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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: 811-07185
Morgan Stanley Select Dimensions Investment Series
(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: December 31, 2004
Date of reporting period: December 31, 2004
Item 1 - Report to Shareholders
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MORGAN STANLEY
SELECT DIMENSIONS INVESTMENT SERIES
ANNUAL REPORT
DECEMBER 31, 2004
<Page>
Morgan Stanley Select Dimensions Investment Series
TABLE OF CONTENTS
<Table>
Letter to the Shareholders 1
Expense Example 24
Portfolio of Investments:
Money Market 29
Flexible Income 32
Balanced Growth 53
Utilities 66
Dividend Growth 70
Equally-Weighted S&P 500 74
Growth 86
American Opportunities 90
Capital Opportunities 94
Global Equity 98
Developing Growth 104
Financial Statements:
Statements of Assets and Liabilities 110
Statements of Operations 112
Statements of Changes in Net Assets 114
Notes to Financial Statements 122
Financial Highlights 134
Report of Independent Registered Public Accounting Firm 144
Trustee and Officer Information 145
Federal Tax Notice 150
</Table>
<Page>
Morgan Stanley Select Dimensions Investment Series
LETTER TO THE SHAREHOLDERS - DECEMBER 31, 2004
Dear Shareholders,
Global capital markets in 2004 were marked by a slowdown in returns after the
torrid pace of 2003. Near-record levels of corporate profits and continued
strength in the U.S. housing market were offset by a series of negative factors
including weaker-than-expected job growth, geopolitical uncertainty and unease
over political events in the U.S. The year ended on a positive note, however,
with brief fourth-quarter rallies in both the stock and bond markets. In all, it
was a year in which both bullish and bearish sentiment could find justification.
Domestic Equity Overview
The U.S. equity market performed solidly for the 12 months ended December 31,
2004, though its performance was somewhat uneven over the course of the year.
After a strong beginning in 2004, the market made little progress for much of
the year as investors attempted to balance a number of factors. Concern that
slow employment growth would undermine the strength of the economic recovery in
the United States, disappointing earnings for many companies, geopolitical
uncertainties and higher interest rates all weighed on the market. Later in
2004, investors became more optimistic about a "soft landing" around the globe
as the U.S. economy continued to grow steadily and inflation remained stable.
The U.S. labor market also improved, though fewer jobs were created than some
economists and investors had expected. Consumer spending also picked up
significantly in the second half of 2004.
Although the U.S. Federal Reserve raised short-term interest rates a number of
times in 2004, these increases were not reflected in long-term interest rates,
and did not seriously disrupt the stock market. In addition, orders for durable
goods were strong despite some inflation. While many investors worried during
the summer and early fall about terrorism and the potential for a drawn-out U.S.
presidential election, these anxieties were alleviated when the election ended
without incident. In addition, investors who were concerned that rising energy
prices could lead to inflation were reassured when the price of crude oil
retreated from its high of $56 a barrel in October. As a result, U.S. equities
ended the year with a sharp rally in November and December.
Of course, some sectors performed better than others in 2004. Commodity-oriented
areas such as energy, basic materials and industrials were the year's top
performers. Interest rate sensitive stocks such as utilities and
telecommunications services also performed well as long-term interest rates did
not rise in line with investors' expectations for them. At the other end of the
spectrum were the health care and consumer staples sectors, which generally
underperformed due largely to fundamental disappointments. Technology stocks
also ended up lagging other sectors for 2004 despite having rallied during the
fall.
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Fixed-Income Overview
The 12-month review period began with interest rates generally falling and still
near their historical lows. Continued low employment numbers and deflationary
pressures caused rates to follow this downward path throughout the first quarter
of 2004. The market then reversed course in April, after the release of March
employment numbers. The surprisingly strong employment data, coupled with
increasing oil prices, led investors to the conclusion that the Federal Reserve
Open Market Committee (the "Fed") would move to raise interest rates. At its
June meeting, the Fed initiated a series of 25-basis point rate increases that
continued through the end of the year.
Despite these rate increases, continued softness in the economy pushed yields on
intermediate and longer maturity government securities lower during the third
quarter of 2004 and into the beginning of the fourth. Investors became
increasingly concerned by rising oil prices and uneven employment gains. While
the bond market gained slightly following the conclusion of the election, gains
were largely limited to intermediate and longer-maturity securities.
Perceptions of the economy were varied during the period. The year began with
concern over economic sluggishness and ended with concern over too much growth.
Overall, rates were mixed, with shorter-term rates rising and longer-term rates
declining from the start of the period.
Against this mixed backdrop, performance varied over the major segments of the
fixed income market. U.S. Treasury securities lagged other parts of the market,
due in most part to their high sensitivity to fluctuating interest rates and
their relatively low yields. Mortgage-backed securities (MBS) had good
performance, especially in those securities with longer durations. Higher-coupon
mortgage-backed securities outperformed their Treasury counterparts as declining
rates resulted in increased prepayment expectations.
The best-performing segments of the U.S. bond market were investment grade and
high yield corporate debt, with high yield leading the performance tables. The
low level of intermediate and long-term yields caused many investors to buy
these securities in the pursuit of attractive income. Within the investment
grade segment of the bond market, corporate bonds outperformed for similar
reasons.
International Equity Overview
International equity markets posted strong gains for the 12 months ended
December 31, 2004, with the Morgan Stanley Capital International (MSCI) EAFE
Index rising 20.25 percent in U.S. dollar terms. Relatively healthy economic
conditions in the United States (among other market drivers) helped to offset
factors such as higher interest rates and slower growth in China as well as a
record high in the price of crude oil. Early in the period, many international
markets were weighed down by investors' concerns that
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the U.S. job market was not as strong as they had expected. Uncertainty about
when and how quickly the U.S. Federal Reserve would raise interest rates also
kept many investors cautious. In the second half of the period, however, data
indicated that the U.S. economy was continuing to grow and that the job market
was recovering steadily. In addition, the conclusion of the U.S. presidential
election without incident alleviated concerns that the financial markets would
be hurt by a major controversy. Late in 2004, the price of crude oil also
retreated from its record high, helping to drive up many international equities
as the reporting period ended.
Performance in the Japanese stock market was positive for the year, and was
supported largely by gains in the U.S. stock market. That said, the country's
economic developments were not as positive. The Japanese market came under
significant pressure when key trading partner China raised interest rates in
order to slow its economy. The prospect of a slowdown in China, coupled with the
high price of crude oil, combined to weaken the Japanese economy. Data released
later in 2004 confirmed that industrial production in Japan was declining and
consumer confidence there was relatively low. The Nikkei 225 Index rose 12.69
percent in U.S. dollar terms for the year.
The European economy was also weaker than many had hoped in 2004. Economic
conditions in the region as a whole remained generally lackluster in 2004, with
consumer spending remaining weak while the Euro's strength relative to the U.S.
dollar helped curb demand for European exports. The European stock market
performed better than the region's economy however, rising on improving earnings
for many of its companies that benefited from improving global economic
conditions. The rising Euro also boosted returns for dollar-based investors in
European stocks, helping lift the MSCI Europe Index to a 20.88 percent gain in
dollar terms.
Although the emerging markets were somewhat volatile in the first half of 2004,
their performance improved greatly over the second half of the year due to
robust growth rates in many emerging economies. Several other factors helped
numerous emerging markets post strong performances in 2004, including the
appreciation of many countries' local currencies against the U.S. dollar during
the second half of the year, considerable current account and fiscal surpluses
in several countries and, for oil exporters such as Brazil, the rising price of
crude oil. While the year's end was marked by the tragedy of the tsunami
disaster, the financial markets of the emerging countries were not significantly
hurt by the event. In fact, the emerging markets were so strong in 2004 that
they outperformed the developed markets for the fourth consecutive year.
Central European and Latin American markets made particularly substantial gains
during 2004. Among the emerging European markets, the Czech Republic and Poland
were bolstered by robust economic growth and optimism about future growth
following these countries' accession to the European Union.The
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setting of dates for negotiations concerning Turkey's accession to the EU led to
that market's strong gains in the fourth quarter. Turkey's stock market was also
boosted by particularly strong economic growth, low inflation and improving
consumption in the country. In addition, earnings growth for many Turkish
companies kept pace with the country's economic progress. Latin America,
meanwhile, was driven by the strong performance of Brazil, Mexico and Colombia
as those markets benefited from strength in their economies. The export-led
recovery in Brazil was particularly important to that market's gains, while
reform and strong demand for natural resources helped make Colombia one of the
world's top-performing equity markets in 2004.
In stark comparison to these strong performers was Russia, which was among the
weakest emerging markets during 2004. Its stock market was particularly hurt
when the Russian government took over the assets of the oil company Yukos, which
raised doubts about property rights and political stability in the country.
Elsewhere, the stock markets of Taiwan and South Korea suffered due to concerns
about a slowdown in China's economy and generally weak demand for technology
products worldwide.
4
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American Opportunities Portfolio
For the 12-month period ended December 31, 2004, American Opportunities
Portfolio Class X shares produced a total return of 8.29(1) percent versus 6.30
percent for the Russell 1000 Growth Index and 10.88 percent for the S&P 500
Index. For the same period, the Portfolio's Class Y shares returned 7.96(1)
percent.
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 PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST.
THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURN FIGURES ASSUMES THE
REINVESTMENT OF ALL DISTRIBUTIONS BUT DO NOT REFLECT THE IMPACT OF ANY CHARGES
BY YOUR INSURANCE COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE.
The largest contributors to the Portfolio's performance were positions in the
health care, energy and consumer discretionary sectors. Within the health care
sector, the Portfolio benefited primarily from underweighting large-cap
pharmaceutical stocks relative to the Russell 1000 Growth Index and from
overweighting health care management services and medical supplies stocks. Stock
selection within the biotechnology sector was also positive for the Portfolio's
relative performance.
[CHART]
GROWTH OF $10,000: AMERICAN OPPORTUNITIES -- CLASS X
($ in Thousands)
<Table>
<Caption>
CLASS X RUSSELL 1000 GROWTH (3) S&P 500(4)
Dec-1994 $ 10,000 $ 10,000 $ 10,000
Dec-1995 $ 13,895 $ 13,718 $ 13,758
Dec-1996 $ 15,694 $ 16,889 $ 16,915
Dec-1997 $ 20,705 $ 22,039 $ 22,559
Dec-1998 $ 27,078 $ 30,569 $ 29,004
Dec-1999 $ 42,190 $ 40,706 $ 35,107
Dec-2000 $ 40,326 $ 31,577 $ 31,907
Dec-2001 $ 28,442 $ 25,128 $ 28,118
Dec-2002 $ 22,310 $ 18,122 $ 21,907
Dec-2003 $ 26,899 $ 23,513 $ 28,191
Dec-2004 $ 29,130(2) $ 24,994 $ 31,259
</Table>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH
LESS THAN THEIR ORIGINAL COST. PERFORMANCE FOR CLASS Y SHARES WILL VARY FROM THE
PERFORMANCE OF CLASS X SHARES SHOWN ABOVE DUE TO DIFFERENCES IN EXPENSES.
Average Annual Total Returns as of December 31, 2004
<Table>
<Caption>
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
11/9/94
Class X 8.29%(1) (7.14)%(1) 11.28%(1) 11.19%(1)
7/24/00
Class Y 7.96%(1) -- -- (8.24)%(1)
</Table>
(1) Figure assumes reinvestment of all distributions for the underlying fund
based on net asset value (NAV). It does not reflect the deduction of
insurance expenses, an annual contract maintenance fee, or surrender
charges.
(2) Ending value on December 31, 2004 for the underlying fund. This figure does
not reflect the deduction of any account fees or sales charges.
(3) The Russell 1000 Growth Index measures the performance of those companies
in the Russell 1000 Index with higher price-to-book ratios and higher
forecasted growth values. 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. The Portfolio's benchmark
was changed from the S&P 500 to the Russell 1000 Growth Index to more
accurately reflect the Portfolio's investable universe.
(4) 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.
5
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Within the energy sector, the Portfolio gained from its emphasis on the coal and
oil services industries. The coal industry benefited indirectly from high
natural gas prices and strong demand for coking coal. Within the consumer
discretionary sector, overweightings in stocks of education services and
internet providers further boosted the Portfolio, as did stock selection in the
retail sector.
Other positions were detrimental to the Portfolio's performance in 2004. The
most significant detractor was the Portfolio's stock selection within the
materials and processing sector, largely because of the Portfolio's overexposure
to copper stocks. We also sold these stocks at a relatively inopportune time,
causing the Portfolio to miss out on their subsequent recovery.
THERE IS NO GUARANTEE THAT ANY SECURITIES MENTIONED WILL CONTINUE TO PERFORM
WELL OR BE HELD BY THE PORTFOLIO IN THE FUTURE.
Balanced Growth Portfolio
For the 12-month period ended December 31, 2004, Balanced Growth Portfolio's
Class X Shares posted a total return of 10.93(1) percent compared to 16.49
percent for the Russell 1000 Value Index and 4.34 percent for the Lehman
Brothers U.S. Aggregate Bond Index. For the same period, the Portfolio's Class Y
shares returned 10.68(1) percent.
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
[CHART]
GROWTH OF $10,000 BALANCED GROWTH -- CLASS X
($ in Thousands)
<Table>
<Caption>
CLASS X RUSSELL 1000 VALUE(3) LEHMAN AGGREGATE(4)
Dec-1994 $ 10,000 $ 10,000 $ 10,000
Dec-1995 $ 12,286 $ 13,836 $ 11,847
Dec-1996 $ 13,950 $ 16,830 $ 12,278
Dec-1997 $ 16,443 $ 22,751 $ 13,463
Dec-1998 $ 18,813 $ 26,307 $ 14,632
Dec-1999 $ 19,475 $ 28,240 $ 14,512
Dec-2000 $ 20,715 $ 30,221 $ 16,199
Dec-2001 $ 20,965 $ 28,532 $ 17,567
Dec-2002 $ 18,556 $ 24,103 $ 19,369
Dec-2003 $ 22,238 $ 31,341 $ 20,164
Dec-2004 $ 24,668(2) $ 36,510 $ 21,038
</Table>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH
LESS THAN THEIR ORIGINAL COST. PERFORMANCE FOR CLASS Y SHARES WILL VARY FROM THE
PERFORMANCE OF CLASS X SHARES SHOWN ABOVE DUE TO DIFFERENCES IN EXPENSES.
Average Annual Total Returns as of December 31, 2004
<Table>
<Caption>
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
11/9/94
Class X 10.93%(1) 4.84%(1) 9.45%(1) 9.37%(1)
7/24/00
Class Y 10.68%(1) -- -- 6.14%(1)
</Table>
(1) Figure assumes reinvestment of all distributions for the underlying fund
based on net asset value (NAV). It does not reflect the deduction of
insurance expenses, an annual contract maintenance fee, or surrender
charges.
(2) Ending value on December 31, 2004 for the underlying fund. This figure does
not reflect the deduction of any account fees or sales charges.
(3) The Russell 1000 Value Index measures the performance of those companies in
the Russell 1000 Index with lower price -to-book ratios and lower
forecasted growth values. 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.
(4) 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.
6
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morganstanley.com OR SPEAK WITH YOUR FINANCIAL ADVISOR. INVESTMENT RETURNS AND
PRINCIPAL VALUE WILL FLUCTUATE AND PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST.
THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURN FIGURES ASSUMES THE
REINVESTMENT OF ALL DISTRIBUTIONS BUT DO NOT REFLECT THE IMPACT OF ANY CHARGES
BY YOUR INSURANCE COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE.
The Portfolio's blend of equity and bond securities led it to underperform its
equity benchmark -- the Russell 1000 Value Index -- while outperforming the
Lehman Brothers U.S. Aggregate Bond Index. Within its equity holdings, the
Portfolio's overweighting in pharmaceutical makers such as Bristol-Myers Squibb
was especially detrimental. The industry faced a number of challenges in 2004,
including a dearth of new drugs in its pipelines, the possibility of drug
reimportation from Canada and other countries, and high-profile withdrawals of
best-selling drugs such as Vioxx. The Portfolio's slight overweighting in
technology stocks relative to the Russell 1000 Value Index was also a
disadvantage as the sector grappled with generally weak sales.
Stock selection within individual sectors was another reason why the Portfolio
underperformed the Russell 1000 Value Index. In retrospect, the Portfolio had
too little exposure to technology hardware and equipment makers and too much
exposure to the semiconductor industry in 2004. Chip-maker Intel was one of our
weakest holdings as it suffered from the general lack of spending on technology.
In the consumer staples sector, Coca-Cola was another notable underperformer due
to weak sales.
On a more positive note, many of the Portfolio's holdings in the
telecommunication services, energy and industrials sectors generated strong
gains. Stock selection in the telecommunications services area was particularly
helpful. Our shares of Sprint performed especially well late in 2004 after the
company announced that it planned to merge with Nextel. The Portfolio's
overweighting in the energy sector relative to the Russell 1000 Value Index was
also rewarding as the rising price of oil benefited many energy stocks. Valero
Energy performed well as the company benefited from improving refining margins
during the period. Within the industrials sector, the Portfolio was helped by
its positions in transportation stocks such as railroad company Norfolk
Southern, which benefited greatly from improving economic conditions that led to
increasing demand for the transportation of goods. Investors also looked
favorably upon the efforts of the company's management team to contain the added
costs resulting from higher energy prices.
THERE IS NO GUARANTEE THAT ANY SECURITIES MENTIONED WILL CONTINUE TO PERFORM
WELL OR BE HELD BY THE PORTFOLIO IN THE FUTURE.
7
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Capital Opportunities Portfolio
For the 12-month period ended December 31, 2004, Capital Opportunities Portfolio
Class X shares produced a total return of 22.59(1) percent, versus 6.93 percent
for the Russell 3000 Growth Index, 16.48 percent for the S&P MidCap 400 Index
and 11.26 percent for the Lipper Multi-Cap Growth Fund's Index. For the same
period, the Portfolio's Class Y shares returned 22.41(1) percent.
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 PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST.
THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURN FIGURES ASSUMES THE
REINVESTMENT OF ALL DISTRIBUTIONS BUT DO NOT REFLECT THE IMPACT OF ANY CHARGES
BY YOUR INSURANCE COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE.
Stock selection was the primary driver of the Portfolio's outperformance in
2004. Sector allocations added to relative performance as well. Stock selection
was favorable across most sectors with the exception of utilities and materials
and processing. Selection was strongest in the health care sector, followed by
technology, consumer discretionary and energy. From a sector allocation
perspective, overweight positions in consumer
[CHART]
GROWTH OF $10,000: CAPITAL OPPORTUNITIES -- CLASS X
($ in Thousands)
<Table>
<Caption>
CLASS X RUSSELL 3000 GROWTH(3) S&P MIDCAP 400(4) LIPPER(5)
Jan-1997 $ 10,000 $ 10,000 $ 10,000 $ 10,000
Mar-1997 $ 9,400 $ 9,390 $ 9,719 $ 9,211
Jun-1997 $ 10,361 $ 11,155 $ 11,147 $ 10,696
Sep-1997 $ 11,739 $ 12,094 $ 12,939 $ 12,080
Dec-1997 $ 11,584 $ 12,154 $ 13,047 $ 11,718
Mar-1998 $ 12,737 $ 13,957 $ 14,484 $ 13,370
Jun-1998 $ 12,679 $ 14,456 $ 14,174 $ 13,680
Sep-1998 $ 9,875 $ 12,973 $ 12,123 $ 11,660
Dec-1998 $ 12,241 $ 16,410 $ 15,541 $ 14,623
Mar-1999 $ 12,861 $ 17,355 $ 14,549 $ 15,551
Jun-1999 $ 13,961 $ 18,153 $ 16,609 $ 16,713
Sep-1999 $ 14,687 $ 17,470 $ 15,214 $ 16,081
Dec-1999 $ 23,516 $ 21,961 $ 17,829 $ 21,402
Mar-2000 $ 27,532 $ 23,563 $ 20,091 $ 24,475
Jun-2000 $ 25,866 $ 22,848 $ 19,429 $ 22,985
Sep-2000 $ 27,194 $ 21,640 $ 21,789 $ 23,175
Dec-2000 $ 17,034 $ 17,038 $ 20,950 $ 18,822
Mar-2001 $ 10,935 $ 13,545 $ 18,693 $ 14,636
Jun-2001 $ 13,315 $ 14,781 $ 21,153 $ 16,094
Sep-2001 $ 7,847 $ 11,823 $ 17,649 $ 11,806
Dec-2001 $ 10,836 $ 13,694 $ 20,824 $ 14,087
Mar-2002 $ 10,149 $ 13,346 $ 22,224 $ 13,604
Jun-2002 $ 7,316 $ 10,881 $ 20,155 $ 11,250
Sep-2002 $ 5,988 $ 9,195 $ 16,820 $ 9,332
Dec-2002 $ 6,087 $ 9,855 $ 17,802 $ 9,885
Mar-2003 $ 6,110 $ 9,732 $ 17,012 $ 9,809
Jun-2003 $ 7,161 $ 11,184 $ 20,011 $ 11,431
Sep-2003 $ 7,726 $ 11,673 $ 21,330 $ 12,020
Dec-2003 $ 8,622 $ 12,907 $ 24,142 $ 13,383
Mar-2004 $ 9,175 $ 13,055 $ 25,365 $ 13,856
Jun-2004 $ 9,419 $ 13,289 $ 25,611 $ 14,001
Sep-2004 $ 9,419 $ 12,586 $ 25,073 $ 13,324
Dec-2004 $ 10,570(2) $ 13,801 $ 28,122 $ 14,891
</Table>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH
LESS THAN THEIR ORIGINAL COST. PERFORMANCE FOR CLASS Y SHARES WILL VARY FROM THE
PERFORMANCE OF CLASS X SHARES SHOWN ABOVE DUE TO DIFFERENCES IN EXPENSES.
Average Annual Total Returns as of December 31, 2004
<Table>
<Caption>
1 YEAR 5 YEARS SINCE INCEPTION
1/21/97
Class X 22.59%(1) (14.78)%(1) 0.70%(1)
7/24/00
Class Y 22.41%(1) -- (19.19)%(1)
</Table>
(1) Figure assumes reinvestment of all distributions for the underlying fund
based on net asset value (NAV). It does not reflect the deduction of
insurance expenses, an annual contract maintenance fee, or surrender
charges.
(2) Ending value on December 31, 2004 for the underlying fund. This figure does
not reflect the deduction of any account fees or sales charges.
(3) The Russell 3000 Growth Index measures the performance of those companies
in the Russell 3000 Index with higher price-to-book ratios and higher
forecasted growth values. 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. The Portfolio's benchmark
was changed from the S&P 400 to the Russell 3000 Growth Index to more
accurately reflect the Portfolio's investable universe.
(4) The Standard and Poor's MidCap 400 Index (S&P 400) is a market-value
weighted index, the performance of which is based on the performance of 400
domestic 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.
(5) The Lipper Multi-Cap Growth Fund's Index tracks the performance of the 30
largest Multi-Cap Growth open-end mutual funds, as categorized by Lipper,
Inc. Funds in this category, by portfolio practice, invest in a variety of
market capitalization ranges without concentrating 75% of their equity
assets in any one market capitalization range over an extended period of
time. Multi-cap growth funds typically have an above-average
price-to-earnings ratio, price-to-book ratio, and three-year
sales-per-share growth value, compared to the S&P SuperComposite 1500
Index. The Index does not include any fees or charges. The Index is
unmanaged and should not be considered an investment.
8
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discretionary, energy, materials and processing and utilities added
significantly to relative return, as did underweight allocations to technology
and health care. Underweighted positions in producer durables and auto &
transportation detracted.
Among the Portfolio's largest holdings, individual contributors to relative
return included Ultra Petroleum in the energy sector; Station Casinos and Royal
Caribbean Cruises, Wynn Resorts and GTECH Holdings in the consumer discretionary
sector; QUALCOMM in the technology sector; and Crown Castle International in the
producer durables sector. Univision Communications, a Spanish language broadcast
company, was a significant detractor among the Portfolio's largest positions as
was Newmont Mining in the materials & processing sector.
Ultra Petroleum continued to benefit from strong production and reserve growth
in its Wyoming operation and high energy prices. Station Casinos has benefited
from continued local population growth in Las Vegas, from further expansion of
California's gambling industry and partnerships with Native American tribes.
Royal Caribbean Cruises has enjoyed steady bookings in an improved leisure
travel market. Investors responded favorably to Wynn Resorts' common stock
offering with the proceeds to be used for debt retirement and to finance the
company's casino resort in China's Macau region. GTECH Holdings, a lottery
system provider, continues to add new contracts in the U.S. and abroad. QUALCOMM
stayed on an upward trend through most of the year, benefiting from the
continuing growth of wireless products utilizing the company's patented CDMA
technology. Crown Castle International, a wireless tower operator, sold its U.K.
subsidiary for $2 billion in August 2004. Crown will use these proceeds to
reduce debt and to finance selective opportunities in the U.S. tower market.
Univision, a Spanish language radio & television broadcast company, declined
after the company's forward earnings guidance fell short of analyst
expectations. Newmont Mining had benefited from higher gold prices for the
majority of the year, however, allegations of pollution in its Indonesian mines
had an adverse impact.
THERE IS NO GUARANTEE THAT ANY SECURITIES MENTIONED WILL CONTINUE TO PERFORM
WELL OR BE HELD BY THE PORTFOLIO IN THE FUTURE.
9
<Page>
Developing Growth Portfolio
For the 12-month period ended December 31, 2004, Developing Growth Portfolio
Class X shares produced a total return of 22.31(1) percent versus 15.48 percent
for the Russell Midcap Growth Index. For the same period, the Portfolio's Class
Y shares returned 21.95(1) percent.
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 PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST.
THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURN FIGURES ASSUMES THE
REINVESTMENT OF ALL DISTRIBUTIONS BUT DO NOT REFLECT THE IMPACT OF ANY CHARGES
BY YOUR INSURANCE COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE.
The Portfolio's outperformance in 2004 was driven largely by stock selection in
a number of sectors, though several sector allocations also played a role. Stock
selection in the technology sector was particularly beneficial. One strong
holding there was the software provider Adobe Systems, which benefited from
better-than-expected sales of its Creative Suite and Acrobat product lines.
Stock selection in, and a general overweighting to, the energy sector also drove
the Portfolio's outperformance. Among energy holdings, Ultra Petroleum continued
to benefit from strong production and expanding reserves in its Wyoming
operation. High energy prices also helped to boost its earnings.
[CHART]
GROWTH OF $10,000: DEVELOPING GROWTH -- CLASS X
($ in Thousands)
<Table>
<Caption>
CLASS X RUSSELL MIDCAP GROWTH(3)
Dec-1994 $ 10,000 $ 10,000
Dec-1995 $ 15,126 $ 13,398
Dec-1996 $ 17,085 $ 15,739
Dec-1997 $ 19,437 $ 19,287
Dec-1998 $ 21,194 $ 22,733
Dec-1999 $ 40,803 $ 34,393
Dec-2000 $ 31,986 $ 30,352
Dec-2001 $ 23,832 $ 24,236
Dec-2002 $ 17,223 $ 17,594
Dec-2003 $ 24,354 $ 25,109
Dec-2004 $ 29,787(2) $ 28,995
</Table>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH
LESS THAN THEIR ORIGINAL COST. PERFORMANCE FOR CLASS Y SHARES WILL VARY FROM THE
PERFORMANCE OF CLASS X SHARES SHOWN ABOVE DUE TO DIFFERENCES IN EXPENSES.
Average Annual Total Returns as of December 31, 2004
<Table>
<Caption>
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
11/9/94
Class X 22.31%(1) (6.10)%(1) 11.53%(1) 11.53%(1)
7/24/00
Class Y 21.95%(1) -- -- (4.87)%(1)
</Table>
(1) Figure assumes reinvestment of all distributions for the underlying fund
based on net asset value (NAV). It does not reflect the deduction of
insurance expenses, an annual contract maintenance fee, or surrender
charges.
(2) Ending value on December 31, 2004 for the underlying fund. This figure does
not reflect the deduction of any account fees or sales charges.
(3) The Russell Midcap Growth Index measures the performance of those Russell
Midcap companies with higher price-to-book ratios and higher forecasted
growth values. The stocks are also members of the Russell 1000 Growth
Index. Indexes are unmanaged and their returns do not include any sales
charges or fees. Such costs would lower performance. It is not possible to
invest directly in an index.
10
<Page>
Stock selection in the consumer discretionary, financial and producer durables
sectors was also beneficial to the Portfolio. Royal Caribbean Cruises, Station
Casinos, Wynn Resorts and GTECH Holdings were among the consumer discretionary
stocks that were positive contributors, while an overweighted position in the
sector also boosted return. Shares of Royal Caribbean benefited from an improved
outlook for leisure travel. Investors responded favorably to Wynn Resorts'
common stock offering with the proceeds to be used for debt retirement and to
finance the company's casino resort in China's Macau region. Shares of Station
Casinos rose on expectations of continued growth in the company's Las Vegas
operations, further expansion in California's gambling industry and excitement
about the company's new partnerships with Native American tribes. In the
financials sector, the Portfolio benefited from its positioning in the
diversified financial services, property & casualty insurance, and securities
brokerage & services industries. Among producer durables stocks, the Portfolio
was helped in particular by Crown Castle International, a wireless tower
operator that successfully sold its U.K. subsidiary for $2 billion in August
2004. Crown will use these proceeds to reduce debt and to finance selective
opportunities in the U.S. tower market.
The strength of these positions was slightly offset by weakness in other areas.
A number of holdings in the cable television & radio, electrical utilities and
telecommunications industries were particularly weak. One such underperformer
was NTL, which came under pressure after the company announced its intentions to
sell its U.K. broadcast business and focus on its core cable and broadband
businesses. Spanish language radio and TV network Univision was another
underperformer. Its shares declined sharply in November when the company's
forward earnings guidance fell short of analyst expectations. The Portfolio's
underweighted positions in both the financial and consumer staples sectors
relative to the Russell Midcap Growth Index were also modest detractors for the
year.
THERE IS NO GUARANTEE THAT ANY SECURITIES MENTIONED WILL CONTINUE TO PERFORM
WELL OR BE HELD BY THE PORTFOLIO IN THE FUTURE.
11
<Page>
Dividend Growth Portfolio
For the 12-month period ended December 31, 2004, Dividend Growth Portfolio Class
X shares produced a total return of 8.29(1) percent versus 10.88 percent for the
S&P 500 Index. For the same period, the Portfolio's Class Y shares returned
8.03(1) percent.
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 PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST.
THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURN FIGURES ASSUMES THE
REINVESTMENT OF ALL DISTRIBUTIONS BUT DO NOT REFLECT THE IMPACT OF ANY CHARGES
BY YOUR INSURANCE COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE.
The Portfolio's underperformance relative to the S&P 500 Index for the period
was driven largely by stock selection. The largest detractor from performance
was the Portfolio's stock selection within industrials, although an overweighted
position in the sector relative to the S&P 500 Index partially mitigated the
negative effect of a number of individual securities. Within the sector,
Caterpillar and 3M detracted most from returns. Stock selection within the
health care sector also hurt relative returns, although our underweighted
position in the sector was positive and slightly offset the detrimental effect
of stock selection. Within that sector, large pharmaceutical companies Pfizer
and Bristol-Myers Squibb served as a drag on performance. Within consumer
staples, the
[CHART]
GROWTH OF $10,000: DIVIDEND GROWTH -- CLASS X
($ in Thousands)
<Table>
<Caption>
CLASS X S&P 500(3)
Dec-1994 $ 10,000 $ 10,000
Dec-1995 $ 14,013 $ 13,758
Dec-1996 $ 17,445 $ 16,915
Dec-1997 $ 22,003 $ 22,559
Dec-1998 $ 26,343 $ 29,004
Dec-1999 $ 26,482 $ 35,107
Dec-2000 $ 27,901 $ 31,907
Dec-2001 $ 26,382 $ 28,118
Dec-2002 $ 21,654 $ 21,907
Dec-2003 $ 27,659 $ 28,191
Dec-2004 $ 29,950(2) $ 31,259
</Table>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH
LESS THAN THEIR ORIGINAL COST. PERFORMANCE FOR CLASS Y SHARES WILL VARY FROM THE
PERFORMANCE OF CLASS X SHARES SHOWN ABOVE DUE TO DIFFERENCES IN EXPENSES.
Average Annual Total Returns as of December 31, 2004
<Table>
<Caption>
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
11/9/94
Class X 8.29%(1) 2.49%(1) 11.59%(1) 11.41%(1)
7/24/00
Class Y 8.03%(1) -- -- 4.22%(1)
</Table>
(1) Figure assumes reinvestment of all distributions for the underlying fund
based on net asset value (NAV). It does not reflect the deduction of
insurance expenses, an annual contract maintenance fee, or surrender
charges.
(2) Ending value on December 31, 2004 for the underlying fund. This figure does
not reflect the deduction of any account fees or sales charges.
(3) 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.
12
<Page>
Portfolio was hurt further by the weak performance of Coca-Cola and Altria
Group. Stock selection in the materials sector also hampered relative
performance, as weakness in Alcoa shares had the most significant negative
impact.
Other security holdings and sector allocations benefited performance. Stock
selection was favorable within the consumer discretionary sector, as the
Portfolio benefited from the strong contributions made by retailers Target and
Home Depot. Within utilities, a relatively small sector, Exelon was a standout
performer for the period. Performance also benefited from an overweighted
position in the energy sector as energy stocks rose strongly due to high oil
prices and continuing signs of economic growth. An underweighted position in
information technology relative to the S&P 500 Index further helped performance
as the sector underperformed for the period after making strong gains in 2003.
THERE IS NO GUARANTEE THAT ANY SECURITIES MENTIONED WILL CONTINUE TO PERFORM
WELL OR BE HELD BY THE PORTFOLIO IN THE FUTURE.
Equally-Weighted S&P 500 Portfolio
For the 12-month period ended December 31, 2004, Equally-Weighted S&P 500
Portfolio Class X shares produced a total return of 16.65(1) percent, versus
18.09 percent for the S&P 500 Equal Weight Index and 10.88 percent for the S&P
500 Index. For the same period, the Portfolio's Class Y shares returned 16.33(1)
percent.
[CHART]
GROWTH OF $10,000: EQUALLY-WEIGHTED S&P 500 -- CLASS X
($ in Thousands)
<Table>
<Caption>
CLASS X S&P EWI(3) S&P 500(4)
Dec-1994 $ 10,000 $ 10,000 $ 10,000
Dec-1995 $ 12,714 $ 13,203 $ 13,758
Dec-1996 $ 14,975 $ 15,715 $ 16,915
Dec-1997 $ 18,886 $ 20,279 $ 22,559
Dec-1998 $ 21,189 $ 22,751 $ 29,004
Dec-1999 $ 23,763 $ 25,487 $ 35,107
Dec-2000 $ 26,610 $ 27,943 $ 31,907
Dec-2001 $ 26,123 $ 27,835 $ 28,118
Dec-2002 $ 21,951 $ 22,774 $ 21,907
Dec-2003 $ 30,105 $ 31,795 $ 28,191
Dec-2004 $ 35,116(2) $ 37,548 $ 31,259
</Table>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH
LESS THAN THEIR ORIGINAL COST. PERFORMANCE FOR CLASS Y SHARES WILL VARY FROM THE
PERFORMANCE OF CLASS X SHARES SHOWN ABOVE DUE TO DIFFERENCES IN EXPENSES.
Average Annual Total Returns as of December 31, 2004
<Table>
<Caption>
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
11/9/94
Class X 16.65%(1) 8.12%(1) 13.38%(1) 13.10%(1)
7/24/00
Class Y 16.33%(1) -- -- 8.65%(1)
</Table>
(1) Figure assumes reinvestment of all distributions for the underlying fund
based on net asset value (NAV). It does not reflect the deduction of
insurance expenses, an annual contract maintenance fee, or surrender
charges.
(2) Ending value on December 31, 2004 for the underlying fund. This figure does
not reflect the deduction of any account fees or sales charges.
(3) The Standard & Poor's 500 Equal Weight Index (S&P EWI) is the
equal-weighted version of the widely regarded S&P 500 Index, which measures
500 leading companies in leading U.S. industries. The S&P EWI has the same
constituents as the capitalization weighted S&P 500 Index, but each company
in the S&P EWI is allocated a fixed weight, rebalancing quarterly. Indexes
are unmanaged and their returns do not include any expenses, sales charges
or fees. Such costs would lower performance. It is not possible to invest
directly in an index. The Portfolio's benchmark was changed from the S&P
500 to the S&P EWI to more accurately reflect the Portfolio's investable
universe.
(4) 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.
13
<Page>
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 PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST.
THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURN FIGURES ASSUMES THE
REINVESTMENT OF ALL DISTRIBUTIONS BUT DO NOT REFLECT THE IMPACT OF ANY CHARGES
BY YOUR INSURANCE COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE.
While all 10 sectors in the S&P 500 posted gains in 2004, some sectors
considerably outperformed others. The best-performing sectors for the 12-month
period were energy and telecommunications. Energy stocks benefited from the rise
in oil prices and higher returns for drilling, while the telecom sector was
boosted by the consolidation of Sprint and Nextel, among other factors. The
worst-performing sector for the period was technology, as many technology
companies were hurt by weak spending and disappointing orders.
Although the Portfolio underperformed its primary benchmark, the S&P 500 Equal
Weight Index, the Portfolio's "capitalization-neutral" or "equally weighted"
strategy allowed it to outperform the S&P 500 Index. This policy dictates that
each stock in the S&P 500 Index be weighted equally, rather than according to
its market capitalization. In other words, the Portfolio initially invests the
same percentage of assets in the smallest-cap stock in the S&P 500 as it does in
the largest-cap stock in the Index.
As a result, much of Portfolio's positive performance was driven by the strong
showings of numerous smaller-cap names in the Index. These included energy
stocks such as Amerada Hess and Transocean, which were helped greatly by rising
oil prices and higher profits from oil drilling. Shares of Starbucks also
performed well as the company opened new stores and met sales expectations. In
the technology sector, Apple was another standout, thanks largely to strong
sales of iPods. Other technology-related stocks that performed well included
Texas Instruments and Autodesk, which appreciated after the company executed a
share buyback that was well received by investors. AT&T Wireless, Sprint PCS,
Goodyear Tire and Nucor Steel also helped the Portfolio excel in 2004.
A number of other positions were less positive for the Portfolio during the
year. Technology holdings that were hurt because of weak spending included both
PMC Sierra and Cienna, which suffered due to a revenue shortfall and earnings
disappointments. In the healthcare sector, shares of Chiron fell sharply after
regulators forced the company to close its flu-vaccine plant in the United
Kingdom. The Portfolio also included underperformers in more prosaic industries,
such as grocery-store operator Winn-Dixie.
THE INVESTMENT PERFORMANCE OF THE S&P 500 EQUAL WEIGHT INDEX DOES NOT INCLUDE
THE IMPACT OF ANY EXPENSES, SALES CHARGES OR FEES. INDEXES ARE UNMANAGED AND
SUCH COSTS WOULD LOWER PERFORMANCE. AS A RESULT, THE PORTFOLIO'S PERFORMANCE
WILL NOT EXACTLY TRACK THE PERFORMANCE OF THE INDEX. IT IS NOT POSSIBLE TO
INVEST DIRECTLY IN AN INDEX.
THERE IS NO GUARANTEE THAT ANY SECURITIES MENTIONED WILL CONTINUE TO PERFORM
WELL OR BE HELD BY THE PORTFOLIO IN THE FUTURE.
14
<Page>
Flexible Income Portfolio
For the 12-month period ended December 31, 2004, Flexible Income Portfolio's
Class X Shares posted a total return of 7.00(1) percent compared to 3.04 percent
for the Lehman Brothers Intermediate U.S. Government/Credit Index. For the same
period, the Portfolio's Class Y shares returned 6.61(1) percent.
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 PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST.
THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURN FIGURES ASSUMES THE
REINVESTMENT OF ALL DISTRIBUTIONS BUT DO NOT REFLECT THE IMPACT OF ANY CHARGES
BY YOUR INSURANCE COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE.
The Portfolio remained diversified across investment grade and high yield
corporate bonds, emerging markets debt and mortgage-backed securities (MBS).
This approach gave the Portfolio exposure to some of the best-performing
segments of the bond market during the period. As was the case for its emerging
markets holdings, the Portfolio's high yield component emphasized medium- and
lower-quality issues. These positions benefited from the market's general
preference for their attractive yields, and supported the Portfolio's
outperformance of its benchmark. The Portfolio also benefited from key exposures
in the gaming & lodging, energy and utilities sectors, all of which gained on
improved earnings and reduced debt ratios.
[CHART]
GROWTH OF $10,000: FLEXIBLE INCOME -- CLASS X
($ in Thousands)
<Table>
<Caption>
CLASS X LEHMAN(3)
Dec-1994 $ 10,000 $ 10,000
Dec-1995 $ 10,696 $ 11,533
Dec-1996 $ 11,717 $ 12,000
Dec-1997 $ 12,692 $ 12,944
Dec-1998 $ 13,227 $ 14,037
Dec-1999 $ 12,985 $ 14,091
Dec-2000 $ 12,369 $ 15,516
Dec-2001 $ 11,866 $ 16,907
Dec-2002 $ 12,895 $ 18,570
Dec-2003 $ 14,642 $ 19,370
Dec-2004 $ 15,667(2) $ 19,959
</Table>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH
LESS THAN THEIR ORIGINAL COST. PERFORMANCE FOR CLASS Y SHARES WILL VARY FROM THE
PERFORMANCE OF CLASS X SHARES SHOWN ABOVE DUE TO DIFFERENCES IN EXPENSES.
Average Annual Total Returns as of December 31, 2004
<Table>
<Caption>
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
11/9/94
Class X 7.00%(1) 3.83%(1) 4.59%(1) 4.60%(1)
7/24/00
Class Y 6.61%(1) -- -- 4.07%(1)
</Table>
(1) Figure assumes reinvestment of all distributions for the underlying fund
based on net asset value (NAV). It does not reflect the deduction of
insurance expenses, an annual contract maintenance fee, or surrender
charges.
(2) Ending value on December 31, 2004 for the underlying fund. This figure does
not reflect the deduction of any account fees or sales charges.
(3) The Lehman Brothers Intermediate U.S. Government/Credit Index tracks the
performance of U.S. government and corporate obligations, including U.S.
government agency and Treasury securities, and corporate and Yankee bonds
with maturities of 1 to 10 years. 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.
15
<Page>
The Portfolio's positioning in the MBS sector was also advantageous. Our
strategy during the year was to emphasize higher-coupon MBS in the Portfolio.
These securities did not benefit as much as lower-coupon issues due to the
market's concerns that lower-coupon securities would continue to suffer from a
decline in prepayments triggered by low interest rates. By the end of the fourth
quarter, we began taking profits in these positions in order to redeploy the
proceeds into securities with more compelling total return potential.
The Portfolio's interest rate exposure was more of a disappointment during the
period. While our analysis was correct in indicating that interest rates were
likely to move upward in 2004, that upward movement was largely limited to
shorter-maturity securities. As a result, the Portfolio's strategy of keeping
its duration* below that of its benchmark served to limit its exposure to the
ongoing gains of longer-maturity securities.
* A MEASURE OF THE SENSITIVITY OF A BOND'S PRICE TO CHANGES IN INTEREST RATES,
EXPRESSED IN YEARS. EACH YEAR OF DURATION REPRESENTS AN EXPECTED 1 PERCENT
CHANGE IN THE PRICE OF A BOND FOR EVERY 1 PERCENT CHANGE IN INTEREST RATES. THE
LONGER A BOND'S DURATION, THE GREATER THE EFFECT OF INTEREST-RATE MOVEMENTS ON
ITS PRICE. TYPICALLY, FUNDS WITH SHORTER DURATIONS PERFORM BETTER IN
RISING-INTEREST-RATE ENVIRONMENTS, WHILE FUNDS WITH LONGER DURATIONS PERFORM
BETTER WHEN RATES DECLINE.
THERE IS NO GUARANTEE THAT ANY SECURITIES MENTIONED WILL CONTINUE TO PERFORM
WELL OR BE HELD BY THE PORTFOLIO IN THE FUTURE.
16
<Page>
Global Equity Portfolio
For the 12-month period ended December 31, 2004, Global Equity Portfolio Class X
shares produced a total return of 8.17(1) percent versus 14.72 percent for the
MSCI World Index. For the same period, the Portfolio's Class Y shares returned
7.89(1) percent
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 PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST.
THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURN FIGURES ASSUMES THE
REINVESTMENT OF ALL DISTRIBUTIONS BUT DO NOT REFLECT THE IMPACT OF ANY CHARGES
BY YOUR INSURANCE COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE.
The Portfolio's underperformance relative to its benchmark -- the MSCI World
Index -- in 2004 resulted from a number of specific sector and country
allocations. Shares in the utilities sector performed better than would be
expected in a period of rising interest rates, making the Portfolio's
underweighting there relative to the MSCI World Index a disadvantage. A large
allocation to the pharmaceutical sector also held back the Portfolio's returns,
as the earnings of many drug makers fell short of overly optimistic outlooks.
Furthermore, Merck's withdrawal of the blockbuster drug Vioxx
[CHART]
GROWTH OF $10,000: GLOBAL EQUITY -- CLASS X
($ in Thousands)
<Table>
<Caption>
CLASS X MSCI WORLD INDEX(3)
Dec-1994 $ 10,000 $ 10,000
Dec-1995 $ 11,376 $ 12,072
Dec-1996 $ 12,677 $ 13,699
Dec-1997 $ 13,775 $ 15,859
Dec-1998 $ 15,857 $ 19,718
Dec-1999 $ 21,270 $ 24,635
Dec-2000 $ 20,009 $ 21,388
Dec-2001 $ 16,563 $ 17,790
Dec-2002 $ 13,686 $ 14,252
Dec-2003 $ 18,437 $ 18,971
Dec-2004 $ 19,943(2) $ 21,764
</Table>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH
LESS THAN THEIR ORIGINAL COST. PERFORMANCE FOR CLASS Y SHARES WILL VARY FROM THE
PERFORMANCE OF CLASS X SHARES SHOWN ABOVE DUE TO DIFFERENCES IN EXPENSES.
Average Annual Total Returns as of December 31, 2004
<Table>
<Caption>
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
11/9/94
Class X 8.17%(1) (1.28)%(1) 7.15%(1) 7.01%(1)
7/24/00
Class Y 7.89%(1) -- -- (2.28)%(1)
</Table>
(1) Figure assumes reinvestment of all distributions for the underlying fund
based on net asset value (NAV). It does not reflect the deduction of
insurance expenses, an annual contract maintenance fee, or surrender
charges.
(2) Ending value on December 31, 2004 for the underlying fund. This figure does
not reflect the deduction of any account fees or sales charges.
(3) The Morgan Stanley Capital International World Index (MSCI) measures
performance from a diverse range of global stock markets including the
U.S., Canada, Europe, Australia, New Zealand, and the Far East. The
performance of the Index is listed in U.S. dollars and assumes reinvestment
of net dividends. "Net dividends" reflects a reduction in dividends after
taking into account withholding of taxes by certain foreign countries
represented in the Index. Indexes are unmanaged and their returns do not
include any sales charges or fees. Such costs would lower performance. It
is not possible to invest directly in an Index.
17
<Page>
not only drove down its shares but also cast a shadow over makers of similar
drugs. Pfizer, maker of Celebrex, was another notable underperformer. The
Portfolio's overweighting in consumer staples relative to the MSCI World Index
was also detrimental. Coca-Cola, for example, suffered over the period because
its sales were weak, while Unilever was hurt by poor earnings momentum and
rising commodities prices.
In addition to these sector allocations, underweightings in the United Kingdom
and Australia relative to the MSCI World Index contributed to the Portfolio's
underperformance. The Portfolio underweighted both markets because of concerns
over the potential effects of tighter interest rate policy. In the case of the
U.K., however, the market performed surprisingly well as higher interest rates
did not dampen consumption or derail the housing market. Returns there were also
supported by several mergers and takeovers. Australia's equity market also
posted a better-than-expected performance, supported by firm commodity prices.
Although these sector and country allocations ultimately led the Portfolio to
underperform its benchmark, other holdings had a more positive influence. One
such advantage was an overweighting relative to the MSCI World Index in Japan,
and particularly to banks in that market. Many Japanese companies posted
surprisingly strong earnings during the period. Investors also reacted
positively as loan loss write-offs in the banking sector began to ebb. Auto
makers were another area of the Japanese market that fared well over the
reporting period. Among the Portfolio's holdings, Toyota has taken market share
from U.S. competitors and has successfully introduced new models. Another
positive was the Portfolio's strong allocation to energy stocks like Suncor and
Exxon Mobil, which benefited from rising oil prices.
THERE IS NO GUARANTEE THAT ANY SECURITIES MENTIONED WILL CONTINUE TO PERFORM
WELL OR BE HELD BY THE PORTFOLIO IN THE FUTURE.
18
<Page>
Growth Portfolio
For the 12-month period ended December 31, 2004, Growth Portfolio Class X shares
produced a total return of 7.64(1) percent, versus 6.30 for the Russell 1000
Growth Index and 10.88 percent for the S&P 500 Index. For the same period, the
Portfolio's Class Y shares returned 7.38(1) percent.
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 PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST.
THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURN FIGURES ASSUMES THE
REINVESTMENT OF ALL DISTRIBUTIONS BUT DO NOT REFLECT THE IMPACT OF ANY CHARGES
BY YOUR INSURANCE COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE.
The Portfolio's performance during 2004 was driven by a number of key factors.
The Portfolio's stock selection in the technology sector was quite strong
overall, with large positions in both Microsoft and QUALCOMM helping to boost
returns. However, an overweighted position in this underperforming sector
relative to the Russell 1000 Growth Index proved a hindrance. Cisco Systems also
hampered returns, as shares of the company suffered from a weak growth outlook
due to lackluster technology spending in 2004. A lack of
[CHART]
GROWTH OF $10,000: GROWTH -- CLASS X
($ in Thousands)
<Table>
<Caption>
CLASS X RUSSELL 1000 GROWTH(3) S&P 500(4)
Dec-1994 $ 10,000 $ 10,000 $ 10,000
Dec-1995 $ 11,329 $ 13,718 $ 13,758
Dec-1996 $ 13,998 $ 16,889 $ 16,915
Dec-1997 $ 17,227 $ 22,039 $ 22,559
Dec-1998 $ 19,505 $ 30,569 $ 29,004
Dec-1999 $ 27,133 $ 40,706 $ 35,107
Dec-2000 $ 23,963 $ 31,577 $ 31,907
Dec-2001 $ 20,313 $ 25,128 $ 28,118
Dec-2002 $ 14,658 $ 18,122 $ 21,907
Dec-2003 $ 18,601 $ 23,513 $ 28,191
Dec-2004 $ 20,022(2) $ 24,994 $ 31,259
</Table>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH
LESS THAN THEIR ORIGINAL COST. PERFORMANCE FOR CLASS Y SHARES WILL VARY FROM THE
PERFORMANCE OF CLASS X SHARES SHOWN ABOVE DUE TO DIFFERENCES IN EXPENSES.
Average Annual Total Returns as of December 31, 2004
<Table>
<Caption>
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
11/9/94
Class X 7.64%(1) (5.90)%(1) 7.19%(1) 7.15%(1)
7/24/00
Class Y 7.38%(1) -- -- (8.58)%(1)
</Table>
(1) Figure assumes reinvestment of all distributions for the underlying fund
based on net asset value (NAV). It does not reflect the deduction of
insurance expenses, an annual contract maintenance fee, or surrender
charges.
(2) Ending value on December 31, 2004 for the underlying fund. This figure does
not reflect the deduction of any account fees or sales charges.
(3) The Russell 1000 Growth Index measures the performance of those companies
in the Russell 1000 Index with higher price-to-book ratios and higher
forecasted growth values. 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. The Portfolio's benchmark
was changed from the S&P 500 to the Russell 1000 Growth Index to more
accurately reflect the Portfolio's investable universe.
(4) 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.
19
<Page>
exposure to the banking industry further hurt the Portfolio, as did stock
selection within the rest of the financial sector. Citigroup lagged the sector
because of concerns about higher interest rates, news of an SEC accounting
probe, and costs related to its involvement in high-profile corporate scandals.
A number of other positions further hindered the Portfolio. Its lack of exposure
to both utilities and integrated oil companies detracted from its relative
performance, as did stock selection among producer durables. While the Portfolio
benefited from an underweighting in the struggling consumer staples sector, its
returns were hurt by the weakness of individual stocks, such as soft-drink
companies, that the Portfolio continued to hold in that area. Selection of
companies within the health care sector had a positive impact on the Portfolio
for 2004. The Portfolio benefited from its positioning in health care management
services and medical and dental instruments & supplies companies. Biotechnology
stocks were a minor drag on the Portfolio's performance. So was pharmaceutical
giant Pfizer, which fell in 2004 due to concerns about competition from generic
drugs and other new products. The stock suffered further late in the year by the
release of unfavorable clinical data on Celebrex. Another key holding was
Johnson & Johnson. The acquisition of Guidant further strengthens Johnson &
Johnson's position in medical devices.
The Portfolio's overweighting in the consumer discretionary sector, one of the
market's strongest areas in 2004, was a plus. A range of holdings in that
somewhat eclectic sector performed well, in industries ranging from
communications and media to consumer electronics to lodging and leisure. eBay
and Yahoo!, two of the Portfolio's largest holdings in 2004, were notable
standouts. During the period eBay launched its PayPal services on eBay France,
completed an acquisition of India's largest on-line marketplace, and launched
service in the Philippines. Yahoo! benefited from strong earnings and a
favorable outlook for internet advertising.
THERE IS NO GUARANTEE THAT ANY SECURITIES MENTIONED WILL CONTINUE TO PERFORM
WELL OR BE HELD BY THE PORTFOLIO IN THE FUTURE.
Money Market Portfolio
AN INVESTMENT IN A MONEY MARKET IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH MONEY
MARKET FUNDS SEEK TO PRESERVE THE VALUE OF AN INVESTMENT AT $1.00 PER SHARE, IT
IS POSSIBLE TO LOSE MONEY BY INVESTING IN SUCH FUNDS.
As of December 31, 2004, Money Market Portfolio had net assets of more than $101
million with an average portfolio maturity of 40 days. For the seven-day period
ended December 31, 2004, the Portfolio's Class X shares provided an effective
annualized yield of 1.68 percent and a current yield of 1.66 percent, while its
30-day moving average yield for December was 1.62 percent. For the 12-month
period ended December 31, 2004, the Portfolio's Class X shares returned 0.86
percent.
20
<Page>
For the seven-day period ended December 31, 2004, the Portfolio's Class Y shares
provided an effective annualized yield of 1.42 percent and a current yield of
1.41 percent, while its 30-day moving average yield for December was 1.37
percent. For the year ended December 31, 2004 the Portfolio's Class Y shares
provided a total return of 0.61 percent.
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 PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST.
THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURN FIGURES ASSUMES THE
REINVESTMENT OF ALL DISTRIBUTIONS BUT DO NOT REFLECT THE IMPACT OF ANY CHARGES
BY YOUR INSURANCE COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE.
Our strategy in managing the Portfolio remained consistent with our long-term
focus on maintaining preservation of capital and liquidity. We adhered to a
conservative approach in managing the Portfolio that emphasized purchasing
high-quality money market obligations and avoided the use of derivatives or
structured notes that might fluctuate excessively with changing interest rates.
On December 31, 2004, approximately 79 percent of the Portfolio was invested in
high-quality commercial paper, 12 percent in federal agency obligations and the
remaining 9 percent in certificates of deposit and short-term bank notes issued
by financially strong commercial banks. At the end of the fiscal period,
approximately 97 percent of the Portfolio's holdings were due to mature in less
than four months.
THERE IS NO GUARANTEE THAT ANY SECURITIES MENTIONED WILL CONTINUE TO PERFORM
WELL OR BE HELD BY THE PORTFOLIO IN THE FUTURE.
21
<Page>
Utilities Portfolio
For the 12-month period ended December 31, 2004, Utilities Portfolio's Class X
shares produced a total return on 24.44(1) percent, versus 10.88 percent for the
S&P 500 Index. For the same period, the Portfolio's Class Y shares returned
24.15(1) percent.
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 PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST.
THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURN FIGURES ASSUMES THE
REINVESTMENT OF ALL DISTRIBUTIONS BUT DO NOT REFLECT THE IMPACT OF ANY CHARGES
BY YOUR INSURANCE COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE.
The Portfolio's outperformance relative to the broad market in 2004 was due
largely to the very strong returns of holdings in the electric utility and
natural gas industries. Our underlying strategy for allocating the Portfolio's
assets is to maintain diversified and strategically balanced exposure to the
electric utility, natural gas and telecommunications industries. On a tactical
basis, we adjust the Portfolio's exposure to these areas if we believe market
conditions warrant. During 2004, for example, the Portfolio had a relatively
heavy weighting in shares of electric companies.
[CHART]
GROWTH OF $10,000: UTILITIES -- CLASS X
($ in Thousands)
<Table>
<Caption>
CLASS X S&P 500(3)
Dec-1994 $ 10,000 $ 10,000
Dec-1995 $ 12,805 $ 13,758
Dec-1996 $ 13,890 $ 16,915
Dec-1997 $ 17,565 $ 22,559
Dec-1998 $ 21,469 $ 29,004
Dec-1999 $ 30,854 $ 35,107
Dec-2000 $ 30,265 $ 31,907
Dec-2001 $ 22,545 $ 28,118
Dec-2002 $ 17,953 $ 21,907
Dec-2003 $ 21,628 $ 28,191
Dec-2004 $ 26,914(2) $ 31,259
</Table>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH
LESS THAN THEIR ORIGINAL COST. PERFORMANCE FOR CLASS Y SHARES WILL VARY FROM THE
PERFORMANCE OF CLASS X SHARES SHOWN ABOVE DUE TO DIFFERENCES IN EXPENSES.
Average Annual Total Returns as of December 31, 2004
<Table>
<Caption>
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
11/9/94
Class X 24.44%(1) (2.70)%(1) 10.41%(1) 10.32%(1)
7/24/00
Class Y 24.15%(1) -- -- (4.46)%(1)
</Table>
(1) Figure assumes reinvestment of all distributions for the underlying fund
based on net asset value (NAV). It does not reflect the deduction of
insurance expenses, an annual contract maintenance fee, or surrender
charges.
(2) Ending value on December 31, 2004 for the underlying fund. This figure does
not reflect the deduction of any account fees or sales charges.
(3) 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.
22
<Page>
This allocation proved beneficial. Electric stocks performed strongly as
interest rates remained low and the industry's fundamentals improved. Improving
conditions in the natural-gas industry also helped to lift the Portfolio's
shares in that area of the market. Higher natural gas prices buoyed many stocks
in the industry, particularly those of companies involved in exploring for and
producing natural gas (rather than merely distributing it).
The Portfolio's gains in the electric and natural-gas sectors during 2004 were
partially offset by the poor performance of several telecommunications holdings.
Although we trimmed the Portfolio's weighting to the telecommunications sector
and redistributed those assets during the year, continuing exposure to the
Regional Bells, selective independent telephone companies and equipment
providers moderated the Portfolio's gains.
THERE IS NO GUARANTEE THAT ANY SECURITIES MENTIONED WILL CONTINUE TO PERFORM
WELL OR BE HELD BY THE PORTFOLIO IN THE FUTURE.
We appreciate your ongoing support of Morgan Stanley Select Dimensions
Investment Series and look forward to continuing to serve your investment needs.
Very truly yours,
/s/Charles A. Fiumefreddo /s/Mitchell M. Merin
Charles A. Fiumefreddo Mitchell M. Merin
CHAIRMAN OF THE BOARD PRESIDENT
Proxy Voting Policies and Procedures
A copy 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 December 31 is available without charge, upon request, by calling
(800) 869-NEWS or by visiting the Mutual Fund Center on our Web site at
www.morganstanley.com. This information is also available on the Securities and
Exchange Commission's Web site at http://www.sec.gov.
23
<Page>
Morgan Stanley Select Dimensions Investment Series
EXPENSE EXAMPLE - DECEMBER 31, 2004
As a shareholder of the Fund, you incur two types of costs: (1) insurance
company charges; and (2) 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 07/01/04-12/31/04.
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 and do not reflect any insurance company charges. 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. In
addition, if these insurance company charges were included, your costs would
have been higher.
24
<Page>
MONEY MARKET
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
---------------- --------------- ---------------
07/01/04 -
07/01/04 12/31/04 12/31/04
---------------- --------------- ---------------
CLASS X
Actual (0.59% return) $ 1,000.00 $ 1,005.90 $ 2.77
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,022.37 $ 2.80
CLASS Y
Actual (0.46% return) $ 1,000.00 $ 1,004.60 $ 4.03
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,021.11 $ 4.06
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.55% AND
0.80% RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE
PERIOD, MULTIPLIED BY 184/366 (TO REFLECT THE ONE-HALF YEAR PERIOD).
FLEXIBLE INCOME
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
---------------- --------------- ---------------
07/01/04 -
07/01/04 12/31/04 12/31/04
---------------- --------------- ---------------
CLASS X
Actual (6.96% return) $ 1,000.00 $ 1,069.60 $ 3.54
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,021.72 $ 3.46
CLASS Y
Actual (6.70% return) $ 1,000.00 $ 1,067.00 $ 4.83
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,020.46 $ 4.72
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.68% AND
0.93% RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE
PERIOD, MULTIPLIED BY 184/366 (TO REFLECT THE ONE-HALF YEAR PERIOD).
BALANCED GROWTH
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
---------------- --------------- ---------------
07/01/04 -
07/01/04 12/31/04 12/31/04
---------------- --------------- ---------------
CLASS X
Actual (8.56% return) $ 1,000.00 $ 1,085.60 $ 3.62
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,021.67 $ 3.51
CLASS Y
Actual (8.44% return) $ 1,000.00 $ 1,084.40 $ 4.93
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,020.41 $ 4.77
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.69% AND
0.94% RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE
PERIOD, MULTIPLIED BY 184/366 (TO REFLECT THE ONE-HALF YEAR PERIOD).
25
<Page>
UTILITIES
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
---------------- --------------- ---------------
07/01/04 -
07/01/04 12/31/04 12/31/04
---------------- --------------- ---------------
CLASS X
Actual (18.15% return) $ 1,000.00 $ 1,181.50 $ 3.89
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,021.57 $ 3.61
CLASS Y
Actual (18.02% return) $ 1,000.00 $ 1,180.20 $ 5.26
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,020.31 $ 4.88
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.71% AND
0.96% RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE
PERIOD, MULTIPLIED BY 184/366 (TO REFLECT THE ONE-HALF YEAR PERIOD).
DIVIDEND GROWTH
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
---------------- --------------- ---------------
07/01/04 -
07/01/04 12/31/04 12/31/04
---------------- --------------- ---------------
CLASS X
Actual (6.06% return) $ 1,000.00 $ 1,060.60 $ 3.21
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,022.02 $ 3.15
CLASS Y
Actual (5.94% return) $ 1,000.00 $ 1,059.40 $ 4.50
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,020.76 $ 4.42
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.62% AND
0.87% RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE
PERIOD, MULTIPLIED BY 184/366 (TO REFLECT THE ONE-HALF YEAR PERIOD).
EQUALLY-WEIGHTED S&P 500
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
---------------- --------------- ---------------
07/01/04 -
07/01/04 12/31/04 12/31/04
---------------- --------------- ---------------
CLASS X
Actual (10.09% return) $ 1,000.00 $ 1,100.90 $ 2.43
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,022.82 $ 2.34
CLASS Y
Actual (9.98% return) $ 1,000.00 $ 1,099.80 $ 3.75
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,021.57 $ 3.61
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.46% AND
0.71% RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE
PERIOD, MULTIPLIED BY 184/366 (TO REFLECT THE ONE-HALF YEAR PERIOD).
26
<Page>
GROWTH
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
---------------- --------------- ---------------
07/01/04 -
07/01/04 12/31/04 12/31/04
---------------- --------------- ---------------
CLASS X
Actual (4.90% return) $ 1,000.00 $ 1,049.00 $ 4.79
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,020.46 $ 4.72
CLASS Y
Actual (4.79% return) $ 1,000.00 $ 1,047.90 $ 6.07
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,019.20 $ 5.99
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.93% AND
1.18% RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE
PERIOD, MULTIPLIED BY 184/366 (TO REFLECT THE ONE-HALF YEAR PERIOD).
AMERICAN OPPORTUNITIES
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
---------------- --------------- ---------------
07/01/04 -
07/01/04 12/31/04 12/31/04
---------------- --------------- ---------------
CLASS X
Actual (6.85% return) $ 1,000.00 $ 1,068.50 $ 3.48
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,021.77 $ 3.40
CLASS Y
Actual (6.66% return) $ 1,000.00 $ 1,066.60 $ 4.78
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,020.51 $ 4.67
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.67% AND
0.92% RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE
PERIOD, MULTIPLIED BY 184/366 (TO REFLECT THE ONE-HALF YEAR PERIOD).
CAPITAL OPPORTUNITIES
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
---------------- --------------- ---------------
07/01/04 -
07/01/04 12/31/04 12/31/04
---------------- --------------- ---------------
CLASS X
Actual (12.22% return) $ 1,000.00 $ 1,122.20 $ 4.69
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,020.71 $ 4.47
CLASS Y
Actual (12.10% return) $ 1,000.00 $ 1,121.00 $ 6.02
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,019.46 $ 5.74
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.88% AND
1.13% RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE
PERIOD, MULTIPLIED BY 184/366 (TO REFLECT THE ONE-HALF YEAR PERIOD).
27
<Page>
GLOBAL EQUITY
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
---------------- --------------- ---------------
07/01/04 -
07/01/04 12/31/04 12/31/04
---------------- --------------- ---------------
CLASS X
Actual (6.77% return) $ 1,000.00 $ 1,067.70 $ 5.77
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,019.56 $ 5.63
CLASS Y
Actual (6.60% return) $ 1,000.00 $ 1,066.00 $ 7.06
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,018.30 $ 6.90
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 1.11% AND
1.36% RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE
PERIOD, MULTIPLIED BY 184/366 (TO REFLECT THE ONE-HALF YEAR PERIOD).
DEVELOPING GROWTH
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
---------------- --------------- ---------------
07/01/04 -
07/01/04 12/31/04 12/31/04
---------------- --------------- ---------------
CLASS X
Actual (12.80% return) $ 1,000.00 $ 1,128.00 $ 3.48
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,021.87 $ 3.30
CLASS Y
Actual (12.64% return) $ 1,000.00 $ 1,126.40 $ 4.81
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,020.61 $ 4.57
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.65% AND
0.90% RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE
PERIOD, MULTIPLIED BY 184/366 (TO REFLECT THE ONE-HALF YEAR PERIOD).
28
<Page>
Money Market
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2004
<Table>
<Caption>
ANNUALIZED
PRINCIPAL YIELD
AMOUNT IN ON DATE OF MATURITY
THOUSANDS PURCHASE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER (79.6%)
ASSET-BACKED - AUTO (9.6%)
$ 1,630 DaimlerChrysler Revolving Auto Conduit LLC 2.30% 01/06/05 $ 1,629,479
4,150 FCAR Owner Trust 2.30 - 2.34 02/02/05 - 02/15/05 4,139,448
3,950 New Center Asset Trust 2.15 - 2.38 02/10/05 - 03/30/05 3,934,452
---------------
9,703,379
---------------
ASSET-BACKED - CONSUMER (8.5%)
3,600 Kitty Hawk Funding Corp. - 144A* 2.18 - 2.20 01/10/05 - 01/18/05 3,597,064
2,700 Old Line Funding Corp. - 144A* 2.26 01/11/05 2,698,312
2,300 Thames Asset Global Securitization - 144A* 2.26 - 2.33 01/12/05 - 02/04/05 2,296,915
---------------
8,592,291
---------------
ASSET-BACKED - CORPORATE (10.1%)
1,500 Amsterdam Funding Corp. - 144A* 2.35 01/19/05 1,498,245
4,500 Atlantis One Funding Corp. - 144A* 2.01 - 2.18 01/11/05 - 02/22/05 4,491,053
2,250 Eureka Securitization, Inc. - 144A* 2.26 - 2.32 01/20/05 - 02/09/05 2,245,355
2,000 Moat Funding, LLC - 144A* 2.25 02/09/05 1,995,147
---------------
10,229,800
---------------
ASSET-BACKED - DIVERSIFIED (3.3%)
2,500 CRC Funding LLC - 144A* 2.06 - 2.19 01/07/05 - 01/12/05 2,498,659
850 Fairway Finance Corp. - 144A* 2.35 01/05/05 849,778
---------------
3,348,437
---------------
ASSET-BACKED - MORTGAGES (4.9%)
5,000 Sydney Capital Corp. - 144A* 2.12 - 2.45 01/24/05 - 02/18/05 4,988,746
---------------
ASSET-BACKED - SECURITIES (11.8%)
1,774 Amstel Funding Corp. - 144A* 2.06 - 2.07 01/18/05 - 02/17/05 1,770,404
1,500 Clipper Receivables Co., LLC - 144A* 2.35 01/19/05 1,498,245
4,000 Galaxy Funding Inc. - 144A* 2.35 - 2.43 02/18/05 - 03/08/05 3,983,570
4,772 Scaldis Capital LLC - 144A* 2.17 - 2.43 01/28/05 - 03/01/05 4,758,603
---------------
12,010,822
---------------
FINANCE - CORPORATE (2.0%)
2,000 CIT Group Inc. 2.33 02/07/05 1,995,231
---------------
FINANCIAL CONGLOMERATES (4.9%)
5,000 General Electric Capital Corp. 1.79 - 2.07 01/03/05 - 04/14/05 4,982,276
---------------
INTERNATIONAL BANKS (21.7%)
1,500 ABN AMRO N.A. Finance, Inc. 2.01 01/24/05 1,498,083
2,100 ANZ (Del) Inc. 2.40 02/14/05 2,093,866
943 Banque Generale du Luxembourg 2.19 - 2.40 02/23/05 - 04/01/05 938,456
2,000 Barclays U.S. Funding Corp. 2.26% 02/22/05 1,993,500
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
29
<Page>
<Table>
<Caption>
ANNUALIZED
PRINCIPAL YIELD
AMOUNT IN ON DATE OF MATURITY
THOUSANDS PURCHASE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------
$ 3,850 CBA (Delaware) Finance Inc. 2.31 - 2.38 02/17/05 - 02/22/05 $ 3,837,388
3,600 CDC Commercial Paper Corp. - 144A* 2.29 - 2.36 02/16/05 - 02/23/05 3,588,966
2,000 KBC Financial Products International
Ltd. - 144A* 2.32 03/02/05 1,992,333
1,587 HBOS Treasury Services PLC 2.13 - 2.28 02/01/05 1,583,995
2,000 Natexis Banques Populaires U.S.
Finance Co. LLC 1.89 01/03/05 1,999,791
1,200 Nordea North America Inc. 2.29 02/01/05 1,197,644
460 Societe General N.A. Inc. 2.34 02/18/05 458,571
850 UniCredit Delaware Inc. 2.37 01/31/05 848,328
---------------
22,030,921
---------------
PHARMACEUTICALS (2.8%)
2,850 GlaxoSmithkline Finance PLC - 144A* 2.39 03/03/05 2,838,507
---------------
TOTAL COMMERCIAL PAPER
(COST $80,720,410) 80,720,410
---------------
U.S. GOVERNMENT AGENCIES (12.0%)
3,100 Federal Home Loan Banks 2.12 01/14/05 3,097,638
9,095 Freddie Mac 1.82 - 2.55 01/04/05 - 05/17/05 9,059,675
---------------
TOTAL U.S. GOVERNMENT AGENCIES
(COST $12,157,313) 12,157,313
---------------
CERTIFICATES OF DEPOSIT (7.0%)
1,500 First Tennessee Bank, NA 2.23 01/31/2005 1,500,000
2,000 Washington Mutual Bank 2.32 01/13/2005 2,000,000
3,600 Wells Fargo Bank, NA 2.05 - 2.42 01/07/05 - 01/27/05 3,600,000
---------------
TOTAL CERTIFICATE OF DEPOSIT
(COST $7,100,000) 7,100,000
---------------
BANKER'S ACCEPTANCE (1.5%)
1,571 J.P. Morgan Chase Bank
(COST $1,566,742) 1.90 - 2.54 01/05/05 - 04/14/05 1,566,742
---------------
TOTAL INVESTMENTS
(COST $101,544,465) (a) 100.1% 101,544,465
LIABILITIES IN EXCESS OF OTHER ASSETS (0.1) (131,578)
---- ---------------
NET ASSETS 100.0% $ 101,412,887
===== ===============
</Table>
- ----------
* Resale is restricted to qualified institutional investors
(a) Cost is the same for federal income tax purposes.
SEE NOTES TO FINANCIAL STATEMENTS
30
<Page>
MATURITY SCHEDULE*
<Table>
1 - 30 Days 41%
31 - 60 Days 41
61 - 90 Days 12
91 - 120 Days 3
121+ Days 3
---
100%
===
</Table>
- ----------
* AS A PERCENTAGE OF TOTAL MARKET VALUE.
SEE NOTES TO FINANCIAL STATEMENTS
31
<Page>
Flexible Income
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2004
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------
GOVERNMENT & CORPORATE BONDS (88.9%)
FOREIGN (16.2%)
ARGENTINA (0.5%)
GOVERNMENT OBLIGATIONS
$ 130 Republic of Argentina (c) 13.969% 04/10/05 $ 52,000
70 Republic of Argentina (c) 12.125 05/21/05 20,302
525 Republic of Argentina (c) 11.75 04/07/09 181,125
35 Republic of Argentina (c) 11.375 03/15/10 12,075
20 Republic of Argentina (c) 11.75 06/15/15 6,850
30 Republic of Argentina (c) 11.375 01/30/17 10,350
5 Republic of Argentina (c) 12.00 02/01/20 1,650
169 Republic of Argentina (c) 6.00 03/21/23 96,724
---------------
TOTAL ARGENTINA 381,076
---------------
AUSTRALIA (0.3%)
OTHER METALS/MINERALS (0.0%)
70 Murrin Murrin Holdings Property Ltd. (c)(h) 9.375 08/31/07 7
---------------
PROPERTY - CASUALTY INSURANCE (0.3%)
200 Mantis Reef Ltd. - 144A* 4.692 11/14/08 200,759
---------------
TOTAL AUSTRALIA 200,766
---------------
AUSTRIA (0.1%)
PULP & PAPER
65 Sappi Papier Holding AG - 144A* 6.75 06/15/12 72,329
---------------
BELGIUM (0.3%)
CABLE/SATELLITE TV
290 Telenet Group Holding NV - 144A* 11.50@ 06/15/14 221,850
---------------
BRAZIL (1.2%)
GOVERNMENT OBLIGATIONS
340 Federal Republic of Brazil 14.50 10/15/09 455,056
323 Federal Republic of Brazil 8.00 04/15/14 332,723
60 Federal Republic of Brazil 11.00 08/17/40 71,265
---------------
TOTAL BRAZIL 859,044
---------------
CANADA (2.8%)
BROADCASTING (0.3%)
187 Canwest Media Inc. - 144A* 8.00 09/15/12 201,059
---------------
DRUGSTORE CHAINS (0.3%)
45 Jean Coutu Group PJC Inc. - 144A* 7.625 08/01/12 47,813
165 Jean Coutu Group PJC Inc. - 144A* 8.50 08/01/14 169,950
---------------
217,763
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
32
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------
GOVERNMENT OBLIGATION (1.0%)
CAD 860 Canadian Government Bond 3.00% 06/01/06 $ 718,951
---------------
FOREST PRODUCTS (0.3%)
$ 40 Tembec Industries Inc. 7.75 03/15/12 38,900
175 Tembec Industries Inc. 8.50 02/01/11 176,750
---------------
215,650
---------------
INTEGRATED OIL (0.1%)
40 Petro-Canada 5.35 07/15/33 37,508
---------------
OIL & GAS PRODUCTION (0.1%)
90 Nexen Inc. 5.05 11/20/13 89,537
---------------
OTHER METALS/MINERALS (0.4%)
210 Inco Ltd. 7.20 09/15/32 245,552
5 Inco Ltd. 7.75 05/15/12 5,928
---------------
251,480
---------------
PULP & PAPER (0.3%)
155 Abitibi-Consolidated Inc. 6.00 06/20/13 148,606
80 Bowater Canada Finance (Canada) 7.95 11/15/11 86,606
---------------
235,212
---------------
TOTAL CANADA 1,967,160
---------------
ECUADOR (0.1%)
GOVERNMENT OBLIGATION
90 Republic of Ecuador 8.00 08/15/30 77,962
---------------
FRANCE (0.5%)
Chemicals: Specialty (0.2%)
140 Rhodia SA (France) 8.875 06/01/11 141,750
---------------
TELECOMMUNICATIONS (0.3%)
EUR 120 France Telecom S.A. 7.25 01/28/13 198,408
$ 25 France Telecom S.A. 9.25 03/01/31 33,990
---------------
232,398
---------------
TOTAL FRANCE 374,148
---------------
GERMANY (0.5%)
CABLE/SATELLITE TV (0.3%)
190 Kabel Deutschland - 144A* 10.625 07/01/14 219,450
---------------
PHARMACEUTICALS: MAJOR (0.2%)
55 VWR International - 144A* 6.875 04/15/12 57,750
70 VWR International - 144A* 8.00 04/15/14 75,075
---------------
132,825
---------------
TOTAL GERMANY 352,275
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
33
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------------------
IRELAND (0.3%)
INVESTMENT MANAGERS
$ 150 JSG Funding PLC 9.625% 10/01/12 $ 168,000
---------------
ISRAEL (0.3%)
ALTERNATIVE POWER GENERATION
170 Ormat Funding Corp. - 144A* 8.25 12/30/20 170,390
---------------
JAPAN (4.0%)
GOVERNMENT OBLIGATIONS
JPY 113,000 Japan (Government of) 0.10 04/20/05 1,103,148
178,000 Japan (Government of) 0.50 06/20/06 1,748,635
---------------
TOTAL JAPAN 2,851,783
---------------
KYRGYZSTAN (0.3%)
INDUSTRIAL CONGLOMERATES
$ 165 Hutchison Whampoa International Ltd. - 144A* 6.50 02/13/13 178,158
---------------
LUXEMBOURG (0.1%)
TELECOMMUNICATIONS
55 Telecom Italia Capital SA - 144A* 4.00 01/15/10 53,988
30 Telecom Italia Capital SA 4.00 11/15/08 29,912
---------------
TOTAL LUXEMBOURG 83,900
---------------
MEXICO (1.2%)
GOVERNMENT OBLIGATIONS (1.0%)
405 United Mexican States Corp. 8.375 01/14/11 476,685
80 United Mexican States Corp. 11.50 05/15/26 122,600
90 United Mexican States Corp. 8.30 08/15/31 105,705
---------------
704,990
---------------
OIL & GAS PRODUCTION (0.2%)
80 Petroleos Mexicanos 9.50 09/15/27 100,600
---------------
TOTAL MEXICO 805,590
---------------
NETHERLANDS (0.3%)
TELECOMMUNICATIONS
65 Deutsche Telekom International Finance
Corp. NV 8.75 06/15/30 86,086
EUR 60 Olivetti Finance NV 7.25 04/24/12 97,710
---------------
TOTAL NETHERLANDS 183,796
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
34
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------
QATAR (0.4%)
GAS DISTRIBUTORS (0.2%)
$ 105 Ras Laffan Liquid Natural Gas
Co. Ltd. - 144A* 8.294 03/15/14 $ 124,592
---------------
GOVERNMENT OBLIGATION (0.2%)
100 State of Qatar 9.75% 06/15/30 145,500
---------------
TOTAL QATAR 270,092
---------------
RUSSIA (1.4%)
GOVERNMENT OBLIGATIONS
70 Federal Republic of Russia 8.25 03/31/10 77,826
201 Federal Republic of Russia 11.00 07/24/18 282,171
190 Federal Republic of Russia 12.75 06/24/28 312,459
330 Federal Republic of Russia 5.00 03/31/30 341,682
---------------
TOTAL RUSSIA 1,014,138
---------------
TURKEY (0.9%)
FINANCIAL CONGLOMERATES (0.6%)
200 Citigroup Inc. - 144A*+++ (Issued 08/30/04) 0.00 02/23/06 248,900
100 Citigroup Inc. - 144A*+++ (Issued 09/17/04) 0.00 02/23/06 121,660
70 Citigroup Inc. - 144A*+++ (Issued 09/27/04) 0.00 02/23/06 90,202
---------------
460,762
---------------
GOVERNMENT OBLIGATIONS (0.3%)
90 Republic of Turkey 11.00 01/14/13 114,975
55 Republic of Turkey 11.50 01/23/12 70,950
---------------
185,925
---------------
TOTAL TURKEY 646,687
---------------
UNITED KINGDOM (0.3%)
ADVERTISING/MARKETING SERVICES (0.2%)
150 WPP Finance (UK) Corp. - 144A* 5.875 06/15/14 156,393
---------------
CHEMICALS: SPECIALTY (0.1%)
75 Avecia Group PLC 11.00 07/01/09 77,625
---------------
TOTAL UNITED KINGDOM 234,018
---------------
VENEZUELA ( 0.4%)
GOVERNMENT OBLIGATIONS
70 Republic of Venezuela 8.50 10/08/14 74,375
120 Republic of Venezuela 9.25 09/15/27 126,900
100 Republic of Venezuela 9.375 01/13/34 106,050
---------------
TOTAL VENEZUELA 307,325
---------------
TOTAL FOREIGN
(COST $10,921,822) 11,420,487
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
35
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------
UNITED STATES ( 72.7%)
CORPORATE BONDS (42.9%)
ADVERTISING/MARKETING SERVICES (0.7%)
$ 222 Advanstar Communications, Inc. 9.79%** 08/15/08 $ 233,297
90 Interep National Radio Sales, Inc. (Series B) 10.00 07/01/08 68,287
165 Interpublic Group of Companies, Inc. (The) 6.25 11/15/14 167,782
---------------
469,366
---------------
AEROSPACE & DEFENSE (0.5%)
105 K&F Acquisition Inc. - 144A* 7.75 11/15/14 108,937
100 Northrop Grumman Corp. 4.079 11/16/06 101,056
30 Raytheon Co. 4.85 01/15/11 30,778
45 Raytheon Co. 8.30 03/01/10 53,382
84 Systems 2001 Asset Trust - 144A* 6.664 09/15/13 93,586
---------------
387,739
---------------
AIR FREIGHT/COURIERS (0.1%)
40 FedEx Corp. 7.25 02/15/11 45,718
30 FedEx Corp. 2.65 04/01/07 29,399
---------------
75,117
---------------
AIRLINES (0.5%)
130 CHC Helicopter Corp. 7.375 05/01/14 137,800
21 Continental Airlines, Inc. 6.545 02/02/19 20,955
195 Continental Airlines, Inc. 6.648 09/15/17 189,078
30 Southwest Airlines Co. (Series 01-1) 5.496 11/01/06 30,911
---------------
378,744
---------------
ALTERNATIVE POWER GENERATION (0.1%)
85 Calpine Corp. - 144A* 8.50 07/15/10 73,312
---------------
APPAREL/FOOTWEAR (0.1%)
60 Oxford Industries, Inc. 8.875 06/01/11 64,725
---------------
AUTO PARTS: O.E.M. (0.4%)
95 Cooper Standard Automotive - 144A* 8.375 12/15/14 95,238
154 TRW Automotive, Inc. 9.375 02/15/13 179,410
---------------
274,648
---------------
BROADCASTING (0.2%)
75 Clear Channel Communications, Inc. 7.65 09/15/10 85,436
74 Salem Communications Holdings Corp. (Series B) 9.00 07/01/11 81,585
---------------
167,021
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
36
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------
BUILDING PRODUCTS (1.3%)
$ 120 ACIH Inc. - 144A* 11.50%@ 12/15/12 $ 87,300
290 Associated Materials Inc. 11.25@ 03/01/14 210,250
125 Brand Services Inc. 12.00 10/15/12 140,625
35 Interface Inc. 7.30 04/01/08 35,962
165 Interface Inc. 9.50 02/01/14 180,675
100 PLY Gem Industries Inc. - 144A* 9.00 02/15/12 102,000
175 THL Buildco Inc. (Nortek) Inc. 144A* 8.50 09/01/14 183,750
---------------
940,562
---------------
CABLE/SATELLITE TV (1.5%)
38 Avalon Cable LLC 11.875 12/01/08 39,656
135 Charter Communications Holdings LLC 10.75 10/01/09 123,525
185 Charter Communications Holdings/Charter
Capital 11.75@ 05/15/11 136,900
180 Comcast Cable Communications Inc. 6.75 01/30/11 202,392
85 Comcast Corp. 6.50 01/15/15 94,660
115 Cox Communications, Inc. - 144A* 4.625 01/15/10 114,862
40 Directv Holdings/Finance 8.375 03/15/13 45,050
210 Echostar DBS Corp. 6.375 10/01/11 215,775
44 Knology, Inc. - 144A* (d) 12.00~ 11/30/09 43,027
60 Renaissance Media Group LLC 10.00 04/15/08 62,100
---------------
1,077,947
---------------
CASINO/GAMING (1.7%)
840 Aladdin Gaming Holdings/Capital Corp. LLC
(Series B)(a)(c)(h) 13.50 03/01/10 0
200 Harrah's Operating Co., Inc. 5.50 07/01/10 207,269
115 Harrah's Operating Co., Inc. 7.875 12/15/05 119,887
130 Isle of Capri Casinos 7.00 03/01/14 133,250
235 MGM Mirage Inc. 6.00 10/01/09 242,050
190 Park Place Entertainment 8.875 09/15/08 215,650
299 Resort At Summerlin LP/Ras Co.
(Series B)(a)(c)(h) 13.00~ 12/15/07 0
75 Station Casinos, Inc. 6.00 04/01/12 76,781
105 Station Casinos, Inc. 6.50 02/01/14 108,412
85 Venetian Casino/LV Sands 11.00 06/15/10 97,431
---------------
1,200,730
---------------
CHEMICALS: AGRICULTURAL (0.0%)
14 IMC Global Inc. (Series B) 10.875 06/01/08 16,870
---------------
CHEMICALS: MAJOR DIVERSIFIED (0.6%)
161 Equistar Chemical Funding 10.125 09/01/08 186,357
35 Equistar Chemical Funding 10.625 05/01/11 40,775
55 Huntsman Advanced Materials Corp. - 144A* 11.00 07/15/10 65,725
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
37
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------
$ 99 Huntsman ICI Chemicals 10.125% 07/01/09 $ 104,693
45 ICI Wilmington Inc. 4.375 12/01/08 45,294
---------------
442,844
---------------
CHEMICALS: SPECIALTY (1.7%)
50 FMC Corp. 10.25 11/01/09 57,625
60 Graham Packaging Company Inc. - 144A* 8.50 10/15/12 63,300
65 Innophos Inc. - 144A* 8.875 08/15/14 70,525
80 ISP Chemco 10.25 07/01/11 90,800
135 ISP Holdings Inc. (Series B) 10.625 12/15/09 150,187
40 Koppers Industry Inc. 9.875 10/15/13 45,800
175 Millennium America, Inc. 7.00 11/15/06 182,875
79 Millennium America, Inc. 9.25 06/15/08 90,258
100 Nalco Co. 7.75 11/15/11 108,500
115 Nalco Co. 8.875 11/15/13 126,787
160 Rockwood Specialties, Inc. 10.625 05/15/11 184,800
45 Westlake Chemical Corp. 8.75 07/15/11 51,075
---------------
1,222,532
---------------
COAL (0.1%)
35 Foundation PA Coal Co. - 144A* 7.25 08/01/14 37,450
---------------
CONSTRUCTION MATERIALS (0.2%)
120 RMCC Acquisition Co. - 144A* 9.50 11/01/12 120,300
---------------
CONSUMER SUNDRIES (0.1%)
80 Amscan Holdings, Inc. 8.75 05/01/14 80,400
---------------
CONSUMER/BUSINESS SERVICES (0.2%)
115 Muzak LLC/Muzak Finance Corp. 9.875 03/15/09 80,931
80 Muzak LLC/Muzak Finance Corp. 10.00 02/15/09 74,900
---------------
155,831
---------------
CONTAINERS/PACKAGING (1.4%)
225 Graphic Packaging International Corp. 9.50 08/15/13 257,062
65 Norampac, Inc. 6.75 06/01/13 68,737
345 Owens-Illinois Inc. 7.50 05/15/10 367,856
70 Pliant Corp. (Issued 04/10/02) 13.00 06/01/10 68,250
95 Pliant Corp. (Issued 08/29/00) 13.00 06/01/10 93,100
125 Sealed Air Corp - 144A* 5.625 07/15/13 129,533
---------------
984,538
---------------
DEPARTMENT STORES (0.1%)
25 May Department Stores Co., Inc. 6.70 09/15/28 26,276
50 May Department Stores Co., Inc. 6.90 01/15/32 54,245
---------------
80,521
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
38
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------
DRUGSTORE CHAINS (0.2%)
$ 15 CVS Corp. - 144A* 6.204% 10/10/25 $ 15,749
90 Rite Aid Corp. 7.125 01/15/07 90,450
30 Rite Aid Corp. 8.125 05/01/10 31,875
---------------
138,074
---------------
ELECTRIC UTILITIES (3.6%)
80 AES Corp. (The) 7.75 03/01/14 87,200
11 AES Corp. (The) 8.875 02/15/11 12,622
16 AES Corp. (The) 9.375 09/15/10 18,680
140 AES Corp. (The) - 144A* 9.00 05/15/15 161,000
60 Allegheny Energy, Inc. 7.75 08/01/05 61,125
140 Arizona Public Service Co. 5.80 06/30/14 149,774
65 Cincinnati Gas & Electric Co. 5.70 09/15/12 68,971
15 Cincinnati Gas & Electric Co. (Series A) 5.40 06/15/33 14,372
40 Cincinnati Gas & Electric Co. (Series B) 5.375 06/15/33 38,184
65 CMS Energy Corp. 7.50 01/15/09 69,550
75 CMS Energy Corp. 8.50 04/15/11 85,594
55 Columbus Southern Power Co. (Series D) 6.60 03/01/33 61,735
35 Consolidated Natural Gas Co. 5.00 12/01/14 35,101
10 Consolidated Natural Gas Co. (Series A) 5.00 03/01/14 10,042
60 Consolidated Natural Gas Co. (Series C) 6.25 11/01/11 65,950
30 Duke Energy Corp. 4.50 04/01/10 30,389
100 Entergy Gulf States, Inc. 2.80** 12/01/09 99,988
45 Entergy Gulf States, Inc. 3.60 06/01/08 44,306
80 Exelon Corp. 6.75 05/01/11 89,606
30 IPALCO Enterprises, Inc. 8.625 11/14/11 33,750
135 Monongahela Power Co. 5.00 10/01/06 138,113
115 MSW Energy Holdings/Finance 7.375 09/01/10 121,325
25 MSW Energy Holdings/Finance 8.50 09/01/10 27,500
190 Nevada Power Co. 9.00 08/15/13 223,250
120 Nisource Finance Corp. 2.915 11/23/09 119,996
120 Ohio Power Co. (Series G) 6.60 02/15/33 134,688
55 Pacific Gas & Electric Co. 6.05 03/01/34 57,323
30 Panhandle Eastern Pipe Line Co. (Series B) 2.75 03/15/07 29,391
15 PSEG Energy Holdings Inc. 7.75 04/16/07 15,937
100 PSEG Energy Holdings Inc. 8.625 02/15/08 110,250
25 Public Service Electric & Gas Co.
(Series MTNB) 5.00 01/01/13 25,558
70 Reliant Energy, Inc. 6.75 12/15/14 69,913
20 South Carolina Electric & Gas Co. 5.30 05/15/33 19,486
30 Southern California Edison Co. 5.00 01/15/14 30,541
20 Texas Eastern Transmission, L.P. 7.00 07/15/32 23,051
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
39
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------
$ 40 TNP Enterprises, Inc. 10.25% 04/01/10 $ 42,900
80 TXU Energy Co. 7.00 03/15/13 89,489
35 Wisconsin Electric Power Co. 3.50 12/01/07 34,883
15 Wisconsin Electric Power Co. 5.625 05/15/33 15,312
---------------
2,566,845
---------------
ELECTRICAL PRODUCTS (0.2%)
35 Cooper Industries Inc. 5.25 07/01/07 36,282
90 Rayovac Corp. 8.50 10/01/13 100,350
---------------
136,632
---------------
ELECTRONIC DISTRIBUTORS (0.1%)
90 BRL Universal Equipment Corp. 8.875 02/15/08 95,063
---------------
ELECTRONIC EQUIPMENT/INSTRUMENTS (0.2%)
140 Xerox Corp. 7.125 06/15/10 151,900
---------------
ENVIRONMENTAL SERVICES (0.2%)
60 Allied Waste North America, Inc. 9.25 09/01/12 65,250
75 Allied Waste North America, Inc. (Series B) 8.875 04/01/08 80,625
---------------
145,875
---------------
FINANCE/RENTAL/LEASING (1.3%)
35 CIT Group, Inc. 2.875 09/29/06 34,650
30 CIT Group, Inc. 3.65 11/23/07 29,904
90 Countrywide Home Loans, Inc. (Series MTN) 3.25 05/21/08 88,074
145 Ford Motor Credit Co. 7.25 10/25/11 155,711
105 Ford Motor Credit Co. 7.375 10/28/09 113,375
135 MBNA America Bank NA 7.125 11/15/12 153,798
70 MBNA Corp. 6.125 03/01/13 75,142
25 SLM Corp. 4.00 01/15/10 24,834
45 SLM Corp. (Series MTNA) 5.00 10/01/13 45,649
115 United Rentals NA, Inc. 6.50 02/15/12 112,700
120 United Rentals NA, Inc. 7.75 11/15/13 118,200
---------------
952,037
---------------
FINANCIAL CONGLOMERATES (2.1%)
25 Bank One Corp. (Series MTNA) 6.00 02/17/09 26,747
55 Chase Manhattan Corp. 6.00 02/15/09 58,727
10 Chase Manhattan Corp. 7.00 11/15/09 11,170
40 Citicorp 6.75 08/15/05 40,931
15 Citigroup Inc. 5.625 08/27/12 15,999
20 Citigroup Inc. 5.75 05/10/06 20,660
45 Citigroup Inc. 6.00 02/21/12 49,301
50 Citigroup Inc. 6.625 06/15/32 56,188
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
40
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------
$ 20 General Electric Capital Corp. 4.25% 12/01/10 $ 20,015
85 General Electric Capital Corp. (Series MTNA) 6.75 03/15/32 99,824
25 General Motors Acceptance Corp. 4.50 07/15/06 25,024
755 General Motors Acceptance Corp. 6.875 09/15/11 774,749
85 General Motors Acceptance Corp. 8.00 11/01/31 87,615
175 Prudential Holdings, LLC (Series B)
(FSA) - 144A* 7.245 12/18/23 208,311
---------------
1,495,261
---------------
FOOD RETAIL (0.5%)
25 Albertson's Inc. 7.45 08/01/29 29,392
50 Albertson's, Inc. 7.50 02/15/11 57,981
42 CA FM Lease Trust - 144A* 8.50 07/15/17 48,441
200 Delhaize America, Inc. 8.125 04/15/11 234,145
15 Kroger Co. 7.50 04/01/31 17,987
---------------
387,946
---------------
FOOD: MAJOR DIVERSIFIED (0.4%)
25 General Mills Inc. 3.875 11/30/07 25,097
30 Kraft Foods Inc. 5.25 06/01/07 31,094
215 Kraft Foods Inc. 5.625 11/01/11 227,995
30 Kraft Foods Inc. 6.25 06/01/12 32,982
---------------
317,168
---------------
FOOD: MEAT/FISH/DAIRY (1.0%)
95 Michael Foods Inc. (Series B) 8.00 11/15/13 100,700
220 Pilgrim's Pride Corp. 9.625 09/15/11 248,600
60 PPC Escrow Corp. 9.25 11/15/13 67,500
65 Smithfield Foods Inc. 7.00 08/01/11 69,713
70 Smithfield Foods Inc. 7.625 02/15/08 75,250
25 Smithfield Foods Inc. 7.75 05/15/13 27,938
130 Smithfield Foods Inc. (Series B) 8.00 10/15/09 144,625
---------------
734,326
---------------
FOREST PRODUCTS (0.2%)
13 Weyerhaeuser Co. 6.125 03/15/07 13,695
85 Weyerhaeuser Co. 6.75 03/15/12 95,919
---------------
109,614
---------------
GAS DISTRIBUTORS (0.4%)
130 Dynegy Holdings, Inc. 6.875 04/01/11 125,775
130 Dynegy Holdings, Inc. - 144A* 9.875 07/15/10 145,925
25 Northwest Pipeline Corp. 8.125 03/01/10 27,781
---------------
299,481
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
41
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------
HOME BUILDING (0.4%)
$ 80 Tech Olympic USA, Inc. 10.375% 07/01/12 $ 90,000
100 Tech Olympic USA, Inc. (Issued 02/03/03) 9.00 07/01/10 107,500
50 Tech Olympic USA, Inc. (Issued 11/27/02) 9.00 07/01/10 53,750
---------------
251,250
---------------
HOME FURNISHINGS (0.1%)
40 Mohawk Industries, Inc. (Series D) 7.20 04/15/12 46,090
40 Tempur-Pedic Inc. 10.25 08/15/10 46,200
---------------
92,290
---------------
HOSPITAL/NURSING MANAGEMENT (0.7%)
85 Community Health Systems Inc. - 144A* 6.50 12/15/12 86,063
45 HCA, Inc. 6.30 10/01/12 45,709
85 HCA, Inc. 7.875 02/01/11 93,741
110 Medcath Holdings Corp. 9.875 07/15/12 119,900
115 Tenet Healthcare Corp. 7.375 02/01/13 112,125
65 Tenet Healthcare Corp. - 144A* 9.875 07/01/14 71,175
---------------
528,713
---------------
HOTELS/RESORTS/CRUISELINES (0.4%)
70 Hilton Hotels Corp. 7.625 12/01/12 81,984
120 Hyatt Equities LLC - 144A* 6.875 06/15/07 126,327
50 Marriott International, Inc. (Series E) 7.00 01/15/08 54,540
---------------
262,851
---------------
HOUSEHOLD/PERSONAL CARE (0.1%)
45 Clorox Co. (The) - 144A* 2.544** 12/14/07 45,014
---------------
INDUSTRIAL MACHINERY (0.2%)
35 Flowserve Corp. 12.25 08/15/10 38,850
50 Goodman Global Holding Company, Inc. - 144A* 5.76** 06/15/12 51,000
45 Goodman Global Holding Company, Inc. - 144A* 7.875 12/15/12 44,775
---------------
134,625
---------------
INDUSTRIAL SPECIALTIES (0.5%)
165 Johnsondiversy, Inc. 9.625 05/15/12 185,213
50 Tekni-Plex Inc. - 144A* 8.75 11/15/13 50,000
115 UCAR Finance, Inc. 10.25 02/15/12 131,963
---------------
367,176
---------------
INFORMATION TECHNOLOGY SERVICES (0.1%)
25 Electronic Data Systems Corp. 7.125 10/15/09 27,563
30 Electronic Data Systems Corp. (Series B) 6.50 08/01/13 31,729
---------------
59,292
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
42
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------
INSURANCE BROKERS/SERVICES (0.7%)
$ 290 Farmers Exchange Capital - 144A* 7.05% 07/15/28 $ 297,902
185 Marsh & McLennan Co., Inc. 5.875 08/01/33 171,981
---------------
469,883
---------------
INTEGRATED OIL (0.3%)
30 Amerada Hess Corp. 6.65 08/15/11 33,035
115 Amerada Hess Corp. 7.875 10/01/29 136,473
30 PC Financial Partnership 5.00 11/15/14 29,947
---------------
199,455
---------------
INTERNET SOFTWARE/SERVICES (0.1%)
184 Exodus Communications, Inc. (a) (c) (h) 11.625 07/15/10 0
50 Global Cash Access LLC 8.75 03/15/12 54,125
---------------
54,125
---------------
INVESTMENT BANKS/BROKERS (0.5%)
55 Goldman Sachs Group Inc. 6.60 01/15/12 61,469
60 Goldman Sachs Group Inc. 6.875 01/15/11 67,775
180 Refco Finance Holdings - 144A* 9.00 08/01/12 198,000
---------------
327,244
---------------
MAJOR BANKS (0.3%)
20 Bank of New York (The) 5.20 07/01/07 20,805
70 FleetBoston Financial Corp. 7.25 09/15/05 72,045
35 HSBC Finance Corp. 6.75 05/15/11 39,329
70 Wachovia Corp. 4.95 11/01/06 71,980
---------------
204,159
---------------
MANAGED HEALTH CARE (0.6%)
245 Aetna, Inc. 7.875 03/01/11 287,093
90 Health Net, Inc. 9.875 04/15/11 108,704
30 WellPoint Health Networks Inc. 6.375 06/15/06 31,248
---------------
427,045
---------------
MEDIA CONGLOMERATES (0.7%)
30 News America Inc. 7.125 04/08/28 33,822
100 News America Inc. 7.30 04/30/28 114,927
55 News America Holdings, Inc. 7.75 02/01/24 65,416
30 News America Holdings, Inc. 8.875 04/26/23 39,103
100 Time Warner, Inc. 6.625 05/15/29 108,088
120 Time Warner, Inc. 7.625 04/15/31 145,628
---------------
506,984
---------------
MEDICAL DISTRIBUTORS (0.2%)
100 AmerisourceBergen Corp. 8.125 09/01/08 111,750
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
43
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------
MEDICAL SPECIALTIES (0.3%)
$ 110 Fisher Scientific International, Inc. 8.125% 05/01/12 $ 122,650
50 Fisher Scientific International, Inc. - 144A* 6.75 08/15/14 53,875
25 National Nephrology Assoc. Inc. - 144A* 9.00 11/01/11 29,063
---------------
205,588
---------------
MEDICAL/NURSING SERVICES (0.5%)
181 Fresenius Medical Care Capital Trust 7.875 06/15/11 202,720
25 Fresenius Medical Care Capital Trust II
(Units) 7.875 02/01/08 27,188
110 Team Health Inc. 9.00 04/01/12 108,075
---------------
337,983
---------------
METAL FABRICATIONS (0.4%)
60 General Cable Corp. 9.50 11/15/10 68,100
170 Trimas Corp. 9.875 06/15/12 181,050
---------------
249,150
---------------
MISCELLANEOUS COMMERCIAL SERVICES (0.6%)
150 Iron Mountain Inc. 7.75 01/15/15 153,000
140 Iron Mountain Inc. 8.625 04/01/13 149,450
115 Vertis Inc. - 144A* 13.50 12/07/09 121,756
---------------
424,206
---------------
MISCELLANEOUS MANUFACTURING (0.3%)
120 Amsted Industries Inc. - 144A* 10.25 10/15/11 136,200
70 Propex Fabrics Inc. - 144A* 10.00 12/01/12 72,975
---------------
209,175
---------------
MOTOR VEHICLES (0.2%)
125 DaimlerChrysler North American Holdings Co. 7.30 01/15/12 142,105
---------------
MOVIES/ENTERTAINMENT (0.2%)
65 Cinemark, Inc. 9.75@ 03/15/14 49,400
65 Marquee Inc. - 144A* 6.54** 08/15/10 68,738
---------------
118,138
---------------
MULTI-LINE INSURANCE (0.4%)
160 AIG Sun America Global Finance VI - 144A* 6.30 05/10/11 174,736
30 American General Finance Corp. (Series MTNH) 4.625 09/01/10 30,042
20 AXA Financial Inc. 6.50 04/01/08 21,654
45 Hartford Financial Services Group, Inc.
(The) (Note 4) 2.375 06/01/06 44,192
15 International Lease Finance Corp. 2.95 05/23/06 14,868
30 International Lease Finance Corp. 3.75 08/01/07 30,012
---------------
315,504
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
44
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------
OIL & GAS PIPELINES (1.0%)
$ 260 El Paso Production Holdings 7.75% 06/01/13 $ 273,650
95 Pacific Energy Partners/Finance 7.125 06/15/14 101,650
40 Southern Natural Gas 8.875 03/15/10 45,000
35 Transcontinental Gas Pipe Line Corp.
(Series B) 8.875 07/15/12 42,744
205 Williams Companies, Inc. (The) 7.875 09/01/21 229,600
---------------
692,644
---------------
OIL & GAS PRODUCTION (1.3%)
160 Chesapeake Energy Corp. 7.50 09/15/13 175,000
160 Hilcorp Energy/Finance - 144A* 10.50 09/01/10 181,600
40 Magnum Hunter Resources, Inc. 9.60 03/15/12 45,600
170 Pemex Project Funding Master Trust - 144A* 3.79** 06/15/10 174,845
60 Plains E & P Corp. 7.125 06/15/14 65,700
225 Vintage Petroleum, Inc. 7.875 05/15/11 240,750
---------------
883,495
---------------
OIL REFINING/MARKETING (0.5%)
35 CITGO Petroleum Corp. - 144A* 6.00 10/15/11 35,000
170 Husky Oil Ltd. 8.90 08/15/28 194,375
30 Marathon Oil Corp. 5.375 06/01/07 31,214
65 Tesoro Petroleum Corp. 9.625 04/01/12 75,075
---------------
335,664
---------------
OILFIELD SERVICES/EQUIPMENT (0.4%)
20 Hanover Compressor Co. 8.625 12/15/10 21,950
50 Hanover Compressor Co. 9.00 06/01/14 55,875
100 Hanover Equipment Trust 2001 A (Series A) 8.50 09/01/08 108,000
60 Hanover Equipment Trust 2001 B (Series B) 8.75 09/01/11 65,400
---------------
251,225
---------------
OTHER TRANSPORTATION (0.3%)
165 Laidlaw International Inc. 10.75 06/15/11 193,463
---------------
PHARMACEUTICALS: OTHER (0.1%)
45 Leiner Health Products Inc. 11.00 06/01/12 49,388
---------------
PUBLISHING: BOOKS/MAGAZINES (0.9%)
59 Dex Media East/Finance 12.125 11/15/12 72,201
95 Dex Media West/Finance 9.875 08/15/13 109,963
150 Houghton Mifflin Co. 9.875 02/01/13 165,000
50 Houghton Mifflin Co. 11.50@ 10/15/13 37,000
40 PEI Holdings, Inc. 11.00 03/15/10 46,800
175 PRIMEDIA, Inc. 8.875 05/15/11 185,938
---------------
616,902
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
45
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------
PULP & PAPER (0.5%)
$ 115 Georgia-Pacific Corp. 8.875% 02/01/10 $ 134,406
560 TJIWI Kimia FN Mauritius (c) 10.00 08/01/04 232,400
---------------
366,806
---------------
RAILROADS (0.4%)
25 Burlington North Santa Fe Railway Co. 4.575 01/15/21 25,315
60 CSX Corp. 2.75 02/15/06 59,501
60 Norfolk Southern Corp. 7.35 05/15/07 64,973
30 Union Pacific Corp. 3.625 06/01/10 28,904
100 Union Pacific Corp - 144A* 5.214 09/30/14 100,439
30 Union Pacific Corp. (Series MTNE) 6.79 11/09/07 32,297
---------------
311,429
---------------
REAL ESTATE DEVELOPMENT (0.3%)
120 CB Richard Ellis Services, Inc. 11.25 06/15/11 138,600
42 CBRE Escrow Inc. 9.75 05/15/10 48,090
---------------
186,690
---------------
REAL ESTATE INVESTMENT TRUSTS (0.1%)
50 HMH Properties, Inc. (Series B) 7.875 08/01/08 51,625
---------------
REGIONAL BANKS (0.2%)
AUD 200 KFW International Inc. 6.25 07/15/05 157,229
---------------
RESTAURANTS (0.1%)
$ 70 Tricon Global Restaurants, Inc. 8.875 04/15/11 86,594
---------------
SAVINGS BANKS (0.4%)
25 Household Finance Corp. 4.125 12/15/08 25,125
15 Household Finance Corp. 5.875 02/01/09 16,043
15 Household Finance Corp. 6.375 10/15/11 16,589
35 Household Finance Corp. 6.40 06/17/08 37,790
180 Washington Mutual Inc. 8.25 04/01/10 210,817
---------------
306,364
---------------
SPECIALTY STORES (0.8%)
130 Autonation, Inc. 9.00 08/01/08 149,175
85 General Nutrition Centers Inc. 8.50 12/01/10 80,750
150 Petro Stopping Centers LP/Petro
Financial Corp. 9.00 02/15/12 159,375
150 Sonic Automotive, Inc. 8.625 08/15/13 160,688
---------------
549,988
---------------
SPECIALTY TELECOMMUNICATIONS (1.2%)
90 American Tower Corp. 7.50 05/01/12 94,950
45 American Tower Corp. 9.375 02/01/09 47,813
85 American Tower Corp. - 144A* 7.125 10/15/12 87,338
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
46
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------
$ 70 Panamsat Corp. - 144A* 9.00% 08/15/14 $ 78,487
190 Panamsat Holding Corp. - 144A* 10.375@ 11/01/14 131,575
125 Qwest Communications International - 144A* 5.79** 02/15/09 127,188
140 Qwest Services Corp. - 144A* 13.50 12/15/07 160,650
90 Satelites Mexicanos SA (c) 10.125 11/01/04 49,950
20 U.S. West Communications Corp. 5.625 11/15/08 20,450
45 U.S. West Communications Corp. 6.625 09/15/05 46,125
---------------
844,526
---------------
STEEL (0.2%)
135 United States Steel Corp. 9.75 05/15/10 154,575
---------------
TELECOMMUNICATION EQUIPMENT (0.2%)
125 Nortel Networks Ltd. 6.125 02/15/06 127,813
---------------
TELECOMMUNICATIONS (0.8%)
50 AT&T Corp. 9.75 11/15/31 59,938
185 Primus Telecommunication Group, Inc. 8.00 01/15/14 163,725
433 Rhythms Netconnections, Inc. (a) (c) (h) 12.75 04/15/09 0
120 Sprint Capital Corp. 8.75 03/15/32 160,369
150 Verizon Global Funding Corp. 7.75 12/01/30 187,084
---------------
571,116
---------------
TOBACCO (0.2%)
25 Altria Group, Inc. 7.00 11/04/13 27,134
110 Altria Group, Inc. 7.75 01/15/27 123,805
---------------
150,939
---------------
TRUCKS/CONSTRUCTION/FARM MACHINERY (0.7%)
175 Caterpillar Financial Services Corp. 2.409** 08/20/07 175,038
190 Manitowoc Inc. (The) 10.50 08/01/12 219,450
60 NMHG Holding Co. 10.00 05/15/09 66,600
---------------
461,088
---------------
WHOLESALE DISTRIBUTORS (0.4%)
150 Buhrmann US Inc. 8.25 07/01/14 152,437
115 Nebraska Book Company, Inc. 8.625 03/15/12 118,450
---------------
270,887
---------------
WIRELESS TELECOMMUNICATIONS (1.2%)
30 AirGATE PCS, Inc. - 144A* 5.85** 10/15/11 30,975
70 AT&T Wireless Services, Inc. 8.75 03/01/31 94,670
40 Centennial Communications Corp. 8.125 02/01/14 41,300
140 Metropcs, Inc. 10.75 10/01/11 150,500
50 Rogers Wireless Communications, Inc. - 144A* 8.00 12/15/12 53,125
65 Rogers Wireless Communications, Inc. - 144A* 7.50 03/15/15 68,900
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
47
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------
$ 75 Rural Cellular Corp. 6.99%** 03/15/10 $ 78,000
120 SBA Communications Corp. 9.75@ 12/15/11 101,700
110 SBA Communications Corp. - 144A* 8.50 12/01/12 112,750
110 Ubiquitel Operating Co. - 144A* 9.875 03/01/11 124,025
---------------
855,945
---------------
TOTAL CORPORATE BONDS
(COST $30,446,060) 30,301,519
---------------
MORTGAGE-BACKED SECURITIES (7.0%)
Federal Home Loan Mortgage Corp. (0.6%)
359 7.50 11/01/29 - 06/01/32 385,184
---------------
Federal National Mortgage Assoc. (6.1%)
1,360 6.50 07/01/29 - 11/01/33 1,428,601
1,303 7.00 10/01/30 - 09/01/33 1,381,720
496 7.50 02/01/31 - 05/01/32 531,793
798 8.00 02/01/12 - 06/01/31 862,965
114 8.50 06/01/30 124,507
---------------
4,329,586
---------------
Government National Mortgage Assoc. (0.3%)
121 7.50 04/15/26 - 08/15/29 130,896
47 8.00 02/15/26 - 06/15/26 51,130
---------------
182,026
---------------
TOTAL MORTGAGE-BACKED SECURITIES
(COST $4,834,776) 4,896,796
---------------
ASSET BACKED SECURITIES (1.8%)
FINANCE/RENTAL/LEASING (0.1%)
80 Chase Funding Mortgage 2.528** 11/25/18 80,243
---------------
INVESTMENT TRUSTS/MUTUAL FUNDS (1.7% )
1,106 Targeted Return 144A* 8.218 08/01/15 1,211,922
---------------
TOTAL ASSET-BACKED SECURITIES
(COST $1,212,506) 1,292,165
---------------
U.S. GOVERNMENT AGENCY & OBLIGATIONS (21.0%)
270 Federal Home Loan Mortgage Corp. 5.125 11/07/13 271,135
---------------
U. S. TREASURY BONDS
3,225 6.125 08/15/29 3,787,363
185 8.125 08/15/21 256,211
1,165 8.75 05/15/17 - 08/15/20 1,663,977
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
48
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------------
U. S. Treasury Notes
$ 2,500 3.875% 02/15/13 $ 2,467,385
3,850 6.75 05/15/05 3,910,761
------------
U. S. Treasury Strips
700 0.00 02/15/06 678,749
3,650 0.00 08/15/17 - 08/15/22 1,746,731
------------
TOTAL U.S. GOVERNMENT AGENCY & OBLIGATIONS
(COST $14,308,084) 14,782,312
------------
TOTAL UNITED STATES
(COST $50,801,426) 51,272,792
------------
TOTAL GOVERNMENT & CORPORATE BONDS
(COST $61,723,248) 62,693,279
------------
CONVERTIBLE BOND (0.2%)
TELECOMMUNICATIONS EQUIPMENT
130 Nortel Networks Ltd. (Cost $124,197) 4.25 09/01/08 127,075
------------
<Caption>
NUMBER OF
SHARES
- -----------
COMMON STOCKS (e) (0.2%)
AEROSPACE & DEFENSE (0.0%)
1,118 Orbital Sciences Corp. (d) 13,226
------------
APPAREL/FOOTWEAR RETAIL (0.0%)
50,166 County Seat Stores Corp. (d) (h) 0
------------
CASINO/GAMING (0.0%)
787 Fitzgeralds Gaming Corp.+ (h) 0
------------
FOOD: SPECIALTY/CANDY (0.0%)
100 SFAC New Holdings Inc.++ (d) (h) 0
18 SFFB New Holdings Inc. (d) (h) 0
------------
0
------------
MEDICAL/NURSING SERVICES (0.0%)
34,888 Raintree Healthcare Corp. (d) (h) 0
------------
RESTAURANTS (0.0%)
10,137 Catalina Restaurant Group (d) (h) 20,274
------------
SPECIALTY TELECOMMUNICATIONS (0.0%)
1,171 Birch Telecom Inc. (d) (h) 0
16,679 PFB Telecom NV (Series B) (d) (h) 0
------------
0
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
49
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------
TEXTILES (0.0%)
11,192 U.S. Leather, Inc. (d) (h) $ 0
------------
WIRELESS TELECOMMUNICATIONS (0.2%)
2,475 NII Holdings, Inc. (Class B) (d) 117,439
46 USA Mobility, Inc. (d) 1,624
4,516 Vast Solutions, Inc. (Class B1) (d) (h) 0
4,516 Vast Solutions, Inc. (Class B2) (d) (h) 0
4,516 Vast Solutions, Inc. (Class B3) (d) (h) 0
------------
119,063
------------
TELECOMMUNICATIONS (0.0%)
352 Viatel Holdings Bermuda Ltd. (d) 334
------------
TOTAL COMMON STOCKS
(COST $3,233,545) 152,897
------------
NON-CONVERTIBLE PREFERRED STOCKS (0.4%)
BROADCASTING (0.1%)
11 Paxson Communications Corp.~ 78,323
------------
ELECTRIC UTILITIES (0.3%)
167 TNP Enterprises, Inc. (Series D)~ 194,138
------------
RESTAURANTS (0.0%)
17 Catalina Restaurant Group, Inc. (Units)^(h) 15,300
------------
TOTAL NON-CONVERTIBLE PREFERRED STOCKS
(COST $295,031) 287,761
------------
</Table>
<Table>
<Caption>
NUMBER OF EXPIRATION
WARRANTS DATE
- ----------- --------------------
WARRANTS (e) (0.0%)
CASINO/GAMING (0.0%)
9,000 Aladdin Gaming Enterprises, Inc. - 144A* (h) 03/01/10 0
250 Resort At Summerlin LP - 144A* (h) 12/15/07 0
------------
0
------------
ELECTRIC UTILITIES (0.0%)
125 TNP Enterprises, Inc. - 144A* 04/01/11 3,781
------------
RESTAURANTS (0.0%)
4,250 Catalina Restaurant Group (d) (h) 07/10/12 0
------------
TOTAL WARRANTS
(COST $3,842) 3,781
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
50
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (9.2%)
U.S. GOVERNMENT OBLIGATIONS (f) (0.1%)
$ 100 U.S. Treasury Bill (b)
(COST $99,569) 1.895% 03/24/05 $ 99,579
------------
REPURCHASE AGREEMENT (9.1%)
6,420 Joint repurchase agreement account
(dated 12/31/04; proceeds $6,421,189) (g)
(COST $6,420,000) 2.223 01/03/05 6,420,000
------------
TOTAL SHORT-TERM INVESTMENTS
(COST $6,519,569) 6,519,579
------------
TOTAL INVESTMENTS
(COST $71,899,432) (i) (j) 98.9% 69,784,372
OTHER ASSETS IN EXCESS OF LIABILITIES 1.1 800,687
----- ------------
NET ASSETS 100.0% $ 70,585,059
===== ============
</Table>
- ----------
* RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS.
** FLOATING RATE SECURITY. RATE SHOWN IS THE RATE IN EFFECT AT DECEMBER 31,
2004.
+ RESALE IS RESTRICTED; ACQUIRED (12/12/98) AT A COST BASIS OF $3,549.
++ RESALE IS RESTRICTED; ACQUIRED (06/10/99) AT A COST BASIS OF $1.
+++ TURKISH CURRENCY INDEX CREDIT LINKED UNSECURED NOTE.
^ CONSISTS OF ONE OR MORE CLASS OF SECURITIES TRADED TOGETHER AS A UNIT;
BONDS OR PREFERRED STOCK WITH ATTACHED WARRANTS.
~ PAYMENT-IN-KIND SECURITY.
@ CURRENTLY A ZERO COUPON BOND AND WILL PAY INTEREST AT THE RATE SHOWN AT
A FUTURE DATE.
(a) ISSUER IN BANKRUPTCY.
(b) ALL OR A PORTION OF THESE SECURITIES HAVE BEEN PHYSICALLY SEGREGATED IN
CONNECTION WITH OPEN FUTURES CONTRACTS IN THE AMOUNT OF $21,250.
(c) NON-INCOME PRODUCING SECURITY; BOND IN DEFAULT.
(d) ACQUIRED THROUGH EXCHANGE OFFER.
(e) NON-INCOME PRODUCING SECURITIES.
(f) PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED
TO REFLECT A MONEY MARKET EQUIVALENT YIELD.
(g) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(h) FAIR VALUED SECURITY.
(i) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN AN AMOUNT EQUAL TO
$15,105,106 IN CONNECTION WITH FORWARD FOREIGN CURRENCY CONTRACTS AND
OPEN FUTURES CONTRACTS.
(j) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $72,354,836. THE
AGGREGATE GROSS UNREALIZED APPRECIATION IS $3,004,937 AND THE AGGREGATE
GROSS UNREALIZED DEPRECIATION IS $5,575,401, RESULTING IN NET UNREALIZED
DEPRECIATION OF $2,570,464.
BOND INSURANCE:
FSA FINANCIAL SECURITY ASSURANCE INC.
SEE NOTES TO FINANCIAL STATEMENTS
51
<Page>
FUTURES CONTRACTS OPEN AT DECEMBER 31, 2004:
<Table>
<Caption>
UNREALIZED
NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE APPRECIATION
CONTRACTS SHORT MONTH AND YEAR AMOUNT AT VALUE (DEPRECIATION)
- ----------------------------------------------------------------------------------------------------------
81 Short US Treasury Notes 5 Year,
March 2005 $ (8,872,031) $ 15,377
13 Short US Treasury Notes 10 Year,
March 2005 (1,455,188) (421)
44 Short US Treasury Bonds 20 Year,
March 2005 (4,950,000) (66,199)
--------------
Net unrealized depreciation $ (51,243)
==============
</Table>
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT DECEMBER 31, 2004:
<Table>
<Caption>
CONTRACTS IN EXCHANGE DELIVERY UNREALIZED
TO DELIVER FOR DATE DEPRECIATION
- ---------------------------------------------------------------------------------------------------------
AUD 200,000 $ 155,378 02/22/05 $ (401)
EUR 229,953 $ 305,814 01/26/05 (6,292)
------------
Total unrealized depreciation $ (6,693)
============
</Table>
CURRENCY ABBREVIATIONS:
AUD Australian Dollar.
CAD Canadian Dollar.
EUR Euro.
JPY Japanese Yen.
SUMMARY OF INVESTMENTS
LONG-TERM CREDIT ANALYSIS
<Table>
AAA 39.6%
AA 4.8
A 4.2
BBB 14.1
BB 12.6
B 24.1
NR 0.6
-----
100.0%*
=====
</Table>
- ----------
* DOES NOT INCLUDE OUTSTANDING SHORT FUTURES CONTRACTS WITH AN UNDERLYING
FACE AMOUNT OF $15,277,219 AND TOTAL UNREALIZED DEPRECIATION OF $51,243 AND
OUTSTANDING FORWARD FOREIGN CURRENCY CONTRACTS WITH UNREALIZED DEPRECIATION
OF $6,693.
SEE NOTES TO FINANCIAL STATEMENTS
52
<Page>
Balanced Growth
PORTFOLIO OF INVESTMENTS DECEMBER 31, 2004
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS (66.6%)
AEROSPACE & DEFENSE (1.3%)
13,260 Northrop Grumman Corp. $ 720,814
17,100 Raytheon Co. 663,993
------------
1,384,807
------------
AUTO PARTS: O.E.M. (0.9%)
10,730 Magna International Inc. (Class A) (Canada) 885,762
------------
BEVERAGES: NON-ALCOHOLIC (1.0%)
23,500 Coca-Cola Co. (The) 978,305
------------
BROADCASTING (1.0%)
31,480 Clear Channel Communications, Inc. 1,054,265
------------
CHEMICALS: MAJOR DIVERSIFIED (3.0%)
60,680 Bayer AG (ADR) (Germany) 2,061,906
20,250 Dow Chemical Co. (The) 1,002,578
------------
3,064,484
------------
CONTAINERS/PACKAGING (0.5%)
7,300 Temple-Inland Inc. 499,320
------------
DATA PROCESSING SERVICES (1.2%)
15,170 Automatic Data Processing, Inc. 672,790
19,300 SunGard Data Systems Inc.* 546,769
------------
1,219,559
------------
DEPARTMENT STORES (0.9%)
17,850 Kohl's Corp.* 877,685
------------
DISCOUNT STORES (0.5%)
10,450 Target Corp. 542,669
------------
ELECTRIC UTILITIES (3.6%)
15,500 American Electric Power Co., Inc. 532,270
12,060 Consolidated Edison, Inc. 527,625
9,250 Edison International 296,278
12,960 Entergy Corp. 875,966
16,390 Exelon Corp. 722,307
19,100 FirstEnergy Corp. 754,641
------------
3,709,087
------------
ELECTRONIC PRODUCTION EQUIPMENT (0.5%)
32,250 Applied Materials, Inc.* 551,475
------------
FINANCE/RENTAL/LEASING (1.3%)
18,100 Freddie Mac 1,333,970
------------
FINANCIAL CONGLOMERATES (4.5%)
34,600 Citigroup, Inc. 1,667,028
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
53
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
56,466 JPMorgan Chase & Co. $ 2,202,739
13,210 Prudential Financial, Inc. 726,022
------------
4,595,789
------------
FINANCIAL PUBLISHING/SERVICES (0.7%)
25,700 Equifax, Inc. 722,170
------------
FOOD: MAJOR DIVERSIFIED (0.7%)
20,500 Kraft Foods Inc. (Class A) 730,005
------------
FOOD: SPECIALTY/CANDY (0.9%)
23,150 Cadbury Schweppes PLC (ADR) (United Kingdom) 872,755
------------
HOTELS/RESORTS/CRUISELINES (1.6%)
14,510 Hilton Hotels Corp. 329,957
13,670 Marriott International, Inc. (Class A) 860,937
7,370 Starwood Hotels & Resorts Worldwide, Inc. 430,408
------------
1,621,302
------------
HOUSEHOLD/PERSONAL CARE (0.8%)
12,940 Kimberly-Clark Corp. 851,581
------------
INDUSTRIAL CONGLOMERATES (1.8%)
34,600 General Electric Co. 1,262,900
7,160 Ingersoll-Rand Co. (Class A) (Bermuda) 574,948
------------
1,837,848
------------
INDUSTRIAL MACHINERY (0.8%)
10,970 Parker-Hannifin Corp. 830,868
------------
INFORMATION TECHNOLOGY SERVICES (1.4%)
33,660 Accenture Ltd. (Class A) (Bermuda)* 908,820
5,670 International Business Machines Corp. 558,949
------------
1,467,769
------------
INTEGRATED OIL (5.4%)
29,850 BP PLC (ADR) (United Kingdom) 1,743,240
11,770 ConocoPhillips 1,021,989
24,810 Exxon Mobil Corp. 1,271,761
26,080 Royal Dutch Petroleum Co. (NY Registered Shares)
(Netherlands) 1,496,470
------------
5,533,460
------------
INVESTMENT BANKS/BROKERS (3.4%)
2,300 Goldman Sachs Group, Inc. (The) 239,292
17,000 Lehman Brothers Holdings Inc. 1,487,160
24,400 Merrill Lynch & Co., Inc. 1,458,388
29,000 Schwab (Charles) Corp. (The) 346,840
------------
3,531,680
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
54
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------
LIFE/HEALTH INSURANCE (0.3%)
17,800 Aegon N.V. (NY Registred Shares) (Netherlands) $ 244,038
2,470 MetLife, Inc. 100,060
------------
344,098
------------
MAJOR BANKS (1.5%)
21,760 Bank of America Corp. 1,022,502
8,920 PNC Financial Services Group 512,365
------------
1,534,867
------------
MAJOR TELECOMMUNICATIONS (2.2%)
18,600 France Telecom S.A. (ADR) (France) 615,288
20,670 Sprint Corp. 513,650
28,220 Verizon Communications Inc. 1,143,192
------------
2,272,130
------------
MANAGED HEALTH CARE (0.9%)
11,800 CIGNA Corp. 962,526
------------
MEDIA CONGLOMERATES (3.2%)
41,940 Disney (Walt) Co. (The) 1,165,932
94,460 Time Warner, Inc.* 1,836,302
9,200 Viacom Inc. (Class B) (Non-Voting) 334,788
------------
3,337,022
------------
MEDICAL SPECIALTIES (0.9%)
5,500 Applera Corp. - Applied Biosystems Group 115,005
13,210 Bausch & Lomb, Inc. 851,517
------------
966,522
------------
MOTOR VEHICLES (1.5%)
57,940 Honda Motor Co., Ltd. (ADR) (Japan) 1,509,916
------------
MULTI-LINE INSURANCE (1.0%)
14,110 Hartford Financial Services Group, Inc. (The) (Note 4) 977,964
------------
OIL REFINING/MARKETING (0.8%)
18,160 Valero Energy Corp. 824,464
------------
OILFIELD SERVICES/EQUIPMENT (1.5%)
22,950 Schlumberger Ltd. (Netherlands Antilles) 1,536,503
------------
PACKAGED SOFTWARE (1.2%)
18,390 Computer Associates International, Inc. 571,193
24,620 Microsoft Corp. 657,600
------------
1,228,793
------------
PHARMACEUTICALS: MAJOR (7.7%)
97,100 Bristol-Myers Squibb Co. 2,487,702
11,000 GlaxoSmithKline PLC (ADR) (United Kingdom) 521,290
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
55
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------
9,000 Lilly (Eli) & Co. $ 510,750
12,370 Roche Holdings Ltd. (ADR) (Switzerland) 1,431,828
17,000 Sanofi-Aventis (ADR) (France) 680,850
72,130 Schering-Plough Corp. 1,506,074
18,270 Wyeth 778,119
------------
7,916,613
------------
PRECIOUS METALS (0.9%)
20,830 Newmont Mining Corp. 925,060
------------
PROPERTY - CASUALTY INSURERS (2.1%)
16,370 Chubb Corp. (The) 1,258,853
24,846 St. Paul Travelers Companies, Inc. (The) 921,041
------------
2,179,894
------------
RAILROADS (1.4%)
41,140 Norfolk Southern Corp. 1,488,857
------------
RESTAURANTS (0.3%)
8,510 McDonald's Corp. 272,830
------------
SEMICONDUCTORS (0.4%)
1,174 Freescale Semiconductor Inc. (Class B)* 21,554
16,650 Intel Corp. 389,443
------------
410,997
------------
TELECOMMUNICATION EQUIPMENT (0.4%)
21,050 Motorola, Inc. 362,060
------------
TOBACCO (0.7%)
12,230 Altria Group, Inc. 747,253
------------
TOTAL COMMON STOCKS
(COST $52,772,386) 68,494,984
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
- --------- ---------- ------------
CORPORATE BONDS (9.0%)
ADVERTISING/MARKETING SERVICES (0.1%)
$ 80 WPP Finance Corp. - 144A** (United Kingdom) 5.875% 06/15/14 83,410
------------
AEROSPACE & DEFENSE (0.2%)
55 Northrop Grumman Corp. 4.079 11/16/06 55,581
15 Raytheon Co. 4.85 01/15/11 15,389
25 Raytheon Co. 8.30 03/01/10 29,657
122 Systems 2001 Asset Trust - 144A**
(Cayman Islands) 6.664 09/15/13 134,764
------------
235,391
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
56
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
AIR FREIGHT/COURIERS (0.0%)
$ 50 Fedex Corp. 2.65% 04/01/07 $ 48,998
------------
AIRLINES (0.2%)
108 America West Airlines, Inc. (Series 01-1) 7.10 04/02/21 115,067
45 Southwest Airlines Co. (Series 01-1) 5.496 11/01/06 46,366
------------
161,433
------------
BEVERAGES: ALCOHOLIC (0.0%)
50 Miller Brewing Co. - 144A** 4.25 08/15/08 50,496
------------
BROADCASTING (0.1%)
50 Clear Channel Communications, Inc. 7.65 09/15/10 56,958
------------
CABLE/SATELLITE TV (0.2%)
10 Comcast Cable Communications Inc. 6.75 01/30/11 11,244
55 Comcast Corp. 6.50 01/15/15 61,250
10 Comcast Corp. 7.625 02/15/08 11,028
65 Cox Communications, Inc. - 144A** 4.625 01/15/10 64,922
55 TCI Communications, Inc. 7.875 02/15/26 67,732
------------
216,176
------------
CHEMICALS: MAJOR DIVERSIFIED (0.0%)
40 ICI Wilmington Inc. 4.375 12/01/08 40,262
------------
CONTAINERS/PACKAGING (0.1%)
70 Sealed Air Corp - 144A** 5.625 07/15/13 72,539
------------
DEPARTMENT STORES (0.2%)
145 May Department Stores Co., Inc. 6.70 09/15/28 152,401
10 May Department Stores Co., Inc. 6.90 01/15/32 10,849
------------
163,250
------------
DRUGSTORE CHAINS (0.2%)
180 CVS Corp. 5.625 03/15/06 184,624
15 CVS Corp. - 144A** 6.204 10/10/25 15,749
------------
200,373
------------
ELECTRIC UTILITIES (1.0%)
20 Appalachian Power Co. (Series H) 5.95 05/15/33 20,276
70 Arizona Public Service Co. 5.80 06/30/14 74,887
70 Carolina Power & Light Co. 5.125 09/15/13 71,737
35 Cincinnati Gas & Electric Co. 5.70 09/15/12 37,138
10 Cincinnati Gas & Electric Co. (Series A) 5.40 06/15/33 9,581
30 Cincinnati Gas & Electric Co. (Series B) 5.375 06/15/33 28,638
15 Columbus Southern Power Co. (Series D) 6.60 03/01/33 16,837
10 Consolidated Natural Gas Co. 5.00 12/01/14 10,029
60 Consolidated Natural Gas Co. (Series C) 6.25 11/01/11 65,950
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
57
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
$ 15 Consolidated Natural Gas Co. (Series A) 5.00% 03/01/14 $ 15,062
70 Detroit Edison Co. 6.125 10/01/10 76,453
45 Duke Energy Corp. 3.75 03/05/08 44,982
45 Duke Energy Corp. 4.50 04/01/10 45,584
45 Entergy Gulf States Inc. 2.80 12/01/09 44,995
30 Entergy Gulf States, Inc. 3.60 06/01/08 29,538
50 Exelon Corp. 6.75 05/01/11 56,004
45 Ohio Edison Co. 5.45 05/01/15 45,735
55 Ohio Power Co. (Series G) 6.60 02/15/33 61,732
65 Pacific Gas & Electric Co. 6.05 03/01/34 67,745
15 Panhandle Eastern Pipe Line Co. (Series B) 2.75 03/15/07 14,695
45 Public Service Electric & Gas Co. (Series MTNB) 5.00 01/01/13 46,005
20 South Carolina Electric & Gas Co. 5.30 05/15/33 19,486
15 Southern California Edison Co. 5.00 01/15/14 15,270
20 Texas Eastern Transmission, L.P. 7.00 07/15/32 23,051
40 TXU Energy Co. 7.00 03/15/13 44,745
25 Wisconsin Electric Power Co. 3.50 12/01/07 24,917
10 Wisconsin Electric Power Co. 5.625 05/15/33 10,208
------------
1,021,280
------------
ELECTRICAL PRODUCTS (0.1%)
70 Cooper Industries Inc. 5.25 07/01/07 72,563
------------
FINANCE/RENTAL/LEASING (0.4%)
55 CIT Group Inc. 2.875 09/29/06 54,450
25 CIT Group Inc. 7.375 04/02/07 27,008
105 Countrywide Home Loans, Inc. (Series MTN) 3.25 05/21/08 102,753
110 MBNA Corp. 6.125 03/01/13 118,080
60 SLM Corp. 4.00 01/15/10 59,603
75 SLM Corp. (Series MTNA) 5.00 10/01/13 76,081
------------
437,975
------------
FINANCIAL CONGLOMERATES (1.2%)
105 Bank One Corp. (Series MTNA) 6.00 02/17/09 112,339
95 Chase Manhattan Corp. 6.00 02/15/09 101,437
40 Citicorp 6.75 08/15/05 40,931
90 Citigroup Inc. 5.625 08/27/12 95,994
60 Citigroup Inc. 5.75 05/10/06 61,979
90 Citigroup Inc. 6.00 02/21/12 98,602
40 General Electric Capital Corp. 4.25 12/01/10 40,030
125 General Electric Capital Corp. (Series MTNA) 6.75 03/15/32 146,800
35 General Motors Acceptance Corp. 4.50 07/15/06 35,034
265 General Motors Acceptance Corp. 6.875 09/15/11 271,932
100 General Motors Acceptance Corp. 8.00 11/01/31 103,076
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
58
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
$ 125 Prudential Holdings, LLC (Series B) (FSA) - 144A** 7.245% 12/18/23 $ 148,793
------------
1,256,947
------------
FOOD RETAIL (0.2%)
40 Albertson's, Inc. 7.50 02/15/11 46,385
110 Kroger Co. 6.80 04/01/11 124,126
------------
170,511
------------
FOOD: MAJOR DIVERSIFIED (0.1%)
20 General Mills Inc. 3.875 11/30/07 20,078
25 Kraft Foods Inc. 5.25 06/01/07 25,912
40 Kraft Foods Inc. 5.625 11/01/11 42,418
30 Kraft Foods Inc. 6.25 06/01/12 32,982
------------
121,390
------------
FOREST PRODUCTS (0.1%)
30 Weyerhaeuser Co. 6.00 08/01/06 31,187
11 Weyerhaeuser Co. 6.125 03/15/07 11,588
10 Weyerhaeuser Co. 6.75 03/15/12 11,285
------------
54,060
------------
GAS DISTRIBUTORS (0.1%)
45 Nisource Finance Corp. 2.915 11/23/09 44,998
65 Ras Laffan Liquid Natural Gas Co.
Ltd. - 144A** (Qatar) 8.294 03/15/14 77,128
------------
122,126
------------
HOME FURNISHINGS (0.0%)
35 Mohawk Industries, Inc. (Series D) 7.20 04/15/12 40,329
------------
HOME IMPROVEMENT CHAINS (0.0%)
15 Lowe's Companies, Inc. 6.50 03/15/29 17,046
10 Lowe's Companies, Inc. 6.875 02/15/28 11,832
------------
28,878
------------
HOTELS/RESORTS/CRUISELINES (0.2%)
70 Hyatt Equities LLC - 144A** 6.875 06/15/07 73,691
110 Marriott International, Inc. (Series E) 7.00 01/15/08 119,987
------------
193,678
------------
HOUSEHOLD/PERSONAL CARE (0.0%)
50 Clorox Co. (The) - 144A** 2.544 12/14/07 50,015
------------
INDUSTRIAL CONGLOMERATES (0.1%)
80 Hutchison Whampoa International
Ltd. - 144A** (Virgin Islands) 6.50 02/13/13 86,380
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
59
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
INSURANCE BROKERS/SERVICES (0.3%)
$ 200 Farmers Exchange Capital - 144A** 7.05% 07/15/28 $ 205,450
110 Marsh & McLennan Companies, Inc. 5.375 07/15/14 107,674
------------
313,124
------------
INTEGRATED OIL (0.1%)
25 Amerada Hess Corp. 6.65 08/15/11 27,529
30 Amerada Hess Corp. 7.875 10/01/29 35,602
10 Petro-Canada (Canada) 4.00 07/15/13 9,384
35 Petro-Canada (Canada) 5.35 07/15/33 32,820
------------
105,335
------------
INVESTMENT BANKS/BROKERS (0.2%)
50 Goldman Sachs Group Inc. 5.25 10/15/13 51,245
30 Goldman Sachs Group Inc. 6.60 01/15/12 33,529
95 Goldman Sachs Group Inc. 6.875 01/15/11 107,311
------------
192,085
------------
LIFE/HEALTH INSURANCE (0.1%)
100 John Hancock Financial Services, Inc. 5.625 12/01/08 106,302
------------
MAJOR BANKS (0.1%)
30 Bank of New York (The) 5.20 07/01/07 31,208
65 FleetBoston Financial Corp. 7.25 09/15/05 66,899
35 HSBC Finance Corp. 6.75 05/15/11 39,329
------------
137,436
------------
MAJOR TELECOMMUNICATIONS (0.5%)
85 Deutsche Telekom International Finance
Corp. NV (Netherlands) 8.75 06/15/30 112,574
35 France Telecom S.A. (France) 9.25 03/01/31 47,586
20 Sprint Capital Corp. 8.75 03/15/32 26,728
45 Telecom Italia Capital SA - 144A** (Italy) 4.00 01/15/10 44,172
45 Telecom Italia Capital SA (Italy) 4.00 11/15/08 44,868
15 Verizon Global Funding Corp. 7.75 12/01/30 18,708
160 Verizon New England Inc. 6.50 09/15/11 176,248
------------
470,884
------------
MANAGED HEALTH CARE (0.2%)
125 Aetna, Inc. 7.875 03/01/11 146,476
60 Wellpoint Health Network, Inc. 6.375 06/15/06 62,496
5 Wellpoint Inc. - 144A** 3.75 12/14/07 5,001
------------
213,973
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
60
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
MEDIA CONGLOMERATES (0.3%)
$ 90 Historic TW Inc. 6.625% 05/15/29 $ 97,279
80 News America Holdings, Inc. 7.28 06/30/28 91,699
30 News America Holdings, Inc. 7.75 02/01/24 35,681
45 Time Warner Inc. 7.70 05/01/32 55,216
------------
279,875
------------
MOTOR VEHICLES (0.3%)
45 DaimlerChrysler North American Holdings Co. 7.30 01/15/12 51,157
35 DaimlerChrysler North American Holdings Co. 8.50 01/18/31 43,861
105 Ford Motor Co. 7.45 07/16/31 105,908
60 General Motors Corp. 8.375 07/15/33 62,337
------------
263,263
------------
MULTI-LINE INSURANCE (0.4%)
180 AIG Sun America Global Finance VI - 144A** 6.30 05/10/11 196,578
90 American General Finance Corp. (Series MTNH) 4.625 09/01/10 90,128
15 AXA Financial Inc. 6.50 04/01/08 16,240
30 Hartford Financial Services Group, Inc. (The)(Note 4) 2.375 06/01/06 29,461
30 International Lease Finance Corp. 3.75 08/01/07 30,011
------------
362,418
------------
OIL & GAS PRODUCTION (0.4%)
50 Nexen Inc. (Canada) 5.05 11/20/13 49,743
40 Pemex Project Funding Master Trust 7.375 12/15/14 44,560
235 Pemex Project Funding Master Trust 8.625 02/01/22 274,010
------------
368,313
------------
OIL REFINING/MARKETING (0.0%)
30 Marathon Oil Corp. 5.375 06/01/07 31,214
------------
OTHER METALS/MINERALS (0.1%)
90 Inco Ltd. (Canada) 7.20 09/15/32 105,236
25 Inco Ltd. (Canada) 7.75 05/15/12 29,642
------------
134,878
------------
PROPERTY - CASUALTY INSURERS (0.2%)
200 Mantis Reef Ltd. - 144A** (Australia) 4.692 11/14/08 200,759
------------
PULP & PAPER (0.1%)
50 Sappi Papier Holding AG - 144A** (Austria) 6.75 06/15/12 55,637
------------
RAILROADS (0.2%)
45 Burlington North Santa Fe Railway Co. 4.575 01/15/21 45,567
35 CSX Corp. 2.75 02/15/06 34,709
25 CSX Corp. 9.00 08/15/06 27,086
20 Norfolk Southern Corp. 7.35 05/15/07 21,658
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
61
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
$ 10 Union Pacific Corp. 6.65% 01/15/11 $ 11,195
25 Union Pacific Corp. (Series MTNE) 6.79 11/09/07 26,914
------------
167,129
------------
REAL ESTATE DEVELOPMENT (0.2%)
180 World Financial Properties - 144A* 6.91 09/01/13 199,251
------------
REAL ESTATE INVESTMENT TRUSTS (0.0%)
10 EOP Operating L.P. 4.75 03/15/14 9,691
25 EOP Operating LP 6.763 06/15/07 26,610
------------
36,301
------------
SAVINGS BANKS (0.3%)
40 Household Finance Corp. 4.125 12/15/08 40,200
50 Household Finance Corp. 5.875 02/01/09 53,478
25 Household Finance Corp. 6.375 10/15/11 27,648
65 Household Finance Corp. 6.40 06/17/08 70,181
55 Washington Mutual Bank 5.50 01/15/13 56,890
45 Washington Mutual Inc. 8.25 04/01/10 52,704
------------
301,101
------------
TOBACCO (0.1%)
45 Altria Group, Inc. 7.00 11/04/13 48,840
60 Altria Group, Inc. 7.75 01/15/27 67,530
------------
116,370
------------
TRUCKS/CONSTRUCTION/FARM MACHINERY (0.1%)
95 Caterpillar Financial Services Corp. 2.409 08/20/07 95,020
20 Caterpillar Financial Services Corp. 3.625 11/15/07 20,035
------------
115,055
------------
WIRELESS TELECOMMUNICATIONS (0.0%)
35 AT&T Wireless Services, Inc. 8.75 03/01/31 47,335
------------
TOTAL CORPORATE BONDS
(COST $8,707,731) 9,203,456
------------
FOREIGN GOVERNMENT OBLIGATIONS (0.2%)
10 United Mexican States (Mexico) (Series MTNA) 8.00 09/24/22 11,560
150 United Mexican States (Mexico) (Series MTN) 8.30 08/15/31 176,175
15 United Mexican States (Mexico) 8.375 01/14/11 17,655
------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(COST $199,635) 205,390
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
62
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES (3.2%)
Federal Home Loan Mortgage Corp.
$ 281 6.50% 03/01/33 $ 295,527
399 7.50 09/01/25 - 06/01/32 428,106
Federal National Mortgage Assoc.
783 6.50 01/01/32 - 09/01/34 822,020
555 7.00 05/01/31 - 03/01/33 588,708
162 7.50 08/01/29 - 01/01/31 173,735
350 7.50 @ 374,718
498 8.00 12/01/28 - 04/01/32 539,808
91 Government National Mortgage Association 7.50 08/15/23 - 10/15/29 98,360
------------
TOTAL MORTGAGE-BACKED SECURITIES
(COST $3,279,598) 3,320,982
------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS (15.0%)
290 Federal Home Loan Mortgage Corp 5.125 11/07/13 291,220
1,575 Federal National Mortgage Assoc@@ 4.25 05/15/09 1,600,515
U.S. Treasury Bonds
1,475 5.50 08/15/28 1,596,919
1,540 7.625 02/15/25 2,086,159
200 8.125 08/15/19 273,047
2,050 8.125 08/15/21 2,839,090
200 8.50 02/15/20 282,328
U.S. Treasury Notes
2,450 3.50 11/15/06 2,471,440
1,600 3.875 02/15/13 1,579,126
900 5.625 02/15/06 928,126
425 8.75 08/15/20 614,457
2,460 U.S. Treasury Strip 0.00 02/15/25 886,267
------------
TOTAL U.S. GOVERNMENT & AGENCIES OBLIGATIONS
(COST $15,087,558) 15,448,694
------------
ASSET-BACKED SECURITIES (1.3%)
FINANCE/RENTAL/LEASING
150 American Express Credit Account Master Trust
2002-3 A 2.51 12/15/09 150,444
76 Asset Backed Funding Certificates 2004-HE1 A1 2.548 06/25/22 75,832
100 Capital Auto Receivables Asset Trust 2004-2 A 3.35 02/15/08 99,844
215 Chase Credit Card Master Trust 2001-4 A 5.50 11/17/08 222,068
200 Citibank Credit Card Issuance Trust 2000-A1 A1 6.90 10/15/07 206,102
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
63
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------
$ 150 GE Dealer Floorplan Master Note Trust 2004-1 A 2.46% 07/20/08 $ 150,111
100 MBNA Master Credit Card Trust 5.90 08/15/11 107,879
44 Nissan Auto Receivables Owner Trust 2001-C A4 4.80 02/15/07 43,776
50 TXU Electric Delivery Transition Bond
Company LLC 2004-1 A2 4.81 11/17/14 51,248
200 USAA Auto Owner Trust 2004-3 A3 3.16 02/17/09 199,278
-------------
TOTAL ASSET-BACKED SECURITIES
(COST $1,292,081) 1,306,582
-------------
SHORT-TERM INVESTMENTS (6.5%)
U.S. GOVERNMENT OBLIGATIONS (a) (0.5%)
200 U.S. Treasury Bill*** 1.895 03/24/05 199,158
300 U. S. Treasury Note 6.75 05/15/05 304,735
-------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $503,935) 503,893
-------------
REPURCHASE AGREEMENT (6.0%)
6,147 Joint repurchase agreement account
(dated 12/31/04; proceeds $6,147,379) (b)
(COST $6,147,000) 2.223 01/03/05 6,147,000
-------------
TOTAL SHORT-TERM INVESTMENTS
(COST $6,650,935) 6,650,893
-------------
TOTAL INVESTMENTS
(COST $87,989,924) (c)(d) 101.8% 104,630,981
LIABILITIES IN EXCESS OF OTHER ASSETS (1.8) (1,806,556)
----- -------------
NET ASSETS 100.0% $ 102,824,425
===== =============
</Table>
- ----------
ADR AMERICAN DEPOSITORY RECEIPT.
FSA FINANCIAL SECURITY ASSURANCE.
* NON-INCOME PRODUCING SECURITY.
** RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS.
*** A PORTION OF THIS SECURITY IS PHYSICALLY SEGREGATED IN CONNECTION WITH OPEN
FUTURES CONTRACTS IN THE AMOUNT OF $65,300.
@ SECURITIES PURCHASED ON A FORWARD COMMITMENT BASIS WITH AN APPROXIMATE
PRINCIPAL AMOUNT AND NO DEFINITE MATURITY DATE.
@@ SECURITY PURCHASED ON A FORWARD COMMITMENT BASIS.
(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
$7,277,270 IN CONNECTION WITH SECURITIES PURCHASED ON A FORWARD COMMITMENT
BASIS AND OPEN FUTURES CONTRACTS.
(d) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $89,214,242. THE
AGGREGATE GROSS UNREALIZED APPRECIATION IS $16,520,826 AND THE AGGREGATE
GROSS UNREALIZED DEPRECIATION IS $1,104,087, RESULTING IN NET UNREALIZED
APPRECIATION OF $15,416,739.
SEE NOTES TO FINANCIAL STATEMENTS
64
<Page>
FUTURES CONTRACTS OPEN AT DECEMBER 31, 2004:
<Table>
<Caption>
UNREALIZED
NUMBER OF DESCRIPTION/DELIVERY UNDERLYING FACE APPRECIATION
CONTRACTS LONG/SHORT MONTH, AND YEAR AMOUNT AT VALUE (DEPRECIATION)
- ----------------------------------------------------------------------------------------------
2 Long U.S. Treasury Bonds 10 Year,
March 2005 $ 223,875 $ (1,099)
1 Short U.S. Treasury Notes 5 Year,
March 2005 (109,531) 185
45 Short U.S. Treasury Notes 20 Year,
March 2005 (5,062,500) (45,317)
------------
Net unrealized depreciation $ (46,231)
============
</Table>
SUMMARY OF INVESTMENTS
<Table>
<Caption>
PERCENT OF
TYPE OF INVESTMENT VALUE NET ASSETS
- ------------------------------------------------------------------------
Common Stocks $ 68,494,984 66.6%
U.S. Government Agencies and Obligations 15,448,694 15.0
Corporate Bonds 9,203,456 9.0
Short-Term 6,650,893 6.5
Mortgage-Backed Securities 3,320,982 3.2
Asset-Backed Securities 1,306,582 1.3
Foreign Government Obligations 205,390 0.2
-------------- ----------
$ 104,630,981* 101.8%
============== ==========
</Table>
- ----------
* DOES NOT INCLUDE OPEN LONG FUTURES CONTRACTS WITH AN UNDERLYING FACE AMOUNT
OF $223,875 AND UNREALIZED DEPRECIATION OF $1,099 AND OPEN SHORT FUTURES
CONTRACTS WITH AN UNDERLYING FACE AMOUNT OF $5,172,031 WITH NET UNREALIZED
DEPRECIATION OF $45,132.
SEE NOTES TO FINANCIAL STATEMENTS
65
<Page>
Utilities
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2004
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------------------------
COMMON STOCKS (94.6%)
ELECTRIC UTILITIES (55.0%)
120,000 AES Corp. (The)* $ 1,640,400
60,000 Allegheny Energy, Inc.* 1,182,600
30,000 American Electric Power Co., Inc. 1,030,200
48,500 Cinergy Corp. 2,019,055
35,000 Constellation Energy Group, Inc. 1,529,850
25,000 Dominion Resources, Inc. 1,693,500
56,710 Duke Energy Corp. 1,436,464
65,000 Edison International 2,081,950
40,000 El Paso Electric Co.* 757,600
32,500 Entergy Corp. 2,196,675
60,000 Exelon Corp. 2,644,200
30,000 FPL Group, Inc. 2,242,500
70,000 NRG Energy Inc.** 2,523,500
47,000 NSTAR 2,551,160
60,000 PG&E Corp.* 1,996,800
29,400 Pinnacle West Capital Corp. 1,305,654
60,000 PNM Resources Inc. 1,517,400
40,000 PPL Corp. 2,131,200
20,000 Public Service Enterprise Group, Inc. 1,035,400
50,000 Reliant Energy, Inc.* 682,500
56,000 SCANA Corp. 2,206,400
30,000 Sempra Energy 1,100,400
40,000 Sierra Pacific Resources* 420,000
42,000 Southern Co. (The) 1,407,840
40,000 TXU Corp. 2,582,400
41,000 Wisconsin Energy Corp. 1,382,110
-------------
43,297,758
-------------
ENERGY (17.5%)
35,000 AGL Resources, Inc. 1,163,400
45,000 Burlington Resources, Inc. 1,957,500
35,600 KeySpan Corp. 1,404,420
25,000 Kinder Morgan, Inc. 1,828,250
67,500 MDU Resources Group, Inc. 1,800,900
39,000 New Jersey Resources Corp. 1,690,260
45,000 Questar Corp. 2,293,200
100,000 Williams Companies, Inc. (The) 1,629,000
-------------
13,766,930
-------------
TELECOMMUNICATIONS (22.1%)
29,160 ALLTEL Corp. 1,713,442
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
66
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------------------------
105,000 American Tower Corp. (Class A)* $ 1,932,000
55,500 BellSouth Corp. 1,542,345
30,625 CenturyTel, Inc. 1,086,269
50,000 Citizens Communications Co. 689,500
75,000 MCI Inc. 1,512,000
55,000 Nextel Communications, Inc. (Class A)* 1,650,000
66,272 SBC Communications, Inc. 1,707,829
105,000 Sprint Corp. 2,609,250
42,394 Verizon Communications Inc. 1,717,381
45,000 Vodafone Group PLC (ADR) (United Kingdom) 1,232,100
-------------
17,392,116
-------------
TOTAL COMMON STOCKS
(COST $46,553,188) 74,456,804
-------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
- ---------- ------ --------
CORPORATE BONDS (2.1%)
ELECTRIC UTILITIES (1.1%)
$ 45 Appalachian Power Co. (Series G) 3.60% 05/15/08 44,497
55 Carolina Power & Light Co. 5.125 09/15/13 56,365
45 Cleco Power LLC 5.375 05/01/13 44,788
60 Commonwealth Edison Co. (Series 98) 6.15 03/15/12 66,053
35 Consolidated Natural Gas Co. (Series B) 5.375 11/01/06 36,166
30 Duke Energy Corp. 4.50 04/01/10 30,389
35 Duquesne Light Co. (Series O) 6.70 04/15/12 39,173
10 Entergy Gulf States Inc. 2.80 12/01/09 9,999
10 Entergy Gulf States, Inc. 3.60 06/01/08 9,846
45 Exelon Corp. 6.75 05/01/11 50,404
25 FirstEnergy Corp. (Series B) 6.45 11/15/11 27,200
15 Indianapolis Power & Light Co. - 144A** 6.30 07/01/13 16,129
60 Jersey Central Power & Light Co. (Series MTN) 6.45 05/15/06 62,251
20 Pacific Gas & Electric Co. 6.05 03/01/34 20,845
15 Panhandle Eastern Pipe Line Co. 4.80 08/15/08 15,332
10 Panhandle Eastern Pipe Line Co. (Series B) 2.75 03/15/07 9,797
65 Pinnacle West Capital Corp. 6.40 04/01/06 66,917
55 Public Service Co. of New Mexico (Series B) 7.50 08/01/18 64,292
50 Public Service Electric & Gas Co. (Series MTNB) 5.00 01/01/13 51,116
10 Southern California Edison Co. 5.00 01/15/14 10,180
65 Texas-New Mexico Power Co. 6.25 01/15/09 68,691
30 TXU Energy Co. 7.00 03/15/13 33,559
----------
833,989
----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
67
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS (1.0%)
$ 20 AT&T Corp. 9.05% 11/15/11 $ 23,125
60 AT&T Wireless Services, Inc. 7.875 03/01/11 70,805
35 AT&T Wireless Services, Inc. 8.75 03/01/31 47,335
30 British Telecommunications PLC (United Kingdom) 8.375 12/15/10 36,069
85 Deutsche Telekom International Finance
Corp. NV (Netherlands) 8.75 06/15/30 112,574
60 France Telecom S.A. (France) 9.25 03/01/31 81,576
180 GTE Corp. 7.90 02/01/27 197,018
20 SBC Communications, Inc. 6.45 06/15/34 21,501
35 Sprint Capital Corp. 8.375 03/15/12 42,695
35 Sprint Capital Corp. 8.75 03/15/32 46,774
65 Telecom Italia Capital SpA (Luxembourg) 4.00 11/15/08 64,809
75 Verizon Global Funding Corp. 6.875 06/15/12 85,742
----------
830,023
----------
TOTAL CORPORATE BONDS
(COST $1,558,756) 1,664,012
----------
ASSET-BACKED SECURITIES (0.1%)
FINANCE/RENTAL/LEASING
100 PSE&G Transition Funding LLC
(Series 2001 - 1 Class A6)
(COST $107,469) 6.61 06/15/15 113,863
----------
U.S. GOVERNMENT OBLIGATIONS (0.1%)
100 U.S. Treasury Strip 0.00 02/15/25 36,097
90 U.S. Treasury Strip 0.00 05/15/25 31,888
----------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $59,841) 67,985
----------
</Table>
<Table>
<Caption>
NUMBER OF EXPIRATION
WARRANTS DATE
- ---------- -----------
WARRANTS (0.0%)
TELECOMMUNICATIONS
1,333 Lucent Technologies Inc.* (COST $0) 12/10/07 2,106
-------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
68
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (3.0%)
REPURCHASE AGREEMENT
$ 2,327 Joint repurchase agreement account
(dated 12/31/04; proceeds $2,327,431) (a)
(COST $2,327,000) 2.223% 01/03/05 $ 2,327,000
-------------
TOTAL INVESTMENTS
(COST $50,606,254)(b) 99.9% 78,631,770
OTHER ASSETS IN EXCESS OF LIABILITIES 0.1 70,875
------ -------------
NET ASSETS 100.0% $ 78,702,645
====== =============
</Table>
- ----------
ADR AMERICAN DEPOSITORY RECEIPT.
* NON-INCOME PRODUCING SECURITY.
** RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS.
(a) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(b) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $52,018,223. THE
AGGREGATE GROSS UNREALIZED APPRECIATION IS $26,634,188 AND THE AGGREGATE
GROSS UNREALIZED DEPRECIATION IS $20,641, RESULTING IN NET UNREALIZED
APPRECIATION OF $26,613,547.
SUMMARY OF INVESTMENTS
<Table>
<Caption>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ------------------------------------------------------------------------------------
Electric Utilities $ 44,131,747 56.1%
Telecommunications 18,224,245 23.1
Energy 13,766,930 17.5
Repurchase Agreement 2,327,000 3.0
Finance/Rental/Leasing 113,863 0.1
U.S. Government Obligations 67,985 0.1
--------------- ------------
$ 78,631,770 99.9%
=============== ============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
69
<Page>
Dividend Growth
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2004
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ---------------------------------------------------------------------
COMMON STOCKS (97.6%)
AEROSPACE & DEFENSE (0.8%)
51,500 Northrop Grumman Corp. $ 2,799,540
-------------
AIR FREIGHT/COURIERS (0.2%)
8,700 FedEx Corp. 856,863
-------------
ALUMINUM (1.4%)
161,600 Alcoa, Inc. 5,077,472
-------------
APPAREL/FOOTWEAR (1.6%)
105,600 V.F. Corp. 5,848,128
-------------
AUTO PARTS: O.E.M. (1.5%)
84,900 Johnson Controls, Inc. 5,386,056
-------------
BEVERAGES:
NON-ALCOHOLIC (1.4%)
123,300 Coca-Cola Co. (The) 5,132,979
-------------
BIOTECHNOLOGY (0.7%)
42,800 Amgen Inc.* 2,745,620
-------------
CASINO/GAMING (0.3%)
26,571 Las Vegas Sands Corp.* 1,275,408
-------------
CHEMICALS:
AGRICULTURAL (0.4%)
28,900 Monsanto Co. 1,605,395
-------------
CHEMICALS: MAJOR
DIVERSIFIED (2.5%)
182,700 Dow Chemical Co. (The) 9,045,477
-------------
COMPUTER
COMMUNICATIONS (1.1%)
187,700 Cisco Systems, Inc.* 3,622,610
20,600 Juniper Networks, Inc.* 560,114
-------------
4,182,724
-------------
COMPUTER PERIPHERALS (1.3%)
152,000 EMC Corp.* 2,260,240
-------------
31,500 Lexmark International, Inc.
(Class A)* 2,677,500
-------------
4,937,740
-------------
COMPUTER PROCESSING
HARDWARE (1.4%)
124,600 Dell Inc.* 5,250,644
-------------
DATA PROCESSING
SERVICES (1.9%)
167,200 First Data Corp. $ 7,112,688
-------------
DISCOUNT STORES (3.0%)
211,700 Target Corp. 10,993,581
-------------
DRUGSTORE CHAINS (1.5%)
120,400 CVS Corp. 5,426,428
-------------
ELECTRIC UTILITIES (3.2%)
196,400 Exelon Corp. 8,655,348
42,500 FPL Group, Inc. 3,176,875
-------------
11,832,223
-------------
FINANCE/RENTAL/
LEASING (1.7%)
219,100 MBNA Corp. 6,176,429
-------------
FINANCIAL CONGLOMERATES (3.7%)
205,600 Citigroup, Inc. 9,905,808
92,800 J.P. Morgan Chase & Co. 3,620,128
-------------
13,525,936
-------------
FOOD: MAJOR DIVERSIFIED (2.7%)
192,200 PepsiCo, Inc. 10,032,840
-------------
HOME IMPROVEMENT
CHAINS (2.7%)
227,400 Home Depot, Inc. (The) 9,719,076
-------------
HOUSEHOLD/PERSONAL
CARE (4.2%)
156,400 Avon Products, Inc. 6,052,680
167,600 Procter & Gamble Co. (The) 9,231,408
-------------
15,284,088
-------------
INDUSTRIAL
CONGLOMERATES (9.7%)
139,800 3M Co. 11,473,386
280,900 General Electric Co. 10,252,850
48,600 Tyco International Ltd.
(Bermuda) 1,736,964
116,100 United Technologies Corp. 11,998,935
-------------
35,462,135
-------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
70
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ---------------------------------------------------------------------
INFORMATION TECHNOLOGY
SERVICES (2.6%)
96,800 International Business
Machines Corp. $ 9,542,544
-------------
INTEGRATED OIL (7.0%)
164,800 BP PLC (ADR) (United Kingdom) 9,624,320
100,500 ChevronTexaco Corp. 5,277,255
208,600 Exxon Mobil Corp. 10,692,836
25,594,411
-------------
INTERNET SOFTWARE/
SERVICES (0.3%)
31,100 Yahoo! Inc.* 1,171,848
-------------
INVESTMENT BANKS/
Brokers (4.7%)
49,100 Goldman Sachs Group,
Inc. (The) 5,108,364
45,500 Lehman Brothers
Holdings Inc. 3,980,340
133,400 Merrill Lynch & Co., Inc. 7,973,318
-------------
17,062,022
-------------
INVESTMENT MANGERS (1.5%)
177,700 Mellon Financial Corp. 5,528,247
-------------
LIFE/HEALTH INSURANCE (1.5%)
17,200 AFLAC, Inc. 685,248
105,400 Lincoln National Corp. 4,920,072
-------------
5,605,320
-------------
MAJOR BANKS (4.7%)
326,000 Bank of America Corp. 15,318,740
28,700 Comerica, Inc. 1,751,274
-------------
17,070,014
-------------
MAJOR
TELECOMMUNICATIONS (2.2%)
198,300 Verizon Communications Inc. 8,033,133
-------------
Managed Health Care (2.4%)
88,000 Caremark Rx, Inc.* 3,469,840
58,600 UnitedHealth Group Inc. 5,158,558
-------------
8,628,398
-------------
MEDICAL SPECIALTIES (1.3%)
20,300 Fisher Scientific
International, Inc.* $ 1,266,314
71,800 Medtronic, Inc. 3,566,306
-------------
4,832,620
-------------
MOTOR VEHICLES (0.3%)
17,600 Harley-Davidson, Inc. 1,069,200
-------------
MULTI-LINE INSURANCE (0.7%)
38,100 American International
Group, Inc. 2,502,027
-------------
OFFICE EQUIPMENT/
SUPPLIES (2.2%)
174,300 Pitney Bowes, Inc. 8,066,604
-------------
OIL & GAS PRODUCTION (1.3%)
79,800 Devon Energy Corp. 3,105,816
46,000 XTO Energy Inc. 1,627,480
-------------
4,733,296
-------------
OILFIELD SERVICES/
EQUIPMENT (1.3%)
117,200 Halliburton Co. 4,598,928
-------------
PACKAGED SOFTWARE (3.4%)
10,100 Mercury Interactive Corp.* 460,055
312,000 Microsoft Corp. 8,333,520
47,000 SAP AG (ADR) (Germany) 2,077,870
29,400 Symantec Corp.* 757,344
26,400 VERITAS Software Corp.* 753,720
-------------
12,382,509
-------------
PHARMACEUTICALS: MAJOR (6.3%)
32,800 Abbott Laboratories 1,530,120
156,100 Bristol-Myers Squibb Co. 3,999,282
86,300 Johnson & Johnson 5,473,146
184,260 Pfizer, Inc. 4,954,751
166,700 Wyeth 7,099,753
-------------
23,057,052
-------------
PHARMACEUTICALS: OTHER (0.9%)
108,200 Teva Pharmaceutical Industries
Ltd. (ADR) (Israel) 3,230,852
-------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
71
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ---------------------------------------------------------------------
RAILROADS (0.5%)
40,400 Burlington Northern Santa
Fe Corp. $ 1,911,324
-------------
SEMICONDUCTORS (2.2%)
171,700 Intel Corp. 4,016,063
42,700 Marvell Technology Group
Ltd. (Bermuda)* 1,514,569
79,300 RF Micro Devices, Inc.* 542,412
76,900 Texas Instruments Inc. 1,893,278
-------------
7,966,322
-------------
TELECOMMUNICATION
EQUIPMENT (0.7%)
61,800 QUALCOMM Inc. 2,620,320
-------------
TRUCKS/CONSTRUCTION/
FARM MACHINERY (0.7%)
34,600 Deere & Co. 2,574,240
-------------
TOTAL COMMON STOCKS
(COST $267,916,395) 357,490,701
-------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS
- ----------
CONVERTIBLE BOND (0.1%)
WIRELESS
TELECOMMUNICATIONS
$ 408 Nextel Communications, Inc.
5.25% due 01/15/10
(COST $394,005) 419,730
-------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ---------------------------------------------------------------------
SHORT-TERM INVESTMENT (2.4%)
REPURCHASE AGREEMENT
$ 8,711 Joint repurchase agreement
account 2.223% due 01/03/05
(dated 12/31/04; proceeds
$8,712,613) (a)
(COST $8,711,000) $ 8,711,000
-------------
TOTAL INVESTMENTS
(COST $277,021,400) (b) 100.1% 366,621,431
LIABILITIES IN EXCESS OF OTHER
ASSETS (0.1) (214,367)
----- -------------
NET ASSETS 100.0% $ 366,407,064
===== =============
</Table>
- ----------
ADR AMERICAN DEPOSITORY RECEIPT.
* NON-INCOME PRODUCING SECURITY.
(a) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(b) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $282,049,677. THE
AGGREGATE GROSS UNREALIZED APPRECIATION IS $87,714,734 AND THE AGGREGATE
GROSS UNREALIZED DEPRECIATION IS $3,142,980, RESULTING IN NET UNREALIZED
APPRECIATION OF $84,571,754.
SEE NOTES TO FINANCIAL STATEMENTS
72
<Page>
Dividend Growth
SUMMARY OF INVESTMENTS - DECEMBER 31, 2004
<Table>
<Caption>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ------------------------------------------------------------------------
Industrial Conglomerates $ 35,462,135 9.7%
Integrated Oil 25,594,411 7.0
Pharmaceuticals: Major 23,057,052 6.3
Major Banks 17,070,014 4.7
Investment Banks/Brokers 17,062,022 4.7
Household/Personal Care 15,284,088 4.2
Financial Conglomerates 13,525,936 3.7
Packaged Software 12,382,509 3.4
Electric Utilities 11,832,223 3.2
Discount Stores 10,993,581 3.0
Food: Major Diversified 10,032,840 2.7
Home Improvement Chains 9,719,076 2.7
Information Technology
Services 9,542,544 2.6
Chemicals: Major
Diversified 9,045,477 2.5
Repurchase Agreement 8,711,000 2.4
Managed Health Care 8,628,398 2.4
Office Equipment/Supplies 8,066,604 2.2
Major Telecommunications 8,033,133 2.2
Semiconductors 7,966,322 2.2
Data Processing Services 7,112,688 1.9
Finance/Rental/Leasing 6,176,429 1.7
Apparel/Footwear 5,848,128 1.6
Life/Health Insurance 5,605,320 1.5
Investment Managers 5,528,247 1.5
Drugstore Chains 5,426,428 1.5
Auto Parts: O.E.M. 5,386,056 1.5
Computer Processing
Hardware $ 5,250,644 1.4%
Beverages: Non-Alcoholic 5,132,979 1.4
Aluminum 5,077,472 1.4
Computer Peripherals 4,937,740 1.3
Medical Specialties 4,832,620 1.3
Oil & Gas Production 4,733,296 1.3
Oilfield Services/
Equipment 4,598,928 1.3
Computer Communications 4,182,724 1.1
Pharmaceuticals: Other 3,230,852 0.9
Aerospace & Defense 2,799,540 0.8
Biotechnology 2,745,620 0.7
Telecommunication
Equipment 2,620,320 0.7
Trucks/Construction/
Farm Machinery 2,574,240 0.7
Multi-Line Insurance 2,502,027 0.7
Railroads 1,911,324 0.5
Chemicals: Agricultural 1,605,395 0.4
Casino/Gaming 1,275,408 0.3
Internet Software/Services 1,171,848 0.3
Motor Vehicles 1,069,200 0.3
Air Freight/Couriers 856,863 0.2
Wireless
Telecommunications 419,730 0.1
------------- ----------
$ 366,621,431 100.1%
============= ==========
</Table>
See Notes to Financial Statements
73
<Page>
Equally-Weighted S&P 500
PORTFOLIO OF INVESTMENTS DECEMBER 31, 2004
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ---------------------------------------------------------------------
COMMON STOCKS (99.1%)
ADVERTISING/MARKETING
SERVICES (0.4%)
32,769 Interpublic Group of
Companies, Inc. (The)* $ 439,105
5,289 Omnicom Group, Inc. 445,968
-------------
885,073
-------------
AEROSPACE & DEFENSE (1.5%)
8,374 Boeing Co. 433,522
4,139 General Dynamics Corp. 432,939
13,912 Goodrich Corp. 454,088
5,838 L-3 Communications
Holdings, Inc. 427,575
7,360 Lockheed Martin Corp. 408,848
7,552 Northrop Grumman Corp. 410,527
11,183 Raytheon Co. 434,236
10,917 Rockwell Collins, Inc. 430,566
-------------
3,432,301
-------------
AGRICULTURAL COMMODITIES/
MILLING (0.2%)
19,798 Archer-Daniels-Midland Co. 441,693
-------------
AIR FREIGHT/COURIERS (0.4%)
4,463 FedEx Corp. 439,561
5,077 United Parcel Service,
Inc. (Class B) 433,880
-------------
873,441
-------------
AIRLINES (0.4%)
57,089 Delta Air Lines, Inc.* 427,026
27,640 Southwest Airlines Co. 449,979
-------------
877,005
-------------
ALTERNATIVE POWER
GENERATION (0.2%)
120,155 Calpine Corp.* 473,411
-------------
ALUMINUM (0.2%)
14,042 Alcoa, Inc. 441,200
-------------
APPAREL/FOOTWEAR (1.4%)
9,459 Cintas Corp. 414,872
7,895 Coach, Inc.* 445,278
12,025 Jones Apparel Group, Inc. $ 439,754
10,801 Liz Claiborne, Inc. 455,910
5,077 Nike, Inc. (Class B) 460,433
10,669 Reebok International Ltd. 469,436
8,108 V.F. Corp. 449,021
-------------
3,134,704
-------------
APPAREL/FOOTWEAR RETAIL (0.7%)
21,422 Gap, Inc. (The) 452,433
18,181 Limited Brands, Inc. 418,527
9,430 Nordstrom, Inc. 440,664
17,687 TJX Companies, Inc. (The) 444,474
-------------
1,756,098
-------------
AUTO PARTS: O.E.M. (1.0%)
26,070 Dana Corp. 451,793
51,617 Delphi Corp. 465,585
6,264 Eaton Corp. 453,263
7,072 Johnson Controls, Inc. 448,648
44,826 Visteon Corp. 437,950
-------------
2,257,239
-------------
AUTOMOTIVE AFTERMARKET (0.4%)
20,819 Cooper Tire & Rubber Co. 448,649
30,543 Goodyear Tire & Rubber
Co. (The)* 447,760
-------------
896,409
-------------
BEVERAGES: ALCOHOLIC (0.6%)
8,624 Anheuser-Busch
Companies, Inc. 437,495
8,839 Brown-Forman Corp.
(Class B) 430,282
5,844 Coors (Adolph) Co.
(Class B) 442,215
-------------
1,309,992
-------------
BEVERAGES:
NON-ALCOHOLIC (0.6%)
10,604 Coca-Cola Co. (The) 441,444
20,352 Coca-Cola Enterprises Inc. 424,339
15,616 Pepsi Bottling Group, Inc. (The) 422,257
-------------
1,288,040
-------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
74
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------
BIOTECHNOLOGY (1.4%)
6,896 Amgen Inc.* $ 442,378
6,619 Biogen Idec Inc.* 440,892
13,647 Chiron Corp.* 454,854
7,846 Genzyme Corp.* 455,617
12,248 Gilead Sciences, Inc.* 428,557
15,814 MedImmune, Inc.* 428,717
8,624 Millipore Corp.* 429,561
------------
3,080,576
------------
BROADCASTING (0.4%)
12,594 Clear Channel
Communications, Inc. 421,773
14,720 Univision Communications
Inc. (Class A)* 430,854
------------
852,627
------------
BUILDING PRODUCTS (0.4%)
10,566 American Standard
Companies, Inc.* 436,587
11,913 Masco Corp. 435,182
------------
871,769
------------
CABLE/SATELLITE TV (0.2%)
14,015 Comcast Corp. (Class A)* 466,419
------------
CASINO/GAMING (0.4%)
6,709 Harrah's Entertainment, Inc. 448,765
12,734 International Game
Technology. 437,795
------------
886,560
------------
CHEMICALS: AGRICULTURAL (0.2%)
8,550 Monsanto Co. 474,952
------------
CHEMICALS: MAJOR
DIVERSIFIED (1.2%)
8,852 Dow Chemical Co. (The) 438,262
9,094 Du Pont (E.I.) de
Nemours & Co. 446,061
7,614 Eastman Chemical Co. 439,556
15,128 Engelhard Corp. 463,976
29,410 Hercules Inc.* 436,739
9,852 Rohm & Haas Co. 435,754
------------
2,660,348
------------
CHEMICALS: SPECIALTY (0.8%)
7,650 Air Products & Chemicals, Inc. $ 443,471
15,144 Great Lakes Chemical Corp. 431,453
9,926 Praxair, Inc. 438,233
7,202 Sigma-Aldrich Corp. 435,433
------------
1,748,590
------------
COMMERCIAL PRINTING/
FORMS (0.2%)
12,734 Donnelley (R.R.) & Sons Co. 449,383
------------
COMPUTER
COMMUNICATIONS (0.6%)
25,432 Avaya Inc.* 437,430
22,482 Cisco Systems, Inc.* 433,903
11,949 QLogic Corp.* 438,887
------------
1,310,220
------------
COMPUTER PERIPHERALS (0.6%)
30,479 EMC Corp.* 453,223
4,987 Lexmark International, Inc.
(Class A)* 423,895
12,794 Network Appliance, Inc.* 425,017
------------
1,302,135
------------
COMPUTER PROCESSING
HARDWARE (1.2%)
6,549 Apple Computer, Inc.* 421,756
10,318 Dell Inc.* 434,801
74,558 Gateway, Inc.* 448,094
20,720 Hewlett-Packard Co. 434,498
6,276 NCR Corp.* 434,487
82,606 Sun Microsystems, Inc.* 444,420
------------
2,618,056
------------
CONSTRUCTION MATERIALS (0.2%)
8,031 Vulcan Materials Co. 438,573
------------
CONTAINERS/PACKAGING (1.0%)
9,803 Ball Corp. 431,136
15,293 Bemis Company, Inc. 444,873
17,622 Pactiv Corp.* 445,660
8,349 Sealed Air Corp.* 444,751
6,841 Temple-Inland Inc. 467,924
------------
2,234,344
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
75
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------
CONTRACT DRILLING (0.8%)
8,408 Nabors Industries,
Ltd. (Bermuda)* $ 431,246
8,921 Noble Corp.* 443,731
17,071 Rowan Companies, Inc.* 442,139
10,781 Transocean Inc.
(Cayman Islands)* 457,007
------------
1,774,123
------------
DATA PROCESSING SERVICES (1.6%)
7,480 Affiliated Computer Services,
Inc. (Class A)* 450,221
9,872 Automatic Data
Processing, Inc 437,823
7,670 Computer Sciences Corp.* 432,358
30,226 Convergys Corp.* 453,088
10,409 First Data Corp. 442,799
11,538 Fiserv, Inc.* 463,712
13,169 Paychex, Inc. 448,800
16,154 SunGard Data Systems Inc.* 457,643
------------
3,586,444
------------
DEPARTMENT STORES (1.2%)
16,571 Dillard's, Inc. (Class A) 445,263
7,934 Federated Department
Stores, Inc. 458,506
9,430 Kohl's Corp.* 463,673
15,538 May Department Stores Co. 456,817
10,912 Penney (J.C.) Co., Inc. 451,757
8,397 Sears, Roebuck & Co. 428,499
------------
2,704,515
------------
DISCOUNT STORES (1.2%)
36,286 Big Lots, Inc.* 440,149
9,096 Costco Wholesale Corp. 440,337
21,743 Dollar General Corp. 451,602
14,660 Family Dollar Stores, Inc. 457,832
8,513 Target Corp. 442,080
8,268 Wal-Mart Stores, Inc. 436,716
------------
2,668,716
------------
DRUGSTORE CHAINS (0.4%)
9,716 CVS Corp. $ 437,900
11,203 Walgreen Co. 429,859
------------
867,759
------------
ELECTRIC UTILITIES (5.1%)
34,809 AES Corp. (The)* 475,839
22,378 Allegheny Energy, Inc.* 441,070
8,772 Ameren Corp. 439,828
12,497 American Electric Power
Co., Inc. 429,147
38,873 CenterPoint Energy, Inc. 439,265
10,389 Cinergy Corp. 432,494
42,845 CMS Energy Corp.* 447,730
9,867 Consolidated Edison, Inc. 431,681
10,122 Constellation Energy
Group, Inc. 442,433
6,383 Dominion Resources, Inc. 432,384
9,876 DTE Energy Co. 425,952
16,938 Duke Energy Corp. 429,040
13,934 Edison International 446,306
6,575 Entergy Corp. 444,404
10,238 Exelon Corp. 451,189
11,241 FirstEnergy Corp. 444,132
5,829 FPL Group, Inc. 435,718
13,241 PG&E Corp.* 440,660
9,861 Pinnacle West Capital Corp. 437,927
8,373 PPL Corp. 446,113
9,569 Progress Energy, Inc. 432,902
9,562 Public Service Enterprise
Group, Inc. 495,025
13,137 Southern Co. (The) 440,352
29,058 TECO Energy, Inc. 445,750
6,812 TXU Corp. 439,783
23,847 Xcel Energy, Inc. 434,015
------------
11,501,139
------------
ELECTRICAL PRODUCTS (1.0%)
21,349 American Power
Conversion Corp. 456,869
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
76
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------
6,453 Cooper Industries Ltd.
(Class A) (Bermuda) $ 438,094
6,228 Emerson Electric Co. 436,583
14,810 Molex Inc. 444,300
46,106 Power-One, Inc.* 411,266
------------
2,187,112
------------
ELECTRONIC COMPONENTS (0.5%)
16,685 Jabil Circuit, Inc.* 426,802
51,373 Sanmina-SCI Corp.* 435,129
73,304 Solectron Corp.* 390,710
------------
1,252,641
------------
ELECTRONIC EQUIPMENT/
INSTRUMENTS (1.6%)
18,419 Agilent Technologies, Inc.* 443,898
143,004 JDS Uniphase Corp.* 453,323
9,207 Rockwell Automation, Inc. 456,207
13,690 Scientific-Atlanta, Inc. 451,907
28,267 Symbol Technologies, Inc. 489,019
14,138 Tektronix, Inc. 427,109
14,161 Thermo Electron Corp.* 427,521
26,354 Xerox Corp.* 448,282
------------
3,597,266
------------
ELECTRONIC PRODUCTION
EQUIPMENT (0.8%)
25,551 Applied Materials, Inc.* 436,922
9,475 KLA-Tencor Corp.* 441,346
15,872 Novellus Systems, Inc.* 442,670
26,579 Teradyne, Inc.* 453,704
------------
1,774,642
------------
ELECTRONICS/APPLIANCE
STORES (0.6%)
7,520 Best Buy Co., Inc. 446,838
28,544 Circuit City Stores - Circuit
City Group 446,428
13,824 RadioShack Corp. 454,533
------------
1,347,799
------------
ELECTRONICS/APPLIANCES (0.6%)
13,613 Eastman Kodak Co. 439,019
20,989 Maytag Corp. $ 442,868
6,445 Whirlpool Corp. 446,058
------------
1,327,945
------------
ENGINEERING &
CONSTRUCTION (0.2%)
8,197 Fluor Corp. 446,818
------------
ENVIRONMENTAL SERVICES (0.4%)
48,842 Allied Waste Industries, Inc.* 453,254
14,428 Waste Management, Inc. 431,974
------------
885,228
------------
FINANCE/RENTAL/LEASING (1.8%)
5,330 Capital One Financial Corp. 448,839
9,834 CIT Group, Inc. 450,594
12,166 Countrywide Financial Corp. 450,264
6,293 Fannie Mae 448,125
6,164 Freddie Mac 454,287
15,924 MBNA Corp. 448,898
27,959 Providian Financial Corp.* 460,485
8,068 Ryder System, Inc. 385,408
8,152 SLM Corp. 435,235
------------
3,982,135
------------
FINANCIAL CONGLOMERATES (1.2%)
7,811 American Express Co. 440,306
9,270 Citigroup, Inc. 446,629
11,203 JP Morgan Chase & Co. 437,029
10,920 Principal Financial Group, Inc. 447,065
8,158 Prudential Financial, Inc. 448,364
9,062 State Street Corp. 445,125
------------
2,664,518
------------
FINANCIAL PUBLISHING/
Services (0.6%)
15,571 Equifax, Inc. 437,545
4,893 McGraw-Hill Companies,
Inc. (The) 447,905
5,194 Moody's Corp. 451,099
------------
1,336,549
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
77
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------
Food Distributors (0.2%)
11,753 SYSCO Corp. $ 448,612
------------
FOOD RETAIL (0.8%)
18,599 Albertson's, Inc. 444,144
25,284 Kroger Co.* 443,481
22,764 Safeway Inc.* 449,361
12,805 Supervalu, Inc. 442,029
------------
1,779,015
------------
FOOD: MAJOR DIVERSIFIED (1.4%)
14,390 Campbell Soup Co. 430,117
15,785 ConAgra Foods Inc. 464,868
9,019 General Mills, Inc. 448,334
11,296 Heinz (H.J.) Co. 440,431
9,801 Kellogg Co. 437,713
8,336 PepsiCo, Inc. 435,139
17,809 Sara Lee Corp. 429,909
------------
3,086,511
------------
FOOD: SPECIALTY/CANDY (0.6%)
7,759 Hershey Foods Corp. 430,935
11,447 McCormick & Co., Inc.
(Non-Voting) 441,854
6,377 Wrigley (Wm.) Jr. Co. 441,225
------------
1,314,014
------------
FOREST PRODUCTS (0.4%)
16,634 Louisiana-Pacific Corp. 444,793
6,525 Weyerhaeuser Co. 438,611
------------
883,404
------------
GAS DISTRIBUTORS (1.2%)
100,037 Dynegy, Inc. (Class A)* 462,171
11,200 KeySpan Corp. 441,840
11,671 Nicor Inc. 431,127
20,072 NiSource, Inc. 457,240
9,688 Peoples Energy Corp. 425,788
12,008 Sempra Energy 440,453
------------
2,658,619
------------
HOME BUILDING (0.6%)
7,468 Centex Corp. 444,943
4,130 KB Home $ 431,172
6,730 Pulte Homes, Inc. 429,374
------------
1,305,489
------------
HOME FURNISHINGS (0.4%)
14,685 Leggett & Platt, Inc. 417,495
19,130 Newell Rubbermaid, Inc. 462,755
------------
880,250
------------
Home Improvement
Chains (0.6%)
10,241 Home Depot, Inc. (The) 437,700
7,580 Lowe's Companies, Inc. 436,532
9,937 Sherwin-Williams Co. 443,488
------------
1,317,720
------------
Hospital/Nursing
Management (0.8%)
10,737 HCA, Inc. 429,051
19,239 Health Management
Associates, Inc.(Class A) 439,024
12,522 Manor Care, Inc. 443,654
41,698 Tenet Healthcare Corp.* 457,844
------------
1,767,659
------------
HOTELS/RESORTS/
CRUISELINES (0.8%)
7,813 Carnival Corp. (Panama) 450,263
19,576 Hilton Hotels Corp. 445,158
6,971 Marriott International, Inc.
(Class A) 439,034
7,665 Starwood Hotels & Resorts
Worldwide, Inc. 447,636
------------
1,782,091
------------
HOUSEHOLD/PERSONAL
CARE (1.5%)
9,170 Alberto-Culver Co. (Class B) 445,387
11,334 Avon Products, Inc. 438,626
7,415 Clorox Co. (The) 436,966
8,740 Colgate-Palmolive Co. 447,138
9,660 Gillette Co. (The) 432,575
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
78
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------
10,248 International Flavors &
Fragrances, Inc. $ 439,024
6,736 Kimberly-Clark Corp. 443,296
7,774 Procter & Gamble Co. (The) 428,192
------------
3,511,204
------------
INDUSTRIAL
CONGLOMERATES (1.8%)
5,458 3M Co. 447,938
7,715 Danaher Corp. 442,918
11,753 General Electric Co.** 428,985
12,248 Honeywell International, Inc. 433,702
5,418 Ingersoll-Rand Co. Ltd.
(Class A) (Bermuda) 435,065
5,264 ITT Industries, Inc. 444,545
5,987 Textron, Inc. 441,841
12,613 Tyco International Ltd.
(Bermuda) 450,789
4,276 United Technologies Corp. 441,925
------------
3,967,708
------------
INDUSTRIAL MACHINERY (0.4%)
4,748 Illinois Tool Works Inc. 440,045
5,744 Parker-Hannifin Corp. 435,051
------------
875,096
------------
INDUSTRIAL SPECIALTIES (0.4%)
12,587 Ecolab Inc. 442,181
6,491 PPG Industries, Inc. 442,427
------------
884,608
------------
INFORMATION TECHNOLOGY
SERVICES (1.0%)
17,349 Citrix Systems, Inc.* 425,571
19,673 Electronic Data
Systems Corp. 454,446
4,475 International Business
Machines Corp. 441,146
16,527 PeopleSoft, Inc.* 437,635
44,965 Unisys Corp.* 457,744
------------
2,216,542
------------
INSURANCE BROKERS/
SERVICES (0.4%)
18,816 AON Corp. $ 448,950
13,651 Marsh & McLennan
Companies, Inc. 449,118
------------
898,068
------------
INTEGRATED OIL (0.8%)
5,159 Amerada Hess Corp. 424,998
8,392 ChevronTexaco Corp. 440,664
5,009 ConocoPhillips 434,931
8,705 Exxon Mobil Corp. 446,218
------------
1,746,811
------------
INTERNET SOFTWARE/
SERVICES (0.4%)
43,791 Siebel Systems, Inc.* 459,806
11,762 Yahoo! Inc.* 443,192
------------
902,998
------------
INVESTMENT BANKS/
BROKERS (1.4%)
4,138 Bear Stearns Companies,
Inc. (The) 423,359
29,711 E*TRADE Group, Inc.* 444,179
4,138 Goldman Sachs Group,
Inc. (The) 430,518
5,013 Lehman Brothers
Holdings Inc. 438,537
7,290 Merrill Lynch & Co., Inc. 435,723
7,951 Morgan Stanley (Note 4) 441,440
36,560 Schwab (Charles) Corp. (The) 437,258
------------
3,051,014
------------
INVESTMENT MANAGERS (1.0%)
13,979 Federated Investors,
Inc. (Class B) 424,962
6,507 Franklin Resources, Inc. 453,213
26,354 Janus Capital Group, Inc. 443,011
14,106 Mellon Financial Corp. 438,838
7,022 T. Rowe Price Group, Inc. 436,768
------------
2,196,792
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
79
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------
LIFE/HEALTH INSURANCE (1.2%)
11,030 AFLAC, Inc. $ 439,435
8,285 Jefferson-Pilot Corp. 430,489
9,288 Lincoln National Corp. 433,564
10,690 MetLife, Inc. 433,052
7,676 Torchmark Corp. 438,607
25,808 UnumProvident Corp. 462,996
------------
2,638,143
------------
MAJOR BANKS (2.4%)
9,463 Bank of America Corp. 444,666
13,217 Bank of New York Co.,
Inc. (The) 441,712
10,360 BB&T Corp. 435,638
7,291 Comerica, Inc. 444,897
18,395 Huntington Bancshares, Inc. 455,828
13,181 KeyCorp 446,836
11,804 National City Corp. 443,240
7,832 PNC Financial Services Group 449,870
12,444 Regions Financial Corp. 442,882
5,987 SunTrust Banks, Inc. 442,320
8,214 Wachovia Corp. 432,056
6,949 Wells Fargo & Co. 431,880
------------
5,311,825
------------
MAJOR
TELECOMMUNICATIONS (1.1%)
7,462 ALLTEL Corp. 438,467
22,752 AT&T Corp. 433,653
15,336 BellSouth Corp. 426,187
16,971 SBC Communications, Inc. 437,343
17,788 Sprint Corp. 442,032
10,796 Verizon Communications Inc. 437,346
------------
2,615,028
------------
MANAGED HEALTH CARE (1.2%)
3,529 Aetna, Inc. 440,243
11,405 Caremark Rx, Inc.* 449,699
5,458 CIGNA Corp. 445,209
14,770 Humana, Inc.* 438,521
5,068 UnitedHealth Group Inc. 446,136
3,762 WellPoint Inc.* 432,630
------------
2,652,438
------------
MEDIA CONGLOMERATES (0.8%)
15,831 Disney (Walt) Co. (The) $ 440,102
23,918 News Corp Inc. (Class A) 446,310
22,367 Time Warner, Inc.* 434,814
12,173 Viacom Inc. (Class B)
(Non-Voting) 442,975
------------
1,764,201
------------
MEDICAL DISTRIBUTORS (0.6%)
6,929 AmerisourceBergen Corp. 406,594
7,546 Cardinal Health, Inc. 438,800
13,466 McKesson Corp. 423,640
------------
1,269,034
------------
MEDICAL SPECIALTIES (3.2%)
20,477 Applera Corp. - Applied
Biosystems Group 428,174
6,862 Bard (C.R.), Inc. 439,031
6,699 Bausch & Lomb, Inc. 431,818
13,008 Baxter International, Inc. 449,296
7,559 Becton, Dickinson & Co. 429,351
10,082 Biomet, Inc. 437,458
12,296 Boston Scientific Corp.* 437,123
7,130 Fisher Scientific
International, Inc.* 444,769
6,083 Guidant Corp. 438,584
13,051 Hospira, Inc.* 437,209
9,032 Medtronic, Inc. 448,619
15,107 Pall Corp. 437,348
19,222 PerkinElmer, Inc. 432,303
10,703 St. Jude Medical, Inc.* 448,777
9,544 Stryker Corp. 460,498
9,309 Waters Corp.* 435,568
5,472 Zimmer Holdings, Inc.* 438,417
------------
7,474,343
------------
MISCELLANEOUS COMMERCIAL
SERVICES (0.2%)
19,462 Sabre Holdings Corp. 431,278
------------
MISCELLANEOUS
MANUFACTURING (0.2%)
10,384 Dover Corp. 435,505
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
80
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------
MOTOR VEHICLES (0.6%)
30,672 Ford Motor Co. $ 449,038
11,118 General Motors Corp. 445,387
7,380 Harley-Davidson, Inc. 448,335
------------
1,342,760
------------
MULTI-LINE INSURANCE (0.8%)
6,765 American International
Group, Inc. 444,258
6,491 Hartford Financial Services
Group, Inc. (The) (Note 4) 449,891
6,284 Loews Corp. 441,765
8,550 Safeco Corp. 446,652
------------
1,782,566
------------
OFFICE EQUIPMENT/
Supplies (0.4%)
7,123 Avery Dennison Corp. 427,166
9,699 Pitney Bowes, Inc. 448,870
------------
876,036
------------
OIL & Gas Pipelines (0.6%)
42,428 El Paso Corp. 441,251
6,074 Kinder Morgan, Inc. 444,192
27,007 Williams Companies,
Inc. (The) 439,944
------------
1,325,387
------------
OIL & Gas Production (1.6%)
6,539 Anadarko Petroleum Corp. 423,793
8,636 Apache Corp. 436,723
9,962 Burlington Resources, Inc. 433,347
10,923 Devon Energy Corp. 425,123
6,070 EOG Resources, Inc. 433,155
7,405 Kerr-McGee Corp. 427,935
7,635 Occidental Petroleum Corp. 445,579
10,082 Unocal Corp. 435,946
6,300 XTO Energy Inc. 222,894
------------
3,684,495
------------
OIL REFINING/MARKETING (0.8%)
7,574 Ashland, Inc. 442,170
11,696 Marathon Oil Corp. 439,887
5,268 Sunoco, Inc. $ 430,448
9,664 Valero Energy Corp. 438,746
------------
1,751,251
------------
OILFIELD SERVICES/
EQUIPMENT (0.8%)
10,200 Baker Hughes Inc. 435,234
9,213 BJ Services Co. 428,773
11,047 Halliburton Co. 433,484
6,659 Schlumberger Ltd.
(Netherlands Antilles) 445,820
------------
1,743,311
------------
OTHER CONSUMER
SERVICES (0.8%)
5,477 Apollo Group, Inc. (Class A)* 442,049
8,967 Block (H.&R.), Inc. 439,383
19,419 Cendant Corp. 454,016
3,769 eBay Inc.* 438,259
------------
1,773,707
------------
OTHER CONSUMER
SPECIALTIES (0.2%)
5,712 Fortune Brands, Inc. 440,852
------------
OTHER METALS/MINERALS (0.2%)
4,537 Phelps Dodge Corp. 448,800
------------
PACKAGED SOFTWARE (2.6%)
7,137 Adobe Systems, Inc.* 447,775
12,560 Autodesk, Inc. 476,652
23,150 BMC Software, Inc.* 430,590
14,340 Computer Associates
International, Inc. 445,400
73,676 Compuware Corp.* 476,684
9,921 Intuit Inc.* 436,623
9,812 Mercury Interactive Corp.* 446,937
16,059 Microsoft Corp.** 428,936
64,047 Novell, Inc.* 432,317
30,955 Oracle Corp.* 424,703
76,252 Parametric Technology Corp.* 449,124
17,356 Symantec Corp.* 447,091
15,582 VERITAS Software Corp.* 444,866
------------
5,787,698
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
81
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------
PERSONNEL SERVICES (0.4%)
13,379 Monster Worldwide Inc.* $ 450,070
16,647 Robert Half International, Inc. 489,921
------------
939,991
------------
PHARMACEUTICALS:
GENERIC DRUGS (0.4%)
24,258 Mylan Laboratories, Inc. 428,881
13,284 Watson
Pharmaceuticals, Inc.* 435,848
------------
864,729
------------
PHARMACEUTICALS: MAJOR (1.5%)
9,442 Abbott Laboratories 440,469
17,064 Bristol-Myers Squibb Co. 437,180
6,874 Johnson & Johnson 435,949
7,598 Lilly (Eli) & Co. 431,187
13,720 Merck & Co., Inc. 440,961
15,050 Pfizer, Inc. 404,695
21,317 Schering-Plough Corp. 445,099
10,462 Wyeth 445,577
------------
3,481,117
------------
PHARMACEUTICALS:
OTHER (0.6%)
5,465 Allergan, Inc. 443,048
9,339 Forest Laboratories, Inc.* 418,948
35,259 King Pharmaceuticals, Inc.* 437,212
------------
1,299,208
------------
PRECIOUS METALS (0.4%)
11,709 Freeport-McMoRan Copper &
Gold, Inc. (Class B) 447,635
9,731 Newmont Mining Corp. 432,154
------------
879,789
------------
PROPERTY - CASUALTY
INSURERS (1.4%)
10,459 ACE Ltd. (Cayman Islands) 447,122
8,628 Allstate Corp. (The) 446,240
5,685 Chubb Corp. (The) 437,177
9,850 Cincinnati Financial Corp. 435,961
5,138 Progressive Corp. (The) 435,908
11,756 St. Paul Travelers Companies,
Inc. (The) $ 435,795
5,545 XL Capital Ltd. (Class A) 430,569
------------
3,068,772
------------
PUBLISHING:
BOOKS/MAGAZINES (0.2%)
8,203 Meredith Corp. 444,603
------------
PUBLISHING: NEWSPAPERS (1.0%)
10,387 Dow Jones & Co., Inc. 447,264
5,474 Gannett Co., Inc. 447,226
6,619 Knight-Ridder, Inc. 443,076
11,058 New York Times Co.
(The) (Class A) 451,166
10,494 Tribune Co. 442,217
------------
2,230,949
------------
PULP & Paper (0.6%)
11,677 Georgia-Pacific Corp. 437,654
10,477 International Paper Co. 440,034
13,008 MeadWestvaco Corp. 440,841
------------
1,318,529
------------
RAILROADS (0.8%)
9,448 Burlington Northern
Santa Fe Corp. 446,985
11,180 CSX Corp. 448,094
12,422 Norfolk Southern Corp. 449,552
7,021 Union Pacific Corp. 472,162
------------
1,816,793
------------
REAL ESTATE INVESTMENT
TRUSTS (1.4%)
11,813 Apartment Investment &
Management Co. (Class A) 455,273
11,386 Archstone-Smith Trust 436,084
15,384 Equity Office Properties Trust 447,982
12,334 Equity Residential 446,244
11,244 Plum Creek Timber Co., Inc. 432,219
10,553 ProLogis 457,261
6,809 Simon Property Group, Inc. 440,338
------------
3,115,401
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
82
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------
RECREATIONAL PRODUCTS (0.8%)
9,079 Brunswick Corp. $ 449,411
7,373 Electronic Arts Inc.* 454,767
23,249 Hasbro, Inc. 450,566
22,599 Mattel, Inc. 440,455
------------
1,795,199
------------
REGIONAL BANKS (2.2%)
17,397 AmSouth Bancorporation 450,582
9,251 Compass Bancshares, Inc. 450,246
9,130 Fifth Third Bancorp 431,666
10,148 First Horizon National Corp. 437,480
4,172 M&T Bank Corp. 449,908
10,214 Marshall & Ilsley Corp. 451,459
15,097 North Fork
Bancorporation, Inc. 435,548
8,856 Northern Trust Corp. 430,224
15,499 Synovus Financial Corp. 442,961
14,404 U.S. Bancorp 451,133
6,582 Zions Bancorporation 447,773
------------
4,878,980
------------
Restaurants (1.0%)
15,633 Darden Restaurants, Inc. 433,659
13,354 McDonald's Corp. 428,129
7,514 Starbucks Corp.* 468,573
11,349 Wendy's International, Inc. 445,562
9,418 Yum! Brands, Inc. 444,341
------------
2,220,264
------------
Savings Banks (0.6%)
7,221 Golden West Financial Corp. 443,514
20,202 Sovereign Bancorp, Inc. 455,555
10,614 Washington Mutual, Inc. 448,760
------------
1,347,829
------------
Semiconductors (3.2%)
19,393 Advanced Micro
Devices, Inc.* 427,034
21,656 Altera Corp.* 448,279
11,750 Analog Devices, Inc. 433,810
116,310 Applied Micro Circuits Corp.* 489,665
13,668 Broadcom Corp. (Class A)* 441,203
25,792 Freescale Semiconductor
Inc. (Class B)* $ 473,541
19,071 Intel Corp. 446,071
11,367 Linear Technology Corp. 440,585
81,985 LSI Logic Corp.* 449,278
10,462 Maxim Integrated
Products, Inc. 443,484
37,503 Micron Technology, Inc.* 463,162
24,669 National Semiconductor Corp. 442,809
18,442 NVIDIA Corp.* 434,494
39,759 PMC - Sierra, Inc.* 447,289
18,150 Texas Instruments Inc. 446,853
14,800 Xilinx, Inc. 438,820
------------
7,166,377
------------
SERVICES TO THE HEALTH
INDUSTRY (1.0%)
5,723 Express Scripts, Inc.
(Class A)* 437,466
18,751 IMS Health Inc. 435,211
8,894 Laboratory Corp. of
America Holdings* 443,099
11,039 Medco Health Solutions Inc.* 459,222
4,643 Quest Diagnostics Inc. 443,639
------------
2,218,637
------------
SPECIALTY INSURANCE (0.6%)
5,242 Ambac Financial Group, Inc. 430,525
6,778 MBIA Inc. 428,912
6,441 MGIC Investment Corp. 443,849
------------
1,303,286
------------
SPECIALTY STORES (1.6%)
23,678 AutoNation, Inc.* 454,854
4,918 AutoZone, Inc.* 449,063
11,003 Bed Bath & Beyond Inc.* 438,249
25,358 Office Depot, Inc.* 440,215
13,346 OfficeMax Inc. 418,797
13,225 Staples, Inc. 445,815
14,092 Tiffany & Co. 450,521
21,667 Toys 'R' Us, Inc.* 443,523
------------
3,541,037
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
83
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------
SPECIALTY
TELECOMMUNICATIONS (0.6%)
12,723 CenturyTel, Inc. $ 451,285
32,070 Citizens Communications Co. 442,245
105,099 Qwest Communications
International, Inc.* 466,640
-------------
1,360,170
-------------
STEEL (0.6%)
19,515 Allegheny Technologies Inc. 422,890
8,268 Nucor Corp. 432,747
8,480 United States Steel Corp. 434,600
-------------
1,290,237
-------------
TELECOMMUNICATION
EQUIPMENT (1.8%)
166,475 ADC
Telecommunications, Inc.* 446,153
33,295 Andrew Corp.* 453,811
151,973 CIENA Corp.* 507,590
17,839 Comverse Technology, Inc.* 436,164
37,535 Corning Inc.* 441,787
116,621 Lucent Technologies Inc.* 438,495
25,432 Motorola, Inc. 437,430
10,038 QUALCOMM Inc. 425,611
52,613 Tellabs, Inc.* 451,946
-------------
4,038,987
-------------
TOBACCO (0.6%)
7,160 Altria Group, Inc. 437,476
5,530 Reynolds American, Inc. 434,658
9,232 UST, Inc. 444,152
-------------
1,316,286
-------------
TOOLS/HARDWARE (0.6%)
5,071 Black & Decker Corp. 447,921
12,824 Snap-On, Inc. 440,633
9,178 Stanley Works (The) 449,630
-------------
1,338,184
-------------
TRUCKS/CONSTRUCTION/
FARM MACHINERY (1.0%)
4,601 Caterpillar Inc. 448,644
5,341 Cummins Inc. 447,522
6,021 Deere & Co. 447,962
10,432 Navistar International Corp.* $ 458,799
5,573 PACCAR, Inc. 448,515
-------------
2,251,442
-------------
WHOLESALE DISTRIBUTORS (0.4%)
10,131 Genuine Parts Co. 446,372
6,760 Grainger (W.W.), Inc. 450,351
-------------
896,723
-------------
WIRELESS
TELECOMMUNICATIONS (0.2%)
14,646 Nextel Communications,
Inc. (Class A)* 439,380
-------------
TOTAL COMMON STOCKS
(Cost $140,452,171) 221,252,289
-------------
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS
- ------------
SHORT-TERM INVESTMENT (0.8%)
REPURCHASE AGREEMENT
$ 1,670 Joint repurchase agreement
account 2.223% due
01/03/05 (dated 12/31/04;
proceeds $1,670,309) (a)
(Cost $1,670,000) 1,670,000
-------------
TOTAL INVESTMENTS
(Cost $142,122,171)(b)(c) 99.9% 222,922,289
OTHER ASSETS IN EXCESS
OF LIABILITIES 0.1 297,206
----- -------------
NET ASSETS 100.0% $ 223,219,495
===== =============
</Table>
- -----------------------------------------------------------------------------
ADR AMERICAN DEPOSITORY RECEIPT.
* NON-INCOME PRODUCING SECURITY.
** A PORTION OF THIS SECURITY IS PHYSICALLY SEGREGATED IN CONNECTION WITH
OPEN FUTURES CONTRACTS IN THE AMOUNT OF $120,000.
(A) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(B) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN AN AMOUNT EQUAL TO
$1,451,343 IN CONNECTION WITH OPEN FUTURES CONTRACTS.
(C) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $142,604,342. THE
AGGREGATE GROSS UNREALIZED APPRECIATION IS $82,447,423 AND THE AGGREGATE
GROSS UNREALIZED DEPRECIATION IS $2,129,476, RESULTING IN NET UNREALIZED
APPRECIATION OF $80,317,947
SEE NOTES TO FINANCIAL STATEMENTS
84
<Page>
FUTURES CONTRACTS OPEN AT DECEMBER 31, 2004:
<Table>
<Caption>
NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE UNREALIZED
CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE APPRECIATION
- ---------------------------------------------------------------------------------------------------------
4 Long S&P Midcap 400 Index
March/2005 $ 1,330,800 $ 54,480
1 Long S&P 500 Index
March/2005 303,425 8,377
----------
Total unrealized appreciation $ 62,857
----------
</Table>
<Table>
SUMMARY OF INVESTMENTS
PERCENT OF
SECTOR VALUE NET ASSETS
- ----------------------------------------------------------
Finance $ 36,239,329 16.2%
Electronic Technology 26,492,625 11.9
Health Technology 16,199,973 7.3
Retail Trade 15,982,659 7.2
Consumer Non-Durables 14,960,751 6.7
Utilities 14,633,169 6.5
Producer Manufacturing 13,721,907 6.1
Technology Services 12,493,682 5.6
Consumer Services 12,421,421 5.6
Process Industries 9,763,064 4.4
Consumer Durables 9,327,088 4.2
Energy Minerals 7,182,557 3.2
Health Services 6,638,734 3.0
Industrial Services 6,174,867 2.8
Non-Energy Minerals 4,382,003 2.0
Communications 4,414,578 1.9
Commercial Services 4,042,274 1.8
Transportation 3,567,239 1.6
Distribution Services 2,614,369 1.2
Repurchase Agreement 1,670,000 0.7
-------------- ------------
$ 222,922,289* 99.9%
============== ============
</Table>
* DOES NOT INCLUDE OUTSTANDING LONG FUTURES CONTRACTS WITH AN UNDERLYING FACE
AMOUNT OF $1,634,225 AND TOTAL UNREALIZED APPRECIATION OF $62,857.
SEE NOTES TO FINANCIAL STATEMENTS
85
<Page>
Growth
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2004
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------
COMMON STOCKS (99.8%)
ADVERTISING/MARKETING
SERVICES (0.7%)
7,000 Lamar Advertising Co.
(Class A)* $ 299,460
------------
AIR FREIGHT/COURIERS (0.8%)
6,595 C.H. Robinson Worldwide, Inc. 366,154
------------
APPAREL/FOOTWEAR (0.8%)
6,350 Coach, Inc.* 358,140
------------
APPAREL/FOOTWEAR RETAIL (0.5%)
5,351 Chico's FAS, Inc.* 243,631
------------
BIOTECHNOLOGY (4.0%)
5,430 Amgen Inc.* 348,335
3,400 Biogen Idec Inc.* 226,474
9,200 Genentech, Inc.* 500,848
3,900 Genzyme Corp.* 226,473
14,618 Gilead Sciences, Inc.* 511,484
------------
1,813,614
------------
BROADCASTING (1.0%)
14,732 Univision Communications Inc.
(Class A)* 431,206
------------
CASINO/GAMING (4.4%)
9,340 GTECH Holdings Corp. 242,373
22,500 International Game Technology 773,550
4,783 Las Vegas Sands Corp.* 229,584
8,000 Station Casinos, Inc. 437,440
4,645 Wynn Resorts, Ltd.* 310,843
------------
1,993,790
------------
CHEMICALS: AGRICULTURAL (0.8%)
6,100 Monsanto Co. 338,855
------------
COAL (0.7%)
3,700 Peabody Energy Corp. 299,367
------------
COMPUTER
COMMUNICATIONS (1.3%)
21,809 Cisco Systems, Inc.* 420,914
5,200 Juniper Networks, Inc.* 141,388
------------
562,302
------------
COMPUTER PROCESSING
HARDWARE (3.0%)
32,319 Dell Inc.* $ 1,361,923
------------
CONTAINERS/PACKAGING (0.4%)
3,000 Sealed Air Corp.* 159,810
------------
DATA PROCESSING SERVICES (2.0%)
10,100 First Data Corp. 429,654
13,450 Paychex, Inc. 458,376
------------
888,030
------------
DISCOUNT STORES (4.4%)
4,500 Costco Wholesale Corp. 217,845
4,500 Kmart Holding Corp.* 445,275
24,954 Wal-Mart Stores, Inc. 1,318,070
------------
1,981,190
------------
FINANCE/RENTAL/LEASING (0.8%)
6,900 SLM Corp. 368,391
------------
FINANCIAL CONGLOMERATES (2.8%)
6,700 American Express Co. 377,679
18,400 Brascan Corp. (Class A)
(Canada) 662,584
4,570 Citigroup, Inc. 220,183
------------
1,260,446
------------
FINANCIAL PUBLISHING/
SERVICES (1.1%)
5,800 Moody's Corp. 503,730
------------
FOOD: MAJOR DIVERSIFIED (1.0%)
8,506 PepsiCo, Inc. 444,013
------------
FOOD: SPECIALTY/CANDY (1.5%)
9,700 Wrigley (Wm.) Jr. Co. 671,143
------------
GAS DISTRIBUTORS (1.0%)
9,100 Questar Corp. 463,736
------------
HOME IMPROVEMENT CHAINS (1.5%)
15,275 Home Depot, Inc. (The) 652,854
------------
HOTELS/RESORTS/CRUISELINES (3.5%)
27,100 Carnival Corp. (Panama) 1,561,773
------------
HOUSEHOLD/PERSONAL CARE (1.7%)
10,000 Gillette Co. (The) 447,800
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
86
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------
6,105 Procter & Gamble Co. (The) $ 336,263
------------
784,063
------------
INDUSTRIAL CONGLOMERATES (1.8%)
4,150 3M Co. 340,591
12,600 Tyco International Ltd.
(Bermuda) 450,324
------------
790,915
------------
INFORMATION TECHNOLOGY
SERVICES (0.5%)
3,200 Infosys Technologies Ltd.
(ADR) (India) 221,792
------------
INSURANCE BROKERS/SERVICES(0.5%)
4,700 ChoicePoint Inc.* 216,153
------------
INTEGRATED OIL (1.4%)
17,400 Suncor Energy, Inc. (Canada) 615,960
------------
INTERNET RETAIL (1.0%)
5,300 Amazon.com, Inc.* 234,737
8,200 IAC/InterActiveCorp.* 226,484
------------
461,221
------------
INTERNET SOFTWARE/
SERVICES (3.5%)
1,300 Google Inc. (Class A)* 251,030
35,540 Yahoo! Inc.* 1,339,147
------------
1,590,177
------------
INVESTMENT BANKS/BROKERS (0.5%)
16,000 Ameritrade Holding Corp.* 227,520
------------
INVESTMENT MANAGERS (1.5%)
9,800 Franklin Resources, Inc. 682,570
------------
MANAGED HEALTH CARE (3.7%)
12,050 Caremark Rx, Inc.* 475,131
13,500 UnitedHealth Group Inc. 1,188,405
------------
1,663,536
------------
MEDIA CONGLOMERATES (1.5%)
23,710 News Corp. (Class B) 455,232
12,400 Time Warner, Inc.* 241,056
------------
696,288
------------
MEDICAL DISTRIBUTORS (0.6%)
5,700 Patterson Companies Inc.* $ 247,323
------------
MEDICAL SPECIALTIES (6.5%)
11,800 Alcon, Inc. (Switzerland) 951,080
5,900 Fisher Scientific
International, Inc.* 368,042
4,741 Kinetic Concepts, Inc.* 361,738
11,536 Medtronic, Inc. 572,993
8,300 Zimmer Holdings, Inc.* 664,996
------------
2,918,849
------------
MISCELLANEOUS COMMERCIAL
SERVICES (0.7%)
4,900 Corporate Executive Board
Co. (The) 328,006
------------
OIL & GAS PRODUCTION (2.4%)
4,100 EnCana Corp. (Canada) 233,946
17,180 Ultra Petroleum Corp.
(Canada)* 826,873
------------
1,060,819
------------
OILFIELD SERVICES/
EQUIPMENT (1.0%)
5,400 Halliburton Co. 211,896
3,300 Schlumberger Ltd.
(Netherlands Antilles) 220,935
------------
432,831
------------
OTHER CONSUMER SERVICES (6.0%)
12,000 Apollo Group, Inc. (Class A)* 968,520
14,918 eBay Inc.* 1,734,665
------------
2,703,185
------------
PACKAGED SOFTWARE (4.9%)
6,800 Adobe Systems, Inc.* 426,632
86 Computer Associates* 2,671
60,780 Microsoft Corp. 1,623,434
5,200 Symantec Corp.* 133,952
------------
2,186,689
------------
PHARMACEUTICALS: MAJOR (4.1%)
22,000 Johnson & Johnson 1,395,240
8,900 Novartis AG (ADR) (Switzerland) 449,806
------------
1,845,046
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
87
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------
PRECIOUS METALS (3.1%)
31,800 Newmont Mining Corp. $ 1,412,238
------------
PROPERTY - CASUALTY
INSURERS (1.5%)
231 Berkshire Hathaway, Inc.
(Class B)* 678,216
------------
RECREATIONAL PRODUCTS (2.9%)
18,400 Electronic Arts Inc.* 1,134,912
4,000 Shanda Interactive Entertainment
Ltd. (Cayman Islands)* 170,000
------------
1,304,912
------------
RESTAURANTS (0.5%)
3,600 Starbucks Corp.* 224,496
------------
SEMICONDUCTORS (2.2%)
9,222 Intel Corp. 215,703
5,651 Linear Technology Corp. 219,033
15,260 Marvell Technology Group Ltd.
(Bermuda)* 541,272
------------
976,008
------------
SPECIALTY STORES (1.0%)
12,660 PETsMART, Inc. 449,810
------------
SPECIALTY
TELECOMMUNICATIONS (1.2%)
19,731 Crown Castle International
Corp.* 328,324
3,200 NTL, Inc.* 233,472
------------
561,796
------------
TELECOMMUNICATION
EQUIPMENT (2.9%)
30,938 QUALCOMM Inc. 1,311,771
------------
TOBACCO (0.5%)
3,800 Altria Group, Inc. 232,180
------------
WIRELESS
TELECOMMUNICATIONS (2.2%)
10,400 America Movil S.A. de C.V.
(Series L) (ADR) (Mexico) 544,440
15,500 Nextel Communications, Inc.
(Class A)* 465,000
------------
1,009,440
------------
TOTAL COMMON STOCKS
(Cost $39,901,618) 44,857,368
------------
<Caption>
NUMBER OF
WARRANTS VALUE
- ----------------------------------------------------------------------------
WARRANTS (0.0%)
TELECOMMUNICATION EQUIPMENT
6,721 Lucent Technologies
(due 12/10/07) (Cost $0)* $ 10,619
------------
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS
- ------------
SHORT-TERM INVESTMENT (0.4%)
REPURCHASE AGREEMENT
$ 188 Joint repurchase agreement
account
2.223% due 01/03/05
(dated 12/31/04;
proceeds $188,035)(a)
(Cost $188,000) 188,000
------------
TOTAL INVESTMENTS
(Cost $40,089,618)(b) 100.2% 45,055,987
LIABILITIES IN EXCESS OF OTHER
ASSETS (0.2) (83,620)
----- ------------
NET ASSETS 100.0% $ 44,972,367
===== ============
- -----------------------------------------------------------------------------
</Table>
ADR AMERICAN DEPOSITORY RECEIPT.
* NON-INCOME PRODUCING SECURITY.
(A) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $41,575,529. THE
AGGREGATE GROSS UNREALIZED APPRECIATION IS $3,726,603 AND THE AGGREGATE
GROSS UNREALIZED DEPRECIATION IS $246,145, RESULTING IN NET UNREALIZED
APPRECIATION OF $3,480,458.
SEE NOTES TO FINANCIAL STATEMENTS
88
<Page>
Growth
SUMMARY OF INVESTMENTS - DECEMBER 31, 2004
<Table>
<Caption>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- --------------------------------------------------------------
Medical Specialties $ 2,918,849 6.5%
Other Consumer Services 2,703,185 6.0
Packaged Software 2,186,689 4.9
Casino/Gaming 1,993,790 4.4
Discount Stores 1,981,190 4.4
Pharmaceuticals: Major 1,845,046 4.1
Biotechnology 1,813,614 4.0
Managed Health Care 1,663,536 3.7
Internet Software/Services 1,590,177 3.5
Hotels/Resorts/Cruiselines 1,561,773 3.5
Precious Metals 1,412,238 3.1
Computer Processing
Hardware 1,361,923 3.0
Telecommunication
Equipment 1,322,390 2.9
Recreational Products 1,304,912 2.9
Financial Conglomerates 1,260,446 2.8
Oil & Gas Production 1,060,819 2.4
Wireless
Telecommunications 1,009,440 2.2
Semiconductors 976,008 2.2
Data Processing Services 888,030 2.0
Industrial Conglomerates 790,915 1.8
Household/Personal Care 784,063 1.7
Media Conglomerates 696,288 1.5
Investment Managers 682,570 1.5
Property - Casualty Insurers 678,216 1.5
Food: Specialty/Candy 671,143 1.5
Home Improvement Chains 652,854 1.5
Integrated Oil 615,960 1.4
Computer Communications 562,302 1.3
Specialty
Telecommunications 561,796 1.2
Financial Publishing/
Services 503,730 1.1
Gas Distributors 463,736 1.0
Internet Retail 461,221 1.0
Specialty Stores 449,810 1.0
Food: Major Diversified 444,013 1.0
Oilfield Services/
Equipment $ 432,831 1.0%
Broadcasting 431,206 1.0
Finance/Rental/Leasing 368,391 0.8
Air Freight/Couriers 366,154 0.8
Apparel/Footwear 358,140 0.8
Chemicals: Agricultural 338,855 0.8
Miscellaneous Commercial
Services 328,006 0.7
Advertising/Marketing
Services 299,460 0.7
Coal 299,367 0.7
Medical Distributors 247,323 0.6
Apparel/Footwear Retail 243,631 0.5
Tobacco 232,180 0.5
Investment Banks/Brokers 227,520 0.5
Restaurants 224,496 0.5
Information Technology
Services 221,792 0.5
Insurance Brokers/
Services 216,153 0.5
Repurchase Agreement 188,000 0.4
Containers/Packaging 159,810 0.4
------------- ------------
$ 45,055,987 100.2%
============= ============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
89
<Page>
American Opportunities
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2004
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------
COMMON STOCKS (96.1%)
ADVERTISING/MARKETING
SERVICES (0.5%)
32,300 Lamar Advertising Co.
(Class A)* $ 1,381,794
------------
APPAREL/FOOTWEAR
RETAIL (0.7%)
40,200 Chico's FAS, Inc.* 1,830,306
------------
BIOTECHNOLOGY (4.8%)
32,700 Amgen Inc.* 2,097,705
49,800 Biogen Idec Inc.* 3,317,178
31,000 Genentech, Inc.* 1,687,640
28,800 Genzyme Corp.* 1,672,416
104,000 Gilead Sciences, Inc.* 3,638,960
------------
12,413,899
------------
BROADCASTING (0.5%)
43,700 Univision Communications Inc.
(Class A)* 1,279,099
------------
CASINO/GAMING (2.7%)
50,000 GTECH Holdings Corp. 1,297,500
27,811 Las Vegas Sands Corp.* 1,334,928
47,100 Station Casinos, Inc. 2,575,428
26,900 Wynn Resorts, Ltd.* 1,800,148
------------
7,008,004
------------
CHEMICALS: AGRICULTURAL (1.0%)
30,400 Potash Corp. of Saskatchewan,
Inc. (Canada) 2,525,024
------------
COAL (2.0%)
62,800 Peabody Energy Corp. 5,081,148
------------
COMPUTER
COMMUNICATIONS (1.1%)
101,100 Cisco Systems, Inc.* 1,951,230
34,600 Juniper Networks, Inc.* 940,774
------------
2,892,004
------------
COMPUTER PROCESSING
HARDWARE (2.5%)
153,700 Dell Inc.* 6,476,918
------------
DATA PROCESSING SERVICES (1.4%)
42,400 CheckFree Corp.* $ 1,614,592
44,500 First Data Corp. 1,893,030
------------
3,507,622
------------
DISCOUNT STORES (3.5%)
10,000 Kmart Holding Corp. 989,500
152,000 Target Corp. 7,893,360
------------
8,882,860
------------
ELECTRICAL PRODUCTS (0.5%)
17,800 Cooper Industries Ltd.
(Class A) (Bermuda) 1,208,442
------------
FINANCE/RENTAL/LEASING (1.7%)
14,000 Capital One Financial Corp. 1,178,940
44,000 Freddie Mac 3,242,800
------------
4,421,740
------------
FINANCIAL CONGLOMERATES (1.3%)
37,900 American Express Co. 2,136,423
22,900 Citigroup, Inc. 1,103,322
------------
3,239,745
------------
FINANCIAL PUBLISHING/
SERVICES (0.8%)
22,900 Moody's Corp. 1,988,865
------------
FOOD: MAJOR DIVERSIFIED (1.8%)
34,200 Campbell Soup Co. 1,022,238
26,400 Kellogg Co. 1,179,024
48,270 PepsiCo, Inc. 2,519,694
------------
4,720,956
------------
HOME IMPROVEMENT
CHAINS (1.5%)
88,800 Home Depot, Inc. (The) 3,795,312
------------
HOTELS/RESORTS/
CRUISELINES (2.7%)
119,200 Carnival Corp. (Panama) 6,869,496
------------
HOUSEHOLD/PERSONAL CARE (2.9%)
45,200 Clorox Co. (The) 2,663,636
59,800 Gillette Co. (The) 2,677,844
36,600 Procter & Gamble Co. (The) 2,015,928
------------
7,357,408
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
90
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------
INDUSTRIAL CONGLOMERATES (6.0%)
38,800 Danaher Corp. $ 2,227,508
201,300 General Electric Co. 7,347,450
125,600 Tyco International Ltd.
(Bermuda) 4,488,944
13,400 United Technologies Corp. 1,384,890
------------
15,448,792
------------
INFORMATION TECHNOLOGY
SERVICES (1.2%)
72,100 Cognizant Technology
Solutions Corp. (Class A)* 3,051,993
------------
INTEGRATED OIL (2.7%)
37,400 BP PLC (ADR)
(United Kingdom) 2,184,160
66,200 Suncor Energy, Inc.
(Canada) 2,343,480
7,998 Total S.A. (France) 1,744,123
4,700 Total SA (ADR) (France) 516,248
------------
6,788,011
------------
INTERNET SOFTWARE/
SERVICES (3.2%)
215,800 Yahoo! Inc.* 8,131,344
------------
INVESTMENT BANKS/
BROKERS (2.8%)
3,700 Chicago Mercantile
Exchange (The) 846,190
40,175 Goldman Sachs Group, Inc.
(The) 4,179,807
30,950 Legg Mason, Inc. 2,267,397
------------
7,293,394
------------
MAJOR BANKS (1.6%)
89,200 Bank of America Corp. 4,191,508
------------
MAJOR TELECOMMUNICATIONS (1.3%)
136,400 Sprint Corp. (FON Group) 3,389,540
------------
MANAGED HEALTH CARE (3.7%)
55,500 Caremark Rx, Inc.* 2,188,365
83,500 UnitedHealth Group Inc. 7,350,505
------------
9,538,870
------------
MEDIA CONGLOMERATES (1.3%)
105,200 News Corp. (Class B) $ 2,019,840
65,800 Time Warner, Inc.* 1,279,152
------------
3,298,992
------------
MEDICAL SPECIALTIES (5.1%)
36,800 Alcon, Inc. (Switzerland) 2,966,080
21,400 Fisher Scientific
International, Inc.* 1,334,932
25,800 Kinetic Concepts, Inc.* 1,968,540
67,300 Medtronic, Inc. 3,342,791
41,700 Zimmer Holdings, Inc.* 3,341,004
------------
12,953,347
------------
MISCELLANEOUS COMMERCIAL
SERVICES (0.4%)
23,200 Laureate Education Inc.* 1,022,888
------------
OIL & GAS PRODUCTION (1.8%)
93,180 Ultra Petroleum Corp.
(Canada)* 4,484,753
------------
OILFIELD SERVICES/
EQUIPMENT (1.6%)
53,700 Halliburton Co. 2,107,188
30,600 Schlumberger Ltd.
(Netherlands Antilles) 2,048,670
------------
4,155,858
------------
OTHER CONSUMER SERVICES (5.6%)
59,115 Apollo Group, Inc. (Class A)* 4,771,172
82,200 eBay Inc.* 9,558,216
------------
14,329,388
------------
PACKAGED SOFTWARE (7.6%)
51,300 Adobe Systems, Inc. 3,218,562
871 Computer Associates
International, Inc 27,053
106,400 McAfee Inc.* 3,078,152
400,800 Microsoft Corp. 10,705,368
36,700 SAP AG (ADR) (Germany) 1,622,507
34,600 Symantec Corp.* 891,296
------------
19,542,938
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
91
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------
PHARMACEUTICALS: MAJOR (5.4%)
136,000 Johnson & Johnson $ 8,625,120
38,800 Novartis AG (ADR) (Switzerland) 1,960,952
149,200 Schering-Plough Corp. 3,115,296
------------
13,701,368
------------
PRECIOUS METALS (3.3%)
187,800 Newmont Mining Corp. 8,340,198
------------
PROPERTY - CASUALTY
INSURERS (0.8%)
717 Berkshire Hathaway, Inc.
(Class B)* 2,105,112
------------
SEMICONDUCTORS (1.6%)
117,700 Marvell Technology Group Ltd.
(Bermuda)* 4,174,819
------------
SPECIALTY STORES (1.0%)
71,400 PETsMART, Inc. 2,536,842
------------
SPECIALTY
TELECOMMUNICATIONS (0.7%)
112,268 Crown Castle
International Corp.* 1,868,139
------------
TELECOMMUNICATION
EQUIPMENT (2.9%)
176,384 QUALCOMM Inc. 7,478,682
------------
WIRELESS
TELECOMMUNICATIONS (0.6%)
50,400 Nextel Communications, Inc.
(Class A)* 1,512,000
------------
TOTAL COMMON STOCKS
(Cost $211,370,483) 246,219,418
------------
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- -------------------------------------------------------------------------
SHORT-TERM INVESTMENT (2.6%)
REPURCHASE AGREEMENT
$ 6,561 Joint repurchase agreement
account
2.223% due 01/03/05
(dated 12/31/04;
proceeds $6,561,405) (a)
(Cost $6,561,000) $ 6,561,000
------------
TOTAL INVESTMENTS
(Cost $217,931,483) (b) 98.7% 252,780,418
OTHER ASSETS IN EXCESS OF
LIABILITIES 1.3 3,225,249
----- ------------
NET ASSETS 100.0% $256,005,667
===== ============
- -------------------------------------------------------------------------
</Table>
ADR AMERICAN DEPOSITORY RECEIPT.
* NON-INCOME PRODUCING SECURITY.
(A) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $218,463,010. THE
AGGREGATE GROSS UNREALIZED APPRECIATION IS $36,076,109 AND THE AGGREGATE
GROSS UNREALIZED DEPRECIATION IS $1,758,701, RESULTING IN NET UNREALIZED
APPRECIATION OF $34,317,408.
SEE NOTES TO FINANCIAL STATEMENTS
92
<Page>
<Table>
<Caption>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ---------------------------------------------------------------
Packaged Software $ 19,542,938 7.6%
Industrial Conglomerates 15,448,792 6.0
Other Consumer Services 14,329,388 5.6
Pharmaceuticals: Major 13,701,368 5.4
Medical Specialties 12,953,347 5.1
Biotechnology 12,413,899 4.8
Managed Health Care 9,538,870 3.7
Discount Stores 8,882,860 3.5
Precious Metals 8,340,198 3.3
Internet Software/Services 8,131,344 3.2
Telecommunication
Equipment 7,478,682 2.9
Household/Personal Care 7,357,408 2.9
Investment Banks/Brokers 7,293,394 2.8
Casino/Gaming 7,008,004 2.7
Hotels/Resorts/Cruiselines 6,869,496 2.7
Integrated Oil 6,788,011 2.7
Repurchase Agreement 6,561,000 2.6
Computer Processing
Hardware 6,476,918 2.5
Coal 5,081,148 2.0
Food: Major Diversified 4,720,956 1.8
Oil & Gas Production 4,484,753 1.8
Finance/Rental/Leasing 4,421,740 1.7
Major Banks 4,191,508 1.6
Semiconductors 4,174,819 1.6
Oilfield Services/Equipment $ 4,155,858 1.6%
Home Improvement Chains 3,795,312 1.5
Data Processing Services 3,507,622 1.4
Major Telecommunications 3,389,540 1.3
Media Conglomerates 3,298,992 1.3
Financial Conglomerates 3,239,745 1.3
Information Technology
Services 3,051,993 1.2
Computer Communications 2,892,004 1.1
Specialty Stores 2,536,842 1.0
Chemicals: Agricultural 2,525,024 1.0
Property - Casualty Insurers 2,105,112 0.8
Financial Publishing/Services 1,988,865 0.8
Specialty
Telecommunications 1,868,139 0.7
Apparel/Footwear Retail 1,830,306 0.7
Wireless Telecommunications 1,512,000 0.6
Advertising/Marketing
Services 1,381,794 0.5
Broadcasting 1,279,099 0.5
Electrical Products 1,208,442 0.5
Miscellaneous Commercial
Services 1,022,888 0.4
------------- ------------
$ 252,780,418 98.7%
============= ============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
93
<Page>
Capital Opportunities
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2004
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------
COMMON STOCKS (97.8%)
ADVERTISING/MARKETING
SERVICES (2.4%)
21,600 Lamar Advertising Co.
(Class A)* $ 924,048
------------
AIR FREIGHT/COURIERS (1.1%)
7,800 C.H. Robinson Worldwide, Inc. 433,056
------------
APPAREL/FOOTWEAR (1.1%)
8,000 Coach, Inc.* 451,200
------------
APPAREL/FOOTWEAR RETAIL (1.0%)
9,050 Chico's FAS, Inc.* 412,046
------------
BIOTECHNOLOGY (2.4%)
9,500 Genentech, Inc.* 517,180
11,900 Gilead Sciences, Inc.* 416,381
------------
933,561
------------
BROADCASTING (1.9%)
26,050 Univision Communications Inc.
(Class A)* 762,484
------------
CASINO/GAMING (9.2%)
29,180 GTECH Holdings Corp. 757,221
28,200 International Game Technology 969,516
4,282 Las Vegas Sands Corp.* 205,536
26,200 Station Casinos, Inc. 1,432,616
4,105 Wynn Resorts, Ltd.* 274,707
------------
3,639,596
------------
COMPUTER PROCESSING
HARDWARE (1.1%)
10,500 Dell Inc.* 442,470
------------
CONSTRUCTION MATERIALS (1.8%)
8,300 Rinker Group Ltd. (ADR)
(Australia) 689,481
------------
DISCOUNT STORES (1.4%)
19,800 Dollar Tree Stores, Inc.* 567,864
------------
FINANCIAL CONGLOMERATES (1.6%)
17,550 Brascan Corp. (Class A)
(Canada) 631,975
------------
FINANCIAL PUBLISHING/
SERVICES (1.2%)
5,200 Moody's Corp. $ 451,620
------------
FOOD: SPECIALTY/CANDY (1.5%)
8,300 Wrigley (Wm.) Jr. Co. 574,277
------------
GAS DISTRIBUTORS (1.1%)
8,400 Questar Corp. 428,064
------------
HOTELS/RESORTS/
CRUISELINES (3.8%)
27,400 Royal Caribbean Cruises Ltd.
(Liberia) 1,491,656
------------
INSURANCE BROKERS/
SERVICES (1.0%)
8,400 ChoicePoint Inc.* 386,316
------------
INTEGRATED OIL (1.3%)
14,900 Suncor Energy, Inc. (Canada) 527,460
------------
INTERNET SOFTWARE/
SERVICES (3.0%)
31,300 Yahoo! Inc.* 1,179,384
------------
INVESTMENT BANKS/
BROKERS (2.2%)
28,200 Ameritrade Holding Corp.* 401,004
16,200 Greenhill & Co., Inc. 464,940
------------
865,944
------------
INVESTMENT MANAGERS (1.2%)
18,000 Calamos Asset Management
Inc. (Class A)* 486,000
------------
MANAGED HEALTH CARE (1.0%)
4,600 UnitedHealth Group Inc. 404,938
------------
MEDICAL DISTRIBUTORS (1.1%)
9,800 Patterson Companies Inc.* 425,222
------------
MEDICAL SPECIALTIES (9.2%)
12,600 Dade Behring Holdings Inc.* 705,600
12,528 Fisher Scientific International,
Inc.* 781,497
13,500 INAMED Corp.* 853,875
11,921 Kinetic Concepts, Inc.* 909,572
4,900 Zimmer Holdings, Inc.* 392,588
------------
3,643,132
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
94
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------------------
MEDICAL/NURSING
SERVICES (1.5%)
30,700 VCA Antech, Inc.* $ 601,720
--------------
MISCELLANEOUS COMMERCIAL
SERVICES (3.1%)
17,950 Corporate Executive Board Co.
(The) 1,201,573
--------------
OIL & GAS PRODUCTION (3.5%)
28,610 Ultra Petroleum Corp.
(Canada)* 1,376,999
--------------
OTHER CONSUMER SERVICES (6.0%)
10,400 Apollo Group, Inc. (Class A)* 839,384
13,100 eBay Inc.* 1,523,268
--------------
2,362,652
--------------
PACKAGED SOFTWARE (2.3%)
6,500 Adobe Systems, Inc.* 407,810
19,100 Microsoft Corp. 510,161
--------------
917,971
--------------
PRECIOUS METALS (3.3%)
29,400 Newmont Mining Corp. 1,305,654
--------------
PROPERTY - CASUALTY
INSURERS (3.5%)
306 Berkshire Hathaway, Inc.
(Class B)* 898,416
715 White Mountains Insurance
Group, Ltd. (Bermuda) 461,890
--------------
1,360,306
--------------
REAL ESTATE INVESTMENT
TRUSTS (1.1%)
10,800 Plum Creek Timber Co., Inc. 415,152
--------------
RECREATIONAL PRODUCTS (3.6%)
16,200 Electronic Arts Inc.* 999,216
9,700 Shanda Interactive
Entertainment Ltd. (ADR)
(Cayman Islands)* 412,250
--------------
1,411,466
--------------
RESTAURANTS (3.6%)
20,120 AFC Enterprises, Inc.* 475,838
7,920 P.F. Chang's China
Bistro, Inc.* $ 446,292
16,687 Sonic Corp.* 508,954
--------------
1,431,084
--------------
SEMICONDUCTORS (1.4%)
15,700 Marvell Technology Group Ltd.
(Bermuda)* 556,879
--------------
SERVICES TO THE HEALTH
INDUSTRY (1.3%)
11,075 Stericycle, Inc.* 508,896
--------------
SPECIALTY STORES (3.3%)
8,100 Guitar Center, Inc.* 426,789
13,320 PETsMART, Inc. 473,260
13,000 Tuesday Morning Corp.* 398,190
--------------
1,298,239
--------------
SPECIALTY
TELECOMMUNICATIONS (3.7%)
53,118 Crown Castle
International Corp.* 883,883
7,585 NTL, Inc.* 553,402
--------------
1,437,285
--------------
TELECOMMUNICATION EQUIPMENT (2.9%)
27,100 QUALCOMM Inc. 1,149,040
--------------
WHOLESALE DISTRIBUTORS (1.1%)
13,500 SCP Pool Corp. 430,650
--------------
TOTAL COMMON STOCKS
(Cost $31,461,784) 38,517,360
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS
- -----------
SHORT-TERM INVESTMENT (1.9%)
REPURCHASE AGREEMENT
$ 756 Joint repurchase agreement account
2.223% due 01/03/05
(dated 12/31/04:
proceeds $756,140) (a)
(Cost $756,000) 756,000
--------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
95
<Page>
<Table>
<Caption>
VALUE
- --------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(Cost $32,217,784) (b) 99.7% $ 39,273,360
OTHER ASSETS IN EXCESS OF
LIABILITIES 0.3 114,317
----- --------------
NET ASSETS 100.0% $ 39,387,677
===== ==============
</Table>
ADR American Depository Receipt.
* Non-income producing security.
(a) Collateralized by federal agency and U.S. Treasury obligations.
(b) The aggregate cost for federal income tax purposes is $32,225,037. The
aggregate gross unrealized appreciation is $7,676,523 and the
aggregate gross unrealized depreciation is $628,200, resulting in net
unrealized appreciation of $7,048,323.
SEE NOTES TO FINANCIAL STATEMENTS
96
<Page>
Capital Opportunities
SUMMARY OF INVESTMENTS - DECEMBER 31, 2004
<Table>
<Caption>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ------------------------------------------------------------------------------
Medical Specialties $ 3,643,132 9.2%
Casino/Gaming 3,639,596 9.2
Other Consumer Services 2,362,652 6.0
Hotels/Resorts/Cruiselines 1,491,656 3.8
Specialty
Telecommunications 1,437,285 3.7
Restaurants 1,431,084 3.6
Recreational Products 1,411,466 3.6
Oil & Gas Production 1,376,999 3.5
Property - Casualty Insurers 1,360,306 3.5
Precious Metals 1,305,654 3.3
Specialty Stores 1,298,239 3.3
Miscellaneous Commercial
Services 1,201,573 3.1
Internet Software/Services 1,179,384 3.0
Telecommunication
Equipment 1,149,040 2.9
Advertising/Marketing
Services 924,048 2.4
Biotechnology 933,561 2.4
Packaged Software 917,971 2.3
Investment Banks/Brokers 865,944 2.2
Broadcasting 762,484 1.9
Repurchase Agreement 756,000 1.9
Construction Materials $ 689,481 1.8%
Financial Conglomerates 631,975 1.6
Medical/Nursing Services 601,720 1.5
Food: Specialty/Candy 574,277 1.5
Discount Stores 567,864 1.4
Semiconductors 556,879 1.4
Integrated Oil 527,460 1.3
Services to the Health Industry 508,896 1.3
Investment Managers 486,000 1.2
Financial Publishing/Services 451,620 1.2
Apparel/Footwear 451,200 1.1
Computer Processing Hardware 442,470 1.1
Air Freight/Couriers 433,056 1.1
Wholesale Distributors 430,650 1.1
Gas Distributors 428,064 1.1
Medical Distributors 425,222 1.1
Real Estate Investment Trusts 415,152 1.1
Apparel/Footwear Retail 412,046 1.0
Managed Health Care 404,938 1.0
Insurance Brokers/Services 386,316 1.0
------------ ------------
$ 39,273,360 99.7%
============ ============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
97
<Page>
Global Equity
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2004
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------------------
COMMON STOCKS (97.9%)
BELGIUM (1.1%)
BEVERAGES: ALCOHOLIC
18,000 InBev $ 697,118
--------------
FINANCIAL CONGLOMERATES
8,000 Fortis 220,920
--------------
TOTAL BELGIUM 918,038
--------------
BRAZIL (0.3%)
WIRELESS TELECOMMUNICATIONS
33,763 Telesp Celular Participacoes
S.A. (ADR)* 229,588
--------------
CANADA (0.7%)
INTEGRATED OIL
15,000 Suncor Energy, Inc. 530,088
--------------
CHINA (0.1%)
ELECTRIC UTILITIES
100,000 Huaneng Power International,
Inc. (Class H) 74,614
--------------
FINLAND (1.9%)
PULP & PAPER
20,000 Stora Enso Oyj (Registered
Shares) 305,868
--------------
TELECOMMUNICATION EQUIPMENT
81,000 Nokia Corp. (ADR) 1,269,270
--------------
TOTAL FINLAND 1,575,138
--------------
FRANCE (9.5%)
ADVERTISING/MARKETING SERVICES
15,000 Publicis Groupe 485,467
--------------
AUTOMOTIVE AFTERMARKET
5,000 Compagnie Generale des
Etablissements Michelin
(B Shares) 320,184
--------------
BROADCASTING
10,000 M6 Metropole Television 283,613
--------------
BUILDING PRODUCTS
6,000 Compagnie de Saint-Gobain 360,853
--------------
ELECTRICAL PRODUCTS
4,000 Schneider Electric S.A. $ 277,914
--------------
ENGINEERING & CONSTRUCTION
4,000 Vinci S.A. 536,286
--------------
FOOD DISTRIBUTORS
10,000 Sodexho Alliance S.A. 302,068
--------------
FOOD RETAIL
6,000 Carrefour S.A. 285,296
--------------
FOOD: MAJOR DIVERSIFIED
4,000 Groupe Danone 368,833
--------------
HOTELS/RESORTS/CRUISELINES
8,000 Accor S.A. Ltd. 349,672
--------------
INFORMATION TECHNOLOGY
SERVICES
13,000 Cap Gemini S.A.* 415,622
--------------
INTEGRATED OIL
4,022 Total S.A. 877,077
--------------
INTERNET SOFTWARE/SERVICES
10,000 Business Objects S.A.* 252,131
--------------
MAJOR BANKS
10,200 BNP Paribas S.A. 737,747
--------------
MAJOR TELECOMMUNICATIONS
10,000 France Telecom S.A.* 330,565
--------------
MEDIA CONGLOMERATES
10,000 Vivendi Universal S.A.* 318,759
--------------
MOTOR VEHICLES
6,000 PSA Peugeot Citroen 380,231
--------------
MULTI-LINE INSURANCE
25,000 Axa 616,757
--------------
REGIONAL BANKS
10,000 Credit Agricole S.A. 301,254
--------------
TOTAL FRANCE 7,800,329
--------------
GERMANY (6.5%)
AIRLINES
20,000 Deutsche Lufthansa AG
(Registered Shares)* 286,327
--------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
98
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------------------
APPAREL/FOOTWEAR
3,000 Adidas-Salomon AG $ 483,431
--------------
AUTO PARTS: O.E.M.
5,000 Continental AG 317,063
--------------
CHEMICALS: MAJOR DIVERSIFIED
8,000 BASF AG 575,368
--------------
ELECTRIC UTILITIES
6,000 E. ON AG 546,003
10,000 RWE AG 552,299
--------------
1,098,302
--------------
FINANCIAL CONGLOMERATES
12,000 Hypo Real Estate
Holding AG* 496,662
--------------
INDUSTRIAL CONGLOMERATES
8,000 MAN AG 307,659
3,000 Siemens AG (Registered
Shares) 253,949
--------------
561,608
--------------
MAJOR BANKS
4,000 Deutsche Bank AG
(Registered Shares) 354,557
--------------
MAJOR TELECOMMUNICATIONS
20,000 Deutsche Telekom AG
(Registered Shares)* 451,881
--------------
PACKAGED SOFTWARE
3,700 SAP AG 659,746
--------------
TOTAL GERMANY 5,284,945
--------------
IRELAND (0.3%)
MAJOR TELECOMMUNICATIONS
100,000 Eircom Group PLC 236,118
--------------
ITALY (0.3%)
INVESTMENT BANKS/BROKERS
15,000 Mediobanca SpA 242,428
--------------
JAPAN (9.3%)
ELECTRONIC COMPONENTS
3,000 Hoya Corp. 338,766
--------------
ELECTRONIC EQUIPMENT/INSTRUMENTS
5,000 Canon, Inc. $ 269,861
38,000 Konica Minolta Holdings, Inc. 504,392
21,000 Ricoh Co., Ltd. 405,202
--------------
1,179,455
--------------
ELECTRONICS/APPLIANCES
10,000 Fuji Photo Film Co., Ltd. 365,020
--------------
FOOD RETAIL
11,000 Ito-Yokado Co., Ltd. 461,644
--------------
GAS DISTRIBUTORS
150,000 Tokyo Gas Co., Ltd. 614,874
--------------
HOUSEHOLD/PERSONAL CARE
10,000 Kao Corp. 255,710
--------------
INDUSTRIAL MACHINERY
5,900 Fanuc Ltd. 385,809
--------------
INVESTMENT BANKS/BROKERS
27,400 Nomura Holdings, Inc. 399,528
--------------
MAJOR BANKS
40 Mitsubishi Tokyo Financial
Group, Inc. 406,012
70 UFJ Holdings, Inc.* 424,263
--------------
830,275
--------------
MAJOR TELECOMMUNICATIONS
50 Nippon Telegraph &
Telephone Corp. 224,478
--------------
MOTOR VEHICLES
10,000 Toyota Motor Corp. 406,988
--------------
PHARMACEUTICALS: MAJOR
15,000 Takeda Pharmaceutical
Co., Ltd. 755,417
--------------
RAILROADS
90 East Japan Railway Co. 500,683
--------------
RECREATIONAL PRODUCTS
7,000 Nintendo Co., Ltd. 879,270
--------------
TOTAL JAPAN 7,597,917
--------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
99
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------------------
NETHERLANDS (3.4%)
AIR FREIGHT/COURIERS
10,000 TPG N.V. $ 271,129
--------------
ELECTRONIC PRODUCTION
EQUIPMENT
20,000 ASML Holding NV* 320,523
--------------
FINANCIAL CONGLOMERATES
15,000 ING Groep NV (Share
Certificates) 453,102
--------------
INTEGRATED OIL
10,000 Royal Dutch Petroleum Co. 574,690
--------------
LIFE/HEALTH INSURANCE
25,000 Aegon NV 340,268
--------------
MAJOR BANKS
17,000 ABN AMRO Holding NV 449,615
--------------
PERSONNEL SERVICES
25,000 Vedior NV 406,761
--------------
TOTAL NETHERLANDS 2,816,088
--------------
NORWAY (1.4%)
INTEGRATED OIL
30,000 Statoil ASA 469,507
--------------
MAJOR TELECOMMUNICATIONS
75,000 Telenor ASA 679,549
--------------
TOTAL NORWAY 1,149,056
--------------
PHILIPPINES (0.2%)
SPECIALTY TELECOMMUNICATIONS
7,000 Philippine Long Distance
Telephone Co. (ADR)* 174,510
--------------
SINGAPORE (1.6%)
ELECTRONIC COMPONENTS
92,800 Flextronics International Ltd.* 1,282,496
--------------
SOUTH KOREA (0.3%)
WIRELESS TELECOMMUNICATIONS
10,000 SK Telecom Co., Ltd. (ADR) 222,500
--------------
SPAIN (1.0%)
APPAREL/FOOTWEAR RETAIL
15,000 Industria de Diseno
Texil, S.A. $ 441,704
--------------
MAJOR TELECOMMUNICATIONS
20,000 Telefonica S.A. 376,160
--------------
TOTAL SPAIN 817,864
--------------
SWEDEN (0.8%)
TELECOMMUNICATION EQUIPMENT
80,000 Telefonaktiebolaget LM
Ericsson (B Shares)* 255,084
--------------
TRUCKS/CONSTRUCTION/
FARM MACHINERY
11,000 Volvo AB (B Shares) 435,943
--------------
TOTAL SWEDEN 691,027
--------------
SWITZERLAND (1.4%)
FINANCIAL CONGLOMERATES
6,000 UBS AG (Registered Shares) 501,842
--------------
MAJOR BANKS
5,000 Credit Suisse Group 209,649
--------------
PHARMACEUTICALS: MAJOR
8,000 Novartis AG (Registered
Shares) 402,105
--------------
TOTAL SWITZERLAND 1,113,596
--------------
UNITED KINGDOM (6.7%)
Advertising/Marketing Services
45,000 WPP Group PLC 494,737
--------------
AIRLINES
40,000 British Airways PLC* 180,358
--------------
HOTELS/RESORTS/CRUISELINES
13,000 Carnival PLC 792,692
--------------
INTEGRATED OIL
7,256 BP PLC (ADR) 423,750
--------------
INVESTMENT MANAGERS
40,000 Amvescap PLC 246,169
--------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
100
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------------------
LIFE/HEALTH INSURANCE
25,000 Prudential PLC $ 217,293
--------------
MAJOR BANKS
9,000 Royal Bank of Scotland
Group PLC 302,541
23,000 Standard Chartered PLC 427,400
--------------
729,941
--------------
MEDICAL SPECIALTIES
25,000 Smith & Nephew PLC 255,667
--------------
MISCELLANEOUS COMMERCIAL
SERVICES
80,000 Group 4 Securicor PLC* 214,894
--------------
MOVIES/ENTERTAINMENT
70,000 Rank Group PLC 354,576
--------------
OTHER METALS/MINERALS
20,000 BHP Billiton PLC 234,273
10,300 Rio Tinto PLC 302,961
--------------
537,234
--------------
PHARMACEUTICALS: MAJOR
16,000 GlaxoSmithKline PLC 375,144
--------------
WIRELESS TELECOMMUNICATIONS
251,534 Vodafone Group PLC 681,698
--------------
TOTAL UNITED KINGDOM 5,504,153
--------------
UNITED STATES (51.1%)
ADVERTISING/MARKETING SERVICES
94,750 Interpublic Group of
Companies, Inc. (The)* 1,269,650
--------------
AEROSPACE & DEFENSE
22,050 Northrop Grumman Corp. 1,198,638
31,140 Raytheon Co. 1,209,166
--------------
2,407,804
--------------
AGRICULTURAL COMMODITIES/
MILLING
53,560 Archer-Daniels-Midland Co. 1,194,924
--------------
BEVERAGES: NON-ALCOHOLIC
28,400 Coca-Cola Co. (The) 1,182,292
--------------
BIOTECHNOLOGY
33,500 Gilead Sciences, Inc.* $ 1,172,165
--------------
CHEMICALS: MAJOR DIVERSIFIED
39,130 Dow Chemical Co. (The) 1,937,326
--------------
COMPUTER COMMUNICATIONS
66,550 Cisco Systems, Inc.* 1,284,415
--------------
DISCOUNT STORES
26,250 Costco Wholesale Corp. 1,270,762
--------------
ELECTRICAL PRODUCTS
17,310 Emerson Electric Co. 1,213,431
--------------
ELECTRONIC PRODUCTION EQUIPMENT
75,770 Applied Materials, Inc.* 1,295,667
--------------
FINANCIAL CONGLOMERATES
21,830 American Express Co. 1,230,557
25,450 Citigroup, Inc. 1,226,181
31,530 J.P. Morgan Chase & Co. 1,229,985
--------------
3,686,723
--------------
FOOD: MAJOR DIVERSIFIED
26,680 Kellogg Co. 1,191,529
--------------
FOOD: MEAT/FISH/DAIRY
35,900 Dean Foods Co.* 1,182,905
--------------
HOUSEHOLD/PERSONAL CARE
26,460 Gillette Co. (The) 1,184,879
--------------
INDUSTRIAL CONGLOMERATES
33,240 General Electric Co. 1,213,260
--------------
INFORMATION TECHNOLOGY
SERVICES
13,050 International Business
Machines Corp. 1,286,469
--------------
INTEGRATED OIL
26,490 Exxon Mobil Corp. 1,357,877
--------------
MAJOR BANKS
26,240 Bank of America Corp. 1,233,018
--------------
MAJOR TELECOMMUNICATIONS
58,220 SBC Communications, Inc. 1,500,329
--------------
MEDIA CONGLOMERATES
64,950 Time Warner, Inc.* 1,262,628
--------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
101
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------------------
MEDICAL SPECIALTIES
18,620 Bard (C.R.), Inc. $ 1,191,308
--------------
OIL & GAS PRODUCTION
31,260 Burlington Resources, Inc. 1,359,810
--------------
PHARMACEUTICALS: MAJOR
18,730 Johnson & Johnson 1,187,857
20,880 Lilly (Eli) & Co. 1,184,940
44,020 Pfizer, Inc. 1,183,698
--------------
3,556,495
--------------
SEMICONDUCTORS
54,950 Intel Corp. 1,285,281
--------------
SPECIALTY STORES
31,540 Bed Bath & Beyond Inc.* 1,256,238
--------------
TELECOMMUNICATION EQUIPMENT
109,200 Corning Inc.* 1,285,284
74,490 Motorola, Inc. 1,281,228
--------------
2,566,512
--------------
TRUCKS/CONSTRUCTION/
FARM MACHINERY
12,350 Caterpillar Inc. 1,204,248
--------------
TOTAL UNITED STATES 41,747,945
--------------
TOTAL COMMON STOCKS
(Cost $70,390,277) 80,008,438
--------------
PREFERRED STOCK (0.5%)
GERMANY
BROADCASTING
22,500 ProSiebenSat.1 Media AG
(Cost $327,625) 412,189
--------------
TOTAL INVESTMENTS
(Cost $70,717,902) (a) 98.4% 80,420,627
OTHER ASSETS IN EXCESS OF
LIABILITIES 1.6 1,268,948
----- --------------
NET ASSETS 100.0% $ 81,689,575
===== ==============
</Table>
ADR AMERICAN DEPOSITORY RECEIPT.
* NON-INCOME PRODUCING SECURITY.
(a) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS THE AGGREGATE
COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS
$13,266,067 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS
$3,563,342, RESULTING IN NET UNREALIZED APPRECIATION OF $9,702,725.
SEE NOTES TO FINANCIAL STATEMENTS
102
<Page>
Global Equity
SUMMARY OF INVESTMENTS - DECEMBER 31, 2004
<Table>
<Caption>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ----------------------------------------------------------------------------
Financial Conglomerates $ 5,359,249 6.5%
Pharmaceuticals: Major 5,089,161 6.2
Major Banks 4,544,802 5.5
Integrated Oil 4,232,989 5.2
Telecommunication
Equipment 4,090,866 5.0
Major Telecommunications 3,799,080 4.6
Chemicals: Major Diversified 2,512,694 3.1
Aerospace & Defense 2,407,804 2.9
Advertising/Marketing
Services 2,249,854 2.7
Industrial Conglomerates 1,774,868 2.2
Information Technology
Services 1,702,091 2.1
Trucks/Construction/
Farm Machinery 1,640,191 2.0
Electronic Components 1,621,262 2.0
Electronic Production
Equipment 1,616,190 2.0
Media Conglomerates 1,581,387 1.9
Food: Major Diversified 1,560,362 1.9
Electrical Products 1,491,345 1.8
Medical Specialties 1,446,975 1.8
Household/Personal Care 1,440,589 1.7
Oil & Gas Production 1,359,810 1.7
Semiconductors 1,285,281 1.6
Computer Communications 1,284,415 1.6
Discount Stores 1,270,762 1.6
Specialty Stores 1,256,238 1.5
Agricultural Commodities/
Milling 1,194,924 1.5
Food: Meat/Fish/Dairy 1,182,905 1.4
Beverages: Non-Alcoholic 1,182,292 1.4
Electronic Equipment/
Instruments 1,179,455 1.4
Electric Utilities 1,172,916 1.4
Biotechnology 1,172,165 1.4
Hotels/Resorts/Cruiselines 1,142,364 1.4
Wireless
Telecommunications 1,133,786 1.4
Recreational Products 879,270 1.1
Motor Vehicles 787,219 1.0
Food Retail $ 746,940 0.9%
Beverages: Alcoholic 697,118 0.9
Broadcasting 695,802 0.9
Packaged Software 659,746 0.8
Investment Banks/
Brokers 641,956 0.8
Multi-Line Insurance 616,757 0.8
Gas Distributors 614,874 0.8
Life/Health Insurance 557,561 0.7
Other Metals/Minerals 537,234 0.7
Engineering & Construction 536,286 0.7
Railroads 500,683 0.6
Apparel/Footwear 483,431 0.6
Airlines 466,685 0.6
Apparel/Footwear Retail 441,704 0.5
Personnel Services 406,761 0.5
Industrial Machinery 385,809 0.5
Electronics/Appliances 365,020 0.4
Building Products 360,853 0.4
Movies/Entertainment 354,576 0.4
Automotive Aftermarket 320,184 0.4
Auto Parts: O.E.M 317,063 0.4
Pulp & Paper 305,868 0.4
Food Distributors 302,068 0.4
Regional Banks 301,254 0.4
Air Freight/Couriers 271,129 0.3
Internet Software/Services 252,131 0.3
Investment Managers 246,169 0.3
Miscellaneous Commercial
Services 214,894 0.3
Specialty
Telecommunications 174,510 0.2
------------ ------------
$ 80,420,627 98.4%
============ ============
<Caption>
TYPE OF INVESTMENT
- ----------------------------------------------------------------------------
Common Stocks $ 80,008,438 97.9%
Preferred Stock 412,189 0.5
------------ ------------
$ 80,420,627 98.4%
============ ============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
103
<Page>
Developing Growth
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2004
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------------------
COMMON STOCKS (99.9%)
ADVERTISING/MARKETING
SERVICES (3.9%)
8,700 Dex Media, Inc. $ 217,152
13,425 Getty Images, Inc.* 924,311
22,400 Lamar Advertising Co.
(Class A)* 958,272
5,000 R.H. Donnelley Corp.* 295,250
--------------
2,394,985
--------------
AEROSPACE & DEFENSE (1.1%)
4,800 FLIR Systems, Inc.* 306,192
2,900 Precision Castparts Corp. 190,472
5,100 Rockwell Collins, Inc. 201,144
--------------
697,808
--------------
AIR FREIGHT/COURIERS (1.5%)
10,750 C.H. Robinson Worldwide, Inc. 596,840
5,700 Expeditors International of
Washington, Inc. 318,516
--------------
915,356
--------------
APPAREL/FOOTWEAR (1.0%)
11,100 Coach, Inc.* 626,040
--------------
APPAREL/FOOTWEAR RETAIL (2.6%)
10,400 Abercrombie & Fitch Co.
(Class A) 488,280
13,125 Chico's FAS, Inc.* 597,581
10,800 Urban Outfitters, Inc.* 479,520
--------------
1,565,381
--------------
BIOTECHNOLOGY (3.7%)
8,400 Amylin Pharmaceuticals, Inc.* 196,224
10,600 Celgene Corp.* 281,218
10,470 Charles River Laboratories
International, Inc.* 481,724
7,500 Gen-Probe Inc.* 339,075
12,200 Genzyme Corp.* 708,454
9,300 MedImmune, Inc.* 252,123
--------------
2,258,818
--------------
BROADCASTING (1.7%)
25,200 Univision Communications Inc.
(Class A)* $ 737,604
7,800 XM Satellite Radio Holdings Inc.
(Class A)* 293,436
--------------
1,031,040
--------------
CASINO/GAMING (6.9%)
32,850 GTECH Holdings Corp. 852,458
17,400 International Game
Technology 598,212
4,441 Las Vegas Sands Corp.* 213,168
8,800 Penn National Gaming, Inc.* 532,840
29,100 Station Casinos, Inc. 1,591,188
6,340 Wynn Resorts, Ltd.* 424,273
--------------
4,212,139
--------------
COAL (0.8%)
6,200 Peabody Energy Corp. 501,642
--------------
COMPUTER COMMUNICATIONS (1.4%)
18,900 Avaya Inc.* 325,080
20,000 Juniper Networks, Inc.* 543,800
--------------
868,880
--------------
COMPUTER PERIPHERALS (1.3%)
4,275 Lexmark International, Inc.
(Class A)* 363,375
13,600 Network Appliance, Inc.* 451,792
--------------
815,167
--------------
COMPUTER PROCESSING
Hardware (0.8%)
7,600 Apple Computer, Inc.* 489,440
--------------
CONSTRUCTION MATERIALS (1.6%)
11,800 Rinker Group Ltd. (ADR)
(Australia) 980,226
--------------
CONTAINERS/PACKAGING (1.0%)
10,900 Sealed Air Corp.* 580,643
--------------
DATA PROCESSING
SERVICES (1.3%)
5,600 CheckFree Corp.* 213,248
10,000 Global Payments Inc. 585,400
--------------
798,648
--------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
104
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------------------
DISCOUNT STORES (2.2%)
26,300 Dollar Tree Stores, Inc.* $ 754,284
6,125 Kmart Holding Corp.* 606,069
--------------
1,360,353
--------------
ELECTRONIC DISTRIBUTORS (0.4%)
3,800 CDW Corp. 252,130
--------------
ELECTRONIC PRODUCTION
EQUIPMENT (0.9%)
4,600 KLA-Tencor Corp.* 214,268
9,400 Tessera Technologies, Inc.* 349,774
--------------
564,042
--------------
ELECTRONICS/APPLIANCES (0.7%)
3,275 Harman International
Industries, Inc. 415,925
--------------
FINANCE/RENTAL/LEASING (0.5%)
6,025 Doral Financial Corp.
(Puerto Rico) 296,731
--------------
FINANCIAL CONGLOMERATES (1.5%)
25,300 Brascan Corp. (Class A)
(Canada) 911,053
--------------
FINANCIAL PUBLISHING/
SERVICES (1.5%)
14,600 Interactive Data Corp.* 317,404
7,075 Moody's Corp. 614,464
--------------
931,868
--------------
GAS DISTRIBUTORS (1.0%)
11,400 Questar Corp. 580,944
--------------
HOME BUILDING (0.5%)
425 NVR, Inc.* 326,995
--------------
HOME FURNISHINGS (0.5%)
3,000 Mohawk Industries, Inc.* 273,750
--------------
HOME IMPROVEMENT
CHAINS (0.5%)
4,500 Fastenal Co. 277,020
--------------
HOTELS/RESORTS/
CRUISELINES (3.5%)
4,300 Four Seasons Hotels, Inc.
(Canada) 351,697
32,950 Royal Caribbean Cruises Ltd.
(Liberia) $ 1,793,798
--------------
2,145,495
--------------
INDUSTRIAL MACHINERY (0.9%)
15,000 Graco Inc. 560,250
--------------
INFORMATION TECHNOLOGY
SERVICES (1.0%)
14,400 Cognizant Technology
Solutions Corp. (Class A)* 609,552
--------------
INSURANCE BROKERS/
SERVICES (0.8%)
11,000 ChoicePoint Inc.* 505,890
--------------
INTEGRATED OIL (0.7%)
12,875 Suncor Energy, Inc.
(Canada) 455,775
--------------
INTERNET RETAIL (0.4%)
3,100 Overstock.com, Inc.* 213,900
--------------
INTERNET SOFTWARE/
SERVICES (0.8%)
21,800 Akamai Technologies, Inc.* 284,054
6,500 VeriSign, Inc.* 217,880
--------------
501,934
--------------
INVESTMENT BANKS/
BROKERS (2.7%)
39,000 AmeriTrade Holding Corp.* 554,580
2,100 Chicago Mercantile
Exchange (The) 480,270
8,487 Legg Mason, Inc. 621,758
--------------
1,656,608
--------------
INVESTMENT MANAGERS (1.2%)
26,100 Calamos Asset Management
Inc. (Class A)* 704,700
--------------
MEDICAL DISTRIBUTORS (1.0%)
14,700 Patterson Companies Inc.* 637,833
--------------
MEDICAL SPECIALTIES (9.7%)
5,000 Advanced Medical
Optics, Inc.* 205,700
8,800 Bard (C.R.), Inc. 563,024
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
105
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------------------
14,600 Biomet, Inc. $ 633,494
4,600 Cooper Companies, Inc. (The) 324,714
14,300 Dade Behring Holdings Inc.* 800,800
16,356 Fisher Scientific
International, Inc.* 1,020,287
5,375 IDEXX Laboratories, Inc.* 293,421
13,400 INAMED Corp.* 847,550
16,783 Kinetic Concepts, Inc.* 1,280,543
--------------
5,969,533
--------------
MEDICAL/NURSING
Services (1.3%)
39,400 VCA Antech, Inc.* 772,240
--------------
MISCELLANEOUS COMMERCIAL
SERVICES (4.0%)
26,050 Corporate Executive Board
Co. (The) 1,743,787
9,275 Iron Mountain Inc.* 282,795
9,700 Laureate Education Inc.* 427,673
--------------
2,454,255
--------------
MISCELLANEOUS
MANUFACTURING (0.3%)
4,900 Pentair, Inc. 213,444
--------------
MOVIES/ENTERTAINMENT (0.4%)
6,900 DreamWorks Animation SKG,
Inc. (Class A)* 258,819
--------------
OIL & GAS PIPELINES (0.5%)
3,900 Kinder Morgan, Inc. 285,207
--------------
OIL & GAS PRODUCTION (3.6%)
36,895 Ultra Petroleum Corp.
(Canada)* 1,775,756
12,000 XTO Energy Inc. 424,560
--------------
2,200,316
--------------
OILFIELD SERVICES/
EQUIPMENT (0.4%)
4,750 Smith International, Inc.* 258,448
--------------
OTHER CONSUMER
SERVICES (1.6%)
7,300 Career Education Corp.* 292,000
6,000 ITT Educational
Services, Inc.* $ 285,300
3,525 Strayer Education, Inc. 387,010
--------------
964,310
--------------
OTHER METALS/MINERALS (0.5%)
3,000 Cameco Corporation 314,580
--------------
PACKAGED SOFTWARE (4.1%)
14,200 Adobe Systems, Inc.* 890,908
14,350 Autodesk, Inc. 544,583
7,200 McAfee Inc.* 208,296
12,600 Mercury Interactive Corp.* 573,930
18,600 Salesforce.com Inc.* 315,084
--------------
2,532,801
--------------
PERSONNEL SERVICES (0.4%)
7,500 Monster Worldwide Inc.* 252,300
--------------
PHARMACEUTICALS: OTHER (0.5%)
11,400 Elan Corp. PLC (ADR)
(Ireland)* 310,650
--------------
PRECIOUS METALS (1.9%)
18,400 Freeport-McMoRan Copper &
Gold, Inc. (Class B) 703,432
25,300 Placer Dome Inc. (Canada) 477,158
--------------
1,180,590
--------------
PROPERTY - CASUALTY
INSURERS (1.0%)
950 White Mountains Insurance
Group, Ltd. (Bermuda) 613,700
--------------
REAL ESTATE INVESTMENT
TRUSTS (0.8%)
12,800 Plum Creek Timber Co., Inc. 492,032
--------------
RECREATIONAL PRODUCTS (2.2%)
11,940 Electronic Arts Inc.* 736,459
14,400 Shanda Interactive
Entertainment Ltd.
(China)* 612,000
--------------
1,348,459
--------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
106
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------------------
RESTAURANTS (2.8%)
13,200 Cheesecake Factory,
Inc. (The)* $ 428,604
10,700 P.F. Chang's China
Bistro, Inc.* 602,945
11,150 Sonic Corp.* 340,075
6,600 Yum! Brands, Inc. 311,388
--------------
1,683,012
--------------
SEMICONDUCTORS (2.4%)
10,400 Altera Corp.* 215,280
13,700 Linear Technology Corp. 531,012
20,900 Marvell Technology Group
Ltd. (Bermuda)* 741,323
--------------
1,487,615
--------------
SERVICES TO THE HEALTH
INDUSTRY (1.1%)
14,575 Stericycle, Inc.* 669,721
--------------
SPECIALTY INSURANCE (0.5%)
9,600 Assurant, Inc. 293,280
--------------
SPECIALTY STORES (1.5%)
20,980 PETsMART, Inc. 745,419
9,600 Toys 'R' Us, Inc.* 196,512
--------------
941,931
--------------
SPECIALTY
TELECOMMUNICATIONS (3.2%)
67,282 Crown Castle International
Corp.* 1,119,572
11,126 NTL, Inc.* 811,753
--------------
1,931,325
--------------
TELECOMMUNICATION
EQUIPMENT (0.3%)
13,500 Andrew Corp.* 184,005
--------------
WHOLESALE DISTRIBUTORS (0.3%)
6,300 SCP Pool Corp. 200,970
--------------
WIRELESS
TELECOMMUNICATIONS (0.8%)
10,150 NII Holdings, Inc.* 481,618
--------------
TOTAL COMMON STOCKS
(Cost $50,615,564) 61,214,122
--------------
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- --------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (0.8%)
REPURCHASE AGREEMENT
$ 521 Joint repurchase agreement
account
2.223% due 01/03/05
(dated 12/31/04; proceeds
$521,096) (a)
(Cost $521,000) $ 521,000
--------------
TOTAL INVESTMENTS
(Cost $51,136,564) (b) 100.7% 61,735,122
LIABILITIES IN EXCESS OF
OTHER ASSETS (0.7) (433,032)
------------- --------------
NET ASSETS 100.0% $ 61,302,090
============= ==============
</Table>
ADR AMERICAN DEPOSITORY RECEIPT.
* NON-INCOME PRODUCING SECURITY.
(a) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(b) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $51,225,012. THE
AGGREGATE GROSS UNREALIZED APPRECIATION IS $11,031,875 AND THE
AGGREGATE GROSS UNREALIZED DEPRECIATION IS $521,765, RESULTING IN NET
UNREALIZED APPRECIATION OF $10,510,110.
SEE NOTES TO FINANCIAL STATEMENTS
107
<Page>
Developing Growth
SUMMARY OF INVESTMENTS - DECEMBER 31, 2004
<Table>
<Caption>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- -----------------------------------------------------------------------------------------
Medical Specialties $ 5,969,533 9.7%
Casino/Gaming 4,212,139 6.9
Packaged Software 2,532,801 4.1
Miscellaneous Commercial
Services 2,454,255 4.0
Advertising/Marketing
Services 2,394,985 3.9
Biotechnology 2,258,818 3.7
Oil & Gas Production 2,200,316 3.6
Hotels/Resorts/Cruiselines 2,145,495 3.5
Specialty
Telecommunications 1,931,325 3.2
Restaurants 1,683,012 2.8
Investment Banks/Brokers 1,656,608 2.7
Apparel/Footwear Retail 1,565,381 2.6
Semiconductors 1,487,615 2.4
Discount Stores 1,360,353 2.2
Recreational Products 1,348,459 2.2
Precious Metals 1,180,590 1.9
Broadcasting 1,031,040 1.7
Construction Materials 980,226 1.6
Other Consumer Services 964,310 1.6
Specialty Stores 941,931 1.5
Financial Publishing/
Services 931,868 1.5
Air Freight/Couriers 915,356 1.5
Financial Conglomerates 911,053 1.5
Computer Communications 868,880 1.4
Computer Peripherals 815,167 1.3
Data Processing Services 798,648 1.3
Medical/Nursing Services 772,240 1.3
Investment Managers 704,700 1.2
Aerospace & Defense 697,808 1.1
Services To The Health
Industry 669,721 1.1
Medical Distributors 637,833 1.0
Apparel/Footwear 626,040 1.0
Property - Casualty
Insurers 613,700 1.0
Gas Distributors 580,944 1.0
Containers/Packaging 580,643 1.0
Information Technology
Services $ 609,552 1.0
Electronic Production
Equipment 564,042 0.9
Industrial Machinery 560,250 0.9
Repurchase Agreement 521,000 0.8
Insurance Brokers/
Services 505,890 0.8
Internet Software/
Services 501,934 0.8
Coal 501,642 0.8
Real Estate Investment
Trusts 492,032 0.8
Computer Processing
Hardware 489,440 0.8
Wireless
Telecommunications 481,618 0.8
Integrated Oil 455,775 0.7
Electronics/Appliances 415,925 0.7
Home Building 326,995 0.5
Other Metals/Minerals 314,580 0.5
Pharmaceuticals: Other 310,650 0.5
Finance/Rental/Leasing 296,731 0.5
Specialty Insurance 293,280 0.5
Oil & Gas Pipelines 285,207 0.5
Home Improvement
Chains 277,020 0.5
Home Furnishings 273,750 0.5
Movies/Entertainment 258,819 0.4
Oilfield Services/
Equipment 258,448 0.4
Personnel Services 252,300 0.4
Electronic Distributors 252,130 0.4
Internet Retail 213,900 0.4
Miscellaneous
Manufacturing 213,444 0.3
Wholesale Distributors 200,970 0.3
Telecommunication
Equipment 184,005 0.3
------------- ----------
$ 61,735,122 100.7%
============= ==========
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
108
<Page>
(This page has been intentionally left blank.)
109
<Page>
Morgan Stanley Select Dimensions Investment Series
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 2004
<Table>
<Caption>
MONEY FLEXIBLE BALANCED
MARKET INCOME GROWTH
---------------- ---------------- ----------------
ASSETS:
Investments in securities, at value $ 101,544,465 $ 69,740,180 $ 103,623,556
Investments in affiliates** -- 44,192 1,007,425
Cash 15,098 102,388+ 554
Receivable for:
Investments sold -- -- 163,167
Interest/principal paydowns 15,911 924,011 397,875
Dividends -- -- 83,132
Shares of beneficial interest sold 24,774 1,744 --
Foreign withholding taxes reclaimed -- -- --
Variation margin -- -- --
Prepaid expenses and other assets 2,316 1,724 3,139
---------------- ---------------- ----------------
TOTAL ASSETS 101,602,564 70,814,239 105,278,848
---------------- ---------------- ----------------
LIABILITIES:
Payable for:
Investments purchased -- -- 2,306,122
Shares of beneficial interest redeemed 113,564 16,408 24,079
Investment advisory fee 39,217 19,131 44,985
Variation margin -- 47,843 33,359
Compensated forward foreign currency contracts -- 32,692 --
Distribution fee 7,299 5,654 5,709
Administration fee 4,357 4,783 6,921
Unrealized depreciation on open forward foreign currency contracts -- 6,693 --
Accrued expenses and other payables 25,240 95,976 33,248
---------------- ---------------- ----------------
TOTAL LIABILITIES 189,677 229,180 2,454,423
---------------- ---------------- ----------------
NET ASSETS $ 101,412,887 $ 70,585,059 $ 102,824,425
================ ================ ================
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 101,412,851 $ 91,725,908 $ 92,486,377
Accumulated undistributed net investment income (net investment loss) 36 1,013,386 (125,048)
Accumulated undistributed net realized gain (loss) -- (19,981,850) (6,131,730)
Net unrealized appreciation (depreciation) -- (2,172,385) 16,594,826
---------------- ---------------- ----------------
NET ASSETS $ 101,412,887 $ 70,585,059 $ 102,824,425
================ ================ ================
TOTAL COST $ 101,544,465 $ 71,899,432 $ 87,989,924
================ ================ ================
CLASS X SHARES:
Net Assets $ 67,944,771 $ 43,657,958 $ 75,516,778
Shares Outstanding (unlimited authorized shares of $.01 par value) 67,944,762 5,688,294 4,733,559
NET ASSET VALUE PER SHARE $ 1.00 $ 7.68 $ 15.95
================ ================ ================
CLASS Y SHARES:
Net Assets $ 33,468,116 $ 26,927,101 $ 27,307,647
Shares Outstanding (unlimited authorized shares of $.01 par value) 33,468,088 3,517,850 1,715,446
NET ASSET VALUE PER SHARE $ 1.00 $ 7.65 $ 15.92
================ ================ ================
</Table>
- ----------
+ INCLUDING $100,000 SEGREGATED IN CONNECTION WITH OPEN FUTURES CONTRACTS.
** COST OF $44,948, $639,870 AND $424,280, RESPECTIVELY.
SEE NOTES TO FINANCIAL STATEMENTS
110
<Page>
<Table>
<Caption>
EQUALLY-
DIVIDEND WEIGHTED
UTILITIES GROWTH S&P 500
---------------- ---------------- ----------------
ASSETS:
Investments in securities, at value $ 78,631,770 $ 366,621,431 $ 222,030,958
Investments in affiliates** -- -- 891,331
Cash 196 631 918
Receivable for:
Investments sold -- -- --
Interest/principal paydowns 26,963 10,433 103
Dividends 154,537 260,476 272,898
Shares of beneficial interest sold 638 1,912 242,916
Foreign withholding taxes reclaimed 8,371 -- --
Variation margin -- -- 3,550
Prepaid expenses and other assets 3,101 8,171 10,372
---------------- ---------------- ----------------
TOTAL ASSETS 78,825,576 366,903,054 223,453,046
---------------- ---------------- ----------------
LIABILITIES:
Payable for:
Investments purchased -- -- --
Shares of beneficial interest redeemed 52,952 261,280 147,497
Investment advisory fee 37,563 156,690 22,345
Variation margin -- -- --
Compensated forward foreign currency contracts -- -- --
Distribution fee 3,254 12,501 16,591
Administration fee 5,272 24,804 14,896
Unrealized depreciation on open forward foreign currency contracts -- -- --
Accrued expenses and other payables 23,890 40,715 32,222
---------------- ---------------- ----------------
TOTAL LIABILITIES 122,931 495,990 233,551
---------------- ---------------- ----------------
NET ASSETS $ 78,702,645 $ 366,407,064 $ 223,219,495
================ ================ ================
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 89,979,343 $ 444,112,876 $ 137,655,167
Accumulated undistributed net investment income (net investment loss) (306) 5,006 1,945,336
Accumulated undistributed net realized gain (loss) (39,301,908) (167,310,849) 2,756,017
Net unrealized appreciation (depreciation) 28,025,516 89,600,031 80,862,975
---------------- ---------------- ----------------
NET ASSETS $ 78,702,645 $ 366,407,064 $ 223,219,495
================ ================ ================
TOTAL COST $ 50,606,254 $ 277,021,400 $ 142,122,171
================ ================ ================
CLASS X SHARES:
Net Assets $ 63,052,255 $ 307,092,641 $ 142,319,656
Shares Outstanding (unlimited authorized shares of $.01 par value) 3,350,369 19,419,300 5,819,789
NET ASSET VALUE PER SHARE $ 18.82 $ 15.81 $ 24.45
================ ================ ================
CLASS Y SHARES:
Net Assets $ 15,650,390 $ 59,314,423 $ 80,899,839
Shares Outstanding (unlimited authorized shares of $.01 par value) 832,124 3,756,312 3,335,988
NET ASSET VALUE PER SHARE $ 18.81 $ 15.79 $ 24.25
================ ================ ================
<Caption>
AMERICAN CAPITAL
GROWTH OPPORTUNITIES OPPORTUNITIES
---------------- ---------------- ----------------
ASSETS:
Investments in securities, at value $ 45,055,987 $ 252,780,418 $ 39,273,360
Investments in affiliates** -- -- --
Cash -- 966 52
Receivable for:
Investments sold 447,480 3,985,391 167,418
Interest/principal paydowns -- 405 47
Dividends 17,451 108,689 6,889
Shares of beneficial interest sold 17,395 2,128 91
Foreign withholding taxes reclaimed -- 6,348 --
Variation margin -- -- --
Prepaid expenses and other assets 7,198 9,796 410
---------------- ---------------- ----------------
TOTAL ASSETS 45,545,511 256,894,141 39,448,267
---------------- ---------------- ----------------
LIABILITIES:
Payable for:
Investments purchased 499,215 611,895 --
Shares of beneficial interest redeemed 21,939 88,938 9,153
Investment advisory fee 18,777 117,684 22,202
Variation margin -- -- --
Compensated forward foreign currency contracts -- -- --
Distribution fee 2,193 9,159 2,922
Administration fee 3,004 17,374 2,651
Unrealized depreciation on open forward foreign currency contracts -- -- --
Accrued expenses and other payables 28,016 43,424 23,662
---------------- ---------------- ----------------
TOTAL LIABILITIES 573,144 888,474 60,590
---------------- ---------------- ----------------
NET ASSETS $ 44,972,367 $ 256,005,667 $ 39,387,677
================ ================ ================
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 76,107,430 $ 481,261,273 $ 122,748,794
Accumulated undistributed net investment income (net investment loss) 146,548 1,532,848 1,624
Accumulated undistributed net realized gain (loss) (36,247,980) (261,639,403) (90,418,317)
Net unrealized appreciation (depreciation) 4,966,369 34,850,949 7,055,576
---------------- ---------------- ----------------
NET ASSETS $ 44,972,367 $ 256,005,667 $ 39,387,677
================ ================ ================
TOTAL COST $ 40,089,618 $ 217,931,483 $ 32,217,784
================ ================ ================
CLASS X SHARES:
Net Assets $ 34,038,446 $ 212,736,440 $ 25,407,671
Shares Outstanding (unlimited authorized shares of $.01 par value) 2,237,471 14,053,962 2,659,582
NET ASSET VALUE PER SHARE $ 15.21 $ 15.14 $ 9.55
================ ================ ================
CLASS Y SHARES:
Net Assets $ 10,933,921 $ 43,269,227 $ 13,980,006
Shares Outstanding (unlimited authorized shares of $.01 par value) 725,037 2,874,418 1,479,846
NET ASSET VALUE PER SHARE $ 15.08 $ 15.05 $ 9.45
================ ================ ================
<Caption>
DEVELOPING
GLOBAL EQUITY GROWTH
---------------- ----------------
ASSETS:
Investments in securities, at value $ 80,420,627 $ 61,735,122
Investments in affiliates** -- --
Cash 18,089 379
Receivable for:
Investments sold 15,539,883 --
Interest/principal paydowns -- 32
Dividends 39,320 7,859
Shares of beneficial interest sold 93,280 240
Foreign withholding taxes reclaimed 57,568 --
Variation margin -- --
Prepaid expenses and other assets 2,807 1,178
---------------- ----------------
TOTAL ASSETS 96,171,574 61,744,810
---------------- ----------------
LIABILITIES:
Payable for:
Investments purchased 14,295,511 376,637
Shares of beneficial interest redeemed 83,092 8,917
Investment advisory fee 63,487 21,553
Variation margin -- --
Compensated forward foreign currency contracts -- --
Distribution fee 1,770 1,839
Administration fee 5,521 4,105
Unrealized depreciation on open forward foreign currency contracts -- --
Accrued expenses and other payables 32,618 29,669
---------------- ----------------
TOTAL LIABILITIES 14,481,999 442,720
---------------- ----------------
NET ASSETS $ 81,689,575 $ 61,302,090
================ ================
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 74,589,128 $ 90,534,177
Accumulated undistributed net investment income (net investment loss) 472,861 1,791
Accumulated undistributed net realized gain (loss) (3,087,216) (39,832,436)
Net unrealized appreciation (depreciation) 9,714,802 10,598,558
---------------- ----------------
NET ASSETS $ 81,689,575 $ 61,302,090
================ ================
TOTAL COST $ 70,717,902 $ 51,136,564
================ ================
CLASS X SHARES:
Net Assets $ 73,290,495 $ 52,358,953
Shares Outstanding (unlimited authorized shares of $.01 par value) 4,793,223 2,616,504
NET ASSET VALUE PER SHARE $ 15.29 $ 20.01
================ ================
CLASS Y SHARES:
Net Assets $ 8,399,080 $ 8,943,137
Shares Outstanding (unlimited authorized shares of $.01 par value) 552,931 451,991
NET ASSET VALUE PER SHARE $ 15.19 $ 19.79
================ ================
</Table>
111
<Page>
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004
<Table>
<Caption>
MONEY FLEXIBLE BALANCED
MARKET INCOME GROWTH
---------------- ---------------- ----------------
INVESTMENT INCOME:
INCOME
Dividends -- $ 52,081 $ 1,324,130*
Interest $ 1,634,522 4,032,805 1,444,801
Interest and dividends from affiliates -- 1,718 25,399
---------------- ---------------- ----------------
TOTAL INCOME 1,634,522 4,086,604 2,794,330
---------------- ---------------- ----------------
EXPENSES
Investment advisory fee 580,239 279,875 600,518
Distribution fee (Class Y shares) 96,389 61,600 61,846
Professional fees 25,116 93,458 27,293
Custodian fees 12,036 58,660 29,102
Administration fee 8,777 9,473 13,520
Shareholder reports and notices 13,131 13,226 15,218
Trustees' fees and expenses 1,505 763 1,246
Transfer agent fees and expenses 500 500 500
Other 5,053 42,516 15,608
---------------- ---------------- ----------------
TOTAL EXPENSES 742,746 560,071 764,851
---------------- ---------------- ----------------
NET INVESTMENT INCOME (LOSS) 891,776 3,526,533 2,029,479
---------------- ---------------- ----------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
NET REALIZED GAIN (LOSS) ON:
Investments -- (274,167) 7,757,128
Futures contracts -- (757,295) (463,820)
Foreign exchange transactions -- 977,284 --
---------------- ---------------- ----------------
NET REALIZED GAIN (LOSS) -- (54,178) 7,293,308
---------------- ---------------- ----------------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments -- 1,156,153 1,096,657
Futures contracts -- 903 (9,181)
Translation of forward foreign currency contracts, other assets and
liabilities denominated in foreign currencies -- 77,820 --
---------------- ---------------- ----------------
NET APPRECIATION (DEPRECIATION) -- 1,234,876 1,087,476
---------------- ---------------- ----------------
NET GAIN -- 1,180,698 8,380,784
---------------- ---------------- ----------------
NET INCREASE $ 891,776 $ 4,707,231 $ 10,410,263
================ ================ ================
</Table>
- ----------
* NET OF FOREIGN WITHHOLDING TAX OF $26,383, $15,269, $998, $30,609, $1,639,
$86,818 AND $2,942, RESPECTIVELY.
SEE NOTES TO FINANCIAL STATEMENTS
112
<Page>
<Table>
<Caption>
EQUALLY-
DIVIDEND WEIGHTED
UTILITIES GROWTH S&P 500
---------------- ---------------- ----------------
INVESTMENT INCOME:
INCOME
Dividends $ 2,026,589 $ 8,188,029* $ 3,099,326
Interest 160,289 130,849 48,038
Interest and dividends from affiliates -- 14,448 14,270
---------------- ---------------- ----------------
TOTAL INCOME 2,186,878 8,333,326 3,161,634
---------------- ---------------- ----------------
EXPENSES
Investment advisory fee 479,136 2,309,085 871,452
Distribution fee (Class Y shares) 35,469 139,495 155,519
Professional fees 25,521 26,132 23,665
Custodian fees -- 26,730 24,017
Administration fee 10,343 48,785 28,888
Shareholder reports and notices 16,206 45,309 29,402
Trustees' fees and expenses 910 4,906 2,406
Transfer agent fees and expenses 500 500 500
Other 2,966 14,878 27,414
---------------- ---------------- ----------------
TOTAL EXPENSES 571,051 2,615,820 1,163,263
---------------- ---------------- ----------------
NET INVESTMENT INCOME (LOSS) 1,615,827 5,717,506 1,998,371
---------------- ---------------- ----------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
NET REALIZED GAIN (LOSS) ON:
Investments 3,923,834 23,968,536 4,306,312
Futures contracts -- -- 233,312
Foreign exchange transactions -- -- --
---------------- ---------------- ----------------
NET REALIZED GAIN (LOSS) 3,923,834 23,968,536 4,539,624
---------------- ---------------- ----------------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments 10,826,751 (607,109) 25,119,121
Futures contracts -- -- 62,857
Translation of forward foreign currency contracts, other assets and
liabilities denominated in foreign currencies -- -- --
---------------- ---------------- ----------------
NET APPRECIATION (DEPRECIATION) 10,826,751 (607,109) 25,181,978
---------------- ---------------- ----------------
NET GAIN 14,750,585 23,361,427 29,721,602
---------------- ---------------- ----------------
NET INCREASE $ 16,366,412 $ 29,078,933 $ 31,719,973
================ ================ ================
<Caption>
AMERICAN CAPITAL
GROWTH OPPORTUNITIES OPPORTUNITIES
---------------- ---------------- ----------------
INVESTMENT INCOME:
INCOME
Dividends $ 571,578* $ 3,351,293* $ 207,437*
Interest 4,862 97,972 7,998
Interest and dividends from affiliates -- -- --
---------------- ---------------- ----------------
TOTAL INCOME 576,440 3,449,265 215,435
---------------- ---------------- ----------------
EXPENSES
Investment advisory fee 331,853 1,661,955 273,541
Distribution fee (Class Y shares) 19,626 109,061 30,817
Professional fees 22,634 27,309 20,885
Custodian fees 36,250 35,229 18,011
Administration fee 5,837 34,039 5,151
Shareholder reports and notices 10,625 43,192 13,467
Trustees' fees and expenses 495 3,517 444
Transfer agent fees and expenses 500 500 500
Other 2,072 11,112 1,790
---------------- ---------------- ----------------
TOTAL EXPENSES 429,892 1,925,914 364,606
---------------- ---------------- ----------------
NET INVESTMENT INCOME (LOSS) 146,548 1,523,351 (149,171)
---------------- ---------------- ----------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
NET REALIZED GAIN (LOSS) ON:
Investments 3,944,191 19,603,553 5,644,119
Futures contracts -- -- --
Foreign exchange transactions -- 9,498 --
---------------- ---------------- ----------------
NET REALIZED GAIN (LOSS) 3,944,191 19,613,051 5,644,119
---------------- ---------------- ----------------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments (898,297) (1,729,644) 2,128,100
Futures contracts -- -- --
Translation of forward foreign currency contracts, other assets and
liabilities denominated in foreign currencies -- 406 --
---------------- ---------------- ----------------
NET APPRECIATION (DEPRECIATION) (898,297) (1,729,238) 2,128,100
---------------- ---------------- ----------------
NET GAIN 3,045,894 17,883,813 7,772,219
---------------- ---------------- ----------------
NET INCREASE $ 3,192,442 $ 19,407,164 $ 7,623,048
================ ================ ================
<Caption>
GLOBAL DEVELOPING
EQUITY GROWTH
---------------- ----------------
INVESTMENT INCOME:
INCOME
Dividends $ 1,438,965* $ 253,871*
Interest 38,925 10,752
Interest and dividends from affiliates -- --
---------------- ----------------
TOTAL INCOME 1,477,890 264,623
---------------- ----------------
EXPENSES
Investment advisory fee 833,873 287,143
Distribution fee (Class Y shares) 20,009 18,876
Professional fees 24,550 24,013
Custodian fees 30,252 38,730
Administration fee 10,863 7,992
Shareholder reports and notices 18,919 14,164
Trustees' fees and expenses 974 230
Transfer agent fees and expenses 500 500
Other 15,443 3,360
---------------- ----------------
TOTAL EXPENSES 955,383 395,008
---------------- ----------------
NET INVESTMENT INCOME (LOSS) 522,507 (130,385)
---------------- ----------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
NET REALIZED GAIN (LOSS) ON:
Investments 7,814,738 10,331,339
Futures contracts -- --
Foreign exchange transactions (49,649) --
---------------- ----------------
NET REALIZED GAIN (LOSS) 7,765,089 10,331,339
---------------- ----------------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments (1,996,440) 1,649,421
Futures contracts -- --
Translation of forward foreign currency contracts, other assets and
liabilities denominated in foreign currencies 3,540 --
---------------- ----------------
NET APPRECIATION (DEPRECIATION) (1,992,900) 1,649,421
---------------- ----------------
NET GAIN 5,772,189 11,980,760
---------------- ----------------
NET INCREASE $ 6,294,696 $ 11,850,375
================ ================
</Table>
113
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
MONEY MARKET FLEXIBLE INCOME
-------------------------------- --------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) $ 891,776 $ 997,750 $ 3,526,533 $ 3,238,705
Net realized gain (loss) -- -- (54,178) (646,350)
Net change in unrealized appreciation/depreciation -- -- 1,234,876 6,565,255
-------------- -------------- -------------- --------------
NET INCREASE 891,776 997,750 4,707,231 9,157,610
-------------- -------------- -------------- --------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class X shares (660,775) (827,889) (3,999,321) (2,773,979)
Class Y shares (231,005) (169,941) (1,962,637) (925,237)
Net realized gain
Class X shares -- -- -- --
Class Y shares -- -- -- --
-------------- -------------- -------------- --------------
TOTAL DIVIDENDS AND DISTRIBUTIONS (891,780) (997,830) (5,961,958) (3,699,216)
-------------- -------------- -------------- --------------
Net increase (decrease) from transactions in shares of
beneficial interest (29,500,076) (62,571,493) (2,384,666) (529,307)
-------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE) (29,500,080) (62,571,573) (3,639,393) 4,929,087
NET ASSETS:
Beginning of period 130,912,967 193,484,540 74,224,452 69,295,365
-------------- -------------- -------------- --------------
END OF PERIOD $ 101,412,887 $ 130,912,967 $ 70,585,059 $ 74,224,452
============== ============== ============== ==============
[ACCUMULATED UNDISTRIBUTED NET INVESTMENT
INCOME (NET INVESTMENT LOSS) $ 36 $ 40 $ 1,013,386 $ 2,169,219
============== ============== ============== ==============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
114
<Page>
<Table>
<Caption>
BALANCED GROWTH UTILITIES
-------------------------------- --------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) $ 2,029,479 $ 1,913,396 $ 1,615,827 $ 1,862,279
Net realized gain (loss) 7,293,308 5,718,894 3,923,834 1,780,791
Net change in unrealized appreciation/depreciation 1,087,476 10,200,229 10,826,751 10,330,998
-------------- -------------- -------------- --------------
NET INCREASE 10,410,263 17,832,519 16,366,412 13,974,068
-------------- -------------- -------------- --------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class X shares (1,745,020) (1,967,896) (1,337,452) (1,584,703)
Class Y shares (517,526) (396,811) (280,659) (281,994)
Net realized gain
Class X shares -- -- -- --
Class Y shares -- -- -- --
-------------- -------------- -------------- --------------
TOTAL DIVIDENDS AND DISTRIBUTIONS (2,262,546) (2,364,707) (1,618,111) (1,866,697)
-------------- -------------- -------------- --------------
Net increase (decrease) from transactions in shares of
beneficial interest (12,373,214) (5,590,818) (13,214,499) (12,512,023)
-------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE) (4,225,497) 9,876,994 1,533,802 (404,652)
NET ASSETS:
Beginning of period 107,049,922 97,172,928 77,168,843 77,573,495
-------------- -------------- -------------- --------------
END OF PERIOD $ 102,824,425 $ 107,049,922 $ 78,702,645 $ 77,168,843
============== ============== ============== ==============
ACCUMULATED UNDISTRIBUTED NET INVESTMENT
INCOME (NET INVESTMENT LOSS) $ (125,048) $ (23,336) $ (306) $ (15,243)
============== ============== ============== ==============
<Caption>
DIVIDEND GROWTH EQUALLY-WEIGHTED S&P 500
-------------------------------- --------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) $ 5,717,506 $ 6,827,801 $ 1,998,371 $ 1,635,302
Net realized gain (loss) 23,968,536 (12,830,310) 4,539,624 (1,891,365)
Net change in unrealized appreciation/depreciation (607,109) 97,796,849 25,181,978 50,755,753
-------------- -------------- -------------- --------------
NET INCREASE 29,078,933 91,794,340 31,719,973 50,499,690
-------------- -------------- -------------- --------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class X shares (4,953,801) (6,163,835) (1,140,613) (1,481,946)
Class Y shares (760,026) (662,650) (441,970) (312,854)
Net realized gain
Class X shares -- -- -- (2,267,155)
Class Y shares -- -- -- (533,709)
-------------- -------------- -------------- --------------
TOTAL DIVIDENDS AND DISTRIBUTIONS (5,713,827) (6,826,485) (1,582,583) (4,595,664)
-------------- -------------- -------------- --------------
Net increase (decrease) from transactions in shares of
beneficial interest (64,541,240) (48,375,157) 2,508,241 4,762,027
-------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE) (41,176,134) 36,592,698 32,645,631 50,666,053
NET ASSETS:
Beginning of period 407,583,198 370,990,500 190,573,864 139,907,811
-------------- -------------- -------------- --------------
END OF PERIOD $ 366,407,064 $ 407,583,198 $ 223,219,495 $ 190,573,864
============== ============== ============== ==============
ACCUMULATED UNDISTRIBUTED NET INVESTMENT
INCOME (NET INVESTMENT LOSS) $ 5,006 $ 1,327 $ 1,945,336 $ 1,594,467
============== ============== ============== ==============
</Table>
115
<Page>
<Table>
<Caption>
GROWTH AMERICAN OPPORTUNITIES
------------------------------------ ------------------------------------
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2004 DECEMBER 31, 2003
----------------- ----------------- ----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) $ 146,548 $ 80,358 $ 1,523,351 $ 879,026
Net realized gain (loss) 3,944,191 1,923,241 19,613,051 12,506,831
Net change in unrealized appreciation/depreciation (898,297) 8,291,544 (1,729,238) 41,524,131
----------------- ----------------- ----------------- -----------------
NET INCREASE 3,192,442 10,295,143 19,407,164 54,909,988
----------------- ----------------- ----------------- -----------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class X shares (76,820) (41,761) (813,707) (963,468)
Class Y shares (3,537) -- (63,498) (70,108)
Net realized gain
Class X shares -- -- -- --
Class Y shares -- -- -- --
----------------- ----------------- ----------------- -----------------
TOTAL DIVIDENDS AND DISTRIBUTIONS (80,357) (41,761) (877,205) (1,033,576)
----------------- ----------------- ----------------- -----------------
Net increase (decrease) from transactions in shares of
beneficial interest (5,345,903) (6,401,441) (68,880,465) (52,264,903)
----------------- ----------------- ----------------- -----------------
TOTAL INCREASE (DECREASE) (2,233,818) 3,851,941 (50,350,506) 1,611,509
NET ASSETS:
Beginning of period 47,206,185 43,354,244 306,356,173 304,744,664
----------------- ----------------- ----------------- -----------------
END OF PERIOD $ 44,972,367 $ 47,206,185 $ 256,005,667 $ 306,356,173
================= ================= ================= =================
ACCUMULATED UNDISTRIBUTED NET INVESTMENT
INCOME (NET INVESTMENT LOSS) $ 146,548 $ 80,357 $ 1,532,848 $ 877,204
================= ================= ================= =================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
116
<Page>
<Table>
<Caption>
CAPITAL OPPORTUNITIES GLOBAL EQUITY
------------------------------------ ------------------------------------
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2004 DECEMBER 31, 2003
----------------- ----------------- ----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) $ (149,171) $ (202,747) $ 522,507 $ 265,681
Net realized gain (loss) 5,644,119 6,411,535 7,765,089 (511,061)
Net change in unrealized appreciation/depreciation 2,128,100 4,645,509 (1,992,900) 24,567,675
----------------- ----------------- ----------------- -----------------
NET INCREASE 7,623,048 10,854,297 6,294,696 24,322,295
----------------- ----------------- ----------------- -----------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class X shares -- -- (187,657) (300,580)
Class Y shares -- -- (6,397) (10,185)
Net realized gain
Class X shares -- -- -- --
Class Y shares -- -- -- --
----------------- ----------------- ----------------- -----------------
TOTAL DIVIDENDS AND DISTRIBUTIONS -- -- (194,054) (310,765)
----------------- ----------------- ----------------- -----------------
Net increase (decrease) from transactions in shares of
beneficial interest (5,009,990) (2,713,544) (15,611,453) (12,372,405)
----------------- ----------------- ----------------- -----------------
TOTAL INCREASE (DECREASE) 2,613,058 8,140,753 (9,510,811) 11,639,125
NET ASSETS:
Beginning of period 36,774,619 28,633,866 91,200,386 79,561,261
----------------- ----------------- ----------------- -----------------
END OF PERIOD $ 39,387,677 $ 36,774,619 $ 81,689,575 $ 91,200,386
================= ================= ================= =================
ACCUMULATED UNDISTRIBUTED NET INVESTMENT
INCOME (NET INVESTMENT LOSS) $ 1,624 $ -- $ 472,861 $ 194,057
================= ================= ================= =================
<Caption>
DEVELOPING GROWTH
------------------------------------
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 2004 DECEMBER 31, 2003
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) $ (130,385) $ (117,933)
Net realized gain (loss) 10,331,339 8,256,395
Net change in unrealized appreciation/depreciation 1,649,421 10,239,030
----------------- -----------------
NET INCREASE 11,850,375 18,377,492
----------------- -----------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class X shares -- --
Class Y shares -- --
Net realized gain
Class X shares -- --
Class Y shares -- --
----------------- -----------------
TOTAL DIVIDENDS AND DISTRIBUTIONS -- --
----------------- -----------------
Net increase (decrease) from transactions in shares of
beneficial interest (11,342,279) (6,077,045)
----------------- -----------------
TOTAL INCREASE (DECREASE) 508,096 12,300,447
NET ASSETS:
Beginning of period 60,793,994 48,493,547
----------------- -----------------
END OF PERIOD $ 61,302,090 $ 60,793,994
================= =================
ACCUMULATED UNDISTRIBUTED NET INVESTMENT
INCOME (NET INVESTMENT LOSS) $ 1,791 $ --
================= =================
</Table>
117
<Page>
SUMMARY OF TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
<Table>
<Caption>
MONEY MARKET FLEXIBLE INCOME
-------------------------------- --------------------------------
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
CLASS X SHARES
SHARES
Sold 37,685,076 48,686,635 288,951 819,656
Reinvestment of dividends and distributions 660,775 827,889 527,610 368,963
Redeemed (62,131,314) (110,263,101) (1,955,037) (1,918,631)
-------------- -------------- -------------- --------------
NET DECREASE - CLASS X (23,785,463) (60,748,577) (1,138,476) (730,012)
============== ============== ============== ==============
AMOUNT
Sold $ 37,685,076 $ 48,686,635 $ 2,190,958 $ 6,110,077
Reinvestment of dividends and distributions 660,775 827,889 3,999,321 2,773,979
Redeemed (62,131,314) (110,263,101) (14,847,279) (14,378,272)
-------------- -------------- -------------- --------------
NET DECREASE - CLASS X $ (23,785,463) $ (60,748,577) $ (8,657,000) $ (5,494,216)
============== ============== ============== ==============
CLASS Y SHARES
SHARES
Sold 35,158,148 61,345,479 1,352,342 1,404,030
Reinvestment of dividends and distributions 231,005 169,941 259,727 123,307
Redeemed (41,103,766) (63,338,336) (786,215) (861,581)
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) - CLASS Y (5,714,613) (1,822,916) 825,854 665,756
============== ============== ============== ==============
AMOUNT
Sold $ 35,158,148 $ 61,345,479 $ 10,264,647 $ 10,478,359
Reinvestment of dividends and distributions 231,005 169,941 1,962,637 925,237
Redeemed (41,103,766) (63,338,336) (5,954,950) (6,438,687)
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) - CLASS Y $ (5,714,613) $ (1,822,916) $ 6,272,334 $ 4,964,909
============== ============== ============== ==============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
118
<Page>
<Table>
<Caption>
BALANCED GROWTH UTILITIES
-------------------------------- --------------------------------
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
CLASS X SHARES
SHARES
Sold 182,919 522,053 94,493 214,482
Reinvestment of dividends and distributions 115,168 146,503 79,241 111,657
Redeemed (1,283,677) (1,694,288) (945,802) (1,281,303)
-------------- -------------- -------------- --------------
NET DECREASE - CLASS X (985,590) (1,025,732) (772,068) (955,164)
============== ============== ============== ==============
AMOUNT
Sold $ 2,757,310 $ 6,847,511 $ 1,577,053 $ 2,983,710
Reinvestment of dividends and distributions 1,745,020 1,967,896 1,337,452 1,584,703
Redeemed (19,230,565) (22,040,823) (15,529,676) (17,688,607)
-------------- -------------- -------------- --------------
NET DECREASE - CLASS X $ (14,728,235) $ (13,225,416) $ (12,615,171) $ (13,120,194)
============== ============== ============== ==============
CLASS Y SHARES
SHARES
Sold 384,916 751,891 153,046 293,544
Reinvestment of dividends and distributions 34,166 29,284 16,608 19,859
Redeemed (263,108) (203,489) (207,468) (260,617)
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) - CLASS Y 155,974 577,686 (37,814) 52,786
============== ============== ============== ==============
AMOUNT
Sold $ 5,760,801 $ 9,921,937 $ 2,522,900 $ 3,996,627
Reinvestment of dividends and distributions 517,526 396,811 280,659 281,994
Redeemed (3,923,306) (2,684,150) (3,402,887) (3,670,450)
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) - CLASS Y $ 2,355,021 $ 7,634,598 $ (599,328) $ 608,171
============== ============== ============== ==============
<Caption>
DIVIDEND GROWTH EQUALLY-WEIGHTED S&P 500
-------------------------------- --------------------------------
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
CLASS X SHARES
SHARES
Sold 585,391 1,772,994 604,921 927,026
Reinvestment of dividends and distributions 324,040 480,186 51,356 214,234
Redeemed (5,503,008) (7,130,986) (1,603,447) (2,000,060)
-------------- -------------- -------------- --------------
NET DECREASE - CLASS X (4,593,577) (4,877,806) (947,170) (858,800)
============== ============== ============== ==============
AMOUNT
Sold $ 8,741,228 $ 22,505,914 $ 13,301,341 $ 16,395,002
Reinvestment of dividends and distributions 4,953,801 6,163,835 1,140,613 3,749,101
Redeemed (82,348,524) (89,625,898) (35,266,843) (34,615,230)
-------------- -------------- -------------- --------------
NET DECREASE - CLASS X $ (68,653,495) $ (60,956,149) $ (20,824,889) $ (14,471,127)
============== ============== ============== ==============
CLASS Y SHARES
SHARES
Sold 836,368 1,465,207 1,404,141 1,317,054
Reinvestment of dividends and distributions 49,628 51,209 20,044 48,653
Redeemed (609,582) (518,581) (353,978) (293,426)
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) - CLASS Y 276,414 997,835 1,070,207 1,072,281
============== ============== ============== ==============
AMOUNT
Sold $ 12,480,219 $ 18,555,581 $ 30,602,353 $ 23,315,043
Reinvestment of dividends and distributions 760,026 662,650 441,970 846,563
Redeemed (9,127,990) (6,637,239) (7,711,193) (4,928,452)
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) - CLASS Y $ 4,112,255 $ 12,580,992 $ 23,333,130 $ 19,233,154
============== ============== ============== ==============
</Table>
119
<Page>
<Table>
<Caption>
GROWTH AMERICAN OPPORTUNITIES
------------------------------------ ------------------------------------
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2004 DECEMBER 31, 2003
----------------- ----------------- ----------------- -----------------
CLASS X SHARES
SHARES
Sold 74,011 300,887 294,249 984,541
Reinvestment of dividends and distributions 5,298 3,325 57,424 77,139
Redeemed (692,429) (1,018,781) (4,841,589) (6,039,452)
----------------- ----------------- ----------------- -----------------
NET DECREASE - CLASS X (613,120) (714,569) (4,489,916) (4,977,772)
================= ================= ================= =================
AMOUNT
Sold $ 1,062,006 $ 3,719,693 $ 4,131,293 $ 12,118,391
Reinvestment of dividends and distributions 76,820 41,761 813,707 963,468
Redeemed (9,833,826) (12,302,379) (67,866,315) (74,062,012)
----------------- ----------------- ----------------- -----------------
NET DECREASE - CLASS X $ (8,695,000) $ (8,540,925) $ (62,921,315) $ (60,980,153)
================= ================= ================= =================
CLASS Y SHARES
SHARES
Sold 344,824 242,391 341,328 1,348,244
Reinvestment of dividends and distributions 246 -- 4,500 5,636
Redeemed (107,687) (71,767) (775,389) (633,416)
----------------- ----------------- ----------------- -----------------
NET INCREASE (DECREASE) - CLASS Y 237,383 170,624 (429,561) 720,464
================= ================= ================= =================
AMOUNT
Sold $ 4,859,789 $ 3,010,578 $ 4,768,395 $ 16,488,980
Reinvestment of dividends and distributions 3,537 -- 63,498 70,108
Redeemed (1,514,229) (871,094) (10,791,043) (7,843,838)
----------------- ----------------- ----------------- -----------------
NET INCREASE (DECREASE) - CLASS Y $ 3,349,097 $ 2,139,484 $ (5,959,150) $ 8,715,250
================= ================= ================= =================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
120
<Page>
<Table>
<Caption>
CAPITAL OPPORTUNITIES GLOBAL EQUITY
------------------------------------ ------------------------------------
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2004 DECEMBER 31, 2003
----------------- ----------------- ----------------- -----------------
CLASS X SHARES
SHARES
Sold 213,276 364,879 178,142 384,457
Reinvestment of dividends and distributions -- -- 13,104 25,048
Redeemed (825,656) (1,111,639) (1,299,648) (1,668,617)
----------------- ----------------- ----------------- -----------------
NET DECREASE - CLASS X (612,380) (746,760) (1,108,402) (1,259,112)
================= ================= ================= =================
AMOUNT
Sold $ 1,784,560 $ 2,408,037 $ 2,537,436 $ 4,428,039
Reinvestment of dividends and distributions -- -- 187,657 300,580
Redeemed (6,926,163) (6,859,678) (18,510,485) (19,093,417)
----------------- ----------------- ----------------- -----------------
NET DECREASE - CLASS X $ (5,141,603) $ (4,451,641) $ (15,785,392) $ (14,364,798)
================= ================= ================= =================
CLASS Y SHARES
SHARES
Sold 394,029 546,847 178,690 234,174
Reinvestment of dividends and distributions -- -- 449 852
Redeemed (378,563) (278,698) (165,283) (72,031)
----------------- ----------------- ----------------- -----------------
NET INCREASE (DECREASE) - CLASS Y 15,466 268,149 13,856 162,995
================= ================= ================= =================
AMOUNT
Sold $ 3,257,263 $ 3,465,304 $ 2,526,862 $ 2,790,650
Reinvestment of dividends and distributions -- -- 6,397 10,185
Redeemed (3,125,650) (1,727,207) (2,359,320) (808,442)
----------------- ----------------- ----------------- -----------------
NET INCREASE (DECREASE) - CLASS Y $ 131,613 $ 1,738,097 $ 173,939 $ 1,992,393
================= ================= ================= =================
<Caption>
DEVELOPING GROWTH
------------------------------------
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 2004 DECEMBER 31, 2003
----------------- -----------------
CLASS X SHARES
SHARES
Sold 94,520 339,110
Reinvestment of dividends and distributions -- --
Redeemed (778,488) (1,006,209)
----------------- -----------------
NET DECREASE - CLASS X (683,968) (667,099)
================= =================
AMOUNT
Sold $ 1,639,068 $ 4,568,617
Reinvestment of dividends and distributions -- --
Redeemed (13,552,390) (13,279,669)
----------------- -----------------
NET DECREASE - CLASS X $ (11,913,322) $ (8,711,052)
================= =================
CLASS Y SHARES
SHARES
Sold 126,054 235,623
Reinvestment of dividends and distributions -- --
Redeemed (93,254) (42,796)
----------------- -----------------
NET INCREASE (DECREASE) - CLASS Y 32,800 192,827
================= =================
AMOUNT
Sold $ 2,186,269 $ 3,194,704
Reinvestment of dividends and distributions -- --
Redeemed (1,615,226) (560,697)
----------------- -----------------
NET INCREASE (DECREASE) - CLASS Y $ 571,043 $ 2,634,007
================= =================
</Table>
121
<Page>
Morgan Stanley Select Dimensions Investment Series
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2004
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Select Dimensions Investment Series (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, which consists of
11 separate portfolios ("Portfolios"), was organized on June 2, 1994, as a
Massachusetts business trust and commenced operations on November 9, 1994, with
the exception of Capital Opportunities which commenced operations on January 21,
1997.
On July 24, 2000, the Fund commenced offering one additional class of shares
(Class Y shares). The two classes are identical except that Class Y shares incur
distribution expenses. Class X shares are generally available to holders of
contracts offered before May 1, 2000. Class Y shares are available to holders of
contracts offered on or after July 24, 2000.
The investment objectives of each Portfolio are as follows:
<Table>
<Caption>
PORTFOLIO INVESTMENT OBJECTIVE
- ------------------------------------------------------------------------------------------------------------------------------
Money Market Seeks high current income, preservation of capital and liquidity.
Flexible Income Seeks, as a primary objective, to earn a high level of current income and, as a secondary
objective, to maximize total return, but only to the extent consistent with its primary objective.
Balanced Growth Seeks to provide capital growth with reasonable current income.
Utilities Seeks both capital appreciation and current income.
Dividend Growth Seeks to provide reasonable current income and long-term growth of income and capital.
Equally-Weighted Seeks to achieve a high level of total return on its assets through a combination of capital
S&P 500 (formerly appreciation and current income.
Value-Added
Market)
Growth Seeks long-term growth of capital.
American
Opportunities Seeks long-term capital growth consistent with an effort to reduce volatility.
Capital Opportunities Seeks long-term capital growth.
Global Equity Seeks to obtain total return on its assets primarily through long-term capital growth and
to a lesser extent from income.
Developing Growth Seeks long-term capital growth.
</Table>
122
<Page>
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- Money Market: securities are valued at amortized
cost which approximates market value. All remaining Portfolios: (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 Adviser") 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 Adviser using a pricing service and/or
procedures approved 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
except certain dividends on foreign securities which are recorded as soon as the
Fund is informed after the
123
<Page>
ex-dividend date. Interest income is accrued daily except where collection is
not expected. The Fund amortizes premiums and accretes discounts over the life
of the respective securities.
C. REPURCHASE AGREEMENTS -- Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Portfolios, 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, or U.S. Treasury or federal agency obligations. The Portfolio 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 which is known as variation margin.
Such receipts or payments are recorded by the Fund as unrealized gains or
losses. Upon closing of the contract, the Fund realizes a gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed.
F. FOREIGN CURRENCY TRANSLATION AND FORWARD FOREIGN CURRENCY CONTRACTS -- The
books and records of the Fund are maintained in U.S. dollars as follows: (1) the
foreign currency market value of investment securities, other assets and
liabilities and forward foreign currency contracts ("forward contracts") are
translated at the exchange rates prevailing at the end of the period; and (2)
purchases, sales, income and expenses are translated at the exchange rates
prevailing on the respective dates of such transactions. The resultant exchange
gains and losses are recorded as realized and unrealized gain/loss on foreign
exchange transactions. Pursuant to U.S. Federal income tax regulations, certain
foreign exchange gains/losses included in realized and unrealized gain/loss are
included in or are a reduction of ordinary income for federal income tax
purposes. The Fund does not isolate that portion of the results of operations
arising as a result of changes in the foreign exchange rates from the changes in
the market prices of the
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<Page>
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 individually
for each Portfolio 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 -- The Fund records dividends and
distributions to its shareholders on the ex-dividend date.
I. EXPENSES -- Direct expenses are charged to the respective Portfolio and
general Fund expenses are allocated on the basis of relative net assets or
equally among the Portfolios.
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 ADVISORY/ADMINISTRATION AND SUB-ADVISORY AGREEMENTS
Effective November 1, 2004, pursuant to an Investment Advisory Agreement, the
Fund pays the Investment Adviser an advisory fee, accrued daily and payable
monthly, by applying the annual rates listed below to each Portfolio's net
assets determined at the close of each business day. Prior to November 1, 2004,
the Fund had retained the Investment Adviser to provide administrative services
and to manage the investment of the Fund's assets pursuant to an investment
management agreement pursuant to which the Fund paid the Investment Adviser a
monthly management fee accrued daily and payable monthly at annual rates listed
below parenthetically.
Money Market - 0.45% to the portion of daily net assets not exceeding $250
million; 0.375% to the portion of daily net assets exceeding $250 million but
not exceeding $750 million; 0.325% to the portion of daily net assets exceeding
$750 million but not exceeding $1.25 billion; 0.30% to the portion of daily net
assets exceeding $1.25 billion but not exceeding $1.5 billion; and 0.275% to the
portion of daily net assets in excess of $1.5 billion. (Prior to November 1,
2004, 0.50%).
Flexible Income - 0.32%. (Prior to November 1, 2004, 0.40%).
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Balanced Growth - 0.52% to the portion of daily net assets not exceeding $500
million and 0.495% to the portion of daily net assets exceeding $500 million.
(Prior to November 1, 2004, 0.60%).
Utilities - 0.57% to the portion of daily net assets not exceeding $500 million;
0.47% to the portion of daily net assets exceeding $500 million but not
exceeding $1 billion; 0.445% to the portion of daily net assets exceeding $1
billion but not exceeding $1.5 billion; 0.42% to the portion of daily net assets
exceeding $1.5 billion but not exceeding $2.5 billion; 0.395% to the portion of
daily net assets exceeding $2.5 billion but not exceeding $3.5 billion; 0.37% to
the portion of daily net assets exceeding $3.5 billion but not exceeding $5
billion; and 0.345% to the portion of daily net assets in excess of $5.0
billion. (Prior to November 1, 2004, 0.65%).
Dividend Growth - 0.545% to the portion of daily net assets not exceeding $250
million; 0.42% to the portion of daily net assets exceeding $250 million, but
not exceeding $1 billion; 0.395% to the portion of daily net assets exceeding $1
billion but not exceeding $2 billion and 0.37% to the portion of daily net
assets exceeding $2 billion. (Prior to November 1, 2004, 0.625% to the portion
of daily net assets not exceeding $500 million; 0.50% to the portion of daily
net assets exceeding $500 million but not exceeding $1 billion and 0.475% to the
portion of daily net assets exceeding $1 billion).
Equally-Weighted S&P 500 - 0.12%. (Prior to November 1, 2004, 0.50%).
Growth - 0.50% to the portion of daily net assets not exceeding $1 billion;
0.45% to the portion of daily net assets exceeding $1 billion but not exceeding
$2 billion; 0.40% to the portion of daily net assets exceeding $2 billion, but
not exceeding $3 billion and 0.35% to the portion of daily net assets exceeding
$3 billion. (Prior to November 1, 2004, 0.80%).
American Opportunities - 0.545% to the portion of daily net assets not exceeding
$250 million; 0.42% to the portion of daily net assets exceeding $250 million
but not exceeding $2.5 billion; 0.395% to the portion of daily net assets
exceeding $2.5 billion but not exceeding $3.5 billion; 0.37% to the portion of
daily net assets exceeding $3.5 billion but not exceeding $4.5 billion; and
0.345% to the portion of daily net assets in excess of $4.5 billion. (Prior to
November 1, 2004, 0.625% to the portion of daily net assets not exceeding $500
million; 0.60% to the portion of daily net assets exceeding $500 million but not
exceeding $1 billion and 0.575% to the portion of daily net assets exceeding $1
billion).
Capital Opportunities - 0.67% to the portion of daily net assets not exceeding
$500 million; 0.645% to the portion of daily net assets exceeding $500 million
but not exceeding $2.0 billion; 0.62% to the portion of daily net assets
exceeding $2.0 billion but not exceeding $3.0 billion and 0.595% to the portion
of daily net assets in excess of $3.0 billion. (Prior to November 1, 2004,
0.75%).
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<Page>
Global Equity - 0.92%. (Prior to November 1, 2004, 1.00%).
Developing Growth - 0.42% to the portion of daily net assets not exceeding $500
million and 0.395% to the portion of daily net assets exceeding $500 million.
(Prior to November 1, 2004, 0.50%).
Prior to May 1, 2004, under a Sub-Advisory Agreement between the Investment
Adviser and Morgan Stanley Investment Management Inc. (the "Sub-Advisor"), an
affiliate of the Investment Adviser, the Sub-Advisor provided Growth with
investment advice and portfolio management relating to the Portfolio's
investments in securities, subject to the overall supervision of the Investment
Manager. As compensation for its services provided pursuant to the Sub-Advisory
Agreement, the Investment Manager paid the Sub-Advisor compensation of $49,777
for the period January 1, 2004 through April 30, 2004. Effective May 1, 2004,
the Investment Adviser assumed direct responsibility for the investment of the
Portfolio.
Effective November 1, 2004, pursuant to an Administration Agreement with Morgan
Stanley Services Company Inc. (the "Administrator"), an affiliate of the
Investment Adviser, each Portfolio pays an administration fee, accrued daily and
payable monthly, by applying the annual rate of 0.08% (Money Market 0.05%) to
the Fund's daily net assets.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the
"Distributor"), an affiliate of the Investment Adviser and Administrator. The
Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1
under the Act. Under the Plan, Class Y shares of each Portfolio bear a
distribution fee which is accrued daily and paid monthly at the annual rate of
0.25% of the average daily net assets of the class.
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<Page>
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
Purchases and sales/maturities of portfolio securities, excluding short-term
investments (except for the Money Market Portfolio), for the year ended December
31, 2004 were as follows:
<Table>
<Caption>
U.S. GOVERNMENT SECURITIES OTHER
-------------------------------- --------------------------------
PURCHASES SALES/MATURITIES PURCHASES SALES/MATURITIES
------------- ---------------- ------------- ----------------
Money Market $ 64,347,453 $ 77,931,756 $ 624,157,299 $ 641,415,001
Flexible Income 98,414,562 102,161,119 38,089,784 46,906,520
Balanced Growth 30,845,160 30,265,890 29,632,958 43,690,819
Utilities 103,287 225,227 21,183,888 33,723,528
Dividend Growth -- -- 161,817,341 213,879,297
Equally-Weighted S&P 500 -- -- 43,821,214 39,963,360
Growth -- -- 74,166,130 79,146,358
American Opportunities -- -- 356,557,293 429,085,698
Capital Opportunities -- -- 43,261,722 48,858,774
Global Equity -- -- 39,196,679 53,661,644
Developing Growth -- -- 79,427,835 90,546,850
</Table>
Equally-Weighted S&P 500 had the following transactions in Morgan Stanley, an
affiliate of the Investment Adviser, Administrator and Distributor:
<Table>
<Caption>
NET REALIZED
PURCHASES SALES GAINS INCOME VALUE
--------- ----- ------------ ------ -----
$ 66,366 $ 1,905 $ 65 $ 7,259 $ 441,440
========= ======== ======= ======== =========
</Table>
The following Portfolios had the following transactions in Hartford Financial
Services Group, Inc., an affiliate of the Fund:
<Table>
<Caption>
NET REALIZED
PURCHASES SALES GAINS (LOSSES) INCOME VALUE
---------- ----------- -------------- --------- -----------
Flexible Income -- $ 5,850 $ (149) $ 1,718 $ 44,192
Balanced Growth $ 105,258 594,870 226,635 25,399 1,007,425
Dividend Growth -- 2,090,052 624,952 14,448 --
Equally-Weighted S&P 500 36,714 25,512 6,672 7,011 449,891
</Table>
The following Portfolios had transactions with other Morgan Stanley funds during
the year ended December 31, 2004:
<Table>
<Caption>
NET REALIZED
PURCHASES SALES GAINS (LOSSES)
------------ ------------ --------------
Flexible Income -- $ 2,599,134 $ 80,930
Dividend Growth $ 287,865 -- --
Growth 246,081 166,713 44,959
American Opportunities 2,093,615 398,397 (54,022)
Capital Opportunities 170,378 277,702 145,820
Developing Growth 170,279 566,723 211,424
</Table>
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<Page>
At December 31, 2004, Global Equity had open payables and receivables of
$4,141,348 and $2,326,391, respectively, with Morgan Stanley & Co., Inc., an
affiliate of the Investment Adviser, Administrator and Distributor.
For the year ended December 31, 2004, the following Portfolios incurred
brokerage commissions with Morgan Stanley & Co., Inc. for executed portfolio
transactions:
<Table>
<Caption>
BALANCED DIVIDEND AMERICAN CAPITAL GLOBAL DEVELOPING
GROWTH UTILITIES GROWTH GROWTH OPPORTUNITIES OPPORTUNITIES EQUITY GROWTH
-------- --------- -------- ------ ------------- ------------- -------- ----------
$ 1,408 $ 11,130 $ 63,598 $ 360 $ 134,356 $ 8,383 $ 15,630 $ 502
======== ========= ======== ====== ========== ========== ========= ==========
</Table>
Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and
Distributor, is the Fund's transfer agent.
5. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
Some of the Portfolios 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.
Some of the Portfolios may purchase and sell interest rate and index futures
("futures contracts") to facilitate trading, increase or decrease the
Portfolio's market exposure, seek higher investment returns, or to seek to
protect against a decline in the value of the Portfolios securities or an
increase in prices of securities that may be purchased.
Forward contracts and futures contracts involve elements of market risk in
excess of the amount reflected in the Statement of Assets and Liabilities. The
Portfolios bear the risk of an unfavorable change in the foreign exchange rates
underlying the forward contracts or an unfavorable change 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.
6. 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
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<Page>
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.
The tax character of distributions paid for the years ended December 31, 2003
and December 31, 2004 for all portfolios was the same as the book character
shown on the Statement of Changes.
As of December 31, 2004, the tax-basis components of accumulated earnings
(losses) were as follows:
<Table>
<Caption>
EQUALLY-
FLEXIBLE BALANCED DIVIDEND WEIGHTED
INCOME GROWTH UTILITIES GROWTH S&P 500
--------------- --------------- --------------- --------------- --------------
Undistributed ordinary income $ 1,261,156 $ 7,584 $ 4,442 $ 5,217 $ 3,065,713
Undistributed long-term gains -- -- -- -- 2,180,779
--------------- --------------- --------------- --------------- --------------
Net accumulated earnings 1,261,156 7,584 4,442 5,217 5,246,492
Capital loss carryforward* (19,804,935) (5,086,217) (37,894,645) (162,282,568) --
Temporary differences (27,219) (58) (42) (215) (111)
Net unrealized appreciation
(depreciation) (2,569,851) 15,416,739 26,613,547 84,571,754 80,317,947
--------------- --------------- --------------- --------------- --------------
Total accumulated earnings (losses) $ (21,140,849) $ 10,338,048 $ (11,276,698) $ (77,705,812) $ 85,564,328
=============== =============== =============== =============== ==============
</Table>
<Table>
<Caption>
AMERICAN CAPITAL GLOBAL DEVELOPING
GROWTH OPPORTUNITIES OPPORTUNITIES EQUITY GROWTH
--------------- --------------- --------------- --------------- -------------
Undistributed ordinary income $ 146,572 $ 1,532,998 $ -- $ 489,069 $ --
Undistributed long-term gains -- -- -- -- --
--------------- --------------- --------------- --------------- -------------
Net accumulated earnings 146,572 1,532,998 -- 489,069 --
Capital loss carryforward* (34,762,069) (261,107,873) (90,409,420) (3,087,214) (39,742,164)
Post-October losses -- -- -- (16,167) --
Temporary differences (24) (153) (20) (43) (33)
Net unrealized appreciation 3,480,458 34,319,422 7,048,323 9,714,802 10,510,110
--------------- --------------- --------------- --------------- -------------
Total accumulated earnings (losses) $ (31,135,063) $ (225,255,606) $ (83,361,117) $ 7,100,447 $ (29,232,087)
=============== =============== =============== =============== =============
</Table>
* As of December 31, 2004, the following Portfolios had a net capital loss
carryforward which may be used to offset future capital gains to the extent
provided by regulations.
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<Page>
<Table>
<Caption>
(AMOUNTS IN THOUSANDS)
----------------------------------------------------------------------------------------------------
AVAILABLE THROUGH DECEMBER 31, 2006 2007 2008 2009 2010 2011 2012 TOTAL
- ------------------------------ -------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Flexible Income $ 153 $ 941 $ 1,681 $ 2,688 $ 6,782 $ 6,161 $ 1,399 $ 19,805
Balanced Growth -- -- -- -- 5,086 -- -- 5,086
Utilities -- -- -- 16,752 21,143 -- -- 37,895
Dividend Growth -- -- 61,265 21,046 58,750 21,222 -- 162,283
Growth -- -- -- 15,102 16,400 3,145 115 34,762
American Opportunities -- -- -- 186,323 74,785 -- -- 261,108
Capital Opportunities -- -- -- 32,842 57,567 -- -- 90,409
Global Equity -- -- -- 424 2,663 -- -- 3,087
Developing Growth -- -- -- 21,430 18,312 -- -- 39,742
</Table>
During the year ended December 31, 2004, the following Portfolios utilized net
capital loss carryforwards: Balanced Growth -- $7,240,239; Utilities --
$3,613,819; Dividend Growth -- $22,268,238; Equally-Weighted S&P 500 --
$1,189,572; American Opportunities -- $17,202,881; Capital Opportunities --
$5,649,572; Global Equity -- $6,074,849; Developing Growth -- $10,368,480.
At December 31, 2004, the primary reason(s) for significant temporary/permanent
book/tax differences were as follows:
<Table>
<Caption>
TEMPORARY DIFFERENCES PERMANENT DIFFERENCES
----------------------- --------------------------
POST- LOSS FOREIGN NET
OCTOBER DEFERRALS FROM CURRENCY OPERATING
LOSSES WASH SALES GAINS/LOSSES LOSS
------- -------------- ------------ ---------
Flexible Income - -
Balanced Growth -
Utilities -
Dividend Growth -
Equally-Weighted S&P 500 -
Growth -
American Opportunities - -
Capital Opportunities - -
Global Equity - -
Developing Growth - -
</Table>
Additionally, the following Portfolios had other temporary differences: Flexible
Income -- interest on bonds in default; Flexible Income and Balanced Growth --
capital loss deferrals on straddles; Flexible Income, Balanced Growth and
Equally-Weighted S&P 500 -- capital gain/loss from the mark-to-market of futures
contracts. Flexible Income and Balanced Growth had permanent differences
attributable to the
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<Page>
reclassification of net losses on paydowns. Equally-Weighted S&P 500, Capital
Opportunities and Developing Growth had temporary and permanent differences
attributable to tax adjustments on real estate investment trusts held and sold,
respectively, by the Portfolios. The following Portfolios had temporary and
permanent differences attributable to book amortization of premiums/discounts on
debt securities: Flexible Income, Balanced Growth and Utilities.
To reflect reclassifications arising from the permanent differences, the
following accounts were (charged) credited:
<Table>
<Caption>
ACCUMULATED UNDISTRIBUTED ACCUMULATED UNDISTRIBUTED
NET INVESTMENT INCOME (LOSS) NET REALIZED GAIN (LOSS) PAID-IN-CAPITAL
---------------------------- ------------------------- ---------------
Flexible Income $ 1,279,592 $ (1,279,592) --
Balanced Growth 131,355 (131,355) --
Utilities 17,221 (17,221) --
Equally-Weighted S&P 500 (64,919) 64,919 --
American Opportunities 9,498 (9,498) --
Capital Opportunities 150,795 14,777 $ (165,572)
Global Equity (49,649) 49,649 --
Developing Growth 132,176 21,572 (153,748)
</Table>
132
<Page>
(This page has been intentionally left blank.)
133
<Page>
Morgan Stanley Select Dimensions Investment Series
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<Table>
<Caption>
NET ASSET
FOR THE YEAR VALUE NET NET REALIZED TOTAL FROM DIVIDENDS
ENDED BEGINNING INVESTMENT AND UNREALIZED INVESTMENT TO
DECEMBER 31 OF PERIOD INCOME (LOSS)* GAIN (LOSS) OPERATIONS SHAREHOLDERS
- ------------ --------------- -------------- -------------- -------------- --------------
MONEY MARKET
CLASS X SHARES
2000(a) $ 1.00 $ 0.06 -- $ 0.06 $ (0.06)
2001 1.00 0.04 -- 0.04 (0.04)
2002 1.00 0.01 -- 0.01 (0.01)
2003 1.00 0.006 -- 0.006 (0.006)
2004 1.00 0.010 -- 0.010 (0.010)
CLASS Y SHARES
2000(b) 1.00 0.03 -- 0.03 (0.03)
2001 1.00 0.04 -- 0.04 (0.04)
2002 1.00 0.01 -- 0.01 (0.01)
2003 1.00 0.004 -- 0.004 (0.004)
2004 1.00 0.010 -- 0.010 (0.010)
FLEXIBLE INCOME
CLASS X SHARES
2000(a) 8.96 0.76 $ (1.15) (0.39) (0.65)
2001 7.83 0.56 (0.88) (0.32) (0.42)
2002 6.99 0.51 0.08 0.59 (0.35)
2003 7.23 0.34 0.62 0.96 (0.39)
2004 7.80 0.38 0.14 0.52 (0.64)
CLASS Y SHARES
2000(b) 8.58 0.33 (0.73) (0.40) (0.33)
2001 7.81 0.52 (0.86) (0.34) (0.41)
2002 6.97 0.48 0.10 0.58 (0.33)
2003 7.22 0.32 0.61 0.93 (0.37)
2004 7.78 0.36 0.13 0.49 (0.62)
BALANCED GROWTH
CLASS X SHARES
2000(a) 14.63 0.47 0.42 0.89 (0.51)
2001 14.90 0.44 (0.28) 0.16 (0.44)
2002 14.62 0.36 (2.02) (1.66) (0.38)
2003 12.58 0.27 2.19 2.46 (0.33)
2004 14.71 0.31 1.28 1.59 (0.35)
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
134
<Page>
<Table>
<Caption>
TOTAL NET ASSET
FOR THE YEAR DISTRIBUTIONS DIVIDENDS VALUE
ENDED TO AND END OF TOTAL
DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS PERIOD RETURN+
- ------------ --------------- -------------- -------------- --------------
MONEY MARKET
CLASS X SHARES
2000(a) -- $ (0.06) $ 1.00 5.98%
2001 -- (0.04) 1.00 3.88
2002 -- (0.01) 1.00 1.34
2003 -- (0.006) 1.00 0.65
2004 -- (0.010) 1.00 0.86
CLASS Y SHARES
2000(b) -- (0.03) 1.00 2.58(1)
2001 -- (0.04) 1.00 3.62
2002 -- (0.01) 1.00 1.09
2003 -- (0.004) 1.00 0.40
2004 -- (0.010) 1.00 0.61
FLEXIBLE INCOME
CLASS X SHARES
2000(a) $ (0.09)++ (0.74) 7.83 (4.74)
2001 (0.10)++ (0.52) 6.99 (4.06)
2002 -- (0.35) 7.23 8.67
2003 -- (0.39) 7.80 13.54
2004 -- (0.64) 7.68 7.00
CLASS Y SHARES
2000(b) (0.04)++ (0.37) 7.81 (4.68)(1)
2001 (0.09)++ (0.50) 6.97 (4.41)
2002 -- (0.33) 7.22 8.59
2003 -- (0.37) 7.78 13.15
2004 (0.62) 7.65 6.61
BALANCED GROWTH
CLASS X SHARES
2000(a) (0.11) (0.62) 14.90 6.37
2001 -- (0.44) 14.62 1.21
2002 -- (0.38) 12.58 (11.49)
2003 -- (0.33) 14.71 19.84
2004 -- (0.35) 15.95 10.93
<Caption>
RATIOS TO AVERAGE
NET ASSETS**
NET ASSETS ----------------------------------
FOR THE YEAR END OF NET PORTFOLIO
ENDED PERIOD INVESTMENT TURNOVER
DECEMBER 31 (000'S) EXPENSES INCOME (LOSS) RATE
- ------------ --------------- -------------- -------------- --------------
MONEY MARKET
CLASS X SHARES
2000(a) $ 118,274 0.55% 5.80% N/A
2001 175,957 0.52 3.63 N/A
2002 152,479 0.52 1.34 N/A
2003 91,730 0.54 0.66 N/A
2004 67,945 0.55 0.84 N/A
CLASS Y SHARES
2000(b) 2,673 0.80(2) 5.55(2) N/A
2001 31,189 0.77 3.38 N/A
2002 41,006 0.77 1.09 N/A
2003 39,183 0.79 0.41 N/A
2004 33,468 0.80 0.59 N/A
FLEXIBLE INCOME
CLASS X SHARES
2000(a) 69,443 0.47 8.92 33%
2001 56,745 0.49 7.48 114
2002 54,669 0.50 7.26 115
2003 53,270 0.57 4.49 258
2004 43,658 0.69 4.96 201
CLASS Y SHARES
2000(b) 602 0.72(2) 9.23(2) 33
2001 3,859 0.74 7.23 114
2002 14,626 0.75 7.01 115
2003 20,955 0.82 4.24 258
2004 26,927 0.94 4.71 201
BALANCED GROWTH
CLASS X SHARES
2000(a) 120,911 0.64 3.29 39
2001 116,002 0.64 2.95 71
2002 84,846 0.66 2.58 161
2003 84,151 0.68 2.01 124
2004 75,517 0.69 2.04 62
</Table>
135
<Page>
<Table>
<Caption>
NET ASSET
FOR THE YEAR VALUE NET NET REALIZED TOTAL FROM DIVIDENDS
ENDED BEGINNING INVESTMENT AND UNREALIZED INVESTMENT TO
DECEMBER 31 OF PERIOD INCOME (LOSS)* GAIN (LOSS) OPERATIONS SHAREHOLDERS
- ------------ --------------- -------------- -------------- -------------- --------------
CLASS Y SHARES
2000(b) $ 13.67 $ 0.18 $ 1.25 $ 1.43 $ (0.22)
2001 14.88 0.39 (0.27) 0.12 (0.41)
2002 14.59 0.32 (2.01) (1.69) (0.34)
2003 12.56 0.23 2.19 2.42 (0.30)
2004 14.68 0.27 1.28 1.55 (0.31)
UTILITIES
CLASS X SHARES
2000(a) 26.25 0.38 (0.79) (0.41) (0.40)
2001 23.99 0.43 (6.45) (6.02) (0.45)
2002 17.10 0.47 (3.93) (3.46) (0.48)
2003 13.16 0.35 2.31 2.66 (0.36)
2004 15.46 0.36 3.37 3.73 (0.37)
CLASS Y SHARES
2000(b) 26.06 0.15 (2.04) (1.89) (0.18)
2001 23.99 0.40 (6.48) (6.08) (0.40)
2002 17.09 0.44 (3.93) (3.49) (0.45)
2003 13.15 0.31 2.31 2.62 (0.32)
2004 15.45 0.32 3.37 3.69 (0.33)
DIVIDEND GROWTH
CLASS X SHARES
2000(a) 19.92 0.33 0.05 0.38 (0.37)
2001 15.85 0.27 (1.13) (0.86) (0.28)
2002 14.71 0.26 (2.88) (2.62) (0.26)
2003 11.83 0.24 3.00 3.24 (0.24)
2004 14.83 0.23 0.99 1.22 (0.24)
CLASS Y SHARES
2000(b) 14.14 0.10 1.73 1.83 (0.13)
2001 15.84 0.23 (1.13) (0.90) (0.25)
2002 14.69 0.23 (2.88) (2.65) (0.23)
2003 11.81 0.20 3.01 3.21 (0.21)
2004 14.81 0.20 0.98 1.18 (0.20)
</Table>
136
<Page>
<Table>
<Caption>
TOTAL NET ASSET
FOR THE YEAR DISTRIBUTIONS DIVIDENDS VALUE
ENDED TO AND END OF TOTAL
DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS PERIOD RETURN+
- ------------ -------------- -------------- -------------- --------------
CLASS Y SHARES
2000(b) -- $ (0.22) $ 14.88 10.55(1)%
2001 -- (0.41) 14.59 0.86
2002 -- (0.34) 12.56 (11.66)
2003 -- (0.30) 14.68 19.51
2004 -- (0.31) 15.92 10.68
UTILITIES
CLASS X SHARES
2000(a) $ (1.45) (1.85) 23.99 (1.91)
2001 (0.42) (0.87) 17.10 (25.51)
2002 -- (0.48) 13.16 (20.37)
2003 -- (0.36) 15.46 20.47
2004 -- (0.37) 18.82 24.44
CLASS Y SHARES
2000(b) -- (0.18) 23.99 (7.26)(1)
2001 (0.42) (0.82) 17.09 (25.69)
2002 -- (0.45) 13.15 (20.58)
2003 -- (0.32) 15.45 20.20
2004 -- (0.33) 18.81 24.15
DIVIDEND GROWTH
CLASS X SHARES
2000(a) (4.08) (4.45) 15.85 5.36
2001 -- (0.28) 14.71 (5.45)
2002 -- (0.26) 11.83 (17.92)
2003 -- (0.24) 14.83 27.73
2004 -- (0.24) 15.81 8.29
CLASS Y SHARES
2000(b) -- (0.13) 15.84 13.02(1)
2001 -- (0.25) 14.69 (5.71)
2002 -- (0.23) 11.81 (18.15)
2003 -- (0.21) 14.81 27.48
2004 -- (0.20) 15.79 8.03
<Caption>
RATIOS TO AVERAGE
NET ASSETS**
NET ASSETS ----------------------------------
FOR THE YEAR END OF NET PORTFOLIO
ENDED PERIOD INVESTMENT TURNOVER
DECEMBER 31 (000'S) EXPENSES INCOME (LOSS) RATE
- ------------ --------------- -------------- -------------- --------------
CLASS Y SHARES
2000(b) $ 1,455 0.86(2)% 2.90(2)% 39%
2001 8,463 0.89 2.70 71
2002 12,327 0.91 2.33 161
2003 22,898 0.93 1.76 124
2004 27,308 0.94 1.79 62
UTILITIES
CLASS X SHARES
2000(a) 196,489 0.69 1.43 32
2001 118,964 0.69 2.15 49
2002 66,825 0.70 3.22 77
2003 63,728 0.71 2.51 91
2004 63,052 0.71 2.19 29
CLASS Y SHARES
2000(b) 5,494 0.95(2) 1.40(2) 32
2001 12,471 0.94 1.90 49
2002 10,749 0.95 2.97 77
2003 13,440 0.96 2.26 91
2004 15,650 0.96 1.94 29
DIVIDEND GROWTH
CLASS X SHARES
2000(a) 619,469 0.63 2.01 41
2001 527,738 0.62 1.79 22
2002 341,673 0.64 1.89 22
2003 356,056 0.66 1.85 42
2004 307,093 0.65 1.54 44
CLASS Y SHARES
2000(b) 2,780 0.88(2) 1.45(2) 41
2001 22,602 0.87 1.54 22
2002 29,318 0.89 1.64 22
2003 51,527 0.91 1.60 42
2004 59,314 0.90 1.29 44
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
137
<Page>
<Table>
<Caption>
NET ASSET
FOR THE YEAR VALUE NET NET REALIZED TOTAL FROM DIVIDENDS
ENDED BEGINNING INVESTMENT AND UNREALIZED INVESTMENT TO
DECEMBER 31 OF PERIOD INCOME (LOSS)* GAIN (LOSS) OPERATIONS SHAREHOLDERS
- ------------ --------------- -------------- -------------- -------------- --------------
EQUALLY-WEIGHTED S&P 500
CLASS X SHARES
2000(a) $ 20.54 $ 0.26 $ 1.95 $ 2.21 $ (0.09)
2001 20.75 0.22 (0.56) (0.34) (0.19)
2002 19.12 0.19 (3.22) (3.03) (0.21)
2003 15.88 0.19 5.59 5.78 (0.21)
2004 21.13 0.23 3.27 3.50 (0.18)
CLASS Y SHARES
2000(b) 18.74 0.09 1.89 1.98 --
2001 20.72 0.16 (0.55) (0.39) (0.18)
2002 19.05 0.16 (3.22) (3.06) (0.20)
2003 15.79 0.15 5.56 5.71 (0.19)
2004 20.99 0.18 3.23 3.41 (0.15)
GROWTH
CLASS X SHARES
2000(a) 23.27 (0.02) (2.47) (2.49) --
2001 19.42 (0.01) (2.90) (2.91) --
2002 15.48 0.01 (4.32) (4.31) --
2003 11.17 0.03 2.97 3.00 (0.01)
2004 14.16 0.05 1.03 1.08 (0.03)
CLASS Y SHARES
2000(b) 23.90 (0.03) (4.47) (4.50) --
2001 19.40 (0.05) (2.90) (2.95) --
2002 15.42 (0.02) (4.30) (4.32) --
2003 11.10 (0.01) 2.96 2.95 --
2004 14.05 0.03 1.01 1.04 (0.01)
AMERICAN OPPORTUNITIES
CLASS X SHARES
2000(a) 32.60 0.05 (1.39) (1.34) --
2001 28.57 0.09 (7.97) (7.88) (0.05)
2002 14.99 0.04 (3.26) (3.22) (0.09)
2003 11.68 0.04 2.36 2.40 (0.05)
2004 14.03 0.08 1.08 1.16 (0.05)
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
138
<Page>
<Table>
<Caption>
TOTAL NET ASSET
FOR THE YEAR DISTRIBUTIONS DIVIDENDS VALUE
ENDED TO AND END OF TOTAL
DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS PERIOD RETURN+
- ------------ --------------- -------------- -------------- --------------
EQUALLY-WEIGHTED S&P 500
CLASS X SHARES
2000(a) $ (1.91) $ (2.00) $ 20.75 11.98%
2001 (1.10) (1.29) 19.12 (1.83)
2002 -- (0.21) 15.88 (15.97)
2003 (0.32) (0.53) 21.13 37.14
2004 -- (0.18) 24.45 16.65
CLASS Y SHARES
2000(b) -- -- 20.72 10.57(1)
2001 (1.10) (1.28) 19.05 (2.04)
2002 -- (0.20) 15.79 (16.21)
2003 (0.32) (0.51) 20.99 36.87
2004 -- (0.15) 24.25 16.33
GROWTH
CLASS X SHARES
2000(a) (1.36) (1.36) 19.42 (11.68)
2001 (1.03) (1.03) 15.48 (15.23)
2002 -- -- 11.17 (27.84)
2003 -- (0.01) 14.16 26.90
2004 -- (0.03) 15.21 7.64
CLASS Y SHARES
2000(b) -- -- 19.40 (18.83)(1)
2001 (1.03) (1.03) 15.42 (15.46)
2002 -- -- 11.10 (28.02)
2003 -- -- 14.05 26.58
2004 -- (0.01) 15.08 7.38
AMERICAN OPPORTUNITIES
CLASS X SHARES
2000(a) (2.69) (2.69) 28.57 (4.42)
2001 (5.65) (5.70) 14.99 (29.47)
2002 -- (0.09) 11.68 (21.56)
2003 -- (0.05) 14.03 20.57
2004 -- (0.05) 15.14 8.29
<Caption>
RATIOS TO AVERAGE
NET ASSETS**
NET ASSETS ----------------------------------
FOR THE YEAR END OF NET PORTFOLIO
ENDED PERIOD INVESTMENT TURNOVER
DECEMBER 31 (000'S) EXPENSES INCOME (LOSS) RATE
- ------------ --------------- -------------- -------------- --------------
EQUALLY-WEIGHTED S&P 500
CLASS X SHARES
2000(a) $ 186,887 0.54% 1.31% 8%
2001 181,881 0.54 1.12 6
2002 121,065 0.54 1.09 8
2003 143,019 0.55 1.11 24
2004 142,320 0.50 1.07 20
CLASS Y SHARES
2000(b) 890 0.78(2) 1.02(2) 8
2001 10,985 0.79 0.87 6
2002 18,843 0.79 0.84 8
2003 47,554 0.80 0.86 24
2004 80,900 0.75 0.82 20
GROWTH
CLASS X SHARES
2000(a) 132,909 0.88 (0.10) 68
2001 80,096 0.86 (0.04) 81
2002 39,834 0.91 0.08 135
2003 40,356 0.93 0.21 128
2004 34,038 0.93 0.37 168
CLASS Y SHARES
2000(b) 2,536 1.14(2) (0.34)(2) 68
2001 4,383 1.11 (0.29) 81
2002 3,520 1.16 (0.17) 135
2003 6,850 1.18 (0.04) 128
2004 10,934 1.18 0.12 168
AMERICAN OPPORTUNITIES
CLASS X SHARES
2000(a) 832,971 0.64 0.17 426
2001 463,012 0.65 0.46 393
2002 274,710 0.66 0.27 309
2003 260,230 0.67 0.33 261
2004 212,736 0.67 0.60 134
</Table>
139
<Page>
<Table>
<Caption>
NET ASSET
FOR THE YEAR VALUE NET NET REALIZED TOTAL FROM DIVIDENDS
ENDED BEGINNING INVESTMENT AND UNREALIZED INVESTMENT TO
DECEMBER 31 OF PERIOD INCOME (LOSS)* GAIN (LOSS) OPERATIONS SHAREHOLDERS
- ------------ --------------- -------------- -------------- -------------- --------------
CLASS Y SHARES
2000(b) $ 29.89 $ 0.05 $ (1.39) $ (1.34) --
2001 28.55 0.03 (7.95) (7.92) $ (0.05)
2002 14.93 0.01 (3.25) (3.24) (0.06)
2003 11.63 0.01 2.34 2.35 (0.02)
2004 13.96 0.05 1.06 1.11 (0.02)
CAPITAL OPPORTUNITIES
CLASS X SHARES
2000(a) 22.66 (0.09) (5.64) (5.73) --
2001 15.38 (0.07) (5.52) (5.59) --
2002 9.79 (0.05) (4.24) (4.29) --
2003 5.50 (0.04) 2.33 2.29 --
2004 7.79 (0.03) 1.79 1.76 --
CLASS Y SHARES
2000(b) 24.41 (0.05) (8.99) (9.04) --
2001 15.37 (0.09) (5.53) (5.62) --
2002 9.75 (0.07) (4.22) (4.29) --
2003 5.46 (0.05) 2.31 2.26 --
2004 7.72 (0.05) 1.78 1.73 --
GLOBAL EQUITY
CLASS X SHARES
2000(a) 19.63 0.13 (1.19) (1.06) (0.06)
2001 17.26 0.04 (2.88) (2.84) (0.11)
2002 12.79 0.04 (2.26) (2.22) (0.01)
2003 10.56 0.04 3.62 3.66 (0.05)
2004 14.17 0.09 1.06 1.15 (0.03)
CLASS Y SHARES
2000(b) 18.85 0.00 (1.61) (1.61) --
2001 17.24 (0.01) (2.86) (2.87) (0.10)
2002 12.75 0.01 (2.26) (2.25) --
2003 10.50 0.01 3.60 3.61 (0.02)
2004 14.09 0.06 1.05 1.11 (0.01)
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
140
<Page>
<Table>
<Caption>
TOTAL NET ASSET
FOR THE YEAR DISTRIBUTIONS DIVIDENDS VALUE
ENDED TO AND END OF TOTAL
DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS PERIOD RETURN+
- ------------ --------------- -------------- -------------- --------------
CLASS Y SHARES
2000(b) -- -- $ 28.55 (4.48)(1)%
2001 $ (5.65) $ (5.70) 14.93 (29.67)
2002 -- (0.06) 11.63 (21.73)
2003 -- (0.02) 13.96 20.25
2004 -- (0.02) 15.05 7.96
CAPITAL OPPORTUNITIES
CLASS X SHARES
2000(a) (1.55) (1.55) 15.38 (27.56)
2001 -- -- 9.79 (36.39)
2002 -- -- 5.50 (43.82)
2003 -- -- 7.79 41.64
2004 -- -- 9.55 22.59
CLASS Y SHARES
2000(b) -- -- 15.37 (36.83)(1)
2001 -- -- 9.75 (36.56)
2002 -- -- 5.46 (44.00)
2003 -- -- 7.72 41.39
2004 -- -- 9.45 22.41
GLOBAL EQUITY
CLASS X SHARES
2000(a) (1.25) (1.31) 17.26 (5.93)
2001 (1.52) (1.63) 12.79 (17.22)
2002 -- (0.01) 10.56 (17.37)
2003 -- (0.05) 14.17 34.71
2004 -- (0.03) 15.29 8.17
CLASS Y SHARES
2000(b) -- -- 17.24 (8.54)(1)
2001 (1.52) (1.62) 12.75 (17.38)
2002 -- -- 10.50 (17.57)
2003 -- (0.02) 14.09 34.33
2004 -- (0.01) 15.19 7.89
<Caption>
RATIOS TO AVERAGE
NET ASSETS**
NET ASSETS ----------------------------------
FOR THE YEAR END OF NET PORTFOLIO
ENDED PERIOD INVESTMENT TURNOVER
DECEMBER 31 (000'S) EXPENSES INCOME (LOSS) RATE
- ------------ --------------- -------------- -------------- --------------
CLASS Y SHARES
2000(b) $ 13,930 0.88(2)% 0.40(2)% 426%
2001 30,768 0.90 0.21 393
2002 30,035 0.91 0.02 309
2003 46,126 0.92 0.08 261
2004 43,269 0.92 0.35 134
CAPITAL OPPORTUNITIES
CLASS X SHARES
2000(a) 116,991 0.79 (0.41) 21
2001 55,488 0.80 (0.63) 16
2002 22,097 0.90 (0.71) 103
2003 25,473 0.87 (0.57) 184
2004 25,408 0.90 (0.32) 118
CLASS Y SHARES
2000(b) 4,895 1.02(2) (0.62)(2) 21
2001 11,410 1.05 (0.88) 16
2002 6,537 1.15 (0.96) 103
2003 11,302 1.12 (0.82) 184
2004 13,980 1.15 (0.57) 118
GLOBAL EQUITY
CLASS X SHARES
2000(a) 171,523 1.06 0.68 68
2001 118,747 1.07 0.29 89
2002 75,611 1.08 0.35 44
2003 83,607 1.08 0.35 72
2004 73,290 1.11 0.64 48
CLASS Y SHARES
2000(b) 883 1.29(2) 0.02(2) 68
2001 3,825 1.32 0.04 89
2002 3,951 1.33 0.10 44
2003 7,593 1.33 0.10 72
2004 8,399 1.36 0.39 48
</Table>
141
<Page>
<Table>
<Caption>
NET ASSET
FOR THE YEAR VALUE NET NET REALIZED TOTAL FROM DIVIDENDS
ENDED BEGINNING INVESTMENT AND UNREALIZED INVESTMENT TO
DECEMBER 31 OF PERIOD INCOME (LOSS)* GAIN (LOSS) OPERATIONS SHAREHOLDERS
- ------------ --------------- -------------- -------------- -------------- --------------
DEVELOPING GROWTH
CLASS X SHARES
2000(a) $ 40.04 $ 0.22 $ (7.89) $ (7.67) --
2001 25.93 (0.01) (6.25) (6.26) $ (0.22)
2002 16.01 (0.03) (4.41) (4.44) --
2003 11.57 (0.03) 4.82 4.79 --
2004 16.36 (0.03) 3.68 3.65 --
CLASS Y SHARES
2000(b) 29.79 0.09 (3.98) (3.89) --
2001 25.90 (0.05) (6.25) (6.30) (0.21)
2002 15.95 (0.06) (4.40) (4.46) --
2003 11.49 (0.07) 4.80 4.73 --
2004 16.22 (0.07) 3.64 3.57 --
</Table>
- ----------
(a) PRIOR TO JULY 24, 2000, THE FUND ISSUED ONE CLASS OF SHARES. ALL SHARES OF
THE FUND HELD PRIOR TO MAY 1, 2000 HAVE BEEN DESIGNATED CLASS X SHARES.
(b) FOR THE PERIOD JULY 24, 2000 (ISSUED DATE) THROUGH DECEMBER 31, 2000.
* THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
** REFLECTS OVERALL PORTFOLIO RATIOS FOR INVESTMENT INCOME AND NON-CLASS
SPECIFIC EXPENSES.
+ CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE
PERIOD.
++ DISTRIBUTION FROM PAID-IN CAPITAL.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS
142
<Page>
<Table>
<Caption>
TOTAL NET ASSET
FOR THE YEAR DISTRIBUTIONS DIVIDENDS VALUE
ENDED TO AND END OF TOTAL
DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS PERIOD RETURN+
- ------------ --------------- -------------- -------------- --------------
DEVELOPING GROWTH
CLASS X SHARES
2000(a) $ (6.44) $ (6.44) $ 25.93 (21.61)%
2001 (3.44) (3.66) 16.01 (25.49)
2002 -- 11.57 (27.73)
2003 -- -- 16.36 41.40
2004 -- -- 20.01 22.31
CLASS Y SHARES
2000(b) -- -- 25.90 (13.06)(1)
2001 (3.44) (3.65) 15.95 (25.67)
2002 -- -- 11.49 (27.96)
2003 -- -- 16.22 41.17
2004 -- -- 19.79 21.95
<Caption>
RATIOS TO AVERAGE
NET ASSETS**
NET ASSETS ----------------------------------
FOR THE YEAR END OF NET PORTFOLIO
ENDED PERIOD INVESTMENT TURNOVER
DECEMBER 31 (000'S) EXPENSES INCOME (LOSS) RATE
- ------------ --------------- -------------- -------------- --------------
DEVELOPING GROWTH
CLASS X SHARES
2000(a) $ 142,640 0.56% 0.66% 207%
2001 85,513 0.59 (0.05) 196
2002 45,892 0.61 (0.26) 251
2003 53,996 0.62 (0.20) 193
2004 52,359 0.64 (0.19) 135
CLASS Y SHARES
2000(b) 1,716 0.83(2) 0.74(2) 207
2001 2,973 0.84 (0.30) 196
2002 2,602 0.86 (0.51) 251
2003 6,798 0.87 (0.45) 193
2004 8,943 0.89 (0.44) 135
</Table>
143
<Page>
Morgan Stanley Select Dimensions Investment Series
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
MORGAN STANLEY SELECT DIMENSIONS INVESTMENT SERIES:
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of Morgan Stanley Select Dimensions Investment
Series (the "Funds"), comprising Money Market Portfolio, Flexible Income
Portfolio, Balanced Growth Portfolio, Utilities Portfolio, Dividend Growth
Portfolio, Equally-Weighted S&P 500 Index Portfolio (formerly Value-Added Market
Portfolio), Growth Portfolio, American Opportunities Portfolio, Capital
Opportunities Portfolio, Global Equity Portfolio and Developing Growth Portfolio
(the "Portfolios") as of December 31, 2004, and the related statements of
operations for the year then ended and changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Funds'
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. Our procedures
included confirmation of securities owned as of December 31, 2004, by
correspondence with the custodians and brokers; where replies were not received
from brokers, we performed other auditing procedures. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position each of
the Portfolios constituting of Morgan Stanley Select Dimensions Investment
Series as of December 31, 2004, the results of their operations for the year
then ended, the changes in their net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended, in conformity with accounting principles generally
accepted in the United States of America.
Deloitte & Touche LLP
NEW YORK, NEW YORK
FEBRUARY 17, 2005
144
<Page>
Morgan Stanley Select Dimensions Investment Series
TRUSTEE AND OFFICER INFORMATION
Independent Trustees:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- --------------------------------------- ----------- -------------- ------------------------- ------------- --------------------
Michael Bozic (63) Trustee Since Private Investor; 208 None.
c/o Kramer Levin Naftalis & Frankel LLP April 1994 Director or Trustee of
Counsel to the Independent Trustees the Retail Funds (since
919 Third Avenue April 1994) and the
New York, NY 10022-3902 Institutional Funds
(since July 2003);
formerly Vice Chairman of
Kmart Corporation
(December 1998-October
2000), Chairman and Chief
Executive Officer of
Levitz Furniture
Corporation (November
1995-November 1998) and
President and Chief
Executive Officer of
Hills Department Stores
(May 1991- July 1995);
formerly variously
Chairman, Chief Executive
Officer, President and
Chief Operating Officer
(1987-1991) of the Sears
Merchandise Group of
Sears, Roebuck& Co.
Edwin J. Garn (72) Trustee Since Consultant; Managing 208 Director of Franklin
1031 N. Chartwell Court January 1993 Director of Summit Covey (time
Salt Lake City, UT 84103 Ventures LLC; Director or management systems),
Trustee of the Retail BMW Bank of North
Funds (since January America, Inc.
1993) and the (industrial loan
Institutional Funds corporation), United
(since July 2003); member Space Alliance
of the Utah Regional (joint venture
Advisory Board of Pacific between Lockheed
Corp.; formerly Managing Martin and the
Director of Summit Boeing Company) and
Ventures LLC (2000-2004); Nuskin Asia Pacific
United States Senator (multilevel
(R-Utah) (1974-1992) and marketing); member
Chairman, Senate Banking of the board of
Committee (1980-1986), various civic and
Mayor of Salt Lake City, charitable
Utah (1971-1974), organizations.
Astronaut, Space Shuttle
Discovery (April 12-19,
1985), and Vice Chairman,
Huntsman Corporation
(chemical company).
Wayne E. Hedien (70) Trustee Since Retired; Director or 208 Director of The PMI
c/o Kramer Levin Naftalis & Frankel LLP September Trustee of the Retail Group Inc. (private
Counsel to the Independent Trustees 1997 Funds (since September mortgage insurance);
919 Third Avenue 1997) and the Trustee and Vice
New York, NY 10022-3902 Institutional Funds Chairman of The
(since July 2003); Field Museum of
formerly associated with Natural History;
the Allstate Companies director of various
(1966-1994), most other business and
recently as Chairman of charitable
The Allstate Corporation organizations.
(March 1993--December
1994) and Chairman and
Chief Executive Officer
of its wholly--owned
subsidiary, Allstate
Insurance Company (July
1989-December 1994).
</Table>
145
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- --------------------------------------- ----------- -------------- ------------------------- ------------- --------------------
Dr.Manuel H. Johnson (55) Trustee Since Senior Partner, Johnson 208 Director of NVR,
c/o Johnson Smick International, Inc. July 1991 Smick International, Inc. (home
2099 Pennsylvania Avenue, N.W. Inc., a consulting firm; construction);
Suite 950 Chairman of the Audit Director of KFX
Washington, D.C. 20006 Committee and Director or Energy; Director of
Trustee of the Retail RBS Greenwich
Funds (since July 1991) Capital Holdings
and the Institutional (financial holding
Funds (since July 2003); company).
Co-Chairman and a founder
of the Group of Seven
Council (G7C), an
international economic
commission; formerly Vice
Chairman of the Board of
Governors of the Federal
Reserve System and
Assistant Secretary of
the U.S. Treasury.
Joseph J. Kearns (62) Trustee Since President, Kearns & 209 Director of Electro
c/o Kearns & Associates LLC July 2003 Associates LLC Rent Corporation
PMB754 (investment consulting); (equipment leasing),
23852 Pacific Coast Highway Deputy Chairman of the The Ford Family
Malibu, CA 90265 Audit Committee and Foundation, and the
Director or Trustee of UCLA Foundation.
the Retail Funds (since
July 2003) and the
Institutional Funds
(since August
1994);previously Chairman
of the Audit Committee of
the Institutional Funds
(October 2001-July 2003);
formerly CFO of the
J.PaulGetty Trust.
Michael E. Nugent (68) Trustee Since General Partner of 208 Director of various
c/o Triumph Capital, L.P. July 1991 Triumph Capital, L.P., a business
445 Park Avenue private investment organizations.
New York, NY 10022 partnership; Chairman of
the Insurance Committee
and Director or Trustee
of the Retail Funds
(since July 1991) and the
Institutional Funds
(since July 2001);
formerly Vice President,
Bankers Trust Company and
BT Capital Corporation
(1984-1988).
Fergus Reid (72) Trustee Since Chairman of Lumelite 209 Trustee and Director
c/o Lumelite Plastics Corporation July 2003 Plastics Corporation; of certain
85 Charles Colman Blvd. Chairman of the investment companies
Pawling, NY 12564 Governance Committee and in the JPMorgan
Director or Trustee of Funds complex
the Retail Funds (since managed by J.P.
July 2003) and the Morgan Investment
Institutional Funds Management Inc.
(since June 1992).
</Table>
146
<Page>
Interested Trustees:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- --------------------------------------- ----------- -------------- ------------------------- ------------- --------------------
Charles A. Fiumefreddo (71) Chairman of Since Chairman and Director or 208 None.
c/o Morgan Stanley Trust the Board July 1991 Trustee of the Retail
Harborside Financial Center, and Trustee Funds (since July 1991)
Plaza Two, and the Institutional
Jersey City, NJ 07311 Funds (since July 2003);
formerly Chief Executive
Officer of the Retail
Funds (until September
2002).
James F. Higgins (56) Trustee Since Director or Trustee of 208 Director of AXA
c/o Morgan Stanley Trust June 2000 the Retail Funds (since Financial, Inc. and
Harborside Financial Center, June 2000) and the The Equitable Life
Plaza Two, Institutional Funds Assurance Society of
Jersey City, NJ 07311 (since July 2003); Senior the United States
Advisor of Morgan Stanley (financial
(since August 2000); services).
Director of the
Distributor and Dean
Witter Realty Inc.;
previously President and
Chief Operating Officer
of the Private Client
Group of Morgan Stanley
(May 1999- August 2000),
and President and Chief
Operating Officer of
Individual Securities of
Morgan Stanley (February
1997-May 1999).
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE TRUSTEE BEGAN SERVING THE FUNDS ADVISED BY
MORGAN STANLEY INVESTMENT ADVISORS INC. (THE "INVESTMENT ADVISER") (THE
"RETAIL FUNDS").
** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICES AS
DIRECTOR/TRUSTEE FOR THE RETAIL FUNDS AND THE FUNDS ADVISED BY MORGAN
STANLEY INVESTMENT MANAGEMENT INC. AND MORGAN STANLEY AIP GP LP (THE
"INSTITUTIONAL FUNDS") REFLECT THE EARLIEST DATE THE DIRECTOR/TRUSTEE BEGAN
SERVING THE RETAIL OR INSTITUTIONAL FUNDS AS APPLICABLE.
*** THE FUND COMPLEX INCLUDES ALL OPEN-END AND CLOSED-END FUNDS (INCLUDING ALL
OF THEIR PORTFOLIOS) ADVISED BY THE INVESTMENT ADVISER AND ANY FUNDS THAT
HAVE AN INVESTMENT ADVISER THAT IS AN AFFILIATED PERSON OF THE INVESTMENT
ADVISER (INCLUDING, BUT NOT LIMITED TO, MORGAN STANLEY INVESTMENT
MANAGEMENT INC.).
147
<Page>
Officers:
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- ---------------------------- ----------------- ----------------- ------------------------------------------------------------
Mitchell M. Merin (51) President Since May 1999 President and Chief Operating Officer of Morgan Stanley
1221 Avenue of the Americas Investment Management Inc.; President, Director and Chief
New York, NY 10020 Executive Officer of the Investment Adviser and the
Administrator; Chairman and Director of the Distributor;
Chairman and Director of the Transfer Agent; Director of
various Morgan Stanley subsidiaries; President of the
Institutional Funds (since July 2003) and President of the
Retail Funds; Trustee (since July 2003) and President (since
December 2002) of the Van Kampen Closed-End Funds; Trustee
and President (since October 2002) of the Van Kampen
Open-End Funds.
Ronald E. Robison (65) Executive Vice Since Principal Executive Officer of Funds in the Fund Complex
1221 Avenue of the Americas President and April 2003 (since May 2003); Managing Director of Morgan Stanley & Co.
New York, NY 10020 Principal Incorporated, Morgan Stanley Investment Management Inc. and
Executive Morgan Stanley; Managing Director, Chief Administrative
Officer Officer and Director of the Investment Adviser and the
Administrator; Director of the Transfer Agent; Managing
Director and Director of the Distributor; Executive Vice
President and Principal Executive Officer of the
Institutional Funds (since July 2003) and the Retail Funds
(since April 2003); Director of Morgan Stanley SICAV (since
May 2004); previously President and Director of the Retail
Funds (March 2001-July 2003) and Chief Global Operations
Officer and Managing Director of Morgan Stanley Investment
Management Inc.
Joseph J. McAlinden (61) Vice President Since July 1995 Managing Director and Chief Investment Officer of the
1221 Avenue of the Americas Investment Adviser and Morgan Stanley Investment Management
New York, NY 10020 Inc., Director of the Transfer Agent, Chief Investment
Officer of the Van Kampen Funds; Vice President of the
Institutional Funds (since July 2003) and the Retail Funds
(since July 1995).
Barry Fink (49) Vice President Since General Counsel (since May 2000) and Managing Director
1221 Avenue of the Americas February 1997 (since December 2000) of Morgan Stanley Investment
New York, NY 10020 Management; Managing Director (since December 2000),
Secretary (since February 1997) and Director of the
Investment Adviser and the Administrator; Vice President of
the Retail Funds; Assistant Secretary of Morgan Stanley DW;
Vice President of the Institutional Funds (since July 2003);
Managing Director, Secretary and Director of the
Distributor; previously Secretary (February 1997-July 2003)
and General Counsel (February 1997-April 2004) of the Retail
Funds; Vice President and Assistant General Counsel of the
Investment Adviser and the Administrator (February 1997-
December 2001).
Amy R. Doberman (42) Vice President Since July 2004 Managing Director and General Counsel, U.S. Investment
1221 Avenue of the Americas Management; Managing Director of Morgan Stanley Investment
New York, NY 10020 Management Inc. and the Investment Adviser, Vice President
of the Institutional and Retail Funds (since July 2004);
Vice President of the Van Kampen Funds (since August 2004);
previously, Managing Director and General Counsel -
Americas, UBS Global Asset Management (July 2000 - July
2004) and General Counsel, Aeltus Investment Management,
Inc. (January 1997 -- July 2000).
Carsten Otto (41) Chief Since October Executive Director and U.S. Director of Compliance for
1221 Avenue of the Americas Compliance 2004 Morgan Stanley Investment Management (since October 2004);
New York, NY 10020 Officer Executive Director of the Investment Adviser and Morgan
Stanley Investment Management Inc.; formerly Assistant
Secretary and Assistant General Counsel of the Morgan
Stanley Retail Funds.
</Table>
148
<Page>
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- ---------------------------- ----------------- ----------------- ------------------------------------------------------------
Stefanie V. Chang (38) Vice President Since July 2003 Executive Director of Morgan Stanley & Co. Incorporated,
1221 Avenue of the Americas Morgan Stanley Investment Management Inc., and the
New York, NY 10020 Investment Adviser; Vice President of the Institutional
Funds and the Retail Funds (since July 2003); formerly
practiced law with the New York law firm of Rogers & Wells
(now Clifford Chance US LLP).
Francis J. Smith (39) Treasurer and Treasurer since Executive Director of the Investment Adviser and Morgan
c/o Morgan Stanley Trust Chief Financial July 2003 and Stanley Services (since December 2001); previously, Vice
Harborside Financial Center, Officer Chief Financial President of the Retail Funds (September 2002-July 2003),
Plaza Two, Officer since and Vice President of the Investment Adviser and the
Jersey City, NJ 07311 September 2002 Administrator (August 2000-November 2001) and Senior
Manager at PricewaterhouseCoopers LLP (January 1998-
August 2000).
Thomas F. Caloia (58) Vice President Since July 2003 Executive Director (since December 2002) and Assistant
c/o Morgan Stanley Trust Treasurer of the Investment Adviser, the Distributor and the
Harborside Financial Center, Administrator; previously Treasurer of the Retail Funds
Plaza Two, (April 1989-July 2003); formerly First Vice President of the
Jersey City, NJ 07311 Investment Adviser, the Distributor and the Administrator.
Mary E. Mullin (37) Secretary Since July 2003 Executive Director of Morgan Stanley & Co. Incorporated,
1221 Avenue of the Americas Morgan Stanley Investment Management Inc. and the Investment
New York, NY 10020 Adviser; Secretary of the Institutional Funds and the Retail
Funds (since July 2003); formerly practiced law with the New
York law firms of McDermott, Will & Emery and Skadden, Arps,
Slate, Meagher & Flom LLP.
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE OFFICER BEGAN SERVING THE RETAIL FUNDS. EACH
OFFICER SERVES AN INDEFINITE TERM, UNTIL HIS OR HER SUCCESSOR IS ELECTED.
** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICE AS AN OFFICER
FOR THE RETAIL AND INSTITUTIONAL FUNDS REFLECT THE EARLIEST DATE THE
OFFICER BEGAN SERVING THE RETAIL OR INSTITUTIONAL FUNDS, AS APPLICABLE.
149
<Page>
Morgan Stanley Select Dimensions Investment Series
FEDERAL TAX NOTICE - DECEMBER 31, 2004 (UNAUDITED)
<Table>
<Caption>
DIVIDENDS RECEIVED U.S. GOVERNMENT
FUND DEDUCTION% (a) INCOME% (b)
- ---- ------------------ ---------------
Money Market Portfolio 0.00% 3.00%
Flexible Income Portfolio 0.00% 8.62%
Balanced Growth Portfolio 48.40% 20.70%
Utilities Portfolio 100.00% 0.30%
Dividend Growth Portfolio 100.00% 0.00%
Equally-Weighted S&P 500 Portfolio 100.00% 0.00%
Growth Portfolio 100.00% 0.00%
American Opportunities Portfolio 100.00% 0.00%
Capital Opportunities Portfolio 0.00% 0.00%
Global Equity Portfolio 100.00% 0.00%
Developing Growth Portfolio 0.00% 0.00%
</Table>
- ----------
(a) THESE PERCENTAGES REPRESENT THE PORTION OF INCOME DIVIDENDS PAID BY EACH
PORTFOLIO THAT QUALIFIED FOR THE DIVIDENDS RECEIVED DEDUCTION AVAILABLE TO
CORPORATIONS.
(b) THESE PERCENTAGES REPRESENT THE PORTION OF INCOME DIVIDENDS PAID BY EACH
PORTFOLIO THAT WERE ATTRIBUTABLE TO QUALIFYING U.S. GOVERNMENT OBLIGATIONS.
150
<Page>
Trustees
Michael Bozic Dr. Manuel H. Johnson
Charles A. Fiumefreddo Joseph J. Kearns
Edwin J. Garn Michael E. Nugent
Wayne E. Hedien Fergus Reid
James F. Higgins
Officers
Charles A. Fiumefreddo
CHAIRMAN OF THE BOARD
Mitchell M. Merin
PRESIDENT
Ronald E. Robison
EXECUTIVE VICE PRESIDENT AND PRINCIPAL EXECUTIVE OFFICER
Joseph J. McAlinden
VICE PRESIDENT
Barry Fink
VICE PRESIDENT AND GENERAL COUNSEL
Amy R. Doberman
VICE PRESIDENT
Carsten Otto
CHIEF COMPLIANCE OFFICER
Stefanie V. Chang
VICE PRESIDENT
Francis J. Smith
TREASURER AND CHIEF FINANCIAL OFFICER
Thomas F. Caloia
VICE PRESIDENT
Mary E. Mullin
SECRETARY
<Table>
<Caption>
TRANSFER AGENT INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Morgan Stanley Trust Deloitte & Touche LLP
Harborside Financial Center, Plaza Two Two World Financial Center
Jersey City, New Jersey 07311 New York, New York 10281
</Table>
Investment Adviser
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
This report is submitted for the general information of 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 Funds are distributed by Morgan Stanley Distributors Inc.
Morgan Stanley Distributors Inc., member NASD.
<Page>
PRSRT STD
U.S. POSTAGE
PAID
HUDSON, MA 01749
PERMIT NO. 6
RA05-00091P-Y12/04
#40474
<Page>
Item 2. Code of Ethics.
(a) The Fund has adopted a code of ethics (the "Code of Ethics") that
applies to its principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by the Fund or a
third party.
(b) No information need be disclosed pursuant to this paragraph.
(c) The Fund has amended its Code of Ethics during the period covered by
the shareholder report presented in Item 1 hereto to delete from the end of the
following paragraph on page 2 of the Code the phrase "to the detriment of the
Fund.":
"Each Covered Officer must not use his personal influence or personal
relationship improperly to influence investment decisions or financial reporting
by the Fund whereby the Covered Officer would benefit personally (directly or
indirectly)."
(d) Not applicable.
(e) Not applicable.
(f)
(1) The Fund's Code of Ethics is attached hereto as Exhibit A.
(2) Not applicable.
(3) Not applicable.
Item 3. Audit Committee Financial Expert.
The Fund's Board of Trustees has determined that it has two "audit committee
financial experts" serving on its audit committee, each of whom are
"independent" Trustees: Dr. Manuel H. Johnson and Joseph J. Kearns. Under
applicable securities laws, a person who is determined to be an audit committee
financial expert will not be deemed an "expert" for any purpose, including
without limitation for the purposes of Section 11 of the Securities Act of 1933,
as a result of being designated or identified as an audit committee financial
expert. The designation or identification of a person as an audit committee
financial expert does not impose on such person any duties, obligations, or
liabilities that are greater than the duties, obligations, and liabilities
imposed on such person as a member of the audit committee and Board of Trustees
in the absence of such designation or identification.
<Page>
Item 4. Principal Accountant Fees and Services.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
2004
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 161,566 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 453 (2) $ 3,746,495 (2)
TAX FEES $ 43,996 (3) $ 79,800 (4)
ALL OTHER FEES $ - $ -
TOTAL NON-AUDIT FEES $ 44,449 $ 3,826,295
TOTAL $ 206,015 $ 3,826,295
</Table>
2003
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 161,328 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 9,684 (2) $ 2,847,161 (2)
TAX FEES $ 38,878 (3) $ 736,810 (4)
ALL OTHER FEES $ - $ - (5)
TOTAL NON-AUDIT FEES $ 48,562 $ 3,583,971
TOTAL $ 209,890 $ 3,583,971
</Table>
N/A- Not applicable, as not required by Item 4.
(1) Covered Entities include the Adviser (excluding sub-advisors)
and any entity controlling, controlled by or under common
control with the Adviser that provides ongoing services to
the Registrant.
(2) Audit-Related Fees represent assurance and related services
provided that are reasonably related to the performance of
the audit of the financial statements of the Covered
Entities' and funds advised by the Adviser or its affiliates,
specifically data verification and agreed-upon procedures
related to asset securitizations and agreed-upon procedures
engagements.
(3) Tax Fees represent tax compliance, tax planning and tax
advice services provided in connection with the preparation
and review of the Registrant's tax returns.
(4) Tax Fees represent tax compliance, tax planning and tax
advice services provided in connection with the review of
Covered Entities' tax returns.
(5) All other fees represent project management for future
business applications and improving business and operational
processes.
<Page>
(e)(1) The audit committee's pre-approval policies and procedures are as
follows:
APPENDIX A
AUDIT COMMITTEE
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS
AS ADOPTED AND AMENDED JULY 23, 2004,(1)
1. STATEMENT OF PRINCIPLES
The Audit Committee of the Board is required to review and, in its sole
discretion, pre-approve all Covered Services to be provided by the Independent
Auditors to the Fund and Covered Entities in order to assure that services
performed by the Independent Auditors do not impair the auditor's independence
from the Fund.
The SEC has issued rules specifying the types of services that an independent
auditor may not provide to its audit client, as well as the audit committee's
administration of the engagement of the independent auditor. The SEC's rules
establish two different approaches to pre-approving services, which the SEC
considers to be equally valid. Proposed services either: may be pre-approved
without consideration of specific case-by-case services by the Audit Committee
("GENERAL PRE-APPROVAL"); or require the specific pre-approval of the Audit
Committee or its delegate ("SPECIFIC PRE-APPROVAL"). The Audit Committee
believes that the combination of these two approaches in this Policy will result
in an effective and efficient procedure to pre-approve services performed by the
Independent Auditors. As set forth in this Policy, unless a type of service has
received general pre-approval, it will require specific pre-approval by the
Audit Committee (or by any member of the Audit Committee to which pre-approval
authority has been delegated) if it is to be provided by the Independent
Auditors. Any proposed services exceeding pre-approved cost levels or budgeted
amounts will also require specific pre-approval by the Audit Committee.
The appendices to this Policy describe the Audit, Audit-related, Tax and All
Other services that have the general pre-approval of the Audit Committee. The
term of any general pre-approval is 12 months from the date of pre-approval,
unless the Audit Committee considers and provides a different period and states
otherwise. The Audit Committee will annually review and pre-approve the services
that may be provided by the Independent Auditors without obtaining specific
pre-approval from the Audit Committee. The Audit Committee will add to or
subtract from the list of general pre-approved services from time to time, based
on subsequent determinations.
- ----------
(1) This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and
Procedures (the "POLICY"), adopted as of the date above, supersedes and
replaces all prior versions that may have been adopted from time to time.
<Page>
The purpose of this Policy is to set forth the policy and procedures by which
the Audit Committee intends to fulfill its responsibilities. It does not
delegate the Audit Committee's responsibilities to pre-approve services
performed by the Independent Auditors to management.
The Fund's Independent Auditors have reviewed this Policy and believes that
implementation of the Policy will not adversely affect the Independent Auditors'
independence.
2. DELEGATION
As provided in the Act and the SEC's rules, the Audit Committee may delegate
either type of pre-approval authority to one or more of its members. The member
to whom such authority is delegated must report, for informational purposes
only, any pre-approval decisions to the Audit Committee at its next scheduled
meeting.
3. AUDIT SERVICES
The annual Audit services engagement terms and fees are subject to the specific
pre-approval of the Audit Committee. Audit services include the annual financial
statement audit and other procedures required to be performed by the Independent
Auditors to be able to form an opinion on the Fund's financial statements. These
other procedures include information systems and procedural reviews and testing
performed in order to understand and place reliance on the systems of internal
control, and consultations relating to the audit. The Audit Committee will
approve, if necessary, any changes in terms, conditions and fees resulting from
changes in audit scope, Fund structure or other items.
In addition to the annual Audit services engagement approved by the Audit
Committee, the Audit Committee may grant general pre-approval to other Audit
services, which are those services that only the Independent Auditors reasonably
can provide. Other Audit services may include statutory audits and services
associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4,
etc.), periodic reports and other documents filed with the SEC or other
documents issued in connection with securities offerings.
The Audit Committee has pre-approved the Audit services in Appendix B.1. All
other Audit services not listed in Appendix B.1 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
4. AUDIT-RELATED SERVICES
Audit-related services are assurance and related services that are reasonably
related to the performance of the audit or review of the Fund's financial
statements and, to the extent they are Covered Services, the Covered Entities or
that are traditionally performed by the Independent Auditors. Because the Audit
Committee believes that the provision of Audit-related services does not impair
the independence of the auditor and is consistent with the SEC's rules on
auditor independence, the Audit Committee may grant general pre-approval to
Audit-related services. Audit-related services include, among others, accounting
consultations related to accounting, financial reporting or disclosure matters
<Page>
not classified as "Audit services"; assistance with understanding and
implementing new accounting and financial reporting guidance from rulemaking
authorities; agreed-upon or expanded audit procedures related to accounting
and/or billing records required to respond to or comply with financial,
accounting or regulatory reporting matters; and assistance with internal control
reporting requirements under Forms N-SAR and/or N-CSR.
The Audit Committee has pre-approved the Audit-related services in Appendix B.2.
All other Audit-related services not listed in Appendix B.2 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
5. TAX SERVICES
The Audit Committee believes that the Independent Auditors can provide Tax
services to the Fund and, to the extent they are Covered Services, the Covered
Entities, such as tax compliance, tax planning and tax advice without impairing
the auditor's independence, and the SEC has stated that the Independent Auditors
may provide such services.
Pursuant to the preceding paragraph, the Audit Committee has pre-approved the
Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
6. ALL OTHER SERVICES
The Audit Committee believes, based on the SEC's rules prohibiting the
Independent Auditors from providing specific non-audit services, that other
types of non-audit services are permitted. Accordingly, the Audit Committee
believes it may grant general pre-approval to those permissible non-audit
services classified as All Other services that it believes are routine and
recurring services, would not impair the independence of the auditor and are
consistent with the SEC's rules on auditor independence.
The Audit Committee has pre-approved the All Other services in Appendix B.4.
Permissible All Other services not listed in Appendix B.4 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
7. PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS
Pre-approval fee levels or budgeted amounts for all services to be provided by
the Independent Auditors will be established annually by the Audit Committee.
Any proposed services exceeding these levels or amounts will require specific
pre-approval by the Audit Committee. The Audit Committee is mindful of the
overall relationship of fees for audit and non-audit services in determining
whether to pre-approve any such services.
8. PROCEDURES
All requests or applications for services to be provided by the Independent
Auditors that do not require specific approval by the Audit Committee will be
submitted to the Fund's Chief Financial Officer and must include a detailed
description of the services to be
<Page>
rendered. The Fund's Chief Financial Officer will determine whether such
services are included within the list of services that have received the general
pre-approval of the Audit Committee. The Audit Committee will be informed on a
timely basis of any such services rendered by the Independent Auditors. Requests
or applications to provide services that require specific approval by the Audit
Committee will be submitted to the Audit Committee by both the Independent
Auditors and the Fund's Chief Financial Officer, and must include a joint
statement as to whether, in their view, the request or application is consistent
with the SEC's rules on auditor independence.
The Audit Committee has designated the Fund's Chief Financial Officer to monitor
the performance of all services provided by the Independent Auditors and to
determine whether such services are in compliance with this Policy. The Fund's
Chief Financial Officer will report to the Audit Committee on a periodic basis
on the results of its monitoring. Both the Fund's Chief Financial Officer and
management will immediately report to the chairman of the Audit Committee any
breach of this Policy that comes to the attention of the Fund's Chief Financial
Officer or any member of management.
9. ADDITIONAL REQUIREMENTS
The Audit Committee has determined to take additional measures on an annual
basis to meet its responsibility to oversee the work of the Independent Auditors
and to assure the auditor's independence from the Fund, such as reviewing a
formal written statement from the Independent Auditors delineating all
relationships between the Independent Auditors and the Fund, consistent with
Independence Standards Board No. 1, and discussing with the Independent Auditors
its methods and procedures for ensuring independence.
10. COVERED ENTITIES
Covered Entities include the Fund's investment adviser(s) and any entity
controlling, controlled by or under common control with the Fund's investment
adviser(s) that provides ongoing services to the Fund(s). Beginning with
non-audit service contracts entered into on or after May 6, 2003, the Fund's
audit committee must pre-approve non-audit services provided not only to the
Fund but also to the Covered Entities if the engagements relate directly to the
operations and financial reporting of the Fund. This list of Covered Entities
would include:
MORGAN STANLEY RETAIL FUNDS
Morgan Stanley Investment Advisors Inc.
Morgan Stanley & Co. Incorporated
Morgan Stanley DW Inc.
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Van Kampen Asset Management
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
<Page>
MORGAN STANLEY INSTITUTIONAL FUNDS
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Advisors Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Morgan Stanley & Co. Incorporated
Morgan Stanley Distribution, Inc.
Morgan Stanley AIP GP LP
Morgan Stanley Alternative Investment Partners LP
(e)(2) Beginning with non-audit service contracts entered into on or after May
6, 2003, the audit committee also is required to pre-approve services to Covered
Entities to the extent that the services are determined to have a direct impact
on the operations or financial reporting of the Registrant. 100% of such
services were pre-approved by the audit committee pursuant to the Audit
Committee's pre-approval policies and procedures (attached hereto).
(f) Not applicable.
(g) See table above.
(h) The audit committee of the Board of Trustees has considered whether the
provision of services other than audit services performed by the auditors to the
Registrant and Covered Entities is compatible with maintaining the auditors'
independence in performing audit services.
Item 5. Audit Committee of Listed Registrants.
(a) The Fund has a separately-designated standing audit committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act whose members are:
Michael Bozic, Edwin J. Garn, Wayne E. Hedien, Manual H. Johnson, Joseph J.
Kearns, Michael Nugent and Fergus Reid.
(b) Not applicable.
Item 6. Schedule of Investments
Refer to Item 1.
<Page>
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Applicable only to annual reports filed by closed-end funds.
Item 8. Closed-End Fund Repurchases
Applicable to reports filed by closed-end funds.
Item 9. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 10 - 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.
(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 11 Exhibits
(a) The Code of Ethics for Principal Executive and Senior Financial Officers is
attached hereto.
(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.
<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 Select Dimensions Investment Series
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
February 17, 2005
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
February 17, 2005
/s/ Francis Smith
Francis Smith
Principal Financial Officer
February 17, 2005