<Page>
[ANNOTATED FORM N-CSR FOR ANNUAL REPORTS]
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: 811-05624
-------------------------------------------------
Morgan Stanley Institutional Fund, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
1221 Avenue of the America's 22nd Floor New York, NY 10020
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Ronald E. Robison
1221 Avenue of the Americas, 33rd Floor New York, New York 10020
- --------------------------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area
code: 1-800-221-6726
-----------------------------------
Date of fiscal year
end: 12/31
--------------------------------------------------------------
Date of reporting
period: 12/31/04
--------------------------------------------------------------
Form N-CSR is to be used by management investment companies to file
reports with the Commission not later than 10 days after the transmission to
stockholders of any report that is required to be transmitted to stockholders
under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1).
The Commission may use the information provided on Form N-CSR in its
regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form
N-CSR, and the Commission will make this information public. A registrant is
not required to respond to the collection of information contained in Form
N-CSR unless the Form displays a currently valid Office of Management and
Budget ("OMB") control number. Please direct comments concerning the accuracy
of the information collection burden estimate and any suggestions for reducing
the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street,
NW, Washington, DC 20549-0609. The OMB has reviewed this collection of
information under the clearance requirements of 44 U.S.C. Section 3507.
<Page>
ITEM 1. REPORTS TO STOCKHOLDERS.
The Fund's annual report transmitted to shareholders pursuant to Rule 30e-1
under the Investment Company Act of 1940 is as follows:
<Page>
[MORGAN STANLEY LOGO]
2004 ANNUAL REPORT
DECEMBER 31, 2004
MORGAN STANLEY INSTITUTIONAL FUND, INC.
GLOBAL AND INTERNATIONAL EQUITY PORTFOLIOS
ACTIVE INTERNATIONAL ALLOCATION
EMERGING MARKETS
EUROPEAN REAL ESTATE
GLOBAL FRANCHISE
GLOBAL VALUE EQUITY
INTERNATIONAL EQUITY
INTERNATIONAL MAGNUM
INTERNATIONAL SMALL CAP
U.S. EQUITY PORTFOLIOS
EQUITY GROWTH
FOCUS EQUITY
SMALL COMPANY GROWTH
U.S. REAL ESTATE
VALUE EQUITY
FIXED INCOME PORTFOLIO
EMERGING MARKETS DEBT
MONEY MARKET PORTFOLIOS
MONEY MARKET
MUNICIPAL MONEY MARKET
<Page>
2004 ANNUAL REPORT
December 31, 2004
Table of Contents
<Table>
SHAREHOLDER'S LETTER 3
PERFORMANCE SUMMARY 4
INVESTMENT OVERVIEWS AND PORTFOLIOS OF INVESTMENTS
GLOBAL AND INTERNATIONAL EQUITY PORTFOLIOS:
Active International Allocation 6
Emerging Markets 20
European Real Estate 27
Global Franchise 31
Global Value Equity 35
International Equity 40
International Magnum 45
International Small Cap 52
U.S. EQUITY PORTFOLIOS:
Equity Growth 57
Focus Equity 62
Small Company Growth 67
U.S. Real Estate 72
Value Equity 77
FIXED INCOME PORTFOLIO:
Emerging Markets Debt 82
MONEY MARKET PORTFOLIOS:
Money Market 88
Municipal Money Market 91
STATEMENTS OF ASSETS AND LIABILITIES 96
STATEMENTS OF OPERATIONS 100
STATEMENTS OF CHANGES IN NET ASSETS 104
FINANCIAL HIGHLIGHTS 112
NOTES TO FINANCIAL STATEMENTS 127
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 137
FEDERAL INCOME TAX INFORMATION 138
DIRECTOR AND OFFICER INFORMATION 139
</Table>
THIS REPORT IS AUTHORIZED FOR DISTRIBUTION ONLY WHEN PRECEDED OR ACCOMPANIED BY
PROSPECTUSES OF THE MORGAN STANLEY INSTITUTIONAL FUND, INC. TO RECEIVE A
PROSPECTUS AND/OR SAI, WHICH CONTAINS MORE COMPLETE INFORMATION SUCH AS
INVESTMENT OBJECTIVES, CHARGES, EXPENSES, POLICIES FOR VOTING PROXIES, RISK
CONSIDERATIONS, AND DESCRIBES IN DETAIL EACH OF THE PORTFOLIO'S INVESTMENT
POLICIES TO THE PROSPECTIVE INVESTOR, PLEASE CALL 1-(800)-548-7786. PLEASE READ
THE PROSPECTUSES CAREFULLY BEFORE YOU INVEST OR SEND MONEY. ADDITIONALLY, YOU
CAN ACCESS PORTFOLIO INFORMATION INCLUDING PERFORMANCE, CHARACTERISTICS, AND
INVESTMENT TEAM COMMENTARY THROUGH MORGAN STANLEY INVESTMENT MANAGEMENT'S
WEB-SITE: www.morganstanley.com/im.
IS05-001841-Y12/04
1
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(This page has been left blank intentionally.)
2
<Page>
2004 ANNUAL REPORT
December 31, 2004
Dear Shareholders:
We are pleased to present to you the Fund's Annual Report for the year ended
December 31, 2004. Our Fund currently offers 16 portfolios providing investors
with a full array of global and domestic equity and fixed-income products. The
Fund's portfolios, together with the portfolios of the Morgan Stanley
Institutional Fund Trust, provide investors with a means to help them meet
specific investment needs and to allocate their investments among equities
(e.g., value and growth; small, medium, and large capitalization), fixed income
(e.g., short, medium, and long duration; investment grade and high yield) and
cash (e.g., money market).
Sincerely,
/s/ Ronald E. Robison
Ronald E. Robison
Executive Vice President --
Principal Executive Officer
January 2005
3
<Page>
2004 ANNUAL REPORT
December 31, 2004
PERFORMANCE SUMMARY
<Table>
<Caption>
ONE YEAR
INCEPTION DATES TOTAL RETURN
-------------------------------------------------------------------
COMPARABLE
CLASS A CLASS B CLASS A CLASS B INDICES
-------------------------------------------------------------------
GLOBAL AND INTERNATIONAL EQUITY PORTFOLIOS:
Active International Allocation 1/17/92 1/2/96 16.64% 16.29% 20.25%(1)
Emerging Markets 9/25/92 1/2/96 24.09 23.84 25.55 (2)
European Real Estate 10/1/97 10/1/97 47.49 47.15 50.60 (3)
Global Franchise 11/28/01 11/28/01 13.77 13.56 14.72 (4)
Global Value Equity 7/15/92 1/2/96 14.13 13.78 14.72 (4)
International Equity 8/4/89 1/2/96 19.96 19.67 20.25 (1)
International Magnum 3/15/96 3/15/96 18.45 18.15 20.25 (1)
International Small Cap 12/15/92 -- 33.53 -- 30.78 (5)
U.S. EQUITY PORTFOLIOS:
Equity Growth 4/2/91 1/2/96 7.75 7.45 6.30 (6)
Focus Equity 3/8/95 1/2/96 7.00 6.75 6.30 (6)
Small Company Growth 11/1/89 1/2/96 19.17 18.79 14.31 (7)
U.S. Real Estate 2/24/95 1/2/96 37.28 36.95 31.58 (8)
Value Equity 1/31/90 1/2/96 14.56 14.07 16.49 (9)
FIXED INCOME PORTFOLIO:
Emerging Markets Debt 2/1/94 1/2/96 10.07 9.90 11.73 (10)
MONEY MARKET PORTFOLIOS:
Money Market 11/15/88 -- -- -- --
Municipal Money Market 2/10/89 -- -- -- --
</Table>
YIELD INFORMATION AS OF DECEMBER 31, 2004
<Table>
<Caption>
7 DAY 7 DAY 30 DAY 30 DAY
CURRENT EFFECTIVE CURRENT COMPARABLE
YIELD+ YIELD+ YIELD++ YIELD
------------------------------------------------------
MONEY MARKET PORTFOLIOS:
Money Market 1.96% 1.98% 1.88% 1.73% (11)
Municipal Money Market 1.62 1.63 1.41 1.20 (12)
</Table>
+ The 7 day current yield and 7 day effective yield assume an annualization
of the current yield with all dividends reinvested. As with all money
market portfolios, yields will fluctuate as market conditions change and
the 7 day yields are not necessarily indicative of future performance.
++ The current 30 day yield reflects the net investment income generated by
the Portfolio over a specified 30 day period expressed as an annual
percentage. Expenses accrued for the 30 day period include any fees charged
to all shareholders. Yields will fluctuate as market conditions change and
are not necessarily indicative of future performance.
4
<Page>
2004 ANNUAL REPORT
December 31, 2004
PERFORMANCE SUMMARY (CONT'D)
<Table>
<Caption>
FIVE YEAR TEN YEAR
AVERAGE ANNUAL TOTAL RETURN AVERAGE ANNUAL TOTAL RETURN
-------------------------------------------------------------------------------
COMPARABLE COMPARABLE
CLASS A CLASS B INDICES CLASS A CLASS B INDICES
-------------------------------------------------------------------------------
GLOBAL AND INTERNATIONAL EQUITY PORTFOLIOS:
Active International Allocation (1.03)% 0.04% (1.13)%(1) 6.74% -- 5.62%(1)
Emerging Markets 1.21 0.96 4.40 (2) 4.47 -- 3.19 (2)
European Real Estate 22.60 22.26 22.55 (3) -- -- -- (3)
Global Franchise -- -- -- (4) -- -- -- (4)
Global Value Equity 4.54 4.26 (2.45) (4) 10.38 -- 8.09 (4)
International Equity 8.57 8.32 (1.13) (1) 12.26 -- 5.62 (1)
International Magnum (0.74) (1.00) (1.13) (1) -- -- -- (1)
International Small Cap 11.99 -- 8.64 (5) 11.79 -- 3.31 (5)
U.S. EQUITY PORTFOLIOS: (5.86) (6.08) (9.29) (6) 11.86 -- 9.59 (6)
Equity Growth (5.66) (5.89) (9.29) (6) -- -- -- (6)
Focus Equity 1.82 1.58 (3.57) (7) 15.49 -- 7.12 (7)
Small Company Growth 21.86 21.49 21.95 (8) -- -- -- (8)
U.S. Real Estate 5.75 6.71 5.27 (9) 12.76 -- 13.83 (9)
Value Equity
FIXED INCOME PORTFOLIO:
Emerging Markets Debt 14.44 14.19 12.99 (10) 13.97 -- 14.49(10)
MONEY MARKET PORTFOLIOS:
Money Market -- -- -- -- -- --
Municipal Money Market -- -- -- -- -- --
<Caption>
SINCE INCEPTION
AVERAGE ANNUAL TOTAL RETURN
----------------------------------------------
COMPARABLE COMPARABLE
INDICES - INDICES -
CLASS A CLASS A CLASS B CLASS B
----------------------------------------------
GLOBAL AND INTERNATIONAL EQUITY PORTFOLIOS:
Active International Allocation 6.97% 6.54% 7.52% 5.01%(1)
Emerging Markets 8.29 7.39 5.70 4.09 (2)
European Real Estate 14.68 15.53 14.39 15.53 (3)
Global Franchise 17.61 7.33 17.28 7.33 (4)
Global Value Equity 11.85 8.51 9.14 6.72 (4)
International Equity 11.69 4.52 11.98 5.01 (1)
International Magnum 4.64 5.17 4.36 5.17 (1)
International Small Cap 13.72 6.15 -- -- (5)
U.S. EQUITY PORTFOLIOS: 10.61 8.98 8.37 6.81 (6)
Equity Growth 13.10 9.13 9.74 6.81 (6)
Focus Equity 13.54 7.56 13.39 4.73 (7)
Small Company Growth 17.77 15.03 16.66 14.77 (8)
U.S. Real Estate 11.13 12.59 13.46 11.31 (9)
Value Equity
FIXED INCOME PORTFOLIO:
Emerging Markets Debt 11.24 11.03 12.19 13.10 (10)
MONEY MARKET PORTFOLIOS:
Money Market -- -- -- --
Municipal Money Market -- -- -- --
</Table>
PERFORMANCE DATA QUOTED ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY,
WERE REINVESTED AND REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF FUTURE
RESULTS. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. FOR
THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT
www.morganstanley.com/im OR CALL 1-800-548-7786. INVESTMENT RETURNS AND
PRINCIPAL VALUE WILL FLUCTUATE AND FUND SHARES, WHEN REDEEMED, MAY BE WORTH MORE
OR LESS THAN THEIR ORIGINAL COST.
INDICES:
(1) MSCI EAFE (Europe, Australasia, and Far East)
(2) MSCI Emerging Markets Free
(3) GPR General Real Estate Securities - Europe
(4) MSCI World
(5) MSCI EAFE Small Cap Total Return
(6) Russell 1000 Growth
(7) Russell 2000 Growth
(8) National Association of Real Estate Investment Trusts (NAREIT) Equity
(9) Russell 1000 Value
(10) J.P. Morgan Emerging Markets Global Bond
(11) iMoneyNet Money Fund Comparable Yield
(12) iMoneyNet Municipal Money Fund Comparable Yield
INVESTMENTS IN THE MONEY MARKET OR MUNICIPAL MONEY MARKET PORTFOLIOS ARE NEITHER
INSURED NOR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION. ALTHOUGH
THE MONEY MARKET AND MUNICIPAL MONEY MARKET PORTFOLIOS SEEK TO PRESERVE THE
VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY
INVESTING IN THESE PORTFOLIOS. PLEASE READ THE PORTFOLIOS' PROSPECTUSES
CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
5
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
[CHART]
COMPARISON OF THE CHANGE IN VALUE OF A $500,000* INVESTMENT OVER 10 YEARS
<Table>
<Caption>
ACTIVE LIPPER
INTERNATIONAL INTERNATIONAL
FISCAL YEAR ALLOCATION MULTI-CAP
ENDED PORTFOLIO - MSCI EAFE CORE FUNDS
DECEMBER 31 CLASS A INDEX INDEX
1994 500000 500000 500000
1995 552850 556050 560579
1996 606532 589691 639149
1997 658754 600188 688978
1998 791295 720225 750912
1999 1011452 914398 1099156
2000 860038 784811 960518
2001 708413 616548 809649
2002 615540 518270 710779
2003 823285 718270 938994
2004 960350 863650 1096150
</Table>
[CHART]
COMPARISON OF THE CHANGE IN VALUE OF A $100,000* INVESTMENT
<Table>
<Caption>
ACTIVE LIPPER
INTERNATIONAL INTERNATIONAL
FISCAL YEAR ALLOCATION MULTI-CAP
ENDED PORTFOLIO - MSCI EAFE CORE FUNDS
DECEMBER 31 CLASS B INDEX INDEX
** 100000 100000 100000
1996 110240 106050 114212
1997 120900 107938 123595
1998 147498 129525 135215
1999 188783 164445 194722
2000 163260 141140 168032
2001 136958 110880 138555
2002 120812 93206 119218
2003 165066 129174 163419
2004 191970 155220 194310
</Table>
* Minimum Investment
** Commenced offering on January 2, 1996.
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EAFE
INDEX(1) AND THE LIPPER INTERNATIONAL MULTI-CAP CORE FUNDS INDEX(2)
<Table>
<Caption>
TOTAL RETURNS(3)
--------------------------------------------
AVERAGE ANNUAL
----------------------------------
ONE FIVE TEN SINCE
YEAR YEARS YEARS INCEPTION(6)
- --------------------------------------------------------------------------------
Portfolio - Class A (4) 16.64% (1.03)% 6.74% 6.97%
MSCI EAFE Index 20.25 (1.13) 5.62 6.54
Lipper International Multi-Cap
Core Funds Index 19.20 0.01 8.17 --
Portfolio - Class B (5) 16.29 0.04 -- 7.52
MSCI EAFE Index 20.25 (1.13) -- 5.01
Lipper International Multi-Cap
Core Funds Index 19.20 0.01 -- 7.66
</Table>
(1) The MSCI EAFE Index (Europe, Australasia, Far East) is a free
float-adjusted market capitalization index that is designed to measure
developed market equity performance, excluding the U.S. & Canada. The MSCI
EAFE Index consists of the following 21 developed market country indices:
Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece,
Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway,
Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.
(2) The Lipper International Multi-Cap Core Funds Index is an equally weighted
performance index of the largest qualifying funds (based on net assets) in
the Lipper International Multi-Cap Core Funds classification. The Index,
which is adjusted for capital gains distributions and income dividends, is
unmanaged and should not be considered an investment. There are currently
10 funds represented in this Index. As of the date of this report, the
Portfolio is in the Lipper International Multi-Cap Core Funds
classification.
(3) Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would have been lower. Fee waivers and/or reimbursements are
voluntary and the Adviser reserves the right to commence or terminate any
waiver and/or reimbursement at any time.
(4) Commenced operations on January 17, 1992
(5) Commenced offering on January 2, 1996
(6) For comparative purposes, average annual since inception returns listed for
the indexes refer to the inception date or initial offering of the
respective share class of the Portfolio, not the inception of the index.
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. PERFORMANCE ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE
REINVESTED. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT
morganstanley.com/im. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO
THAT PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. TOTAL RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A
SHAREHOLDER WOULD PAY ON PORTFOLIO DISTRIBUTIONS OR THE REDEMPTION OF PORTFOLIO
SHARES.
The Active International Allocation Portfolio seeks long-term capital
appreciation by investing primarily, in accordance with country and sector
weightings determined by the Adviser, in equity securities of non-U.S. issuers
which, in the aggregate, replicate broad market indices. Foreign investing
involves certain risks, including currency fluctuations and controls,
restrictions on foreign investments, less governmental
6
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW (CONT'D)
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
supervision and regulation, less liquidity and the potential for market
volatility and political instability.
PERFORMANCE
For the year ended December 31, 2004, the Portfolio had a total return based on
net asset value per share of 16.64%, net of fees, for Class A shares and 16.29%,
net of fees, for Class B shares compared to 20.25% for the Morgan Stanley
Capital International (MSCI) EAFE Index (the "Index").
FACTORS AFFECTING PERFORMANCE
- For the full year period, we maintained a fully invested strategy and did
not move to a defensive posture. In our opinion, the overall market called
to stay fully invested and to keep some exposure to beta (Asia and
Emerging Markets) and to materials and resources.
- Performance was hurt by Germany's poor showing, by Japan's third and
fourth quarter underperformance, a small underweight to technology in the
first quarter and by a slight underweight to real estate and some
financials.
- Nearly every country in the Index had positive performance for 2004, and
U.S. based investors were helped by further strength of foreign
currencies. In Asia, Australia and Hong Kong each gained over 25%, while
in Singapore, the currency rose 17.5%. Japan was aided by the nearly 5%
boost in the Japanese yen.
- There was some divergence in sector performance for the year, with
utilities (34.0%) and energy (24.7%) being the best, and with information
technology (6.8%) and health care (14.6%)being the worst.
MANAGEMENT STRATEGIES
- We remain cautiously optimistic on markets for the next few months at
least and continue to favor the higher growth/somewhat cyclical areas of
Asia and core Europe over the United Kingdom and late cyclical sectors
over staples.
- While it is true that markets need to adjust to a still tightening Federal
Reserve Policy, some rise in inflation, and slowing global economies, we
do not believe the business and market cycles have to abort just yet.
While leading economic indicators have been falling since February 2004,
manufacturing and business surveys are still mixed-to-positive, long and
short interest rates remain low, and corporate and household cash levels
quite high. Our work on valuations shows that global equities are cheap
almost everywhere versus bond yields. In Europe, most dividend yields are
higher than bond yields. This gives support to markets even if economic
growth just muddles along.
- Japan's economic recovery has slowed - to the point where many investors
(such as ourselves) who were hopeful that "this time it was different" are
beginning to feel "deja vu all over again." While it is true that Japan's
economy remains primarily cyclically driven by growth in the United States
and China, we believe that the corporate/micro story has improved and that
deflation is nearing its end, which provides a better economic foundation
for this slowdown. This is not all bad for the long run and it adds to the
operating leverage if there is any surprise in top line growth. We are
hopeful there will be.
- An issue that has gotten a lot of attention in the past quarter has been
the potential ramifications of a decline in the U.S. dollar. Aside from
the obvious benefit rising currencies give to U.S. investors in foreign
markets - the worry is that a too-rapid U.S. dollar decline could become
disorderly; raising U.S. Treasury yields/inflation and choking off
economic growth. The dollar decline up to this point has been orderly
(about 15% on a trade weighted basis since early 2002), and unlike in
1987, inflation is under control, U.S. Treasury yields remain low, and the
Asian buyers of U.S. assets continue to seem inclined to buy. This gives
more hope that the slowing of U.S. (at least relative) demand, which is
required to bring the U.S. current account deficit back in line, can occur
in part by boosting European, Japanese, and Asian domestic growth. If
these events occur, the result should benefit international market
returns.
- While 2004 was a big disappointment on the European economic front (2.0%
gross domestic product (GDP) growth vs. 4.4% for U.S., 2.8% for Japan),
European markets powered ahead each time the outlook for continued global
health cleared. It will be interesting in 2005 to see how these factors
play out, but the impetus and acknowledgement of the need for corporate
self-help in terms of cost cutting and productivity has been greatly
heightened in the past couple years.
- The emerging markets remain the fastest growing regions of the world and
still the cheapest, in our opinion. Earnings expectations for 2005 are
subdued, as return on equities have risen greatly, and no one wants to
forecast too optimistically given the uncertainties of China, oil, the
U.S. dollar etc. We continue to have positions in Brazil, China, Thailand,
Russia and Malaysia. The frustration is how often these markets run at
odds to one another. However, as long as the global growth environment
remains stable, we believe these markets should add value over time. A
positive
7
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW (CONT'D)
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
surprise could be that China's growth is solid for another year.
EXPENSE EXAMPLES
As a shareholder of the Portfolio, you incur ongoing costs, including management
fees, distribution (12b-1) fees (in the case of Class B) and other Portfolio
expenses. These examples are intended to help you understand your ongoing costs
(in dollars) of investing in the Portfolio and to compare these costs with the
ongoing costs of investing in other mutual funds.
The examples are based on an investment of $1,000 invested at the beginning of
the six-month period ended December 31, 2004 and held for the entire six-month
period.
ACTUAL EXPENSES
The first line of the tables 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 tables below provides information about hypothetical
account values and hypothetical expenses based on the Portfolio's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Portfolio's actual return. The hypothetical account value and expenses may
not be used to estimate the actual ending account balance or expenses you paid
for the period. You may use this information to compare the ongoing costs of
investing in the Portfolio 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.
<Table>
<Caption>
EXPENSES PAID
ENDING ACCOUNT DURING PERIOD*
BEGINNING VALUE JULY 1, 2004--
ACCOUNT VALUE DECEMBER 31, DECEMBER 31,
JULY 1, 2004 2004 2004
- --------------------------------------------------------------------------------------
CLASS A
Actual $ 1,000.00 $ 1,128.70 $ 4.28
Hypothetical (5% average
annual return before expenses) 1,000.00 1,021.11 4.06
CLASS B
Actual 1,000.00 1,127.00 5.61
Hypothetical (5% average
annual return before expenses) 1,000.00 1,019.86 5.33
</Table>
* Expenses are equal to Class A and Class B annualized net expense ratios of
0.80% and 1.05%, respectively, multiplied by the average account value over
the period, multiplied by 184/366 (to reflect the one-half year period).
GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS
The following graph depicts the Portfolio's holding by industry, as a percentage
of total investments.
[CHART]
<Table>
Commercial Banks 12.3%
Oil & Gas 6.7%
Pharmaceuticals 4.8%
Diversified Telecommunication Services 4.1%
Other* 49.4%
Short-Term Investments 22.7%
</Table>
* Industries which do not appear in the top 10 industries and industries
which represent less than 3% of total investments, if applicable, are
included in the category labeled "Other".
January 2005
8
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
<Table>
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
COMMON STOCKS (84.3%)
AUSTRALIA (2.4%)
Alumina Ltd. 68,209 $ 317
Amcor Ltd. 51,641 297
AMP Ltd. 33,484 190
Ansell Ltd. 4,383 31
Australia & New Zealand Banking Group Ltd. 36,406 586
Australian Gas Light Co., Ltd. 11,707 125
BHP Billiton Ltd. 221,127 2,654
BlueScope Steel Ltd. 43,080 278
Boral Ltd. 34,501 185
Brambles Industries Ltd. 24,925 136
Centro Properties Group 18,917 86
CFS Gandel Retail Trust 40,762 51
Coca-Cola Amatil Ltd. 12,924 82
Coles Myer Ltd. 27,045 209
Commonwealth Bank of Australia 30,082 755
CSL Ltd. 2,172 50
CSR Ltd. (c)53,898 112
Foster's Group Ltd. 51,400 233
General Property Trust 49,849 146
Insurance Australia Group Ltd. 42,790 215
Investa Property Group 32,296 57
James Hardie Industries N.V. 26,984 141
John Fairfax Holdings Ltd. 25,260 90
Leighton Holdings Ltd. (c)5,438 52
Lend Lease Corp., Ltd. 10,440 108
Macquarie Bank Ltd. 5,261 191
Macquarie Infrastructure Group 48,133 128
Mayne Group Ltd. 22,671 76
Mirvac Group (c)20,222 77
National Australia Bank Ltd. 39,082 881
Newcrest Mining Ltd. 19,326 264
OneSteel Ltd. 32,642 66
Orica Ltd. 15,887 253
Origin Energy Ltd. 7,888 43
PaperlinX Ltd. (c)26,241 97
Patrick Corp., Ltd. 23,518 121
QBE Insurance Group Ltd. (c)16,796 202
Rinker Group Ltd. 55,591 463
Rio Tinto Ltd. (c)18,317 561
Santos Ltd. 15,736 104
Sonic Healthcare Ltd. 4,662 44
Southcorp Ltd. (a)17,933 60
Stockland 29,192 137
Stockland (New) 1,035 5
Suncorp-Metway Ltd. 13,882 189
TABCORP Holdings Ltd. 10,214 138
Telstra Corp., Ltd. 54,349 209
Transurban Group 14,272 75
Wesfarmers Ltd. 9,460 295
Westfield Group (a)(c)27,210 350
Westpac Banking Corp. 42,543 649
WMC Resources Ltd. 68,081 385
Woodside Petroleum Ltd. 12,003 189
Woolworths Ltd. 24,886 $ 292
- ----------------------------------------------------------------------------------------------
13,730
==============================================================================================
AUSTRIA (1.3%)
Bank Austria Creditanstalt AG 10,833 977
Boehler-Uddeholm AG 1,904 240
Erste Bank der Oesterreichischen
Sparkassen AG 35,060 1,869
Flughafen Wien AG 3,154 238
IMMOFINANZ Immobilien Anlagen AG (a)56,528 540
Mayr-Melnhof Karton AG 1,261 214
OMV AG 3,262 981
RHI AG (a)(c)4,447 135
Telekom Austria AG 58,763 1,112
VA Technologie AG (a)2,483 197
Verbund-Oesterreichische
Elektrizitaetswirtschafts AG, Class A 1,049 233
Voestalpine AG (c)6,430 499
Wienerberger AG 9,664 461
- ----------------------------------------------------------------------------------------------
7,696
==============================================================================================
BELGIUM (0.6%)
AGFA-Gevaert N.V. 7,790 264
Bekaert S.A. 281 22
Belgacom S.A. (a)3,371 145
Dexia 30,331 696
Electrabel S.A. 708 315
Fortis 45,201 1,248
InBev N.V. 2,208 86
KBC Bancassurance Holding (c)4,183 321
Solvay S.A., Class A 2,252 247
UCB S.A. 3,462 176
Umicore 266 25
- ----------------------------------------------------------------------------------------------
3,545
==============================================================================================
BRAZIL (1.0%)
AmBev (Preference) 1,247,000 347
Aracruz Celulose S.A., Class B (Preference) 32,000 122
Banco Bradesco S.A. (Preference) 15,000 363
Banco Itau Holding Financeira S.A. (Preference) 3,075 462
Brasil Telecom Participacoes S.A. (Preference) 17,028,000 129
Caemi Mineracao e Metalurgica S.A. (Preference) (a)119,000 102
CEMIG S.A. (Preference) 7,130,000 174
Cia Brasileira de Distribuicao Grupo Pao de
Acucar ADR (Preference) 1,000 26
Cia Siderurgica de Tubarao (Preference) 1,042,000 61
Cia Siderurgica Nacional S.A. 8,000 153
CVRD, Class A (Preference) 42,000 1,014
Electrobras S.A. Class B (Preference) 8,576,000 127
Embraer (Preference) 25,000 209
Embratel Participacoes S.A. (Preference) (a)15,222,000 32
Gerdau S.A. (Preference) 10,000 179
Klabin S.A. (Preference) 44,000 89
Petrobras S.A. (Preference) 40,000 1,463
Sadia S.A. (Preference) 35,000 79
Souza Cruz S.A. 6,000 81
Tele Centro Oeste Celular Participacoes
S.A. (Preference) 17,449,729 57
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
9
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS (CONT'D)
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
<Table>
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
BRAZIL (CONT'D)
Tele Norte Leste Participacoes S.A.
(Preference) 19,661 $ 329
Telesp Celular Participacoes S.A. (Preference) (a)30,625,000 83
Unibanco GDR 5,700 181
Usiminas S.A., Class A (Preference) 7,000 142
Votorantim Celulose e Papel S.A. (Preference) 5,935 97
- ----------------------------------------------------------------------------------------------
6,101
==============================================================================================
DENMARK (0.3%)
Danske Bank A/S 27,045 827
ISS A/S 500 28
Novo-Nordisk A/S, Class B 10,700 583
Novozymes A/S, Class B 914 46
TDC A/S 3,000 127
Vestas Wind Systems A/S (a)(c)1,650 21
- ----------------------------------------------------------------------------------------------
1,632
==============================================================================================
FINLAND (1.4%)
Fortum Oyj 23,010 425
Kesko Oyj, Class B 858 21
Kone Oyj, Class B 3,935 305
Metso Oyj 18,330 290
Nokia Oyj 294,790 4,647
Outokumpu Oyj 13,050 233
Sampo Oyj, Class A 18,919 261
Stora Enso Oyj, Class R 39,983 611
TietoEnator Oyj 8,736 277
UPM-Kymmene Oyj 30,244 671
Uponor Oyj 2,504 47
Wartsila Oyj, Class B (c)5,234 111
- ----------------------------------------------------------------------------------------------
7,899
==============================================================================================
FRANCE (8.8%)
Accor S.A. 13,788 602
Alcatel S.A. (a)(c)86,594 1,345
Alstom (a)2,427 2
Atos Origin (a)1,223 83
AXA 92,054 2,270
BNP Paribas S.A. (c)63,340 4,580
Bouygues S.A. (c)27,175 1,253
Business Objects S.A. (a)3,599 91
Cap Gemini S.A. (a)(c)10,438 334
Carrefour S.A. 24,196 1,150
Casino Guichard Perrachon S.A. (c)2,675 213
Cie de Saint-Gobain (c)30,221 1,817
Cie Generale d'Optique Essilor International S.A. 2,781 218
CNP Assurances 3,930 281
Credit Agricole S.A. (c)27,291 822
Dassault Systemes S.A. 3,315 167
France Telecom S.A. 93,138 3,078
Gecina S.A. (c)1,319 130
Groupe Danone (c)10,723 988
Imerys S.A. 3,490 292
Klepierre 1,223 108
L'Air Liquide S.A. 8,376 1,545
L'Oreal S.A. (c)1,932 146
Lafarge S.A. 11,577 1,115
Lagardere S.C.A. 8,927 $ 643
LVMH Moet Hennessy Louis Vuitton S.A. (c)27,119 2,073
Michelin (CGDE), Class B 8,664 555
Pernod-Ricard S.A. (c)980 150
Peugeot S.A. (c)12,009 761
Pinault-Printemps-Redoute S.A. 3,336 333
Publicis Groupe (c)6,201 201
Renault S.A. (c)10,906 911
Sagem S.A. 6,485 138
Sanofi-Aventis S.A. (c)38,397 3,063
Schneider Electric S.A. (c)13,755 955
Societe BIC S.A. 3,229 162
Societe Generale (c)24,886 2,513
Societe Television Francaise 1 (c)7,686 250
Sodexho Alliance S.A. (c)7,741 234
Suez S.A. (c)43,895 1,168
Technip S.A. 157 29
Thales S.A. (c)12,914 619
Thomson (c)19,575 516
Total S.A. (c)46,313 10,096
Unibail (c)2,151 338
Valeo S.A. 4,310 180
Veolia Environnement (c)9,054 327
Vinci S.A. (c)5,144 689
Vivendi Universal S.A. (a)62,275 1,984
Zodiac S.A. 458 21
- ----------------------------------------------------------------------------------------------
51,539
==============================================================================================
GERMANY (7.2%)
Adidas-Salomon AG 1,813 292
Allianz AG (Registered) 18,885 2,500
Altana AG 2,976 188
BASF AG 33,946 2,441
Bayer AG 41,881 1,417
Bayerische Hypo-und Vereinsbank AG (a)56,012 1,269
Beiersdorf AG 5,684 660
Celesio AG 1,833 149
Commerzbank AG (a)65,866 1,354
Continential AG 8,829 560
DaimlerChrysler AG 53,974 2,582
Deutsche Bank AG (Registered) 57,870 5,128
Deutsche Boerse AG 14,349 862
Deutsche Lufthansa AG (Registered) (a)12,385 177
Deutsche Post AG (Registered) 37,297 855
Deutsche Telekom AG (Registered) (a)182,548 4,123
Douglas Holding AG 1,851 65
E. ON AG 44,245 4,025
Epcos AG (a)(c)3,058 46
Fresenius Medical Care AG 3,032 244
HeidelbergCement AG 2,382 143
Henkel KGaA (Non-Voting Shares) 1,291 112
Infineon Technologies AG (a)32,027 347
KarstadtQuelle AG 814 8
Linde AG 7,449 465
MAN AG 7,748 298
Merck KGaA 2,356 162
Metro AG 5,976 328
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
10
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS (CONT'D)
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
<Table>
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
GERMANY (CONT'D)
Muenchener Rueckversicherungs AG
(Registered) 2,773 $ 340
Porsche AG (Non-Voting shares) 626 399
ProSieben SAT.1 Media AG (Non-Voting Shares) 4,021 74
Puma AG Rudolf Dassler Sport 625 171
RWE AG 23,075 1,274
SAP AG 11,463 2,043
Schering AG 6,960 519
Siemens AG (Registered) (c)55,145 4,666
ThyssenKrupp AG (c)24,070 529
TUI AG (c)8,010 189
Volkswagen AG 14,496 656
Volkswagen AG (Non-Voting Shares) 6,688 221
- ----------------------------------------------------------------------------------------------
41,881
==============================================================================================
GREECE (0.1%)
Alpha Bank A.E 7,320 255
EFG Eurobank Ergasias S.A. 5,092 175
National Bank of Greece S.A. 10,973 361
Titan Cement Co., S.A. 1,800 53
- ----------------------------------------------------------------------------------------------
844
==============================================================================================
HONG KONG (2.8%)
Aluminum Corp. of China Ltd., Class H 302,000 179
Angang New Steel Co. Ltd., Class H (c)82,000 42
Bank of East Asia Ltd. 110,029 342
Beijing Capital International Airport Co.,
Ltd., Class H 124,000 53
BOC Hong Kong Holdings Ltd. 287,000 548
Byd Co., Ltd., Class H 13,500 36
Cathay Pacific Airways Ltd. 87,000 165
Cheung Kong Holdings Ltd. 118,000 1,177
Cheung Kong Infrastructure Holdings Ltd. 63,000 182
China Life Insurance Co., Ltd. (a)(c)682,000 456
China Oilfield Services Ltd., Class H 140,000 43
China Petroleum & Chemical Corp., Class H 1,538,000 633
China Shipping Container Lines Co., Ltd.,
Class H (a)195,000 78
China Shipping Development Co., Ltd., Class H 118,000 105
China Southern Airlines Co., Ltd., Class H (a)(c)108,000 43
China Telecom Corp., Ltd., Class H 1,272,000 466
CLP Holdings Ltd. 142,300 818
Datang International Power Generation Co., Ltd.,
Class H (c)132,000 99
Esprit Holdings Ltd. 59,500 360
Hang Lung Properties Ltd. 110,000 170
Hang Seng Bank Ltd. (c)60,000 834
Henderson Land Development Co., Ltd. 59,000 307
Hong Kong & China Gas Co., Ltd. 294,079 607
Hong Kong Exchanges & Clearing Ltd. 89,000 238
HongKong Electric Holdings Ltd. 111,000 507
Hopewell Holdings Ltd. 50,000 128
Huadian Power International Co., Class H 132,000 39
Huaneng Power International, Inc., Class H 280,000 209
Hutchison Whampoa Ltd. 167,200 1,565
Hysan Development Co., Ltd. 33,324 70
Jiangsu Express Co., Ltd., Class H 112,000 49
Jiangxi Copper Co., Ltd., Class H 106,000 $ 60
Johnson Electric Holdings Ltd. 127,500 124
Li & Fung Ltd. 133,000 224
Maanshan Iron & Steel, Class H 158,000 61
MTR Corp. 113,110 181
New World Development Ltd. 182,179 204
PCCW Ltd. 289,411 183
PetroChina Co., Ltd., Class H 1,612,000 861
PICC Property & Casualty Co., Ltd. (a)316,000 110
Ping An Insurance Group Co. of China Ltd.,
Class H (a)240,500 408
SCMP Group Ltd. 18,000 7
Shangri-La Asia Ltd. (c)104,427 150
Sino Land Co. (c)46,348 46
Sinopec Shangai Petrochemical Co., Ltd.,
Class H 214,000 80
Sinopec Zhenhai Refining & Chemical Co., Ltd.,
Class H 66,000 68
Sinotrans Ltd. 164,000 48
Sun Hung Kai Properties Ltd. (c)104,000 1,040
Swire Pacific Ltd., Class A 74,000 619
Techtronic Industries Co. 76,500 167
Television Broadcasts Ltd. 25,000 116
Weiqiao Textile Co., Class H 31,500 50
Wharf Holdings Ltd. 98,600 345
Yanzhou Coal Mining Co., Ltd., Class H 112,000 160
Yue Yuen Industrial Holdings Ltd. 61,500 169
Zhejiang Expressway Co., Ltd., Class H 132,000 91
- ----------------------------------------------------------------------------------------------
16,120
==============================================================================================
IRELAND (0.4%)
Allied Irish Banks plc 35,596 741
Bank of Ireland 41,594 687
CRH plc 1,700 45
CRH plc (London Shares) 7,082 189
DCC plc 1,500 33
Elan Corp. plc (a)16,150 430
Grafton Group plc (a)2,950 32
Independent News & Media plc 8,500 27
Irish Life & Permanent plc 2,300 43
- ----------------------------------------------------------------------------------------------
2,227
==============================================================================================
ITALY (1.9%)
Alleanza Assicurazioni S.p.A. 10,315 144
Assicurazioni Generali S.p.A. 15,122 512
Autogrill S.p.A. (a)3,112 52
Autostrade S.p.A. 1,404 37
Banca Antonveneta S.p.A. (a)1,590 42
Banca Fideuram S.p.A. 4,060 21
Banca Intesa S.p.A. 116,790 561
Banca Intesa S.p.A. RNC 16,133 69
Banca Monte dei Paschi di Siena S.p.A. (c)17,656 63
Banca Nazionale del Lavoro S.p.A. (a)(c)19,810 59
Banca Popolare di Milano Scrl (c)5,776 51
Banche Popolari Unite Scrl 2,271 46
Banco Popolare di Verona e Novara Scrl 11,763 239
Benetton Group S.p.A. 2,526 33
Capitalia S.p.A. 10,941 50
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
11
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS (CONT'D)
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
<Table>
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
ITALY (CONT'D)
Enel S.p.A. 57,728 $ 566
ENI S.p.A. 72,317 1,807
Fiat S.p.A. (a)(c)13,567 108
Finmeccanica S.p.A. 118,051 107
Italcementi S.p.A. 1,801 29
Luxottica Group S.p.A. 1,092 22
Mediaset S.p.A. 23,928 303
Mediobanca S.p.A. 10,262 166
Mediolanum S.p.A. (c)3,051 22
Pirelli & C S.p.A. (c)43,723 59
Riunione Adriatica di Sicurta S.p.A. 5,483 124
Sanpaolo IMI S.p.A. 45,873 659
Seat Pagine Gialle S.p.A. (a)60,586 28
Snam Rete Gas S.p.A. 8,919 52
Telecom Italia S.p.A. 418,595 1,709
Telecom Italia S.p.A. RNC 270,455 877
TIM S.p.A. (c)179,601 1,340
Tiscali S.p.A. (a)2,748 10
UniCredito Italiano S.p.A. 147,944 849
- ----------------------------------------------------------------------------------------------
10,816
==============================================================================================
JAPAN (23.2%)
Advantest Corp. (c)5,990 514
Aeon Co., Ltd. 30,800 514
Ajinomoto Co., Inc. 50,400 600
Alps Electric Co., Ltd. 13,000 194
Amada Co., Ltd. (c)16,000 88
Asahi Breweries Ltd. 26,000 322
Asahi Glass Co., Ltd. (c)81,800 902
Asahi Kasei Corp. 81,000 406
Asatsu-DK, Inc. 2,800 79
Bellsystem 24, Inc. (c)160 44
Benesse Corp. 3,900 137
Bridgestone Corp. 65,000 1,295
Canon, Inc. 65,000 3,509
Casio Computer Co., Ltd. 29,800 460
Central Japan Railway Co. 104 850
Chubu Electric Power Co., Inc. (c)41,400 994
Chugai Pharmaceutical Co., Ltd. 24,400 404
Citizen Watch Co., Ltd. 23,000 221
Coca-Cola West Japan Co., Ltd. 1,000 26
COMSYS Holdings Corp. 1,000 9
Credit Saison Co., Ltd. 8,600 313
CSK Corp. (c)6,100 276
Dai Nippon Printing Co., Ltd. 30,600 491
Daicel Chemical Industries Ltd. 9,000 51
Daiichi Pharmaceutical Co., Ltd. 18,900 409
Daikin Industries Ltd. 10,600 306
Daimaru, Inc. (c)19,000 156
Dainippon Ink & Chemicals, Inc. 42,000 97
Daito Trust Construction Co., Ltd. (c)7,700 366
Daiwa House Industry Co., Ltd. 40,600 462
Daiwa Securities Group, Inc. 233,000 1,683
Denki Kagaku Kogyo K.K. 28,000 93
Denso Corp. 46,850 1,256
Dowa Mining Co., Ltd. 15,000 98
East Japan Railway Co. 238 $ 1,324
Ebara Corp. (c)24,800 115
Eisai Co., Ltd. 20,300 668
FamilyMart Co., Ltd. 3,700 108
Fanuc Ltd. 12,500 818
Fast Retailing Co., Ltd. 6,500 495
Fuji Photo Film Co., Ltd. 33,000 1,205
Fuji Television Network, Inc. 24 52
Fujikura Ltd. (c)12,000 55
Fujisawa Pharmaceutical Co., Ltd. 19,800 542
Fujitsu Ltd. 141,200 919
Furukawa Electric Co., Ltd. (a)41,800 232
Hankyu Department Stores, Inc. 7,000 51
Hirose Electric Co., Ltd. 2,600 304
Hitachi Ltd. 256,000 1,774
Hokkaido Electric Power Co., Inc. 12,000 236
Honda Motor Co., Ltd. 65,204 3,380
Hoya Corp. 8,200 926
Isetan Co., Ltd. 12,400 145
Ishihara Sangyo Kaisha Ltd. 10,000 23
Ishikawajima-Harima Heavy Industries Co., Ltd. (a)52,000 72
Ito En Ltd. 1,400 73
Ito-Yokado Co., Ltd. 22,000 924
Itochu Corp. (a)(c)79,000 366
Itochu Techno-Science Corp. 2,700 108
Japan Airlines Corp. (a)63,000 183
Japan Real Estate Investment Corp. REIT (c)20 169
Japan Tobacco, Inc. 63 720
JFE Holdings, Inc. (c)28,400 811
JGC Corp. 8,000 73
JS Group Corp. 14,000 254
JSR Corp. 10,000 219
Kajima Corp. 77,400 333
Kaken Pharmaceutical Co., Ltd. 3,000 20
Kaneka Corp. 16,000 181
Kansai Electric Power Co., Inc. (The) 47,500 965
Kao Corp. 42,000 1,074
Kawasaki Heavy Industries Ltd. (c)52,000 85
Kawasaki Kisen Kaisha Ltd. 4,000 26
Keihin Electric Express Railway Co., Ltd. (c)25,000 154
Keio Electric Railway Co., Ltd. 14,000 82
Keyence Corp. 2,500 560
Kikkoman Corp. 8,000 76
Kinden Corp. 1,000 7
Kintetsu Corp. (c)110,200 381
Kirin Brewery Co., Ltd. (c)71,400 703
Kobe Steel Ltd. (c)128,000 196
Kokuyo Co., Ltd. 4,500 54
Komatsu Ltd. 73,400 514
Konami Corp. 7,100 165
Konica Minolta Holdings, Inc. 35,000 465
Kubota Corp. 103,000 511
Kuraray Co., Ltd. 23,000 206
Kurita Water Industries Ltd. 4,500 65
Kyocera Corp. 12,900 994
Kyowa Hakko Kogyo Co., Ltd. 28,600 215
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
12
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS (CONT'D)
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
<Table>
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
JAPAN (CONT'D)
Kyushu Electric Power Co., Inc. 26,500 $ 536
Lawson, Inc. 3,500 129
Mabuchi Motor Co., Ltd. 2,400 173
Marubeni Corp. 78,000 216
Marui Co., Ltd. 27,900 374
Matsushita Electric Industrial Co., Ltd. (c)146,000 2,318
Matsushita Electric Works Ltd. 10,000 87
Meiji Dairies Corp. 12,000 71
Meiji Seika Kaisha Ltd. 15,000 69
Meitec Corp. (c)1,800 67
Millea Holdings, Inc. 90 1,336
Minebea Co., Ltd. 18,000 79
Mitsubishi Chemical Corp. 116,000 353
Mitsubishi Corp. (c)78,000 1,008
Mitsubishi Electric Corp. 134,800 661
Mitsubishi Estate Co., Ltd. (c)107,000 1,254
Mitsubishi Heavy Industries Ltd. 232,000 659
Mitsubishi Logistics Corp. 5,000 49
Mitsubishi Rayon Co., Ltd. 33,000 120
Mitsubishi Tokyo Financial Group, Inc. 583 5,919
Mitsui & Co., Ltd. 91,800 824
Mitsui Chemicals, Inc. 33,000 180
Mitsui Fudosan Co., Ltd. 93,400 1,135
Mitsui Mining & Smelting Co., Ltd. (c)37,000 163
Mitsui OSK Lines Ltd. 11,000 66
Mitsui Sumitomo Insurance Co., Ltd. 171,000 1,486
Mitsui Trust Holdings, Inc. (c)81,545 815
Mitsukoshi Ltd. (c)25,000 122
Mizuho Financial Group, Inc. 1,000 5,038
Murata Manufacturing Co., Ltd. 18,300 1,024
Namco Ltd. 2,400 32
NEC Corp. 128,400 798
NEC Electronics Corp. (c)4,000 195
Net One Systems Co., Ltd. 44 183
NGK Insulators Ltd. 28,600 274
NGK Spark Plug Co., Ltd. 21,000 218
Nidec Corp. (c)3,600 439
Nikko Cordial Corp. 75,000 398
Nikon Corp. (c)24,000 297
Nintendo Co., Ltd. 7,800 980
Nippon Building Fund, Inc. REIT 19 162
Nippon Express Co., Ltd. 59,800 295
Nippon Meat Packers, Inc. 16,600 225
Nippon Mining Holdings, Inc. 16,500 78
Nippon Oil Corp. 109,800 704
Nippon Paper Group, Inc. 53 238
Nippon Sheet Glass Co., Ltd. (c)23,000 95
Nippon Steel Corp. 425,000 1,041
Nippon Telegraph & Telephone Corp. 471 2,115
Nippon Yusen Kabushiki Kaisha 81,000 437
Nissan Chemical Industries Ltd. 9,000 71
Nissan Motor Co., Ltd. (c)194,100 2,111
Nisshin Seifun Group, Inc. 9,000 100
Nisshinbo Industries, Inc. 5,000 37
Nissin Food Products Co., Ltd. 5,000 125
Nitto Denko Corp. 15,200 $ 834
Nomura Holdings, Inc. 139,000 2,027
Nomura Research Institute Ltd. 2,400 225
NSK Ltd. 48,000 241
NTN Corp. 27,000 155
NTT Data Corp. 110 355
NTT DoCoMo, Inc. 608 1,122
Obayashi Corp. 37,000 233
Obic Co., Ltd. 700 139
OJI Paper Co., Ltd. 80,400 462
Oki Electric Industry Co., Ltd. (a)(c)47,000 202
Olympus Corp. 9,000 192
Omron Corp. 16,900 403
Onward Kashiyama Co., Ltd. 12,000 175
Oracle Corp. Japan (c)2,900 150
Oriental Land Co., Ltd. (c)4,900 341
ORIX Corp. 4,300 584
Osaka Gas Co., Ltd. 132,600 414
Pioneer Corp. (c)11,254 220
Ricoh Co., Ltd. 53,000 1,023
Rohm Co., Ltd. 8,400 869
Sanden Corp. 1,000 6
Sankyo Co., Ltd. 40,300 911
Sanyo Electric Co., Ltd. 120,000 415
Sapporo Holdings Ltd. 13,000 62
Secom Co., Ltd. 10,100 404
Seiko Epson Corp. 8,200 365
Sekisui Chemical Co., Ltd. 23,000 168
Sekisui House Ltd. 48,600 567
Seven-Eleven Japan Co., Ltd. (c)26,000 820
Sharp Corp. 59,200 967
Shimachu Co., Ltd. 4,200 104
Shimamura Co., Ltd. 1,500 110
Shimano, Inc. 7,300 208
Shimizu Corp. 59,600 299
Shin-Etsu Chemical Co., Ltd. 28,196 1,156
Shionogi & Co., Ltd. 24,000 332
Shiseido Co., Ltd. 27,000 391
Showa Denko K.K. 46,000 119
Showa Shell Sekiyu K.K. (c)11,400 104
Skylark Co., Ltd. 8,600 148
SMC Corp. 4,300 492
Softbank Corp. 17,700 862
Sompo Japan Insurance, Inc. 61,000 622
Sony Corp. (c)51,397 1,987
Stanley Electric Co., Ltd. (c)4,400 75
Sumitomo Bakelite Co., Ltd. 9,000 57
Sumitomo Chemical Co., Ltd. 94,600 464
Sumitomo Corp. 53,400 461
Sumitomo Electric Industries Ltd. 39,400 429
Sumitomo Metal Industries Ltd. 214,000 290
Sumitomo Metal Mining Co., Ltd. 35,800 256
Sumitomo Realty & Development Co., Ltd. (c)38,000 496
Sumitomo Trust & Banking Co., Ltd. (The) 108,000 781
Taiheiyo Cement Corp. 46,000 115
Taisei Corp. 5,000 19
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
13
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS (CONT'D)
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
<Table>
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
JAPAN (CONT'D)
Taisho Pharmaceutical Co., Ltd. 26,800 $ 583
Taiyo Yuden Co., Ltd. 6,000 70
Takara Holdings, Inc. 8,000 52
Takashimaya Co., Ltd. (c)26,000 250
Takeda Pharmaceutical Co., Ltd. 67,300 3,390
Takefuji Corp. 4,290 290
Takuma Co., Ltd. (c)5,000 39
TDK Corp. 9,700 719
Teijin Ltd. 59,400 258
Teikoku Oil Co., Ltd. 6,000 33
Terumo Corp. 14,200 383
THK Co., Ltd. (c)1,300 26
TIS, Inc. (c)3,204 140
Tobu Railway Co., Ltd. 59,400 226
Toho Co., Ltd. 4,500 71
Tohoku Electric Power Co., Inc. 28,100 505
Tokyo Broadcasting System, Inc. 8,000 130
Tokyo Electric Power Co., Inc. (The) 75,600 1,856
Tokyo Electron Ltd. 13,500 832
Tokyo Gas Co., Ltd. (c)166,600 683
Tokyu Corp. (c)68,400 370
TonenGeneral Sekiyu K.K. 8,000 73
Toppan Printing Co., Ltd. 29,600 329
Toray Industries, Inc. 81,100 380
Toshiba Corp. (c)228,000 979
Tosoh Corp. 31,000 140
Toto Ltd. 36,600 349
Toyo Seikan Kaisha Ltd. 13,000 240
Toyobo Co., Ltd. 5,000 12
Toyoda Gosei Co., Ltd. (c)800 16
Toyota Industries Corp. 6,350 159
Toyota Motor Corp. (c)189,800 7,727
Trend Micro, Inc. (a)(c)7,700 416
UFJ Holdings, Inc. (a)594 3,601
Uni-Charm Corp. 2,800 134
Uniden Corp. 5,000 99
UNY Co., Ltd. 8,000 91
Ushio, Inc. 1,000 19
USS Co., Ltd. 2,000 168
Wacoal Corp. (c)5,000 60
West Japan Railway Co. 24 97
World Co., Ltd. 1,800 63
Yahoo! Japan Corp. (a)132 634
Yakult Honsha Co., Ltd. (c)7,000 125
Yamada Denki Co., Ltd. (c)7,700 330
Yamaha Corp. 6,800 104
Yamaha Motor Co., Ltd. (c)3,000 45
Yamanouchi Pharmaceutical Co., Ltd. 32,400 1,262
Yamato Transport Co., Ltd. 19,000 282
Yamazaki Baking Co., Ltd. 6,000 56
Yokogawa Electric Corp. 17,000 227
- ----------------------------------------------------------------------------------------------
135,531
==============================================================================================
LUXEMBOURG (0.1%)
Arcelor 13,699 315
- ----------------------------------------------------------------------------------------------
MALAYSIA (0.6%)
AMMB Holdings Bhd 122,600 $ 105
Astro All Asia Networks plc (a)90,400 128
Berjaya Sports Toto Bhd 64,800 69
British American Tobacco (Malaysia) Bhd 14,300 172
Commerce Asset Holdings Bhd 117,300 145
Gamuda Bhd 36,800 51
Genting Bhd 31,200 156
Hong Leong Bank Bhd 62,100 90
IOI Corp. Bhd 62,000 155
Kuala Lumpur Kepong Bhd 32,400 59
Magnum Corp. Bhd 54,700 35
Malakoff Bhd 52,000 99
Malayan Banking Bhd 148,700 462
Malaysia International Shipping Corp. Bhd
(Foreign) 47,700 192
Maxis Communications Bhd 63,000 155
Media Prima Bhd (a)1 @--
Nestle (Malaysia) Bhd 10,000 61
OYL Industries Bhd 6,600 66
Petronas Gas Bhd 12,000 22
PLUS Expressways Bhd 143,300 106
Proton Holdings Bhd 23,000 55
Public Bank Bhd (Foreign) 87,000 174
Resorts World Bhd 41,000 108
RHB Capital Bhd 116,000 71
Sime Darby Bhd 120,200 190
SP Setia Bhd 66,400 76
Tanjong plc 22,600 84
Telekom Malaysia Bhd 74,000 226
Tenaga Nasional Bhd 76,100 218
YTL Corp. Bhd 72,000 101
- ----------------------------------------------------------------------------------------------
3,631
==============================================================================================
NETHERLANDS (3.9%)
ABN AMRO Holding N.V. 79,686 2,107
Aegon N.V. 86,605 1,178
Akzo Nobel N.V. (c)12,798 545
ASML Holding N.V. (a)(c)23,788 381
Corio N.V. REIT 1,857 109
DSM N.V. 2,328 150
Euronext N.V. 4,671 142
European Aeronautic Defense & Space Co. (c)20,250 588
Hagemeyer N.V. (a)4,613 11
Heineken N.V. 36,037 1,199
ING Groep N.V. CVA 91,609 2,766
Koninklijke Philips Electronics N.V. 76,521 2,025
OCE N.V. 4,186 64
Reed Elsevier N.V. 36,718 500
Rodamco Europe N.V. REIT 1,663 132
Royal Dutch Petroleum Co. 97,241 5,586
Royal KPN N.V. 93,870 890
Royal Numico N.V. (a)7,867 283
TPG N.V. 33,998 921
Unilever N.V. CVA 36,128 2,417
Vedior N.V. CVA 9,999 163
VNU N.V. 10,485 309
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
14
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS (CONT'D)
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
<Table>
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
NETHERLANDS (CONT'D)
Wereldhave N.V. REIT 763 $ 83
Wolters Kluwer N.V. CVA 19,575 392
- ----------------------------------------------------------------------------------------------
22,941
==============================================================================================
NEW ZEALAND (0.0%)
Carter Holt Harvey Ltd. 37,926 56
Telecom Corp. of New Zealand Ltd. 13,998 62
- ----------------------------------------------------------------------------------------------
118
==============================================================================================
NORWAY (0.2%)
DNB NOR ASA 11,099 109
Norsk Hydro ASA 5,919 465
Norske Skogindustrier ASA 4,300 93
Orkla ASA 7,350 241
Statoil ASA 10,000 157
Tandberg ASA (c)900 11
Telenor ASA 14,600 132
Tomra Systems ASA 4,553 25
Yara International ASA (a)(c)7,419 98
- ----------------------------------------------------------------------------------------------
1,331
==============================================================================================
PORTUGAL (0.1%)
Banco Commercial Portugues S.A. (Registered) 75,976 195
Energias de Portugal S.A. 15,231 46
Portugal Telecom SGPS S.A. (Registered) 38,617 477
PT Multimedia SGPS S.A. 416 10
- ----------------------------------------------------------------------------------------------
728
==============================================================================================
RUSSIA (0.4%)
LUKOIL ADR (c)6,800 826
MMC Norilsk Nickel ADR 4,300 239
OAO Gazprom ADR (Registered) 4,188 149
Rostelecom ADR (c)7,600 83
Surgutneftegaz ADR 5,400 202
Surgutneftegaz ADR (Preference) (c)7,600 414
Tatneft ADR 3,900 113
Unified Energy System ADR 4,700 134
- ----------------------------------------------------------------------------------------------
2,160
==============================================================================================
SINGAPORE (1.2%)
Ascendas REIT 69,000 72
CapitaLand Ltd. (c)112,000 146
CapitaMall Trust REIT 62,500 67
Chartered Semiconductor Manufacturing Ltd. (a)(c)123,000 74
City Developments Ltd. 66,719 290
ComfortDelgro Corp., Ltd. 197,477 188
Creative Technology Ltd. 6,270 94
DBS Group Holdings Ltd. 111,612 1,101
Fraser & Neave Ltd. 16,000 160
Keppel Corp., Ltd. (c)57,000 300
Neptune Orient Lines Ltd. 108,000 199
Oversea-Chinese Banking Corp., Ltd. 97,356 805
Overseas Union Enterprise Ltd. 7,468 36
SembCorp Industries Ltd. 96,493 96
Singapore Airlines Ltd. 56,000 391
Singapore Exchange Ltd. 118,539 130
Singapore Post Ltd. 184,000 100
Singapore Press Holdings Ltd. 165,028 465
Singapore Technologies Engineering Ltd. (c)141,296 $ 202
Singapore Telecommunications Ltd. 536,595 783
United Overseas Bank Ltd. 120,389 1,018
United Overseas Land Ltd. (London Shares) 48,851 60
Venture Corp., Ltd. 24,444 238
- ----------------------------------------------------------------------------------------------
7,015
==============================================================================================
SPAIN (2.8%)
Abertis Infraestructuras S.A. 18,533 407
Acerinox S.A. (c)8,748 140
ACS S.A. (c)20,916 477
Altadis S.A. (c)11,925 545
Amadeus Global Travel Distribution S.A., Class A (c)21,805 224
Antena 3 de Television S.A. (a)647 46
Banco Bilbao Vizcaya Argentaria S.A. (c)102,567 1,816
Banco Popular Espanol S.A. 5,693 374
Banco Santander Central Hispano S.A. 143,660 1,779
Endesa S.A. (c)35,761 839
Gas Natural SDG S.A. (c)51,329 1,585
Grupo Ferrovial S.A. 4,910 262
Iberdrola S.A. (c)30,933 785
Inditex S.A. (c)2,742 81
Indra Sistemas S.A. 2,154 37
Metrovacesa S.A. 1,527 71
Repsol YPF S.A. (c)37,316 970
Sacyr Vallehermoso S.A. 12,610 208
Sociedad General de Aguas de Barcelona S.A.,
Class A (c)7,719 161
Telefonica S.A. 286,710 5,390
Union Fenosa S.A. (c)7,982 209
- ----------------------------------------------------------------------------------------------
16,406
==============================================================================================
SWEDEN (1.7%)
Alfa Laval AB 950 15
Assa Abloy AB, Class B 12,477 213
Atlas Copco AB, Class A 4,166 188
Atlas Copco AB, Class B 399 17
Electrolux AB, Class B 23,000 526
Eniro AB (c)4,500 46
Holmen AB, Class B (c)4,000 138
Modern Times Group AB, Class B (a)(c)1,200 33
Nordea Bank AB 128,744 1,297
Sandvik AB 9,418 380
Securitas AB, Class B 25,740 441
Skandia Forsakrings AB 22,865 114
Skandinaviska Enskilda Banken AB, Class A 22,266 430
Skanska AB, Class B 38,951 467
SKF AB, Class B 6,266 279
Ssab Svenskt Stal AB, Class A 4,850 117
Svenska Cellulosa AB, Class B 9,122 389
Svenska Handelsbanken, Class A 36,136 940
Swedish Match AB 19,700 228
Tele2 AB, Class B (c)3,658 144
Telefonaktiebolaget LM Ericsson, Class B (a)649,042 2,069
TeliaSonera AB (c)106,587 638
Volvo AB, Class A 2,895 110
Volvo AB, Class B 8,685 344
Wihlborgs Fastigheter AB (c)3,300 70
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
15
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS (CONT'D)
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
<Table>
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
SWEDEN (CONT'D)
Wm-Data AB, Class B 10,675 $ 23
- ----------------------------------------------------------------------------------------------
9,656
==============================================================================================
SWITZERLAND (3.6%)
ABB Ltd. (a)21,992 122
Adecco S.A. (Registered) 3,588 180
Ciba Specialty Chemicals AG (Registered) (a)1,814 138
Clariant AG (Registered) 3,489 56
Compagnie Financiere Richemont AG, Class A 7,511 249
Credit Suisse Group (a)34,410 1,443
Geberit AG (Registered) 44 32
Givaudan (Registered) 253 166
Holcim Ltd. (Registered) 3,981 239
Kudelski S.A. (a)322 12
Logitech International S.A. (Registered) (a)1,200 73
Lonza Group AG (Registered) 1,064 60
Nestle S.A. (Registered) 16,228 4,235
Novartis AG (Registered) 101,002 5,076
Roche Holding AG (Genusschein) 29,709 3,411
Schindler Holding AG 88 35
Serono S.A., Class B 549 361
SGS S.A. 272 190
STMicroelectronics N.V. 23,497 457
Sulzer AG (Registered) 39 15
Swatch Group AG (Registered) 897 27
Swatch Group AG, Class B 862 126
Swiss Reinsurance (Registered) 3,383 241
Swisscom AG (Registered) 813 319
Syngenta AG (a)2,866 304
UBS AG (Registered) 35,577 2,976
Valora Holding AG 56 14
Zurich Financial Services AG (a)2,421 403
- ----------------------------------------------------------------------------------------------
20,960
==============================================================================================
THAILAND (0.7%)
Advanced Info Sevice PCL (Foreign) (c)(d)193,400 532
Bangkok Bank PCL 76,500 205
Bangkok Bank PCL (Foreign) 147,100 431
BEC World PCL (Foreign) (d)194,600 79
Charoen Pokphand Foods PCL (Foreign) (d)484,652 47
Delta Electronics Thai PCL (Foreign) (d)68,700 29
Electricity Generating PCL 37,156 71
Hana Microelectronics PCL (Foreign) 41,580 21
Kasikornbank PCL (a)123,100 166
Kasikornbank PCL (Foreign) (a)184,461 266
Land & Houses PCL 378,839 98
Land & Houses PCL (Foreign, Registered) 283,236 82
National Finance PCL (Foreign) (d)138,900 49
PTT Exploration & Production PCL
(Foreign) (c)(d)22,394 167
PTT PCL (Foreign) (d)161,100 717
Sahaviriya Steel Industry PCL (Foreign) (d)916,000 68
Shin Corp. PCL (Foreign) (d)250,600 256
Siam Cement PCL 36,936 232
Siam Cement PCL (Foreign) 66,700 474
Siam City Cement PCL (Foreign) (d)21,700 136
Siam Commercial Bank PCL (Foreign,
Preference) 51,768 $ 67
Siam Commercial Bank PCL
(Foreign, Registered) (d)109,000 137
Tisco Finance PCL (Foreign) 83,400 52
- ----------------------------------------------------------------------------------------------
4,382
==============================================================================================
UNITED KINGDOM (17.6%)
3i Group plc 10,052 128
Aegis Group plc 60,287 125
Alliance Unichem plc 4,158 60
Amec plc 9,740 56
Amvescap plc 11,317 70
ARM Holdings plc 43,269 92
AstraZeneca plc 70,786 2,565
Aviva plc 106,444 1,282
BAA plc 14,368 161
BAE Systems plc 174,179 770
Balfour Beatty plc 7,505 45
Barclays plc 297,138 3,340
Barratt Developments plc 14,289 163
BG Group plc 185,604 1,260
BHP Billiton plc 120,873 1,416
BOC Group plc 24,664 470
Boots Group plc 31,872 401
BP plc 1,045,419 10,188
BPB plc 21,675 197
Brambles Industries plc 61,641 308
British Airways plc (a)26,082 118
British American Tobacco plc 74,536 1,283
British Land Co. plc 20,360 350
British Sky Broadcasting plc 75,484 814
BT Group plc 494,165 1,924
Bunzl plc 26,895 224
Cable & Wireless plc 107,616 246
Cadbury Schweppes plc 103,126 959
Capita Group plc 75,169 527
Carnival plc 6,987 426
Centrica plc 123,359 559
Cobham plc 3,996 95
Compass Group plc 91,238 431
Daily Mail & General Trust, Class A 17,009 242
Davis Service Group plc 2,167 17
De La Rue plc 22,562 150
Diageo plc 168,739 2,405
Dixons Group plc 115,920 338
Electrocomponents plc 29,846 163
Emap plc 14,226 223
EMI Group plc 44,900 228
Enterprise Inns plc 14,467 221
Exel plc 20,182 280
FKI plc 7,577 17
Friends Provident plc 78,725 233
GKN plc 51,505 234
GlaxoSmithKline plc 249,941 5,859
Group 4 Securicor plc (a)38,187 103
GUS plc 73,857 1,330
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
16
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS (CONT'D)
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
<Table>
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
UNITED KINGDOM (CONT'D)
Hammerson plc 12,144 $ 202
Hanson plc 35,478 304
Hays plc 176,839 422
HBOS plc 176,390 2,870
Hilton Group plc 65,908 360
HSBC Holdings plc 526,984 8,886
IMI plc 16,321 123
Imperial Chemical Industries plc 58,623 271
Imperial Tobacco Group plc 31,636 866
Intercontinental Hotels Group plc 28,356 352
Invensys plc (a)60,854 18
ITV plc (a)226,210 457
Johnson Matthey plc 11,648 221
Kelda Group plc 28,432 345
Kesa Electricals plc 15,655 85
Kidde plc 22,107 71
Kingfisher plc 70,070 416
Land Securities Group plc 19,831 533
Legal & General Group plc 265,165 560
Liberty International plc 10,596 197
Lloyds TSB Group plc 254,973 2,314
LogicaCMG plc 35,943 133
Man Group plc 3,684 104
Marks & Spencer Group plc 155,287 1,022
MFI Furniture plc 6,439 15
Misys plc 24,343 98
Mitchells & Butlers plc 30,681 200
National Grid Transco plc 174,752 1,663
Next plc 3,638 115
Novar plc 1,596 6
Pearson plc 43,287 522
Peninsular & Oriental Steam Navigation Co. (The) 45,240 258
Persimmon plc 12,995 172
Pilkington plc 26,409 56
Prudential plc 71,742 623
Rank Group plc 26,939 136
Reckitt Benckiser plc 51,873 1,566
Reed Elsevier plc 68,282 629
Rentokil Initial plc 195,393 554
Reuters Group plc 80,258 581
Rexam plc 23,789 210
Rio Tinto plc 52,799 1,553
RMC Group plc 11,141 181
Rolls-Royce Group plc (a)161,782 767
Rolls-Royce Group plc, Class B 5,144,667 10
Royal & Sun Alliance Insurance Group 105,213 156
Royal Bank of Scotland Group plc 137,235 4,613
SABMiller plc 26,725 443
Sage Group plc 70,602 274
Sainsbury (J) plc 56,599 294
Scottish & Newcastle plc 12,647 106
Scottish & Southern Energy plc 48,116 805
Scottish Power plc 104,601 809
Serco Group plc 29,265 135
Severn Trent plc 24,738 459
Shell Transport & Trading Co. plc (Registered) 457,828 $ 3,900
Signet Group plc 28,190 59
Slough Estates plc 18,463 195
Smith & Nephew plc 31,748 325
Smiths Group plc 22,933 362
Tate & Lyle plc 35,920 326
Taylor Woodrow plc 21,723 113
Tesco plc 321,298 1,983
TI Automotive Ltd., Class A (a)(d)1,505 @--
Tomkins plc 29,164 142
Unilever plc 150,711 1,479
United Business Media plc 18,032 166
United Utilities plc 5,482 66
Vodafone Group plc 3,303,091 8,951
Whitbread plc 15,484 251
William Hill plc 22,997 249
Wimpey George plc 15,718 122
Wolseley plc 38,135 712
WPP Group plc 67,384 741
Yell Group plc 26,049 220
- ----------------------------------------------------------------------------------------------
102,599
==============================================================================================
TOTAL COMMON STOCKS (COST $416,521) 491,803
==============================================================================================
<Caption>
NO. OF
RIGHTS
- ----------------------------------------------------------------------------------------------
RIGHTS (0.0%)
BRAZIL (0.0%)
Banco Bradesco S.A.
TOTAL RIGHTS (COST $@--) (a)553 5
==============================================================================================
<Caption>
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (24.8%)
SHORT-TERM DEBT SECURITIES HELD AS COLLATERAL ON LOANED SECURITIES (11.3%)
Bank of New York, 2.33%, 10/28/05 $ (h)2,475 2,475
Bear Stearns, 2.37%, 4/15/05 (h)1,360 1,360
Beta Finance, Inc., 2.28%, 2/18/05 1,021 1,020
Calyon NY, 2.04%, 3/4/05 (h)2,174 2,174
CIT Group Holdings,
2.17%, 1/31/05 (h)211 211
2.30%, 2/14/05 (h)1,148 1,148
Citigroup, Inc., 2.39%, 9/1/05 (h)725 725
Compass Securitization, 2.38%, 3/17/05 (h)1,057 1,057
Corporate Receivables Corp., 2.46%, 3/14/05 451 450
Discover Card Master Trust, 2.39%, 5/16/05 (h)(i)1,006 1,006
Eni Coordination Center, 2.38%, 8/29/05 (h)755 755
Giro Funding U.S. Corp., 2.37%, 2/7/05 451 451
HBOS Treasury Services plc, N.Y.,
2.46%, 3/14/05 906 906
International Lease Finance Corp.,
2.51%, 9/22/05 (h)1,164 1,164
Jackson National Life Global Fund,
2.32%, 1/18/05 (h)755 755
K2 (USA) LLC, 2.33%, 10/24/05 (h)2,143 2,143
Landesbank Hessen Thur New York,
2.24%, 2/2/05 (h)762 762
Lehman Brothers, Inc., 2.33%, 1/3/05 18,507 18,507
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
17
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS (CONT'D)
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
<Table>
<Caption>
FACE
AMOUNT VALUE
(000) (000)
- ----------------------------------------------------------------------------------------------
SHORT-TERM DEBT SECURITIES HELD AS COLLATERAL ON LOANED SECURITIES (CONT'D)
Links Finance LLC,
2.33%, 10/27/05 $ (h)1,509 $ 1,509
2.40%, 9/26/05 (h)755 755
Marshall & Ilsley Bank, 2.51%, 12/29/05 (h)2,114 2,113
Nationwide Building Society, 2.58%, 1/2/06 (h)1,751 1,751
Pfizer, Inc., 2.30%, 1/31/06 (h)1,510 1,510
Proctor & Gamble, 2.42%, 1/31/06 (h)619 619
Royal Bank of Canada NY, 2.38%, 6/27/05 (h)1,509 1,509
Sheffield Receivable Corp., 2.21%, 1/12/05 2,119 2,119
Sigma Finance, Inc., 2.38%, 9/15/05 (h)1,510 1,510
SLM Corp., 2.41%, 1/31/06 (h)1,510 1,510
Societe Generale, N.Y., 2.04%, 3/3/05 (h)1,585 1,585
Svenska Handelsbank N.Y., 2.32%, 5/10/05 (h)1,509 1,509
UBS Finance (Delaware), Inc., 2.33%, 1/6/05 2,263 2,263
UBS Securities LLC, 2.30%, 1/3/05 8,452 8,452
- ----------------------------------------------------------------------------------------------
65,783
==============================================================================================
<Caption>
SHARES
- ----------------------------------------------------------------------------------------------
INVESTMENT COMPANY HELD AS COLLATERAL ON LOANED SECURITIES (0.1%)
JPMorgan Securities Lending Collateral
Investment Fund 380,419 380
- ----------------------------------------------------------------------------------------------
<Caption>
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT (13.4%)
J.P. Morgan Securities, Inc., 2.00%,
dated 12/31/04, due 1/3/05,
repurchase price $78,397 $ (f)78,384 78,384
- ----------------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (COST $144,547) 144,547
==============================================================================================
TOTAL INVESTMENTS (109.1%) (COST $561,068) --
INCLUDING $62,888 OF SECURITIES LOANED 636,355
==============================================================================================
LIABILITIES IN EXCESS OF OTHER ASSETS (-9.1%) (52,881)
==============================================================================================
NET ASSETS (100%) $ 583,474
==============================================================================================
</Table>
(a) Non-income producing security.
(c) All or portion of security on loan at December 31, 2004.
(d) Security was valued at fair value -- At December 31, 2004, the Portfolio
held $2,217,000 of fair valued securities, representing 0.4% of net assets.
(f) Represents the Portfolio's undivided interest in a joint repurchase
agreement which has a total value of $1,018,656,000. The repurchase
agreement was fully collateralized by U.S. government agency securities at
the date of this portfolio of investments as follows: Federal Farm Credit
Bank, 0.00% to 6.75%, due 2/28/05 to 8/15/13; Federal Home Loan Bank, 1.10%
to 6.875%, due 4/15/05 to 10/28/24; Federal Home Loan Mortgage Corp., 2.00%
to 6.51%, due 6/15/15 to 3/15/19; Federal National Mortgage Association,
1.75% to 8.20%, due 2/24/05 to 5/24/19; and Financial Assist Corp., 8.80%,
due 6/10/05. The investment in the repurchase agreement is through
participation in a joint account with affiliated parties pursuant to
exemptive relief received by the Portfolio from the SEC.
(h) Variable/Floating Rate Security -- interest rate changes on these
instruments are based on changes in a designated base rate. The rates shown
are those in effect on December 31, 2004.
(i) Security's issuer is an affiliate of the adviser. Held as collateral for
securities on loan.
@ Face Amount/Value is less than $500.
ADR American Depositary Receipt
GDR Global Depositary Receipt
CVA Certificaten Van Aandelen
REIT Real Estate Investment Trust
RNC Non-Convertible Savings Shares
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
18
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS (CONT'D)
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
The Portfolio had the following foreign currency exchange contract(s) open
at period end:
<Table>
<Caption>
NET
CURRENCY IN UNREALIZED
TO EXCHANGE APPRECIATION
DELIVER VALUE SETTLEMENT FOR VALUE (DEPRECIATION)
(000) (000) DATE (000) (000) (000)
- -----------------------------------------------------------------------------------------
EUR 25,989 $ 35,281 3/16/05 US$ 34,582 $ 34,582 $ (699)
EUR 4,987 6,770 3/16/05 US$ 6,638 6,638 (132)
GBP 3,160 6,036 3/16/05 US$ 6,050 6,050 14
JPY 1,143,230 11,174 1/20/05 US$ 10,470 10,470 (704)
JPY 31,271 307 3/16/05 US$ 300 300 (7)
JPY 124,000 1,217 3/16/05 US$ 1,187 1,187 (30)
US$ 2,944 2,944 3/16/05 AUD 3,910 3,041 97
US$ 2,910 2,910 1/3/05 EUR 2,144 2,908 (2)
US$ 2,664 2,664 3/16/05 EUR 2,000 2,715 51
US$ 9,879 9,879 3/16/05 EUR 7,414 10,064 185
US$ 14,823 14,823 3/16/05 EUR 11,137 15,118 295
US$ 15,910 15,910 3/16/05 EUR 11,957 16,232 322
US$ 3,927 3,927 3/16/05 EUR 2,950 4,005 78
US$ 6,770 6,770 3/16/05 EUR 5,079 6,894 124
US$ 25,102 25,102 3/16/05 EUR 18,872 25,619 517
US$ 3,515 3,515 3/16/05 GBP 1,839 3,511 (4)
US$ 164 164 3/16/05 GBP 86 164 @--
US$ 441 441 3/16/05 GBP 230 439 (2)
US$ 3,849 3,849 3/16/05 GBP 2,012 3,842 (7)
US$ 9,150 9,150 3/16/05 GBP 4,781 9,131 (19)
US$ 2,848 2,848 3/16/05 GBP 1,495 2,853 5
US$ 10,550 10,550 1/20/05 JPY 1,143,230 11,174 624
US$ 7,631 7,631 3/16/05 JPY 797,445 7,824 193
US$ 6,091 6,091 3/16/05 JPY 637,080 6,251 160
US$ 1,437 1,437 3/16/05 JPY 148,915 1,463 26
US$ 3,724 3,724 3/16/05 SEK 25,050 3,770 46
US$ 2,384 2,384 3/16/05 SGD 3,915 2,404 20
---------- ---------- --------------
$ 197,498 $ 198,649 $ 1,151
========== ========== ==============
</Table>
AUD -- Australian Dollar
EUR -- Euro
GBP -- British Pound
JPY -- Japanese Yen
SEK -- Swedish Krona
SGD -- Singapore Dollar
FUTURES CONTRACTS:
The Portfolio had the following futures contract(s) open at period end:
<Table>
<Caption>
NET
UNREALIZED
NUMBER APPRECIATION
OF VALUE EXPIRATION (DEPRECIATION)
CONTRACTS (000) DATE (000)
- -------------------------------------------------------------------------------
LONG:
CAC 40 Index
(France) 52 $ 2,692 Jan-05 $ @--
Hang Seng Index
(Hong Kong) 56 5,123 Jan-05 11
IBEX 35 Index
(Spain) 81 9,940 Jan-05 163
MSCI SING Index
(Singapore) 83 2,505 Jan-05 1
OMX 30 Index
(Sweden) 350 3,913 Jan-05 47
DAX Index
(Germany) 115 16,661 Mar-05 67
DJ Euro STOXX 50
(Germany) 309 12,357 Mar-05 42
FTSE 100 Index
(United Kingdom) 161 14,818 Mar-05 103
SPI 200 Index
(Australia) 42 3,332 Mar-05 71
TOPIX Index
(Japan) 130 14,564 Mar-05 606
------------
$ 1,111
============
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
19
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW
EMERGING MARKETS PORTFOLIO
[CHART]
COMPARISON OF THE CHANGE IN VALUE OF A $500,000* INVESTMENT OVER 10 YEARS
<Table>
<Caption>
LIPPER
EMERGING MSCI EMERGING
FISCAL YEAR MARKETS EMERGING MARKETS
ENDED PORTFOLIO - MARKETS FREE NET FUNDS
DECEMBER 31 CLASS A INDEX INDEX
1994 500000 500000 500000
1995 436175 473950 466120
1996 489362 502529 523043
1997 484346 444286 469480
1998 361250 331704 343314
1999 728944 551989 580090
2000 448847 383025 400848
2001 429031 372990 386821
2002 402281 349976 368948
2003 623857 545333 579016
2004 774150 684750 727850
</Table>
[CHART]
COMPARISON OF THE CHANGE IN VALUE OF A $100,000* INVESTMENT
<Table>
<Caption>
LIPPER
EMERGING MSCI EMERGING
FISCAL YEAR MARKETS EMERGING MARKETS
ENDED PORTFOLIO - MARKETS FREE FUNDS
DECEMBER 31 CLASS B INDEX INDEX
** 100000 100000 100000
1996 109940 106030 112212
1997 107840 93741 100721
1998 78993 69987 73654
1999 158902 116466 124451
2000 97089 80815 85997
2001 92623 78698 82988
2002 85917 73842 79153
2003 132837 115061 124220
2004 164680 143450 154720
</Table>
* Minimum Investment
** Commenced offering on January 2, 1996.
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EMERGING
MARKETS FREE NET INDEX(1) AND THE LIPPER EMERGING MARKETS FUNDS INDEX(2)
<Table>
<Caption>
TOTAL RETURNS(3)
-----------------------------------------
AVERAGE ANNUAL
-------------------------------
ONE FIVE TEN SINCE
YEAR YEARS YEARS INCEPTION(6)
- ------------------------------------------------------------------------------------
Portfolio - Class A (4) 24.09% 1.21% 4.47% 8.29%
MSCI Emerging Markets Free Net Index 25.55 4.40 3.19 7.39
Lipper Emerging Markets Funds Index 25.70 4.64 3.83 --
Portfolio - Class B (5) 23.84 0.96 -- 5.70
MSCI Emerging Markets Free Net Index 25.55 4.40 -- 4.09
Lipper Emerging Markets Funds Index 25.70 4.64 -- 4.97
</Table>
(1) The MSCI Emerging Markets Free Net Index is a free float-adjusted market
capitalization index that is designed to measure equity market performance
in the global emerging markets. The MSCI Emerging Markets Index consists of
the following 26 emerging market country indices: Argentina, Brazil, Chile,
China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel,
Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines,
Poland, Russia, South Africa, Taiwan, Thailand, Turkey and Venezuela. This
series approximates the minimum possible dividend reinvestment. The
dividend is reinvested after deduction of withholding tax, applying the
rate to non-resident individuals who do not benefit from double taxation
treaties.
(2) The Lipper Emerging Markets Funds Index is an equally weighted performance
index of the largest qualifying funds (based on net assets) in the Lipper
Emerging Markets Funds classification. The Index, which is adjusted for
capital gains distributions and income dividends, is unmanaged and should
not be considered an investment. There are currently 30 funds represented
in this Index. As of the date of this report, the Portfolio is in the
Lipper Emerging Markets Funds classification.
(3) Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would have been lower. Fee waivers and/or reimbursements are
voluntary and the Adviser reserves the right to commence or terminate any
waiver and/or reimbursement at any time.
(4) Commenced operations on September 25, 1992
(5) Commenced offering on January 2, 1996
(6) For comparative purposes, average annual since inception returns listed for
the indexes refer to the inception date or initial offering of the
respective share class of the Portfolio, not the inception of the index.
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. PERFORMANCE ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE
REINVESTED. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT
morganstanley.com/im. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO
THAT PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. TOTAL RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A
SHAREHOLDER WOULD PAY ON PORTFOLIO DISTRIBUTIONS OR THE REDEMPTION OF PORTFOLIO
SHARES.
The Emerging Markets Portfolio seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of issuers in emerging market
countries. Foreign investing involves certain risks, including currency
fluctuations and controls, restrictions on foreign investments, less
governmental supervision and regulation, less liquidity and the potential for
market volatility and political instability.
20
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW (CONT'D)
EMERGING MARKETS PORTFOLIO
In addition, investing in emerging markets may involve a relative higher degree
of volatility.
PERFORMANCE
For the year ended December 31, 2004, the Portfolio had a total return based on
net asset value per share of 24.09%, net of fees, for the Class A shares and
23.84%, net of fees, for the Class B shares compared to 25.55% for the Morgan
Stanley Capital International (MSCI) Emerging Markets Free Index (the "Index").
FACTORS AFFECTING PERFORMANCE
- The largest detractor to relative performance was our modest cash
position, which in a rising market can hurt performance.
- Stock selection in South Korea and Thailand coupled with negative country
allocation scores from our overweight position in Thailand and Russia were
the next largest detractors to relative performance.
- Our underweight position in the Central European countries of Hungary and
the Czech Republic also hurt performance. Hungary and the Czech Republic,
despite expensive valuations and weak fundamentals, continue to outperform
given continued optimism over the European Union convergence.
- Stock selection in Russia was once again the largest contributor to
relative performance. Other strong contributors came from our overweight
position in the outperforming markets of Egypt, Brazil and Turkey and
stock selection in South Africa and Brazil.
- Global emerging markets, after gaining more than 50% in 2003, remained
among the best performing asset classes in 2004, gaining more than 25%.
This marked the first sequential annual gain we have seen in Emerging
Markets since 1992-1993 and the fourth straight year the asset class has
outperformed world markets.
- During the year, the asset class benefited from accelerating global
growth, supportive macroeconomic policy, local currency strength, rising
corporate earnings and improving economic fundamentals. The dollar lost
ground against many emerging markets currencies during the year as many
developing countries continued to post current account and fiscal
surpluses, as well as solid economic growth.
- Led by Latin America, all regions were strong performers. The tragic
tsunami disaster that struck Southeast Asia on December 26 did not result
in a significant sell-off of assets as many expect minimal impact to major
economies.
- Egypt, Colombia, Hungary, the Czech Republic, Poland, Indonesia, Mexico,
South Africa and Turkey were among the best performers. Thailand, China
and Russia, among the top performers in 2003, were among the worst
performing markets this year given political and economic concerns.
MANAGEMENT STRATEGIES
- We maintain our long-term positive outlook for emerging markets given
relative valuations and fundamentals. We continue to focus on countries
where gross domestic product (GDP) growth, fiscal policy and reform
agendas remain strong and on companies that we believe have strong
management and earnings visibility.
- We have continued to reduce cyclicality in the Portfolio, primarily by
reducing our position within South African materials and South Korean
technology sectors, specifically in names that have recently performed
strongly and now face a headwind as global growth decelerates. We
continued to trim our long-term overweight position in the Portfolio in
Turkey given the relative out-performance of the country while increasing
our overweight position in Brazil given attractive valuations and the
improving domestic growth outlook.
- In general, we have moved away from cyclical plays and into stocks with
secular drivers. The investment ideas about which we have the most
conviction have led us to consolidate the Portfolio on both a country and
stock level, into those that we expect to benefit from stronger domestic
economies, the growing trend towards outsourcing, and new product cycles.
- The Portfolio's key overweight positions going into 2005 are Russia,
Thailand, Turkey, South Africa, Mexico and Brazil. We are neutral in India
and Poland while South Korea, Taiwan, Israel, Malaysia and China are our
largest underweight countries.
- We believe the emerging markets are in a better position than in past
times to withstand the tough global environment. In our opinion,
valuations are cheaper while strong fiscal positions and lower interest
rates are a boost to growth prospects. In addition, emerging market growth
has been both export-driven as well as consumer-led, which marks an
improvement from investment-led cycles of the late 1990's.
21
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW (CONT'D)
EMERGING MARKETS PORTFOLIO
EXPENSE EXAMPLES
As a shareholder of the Portfolio, you incur ongoing costs, including management
fees, distribution (12b-1) fees (in the case of Class B) and other Portfolio
expenses. These examples are intended to help you understand your ongoing costs
(in dollars) of investing in the Portfolio and to compare these costs with the
ongoing costs of investing in other mutual funds.
The examples are based on an investment of $1,000 invested at the beginning of
the six-month period ended December 31, 2004 and held for the entire six-month
period.
ACTUAL EXPENSES
The first line of the tables 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 tables below provides information about hypothetical
account values and hypothetical expenses based on the Portfolio's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Portfolio's acctual return. The hypothetical account values and expenses may
not be used to estimate the actual ending account balance or expenses you paid
for the period. You may use this information to compare the ongoing costs of
investing in the Portfolio 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.
<Table>
<Caption>
EXPENSES PAID
ENDING ACCOUNT DURING PERIOD*
BEGINNING VALUE JULY 1, 2004 --
ACCOUNT VALUE DECEMBER 31, DECEMBER 31,
JULY 1, 2004 2004 2004
- --------------------------------------------------------------------------------------
CLASS A
Actual $ 1,000.00 $ 1,268.70 $ 8.67
Hypothetical (5% average
annual return before expenses) 1,000.00 1,017.50 7.71
CLASS B
Actual 1,000.00 1,267.30 10.09
Hypothetical (5% average
annual return before expenses) 1,000.00 1,016.24 8.97
</Table>
* Expenses are equal to Class A and Class B annualized net expense ratios of
1.52% and 1.77%, respectively, multiplied by the average account value over
the period, multiplied by 184/366 (to reflect the one-half year period).
GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS
The following graph depicts the Portfolio's holdings by industry, as a
percentage of total investments.
[CHART]
<Table>
Commercial Banks 13.2%
Wireless Telecommunication Services 10.4%
Oil & Gas 9.3%
Metals & Mining 6.4%
Electronic Equipment & Instruments 4.1%
Semiconductors & Semiconductor Equipment 4.0%
Insurance 3.2%
Food & Staples Retailing 3.7%
Diversified Telecommunication Services 3.2%
Other* 33.8%
</Table>
* Industries which do not appear in the top 10 industries and industries
which represent less than 3% of total investments, if applicable, are
included in the category labeled "Other".
January 2005
22
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS
EMERGING MARKETS PORTFOLIO
<Table>
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
COMMON STOCKS (95.9%)
(UNLESS OTHERWISE NOTED)
BRAZIL (11.5%)
All America Latina Logistica S.A.
(Preference) (a)107,700 $ 3,203
Banco Bradesco S.A. (Preference) 317,889 7,687
Banco Bradesco S.A. ADR (Preference) (c)142,840 3,580
Banco Itau Holding Financeira S.A.
(Preference) 46,023 6,914
Banco Itau Holding Financeira S.A.
ADR (Preference) (c)168,316 12,652
Braskem S.A. (Preference) 41,656,000 2,102
Braskem S.A. ADR 75,200 3,832
CEMIG S.A. (Preference) 250,989,200 6,133
CEMIG S.A. ADR (Preference) 155,000 3,804
Cia Siderurgica de Tubarao (Preference) 21,585,000 1,272
Cia Siderurgica Nacional S.A. 60,479 1,156
Cia Siderurgica Nacional S.A. ADR (c)274,500 5,248
CPFL Energia S.A. ADR (a)34,900 693
CPFL Energia S.A. (a)149,300 1,010
CVRD ADR 18,379 533
CVRD ADR (Preference) 1,117,714 27,250
CVRD, Class A (Preference) 14,021 339
Petrobras S.A. (Preference) 56,883 2,081
Petrobras S.A. ADR 565,675 22,502
Petrobras S.A. ADR (Preference) 498,698 18,058
Telesp Celular Participacoes S.A.
(Preference) (a)3,802,128,938 10,293
Telesp Celular Participacoes S.A.
ADR (Preference) (a)(c)866,113 5,890
Votorantim Celulose e Papel S.A.
ADR (Preference) (c)339,750 5,504
- ----------------------------------------------------------------------------------------------
151,736
==============================================================================================
CHILE (0.9%)
Enersis S.A. ADR (a)(c)1,320,100 11,234
- ----------------------------------------------------------------------------------------------
CHINA/HONG KONG (5.4%)
Air China Ltd., Class H (a)2,543,000 982
Asia Aluminum Holdings Ltd. 29,246,000 3,010
AviChina Industry & Technology Co.,
Class H (c)10,641,000 999
China Life Insurance Co., Ltd. (a)(c)7,429,000 4,970
China Petroleum & Chemical Corp.,
Class H 11,558,000 4,758
China Resources Power Holdings Co. 2,539,000 1,380
CNOOC Ltd. 14,747,000 7,921
Fountain Set Holdings Ltd. 4,633,000 3,010
GOME Electrical Appliances Holdings Ltd (a)4,213,000 3,821
Grande Holdings Ltd. 2,119,000 2,072
Hainan Meilan International Airport
Co., Ltd., Class H 2,406,000 2,028
Hopewell Highway Infrastructure Ltd. (c)4,809,000 3,960
Huadian Power International Co., Class H 10,605,000 3,138
Kingboard Chemical Holdings Ltd. 1,843,000 3,900
Lianhua Supermarket Holdings Co.,
Ltd., Class H 2,064,000 2,523
Moulin International Holdings Ltd. (c)2,150,000 1,466
Norstar Founders Group Ltd. (c)5,621,000 1,280
Ping An Insurance Group Co. of
China Ltd., Class H (a)3,193,000 $ 5,422
Shougang Concord Century Holdings Ltd. 12,407,000 1,197
Tom Online, Inc. (a)6,364,000 1,195
TPV Technology Ltd. (c)7,530,000 4,545
Victory City International Holdings 3,751,000 1,581
Wumart Stores, Inc. (a)1,033,000 1,661
Yanzhou Coal Mining Co., Ltd., Class H (c)3,014,000 4,304
ZTE Corp., Class H (a)177,000 573
- ----------------------------------------------------------------------------------------------
71,696
==============================================================================================
COLOMBIA (0.4%)
BanColombia S.A. ADR 375,300 5,299
- ----------------------------------------------------------------------------------------------
EGYPT (1.6%)
Eastern Tobacco 185,476 3,974
MobiNil 553,149 11,699
Orascom Construction Industries 447,712 5,350
Orascom Construction Industries GDR 2,608 63
- ----------------------------------------------------------------------------------------------
21,086
==============================================================================================
INDIA (6.4%)
ABB Ltd. India 123,500 2,770
Aventis Pharma Ltd. 82,492 2,519
Bharat Heavy Electricals Corp. 512,465 9,122
Cipla Ltd. 509,665 3,739
Container Corp. of India Ltd. 140,919 2,988
GlaxoSmithKline Pharmaceuticals Ltd. 146,500 2,606
Grasim Industries Ltd. 73,000 2,232
HDFC Bank Ltd. 225,000 2,699
Hero Honda Motors Ltd. 391,385 5,168
Hindalco Industries Ltd. 86,480 2,853
Hindustan Lever Ltd. 694,260 2,304
Housing Development Finance Corp. 251,000 4,446
India Info.com PCL (d)393,611 @--
Industrial Development Bank of India Ltd. (a)1,128,000 2,864
Infosys Technologies Ltd. 152,436 7,363
ITC Ltd. 44,000 1,333
ITC Ltd.(Registered) GDR 43,400 1,302
Mahanagar Telephone Nigam Ltd. 1,095,000 3,922
Mahindra & Mahindra Ltd. 284,000 3,575
Morgan Stanley Growth Fund (k)17,282,900 7,712
Oil & Natural Gas Corp., Ltd. 225,200 4,267
Siemens India Ltd. 51,000 1,559
Steel Authority of India Ltd. (a)3,507,082 5,076
Wipro Ltd. 109,500 1,894
- ----------------------------------------------------------------------------------------------
84,313
==============================================================================================
INDONESIA (2.4%)
Bank Central Asia Tbk PT 14,798,000 4,743
Bank Internasional Indonesia Tbk PT (a)75,304,000 1,501
Bank Mandiri Persero Tbk PT 19,283,000 3,999
Bank Rakyat Indonesia 16,257,500 5,035
Bumi Resources Tbk PT (a)54,977,000 4,738
Gudang Garam Tbk PT 1,449,000 2,115
Indocement Tunggal Prakarsa Tbk PT (a)13,329,500 4,416
Ramayana Lestari Sentosa Tbk PT 14,125,000 1,179
Telekomunikasi Indonesia Tbk PT 7,005,000 3,641
- ----------------------------------------------------------------------------------------------
31,367
==============================================================================================
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
23
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS (CONT'D)
EMERGING MARKETS PORTFOLIO
<Table>
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
ISRAEL (0.9%)
Check Point Software Technologies Ltd. (a)(c)484,284 $ 11,928
- ----------------------------------------------------------------------------------------------
MALAYSIA (1.4%)
Bandar Raya Developments Bhd 660,000 339
Commerce Asset Holdings Bhd 2,074,000 2,565
Magnum Corp. Bhd 4,361,000 2,777
MK Land Holdings Bhd 2,599,000 1,211
Resorts World Bhd 784,000 2,063
SP Setia Bhd 2,839,999 3,229
Tenaga Nasional Bhd 1,671,000 4,793
YTL Corp. Bhd 1,472,000 2,072
- ----------------------------------------------------------------------------------------------
19,049
==============================================================================================
MEXICO (8.5%)
America Movil S.A. de C.V., Class L ADR 748,703 39,195
Cemex S.A. de C.V. 47,475 347
Cemex S.A. de C.V. ADR 144,581 5,266
Fomento Economico Mexicano S.A.
de C.V. ADR 88,600 4,661
Grupo Financiero Banorte S.A. de
C.V., Class O 409,800 2,583
Grupo Televisa S.A. ADR 399,300 24,158
Kimberly-Clark de Mexico S.A. de
C.V., Class A 747,700 2,585
Telmex, Class L ADR 53,568 2,053
Wal-Mart de Mexico S.A. de C.V. ADR (c)153,647 5,279
Wal-Mart de Mexico S.A. de C.V., Series V 7,445,054 25,608
- ----------------------------------------------------------------------------------------------
111,735
==============================================================================================
MOROCCO (0.3%)
Banque Marocaine du Commerce
Exterieur 65,600 4,172
- ----------------------------------------------------------------------------------------------
POLAND (2.3%)
Agora S.A. (a)70,434 1,328
NFI Empik Media & Fasion S.A. (a)758,047 1,648
Powszechna Kasa Oszczednosci
Bank Polski S.A. (a)913,603 8,431
Telekomunikacja Polska S.A. 608,589 4,000
Telekomunikacja Polska S.A. GDR 2,241,200 14,792
- ----------------------------------------------------------------------------------------------
30,199
==============================================================================================
RUSSIA (7.3%)
Alliance Cellulose Ltd. (a)(d)592,359 @--
LUKOIL ADR 196,334 23,835
Mobile Telesystems ADR (c)6,800 942
Mobile Telesystems GDR 254,800 8,822
OAO Gazprom ADR (Registered) (c)665,840 23,637
Sberbank RF GDR (a)248,400 13,647
Surgutneftegaz ADR (c)186,889 7,008
Surgutneftegaz ADR (Preference) (c)165,490 9,019
Uralsvyazinform ADR 373,500 2,742
Vimpel-Communications ADR (a)114,600 4,142
VolgaTelecom ADR 489,600 3,182
- ----------------------------------------------------------------------------------------------
96,976
==============================================================================================
SOUTH AFRICA (14.5%)
African Bank Investments Ltd. 7,161,900 23,135
African Life Assurance Co., Ltd. 2,430,213 7,915
Anglo American Platinum Corp., Ltd. 74,900 2,737
Anglo American plc (London Shares) 1 $ @--
Aveng Ltd. 2,783,200 5,895
AVI Ltd. 965,800 3,921
Barloworld Ltd. 502,800 9,435
Edgars Consolidated Stores Ltd. 226,600 12,090
Gold Fields Ltd. ADR (c)84,676 1,057
Harmony Gold Mining Co., Ltd. (c)1,089,102 9,843
Harmony Gold Mining Co., Ltd. ADR 364,613 3,380
Impala Platinum Holdings Ltd. 73,038 6,176
Ispat Iscor Ltd. 276,300 3,195
Kumba Resources Ltd. 601,138 4,669
Lewis Group Ltd. (a)785,300 5,406
Massmart Holdings Ltd. 1,488,045 11,896
MTN Group Ltd. 3,570,850 27,419
Sanlam Ltd. 5,397,700 12,386
Shoprite Holdings Ltd. 2,732,909 6,223
Standard Bank Group Ltd. 1,141,404 13,257
Steinhoff International Holdings Ltd. 5,455,621 12,134
Telkom S.A. Ltd. 579,030 10,017
- ----------------------------------------------------------------------------------------------
192,186
==============================================================================================
SOUTH KOREA (12.8%)
Cheil Industries, Inc. (a)338,520 5,216
Daishin Securities Co., Ltd. 205,720 2,802
Daishin Securities Co., Ltd. (Preferred) 189,060 1,635
Doosan Heavy Industries and
Construction Co., Ltd. (a)363,880 4,148
Handsome Co., Ltd. (a)360,530 2,915
Hankook Tire Co., Ltd. (a)1,121,320 11,049
Hyundai Mobis (a)199,450 12,620
Hyundai Motor Co. (a)65,960 3,536
Hyundai Motor Co. (Preferred) (a)41,910 1,257
Korea Electric Power Corp. (a)100,980 2,619
Korean Airlines Co., Ltd. (a)417,450 7,601
KT&G Corp. (a)233,440 6,979
LG Engineering & Construction Corp. (a)124,690 3,433
LG Investment & Securities Co., Ltd. (a)967,770 7,984
Orion Corp. (a)51,730 5,447
Pusan Bank (a)483,220 3,711
Samsung Electronics Co., Ltd. 77,893 33,898
Samsung Electronics Co., Ltd. (Preferred) 26,600 7,670
Samsung Fire & Marine Insurance Co.,
Ltd 33,660 2,650
Samsung SDI Co., Ltd. 272,060 29,697
Shinhan Financial Group Co., Ltd. (a)367,330 8,303
STX Shipbuilding Co., Ltd. (a)212,480 3,448
- ----------------------------------------------------------------------------------------------
168,618
==============================================================================================
TAIWAN (10.1%)
Acer, Inc. 2,400,217 3,964
Asia Optical Co., Inc. 1,658,272 9,233
Catcher Technology Co., Ltd. 811,800 2,669
Cathay Financial Holding Co., Ltd. 2,637,000 5,392
Cheng Shin Rubber Industry Co., Ltd. 2,024,936 2,580
Chinatrust Financial Holding Co., Ltd. 5,508,422 6,567
CTCI Corp. 5,110,538 3,247
Cyberlink Corp. 705,066 1,763
Delta Electronics, Inc. 2,299,000 4,050
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
24
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS (CONT'D)
EMERGING MARKETS PORTFOLIO
<Table>
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
TAIWAN (CONT'D)
Eva Airways Corp. (a)5,421,730 $ 2,661
Far EasTone Telecommunications Co.,
Ltd. 1,562,000 1,892
Faraday Technology Corp. 862,363 1,506
Fubon Financial Holding Co., Ltd. 3,723,000 3,806
Fubon Financial Holding Co., Ltd. GDR 116,510 1,163
HON HAI Precision Industry Co., Ltd. 2,677,441 12,381
Infortrend Technology, Inc. 1,631,565 3,541
Kaulin Manufacturing Co., Ltd. 1,241,250 1,218
Largan Precision Co., Ltd. 468,138 2,607
MediaTek, Inc. 949,013 6,448
Mega Financial Holding Co., Ltd. 10,640,000 7,330
Phoenixtec Power Co., Ltd. 2,353,355 2,835
Polaris Securities Co., Ltd. 5,867,183 3,285
Richtek Technology Corp. 624,100 1,315
Shin Kong Financial Holding Co., Ltd. 5,625,000 5,414
Springsoft, Inc. 1,584,586 3,390
Sunplus Technology Co., Ltd. 930,200 1,305
Taishin Financial Holdings Co., Ltd. 4,262,256 3,995
Taiwan Cellular Corp. 3,583,000 4,001
Taiwan Cement Corp. 10,837,412 7,125
Taiwan Semiconductor Manufacturing Co.,
Ltd. 3,297,000 5,237
Tsann Kuen Enterprise Co. 1,918,825 2,215
Waffer Technology Co., Ltd. 1,182,500 1,495
Ya Hsin Industrial Co., Ltd. 7,535,042 7,229
- ----------------------------------------------------------------------------------------------
132,859
==============================================================================================
THAILAND (5.0%)
Advanced Info Service PCL (Foreign) (d)3,039,200 8,365
Asian Property Development PCL (d)14,164,700 1,334
Bangkok Bank PCL (Foreign) 3,936,000 11,542
Banpu PCL (Foreign) (d)766,200 2,996
CP Seven Eleven PCL (Foreign) (d)1,799,500 2,639
Italian-Thai Development PCL (Foreign) (c)(d)17,050,800 4,211
Kasikornbank PCL (Foreign) (a)4,098,600 5,904
Kasikornbank PCL NVDR (a)(c)1,825,900 2,466
Lalin Property PCL (Foreign) (d)4,420,600 716
Land & Houses PCL (Foreign, Registered) (c)13,265,300 3,856
MBK PCL (Foreign) (d)765,700 945
PTT PCL (Foreign) (c)(d)1,493,300 6,646
Siam City Bank PCL (Foreign, Registered) (d)4,090,200 2,657
Siam Commercial Bank PCL
(Foreign, Registered) (d)2,194,500 2,766
Siam Makro PCL (Foreign) (d)389,600 491
Sino Thai Engineering &
Construction PCL (Foreign) (d)3,794,400 825
Total Access Communication PCL (a)1,313,600 4,650
True Corp. PCL (Foreign) (a)(c)(d)14,302,300 2,980
- ----------------------------------------------------------------------------------------------
65,989
==============================================================================================
TURKEY (4.2%)
Akbank T.A.S. 1,336,947,411 8,278
Akcansa Cimento A.S. 1,660,271,450 5,860
Arcelik A.S. (a)583,056,550 3,567
Enka Insaat ve Sanayi A.S. 162,485,114 4,488
Hurriyet Gazetecilik ve Matbaacilik A.S. 2,777,255,070 6,549
Trakya Cam Sanayii A.S. 1,532,708,826 $ 4,183
Turkcell Iletisim Hizmetleri A.S. (a)877,641,186 6,118
Turkiye Garanti Bankasi A.S. (a)2,317,360,373 7,321
Yapi Ve Kredi Bankasi A.S. (a)3,095,997,200 9,735
- ----------------------------------------------------------------------------------------------
56,099
==============================================================================================
TOTAL COMMON STOCKS (COST $961,599) 1,266,541
==============================================================================================
<Caption>
NO. OF
RIGHTS
- ----------------------------------------------------------------------------------------------
RIGHTS (0.0%)
BRAZIL (0.0%)
Banco Bradesco S.A. (COST $@--) (a)13,613 124
- ----------------------------------------------------------------------------------------------
<Caption>
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------------------------------
FIXED INCOME SECURITIES (0.7%)
INDIA (0.0%)
Saurashtra Cement & Chemicals
Ltd. (expired maturity) INR (b)(d)700 @--
- ----------------------------------------------------------------------------------------------
RUSSIA (0.7%)
MCSI Holding Ltd. (Secured Notes) $ (d)10,337 8,994
- ----------------------------------------------------------------------------------------------
TOTAL FIXED INCOME SECURITIES (COST $11,339) 8,994
==============================================================================================
SHORT-TERM INVESTMENTS (9.2%)
SHORT-TERM DEBT SECURITIES HELD AS COLLATERAL ON LOANED SECURITIES (5.3%)
Bank of New York, 2.33%, 10/28/05 (h)2,609 2,610
Bear Stearns, 2.37%, 4/15/05 (h)1,434 1,434
Beta Finance, Inc., 2.28%, 2/18/05 1,076 1,076
Calyon NY, 2.04%, 3/4/05 (h)2,292 2,292
CIT Group Holdings,
2.17%, 1/31/05 (h)222 222
2.30%, 2/14/05 (h)1,210 1,210
Citigroup, Inc., 2.39%, 9/1/05 (h)764 764
Compass Securitization, 2.38%, 3/17/05 (h)1,114 1,114
Corporate Receivables Corp.,
2.46%, 3/14/05 475 475
Discover Card Master Trust,
2.39%, 5/16/05 (h)(i)1,060 1,060
Eni Coordination Center, 2.38%, 8/29/05 (h)796 796
Giro Funding U.S. Corp., 2.37%, 2/7/05 476 476
HBOS Treasury Services plc, N.Y.,
2.46%, 3/14/05 955 955
International Lease Finance Corp.,
2.51%, 9/22/05 (h)1,227 1,227
Jackson National Life Global Fund,
2.32%, 1/18/05 (h)796 796
K2 (USA) LLC, 2.33%, 10/24/05 (h)2,259 2,260
Landesbank Hessen Thur New York,
2.24%, 2/2/05 (h)803 803
Lehman Brothers, Inc., 2.33%, 1/3/05 19,512 19,512
Links Finance LLC,
2.33%, 10/27/05 (h)1,591 1,591
2.40%, 9/26/05 (h)796 796
Marshall & Ilsley Bank, 2.51%, 12/29/05 (h)2,228 2,228
Nationwide Building Society,
2.58%, 1/2/06 (h)1,846 1,846
Pfizer, Inc., 2.30%, 1/31/06 (h)1,592 1,592
Proctor & Gamble, 2.42%, 1/31/06 (h)653 653
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
25
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS (CONT'D)
EMERGING MARKETS PORTFOLIO
<Table>
<Caption>
FACE
AMOUNT VALUE
(000) (000)
- ----------------------------------------------------------------------------------------------
SHORT-TERM DEBT SECURITIES HELD AS COLLATERAL ON LOANED SECURITIES (CONT'D)
Royal Bank of Canada NY,
2.38%, 6/27/05 $ (h)1,591 $ 1,591
Sheffield Receivable Corp.,
2.21%, 1/12/05 2,234 2,234
Sigma Finance, Inc., 2.38%, 9/15/05 (h)1,592 1,592
SLM Corp., 2.41%, 1/31/06 (h)1,592 1,592
Societe Generale, N.Y., 2.04%, 3/3/05 (h)1,671 1,671
Svenska Handelsbank N.Y.,
2.32%, 5/10/05 (h)1,591 1,591
UBS Finance (Delaware), Inc.,
2.33%, 1/6/05 2,386 2,386
UBS Securities LLC, 2.30%, 1/3/05 8,911 8,912
- ----------------------------------------------------------------------------------------------
69,357
==============================================================================================
<Caption>
SHARES
- ----------------------------------------------------------------------------------------------
INVESTMENT COMPANY HELD AS COLLATERAL ON LOANED SECURITIES (0.0%)
JPMorgan Securities Lending Collateral
Investment Fund 401,088 401
- ----------------------------------------------------------------------------------------------
<Caption>
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT (3.9%)
J.P. Morgan Securities, Inc., 2.00%,
dated 12/31/04, due 1/3/05,
repurchase price $51,379 $ (f)51,370 51,370
- ----------------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (COST $121,128) 121,128
==============================================================================================
TOTAL INVESTMENTS (105.8%) (COST $1,094,066) --
INCLUDING $67,299 OF SECURITIES LOANED 1,396,787
==============================================================================================
LIABILITIES IN EXCESS OF OTHER ASSETS (-5.8%) (76,234)
- ----------------------------------------------------------------------------------------------
NET ASSETS (100%) $ 1,320,553
==============================================================================================
</Table>
(a) Non-income producing security.
(b) Issuer is in default.
(c) All or portion of security on loan at December 31, 2004.
(d) Security was valued at fair value -- At December 31, 2004, the Portfolio
held $46,565,000 of fair valued securities, representing 3.5% of net
assets.
(f) Represents the Portfolio's undivided interest in a joint repurchase
agreement which has a total value of $1,018,656,000. The repurchase
agreement was fully collateralized by U.S. government agency securities
at the date of this portfolio of investments as follows: Federal Farm
Credit Bank, 0.00% to 6.75%, due 2/28/05 to 8/15/13; Federal Home Loan
Bank, 1.10% to 6.875%, due 4/15/05 to 10/28/24; Federal Home Loan
Mortgage Corp., 2.00% to 6.51%, due 6/15/15 to 3/15/19; Federal National
Mortgage Association, 1.75% to 8.20%, due 2/24/05 to 5/24/19; and
Financial Assist Corp., 8.80%, due 6/10/05. The investment in the
repurchase agreement is through participation in a joint account with
affiliated parties pursuant to exemptive relief received by the Portfolio
from the SEC.
(h) Variable/Floating Rate Security -- interest rate changes on these
instruments are based on changes in a designated base rate. The rates
shown are those in effect on December 31, 2004.
(i) Security's securities on loan.
(k) Investments of Securities of Affiliated issuer -- The Morgan Stanley
Growth Fund, acquired at a cost of $3,415,000, is advised by an affiliate
of the Adviser. During the year ended December 31, 2004, the Portfolio
had no purchases or sales of this security. The Portfolio derived
$572,000 of income from this security during the year ended December 31,
2004.
@ Face Amount/Value is less than $500.
ADR American Depositary Receipts
GDR Global Depositary Receipts
INR Indian Rupee
NVDR Non Voting Depositary Receipts
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
The Portfolio had the following foreign currency exchange contract(s) open at
period end:
<Table>
<Caption>
NET
CURRENCY IN UNREALIZED
TO EXCHANGE APPRECIATION
DELIVER VALUE SETTLEMENT FOR VALUE (DEPRECIATION)
(000) (000) DATE (000) (000) (000)
- -----------------------------------------------------------------------------------------
US$ 26 $ 26 1/3/05 BRL 70 $ 26 $ @--
US$ 159 159 1/3/05 PLN 475 157 (2)
US$ 39 39 1/5/05 ZAR 223 39 @--
ZAR 113,448 19,593 6/27/05 US$ 16,710 16,710 (2,883)
ZAR 90,524 15,591 7/22/05 US$ 13,812 13,812 (1,779)
---------- ---------- --------------
$ 35,408 $ 30,744 $ (4,664)
========== ========== ==============
</Table>
BRL -- Brazil Real
PLN -- Polish Zloty
ZAR -- South African Rand
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
26
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW
EUROPEAN REAL ESTATE PORTFOLIO
[CHART]
COMPARISON OF THE CHANGE IN VALUE OF A $500,000* INVESTMENT OVER 10 YEARS
<Table>
<Caption>
GPR
GENERAL LIPPER
EUROPEAN REAL REAL ESTATE REAL
FISCAL YEAR ESTATE SECURITIES ESTATE
ENDED PORTFOLIO - INDEX - FUNDS
DECEMBER 31 CLASS A EUROPE INDEX
** 500000 500000 500000
1997 476400 500445 495386
1998 499029 497993 411141
1999 487252 514925 396468
2000 559901 561525 497800
2001 515949 532606 548683
2002 642460 651591 568575
2003 914927 945002 780166
2004 1349450 1423450 1030800
</Table>
[CHART]
COMPARISON OF THE CHANGE IN VALUE OF A $100,000* INVESTMENT SINCE INCEPTION
<Table>
<Caption>
GPR
GENERAL LIPPER
EUROPEAN REAL REAL ESTATE REAL
FISCAL YEAR ESTATE SECURITIES ESTATE
ENDED PORTFOLIO - INDEX - FUNDS
DECEMBER 31 CLASS B EUROPE INDEX
*** 100000 100000 100000
1997 95240 100089 99077
1998 99621 99599 82228
1999 97021 102985 79294
2000 111138 112305 99560
2001 102158 106521 109737
2002 126788 130318 113715
2003 180115 189000 156033
2004 265030 284690 206160
</Table>
* Minimum Investment
** Commenced operations on October 1, 1997
*** Commenced offering on October 1, 1997
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE GPR GENERAL REAL ESTATE SECURITIES INDEX - EUROPE(1)
AND THE LIPPER REAL ESTATE FUNDS INDEX(2)
<Table>
<Caption>
TOTAL RETURNS(3)
-------------------------------
AVERAGE ANNUAL
---------------------
ONE FIVE SINCE
YEAR YEARS INCEPTION(6)
- --------------------------------------------------------------------------
Portfolio - Class A (4) 47.49% 22.60% 14.68%
Portfolio - Class B (5) 47.15 22.26 14.39
GPR General Real Estate Securities
Index - Europe 50.60 22.55 15.53
Lipper Real Estate Funds Index 32.12 21.04 10.49
</Table>
(1) The GPR General Real Estate Securities Index - Europe is a market
capitalization weighted index of listed property/real estate securities in
Europe measuring total return.
(2) The Lipper Real Estate Funds Index is an equally weighted performance index
of the largest qualifying funds (based on net assets) in the Lipper Real
Estate Funds classification. The Index, which is adjusted for capital gains
distributions and income dividends, is unmanaged and should not be
considered an investment. There are currently 30 funds represented in this
Index. As of the date of this report, the Portfolio is in the Lipper Real
Estate Funds classification.
(3) Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would have been lower. Fee waivers and/or reimbursements are
voluntary and the Adviser reserves the right to commence or terminate any
waiver and/or reimbursement at any time.
(4) Commenced operations on October 1, 1997
(5) Commenced offering on October 1, 1997
(6) For comparative purposes, average annual since inception returns listed for
the indexes refer to the inception date or initial offering of the
respective share class of the Portfolio, not the inception of the index.
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. PERFORMANCE ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE
REINVESTED. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT
morganstanley.com/im. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO
THAT PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. TOTAL RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A
SHAREHOLDER WOULD PAY ON PORTFOLIO DISTRIBUTIONS OR THE REDEMPTION OF PORTFOLIO
SHARES.
The European Real Estate Portfolio seeks to provide current income and long-term
capital appreciation by investing primarily in equity securities of companies in
the European real estate industry. Foreign investing involves certain risks,
including currency fluctuations and controls, restrictions on foreign
investments, less governmental supervision and regulation, less liquidity and
the potential for market volatility and political instability. The Portfolio's
concentration in the real estate sector makes it subject to greater risk and
volatility than other portfolios that are more diversified and the value of its
shares may be substantially affected by economic events in the real estate
industry.
27
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW (CONT'D)
EUROPEAN REAL ESTATE PORTFOLIO
PERFORMANCE
For the year ended December 31, 2004, the Portfolio had a total return of 47.49%
for the Class A shares, net of fees, and 47.15% for the Class B shares, net of
fees, compared to 50.60% for the GPR General Real Estate Securities Index -
Europe (the "Index").
FACTORS AFFECTING PERFORMANCE
- Following the strong performance in 2004, European real estate securities
have now outperformed the broader equity markets for the fifth consecutive
year.
- The best performing listed property markets for the year were Spain, the
U.K. and Sweden returning 63.1%, 58.2% and 56.3% in euros, respectively.
The weakest relative performing markets for the year were Austria, Belgium
and Switzerland with euro returns of 18.8%, 21.7% and 30.4%, respectively.
- A country overweight in Spain and underweights in Austria and Belgium had
a positive impact on relative performance, but this was offset by the
negative effect from an overweight in Finland and an underweight in
Sweden. Stock selection in France and Sweden added to returns, but stock
selection in Italy and The Netherlands negatively affected performance.
MANAGEMENT STRATEGIES
- The European office market appeared to have bottomed in the majority of
locations across Europe by the end of 2004. Vacancy rates have stabilized
in most markets, and they have even started to decline in a select number
of markets. Prime rents have also stopped falling, although rents for
secondary assets remain under pressure. Prospects for a recovery have
therefore improved markedly, although we expect that it will take time
before rents start to show significant improvements given the current high
vacancy level and modest economic growth forecasts. We also expect retail
capital growth to be more in line with offices during 2005 after a
sustained period of outperformance in recent years.
- In our opinion, the real estate investment market remains very liquid
across Europe, as demand from both debt-backed and institutional buyers
outstripped the limited number of available assets for sale. This high
demand has resulted in falling property yields and rising capital values.
Looking forward, we expect buying interest to remain high during 2005,
given that interest rates are not forecast to rise materially and
institutional interest in the asset class is also expected to continue. In
our experience, this should result in increasing capital values, although
we do not expect to see a similar drop in yields during 2005 as we have
seen in 2004. Improving NAV's, combined with increasing premiums to NAV as
a result of a strong capital flows into the public markets, could possibly
result in price appreciation for property shares. This price appreciation,
combined with a secure dividend yield, should lead to attractive returns,
albeit lower than the strong returns seen over the last several years.
EXPENSE EXAMPLES
As a shareholder of the Portfolio, you incur ongoing costs, including management
fees, distribution (12b-1) fees (in the case of Class B) and other Portfolio
expenses. These examples are intended to help you understand your ongoing costs
(in dollars) of investing in the Portfolio and to compare these costs with the
ongoing costs of investing in other mutual funds.
The examples are based on an investment of $1,000 invested at the beginning of
the six-month period ended December 31, 2004 and held for the entire six-month
period.
ACTUAL EXPENSES
The first line of the tables 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 tables below provides information about hypothetical
account values and hypothetical expenses based on the Portfolio's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Portfolio's actual return. The hypothetical account values and expenses may
not be used to estimate the actual ending account balance or expenses you paid
for the period. You may use this information to compare the ongoing costs of
investing in the Portfolio 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.
28
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW (CONT'D)
EUROPEAN REAL ESTATE PORTFOLIO
<Table>
<Caption>
EXPENSES PAID
ENDING ACCOUNT DURING PERIOD*
BEGINNING VALUE JULY 1, 2004--
ACCOUNT VALUE DECEMBER 31, DECEMBER 31,
JULY 1, 2004 2004 2004
- --------------------------------------------------------------------------------------
CLASS A
Actual $ 1,000.00 $ 1,305.70 $ 5.80
Hypothetical (5% average
annual return before expenses) 1,000.00 1,020.11 5.08
CLASS B
Actual 1,000.00 1,303.20 7.24
Hypothetical (5% average
annual return before expenses) 1,000.00 1,018.85 6.34
</Table>
* Expenses are equal to Class A and Class B annualized net expense ratios of
1.00% and 1.25%, respectively, multiplied by the average account value over
the period, multiplied by 184/366 (to reflect the one-half year period).
GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS
The following graph depicts the Portfolio's holdings by industry, as a
percentage of total investments.
[CHART]
<Table>
Short-Term Investment 4.0%
Diversified 56.6%
Office & Industrial 23.4%
Office Buildings 5.0%
Apartments 4.4%
Shopping Centers 3.1%
Other* 3.5%
</Table>
* Industries which do not appear in the top 10 industries and industries
which represent less than 3% of total investments, if applicable, are
included in the category labeled "Other".
January 2005
29
<Page>
2004 ANNUAL REPORT
December 31, 2004
Portfolio of Investments
EUROPEAN REAL ESTATE PORTFOLIO
<Table>
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
COMMON STOCKS (95.9%)
BELGIUM (1.2%)
Cofinimmo REIT 3,736 $ 610
- ----------------------------------------------------------------------------------------------
FINLAND (3.7%)
Citycon Oyj 48,258 160
Sponda Oyj 180,361 1,756
- ----------------------------------------------------------------------------------------------
1,916
==============================================================================================
FRANCE (14.6%)
Bail Investissement Fonciere 12,827 540
Gecina S.A. 39,376 3,894
Klepierre 9,922 877
Silic 2,681 269
Unibail 12,421 1,951
- ----------------------------------------------------------------------------------------------
7,531
==============================================================================================
GERMANY (1.9%)
IVG Immobilien AG 59,904 971
- ----------------------------------------------------------------------------------------------
ITALY (5.8%)
Aedes S.p.A. (a)127,370 678
Beni Stabili S.p.A. 2,269,725 2,309
- ----------------------------------------------------------------------------------------------
2,987
==============================================================================================
NETHERLANDS (11.7%)
AM N.V. 75,911 735
Corio N.V. REIT 15,171 887
Eurocommercial Properties N.V. CVA REIT 35,636 1,265
Rodamco Europe N.V. REIT 31,516 2,497
Vastned Offices/Industrial N.V. REIT 7,780 241
Wereldhave N.V. REIT 3,732 405
- ----------------------------------------------------------------------------------------------
6,030
==============================================================================================
NORWAY (0.9%)
Steen & Strom ASA 20,500 480
- ----------------------------------------------------------------------------------------------
SPAIN (7.4%)
Inmobiliaria Colonial S.A. 37,812 1,518
Inmobiliaria Urbis S.A. 71,047 1,029
Metrovacesa S.A. 26,627 1,236
- ----------------------------------------------------------------------------------------------
3,783
==============================================================================================
SWEDEN (0.1%)
Castellum AB 1,616 58
- ----------------------------------------------------------------------------------------------
SWITZERLAND (3.5%)
PSP Swiss Property AG 41,312 1,790
- ----------------------------------------------------------------------------------------------
UNITED KINGDOM (45.1%)
British Land Co. plc 238,431 4,098
Brixton plc 95,800 645
Capital & Regional plc 69,612 928
CLS Holdings plc (a)65,995 516
Derwent Valley Holdings plc 11,646 251
Freeport plc 141,913 1,078
Great Portland Estates plc 24,720 156
Hammerson plc (a)150,142 2,502
Land Securities Group plc 182,250 4,895
Liberty International plc 144,112 2,683
London Merchant Securities plc 118,011 510
Minerva plc 219,473 1,179
Pillar Property plc 28,338 444
Shaftesbury plc 62,142 441
Slough Estates plc 144,996 $ 1,530
Unite Group plc 227,794 1,320
- ----------------------------------------------------------------------------------------------
23,176
==============================================================================================
TOTAL COMMON STOCKS (COST $33,568) 49,332
==============================================================================================
<Caption>
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (4.0%)
REPURCHASE AGREEMENT (4.0%)
J.P. Morgan Securities, Inc., 2.00%,
dated 12/31/04, due 1/3/05,
repurchase price $2,048
(COST $2,048) $ (f)2,048 2,048
- ----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.9%) (COST $35,616) 51,380
==============================================================================================
OTHER ASSETS IN EXCESS OF LIABILITIES (0.1%) 67
==============================================================================================
NET ASSETS (100%) $ 51,447
==============================================================================================
</Table>
(a) Non-income producing security.
(f) Represents the Portfolio's undivided interest in a joint repurchase
agreement which has a total value of $1,018,656,000. The
repurchase agreement was fully collateralized by U.S. government
agency securities at the date of this portfolio of investments as follows:
Federal Farm Credit Bank, 0.00% to 6.75%, due 2/28/05 to 8/15/13;
Federal Home Loan Bank, 1.10% to 6.875%, due 4/15/05 to
10/28/24; Federal Home Loan Mortgage Corp., 2.00% to 6.51%, due
6/15/15 to 3/15/19; Federal National Mortgage Association, 1.75%
to 8.20%, due 2/24/05 to 5/24/19; and Financial Assist Corp.,
8.80%, due 6/10/05. The investment in the repurchase agreement is
through participation in a joint account with affiliated parties pursuant
to exemptive relief received by the Portfolio from the SEC.
CVA Certificaten Van Aandelen
REIT Real Estate Investment Trust
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
30
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW
GLOBAL FRANCHISE PORTFOLIO
[CHART]
COMPARISON OF THE CHANGE IN VALUE OF A $500,000* INVESTMENT SINCE INCEPTION
<Table>
<Caption>
LIPPER GLOBAL
FISCAL YEAR GLOBAL FRANCHISE MULTI-CAP
ENDED PORTFOLIO - MSCI GROWTH FUNDS
DECEMBER 31 CLASS A WORLD INDEX INDEX
** 500000 500000 500000
2001 524000 503100 510500
2002 566968 407511 397016
2003 725379 542438 540656
2004 825350 622150 621000
</Table>
[CHART]
COMPARISON OF THE CHANGE IN VALUE OF A $100,000* INVESTMENT SINCE INCEPTION
<Table>
<Caption>
LIPPER GLOBAL
FISCAL YEAR GLOBAL FRANCHISE MULTI-CAP
ENDED PORTFOLIO - MSCI GROWTH FUNDS
DECEMBER 31 CLASS B WORLD INDEX INDEX
*** 100000 100000 100000
2001 104700 100620 102100
2002 112898 81502 79403
2003 144103 108488 108131
2004 163660 124430 124200
</Table>
* Minimum Investment
** Commenced operations on November 28, 2001
*** Commenced offering on November 28, 2001
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) WORLD
INDEX(1) AND THE LIPPER GLOBAL MULTI-CAP GROWTH FUNDS INDEX(2)
<Table>
<Caption>
TOTAL RETURNS(3)
-------------------------
AVERAGE
ANNUAL
ONE SINCE
YEAR INCEPTION(6)
- --------------------------------------------------------------------------------
Portfolio - Class A (4) 13.77% 17.61%
Portfolio - Class B (5) 13.56 17.28
MSCI World Index 14.72 7.33
Lipper Global Multi-Cap Growth Funds Index 14.85 7.26
</Table>
(1) The MSCI World Index is a free float-adjusted market capitalization index
that is designed to measure global developed market equity performance. The
MSCI World Index consists of the following 23 developed market country
indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New
Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the
United Kingdom and the United States.
(2) The Lipper Global Multi-Cap Growth Funds Index is an equally weighted
performance index of the largest qualifying funds (based on net assets) in
the Lipper Global Multi-Cap Growth Funds classification. The Index, which
is adjusted for capital gains distributions and income dividends, is
unmanaged and should not be considered an investment. There are currently
10 funds represented in this Index. As of the date of this report, the
Portfolio is in the Lipper Global Multi-Cap Growth Funds classification.
(3) Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would have been lower. Fee waivers and/or reimbursements are
voluntary and the Adviser reserves the right to commence or terminate any
waiver and/or reimbursement at any time.
(4) Commenced operations on November 28, 2001
(5) Commenced offering on November 28, 2001
(6) For comparative purposes, average annual since inception returns listed for
the indexes refer to the inception date or initial offering of the
respective share class of the Portfolio, not the inception of the index.
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. PERFORMANCE ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE
REINVESTED. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT
morganstanley.com/im. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO
THAT PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. TOTAL RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A
SHAREHOLDER WOULD PAY ON PORTFOLIO DISTRIBUTIONS OR THE REDEMPTION OF PORTFOLIO
SHARES.
The Global Franchise Portfolio seeks long-term capital appreciation by investing
primarily in equity securities of issuers located throughout the world, that it
believes have, among other things, resilient business franchises and growth
potential. This Portfolio's concentration of its assets in a smaller number of
companies may subject it to greater investment risk than a portfolio with a
larger number of companies. Foreign investing involves certain risks, including
currency fluctuations and controls, restrictions on foreign investments, less
governmental supervision and regulation, less liquidity and the potential for
market volatility and political instability.
31
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW (CONT'D)
GLOBAL FRANCHISE PORTFOLIO
PERFORMANCE
For the year ended December 31, 2004, the Portfolio had a total return based on
net asset value per share of 13.77%, net of fees, for the Class A shares and
13.56%, net of fees, for the Class B shares, compared to 14.72% for the Morgan
Stanley Capital International (MSCI) World Index (the "Index").
FACTORS AFFECTING PERFORMANCE
- In the year marked by record high oil prices, it is no surprise that the
market has been driven by positive sector performance in utilities (+29%),
energy (+29%) and industrials (+20%). The three worst performing sectors
for the year were information technology (+3%), health care (+6%) and
consumer staples (+12%).
- For the year, we continued to adhere to the Portfolio's buy-and-hold
investment strategy.
- During the fourth quarter, the Portfolio had two noteworthy transactions.
The Portfolio added to its position in a major pharmaceutical company; and
we completed the final sale of a conglomerate in the Portfolio.
- In the first case, we met with the management and updated our model. We
concluded that the firm offers both resilient franchise and good value. We
are confident in the company's long-term prospects, and we believe that
the market is not giving it credit for both its new drug pipeline and
financial strength.
- The Portfolio's sale of our stake in the conglomerate was consistent with
our long-only investment philosophy and valuation discipline. The
Portfolio first initiated a position in this stock in July 1999. At that
time, it offered a free cash flow yield in excess of 8%. When the
Portfolio sold the stock in December, the free cash flow yield was below
5%.
MANAGEMENT STRATEGIES
- We continue our dialogue with a number of companies and are researching
new ideas.
- We remain focused on the global brands philosophy of exceptional quality
at compelling value. We continue to seek investment opportunities in
companies with strong business franchises protected by a dominant
intangible asset. Additionally, we demand sound management, substantial
free cash flow and growth potential. We invest in these high quality
companies only when we can identify compelling value as measured by a
current free cash flow yield in excess of the risk-free bond yield. We
seek to deliver attractive returns while striving to minimize business
risk and valuation risk.
EXPENSE EXAMPLES
As a shareholder of the Portfolio, you incur ongoing costs, including management
fees, distribution (12b-1) fees (in the case of Class B) and other Portfolio
expenses. These examples are intended to help you understand your ongoing costs
(in dollars) of investing in the Portfolio and to compare these costs with the
ongoing costs of investing in other mutual funds.
The examples are based on an investment of $1,000 invested at the beginning of
the six-month period ended December 31, 2004 and held for the entire six-month
period.
ACTUAL EXPENSES
The first line of the tables 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 tables below provides information about hypothetical
account values and hypothetical expenses based on the Portfolio's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Portfolio's actual return. The hypothetical account values and expenses may
not be used to estimate the actual ending account balance or expenses you paid
for the period. You may use this information to compare the ongoing costs of
investing in the Portfolio 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.
<Table>
<Caption>
EXPENSES PAID
ENDING ACCOUNT DURING PERIOD*
BEGINNING VALUE JULY 1, 2004--
ACCOUNT VALUE DECEMBER 31, DECEMBER 31,
JULY 1, 2004 2004 2004
- --------------------------------------------------------------------------------------
CLASS A
Actual $ 1,000.00 $ 1,076.00 $ 5.27
Hypothetical (5% average
annual return before expenses) 1,000.00 1,020.06 5.13
CLASS B
Actual 1,000.00 1,075.10 6.57
Hypothetical (5% average
annual return before expenses) 1,000.00 1,018.80 6.39
</Table>
* Expenses are equal to Class A and Class B annualized net expense ratios of
1.00% and 1.25%, respectively, multiplied by the average account value over
the period, multiplied by 184/366 (to reflect the one-half year period).
32
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW (CONT'D)
GLOBAL FRANCHISE PORTFOLIO
GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS
The following graph depicts the industry, as a percentage of total investments.
[CHART]
<Table>
Short-Term Investment 3.6%
Tobacco 23.0%
Food Products 18.2%
Pharmaceuticals 16.3%
Media 15.0%
Beverages 9.7%
Household Products 7.2%
Machinery 7.0%
</Table>
January 2005
33
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS
GLOBAL FRANCHISE PORTFOLIO
<Table>
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
COMMON STOCKS (97.6%)
CANADA (2.3%)
Torstar Corp., Class B 79,635 $ 1,458
- ----------------------------------------------------------------------------------------------
FINLAND (5.5%)
Kone Oyj, Class B 43,858 3,397
- ----------------------------------------------------------------------------------------------
FRANCE (6.6%)
Groupe Danone 29,116 2,684
Sanofi-Aventis S.A. 17,990 1,435
- ----------------------------------------------------------------------------------------------
4,119
==============================================================================================
NETHERLANDS (6.8%)
Reed Elsevier N.V. 122,214 1,663
Royal Numico N.V. (a)57,623 2,073
Wolters Kluwer N.V. CVA 23,847 478
- ----------------------------------------------------------------------------------------------
4,214
==============================================================================================
SPAIN (4.7%)
Altadis S.A. 42,576 1,946
Zardoya Otis S.A. 39,420 1,009
- ----------------------------------------------------------------------------------------------
2,955
==============================================================================================
SWEDEN (4.7%)
Swedish Match AB 250,674 2,903
- ----------------------------------------------------------------------------------------------
SWITZERLAND (8.1%)
Nestle S.A. (Registered) 10,750 2,805
Novartis AG (Registered) 43,865 2,205
- ----------------------------------------------------------------------------------------------
5,010
==============================================================================================
UNITED KINGDOM (41.2%)
Allied Domecq plc 289,100 2,845
British American Tobacco plc 272,434 4,691
Cadbury Schweppes plc 418,980 3,898
Capital Radio plc 135,627 1,145
Diageo plc 181,756 2,591
GlaxoSmithKline plc 112,337 2,634
Imperial Tobacco Group plc 80,887 2,214
Reckitt Benckiser plc 101,891 3,077
SMG plc 673,377 1,379
WPP Group plc 103,661 1,139
- ----------------------------------------------------------------------------------------------
25,613
==============================================================================================
UNITED STATES (17.7%)
Altria Group, Inc. 44,470 2,717
Bristol-Myers Squibb Co. 66,856 1,713
Brown-Forman Corp., Class B 13,633 664
Kimberly-Clark Corp. 22,011 1,448
Merck & Co., Inc. 70,820 2,276
Neenah Paper, Inc. (a)693 23
New York Times Co. (The), Class A 53,443 2,180
- ----------------------------------------------------------------------------------------------
11,021
==============================================================================================
TOTAL COMMON STOCKS (COST $42,893) 60,690
==============================================================================================
<Caption>
FACE
AMOUNT VALUE
(000) (000)
- ----------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (3.6%)
REPURCHASE AGREEMENT (3.6%)
J.P. Morgan Securities, Inc., 2.00%,
dated 12/31/04, due 1/3/05,
repurchase price $2,248
(COST $2,248) $ (f)2,248 $ 2,248
- ----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.2%) (COST $45,141) 62,938
==============================================================================================
LIABILITIES IN EXCESS OF OTHER ASSETS (-1.2%) (774)
==============================================================================================
NET ASSETS (100%) $ 62,164
==============================================================================================
</Table>
(a) Non-income producing security.
(f) Represents the Portfolio's undivided interest in a joint repurchase
agreement which has a total value of $1,018,656,000. The repurchase
agreement was fully collateralized by U.S. government agency securities at
the date of this portfolio of investments as follows: Federal Farm Credit
Bank, 0.00% to 6.75%, due 2/28/05 to 8/15/13; Federal Home Loan Bank,
1.10% to 6.875%, due 4/15/05 to 10/28/24; Federal Home Loan Mortgage
Corp., 2.00% to 6.51%, due 6/15/15 to 3/15/19; Federal National Mortgage
Association, 1.75% to 8.20%, due 2/24/05 to 5/24/19; and Financial Assist
Corp., 8.80%, due 6/10/05. The investment in the repurchase agreement is
through participation in a joint account with affiliated parties pursuant
to exemptive relief received by the Portfolio from the SEC.
CVA Certificaten Van Aandelen
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
The Portfolio had the following foreign currency exchange contract(s) open
at period end:
<Table>
<Caption>
NET
CURRENCY IN UNREALIZED
TO EXCHANGE APPRECIATION
DELIVER VALUE SETTLEMENT FOR VALUE (DEPRECIATION)
(000) (000) DATE (000) (000) (000)
- -----------------------------------------------------------------------------------------
GBP 6,570 $ 12,588 1/21/05 US$ 11,719 $ 11,719 $ (869)
US$ 16 16 1/3/05 EUR 12 16 @--
US$ 4 4 1/4/05 EUR 3 4 @--
---------- ---------- --------------
$ 12,608 $ 11,739 $ (869)
========== ========== ==============
</Table>
EUR -- Euro
GBP -- British Pound
@ -- Amount is less than $500.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
34
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW
GLOBAL VALUE EQUITY PORTFOLIO
[CHART]
COMPARISON OF THE CHANGE IN VALUE OF A $500,000* INVESTMENT OVER 10 YEARS
<Table>
<Caption>
GLOBAL LIPPER
VALUE GLOBAL
FISCAL EQUITY MSCI LARGE-CAP
YEAR PORTFOLIO - WORLD VALUE FUNDS
ENDED 31 CLASS A INDEX INDEX
1994 500000 500000 500000
1995 593320 603600 666214
1996 728799 684965 806553
1997 901918 792916 1036211
1998 1033634 985912 1225222
1999 1075124 1231798 1357292
2000 1201386 1069423 1383822
2001 1100986 889546 1265153
2002 909976 712616 1016213
2003 1175780 948563 1300726
2004 1341950 1088200 1320500
</Table>
[CHART]
COMPARISON OF THE CHANGE IN VALUE OF A $100,000* INVESTMENT SINCE INCEPTION
<Table>
<Caption>
GLOBAL LIPPER
VALUE GLOBAL
FISCAL YEAR EQUITY MSCI LARGE-CAP
ENDED PORTFOLIO - WORLD VALUE FUNDS
DECEMBER 31 CLASS B INDEX INDEX
** 100000 100000 100000
1996 122040 113480 120291
1997 150561 131364 154543
1998 171865 163339 182733
1999 178310 204075 202430
2000 198851 177174 206387
2001 181790 147374 188688
2002 149740 118061 151561
2003 193090 157151 193994
2004 219690 179490 217263
</Table>
* Minimum Investment
** Commenced offering on January 2, 1996
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) WORLD
INDEX(1) AND THE LIPPER GLOBAL LARGE-CAP VALUE FUNDS INDEX(2)
<Table>
<Caption>
TOTAL RETURNS(3)
-----------------------------------------
AVERAGE ANNUAL
-------------------------------
ONE FIVE TEN SINCE
YEAR YEARS YEARS INCEPTION(6)
- ------------------------------------------------------------------------------------
Portfolio - Class A (4) 14.13% 4.54% 10.38% 11.85%
MSCI World Index 14.72 (2.45) 8.09 8.51
Lipper Global Large-Cap Value Funds Index 14.31 2.55 10.28 --
Portfolio - Class B (5) 13.78 4.26 -- 9.14
MSCI World Index 14.72 (2.45) -- 6.72
Lipper Global Large-Cap Value Funds Index 14.31 2.55 -- --
</Table>
(1) The MSCI World Index is a free float-adjusted market capitalization index
that is designed to measure global developed market equity performance. The
MSCI World Index consists of the following 23 developed market country
indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New
Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the
United Kingdom and the United States.
(2) The Lipper Global Large-Cap Value Funds Index is an equally weighted
performance index of the largest qualifying funds (based on net assets) in
the Lipper Global Large-Cap Value Funds classification. The Index, which is
adjusted for capital gains distributions and income dividends, is unmanaged
and should not be considered an investment. As of the date of this report,
the Portfolio is in the Lipper Global Large-Cap Value Funds classification.
(3) Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would have been lower. Fee waivers and/or reimbursements are
voluntary and the Adviser reserves the right to commence or terminate any
waiver and/or reimbursement at any time.
(4) Commenced operations on July 15, 1992
(5) Commenced offering on January 2, 1996
(6) For comparative purposes, average annual since inception returns listed for
the indexes refer to the inception date or initial offering of the
respective share class of the Portfolio, not the inception of the index.
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. PERFORMANCE ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE
REINVESTED. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT
morganstanley.com/im. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO
THAT PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. TOTAL RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A
SHAREHOLDER WOULD PAY ON PORTFOLIO DISTRIBUTIONS OR THE REDEMPTION OF PORTFOLIO
SHARES.
The Global Value Equity Portfolio seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers. Foreign investing involves certain risks, including
currency fluctuations and controls, restrictions on foreign investments, less
governmental supervision and regulation, less liquidity and the potential for
market volatility and political instability.
PERFORMANCE
For the year ended December 31, 2004, the Portfolio had a total return based on
net asset value per share of 14.13% for the Class A shares, net of fees, and
13.78% for the Class B
35
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW (CONT'D)
GLOBAL VALUE EQUITY PORTFOLIO
shares, net of fees, compared to 14.72% for the Morgan Stanley Capital
International (MSCI) World Index (the "Index").
FACTORS AFFECTING PERFORMANCE
- Equity markets around the world ended the year on a positive note and
although the gains were not spectacular, there were very few negatives to
be seen. Much of the good news came from strong market performance
following the United States elections and although some concerns linger,
there is an expectation of continued growth in the major global economies
in 2005. On an absolute basis returns for the Portfolio were positive
across all sectors.
- On a relative basis, stock selection in information technology was the
strongest contributor over the twelve month period for the Portfolio.
However, information technology was the weakest performing sector for the
benchmark and, therefore, the Portfolio's underweight in the sector was
also positive. Stocks within the consumer staples sector also performed
well as food, beverage and tobacco holdings all had strong returns.
- Stock selection in the financials sector was the main detractor from
relative performance. The underperformance in this sector can be largely
attributed to holdings in the insurance sector, particularly one U.S.
holding which fell dramatically as the market reacted to a reserve
increase to cover adverse developments in some insurance business they had
previously written. We reviewed the capital position and relative merits
of this stock and decided to sell it from the Portfolio.
- Although there were a number of stock changes in the Portfolio over the
year, the key sector over and underweights remained the same.
MANAGEMENT STRATEGIES
- The Portfolio's management team continued to find value in consumer
staples, telecommunication services and pharmaceuticals sectors and remain
overweight in those. As mentioned, the Portfolio is underweight in the
information technology sector and also financials. The Portfolio also
continues to be significantly underweight relative to the benchmark to the
U.S., as we find that the price we have to pay for stocks there, in most
cases, is expensive relative to the price demanded for similar quality
peers in Europe or Asia.
- Our outlook is cautious. The U.S. is burdened with lingering economic
issues such as the balance of trade and budget deficit. In tandem, while
global economic growth is expected to continue in 2005 it is generally
anticipated that it will be slower than it was in the past twelve months.
As bottom up investors stock selection is key and we continue to focus our
research efforts on identifying investment opportunities which meet our
strict quality and valuation criteria.
EXPENSE EXAMPLES
As a shareholder of the Portfolio, you incur ongoing costs, including management
fees, distribution (12b-1) fees (in the case of Class B) and other Portfolio
expenses. These examples are intended to help you understand your ongoing costs
(in dollars) of investing in the Portfolio and to compare these costs with the
ongoing costs of investing in other mutual funds.
The examples are based on an investment of $1,000 invested at the beginning of
the six-month period ended December 31, 2004 and held for the entire six-month
period.
ACTUAL EXPENSES
The first line of the tables 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 tables below provides information about hypothetical
account values and hypothetical expenses based on the Portfolio's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Portfolio's actual return. The hypothetical account values and expenses may
not be used to estimate the actual ending account balance or expenses you paid
for the period. You may use this information to compare the ongoing costs of
investing in the Portfolio 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
<Table>
<Caption>
EXPENSES PAID
ENDING ACCOUNT DURING PERIOD*
BEGINNING VALUE JULY 1, 2004--
ACCOUNT VALUE DECEMBER 31, DECEMBER 31,
JULY 1, 2004 2004 2004
- --------------------------------------------------------------------------------------
CLASS A
Actual $ 1,000.00 $ 1,090.40 $ 5.25
Hypothetical (5% average
annual return before expenses) 1,000.00 1,020.11 5.08
CLASS B
Actual 1,000.00 1,088.60 6.56
Hypothetical (5% average
annual return before expenses) 1,000.00 1,018.85 6.34
</Table>
* Expenses are equal to Class A and Class B annualized net expense ratios of
1.00% and 1.25%, respectively, multiplied by the average account value over
the period, multiplied by 184/366 (to reflect the one-half year period).
36
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW
GLOBAL VALUE EQUITY PORTFOLIO (CONT'D)
GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS
The following graph depicts the Portfolio's holding by industry, as a percentage
of total investments.
[CHART]
<Table>
Pharmaceuticals 13.6%
Oil & Gas 6.8%
Commercial Banks 6.5%
Diversified Telecommunication Services 6.0%
Food Products 5.6%
Aerospace & Defense 5.1%
Media 4.8%
Insurance 4.7%
Tobacco 4.5%
Capital Markets 3.8%
Other* 34.8%
Short-Term Investment 3.8%
</Table>
* Industries which do not appear in the top 10 industries and industries
which represent less than 3% of total investments, if applicable, are
included in the category labeled "Other".
January 2005
37
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS
GLOBAL VALUE EQUITY PORTFOLIO
<Table>
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
COMMON STOCKS (96.4%)
AUSTRALIA (1.5%)
Foster's Group Ltd. 139,298 $ 631
National Australia Bank Ltd. 40,028 903
- ----------------------------------------------------------------------------------------------
1,534
==============================================================================================
BERMUDA (2.0%)
Tyco International Ltd. 28,250 1,009
XL Capital Ltd., Class A 12,516 972
- ----------------------------------------------------------------------------------------------
1,981
==============================================================================================
FRANCE (6.0%)
BNP Paribas S.A. 18,166 1,314
Groupe Danone 6,230 574
Lafarge S.A. 12,680 1,221
Sanofi-Aventis S.A. 17,230 1,374
Total S.A. 6,637 1,447
- ----------------------------------------------------------------------------------------------
5,930
==============================================================================================
GERMANY (1.6%)
BASF AG 14,931 1,073
Bayerische Motoren Werke AG 10,580 477
- ----------------------------------------------------------------------------------------------
1,550
==============================================================================================
HONG KONG (0.5%)
HongKong Electric Holdings Ltd. 113,180 517
- ----------------------------------------------------------------------------------------------
IRELAND (1.8%)
Bank of Ireland (London Shares) 73,474 1,213
Kerry Group plc, Class A 3,136 580
- ----------------------------------------------------------------------------------------------
1,793
==============================================================================================
ITALY (3.3%)
ENI S.p.A 70,443 1,760
Telecom Italia S.p.A. RNC 453,080 1,469
- ----------------------------------------------------------------------------------------------
3,229
==============================================================================================
JAPAN (10.8%)
Canon, Inc. 20,200 1,091
Fuji Photo Film Co., Ltd. 39,400 1,439
Kao Corp. 46,000 1,177
Mitsui Sumitomo Insurance Co., Ltd. 53,000 460
Nippon Telegraph & Telephone Corp. 143 642
Rohm Co., Ltd. 5,400 559
Sankyo Co., Ltd. 23,100 522
Sekisui House Ltd. 72,000 839
Sumitomo Electric Industries Ltd. 86,000 936
Takeda Pharmaceutical Co., Ltd. 30,400 1,531
Toyota Motor Corp. 10,900 444
Yamanouchi Pharmaceutical Co., Ltd. 28,100 1,095
- ----------------------------------------------------------------------------------------------
10,735
==============================================================================================
NETHERLANDS (3.4%)
Koninklijke Philips Electronics N.V. 15,693 415
Royal Dutch Petroleum Co. (NY Shares) 36,038 2,068
Unilever N.V. CVA 14,068 941
- ----------------------------------------------------------------------------------------------
3,424
==============================================================================================
SOUTH KOREA (0.9%)
SK Telecom Co., Ltd. ADR 39,378 876
- ----------------------------------------------------------------------------------------------
SPAIN (1.2%)
Telefonica S.A. 61,442 1,155
- ----------------------------------------------------------------------------------------------
SWITZERLAND (6.3%)
Holcim Ltd. (Registered) 9,919 $ 596
Nestle S.A. (Registered) 7,139 1,863
Novartis AG (Registered) 21,329 1,072
Roche Holding AG (Genusschein) 4,696 539
Syngenta AG (a)10,284 1,090
UBS AG (Registered) 12,783 1,069
- ----------------------------------------------------------------------------------------------
6,229
==============================================================================================
UNITED KINGDOM (20.4%)
Allied Domecq plc 100,682 991
Amvescap plc 76,931 473
BAA plc 61,244 686
Barclays plc 104,981 1,180
Cadbury Schweppes plc 176,553 1,643
Diageo plc 80,369 1,146
GlaxoSmithKline plc 110,159 2,582
Imperial Tobacco Group plc 63,914 1,750
Prudential plc 67,347 585
Reed Elsevier plc 238,036 2,194
Rentokil Initial plc 143,142 406
Rolls-Royce Group plc (a)249,041 1,180
Rolls-Royce Group plc, Class B 7,665,072 15
Royal Bank of Scotland Group plc 53,910 1,812
Scottish & Southern Energy plc 65,224 1,092
Vodafone Group plc 696,202 1,887
WPP Group plc 51,625 567
- ----------------------------------------------------------------------------------------------
20,189
==============================================================================================
UNITED STATES (36.7%)
Alcoa, Inc. 27,565 866
Altria Group, Inc. 32,076 1,960
American Electric Power Co., Inc. 27,682 951
BJ's Wholesale Club, Inc. (a)30,595 891
Boeing Co. (The) 27,563 1,427
Bristol-Myers Squibb Co. 50,584 1,296
ChevronTexaco Corp. 14,212 746
Citigroup, Inc. 45,706 2,202
Coca Cola Co. (The) 10,497 437
DuPont (E.I.) De Nemours & Co. 5,494 269
Emerson Electric Co. 4,993 350
Exxon Mobil Corp. 13,469 690
First Data Corp. 25,493 1,084
Gap, Inc. (The) 23,344 493
General Dynamics Corp. 9,394 983
Georgia-Pacific Corp. 19,096 716
Hewlett-Packard Co. 46,786 981
International Business Machines Corp. 21,688 2,138
Kroger Co. (The) (a)41,852 734
Loews Corp. - Carolina Group 25,642 742
MBIA, Inc. 9,674 612
McDonald's Corp. 36,286 1,163
Mellon Financial Corp. 36,982 1,150
Merck & Co., Inc. 12,690 408
Merrill Lynch & Co., Inc. 17,780 1,063
New York Times Co. (The), Class A 24,769 1,011
Northrop Grumman Corp. 15,224 828
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
38
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS (CONT'D)
GLOBAL VALUE EQUITY PORTFOLIO
<Table>
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
UNITED STATES (CONT'D)
Pfizer, Inc. 38,814 $ 1,044
Prudential Financial, Inc. 17,811 979
SBC Communications, Inc. 46,473 1,198
St. Paul Travelers Cos., Inc. (The) 29,758 1,103
United Technologies Corp. 5,640 583
Verizon Communications, Inc. 35,714 1,447
Viacom, Inc., Class B 27,824 1,012
Wyeth 48,738 2,076
Xerox Corp. (a)42,135 717
- ----------------------------------------------------------------------------------------------
36,350
==============================================================================================
TOTAL COMMON STOCKS (COST $78,806) 95,492
==============================================================================================
<Caption>
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (3.8%)
REPURCHASE AGREEMENT (3.8%)
J.P. Morgan Securities, Inc., 2.00%,
dated 12/31/04, due 1/3/05,
repurchase price $3,767
(COST $3,766) $ (f)3,766 3,766
- ----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.2%) (COST $82,572) 99,258
==============================================================================================
LIABILITIES IN EXCESS OF OTHER ASSETS (-0.2%) (155)
==============================================================================================
NET ASSETS (100%) $ 99,103
==============================================================================================
</Table>
(a) Non-income producing security.
(f) Represents the Portfolio's undivided interest in a joint repurchase
agreement which has a total value of $1,018,656,000. The repurchase
agreement was fully collateralized by U.S. government agency securities at
the date of this portfolio of investments as follows: Federal Farm Credit
Bank, 0.00% to 6.75%, due 2/28/05 to 8/15/13; Federal Home Loan Bank,
1.10% to 6.875%, due 4/15/05 to 10/28/24; Federal Home Loan Mortgage
Corp., 2.00% to 6.51%, due 6/15/15 to 3/15/19; Federal National Mortgage
Association, 1.75% to 8.20%, due 2/24/05 to 5/24/19; and Financial Assist
Corp., 8.80%, due 6/10/05. The investment in the repurchase agreement is
through participation in a joint account with affiliated parties pursuant
to exemptive relief received by the Portfolio from the SEC.
ADR American Depositary Receipts
CVA Certificaten Van Aandelen
RNC Non-Convertible Savings Shares
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
39
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW
INTERNATIONAL EQUITY PORTFOLIO
[CHART]
COMPARISON OF THE CHANGE IN VALUE OF A $500,000* INVESTMENT OVER 10 YEARS
<Table>
<Caption>
LIPPER
INTERNATIONAL INTERNATIONAL
FISCAL YEAR EQUITY MSCI LARGE-CAP
ENDED PORTFOLIO - EAFE CORE FUNDS
DECEMBER 31 CLASS A INDEX INDEX
1994 500000 500000 500000
1995 558750 556050 558303
1996 668489 589691 638165
1997 761475 600188 702015
1998 900825 720201 805948
1999 1053155 914367 1119884
2000 1150993 784765 994772
2001 1038840 616480 792539
2002 997079 518213 677207
2003 1324320 718191 898643
2004 1588750 863650 1053000
</Table>
[CHART]
COMPARISON OF THE CHANGE IN VALUE OF A $100,000* INVESTMENT SINCE INCEPTION
<Table>
<Caption>
LIPPER
INTERNATIONAL INTERNATIONAL
FISCAL YEAR EQUITY MSCI LARGE-CAP
ENDED PORTFOLIO - EAFE CORE FUNDS
DECEMBER 31 CLASS B INDEX INDEX
** 100000 100000 100000
1996 118580 106050 113554
1997 134671 107938 124916
1998 159087 129521 143409
1999 185623 164440 199271
2000 202218 141132 177009
2001 182340 110868 141023
2002 174590 93195 120501
2003 231262 129159 159904
2004 276780 155220 187370
</Table>
* Minimum Investment
** Commenced offering on January 2, 1996
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EAFE
INDEX(1) AND THE LIPPER INTERNATIONAL LARGE-CAP CORE FUNDS INDEX(2)
<Table>
<Caption>
TOTAL RETURNS(3)
--------------------------------------------
AVERAGE ANNUAL
----------------------------------
ONE FIVE TEN SINCE
YEAR YEARS YEARS INCEPTION(6)
- --------------------------------------------------------------------------------
Portfolio - Class A (4) 19.96% 8.57% 12.26% 11.69%
MSCI EAFE Index 20.25 (1.13) 5.62 4.52
Lipper International Large-Cap
Core Funds Index 17.18 (1.22) 7.73 --
Portfolio - Class B (5) 19.67 8.32 -- 11.98
MSCI EAFE Index 20.25 (1.13) -- 5.01
Lipper International Large-Cap
Core Funds Index 17.18 (1.22) -- 7.23
</Table>
(1) The MSCI EAFE Index (Europe, Australasia, Far East) is a free
float-adjusted market capitalization index that is designed to measure
developed market equity performance, excluding the U.S. & Canada. The MSCI
EAFE Index consists of the following 21 developed market country indices:
Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece,
Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway,
Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.
(2) The Lipper International Large-Cap Core Funds Index is an equally weighted
performance index of the largest qualifying funds (based on net assets) in
the Lipper International Large-Cap Core Funds classification. The Index,
which is adjusted for capital gains distributions and income dividends, is
unmanaged and should not be considered an investment. There are currently
10 funds represented in this Index. As of the date of this report, the
Portfolio is in the Lipper International Large-Cap Core Funds
classification.
(3) Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would have been lower. Fee waivers and/or reimbursements are
voluntary and the Adviser reserves the right to commence or terminate any
waiver and/or reimbursement at any time.
(4) Commenced operations on August 4, 1989
(5) Commenced offering on January 2, 1996
(6) For comparative purposes, average annual since inception returns listed for
the indexes refer to the inception date or initial offering of the
respective share class of the Portfolio, not the inception of the index.
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. PERFORMANCE ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE
REINVESTED. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT
morganstanley.com/im. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO
THAT PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. TOTAL RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A
SHAREHOLDER WOULD PAY ON PORTFOLIO DISTRIBUTIONS OR THE REDEMPTION OF PORTFOLIO
SHARES.
The International Equity Portfolio seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers. Foreign investing
involves certain risks, including currency fluctuations and controls,
restrictions on foreign investments, less governmental supervision and
regulation, less liquidity and the potential for market volatility and political
instability.
40
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW (CONT'D)
INTERNATIONAL EQUITY PORTFOLIO
PERFORMANCE
For the year ended December 31, 2004, the Portfolio had a total return based on
net asset value per share of 19.96% for the Class A shares, net of fees, and
19.67% for the Class B shares, net of fees, compared to 20.25% for the Morgan
Stanley Capital International (MSCI) EAFE Index (the "Index").
FACTORS AFFECTING PERFORMANCE
- Currency was once again a major factor driving returns with the U.S.
dollar declining 16.8% against the Euro, 10% against the British pound and
9.7% against the Japanese yen. The fall against the commodity linked
currencies of Australia, South Africa and New Zealand was even more
pronounced at over 20%.
- Portfolio returns for the year broadly matched those of the Index with
strong outperformance from stock selection in telecoms, consumer staples
(despite the disappointing performance of the food manufacturers), health
care and materials, offset by poor stock selection in the utilities and
consumer discretionary sectors (mainly autos and media) and the large
underweight position in financials.
- On a country basis, stock selection in the United Kingdom (consumer
staples, particularly tobacco), France (telecom and health care) and Italy
(telecoms) were positive contributors, while poor stock selection in Japan
(information technology, consumer discretionary, telecoms) and underweight
exposure to the strongly performing Australian currency and local market
were the two largest negative factors.
MANAGEMENT STRATEGIES
- 2004 was a year where investors were generally handsomely rewarded for
taking risk across virtually every asset class whether one looks at the
narrowing of spreads in corporate and emerging market debt, to speculative
commodity positions or to the seemingly universal fall in property yields.
However, as we enter 2005, risk aversion may become the watch word if the
economic imbalances and geopolitical uncertainties evident throughout 2004
start to have a more pronounced effect on economic growth in 2005. This is
the case with the knock-on effects from the U.S. authorities' tacit change
in U.S. dollar policy. So far equity markets have responded in a
remarkably benign and almost complacent fashion to this significant change
in U.S. policy, no more so than the Euro bloc markets whose already
fragile economies we believe will undoubtedly suffer from a loss of
competitiveness. In our opinion, politicians and equity investors' resolve
will surely be severely tested if the dollar repeats its performance again
this year.
- An emerging theme in equity markets has been the hunt for high and
sustainable dividend yielding companies (hence the outperformance of
utilities). We believe with free cash flows at or very near a cyclical
high, and corporate balance sheets in good standing after three years of
balance sheet repair (a decade or more for Japanese companies) the
prospects for significant dividend growth look sound, making dividend
yield an increasingly meaningful contributor to total return. We expect
the search for yield will continue to be a major theme in 2005 and will
spread to companies with the prospect of converting high free cash flow
yields into tangible dividend yields.
EXPENSE EXAMPLES
As a shareholder of the Portfolio, you incur ongoing costs, including management
fees, distribution (12b-1) fees (in the case of Class B) and other Portfolio
expenses. These examples are intended to help you understand your ongoing costs
(in dollars) of investing in the Portfolio and to compare these costs with the
ongoing costs of investing in other mutual funds.
The examples are based on an investment of $1,000 invested at the beginning of
the six-month period ended December 31, 2004 and held for the entire six-month
period.
ACTUAL EXPENSES
The first line of the tables 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 tables below provides information about hypothetical
account values and hypothetical expenses based on the Portfolio's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Portfolio's actual return. The hypothetical account values and expenses may
not be used to estimate the actual ending account balance or expenses you paid
for the period. You may use this information to compare the ongoing costs of
investing
41
<Page>
2004 ANNUAL REPORT
DECEMBER 31, 2004
INVESTMENT OVERVIEW (CONT'D)
INTERNATIONAL EQUITY PORTFOLIO
in the Portfolio 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.
<Table>
<Caption>
EXPENSES PAID
ENDING ACCOUNT DURING PERIOD*
BEGINNING VALUE JULY 1, 2004--
ACCOUNT VALUE DECEMBER 31, DECEMBER 31,
JULY 1, 2004 2004 2004
- --------------------------------------------------------------------------------------
CLASS A
Actual $ 1,000.00 $ 1,134.10 $ 5.20
Hypothetical (5% average
annual return before expenses) 1,000.00 1,020.26 4.93
CLASS B
Actual 1,000.00 1,132.80 6.54
Hypothetical (5% average
annual return before expenses) 1,000.00 1,019.00 6.19
</Table>
* Expenses are equal to Class A and Class B annualized net expense ratios of
0.97% and 1.22%, respectively, multiplied by the average account value over
the period, multiplied by 184/366 (to reflect the one-half year period).
GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS
The following graph depicts the Portfolio's holdings by industry, as a
percentage of total investments.
[CHART]
<Table>
Diversified Telecommunication Services 13.0%
Commercial Banks 7.5%
Food Products 7.4%
Oil & Gas 6.5%
Pharmaceuticals 5.8%
Tobacco 4.1%
Commercial Services & Supplies 3.5%
Chemicals 3.1%
Other* 37.5%
Short-Term Investments 11.6%
</Table>
* Industries which do not appear in the top 10 industries and industries which
represent less than 3% of total investments, if applicable, are included in
the category labeled "Other".
January 2005
42
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS
INTERNATIONAL EQUITY PORTFOLIO
<Table>
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
COMMON STOCKS (97.0%)
AUSTRALIA (1.4%)
National Australia Bank Ltd. (c)1,865,064 $ 42,055
Telstra Corp., Ltd. 19,202,388 73,768
- ----------------------------------------------------------------------------------------------
115,823
==============================================================================================
AUSTRIA (1.2%)
Telekom Austria AG 5,451,798 103,165
- ----------------------------------------------------------------------------------------------
BELGIUM (0.7%)
Fortis (a)(c)1,964,038 54,270
- ----------------------------------------------------------------------------------------------
CANADA (0.7%)
Royal Bank of Canada (c)1,020,595 54,581
- ----------------------------------------------------------------------------------------------
FINLAND (0.5%)
Nokia Oyj 2,355,989 37,136
- ----------------------------------------------------------------------------------------------
FRANCE (9.1%)
BNP Paribas S.A. (c)721,827 52,189
France Telecom S.A. (c)10,558,414 348,896
Renault S.A. (c)672,956 56,187
Sanofi-Aventis S.A. (c)1,012,481 80,758
Societe Generale 516,311 52,143
Total S.A. (c)729,559 159,036
- ----------------------------------------------------------------------------------------------
749,209
==============================================================================================
GERMANY (6.2%)
Bayer AG 1,342,283 45,411
Bayerische Motoren Werke AG 1,395,115 62,830
Deutsche Telekom AG (Registered) (a)(c)5,716,970 129,122
Linde AG 704,784 44,035
Muenchener Rueckversicherungs AG
(Registered) (c)435,985 53,493
Porsche AG (Non-Voting Shares) (c)123,937 78,933
Siemens AG (Registered) (c)1,212,439 102,595
- ----------------------------------------------------------------------------------------------
516,419
==============================================================================================
ITALY (4.4%)
ENI S.p.A. 3,398,820 84,925
Telecom Italia S.p.A. RNC (c)53,025,809 171,912
UniCredito Italiano S.p.A. 19,186,952 110,095
- ----------------------------------------------------------------------------------------------
366,932
==============================================================================================
JAPAN (18.2%)
Asatsu-DK, Inc. (c)686,600 19,339
Canon, Inc. (c)2,519,600 136,028
Central Japan Railway Co. (c)1,330 10,868
Dai Nippon Printing Co., Ltd. (c)9,958,000 159,826
Daiwa Securities Group, Inc. 1,363,000 9,847
Fuji Photo Film Co., Ltd. (c)4,716,600 172,216
Fuji Television Network, Inc. 7,930 17,187
Japan Tobacco, Inc. 2,262 25,838
Kansai Electric Power Co., Inc. (The) 5,871,700 119,234
Kao Corp. 4,996,000 127,790
Kyocera Corp. 1,111,800 85,640
Lawson, Inc. 1,031,300 38,058
Millea Holdings, Inc. 2,776 41,194
Mitsubishi Estate Co., Ltd. (c)5,154,400 60,385
Mitsui Sumitomo Insurance Co., Ltd. 4,952,000 43,027
Nippon Telegraph & Telephone Corp. 8,511 38,222
NTT DoCoMo, Inc. 23,074 42,575
Oriental Land Co., Ltd. (c)941,000 $ 65,410
Osaka Gas Co., Ltd. 13,953,000 43,590
Rohm Co., Ltd. 783,500 81,081
Tokyo Gas Co., Ltd. (c)20,077,200 82,324
Yamanouchi Pharmaceutical Co., Ltd. 2,099,200 81,771
- ----------------------------------------------------------------------------------------------
1,501,450
==============================================================================================
NETHERLANDS (8.7%)
ABN AMRO Holding N.V. 2,087,638 55,193
Akzo Nobel N.V. (c)1,911,883 81,383
CSM N.V. CVA 1,070,076 33,270
ING Groep N.V. CVA 3,041,036 91,826
Royal Dutch Petroleum Co. (c)2,691,603 154,627
Royal KPN N.V. 3,576,517 33,912
Unilever N.V. CVA 4,005,250 268,016
- ----------------------------------------------------------------------------------------------
718,227
==============================================================================================
NEW ZEALAND (0.7%)
Telecom Corp. of New Zealand Ltd. (c)13,924,564 61,491
- ----------------------------------------------------------------------------------------------
SOUTH KOREA (1.4%)
Samsung Electronics Co., Ltd. GDR
(Registered) 544,776 119,306
- ----------------------------------------------------------------------------------------------
SPAIN (2.1%)
Telefonica S.A. 9,265,273 174,197
- ----------------------------------------------------------------------------------------------
SWEDEN (1.4%)
Nordea Bank AB 6,884,824 69,369
SKF AB, Class B 1,093,571 48,679
- ----------------------------------------------------------------------------------------------
118,048
==============================================================================================
SWITZERLAND (9.7%)
Credit Suisse Group (a)1,592,047 66,751
Holcim Ltd. (Registered) 1,777,283 106,788
Nestle S.A. (Registered) 1,045,825 272,912
Novartis AG (Registered) 3,243,593 163,026
Roche Holding AG (Genusschein) 421,719 48,422
UBS AG (Registered) 1,730,417 144,726
- ----------------------------------------------------------------------------------------------
802,625
==============================================================================================
TAIWAN (0.7%)
Chunghwa Telecom Co., Ltd. ADR 2,613,621 55,017
- ----------------------------------------------------------------------------------------------
UNITED KINGDOM (29.9%)
Allied Domecq plc 16,649,456 163,854
BAA plc 2,505,509 28,070
Barclays plc 15,121,024 169,988
BHP Billiton plc 8,559,722 100,250
BOC Group plc 5,850,778 111,512
BP plc 20,298,805 197,821
British American Tobacco plc 8,283,759 142,627
Bunzl plc 5,262,341 43,864
Cadbury Schweppes plc 10,375,095 96,532
DX Services plc (a)1,661,730 11,667
GlaxoSmithKline plc 6,654,169 155,992
GUS plc 3,157,308 56,845
Hays plc 33,234,604 79,218
Imperial Tobacco Group plc 7,554,303 206,803
ITV plc 18,385,150 37,122
National Grid Transco plc 12,411,286 118,097
Prudential plc 11,776,049 102,338
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
43
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS (CONT'D)
INTERNATIONAL EQUITY PORTFOLIO
<Table>
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
UNITED KINGDOM (CONT'D)
Reckitt Benckiser plc 3,240,633 $ 97,853
Reed Elsevier plc 16,101,273 148,420
Rentokil Initial plc 13,199,734 37,414
Rolls-Royce Group plc (a)11,823,515 56,025
Rolls-Royce Group plc, Class B 390,324,138 764
Royal Bank of Scotland Group plc 2,472,054 83,087
Vodafone Group plc 65,948,260 178,702
Wolseley plc 2,802,162 52,332
- ----------------------------------------------------------------------------------------------
2,477,197
==============================================================================================
TOTAL COMMON STOCKS (COST $6,303,049) 8,025,093
==============================================================================================
<Caption>
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (13.5%)
SHORT-TERM DEBT SECURITIES HELD AS COLLATERAL ON LOANED SECURITIES (12.7%)
Bank of New York, 2.33%, 10/28/05 $ (h)39,612 39,612
Bear Stearns, 2.37%, 4/15/05 (h)21,766 21,766
Beta Finance, Inc., 2.28%, 2/18/05 16,333 16,333
Calyon NY, 2.04%, 3/4/05 (h)34,790 34,790
CIT Group Holdings,
2.17%, 1/31/05 (h)3,371 3,371
2.30%, 2/14/05 (h)18,374 18,374
Citigroup, Inc., 2.39%, 9/1/05 (h)11,602 11,602
Compass Securitization, 2.38%, 3/17/05 (h)16,912 16,912
Corporate Receivables Corp.,
2.46%, 3/14/05 7,211 7,211
Discover Card Master Trust, 2.39%, 5/16/05 (h)(i)16,096 16,096
Eni Coordination Center, 2.38%, 8/29/05 12,081 12,081
Giro Funding U.S. Corp., 2.37%, 2/7/05 7,222 7,222
HBOS Treasury Services plc, N.Y.,
2.46%, 3/14/05 14,502 14,502
International Lease Finance Corp.,
2.51%, 9/22/05 (h)18,625 18,625
Jackson National Life Global Fund,
2.32%, 1/18/05 (h)12,087 12,087
K2 (USA) LLC, 2.33%, 10/24/05 (h)34,298 34,298
Landesbank Hessen Thur New York,
2.24%, 2/2/05 (h)12,193 12,193
Lehman Brothers, Inc., 2.33%, 1/3/05 296,201 296,201
Links Finance LLC,
2.33%, 10/27/05 (h)24,154 24,154
2.40%, 9/26/05 (h)12,081 12,081
Marshall & Ilsley Bank, 2.51%, 12/29/05 (h)33,828 33,828
Nationwide Building Society, 2.58%, 1/2/06 (h)28,027 28,027
Pfizer, Inc., 2.30%, 1/31/06 (h)24,161 24,161
Proctor & Gamble, 2.42%, 1/31/06 (h)9,906 9,906
Royal Bank of Canada NY, 2.38%, 6/27/05 (h)24,158 24,157
Sheffield Receivable Corp., 2.21%, 1/12/05 33,910 33,910
Sigma Finance, Inc., 2.38%, 9/15/05 (h)24,163 24,163
SLM Corp., 2.41%, 1/31/06 (h)24,161 24,161
Societe Generale, N.Y., 2.04%, 3/3/05 (h)25,368 25,368
Svenska Handelsbank N.Y., 2.32%, 5/10/05 (h)24,157 24,157
UBS Finance (Delaware), Inc., 2.33%, 1/6/05 36,225 36,225
UBS Securities LLC, 2.30%, 1/3/05 135,277 135,277
- ----------------------------------------------------------------------------------------------
1,052,851
==============================================================================================
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
INVESTMENT COMPANY HELD AS COLLATERAL ON LOANED SECURITIES (0.1%)
JPMorgan Securities Lending Collateral
Investment Fund 6,088,591 $ 6,089
<Caption>
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT (0.7%)
J.P. Morgan Securities, Inc., 2.00%,
dated 12/31/04, due 1/3/05,
repurchase price $55,923 $ (f)55,914 55,914
- ----------------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (COST $1,114,854) 1,114,854
==============================================================================================
TOTAL INVESTMENTS (110.5%) (COST $7,417,903)--
INCLUDING $1,006,675 OF SECURITIES LOANED 9,139,947
==============================================================================================
LIABILITIES IN EXCESS OF OTHER ASSETS (-10.5%) (866,063)
==============================================================================================
NET ASSETS (100%) $ 8,273,884
==============================================================================================
</Table>
(a) Non-income producing security.
(c) All or portion of security on loan at December 31, 2004.
(f) Represents the Portfolio's undivided interest in a joint repurchase
agreement which has a total value of $1,018,656,000. The repurchase
agreement was fully collateralized by U.S. government agency securities
at the date of this portfolio of investments as follows: Federal Farm
Credit Bank, 0.00% to 6.75%, due 2/28/05 to 8/15/13; Federal Home Loan
Bank, 1.10% to 6.875%, due 4/15/05 to 10/28/24; Federal Home Loan
Mortgage Corp., 2.00% to 6.51%, due 6/15/15 to 3/15/19; Federal National
Mortgage Association, 1.75% to 8.20%, due 2/24/05 to 5/24/19; and
Financial Assist Corp., 8.80%, due 6/10/05. The investment in the
repurchase agreement is through participation in a joint account with
affiliated parties pursuant to exemptive relief received by the Portfolio
from the SEC.
(h) Variable/Floating Rate Security -- interest rate changes on these
instruments are based on changes in a designated base rate. The rates
shown are those in effect on December 31, 2004.
(i) Security's issuer is an affiliate of the adviser. Held as collateral for
securities on loan.
ADR American Depositary Receipts
CVA Certificaten Van Aandelen
GDR Global Depositary Receipts
RNC Non-Convertible Savings Shares
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
The Portfolio had the following foreign currency exchange contract(s) open at
period end:
<Table>
<Caption>
NET
CURRENCY IN UNREALIZED
TO EXCHANGE APPRECIATION
DELIVER VALUE SETTLEMENT FOR VALUE (DEPRECIATION)
(000) (000) DATE (000) (000) (000)
- -----------------------------------------------------------------------------------------
EUR 481 $ 653 1/5/05 JPY 68,018 $ 664 $ 11
EUR 413 560 1/6/05 JPY 57,788 564 4
GBP 330 634 1/5/05 EUR 467 634 @--
GBP 121,000 231,789 1/24/05 EUR 172,698 234,297 2,508
GBP 141,200 270,484 1/24/05 JPY 27,320,153 267,109 (3,375)
---------- ---------- --------------
$ 504,120 $ 503,268 $ (852)
========== ========== ==============
</Table>
EUR -- Euro
GBP -- British Pound
JPY -- Japanese Yen
@ -- Amount is less than $500.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
44
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW
INTERNATIONAL MAGNUM PORTFOLIO
[CHART]
COMPARISON OF THE CHANGE IN VALUE OF A $500,000* INVESTMENT OVER 10 YEARS
<Table>
<Caption>
LIPPER
INTERNATIONAL INTERNATIONAL
FISCAL YEAR MAGNUM MSCI MULTI-CAP
ENDED PORTFOLIO - EAFE CORE FUNDS
DECEMBER 31 CLASS A INDEX INDEX
** 500000 500000 500000
1996 541250 526300 564097
1997 576864 535668 611118
1998 619148 642802 669245
1999 773130 816101 964110
2000 691951 700377 831874
2001 562487 550217 685289
2002 487339 467134 589468
2003 629008 647401 809267
2004 745100 779050 964700
</Table>
[CHART]
COMPARISON OF THE CHANGE IN VALUE OF A $100,000* INVESTMENT SINCE INCEPTION
<Table>
<Caption>
LIPPER
INTERNATIONAL INTERNATIONAL
FISCAL YEAR MAGNUM MSCI MULTI-CAP
ENDED PORTFOLIO - EAFE CORE FUNDS
DECEMBER 31 CLASS B INDEX INDEX
*** 100000 100000 100000
1996 107900 105260 112819
1997 114730 107134 122224
1998 122910 128560 133849
1999 153121 163220 192822
2000 136569 140075 166375
2001 110798 110043 137058
2002 95851 93427 117894
2003 123159 129480 161853
2004 145500 155810 192940
</Table>
* Minimum Investment
** Commenced operations on March 15, 1996
*** Commenced offering on March 15, 1996
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EAFE
INDEX(1) AND THE LIPPER INTERNATIONAL MULTI-CAP CORE FUNDS INDEX(2)
<Table>
<Caption>
TOTAL RETURNS(3)
--------------------------------
AVERAGE ANNUAL
----------------------
ONE FIVE SINCE
YEAR YEARS INCEPTION(6)
- ----------------------------------------------------------------------------
Portfolio - Class A (4) 18.45% (0.74)% 4.64%
Portfolio - Class B (5) 18.15 (1.00) 4.36
MSCI EAFE Index 20.25 (1.13) 5.17
Lipper International Multi-Cap Core
Funds Index 19.20 0.01 7.76
</Table>
(1) The MSCI EAFE Index (Europe, Australasia, Far East) is a free
float-adjusted market capitalization index that is designed to measure
developed market equity performance, excluding the U.S. & Canada. The MSCI
EAFE Index consists of the following 21 developed market country indices:
Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece,
Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway,
Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.
(2) The Lipper International Multi-Cap Core Funds Index is an equally weighted
performance index of the largest qualifying funds (based on net assets) in
the Lipper International Multi-Cap Core Funds classification. The Index,
which is adjusted for capital gains distributions and income dividends, is
unmanaged and should not be considered an investment. There are currently
10 funds represented in this Index. As of the date of this report, the
Portfolio is in the Lipper International Multi-Cap Core Funds
classification.
(3) Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would have been lower. Fee waivers and/or reimbursements are
voluntary and the Adviser reserves the right to commence or terminate any
waiver and/or reimbursement at any time.
(4) Commenced operations on March 15, 1996
(5) Commenced offering on March 15, 1996
(6) For comparative purposes, average annual since inception returns listed for
the indexes refer to the inception date or initial offering of the
respective share class of the Portfolio, not the inception of the index.
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. PERFORMANCE ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE
REINVESTED. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT
morganstanley.com/im. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO
THAT PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. TOTAL RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A
SHAREHOLDER WOULD PAY ON PORTFOLIO DISTRIBUTIONS OR THE REDEMPTION OF PORTFOLIO
SHARES.
The International Magnum Portfolio seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers domiciled in EAFE
countries. Foreign investing involves certain risks, including currency
fluctuations and controls, restrictions on foreign investments, less
governmental supervision and regulation, less liquidity and the potential for
market volatility and political instability.
45
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW (CONT'D)
INTERNATIONAL MAGNUM PORTFOLIO
PERFORMANCE
For the year ended December 31, 2004, the Portfolio had a total return based on
net asset value per share of 18.45%, net of fees, for the Class A shares and
18.15%, net of fees, for the Class B shares compared to 20.25% for the Morgan
Stanley Capital International (MSCI) EAFE Index (the "Index").
FACTORS AFFECTING PERFORMANCE
- The first half of 2004 saw a continuation of economic growth, albeit at a
more moderate pace. Global equity markets advanced, reflecting investors'
belief that growth in corporate profits was sustainable.
- As we entered the second half of the year, soaring oil prices and
heightened geo-political fears weighed heavily on world equity markets. A
dip in the United States (U.S.) leading economic indicators, an abrupt
slowdown in Japan's gross domestic product (GDP) growth, and tepid
domestic activity in Europe pointed to a softening of the global economic
expansion. After a correction in July and August, markets began to reverse
course in September and completed the year on a high note reflecting
improved sentiment and a return of confidence in growth. For the year,
non-U.S. markets significantly outperformed the U.S. markets based on a
combination of better valuations and a stronger local currency.
- From a regional allocation perspective, the Portfolio did not benefit from
its underweight to Europe and Asia ex-Japan and overweight to Japan.
Europe ended the year with a positive return in U.S. dollar terms (+12.2%
in local terms) on the back of strong performance from the financial
sector, particularly the banks.
- Asia ex-Japan was the best performing region during the year, driven
largely by the performance of Australia. Japan, while showing strong
absolute performance in U.S. dollar terms, was the worst performing
region, underperforming the Index for the year.
- The largest detractor from performance came from within Europe. Security
selection within european financials, consumer discretionary, energy and
industrials coupled with the Portfolio's underweight to the european
utility and energy sectors detracted from results. Also causing a
significant drag on performance was the Portfolio's underweight to
financials and information technology (Japan) and security selection
within industrials (Asia ex-Japan).
- Offsetting the negatives was the Portfolio's security selection within
european telecommunications, materials and consumer staples. Also helping
the Portfolio's absolute returns was security selection within Asia
ex-Japan financials and Japanese materials, health care and consumer
staples.
MANAGEMENT STRATEGIES
- The Portfolio has maintained an overweight position to Japan and an
underweight position to Europe and Asia ex-Japan during the year. Within
Europe, the Portfolio is overweight to the euro zone region and an
underweight to the United Kingdom (U.K.). We believe, the euro zone is
likely to benefit from good global growth, better relative value and an
improved earnings forecast. By contrast, the U.K. has become cyclically
divergent from both the U.S. and continental Europe, at least in the short
term. In our opinion, interest rates are very likely to have peaked, which
puts the U.K. in a very different position of its major trading partners.
Within the Pacific Rim we continue to be overweight to Japan, Hong Kong
and Singapore and underweight to Australia and New Zealand.
- From a sector allocation perspective, we continue to see better relative
value within the cyclical sectors including industrials (Europe & Japan),
information technology (Japan) and consumer discretionary (Pacific Rim).
We are underweight to financials (Europe & Japan), utilities (all
regions), and energy (all regions).
- Going forward in 2005, we anticipate global economic growth to decelerate.
In our opinion, the impact of higher oil prices, the fading effect of
fiscal stimulus, reduced pace of corporate profit gains and rising
interest rates may cause growth to slow to historical trends. We believe
the U.S. market is highly vulnerable to future disappointing earnings. In
addition, the potential of inflation exceeding expectations could lead the
Fed to alter course and raise interest rates at a more aggressive rather
than "measured" pace. We are concerned about rapidly rising interest rates
because the U.S. economy is more highly leveraged today than during past
tightening cycles, especially for households.
EXPENSE EXAMPLES
As a shareholder of the Portfolio, you incur ongoing costs, including management
fees, distribution (12b-1) fees (in the case of Class B) and other Portfolio
expenses. These examples are intended to help you understand your ongoing costs
(in dollars) of investing in the Portfolio and to compare these costs with the
ongoing costs of investing in other mutual funds.
46
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW (CONT'D)
INTERNATIONAL MAGNUM PORTFOLIO
The examples are based on an investment of $1,000 invested at the beginning of
the six-month period ended December 31, 2004 and held for the entire six-month
period.
ACTUAL EXPENSES
The first line of the tables 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 tables below provides information about hypothetical
account values and hypothetical expenses based on the Portfolio's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Portfolio's actual return. The hypothetical account values and expenses may
not be used to estimate the actual ending account balance or expenses you paid
for the period. You may use this information to compare the ongoing costs of
investing in the Portfolio 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.
<Table>
<Caption>
EXPENSES PAID
ENDING ACCOUNT DURING PERIOD*
BEGINNING VALUE JULY 1, 2004--
ACCOUNT VALUE DECEMBER 31, DECEMBER 31,
JULY 1, 2004 2004 2004
- --------------------------------------------------------------------------------------
CLASS A
Actual $ 1,000.00 $ 1,130.20 $ 5.35
Hypothetical (5% average
annual return before expenses) 1,000.00 1,020.11 5.08
CLASS B
Actual 1,000.00 1,128.30 6.69
Hypothetical (5% average
annual return before expenses) 1,000.00 1,018.85 6.34
</Table>
* Expenses are equal to Class A and Class B annualized net expense ratios of
1.00% and 1.25%, respectively, multiplied by the average account value over
the period, multiplied by 184/366 (to reflect the one-half year period).
GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS
The following graph depicts the Portfolio's holding by industry, as a percentage
of total investments.
[CHART]
<Table>
Commercial Banks 9.1%
Pharmaceuticals 7.4%
Diversified Telecommunication Services 6.0%
Oil & Gas 5.7%
Insurance 5.1%
Chemicals 4.2%
Food Products 3.3%
Other* 43.4%
Short-Terms Investments 15.8%
</Table>
* Industries which do not appear in the top 10 industries and industries
which represent less than 3% of total investments, if applicable, are
included in the category labeled "Other".
January 2005
47
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS
INTERNATIONAL MAGNUM PORTFOLIO
<Table>
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
COMMON STOCKS (91.7%)
AUSTRALIA (2.8%)
AMP Ltd. 75,100 $ 427
Australia & New Zealand Banking Group Ltd. 10,508 169
BHP Billiton Ltd. 40,489 486
Coles Myer Ltd. 11,700 90
Gunns Ltd. 51,800 192
National Australia Bank Ltd. 8,480 191
Newcrest Mining Ltd. 13,350 182
Qantas Airways Ltd. 29,400 86
QBE Insurance Group Ltd. 15,400 185
Rio Tinto Ltd. (c)14,050 430
Westpac Banking Corp. 14,700 224
- ----------------------------------------------------------------------------------------------
2,662
==============================================================================================
AUSTRIA (0.5%)
Telekom Austria AG 25,863 489
- ----------------------------------------------------------------------------------------------
BELGIUM (1.1%)
AGFA-Gevaert N.V. 13,836 468
Fortis (a)6,824 189
Solvay S.A., Class A 4,055 446
- ----------------------------------------------------------------------------------------------
1,103
==============================================================================================
DENMARK (0.6%)
Carlsberg A/S, Class B 6,158 311
Novo-Nordisk A/S, Class B 4,409 240
- ----------------------------------------------------------------------------------------------
551
==============================================================================================
FINLAND (1.1%)
Nokia Oyj 13,725 216
Pohjola Group plc, Class D 9,267 107
Sampo Oyj, Class A 55,443 764
- ----------------------------------------------------------------------------------------------
1,087
==============================================================================================
FRANCE (10.1%)
Atos Origin (a)5,923 401
AXA 28,981 715
BNP Paribas S.A. (c)18,562 1,342
Business Objects S.A. (a)5,185 131
Cap Gemini S.A. (a)(c)5,782 185
Carrefour S.A. 6,705 319
France Telecom S.A. 56,975 1,883
Groupe Danone (c)2,138 197
M6-Metropole Television 6,213 176
Neopost S.A. 3,450 268
Sanofi-Aventis S.A. (c)8,796 701
Schneider Electric S.A. (c)13,638 947
Societe Generale (c)4,838 489
Total S.A. (c)7,420 1,617
Vinci S.A. (c)2,956 396
- ----------------------------------------------------------------------------------------------
9,767
==============================================================================================
GERMANY (6.1%)
Allianz AG (Registered) 6,886 912
Bayerische Motoren Werke AG 19,111 861
Deutsche Bank AG (Registered) 2,408 213
Deutsche Boerse AG 3,410 205
Deutsche Telekom AG (Registered) (a)55,854 1,261
Fresenius Medical Care AG (c)2,809 225
Linde AG 3,256 $ 203
Muenchener Rueckversicherungs AG (Registered) 3,519 432
Siemens AG (Registered) 15,939 1,349
Volkswagen AG 5,518 250
- ----------------------------------------------------------------------------------------------
5,911
==============================================================================================
HONG KONG (3.1%)
Cheung Kong Holdings Ltd. (c)13,000 130
Esprit Holdings Ltd. 67,800 410
Great Eagle Holdings Co. 194,000 502
Henderson Land Development Co., Ltd. 113,000 587
Hutchison Whampoa Ltd. 14,000 131
Hysan Development Co., Ltd. (c)141,000 297
Kerry Properties Ltd. (c)85,000 181
Li & Fung Ltd. 105,000 177
New World Development Ltd. 413,000 462
Sun Hung Kai Properties Ltd. 7,000 70
Techtronic Industries Co. 40,000 87
- ----------------------------------------------------------------------------------------------
3,034
==============================================================================================
IRELAND (0.7%)
Bank of Ireland 25,150 419
Kerry Group plc, Class A 9,188 220
- ----------------------------------------------------------------------------------------------
639
==============================================================================================
ITALY (3.7%)
ENI S.p.A. 31,171 779
Sanpaolo IMI S.p.A. 29,539 425
Telecom Italia S.p.A. 81,368 332
Telecom Italia S.p.A. RNC 220,979 717
TIM S.p.A. (c)71,208 531
UniCredito Italiano S.p.A. 133,320 765
- ----------------------------------------------------------------------------------------------
3,549
==============================================================================================
JAPAN (21.2%)
Amada Co., Ltd. (c)34,000 188
Canon, Inc. 12,000 648
Casio Computer Co., Ltd. (c)28,000 432
Dai Nippon Printing Co., Ltd. 18,000 289
Daicel Chemical Industries Ltd. 70,000 396
Daifuku Co., Ltd. (c)42,000 272
Daikin Industries Ltd. 18,000 520
Denki Kagaku Kogyo K.K. 80,000 266
East Japan Railway Co. 68 378
FamilyMart Co., Ltd. (c)11,300 329
Fuji Machine Manufacturing Co., Ltd. 6,500 64
Fuji Photo Film Co., Ltd. 14,000 511
Fujitec Co., Ltd. 21,000 111
Fujitsu Ltd. 81,000 527
Furukawa Electric Co., Ltd. (a)35,000 194
Hitachi Capital Corp. (c)18,200 376
Hitachi High-Technologies Corp. 6,900 98
Hitachi Ltd. 71,000 492
House Foods Corp. (c)9,200 133
Kaneka Corp. 42,000 476
Kurita Water Industries Ltd. (c)23,600 340
Kyocera Corp. 5,100 393
Kyudenko Corp. 6,000 32
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
48
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS (CONT'D)
INTERNATIONAL MAGNUM PORTFOLIO
<Table>
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
JAPAN (CONT'D)
Lintec Corp. 10,000 $ 152
Matsushita Electric Industrial Co., Ltd. 40,000 635
Minebea Co., Ltd. 48,000 209
Mitsubishi Chemical Corp. (c)112,000 341
Mitsubishi Corp. (c)41,000 530
Mitsubishi Estate Co., Ltd. 23,000 269
Mitsubishi Heavy Industries Ltd. 127,000 361
Mitsubishi Logistics Corp. (c)9,000 89
Mitsumi Electric Co., Ltd. (c)18,100 207
Nagase & Co., Ltd. (c)13,000 112
NEC Corp. 66,000 410
Nifco, Inc. (c)16,000 268
Nintendo Co., Ltd. 4,700 591
Nippon Meat Packers, Inc. 17,000 231
Nippon Telegraph & Telephone Corp. 60 269
Nissan Motor Co., Ltd. (c)54,600 594
Nissha Printing Co., Ltd. 6,000 83
Nisshinbo Industries, Inc. (c)24,000 180
Obayashi Corp. 42,000 265
Ono Pharmaceutical Co., Ltd. 7,800 438
Ricoh Co., Ltd. 25,000 483
Rinnai Corp. 5,600 150
Rohm Co., Ltd. 2,000 207
Ryosan Co., Ltd. (c)8,700 201
Sangetsu Co., Ltd. 300 7
Sanki Engineering Co., Ltd. 4,000 29
Sankyo Co., Ltd. 19,700 445
Sanwa Shutter Corp. 29,000 163
Sekisui Chemical Co., Ltd. 43,000 314
Sekisui House Ltd. 26,000 303
Shin-Etsu Polymer Co., Ltd. 25,000 180
Sony Corp. 10,000 387
Suzuki Motor Corp. (c)21,200 387
TDK Corp. 5,400 400
Teijin Ltd. (c)25,000 109
Toho Co., Ltd. 7,400 117
Tokyo Electric Power Co., Inc. (The) 10,600 260
Toshiba Corp. (c)119,000 511
Toyo INK MFG Co., Ltd. 31,000 124
Toyota Motor Corp. 17,400 708
Tsubakimoto Chain Co. 57,000 220
Yamaha Corp. 23,100 353
Yamaha Motor Co., Ltd. (c)18,000 270
Yamanouchi Pharmaceutical Co., Ltd. 12,600 491
- ----------------------------------------------------------------------------------------------
20,518
==============================================================================================
NETHERLANDS (7.1%)
ASML Holding N.V. (a)(c)25,941 416
ING Groep N.V. CVA 15,406 465
Koninklijke Ahold N.V. (a)61,616 476
Royal Dutch Petroleum Co. 25,823 1,484
Royal Numico N.V. (a)12,448 448
TPG N.V. 27,466 744
Unilever N.V. CVA 17,978 1,203
VNU N.V. 14,188 418
Wolters Kluwer N.V. CVA 62,877 $ 1,260
- ----------------------------------------------------------------------------------------------
6,914
==============================================================================================
POLAND (0.3%)
Telekomunikacja Polska S.A. 42,863 282
- ----------------------------------------------------------------------------------------------
SINGAPORE (1.5%)
CapitaCommercial Trust REIT (a)(c)45,400 36
CapitaLand Ltd. (c)227,000 296
City Developments Ltd. 60,000 261
Oversea-Chinese Banking Corp., Ltd. 25,000 207
SembCorp Industries Ltd. 122,000 121
Singapore Airlines Ltd. 53,000 370
Venture Corp., Ltd. 20,000 195
- ----------------------------------------------------------------------------------------------
1,486
==============================================================================================
SPAIN (3.0%)
Altadis S.A. 23,146 1,058
Banco Bilbao Vizcaya Argentaria S.A. (c)23,622 418
Banco Santander Central Hispano S.A. 29,179 361
Telefonica S.A. 54,925 1,033
- ----------------------------------------------------------------------------------------------
2,870
==============================================================================================
SWEDEN (1.1%)
Nordea Bank AB 23,464 236
Sandvik AB 8,513 343
SKF AB, Class B 10,577 471
- ----------------------------------------------------------------------------------------------
1,050
==============================================================================================
SWITZERLAND (6.8%)
Ciba Specialty Chemicals AG (Registered) (a)5,422 411
Nestle S.A. (Registered) 2,597 678
Novartis AG (Registered) 49,780 2,502
Schindler Holding AG (Registered) 730 304
STMicroelectronics N.V. 11,622 226
Swiss Reinsurance (Registered) 8,456 602
UBS AG (Registered) 19,686 1,647
Zurich Financial Services AG (a)1,157 192
- ----------------------------------------------------------------------------------------------
6,562
==============================================================================================
UNITED KINGDOM (20.9%)
Allied Domecq plc 40,683 400
Amvescap plc 43,245 266
AstraZeneca plc 19,742 715
Barclays plc 62,701 705
BOC Group plc 43,520 829
BP plc 67,662 659
British American Tobacco plc 11,674 201
British Sky Broadcasting plc 49,964 539
Bunzl plc 22,583 188
Cadbury Schweppes plc 24,235 226
Carnival plc 4,328 264
Diageo plc 16,379 233
DX Services plc (a)17,289 121
GlaxoSmithKline plc 95,281 2,234
Hays plc 193,033 460
HSBC Holdings plc 80,543 1,358
Imperial Chemical Industries plc 56,380 261
International Power plc (a)59,562 177
Lloyds TSB Group plc 45,603 414
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
49
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS (CONT'D)
INTERNATIONAL MAGNUM PORTFOLIO
<Table>
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
UNITED KINGDOM (CONT'D)
Man Group plc 6,637 $ 187
National Grid Transco plc 20,131 192
Prudential plc 122,948 1,069
Reed Elsevier plc 35,927 331
Rentokil Initial plc 63,613 180
Rexam plc 42,105 371
Rolls-Royce Group plc (a)53,340 253
Rolls-Royce Group plc, Class B 1,671,885 3
Royal Bank of Scotland Group plc 51,852 1,743
Scottish & Southern Energy plc 14,386 241
Shell Transport & Trading Co. plc (Registered) 168,595 1,436
Smith & Nephew plc 26,787 274
Smiths Group plc 44,513 702
Stagecoach Group plc 85,654 187
Standard Chartered plc 5,499 102
Tesco plc 39,533 244
Unilever plc 17,940 176
Vedanta Resources plc 31,120 236
Vodafone Group plc 754,474 2,044
- ----------------------------------------------------------------------------------------------
20,221
==============================================================================================
TOTAL COMMON STOCKS (COST $71,501) 88,695
==============================================================================================
<Caption>
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (17.2%)
SHORT-TERM DEBT SECURITIES HELD AS COLLATERAL ON LOANED SECURITIES (11.0%)
Bank of New York, 2.33%, 10/28/05 $ (h)400 400
Bear Stearns, 2.37%, 4/15/05 (h)220 220
Beta Finance, Inc., 2.28%, 2/18/05 165 165
Calyon NY, 2.04%, 3/4/05 (h)352 352
CIT Group Holdings,
2.17%, 1/31/05 (h)34 34
2.30%, 2/14/05 (h)186 186
Citigroup, Inc., 2.39%, 9/1/05 (h)117 117
Compass Securitization, 2.38%, 3/17/05 (h)171 171
Corporate Receivables Corp., 2.46%, 3/14/05 73 73
Discover Card Master Trust, 2.39%, 5/16/05 (h)(i)163 163
Eni Coordination Center, 2.38%, 8/29/05 (h)122 122
Giro Funding U.S. Corp., 2.37%, 2/7/05 73 73
HBOS Treasury Services plc, N.Y.,
2.46%, 3/14/05 147 147
International Lease Finance Corp.,
2.51%, 9/22/05 (h)188 188
Jackson National Life Global Fund,
2.32%, 1/18/05 (h)122 122
K2 (USA) LLC, 2.33%, 10/24/05 (h)347 347
Landesbank Hessen Thur New York,
2.24%, 2/2/05 (h)123 123
Lehman Brothers, Inc., 2.33%, 1/3/05 2,994 2,994
Links Finance LLC,
2.33%, 10/27/05 (h)244 244
2.40%, 9/26/05 (h)122 122
Marshall & Ilsley Bank, 2.51%, 12/29/05 (h)342 342
Nationwide Building Society, 2.58%, 1/2/06 (h)283 283
<Caption>
FACE
AMOUNT VALUE
(000) (000)
- ----------------------------------------------------------------------------------------------
Pfizer, Inc., 2.30%, 1/31/06 $ (h)244 $ 244
Proctor & Gamble, 2.42%, 1/31/06 (h)100 100
Royal Bank of Canada NY, 2.38%, 6/27/05 (h)244 244
Sheffield Receivable Corp., 2.21%, 1/12/05 343 343
Sigma Finance, Inc., 2.38%, 9/15/05 (h)244 244
SLM Corp., 2.41%, 1/31/06 (h)244 244
Societe Generale, N.Y., 2.04%, 3/3/05 (h)256 257
Svenska Handelsbank N.Y., 2.32%, 5/10/05 (h)244 244
UBS Finance (Delaware), Inc., 2.33%, 1/6/05 366 366
UBS Securities LLC, 2.30%, 1/3/05 1,367 1,367
- ----------------------------------------------------------------------------------------------
10,641
==============================================================================================
<Caption>
SHARES
- ----------------------------------------------------------------------------------------------
INVESTMENT COMPANY HELD AS COLLATERAL ON LOANED SECURITIES (0.0%)
JPMorgan Securities Lending Collateral
Investment Fund 61,540 62
- ----------------------------------------------------------------------------------------------
<Caption>
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT (6.2%)
J.P. Morgan Securities, Inc., 2.00%,
dated 12/31/04, due 1/3/05,
repurchase price $5,974 $ (f)5,973 5,973
- ----------------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (COST $16,676) 16,676
==============================================================================================
TOTAL INVESTMENTS (108.9%) (COST $88,177)--
INCLUDING $10,169 OF SECURITIES LOANED 105,371
==============================================================================================
LIABILITIES IN EXCESS OF OTHER ASSETS (-8.9%) (8,604)
==============================================================================================
NET ASSETS (100%) $ 96,767
==============================================================================================
</Table>
(a) Non-income producing security.
(c) All or portion of security on loan at December 31, 2004.
(f) Represents the Portfolio's undivided interest in a joint repurchase
agreement which has a total value of $1,018,656,000. The repurchase
agreement was fully collateralized by U.S. government agency securities
at the date of this portfolio of investments as follows: Federal Farm
Credit Bank, 0.00% to 6.75%, due 2/28/05 to 8/15/13; Federal Home Loan
Bank, 1.10% to 6.875%, due 4/15/05 to 10/28/24; Federal Home Loan
Mortgage Corp., 2.00% to 6.51%, due 6/15/15 to 3/15/19; Federal National
Mortgage Association, 1.75% to 8.20%, due 2/24/05 to 5/24/19; and
Financial Assist Corp., 8.80%, due 6/10/05. The investment in the
repurchase agreement is through participation in a joint account with
affiliated parties pursuant to exemptive relief received by the Portfolio
from the SEC.
(h) Variable/Floating Rate Security -- interest rate changes on these
instruments are based on changes in a designated base rate. The rates
shown are those in effect on December 31, 2004.
(i) Security's issuer is an affiliate of the adviser. Held as collateral for
securities on loan.
@ Face Amount/Value is less than $500.
CVA Certificaten Van Aandelen
REIT Real Estate Investment Trust
RNC Non-Convertible Savings Shares
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
50
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS (CONT'D)
INTERNATIONAL MAGNUM PORTFOLIO
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
The Portfolio had the following foreign currency exchange contract(s) open
at period end:
<Table>
<Caption>
NET
CURRENCY IN UNREALIZED
TO EXCHANGE APPRECIATION
DELIVER VALUE SETTLEMENT FOR VALUE (DEPRECIATION)
(000) (000) DATE (000) (000) (000)
- -----------------------------------------------------------------------------------------
EUR 6,908 $ 9,378 3/16/05 US$ 9,192 $ 9,192 $ (186)
GBP 46 88 3/16/05 US$ 88 88 @--
GBP 143 274 3/16/05 US$ 275 275 1
GBP 340 650 3/16/05 US$ 651 651 1
GBP 692 1,321 3/16/05 US$ 1,325 1,325 4
HKD 20 3 1/3/05 US$ 3 3 @--
HKD 20 3 1/4/05 US$ 3 3 @--
JPY 797,066 7,820 3/16/05 US$ 7,627 7,627 (193)
JPY 55,925 549 3/16/05 US$ 533 533 (16)
US$ 2,034 2,034 3/16/05 AUD 2,695 2,097 63
US$ 2,068 2,068 3/16/05 EUR 1,553 2,109 41
US$ 1,911 1,911 3/16/05 EUR 1,437 1,950 39
US$ 1,217 1,217 3/16/05 EUR 915 1,242 25
US$ 6,731 6,731 3/16/05 EUR 5,057 6,865 134
US$ 1,580 1,580 3/16/05 GBP 825 1,577 (3)
US$ 920 920 3/16/05 GBP 481 918 (2)
US$ 859 859 3/16/05 GBP 449 856 (3)
US$ 3,063 3,063 3/16/05 GBP 1,602 3,059 (4)
US$ 6,994 6,994 3/16/05 JPY 731,552 7,178 184
US$ 257 257 3/16/05 JPY 26,786 263 6
US$ 1,262 1,262 3/16/05 JPY 131,925 1,294 32
US$ 386 386 3/16/05 JPY 40,385 396 10
---------- ---------- --------------
$ 49,368 $ 49,501 $ 133
========== ========== ==============
</Table>
AUD -- Australian Dollar
EUR -- Euro
GBP -- British Pound
HKD -- Hong Kong Dollar
JPY -- Japanese Yen
FUTURES CONTRACTS:
The Portfolio had the following futures contract(s) open at period end:
<Table>
<Caption>
NET
UNREALIZED
NUMBER APPRECIATION
OF VALUE EXPIRATION (DEPRECIATION)
CONTRACTS (000) DATE (000)
- -------------------------------------------------------------------------------
LONG:
DJ EURO STOXX 50
(Germany) 83 $ 3,319 Mar-05 $ 11
FTSE 100 Index
(United Kingdom) 23 2,117 Mar-05 21
SPI 200 Index
(Australia) 6 476 Mar-05 10
TOPIX Index
(Japan) 17 1,904 Mar-05 88
--------------
$ 130
==============
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
51
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW
INTERNATIONAL SMALL CAP PORTFOLIO
[CHART]
COMPARISON OF THE CHANGE IN VALUE OF A $500,000* INVESTMENT OVER 10 YEARS
<Table>
<Caption>
MSCI EAFE LIPPER
INTERNATIONAL SMALL CAP INTERNATIONAL
FISCAL YEAR SMALL CAP TOTAL SMALL/MID-CAP
ENDED PORTFOLIO - RETURN CORE FUNDS
DECEMBER 31 CLASS A INDEX INDEX
1994 500000 500000 500000
1995 513000 480250 512600
1996 599364 479554 598845
1997 596067 361368 595521
1998 622056 381026 620831
1999 867456 448372 865066
2000 842821 406674 839806
2001 793263 355766 790392
2002 769624 327945 766759
2003 1141660 529206 986950
2004 1524650 692200 1461911
</Table>
* Minimum Investment
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EAFE
SMALL CAP TOTAL RETURN INDEX(1) AND THE LIPPER INTERNATIONAL SMALL/MID-CAP CORE
FUNDS INDEX(2)
<Table>
<Caption>
TOTAL RETURNS(3)
--------------------------------------------
AVERAGE ANNUAL
----------------------------------
ONE FIVE TEN SINCE
YEAR YEARS YEARS INCEPTION(5)
- --------------------------------------------------------------------------------
Portfolio - Class A (4) 33.53% 11.99% 11.79% 13.72%
MSCI EAFE Small Cap Total Return
Index 30.78 8.64 3.31 6.15
Lipper International
Small/Mid-Cap Core Funds Index 25.52 7.76 10.53 --
</Table>
(1) The MSCI EAFE Small Cap Total Return Index is an unmanaged, market value
weighted average of the performance of over 900 securities of companies
listed on the stock exchanges of countries in Europe, Australasia and the
Far East, including price performance and income from dividend payments.
(2) The Lipper International Small/Mid-Cap Core Funds Index is an equally
weighted performance index of the largest qualifying funds (based on net
assets) in the Lipper International Small/Mid-Cap Core Funds
classification. The Index, which is adjusted for capital gains
distributions and income dividends, is unmanaged and should not be
considered an investment. There are currently 10 funds represented in this
Index. As of the date of this report, the Portfolio is in the Lipper
International Small/Mid-Cap Core Funds classification.
(3) Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would have been lower. Fee waivers and/or reimbursements are
voluntary and the Adviser reserves the right to commence or terminate any
waiver and/or reimbursement at any time.
(4) Commenced operations on December 15, 1992
(5) For comparative purposes, average annual since inception returns listed for
the indexes refer to the inception date or initial offering of the
respective share class of the Portfolio, not the inception of the index.
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. PERFORMANCE ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE
REINVESTED. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT
morganstanley.com/im. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO
THAT PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. TOTAL RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A
SHAREHOLDER WOULD PAY ON PORTFOLIO DISTRIBUTIONS OR THE REDEMPTION OF PORTFOLIO
SHARES.
The International Small Cap Portfolio seeks long-term capital appreciation by
investing primarily in equity securities of small non-U.S. companies.
Investments in small sized corporations are more vulnerable to financial risks
and other risks than larger corporations and may involve a higher degree of
price volatility than investments in the general equity markets. Foreign
investing involves certain risks, including currency fluctuations and controls,
restrictions on foreign investments, less governmental supervision and
regulation, less liquidity and the potential for market volatility and political
instability.
PERFORMANCE
For the year ended December 31, 2004, the Portfolio had a total return of
33.53%, net of fees, compared to 30.78% for the Morgan Stanley Capital
International (MSCI) EAFE Small Cap Total Return Index (the "Index").
FACTORS AFFECTING PERFORMANCE
- For the second year in a row, the U.S. investor was helped by the U.S.
dollar weakening approximately 17% against the Euro and 10% against the
Japanese yen and the British pound.
- On a regional basis, Nordic countries generally experienced a better macro
environment in part due to higher energy prices which positively impacted
performance at a country and sector level. Consequently, Nordic countries
rose 47.9% to become the Index's best performing region for the year.
- In the Pacific region, Japan rose 22.2% in the first quarter alone on the
back of positive economic news. However, weaker economic indicators such
as softer gross domestic product (GDP) growth figures, lower machinery
orders and slowing of economic activity in China, led to reduced
enthusiasm for Japanese small cap stocks.
- Most core European markets experienced lackluster performances during the
first three quarters of the year on the back of concerns over slower
economic growth and the prospect of higher inflation given the stronger
52
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW (CONT'D)
INTERNATIONAL SMALL CAP PORTFOLIO
euro. However, a bit of life came to the European markets in the final
quarter and the region posted a return of 32.7% for the full year.
- There was a consistent theme to Index sector performance during 2004.
Energy, which represents 2.5% of the benchmark, rose 87.6% as energy
equipment and oil and gas companies benefited from higher commodity
prices. The second best performing sector, utilities, also benefited from
higher oil prices and rose 49.8%. Financials (+39.8%) were also strong due
to a rebound in real estate and consumer finance companies. The year's
worst performing sector, information technology, rose a mere 6.4%, as
investors grew skeptical of the prospects for semiconductor and software
companies.
- Stock selection in the industrial sector was the primary contributor to
performance. In addition, stock selection in the information technology
(hardware), health care (equipment), consumer discretionary (media and
restaurants) and financials sectors (real estate, consumer finance) also
added value in 2004. For the full year, stock selection in consumer
staples was the biggest single detractor from performance. The Portfolio's
underweight to the utility and energy sectors coupled with poor stock
selection in the energy sector also detracted over the year. Value added
at a country level was also fairly broad but the three most significant
contributions came from Japan (financials), Germany (industrials, consumer
discretionary) and France (hardware). Stock selection in the Netherlands
was the most significant detractor due to consumer staples and energy
holdings.
MANAGEMENT STRATEGIES
- Weakness in the U.S. dollar, most noticeably against the euro, has been
whittling away at the competitive position of European exporters, making
stronger growth a difficult task in 2005. In our opinion, the cautious
Euro zone consumer appears unlikely to come to the rescue. In Asia,
arguably, prospects look brighter. After a decade of deflation in Japan,
we believe signs are appearing that this era is ending. However the fate
of this economy, as well as of the broader Asian region, is clearly tied
to a continued growth of the U.S. and Chinese economies as well as their
respective currency evolutions.
- Small caps in the EAFE region are now trading in line with their large cap
counterparts. However, they remain inexpensive compared with U.S. equities
while still offering relatively attractive growth prospects. Furthermore,
we believe investors continue to perceive them as relatively immune from
the dollar's volatility. Finally, it is our view that small cap stocks
remain less efficiently priced than more researched asset classes and
remain what we view as a privileged hunting ground of experienced stock
pickers.
EXPENSE EXAMPLES
As a shareholder of the Portfolio, you incur ongoing costs, including management
fees and other Portfolio expenses. These examples are intended to help you
understand your ongoing costs (in dollars) of investing in the Portfolio and to
compare these costs with the ongoing costs of investing in other mutual funds.
The examples are based on an investment of $1,000 invested at the beginning of
the six-month period ended December 31, 2004 and held for the entire six-month
period.
ACTUAL EXPENSES
The first line of the tables 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 tables below provides information about hypothetical
account values and hypothetical expenses based on the Portfolio's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Portfolio's actual return. The hypothetical account values and expenses may
not be used to estimate the actual ending account balance or expenses you paid
for the period. You may use this information to compare the ongoing costs of
investing in the Portfolio 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.
<Table>
<Caption>
EXPENSES PAID
ENDING ACCOUNT DURING PERIOD*
BEGINNING VALUE JULY 1, 2004 --
ACCOUNT VALUE DECEMBER 31, DECEMBER 31,
JULY 1, 2004 2004 2004
- --------------------------------------------------------------------------------------
CLASS A
Actual $ 1,000.00 $ 1,148.90 $ 6.21
Hypothetical (5% average
annual return before expenses) 1,000.00 1,019.36 5.84
</Table>
* Expenses are equal to Class A annualized net expense ratios of 1.15%,
multiplied by the average account value over the period, multiplied by
184/366 (to reflect the one-half year period).
53
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW (CONT'D)
INTERNATIONAL SMALL CAP PORTFOLIO
GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS
The following graph depicts the Portfolio's holdings by industry, as a
percentage of total investments.
[CHART]
<Table>
Machinery 13.1%
Media 7.8%
Hotels, Restaurants & Leisure 5.9%
Commercial Services & Supplies 5.8%
Consumer Finance 5.6%
Health Care Equipment & Supplies 5.5%
Building Products 5.1%
Food Products 4.8%
Real Estate 4.2%
Construction Materials 3.4%
Other* 38.5%
Short-Term Investment 0.3%
</Table>
* Industries which do not appear in the top 10 industries and industries
which represent less than 3% of total investments, if applicable, are
included in the category labeled "Other".
January 2005
54
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS
INTERNATIONAL SMALL CAP PORTFOLIO
<Table>
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
COMMON STOCKS (99.8%)
AUSTRALIA (3.6%)
Infomedia Ltd. 13,285,608 $ 7,900
John Fairfax Holdings Ltd. 4,734,417 16,854
MYOB Ltd. 5,177,977 5,469
Pacific Brands Ltd. 3,206,915 8,004
Ramsay Health Care Ltd. 1,496,375 8,336
- ----------------------------------------------------------------------------------------------
46,563
==============================================================================================
AUSTRIA (1.3%)
Andritz AG 218,439 16,623
- ----------------------------------------------------------------------------------------------
BELGIUM (1.6%)
Omega Pharma S.A. 425,147 20,329
- ----------------------------------------------------------------------------------------------
BERMUDA (0.5%)
Catlin Group Ltd. 995,628 6,260
- ----------------------------------------------------------------------------------------------
DENMARK (2.1%)
Carlsberg A/S, Class B 210,013 10,609
Danisco A/S 138,336 8,426
Kobenhavns Lufthavne A/S 38,405 8,146
- ----------------------------------------------------------------------------------------------
27,181
==============================================================================================
FINLAND (3.6%)
KCI Konecranes Oyj 321,942 14,197
Kone Oyj, Class B 193,303 14,970
Pohjola Group plc, Class D 953,488 10,981
Uponor Oyj 327,118 6,106
- ----------------------------------------------------------------------------------------------
46,254
==============================================================================================
FRANCE (4.4%)
Autoroutes du Sud de la France 181,874 9,128
Europeenne D'extincteurs (a)(d)131,043 @--
Neopost S.A. 307,730 23,877
NRJ Group 429,564 9,411
Zodiac S.A. 302,469 14,053
- ----------------------------------------------------------------------------------------------
56,469
==============================================================================================
GERMANY (6.2%)
Beru AG 67,638 6,285
Celesio AG 81,526 6,618
GFK AG 71,548 2,780
Hugo Boss AG (Non-Voting Shares) 318,742 10,593
K&S AG 408,597 21,672
Rational AG 41,133 3,820
Sartorius AG (Non-Voting Shares) 328,639 6,794
SCS Standard Computersysteme AG (a)(d)21,289 @--
Techem AG (a)518,210 18,804
WMF Wuerttembergische Metallwarenfabrik AG
(Non-Voting Shares) 80,517 1,283
- ----------------------------------------------------------------------------------------------
78,649
==============================================================================================
GREECE (0.3%)
OPAP S.A. 129,759 3,584
- ----------------------------------------------------------------------------------------------
HONG KONG (1.6%)
Asia Satellite Telecommunications Holdings Ltd. 5,477,500 10,430
Solomon Systech International Ltd. 22,593,900 5,581
Weichai Power Co., Ltd., Class H 1,845,400 5,116
- ----------------------------------------------------------------------------------------------
21,127
==============================================================================================
IRELAND (3.3%)
Independent News & Media plc 4,356,148 $ 13,709
Kerry Group plc, Class A 649,680 15,555
Kingspan Group plc 1,363,073 13,035
- ----------------------------------------------------------------------------------------------
42,299
==============================================================================================
ITALY (4.5%)
Buzzi Unicem S.p.A. 1,311,505 19,107
Cassa di Risparmio di Firenze S.p.A. 3,200,089 7,814
Davide Campari-Milano S.p.A. 233,615 15,037
SAES Getters S.p.A. 194,358 4,748
SAES Getters S.p.A. RNC 334,706 5,312
Sogefi S.p.A. 1,081,113 5,250
- ----------------------------------------------------------------------------------------------
57,268
==============================================================================================
JAPAN (27.2%)
Aiful Corp. 58,500 6,437
Ariake Japan Co., Ltd. 713,500 17,205
Asatsu-DK, Inc. 218,900 6,165
Asia Securities Printing Co., Ltd. 722,000 6,555
Daibiru Corp. 3,647,500 28,844
Fujimi, Inc. 367,600 9,618
HS Securities Co., Ltd. (a)330,700 3,987
Hurxley Corp. 355,437 5,798
Ito En Ltd. 307,100 15,950
Jaccs Co., Ltd. 4,352,000 26,172
Mani, Inc. 7,800 327
Megane TOP Co., Ltd. 297,100 2,929
Nakanishi, Inc. 219,400 14,994
Nihon Trim Co., Ltd. 161,650 11,363
Nisshin Fire & Marine Insurance Co. Ltd. (The) 2,761,200 10,190
Nitta Corp. 385,900 6,201
Sanrio Co., Ltd. 1,214,300 10,907
Sanyo Electric Credit Co., Ltd. 813,700 17,119
Shinkawa Ltd. 571,100 11,235
Snow Brand Milk Products Co., Ltd. (a)554,500 1,705
Sumitomo Osaka Cement Co., Ltd. 9,749,000 23,889
Taisei Lamick Co., Ltd. 239,300 6,133
Takuma Co., Ltd. 1,375,000 10,833
Tenma Corp. 346,000 6,313
TOC Co., Ltd. 2,631,000 25,301
Tokyo Tomin Bank Ltd. (The) 569,800 11,877
Tomy Co., Ltd. 634,800 9,866
Toppan Forms Co., Ltd. 747,400 9,121
TV Asahi Corp. 1,779 3,613
Union Tool Co. 206,100 7,284
Yamaichi Electronics Co., Ltd. 655,600 7,546
Yomiuri Land Co., Ltd. 2,385,000 7,777
Zentek Technology Japan, Inc. (a)1,683 4,108
- ----------------------------------------------------------------------------------------------
347,362
==============================================================================================
NETHERLANDS (1.8%)
Laurus N.V. (a)905,962 5,014
Nutreco Holding N.V. 404,930 11,112
Van Lanschot N.V. CVA 98,341 6,430
- ----------------------------------------------------------------------------------------------
22,556
==============================================================================================
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
55
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS (CONT'D)
INTERNATIONAL SMALL CAP PORTFOLIO
<Table>
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
NEW ZEALAND (3.3%)
Fisher & Paykel Appliances Holdings Ltd. 1,450,109 $ 4,478
Fisher & Paykel Healthcare Corp., Ltd. 10,501,231 24,431
Sky City Entertainment Group Ltd. 3,463,616 13,380
- ----------------------------------------------------------------------------------------------
42,289
==============================================================================================
NORWAY (3.6%)
DNB NOR ASA 1,339,634 13,193
Schibsted Group ASA 974,741 27,633
Visma ASA CVA 377,707 4,762
- ----------------------------------------------------------------------------------------------
45,588
==============================================================================================
SOUTH KOREA (1.7%)
KT&G Corp. (a)723,780 21,639
- ----------------------------------------------------------------------------------------------
SPAIN (1.3%)
Miquel y Costas & Miquel S.A. 343,189 16,527
- ----------------------------------------------------------------------------------------------
SWEDEN (2.2%)
D. Carnegie AB 514,475 6,654
Intrum Justitia AB (a)941,223 7,289
Swedish Match AB 1,206,360 13,969
- ----------------------------------------------------------------------------------------------
27,912
==============================================================================================
SWITZERLAND (8.2%)
Edipresse S.A. (Bearer), Class B 25,416 13,153
Galenica Holding AG (Registered) 36,037 6,591
Kaba Holding AG, Class B (Registered) 61,865 19,129
Schindler Holding AG 56,300 22,272
SIG Holding AG (Registered) 117,164 26,720
Valora Holding AG 25,100 6,165
Zehnder Group AG, Class B 7,400 10,061
- ----------------------------------------------------------------------------------------------
104,091
==============================================================================================
UNITED KINGDOM (17.5%)
British Vita plc 1,871,128 9,692
Capital Radio plc 1,022,659 8,632
Cattles plc 3,116,438 21,941
De La Rue plc 1,553,150 10,339
Devro plc 3,192,880 7,657
DX Services plc (a)1,392,257 9,776
FKI plc 2,832,198 6,330
Keller Group plc 1,650,701 7,568
Luminar plc 2,732,002 29,271
Novar plc 3,348,602 12,093
Regent Inns plc 3,787,088 5,485
Rotork plc 1,584,929 12,573
SIG plc 1,482,413 16,637
Spirax-Sarco Engineering plc 1,182,654 14,690
SSL International plc 1,583,253 9,568
Stagecoach Group plc 5,748,819 12,545
William Hill plc 986,584 10,675
Wincanton plc 3,316,232 17,606
- ----------------------------------------------------------------------------------------------
223,078
==============================================================================================
TOTAL COMMON STOCKS (COST $913,351) 1,273,648
==============================================================================================
<Caption>
FACE
AMOUNT VALUE
(000) (000)
- ----------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (0.3%)
REPURCHASE AGREEMENT (0.3%)
J.P. Morgan Securities, Inc., 2.00%,
dated 12/31/04, due 1/3/05,
repurchase price $3,390
(COST $3,389) $ (f)3,389 $ 3,389
==============================================================================================
TOTAL INVESTMENTS (100.1%) (COST $916,740) 1,277,037
==============================================================================================
LIABILITIES IN EXCESS OF OTHER ASSETS (-0.1%) (954)
==============================================================================================
NET ASSETS (100%) $ 1,276,083
==============================================================================================
</Table>
(a) Non-income producing security.
(d) Security was valued at fair value -- At December 31, 2004, the Portfolio
held fair valued securities, each valued at less than $500, representing
less than 0.05% of net assets.
(f) Represents the Portfolio's undivided interest in a joint repurchase
agreement which has a total value of $1,018,656,000. The repurchase
agreement was fully collateralized by U.S. government agency securities
at the date of this portfolio of investments as follows: Federal Farm
Credit Bank, 0.00% to 6.75%, due 2/28/05 to 8/15/13; Federal Home Loan
Bank, 1.10% to 6.875%, due 4/15/05 to 10/28/24; Federal Home Loan
Mortgage Corp., 2.00% to 6.51%, due 6/15/15 to 3/15/19; Federal National
Mortgage Association, 1.75% to 8.20%, due 2/24/05 to 5/24/19; and
Financial Assist Corp., 8.80%, due 6/10/05. The investment in the
repurchase agreement is through participation in a joint account with
affiliated parties pursuant to exemptive relief received by the Portfolio
from the SEC.
@ Face Amount/Value is less than $500.
CVA Certificaten Van Aandelen
RNC Non-Convertible Savings Shares
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
The Portfolio had the following foreign currency exchange contract(s) open
at period end:
<Table>
<Caption>
NET
CURRENCY IN UNREALIZED
TO EXCHANGE APPRECIATION
DELIVER VALUE SETTLEMENT FOR VALUE (DEPRECIATION)
(000) (000) DATE (000) (000) (000)
- -----------------------------------------------------------------------------------------
EUR 46 $ 63 1/5/05 US$ 63 $ 63 $ @--
JPY 25,358 247 1/5/05 US$ 244 244 (3)
JPY 4,338 42 1/6/05 US$ 42 42 @--
US$ 322 322 1/4/05 DKK 1,760 321 (1)
US$ 350 350 1/3/05 HKD 2,723 350 @--
US$ 4 4 1/4/05 JPY 441 4 @--
---------- ---------- --------------
$ 1,028 $ 1,024 $ (4)
========== ========== ==============
</Table>
DKK -- Danish Krone
EUR -- Euro
HKD -- Hong Kong Dollar
JPY -- Japanese Yen
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
56
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW
EQUITY GROWTH PORTFOLIO
[CHART]
COMPARISON OF THE CHANGE IN VALUE OF A $500,000* INVESTMENT OVER 10 YEARS
<Table>
<Caption>
FISCAL YEAR EQUITY GROWTH LIPPER LARGE-CAP
ENDED PORTFOLIO - RUSSELL 1000 S&P 500 GROWTH FUNDS
DECEMBER 31 CLASS A GROWTH INDEX INDEX INDEX
1994 500000 500000 500000 500000
1995 725050 685900 687720 674597
1996 949525 844480 845648 813296
1997 1246949 1101962 1127790 1037692
1998 1484406 1528532 1450045 1416166
1999 2076387 2035393 1755192 1909240
2000 1831581 1579058 1595206 1533525
2001 1557210 1256614 1405776 1167498
2002 1126641 906144 1095310 839286
2003 1424075 1175632 1409445 1065581
2004 1534300 1249700 1562950 1145000
</Table>
[CHART]
COMPARISON OF THE CHANGE IN VALUE OF A $100,000* INVESTMENT SINCE INCEPTION
<Table>
<Caption>
FISCAL YEAR EQUITY GROWTH LIPPER LARGE-CAP
ENDED PORTFOLIO - RUSSELL 1000 S&P 500 GROWTH FUNDS
DECEMBER 31 CLASS B GROWTH INDEX INDEX INDEX
** 100000 100000 100000 100000
1996 129920 122190 122964 120280
1997 170260 159446 163990 153467
1998 202116 221167 210848 209440
1999 282174 294506 255219 282362
2000 248285 228478 231956 226797
2001 210397 181823 204411 172664
2002 152012 131131 159267 124124
2003 191732 170142 204945 157591
2004 206020 180830 225430 169340
</Table>
* Minimum Investment
** Commenced offering on January 2, 1996
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE RUSSELL 1000 GROWTH INDEX(1), THE S&P 500 INDEX(2)
AND THE LIPPER LARGE-CAP GROWTH FUNDS INDEX(3)
<Table>
<Caption>
TOTAL RETURNS(4)
--------------------------------------------
AVERAGE ANNUAL
----------------------------------
ONE FIVE TEN SINCE
YEAR YEARS YEARS INCEPTION(7)
- --------------------------------------------------------------------------------
Portfolio - Class A (5) 7.75% (5.86)% 11.86% 10.61%
Russell 1000 Growth Index 6.30 (9.29) 9.59 8.98
S&P 500 Index 10.88 (2.30) 12.07 10.97
Lipper Large-Cap Growth
Funds Index 7.45 (9.72) 8.64 8.61
Portfolio - Class B (6) 7.45 (6.08) -- 8.37
Russell 1000 Growth Index 6.30 (9.29) -- 6.81
S&P 500 Index 10.88 (2.30) -- 9.46
Lipper Large-Cap Growth
Funds Index 7.45 (9.72) -- 6.03
</Table>
(1) Russell 1000 Growth Index measures the performance of those Russell 1000
companies with higher price-to-book ratios and higher forecasted growth
values.
(2) The S&P 500 Index is a capitalization-weighted index of 500 stocks. The
index is designed to measure performance of the broad domestic economy
through changes in the aggregate market value of 500 stocks representing
all major industries.
(3) The Lipper Large-Cap Growth Funds Index is an equally weighted performance
index of the largest qualifying funds (based on net assets) in the Lipper
Large-Cap Growth Funds classification. The Index, which is adjusted for
capital gains distributions and income dividends, is unmanaged and should
not be considered an investment. There are currently 30 funds represented
in this Index. As of the date of this report, the Portfolio is in the
Lipper Large-Cap Growth Funds classification.
(4) Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would have been lower. Fee waivers and/or reimbursements are
voluntary and the Adviser reserves the right to commence or terminate any
waiver and/or reimbursement at any time.
(5) Commenced operations on April 2, 1991
(6) Commenced offering on January 2, 1996
(7) For comparative purposes, average annual since inception returns listed for
the indexes refer to the inception date or initial offering of the
respective share class of the Portfolio, not the inception of the index.
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. PERFORMANCE ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE
REINVESTED. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT
morganstanley.com/im. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO
THAT PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. TOTAL RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A
SHAREHOLDER WOULD PAY ON PORTFOLIO DISTRIBUTIONS OR THE REDEMPTION OF PORTFOLIO
SHARES.
The Equity Growth Portfolio seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of large capitalization
companies.
PERFORMANCE
For the year ended December 31, 2004, the Portfolios Class A shares had a total
return of 7.75%, net of fees, and 7.45% for the Class B shares, net of fees,
compared to 10.88% for the S&P 500 Index and 6.30% for the Russell 1000 Growth
Index (the "Index"). Effective June 30, 2004, the Portfolio's
57
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW (CONT'D)
EQUITY GROWTH PORTFOLIO
benchmark was changed from the S&P 500 Index to the Russell 1000 Growth Index.
Based on the Portfolio's asset composition and investment strategy, the Adviser
believes the Russell 1000 Growth Index is a more appropriate benchmark than the
S&P 500 Index for the Portfolio.
FACTORS AFFECTING PERFORMANCE
- Stock selection in the healthcare sector was the largest positive
contributor to relative results for the year. Although healthcare was one
of the weaker performing index sectors, the Portfolio's holdings far
outpaced healthcare stocks within the Index. The Portfolio's healthcare
underweight also added to relative return.
- Stock selection in technology was a positive factor, although the
technology sector performed poorly during the year, suffering from
concerns about excess inventory in the semi-conductor industry and
uncertainty about sustainable gains in corporate spending. Technology
stocks gained some momentum in the final quarter of 2004, but still lagged
the Index return for the full year.
- Stock selection was weak in the consumer discretionary sector, but this
was more than offset by the favorable impact of the Portfolio's
substantial overweight in the strong performing sector. Stock selection in
the consumer staples, financial services, and energy sectors detracted, as
did stock selection in producer durables.
- An overweight in integrated oils added to relative return.
MANAGEMENT STRATEGIES
- The U.S. Growth team assumed responsibility for the Portfolio at the
beginning of the third quarter. The Portfolio transition was completed by
August 6th. As a result of the Portfolio's stock selection process, the
most significant changes were an increase to consumer discretionary names
and a decrease to the Portfolio's technology exposure. We also increased
the Portfolio's energy position.
- Our goal is to add value relative to the Index primarily through stock
selection. We seek what we believe are high quality growth companies that
have distinct and sustainable competitive advantages.
EXPENSE EXAMPLES
As a shareholder of the Portfolio, you incur ongoing costs, including management
fees, distribution (12b-1) fees (in the case of Class B) and other Portfolio
expenses. These examples are intended to help you understand your ongoing costs
(in dollars) of investing in the Portfolio and to compare these costs with the
ongoing costs of investing in other mutual funds.
The examples are based on an investment of $1,000 invested at the beginning of
the six-month period ended December 31, 2004 and held for the entire six-month
period.
ACTUAL EXPENSES
The first line of the tables 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 tables below provides information about hypothetical
account values and hypothetical expenses based on the Portfolio's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Portfolio's actual return. The hypothetical account values and expenses may
not be used to estimate the actual ending account balance or expenses you paid
for the period. You may use this information to compare the ongoing costs of
investing in the Portfolio 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.
<Table>
<Caption>
EXPENSES PAID
ENDING ACCOUNT DURING PERIOD*
BEGINNING VALUE JULY 1, 2004 --
ACCOUNT VALUE DECEMBER 31, DECEMBER 31,
JULY 1, 2004 2004 2004
- --------------------------------------------------------------------------------------
CLASS A
Actual $ 1,000.00 $ 1,050.80 $ 3.81
Hypothetical (5% average
annual return before expenses) 1,000.00 1,021.42 3.76
CLASS B
Actual 1,000.00 1,049.50 5.10
Hypothetical (5% average
annual return before expenses) 1,000.00 1,020.16 5.03
</Table>
* Expenses are equal to Class A and Class B annualized net expense ratios of
0.74% and 0.99%, respectively, multiplied by the average account value
over the period, multiplied by 184/366 (to reflect the one-half year
period).
58
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW (CONT'D)
EQUITY GROWTH PORTFOLIO
GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS
The following graph depicts the Portfolio's holdings by industry, as a
percentage of total investments.
[CHART]
<Table>
Retail 7.9%
Computer Services Software & Systems 6.2%
Communications Technology 5.7%
Drugs & Pharmaceuticals 5.7%
Financial - Miscellaneous 5.7%
Services : Commercial 5.6%
Consumer Electronics 5.4%
Casinos & Gambling 4.4%
Energy - Miscellaneous 3.6%
Leisure Time 3.5%
Other* 44.9%
Short-Term Investment 1.4%
</Table>
* Industries which do not appear in the top 10 industries and industries
which represent less than 3% of total investments, if applicable, are
included in the category labeled "Other".
January 2005
59
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS
EQUITY GROWTH PORTFOLIO
<Table>
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
COMMON STOCKS (99.1%)
ADVERTISING AGENCIES (0.7%)
Lamar Advertising Co., Class A (a)116,200 $ 4,971
- ----------------------------------------------------------------------------------------------
BEVERAGES: SOFT DRINKS (1.0%)
PepsiCo., Inc. 140,610 7,340
- ----------------------------------------------------------------------------------------------
BIOTECHNOLOGY RESEARCH & PRODUCTION (2.3%)
Amgen, Inc. (a)88,842 5,699
Biogen Idec, Inc. (a)58,300 3,883
Genentech, Inc. (a)149,900 8,161
- ----------------------------------------------------------------------------------------------
17,743
==============================================================================================
CASINOS & GAMBLING (4.5%)
GTECH Holdings Corp. 158,880 4,123
International Game Technology 380,100 13,068
Las Vegas Sands Corp. (a)81,300 3,902
Station Casinos, Inc. 136,100 7,442
Wynn Resorts Ltd. (a)79,055 5,290
- ----------------------------------------------------------------------------------------------
33,825
==============================================================================================
COAL (0.7%)
Peabody Energy Corp. 63,700 5,154
- ----------------------------------------------------------------------------------------------
COMMUNICATIONS & MEDIA (1.5%)
News Corp., Class B 388,140 7,452
Time Warner, Inc. (a)204,800 3,982
- ----------------------------------------------------------------------------------------------
11,434
==============================================================================================
COMMUNICATIONS TECHNOLOGY (5.7%)
America Movil S.A. de C.V., Class L ADR 170,200 8,910
Cisco Systems, Inc. (a)358,050 6,910
Crown Castle International Corp. (a)326,532 5,434
QUALCOMM, Inc. 520,682 22,077
- ----------------------------------------------------------------------------------------------
43,331
==============================================================================================
COMPUTER SERVICES SOFTWARE & SYSTEMS (6.3%)
Adobe Systems, Inc. 113,100 7,096
Google, Inc., Class A (a)22,200 4,287
Infosys Technologies Ltd. ADR 54,100 3,750
Juniper Networks, Inc. (a)88,500 2,406
Microsoft Corp. 1,030,726 27,531
Symantec Corp. (a)89,100 2,295
- ----------------------------------------------------------------------------------------------
47,365
==============================================================================================
COMPUTER TECHNOLOGY (3.4%)
Dell, Inc. (a)544,725 22,955
Seagate Technology, Inc. (a)(d)186,100 @--
Shanda Interactive Entertainment Ltd. ADR (a)67,400 2,864
- ----------------------------------------------------------------------------------------------
25,819
==============================================================================================
CONSUMER ELECTRONICS (5.5%)
Electronic Arts, Inc. (a)303,300 18,708
Yahoo!, Inc. (a)601,440 22,662
- ----------------------------------------------------------------------------------------------
41,370
==============================================================================================
CONSUMER PRODUCTS (1.0%)
Gillette Co. (The) 165,800 7,425
- ----------------------------------------------------------------------------------------------
CONTAINERS & PACKAGING: PAPER & PLASTIC (0.3%)
Sealed Air Corp. (a)49,200 2,621
- ----------------------------------------------------------------------------------------------
DRUGS & PHARMACEUTICALS (5.7%)
Genzyme Corp. (a)65,200 3,786
Gilead Sciences, Inc. (a)239,360 $ 8,375
Johnson & Johnson 371,500 23,561
Novartis AG ADR 150,300 7,596
- ----------------------------------------------------------------------------------------------
43,318
==============================================================================================
EDUCATION SERVICES (2.2%)
Apollo Group, Inc., Class A (a)203,500 16,424
- ----------------------------------------------------------------------------------------------
ELECTRONICS: INSTRUMENTS GAUGES & METERS (0.8%)
Fisher Scientific International, Inc. (a)96,600 6,026
- ----------------------------------------------------------------------------------------------
ELECTRONICS: MEDICAL SYSTEMS (1.3%)
Medtronic, Inc. 195,400 9,705
- ----------------------------------------------------------------------------------------------
ELECTRONICS: SEMI-CONDUCTORS/COMPONENTS (2.1%)
Intel Corp. 152,013 3,555
Linear Technology Corp. 95,450 3,700
Marvell Technology Group Ltd. (a)248,640 8,819
- ----------------------------------------------------------------------------------------------
16,074
==============================================================================================
ENERGY EQUIPMENT (0.9%)
Halliburton Co. 88,700 3,481
Schlumberger Ltd. 55,000 3,682
- ----------------------------------------------------------------------------------------------
7,163
==============================================================================================
ENERGY -- MISCELLANEOUS (3.6%)
EnCana Corp. 68,500 3,909
Suncor Energy, Inc. 286,400 10,139
Ultra Petroleum Corp. (a)283,530 13,646
- ----------------------------------------------------------------------------------------------
27,694
==============================================================================================
FINANCIAL DATA PROCESSING SERVICES & SYSTEMS (1.9%)
First Data Corp. 167,200 7,113
Paychex, Inc. 220,610 7,518
- ----------------------------------------------------------------------------------------------
14,631
==============================================================================================
FINANCIAL -- MISCELLANEOUS (5.7%)
American Express Co. 110,350 6,220
Berkshire Hathaway, Inc., Class B (a)3,817 11,207
Brascan Corp., Class A 311,700 11,224
Moody's Corp. 95,400 8,285
SLM Corp. 114,400 6,108
- ----------------------------------------------------------------------------------------------
43,044
==============================================================================================
FOODS (1.5%)
Wrigley (W.M.) Jr. Co. 159,200 11,015
- ----------------------------------------------------------------------------------------------
HEALTH CARE MANAGEMENT SERVICES (0.5%)
Patterson Cos., Inc. (a)93,600 4,061
- ----------------------------------------------------------------------------------------------
HEALTH CARE -- MISCELLANEOUS (3.1%)
Alcon, Inc. 192,400 15,507
Caremark Rx, Inc. (a)200,250 7,896
- ----------------------------------------------------------------------------------------------
23,403
==============================================================================================
HEALTH CARE SERVICES (2.6%)
UnitedHealth Group, Inc. 221,800 19,525
- ----------------------------------------------------------------------------------------------
INVESTMENT MANAGEMENT COMPANIES (2.0%)
Citigroup, Inc. 76,179 3,670
Franklin Resources, Inc. 165,800 11,548
- ----------------------------------------------------------------------------------------------
15,218
==============================================================================================
LEISURE TIME (3.5%)
Carnival Corp. 460,000 26,510
- ----------------------------------------------------------------------------------------------
MANUFACTURING (1.0%)
Tyco International Ltd. 208,300 7,445
- ----------------------------------------------------------------------------------------------
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
60
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS (CONT'D)
EQUITY GROWTH PORTFOLIO
<Table>
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
MATERIALS & PROCESSING -- MISCELLANEOUS (3.2%)
Newmont Mining Corp. 537,900 $ 23,888
- ----------------------------------------------------------------------------------------------
MEDICAL & DENTAL INSTRUMENTS & SUPPLIES (2.2%)
Kinetic Concepts, Inc. (a)77,194 5,890
Zimmer Holdings, Inc. (a)134,800 10,800
- ----------------------------------------------------------------------------------------------
16,690
==============================================================================================
MISCELLANEOUS (0.8%)
Monsanto Co. 106,600 5,922
- ----------------------------------------------------------------------------------------------
MULTI-SECTOR COMPANIES (0.8%)
3M Co. 70,200 5,761
- ----------------------------------------------------------------------------------------------
RADIO & TV BROADCASTERS (1.0%)
Univision Communications, Inc., Class A (a)249,885 7,314
- ----------------------------------------------------------------------------------------------
RESTAURANTS (0.5%)
Starbucks Corp. (a)60,300 3,760
- ----------------------------------------------------------------------------------------------
RETAIL (7.9%)
Amazon.com, Inc. (a)89,200 3,951
Chico's FAS, Inc. (a)90,820 4,135
Costco Wholesale Corp. 77,600 3,757
Home Depot, Inc. 256,300 10,954
Kmart Holding Corp. (a)76,200 7,540
Petsmart, Inc. 208,210 7,398
Wal-Mart Stores, Inc. 423,638 22,376
- ----------------------------------------------------------------------------------------------
60,111
==============================================================================================
SECURITIES BROKERAGE & SERVICES (0.5%)
Ameritrade Holding Corp. (a)271,500 3,861
- ----------------------------------------------------------------------------------------------
SERVICES: COMMERCIAL (5.6%)
ChoicePoint, Inc. (a)77,600 3,569
Corporate Executive Board Co. 82,000 5,489
eBay, Inc. (a)252,525 29,364
IAC/InterActiveCorp (a)137,800 3,806
- ----------------------------------------------------------------------------------------------
42,228
==============================================================================================
SOAPS & HOUSEHOLD CHEMICALS (0.7%)
Procter & Gamble Co. 99,676 5,490
- ----------------------------------------------------------------------------------------------
TEXTILE APPAREL MANUFACTURERS (0.8%)
Coach, Inc. (a)103,490 5,837
- ----------------------------------------------------------------------------------------------
TOBACCO (0.5%)
Altria Group, Inc. 63,600 3,886
- ----------------------------------------------------------------------------------------------
TRANSPORTATION -- MISCELLANEOUS (0.8%)
C.H. Robinson Worldwide, Inc. 109,125 6,059
- ----------------------------------------------------------------------------------------------
UTILITIES: GAS PIPELINES (1.0%)
Questar Corp. 150,300 7,659
- ----------------------------------------------------------------------------------------------
UTILITIES: TELECOMMUNICATIONS (1.5%)
Nextel Communications, Inc., Class A (a)262,900 7,887
NTL, Inc. (a)52,300 3,816
- ----------------------------------------------------------------------------------------------
11,703
==============================================================================================
TOTAL COMMON STOCKS (COST $672,716) 749,823
==============================================================================================
<Caption>
FACE
AMOUNT VALUE
(000) (000)
- ----------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (1.4%)
REPURCHASE AGREEMENT (1.4%)
J.P. Morgan Securities, Inc., 2.00%,
dated 12/31/04, due 1/3/05,
repurchase price $10,641
(COST $10,639) $ (f)10,639 $ 10,639
==============================================================================================
TOTAL INVESTMENTS (100.5%) (COST $683,355) 760,462
==============================================================================================
LIABILITIES IN EXCESS OF OTHER ASSETS (-0.5%) (3,472)
==============================================================================================
NET ASSETS (100%) $ 756,990
==============================================================================================
</Table>
(a) Non-income producing security.
(d) Security was valued at fair value -- At December 31, 2004, the Portfolio
held a fair valued security, valued at less than $500, representing less
than 0.05% of net assets.
(f) Represents the Portfolio's undivided interest in a joint repurchase
agreement which has a total value of $1,018,656,000. The repurchase
agreement was fully collateralized by U.S. government agency securities
at the date of this portfolio of investments as follows: Federal Farm
Credit Bank, 0.00% to 6.75%, due 2/28/05 to 8/15/13; Federal Home Loan
Bank, 1.10% to 6.875%, due 4/15/05 to 10/28/24; Federal Home Loan
Mortgage Corp., 2.00% to 6.51%, due 6/15/15 to 3/15/19; Federal National
Mortgage Association, 1.75% to 8.20%, due 2/24/05 to 5/24/19; and
Financial Assist Corp., 8.80%, due 6/10/05. The investment in the
repurchase agreement is through participation in a joint account with
affiliated parties pursuant to exemptive relief received by the Portfolio
from the SEC.
@ Face Amount/Value is less than $500.
ADR American Depositary Receipts
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
61
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW
FOCUS EQUITY PORTFOLIO
[CHART]
COMPARISON OF THE CHANGE IN VALUE OF A $500,000* INVESTMENT SINCE INCEPTION
<Table>
<Caption>
LIPPER
FISCAL YEAR FOCUS EQUITY LARGE-CAP
ENDED PORTFOLIO - RUSSELL 1000 GROWTH
DECEMBER 31 CLASS A GROWTH INDEX S&P 500 INDEX FUNDS INDEX
** 500000 500000 500000 500000
1995 706250 646950 650860 649796
1996 995106 796525 800285 783396
1997 1326576 1039385 1067260 999542
1998 1530205 1441731 1372176 1364101
1999 2240832 1919809 1660883 1839047
2000 1979551 1489388 1509410 1477146
2001 1678263 1185255 1330092 1124575
2002 1194755 854806 1036142 808430
2003 1565010 1109025 1333203 1026405
2004 1674500 1178800 1478250 1102900
</Table>
[CHART]
COMPARISON OF THE CHANGE IN VALUE OF A $100,000* INVESTMENT SINCE INCEPTION
<Table>
<Caption>
LIPPER
FISCAL YEAR FOCUS EQUITY LARGE-CAP
ENDED PORTFOLIO - RUSSELL 1000 GROWTH
DECEMBER 31 CLASS B GROWTH INDEX S&P 500 INDEX FUNDS INDEX
*** 100000 100000 100000 100000
1996 139720 122190 122958 120280
1997 185688 159446 163976 153467
1998 213820 221167 210825 209440
1999 312455 294506 255182 282362
2000 275304 228478 231910 226797
2001 232769 181823 204359 172664
2002 165452 131131 159195 124124
2003 216114 170142 204837 157591
2004 230730 180830 225430 169340
</Table>
* Minimum Investment
** Commenced operations on March 8, 1995
*** Commenced offering on January 2, 1996
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE RUSSELL 1000 GROWTH INDEX(1), THE S&P 500
INDEX(2) AND THE LIPPER LARGE-CAP GROWTH FUNDS INDEX(3)
<Table>
<Caption>
TOTAL RETURNS(4)
-------------------------------
AVERAGE ANNUAL
---------------------
ONE FIVE SINCE
YEAR YEARS INCEPTION(7)
- --------------------------------------------------------------------------
Portfolio - Class A (5) 7.00% (5.66)% 13.10%
Russell 1000 Growth Index 6.30 (9.29) 9.13
S&P 500 Index 10.88 (2.30) 11.68
Lipper Large-Cap Growth Funds Index 7.45 (9.72) 8.39
Portfolio - Class B (6) 6.75 (5.89) 9.74
Russell 1000 Growth Index 6.30 (9.29) 6.81
S&P 500 Index 10.88 (2.30) 9.46
Lipper Large-Cap Growth Funds Index 7.45 (9.72) 6.03
</Table>
(1) Russell 1000 Growth Index measures the performance of those Russell 1000
companies with higher price-to-book ratios and higher forecasted growth
values.
(2) The S&P 500 Index is a capitalization-weighted index of 500 stocks. The
index is designed to measure performance of the broad domestic economy
through changes in the aggregate market value of 500 stocks representing
all major industries.
(3) The Lipper Large-Cap Growth Funds Index is an equally weighted performance
index of the largest qualifying funds (based on net assets) in the Lipper
Large-Cap Growth Funds classification. The Index, which is adjusted for
capital gains distributions and income dividends, is unmanaged and should
not be considered an investment. There are currently 30 funds represented
in this Index. As of the date of this report, the Portfolio is in the
Lipper Large-Cap Growth Funds classification.
(4) Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would have been lower. Fee waivers and/or reimbursements are
voluntary and the Adviser reserves the right to commence or terminate any
waiver and/or reimbursement at any time.
(5) Commenced operations on March 8, 1995
(6) Commenced offering on January 2, 1996
(7) For comparative purposes, average annual since inception returns listed for
the indexes refer to the inception date or initial offering of the
respective share class of the Portfolio, not the inception of the index.
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. PERFORMANCE ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE
REINVESTED. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT
morganstanley.com/im. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO
THAT PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. TOTAL RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A
SHAREHOLDER WOULD PAY ON PORTFOLIO DISTRIBUTIONS OR THE REDEMPTION OF PORTFOLIO
SHARES.
The Focus Equity Portfolio seeks capital appreciation by investing primarily in
growth-oriented equity securities of large capitalization companies. The
Portfolio's Concentration of its assets in a small number of issuers will
subject it to greater risks.
PERFORMANCE
For the year ended December 31, 2004, the Portfolio's Class A shares had a total
return of 7.00%, net of fees, and 6.75% for
62
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW (CONT'D)
FOCUS EQUITY PORTFOLIO
the Class B shares, net of fees, compared to 10.88% for the S&P 500 Index and
6.30% for the Russell 1000 Growth Index (the "Index"). Effective June 30, 2004,
the Portfolio's benchmark was changed from the S&P 500 Index to the Russell 1000
Growth Index. Based on the Portfolio's asset composition and investment
strategy, the Adviser believes the Russell 1000 Growth Index is a more
appropriate benchmark than the S&P 500 Index for the Portfolio.
FACTORS AFFECTING PERFORMANCE
- Stock selection in the healthcare sector was the largest positive
contributor to relative results for the year. Although healthcare was one
of the weaker performing index sectors, the Portfolio's holdings far
outpaced healthcare stocks within the Index. The Portfolio's healthcare
underweight also added to relative return.
- Stock selection in technology added to relative return, although the
technology sector performed poorly during the year, suffering from
concerns about excess inventory in the semi-conductor industry and
uncertainty about sustainable gains in corporate spending. Technology
stocks gained some momentum in the final quarter of 2004, but still lagged
the Index return for the full year.
- Stock selection was weak in the consumer discretionary sector, but this
was nearly offset by the favorable impact of the Portfolio's substantial
overweight in the strong performing sector. Stock selection in the
consumer staples, financial services, and energy sectors detracted, as did
stock selection and an underweight in autos and transportation.
- From a sector allocation standpoint, additional positive contributors
included overweights in integrated oils and financial services, and an
underweight in consumer staples.
MANAGEMENT STRATEGIES
- - The U.S. Growth team assumed responsibility for the Portfolio at the
beginning of the third quarter. The Portfolio transition was completed by
August 6th. As a result of the Portfolio's stock selection process, the
most significant changes were an increase to consumer discretionary names
and a decrease to the Portfolio's technology exposure. We also increased
the Portfolio's energy position.
- - Our goal is to add value relative to the Index primarily through stock
selection. We seek what we believe to be high quality growth companies
that have distinct and sustainable competitive advantages.
EXPENSE EXAMPLES
As a shareholder of the Portfolio, you incur ongoing costs, including management
fees, distribution (12b-1) fees (in the case of Class B) and other Portfolio
expenses. These examples are intended to help you understand your ongoing costs
(in dollars) of investing in the Portfolio and to compare these costs with the
ongoing costs of investing in other mutual funds.
The examples are based on an investment of $1,000 invested at the beginning of
the six-month period ended December 31, 2004 and held for the entire six-month
period.
ACTUAL EXPENSES
The first line of the tables 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 tables below provides information about hypothetical
account values and hypothetical expenses based on the Portfolio's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Portfolio's actual return. The hypothetical account values and expenses may
not be used to estimate the actual ending account balance or expenses you paid
for the period. You may use this information to compare the ongoing costs of
investing in the Portfolio 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.
<Table>
<Caption>
EXPENSES PAID
ENDING ACCOUNT DURING PERIOD*
BEGINNING VALUE JULY 1, 2004 --
ACCOUNT VALUE DECEMBER 31, DECEMBER 31,
JULY 1, 2004 2004 2004
- --------------------------------------------------------------------------------------
CLASS A
Actual $ 1,000.00 $ 1,051.20 $ 5.16
Hypothetical (5% average
annual return before expenses) 1,000.00 1,020.11 5.08
CLASS B
Actual 1,000.00 1,049.30 6.44
Hypothetical (5% average
annual return before expenses) 1,000.00 1,018.85 6.34
</Table>
* Expenses are equal to Class A and Class B annualized net expense ratios of
1.00% and 1.25%, respectively, multiplied by the average account value over
the period, multiplied by 184/366 (to reflect the one-half year period).
63
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW (CONT'D)
FOCUS EQUITY PORTFOLIO
GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS
The following graph depicts the Portfolio's holdings by industry, as a
percentage of total investments.
[CHART]
<Table>
Retail 8.1%
Consumer Electronics 7.6%
Communications Technology 7.6%
Services: Commercial 6.7%
Financial - Miscellaneous 6.1%
Casinos & Gambling 5.7%
Energy - Miscellaneous 5.5%
Leisure Time 5.4%
Computer Services Software & Systems 5.2%
Health Care - Miscellaneous 3.9%
Other* 36.3%
Short-Term Investment 1.9%
</Table>
* Industries which do not appear in the top 10 industries and industries
which represent less than 3% of total investments, if applicable, are
included in the category labeled "Other".
January 2005
64
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS
FOCUS EQUITY PORTFOLIO
<Table>
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
COMMON STOCKS (97.7%)
ADVERTISING AGENCIES (1.0%)
Lamar Advertising Co., Class A (a)14,100 $ 603
- ----------------------------------------------------------------------------------------------
BIOTECHNOLOGY RESEARCH & PRODUCTION (1.8%)
Genentech, Inc. (a)19,900 1,083
- ----------------------------------------------------------------------------------------------
CASINOS & GAMBLING (5.6%)
GTECH Holdings Corp. 25,200 654
International Game Technology 45,500 1,564
Las Vegas Sands Corp. (a)6,762 324
Station Casinos, Inc. 16,800 919
- ----------------------------------------------------------------------------------------------
3,461
==============================================================================================
COMMUNICATIONS & MEDIA (1.6%)
News Corp., Class B 51,000 979
- ----------------------------------------------------------------------------------------------
COMMUNICATIONS TECHNOLOGY (7.5%)
America Movil S.A. de C.V., Class L ADR 20,000 1,047
Crown Castle International Corp. (a)88,737 1,476
QUALCOMM, Inc. 49,264 2,089
- ----------------------------------------------------------------------------------------------
4,612
==============================================================================================
COMPUTER SERVICES SOFTWARE & SYSTEMS (5.1%)
Google, Inc., Class A (a)2,000 386
Microsoft Corp. 103,500 2,765
- ----------------------------------------------------------------------------------------------
3,151
==============================================================================================
COMPUTER TECHNOLOGY (3.5%)
Dell, Inc. (a)50,925 2,146
- ----------------------------------------------------------------------------------------------
CONSUMER ELECTRONICS (7.6%)
Electronic Arts, Inc. (a)35,400 2,183
Yahoo!, Inc. (a)65,440 2,466
- ----------------------------------------------------------------------------------------------
4,649
==============================================================================================
DRUGS & PHARMACEUTICALS (1.5%)
Gilead Sciences, Inc. (a)25,600 896
- ----------------------------------------------------------------------------------------------
EDUCATION SERVICES (3.2%)
Apollo Group, Inc., Class A (a)24,100 1,945
- ----------------------------------------------------------------------------------------------
ELECTRONICS: INSTRUMENTS GAUGES & METERS (1.4%)
Fisher Scientific International, Inc. (a)14,100 880
- ----------------------------------------------------------------------------------------------
ELECTRONICS: SEMI-CONDUCTORS/COMPONENTS (1.5%)
Marvell Technology Group Ltd. (a)26,800 951
- ----------------------------------------------------------------------------------------------
ENERGY -- MISCELLANEOUS (5.5%)
Suncor Energy, Inc. 41,800 1,480
Ultra Petroleum Corp. (a)39,570 1,905
- ----------------------------------------------------------------------------------------------
3,385
==============================================================================================
FINANCIAL DATA PROCESSING SERVICES & SYSTEMS (1.1%)
Paychex, Inc. 20,230 689
- ----------------------------------------------------------------------------------------------
FINANCIAL -- MISCELLANEOUS (6.1%)
Berkshire Hathaway, Inc., Class B (a)553 1,624
Brascan Corp., Class A 37,200 1,340
Moody's Corp. 8,600 747
- ----------------------------------------------------------------------------------------------
3,711
==============================================================================================
FOODS (2.6%)
Wrigley (W.M.) Jr. Co. 22,700 1,571
- ----------------------------------------------------------------------------------------------
HEALTH CARE -- MISCELLANEOUS (3.8%)
Alcon, Inc. 21,300 1,717
Caremark Rx, Inc. (a)16,300 642
- ----------------------------------------------------------------------------------------------
2,359
==============================================================================================
HEALTH CARE SERVICES (2.8%)
UnitedHealth Group, Inc. 19,300 $ 1,699
- ----------------------------------------------------------------------------------------------
INVESTMENT MANAGEMENT COMPANIES (2.2%)
Franklin Resources, Inc. 19,600 1,365
- ----------------------------------------------------------------------------------------------
LEISURE TIME (5.4%)
Carnival Corp. 57,400 3,308
- ----------------------------------------------------------------------------------------------
MATERIALS & PROCESSING -- MISCELLANEOUS (3.8%)
Newmont Mining Corp. 51,800 2,300
- ----------------------------------------------------------------------------------------------
MEDICAL & DENTAL INSTRUMENTS & SUPPLIES (3.2%)
Kinetic Concepts, Inc. (a)9,100 694
Zimmer Holdings, Inc. (a)15,900 1,274
- ----------------------------------------------------------------------------------------------
1,968
==============================================================================================
MISCELLANEOUS (1.0%)
Monsanto Co. 11,100 617
- ----------------------------------------------------------------------------------------------
RADIO & TV BROADCASTERS (2.0%)
Univision Communications, Inc., Class A (a)41,320 1,209
- ----------------------------------------------------------------------------------------------
RETAIL (8.1%)
Chico's FAS, Inc. (a)16,200 738
Home Depot, Inc. 29,100 1,244
Petsmart, Inc. 26,970 958
Wal-Mart Stores, Inc. 38,100 2,012
- ----------------------------------------------------------------------------------------------
4,952
==============================================================================================
SERVICES: COMMERCIAL (6.6%)
Corporate Executive Board Co. 14,000 937
eBay, Inc. (a)26,960 3,135
- ----------------------------------------------------------------------------------------------
4,072
==============================================================================================
UTILITIES: GAS PIPELINES (1.1%)
Questar Corp. 13,500 688
- ----------------------------------------------------------------------------------------------
UTILITIES: TELECOMMUNICATIONS (1.1%)
Nextel Communications, Inc., Class A (a)21,900 657
- ----------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST $53,840) 59,906
==============================================================================================
<Caption>
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (1.9%)
REPURCHASE AGREEMENT (1.9%)
J.P. Morgan Securities, Inc., 2.00%,
dated 12/31/04, due 1/3/05,
repurchase price $1,175
(COST $1,175) $ (f)1,175 1,175
- ----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.6%) (COST $55,015) 61,081
==============================================================================================
OTHER ASSETS IN EXCESS OF LIABILITIES (0.4%) 235
==============================================================================================
NET ASSETS (100%) $ 61,316
==============================================================================================
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
65
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS (CONT'D)
FOCUS EQUITY PORTFOLIO
(a) Non-income producing security.
(f) Represents the Portfolio's undivided interest in a joint repurchase
agreement which has a total value of $1,018,656,000. The repurchase
agreement was fully collateralized by U.S. government agency securities
at the date of this portfolio of investments as follows: Federal Farm
Credit Bank, 0.00% to 6.75%, due 2/28/05 to 8/15/13; Federal Home Loan
Bank, 1.10% to 6.875%, due 4/15/05 to 10/28/24; Federal Home Loan
Mortgage Corp., 2.00% to 6.51%, due 6/15/15 to 3/15/19; Federal National
Mortgage Association, 1.75% to 8.20%, due 2/24/05 to 5/24/19; and
Financial Assist Corp., 8.80%, due 6/10/05. The investment in the
repurchase agreement is through participation in a joint account with
affiliated parties pursuant to exemptive relief received by the Portfolio
from the SEC.
ADR American Depositary Receipts
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
66
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW
SMALL COMPANY GROWTH PORTFOLIO
[CHART]
COMPARISON OF THE CHANGE IN VALUE OF A $500,000* INVESTMENT OVER 10 YEARS
<Table>
<Caption>
SMALL LIPPER
COMPANY SMALL-CAP
FISCAL YEAR GROWTH RUSSELL GROWTH
ENDED PORTFOLIO - 2000 GROWTH FUNDS
DECEMBER 31 CLASS A INDEX INDEX
1994 500000 500000 500000
1995 666550 655200 682521
1996 691346 728976 798872
1997 769883 823378 888548
1998 981908 833505 897122
1999 1928959 1192663 1445873
2000 1800799 925149 1326555
2001 1581389 839757 1157480
2002 1229056 585647 835575
2003 1771438 869920 1209704
2004 2110950 994400 1340250
</Table>
[CHART]
COMPARISON OF THE CHANGE IN VALUE OF A $100,000* INVESTMENT SINCE INCEPTION
<Table>
<Caption>
SMALL LIPPER
COMPANY SMALL-CAP
GROWTH RUSSELL GROWTH
PORTFOLIO - 2000 GROWTH FUNDS
CLASS B INDEX INDEX
** 100000 100000 100000
1996 103580 111000 117361
1997 115108 125375 130535
1998 146027 126917 131795
1999 286168 181605 212411
2000 266680 140871 194882
2001 233745 127869 170043
2002 181293 89176 122753
2003 260699 132461 177715
2004 309710 151600 196890
</Table>
* Minimum Investment
** Commenced offering on January 2, 1996
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE RUSSELL 2000 GROWTH INDEX(1) AND THE LIPPER
SMALL-CAP GROWTH FUNDS INDEX(2)
<Table>
<Caption>
TOTAL RETURNS(3)
----------------------------------------------
AVERAGE ANNUAL
-----------------------------------
ONE FIVE TEN SINCE
YEAR YEARS YEARS INCEPTION(6)
- -----------------------------------------------------------------------------------------
Portfolio - Class A (4) 19.17% 1.82% 15.49% 13.54%
Russell 2000 Growth Index 14.31 (3.57) 7.12 7.56
Lipper Small-Cap Growth Funds Index 10.79 (1.51) 10.36 10.78
Portfolio - Class B (5) 18.79 1.58 -- 13.39
Russell 2000 Growth Index 14.31 (3.57) -- 4.73
Lipper Small-Cap Growth Funds Index 10.79 (1.51) -- 7.82
</Table>
(1) Russell 2000 Growth Index measures the performance of those Russell 2000
companies with higher price-to-book ratios and higher forecasted growth
values.
(2) The Lipper Small-Cap Growth Funds Index is an equally weighted performance
index of the largest qualifying funds (based on net assets) in the Lipper
Small-Cap Growth Funds classification. The Index, which is adjusted for
capital gains distributions and income dividends, is unmanaged and should
not be considered an investment. There are currently 30 funds represented
in this Index. As of the date of this report, the Portfolio is in the
Lipper Small-Cap Growth Funds classification.
(3) Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would have been lower. Fee waivers and/or reimbursements are
voluntary and the Adviser reserves the right to commence or terminate any
waiver and/or reimbursement at any time.
(4) Commenced operations on November 1, 1989
(5) Commenced offering on January 2, 1996
(6) For comparative purposes, average annual since inception returns listed for
the indexes refer to the inception date or initial offering of the
respective share class of the Portfolio, not the inception of the index.
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. PERFORMANCE ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE
REINVESTED. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT
morganstanley.com/im. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO
THAT PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. TOTAL RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A
SHAREHOLDER WOULD PAY ON PORTFOLIO DISTRIBUTIONS OR THE REDEMPTION OF PORTFOLIO
SHARES.
The Small Company Growth Portfolio seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small U.S. and, to a
limited extent, foreign companies that are listed on U.S. exchanges or traded in
U.S. markets. Investments in small sized corporations are more vulnerable to
financial risks and other risks than larger corporations and may involve a
higher degree of price volatility than investments in the general equity
markets.
PERFORMANCE
For the year ended December 31, 2004, the Portfolio had a total return of 19.17%
for the Class A shares, net of fees, and 18.79% for the Class B shares, net of
fees, compared to 14.31% for the Russell 2000 Growth Index (the "Index").
67
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW (CONT'D)
SMALL COMPANY GROWTH PORTFOLIO
FACTORS AFFECTING PERFORMANCE
- The Portfolio outperformed the Index primarily as a result of stock
selection, although sector weights also had a favorable impact.
- Stock selection within technology significantly exceeded the index sector
return, and coupled with an underweight this was the strongest contributor
to performance relative to the Index. Communications technology, software
and electronics were particularly strong in the Portfolio. Technology was
the only sector of the Index with a negative return, while stocks held in
the Portfolio advanced sharply.
- Energy was the top performing segment of the Index and the Portfolio. An
overweight in this sector, combined with superior stock selection added
favorably to results. Crude oil producers had a positive impact,
benefiting from rising prices throughout the year.
- Consumer discretionary was the largest sector in the Portfolio and the
largest overweight relative to the Index. Stock selection exceeded the
Index sector return, and combined with an overweight contributed to the
Portfolio's performance. Casinos and gambling, hotel/motel and leisure
names performed well.
- Underperformance in small sectors such as materials and processing and
utilities detracted modestly from results.
MANAGEMENT STRATEGIES
- On average, the three largest sectors in the Portfolio during 2004 were
consumer discretionary, healthcare and technology.
EXPENSE EXAMPLES
As a shareholder of the Portfolio, you incur ongoing costs, including management
fees, distribution (12b-1) fees (in the case of Class B) and other Portfolio
expenses. These examples are intended to help you understand your ongoing costs
(in dollars) of investing in the Portfolio and to compare these costs with the
ongoing costs of investing in other mutual funds.
The examples are based on an investment of $1,000 invested at the beginning of
the six-month period ended December 31, 2004 and held for the entire six-month
period.
ACTUAL EXPENSES
The first line of the tables 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 tables below provides information about hypothetical
account values and hypothetical expenses based on the rate Portfolio's actual
expense ratio and an assumed of return of 5% per year before expenses, which is
not the Portfolio's actual return. The hypothetical account values and expenses
may not be used to estimate the actual ending account balance or expenses you
paid for the period. You may use this information to compare the ongoing costs
of investing in the Portfolio 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.
<Table>
<Caption>
EXPENSES PAID
ENDING ACCOUNT DURING PERIOD*
BEGINNING VALUE JULY 1, 2004 --
ACCOUNT VALUE DECEMBER 31, DECEMBER 31,
JULY 1, 2004 2004 2004
- ------------------------------------------------------------------------------------------
CLASS A
Actual $ 1,000.00 $ 1,100.10 $ 5.81
Hypothetical (5% average
annual return before expenses) 1,000.00 1,019.61 5.58
CLASS B
Actual 1,000.00 1,098.50 7.12
Hypothetical (5% average
annual return before expenses) 1,000.00 1,018.35 6.85
</Table>
* Expenses are equal to Class A and Class B annualized net expense ratios of
1.10% and 1.35%, respectively, multiplied by the average account value over
the period, multiplied by 184/366 (to reflect the one-half year period).
GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS
The following graph depicts the Portfolio's holdings by industry, as a
percentage of total investments.
[CHART]
<Table>
Retail 9.4%
Computer Services Software & Systems 8.0%
Casinos & Gambling 6.3%
Energy - Miscellaneous 6.2%
Services: Commercial 5.0%
Leisure Time 4.3%
Health Care Services 4.2%
Medical & Dental Instruments & Supplies 3.9%
Hotel/Motel 3.5%
Health Care - Miscellaneous 3.3%
Other* 41.7%
Short-Term Investments 4.2%
</Table>
* Industries which do not appear in the top 10 industries and industries
which represent less than 3% of total investments, if applicable, are
included in the category labeled "Other".
January 2005
68
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS
SMALL COMPANY GROWTH PORTFOLIO
<Table>
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
COMMON STOCKS (96.7%)
BANKS: OUTSIDE NEW YORK CITY (1.1%)
Texas Regional Bancshares, Inc. 147,371 $ 4,816
UCBH Holdings, Inc. 220,200 10,090
- ----------------------------------------------------------------------------------------------
14,906
==============================================================================================
BIOTECHNOLOGY RESEARCH & PRODUCTION (1.2%)
Idexx Laboratories, Inc. (a)141,500 7,724
MGI Pharma, Inc. (a)111,800 3,132
Telik, Inc. (a)267,525 5,120
- ----------------------------------------------------------------------------------------------
15,976
==============================================================================================
BUILDING: CEMENT (1.7%)
Eagle Materials, Inc. 85,600 7,216
Florida Rock Industries, Inc. 258,200 15,371
- ----------------------------------------------------------------------------------------------
22,587
==============================================================================================
CASINOS & GAMBLING (6.4%)
Kerzner International Ltd. (a)468,700 28,146
Lakes Entertainment, Inc. (a)523,900 8,534
Penn National Gaming, Inc. (a)538,700 32,618
Shuffle Master, Inc. (a)382,750 18,028
- ----------------------------------------------------------------------------------------------
87,326
==============================================================================================
COMMUNICATIONS TECHNOLOGY (2.8%)
Plantronics, Inc. 145,000 6,013
Spectrasite, Inc. (a)555,700 32,175
- ----------------------------------------------------------------------------------------------
38,188
==============================================================================================
COMPUTER SERVICES SOFTWARE & SYSTEMS (8.1%)
Akamai Technologies, Inc. (a)867,700 11,306
Avocent Corp. (a)117,900 4,777
FileNET Corp. (a)203,000 5,229
Hyperion Solutions Corp. (a)146,300 6,820
Macromedia, Inc. (a)153,900 4,789
Micros Systems, Inc. (a)149,100 11,639
Neoforma, Inc. (a)592,029 4,553
Netease.com ADR (a)103,500 5,468
Salesforce.com, Inc. (a)555,000 9,402
Sina Corp. (a)180,900 5,800
SkillSoft plc ADR (a)1,002,300 5,663
SS&C Technologies, Inc. 233,300 4,818
Transact Technologies, Inc. (a)305,850 6,533
ValueClick, Inc. (a)368,150 4,907
Verint Systems, Inc. (a)172,300 6,260
Websense, Inc. (a)250,600 12,710
- ----------------------------------------------------------------------------------------------
110,674
==============================================================================================
COMPUTER TECHNOLOGY (2.1%)
RSA Security, Inc. (a)715,900 14,361
Shanda Interactive Entertainment Ltd. ADR (a)334,100 14,199
- ----------------------------------------------------------------------------------------------
28,560
==============================================================================================
CONSTRUCTION (0.6%)
Chicago Bridge & Iron Co. N.V. (NY Shares) 196,000 7,840
- ----------------------------------------------------------------------------------------------
CONSUMER ELECTRONICS (1.1%)
Activision, Inc. (a)274,700 5,543
CNET Networks, Inc. (a)894,000 10,040
- ----------------------------------------------------------------------------------------------
15,583
==============================================================================================
CONSUMER PRODUCTS (0.4%)
PlanetOut, Inc. (a)363,800 $ 4,948
- ----------------------------------------------------------------------------------------------
DIVERSIFIED (0.4%)
Beacon Roofing Supply, Inc. (a)304,400 6,045
- ----------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES (1.2%)
Calamos Asset Management, Inc., Class A (a)602,000 16,254
- ----------------------------------------------------------------------------------------------
DRUGS & PHARMACEUTICALS (1.7%)
Flamel Technologies ADR (a)315,830 6,156
Gen-Probe, Inc. (a)224,400 10,145
Noven Pharmaceuticals, Inc. (a)413,500 7,054
- ----------------------------------------------------------------------------------------------
23,355
==============================================================================================
EDUCATION SERVICES (3.2%)
Bright Horizons Family Solutions, Inc. (a)147,000 9,520
Laureate Education, Inc. (a)171,200 7,548
Strayer Education, Inc. 237,150 26,037
- ----------------------------------------------------------------------------------------------
43,105
==============================================================================================
ELECTRICAL & ELECTRONICS (0.9%)
Flir Systems, Inc. (a)200,900 12,815
- ----------------------------------------------------------------------------------------------
ELECTRONICS (1.1%)
Avid Technology, Inc. (a)241,600 14,919
- ----------------------------------------------------------------------------------------------
ELECTRONICS: SEMI-CONDUCTORS/COMPONENTS (1.4%)
Microsemi Corp. (a)256,100 4,446
Tessera Technologies, Inc. (a)399,000 14,847
- ----------------------------------------------------------------------------------------------
19,293
==============================================================================================
ENERGY -- MISCELLANEOUS (6.2%)
Bill Barrett Corp. (a)211,800 6,775
Denbury Resources, Inc. (a)572,300 15,710
Gasco Energy, Inc. (a)1,801,700 7,675
Quicksilver Resources, Inc. (a)761,400 28,004
Range Resources Corp. 242,900 4,970
Southwestern Energy Co. (a)334,100 16,936
Veritas DGC, Inc. (a)221,600 4,966
- ----------------------------------------------------------------------------------------------
85,036
==============================================================================================
ENGINEERING & CONTRACTING SERVICES (0.5%)
Washington Group International, Inc. (a)167,100 6,893
- ----------------------------------------------------------------------------------------------
ENTERTAINMENT (0.5%)
Lions Gate Entertainment Corp. (a)653,700 6,942
- ----------------------------------------------------------------------------------------------
FINANCIAL DATA PROCESSING SERVICES & SYSTEMS (0.4%)
Advent Software, Inc. (a)298,900 6,122
- ----------------------------------------------------------------------------------------------
FINANCIAL -- MISCELLANEOUS (0.7%)
Interactive Data Corp. (a)463,175 10,069
- ----------------------------------------------------------------------------------------------
HEALTH CARE MANAGEMENT SERVICES (0.7%)
Eclipsys Corp. (a)467,300 9,547
- ----------------------------------------------------------------------------------------------
HEALTH CARE -- MISCELLANEOUS (3.4%)
Adeza Biomedical Corp. (a)268,391 4,710
Advanced Medical Optics, Inc. (a)248,500 10,223
VCA Antech, Inc. (a)1,585,700 31,080
- ----------------------------------------------------------------------------------------------
46,013
==============================================================================================
HEALTH CARE SERVICES (4.2%)
Animas Corp. (a)285,250 4,459
Dade Behring Holdings, Inc. (a)654,400 36,646
Stericycle, Inc. (a)350,725 16,116
- ----------------------------------------------------------------------------------------------
57,221
==============================================================================================
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
69
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS (CONT'D)
SMALL COMPANY GROWTH PORTFOLIO
<Table>
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
HOMEBUILDING (0.6%)
Brookfield Homes Corp. 223,650 $ 7,582
- ----------------------------------------------------------------------------------------------
HOTEL/MOTEL (3.5%)
BJ's Restaurants, Inc. (a)464,950 6,509
Gaylord Entertainment Co. (a)515,000 21,388
Great Wolf Resorts, Inc. (a)659,862 14,741
Multimedia Games, Inc. (a)359,500 5,666
- ----------------------------------------------------------------------------------------------
48,304
==============================================================================================
IDENTIFICATION CONTROL & FILTER DEVICES (0.4%)
CUNO, Inc. (a)92,500 5,495
- ----------------------------------------------------------------------------------------------
INSURANCE: PROPERTY & CASUALTY (0.8%)
Markel Corp. (a)29,850 10,865
- ----------------------------------------------------------------------------------------------
INVESTMENT MANAGEMENT COMPANIES (1.7%)
Affiliated Managers Group, Inc. (a)108,800 7,370
Greenhill & Co., Inc. 548,800 15,751
- ----------------------------------------------------------------------------------------------
23,121
==============================================================================================
LEISURE TIME (4.3%)
SCP Pool Corp. 888,050 28,329
WMS Industries, Inc. (a)902,000 30,253
- ----------------------------------------------------------------------------------------------
58,582
==============================================================================================
MACHINERY: INDUSTRIAL/SPECIALTY (0.3%)
Middleby Corp. 93,900 4,763
- ----------------------------------------------------------------------------------------------
MACHINERY: OIL WELL EQUIPMENT & SERVICES (0.4%)
CARBO Ceramics, Inc. 83,000 5,727
- ----------------------------------------------------------------------------------------------
MANUFACTURED HOUSING (0.5%)
Winnebago Industries, Inc. 176,700 6,902
- ----------------------------------------------------------------------------------------------
MANUFACTURING (0.9%)
Actuant Corp., Class A (a)229,200 11,953
- ----------------------------------------------------------------------------------------------
MATERIALS & PROCESSING -- MISCELLANEOUS (1.3%)
Agnico-Eagle Mines, Ltd. 521,600 7,172
Glamis Gold, Ltd. (a)633,200 10,866
- ----------------------------------------------------------------------------------------------
18,038
==============================================================================================
MEDICAL & DENTAL INSTRUMENTS & SUPPLIES (3.9%)
American Medical Systems Holdings, Inc. (a)242,300 10,131
Enzon Pharmaceuticals, Inc. (a)188,500 2,586
Inamed Corp. (a)417,000 26,375
Sybron Dental Specialties, Inc. (a)258,200 9,135
Techne Corp. (a)138,100 5,372
- ----------------------------------------------------------------------------------------------
53,599
==============================================================================================
METALS & MINERALS -- MISCELLANEOUS (0.7%)
Coeur d'Alene Mines Corp. (a)2,498,200 9,818
- ----------------------------------------------------------------------------------------------
OIL: INTEGRATED DOMESTIC (0.5%)
Delta Petroleum Corp. (a)465,650 7,301
- ----------------------------------------------------------------------------------------------
PAPER (0.5%)
Neenah Paper, Inc. (a)205,900 6,712
- ----------------------------------------------------------------------------------------------
PRODUCTION TECHNOLOGY EQUIPMENT (0.8%)
Cymer, Inc. (a)139,400 4,118
Dionex Corp. (a)116,700 6,613
- ----------------------------------------------------------------------------------------------
10,731
==============================================================================================
PUBLISHING: MISCELLANEOUS (0.5%)
ProQuest Co. (a)228,500 6,786
- ----------------------------------------------------------------------------------------------
RADIO & TV BROADCASTERS (0.5%)
Radio One, Inc., Class D (a)398,836 6,429
- ----------------------------------------------------------------------------------------------
RESTAURANTS (2.8%)
P.F. Chang's China Bistro, Inc. (a)249,695 $ 14,071
Sonic Corp. (a)545,907 16,650
Steak N Shake Co. (The) (a)359,325 7,215
- ----------------------------------------------------------------------------------------------
37,936
==============================================================================================
RETAIL (9.4%)
AFC Enterprises, Inc. (a)706,620 16,754
Blue Nile, Inc. (a)172,950 4,777
Build-A-Bear Workshop, Inc. (a)336,920 11,843
CEC Entertainment, Inc. (a)220,900 8,829
Guitar Center, Inc. (a)411,400 21,677
Overstock.com, Inc. (a)158,800 10,957
Petco Animal Supplies, Inc. (a)337,600 13,328
Provide Commerce, Inc. (a)147,700 5,487
Tractor Supply Co. (a)405,900 15,104
Tuesday Morning Corp. (a)658,600 20,173
- ----------------------------------------------------------------------------------------------
128,929
==============================================================================================
SERVICES: COMMERCIAL (5.0%)
51job, Inc. ADR (a)96,700 5,026
Advisory Board Co. (The) (a)381,100 14,055
Arbitron, Inc. (a)159,775 6,260
Corporate Executive Board Co. 304,399 20,376
Macquarie Infrastructure Co. Trust (a)265,900 7,804
Universal Technical Institute, Inc. (a)387,300 14,764
- ----------------------------------------------------------------------------------------------
68,285
==============================================================================================
TELECOMMUNICATIONS EQUIPMENT (0.4)
Andrew Corp. (a)451,000 6,147
- ----------------------------------------------------------------------------------------------
TEXTILE APPAREL MANUFACTURERS (1.0%)
Carter's, Inc. (a)382,075 12,987
- ----------------------------------------------------------------------------------------------
TRANSPORTATION -- MISCELLANEOUS (0.4%)
Arlington Tankers Ltd. (a)220,200 5,054
- ----------------------------------------------------------------------------------------------
TRUCKERS (1.3%)
Landstar System, Inc. (a)240,200 17,688
- ----------------------------------------------------------------------------------------------
UTILITIES: MISCELLANEOUS (0.4%)
Petroleum Development Corp. (a)128,400 4,952
- ----------------------------------------------------------------------------------------------
UTILITIES: TELECOMMUNICATIONS (1.9%)
Arbinet-thexchange, Inc. (a)188,040 4,673
IDT Corp., Class B (a)272,700 4,221
NII Holdings, Inc. (a)150,044 7,119
PTEK Holdings, Inc. (a)439,000 4,702
USA Mobility, Inc. (a)140,800 4,972
- ----------------------------------------------------------------------------------------------
25,687
==============================================================================================
TOTAL COMMON STOCKS (COST $1,098,639) 1,320,590
==============================================================================================
<Caption>
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (4.2%)
REPURCHASE AGREEMENT (4.2%)
J.P. Morgan Securities, Inc., 2.00%,
dated 12/31/04, due 1/3/05,
repurchase price $57,249
(COST $57,239) $ (f)57,239 57,239
==============================================================================================
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
70
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS (CONT'D)
SMALL COMPANY GROWTH PORTFOLIO
<Table>
<Caption>
VALUE
(000)
- ----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.9%) (COST $1,155,878) $ 1,377,829
==============================================================================================
LIABILITIES IN EXCESS OF OTHER ASSETS (-0.9%) (12,820)
==============================================================================================
NET ASSETS (100%) $ 1,365,009
==============================================================================================
</Table>
(a) Non-income producing security.
(f) Represents the Portfolio's undivided interest in a joint repurchase
agreement which has a total value of $1,018,656,000. The repurchase
agreement was fully collateralized by U.S. government agency securities
at the date of this portfolio of investments as follows: Federal Farm
Credit Bank, 0.00% to 6.75%, due 2/28/05 to 8/15/13; Federal Home Loan
Bank, 1.10% to 6.875%, due 4/15/05 to 10/28/24; Federal Home Loan
Mortgage Corp., 2.00% to 6.51%, due 6/15/15 to 3/15/19; Federal National
Mortgage Association, 1.75% to 8.20%, due 2/24/05 to 5/24/19; and
Financial Assist Corp., 8.80%, due 6/10/05. The investment in the
repurchase agreement is through participation in a joint account with
affiliated parties pursuant to exemptive relief received by the Portfolio
from the SEC.
ADR American Depositary Receipts
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
71
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW
U.S. REAL ESTATE PORTFOLIO
[CHART]
COMPARISON OF THE CHANGE IN VALUE OF A $500,000* INVESTMENT SINCE INCEPTION
<Table>
<Caption>
U.S. REAL
FISCAL YEAR ESTATE NAREIT LIPPER
ENDED PORTFOLIO - EQUITY REAL ESTATE
DECEMBER 31 CLASS A INDEX FUNDS INDEX
** 500000 500000 500000
1995 605450 575000 312264
1996 845087 777803 411648
1997 1078669 935385 496347
1998 948257 771693 411938
1999 934128 736040 396825
2000 1210910 930134 498248
2001 1322919 1059702 548679
2002 1325301 1100183 568570
2003 1823746 1508681 780160
2004 2503650 1985050 1030783
</Table>
[CHART]
COMPARISON OF THE CHANGE IN VALUE OF A $100,000* INVESTMENT SINCE INCEPTION
<Table>
<Caption>
U.S. REAL
FISCAL YEAR ESTATE NAREIT LIPPER
ENDED PORTFOLIO - EQUITY REAL ESTATE
DECEMBER 31 CLASS B INDEX FUNDS INDEX
*** 100000 100000 100000
1996 138250 135270 131602
1997 175868 162676 158680
1998 153849 134207 131695
1999 151188 128007 126863
2000 195576 161762 159288
2001 212943 184296 175410
2002 212816 191336 181769
2003 292089 262379 249414
2004 400100 345260 329540
</Table>
* Minimum Investment
** Commenced operations on February 24, 1995
*** Commenced offering on January 2, 1996
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE NATIONAL ASSOCIATION OF REAL ESTATE INVESTMENT
TRUSTS (NAREIT) EQUITY INDEX(1) AND THE LIPPER REAL ESTATE FUNDS INDEX(2)
<Table>
<Caption>
TOTAL RETURNS(3)
------------------------
AVERAGE ANNUAL
---------------------
ONE FIVE SINCE
YEAR YEARS INCEPTION(6)
- --------------------------------------------------------------------------------
Portfolio - Class A (4) 37.28% 21.86% 17.77%
NAREIT Equity Index 31.58 21.95 15.03
Lipper Real Estate Funds Index 32.12 21.04 --
Portfolio - Class B (5) 36.95 21.49 16.66
NAREIT Equity Index 31.58 21.95 14.77
Lipper Real Estate Funds Index 32.12 21.04 14.18
</Table>
(1) The NAREIT Equity Index is an unmanaged market weighted index of tax
qualified REITs listed on the New York Stock Exchange, American Stock
Exchange and the NASDAQ National Market System, including dividends.
(2) The Lipper Real Estate Funds Index is an equally weighted performance index
of the largest qualifying funds (based on net assets) in the Lipper Real
Estate Funds classification. The Index, which is adjusted for capital gains
distributions and income dividends, is unmanaged and should not be
considered an investment. There are currently 30 funds represented in this
Index. As of the date of this report, the Portfolio is in the Lipper Real
Estate Funds classification.
(3) Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would have been lower. Fee waivers and/or reimbursements are
voluntary and the Adviser reserves the right to commence or terminate any
waiver and/or reimbursement at any time.
(4) Commenced operations on February 24, 1995
(5) Commenced offering on January 2, 1996
(6) For comparative purposes, average annual since inception returns listed for
the indexes refer to the inception date or initial offering of the
respective share class of the Portfolio, not the inception of the index.
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. PERFORMANCE ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE
REINVESTED. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT
morganstanley.com/im. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO
THAT PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. TOTAL RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A
SHAREHOLDER WOULD PAY ON PORTFOLIO DISTRIBUTIONS OR THE REDEMPTION OF PORTFOLIO
SHARES.
The U.S. Real Estate Portfolio seeks to provide above average current income and
long-term capital appreciation by investing primarily in equity securities of
companies in the U.S. real estate industry, including real estate investment
trusts ("REITs"). The Portfolio's concentration in the real estate sector makes
it subject to greater risk and volatility than other portfolios that are more
diversified, and the value of its shares may be substantially affected by
economic events in the real estate industry.
72
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW (CONT'D)
U.S. REAL ESTATE PORTFOLIO
PERFORMANCE
For the year ended December 31, 2004, the Portfolio had a total return of 37.28%
for the Class A shares, net of fees, and 36.95% for the Class B shares, net of
fees, compared to 31.58% for the National Association of Real Estate Investment
Trusts (NAREIT) Equity Index (the "Index").
FACTORS AFFECTING PERFORMANCE
- - We believe there were two primary catalysts for the remarkable performance
of real estate securities in 2004.
- - First, the sector continued to benefit from the strong favorable funds
flows from both retail and institutional investors committed to increasing
their allocations to real estate securities. In 2004, fund flows to
dedicated REIT mutual funds totaled $6.9 billion, which represented the
highest level of total annual net inflows and surpassed the $4.5 billion
received in 2003.
- - Aside from the strong funds flows to the sector, the continued improvement
in underlying real estate values contributed to and supported rising REIT
share prices in 2004. Several large portfolio transactions and public
company mergers in the latter half of the year provided evidence of a
continuation of the improvement in property prices.
- - Other key factors that impacted stocks during the year were a slower than
expected recovery in the job market for the year, no back-up in interest
rates and continued strength in consumer spending.
- - For the full year, among the major sectors, the office stocks
underperformed while the apartment and retail stocks outperformed. The
office companies suffered as it became clear throughout the year that the
office recovery will take significantly longer than investors had expected.
Although the apartment recovery was also dampened by weaker job growth and
the continued loss of tenants to for-sale housing, portfolio transactions
and M&A activity continued to demonstrate the robust underlying property
values, which supported valuations of apartment stocks. Retail stocks
remained strong throughout the year as favorable earnings and transaction
activities supported these stocks. This was particularly the case in the
malls, which were the best performing stocks, as multiple portfolio
transactions proved the high values of these assets. The hotel REITs
provided strong operating results throughout the year and performed in-line
due to a strong rally in December. Healthcare REITs were the weakest
performers as the external growth prospects for these companies remained
muted.
- - Stock selection was the largest contributor to the Portfolio's
outperformance versus the Index this year and sector allocation was also
favorable. From a bottom-up perspective, the most significant contributions
were generated in the apartment, office and hotel sectors. In apartments,
the Portfolio benefited from the strong relative performance from the
owners of coastal assets. The outperformance in the office space was driven
by the predominant exposure to owners in the stronger office markets of New
York, Washington D.C. and Southern California. Favorable attribution in the
hotel sector was due to the preference for owners of upscale urban hotel
assets. From a top-down perspective, the most significant favorable
contributors to outperformance were from the overweight to the mall sector
and underweight to the mixed office/industrial, specialty and healthcare
sectors.
MANAGEMENT STRATEGIES
- - We have maintained the Portfolio's core investment philosophy as a real
estate value investor. This results in the ownership of stocks that provide
what we view as the best valuation relative to their underlying real estate
values.
- - Current top-down preferences include an overweighting of companies that
are focused in the ownership of upscale urban hotels, coastal apartments,
higher-end malls and urban offices, and underweighting to owners of strip
shopping centers and suburban offices.
- - The overweighting in the hotel sector continues to be accomplished through
the ownership of companies that are owners of portfolios of major upscale
urban hotel assets, which are recovering along with the return of corporate
travel. The hotel REITs benefited from improving fundamentals, as gains in
occupancy were complemented by improvements in average daily rate and new
supply remains limited. Transaction activity during the year provided
further evidence that the public hotel companies are trading below private
market values.
- - We remain optimistic for the prospects of a recovery in fundamentals for
the apartment sector due to evidence of job growth and the growing
disparity between affordability for rental versus for-sale housing.
Clearly, this remains tied to the continuation of an economic recovery and
related job growth. Given the short lease term structure, this sector
should be well-positioned for a recovery, beginning gradually in 2005. We
believe
73
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW (CONT'D)
U.S. REAL ESTATE PORTFOLIO
valuations remain most attractive in the owners of coastal assets, as the
stocks are trading below private market values, which have continued to
improve.
- - We remain cautious on the prospects of a recovery in fundamentals for the
office sector. While the sector is similar to the apartments in that it
requires a job recovery in order to generate better demand, there are
several notable differences. Tenants are currently leasing excess office
space, which will absorb part of the demand recovery. In addition, there
are high costs required for attracting and retaining tenants. Finally,
given the longer lease term, office owners will face a roll down in rents
at lease expiration in most markets for the next several years. Thus,
despite improvements in occupancy, a recovery in both net effective rents
and NAV per share, REITs in the office sector are likely to lag that of
other real estate sectors. Despite weak overall national trends, there are
a number of markets with considerably better characteristics.
- - In retail, we continue to favor malls over the open-air shopping centers,
which in our opinion, appear expensive versus underlying real estate
values. Within both sub-sectors, we continue to favor owners of higher
quality assets in major metropolitan areas. For the malls, this results in
a preference for owners of large malls that dominate a trade area. Within
open-air centers, we prefer the in-fill centers anchored by leading grocers
and the dominant community centers with multiple key anchor tenants.
EXPENSE EXAMPLES
As a shareholder of the Portfolio, you incur ongoing costs, including management
fees, distribution (12b-1) fees (in the case of Class B) and other Portfolio
expenses. These examples are intended to help you understand your ongoing costs
(in dollars) of investing in the Portfolio and to compare these costs with the
ongoing costs of investing in other mutual funds.
The examples are based on an investment of $1,000 invested at the beginning of
the six-month period ended December 31, 2004 and held for the entire six-month
period.
ACTUAL EXPENSES
The first line of the tables 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 tables below provides information about hypothetical
account values and hypothetical expenses based on the Portfolio's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Portfolio's actual return. The hypothetical account values and expenses may
not be used to estimate the actual ending account balance or expenses you paid
for the period. You may use this information to compare the ongoing costs of
investing in the Portfolio 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.
<Table>
<Caption>
EXPENSES PAID
ENDING ACCOUNT DURING PERIOD*
BEGINNING VALUE JULY 1, 2004 --
ACCOUNT VALUE DECEMBER 31, DECEMBER 31,
JULY 1, 2004 2004 2004
- ------------------------------------------------------------------------------------------
CLASS A
Actual $ 1,000.00 $ 1,283.30 $ 5.45
Hypothetical (5% average
annual return before expenses) 1,000.00 1,020.36 4.82
CLASS B
Actual 1,000.00 1,281.70 6.83
Hypothetical (5% average
annual return before expenses) 1,000.00 1,019.15 6.04
</Table>
* Expenses are equal to Class A and Class B annualized net expense ratios of
0.95% and 1.19%, respectively, multiplied by the average account value over
the period, multiplied by 184/366 (to reflect the one-half year period).
GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS
The following graph depicts the Portfolio's holdings by industry, as a
percentage of total investments.
[CHART]
<Table>
Office 22.3%
Residential Apartments 18.2%
Retail Regional Malls 15.4%
Lodging/Resorts 13.2%
Retail Strip Centers 8.1%
Industrial 7.2%
Self Storage 5.8%
Diversified 5.4%
Other* 3.0%
Short-Term Investment 1.4%
</Table>
* Industries which do not appear in the top 10 industries and industries
which represent less than 3% of total investments, if applicable, are
included in the category labeled "Other".
January 2005
74
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS
U.S. REAL ESTATE PORTFOLIO
<Table>
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
COMMON STOCKS (97.6%)
DIVERSIFIED (5.4%)
Capital Automotive REIT 53,400 $ 1,897
Correctional Properties Trust REIT 148,630 4,293
Forest City Enterprises, Inc., Class A 210,170 12,095
Spirit Finance Corp. REIT (a)265,100 3,353
Vornado Realty Trust REIT 557,800 42,465
Wellsford Real Properties, Inc. (a)218,389 3,149
- ----------------------------------------------------------------------------------------------
67,252
==============================================================================================
HEALTH CARE (2.2%)
Health Care Property Investors, Inc. REIT 124,100 3,436
Healthcare Realty Trust, Inc. REIT 56,100 2,283
Omega Healthcare Investors, Inc. REIT 754,300 8,901
Senior Housing Properties Trust REIT 485,900 9,203
Ventas, Inc. REIT 141,900 3,890
- ----------------------------------------------------------------------------------------------
27,713
==============================================================================================
INDUSTRIAL (7.1%)
AMB Property Corp. REIT 963,220 38,904
BRCP Realty LP I (d)(i)2,117,638 2,118
Cabot Industrial Value Fund, Inc. (d)(i)1,904 952
Catellus Development Corp. REIT 292,500 8,950
ProLogis REIT 877,289 38,013
- ----------------------------------------------------------------------------------------------
88,937
==============================================================================================
LODGING/RESORTS (12.5%)
Hilton Hotels Corp. 1,641,900 37,337
Host Marriot Corp. REIT 2,462,000 42,593
Innkeepers USA Trust REIT 43,100 612
Interstate Hotels & Resorts, Inc. (a)257,080 1,378
Lodgian, Inc. (a)176,900 2,176
Meristar Hospitality Corp. REIT (a)564,725 4,715
Starwood Hotels & Resorts Worldwide, Inc. 1,094,393 63,912
Sunstone Hotel Investors, Inc. REIT 109,750 2,281
Wyndham International, Inc., Class A (a)985,554 1,173
- ----------------------------------------------------------------------------------------------
156,177
==============================================================================================
OFFICE (22.3%)
Arden Realty, Inc. REIT 1,175,400 44,336
Beacon Capital Partners, Inc. (a)(d)(i)335,100 1,420
Boston Properties, Inc. REIT 876,150 56,661
Brandywine Realty Trust REIT 131,000 3,850
Brookfield Properties Co. 2,029,601 75,907
Equity Office Properties Trust REIT 1,180,407 34,373
Mack-Cali Realty Corp. REIT 376,975 17,352
PS Business Parks, Inc. REIT 123,900 5,588
Reckson Associates Realty Corp. REIT 717,800 23,551
SL Green Realty Corp. REIT 172,550 10,448
Trizec Properties, Inc. REIT 223,500 4,229
- ----------------------------------------------------------------------------------------------
277,715
==============================================================================================
RESIDENTIAL APARTMENTS (18.2%)
American Campus Communities, Inc. REIT 140,700 3,164
Amli Residential Properties Trust REIT 58,600 1,875
Apartment Investment & Management Co.,
Class A REIT 522,400 $ 20,133
Archstone-Smith Trust REIT 1,608,096 61,590
AvalonBay Communities, Inc. REIT 942,362 70,960
BRE Properties REIT 11,650 470
Brookfield Homes Corp. 4,300 146
Equity Residential REIT 714,850 25,863
Essex Property Trust, Inc. REIT 299,200 25,073
Gables Residential Trust REIT 36,900 1,321
Post Properties, Inc. REIT 456,950 15,948
- ----------------------------------------------------------------------------------------------
226,543
==============================================================================================
RESIDENTIAL MANUFACTURED HOMES (0.8%)
Equity Lifestyle Properties, Inc. REIT 282,060 10,084
- ----------------------------------------------------------------------------------------------
RETAIL REGIONAL MALLS (15.3%)
General Growth Properties, Inc. REIT 749,590 27,105
Macerich Co. (The) REIT 321,100 20,165
Simon Property Group, Inc. REIT 1,762,252 113,965
Taubman Centers, Inc. REIT 970,478 29,066
- ----------------------------------------------------------------------------------------------
190,301
==============================================================================================
RETAIL STRIP CENTERS (8.1%)
Acadia Realty Trust REIT 345,340 5,629
BPP Liquidating Trust REIT (d)113,290 36
Developers Diversified Realty Corp. REIT 129,500 5,746
Federal Realty Investment Trust REIT 891,900 46,066
Heritage Property Investment Trust REIT 169,425 5,437
Kimco Realty Corp. REIT 54,280 3,148
Pan Pacific Retail Properties, Inc. REIT 44,980 2,820
Regency Centers Corp. REIT 584,200 32,365
- ----------------------------------------------------------------------------------------------
101,247
==============================================================================================
SELF STORAGE (5.7%)
Public Storage, Inc. REIT 742,690 41,405
Shurgard Storage Centers, Inc., Class A
REIT 685,980 30,190
- ----------------------------------------------------------------------------------------------
71,595
==============================================================================================
TOTAL COMMON STOCKS (COST $746,258) 1,217,564
==============================================================================================
PREFERRED STOCKS (0.8%)
LODGING/RESORTS (0.7%)
Wyndham International, Inc., Series II (d)(i)53,537 2,963
Wyndham, Series B (d)(i)100,022 5,259
- ----------------------------------------------------------------------------------------------
8,222
==============================================================================================
RESIDENTIAL APARTMENTS (0.0%)
Atlantic Gulf Communities Corp., Series B (a)(d)107,021 @--
Atlantic Gulf Communities Corp., Series B (a)(d)(i)140,284 @--
Atlantic Gulf Communities Corp., Series
B (Convertible) (a)(d)75,765 @--
- ----------------------------------------------------------------------------------------------
@--
==============================================================================================
RETAIL REGIONAL MALLS (0.1%)
Simon Property Group, Inc. 18,855 1,117
- ----------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCKS (COST $8,354) 9,339
==============================================================================================
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
75
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS (CONT'D)
U.S. REAL ESTATE PORTFOLIO
<Table>
<Caption>
FACE
AMOUNT VALUE
(000) (000)
- ----------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (1.4%)
REPURCHASE AGREEMENT (1.4%)
J.P. Morgan Securities, Inc., 2.00%,
dated 12/31/04, due 1/3/05,
repurchase price $17,346
(COST $17,343) $ (f)17,343 $ 17,343
- ----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.8%) (COST $771,955) 1,244,246
==============================================================================================
OTHER ASSETS IN EXCESS OF LIABILITIES (0.2%) 2,652
==============================================================================================
NET ASSETS (100%) $ 1,246,898
==============================================================================================
</Table>
(a) Non-income producing security.
(d) Security was valued at fair value -- At December 31, 2004, the Portfolio
held $12,748,000 of fair valued securities, representing 1.0% of net
assets.
(f) Represents the Portfolio's undivided interest in a joint repurchase
agreement which has a total value of $1,018,656,000. The repurchase
agreement was fully collateralized by U.S. government agency securities
at the date of this portfolio of investments as follows: Federal Farm
Credit Bank, 0.00% to 6.75%, due 2/28/05 to 8/15/13; Federal Home Loan
Bank, 1.10% to 6.875%, due 4/15/05 to 10/28/24; Federal Home Loan
Mortgage Corp., 2.00% to 6.51%, due 6/15/15 to 3/15/19; Federal National
Mortgage Association, 1.75% to 8.20%, due 2/24/05 to 5/24/19; and
Financial Assist Corp., 8.80%, due 6/10/05. The investment in the
repurchase agreement is through participation in a joint account with
affiliated parties pursuant to exemptive relief received by the Portfolio
from the SEC.
(i) Restricted security not registered under the Securities Act of 1933.
Beacon Capital Partners, Inc. was acquired 3/98 and has a current cost
basis of $1,420,000. Wyndham, Series B Preferred was acquired 6/99 -
12/04 and has a current cost basis of $3,037,000. Wyndham International,
Inc., Series II Preferred was acquired 11/00 - 12/04 and has a current
cost basis of $1,686,000. Atlantic Gulf Communities Corp., Series B
Preferred was acquired 6/97 and has a current cost basis of $790,000.
Cabot Industrial Value Fund, Inc. was acquired 12/03-11/04 and has a
current cost basis of $952,000. BRCP REIT LLC I was acquired 03/03-12/04
and has a current cost basis of $2,118,000. At December 31, 2004, these
securities had an aggregate market value of $10,003,000, representing
0.8% of net assets.
@ Face Amount/Value is less than $500.
REIT Real Estate Investment Trust
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
76
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW
VALUE EQUITY PORTFOLIO
[CHART]
COMPARISON OF THE CHANGE IN VALUE OF A $500,000* INVESTMENT OVER 10 YEARS
<Table>
<Caption>
FISCAL YEAR VALUE EQUITY LIPPER LARGE-CAP
ENDED PORTFOLIO - RUSSELL 1000 S&P 500 VALUE FUNDS
DECEMBER 31 CLASS A VALUE INDEX INDEX INDEX
1994 500000 500000 500000 500000
1995 668470 691800 687720 666214
1996 800386 841506 845648 806553
1997 1034111 1137547 1127790 1036211
1998 1125009 1315346 1450045 1225222
1999 1255847 1412024 1755192 1357292
2000 1482905 1511148 1595206 1383822
2001 1459920 1426613 1405776 1265153
2002 1106327 1205202 1095310 1016213
2003 1449842 1567125 1409445 1300726
2004 1661150 1825500 1562950 1456750
</Table>
[CHART]
COMPARISON OF THE CHANGE IN VALUE OF A $100,000* INVESTMENT SINCE INCEPTION
<Table>
<Caption>
FISCAL YEAR VALUE EQUITY LIPPER LARGE-CAP
ENDED PORTFOLIO - RUSSELL 1000 S&P 500 VALUE FUNDS
DECEMBER 31 CLASS A VALUE INDEX INDEX INDEX
** 100000 100000 100000 100000
1996 122590 120850 122964 120291
1997 161819 163365 163990 154543
1998 182192 188899 210848 182733
1990 209921 202783 255219 202430
2000 258035 217018 231956 206387
2001 253933 204878 204411 188688
2002 202333 173081 159267 151561
2003 273069 225057 204945 193994
2004 311500 262190 225430 217260
</Table>
* Minimum Investment
** Commenced offering on January 2, 1996
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE RUSSELL 1000 VALUE INDEX(1), THE S&P 500 INDEX(2)
AND THE LIPPER LARGE-CAP VALUE FUNDS INDEX(3)
<Table>
<Caption>
TOTAL RETURNS(4)
----------------------------------------
AVERAGE ANNUAL
-------------------------------
ONE FIVE TEN SINCE
YEAR YEARS YEARS INCEPTION(7)
- -----------------------------------------------------------------------------
Portfolio - Class A (5) 14.56% 5.75% 12.76% 11.13%
Russell 1000 Value Index 16.49 5.27 13.83 12.59
S&P 500 Index 10.88 (2.30) 12.07 11.52
Lipper Large-Cap Value Funds Index 12.00 1.42 11.29 11.11
Portfolio - Class B (6) 14.07 6.71 -- 13.46
Russell 1000 Value Index 16.49 5.27 -- 11.31
S&P 500 Index 10.88 (2.30) -- 9.46
Lipper Large-Cap Value Funds Index 12.00 1.42 -- 9.01
</Table>
(1) 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.
(2) The S&P 500 Index is a capitalization-weighted index of 500 stocks. The
index is designed to measure performance of the broad domestic economy
through changes in the aggregate market value of 500 stocks representing
all major industries.
(3) The Lipper Large-Cap Value Funds Index is an equally weighted performance
index of the largest qualifying funds (based on net assets) in the Lipper
Large-Cap Value Funds classification. The Index, which is adjusted for
capital gains distributions and income dividends, is unmanaged and should
not be considered an investment. There are currently 30 funds represented
in this Index. As of the date of this report, the Portfolio is in the
Lipper Large-Cap Value Funds classification.
(4) Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would have been lower. Fee waivers and/or reimbursements are
voluntary and the Adviser reserves the right to commence or terminate any
waiver and/or reimbursement at any time.
(5) Commenced operations on January 31, 1990
(6) Commenced offering on January 2, 1996
(7) For comparative purposes, average annual since inception returns listed for
the indexes refer to the inception date or initial offering of the
respective share class of the Portfolio, not the inception of the index.
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. PERFORMANCE ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE
REINVESTED. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT
morganstanley.com/im. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO
THAT PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. TOTAL RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A
SHAREHOLDER WOULD PAY ON PORTFOLIO DISTRIBUTIONS OR THE REDEMPTION OF PORTFOLIO
SHARES.
The Value Equity Portfolio seeks high total return by investing primarily in
equity securities that the Advisor believes to be undervalued relative to the
stock market in general at the time of purchase.
PERFORMANCE
For the year ended December 31, 2004, the Portfolio had a total return of 14.56%
for the Class A shares, net of fees, and 14.07% for the Class B shares, net of
fees, compared to
77
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW (CONT'D)
VALUE EQUITY PORTFOLIO
16.49% for the Russell 1000 Value Index (the "Index") and 10.88% for the S&P 500
Index.
FACTORS AFFECTING PERFORMANCE
- For the second consecutive year, the markets finished in positive
territory and stock prices continued to advance as the economy grew
throughout the year.
- Total returns in the market were strongest in sectors that were
economically sensitive including industrials, materials and energy, which
performed well as the price of oil steadily climbed throughout the year.
- Stock selection was strong, but sector allocation more than negated this.
Therefore, the Portfolio underperformed versus the Index for the year. All
sectors had positive returns for the year.
- Telecommunication services contributed the most to relative performance.
The Portfolio maintained an underweight relative to the benchmark, however
stock selection aided performance.
- The Portfolio maintained an underweight in financials versus the benchmark
and the allocation aided the relative performance for the year
- Technology detracted the most as the Portfolio maintained an overweight
versus the benchmark. Within technology, semiconductors proved to be the
largest detriment to relative performance.
- The overweight position in healthcare was also a detriment to performance.
While stock selection was strong in the sector, the overweighting of
pharmaceuticals hurt the Portfolio.
MANAGEMENT STRATEGIES
- Throughout 2004, the portfolio management team reduced the energy exposure
in the Portfolio. The Portfolio continues to emphasize health care (mainly
pharmaceuticals) and consumer discretionary. The Portfolio continues to
maintain an underweight within financials.
EXPENSE EXAMPLES
As a shareholder of the Portfolio, you incur ongoing costs, including management
fees, distribution (12b-1) fees (in the case of Class B) and other Portfolio
expenses. These examples are intended to help you understand your ongoing costs
(in dollars) of investing in the Portfolio and to compare these costs with the
ongoing costs of investing in other mutual funds.
The examples are based on an investment of $1,000 invested at the beginning of
the six-month period ended December 31, 2004 and held for the entire six-month
period.
ACTUAL EXPENSES
The first line of the tables 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 tables below provides information about hypothetical
account values and hypothetical expenses based on the Portfolio's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Portfolio's actual return. The hypothetical account values and expenses may
not be used to estimate the actual ending account balance or expenses you paid
for the period. You may use this information to compare the ongoing costs of
investing in the Portfolio and other funds. To do so, compare this 5%
hypothetical example with the 5% hypothetical examples that Technology detracted
most as the Portfolio appear in the shareholder reports of the other funds.
<Table>
<Caption>
EXPENSES PAID
ENDING ACCOUNT DURING PERIOD*
BEGINNING VALUE JULY 1, 2004--
ACCOUNT VALUE DECEMBER 31, DECEMBER 31,
JULY 1, 2004 2004 2004
- --------------------------------------------------------------------------------
CLASS A
Actual $ 1,000.00 $ 1,106.40 $ 3.71
Hypothetical (5% average
annual return before expenses) 1,000.00 1,021.62 3.56
CLASS B
Actual 1,000.00 1,104.50 5.03
Hypothetical (5% average
annual return before expenses) 1,000.00 1,020.36 4.82
</Table>
* Expenses are equal to Class A and Class B annualized net expense ratios of
0.70% and 0.95%, respectively, multiplied by the average account value over
the period, multiplied by 184/366 (to reflect the one-half year period).
78
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW (CONT'D)
VALUE EQUITY PORTFOLIO
GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS
The following graph depicts the Portfolio's holdings by industry, as a
percentage of total investments.
[CHART]
<Table>
Drugs & Pharmaceuticals 11.1%
Investment Management Companies 9.8%
Oil: Integrated Domestic 7.9%
Utilities: Electrical 5.1%
Communication & Media 4.3%
Chemicals 4.2%
Utilities: Telecommunications 3.2%
Insurance Property & Casualty 3.0%
Other* 47.3%
Short-Term Investment 4.1%
</Table>
* Industries which do not appear in the top 10 industries and industries
which represent less than 3% of total investments, if applicable, are
included in the category labeled "Other".
January 2005
79
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS
VALUE EQUITY PORTFOLIO
<Table>
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
COMMON STOCKS (95.7%)
AEROSPACE (2.0%)
Northrop Grumman Corp. 32,430 $ 1,763
Raytheon Co. 40,350 1,567
- ----------------------------------------------------------------------------------------------
3,330
==============================================================================================
AUTO TRUCKS & PARTS (1.2%)
Magna International, Inc., Class A 24,110 1,990
- ----------------------------------------------------------------------------------------------
AUTOMOBILES (2.1%)
Honda Motor Co., Ltd. ADR 135,060 3,520
- ----------------------------------------------------------------------------------------------
BEVERAGES: SOFT DRINKS (1.4%)
Coca Cola Co. (The) 55,010 2,290
- ----------------------------------------------------------------------------------------------
BIOTECHNOLOGY RESEARCH & PRODUCTION (0.2%)
Applera Corp. - Applied Biosystems Group 12,940 271
- ----------------------------------------------------------------------------------------------
CHEMICALS (4.2%)
Bayer AG ADR 139,920 4,754
Dow Chemical Co. (The) 44,490 2,203
- ----------------------------------------------------------------------------------------------
6,957
==============================================================================================
COMMUNICATIONS & MEDIA (4.2%)
Time Warner, Inc. (a)221,340 4,303
Walt Disney Co. (The) 98,890 2,749
- ----------------------------------------------------------------------------------------------
7,052
==============================================================================================
COMMUNICATIONS TECHNOLOGY (0.5%)
Motorola, Inc. 48,970 842
- ----------------------------------------------------------------------------------------------
COMPUTER SERVICES SOFTWARE & SYSTEMS (1.7%)
Computer Associates International, Inc. 43,430 1,349
Microsoft Corp. 58,030 1,550
- ----------------------------------------------------------------------------------------------
2,899
==============================================================================================
COMPUTER TECHNOLOGY (0.8%)
International Business Machines Corp. 13,230 1,304
- ----------------------------------------------------------------------------------------------
CONSUMER STAPLES -- MISCELLANEOUS (1.1%)
Kimberly-Clark Corp. 28,840 1,898
- ----------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES (2.2%)
Bank of America Corp. 51,940 2,441
PNC Financial Services Group, Inc. 22,240 1,277
- ----------------------------------------------------------------------------------------------
3,718
==============================================================================================
DRUGS & PHARMACEUTICALS (11.1%)
Bristol-Myers Squibb Co. 217,990 5,585
Eli Lilly & Co. 21,050 1,195
GlaxoSmithKline plc ADR 25,760 1,221
Roche Holding AG ADR 29,670 3,415
Sanofi-Aventis ADR 39,740 1,592
Schering-Plough Corp. 170,190 3,553
Wyeth 43,060 1,834
- ----------------------------------------------------------------------------------------------
18,395
==============================================================================================
ELECTRONICS: INSTRUMENTS GAUGES & METERS (1.2%)
Parker Hannifin Corp. 26,320 1,993
- ----------------------------------------------------------------------------------------------
ELECTRONICS: SEMI-CONDUCTORS/COMPONENTS (0.6%)
Freescale Semiconductor, Inc., Class B (a)2,757 51
Intel Corp. 38,870 909
- ----------------------------------------------------------------------------------------------
960
==============================================================================================
ENERGY EQUIPMENT (2.2%)
Schlumberger Ltd. 53,510 3,582
- ----------------------------------------------------------------------------------------------
ENERGY -- MISCELLANEOUS (1.1%)
Valero Energy Corp. 41,580 $ 1,888
- ----------------------------------------------------------------------------------------------
ENTERTAINMENT (0.5%)
Viacom, Inc., Class B 21,620 787
- ----------------------------------------------------------------------------------------------
FINANCIAL DATA PROCESSING SERVICES & SYSTEMS (1.7%)
Automatic Data Processing, Inc. 35,910 1,592
SunGard Data Systems, Inc. (a)44,790 1,269
- ----------------------------------------------------------------------------------------------
2,861
==============================================================================================
FINANCIAL -- MISCELLANEOUS (2.8%)
Equifax, Inc. 57,540 1,617
Freddie Mac 40,850 3,010
- ----------------------------------------------------------------------------------------------
4,627
==============================================================================================
FOODS (2.2%)
Cadbury Schweppes plc ADR 53,360 2,012
Kraft Foods, Inc., Class A 48,390 1,723
- ----------------------------------------------------------------------------------------------
3,735
==============================================================================================
HEALTH CARE -- MISCELLANEOUS (1.1%)
Bausch & Lomb, Inc. 29,750 1,918
- ----------------------------------------------------------------------------------------------
HOTEL/MOTEL (2.3%)
Hilton Hotels Corp. 34,360 781
Marriot International, Inc., Class A 31,780 2,002
Starwood Hotels & Resorts Worldwide, Inc. 17,140 1,001
- ----------------------------------------------------------------------------------------------
3,784
==============================================================================================
INSURANCE: LIFE (1.4%)
Cigna Corp. 27,870 2,273
- ----------------------------------------------------------------------------------------------
INSURANCE: MULTI-LINE (2.8%)
Aegon N.V. (NY Shares) 42,240 579
Hartford Financial Services Group, Inc. 32,240 2,235
Metlife, Inc. 5,730 232
Prudential Financial, Inc. 30,210 1,660
- ----------------------------------------------------------------------------------------------
4,706
==============================================================================================
INSURANCE: PROPERTY & CASUALTY (3.0%)
Chubb Corp. 37,220 2,862
St. Paul Travelers Cos., Inc. (The) 56,551 2,097
- ----------------------------------------------------------------------------------------------
4,959
==============================================================================================
INVESTMENT MANAGEMENT COMPANIES (9.8%)
Citigroup, Inc. 81,030 3,904
Goldman Sachs Group, Inc. 5,480 570
J.P. Morgan Chase & Co. 126,017 4,916
Lehman Brothers Holdings, Inc. 40,130 3,511
Merrill Lynch & Co., Inc. 56,760 3,392
- ----------------------------------------------------------------------------------------------
16,293
==============================================================================================
MANUFACTURING (0.8%)
Ingersoll Rand Co., Class A 16,990 1,364
- ----------------------------------------------------------------------------------------------
MATERIALS & PROCESSING -- MISCELLANEOUS (1.3%)
Newmont Mining Corp. 48,560 2,157
- ----------------------------------------------------------------------------------------------
MULTI-SECTOR COMPANIES (1.8%)
General Electric Co. 80,900 2,953
- ----------------------------------------------------------------------------------------------
OIL: INTEGRATED DOMESTIC (7.9%)
BP plc ADR 69,220 4,042
ConocoPhillips 27,580 2,395
Exxon Mobil Corp. 58,010 2,974
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
80
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS (CONT'D)
VALUE EQUITY PORTFOLIO
<Table>
<Caption>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------
OIL: INTEGRATED DOMESTIC (CONT'D)
Royal Dutch Petroleum Co. (NY Shares) 63,880 $ 3,665
- ----------------------------------------------------------------------------------------------
13,076
==============================================================================================
PAPER (0.6%)
Temple-Inland, Inc. 15,380 1,052
- ----------------------------------------------------------------------------------------------
PRODUCTION TECHNOLOGY EQUIPMENT (0.8%)
Applied Materials, Inc. (a)73,260 1,253
- ----------------------------------------------------------------------------------------------
RADIO & TV BROADCASTERS (1.5%)
Clear Channel Communications, Inc. 74,540 2,496
- ----------------------------------------------------------------------------------------------
RAILROADS (2.0%)
Norfolk Southern Corp. 94,050 3,404
- ----------------------------------------------------------------------------------------------
RETAIL (2.4%)
Kohl's Corp. (a)40,600 1,996
McDonald's Corp. 20,030 642
Target Corp. 24,580 1,277
- ----------------------------------------------------------------------------------------------
3,915
==============================================================================================
SECURITIES BROKERAGE & SERVICES (0.5%)
Charles Schwab Corp. (The) 66,070 790
- ----------------------------------------------------------------------------------------------
SERVICES: COMMERCIAL (1.3%)
Accenture Ltd., Class A (a)82,340 2,223
- ----------------------------------------------------------------------------------------------
TOBACCO (1.1%)
Altria Group, Inc. 28,900 1,766
- ----------------------------------------------------------------------------------------------
UTILITIES: ELECTRICAL (5.1%)
American Electric Power Co., Inc. 35,180 1,208
Consolidated Edison, Inc. 27,690 1,211
Edison International 21,830 699
Entergy Corp. 30,160 2,039
Exelon Corp. 37,100 1,635
FirstEnergy Corp. 41,730 1,649
- ----------------------------------------------------------------------------------------------
8,441
==============================================================================================
UTILITIES: TELECOMMUNICATIONS (3.2%)
France Telecom S.A. ADR 42,400 1,403
Sprint Corp. 46,690 1,160
Verizon Communications, Inc. 67,020 2,715
- ----------------------------------------------------------------------------------------------
5,278
==============================================================================================
TOTAL COMMON STOCKS (COST $139,586) 159,000
==============================================================================================
<Caption>
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (4.1%)
REPURCHASE AGREEMENT (4.1%)
J.P.Morgan Securities, Inc., 2.00%,
dated 12/31/04, due 1/3/05,
repurchase price $6,858
(COST $6,857) $ (f)6,857 6,857
- ----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.8%) (COST $146,443) 165,857
==============================================================================================
OTHER ASSETS IN EXCESS OF LIABILITIES (0.2%) 270
==============================================================================================
NET ASSETS (100%) $ 166,127
==============================================================================================
</Table>
(a) Non-income producing security.
(f) Represents the Portfolio's undivided interest in a joint repurchase
agreement which has a total value of $1,018,656,000. The repurchase
agreement was fully collateralized by U.S. government agency securities at
the date of this portfolio of investments as follows: Federal Farm Credit
Bank, 0.00% to 6.75%, due 2/28/05 to 8/15/13; Federal Home Loan Bank, 1.10%
to 6.875%, due 4/15/05 to 10/28/24; Federal Home Loan Mortgage Corp., 2.00%
to 6.51%, due 6/15/15 to 3/15/19; Federal National Mortgage Association,
1.75% to 8.20%, due 2/24/05 to 5/24/19; and Financial Assist Corp., 8.80%,
due 6/10/05. The investment in the repurchase agreement is through
participation in a joint account with affiliated parties pursuant to
exemptive relief received by the Portfolio from the SEC.
ADR American Depositary Receipts
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
81
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW
EMERGING MARKETS DEBT PORTFOLIO
[CHART]
COMPARISON OF THE CHANGE IN VALUE OF A $500,000* INVESTMENT OVER 10 YEARS
<Table>
<Caption>
FISCAL YEAR EMERGING MARKETS J.P. MORGAN LIPPER EMERGING
ENDED DEBT PORTFOLIO - EMERGING MARKETS MARKETS DEBT
DECEMBER 31 CLASS A BOND GLOBAL INDEX FUNDS INDEX
1994 500000 500000 500000
1995 639000 631875 696255
1996 961823 854465 804285
1997 1137740 956574 598180
1998 728723 846147 764490
1999 941655 1050745 863610
2000 1062470 1202157 931040
2001 1174773 1218507 1035645
2002 1307405 1378253 1356450
2003 1679492 1731913 1542650
2004 1848600 1935050 2002800
</Table>
[CHART]
COMPARISON OF THE CHANGE IN VALUE OF A $100,000* INVESTMENT SINCE INCEPTION
<Table>
<Caption>
FISCAL YEAR EMERGING MARKETS J.P. MORGAN LIPPER EMERGING
ENDED DEBT PORTFOLIO - EMERGING MARKETS MARKETS DEBT
DECEMBER 31 CLASS B BOND GLOBAL INDEX FUNDS INDEX
** 100000 100000 100000
1996 149000 133500 137450
1997 175895 149453 158777
1998 113681 132200 118089
1999 145523 164166 150921
2000 163713 187856 170489
2001 180903 190429 183800
2002 199608 215433 204451
2003 256177 270756 267782
2004 281560 302580 304541
</Table>
* Minimum Investment
** Commenced offering on January 2, 1996
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE J.P. MORGAN EMERGING MARKETS BOND GLOBAL INDEX(1)
AND THE LIPPER EMERGING MARKETS DEBT FUNDS INDEX(2)
<Table>
<Caption>
TOTAL RETURNS(3)
------------------------------
AVERAGE ANNUAL
------------------------------
ONE FIVE TEN SINCE
YEAR YEARS YEARS INCEPTION(6)
- ----------------------------------------------------------------------------
Portfolio - Class A (4) 10.07% 14.44% 13.97% 11.24%
J.P. Morgan Emerging Markets Bond
Global Index 11.73 12.99 14.49 11.03
Lipper Emerging Markets Debt Funds
Index 12.33 14.97 13.56 --
Portfolio - Class B (5) 9.90 14.19 -- 12.19
J.P. Morgan Emerging Markets Bond
Global Index 11.73 12.99 -- 13.10
Lipper Emerging Markets Debt Funds
Index 12.33 14.97 -- --
</Table>
(1) The J.P. Morgan Emerging Markets Bond Global Index tracks total returns for
U.S. dollar - denominated debt instruments issued by emerging market
sovereign and quasi - sovereign entities, including Brady Bonds, loans,
Eurobonds and local market instruments for over 30 emerging market
countries.
(2) The Lipper Emerging Markets Debt Funds Index is an equally weighted
performance index of the largest qualifying funds (based on net assets) in
the Lipper Emerging Markets Debt Funds classification. The Index, which is
adjusted for capital gains distributions and income dividends, is unmanaged
and should not be considered an investment. There are currently 10 funds
represented in this Index. As of the date of this report, the Portfolio is
in the Lipper Emerging Markets Debt Funds classification.
(3) Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would have been lower. Fee waivers and/or reimbursements are
voluntary and the Adviser reserves the right to commence or terminate any
waiver and/or reimbursement at any time.
(4) Commenced operations on February 1, 1994
(5) Commenced offering on January 2, 1996
(6) For comparative purposes, average annual since inception returns listed for
the indexes refer to the inception date or initial offering of the
respective share class of the Portfolio, not the inception of the index.
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. PERFORMANCE ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE
REINVESTED. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT
morganstanley.com/im. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO
THAT PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. TOTAL RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A
SHAREHOLDER WOULD PAY ON PORTFOLIO DISTRIBUTIONS OR THE REDEMPTION OF PORTFOLIO
SHARES.
The Emerging Markets Debt Portfolio seeks high total return by investing
primarily in fixed income securities of government and government-related
issuers and, to a lesser extent, of corporate issuers in emerging market
countries. Foreign investing involves certain risks, including currency
fluctuations and controls, restrictions on foreign investments, less
governmental supervision and regulation, less liquidity and the potential for
market volatility and political instability.
82
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW (CONT'D)
EMERGING MARKETS DEBT PORTFOLIO
In addition, investing in emerging markets may involve a relatively higher
degree of volatility.
PERFORMANCE
For the year ended December 31, 2004, the Portfolio had a total return of 10.07%
for Class A, net of fees, shares and 9.90% for Class B, net of fees, shares
compared to 11.73% for the J.P. Morgan Emerging Markets Bond Global Index (the
"Index").
FACTORS AFFECTING PERFORMANCE
- In sharp contrast to the relatively gloomy end-2003 market expectations,
2004 turned out to be a surprisingly good year for emerging markets debt
(EMD). The largely anticipated impact of higher global interest rates on
global liquidity and hence on credit product in general and EMD in
particular did not materialize, as interest rates in the U.S. increased in
line with market expectations. Interest rates rose across the shorter end
of the yield curve as the U.S. economy grew at a healthy 4% pace without
generating significant inflationary pressures. Longer-term interest rates
remained stable. Furthermore, the surprisingly orderly depreciation of the
U.S. dollar did not disrupt markets despite the magnitude of its decline.
- EMD spreads compressed to new absolute lows in 2004 reflecting the asset
class'higher average rating continued large inflows from strategic
investors, a supportive environment for credit product and fundamental
improvements in most of the countries that constitute the EMD investable
universe. The abundance of financial market liquidity greatly benefited
emerging economies, lifting EMD in spite of tight absolute valuations at
the beginning of the year. High global growth, low global interest rates,
high commodity prices, and a weak U.S. dollar together with a marked
improvement in the quality of economic management proved to be a powerful
mix. Despite the historically low spread level for the Index, EMD remains
cheap relative to comparable corporate credits. In fact, BBB, BB, and B
credits in EMD are about 60, 160, and 100 basis points wider,
respectively, than comparable corporate credits in the U.S.
- In addition, most emerging economies took advantage of the expansionary
global cycle to strengthen their external and fiscal accounts and reduce
(and/or improve the composition and duration) their net external
liabilities, while benefiting from high growth and low unemployment at
home. The export-led growth trickled down to the domestic economy helping
to appease social and political pressures in most emerging countries.
- The benign international environment benefited high beta credits that were
in distress at the end of 2003, including Uruguay (up 34%), the Dominican
Republic (up 27%), and Argentina (up 19.8%). High oil prices lifted
Venezuela's bonds by 23% and Ecuador's debt by 21%. Among the largest
countries, Brazil returned 14.33%, Russia 11.51%, and Mexico 8.56%. Turkey
(up 10%), benefited from cautious policies and the EU invitation to start
accession negotiation on October 3, 2005. Investment grade emerging
markets credits lagged the market during 2004, returning 8.8%, while the
overall Index returned 11.7%.
- Performance for 2004 was negatively impacted by the Portfolio's more
defensive positioning relative to its benchmark during the second and
third quarters. The Portfolio's management team emphasized defensive
credits and deemphasized bonds of countries dependant on ample global
liquidity conditions. Unfortunately, weaker than expected U.S. economic
data and the perception that the U.S. Federal Reserve would slow down the
pace of interest rate hikes, had the effect of increasing investor risk
appetite throughout the summer months. Lower-rated credits such as Brazil,
Turkey and Venezuela led the advance during July and August and handily
outperformed the market. An underweight in Brazil during the second
quarter detracted from the portfolio's relative returns. Brazilian bonds
rose more than 14% between the end of May and the end of August, as strong
economic data in Brazil helped drive spreads back toward their low point
for the year. The portfolio's underweight in Uruguayan and Venezuelan debt
also adversely impacted relative performance. The portfolio's overweights
in Turkish local currency debt aided relative performance during the
fourth quarter, as did overweights in select distressed credits in Mexico
and Indonesia.
MANAGEMENT STRATEGIES
- Next year is likely to benefit from the last leg of the current global
expansionary cycle. We expect 2005 to deliver an above-trend global real
gross domestic product (GDP) growth rate, albeit at a somewhat lower level
than in 2004. Consequently, we expect a respectable growth rate in trade
volumes (albeit lower than in 2004) and relatively stable commodity prices
(from a high base in 2004). We also expect global real interest rates to
remain below their historical average (albeit slightly positive in
contrast with negative real rates in 2004), in spite of the expected hikes
in policy
83
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW (CONT'D)
EMERGING MARKETS DEBT PORTFOLIO
rates in the U.S. As such, global liquidity will most likely remain
abundant in 2005. We are relatively agnostic vis-a-vis the U.S. dollar as
there are powerful offsetting forces playing against each other.
- In all, we expect benign external conditions to continue supporting
emerging countries in 2005, which together with cautious financial
policies should result in a further improvement in macroeconomic
fundamentals and payment capacity. Nonetheless, there are several risks to
our otherwise benign external 2005 outlook. First, inflationary pressures
are building up in the U.S. and there is a risk that investors may adjust
their expectations about the likely pace and magnitude of interest rate
hikes--just as they did in April/May 2004--particularly if the Fed is
perceived to be behind the curve. Second, the large fiscal and external
imbalances in the U.S. economy pose a risk to what so far has been an
orderly (and hence beneficial) depreciation of the U.S. dollar. Sharp
movements in interest and exchange rates in the U.S. could adversely
affect risk taking, global growth, capital flows trade flows, and
commodity prices.
- We believe that a cautious management of interest rate risk together with
selective allocation of resources in countries that still offer
fundamental value will be the best strategy to maximize returns in 2005.
We also believe that certain local markets, which have yet to fully
reflect the ongoing improvement in economic fundamentals, may provide good
investment opportunities in 2005.
EXPENSE EXAMPLES
As a shareholder of the Portfolio, you incur ongoing costs, including management
fees, distribution (12b-1) fees (in the case of Class B) and other Portfolio
expenses. These examples are intended to help you understand your ongoing costs
(in dollars) of investing in the Portfolio and to compare these costs with the
ongoing costs of investing in other mutual funds.
The examples are based on an investment of $1,000 invested at the beginning of
the six-month period ended December 31, 2004 and held for the entire six-month
period.
ACTUAL EXPENSES
The first line of the tables 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 tables below provides information about hypothetical
account values and hypothetical expenses based on the Portfolio's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Portfolio's actual return. The hypothetical account values and expenses may
not be used to estimate the actual ending account balance or expenses you paid
for the period. You may use this information to compare the ongoing costs of
investing in the Portfolio 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.
<Table>
<Caption>
EXPENSES PAID
ENDING ACCOUNT DURING PERIOD*
BEGINNING VALUE JULY 1, 2004--
ACCOUNT VALUE DECEMBER 31, DECEMBER 31,
JULY 1, 2004 2004 2004
- --------------------------------------------------------------------------------
CLASS A
Actual $ 1,000.00 $ 1,136.10 $ 5.37
Hypothetical (5% average
annual return before expenses) 1,000.00 1,020.11 5.08
CLASS B
Actual 1,000.00 1,136.80 6.71
Hypothetical (5% average
annual return before expenses) 1,000.00 1,018.85 6.34
</Table>
* Expenses are equal to Class A and Class B annualized net expense ratios of
1.00% and 1.25%, respectively, multiplied by the average account value over
the period, multiplied by 184/366 (to reflect the one-half year period).
GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS
The following graph depicts the Portfolio's holdings by industry, as a
percentage of total investments.
<Table>
Short-Term Investment 0.3%
Sovereign 86.8%
Finance 3.6%
Other* 9.3%
</Table>
* Industries which do not appear in the top 10 industries and industries
which represent less than 3% of total investments, if applicable, are
included in the category labeled "Other".
January 2005
84
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS
EMERGING MARKETS DEBT PORTFOLIO
<Table>
<Caption>
FACE
AMOUNT VALUE
(000) (000)
- ----------------------------------------------------------------------------------------------
DEBT INSTRUMENTS (95.8%)
ARGENTINA (3.8%)
SOVEREIGN (3.8%)
Republic of Argentina
6.00%, 3/31/23 $ (b)472 $ 269
11.375%, 3/15/10-1/30/17 (b)1,100 380
11.75%, 4/7/09-6/15/15 (b)5,235 1,802
12.00%, 2/1/20 (b)45 15
12.125%, 5/21/05 (b)440 139
Republic of Argentina (Linked Variable Rate)
100.74%, 4/10/05 (b)(h)1,210 484
- ----------------------------------------------------------------------------------------------
3,089
==============================================================================================
BRAZIL (15.9%)
SOVEREIGN (15.9%)
Federative Republic of Brazil
3.062%, 4/15/24 (h)1,480 1,369
6.00%, 4/15/24 (h)400 372
8.875%, 4/15/24 1,275 1,326
10.50%, 7/14/14 1,230 1,460
11.00%, 8/17/40 1,330 1,580
14.50%, 10/15/09 2,810 3,761
Federative Republic of Brazil, PIK
8.00%, 4/15/14 3,003 3,076
- ----------------------------------------------------------------------------------------------
12,944
==============================================================================================
BULGARIA (1.4%)
SOVEREIGN (1.4%)
Republic of Bulgaria
8.25%, 1/15/15 (e)200 251
8.25%, 1/15/15 473 593
Republic of Bulgaria (Registered)
8.25%, 1/15/15 270 339
- ----------------------------------------------------------------------------------------------
1,183
==============================================================================================
CHILE (1.5%)
CORPORATE (1.5%)
Empresa Nacional de Petroleo
6.75%, 11/15/12 (e)1,100 1,226
- ----------------------------------------------------------------------------------------------
COLOMBIA (3.7%)
SOVEREIGN (3.7%)
Republic of Colombia
9.75%, 4/9/11 849 981
10.375%, 1/28/33 510 592
11.75%, 2/25/20 1,095 1,412
- ----------------------------------------------------------------------------------------------
2,985
==============================================================================================
ECUADOR (1.4%)
SOVEREIGN (1.4%)
Government of Ecuador (Registered)
8.00%, 8/15/30 1,350 1,171
- ----------------------------------------------------------------------------------------------
INDONESIA (2.3%)
CORPORATE (2.3%)
Pindo Deli Finance Mauritius
10.75%, 10/1/07 (b)(e)3,200 1,008
Tjiwi Kimia Finance Mauritius Ltd.
10.00%, (expired maturity) $ (b)670 $ 278
Tjiwi Kimia International BV
13.25%, (expired maturity) (b)1,450 587
- ----------------------------------------------------------------------------------------------
1,873
==============================================================================================
IVORY COAST (0.1%)
SOVEREIGN (0.1%)
Ivory Coast
22.66%, 3/29/18 (b)(h)580 103
- ----------------------------------------------------------------------------------------------
MALAYSIA (1.8%)
SOVEREIGN (1.8%)
Government of Malaysia
8.75%, 6/1/09 1,240 1,473
- ----------------------------------------------------------------------------------------------
MEXICO (20.0%)
CORPORATE (6.4%)
Pemex Project Funding Master Trust
3.79%, 6/15/10 (e)(h)1,080 1,111
9.125%, 10/13/10 1,260 1,514
Petroleos Mexicanos
9.50%, 9/15/27 1,190 1,500
Petroleos Mexicanos (Registered)
8.625%, 12/1/23 460 534
Satelites Mexicanos S.A. de C.V.
10.125%, 11/1/04 (b)977 542
- ----------------------------------------------------------------------------------------------
5,201
==============================================================================================
SOVEREIGN (13.6%)
United Mexican States
8.00%, 9/24/22 370 428
8.125%, 12/30/19 1,210 1,423
8.30%, 8/15/31 1,490 1,750
8.375%, 1/14/11 2,890 3,401
10.375%, 2/17/09 1,190 1,458
11.50%, 5/15/26 1,749 2,680
- ----------------------------------------------------------------------------------------------
11,140
==============================================================================================
16,341
==============================================================================================
NIGERIA (1.2%)
SOVEREIGN (1.2%)
Central Bank of Nigeria
6.25%, 11/15/20 (n)1,000 945
- ----------------------------------------------------------------------------------------------
PANAMA (3.3%)
SOVEREIGN (3.3%)
Republic of Panama
8.875%, 9/30/27 750 829
9.375%, 4/1/29 590 696
9.625%, 2/8/11 725 859
10.75%, 5/15/20 220 287
- ----------------------------------------------------------------------------------------------
2,671
==============================================================================================
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
85
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS (CONT'D)
EMERGING MARKETS DEBT PORTFOLIO
<Table>
<Caption>
FACE
AMOUNT VALUE
(000) (000)
- ----------------------------------------------------------------------------------------------
PERU (2.5%)
SOVEREIGN (2.5%)
Republic of Peru
4.50%, 3/7/17 $ (h)460 $ 430
8.375%, 5/3/16 860 967
9.875%, 2/6/15 520 640
- ----------------------------------------------------------------------------------------------
2,037
==============================================================================================
PHILIPPINES (3.4%)
SOVEREIGN (3.4%)
Republic of Philippines
8.875%, 3/17/15 2,770 2,777
- ----------------------------------------------------------------------------------------------
QATAR (0.9%)
SOVEREIGN (0.9%)
State of Qatar (Registered)
9.75%, 6/15/30 500 728
- ----------------------------------------------------------------------------------------------
RUSSIA (18.0%)
SOVEREIGN (18.0%)
Aries Vermoegensverwaltungs GmbH (Registered)
9.60%, 10/25/14 1,250 1,546
Russian Federation
5.00%, 3/31/30 (e)(n)65 68
Russian Federation (Registered)
5.00%, 3/31/30 (n)3,723 3,853
8.25%, 3/31/10 1,030 1,141
11.00%, 7/24/18 2,186 3,039
12.75%, 6/24/28 3,100 5,068
- ----------------------------------------------------------------------------------------------
14,715
==============================================================================================
TUNISIA (0.3%)
SOVEREIGN (0.3%)
Banque Centrale de Tunisie
7.375%, 4/25/12 210 241
- ----------------------------------------------------------------------------------------------
TURKEY (8.3%)
SOVEREIGN (8.3%)
Citigroup Global Markets Holdings, Inc.
(Turkish Lira Index Linked)
Zero coupon, 2/23/06 1,250 1,556
Zero coupon, 2/23/06 710 864
Zero coupon, 2/23/06 560 721
Republic of Turkey
11.00%, 1/14/13 1,360 1,737
11.50%, 1/23/12 1,460 1,884
- ----------------------------------------------------------------------------------------------
6,762
==============================================================================================
UKRAINE (1.2%)
SOVEREIGN (1.2%)
Ukraine Government
5.33%, 8/5/09 (h)930 983
- ----------------------------------------------------------------------------------------------
VENEZUELA (4.8%)
SOVEREIGN (4.8%)
Republic of Venezuela
8.50%, 10/8/14 $ 440 $ 467
9.25%, 9/15/27 520 550
9.375%, 1/13/34 790 838
10.75%, 9/19/13 1,690 2,028
- ----------------------------------------------------------------------------------------------
3,883
==============================================================================================
TOTAL DEBT INSTRUMENTS (COST $75,647) 78,130
==============================================================================================
<Caption>
NO. OF
WARRANTS
- ----------------------------------------------------------------------------------------------
WARRANTS (0.0%)
NIGERIA (0.0%)
Central Bank of Nigeria, expiring 11/15/20 (a)(d)8,500 $ @--
- ----------------------------------------------------------------------------------------------
VENEZUELA (0.0%)
Republic of Venezuela Oil-Linked Payment Obligation,
expiring 4/15/20 (a)2,700 @--
- ----------------------------------------------------------------------------------------------
TOTAL WARRANTS (COST $ @--) @--
==============================================================================================
<Caption>
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (0.3%)
REPURCHASE AGREEMENT (0.3%)
J.P. Morgan Securities, Inc., 2.00%,
dated 12/31/04, due 1/3/05,
repurchase price $238
(COST $238) $ (f)238 238
==============================================================================================
TOTAL INVESTMENTS (96.1%) (COST $75,885) 78,368
==============================================================================================
OTHER ASSETS IN EXCESS OF LIABILITIES (3.9%) 3,178
==============================================================================================
NET ASSETS (100%) $ 81,546
==============================================================================================
</Table>
(a) Non-income producing security.
(b) Issuer is in default.
(d) Security was valued at fair value -- At December 31, 2004, the Portfolio
held a fair valued security valued at less than $500, representing less
than 0.05% of net assets.
(e) 144A security -- certain conditions for public sale may exist. Unless
otherwise noted, these securities are deemed to be liquid.
(f) Represents the Portfolio's undivided interest in a joint repurchase
agreement which has a total value of $1,018,656,000. The repurchase
agreement was fully collateralized by U.S. government agency securities at
the date of this portfolio of investments as follows: Federal Farm Credit
Bank, 0.00% to 6.75%, due 2/28/05 to 8/15/13; Federal Home Loan Bank, 1.10%
to 6.875%, due 4/15/05 to 10/28/24; Federal Home Loan Mortgage Corp., 2.00%
to 6.51%, due 6/15/15 to 3/15/19; Federal National Mortgage Association,
1.75% to 8.20%, due 2/24/05 to 5/24/19; and Financial Assist Corp., 8.80%,
due 6/10/05. The investment in the repurchase agreement is through
participation in a joint account with affiliated parties pursuant to
exemptive relief received by the Portfolio from the SEC.
(h) Variable/Floating Rate Security -- interest rate changes on these
instruments are based on changes in a designated base rate. The rates shown
are those in effect on December 31, 2004.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
86
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS (CONT'D)
EMERGING MARKETS DEBT PORTFOLIO
(n) Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of December 31, 2004. Maturity date disclosed is the
ultimate maturity date.
@ Face Amount/Value is less than $500.
PIK Payment-in-Kind. Income may be paid in additional securities or cash at the
discretion of the issuer.
FUTURES CONTRACTS:
The Portfolio had the following futures contract(s) open at period end:
<Table>
<Caption>
NET
UNREALIZED
NUMBER APPRECIATION
OF VALUE EXPIRATION (DEPRECIATION)
CONTRACTS (000) DATE (000)
- ------------------------------------------------------------
SHORT:
U.S. 5 Year
Treasury Note 136 14,896 Mar-05 $ 24
==============
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
87
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW
MONEY MARKET PORTFOLIO
The Money Market Portfolio seeks to maximize current income and preserve capital
while maintaining high levels of liquidity. Investments in shares of the
Portfolio are neither insured nor guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. Although the Portfolio seeks to
preserve the value of your investment at $1.00 per share, it is possible to lose
money by investing in the Portfolio.
PERFORMANCE
The seven day yield and seven day effective yield (which assumes an
annualization of the current yield with all dividends reinvested) for the
Portfolio as of December 31, 2004, were 1.96% and 1.98%, respectively. The yield
quotation more closely reflects the current earnings of the Portfolio than the
total return. As with all money market portfolios, the seven day yields are not
necessarily indicative of future performance.
FACTORS AFFECTING PERFORMANCE
- During the year ended December 31, 2004, favorable economic trends began
to appear. Revised gross domestic product (GDP) growth for the third
quarter was 4.0%. Although this was below the fourth quarter of 2003 and
the first quarter of 2004, it was stronger than the 3.3% rate posted in
the second quarter of this year. Job growth (as measured by non-farm
payrolls), which slowed in mid 2004, appeared to regain some momentum
early in the third quarter. In addition, leading economic indicators
turned positive in November, after posting five consecutive months of
contraction. As a result, December consumer confidence rose to its highest
level in five months, well above analysts' expectations.
- The Federal Reserve Open Market Committee (the Fed) began its current
tightening cycle at its June 30 meeting. The Fed has increased its target
rate for federal funds a cumulative 125 basis points over five separate
meetings to 2.25% as of the December meeting. The Fed's formal risk
assessment was balanced, and it has stated that increases will continue at
a "measured pace." Against this backdrop, money market fund yield levels
have begun rising from record lows.
MANAGEMENT STRATEGY
- As of December 31, 2004, the Portfolio had net assets of $547 million. The
average maturity of the Portfolio was 13 days.
- In the face of steadily rising interest rates, we maintained a strategy of
keeping the average maturity of the Portfolio short. This enabled us to
better capitalize on interest rate increases.
- The Portfolio seeks to maximize current income and preserve capital while
maintaining liquidity by purchasing only high quality, very liquid money
market securities. The Portfolio does not contain any derivative
securities.
EXPENSE EXAMPLES
As a shareholder of the Portfolio, you incur ongoing costs, including management
fees and other Portfolio expenses. These examples are intended to help you
understand your ongoing costs (in dollars) of investing in the Portfolio and to
compare these costs with the ongoing costs of investing in other mutual funds.
The examples are based on an investment of $1,000 invested at the beginning of
the six-month period ended December 31, 2004 and held for the entire six-month
period.
ACTUAL EXPENSES
The first line of the tables 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 tables below provides information about hypothetical
account values and hypothetical expenses based on the Portfolio's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Portfolio's actual return. The hypothetical account values and expenses may
not be used to estimate the actual ending account balance or expenses you paid
for the period. You may use this information to compare the ongoing costs of
investing in the Portfolio 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.
<Table>
<Caption>
EXPENSES PAID
ENDING ACCOUNT DURING PERIOD*
BEGINNING VALUE JULY 1, 2004 --
ACCOUNT VALUE DECEMBER 31, DECEMBER 31,
JULY 1, 2004 2004 2004
- --------------------------------------------------------------------------------
CLASS A
Actual $ 1,000.00 $ 1,006.56 $ 2.22
Hypothetical (5% average
annual return before expenses) 1,000.00 1,022.92 2.24
</Table>
* Expenses are equal to Class A annualized net expense ratios of 0.44%,
multiplied by the average account value over the period, multiplied by
184/366 (to reflect the one-half year period).
88
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW (CONT'D)
MONEY MARKET PORTFOLIO
GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS
The following graph depicts the Portfolio's holdings by industry, as a
percentage of total investments.
<Table>
Repurchase Agreements 38.6%
International Banks 16.6%
Asset Backed - Securities 7.7%
Major Banks 4.6%
Insurance 4.6%
Asset Backed - Automotive 4.6%
Financial Conglomerate 4.5%
Asset Backed - Diversified 4.2%
Asset Backed - Corporate 3.6%
Asset Backed - Mortgage 3.6%
Other* 7.4%
</Table>
* Industries which do not appear in the top 10 industries and industries
which represent less than 3% of total investments, if applicable, are
included in the category labeled "Other".
January 2005
89
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS
MONEY MARKET PORTFOLIO
<Table>
<Caption>
FACE
AMOUNT VALUE
(000) (000)
- ----------------------------------------------------------------------------------------------
CERTIFICATE OF DEPOSIT (4.6%)
MAJOR BANKS (4.6%)
Wells Fargo Bank NA, 2.32%, 1/14/05
(COST $25,000) $ 25,000 $ 25,000
==============================================================================================
COMMERCIAL PAPER (54.3%)
ASSET BACKED -- AUTOMOTIVE (4.6%)
New Center Asset Trust, 2.19%, 1/12/05 25,000 24,983
- ----------------------------------------------------------------------------------------------
ASSET BACKED -- CORPORATE (3.7%)
Variable Funding Capital, 2.08%, 1/10/05 (e)20,000 19,990
- ----------------------------------------------------------------------------------------------
ASSET BACKED -- DIVERSIFIED (4.2%)
CRC Funding LLC, 2.05%, 1/7/05 (e)23,000 22,992
- ----------------------------------------------------------------------------------------------
ASSET BACKED -- MORTGAGE (3.7%)
Sydney Capital Corp., 2.25%, 2/14/05 (e)20,000 19,945
- ----------------------------------------------------------------------------------------------
ASSET BACKED -- SECURITIES (7.7%)
Cancara Asset Securitization Ltd., 2.23%, 1/5/05 (e)22,000 21,994
Galaxy Funding, Inc., 2.07%, 1/28/05 (e)20,000 19,969
- ----------------------------------------------------------------------------------------------
41,963
==============================================================================================
COMPUTER HARDWARE (2.9%)
International Business Machines Corp.,
2.15%, 1/24/05 16,000 15,978
- ----------------------------------------------------------------------------------------------
FINANCE -- CORPORATE (1.8%)
CIT Group, Inc., 2.19%, 1/19/05 10,000 9,989
- ----------------------------------------------------------------------------------------------
FINANCIAL CONGLOMERATE (4.6%)
General Electric Capital Corp., 2.11%, 3/21/05 10,000 9,954
General Electric Capital Corp., 2.31%, 1/20/05 15,000 14,982
- ----------------------------------------------------------------------------------------------
24,936
==============================================================================================
INSURANCE (4.5%)
USAA Capital Corp., 2.28%, 1/4/05 25,000 24,996
- ----------------------------------------------------------------------------------------------
INTERNATIONAL BANKS (16.6%)
Barclays U.S. Funding Corp., 2.26%, 2/22/05 25,000 24,919
Danske Corp., 2.35%, 1/4/05 16,000 15,997
Deutsche Bank Financial LLC, 2.32%, 1/11/05 25,000 24,984
UBS Finance (Delaware) LLC, 2.31%, 1/6/05 25,000 24,991
- ----------------------------------------------------------------------------------------------
90,891
==============================================================================================
TOTAL COMMERCIAL PAPER (COST $296,663) 296,663
==============================================================================================
DISCOUNT NOTE (2.7%)
U.S. GOVERNMENT & AGENCY SECURITIES (2.7%)
Federal Home Loan Bank, 2.06%, 1/14/05
(COST $14,989) 15,000 14,989
==============================================================================================
REPURCHASE AGREEMENTS (38.6%)
Bear Stearns & Co., 2.29%,
dated 12/31/04, due 1/3/05,
repurchase price $107,220; fully collateralized by
U.S. government and/or agency obligations with
coupons of 2.97% - 4.84%, maturing from
9/1/19 - 1/1/42, valued at $109,346 107,200 107,200
UBS Finance Securities LLC 2.25%,
dated 12/31/04, due 1/3/05,
repurchase price $104,020; fully collateralized by
U.S. government and/or agency obligations with
coupons of 3.57% - 5.81%, maturing from
10/1/31 - 12/1/34, valued at $106,080 104,000 104,000
- ----------------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS (COST $211,200) 211,200
==============================================================================================
TOTAL INVESTMENTS (100.2%) (COST $547,852) $ 547,852
==============================================================================================
LIABILITIES IN EXCESS OF OTHER ASSETS (-0.2%) (986)
==============================================================================================
NET ASSETS (100%) $ 546,866
==============================================================================================
</Table>
(e) 144A security -- certain conditions for public sale may exist. Unless
otherwise noted, these securities are deemed to be liquid.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
90
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW
MUNICIPAL MONEY MARKET PORTFOLIO
The Municipal Money Market Portfolio seeks to maximize current tax-exempt income
and preserve capital. Investments in shares of the Portfolio are neither insured
nor guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. Although the Portfolio seeks to preserve its net asset value
of $1.00 per share, it is possible to lose money by investing in the Portfolio.
PERFORMANCE
The seven-day yield and seven-day effective yield (assuming an annualized
current yield with all dividends reinvested) for the Portfolio as of December
31, 2004, were 1.62% and 1.63%, respectively. The seven-day taxable-equivalent
yield and the seven-day taxable-equivalent effective yield for the Portfolio as
of December 31, 2004 (assuming the maximum Federal income tax rate of 35%) were
2.49 and 2.51%, respectively. The seven-day yields are not necessarily
indicative of future performance.
FACTORS AFFECTING PERFORMANCE
- Tax-free money-market yields were dominated by typical seasonal events in
the first half of 2004, as opposed to any shift in market expectations.
Beginning in June, five consecutive increases to the Federal Funds target
rate, and the anticipation of more to come, pushed short-term tax-exempt
yields to their highest levels in two years. Subsequently, yields for both
fixed-rate and variable-rate municipal money-market instruments registered
further sharp increases. The Bond Buyer One Year Note Index, an indicator
for the tax-free money market, increased from 1.60% to 2.08% between the
end of June and the end of December.
- At the same time, yields for daily and weekly variable-rate demand
obligations (VRDOs) rose even more dramatically. Yields for weekly VRDOs
increased from 1.05% in late June to 1.99% in late December. The year
closed with daily and weekly VRDO yields at more attractive levels as the
market faced its traditional seasonal cash outflows.
MANAGEMENT STRATEGIES
- Our asset allocation strategy heavily favored VRDOs and short-maturity
commercial paper, and the Portfolio's weighted average maturity (WAM)
moved lower. We were largely cautious in managing the Portfolio's
fixed-rate investment during the period, tending to avoid the one-year
segment of the money market in anticipation of further yield increases
there. As a result, the Portfolio ended the period with a WAM somewhat
lower than has historically been the case at this point in the year. The
rising rate environment, coupled with existing municipal budgetary
pressures, called for greater restraint in managing maturity. At the end
of December, the Portfolio's average maturity was nine days.
- We expect the pace of economic activity during 2005 to begin to reflect
some improvement as the economy responds to stimulative monetary policy
and fiscal conditions. Barring any significant geo-political activity in
the world, we believe that consumer and business confidence should
continue to improve, producing meaningful economic expansion. Such an
economic environment, in our experience, normally leads to moderately
higher levels of short-term interest rates, which could become more
evident during the second half of 2005.
EXPENSE EXAMPLES
As a shareholder of the Portfolio, you incur ongoing costs, including management
fees and other Portfolio expenses. These examples are intended to help you
understand your ongoing costs (in dollars) of investing in the Portfolio and to
compare these costs with the ongoing costs of investing in other mutual funds.
The examples are based on an investment of $1,000 invested at the beginning of
the six-month period ended December 31, 2004 and held for the entire six-month
period.
ACTUAL EXPENSES
The first line of the tables 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.
91
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT OVERVIEW (CONT'D)
MUNICIPAL MONEY MARKET PORTFOLIO
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the tables below provides information about hypothetical
account values and hypothetical expenses based on the Portfolio's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Portfolio's actual return. The hypothetical account values and expenses may
not be used to estimate the actual ending account balance or expenses you paid
for the period. You may use this information to compare the ongoing costs of
investing in the Portfolio 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.
<Table>
<Caption>
EXPENSES PAID
ENDING ACCOUNT DURING PERIOD*
BEGINNING VALUE JULY 1, 2004 --
ACCOUNT VALUE DECEMBER 31, DECEMBER 31,
JULY 1, 2004 2004 2004
- --------------------------------------------------------------------------------
CLASS A
Actual $ 1,000.00 $ 1,005.05 $ 2.22
Hypothetical (5% average
annual return before expenses) 1,000.00 1,022.92 2.24
</Table>
* Expenses are equal to Class A annualized net expense ratios of 0.44%,
multiplied by the average account value over the period, multiplied by
184/366 (to reflect the one-half year period).
GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS
The following graph depicts the Portfolio's holdings by industry, as a
percentage of total investments.
<Table>
Commercial Paper 16.6%
Daily Variable Rate Bonds 10.5%
Weekly Variable Rate Bonds 72.9%
</Table>
January 2005
92
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS
MUNICIPAL MONEY MARKET PORTFOLIO
<Table>
<Caption>
AMORTIZED
COST VALUE
(000) (000)
- ----------------------------------------------------------------------------------------------
TAX-EXEMPT INSTRUMENTS (104.4%)
FIXED RATE INSTRUMENTS (17.4%)
COMMERCIAL PAPER (17.4%)
Burke County Development Authority, Georgia,
Oglethorpe Power Corp., Ser. 1998 B (Ambac),
1.83%, 1/26/05 $ 7,000 $ 7,000
Burke County Development Authority, Georgia,
Oglethorpe Power Corp., Ser. 1998 B (Ambac),
1.85%, 1/18/05 7,000 7,000
Jacksonville, Florida, Ser. A, 1.80%, 1/20/05 9,500 9,500
Jacksonville, Florida, Ser. A, 1.83%, 2/23/05 7,000 7,000
King County, Washington, Sewer, Ser. A,
1.83%, 1/24/05 5,000 5,000
Las Vegas Valley Water District, Nevada, Water, Ser.
2004 A, 1.82%, 1/25/05 6,000 6,000
Montgomery County Industrial Development Authority,
Pennsylvania, PECO Energy Co., Ser. 1994 A,
1.84%, 1/19/05 8,400 8,400
Rochester, Minnesota, Mayo Foundation/Mayo
Medical Center, Ser. 2001B, 1.88%, 1/13/05 5,000 5,000
San Antonio, Texas, Electric & Gas, Ser. 1995 A,
1.82%, 1/11/05 5,000 5,000
San Antonio, Texas, Electric & Gas, Ser. 1995 A,
1.82%, 1/21/05 5,000 5,000
San Antonio, Texas, Water System, Ser. 2001 A,
1.85%, 1/21/05 5,000 5,000
Texas Public Finance Authority, Unemployment
Compensation, Ser. 2003 C-1, 1.80%, 1/19/05 5,000 5,000
Texas Tech University System, Ser. A,
1.85%, 1/18/05 3,256 3,256
- ----------------------------------------------------------------------------------------------
78,156
==============================================================================================
VARIABLE/FLOATING RATE INSTRUMENTS (87.0%)
DAILY VARIABLE RATE BONDS (10.9%)
Breckinridge County, Kentucky, Kentucky
Association of Counties Leasing Trust, 2002
Ser. A, 2.20%, 2/1/32 2,395 2,395
California Health Facilities Financing Authority,
Adventist Health System/West, Ser. 2002 B,
2.20%, 9/1/25 2,100 2,100
Collier County Health Facilities Authority, Florida,
Cleveland Clinic Health System, Ser. 2003 C-1,
2.19%, 1/1/35 200 200
Cuyahoga County, Ohio, Cleveland Clinic Health System,
Ser. 2004 B, 2.27%, 1/1/39 3,000 3,000
Harris County Health Facilities Development Corp., Texas,
Methodist Hospital, Ser. 2002, 2.20%, 12/1/32 13,200 13,200
Illinois Health Facilities Authority, Northwestern
Memorial Hospital, Subser. 2004 B-1,
2.19%, 8/15/38 3,600 3,600
Illinois Finance Authority, Northwestern Memorial
Hospital, Ser. B-2, 2.15%, 8/15/38 1,100 1,100
Jackson County, Mississippi; Pollution Control
Revenue Bonds, Chevron USA, Inc. Project, Ser.
1993, 2.15%, 6/1/23 100 100
Los Angeles Department of Water & Power, California,
Water System, 2001 Subser. B-2, 2.15%, 7/1/35 800 800
Metropolitan Government of Nashville & Davidson
County Health & Educational Facilities Board,
Tennessee, Vanderbilt University, Ser. 2002 B,
2.15%, 10/1/32 $ 5,675 $ 5,675
Mount Vernon, Indiana, Pollution Control & Solid
Waste Disposal General Electric Co., Ser. 2004,
2.10%, 12/1/14 5,000 5,000
New York City Municipal Water Finance Authority,
Ser. F-1, 2.20%, 6/15/33 250 250
New York City Transitional Finance Authority, NY,
Recovery, Fiscal 2003 Ser. 1, 2.20%, 11/1/22 500 500
Salt Lake County, Utah, Service Station Holdings, British
Petroleum, Ser. 1994 B, 2.19%, 8/1/07 3,000 3,000
Uinta County, Wyoming, Chevron USA, Inc., Ser. 1993,
2.15%, 8/15/20 1,100 1,100
University of Missouri, Ser. 2000 B, 2.19%, 11/1/30 400 400
University of Missouri, Systems Facilities, Ser. A,
2.19%, 11/1/31 2,055 2,055
Ward County, North Dakota, Trinity Obligated Group, Ser.
2002 A, 2.27%, 7/1/29 4,155 4,155
Weber County, Utah, IHC Health Services, Inc., Ser
2000 B, 2.20%, 2/15/32 600 600
- ----------------------------------------------------------------------------------------------
49,230
==============================================================================================
WEEKLY VARIABLE RATE BONDS (76.1%)
American Public Energy Agency, Nebraska, National
Public Gas Agency, 2003 Ser. A, 2.015%, 2/1/14 16,100 16,100
Arizona Health Facilities Authority, Northern Arizona
Healthcare, Ser. 1996 B (MBIA), 2.00%, 10/1/26 6,850 6,850
Bexar County Housing Finance Corp., Texas, Multi-Family
PT-2082, 2.03%, 1/20/10 1,000 1,000
Broward County Health Facilities Authority, Florida,
Henderson Mental Health Center, Ser. 2004,
2.05%, 7/1/29 5,100 5,100
California, Ser. A-9, 1.97%, 5/1/34 3,400 3,400
Centerra Metropolitan District No. 1, Colorado, Ser.
2004, 2.02%, 12/1/29 7,100 7,100
Central Washington University Housing System,
Washington, Ser. 2002 ROCs R-2121 (FGIC),
2.04%, 5/1/21 4,195 4,195
Charlotte, North Carolina, Convention Facility, Ser.
2003 B COPs, 2.05%, 12/1/21 9,950 9,950
Chicago Board of Education, Illinois, Ser. 2000 B
(FSA), 2.00%, 3/1/32 3,110 3,110
Chicago Board of Education, Illinois, Ser. 2004 D
(FSA), 2.01%, 3/1/23 7,030 7,030
Chicago, Illinois, Ser. 1997, 1.95%, 1/1/12 990 990
Clarksville Public Building Authority, Tennessee,
Pooled Financing, Ser. 1994, 2.00%, 6/1/24 4,310 4,310
Cobb County Housing Authority, Georgia, Tamarron
Apartments Project, Ser. 2003, 2.00%, 3/1/24 4,820 4,820
Colorado Health Facilities Authority, Catholic Health
Initiatives, Ser. 2004 B-4, 1.95%, 3/1/23 15,100 15,100
Dayton City School District, Ohio, Ser. 2003-A P-
FLOATs SG-173 (FGIC), 2.02%, 12/1/31 7,530 7,530
DeKalb County Housing Authority, Georgia,
Multifamily Housing Post Brook, Ser. 1995,
2.00%, 6/1/25 4,000 4,000
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
93
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS (CONT'D)
MUNICIPAL MONEY MARKET PORTFOLIO
<Table>
<Caption>
AMORTIZED
COST VALUE
(000) (000)
- ----------------------------------------------------------------------------------------------
VARIABLE/FLOATING RATE INSTRUMENTS (CONT'D)
WEEKLY VARIABLE RATE BONDS (CONT'D)
Denver Urban Renewal Authority, Colorado,
Stapleton Senior Tax Increment, Ser. PT-999,
2.08%, 10/07/06 $ 3,000 $ 3,000
Dyer, Indiana, Regency Place of Dyer, Ser. 1992 A
TOBs (FHA), 2.17%, 8/1/12 2,655 2,655
Fulton County Development Authority, Georgia,
Morehouse College, Ser. 1997, 1.99%, 8/1/17 3,010 3,010
Georgia, PUTTERs, Ser. 440, 2.01%, 5/1/10 2,995 2,995
Hamilton County, Ohio, Twin Towers and Twin
Lakes, Ser. 2003 A, 2.02%, 7/1/23 3,500 3,500
Houston, Texas, Combined Utility System, MERLOTS Ser.
C-13 (MBIA), 2.06%, 5/15/25 2,995 2,995
Houston, Texas, Combined Utility System, MERLOTS Ser.
C-17 (MBIA), 2.06%, 5/15/26 3,000 3,000
Illinois Finance Authority, Northwestern University, Ser.
2004 B, 1.97%, 12/1/34 8,500 8,500
Illinois Housing Development Authority, Village Center
Development, Ser. 2004, 1.99%, 3/1/20 7,000 7,000
Illinois, PUTTERs, Ser. 409, 2.03%, 3/1/12 1,990 1,990
Indiana Transportation Finance Authority, Highway,
Ser. CDC 2004-5 (FGIC), 2.03%, 12/1/18 2,770 2,770
Indiana Transportation Finance Authority, MERLOTs Ser.
B-21 (FGIC), 2.06%, 12/1/22 2,100 2,100
Jackson Energy Authority, Tennessee, Water System, Ser.
2002 (FSA), 2.00%, 12/1/23 5,210 5,210
JEA, Florida, Water & Sewer System, PUTTERS,
Ser. 408 (FGIC), 2.03%, 10/1/11 2,715 2,715
Kansas Department of Transportation, Highway,
Ser. 2004 C-4, 1.95%, 9/1/24 18,600 18,600
Louisiana Public Facilities Authority,
College & University Equipment, Ser. A (FGIC),
2.00%, 9/1/10 4,400 4,400
Massachusetts Bay Transportation Authority, Ser.
2000, 1.95%, 3/1/30 4,750 4,750
Massachusetts Development Finance Agency, The
Institute of Contemporary Art, Ser. 2004 A,
1.99%, 7/1/34 7,000 7,000
Miami-Dade County School Board, Florida, COPs Floater-
TRs, Ser. 2004 L29 (MBIA), 2.05%, 8/1/27 6,285 6,285
Minneapolis, Minnesota, Guthrie Theater on the River,
Ser. 2003 A, 2.00%, 10/1/23 7,000 7,000
Mississippi Hospital Equipment & Facilities
Authority, Baptist Memorial Health Care, Ser. PA-
1276, 2.04%, 9/1/24 13,125 13,125
Missouri State Health & Educational Facilities
Authority, Stowers Institute, Ser. 2002 (MBIA),
2.00%, 7/1/36 6,700 6,700
Mobile Industrial Development Board, Alabama, Holnam
Inc., Ser. 1999 B, 1.98%, 6/1/32 1,700 1,700
Municipal Securities Pooled Trust Receipts, Various
States, Ser. 2004 SG P-18, 2.14%, 1/1/35 5,545 5,545
Nebraska Public Power District, Ser. 2003 A Eagle
#20041016 Class A (Ambac), 2.04%, 1/1/35 5,335 5,335
New York City Industrial Development Agency,
Bryant Park LLC, Ser. A, 2.03%, 11/1/39 5,000 5,000
North Carolina Capital Facilities Finance Agency,
Barton College, Ser. 2004, 2.02%, 7/1/19 2,000 2,000
North Carolina Medical Care Commission,
Firsthealth of the Carolinas, Ser. 2002,
1.97%, 10/1/32 $ 9,500 $ 9,500
North Carolina Medical Care Commission, Mission-
St. Joseph's Health System, Ser. 2003,
2.05%, 10/1/18 6,135 6,135
North East Independent School District, Texas,
PUTTERs, Ser. 393 (PSFG), 2.03%, 2/1/12 5,790 5,790
Orange County Industrial Development Authority,
Florida, Independent Blood & Tissue Services of
Florida, Ser. 2002, 2.00%, 10/1/27 3,290 3,290
Palm Beach County, Florida, Hospice of Palm Beach
County, Inc., Ser. 2001, 2.00%, 10/1/31 4,600 4,600
Pennsylvania Turnpike Commission, 2002 Ser. A-2,
2.00%, 12/1/30 13,000 13,000
Private Colleges & Universities Authority,
Georgia, Emory University, Ser. 2001 B, 1.95%, 9/1/33 4,610 4,610
Rhode Island Convention Center Authority, Refunding,
Ser. 2001 A (MBIA), 1.95%, 5/15/27 10,300 10,300
Sayre Health Care Facilities Authority,
Pennsylvania, VHA of Pennsylvania, Inc.,
Capital Asset Financing, Ser 1985 B (AMBAC),
2.02%, 12/1/20 1,400 1,400
South Carolina Jobs Economic Development Authority,
Burroughs & Chapin Business Park, Ser. 2002,
2.05%, 5/1/32 700 700
University of Texas, Permanent University Fund,
PUTTERs, Ser. 411, 2.03%, 1/1/12 2,845 2,845
Utah County, Utah, IHC Health Services, Inc., Ser.
2002 B, 2.00%, 5/15/35 1,500 1,500
Virginia Public Building Authority, ROCs R-6027,
2.04%, 8/1/14 2,000 2,000
Washington County Authority, Pennsylvania, The
Trustees of the University of Pennsylvania, Ser.
2004, 1.96%, 7/1/34 13,300 13,300
Williamsburg, Kentucky, Cumberland College, Ser.
2002, 1.99%, 9/1/32 9,345 9,345
Wilmot Union High School District, Wisconsin, Ser. PT-
2275 (FSA), 2.03%, 3/1/23 5,205 5,205
York County School District No 4, South Carolina,
Fort Mill, Ser. 2004 F TOCs, 2.03%, 4/16/12 5,870 5,870
Yorkville United City Special Service Area 2004-106,
Illinois, Ser. 2004, 2.01%, 3/1/34 3,000 3,000
- ----------------------------------------------------------------------------------------------
341,855
==============================================================================================
391,085
==============================================================================================
TOTAL TAX-EXEMPT INSTRUMENTS (COST $469,241) 469,241
==============================================================================================
TOTAL INVESTMENTS (104.4%) (COST $469,241) 469,241
==============================================================================================
LIABILITIES IN EXCESS OF OTHER ASSETS (-4.4%) (19,923)
==============================================================================================
NET ASSETS (100%) $ 449,318
==============================================================================================
</Table>
AMBAC Ambac Assurance Corp.
FGIC Financial Guaranty Insurance Co.
FHA Federal Housing Administration
FSA Financial Security Assurance Inc.
MBIA MBIA Insurance Corp.
PSFG Permanent School Fund Guaranteed
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
94
<Page>
2004 ANNUAL REPORT
December 31, 2004
PORTFOLIO OF INVESTMENTS (CONT'D)
MUNICIPAL MONEY MARKET PORTFOLIO
SUMMARY OF TAX-EXEMPT INSTRUMENTS BY STATE
(UNAUDITED)
<Table>
<Caption>
AMORTIZED PERCENT
COST OF NET
STATE (000) ASSETS
- -------------------------------------------------------------------------------
Texas $ 52,086 11.6%
Florida 38,690 8.6
Illinois 36,320 8.1
Pennsylvania 36,100 8.0
Georgia 33,435 7.4
North Carolina 27,585 6.1
Colorado 25,200 5.6
Nebraska 21,435 4.8
Kansas 18,600 4.1
Tennessee 15,195 3.4
Ohio 14,030 3.1
Mississippi 13,225 2.9
Indiana 12,525 2.8
Minnesota 12,000 2.7
Massachusetts 11,750 2.6
Kentucky 11,740 2.6
Rhode Island 10,300 2.3
Washington 9,195 2.1
Missouri 9,155 2.0
Arizona 6,850 1.5
South Carolina 6,570 1.5
California 6,300 1.4
Nevada 6,000 1.3
New York 5,750 1.3
Delaware 5,545 1.2
Wisconsin 5,205 1.2
Utah 5,100 1.1
Louisiana 4,400 1.0
North Dakota 4,155 0.9
Virginia 2,000 0.5
Alabama 1,700 0.4
Wyoming 1,100 0.3
- -------------------------------------------------------------------------------
$ 469,241 104.4%
===============================================================================
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
95
<Page>
2004 ANNUAL REPORT
December 31, 2004
STATEMENTS OF ASSETS AND LIABILITIES
<Table>
<Caption>
ACTIVE INTERNATIONAL EMERGING EUROPEAN GLOBAL
ALLOCATION MARKETS REAL ESTATE FRANCHISE
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments in Securities of Unaffiliated
Issuers, at Cost: $ 561,068 $ 1,090,651 $ 35,616 $ 45,141
Investment in Security of Affiliated Issuer,
at Cost: -- 3,415 -- --
Foreign Currency, at Cost: 6,765 2,093 7 33
==========================================================================================================================
Investments in Securities of Unaffiliated
Issuers, at Value:(1) 636,355 1,389,075 51,380 62,938
Investment in Security of Affiliated
Issuer, at Value: -- 7,712 -- --
Foreign Currency, at Value: 6,877 2,098 7 33
Cash 1 -- 1 @--
Due from Broker 8,192 -- -- --
Receivable for Portfolio Shares Sold 442 4,405 85 --
Receivable for Investments Sold -- 2,027 -- --
Unrealized Appreciation on Foreign Currency
Exchange Contracts 2,757 -- -- --
Foreign Withholding Tax Reclaim Receivable 45 411 44 119
Dividends Receivable 546 2,636 51 129
Interest Receivable 4 112 @-- @--
Other Assets 16 33 1 2
- --------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 655,235 1,408,509 51,569 63,221
- --------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Collateral on Securities Loaned, at Value (66,163) (69,758) -- --
Unrealized Depreciation on Foreign Currency
Exchange Contracts (1,606) (4,664) -- (869)
Payable for Investments Purchased (2,908) (1,555) -- (55)
Payable for Portfolio Shares Redeemed (149) (7,138) (22) --
Investment Advisory Fees Payable (808) (3,607) (73) (105)
Bank Overdraft Payable -- (124) -- --
Payable for Administration Fees (40) (89) (4) (5)
Payable for Custodian Fees (36) (172) (11) (6)
Directors' Fees and Expenses Payable (17) (69) (1) (1)
Distribution Fees, Class B (2) (39) (1) (2)
Deferred Country Taxes -- (666) -- --
Other Liabilities (32) (75) (10) (14)
- --------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES (71,761) (87,956) (122) (1,057)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS $ 583,474 $ 1,320,553 $ 51,447 $ 62,164
==========================================================================================================================
NET ASSETS CONSIST OF:
Paid-in Capital $ 603,631 $ 1,238,996 $ 36,278 $ 44,060
Undistributed (Distributions in Excess of)
Net Investment Income 2,454 (3,455) (293) 287
Accumulated Net Realized Gain (Loss) (100,301) (212,177) (308) 863
Unrealized Appreciation (Depreciation) on:
Investments 75,287 301,780* 15,763 17,797
oreign Currency Exchange Contracts and
Translations 1,292 (4,591) 7 (843)
Futures Contracts 1,111 -- -- --
==========================================================================================================================
NET ASSETS $ 583,474 $ 1,320,553 $ 51,447 $ 62,164
==========================================================================================================================
CLASS A:
NET ASSETS $ 580,851 $ 1,249,299 $ 50,620 $ 58,223
SHARES OUTSTANDING $0.01 par value shares of
beneficial interest (500,000,000 shares
authorized) (not in 000's) 53,017,626 65,394,891 2,306,303 3,849,941
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE $ 10.96 $ 19.10 $ 21.95 $ 15.12
==========================================================================================================================
CLASS B:
NET ASSETS $ 2,623 $ 71,254 $ 827 $ 3,941
SHARES OUTSTANDING $0.01 par value shares of
beneficial interest (500,000,000 shares
authorized) (not in 000's) 235,700 3,769,982 37,525 262,568
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE $ 11.13 $ 18.90 $ 22.04 $ 15.01
==========================================================================================================================
(1) INCLUDING:
Repurchase Agreements, at Value: $ 78,384 $ 51,370 $ 2,048 $ 2,248
Securities on Loan, at Value: 62,888 67,299 -- --
==========================================================================================================================
Net of $941 Deferred Country Tax.
</Table>
@ Amount is less than $500.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
96
<Page>
2004 ANNUAL REPORT
December 31, 2004
STATEMENTS OF ASSETS AND LIABILITIES
<Table>
<Caption>
GLOBAL
VALUE INTERNATIONAL INTERNATIONAL INTERNATIONAL
EQUITY EQUITY MAGNUM SMALL CAP
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------
ASSETS:
Investments in Securities of Unaffiliated
Issuers, at Cost: $ 82,572 $ 7,417,903 $ 88,177 $ 916,740
Foreign Currency, at Cost: -- 190,589 55 5
=================================================================================================================
Investments in Securities of Unaffiliated
Issuers, at Value:(1) 99,258 9,139,947 105,371 1,277,037
Foreign Currency, at Value: -- 192,695 56 5
Cash 7 1 @-- @--
Due from Broker -- -- 1,953 --
Receivable for Portfolio Shares Sold 63 25,994 42 1,207
Receivable for Investments Sold -- 634 5 352
Unrealized Appreciation on Foreign Currency
Exchange Contracts -- 2,523 540 @--
Foreign Withholding Tax Reclaim Receivable 61 1,163 55 910
Dividends Receivable 133 7,722 86 1,238
Interest Receivable @-- 3 @-- @--
Other Assets 3 234 3 39
- -----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 99,525 9,370,916 108,111 1,280,788
- -----------------------------------------------------------------------------------------------------------------
LIABILITIES:
Collateral on Securities Loaned, at Value -- (1,058,940) (10,703) --
Unrealized Depreciation on Foreign Currency
Exchange Contracts -- (3,375) (407) (4)
Payable for Investments Purchased -- (1,228) -- (1,019)
Payable for Portfolio Shares Redeemed (189) (16,086) (17) (449)
Investment Advisory Fees Payable (175) (15,531) (153) (2,984)
Payable for Administration Fees (8) (567) (8) (89)
Payable for Custodian Fees (8) (315) (17) (77)
Directors' Fees and Expenses Payable (8) (199) (10) (18)
Distribution Fees, Class B (18) (593) (1) --
Other Liabilities (16) (198) (28) (65)
- -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES (422) (1,097,032) (11,344) (4,705)
- -----------------------------------------------------------------------------------------------------------------
NET ASSETS $ 99,103 $ 8,273,884 $ 96,767 $ 1,276,083
=================================================================================================================
NET ASSETS CONSIST OF:
Paid-in Capital $ 84,515 $ 6,532,781 $ 93,268 $ 896,082
Undistributed (Distributions in Excess of) Net
Investment Income (8) (6,123) 257 (2,567)
Accumulated Net Realized Gain (Loss) (2,103) 23,504 (14,228) 22,099
Unrealized Appreciation (Depreciation) on:
Investments 16,686 1,722,044 17,194 360,297
Foreign Currency Exchange Contracts and
Translations 13 1,678 146 172
Futures Contracts -- -- 130 --
=================================================================================================================
NET ASSETS $ 99,103 $ 8,273,884 $ 96,767 $ 1,276,083
=================================================================================================================
CLASS A:
NET ASSETS $ 68,505 $ 7,200,606 $ 94,162 $ 1,276,083
SHARES OUTSTANDING $0.01 par value shares of
beneficial interest (500,000,000 shares
authorized) (not in 000's) 3,846,584 343,072,956 7,956,605 50,818,493
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE
PER SHARE $ 17.81 $ 20.99 $ 11.83 $ 25.11
=================================================================================================================
CLASS B:
NET ASSETS $ 30,598 $ 1,073,278 $ 2,605 $ --
SHARES OUTSTANDING $0.01 par value shares of
beneficial interest (500,000,000 shares
authorized) (not in 000's) 1,734,260 51,470,006 220,665 --
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE
PER SHARE $ 17.64 $ 20.85 $ 11.80 $ --
=================================================================================================================
(1) INCLUDING:
Repurchase Agreements, at Value: $ 3,766 $ 55,914 $ 5,973 $ 3,389
Securities on Loan, at Value: -- 1,006,675 10,169 --
=================================================================================================================
</Table>
@ Amount is less than $500.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
97
<Page>
2004 ANNUAL REPORT
December 31, 2004
STATEMENTS OF ASSETS AND LIABILITIES
<Table>
<Caption>
EQUITY FOCUS SMALL COMPANY U.S. REAL
GROWTH EQUITY GROWTH ESTATE
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments in Securities of Unaffiliated Issuers, at Cost: $ 683,355 $ 55,015 $ 1,155,878 $ 771,955
===================================================================================================================================
Investments in Securities of Unaffiliated Issuers, at Value:(1) 760,462 61,081 1,377,829 1,244,246
Cash 1 1 1,943 233
Receivable for Portfolio Shares Sold 667 51 2,440 2,201
Receivable for Investments Sold 37,801 322 1,473 4,200
Dividends Receivable 322 19 111 6,706
Interest Receivable 1 @-- 3 1
Other Assets 26 2 35 36
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 799,280 61,476 1,383,834 1,257,623
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for Investments Purchased (8,118) -- (5,026) (1,880)
Payable for Portfolio Shares Redeemed (32,765) -- (10,209) (6,317)
Investment Advisory Fees Payable (1,126) (110) (3,033) (2,292)
Payable for Administration Fees (58) (5) (93) (87)
Payable for Custodian Fees (11) (3) (13) (10)
Directors' Fees and Expenses Payable (46) (8) (12) (21)
Distribution Fees, Class B (133) (5) (405) (80)
Other Liabilities (33) (29) (34) (38)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES (42,290) (160) (18,825) (10,725)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $ 756,990 $ 61,316 $ 1,365,009 $ 1,246,898
===================================================================================================================================
NET ASSETS CONSIST OF:
Paid-in Capital $ 797,087 $ 87,821 $ 1,171,895 $ 739,534
Undistributed (Distributions in Excess of) Net Investment Income 894 90 -- (21)
Accumulated Net Investment Loss -- -- (134) --
Accumulated Net Realized Gain (Loss) (118,098) (32,661) (28,703) 35,094
Unrealized Appreciation (Depreciation) on:
Investments 77,107 6,066 221,951 472,291
===================================================================================================================================
NET ASSETS $ 756,990 $ 61,316 $ 1,365,009 $ 1,246,898
===================================================================================================================================
CLASS A:
NET ASSETS $ 554,097 $ 52,757 $ 651,276 $ 1,097,718
SHARES OUTSTANDING $0.01 par value shares of beneficial interest
(500,000,000 shares authorized) (not in 000's) 32,817,608 4,191,468 52,101,905 47,300,320
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE $ 16.88 $ 12.59 $ 12.50 $ 23.21
===================================================================================================================================
CLASS B:
NET ASSETS $ 202,893 $ 8,559 $ 713,733 $ 149,180
SHARES OUTSTANDING $0.01 par value shares of beneficial interest
(500,000,000 shares authorized) (not in 000's) 12,168,487 693,675 59,374,837 6,474,615
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE $ 16.67 $ 12.34 $ 12.02 $ 23.04
===================================================================================================================================
(1) INCLUDING:
Repurchase Agreements, at Value: $ 10,639 $ 1,175 $ 57,239 $ 17,343
===================================================================================================================================
</Table>
@ Amount is less than $500.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
98
<Page>
2004 ANNUAL REPORT
December 31, 2004
STATEMENTS OF ASSETS AND LIABILITIES
<Table>
<Caption>
EMERGING MUNICIPAL
MARKETS MONEY MONEY
VALUE EQUITY DEBT MARKET MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments in Securities of Unaffiliated Issuers, at Cost: $ 146,443 $ 75,885 $ 547,852 $ 469,241
Foreign Currency, at Cost: -- 13 -- --
===================================================================================================================================
Investments in Securities of Unaffiliated Issuers, at Value:(1) 165,857 78,368 547,852 469,241
Foreign Currency, at Value: -- 15 -- --
Cash 1 1 31 11
Due from Broker -- 466 -- --
Receivable for Portfolio Shares Sold 36 74 -- --
Receivable for Investments Sold 357 1,613 -- 120
Dividends Receivable 191 -- -- --
Interest Receivable @-- 1,433 21 972
Other Assets 6 2 19 16
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 166,448 81,972 547,923 470,360
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for Investments Purchased -- (259) -- (20,263)
Payable for Portfolio Shares Redeemed (29) -- -- --
Dividends Declared -- -- (465) (308)
Investment Advisory Fees Payable (203) (134) (430) (344)
Payable for Administration Fees (12) (7) (26) (22)
Payable for Custodian Fees (5) (5) (4) @--
Directors' Fees and Expenses Payable (10) (7) (103) (57)
Distribution Fees, Class B (44) @-- -- --
Other Liabilities (18) (14) (29) (48)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES (321) (426) (1,057) (21,042)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $ 166,127 $ 81,546 $ 546,866 $ 449,318
===================================================================================================================================
NET ASSETS CONSIST OF:
Paid-in Capital $ 153,104 $ 165,480 $ 546,836 $ 449,299
Undistributed (Distributions in Excess of) Net Investment Income (10) (503) 30 19
Accumulated Net Realized Gain (Loss) (6,381) (85,940) @-- @--
Unrealized Appreciation (Depreciation) on:
Investments 19,414 2,483 -- --
Foreign Currency Translations -- 2 -- --
Futures Contracts -- 24 -- --
===================================================================================================================================
NET ASSETS $ 166,127 $ 81,546 $ 546,866 $ 449,318
===================================================================================================================================
CLASS A:
NET ASSETS $ 90,938 $ 81,109 $ 546,866 $ 449,318
SHARES OUTSTANDING $0.01 par value shares of beneficial interest
(500,000,000 shares authorized for Value Equity Portfolio and
Emerging Market Debt Portfolio) (4,000,000,000 shares
authorized for Money Market Portfolio and Municipal Money
Market Portfolio) (not in 000's) 8,645,567 22,275,638 547,012,269 449,299,194
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE $ 10.52 $ 3.64 $ 1.00 $ 1.00
===================================================================================================================================
CLASS B:
NET ASSETS $ 75,189 $ 437 $ -- $ --
SHARES OUTSTANDING $0.01 par value shares of beneficial interest
(unlimited number of shares authorized) (not in 000's) 7,151,159 117,351 -- --
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE $ 10.51 $ 3.72 $ -- $ --
===================================================================================================================================
(1) INCLUDING:
Repurchase Agreements, at Value: $ 6,857 $ 238 $ 211,200 $ --
===================================================================================================================================
</Table>
@ Amount is less than $500.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
99
<Page>
2004 ANNUAL REPORT
December 31, 2004
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 2004
<Table>
<Caption>
ACTIVE EUROPEAN GLOBAL
INTERNATIONAL EMERGING REAL GLOBAL VALUE
ALLOCATION MARKETS ESTATE FRANCHISE EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends from Securities of Unaffiliated Issuers $ 9,176 $ 26,691 $ 1,153 $ 2,083 $ 2,131
Dividends from Affiliated Issuer -- 572 -- -- --
Interest 1,081 2,619 23 28 58
Less: Foreign Taxes Withheld (990) (1,732) (147) (179) (129)
- ------------------------------------------------------------------------------------------------------------------------------
Total Investment Income 9,267 28,150 1,029 1,932 2,060
- ------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment Advisory Fees (Note B) 2,901 13,384 269 548 692
Administration Fees (Note C) 622 1,509 51 103 130
Custodian Fees (Note E) 239 1,085 74 43 46
Directors' Fees and Expenses 8 24 1 1 2
Bank Overdraft Expense @-- 21 @-- 4 @--
Professional Fees 48 138 25 25 34
Shareholder Reporting Fees 93 122 5 31 9
Distribution Fees on Class B Shares (Note D) 9 142 3 9 75
Other Expenses 86 85 39 42 46
- ------------------------------------------------------------------------------------------------------------------------------
Total Expenses 4,006 16,510 467 806 1,034
- ------------------------------------------------------------------------------------------------------------------------------
Waiver of Investment Advisory Fees (Note B) (424) -- (127) (109) (68)
- ------------------------------------------------------------------------------------------------------------------------------
Net Expenses 3,582 16,510 340 697 966
- ------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 5,685 11,640 689 1,235 1,094
- ------------------------------------------------------------------------------------------------------------------------------
REALIZED GAIN (LOSS):
Investments Sold 10,584 123,143* 3,825 7,856 5,902
Foreign Currency Transactions 5,695 (610) 2 (811) 36
Futures Contracts 4,921 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net Realized Gain (Loss) 21,200 122,533 3,827 7,045 5,938
- ------------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION):
Investments 51,179 112,023** 10,115 725 4,960
Foreign Currency Exchange Contracts and Translations 165 (4,597) (24) (409) (29)
Futures Contracts (259) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net Change in Unrealized Appreciation (Depreciation) 51,085 107,426 10,091 316 4,931
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) 72,285 229,959 13,918 7,361 10,869
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Operations $ 77,970 $ 241,599 $ 14,607 $ 8,596 $ 11,963
==============================================================================================================================
</Table>
@ Amount is less than $500.
* Net of Country Taxes of $(252).
** Net of Decrease in Deferred Country Tax Accrual of $988.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
100
<Page>
2004 ANNUAL REPORT
December 31, 2004
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 2004
<Table>
<Caption>
INTERNATIONAL INTERNATIONAL INTERNATIONAL EQUITY FOCUS
EQUITY MAGNUM SMALL CAP GROWTH EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends from Securities of Unaffiliated
Issuers $ 189,180 $ 2,002 $ 26,347 $ 10,944 $ 857
Interest 6,268 131 559 155 20
Less: Foreign Taxes Withheld (20,916) (217) (2,969) (11) (1)
- -------------------------------------------------------------------------------------------------------------------------------
Total Investment Income 174,532 1,916 23,937 11,088 876
- -------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment Advisory Fees (Note B) 56,800 694 10,377 4,807 514
Administration Fees (Note C) 9,921 127 1,529 1,167 96
Custodian Fees (Note E) 1,890 135 491 69 20
Directors' Fees and Expenses 120 3 16 18 2
Bank Overdraft Expense 2 1 1 2 1
Professional Fees 211 27 90 48 29
Shareholder Reporting Fees 665 34 118 144 11
Distribution Fees on Class B Shares
(Note D) 2,110 5 -- 523 21
Other Expenses 293 48 77 85 39
- -------------------------------------------------------------------------------------------------------------------------------
Total Expenses 72,012 1,074 12,699 6,863 733
- -------------------------------------------------------------------------------------------------------------------------------
Waiver of Investment Advisory Fees
(Note B) -- (199) (138) -- (69)
- -------------------------------------------------------------------------------------------------------------------------------
Net Expenses 72,012 875 12,561 6,863 664
- -------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 102,520 1,041 11,376 4,225 212
- -------------------------------------------------------------------------------------------------------------------------------
REALIZED GAIN (LOSS):
Investments Sold 626,725 7,089 110,193 77,504 2,863
Foreign Currency Transactions 42,185 976 42 -- --
Futures Contracts -- 456 -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Net Realized Gain (Loss) 668,910 8,521 110,235 77,504 2,863
- -------------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments 608,282 5,830 198,546 (18,972) 884
Foreign Currency Exchange Contracts and
Translations (29,655) (243) (126) -- --
Futures Contracts -- (132) -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Net Change in Unrealized Appreciation
(Depreciation) 578,627 5,455 198,420 (18,972) 884
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE
IN UNREALIZED APPRECIATION (DEPRECIATION) 1,247,537 13,976 308,655 58,532 3,747
- -------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations $ 1,350,057 $ 15,017 $ 320,031 $ 62,757 $ 3,959
===============================================================================================================================
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
101
<Page>
2004 ANNUAL REPORT
December 31, 2004
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 2004
<Table>
<Caption>
SMALL EMERGING
COMPANY U.S. REAL VALUE MARKETS
GROWTH ESTATE EQUITY DEBT
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends from Securities of Unaffiliated Issuers $ 2,731 $ 31,000 $ 3,456 $ --
Interest 457 320 101 5,560
Less: Foreign Taxes Withheld -- (193) (13) --
- ----------------------------------------------------------------------------------------------------------------------
Total Investment Income 3,188 31,127 3,544 5,560
- ----------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment Advisory Fees (Note B) 9,794 8,269 890 499
Administration Fees (Note C) 1,381 1,456 259 98
Custodian Fees (Note E) 81 57 29 26
Directors' Fees and Expenses 14 17 4 2
Bank Overdraft Expense 3 4 1 2
Professional Fees 92 48 34 38
Shareholder Reporting Fees 168 153 49 7
Distribution Fees on Class B Shares (Note D) 1,434 239 176 1
Other Expenses 100 105 55 38
- ----------------------------------------------------------------------------------------------------------------------
Total Expenses 13,067 10,348 1,497 711
- ----------------------------------------------------------------------------------------------------------------------
Waiver of Investment Advisory Fees (Note B) (628) -- (72) (22)
- ----------------------------------------------------------------------------------------------------------------------
Net Expenses 12,439 10,348 1,425 689
- ----------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) (9,251) 20,779 2,119 4,871
- ----------------------------------------------------------------------------------------------------------------------
REALIZED GAIN (LOSS):
Investments Sold 94,642 78,698 17,231 782
Future Contracts -- -- -- (107)
- ----------------------------------------------------------------------------------------------------------------------
Net Realized Gain (Loss) 94,642 78,698 17,231 675
- ----------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION):
Investments 111,273 245,206 1,949 (280)
Foreign Currency Exchange Contracts and Translations -- -- -- 2
Futures Contracts -- -- -- 202
- ----------------------------------------------------------------------------------------------------------------------
Net Change in Unrealized Appreciation (Depreciation) 111,273 245,206 1,949 (76)
- ----------------------------------------------------------------------------------------------------------------------
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) 205,915 323,904 19,180 599
- ----------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations $ 196,664 $ 344,683 $ 21,299 $ 5,470
======================================================================================================================
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
102
<Page>
2004 ANNUAL REPORT
December 31, 2004
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 2004
<Table>
<Caption>
MUNICIPAL
MONEY MONEY
MARKET MARKET
PORTFOLIO PORTFOLIO
(000) (000)
- -------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 8,871 $ 5,744
- -------------------------------------------------------------------------------------------
EXPENSES:
Investment Advisory Fees (Note B) 1,986 1,421
Administration Fees (Note C) 922 649
Custodian Fees (Note E) 28 14
Directors' Fees and Expenses 24 15
Bank Overdraft Expense 1 2
Professional Fees 44 43
Shareholder Reporting Fees 3 21
Other Expenses 93 76
- -------------------------------------------------------------------------------------------
Total Expenses 3,101 2,241
- -------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 5,770 3,503
- -------------------------------------------------------------------------------------------
REALIZED GAIN (LOSS):
Investments Sold @-- @--
- -------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations $ 5,770 $ 3,503
===========================================================================================
</Table>
@ Amount is less than $500.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
103
<Page>
2004 ANNUAL REPORT
December 31, 2004
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
ACTIVE INTERNATIONAL ALLOCATION EMERGING MARKETS
PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 2004 2003
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ 5,685 $ 4,731 $ 11,640 $ 9,042
Net Realized Gain (Loss) 21,200 (17,331) 122,533 60,144
Net Change in Unrealized Appreciation (Depreciation) 51,085 102,137 107,426 310,184
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Operations 77,970 89,537 241,599 379,370
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
CLASS A:
Net Investment Income (10,301) (6,132) (9,513) (11,316)
Net Realized Gain -- -- -- (653)
CLASS B:
Net Investment Income (42) (86) (416) (408)
Net Realized Gain -- -- -- (24)
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions (10,343) (6,218) (9,929) (12,401)
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:(1)
CLASS A:
Subscribed 219,838 150,855 563,202 861,356
Distributions Reinvested 9,070 5,120 8,957 11,229
Redeemed (68,754) (133,423) (564,272) (860,424)
Redemption Fees -- -- 104 13
CLASS B:
Subscribed 2,286 40,954 38,135 554,055
Distributions Reinvested 42 86 413 421
Redeemed (5,807) (45,948) (20,076) (541,631)
Redemption Fees 49 -- 21 --
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Capital Share Transactions 156,724 17,644 26,484 25,019
- -----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 224,351 100,963 258,154 391,988
NET ASSETS:
Beginning of Period 359,123 258,160 1,062,399 670,411
- -----------------------------------------------------------------------------------------------------------------------------
End of Period $ 583,474 $ 359,123 $ 1,320,553 $ 1,062,399
=============================================================================================================================
Undistributed (Distributions in Excess of) Net Investment
Income Included in End of Period Net Assets $ 2,454 $ 1,349 $ (3,455) $ (4,916)
=============================================================================================================================
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 22,277 19,765 34,353 72,921
Shares Issued on Distributions Reinvested 840 555 481 742
Shares Redeemed (7,005) (17,615) (35,194) (72,761)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares Outstanding 16,112 2,705 (360) 902
=============================================================================================================================
CLASS B:
Shares Subscribed 226 5,167 2,292 49,916
Shares Issued on Distributions Reinvested 4 9 22 28
Shares Redeemed (574) (5,732) (1,282) (48,519)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares Outstanding (344) (556) 1,032 1,425
=============================================================================================================================
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
104
<Page>
2004 ANNUAL REPORT
December 31, 2004
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
EUROPEAN REAL ESTATE GLOBAL FRANCHISE
PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 2004 2003
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ 689 $ 457 $ 1,235 $ 1,064
Net Realized Gain (Loss) 3,827 2,509 7,045 311
Net Change in Unrealized Appreciation (Depreciation) 10,091 4,781 316 14,286
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Operations 14,607 7,747 8,596 15,661
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
CLASS A:
Net Investment Income (821) (609) -- (197)
Net Realized Gain -- -- (3,955) (581)
CLASS B:
Net Investment Income (11) (23) -- (2)
Net Realized Gain -- -- (277) (19)
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions (832) (632) (4,232) (799)
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:(1)
CLASS A:
Subscribed 15,851 6,645 7,145 29,757
Distributions Reinvested 821 607 3,953 771
Redeemed (1,596) (11,123) (36,966) (13,713)
Redemption Fees 1 -- 149 10
CLASS B:
Subscribed 100 50 1,671 1,050
Distributions Reinvested @-- 12 277 21
Redeemed (604) (375) (871) (391)
Redemption Fees -- -- 4 --
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Capital Share Transactions 14,573 (4,184) (24,638) 17,505
- -----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 28,348 2,931 (20,274) 32,367
NET ASSETS:
Beginning of Period 23,099 20,168 82,438 50,071
- -----------------------------------------------------------------------------------------------------------------------------
End of Period $ 51,447 $ 23,099 $ 62,164 $ 82,438
=============================================================================================================================
Undistributed (Distributions in Excess of) Net Investment
Income Included in End of Period Net Assets $ (293) $ (274) $ 287 $ (212)
=============================================================================================================================
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 888 551 479 2,451
Shares Issued on Distributions Reinvested 37 41 260 56
Shares Redeemed (86) (884) (2,472) (1,234)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares Outstanding 839 (292) (1,733) 1,273
=============================================================================================================================
CLASS B:
Shares Subscribed 6 3 115 92
Shares Issued on Distributions Reinvested @-- 1 18 2
Shares Redeemed (29) (30) (59) (32)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares Outstanding (23) (26) 74 62
=============================================================================================================================
</Table>
@ Amount is less than $500.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
105
<Page>
2004 ANNUAL REPORT
December 31, 2004
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
GLOBAL VALUE EQUITY INTERNATIONAL EQUITY
PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 2004 2003
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ 1,094 $ 966 $ 102,520 $ 73,302
Net Realized Gain (Loss) 5,938 (3,228) 668,910 66,729
Net Change in Unrealized Appreciation (Depreciation) 4,931 22,557 578,627 1,420,439
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Operations 11,963 20,295 1,350,057 1,560,470
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
CLASS A:
Net Investment Income (832) (552) (116,252) (93,410)
Net Realized Gain (184) (296) (474,947) --
CLASS B:
Net Investment Income (299) (260) (15,360) (11,014)
Net Realized Gain (83) (176) (71,363) --
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions (1,398) (1,284) (677,922) (104,424)
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:(1)
CLASS A:
Subscribed 11,471 50,855 1,643,058 2,674,838
Distributions Reinvested 1,000 837 549,353 76,093
Redeemed (6,705) (42,321) (1,245,518) (2,347,380)
Redemption Fees 9 28 91 7
CLASS B:
Subscribed 5,089 12,816 414,909 493,867
Distributions Reinvested 382 436 86,576 10,897
Redeemed (11,020) (14,519) (237,977) (366,212)
Redemption Fees 6 -- 18 6
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Capital Share Transactions 232 8,132 1,210,510 542,116
- -----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 10,797 27,143 1,882,645 1,998,162
NET ASSETS:
Beginning of Period 88,306 61,163 6,391,239 4,393,077
- -----------------------------------------------------------------------------------------------------------------------------
End of Period $ 99,103 $ 88,306 $ 8,273,884 $ 6,391,239
=============================================================================================================================
Undistributed (Distributions in Excess of) Net
Investment Income Included in End of
Period Net Assets $ (8) $ (12) $ (6,123) $ 13,763
=============================================================================================================================
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 693 4,031 82,082 172,150
Shares Issued on Distributions Reinvested 56 57 26,129 4,076
Shares Redeemed (409) (3,335) (61,971) (150,128)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares Outstanding 340 753 46,240 26,098
=============================================================================================================================
CLASS B:
Shares Subscribed 313 1,014 20,517 31,747
Shares Issued on Distributions Reinvested 22 30 4,164 587
Shares Redeemed (688) (1,133) (11,898) (23,883)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares Outstanding (353) (89) 12,783 8,451
=============================================================================================================================
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
106
<Page>
2004 ANNUAL REPORT
December 31, 2004
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
INTERNATIONAL MAGNUM INTERNATIONAL SMALL CAP
PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 2004 2003
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ 1,041 $ 1,024 $ 11,376 $ 8,911
Net Realized Gain (Loss) 8,521 (877) 110,235 35,111
Net Change in Unrealized Appreciation (Depreciation) 5,455 24,407 198,420 219,303
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Operations 15,017 24,554 320,031 263,325
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
CLASS A:
Net Investment Income (1,884) (1,476) (16,593) (9,894)
Net Realized Gain -- -- (89,822) (13,236)
CLASS B:
Net Investment Income (44) (164) -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions (1,928) (1,640) (106,415) (23,130)
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:(1)
CLASS A:
Subscribed 14,773 26,857 290,544 322,236
Distributions Reinvested 1,707 1,369 97,500 21,202
Redeemed (26,151) (23,785) (225,580) (123,761)
Redemption Fees -- -- 7 @--
CLASS B:
Subscribed 1,464 312,397 -- --
Distributions Reinvested 44 164 -- --
Redeemed (1,484) (321,519) -- --
Redemption Fees 6 3 -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Capital Share Transactions (9,641) (4,514) 162,471 219,677
- -----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 3,448 18,400 376,087 459,872
NET ASSETS:
Beginning of Period 93,319 74,919 899,996 440,124
- -----------------------------------------------------------------------------------------------------------------------------
End of Period $ 96,767 $ 93,319 $ 1,276,083 $ 899,996
=============================================================================================================================
Undistributed (Distributions in Excess of) Net Investment
Income Included in End of Period Net Assets $ 257 $ 168 $ (2,567) $ (660)
=============================================================================================================================
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 1,391 3,223 12,655 19,043
Shares Issued on Distributions Reinvested 149 141 3,943 1,059
Shares Redeemed (2,512) (2,922) (9,636) (7,215)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares Outstanding (972) 442 6,962 12,887
=============================================================================================================================
CLASS B:
Shares Subscribed 140 37,663 -- --
Shares Issued on Distributions Reinvested 4 17 -- --
Shares Redeemed (142) (38,288) -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares Outstanding 2 (608) -- --
=============================================================================================================================
</Table>
@ Amount is less than $500.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
107
<Page>
2004 ANNUAL REPORT
December 31, 2004
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
EQUITY GROWTH FOCUS EQUITY
PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 2004 2003
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ 4,225 $ 1,854 $ 212 $ 130
Net Realized Gain (Loss) 77,504 30,184 2,863 8,486
Net Change in Unrealized Appreciation (Depreciation) (18,972) 128,831 884 9,403
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Operations 62,757 160,869 3,959 18,019
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
CLASS A:
Net Investment Income (2,734) (1,800) (103) (137)
CLASS B:
Net Investment Income (480) (170) -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions (3,214) (1,970) (103) (137)
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:(1)
CLASS A:
Subscribed 206,548 215,085 5,830 39,096
Distributions Reinvested 2,720 1,755 102 132
Redeemed (289,148) (179,059) (17,889) (45,080)
CLASS B:
Subscribed 45,500 46,547 2,104 2,464
Distributions Reinvested 477 168 -- --
Redeemed (57,939) (42,814) (2,263) (2,679)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Capital Share Transactions (91,842) 41,682 (12,116) (6,067)
- -----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets (32,299) 200,581 (8,260) 11,815
NET ASSETS:
Beginning of Period 789,289 588,708 69,576 57,761
- -----------------------------------------------------------------------------------------------------------------------------
End of Period $ 756,990 $ 789,289 $ 61,316 $ 69,576
=============================================================================================================================
Undistributed (Distributions in Excess of) Net
Investment Income Included in End of Period Net Assets $ 894 $ (117) $ 90 $ (19)
=============================================================================================================================
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 13,069 20,284 492 3,847
Shares Issued on Distributions Reinvested 162 113 8 11
Shares Redeemed (17,875) (17,540) (1,516) (4,344)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares Outstanding (4,644) 2,857 (1,016) (486)
=============================================================================================================================
CLASS B:
Shares Subscribed 2,947 3,359 183 275
Shares Issued on Distributions Reinvested 29 11 -- --
Shares Redeemed (3,644) (3,217) (195) (295)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares Outstanding (668) 153 (12) (20)
=============================================================================================================================
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
108
<Page>
2004 ANNUAL REPORT
December 31, 2004
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
SMALL COMPANY GROWTH U.S. REAL ESTATE
PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 2004 2003
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ (9,251) $ (5,016) $ 20,779 $ 24,853
Net Realized Gain (Loss) 94,642 69,288 78,698 23,763
Net Change in Unrealized Appreciation (Depreciation) 111,273 104,359 245,206 215,670
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Operations 196,664 168,631 344,683 264,286
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
CLASS A:
Net Investment Income -- -- (20,112) (23,648)
Net Realized Gain (19,248) -- (39,780) (8,798)
CLASS B:
Net Investment Income -- -- (1,863) (1,359)
Net Realized Gain (21,671) -- (5,186) (689)
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions (40,919) -- (66,941) (34,494)
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:(1)
CLASS A:
Subscribed 383,757 137,063 272,597 236,560
Issued on Portfolio Merger -- 98,228 -- --
Distributions Reinvested 18,037 -- 56,387 29,125
Redeemed (121,266) (58,979) (380,361) (240,705)
CLASS B:
Subscribed 291,972 247,321 80,932 40,038
Issued on Portfolio Merger -- 1,975 -- --
Distributions Reinvested 21,670 -- 7,046 1,994
Redeemed (168,240) (101,358) (35,142) (15,965)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Capital Share Transactions 425,930 324,250 1,459 51,047
- -----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 581,675 492,881 279,201 280,839
NET ASSETS:
Beginning of Period 783,334 290,453 967,697 686,858
- -----------------------------------------------------------------------------------------------------------------------------
End of Period $ 1,365,009 $ 783,334 $ 1,246,898 $ 967,697
=============================================================================================================================
Undistributed (Distributions in Excess of) Net
Investment Income Included in End of Period
Net Assets $ -- $ -- $ (21) $ (52)
Accumulated Net Investment Loss Included in End of
Period Net Assets (134) (30) -- --
=============================================================================================================================
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 33,511 13,630 13,971 16,166
Shares Issued on Portfolio Merger -- 10,221 -- --
Shares Issued on Distributions Reinvested 1,462 -- 2,587 1,764
Shares Redeemed (10,553) (6,106) (19,349) (16,197)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares Outstanding 24,420 17,745 (2,791) 1,733
=============================================================================================================================
CLASS B:
Shares Subscribed 26,411 27,650 4,029 2,488
Shares Issued on Portfolio Merger -- 213 -- --
Shares Issued on Distributions Reinvested 1,826 -- 322 120
Shares Redeemed (15,258) (11,195) (1,817) (1,013)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares Outstanding 12,979 16,668 2,534 1,595
=============================================================================================================================
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
109
<Page>
2004 ANNUAL REPORT
December 31, 2004
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
VALUE EQUITY EMERGING MARKETS DEBT
PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 2004 2003
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ 2,119 $ 2,009 $ 4,871 $ 4,161
Net Realized Gain (Loss) 17,231 2,159 675 7,192
Net Change in Unrealized Appreciation (Depreciation) 1,949 32,309 (76) 2,777
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Operations 21,299 36,477 5,470 14,130
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
CLASS A:
Net Investment Income (1,367) (1,250) (5,246) (3,737)
CLASS B:
Net Investment Income (745) (778) (26) (28)
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions (2,112) (2,028) (5,272) (3,765)
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:(1)
CLASS A:
Subscribed 19,852 66,165 47,055 20,057
Distributions Reinvested 1,350 1,164 3,506 3,619
Redeemed (50,149) (53,059) (24,285) (28,095)
Redemption Fees -- -- 2 --
CLASS B:
Subscribed 25,523 45,709 -- --
Distributions Reinvested 739 752 26 28
Redeemed (31,552) (37,212) (32) (10)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Capital Share Transactions (34,237) 23,519 26,272 (4,401)
- -----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets (15,050) 57,968 26,470 5,964
NET ASSETS:
Beginning of Period 181,177 123,209 55,076 49,112
- -----------------------------------------------------------------------------------------------------------------------------
End of Period $ 166,127 $ 181,177 $ 81,546 $ 55,076
=============================================================================================================================
Undistributed (Distributions in Excess of) Net Investment
Income Included in End of Period Net Asset $ (10) $ (20) $ (503) $ (174)
=============================================================================================================================
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 2,070 7,984 12,890 6,560
Shares Issued on Distributions Reinvested 138 142 964 1,028
Shares Redeemed (5,277) (7,020) (7,065) (8,658)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares Outstanding (3,069) 1,106 6,789 (1,070)
=============================================================================================================================
CLASS B:
Shares Subscribed 2,668 5,461 -- --
Shares Issued on Distributions Reinvested 75 93 7 8
Shares Redeemed (3,349) (4,284) (9) (3)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares Outstanding (606) 1,270 (2) 5
=============================================================================================================================
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
110
<Page>
2004 ANNUAL REPORT
December 31, 2004
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
MONEY MARKET MUNICIPAL MONEY MARKET
PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 2004 2003
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 5,770 $ 7,531 $ 3,503 $ 4,229
Net Realized Gain (Loss) @-- -- @-- 10
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Operations 5,770 7,531 3,503 4,239
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
CLASS A:
Net Investment Income (5,834) (7,531) (3,503) (4,229)
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:(1)
CLASS A:
Subscribed 2,279,953 3,249,589 2,140,786 3,422,911
Distributions Reinvested 5,179 7,829 3,086 4,390
Redeemed (2,533,601) (3,831,954) (2,206,105) (3,826,186)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Capital Share Transactions (248,469) (574,536) (62,233) (398,885)
- -----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets (248,533) (574,536) (62,233) (398,875)
NET ASSETS:
Beginning of Period 795,399 1,369,935 511,551 910,426
- -----------------------------------------------------------------------------------------------------------------------------
End of Period $ 546,866 $ 795,399 $ 449,318 $ 511,551
=============================================================================================================================
Undistributed (Distributions in Excess of) Net Investment
Income Included in End of Period Net Asset $ 30 $ 88 $ 19 $ 19
=============================================================================================================================
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 2,279,952 3,249,588 2,140,786 3,422,906
Shares Issued on Distributions Reinvested 5,179 7,829 3,086 4,390
Shares Redeemed (2,533,600) (3,831,950) (2,206,105) (3,826,184)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares Outstanding (248,469) (574,533) (62,233) (398,888)
=============================================================================================================================
</Table>
@ Amount is less than $500.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
111
<Page>
2004 ANNUAL REPORT
December 31, 2004
FINANCIAL HIGHLIGHTS
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
<Table>
<Caption>
CLASS A
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.58 $ 7.30 $ 8.65 $ 10.68 $ 14.26
=================================================================================================================================
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.13+ 0.13+ 0.13+ 0.12 0.19
Net Realized and Unrealized Gain (Loss) on
Investments 1.46 2.32 (1.26) (2.01) (2.32)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.59 2.45 (1.13) (1.89) (2.13)
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
Net Investment Income (0.21) (0.17) (0.22) (0.14) (0.01)
Net Realized Gain -- -- -- (0.00)++ (1.44)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.21) (0.17) (0.22) (0.14) (1.45)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.96 $ 9.58 $ 7.30 $ 8.65 $ 10.68
=================================================================================================================================
TOTAL RETURN 16.64% 33.65% (13.11)% (17.63)% (14.97)%
=================================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 580,851 $ 353,488 $ 249,742 $ 388,225 $ 509,309
Ratio of Expenses to Average Net Assets(1) 0.80% 0.80% 0.80% 0.81% 0.82%
Ratio of Expenses to Average Net Assets Excluding Bank
Overdraft Expense 0.80% 0.80% N/A 0.80% 0.80%
Ratio of Net Investment Income (Loss) to Average Net
Assets(1) 1.28% 1.66% 1.57% 1.25% 1.55%
Portfolio Turnover Rate 24% 55% 42% 36% 80%
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Ratios before expense limitation:
Expenses to Average Net Assets 0.91% 0.96% 0.93% 0.89% 0.93%
Net Investment Income (Loss) to Average Net Assets 1.18% 1.50% 1.44% 1.17% 1.45%
- ---------------------------------------------------------------------------------------------------------------------------------
<Caption>
CLASS B
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.72 $ 7.41 $ 8.77 $ 10.80 $ 14.41
=================================================================================================================================
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.10+ 0.12+ 0.11+ 0.13 0.27
Net Realized and Unrealized Gain (Loss) on Investments 1.35 2.33 (1.27) (2.06) (2.43)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.45 2.45 (1.16) (1.93) (2.16)
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
Net Investment Income (0.17) (0.14) (0.20) (0.10) (0.01)
Net Realized Gain -- -- -- (0.00)++ (1.44)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.17) (0.14) (0.20) (0.10) (1.45)
- ---------------------------------------------------------------------------------------------------------------------------------
REDEMPTION FEES 0.13 -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 11.13 $ 9.72 $ 7.41 $ 8.77 $ 10.80
=================================================================================================================================
TOTAL RETURN 16.29% 33.13% (13.29)% (17.81)% (15.02)%
=================================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 2,623 $ 5,635 $ 8,418 $ 10,362 $ 19,814
Ratio of Expenses to Average Net Assets(2) 1.05% 1.05% 1.05% 1.06% 1.07%
Ratio of Expenses to Average Net Assets Excluding Bank
Overdraft Expense 1.05% 1.05% N/A 1.05% 1.05%
Ratio of Net Investment Income (Loss) to Average Net
Assets(2) 1.03% 1.41% 1.32% 1.05% 1.42%
Portfolio Turnover Rate 24% 55% 42% 36% 80%
- ---------------------------------------------------------------------------------------------------------------------------------
(2) Ratios before expense limitation:
Expenses to Average Net Assets 1.16% 1.21% 1.18% 1.14% 1.18%
Net Investment Income (Loss) to Average Net Assets 0.92% 1.25% 1.19% 0.97% 1.31%
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
+ Per share amount is based on average shares outstanding.
++ Amount is less than $0.005 per share.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
112
<Page>
2004 ANNUAL REPORT
December 31, 2004
FINANCIAL HIGHLIGHTS
EMERGING MARKETS PORTFOLIO
<Table>
<Caption>
CLASS A
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.52 $ 10.13 $ 10.81 $ 11.31 $ 19.27
=================================================================================================================================
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.19+ 0.14+ 0.04+ 0.05 (0.10)
Net Realized and Unrealized Gain (Loss) on Investments 3.54 5.44 (0.71) (0.55) (7.28)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 3.73 5.58 (0.67) (0.50) (7.38)
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
Net Investment Income (0.15) (0.18) (0.01) -- --
Net Realized Gain -- -- -- -- (0.58)
Return of Capital -- (0.01) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.15) (0.19) (0.01) -- (0.58)
- ---------------------------------------------------------------------------------------------------------------------------------
REDEMPTION FEES 0.00++ 0.00++ -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 19.10 $ 15.52 $ 10.13 $ 10.81 $ 11.31
=================================================================================================================================
TOTAL RETURN 24.09% 55.08% (6.24)% (4.42)% (38.43)%
=================================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 1,249,299 $ 1,020,353 $ 657,203 $ 748,058 $ 917,091
Ratio of Expenses to Average Net Assets 1.52%# 1.64% 1.65% 1.65% 1.63%
Ratio of Expenses to Average Net Assets Excluding
Country Tax Expense and Bank Overdraft Expense 1.52% 1.61% 1.58% N/A N/A
Ratio of Net Investment Income (Loss) to Average
Net Assets 1.09% 1.15% 0.35% 0.47% (0.63)%
Portfolio Turnover Rate 73% 92% 91% 93% 92%
- ---------------------------------------------------------------------------------------------------------------------------------
<Caption>
CLASS B
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.36 $ 10.06 $ 10.73 $ 11.26 $ 19.24
=================================================================================================================================
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.15+ 0.11+ 0.01+ 0.03 (0.11)
Net Realized and Unrealized Gain (Loss) on Investments 3.49 5.35 (0.68) (0.56) (7.29)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 3.64 5.46 (0.67) (0.53) (7.40)
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
Net Investment Income (0.11) (0.15) -- -- --
Net Realized Gain -- -- -- -- (0.58)
Return of Capital -- (0.01) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.11) (0.16) -- -- (0.58)
- ---------------------------------------------------------------------------------------------------------------------------------
REDEMPTION FEES 0.01 -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 18.90 $ 15.36 $ 10.06 $ 10.73 $ 11.26
=================================================================================================================================
TOTAL RETURN 23.84% 54.31% (6.24)% (4.71)% (38.60)%
=================================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 71,254 $ 42,046 $ 13,208 $ 14,456 $ 13,949
Ratio of Expenses to Average Net Assets 1.77%# 1.89% 1.90% 1.90% 1.88%
Ratio of Expenses to Average Net Assets Excluding
Country Tax Expense and Bank Overdraft Expense 1.77% 1.86% 1.83% N/A N/A
Ratio of Net Investment Income (Loss) to Average Net
Assets 0.89% 0.90% 0.10% 0.22% (0.82)%
Portfolio Turnover Rate 73% 92% 91% 93% 92%
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
+ Per share amount is based on average shares outstanding.
++ Amount is less than $0.005 per share.
# Effective November 1, 2004, the Adviser has agreed to limit the ratio of
expenses to average net assets to the maximum ratio of 1.65% for Class A
shares and 1.90% for Class B shares. Prior to November 1, 2004, these
maximum ratios were 1.75% for Class A shares and 2.00% for Class B shares.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
113
<Page>
2004 ANNUAL REPORT
December 31, 2004
FINANCIAL HIGHLIGHTS
EUROPEAN REAL ESTATE PORTFOLIO
<Table>
<Caption>
CLASS A
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.13 $ 10.93 $ 9.30 $ 10.38 $ 9.16
=================================================================================================================================
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.36+ 0.27+ 0.37+ 0.27 0.07
Net Realized and Unrealized Gain (Loss) on Investments 6.82 4.35 1.90 (1.09) 1.30
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 7.18 4.62 2.27 (0.82) 1.37
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
Net Investment Income (0.36) (0.42) (0.64) (0.26) (0.15)
- ---------------------------------------------------------------------------------------------------------------------------------
REDEMPTION FEES 0.00++ -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 21.95 $ 15.13 $ 10.93 $ 9.30 $ 10.38
=================================================================================================================================
TOTAL RETURN 47.49% 42.41% 24.52% (7.85)% 14.91%
=================================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 50,620 $ 22,184 $ 19,215 $ 13,826 $ 7,766
Ratio of Expenses to Average Net Assets (1) 1.00% 1.00% 1.00% 1.01% 1.03%
Ratio of Expenses to Average Net Assets Excluding Bank
Overdraft Expense 1.00% 1.00% N/A 1.00% 1.00%
Ratio of Net Investment Income (Loss) to Average
Net Assets (1) 2.05% 2.23% 3.37% 2.30% 1.55%
Portfolio Turnover Rate 42% 47% 79% 46% 74%
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Ratios before expense limitation:
Expenses to Average Net Assets 1.38% 1.49% 1.56% 1.53% 1.90%
Net Investment Income (Loss) to Average Net Assets 1.67% 1.74% 2.81% 1.74% 0.69%
- ---------------------------------------------------------------------------------------------------------------------------------
<Caption>
CLASS B
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.17 $ 10.96 $ 9.33 $ 10.41 $ 9.19
=================================================================================================================================
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.35+ 0.28+ 0.27+ 0.08 0.18
Net Realized and Unrealized Gain (Loss) on Investments 6.81 4.32 1.97 (0.93) 1.16
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 7.16 4.60 2.24 (0.85) 1.34
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
Net Investment Income (0.29) (0.39) (0.61) (0.23) (0.12)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 22.04 $ 15.17 $ 10.96 $ 9.33 $ 10.41
=================================================================================================================================
TOTAL RETURN 47.15% 42.06% 24.11% (8.08)% 14.55%
=================================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 827 $ 915 $ 953 $ 1,687 $ 1,449
Ratio of Expenses to Average Net Assets (2) 1.25% 1.25% 1.25% 1.26% 1.28%
Ratio of Expenses to Average Net Assets Excluding Bank
Overdraft Expense 1.25% 1.25% N/A 1.25% 1.25%
Ratio of Net Investment Income (Loss) to Average
Net Assets (2) 2.03% 1.98% 3.12% 1.53% 1.50%
Portfolio Turnover Rate 42% 47% 79% 46% 74%
- ---------------------------------------------------------------------------------------------------------------------------------
(2) Ratios before expense limitation:
Expenses to Average Net Assets 1.66% 1.74% 1.81% 1.78% 2.15%
Net Investment Income (Loss) to Average Net Assets 1.62% 1.49% 2.56% 0.96% 0.61%
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
+ Per share amount is based on average shares outstanding.
++ Amount is less than $0.005 per share.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
114
<Page>
2004 ANNUAL REPORT
December 31, 2004
FINANCIAL HIGHLIGHTS
GLOBAL FRANCHISE PORTFOLIO
<Table>
<Caption>
CLASS A
------------------------------------------------------------------
YEAR ENDED DECEMBER 31, PERIOD FROM
---------------------------------------------- NOVEMBER 28, 2001^
SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 TO DECEMBER 31, 2001
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.29 $ 11.29 $ 10.48 $ 10.00
============================================================================================================================
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.27+ 0.23+ 0.17+ 0.01
Net Realized and Unrealized Gain (Loss) on Investments 1.66 2.91 0.68 0.47
- ----------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.93 3.14 0.85 0.48
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
Net Investment Income -- (0.03) -- --
Net Realized Gain (1.13) (0.11) (0.04) --
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.13) (0.14) (0.04) --
- ----------------------------------------------------------------------------------------------------------------------------
REDEMPTION FEES 0.03 0.00++ -- --
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 15.12 $ 14.29 $ 11.29 $ 10.48
============================================================================================================================
TOTAL RETURN 13.77% 27.92% 8.10% 4.80%#
============================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 58,223 $ 79,756 $ 48,644 $ 10,595
Ratio of Expenses to Average Net Assets (1) 1.00% 1.00% 1.00% 1.00%*
Ratio of Net Investment Income (Loss) to Average
Net Assets (1) 1.82% 1.91% 1.41% 1.30%*
Portfolio Turnover Rate 21% 32% 62% N/A
- ----------------------------------------------------------------------------------------------------------------------------
(1) Ratios before expense limitation:
Expenses to Average Net Assets 1.16% 1.23% 1.28% 16.47%*
Net Investment Income (Loss) to Average Net Assets 1.66% 1.68% 1.13% (14.17)%*
- ----------------------------------------------------------------------------------------------------------------------------
<Caption>
CLASS B
------------------------------------------------------------------
YEAR ENDED DECEMBER 31, PERIOD FROM
---------------------------------------------- NOVEMBER 28, 2001^
SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 TO DECEMBER 31, 2001
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.22 $ 11.24 $ 10.46 $ 10.00
============================================================================================================================
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.22+ 0.22+ 0.11+ (0.09)
Net Realized and Unrealized Gain (Loss) on Investments 1.69 2.88 0.71 0.55
- ----------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.91 3.10 0.82 0.46
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
Net Investment Income -- (0.01) -- --
Net Realized Gain (1.13) (0.11) (0.04) --
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.13) (0.12) (0.04) --
- ----------------------------------------------------------------------------------------------------------------------------
REDEMPTION FEES 0.01 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 15.01 $ 14.22 $ 11.24 $ 10.46
============================================================================================================================
TOTAL RETURN 13.56% 27.62% 7.82% 4.60%#
============================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 3,941 $ 2,682 $ 1,427 $ 415
Ratio of Expenses to Average Net Assets (2) 1.25% 1.25% 1.25% 1.25%*
Ratio of Net Investment Income (Loss) to Average Net
Assets (2) 1.47% 1.66% 1.16% (13.29)%*
Portfolio Turnover Rate 21% 32% 62% N/A
- ----------------------------------------------------------------------------------------------------------------------------
(2) Ratios before expense limitation:
Expenses to Average Net Assets 1.41% 1.48% 1.53% 16.72%*
Net Investment Income (Loss) to Average Net Assets 1.31% 1.43% 0.88% (21.62)%*
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
+ Per share amount is based on average shares outstanding.
++ Amount is less than $0.005 per share.
^ Commencement of Operations
# Not annualized
* Annualized
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
115
<Page>
2004 ANNUAL REPORT
December 31, 2004
FINANCIAL HIGHLIGHTS
GLOBAL VALUE EQUITY PORTFOLIO
<Table>
<Caption>
CLASS A
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.84 $ 12.46 $ 15.45 $ 17.05 $ 18.32
=================================================================================================================================
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.22+ 0.19+ 0.15+ 0.13 0.26
Net Realized and Unrealized Gain (Loss) on Investments 2.02 3.42 (2.82) (1.56) 1.75
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 2.24 3.61 (2.67) (1.43) 2.01
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
Net Investment Income (0.22) (0.16) (0.20) (0.17) (0.62)
Net Realized Gain (0.05) (0.08) (0.12) -- (2.66)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.27) (0.24) (0.32) (0.17) (3.28)
- ---------------------------------------------------------------------------------------------------------------------------------
REDEMPTION FEES 0.00++ 0.01 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 17.81 $ 15.84 $ 12.46 $ 15.45 $ 17.05
=================================================================================================================================
TOTAL RETURN 14.13% 29.21% (17.34)% (8.36)% 11.75%
=================================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 68,505 $ 55,545 $ 34,297 $ 34,079 $ 40,418
Ratio of Expenses to Average Net Assets (1) 1.00% 1.00% 1.00% 1.01% 1.01%
Ratio of Expenses to Average Net Assets Excluding Bank
Overdraft Expense 1.00% 1.00% N/A 1.00% 1.00%
Ratio of Net Investment Income (Loss) to Average
Net Assets (1) 1.31% 1.44% 1.08% 0.79% 1.16%
Portfolio Turnover Rate 30% 53% 42% 51% 48%
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Ratios before expense limitation:
Expenses to Average Net Assets 1.07% 1.20% 1.12% 1.16% 1.17%
Net Investment Income (Loss) to Average Net Assets 1.24% 1.24% 0.96% 0.64% 1.00%
- ---------------------------------------------------------------------------------------------------------------------------------
<Caption>
CLASS B
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.70 $ 12.35 $ 15.33 $ 16.92 $ 18.20
=================================================================================================================================
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.17+ 0.16+ 0.12+ 0.13 0.27
Net Realized and Unrealized Gain (Loss) on Investments 2.00 3.40 (2.82) (1.58) 1.68
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 2.17 3.56 (2.70) (1.45) 1.95
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
Net Investment Income (0.18) (0.13) (0.16) (0.14) (0.57)
Net Realized Gain (0.05) (0.08) (0.12) -- (2.66)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.23) (0.21) (0.28) (0.14) (3.23)
- ---------------------------------------------------------------------------------------------------------------------------------
REDEMPTION FEES 0.00++ -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 17.64 $ 15.70 $ 12.35 $ 15.33 $ 16.92
=================================================================================================================================
TOTAL RETURN 13.78% 28.95% (17.63)% (8.58)% 11.52%
=================================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 30,598 $ 32,761 $ 26,866 $ 30,089 $ 30,196
Ratio of Expenses to Average Net Assets (2) 1.25% 1.25% 1.25% 1.26% 1.26%
Ratio of Expenses to Average Net Assets Excluding Bank
Overdraft Expense 1.25% 1.25% N/A 1.25% 1.25%
Ratio of Net Investment Income (Loss) to Average
Net Assets (2) 1.07% 1.19% 0.83% 0.78% 1.14%
Portfolio Turnover Rate 30% 53% 42% 51% 48%
- ---------------------------------------------------------------------------------------------------------------------------------
(2) Ratios before expense limitation:
Expenses to Average Net Assets 1.32% 1.45% 1.37% 1.41% 1.42%
Net Investment Income (Loss) to Average Net Assets 0.99% 0.99% 0.71% 0.64% 0.97%
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
+ Per share amount is based on average shares outstanding.
++ Amount is less than $0.005 per share.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
116
<Page>
2004 ANNUAL REPORT
December 31, 2004
FINANCIAL HIGHLIGHTS
INTERNATIONAL EQUITY PORTFOLIO
<Table>
<Caption>
CLASS A
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 19.06 $ 14.60 $ 15.59 $ 17.88 $ 19.62
=================================================================================================================================
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.30+ 0.24+ 0.19+ 0.25 0.25
Net Realized and Unrealized Gain (Loss) on Investments 3.50 4.54 (0.82) (2.00) 1.44
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 3.80 4.78 (0.63) (1.75) 1.69
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
Net Investment Income (0.37) (0.32) (0.33) (0.34) (0.04)
Net Realized Gain (1.50) -- (0.03) (0.20) (3.39)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.87) (0.32) (0.36) (0.54) (3.43)
- ---------------------------------------------------------------------------------------------------------------------------------
REDEMPTION FEES 0.00++ 0.00++ -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 20.99 $ 19.06 $ 14.60 $ 15.59 $ 17.88
=================================================================================================================================
TOTAL RETURN 19.96% 32.82% (4.02)% (9.74)% 9.29%
=================================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 7,200,606 $ 5,657,941 $ 3,953,655 $ 4,004,817 $ 4,810,852
Ratio of Expenses to Average Net Assets (1) 0.98% 1.00% 1.00% 1.00% 1.00%
Ratio of Net Investment Income (Loss) to Average
Net Assets (1) 1.48% 1.48% 1.24% 1.35% 1.45%
Portfolio Turnover Rate 41% 45% 51% 63% 53%
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Ratios before expense limitation:
Expenses to Average Net Assets N/A 1.02% 1.00% 1.01% 1.00%
Net Investment Income (Loss) to Average Net Assets N/A 1.46% 1.24% 1.34% 1.45%
- ---------------------------------------------------------------------------------------------------------------------------------
<Caption>
CLASS B
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 18.96 $ 14.53 $ 15.53 $ 17.81 $ 19.58
=================================================================================================================================
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.24+ 0.18+ 0.12+ 0.07 0.23
Net Realized and Unrealized Gain (Loss) on Investments 3.47 4.54 (0.78) (1.83) 1.39
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 3.71 4.72 (0.66) (1.76) 1.62
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
Net Investment Income (0.32) (0.29) (0.31) (0.32) --
Net Realized Gain (1.50) -- (0.03) (0.20) (3.39)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.82) (0.29) (0.34) (0.52) (3.39)
- ---------------------------------------------------------------------------------------------------------------------------------
REDEMPTION FEES 0.00++ 0.00++ -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 20.85 $ 18.96 $ 14.53 $ 15.53 $ 17.81
=================================================================================================================================
TOTAL RETURN 19.67% 32.46% (4.25)% (9.83)% 8.94%
=================================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 1,073,278 $ 733,298 $ 439,422 $ 165,439 $ 59,945
Ratio of Expenses to Average Net Assets (2) 1.23% 1.25% 1.25% 1.25% 1.25%
Ratio of Net Investment Income (Loss) to Average
Net Assets (2) 1.21% 1.23% 0.99% 0.73% 1.44%
Portfolio Turnover Rate 41% 45% 51% 63% 53%
- ---------------------------------------------------------------------------------------------------------------------------------
(2) Ratios before expense limitation:
Expenses to Average Net Assets N/A 1.27% 1.25% 1.26% 1.25%
Net Investment Income (Loss) to Average Net Assets N/A 1.21% 0.99% 0.72% 1.44%
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
+ Per share amount is based on average shares outstanding.
++ Amount is less than $0.005 per share.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
117
<Page>
2004 ANNUAL REPORT
December 31, 2004
FINANCIAL HIGHLIGHTS
INTERNATIONAL MAGNUM PORTFOLIO
<Table>
<Caption>
CLASS A
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.20 $ 8.04 $ 9.34 $ 11.56 $ 13.62
=================================================================================================================================
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.13+ 0.11+ 0.07+ 0.11 0.11
Net Realized and Unrealized Gain (Loss) on Investments 1.74 2.22 (1.31) (2.27) (1.52)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.87 2.33 (1.24) (2.16) (1.41)
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
Net Investment Income (0.24) (0.17) (0.06) (0.06) (0.16)
Net Realized Gain -- -- -- -- (0.49)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.24) (0.17) (0.06) (0.06) (0.65)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 11.83 $ 10.20 $ 8.04 $ 9.34 $ 11.56
=================================================================================================================================
TOTAL RETURN 18.45% 29.07% (13.36)% (18.71)% (10.50)%
=================================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 94,162 $ 91,087 $ 68,275 $ 120,753 $ 183,566
Ratio of Expenses to Average Net Assets (1) 1.00% 1.00% 1.01% 1.01% 1.01%
Ratio of Expenses to Average Net Assets Excluding Bank
Overdraft Expense 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of Net Investment Income (Loss) to Average
Net Assets (1) 1.20% 1.25% 0.81% 1.00% 0.84%
Portfolio Turnover Rate 49% 53% 59% 44% 56%
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Ratios before expense limitation:
Expenses to Average Net Assets 1.23% 1.29% 1.30% 1.14% 1.10%
Net Investment Income (Loss) to Average Net Assets 0.96% 0.96% 0.52% 0.87% 0.75%
- ---------------------------------------------------------------------------------------------------------------------------------
<Caption>
CLASS B
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.18 $ 8.04 $ 9.32 $ 11.52 $ 13.58
=================================================================================================================================
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.11+ 0.10+ 0.06+ 0.01 0.08
Net Realized and Unrealized Gain (Loss) on Investments 1.70 2.18 (1.31) (2.18) (1.54)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.81 2.28 (1.25) (2.17) (1.46)
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
Net Investment Income (0.22) (0.14) (0.03) (0.03) (0.12)
Net Realized Gain -- -- -- -- (0.48)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.22) (0.14) (0.03) (0.03) (0.60)
- ---------------------------------------------------------------------------------------------------------------------------------
REDEMPTION FEES 0.03 0.00++ -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 11.80 $ 10.18 $ 8.04 $ 9.32 $ 11.52
=================================================================================================================================
TOTAL RETURN 18.15% 28.49% (13.49)% (18.87)% (10.81)%
=================================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 2,605 $ 2,232 $ 6,644 $ 10,542 $ 23,474
Ratio of Expenses to Average Net Assets (2) 1.25% 1.25% 1.26% 1.26% 1.26%
Ratio of Expenses to Average Net Assets Excluding Bank
Overdraft Expense 1.25% 1.25% 1.25% 1.25% 1.25%
Ratio of Net Investment Income (Loss) to Average
Net Assets (2) 1.00% 1.00% 0.56% 0.75% 0.58%
Portfolio Turnover Rate 49% 53% 59% 44% 56%
- ---------------------------------------------------------------------------------------------------------------------------------
(2) Ratios before expense limitation:
Expenses to Average Net Assets 1.48% 1.54% 1.55% 1.39% 1.35%
Net Investment Income (Loss) to Average Net Assets 0.77% 0.71% 0.27% 0.62% 0.49%
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
+ Per share amount is based on average shares outstanding.
++ Amount is less than $0.005 per share.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
118
<Page>
2004 ANNUAL REPORT
December 31, 2004
FINANCIAL HIGHLIGHTS
INTERNATIONAL SMALL CAP PORTFOLIO
<Table>
<Caption>
CLASS A
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 20.52 $ 14.21 $ 14.82 $ 16.30 $ 19.67
=================================================================================================================================
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.24+ 0.24+ 0.15+ 0.21 0.24
Net Realized and Unrealized Gain (Loss) on
Investments ^^ 6.59 6.61 (0.59) (1.18) (0.86)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 6.83 6.85 (0.44) (0.97) (0.62)
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
Net Investment Income (0.35) (0.23) (0.13) (0.27) (0.17)
Net Realized Gain (1.89) (0.31) (0.04) (0.24) (2.61)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (2.24) (0.54) (0.17) (0.51) (2.78)
- ---------------------------------------------------------------------------------------------------------------------------------
REDEMPTION FEES 0.00++ 0.00++ -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
TRANSACTION FEES -- -- -- 0.00++ 0.03
=================================================================================================================================
NET ASSET VALUE, END OF PERIOD $ 25.11 $ 20.52 $ 14.21 $ 14.82 $ 16.30
=================================================================================================================================
TOTAL RETURN 33.53% 48.32% (2.99)% (5.88)% (2.92)%
=================================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 1,276,083 $ 899,996 $ 440,124 $ 376,981 $ 374,924
Ratio of Expenses to Average Net Assets (1) 1.15% 1.15% 1.15% 1.15% 1.16%
Ratio of Expenses to Average Net Assets Excluding Bank
Overdraft Expense 1.15% 1.15% N/A N/A 1.15%
Ratio of Net Investment Income (Loss) to Average
Net Assets (1) 1.04% 1.40% 1.00% 1.38% 1.32%
Portfolio Turnover Rate 38% 38% 34% 39% 54%
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Ratios before expense limitation:
Expenses to Average Net Assets 1.16% 1.20% 1.19% 1.19% 1.22%
Net Investment Income (Loss) to Average Net Assets 1.03% 1.35% 0.96% 1.34% 1.38%
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
+ Per share amount is based on average shares outstanding.
++ Amount is less than $0.005 per share.
^^ Includes a 0.50% transaction fee on subscriptions and redemptions of
capital shares for the years ended 2000 and 2001.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
119
<Page>
2004 ANNUAL REPORT
December 31, 2004
FINANCIAL HIGHLIGHTS
EQUITY GROWTH PORTFOLIO
<Table>
<Caption>
CLASS A
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.74 $ 12.49 $ 17.29 $ 20.51 $ 25.04
=================================================================================================================================
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.09+ 0.05+ 0.03+ 0.01 (0.01)
Net Realized and Unrealized Gain (Loss) on Investments 1.13 3.25 (4.80) (3.08) (2.76)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.22 3.30 (4.77) (3.07) (2.77)
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
Net Investment Income (0.08) (0.05) (0.03) -- --
Net Realized Gain -- -- -- (0.15) (1.76)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.08) (0.05) (0.03) (0.15) (1.76)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 16.88 $ 15.74 $ 12.49 $ 17.29 $ 20.51
=================================================================================================================================
TOTAL RETURN 7.75% 26.41%^ (27.64)% (14.97)% (11.78)%
=================================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 554,097 $ 589,698 $ 432,207 $ 603,652 $ 886,824
Ratio of Expenses to Average Net Assets (1) 0.77% 0.80% 0.80% 0.80% 0.80%
Ratio of Net Investment Income (Loss) to Average
Net Assets (1) 0.58% 0.34% 0.21% 0.05% 0.79%
Portfolio Turnover Rate 179% 131% 143% 94% 71%
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Ratios before expense limitation:
Expenses to Average Net Assets N/A 0.82% 0.81% 0.81% 0.80%
Net Investment Income (Loss) to Average Net Assets N/A 0.32% 0.21% 0.06% (0.06)%
- ---------------------------------------------------------------------------------------------------------------------------------
<Caption>
CLASS B
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.55 $ 12.34 $ 17.08 $ 20.32 $ 24.90
=================================================================================================================================
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.05+ 0.01+ (0.00)+** (0.04) (0.04)
Net Realized and Unrealized Gain (Loss) on Investments 1.11 3.21 (4.74) (3.05) (2.78)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.16 3.22 (4.74) (3.09) (2.82)
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
Net Investment Income (0.04) (0.01) -- -- --
Net Realized Gain -- -- -- (0.15) (1.76)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.04) (0.01) -- (0.15) (1.76)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 16.67 $ 15.55 $ 12.34 $ 17.08 $ 20.32
=================================================================================================================================
TOTAL RETURN 7.45% 26.13%^ (27.75)% (15.26)% (12.01)%
=================================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 202,893 $ 199,591 $ 156,501 $ 223,646 $ 350,556
Ratio of Expenses to Average Net Assets(2) 1.02% 1.05% 1.05% 1.05% 1.05%
Ratio of Net Investment Income (Loss) to Average
Net Assets(2) 0.33% 0.09% (0.04)% (0.22)% (1.04)%
Portfolio Turnover Rate 179% 131% 143% 94% 71%
- ---------------------------------------------------------------------------------------------------------------------------------
(2) Ratios before expense limitation:
Expenses to Average Net Assets N/A 1.07% 1.06% 1.06% 1.05%
Net Investment Income (Loss) to Average Net Assets N/A 0.07% (0.04)% (0.22)% (0.30)%
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
+ Per share amount is based on average shares outstanding.
** Amount is less than $0.005 per share.
^ In 2003, performance was positively impacted by approximately 1.34%, due to
the receipt of proceeds from the settlement of class action suits
involving, primarily, one of the Portfolio's holdings. This was a one-time
settlement, and as a result, the impact on the NAV and consequently the
performance will not likely be repeated in the future. Had these
settlements not occurred, the total return for Class A shares and Class B
shares would have been approximately 25.07% and 24.79%, respectively.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
120
<Page>
2004 ANNUAL REPORT
December 31, 2004
FINANCIAL HIGHLIGHTS
FOCUS EQUITY PORTFOLIO
<Table>
<Caption>
CLASS A
------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.79 $ 9.02 $ 12.67 $ 15.31 $ 19.70
==================================================================================================================================
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.04+ 0.02+ 0.00+++ (0.03) (0.05)
Net Realized and Unrealized Gain (Loss) on Investments 0.78 2.77 (3.65) (2.28) (2.05)
- ----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.82 2.79 (3.65) (2.31) (2.10)
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
Net Investment Income (0.02) (0.02) -- -- --
Net Realized Gain -- -- -- (0.33) (2.29)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.02) (0.02) -- (0.33) (2.29)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.59 $ 11.79 $ 9.02 $ 12.67 $ 15.31
==================================================================================================================================
TOTAL RETURN 7.00% 30.99%^ (28.81)% (15.22)% (11.66)%
==================================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 52,757 $ 61,420 $ 51,347 $ 85,204 $ 126,531
Ratio of Expenses to Average Net Assets (1) 1.00% 1.00% 1.00% 1.01% 1.00%
Ratio of Expenses to Average Net Assets Excluding Bank
Overdraft Expense 1.00% 1.00% N/A 1.00% 1.00%
Ratio of Net Investment Income (Loss) to Average
Net Assets (1) 0.35% 0.22% 0.02% (0.21)% (0.27)%
Portfolio Turnover Rate 163% 160% 173% 95% 93%
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Ratios before expense limitation:
Expenses to Average Net Assets 1.11% 1.14% 1.09% 1.08% 1.04%
Net Investment Income (Loss) to Average Net Assets 0.24% 0.08% (0.07)% (0.28)% (0.29)%
- ----------------------------------------------------------------------------------------------------------------------------------
<Caption>
CLASS B
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.57 $ 8.85 $ 12.45 $ 15.09 $ 19.50
=================================================================================================================================
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.02+ (0.00)+++ (0.03)+ (0.07) (0.08)
Net Realized and Unrealized Gain (Loss) on Investments 0.75 2.72 (3.57) (2.24) (2.04)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.77 2.72 (3.60) (2.31) (2.12)
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
Net Realized Gain -- -- -- (0.33) (2.29)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.34 $ 11.57 $ 8.85 $ 12.45 $ 15.09
=================================================================================================================================
TOTAL RETURN 6.75% 30.62%^ (28.92)% (15.45)% (11.89)%
=================================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 8,559 $ 8,156 $ 6,414 $ 13,143 $ 18,876
Ratio of Expenses to Average Net Assets (2) 1.25% 1.25% 1.25% 1.26% 1.25%
Ratio of Expenses to Average Net Assets Excluding Bank
Overdraft Expense 1.25% 1.25% N/A 1.25% 1.25%
Ratio of Net Investment Income (Loss) to Average
Net Assets (2) 0.18% (0.03)% (0.23)% (0.45)% (0.52)%
Portfolio Turnover Rate 163% 160% 173% 95% 93%
- ---------------------------------------------------------------------------------------------------------------------------------
(2) Ratios before expense limitation:
Expenses to Average Net Assets 1.36% 1.39% 1.34% 1.33% 1.29%
Net Investment Income (Loss) to Average Net Assets 0.07% (0.17)% (0.32)% (0.53)% (0.54)%
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
+ Per share amount is based on average shares outstanding.
++ Amount is less than $0.005 per share.
^ In 2003, performance was positively impacted by approximately 5.64%, due to
the receipt of proceeds from the settlement of class action suits
involving, primarily, one of the Portfolio's holdings. This was a one-time
settlement, and as a result, the impact on the NAV and consequently the
performance will not likely be repeated in the future. Had these
settlements not occurred, the 2003 total return for Class A shares and
Class B shares would have been approximately 25.35% and 24.98%,
respectively.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
121
<Page>
2004 ANNUAL REPORT
December 31, 2004
FINANCIAL HIGHLIGHTS
SMALL COMPANY GROWTH PORTFOLIO
<Table>
<Caption>
CLASS A
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.81 $ 7.50 $ 9.65 $ 10.99 $ 13.32
=================================================================================================================================
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.09)+ (0.09)+ (0.07)+ (0.06) (0.08)
Net Realized and Unrealized Gain (Loss) on Investments 2.16 3.40 (2.08) (1.28) (0.69)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 2.07 3.31 (2.15) (1.34) (0.77)
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
Net Realized Gain (0.38) -- -- (0.00)++ (1.56)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.50 $ 10.81 $ 7.50 $ 9.65 $ 10.99
=================================================================================================================================
TOTAL RETURN 19.17% 44.13% (22.28)% (12.18)% (6.64)%
=================================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 651,276 $ 299,198 $ 74,554 $ 82,300 $ 89,367
Ratio of Expenses to Average Net Assets (1) 1.10% 1.10% 1.10% 1.10% 1.25%
Ratio of Net Investment Income (Loss) to Average Net
Assets (1) (0.79)% (0.93)% (0.82)% (0.69)% (0.68)%
Portfolio Turnover Rate 111% 160% 133% 144% 129%
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Ratios before expense limitation:
Expenses to Average Net Assets 1.16% 1.26% 1.22% 1.25% 1.30%
Net Investment Income (Loss) to Average Net Assets (0.85)% (1.09)% (0.94)% (0.83)% (0.73)%
- ---------------------------------------------------------------------------------------------------------------------------------
<Caption>
CLASS B
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.43 $ 7.26 $ 9.36 $ 10.68 $ 13.01
=================================================================================================================================
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.11)+ (0.10)+ (0.09)+ (0.06) (0.10)
Net Realized and Unrealized Gain (Loss) on Investments 2.08 3.27 (2.01) (1.26) (0.67)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.97 3.17 (2.10) (1.32) (0.77)
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
Net Realized Gain (0.38) -- -- (0.00)++ (1.56)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.02 $ 10.43 $ 7.26 $ 9.36 $ 10.68
=================================================================================================================================
TOTAL RETURN 18.79% 43.80% (22.44)% (12.35)% (6.81)%
=================================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 713,733 $ 484,136 $ 215,899 $ 184,099 $ 91,069
Ratio of Expenses to Average Net Assets (2) 1.35% 1.35% 1.35% 1.35% 1.50%
Ratio of Net Investment Income (Loss) to Average
Net Assets (2) (1.02)% (1.18)% (1.07)% (0.97)% (0.97)%
Portfolio Turnover Rate 111% 160% 133% 144% 129%
- ---------------------------------------------------------------------------------------------------------------------------------
(2) Ratios before expense limitation:
Expenses to Average Net Assets 1.41% 1.51% 1.47% 1.50% 1.55%
Net Investment Income (Loss) to Average Net Assets (1.09)% (1.34)% (1.19)% (1.12)% (1.02)%
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
+ Per share amount is based on average shares outstanding.
++ Amount is less than $0.005 per share.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
122
<Page>
2004 ANNUAL REPORT
December 31, 2004
FINANCIAL HIGHLIGHTS
U.S. REAL ESTATE PORTFOLIO
<Table>
<Caption>
CLASS A
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 17.92 $ 13.55 $ 14.63 $ 14.50 $ 11.84
=================================================================================================================================
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.40+ 0.48+ 0.52+ 0.60 0.51
Net Realized and Unrealized Gain (Loss) on Investments 6.17 4.55 (0.48) 0.71 2.94
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 6.57 5.03 0.04 1.31 3.45
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
Net Investment Income (0.42) (0.48) (0.52) (0.57) (0.56)
Net Realized Gain (0.86) (0.18) (0.60) (0.61) (0.23)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.28) (0.66) (1.12) (1.18) (0.79)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 23.21 $ 17.92 $ 13.55 $ 14.63 $ 14.50
=================================================================================================================================
TOTAL RETURN 37.28% 37.61% 0.18% 9.27% 29.65%
=================================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 1,097,718 $ 897,551 $ 655,274 $ 696,871 $ 584,263
Ratio of Expenses to Average Net Assets (1) 0.97% 1.00% 0.99% 1.00% 1.00%
Ratio of Net Investment Income (Loss) to Average
Net Assets (1) 2.02% 3.08% 3.49% 4.19% 4.13%
Portfolio Turnover Rate 21% 17% 47% 33% 31%
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Ratios before expense limitation:
Expenses to Average Net Assets N/A 1.01% 0.99% 1.01% 1.01%
Net Investment Income (Loss) to Average Net Assets N/A 3.07% 3.49% 4.18% 4.11%
- ---------------------------------------------------------------------------------------------------------------------------------
<Caption>
CLASS B
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 17.80 $ 13.47 $ 14.55 $ 14.45 $ 11.80
=================================================================================================================================
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.35+ 0.45+ 0.45+ 0.56 0.49
Net Realized and Unrealized Gain (Loss) on Investments 6.13 4.50 (0.45) 0.68 2.92
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 6.48 4.95 -- 1.24 3.41
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
Net Investment Income (0.38) (0.44) (0.48) (0.53) (0.53)
Net Realized Gain (0.86) (0.18) (0.60) (0.61) (0.23)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.24) (0.62) (1.08) (1.14) (0.76)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 23.04 $ 17.80 $ 13.47 $ 14.55 $ 14.45
=================================================================================================================================
TOTAL RETURN 36.95% 37.23% (0.07)% 8.78% 29.36%
=================================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 149,180 $ 70,146 $ 31,584 $ 23,198 $ 20,235
Ratio of Expenses to Average Net Assets (2) 1.22% 1.25% 1.24% 1.25% 1.25%
Ratio of Net Investment Income (Loss) to Average
Net Assets (2) 1.76% 2.83% 3.24% 3.96% 3.83%
Portfolio Turnover Rate 21% 17% 47% 33% 31%
- ---------------------------------------------------------------------------------------------------------------------------------
(2) Ratios before expense limitation:
Expenses to Average Net Assets N/A 1.26% 1.24% 1.26% 1.26%
Net Investment Income (Loss) to Average Net Assets N/A 2.82% 3.24% 3.95% 3.81%
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
+ Per share amount is based on average shares outstanding.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
123
<Page>
2004 ANNUAL REPORT
December 31, 2004
FINANCIAL HIGHLIGHTS
VALUE EQUITY PORTFOLIO
<Table>
<Caption>
CLASS A
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.30 $ 7.21 $ 9.68 $ 10.32 $ 9.63
=================================================================================================================================
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.12+ 0.13+ 0.14+ 0.15+ 0.16
Net Realized and Unrealized Gain (Loss) on Investments 1.23 2.09 (2.47) (0.31) 1.54
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.35 2.22 (2.33) (0.16) 1.70
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
Net Investment Income (0.13) (0.13) (0.14) (0.15) (0.16)
Net Realized Gain -- -- -- (0.33) (0.85)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.13) (0.13) (0.14) (0.48) (1.01)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.52 $ 9.30 $ 7.21 $ 9.68 $ 10.32
=================================================================================================================================
TOTAL RETURN 14.56% 31.05% (24.22)% (1.55)% 18.08%
=================================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 90,938 $ 108,997 $ 76,452 $ 101,691 $ 70,454
Ratio of Expenses to Average Net Assets (1) 0.70% 0.70% 0.70% 0.70% 0.70%
Ratio of Net Investment Income (Loss) to Average
Net Assets (1) 1.28% 1.62% 1.69% 1.56% 1.64%
Portfolio Turnover Rate 84% 130% 45% 50% 62%
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Ratios before expense limitation:
Expenses to Average Net Assets 0.74% 0.77% 0.76% 0.79% 0.81%
Net Investment Income (Loss) to Average Net Assets 1.24% 1.55% 1.63% 1.47% 1.54%
- ---------------------------------------------------------------------------------------------------------------------------------
<Caption>
CLASS B
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.31 $ 7.21 $ 9.67 $ 10.32 $ 9.60
=================================================================================================================================
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.10+ 0.11++ 0.12+ 0.13+ 0.1
Net Realized and Unrealized Gain (Loss) on Investments 1.20 2.10 (2.46) (0.32) 1.56
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.30 2.21 (2.34) (0.19) 1.68
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
Net Investment Income (0.10) (0.11) (0.12) (0.13) (0.11)
Net Realized Gain -- -- -- (0.33) (0.85)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.10) (0.11) (0.12) (0.46) (0.96)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.51 $ 9.31 $ 7.21 $ 9.67 $ 10.32
=================================================================================================================================
TOTAL RETURN 14.07% 30.86% (24.32)% (1.89)% 17.92%
=================================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 75,189 $ 72,180 $ 46,757 $ 24,597 $ 891
Ratio of Expenses to Average Net Assets (2) 0.95% 0.95% 0.95% 0.95% 0.95%
Ratio of Net Investment Income (Loss) to Average
Net Assets (2) 1.05% 1.37% 1.44% 1.25% 1.35%
Portfolio Turnover Rate 84% 130% 45% 50% 62%
- ---------------------------------------------------------------------------------------------------------------------------------
(2) Ratios before expense limitation:
Expenses to Average Net Assets 0.99% 1.02% 1.01% 1.04% 1.11%
Net Investment Income (Loss) to Average Net Assets 1.01% 1.30% 1.38% 1.17% 1.24%
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
+ Per share amount is based on average shares outstanding.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
124
<Page>
2004 ANNUAL REPORT
December 31, 2004
FINANCIAL HIGHLIGHTS
EMERGING MARKETS DEBT PORTFOLIO
<Table>
<Caption>
CLASS A
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 3.53 $ 2.95 $ 2.95 $ 2.88 $ 3.00
=================================================================================================================================
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Investment Income 0.26+ 0.25+ 0.27+ 0.21 0.55
Net Realized and Unrealized Gain (Loss) on Investments 0.10 0.59 0.06 0.09 (0.17)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.36 0.84 0.33 0.30 0.38
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
Net Investment Income (0.25) (0.26) (0.33) (0.23) (0.50)
- ---------------------------------------------------------------------------------------------------------------------------------
REDEMPTION FEES 0.00++ -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 3.64 $ 3.53 $ 2.95 $ 2.95 $ 2.88
=================================================================================================================================
TOTAL RETURN 10.07% 28.46% 11.29% 10.57% 12.81%
=================================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 81,109 $ 54,647 $ 48,769 $ 52,561 $ 47,080
Ratio of Expenses to Average Net Assets(1) 1.04%# 1.16% 1.06% 1.13% 1.15%
Ratio of Expenses to Average Net Assets Excluding Bank
Overdraft Expense 1.04% 1.13% N/A N/A 1.10%
Ratio of Net Investment Income to Average Net Assets(1) 7.33% 7.48% 8.79% 8.22% 13.33%
Portfolio Turnover Rate 151% 216% 157% 316% 375%
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Ratios before expense limitation:
Expenses to Average Net Assets 1.07% N/A N/A N/A N/A
Net Investment Income (Loss) to Average Net Assets 7.30% N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------------
<Caption>
CLASS B
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 3.60 $ 3.00 $ 3.01 $ 2.92 $ 3.03
=================================================================================================================================
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Investment Income 0.26+ 0.25+ 0.26+ 0.30 0.20
Net Realized and Unrealized Gain (Loss) on Investments 0.10 0.60 0.05 0.02 0.17
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.36 0.85 0.31 0.32 0.37
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
Net Investment Income (0.24) (0.25) (0.32) (0.23) (0.48)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 3.72 $ 3.60 $ 3.00 $ 3.01 $ 2.92
=================================================================================================================================
TOTAL RETURN 9.90% 28.34% 10.34% 10.50% 12.50%
=================================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 437 $ 429 $ 343 $ 429 $ 387
Ratio of Expenses to Average Net Assets(2) 1.29%# 1.41% 1.31% 1.38% 1.40%
Ratio of Expenses to Average Net Assets Excluding Bank
Overdraft Expense 1.29% 1.38% N/A N/A 1.35%
Ratio of Net Investment Income to Average Net Assets(2) 7.07% 7.23% 8.54% 7.97% 13.28%
Portfolio Turnover Rate 151% 216% 157% 316% 375%
- ---------------------------------------------------------------------------------------------------------------------------------
(2) Ratios before expense limitation:
Expenses to Average Net Assets 1.32% N/A N/A N/A N/A
Net Investment Income (Loss) to Average Net Assets 7.04% N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
+ Per share amount is based on average shares outstanding.
++ Amount is less than $0.005 per share.
# Effective May 1, 2004, the Adviser has agreed to limit the ratio of
expenses to average net assets to the maximum ratio of 1.00% for Class A
shares and 1.25% for Class B shares. Prior to May 1, 2004, these maximum
ratios were 1.75% for Class A shares and 2.00% for Class B shares.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
125
<Page>
2004 ANNUAL REPORT
December 31, 2004
FINANCIAL HIGHLIGHTS
MONEY MARKET PORTFOLIO
<Table>
<Caption>
CLASS A
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
=================================================================================================================================
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Investment Income 0.009 0.007+ 0.013 0.038 0.060
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
Net Investment Income (0.009) (0.007) (0.013) (0.038) (0.060)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
=================================================================================================================================
TOTAL RETURN 0.93% 0.64% 1.30% 3.82% 6.06%
=================================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 546,866 $ 795,399 $ 1,369,935 $ 2,706,283 $ 3,026,412
Ratio of Expenses to Average Net Assets 0.47% 0.51% 0.48% 0.48% 0.48%
Ratio of Net Investment Income to Average Net Assets 0.87% 0.69% 1.32% 3.90% 6.07%
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
MUNICIPAL MONEY MARKET PORTFOLIO
<Table>
<Caption>
CLASS A
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
=================================================================================================================================
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Investment Income 0.008 0.005+ 0.009 0.022 0.035
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
Net Investment Income (0.008) (0.005) (0.009) (0.022) (0.035)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
=================================================================================================================================
TOTAL RETURN 0.75% 0.50% 0.90% 2.23% 3.57%
=================================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 449,318 $ 511,551 $ 910,426 $ 1,346,818 $ 1,476,436
Ratio of Expenses to Average Net Assets 0.48% 0.50% 0.48% 0.49% 0.48%
Ratio of Net Investment Income to Average Net Assets 0.74% 0.54% 0.90% 2.25% 3.50%
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
+ Per share amount is based on average shares outstanding.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
126
<Page>
2004 ANNUAL REPORT
December 31, 2004
NOTES TO FINANCIAL STATEMENTS
Morgan Stanley Institutional Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 (the "1940 Act"), as amended, as an open-end
management investment company. The Fund is comprised of sixteen separate,
active, diversified and non-diversified portfolios (individually referred to as
a "Portfolio", collectively as the "Portfolios"). Each Portfolio (with the
exception of the International Small Cap, Money Market and Municipal Money
Market Portfolios) offers two classes of shares - Class A and Class B. Both
classes of shares have identical voting rights (except that shareholders of a
Class have exclusive voting rights regarding any matter relating solely to that
Class of shares), dividend, liquidation and other rights.
For detailed descriptions of the investment objectives of each of the Portfolios
and other related information, please refer to the Prospectuses of the Fund.
Generally, the investment objective of the domestic and international equity
portfolios is to seek capital appreciation by investing in equity and
equity-related securities. The investment objective of the international fixed
income portfolio is primarily to seek a high total return consistent with
preservation of capital. The investment objective of the money market portfolios
is to seek current income and preserve capital.
The International Equity Portfolio is authorized to issue 500 million shares per
class but is currently closed to new accounts.
On September 26, 2003, the net assets of the Small Cap Growth Portfolio's
(formerly a Portfolio of Morgan Stanley Institutional Fund Trust) Institutional
and Adviser Class shares were merged into the Small Company Growth Portfolio's
Class A and B shares, respectively, through a tax-free exchange. In exchange for
the $100,203,000 in net assets received, including $13,556,000 in unrealized
appreciation, 10,221,445 Class A and 212,563 Class B shares of the Small Company
Growth Portfolio were issued. Prior to the combination, the net assets of the
Small Company Growth Portfolio totaled $497,416,000. Immediately after the
combination, the net assets of the Small Company Growth Portfolio totaled
$597,618,000.
On May 27, 2004, the Asian Real Estate, European Value Equity, Japanese Value
Equity and Latin American Portfolios were liquidated. On August 20, 2004, the
Technology Portfolio was liquidated.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with U.S. generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. U.S. generally accepted accounting
principles may require management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual results
may differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange are valued
at the latest quoted sales price on the valuation date. Equity securities
listed or traded on NASDAQ, for which market quotations are available, are
valued at the NASDAQ Official Closing Price. Securities listed on a foreign
exchange are valued at their closing price. Unlisted securities and listed
securities not traded on the valuation date for which market quotations are
readily available are valued at the mean between the current bid and asked
prices obtained from reputable brokers. Bonds and other fixed income
securities may be valued according to the broadest and most representative
market. In addition, bonds and other fixed income securities may be valued
on the basis of prices provided by a pricing service. The prices provided
by a pricing service take into account broker dealer market price
quotations for institutional size trading in similar groups of securities,
security quality, maturity, coupon and other security characteristics as
well as any developments related to the specific securities. Debt
securities purchased with remaining maturities of 60 days or less are
valued at amortized cost, if it approximates value. Securities owned by the
Money Market and Municipal Money Market Portfolios are stated at amortized
cost, which approximates market value.
All other securities and investments for which market values are not
readily available, including restricted securities, and those securities
for which it is inappropriate to determine prices in accordance with the
aforementioned procedures, are valued at fair value as determined in good
faith under procedures adopted by the Board of Directors, although the
actual calculations may be done by others. Factors considered in making
this determination may include, but are not limited to, information
obtained by contacting the issuer, analysts, or the appropriate stock
exchange (for exchange-traded securities), analysis of the issuer's
financial statements or other available documents and, if necessary,
available information concerning other securities in similar circumstances.
Most foreign markets close before the New York Stock Exchange (NYSE).
Occasionally, developments that could affect 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 these
developments are expected to materially affect the value of the securities,
the valuations may be adjusted to reflect the estimated fair value as of
the close of the NYSE, as determined in
127
<Page>
2004 ANNUAL REPORT
December 31, 2004
NOTES TO FINANCIAL STATEMENTS (CONT'D)
good faith under procedures established by the Board of Directors.
2. REPURCHASE AGREEMENTS: The Portfolios may enter into repurchase agreements
under which a Portfolio lends excess cash and takes possession of
securities with an agreement that the counterparty will repurchase such
securities. In connection with transactions in repurchase agreements, a
bank as custodian for the Fund takes possession of the underlying
securities which are held as collateral, with a market value at least equal
to the amount of the repurchase transaction, including principal and
accrued interest. To the extent that any repurchase transaction exceeds one
business day, the value of the collateral is marked-to-market on a daily
basis to determine the adequacy of the collateral. In the event of default
on the obligation to repurchase, the Fund has the right to liquidate the
collateral and apply the proceeds in satisfaction of the obligation. In the
event of default or bankruptcy by the counterparty to the agreement,
realization and/or retention of the collateral or proceeds may be subject
to legal proceedings. The Portfolios, along with other affiliated
investment companies, may utilize a joint trading account for the purpose
of entering into repurchase agreements.
3. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: The books and records
of the Fund are maintained in U.S. dollars. Foreign currency amounts are
translated into U.S. dollars at the mean of the bid and asked prices of
such currencies against U.S. dollars last quoted by a major bank as
follows:
- investments, other assets and liabilities-at the prevailing rates of
exchange on the valuation date;
- investment transactions, investment income and expenses-at the prevailing
rates of exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange
rates and market values at the close of the period, 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 fluctuations arising from
changes in the market prices of the securities held at period end.
Similarly, the Fund does not isolate the effect of changes in foreign
exchange rates from the fluctuations arising from changes in the market
prices of securities sold during the period. Accordingly, realized and
unrealized foreign currency gains (losses) on investments in securities are
included in the reported net realized and unrealized gains (losses) on
investment transactions and balances. However, pursuant to U.S. Federal
income tax regulations, gains and losses from certain foreign currency
transactions and the foreign currency portion of gains and losses realized
on sales and maturities of foreign denominated debt securities are treated
as ordinary income for U.S. Federal income tax purposes.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from foreign currency exchange contracts,
disposition of foreign currencies, currency gains or losses realized
between the trade and settlement dates on securities transactions, and the
difference between the amount of investment income and foreign taxes
recorded on the Fund's books and the U.S. dollar equivalent amounts
actually received or paid. Net unrealized currency gains (losses) from
valuing foreign currency denominated assets and liabilities at period end
exchange rates are reflected as a component of unrealized appreciation
(depreciation) on the Statements of Assets and Liabilities. The change in
net unrealized currency gains (losses) for the period is reflected on the
Statements of Operations.
Foreign security and currency transactions may involve certain
considerations and risks not typically associated with those of U.S. dollar
denominated transactions as a result of, among other factors, fluctuations
of exchange rates in relation to the U.S. dollar, the possibility of lower
levels of government supervision and regulation of foreign securities
markets and the possibility of political or economic instability.
Prior governmental approval for foreign investments may be required under
certain circumstances in some countries, and the extent of foreign
investments in domestic companies may be subject to limitation in other
countries. Foreign ownership limitations also may be imposed by the
charters of individual companies to prevent, among other concerns,
violations of foreign investment limitations. As a result, an additional
class of shares (identified as "Foreign" in the Portfolio of Investments)
may be created and offered for investment. The "local" and "foreign shares"
market values may differ. In the absence of trading of the foreign shares
in such markets, the Fund values the foreign shares at the closing exchange
price of the local shares. Such securities, if any, are identified as fair
valued on the Portfolio of Investments.
4. FOREIGN CURRENCY EXCHANGE CONTRACTS: Certain Portfolios may enter into
foreign currency exchange contracts generally to attempt to protect
securities and related receivables and payables against changes in future
foreign currency exchange rates and, in certain situations, to gain
exposure to foreign currencies. A foreign currency exchange contract is an
agreement between two parties to buy or sell currency at a set price on a
future date. The
128
<Page>
2004 ANNUAL REPORT
December 31, 2004
NOTES TO FINANCIAL STATEMENTS (CONT'D)
market value of the contract will fluctuate with changes in currency
exchange rates. The contract is marked-to-market daily and the change in
market value is recorded by the Portfolios as unrealized gain or loss. The
Portfolios record realized gains or losses when the contract is closed
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. Credit risk may arise
upon entering into these contracts from the potential inability of
counterparties to meet the terms of their contracts and is generally
limited to the amount of the unrealized gains on the contracts, if any, at
the date of default. Risks may also arise from unanticipated movements in
the value of a foreign currency relative to the U.S. dollar.
5. LOAN AGREEMENTS: Certain Portfolios may invest in fixed and floating rate
loans ("Loans") arranged through private negotiations between an issuer of
sovereign debt obligations and one or more financial institutions
("Lenders") deemed to be creditworthy by the investment adviser. A
Portfolio's investments in Loans may be in the form of participations in
Loans ("Participations") or assignments of all or a portion of Loans
("Assignments") from third parties. A Portfolio's investment in
Participations typically results in the Portfolio having a contractual
relationship with only the Lender and not with the borrower. The Portfolios
have the right to receive payments of principal, interest and any fees to
which it is entitled only upon receipt by the Lender of the payments from
the borrower. The Portfolios generally have no right to enforce compliance
by the borrower under the terms of the loan agreement. As a result, the
Portfolio may be subject to the credit risk of both the borrower and the
Lender that is selling the Participation and any intermediaries between the
Lender and the Portfolio. When a Portfolio purchases Assignments from
Lenders, it typically acquires direct rights against the borrower on the
Loan. Because Assignments are arranged through private negotiations between
potential assignees and potential assignors, the rights and obligations
acquired by the Portfolio as the purchaser of an Assignment may differ
from, and be more limited than, those held by the assigning Lender.
6. SHORT SALES: Certain Portfolios may sell securities short. A short sale is
a transaction in which a Portfolio sells securities it may or may not own,
but has borrowed, in anticipation of a decline in the market price of the
securities. The Portfolio is obligated to replace the borrowed securities
at the market price at the time of replacement. The Portfolio may have to
pay a premium to borrow the securities as well as pay any dividends or
interest payable on the securities until they are replaced. Dividends and
interest payable on such securities sold short are included in dividend
expense and interest expense, respectively, in the Statements of
Operations. A Portfolio's obligation to replace the securities borrowed in
connection with a short sale will generally be secured by collateral
deposited with the broker that consists of cash, U.S. government securities
or other liquid, high grade debt obligations. In addition, the Portfolio
will either designate on the Portfolio's records or place in a segregated
account with its Custodian an amount of cash, U.S. government securities or
other liquid high grade debt obligations equal to the difference, if any,
between (1) the market value of the securities sold at the time they were
sold short and (2) cash, U.S. government securities or other liquid high
grade debt obligations deposited as collateral with the broker in
connection with the short sale. Short sales by the Portfolios involve
certain risks and special considerations. Possible losses from short sales
differ from losses that could be incurred from the purchase of a security,
because losses from short sales may be unlimited, whereas losses from
purchases cannot exceed the total amount invested.
7. SECURITIES LENDING: Certain Portfolios may lend securities to qualified
financial institutions, such as broker-dealers, to earn additional income.
Any increase or decrease in the fair value of the securities loaned that
might occur and any interest earned or dividends declared on those
securities during the term of the loan would remain in the Portfolio.
Portfolios that lend securities receive cash or securities as collateral in
an amount equal to or exceeding 100% of the current fair value of the
loaned securities. The collateral is marked to market daily, by the
securities lending agent, to ensure that a minimum of 100% collateral
coverage is maintained.
Based on pre-established guidelines, the securities lending agent invests
any cash collateral that is received in high-quality short-term
investments. Securities lending income is generated from the earnings on
the invested collateral and borrowing fees, less any rebates owed to the
borrowers and compensation to the lending agent, and is included in the
Portfolios' Statements of Operations in interest income. Risks in
securities lending transactions are that a borrower may not provide
additional collateral when required or return the securities when due, and
that the value of the short-term investments will be less than the amount
of cash collateral plus any rebate that is required to be returned to the
borrower.
129
<Page>
2004 ANNUAL REPORT
December 31, 2004
NOTES TO FINANCIAL STATEMENTS (CONT'D)
The value of loaned securities and related collateral outstanding at December
31, 2004 are as follows:
<Table>
<Caption>
VALUE OF
LOANED VALUE OF
SECURITIES COLLATERAL
PORTFOLIO (000) (000)
- -------------------------------------------------------------
Active International Allocation $ 62,888 $ 66,163
Emerging Markets 67,299 69,758
International Equity 1,006,675 1,058,940
International Magnum 10,169 10,703
</Table>
The following Portfolios had income from securities lending (after rebates to
borrowers and fee paid to securities lending agent):
<Table>
<Caption>
NET INTEREST
EARNED BY
PORTFOLIO
PORTFOLIO (000)
- -------------------------------------------------------------
Active International Allocation $ 252
Emerging Markets 531
International Equity 4,444
International Magnum 58
</Table>
8. STRUCTURED SECURITIES: The Emerging Markets Debt Portfolio may invest in
interests in entities organized and operated solely for the purpose of
restructuring the investment characteristics of sovereign debt obligations.
This type of restructuring involves the deposit with or purchase by an
entity of specified instruments and the issuance by that entity of one or
more classes of securities ("Structured Securities") backed by, or
representing interests in, the underlying instruments. Structured
Securities generally will expose the Portfolio to credit risks of the
underlying instruments as well as of the issuer of the structured security.
Structured securities are typically sold in private placement transactions
with no active trading market. Investments in Structured Securities may be
more volatile than their underlying instruments; however, any loss is
limited to the amount of the original investment.
9. FUTURES: Certain Portfolios may purchase and sell futures contracts.
Futures contracts provide for the sale by one party and purchase by another
party of a specified amount of a specified security, index, instrument or
basket of instruments. Futures contracts (secured by cash, government
securities or other high grade liquid investments deposited with brokers or
custodians as "initial margin") are valued based upon their quoted daily
settlement prices; changes in initial settlement value (represented by cash
paid to or received from brokers as "variation margin") are accounted for
as unrealized appreciation (depreciation). When futures contracts are
closed, the difference between the opening value at the date the contract
was entered into and the value at closing is recorded as a realized gain or
loss in the Statements of Operations. Due from (to) broker includes both
initial margin and variation margin, as stated in the Statements of Assets
and Liabilities.
Certain Portfolios may use futures contracts in order to manage their
exposure to the stock and bond markets, to hedge against unfavorable
changes in the value of securities or to remain fully invested and to
reduce transaction costs. Futures contracts involve market risk in excess
of the amounts recognized in the Statements of Assets and Liabilities.
Risks arise from the possible movements in security values underlying these
instruments. The change in value of futures contracts primarily corresponds
with the value of their underlying instruments, which may not correlate
with the change in value of hedged investments.
10. PURCHASED AND WRITTEN OPTIONS: Certain Portfolios may write covered call
and put options on portfolio securities and other financial instruments.
Premiums are received and are recorded as liabilities. The liabilities are
subsequently adjusted to reflect the current value of the options written.
Premiums received from writing options which expire are treated as realized
gains. Premiums received from writing options which are exercised or are
closed are added to or offset against the proceeds or amount paid on the
transaction to determine the net realized gain or loss. By writing a
covered call option, a Portfolio, in exchange for the premium, foregoes the
opportunity for capital appreciation above the exercise price should the
market price of the underlying security increase. By writing a put option,
a Portfolio, in exchange for the premium, accepts the risk of having to
purchase a security at an exercise price that is above the current market
price.
Certain Portfolios may purchase call and put options on their portfolio
securities or other financial instruments. Each Portfolio may purchase call
options to protect against an increase in the price of the security or
financial instrument it anticipates purchasing. Each Portfolio may purchase
put options on securities which it holds or other financial instruments to
protect against a decline in the value of the security or financial
instrument or to close out covered written put positions. Risks may arise
from an imperfect correlation between the change in market value of the
securities held by the Portfolio and the prices of options relating to the
securities purchased or sold by the Portfolio and from the possible lack of
a liquid secondary market for an option. The maximum exposure to loss for
any purchased option is limited to the premium initially paid for the
option.
130
<Page>
2004 ANNUAL REPORT
December 31, 2004
NOTES TO FINANCIAL STATEMENTS (CONT'D)
11. UNFUNDED COMMITMENTS: Subject to the terms of a Subscription Agreement
between the U.S. Real Estate Portfolio and Cabot Industrial Value Fund,
Inc., the Portfolio has made a subscription commitment of $5,000,000 for
which it will receive 10,000 shares of common stock. As of December 31,
2004, Cabot Industrial Value Fund, Inc. has drawn down $952,000, which
represents 19.0% of the commitment.
Subject to the terms of a Subscription Agreement between the U.S. Real
Estate Portfolio and BRCP REIT LLC I, the Portfolio has made a subscription
commitment of $7,000,000 for which it will receive 7,000,000 shares of
common stock. As of December 31, 2004, BRCP REIT LLC I has drawn down
$2,117,638, which represents 30.3% of the commitment.
12. REDEMPTION FEES: Shares of the Active International Allocation, Emerging
Markets, European Real Estate, Global Franchise, Global Value Equity,
International Equity, International Magnum, International Small Cap and
Emerging Markets Debt Portfolios redeemed within 60 days of purchase may be
subject to a 2% redemption fee. The redemption fee is designed to protect
the Portfolio and remaining shareholders from the effects of short-term
trading. These fees, if any, are included on the Statement of Changes in
Net Assets.
13. RESTRICTED SECURITIES: Certain Portfolios may invest in unregistered or
otherwise restricted securities. The term restricted securities refers to
securities that are unregistered or are held by control persons of the
issuer and securities that are subject to contractual restrictions on their
resale. As a result, restricted securities may be more difficult to value
and the Portfolio may have difficulty disposing of such assets either in a
timely manner or for a reasonable price. In order to dispose of an
unregistered security, the Portfolio, where it has contractual rights to do
so, may have to cause such security to be registered. A considerable period
may elapse between the time the decision is made to sell the security and
the time the security is registered so that the Fund could sell it.
Contractual restrictions on the resale of securities vary in length and
scope and are generally the result of a negotiation between the issuer and
acquiror of the securities. The Portfolio would, in either case, bear
market risks during that period.
14. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Realized gains and losses on the sale of investment
securities are determined on the specific identified cost basis. Dividend
income is recorded on the ex-dividend date (except for certain foreign
dividends which may be recorded as soon as the Fund is informed of such
dividends) net of applicable withholding taxes. Interest income is
recognized on the accrual basis except where collection is in doubt.
Discounts and premiums on securities purchased are amortized according to
the effective yield method over their respective lives. Most expenses of
the Fund can be directly attributed to a particular Portfolio. Expenses
which cannot be directly attributed are apportioned among the Portfolios
based upon relative net assets. Income, expenses (other than class specific
expenses) and realized and unrealized gains or losses are allocated to each
class of shares based upon their relative net assets. Dividends to the
shareholders of the Money Market and the Municipal Money Market Portfolios
are accrued daily and are distributed on or about the 15th of each month.
Distributions for the remaining Portfolios are recorded on the
ex-distribution date.
The U.S. Real Estate Portfolio owns shares of real estate investment trusts
("REITs") which report information on the source of their distributions
annually. A portion of distributions received from REITs during the year is
estimated to be a return of capital and is recorded as a reduction of their
cost.
B. INVESTMENT ADVISORY FEES: Morgan Stanley Investment Management Inc. (the
"Adviser" or "MS Investment Management"), a wholly-owned subsidiary of Morgan
Stanley, provides the Fund with investment advisory services under the terms of
an investment advisory agreement (the "Agreement"). Prior to November 1, 2004,
MS Investment Management provided such services at the annual rates of the
average daily net assets indicated below. MS Investment Management has
voluntarily agreed to waive fees payable to it and to reimburse the Portfolios,
if necessary, if the annual operating expenses, as defined, expressed as a
percentage of average daily net assets, exceed the maximum ratios indicated as
follows:
<Table>
<Caption>
MAXIMUM
EXPENSE RATIO
ADVISORY -----------------------
PORTFOLIO FEE CLASS A CLASS B
- ----------------------------------------------------------------------------
Active International
Allocation 0.65% 0.80% 1.05%
European Real Estate 0.80 1.00 1.25
Global Franchise 0.80 1.00 1.25
Global Value Equity 0.80 1.00 1.25
International Equity 0.80 1.00 1.25
International Magnum 0.80 1.00 1.25
International Small Cap 0.95 1.15 N/A
Equity Growth 0.60 0.80 1.05
Focus Equity 0.80 1.00 1.25
Small Company Growth 1.00 1.10 1.35
U.S. Real Estate 0.80 1.00 1.25
Value Equity 0.50 0.70 0.95
Emerging Markets Debt (1) 0.75 1.00 1.25
Money Market 0.30 0.55 N/A
</Table>
131
<Page>
2004 ANNUAL REPORT
December 31, 2004
NOTES TO FINANCIAL STATEMENTS (CONT'D)
<Table>
<Caption>
MAXIMUM
EXPENSE RATIO
ADVISORY -----------------
PORTFOLIO FEE CLASS A CLASS B
- -----------------------------------------------------------------------------
Municipal Money Market 0.30% 0.57% N/A
AVERAGE DAILY NET ASSETS
Emerging Markets(2) First $1.0 billion 1.25 1.65 1.90%
Next $1.0 billion 1.20 1.65 1.90
Over $2.0 billion 1.00 1.65 1.90
</Table>
(1)Prior to May 1, 2004, the Maximum Expense Ratios for the Emerging Markets
Debt Portfolio's Class A shares and Class B shares were 1.75% and 2.00%,
respectively.
(2)Prior to May 1, 2004, the Advisory Fee for the Emerging Markets Portfolio
was 1.25%. Effective November 1, 2004, MS Investment Management has agreed
to waive fees payable to it and to reimburse the Emerging Markets
Portfolio, if necessary, to the extent that the annual operating expenses,
excluding bank overdraft, certain foreign taxes and extraordinary expenses,
expressed as a percentage of average daily net assets, exceed the maximum
ratio of 1.65% for Class A shares and 1.90% for Class B shares. Prior to
November 1, 2004, these maximum ratios were 1.75% for Class A shares and
2.00% for Class B shares.
Effective November 1, 2004, the investment advisory fees of some of the
Portfolios were reduced as follows:
<Table>
<Caption>
FEE PRIOR TO FEE EFFECTIVE
PORTFOLIO NOVEMBER 1, 2004 NOVEMBER 1, 2004
- ------------------------------------------------------------------------------
Emerging Markets 1.25% first $1 billion 1.25% first $500 million
1.20% next $1 billion 1.20% next $500 million
1.00% over $2 billion 1.15% next $1.5 billion
1.00% over $2.5 billion
Global Franchise 0.80% 0.80% first $500 million
0.75% next $500 million
0.70% over $1 billion
Global Value Equity 0.80% 0.67% first $1 billion
0.645% next $500 million
0.62% next $1 billion
0.595% next $1 billion
0.57% next $1 billion
0.545% over $4.5 billion
International Magnum 0.80% 0.80% first $500 million
0.75% next $500 million
0.70% over $1 billion
Equity Growth 0.60% 0.50% first $1 billion
0.45% next $1 billion
0.40% next $1 billion
0.35% over $3 billion
Small Company Growth 1.00% 0.92% first $1 billion
0.85% over $1 billion
U.S. Real Estate 0.80% 0.80% first $500 million
0.75% next $500 million
0.70% over $1 billion
Value Equity 0.50% 0.50% first $150 million
0.45% next $100 million
0.40% next $100 million
0.35% over $350 million
Emerging Markets Debt 0.75% 0.75% first $500 million
0.70% next $500 million
0.65% over $1 billion
</Table>
For the year ended December 31, 2004, the Portfolios had advisory fees waived as
follows:
<Table>
<Caption>
ADVISORY FEES
WAIVED
PORTFOLIO (000)
- --------------------------------------------------------------
Active International Allocation $ 424
European Real Estate 127
Global Franchise 109
Global Value Equity 68
International Magnum 199
International Small Cap 138
Focus Equity 69
Small Company Growth 628
Value Equity 72
Emerging Markets Debt 22
</Table>
The Adviser has entered into Sub-Advisory Agreements with Morgan Stanley
Investment Advisors Inc., Morgan Stanley Investment Management Limited, Morgan
Stanley Asset & Investment Trust Management Co., Limited and Morgan Stanley
Investment Management Company (each a "Sub-Adviser"), all wholly-owned
subsidiaries of Morgan Stanley. The Sub-Advisers, subject to the control and
supervision of the Fund, its officers, Directors and the Adviser, and in
accordance with the investment objectives, policies and restrictions of the
Portfolios, make certain day-to-day investment decisions for certain Portfolios
and place certain of the Portfolios' purchase and sales orders. The Adviser pays
the Sub-Advisers on a monthly basis a portion of the net advisory fees the
Adviser receives from the Portfolios which receive these services.
C. ADMINISTRATION FEES: Prior to November 1, 2004, MS Investment Management (the
"Administrator") also provided the Fund with administrative services pursuant to
an administration agreement for a monthly fee, which on an annual basis equaled
0.15% of the average daily net assets of each Portfolio, plus reimbursement of
out-of-pocket expenses. Under an agreement between the Administrator and J.P.
Morgan Investor Services Co. ("JPMIS"), a corporate affiliate of JPMorgan Chase
Bank, JPMIS provides certain administrative services to the Fund. For such
services, the Administrator pays JPMIS a portion of the fee the Administrator
receives from the Fund. An employee of JPMIS is an officer of the Fund. In
addition, the Fund incurs local administration fees in connection with doing
business in certain emerging market countries.
Effective November 1, 2004, Morgan Stanley Investment Management Inc. (MSIM)
serves as Administrator to the Fund pursuant to an Amended and Restated
Administration Agreement. Under the Amended and Restated Administration
Agreement, the Administration Fee was reduced to 0.08% of the average daily net
assets of each non-money market Portfolio and 0.05% of the average daily net
assets of each money market Portfolio. JPMIS will continue to provide certain
administrative services pursuant to an Amended and Restated
132
<Page>
2004 ANNUAL REPORT
December 31, 2004
NOTES TO FINANCIAL STATEMENTS (CONT'D)
Sub-Administration Agreement with MSIM and receives compensation from MSIM for
these services. Expenses covered by the Administration Fee will change.
Administration costs (including out-of-pocket expenses incurred in the ordinary
course of providing services under the Agreement, which were previously borne by
the Fund), except pricing services and extraordinary expenses, will now be
covered under the Administration Fee. Transfer Agency expenses will no longer be
paid by MSIM, but will be borne by the Fund.
D. DISTRIBUTION FEES: Morgan Stanley & Co., Incorporated (the "Distributor"), a
wholly-owned subsidiary of Morgan Stanley, and an affiliate of MS Investment
Management, serves as the distributor of the Fund and provides Class B
shareholders of the applicable Portfolios with distribution services pursuant to
a Distribution Plan (the "Plan") in accordance with Rule 12b-1 under the 1940
Act. Under the Plan, the Distributor is entitled to receive from each applicable
Portfolio, a distribution fee, which is accrued daily and paid quarterly, at an
annual rate of 0.25% of the Class B shares' average daily net assets. The
Distributor may voluntarily waive from time to time all or any portion of its
distribution fee.
E. CUSTODIAN FEES: JPMorgan Chase Bank serves as custodian for the Fund in
accordance with a custodian agreement. The Custodian holds cash, securities, and
other assets of the Fund as required by the 1940 Act.
F. PURCHASES AND SALES: During the year ended December 31, 2004, purchases and
sales of investment securities, other than long-term U.S. Government securities
and short-term investments, were:
<Table>
<Caption>
PURCHASES SALES
PORTFOLIO (000) (000)
- ---------------------------------------------------------------------------------
Active International Allocation $ 218,259 $ 91,941
Emerging Markets 775,361 768,913
European Real Estate 26,342 13,513
Global Franchise 13,752 39,756
Global Value Equity 25,849 26,027
International Equity 3,535,908 2,804,265
International Magnum 40,483 55,471
International Small Cap 487,983 397,334
Equity Growth 1,444,378 1,525,097
Focus Equity 102,381 119,095
Small Company Growth 1,422,976 1,079,273
U.S. Real Estate 215,205 230,228
Value Equity 143,141 182,143
Emerging Markets Debt 119,921 95,686
</Table>
There were no purchases and sales of long-term U.S. Government securities for
the year ended December 31, 2004.
During the year ended December 31, 2004, the following Portfolios paid brokerage
commissions to Morgan Stanley & Co., an affiliated broker/dealer:
<Table>
<Caption>
BROKERAGE
COMMISSIONS
PORTFOLIO (000)
- --------------------------------------------------------------------------------
Emerging Markets $ 57
Global Value Equity 1
International Magnum 1
Equity Growth 9
Focus Equity 1
Value Equity 3
</Table>
Additionally, during the year ended December 31, 2004, International Magnum
Portfolio paid $141 brokerage commissions to China International Capital
Corporation, an affiliated broker/dealer.
G. FEDERAL INCOME TAXES: It is each Portfolio's intention to qualify as a
regulated investment company and distribute all of its taxable and tax-exempt
income. Accordingly, no provision for Federal income taxes is required in the
financial statements.
A Portfolio may be subject to taxes imposed by countries in which it invests.
Such taxes are generally based on income and/or capital gains earned or
repatriated. Taxes are accrued based on net investment income, net realized
gains and net unrealized appreciation as income and/or capital gains are earned.
Taxes may also be based on the movement of foreign currency and are accrued
based on the value of investments denominated in such currency.
The tax character of distributions paid may differ from the character of
distributions shown on the Statements of Changes in Net Assets due to short-term
capital gains being treated as ordinary income for tax purposes. The Municipal
Money Market Portfolio's ordinary income distributions shown below include
tax-exempt as well as taxable components.
133
<Page>
2004 ANNUAL REPORT
December 31, 2004
NOTES TO FINANCIAL STATEMENTS (CONT'D)
The tax character of distributions paid during 2004 and 2003 were as follows:
<Table>
<Caption>
2004 DISTRIBUTIONS 2003 DISTRIBUTIONS
PAID FROM: PAID FROM:
--------------------------- ---------------------------
ORDINARY LONG-TERM ORDINARY LONG-TERM
INCOME CAPITAL GAIN INCOME CAPITAL GAIN
PORTFOLIO (000) (000) (000) (000)
- --------------------------------------------------------------------------------------------
Active International
Allocation $ 10,343 $ -- $ 6,218 $ --
Emerging Markets 9,929 -- 12,401 --
European Real Estate 832 -- 632 --
Global Franchise 973 3,259 440 359
Global Value Equity 1,126 272 812 472
International Equity 231,683 446,239 104,424 --
International Magnum 1,928 -- 1,640 --
International Small Cap 37,896 68,519 13,275 9,855
Equity Growth 3,214 -- 1,970 --
Focus Equity 103 -- 137 --
Small Company Growth -- 40,919 -- --
U.S. Real Estate 25,591 41,350 27,350 7,144
Value Equity 2,112 -- 2,028 --
Emerging Markets Debt 5,272 -- 3,765 --
Money Market 5,834 -- 7,531 --
Municipal Money Market 3,503 -- 4,229 --
</Table>
The amount and character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from U.S. generally
accepted accounting principles. The book/tax differences are either considered
temporary or permanent in nature. Temporary differences are generally due to
differing book and tax treatments for the timing of the recognition of gains and
losses on securities, forwards and futures, including Post October losses.
Permanent differences are generally due to REIT adjustments, gain (loss) on
in-kind redemptions, foreign currency transactions, distribution reclass,
paydown adjustments and gains on certain equity securities designated as issued
by "passive foreign investment companies".
Permanent book and tax basis differences may result in reclassification among
undistributed (distributions in excess of ) net investment income (or
accumulated net investment loss), accumulated net realized gain (loss) and
paid-in capital.
At December 31, 2004, the components of distributable earnings on a tax basis
were as follows:
<Table>
<Caption>
UNDISTRIBUTED
UNDISTRIBUTED LONG-TERM
ORDINARY INCOME CAPITAL GAIN
PORTFOLIO (000) (000)
- ----------------------------------------------------------------
Active International Allocation $ 4,062 $ --
European Real Estate 127 --
Global Franchise 127 1,115
Global Value Equity -- 1,034
International Magnum 413 --
International Small Cap 3,405 23,528
Equity Growth 940 --
Focus Equity 97 --
Small Company Growth -- 4,483
U.S. Real Estate 2,500 34,174
Money Market 134 --
Municipal Money Market 77 --
</Table>
Any Portfolios not shown above had no distributable earnings on a tax basis at
December 31, 2004. The undistributed ordinary income for the Municipal Money
Market represents tax-exempt income.
At December 31, 2004, cost, unrealized appreciation, unrealized depreciation,
and net unrealized appreciation (depreciation) for U.S. Federal income tax
purposes of the investments of each of the Portfolios were:
<Table>
<Caption>
NET
APPRECIATION
COST APPRECIATION DEPRECIATION (DEPRECIATION)
PORTFOLIO (000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------
Active International
Allocation $ 569,865 $ 83,427 $ (16,937) $ 66,490
Emerging Markets 1,100,832 337,366 (41,411) 295,955
European Real Estate 36,044 15,338 (2) 15,336
Global Franchise 45,520 18,182 (764) 17,418
Global Value Equity 85,709 15,665 (2,116) 13,549
International Equity 7,470,094 1,696,378 (26,525) 1,669,853
International Magnum 90,032 18,012 (2,673) 15,339
International Small Cap 924,092 375,028 (22,083) 352,945
Equity Growth 692,486 72,081 (4,105) 67,976
Focus Equity 55,561 6,742 (1,222) 5,520
Small Company Growth 1,158,987 239,136 (20,294) 218,842
U.S. Real Estate 773,534 477,119 (6,407) 470,712
Value Equity 148,331 18,230 (704) 17,526
Emerging Markets Debt 75,906 4,159 (1,697) 2,462
Money Market 547,852 -- -- --
Municipal Money Market 469,241 -- -- --
</Table>
At December 31, 2004, the following Portfolios had available capital loss
carryforwards to offset future net capital gains, to the extent provided by
regulations, through the indicated expiration dates:
<Table>
<Caption>
EXPIRATION DATE DECEMBER 31, (000)
- ------------------------------------------------------------------------------------------------------------
PORTFOLIO 2006 2007 2008 2009 2010 2011 2012 TOTAL
- ------------------------------------------------------------------------------------------------------------
Active International
Allocation $ -- $ -- $ -- $ 5,749 $ 60,663 $ 25,582 $ -- $ 91,994
Emerging
Markets -- -- -- 109,167 102,772 -- -- 211,939
European Real
Estate -- -- 197 101 -- -- -- 298
International
Magnum -- -- -- 5,073 4,936 2,377 -- 12,386
Equity
Growth -- -- -- -- 86,561 22,405 -- 108,966
Focus Equity -- -- -- 10,195 21,111 -- 296 31,602
Small
Company
Growth* -- -- -- 11,988 18,090 -- -- 30,078
Value Equity -- -- -- -- 4,493 -- -- 4,493
Emerging
Markets
Debt 75,356 9,761 -- 778 -- -- -- 85,895
</Table>
*Capital loss carryover from target fund.
The amounts reflected in the capital loss carryforward table above represent
capital loss carryforward from MSIFT Small
134
<Page>
2004 ANNUAL REPORT
December 31, 2004
NOTES TO FINANCIAL STATEMENTS (CONT'D)
Cap Growth Portfolio after limitations pursuant to Internal Revenue Code,
Section 383. Due to the limitation on utilization of capital loss carryforwards
of $4,659,000 per year, only $30,078,000 of the $102,883,000 will actually be
eligible to offset future capital gains. Consequently, the difference of
$72,805,000 has been recorded as a reduction of paid in capital in 2004.
During the year ended December 31, 2004, the following Portfolios utilized
capital loss carryforwards for U.S. Federal income tax purposes of
approximately:
<Table>
<Caption>
CAPITAL LOSS
CARRYFORWARD
UTILIZED
PORTFOLIO (000)
- --------------------------------------------------------------
Active International Allocation $ 14,601
Emerging Markets 117,710
European Real Estate 3,679
Global Value Equity 3,058
International Equity* 41,510
International Magnum 6,808
Equity Growth 63,490
Small Company Growth 35,937
Value Equity 18,313
Emerging Markets Debt 861
</Table>
* Amounts based on October 31, tax year end.
In addition to the $35,937,000 utilized capital loss carryforward attributed to
the Small Company Growth Portfolio in the table above, approximately $8,822,000
of capital losses acquired from MSIFT Small Cap Growth Portfolio were utilized
for federal tax purposes during the year ended December 31, 2004.
To the extent that capital loss carryovers are used to offset any future capital
gains realized during the carryover period as provided by U.S. Federal income
tax regulations, no capital gains tax liability will be incurred by a Portfolio
for gains realized and not distributed. To the extent that capital gains are
offset, such gains will not be distributed to the shareholders.
Net capital, passive investment company (PFIC), and currency losses incurred
after October 31, and within the taxable year are deemed to arise on the first
day of the Portfolio's next taxable year. For the year ended December 31, 2004,
the Portfolio deferred to January 1, 2005 for U.S. Federal income tax purposes,
post-October capital, PFIC and currency losses as indicated:
<Table>
<Caption>
CAPITAL CURRENCY
LOSSES LOSSES
PORTFOLIO (000) (000)
- ---------------------------------------------------------
Emerging Markets $ -- $ 2,692
European Real Estate -- 1
Global Franchise -- 582
International Small Cap -- 35
Focus Equity 512 --
</Table>
For the year ended December 31, 2004, the Global Franchise Portfolio realized
gains from in-kind redemptions of $2,600,000. For the fiscal year ended December
31, 2003, the Global Franchise and International Equity Portfolios realized
gains from in-kind redemptions of $584,000 and $14,820,000, respectively.
H. CONTRACTUAL OBLIGATIONS: The Fund enters into contracts that contain a
variety of indemnifications. The Fund's maximum exposure under these
arrangements is unknown. However, the Fund has not had prior claims or losses
pursuant to these contracts and expects the risk of loss to be remote.
I. OTHER: The net assets of certain Portfolios include foreign denominated
securities and currency. Changes in currency exchange rates will affect the U.S.
dollar value of and investment income from such securities. Further, at times
certain of the Portfolios' investments are concentrated in a limited number of
countries and regions. This concentration may further increase the risk of the
Portfolio.
The Emerging Markets Debt Portfolio holds a significant portion of its
investments in securities which are traded by a small number of market makers
who may also be utilized by the Portfolio to provide pricing information used to
value such investments. The amounts realized upon disposition of these
securities may differ from the value reflected on the Statements of Assets and
Liabilities.
Settlement and registration of foreign securities transactions may be subject to
significant risks not normally associated with investments in the United States.
In certain markets, including Russia, ownership of shares is defined according
to entries in the issuer's share register. In Russia, currently no central
registration system exists and the share registrars may not be subject to
effective state supervision. It is possible that a Portfolio could lose its
share registration through fraud, negligence or even mere oversight. In
addition, shares being delivered for sales and cash being paid for purchases may
be delivered before the exchange is complete. This may subject the Portfolio to
further risk of loss in the event of a counterparty's failure to complete the
transaction.
135
<Page>
2004 ANNUAL REPORT
December 31, 2004
NOTES TO FINANCIAL STATEMENTS (CONT'D)
A portion of the securities of the Municipal Money Market Portfolio are insured
by certain companies specializing in the insurance of municipal debt
obligations. At December 31, 2004, approximately 20.0% of the net assets of the
Municipal Money Market Portfolio are covered by such insurance. The insurers and
their obligations are as follows:
<Table>
<Caption>
PERCENTAGE OF
INSURER NET ASSETS
-----------------------------------------------
MBIA 8.0%
FGIC 5.3
FSA 4.6
AMBAC 1.5
FHA 0.6
</Table>
At December 31, 2004, certain Portfolios had otherwise unaffiliated record
owners of 10% or greater. Investment activities of these shareholders could have
a material impact on these Portfolios.
These Portfolios and the aggregate percentage of such owners were as follows:
<Table>
<Caption>
PERCENTAGE OF OWNERSHIP
-----------------------
PORTFOLIO CLASS A CLASS B
- -------------------------------------------------------------
Active International Allocation 53.3% 78.7%
Emerging Markets 10.2 93.1
European Real Estate 48.9 96.4
Global Franchise 56.1 11.4
Global Value Equity 70.3 88.0
International Equity -- 73.8
International Magnum 89.4 78.2
International Small Cap 29.2 N/A
Equity Growth 73.2 75.7
Focus Equity 64.8 40.3
Small Company Growth 26.0 51.5
U.S. Real Estate 39.3 71.3
Value Equity 75.7 92.8
Emerging Markets Debt 84.5 96.9
</Table>
J. SUBSEQUENT EVENTS: Effective January 31, 2005, the Fund has suspended
offering shares of the International Small Cap Portfolio and the International
Equity Portfolio to new investors, except as follows. The Fund will continue to
offer shares of the Portfolios (1) through certain retirement plan accounts, (2)
to clients of registered investment advisors who currently offer shares of the
Portfolios in their discretionary asset allocation programs, (3) through certain
endowments and foundations, (4) to clients of family office practices where
shares of the Portfolios are held by family members of such clients, (5) to
directors and trustees of the Morgan Stanley Funds, (6) to Morgan Stanley and
its affiliates and their employees, and (7) to benefit plans sponsored by Morgan
Stanley and its affiliates. The Fund will continue to offer shares of the
Portfolios to existing shareholders and may recommence offering shares of the
Portfolios to other new investors in the future.
Effective January 31, 2005, the Fund will suspend offering shares of the Global
Franchise Portfolio to new investors when assets in the Portfolio reach $100
million, except as follows. Following the general suspension of the offering of
shares of the Portfolio to new investors, the Fund will continue to offer shares
of the Portfolio (1) through certain retirement plan accounts, (2) to clients of
registered investment advisors who currently offer shares of the Portfolio in
their discretionary asset allocation programs, (3) through certain endowments
and foundations, (4) to clients of family office practices where shares of the
Portfolio are held by family members of such clients, (5) to directors and
trustees of the Morgan Stanley Funds, (6) to Morgan Stanley and its affiliates
and their employees, and (7) to benefit plans sponsored by Morgan Stanley and
its affiliates. Also following the general suspension of the offering of shares
of the Portfolio to new investors, the Fund will continue to offer shares of the
Portfolio to existing shareholders and may recommence offering shares of the
Portfolio to other new investors in the future.
136
<Page>
2004 ANNUAL REPORT
December 31, 2004
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
MORGAN STANLEY INSTITUTIONAL FUND, INC.
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of the Morgan Stanley Institutional Fund, Inc.
(comprising, respectively, the Active International Allocation Portfolio,
Emerging Markets Portfolio, European Real Estate Portfolio, Global Franchise
Portfolio, Global Value Equity Portfolio, International Equity Portfolio,
International Magnum Portfolio, International Small Cap Portfolio, Equity Growth
Portfolio, Focus Equity Portfolio, Small Company Growth Portfolio, U.S. Real
Estate Portfolio, Value Equity Portfolio, Emerging Markets Debt Portfolio, Money
Market Portfolio and Municipal Money Market Portfolio) (the "Fund") as of
December 31, 2004, and the related statements of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial high-lights based on out
audits. lights 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 a appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Fund's
internal control over financial reporting. Accordingly, we express no such
opionion An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements and financial
highlights, 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 custodian and brokers or by other
appropriate auditing procedures where replies from brokers were not received. 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 of each
of the respective portfolios constituting the Morgan Stanley Institutional Fund,
Inc. at 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 periods indicated
therein, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 11, 2005
137
<Page>
2004 ANNUAL REPORT
December 31, 2004
FEDERAL TAX INFORMATION (UNAUDITED)
For the year ended December 31, 2004, the percentage of dividends paid that
qualify for the 70% dividend received deduction for corporate shareholders for
the Global Franchise, Global Value Equity, Equity Growth, Focus Equity, U.S.
Real Estate and Value Equity Portfolios are 36.2%, 60.4%, 100.0%, 100.0%, 4.5%
and 100.0%, respectively.
For the year ended December 31, 2004, the percentage of income earned from
direct U.S. Treasury Obligations for the Money Market Portfolio is 6.0%.
For the year ended December 31, 2004, the percentage of exempt interest
dividends paid by the Municipal Money Market Portfolios is 98.9%.
For the year ended December 31, 2004, the following Portfolios intend to pass
through foreign tax credits and have derived gross income from sources within
foreign countries amounting to:
<Table>
<Caption>
FOREIGN FOREIGN
TAX CREDIT SOURCE
PASS-THROUGH INCOME
PORTFOLIO (000) (000)
---------------------------------------------------------------
Active International Allocation $ 655 $ 8,885
Emerging Markets 2,696 27,268
European Real Estate 147 1,157
Global Franchise 179 1,690
Global Value Equity 134 1,384
International Equity* 12,152 117,980
International Magnum 142 1,931
International Small Cap 2,969 26,348
</Table>
Each applicable Portfolio hereby designates the following amount as long-term
capital gain dividends for the purpose of the dividend paid deduction on its
federal tax return:
<Table>
<Caption>
LONG-TERM
LONG-TERM
CAPITAL GAIN - 20%
PORTFOLIO (000)
---------------------------------------------------------------
Global Franchise $ 3,259
Global Value Equity 272
International Equity 446,239
International Small Cap 68,519
Small Company Growth 40,919
U.S. Real Estate 41,350
</Table>
S
For the year ended December 31, 2004, qualified dividend income for each
applicable Portfolio totaled:
<Table>
<Caption>
QUALIFYING
DIVIDEND
INCOME
PORTFOLIO (000)
---------------------------------------------------------------
Active International Allocation $ 5,687
Emerging Markets 11,881
European Real Estate 750
Global Value Equity 1,265
Global Franchise 1,152
International Equity 68,837
International Magnum 1,243
International Small Cap 19,151
Equity Growth 3,214
Focus Equity 103
Value Equity 2,112
</Table>
138
<Page>
2004 ANNUAL REPORT
December 31, 2004
DIRECTOR AND OFFICER INFORMATION (UNAUDITED)
INDEPENDENT DIRECTORS:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
POSITION(S) TERM OF OFFICE FUND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DIRECTOR REGISTRANT TIME SERVED* DURING PAST 5 YEARS DIRECTOR** HELD BY DIRECTOR
- --------------------------- ------------ -------------- ---------------------------------- ------------- ---------------------------
Michael Bozic (63) Director Director since Private investor; Director or 197 Director of various
c/o Kramer Levin Naftalis & July 2003 Trustee of the Retail Funds (since business organizations.
Frankel LLP April 1994) and the Institutional
Counsel to the Independent Funds (since July 2003); formerly
Directors Vice Chairman of Kmart Corporation
919 Third Avenue (December 1998-October 2000),
New York, NY 10022-3902 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) Director Director since Consultant. Director or Trustee of 197 Director of Franklin Covey
1031 N. Chartwell Court July 2003 the Retail Funds (since January (time management systems),
Salt Lake City, UT 84103 1993) and the Institutional Funds BMW Bank of North America,
(since July 2003); member of the Inc. (industrial loan
Utah Regional Advisory Board of corporation), Escrow Bank
Pacific Corp.; formerly Managing USA (industrial loan
Director of Summit Ventures LLC corporation), United Space
(2000 - 2004), United States Alliance (joint venture
Senator (R- Utah) (1974-1992) and between Lockheed Martin and
Chairman, Senate Banking Committee The Boeing Company) and
(1980-1986), Mayor of Salt Lake Nuskin Asia Pacific
City, Utah (1971-1974), Astronaut, (multilevel marketing);
Space Shuttle Discovery (April member of the board of
12-19, 1985), and Vice Chairman, various civic and
Huntsman Corporation (chemical charitable organizations.
company).
Wayne E. Hedien (70) Director Director since Retired; Director or Trustee of 197 Director of the PMI Group
c/o Kramer Levin Naftalis & July 2003 the Retail Funds (since September Inc. (private mortgage
Frankel LLP 1997) and the Institutional Funds insurance); Trustee and
Counsel to the (since July 2003); formerly Vice Chairman of The Field
Independent Directors associated with the Allstate Museum of Natural History;
919 Third Avenue Companies (1966-1994), most director of various other
New York, NY 10022-3902 recently as Chairman of The business and charitable
Allstate Corporation (March organizations.
1993-December 1994) and Chairman
and Chief Executive Officer of its
wholly-owned subsidiary, Allstate
Insurance Company (July
1989-December 1994).
Dr. Manuel H. Johnson (55) Director Director since Senior Partner, Johnson Smick 197 Director of NVR, Inc. (home
c/o Johnson Smick July 2003 International, Inc., a consulting construction); Director of
International, Inc. firm; Chairman of the Audit KFX Energy; Director of RBS
2099 Pennsylvania Avenue, Committee and Director or Trustee Greenwich Capital Holdings
NW Suite 950 of the Retail Funds (since July (financial holdings
Washington, D.C. 20006 1991) and the Institutional Funds company).
(since July 2003); 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) Director Director since President, Kearns & Associates LLC 198 Director of Electro Rent
c/o Kearns & Associates LLC August 1994 (investment consulting); Deputy Corporation (equipment
PMB754 Chairman of the Audit Committee leasing), The Ford Family
23852 Pacific Coast Highway and Director or Trustee of the Foundation and the UCLA
Malibu, CA 90265 Retail Funds (since July 2003) and Foundation.
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.
Paul Getty Trust.
Michael E. Nugent (68) Director Director since General Partner of Triumph 197 Director of various
c/o Triumph Capital, L.P. July 2001 Capital, L.P., a private business organizations.
445 Park Avenue, 10th Floor investment partnership; Chairman
New York, NY 10022 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) Director Director since Chairman of Lumelite Plastics 198 Trustee and Director of
c/o Lumelite Plastics June 1992 Corporation; Chairman of the certain investment
Corporation Governance Committee and Director companies in the J.P.
85 Charles Coleman Blvd. or Trustee of the Retail Funds Morgan Funds complex
Pawling, NY 12564 (since July 2003) and the managed by J.P. Morgan
Institutional Funds (since June Investment Management Inc.
1992).
</Table>
139
<Page>
2004 ANNUAL REPORT
December 31, 2004
DIRECTOR AND OFFICER INFORMATION (CONT'D)
INTERESTED DIRECTORS:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
POSITION(S) TERM OF OFFICE FUND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DIRECTOR REGISTRANT TIME SERVED* DURING PAST 5 YEARS DIRECTOR** HELD BY DIRECTOR
- --------------------------- ------------ -------------- ---------------------------------- ------------- ---------------------------
Charles A. Fiumefreddo (71) Chairman and Chairman of Chairman and Director or Trustee 197 None.
c/o Morgan Stanley Trust Director of the Board and of the Retail Funds (since July
Harborside Financial Center the Board Director since 1991) and the Institutional Funds
Plaza Two 3rd Floor July 2003 (since July 2003); formerly Chief
Jersey City, NJ 07311 Executive Officer of the Retail
Funds (until September 2002).
James F. Higgins (56) Director Director since Director or Trustee of the Retail 197 Director of AXA Financial,
c/o Morgan Stanley Trust July 2003 Funds (since June 2000) and the Inc. and The Equitable Life
Harborside Financial Center Institutional Funds (since July Assurance Society of the
Plaza Two 2nd Floor 2003); Senior Advisor of Morgan United States (financial
Jersey City, NJ 07311 Stanley (since August 2000); services).
Director of Morgan Stanley
Distributors Inc. 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 Director began serving the Institutional
Funds. Each Director serves an indefinite term, until his or her successor
is elected.
** The Fund Complex includes all funds advised by Morgan Stanley Investment
Management Inc. and funds that have an investment advisor that is an
affiliated entity of Morgan Stanley Investment Management Inc. (including,
but not limited to, Morgan Stanley Investments LP and Morgan Stanley
Investment Advisors Inc.).
Additional information about the Fund's Directors can be found in the Fund's
Statement of Additional Information (SAI). The SAI may be obtained without
charge upon request, by calling the Fund at 1-800-548-7786 or by accessing the
Morgan Stanley Investment Management's website at www.morganstanley.com/im. You
may also retrieve this information on-line at the Securities and Exchange
Commission's web site at www.sec.gov.
140
<Page>
2004 ANNUAL REPORT
December 31, 2004
DIRECTOR AND OFFICER INFORMATION (CONT'D)
OFFICERS:
<Table>
<Caption>
POSITION(S) TERM OF OFFICE
HELD WITH AND LENGTH OF
NAME, AGE AND ADDRESS OF EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
- ------------------------------------------- --------------- ---------------- --------------------------------------------------
Mitchell M. Merin (51) President President President and Chief Operating Officer of Morgan
Morgan Stanley Investment Management Inc. since July Stanley Investment Management Inc.; President,
1221 Avenue of the Americas 33rd Floor 2003 Director and Chief Executive Officer of Morgan
New York, NY 10020 Stanley Investment Advisors Inc. and Morgan
Stanley Services Company Inc.; Chairman and
Director of Morgan Stanley Distributors Inc.;
Chairman and Director of Morgan Stanley Trust;
Director of various Morgan Stanley subsidiaries;
President of the Institutional Funds (since July
2003) and President of the Retail Funds (since May
1999); Director (since July 2003) and President
(since December 2002) of the Van Kampen Closed-End
Funds; Trustee (since May 1999) and President
(since October 2002) of the Van Kampen Open-End
Funds.
Ronald E. Robison (65) Executive Executive Vice Principal Executive Officer of Funds in the Fund
Morgan Stanley Investment Management Inc. Vice President President and complex (since May 2003); Managing Director of
1221 Avenue of the Americas 33rd Floor and Principal Principal Morgan Stanley & Co. Incorporated, Managing
New York, NY 10020 Executive Executive Director of Morgan Stanley; Managing Director,
Officer Officer since Chief Administrative Officer and Director of
July 2003 Morgan Stanley Investment Advisors Inc. and Morgan
Stanley Services Company Inc.; Director of Morgan
Stanley Trust; Managing Director and Director of
Morgan Stanley Distributors Inc.; Executive Vice
President and Principal Executive Officer of the
Retail Funds (since April 2003) and the
Institutional Funds (since July 2003); 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 Vice President Managing Director and Chief Investment Officer of
Morgan Stanley Investment Management Inc. since July Morgan Stanley Investment Advisors Inc. and Morgan
1221 Avenue of the Americas 33rd Floor 2003 Stanley Investment Management Inc.; Director of
New York, NY 10020 Morgan Stanley Trust; 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 Vice President General Counsel (since May 2000) and Managing
Morgan Stanley Investment Management Inc. since July Director (since December 2000) of Morgan Stanley
1221 Avenue of the Americas 22nd Floor 2003 Investment Management; Managing Director (since
New York, NY 10020 December 2000), Secretary (since February 1997)
and Director (since July 1998) of Morgan Stanley
Investment Advisors Inc. and Morgan Stanley
Services Company Inc.; Vice President of the
Retail Funds; Assistant Secretary of Morgan
Stanley DW Inc.; Vice President of the
Institutional Funds (since July 2003); Managing
Director, Secretary and Director of Morgan Stanley
Distributors Inc.; previously Secretary of the
Retail Funds and General Counsel (February 1997-
April 2004) of the Retail Funds; Vice President
and Assistant General Counsel of Morgan Stanley
Investment Advisors Inc. and Morgan Stanley
Services Company Inc. (February 1997- December
2001).
Amy R. Doberman (42) Vice President Vice President Managing Director and General Counsel, U.S.
Morgan Stanley Investment Management Inc. since July Investment Management; Managing Director of the
1221 Avenue of the Americas 22nd Floor 2004 Investment Manager and Morgan Stanley Investment
New York, NY 10020 Advisor Inc.; 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 Chief Executive Director and U.S. Director of Compliance
Morgan Stanley Investment Management Inc. Compliance Compliance for Morgan Stanley Investment Management (since
1221 Avenue of the Americas 22nd Floor Officer Officer since October 2004); Executive Director of Morgan
New York, NY 10020 2004 Stanley Investment Advisors Inc. and Morgan
Stanley Investment Management Inc.; formerly
Assistant Secretary and Assistant General Counsel
of the Morgan Stanley Retail Funds.
Stefanie V. Chang (38) Vice President Vice President Executive Director of Morgan Stanley & Co.
Morgan Stanley Investment Management Inc. since Incorporated, Morgan Stanley Investment Management
1221 Avenue of the Americas 22nd Floor December Inc. and Morgan Stanley Investment Advisors Inc.;
New York, NY 10020 1997 Vice President of the Institutional Funds and the
Retail Funds; formerly practiced law with the New
York law firm of Rogers & Wells (now Clifford
Chance US LLP).
James W. Garrett (36) Treasurer and Treasurer Executive Director of Morgan Stanley & Co.
Morgan Stanley Investment Management Inc. Chief since February Incorporated and Morgan Stanley Investment
1221 Avenue of the Americas 34th Floor Financial 2002; Chief Management Inc.; Treasurer and Chief Financial
New York, NY 10020 Officer Financial Officer of the Institutional Funds; previously
Officer since with PriceWaterhouse LLP (now
July 2003 PriceWaterhouseCoopers LLP).
Michael J. Leary (38) Assistant Assistant Assistant Director and Vice President of Fund
J.P. Morgan Investor Services Co. Treasurer Treasurer Administration, JPMorgan Investor Services Co.
73 Tremont Street since March (formerly Chase Global Funds Services Company);
Boston, MA 02108 2003 formerly Audit Manager at Ernst & Young LLP.
Mary E. Mullin (37) Secretary Secretary Executive Director of Morgan Stanley & Co.
Morgan Stanley Investment Management Inc. since June Incorporated, Morgan Stanley Investment Management
1221 Avenue of the Americas 22nd Floor 1999 Inc. and Morgan Stanley Investment Advisors Inc.;
New York, NY 10020 Secretary of the Institutional Funds and (since
July 2003) the Retail Funds; formerly practiced
law with the New York law firms of McDermott, Will
& Emery and Skadden, Arps, Slate, Meagher & Flom
LLP.
</Table>
- ----------
* This is the date the Officer began serving the Institutional Funds. Each
Officer serves an indefinite term, until his or her successor is elected.
141
<Page>
2004 ANNUAL REPORT
December 31, 2004
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Investment Management Inc.
1221 Avenue of the Americas
New York, NY 10020
DISTRIBUTOR
Morgan Stanley & Co., Incorporated
1221 Avenue of the Americas
New York, NY 10020
CUSTODIAN
JPMorgan Chase Bank
270 Park Avenue
New York, NY 10017
LEGAL COUNSEL
Clifford Chance US LLP
31 West 52nd Street
New York, NY 10019
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116-5072
REPORTING TO SHAREHOLDERS
Each Morgan Stanley fund provides a complete schedule of portfolio holdings in
its semi-annual and annual reports within 60 days of the end of the fund's
second and fourth fiscal quarters by filing the schedule electronically with the
Securities and Exchange Commission (SEC). The semi-annual reports are filed on
Form N-CSRS and the annual reports are filed on Form N-CSR. Morgan Stanley also
delivers the semi-annual and annual reports to fund shareholders and makes these
reports available on its public website, www.morganstanley.com. Each Morgan
Stanley fund also files a complete schedule of portfolio holdings with the SEC
for the fund's first and third fiscal quarters on Form N-Q. Morgan Stanley does
not deliver the reports for the first and third fiscal quarters to shareholders,
nor are the reports posted to the Morgan Stanley public website. You may,
however, obtain the Form N-Q filings (as well as the Form N-CSR and N-CSRS
filings) by accessing the SEC's website, www.sec.gov. You may also review and
copy them at the SEC's Public Reference Room in Washington, DC. Information on
the operation of the SEC's Public Reference Room may be obtained by calling the
SEC at 1(800) SEC-0330. You can also request copies of these materials, upon
payment of a duplicating fee, by electronic request at the SEC's email address
(publicinfo@sec.gov) or by writing the Public Reference section of the SEC,
Washington, DC 20549-0102.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
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 June 30 is available without charge, upon request, by calling
1-800-548-7786 or by visiting our website at www.morganstanley.com/im. This
information is also available on the SEC's website at www.sec.gov.
This report is authorized for distribution only when preceded or accompanied by
the prospectuses of the Morgan Stanley Institutional Fund, Inc. which describes
in detail each Investment Portfolio's investment policies, risks, fees and
expenses. Please read the prospectus carefully before you invest or send money.
For additional information, including information regarding the investments
comprising the Portfolio, please visit our website at www.morganstanley.com/im
or call 1-800-548-7786.
142
<Page>
Printed in U.S.A.
This Report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus.
Morgan Stanley Investment Management Inc.
1221 Avenue of the Americas
New York, NY 10020
MSIF: (800) 548-7786
(C)2005 Morgan Stanley
[MORGAN STANLEY LOGO]
1231-fibaleqseman-0205
<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."
(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 Directors has determined that it has two "audit committee
financial experts" serving on its audit committee, each of whom are
"independent" Directors: 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 Directors
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:
<Table>
<Caption>
2004 REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 461,270 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ $ 115,000 (2)
TAX FEES $ 43,750 (3) $ 100,829 (4)
ALL OTHER FEES $ $ 60,985 (6)
TOTAL NON-AUDIT FEES $ 43,750 $ 276,814
TOTAL $ 505,020 $ 276,814
<Caption>
2003 REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 539,617 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ $ 93,000 (2)
TAX FEES $ 54,693 (3) $ 163,414 (5)
ALL OTHER FEES $ $ 341,775 (6)
TOTAL NON-AUDIT FEES $ 54,693 $ 598,189
TOTAL $ 594,310 $ 598,189
</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 attestation services provided in connection with a SAS
70 Report.
(3) Tax Fees represent tax advice and compliance services provided in connection
with the review of the Registrant's tax returns.
(4) Tax Fees represent tax advice services provided to Covered Entities,
including research and identification of PFIC entities.
2
<Page>
(5) All Other Fees represent attestation services provided in connection with
performance presentation standards.
(6) All Other Fees represent attestation services provided in connection with
performance presentation standards, general industry education seminars
provided, and a regulatory review project performed.
3
<Page>
(e)(1) The audit committee's pre-approval policies and procedures are as
follows:
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)
- - 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.
4
<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.
- - 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.
- - 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).
- - 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
5
<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).
- - 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).
- - 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).
- - 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.
- - 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
6
<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.
- - 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.
- - 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 gt
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
7
<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 Directors 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.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
8
<Page>
Applicable only to annual reports filed by closed-end funds.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Not Applicable
Item 9. Closed-End Fund Repurchases
Applicable to reports filed by closed-end funds.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11 - 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 12. 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.
9
<Page>
<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.
(Registrant) Morgan Stanley Institutional Fund, Inc.
--------------------------------------------------------------------
By: /s/ Ronald E. Robison
-----------------------------------------------------------------------------
Name: Ronald E. Robison
Title: Principal Executive Officer
Date: 2/17/2005
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.
By: /s/ Ronald E. Robison
-----------------------------------------------------------------------------
Name: Ronald E. Robison
Title: Principal Executive Officer
Date: 2/17/2005
By: /s/ James W. Garrett
-----------------------------------------------------------------------------
Name: James W. Garrett
Title: Chief Financial Officer
Date: 2/17/2005