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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-07185
Morgan Stanley Select Dimensions Investment Series
(Exact name of registrant as specified in charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip code)
Ronald E. Robison
1221 Avenue of the Americas, New York, New York 10020
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-762-4000
Date of fiscal year end: December 31, 2005
Date of reporting period: June 30, 2005
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Item 1 - Report to Shareholders
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MORGAN STANLEY
SELECT DIMENSIONS INVESTMENT SERIES
SEMI-ANNUAL REPORT
JUNE 30, 2005
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MORGAN STANLEY SELECT DIMENSIONS INVESTMENT SERIES
TABLE OF CONTENTS
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Letter to the Shareholders 1
Fund Performance 15
Expense Example 17
Investment Advisory Agreement Approval 24
Portfolio of Investments:
Money Market 54
Flexible Income 57
Balanced Growth 77
Utilities 90
Dividend Growth 94
Equally-Weighted S&P 500 98
Growth 111
American Opportunities 115
Capital Opportunities 119
Global Equity 122
Developing Growth 128
Financial Statements:
Statements of Assets and Liabilities 132
Statements of Operations 134
Statements of Changes in Net Assets 136
Notes to Financial Statements 144
Financial Highlights 154
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MORGAN STANLEY SELECT DIMENSIONS INVESTMENT SERIES
LETTER TO THE SHAREHOLDERS - JUNE 30, 2005
Dear Shareholder,
During the first half of 2005, investors grappled with an unclear economic
landscape and stubbornly steep oil prices. The pace and strength of economic
growth came into question, and this uncertainty created a higher degree of
anxiety than that seen in the final months of 2004. By the end of the reporting
period, indications that the U.S. economy remained on track, bolstered
sentiment, and offset some concerns about high oil prices, inflation and global
economic growth.
Domestic Equity Overview
Following an equity rally in the final months of 2004, 2005 opened on a much
less optimistic note. Sentiment shifted and stocks retreated as investors sold
shares to lock in gains. Against the backdrop of rising oil prices, mixed
economic data, continued increases to the federal funds target rate, and the
prospect of a global economic slowdown, investors began to worry about the
prospect of "stagflation" (a climate marked by both stagnant growth and
inflation). Anxiety increased as disappointing news from corporate bellwethers
General Motors and Ford Motor cast a shadow across the auto and auto-related
industries, and the market overall.
However, after reaching a low point in April, the market rebounded during the
final two months of the period. Encouraging retail sales and payroll data, an
upward revision of first-quarter gross domestic product, and strengthening
consumer confidence were among the factors that raised investor sentiment.
Investors also seemed encouraged by merger and acquisition activity and by
signals that the Federal Reserve might be nearing the end of its rate tightening
cycle. During this period, large-cap stocks gained back ground, though not as
much as their small- and mid-cap counterparts.
Within the S&P 500(R) Index, the energy, utilities, and healthcare sectors
posted particularly good gains. Energy stocks were well positioned to profit
from high commodity prices and supply concerns. Utilities also benefited from
increasing energy costs, as well as from the market's hunger for yield-oriented
investments. After struggling in 2004, healthcare stocks rebounded, driven by
strength in healthcare providers and services. The group was helped by abating
negative sentiment and the prospect of further industry consolidation. In
contrast, the materials, technology and consumer discretionary sectors lagged.
Materials stocks were hindered due to investors' anticipation of slowing
worldwide growth and rising production costs, while technology languished as a
long-awaited spending recovery had yet to take hold. The consumer discretionary
sector was held back primarily by weakness in auto, auto-related and media
stocks.
Fixed-Income Overview
As expected, the Federal Open Market Committee (the "Fed") increased the federal
funds target rate at each of its four meetings in the first half of 2005.
Consequently, the benchmark overnight rate increased
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from 2.25 percent at the beginning of the review period to 3.25 percent at the
end. Despite the actions of the Fed, most U.S. Treasury yields fell during the
second half of the six-month period, erasing all of the gains posted by
long-term Treasuries and much of the gains posted by short- and
intermediate-term Treasuries during the first half of the six-month period.
Nevertheless, the period concluded on a positive note, with bond markets
achieving positive returns during the month of June.
It is important to note, however, that as of the end of the period, we have yet
to see the full effects of the Fed's actions on economic activity. For the most
part, the market's concerns over rising energy prices and inflation as well as
faltering growth have muted the impact of the Fed's rate increases. With
two-year and five-year Treasuries near the 3.6 percent to 3.7 percent area at
the end of June, the market reflects neither underlying fundamental trends nor a
more likely course for Fed policy.
Among government-related issues, the Treasury sector outperformed and rebounded
from earlier losses during the latter months of the period. However, the
relative lack of yield offered by Treasuries caused them to underperform other
non-government sectors. Agency debenture yield spreads narrowed slightly during
the second quarter.
Mortgage-backed issues as a group ended the period largely where they began.
After generating good performance in January, spreads widened over the next
three months and much of the excess return was lost. However, the sector managed
to make some of it back in the last two months, ending the period flat.
The credit sector underperformed during the first half of the year, with
higher-quality credits outperforming their medium- and lower-quality
counterparts. The brunt of this weakness came from the industrial sector, while
the financial and utilities sectors posted the highest returns. Among the
corporate sub-sectors, autos was the worst performing due, for the most part, to
news that General Motors had lowered it earnings guidance for the balance of
2005 and that Standard & Poor's downgrades GM and Ford Motor to below
investment-grade. Banking was the best performing sub-sector.
International Equity Overview
Against a backdrop of mixed sentiment and exceptionally high oil prices, global
equity markets slowed overall during the six-month period ended June 30, 2005.
While the leveling off of the United States economy was not surprising, given
the good clip of growth in 2004 and the continued tightening in the federal
funds target rate, the declines in Europe were more unsettling. Economies which
had performed strongly, such as Sweden and the United Kingdom, lost ground. A
strong euro (which can hurt exports) and high oil prices contributed to falling
business confidence and a lack of momentum. Industrial production, consumer
confidence and retail sales faltered significantly. Export activity, typically
an area of strength in
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the European economy, also weakened due to slowing demand from China. In the
United Kingdom, consumers retrenched markedly as protracted weakness in the
housing market spilled over to the retailing sector. As these trends unfolded,
speculation increased that the Bank of England and the European Central Bank
would reduce rates to stimulate growth. Sweden's central bank, meanwhile, did
move forward with a rate reduction.
Japan, meanwhile, showed signs of improvement. Despite recent weakness in its
consumer economy and its dependence on demand from China, Japan's gross domestic
product data was revised upward, deflationary pressures continued to abate, and
banks made progress in clearing problem loans from their books.
Within many emerging market countries, strong macroeconomic policies,
appreciating currencies and record corporate earnings contributed to
considerable gains in their markets. Rising commodity prices also benefited
emerging market economies, as these countries have historically been the world's
leading producers in many commodities.
American Opportunities Portfolio
For the six-month period ended June 30, 2005, American Opportunities Portfolio
Class X shares produced a total return of -1.31 percent versus -1.72 percent for
the Russell 1000(R) Growth Index(1). For the same period, the Portfolio's
Class Y shares returned -1.40 percent. PAST PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS.
THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL
DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY CHARGES BY YOUR INSURANCE
COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE.
Overall, favorable sector allocation drove outperformance relative to the
Russell 1000(R) Growth benchmark, offsetting stock selection, which detracted.
Within the energy sector, the Portfolio benefited from positions in crude oil
producers and coal stocks. International integrated oil stocks further enhanced
performance. Within financial services, contributors included securities
brokerage and services and multi-line insurance stocks. Relative performance was
also helped by positioning in the healthcare management services and
medical-and-dental instruments-and-supplies industries.
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(1) THE RUSSELL 1000 (R) GROWTH INDEX MEASURES THE PERFORMANCE OF THOSE
COMPANIES IN THE RUSSELL 1000 (R) INDEX WITH HIGHER PRICE-TO-BOOK RATIOS
AND HIGHER FORECASTED GROWTH VALUES. INDEXES ARE UNMANAGED AND THEIR
RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER
PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. THE
PORTFOLIO'S BENCHMARK WAS CHANGED FROM THE S&P 500 (R) TO THE RUSSELL
1000 (R) GROWTH INDEX TO MORE ACCURATELY REFLECT THE PORTFOLIO'S INVESTIBLE
UNIVERSE.
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In contrast, areas of weakness for the Portfolio included the materials and
processing sector, where stock selection in gold companies had a negative
impact. Within the consumer discretionary sector, exposure to the Internet and
hotel/motel industry tempered overall gains. An underweighted position relative
to the benchmark in drug and grocery store chains impeded performance. The
Portfolio's technology stake modestly detracted from performance, due to stock
selection in the communications technology industry.
THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL
OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE PORTFOLIO IN THE FUTURE.
Balanced Growth Portfolio
For the six-month period ended June 30, 2005, Balanced Growth Portfolio Class X
shares posted a total return of 2.62 percent versus 1.76 percent for the Russell
1000(R) Value Index(2) and 2.51 percent for the Lehman Brothers U.S. Aggregate
Index(3). For the same period, the Portfolio's Class Y shares returned 2.50
percent. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL
DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY CHARGES BY YOUR INSURANCE
COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE.
Energy holdings added the most to the Portfolio's overall return. Refining
companies led the group, driven by the wider profit margins gained from the high
price of crude oil. These companies' budgets were structured based on oil prices
estimated in the $25 to $30 per barrel range. As crude climbed north of $50 per
barrel, the refiners were able to capture significantly higher than expected
operating margins. Exposure to health care equipment and services stocks
generated particularly strong performance among the Portfolio's health care
holdings, due to company specific positive events. Utilities stocks performed
well for the Portfolio, as these companies successfully passed higher fuel costs
onto their customers. The market also rewarded utilities companies for their
defensive traits and yield potential.
Weakness in the Portfolio came from the consumer discretionary sector, primarily
media-related holdings. Radio companies continued to struggle with generating
advertising revenues -- typically a mainstay of their earnings -- as the radio
industry contended with alternative formats, such as satellite radio and the
Apple iPod and its imitators. Industrials and telecommunication services also
detracted from the Portfolio's
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(2) THE RUSSELL 1000 (R) VALUE INDEX MEASURES THE PERFORMANCE OF THOSE
COMPANIES IN THE RUSSELL 1000 (R) INDEX WITH LOWER PRICE -TO-BOOK RATIOS
AND LOWER FORECASTED GROWTH VALUES. INDEXES ARE UNMANAGED AND THEIR RETURNS
DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER
PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
(3) THE LEHMAN BROTHERS U.S. AGGREGATE INDEX TRACKS THE PERFORMANCE OF ALL U.S.
GOVERNMENT AGENCY AND TREASURY SECURITIES, INVESTMENT-GRADE CORPORATE DEBT
SECURITIES, AGENCY MORTGAGE-BACKED SECURITIES, ASSET-BACKED SECURITIES AND
COMMERCIAL MORTGAGE-BASED SECURITIES. INDEXES ARE UNMANAGED AND THEIR
RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER
PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
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performance. Unlike utilities companies, industrial companies have been unable
to transfer their higher raw material costs to their customers.
Telecommunication services have continued to languish under the industry's
overcapacity, and face a new threat from cable phone service.
The Portfolio's fixed income position slightly added to performance. The
portfolio included investment-grade corporate bonds and Treasury securities.
This emphasis on credit quality served the Portfolio well, as the market favored
these sectors over more risky high-yield issuers.
During the six-month period, the Portfolio's stock and bond proportions remained
fairly constant. As of the end of the reporting period, the Portfolio held 68
percent in stocks and 9 percent in bonds.
THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL
OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE PORTFOLIO IN THE FUTURE.
Capital Opportunities Portfolio
For the six-month period ended June 30, 2005, Capital Opportunities Portfolio
Class X shares produced a total return of 1.78 percent versus -1.88 percent for
the Russell 3000(R) Growth Index(4) and -1.90 percent for the Lipper Multi-Cap
Growth Funds Index(5). For the same period, the Portfolio's Class Y shares
returned 1.59 percent. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL
DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY CHARGES BY YOUR INSURANCE
COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE.
Stock selection across a range of industries drove the Portfolio's
outperformance, offsetting sector allocations, which detracted modestly. Areas
of strength included financial services, consumer discretionary and energy. In
its financial services stake, the Portfolio's diversified financial services
contributed positively. Within consumer discretionary, stock selection in the
Internet and retail industries buoyed returns. Among the Portfolio's energy
holdings, crude oil producers were notable contributors.
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(4) THE RUSSELL 3000 (R) GROWTH INDEX MEASURES THE PERFORMANCE OF THOSE
COMPANIES IN THE RUSSELL 3000 (R) INDEX WITH HIGHER PRICE-TO-BOOK RATIOS
AND HIGHER FORECASTED GROWTH VALUES. INDEXES ARE UNMANAGED AND THEIR
RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER
PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
(5) THE LIPPER MULTI-CAP GROWTH FUNDS INDEX TRACKS THE PERFORMANCE OF THE 30
LARGEST MULTI-CAP GROWTH OPEN-END MUTUAL FUNDS, AS CATEGORIZED BY LIPPER,
INC. FUNDS IN THIS CATEGORY, BY PORTFOLIO PRACTICE, INVEST IN A VARIETY OF
MARKET CAPITALIZATION RANGES WITHOUT CONCENTRATING 75% OF THEIR EQUITY
ASSETS IN ANY ONE MARKET CAPITALIZATION RANGE OVER AN EXTENDED PERIOD OF
TIME. MULTI-CAP GROWTH FUNDS TYPICALLY HAVE AN ABOVE-AVERAGE
PRICE-TO-EARNINGS RATIO, PRICE-TO-BOOK RATIO, AND THREE-YEAR
SALES-PER-SHARE GROWTH VALUE, COMPARED TO THE S&P SUPERCOMPOSITE 1500
INDEX. THE INDEX DOES NOT INCLUDE ANY FEES OR CHARGES. THE INDEX IS
UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT.
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Not all areas performed so strongly, however. Within the Portfolio's healthcare
holdings, biotechnology, and drugs and pharmaceuticals detracted from relative
performance. In consumer staples, an underweighted position relative to the
Russell 3000(R) Growth Index in the drugs and grocery store chain industry
detracted. Also on the downside, the Portfolio's consumer discretionary
allocation was hindered by disadvantageous positioning in commercial services
and hotel/motel stocks. Computer services and software systems slowed the
Portfolio's pace as well.
THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL
OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE PORTFOLIO IN THE FUTURE.
Developing Growth Portfolio
For the six-month period ended June 30, 2005, Developing Growth Portfolio Class
X shares produced a total return of 3.20 percent versus 1.70 percent for the
Russell Midcap(R) Growth Index(6). For the same period, the Portfolio's Class Y
shares returned 3.08 percent. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE
RESULTS.
THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL
DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY CHARGES BY YOUR INSURANCE
COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE.
Stock selection across a diverse group of industries was the primary driver of
performance, while sector allocations were also favorable. Areas of strength
included the technology, financial services, and materials and processing
sectors. Within its technology exposure, the Portfolio benefited from exposure
to the computer services and software systems, and communication technology
industries. Returns were boosted by diversified financial services stocks.
Additionally, a number of banking companies included in the benchmark did not
meet our investment criteria. The decision to avoid these companies helped
relative performance. In the materials and processing area, relative returns
were enhanced by positions in building materials and miscellaneous metals and
materials companies. Within the producer durable sector, telecommunications
equipment exposure benefited the Portfolio's relative performance.
In contrast, within the Portfolio's healthcare stake, stock selection in drugs
and pharmaceutical companies detracted. Also, within consumer discretionary,
pockets of weakness included hotel/motel stocks and consumer electronics stocks.
In the producer durables area, home building stocks had a detrimental impact.
THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL
OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE PORTFOLIO IN THE FUTURE.
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(6) THE RUSSELL MIDCAP (R) GROWTH INDEX MEASURES THE PERFORMANCE OF THOSE
RUSSELL MIDCAP COMPANIES WITH HIGHER PRICE-TO-BOOK RATIOS AND HIGHER
FORECASTED GROWTH VALUES. THE STOCKS ARE ALSO MEMBERS OF THE RUSSELL 1000
(R) GROWTH INDEX. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE
ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT
POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
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Dividend Growth Portfolio
For the six-month period ended June 30, 2005, Dividend Growth Portfolio Class X
shares produced a total return of -1.29 percent versus -0.81 percent for the S&P
500(R) Index(7). For the same period, the Portfolio's Class Y shares returned
- -1.42 percent. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL
DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY CHARGES BY YOUR INSURANCE
COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE.
Factors contributing positively to relative performance included security
selection within the consumer staples, health care, and consumer discretionary
sectors. Among the Portfolio's consumer staples holdings, particular strength
was seen in food and staples retailer and beverage exposure. The Portfolio was
also well served by positions in healthcare providers and services and
healthcare equipment stocks. Also on the upside, relative to the benchmark
index, the Portfolio included less exposure to the struggling consumer
discretionary sector. Moreover, in addition to its overall reduced emphasis, the
Portfolio benefited from strong stock selection within this sector; multi-line
retail stock exposure enhanced returns markedly.
In contrast to these positive factors, the Portfolio's focus on mega-cap names
impeded relative performance. In the final months of the reporting period,
mega-cap stocks did not regain as much ground as their large- and mid-cap
counterparts. Within the Portfolio's energy stake, for example, a focus on
mega-caps hindered performance relative to the benchmark. While the Portfolio's
energy holdings performed quite well in absolute terms, they were not able to
keep up with the more robust returns of other smaller energy stocks within the
S&P 500(R) Index. Security selection within technology also detracted from
performance, driven by company-specific weakness in certain hardware and
telecommunications equipment holdings. The Portfolio's financial stocks tempered
gains as well, with specific holdings in the consumer finance and capital
markets industries being the primary detractors.
THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL
OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE PORTFOLIO IN THE FUTURE.
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(7) THE STANDARD & POOR'S 500 (R) INDEX (S&P 500 (R)) IS A BROAD-BASED INDEX,
THE PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 500 WIDELY-HELD
COMMON STOCKS CHOSEN FOR MARKET SIZE, LIQUIDITY AND INDUSTRY GROUP
REPRESENTATION. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY
SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT
POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
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Equally-Weighted S&P 500 Portfolio
For the six-month period ended June 30, 2005, Equally-Weighted S&P 500 Portfolio
Class X shares produced a total return of 0.43 percent versus 0.52 percent for
the S&P 500 Equal Weight Index(8). For the same period, the Portfolio's Class Y
shares returned 0.31 percent. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE
RESULTS.
THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL
DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY CHARGES BY YOUR INSURANCE
COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE.
The Portfolio benefited most from energy and healthcare stocks. High oil prices
supported many energy companies that deal with crude oil, including those in the
exploration and production, drilling equipment and services, and refining
industries. Healthcare facilities, services and supplies companies largely drove
gains within the healthcare sector. Additionally, both the energy and healthcare
areas were well positioned to profit from investors' preference for "defensive"
areas of the market, given the uncertainties of the rising interest rate and
rising oil price environment.
The Portfolio's chief detractors were in the technology, materials and consumer
discretionary sectors. Technology companies across the board continued to
struggle. Despite improved earnings and increased cash reserves, corporations
remained reluctant to open their budgets for technology outlays. Materials
stocks lagged the market as rising commodity prices increased the production
costs of papers, chemicals, and metals. These companies must absorb the higher
costs, eroding their profits. Within the consumer discretionary space,
automobile and media stocks were among the worst performing groups. Furthermore,
because consumer discretionary represented the Portfolio's largest sector
weighting (but a smaller proportion of the market-capitalization weighted S&P
500(R) Index) the impact of negative performance in that sector was amplified
within the portfolio.
THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL
OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE PORTFOLIO IN THE FUTURE.
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(8) THE STANDARD & POOR'S 500 EQUAL WEIGHT INDEX (S&P EWI) IS THE
EQUAL-WEIGHTED VERSION OF THE WIDELY REGARDED S&P 500 (R) INDEX, WHICH
MEASURES 500 LEADING COMPANIES IN LEADING U.S. INDUSTRIES. THE S&P EWI HAS
THE SAME CONSTITUENTS AS THE CAPITALIZATION WEIGHTED S&P 500 (R) INDEX, BUT
EACH COMPANY IN THE S&P EWI IS ALLOCATED A FIXED WEIGHT, REBALANCING
QUARTERLY. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY
EXPENSES, SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS
NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
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Flexible Income Portfolio
For the six-month period ended June 30, 2005, Flexible Income Portfolio Class X
shares produced a total return of 1.54 percent versus 1.59 percent for the
Lehman Brothers U.S. Intermediate Government/Credit Index(9). For the same
period, the Portfolio's Class Y shares returned 1.56 percent. PAST PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS.
THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL
DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY CHARGES BY YOUR INSURANCE
COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE.
Within the investment grade portion of the Portfolio, an underweighted position
relative to the benchmark in banking and finance as well as energy contributed
positively to relative performance. Within the global portion of the Portfolio,
non-U.S. holdings were hurt by the appreciation of the U.S. dollar relative to
other currencies.
During the period, the high yield portion of the Portfolio benefited from
advantageous positioning in transportation securities, where our investment
discipline had led us to de-emphasize struggling auto and auto related
companies. Security selection in wireless communications also enhanced
performance. The sector performed well overall, and several of the Portfolio's
positions were particularly rewarded for their strong fundamentals. In contrast,
forest products, housing and manufacturing securities slowed the Portfolio's
pace. Within housing, exposure to highly leveraged building product companies
hindered performance as investors worried about a potential decline in home
construction. Forest and manufacturing securities detracted from overall returns
due to company-specific reasons.
The Portfolio's mortgage position, specifically the emphasis on higher coupon,
slow prepaying mortgages, had a positive impact on relative performance. These
types of mortgages tend to be less sensitive to rising interest rates than
lower-coupon, fast pre-paying mortgages.
We kept the Portfolio's overall interest-rate exposure well below that of its
benchmark during the period. This posture was beneficial as interest rates rose
across the short- and intermediate-portions of the curve. That said, we note
that during periods of rate declines, this position may be a hindrance to
relative performance.
THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL
OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE PORTFOLIO IN THE FUTURE.
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(9) THE LEHMAN BROTHERS INTERMEDIATE U.S. GOVERNMENT/CREDIT INDEX TRACKS THE
PERFORMANCE OF U.S. GOVERNMENT AND CORPORATE OBLIGATIONS, INCLUDING U.S.
GOVERNMENT AGENCY AND TREASURY SECURITIES, AND CORPORATE AND YANKEE BONDS
WITH MATURITIES OF 1 TO 10 YEARS. INDEXES ARE UNMANAGED AND THEIR RETURNS
DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER
PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
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Global Equity Portfolio
For the six-month period ended June 30, 2005, Global Equity Portfolio Class X
shares produced a total return of -0.55 percent versus -0.70 percent for the
MSCI World Index(10). For the same period, the Portfolio's Class Y shares
returned -0.73 percent. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL
DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY CHARGES BY YOUR INSURANCE
COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE.
During the reporting period, the Portfolio benefited from its underweighting in
the United Kingdom relative to the MSCI World Index. Prior to the Federal Open
Market Committee's move to increase the federal funds target rate in the United
States, the Bank of England had embarked upon a tightening program. We were
concerned that such a course could signal economic slowdown in the United
Kingdom, which did come to pass. Relative performance was also helped by
underweighting Japan. This position was underpinned by our concerns that
although banks were clearing problem loans from their books and stocks appeared
attractively valued, the economy was still not on a sufficiently strong footing
for sustainable growth.
In addition to these geographic underweightings, the Portfolio was well served
from an underweighted position in consumer discretionary stocks - specifically
autos, retailers and consumer durables. Our reduced emphasis on this sector was
influenced by our analysis of U.S. climate, notably rising short-term interest
rates, the prospect of slowing economic growth and mixed labor market data. An
underweighting of rate-sensitive financials stocks proved advantageous as the
yield curve flattened. Returns were further buoyed by an overweight in
technology hardware. European semiconductor stocks were particularly robust
performers. We had established positions based on our view that the stocks were
attractively priced given their improving fundamentals. During the period, the
market rewarded these companies as their prospects for the second half of 2005
became clearer.
Not all positions performed as well, however. The Portfolio was overweighted
relative to the benchmark in the continental Europe region. Our optimism was
supported by cheap stock price valuations, attractive dividend yields and the
potential for positive earnings surprises driven by corporate cost cutting.
However, the economies of the region generally slowed: High oil prices, a strong
Euro (which can weaken exports) combined with weakening trends in consumer
confidence, industrial production and retail sales. Reflecting
- ----------
(10) THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) WORLD INDEX MEASURES
PERFORMANCE FROM A DIVERSE RANGE OF GLOBAL STOCK MARKETS INCLUDING THE
U.S., CANADA, EUROPE, AUSTRALIA, NEW ZEALAND, AND THE FAR EAST. THE
PERFORMANCE OF THE INDEX IS LISTED IN U.S. DOLLARS AND ASSUMES REINVESTMENT
OF NET DIVIDENDS. "NET DIVIDENDS" REFLECTS A REDUCTION IN DIVIDENDS AFTER
TAKING INTO ACCOUNT WITHHOLDING OF TAXES BY CERTAIN FOREIGN COUNTRIES
REPRESENTED IN THE INDEX. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT
INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT
IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
10
<Page>
the view that the utilities sector might retreat as rates rose, the Portfolio
was underweighted in that group. This reduced commitment tempered performance,
as long-term rates declined nonetheless and investors continued to seek the
yield potential offered by utilities. Exposure to European telecommunications
also detracted from performance. A number of these stocks struggled in a climate
of intensifying mobile market competition and market saturation, which triggered
a reduction in earnings expectations.
THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL
OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE PORTFOLIO IN THE FUTURE.
Growth Portfolio
For the six-month period ended June 30, 2005, Growth Portfolio Class X shares
produced a total return of 0.05 percent versus -1.72 percent for the Russell
1000(R) Growth Index(11). For the same period, the Portfolio's Class Y shares
returned -0.08 percent. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL
DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY CHARGES BY YOUR INSURANCE
COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE.
Favorable stock selection across a variety of industries drove the Portfolio's
outperformance versus the benchmark. This positive stock selection offset the
impact of sector allocations, which detracted modestly. Areas of strength
included the Portfolio's healthcare, financial services and utilities stakes.
Within the healthcare sector, the Portfolio benefited from positions in medical
and dental instruments and supplies companies, as well as from biotechnology
research and production companies. The Portfolio was also well served by an
overall underweighting in the healthcare sector relative to the Russell 1000(R)
Growth Index. Relative returns were also boosted by diversified financial
services stocks and miscellaneous financial stocks. Utilities stocks were
represented among the positive contributors, including wireless companies and
gas distributors. Also on the upside, telecommunications equipment exposure
enhanced results.
In contrast, the Portfolio's performance was dampened by consumer discretionary
exposure, as stocks from the commercial services, hotel/motel, and casinos and
gambling industries hindered gains. Technology exposure also slowed the
Portfolio's pace. Computer technology, communications technology and
semiconductors/components companies detracted from relative performance.
THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL
OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE PORTFOLIO IN THE FUTURE.
- ----------
(11) THE RUSSELL 1000 (R) GROWTH INDEX MEASURES THE PERFORMANCE OF THOSE
COMPANIES IN THE RUSSELL 1000 (R) INDEX WITH HIGHER PRICE-TO-BOOK RATIOS
AND HIGHER FORECASTED GROWTH VALUES. INDEXES ARE UNMANAGED AND THEIR
RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER
PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
11
<Page>
Money Market Portfolio
AN INVESTMENT IN A MONEY MARKET IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH MONEY
MARKET FUNDS SEEK TO PRESERVE THE VALUE OF AN INVESTMENT AT $1.00 PER SHARE, IT
IS POSSIBLE TO LOSE MONEY BY INVESTING IN SUCH FUNDS.
As of June 30, 2005, Money Market Portfolio had net assets of more than $94
million with an average portfolio maturity of 38 days. For the seven-day period
ended June 30, 2005, the Portfolio's Class X shares provided an effective
annualized yield of 2.68 percent and a current yield of 2.65 percent, while its
30-day moving average yield for June was 2.60 percent. For the six-month period
ended June 30, 2005, the Portfolio's Class X shares returned 1.10 percent.
For the seven-day period ended June 30, 2005 the Portfolio's Class Y shares
provided an effective annualized yield of 2.42 percent and a current yield of
2.39 percent, while its 30-day moving average yield for June was 2.35 percent.
For the six-month period ended June 30, 2005, the Portfolio's Class Y shares
provided a total return of 0.97 percent.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
Our strategy in managing the Portfolio remained consistent with the Portfolio's
long-term focus on maintaining preservation of capital and liquidity. We adhered
to a conservative approach in managing the Portfolio that emphasized purchasing
high-quality money market obligations and avoided the use of derivatives or
structured notes that might fluctuate excessively with changing interest rates.
During the period, we took advantage of the rising yields available on money
market securities by reinvesting proceeds of maturing short-term holdings at
increased levels as rates climbed. We anticipate continuing this approach if
rates continue to rise during the remainder of 2005.
At the end of the measurement period, all of the Portfolio's holdings were due
to mature in less than four months. As a result, we believe the Portfolio is
well-positioned for stability of value with a high degree of liquidity.
THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL
DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY CHARGES BY YOUR INSURANCE
COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE.
THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL
OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE PORTFOLIO IN THE FUTURE.
12
<Page>
Utilities Portfolio
For the six-month period ended June 30, 2005, Utilities Portfolio Class X shares
produced a total return of 11.67 percent versus -0.81 percent for the S&P 500(R)
Index(12). For the same period, the Portfolio's Class Y shares returned 11.48
percent. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL
DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY CHARGES BY YOUR INSURANCE
COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE.
Attractive yield and dividend growth characteristics, improving fundamentals,
merger-and-acquisition activity, legislative developments and the specific
benefits of commodity prices supported utilities during the period. The
Portfolio participated in the sector's broad strength. In particular, solid
contributions by the natural gas and electric stocks fuelled the Portfolio's
performance. Exceptionally strong oil and natural gas prices were key factors
underlying the significant upside of natural gas companies with exploration and
production affiliations. Selective electric utilities were also beneficiaries of
higher commodity prices, especially those having relatively low cost and excess
coal and nuclear generation.
The Portfolio's telecommunications stocks were mixed. The threat of
competition and regulatory uncertainty hindered the large-cap legacy Regional
Bell companies. However, a number of wireless stocks offset this weakness.
Overall, merger and acquisition activity within the wireless industry has been a
major stimulant among the principal operators while related areas such as the
tower companies have been exceptional performers.
Unlike the Regional Bells where growth is slow at best, the wireless area has
attractive organic growth prospects as well as the benefit of synergies from
current and future consolidation. Consequently, the portfolio's incremental
investment in telecom has focused on the wireless arena.
THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL
OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE PORTFOLIO IN THE FUTURE.
- ----------
(12) THE STANDARD & POOR'S 500 (R) INDEX (S&P 500 (R)) IS A BROAD-BASED INDEX,
THE PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 500 WIDELY-HELD
COMMON STOCKS CHOSEN FOR MARKET SIZE, LIQUIDITY AND INDUSTRY GROUP
REPRESENTATION. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY
SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT
POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
13
<Page>
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORDS
You may obtain a copy of the Fund's Proxy Voting Policies and Procedures without
charge, upon request, by calling toll free 800-869-NEWS or by visiting the
Mutual Fund Center on our Web site at www.morganstanley.com. They are also
available on the Securities and Exchange Commission's Web site at
http://www.sec.gov.
You may obtain information regarding how the Funds voted proxies relating to
portfolio securities during the most recent twelve-month period ended June 30 by
visiting the Mutual Fund Center on our Web site at www.morganstanley.com. This
information is also available on the Securities and Exchange Commission's Web
site at http://www.sec.gov.
14
<Page>
MORGAN STANLEY SELECT DIMENSIONS INVESTMENT SERIES
FUND PERFORMANCE - JUNE 30, 2005
AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED JUNE 30, 2005(1)
<Table>
<Caption>
SINCE
CLASS X 1 YEAR 5 YEARS 10 YEARS INCEPTION*
- ------- ------ ------- -------- ----------
American Opportunities 5.44% (7.24)% 9.41% 10.51%
Balanced Growth 11.41 6.78 8.32 9.18
Capital Opportunities 14.22 (16.09) N/A 0.87
Developing Growth 16.40 (4.02) 9.46 11.30
Dividend Growth 4.69 4.17 9.33 10.72
Equally-Weighted S&P 500 10.56 8.35 11.79 12.50
Flexible Income 8.61 4.10 4.49 4.53
Global Equity 6.18 (1.77) 6.35 6.62
Growth 4.95 (7.03) 6.53 6.81
Money Market 1.69 2.18 3.68 3.83
Utilities 31.94 (1.19) 10.52 10.96
</Table>
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF
FUTURE RESULTS, AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES
SHOWN. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT
www.morganstanley.com OR SPEAK WITH YOUR FINANCIAL ADVISOR. INVESTMENT RETURNS
AND PRINCIPAL VALUE WILL FLUCTUATE AND PORTFOLIO SHARES, WHEN REDEEMED, MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
The performance of the Portfolio's two share classes varies because each has
different expenses. The Portfolio's total return figures assume the reinvestment
of all distributions but do not reflect the impact of any charges by your
insurance company. Such costs would lower performance.
- ----------
(1) Figure assumes reinvestment of all distributions for the underlying fund
based on net asset value (NAV). It does not reflect the deduction of
insurance expenses, an annual contract maintenance fee, or surrender
charges.
* The inception date of each Portfolio was November 9, 1994, with the
exception of Capital Opportunities, which commenced operations on January
21, 1997.
15
<Page>
AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED JUNE 30, 2005(1)
<Table>
<Caption>
SINCE
CLASS Y 1 YEAR INCEPTION*
- ------- ------- ----------
American Opportunities 5.17% (7.71)%
Balanced Growth 11.16 6.04
Capital Opportunities 13.88 (17.18)
Developing Growth 16.12 (3.80)
Dividend Growth 4.44 3.49
Equally-Weighted S&P 500 10.31 7.81
Flexible Income 8.36 3.98
Global Equity 5.82 (2.20)
Growth 4.71 (7.77)
Money Market 1.44 1.87
Utilities 31.57 (1.88)
</Table>
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF
FUTURE RESULTS, AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES
SHOWN. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT
www.morganstanley.com OR SPEAK WITH YOUR FINANCIAL ADVISOR. INVESTMENT RETURNS
AND PRINCIPAL VALUE WILL FLUCTUATE AND PORTFOLIO SHARES, WHEN REDEEMED, MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
The performance of the Portfolio's two share classes varies because each has
different expenses. The Portfolio's total return figures assume the reinvestment
of all distributions but do not reflect the impact of any charges by your
insurance company. Such costs would lower performance.
- ----------
(1) Figure assumes reinvestment of all distributions for the underlying fund
based on net asset value (NAV). It does not reflect the deduction of
insurance expenses, an annual contract maintenance fee, or surrender
charges.
* Inception date of July 24, 2000.
16
<Page>
MORGAN STANLEY SELECT DIMENSIONS INVESTMENT SERIES
EXPENSE EXAMPLE - JUNE 30, 2005
As a shareholder of the Fund, you incur two types of costs: (1) insurance
company charges; and (2) ongoing costs, including management fees; distribution
and service (12b-1) fees; and other Fund expenses. This example is intended to
help you understand your ongoing costs (in dollars) of investing in the Fund and
to compare these costs with the ongoing costs of investing in other mutual
funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period 01/01/05 - 06/30/05.
ACTUAL EXPENSES
The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table below provides information about hypothetical
expenses based on the Fund's actual expense ratio and an assumed rate of return
of 5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use this
information to compare the ongoing cost of investing in the Fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any insurance company charges. Therefore,
the second line of the table is useful in comparing ongoing costs, and will not
help you determine the relative total cost of owning different funds. In
addition, if these insurance company charges were included, your costs would
have been higher.
17
<Page>
MONEY MARKET
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
------------- ------------- --------------
01/01/05 -
01/01/05 06/30/05 06/30/05
------------- ------------- --------------
CLASS X
Actual (1.10% return) $ 1,000.00 $ 1,011.00 $ 2.79
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,022.02 $ 2.81
CLASS Y
Actual (0.97% return) $ 1,000.00 $ 1,009.70 $ 4.04
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,020.78 $ 4.06
</Table>
- ----------
* Expenses are equal to the Portfolio's annualized expense ratio of 0.56% and
0.81% respectively, multiplied by the average account value over the
period, multiplied by 181/365 (to reflect the one-half year period).
FLEXIBLE INCOME
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
------------- ------------- --------------
01/01/05 -
01/01/05 06/30/05 06/30/05
------------- ------------- --------------
CLASS X
Actual (1.54% return) $ 1,000.00 $ 1,015.40 $ 3.15
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,021.67 $ 3.16
CLASS Y
Actual (1.56% return) $ 1,000.00 $ 1,015.60 $ 4.40
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,020.43 $ 4.41
</Table>
- ----------
* Expenses are equal to the Portfolio's annualized expense ratio of 0.63% and
0.88% respectively, multiplied by the average account value over the
period, multiplied by 181/365 (to reflect the one-half year period).
18
<Page>
BALANCED GROWTH
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
------------- ------------- --------------
01/01/05 -
01/01/05 06/30/05 06/30/05
------------- ------------- --------------
CLASS X
Actual (2.62% return) $ 1,000.00 $ 1,026.20 $ 3.47
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,021.37 $ 3.46
CLASS Y
Actual (2.50% return) $ 1,000.00 $ 1,025.00 $ 4.72
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,020.13 $ 4.71
</Table>
- ----------
* Expenses are equal to the Portfolio's annualized expense ratio of 0.69% and
0.94% respectively, multiplied by the average account value over the
period, multiplied by 181/365 (to reflect the one-half year period).
UTILITIES
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
------------- ------------- --------------
01/01/05 -
01/01/05 06/30/05 06/30/05
------------- ------------- --------------
CLASS X
Actual (11.67% return) $ 1,000.00 $ 1,116.70 $ 3.73
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,021.27 $ 3.56
CLASS Y
Actual (11.48% return) $ 1,000.00 $ 1,114.80 $ 5.03
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,020.03 $ 4.81
</Table>
- ----------
* Expenses are equal to the Portfolio's annualized expense ratio of 0.71% and
0.96% respectively, multiplied by the average account value over the
period, multiplied by 181/365 (to reflect the one-half year period).
19
<Page>
DIVIDEND GROWTH
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
------------- ------------- --------------
01/01/05 -
01/01/05 06/30/05 06/30/05
------------- ------------- --------------
CLASS X
Actual (-1.29% return) $ 1,000.00 $ 987.10 $ 3.05
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,021.72 $ 3.11
CLASS Y
Actual (-1.42% return) $ 1,000.00 $ 985.80 $ 4.28
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,020.48 $ 4.36
</Table>
- ----------
* Expenses are equal to the Portfolio's annualized expense ratio of 0.62% and
0.87% respectively, multiplied by the average account value over the
period, multiplied by 181/365 (to reflect the one-half year period).
EQUALLY-WEIGHTED S&P 500
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
------------- ------------- --------------
01/01/05 -
01/01/05 06/30/05 06/30/05
------------- ------------- --------------
CLASS X
Actual (0.43% return) $ 1,000.00 $ 1,004.30 $ 1.29
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,023.51 $ 1.30
CLASS Y
Actual (0.31% return) $ 1,000.00 $ 1,003.10 $ 2.53
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,022.27 $ 2.56
</Table>
- ----------
* Expenses are equal to the Portfolio's annualized expense ratio of 0.26% and
0.51% respectively, multiplied by the average account value over the
period, multiplied by 181/365 (to reflect the one-half year period).
20
<Page>
GROWTH
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
------------- ------------- --------------
01/01/05 -
01/01/05 06/30/05 06/30/05
------------- ------------- --------------
CLASS X
Actual (0.05% return) $ 1,000.00 $ 1,000.50 $ 3.57
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,021.22 $ 3.61
CLASS Y
Actual (-0.08% return) $ 1,000.00 $ 999.20 $ 4.81
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,019.98 $ 4.86
</Table>
- ----------
* Expenses are equal to the Portfolio's annualized expense ratio of 0.72% and
0.97% respectively, multiplied by the average account value over the
period, multiplied by 181/365 (to reflect the one-half year period).
AMERICAN OPPORTUNITIES
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
------------- ------------- --------------
01/01/05 -
01/01/05 06/30/05 06/30/05
------------- ------------- --------------
CLASS X
Actual (-1.31% return) $ 1,000.00 $ 986.90 $ 3.30
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,021.47 $ 3.36
CLASS Y
Actual (-1.40% return) $ 1,000.00 $ 986.00 $ 4.53
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,020.23 $ 4.61
</Table>
- ----------
* Expenses are equal to the Portfolio's annualized expense ratio of 0.67% and
0.92% respectively, multiplied by the average account value over the
period, multiplied by 181/365 (to reflect the one-half year period).
21
<Page>
CAPITAL OPPORTUNITIES
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
------------- ------------- --------------
01/01/05 -
01/01/05 06/30/05 06/30/05
------------- ------------- --------------
CLASS X
Actual (1.78% return) $ 1,000.00 $ 1,017.80 $ 4.40
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,020.43 $ 4.41
CLASS Y
Actual (1.59% return) $ 1,000.00 $ 1,015.90 $ 5.65
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,019.19 $ 5.66
</Table>
- ----------
* Expenses are equal to the Portfolio's annualized expense ratio of 0.88% and
1.13% respectively, multiplied by the average account value over the
period, multiplied by 181/365 (to reflect the one-half year period).
GLOBAL EQUITY
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
------------- ------------- --------------
01/01/05 -
01/01/05 06/30/05 06/30/05
------------- ------------- --------------
CLASS X
Actual (-0.55% return) $ 1,000.00 $ 994.50 $ 5.44
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,019.34 $ 5.51
CLASS Y
Actual (-0.73% return) $ 1,000.00 $ 992.70 $ 6.67
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,018.10 $ 6.76
</Table>
- ----------
* Expenses are equal to the Portfolio's annualized expense ratio of 1.10% and
1.35% respectively, multiplied by the average account value over the
period, multiplied by 181/365 (to reflect the one-half year period).
22
<Page>
DEVELOPING GROWTH
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
------------- ------------- --------------
01/01/05 -
01/01/05 06/30/05 06/30/05
------------- ------------- --------------
CLASS X
Actual (3.20% return) $ 1,000.00 $ 1,032.00 $ 3.17
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,021.67 $ 3.16
CLASS Y
Actual (3.08% return) $ 1,000.00 $ 1,030.80 $ 4.43
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,020.43 $ 4.41
</Table>
- ----------
* Expenses are equal to the Portfolio's annualized expense ratio of 0.63% and
0.88% respectively, multiplied by the average account value over the
period, multiplied by 181/365 (to reflect the one-half year period).
23
<Page>
MORGAN STANLEY SELECT DIMENSIONS INVESTMENT SERIES
INVESTMENT ADVISORY AGREEMENT APPROVAL - JUNE 30, 2005
MONEY MARKET PORTFOLIO
NATURE, EXTENT AND QUALITY OF SERVICES
The Board reviewed and considered the nature and extent of the investment
advisory services provided by the Investment Adviser under the Advisory
Agreement, including portfolio management, investment research and fixed income
securities trading. The Board also reviewed and considered the nature and extent
of the non-advisory, administrative services provided by the Portfolio's
Administrator under the Administration Agreement, including accounting,
clerical, bookkeeping, compliance, business management and planning, and the
provision of supplies, office space and utilities. (The Investment Adviser and
the Administrator together are referred to as the "Adviser" and the Advisory and
Administration Agreements together are referred to as the "Management
Agreement.") The Board also compared the nature of the services provided by the
Adviser with similar services provided by non-affiliated advisers as reported to
the Board by Lipper Inc. ("Lipper").
The Board reviewed and considered the qualifications of the portfolio managers,
the senior administrative managers and other key personnel of the Adviser who
provide the administrative and investment advisory services to the Portfolio.
The Board determined that the Adviser's portfolio managers and key personnel are
well qualified by education and/or training and experience to perform the
services in an efficient and professional manner. The Board concluded that the
nature and extent of the advisory and administrative services provided were
necessary and appropriate for the conduct of the business and investment
activities of the Portfolio. The Board also concluded that the overall quality
of the advisory and administrative services was satisfactory.
PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the Portfolio's performance for the one-, three- and
five-year periods ended November 30, 2004, as shown in reports provided by
Lipper (the "Lipper Reports"), compared to the performance of comparable funds
selected by Lipper (the "performance peer group"), and noted that the
Portfolio's performance was lower, but close to, than its performance peer group
average for all three periods. The Board concluded that the Fund's overall
performance was competitive with its performance peer group.
FEES RELATIVE TO OTHER FUNDS MANAGED BY THE ADVISER WITH COMPARABLE INVESTMENT
STRATEGIES
The Board reviewed the advisory and administrative fees (together, the
"management fee") paid by the Portfolio under the Management Agreement. The
Board noted that the rate was comparable to the management fee rates charged by
the Adviser to any other funds it manages with investment strategies comparable
to those of the Portfolio.
FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the management fee rate and the total expense ratio of the
Portfolio. The Board noted that: (i) the Portfolio's management fee rate was
higher than the average management fee rate for funds, selected by Lipper (the
"expense peer group"), managed by other advisers with investment strategies
comparable to those of the Portfolio, as shown in the Lipper Report for the
Portfolio; and (ii) the Portfolio's total expense ratio was also
24
<Page>
higher than, but close to, the average total expense ratio of the funds included
in the Portfolio's expense peer group. The Board concluded that the Portfolio's
management fee and total expense ratio were competitive with those of its
expense peer group.
BREAKPOINTS AND ECONOMIES OF SCALE
The Board reviewed the structure of the Portfolio's management fee schedule
under the Management Agreement and noted that it includes breakpoints. The Board
also reviewed the level of the Portfolio's management fee and noted that the
fee, as a percentage of the Portfolio's net assets, would decrease as net assets
increase because the management fee includes breakpoints. The Board concluded
that the Portfolio's management fee would reflect economies of scale as assets
increase.
PROFITABILITY OF ADVISER AND AFFILIATES
The Board considered and reviewed information concerning the costs incurred and
profits realized by the Adviser and its affiliates during the last two years
from their relationship with the Portfolio and the Morgan Stanley Fund Complex
and reviewed with the Controller of the Adviser the cost allocation methodology
used to determine the Adviser's profitability. Based on their review of the
information they received, the Board concluded that the profits earned by the
Adviser and its affiliates were not excessive in light of the advisory,
administrative and other services provided to the Portfolio.
FALL-OUT BENEFITS
The Board considered so-called "fall-out benefits" derived by the Adviser and
its affiliates from their relationship with the Portfolio and the Morgan Stanley
Fund Complex, such as "float" benefits derived from handling of checks for
purchases and redemptions of Portfolio shares through a broker-dealer affiliate
of the Adviser. The Board also considered that a broker-dealer affiliate of the
Adviser receives from the Portfolio 12b-1 fees for distribution and shareholder
services. The Board concluded that the float benefits were relatively small and
that the 12b-1 fees were competitive with those of other broker-dealer
affiliates of investment advisers.
SOFT DOLLAR BENEFITS
The Board considered whether the Adviser realizes any benefits from commissions
paid to brokers who execute securities transactions for the Portfolio ("soft
dollars"). The Board noted that the Portfolio invests only in fixed income
securities, which do not generate soft dollars.
ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE PORTFOLIO'S
NEEDS
The Board considered whether the Adviser is financially sound and has the
resources necessary to perform its obligations under the Management Agreement.
The Board noted that the Adviser's operations remain profitable, although
increased expenses in recent years have reduced the Adviser's profitability. The
Board concluded that the Adviser has the financial resources necessary to
fulfill its obligations under the Management Agreement.
25
<Page>
HISTORICAL RELATIONSHIP BETWEEN THE PORTFOLIO AND THE ADVISER
The Board also reviewed and considered the historical relationship between the
Portfolio and the Adviser, including the organizational structure of the
Adviser, the policies and procedures formulated and adopted by the Adviser for
managing the Portfolio's operations and the Board's confidence in the competence
and integrity of the senior managers and key personnel of the Adviser. The Board
concluded that it is beneficial for the Portfolio to continue its relationship
with the Adviser.
OTHER FACTORS AND CURRENT TRENDS
The Board considered the controls and procedures adopted and implemented by the
Adviser and monitored by the Portfolio's Chief Compliance Officer and concluded
that the conduct of business by the Adviser indicates a good faith effort on its
part to adhere to high ethical standards in the conduct of the Portfolio's
business.
GENERAL CONCLUSION
After considering and weighing all of the above factors, the Board concluded it
would be in the best interest of the Portfolio and its shareholders to approve
renewal of the Management Agreement for another year.
FLEXIBLE INCOME PORTFOLIO
NATURE, EXTENT AND QUALITY OF SERVICES
The Board reviewed and considered the nature and extent of the investment
advisory services provided by the Investment Adviser under the Advisory
Agreement, including portfolio management, investment research and fixed income
securities trading. The Board also reviewed and considered the nature and extent
of the non-advisory, administrative services provided by the Portfolio's
Administrator under the Administration Agreement, including accounting,
clerical, bookkeeping, compliance, business management and planning, and the
provision of supplies, office space and utilities. (The Investment Adviser and
the Administrator together are referred to as the "Adviser" and the Advisory and
Administration Agreements together are referred to as the "Management
Agreement.") The Board also compared the nature of the services provided by the
Adviser with similar services provided by non-affiliated advisers as reported to
the Board by Lipper Inc. ("Lipper").
The Board reviewed and considered the qualifications of the portfolio managers,
the senior administrative managers and other key personnel of the Adviser who
provide the administrative and investment advisory services to the Portfolio.
The Board determined that the Adviser's portfolio managers and key personnel are
well qualified by education and/or training and experience to perform the
services in an efficient and professional manner. The Board concluded that the
nature and extent of the advisory and administrative services provided were
necessary and appropriate for the conduct of the business and investment
activities of the Portfolio. The Board also concluded that the overall quality
of the advisory and administrative services was satisfactory.
26
<Page>
PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the Portfolio's performance for the one-, three- and
five-year periods ended November 30, 2004, as shown in reports provided by
Lipper (the "Lipper Reports"), compared to the performance of comparable funds
selected by Lipper (the "performance peer group"), and noted that the
Portfolio's performance was lower than its performance peer group average for
the five-year period but better for the one- and three-year periods. The Board
concluded that the Portfolio's overall performance was competitive with its
performance peer group.
FEES RELATIVE TO OTHER FUNDS MANAGED BY THE ADVISER WITH COMPARABLE INVESTMENT
STRATEGIES
The Board reviewed the advisory and administrative fees (together, the
"management fee") paid by the Portfolio under the Management Agreement. The
Board noted that the rate was comparable to the management fee rates charged by
the Adviser to any other funds it manages with investment strategies comparable
to those of the Portfolio.
FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the management fee rate and the total expense ratio of the
Portfolio. The Board noted that: (i) the Portfolio's management fee rate was
lower than the average management fee rate for funds, selected by Lipper (the
"expense peer group"), managed by other advisers with investment strategies
comparable to those of the Portfolio, as shown in the Lipper Report for the
Portfolio; and (ii) the Portfolio's total expense ratio was also lower than the
average total expense ratio of the funds included in the Portfolio's expense
peer group. The Board concluded that the Portfolio's management fee and total
expense ratio were competitive with those of its expense peer group.
BREAKPOINTS AND ECONOMIES OF SCALE
The Board reviewed the structure of the Portfolio's management fee schedule
under the Management Agreement and noted that it does not include any
breakpoints. The Board considered that the Portfolio's assets were small and its
potential growth was unpredictable. The Board concluded that it would be
premature to consider economies of scale as a factor in approving the Management
Agreement.
PROFITABILITY OF ADVISER AND AFFILIATES
The Board considered and reviewed information concerning the costs incurred and
profits realized by the Adviser and its affiliates during the last two years
from their relationship with the Portfolio and the Morgan Stanley Fund Complex
and reviewed with the Controller of the Adviser the cost allocation methodology
used to determine the Adviser's profitability. Based on their review of the
information they received, the Board concluded that the profits earned by the
Adviser and its affiliates were not excessive in light of the advisory,
administrative and other services provided to the Portfolio.
FALL-OUT BENEFITS
The Board considered so-called "fall-out benefits" derived by the Adviser and
its affiliates from their relationship with the Portfolio and the Morgan Stanley
Fund Complex, such as "float" benefits derived from handling of checks for
27
<Page>
purchases and redemptions of Portfolio shares through a broker-dealer affiliate
of the Adviser. The Board also considered that a broker-dealer affiliate of the
Adviser receives from the Portfolio 12b-1 fees for distribution and shareholder
services. The Board concluded that the float benefits were relatively small and
that the 12b-1 fees were competitive with those of other broker-dealer
affiliates of investment advisers.
SOFT DOLLAR BENEFITS
The Board considered whether the Adviser realizes any benefits from commissions
paid to brokers who execute securities transactions for the Portfolio ("soft
dollars"). The Board noted that the Portfolio invests only in fixed income
securities, which do not generate soft dollars.
ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE PORTFOLIO'S
NEEDS
The Board considered whether the Adviser is financially sound and has the
resources necessary to perform its obligations under the Management Agreement.
The Board noted that the Adviser's operations remain profitable, although
increased expenses in recent years have reduced the Adviser's profitability. The
Board concluded that the Adviser has the financial resources necessary to
fulfill its obligations under the Management Agreement.
HISTORICAL RELATIONSHIP BETWEEN THE PORTFOLIO AND THE ADVISER
The Board also reviewed and considered the historical relationship between the
Portfolio and the Adviser, including the organizational structure of the
Adviser, the policies and procedures formulated and adopted by the Adviser for
managing the Portfolio's operations and the Board's confidence in the competence
and integrity of the senior managers and key personnel of the Adviser. The Board
concluded that it is beneficial for the Portfolio to continue its relationship
with the Adviser.
OTHER FACTORS AND CURRENT TRENDS
The Board considered the controls and procedures adopted and implemented by the
Adviser and monitored by the Portfolio's Chief Compliance Officer and concluded
that the conduct of business by the Adviser indicates a good faith effort on its
part to adhere to high ethical standards in the conduct of the Portfolio's
business.
GENERAL CONCLUSION
After considering and weighing all of the above factors, the Board concluded it
would be in the best interest of the Portfolio and its shareholders to approve
renewal of the Management Agreement for another year.
BALANCED GROWTH PORTFOLIO
NATURE, EXTENT AND QUALITY OF SERVICES
The Board reviewed and considered the nature and extent of the investment
advisory services provided by the Investment Adviser under the Advisory
Agreement, including portfolio management, investment research and equity
28
<Page>
and fixed income securities trading. The Board also reviewed and considered the
nature and extent of the non-advisory, administrative services provided by the
Portfolio's Administrator under the Administration Agreement, including
accounting, clerical, bookkeeping, compliance, business management and planning,
and the provision of supplies, office space and utilities at the Adviser's
expense. (The Investment Adviser and the Administrator together are referred to
as the "Adviser" and the Advisory and Administration Agreements together are
referred to as the "Management Agreement.") The Board also compared the nature
of the services provided by the Adviser with similar services provided by
non-affiliated advisers as reported to the Board by Lipper Inc. ("Lipper").
The Board reviewed and considered the qualifications of the portfolio managers,
the senior administrative managers and other key personnel of the Adviser who
provide the administrative and investment advisory services to the Portfolio.
The Board determined that the Adviser's portfolio managers and key personnel are
well qualified by education and/or training and experience to perform the
services in an efficient and professional manner. The Board concluded that the
nature and extent of the advisory and administrative services provided were
necessary and appropriate for the conduct of the business and investment
activities of the Portfolio. The Board also concluded that the overall quality
of the advisory and administrative services was satisfactory.
PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the Portfolio's performance for the one-, three- and
five-year periods ended November 30, 2004, as shown in reports provided by
Lipper (the "Lipper Reports"), compared to the performance of comparable funds
selected by Lipper (the "performance peer group"), and noted that the
Portfolio's performance for the three-year period was lower than its performance
peer group average but better for the one- and five-year periods. The Board
concluded that the Portfolio's performance was satisfactory.
FEES RELATIVE TO OTHER FUNDS MANAGED BY THE ADVISER WITH COMPARABLE INVESTMENT
STRATEGIES
The Board reviewed the advisory and administrative fees (together, the
"management fee") paid by the Portfolio under the Management Agreement. The
Board noted that the rate was comparable to the management fee rates charged by
the Adviser to any other funds it manages with investment strategies comparable
to those of the Portfolio.
FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the management fee rate and the total expense ratio of the
Portfolio. The Board noted that: (i) the Portfolio's management fee rate was
lower than the average management fee rate for funds, selected by Lipper (the
"expense peer group"), managed by other advisers with investment strategies
comparable to those of the Portfolio, as shown in the Lipper Report for the
Portfolio; and (ii) the Portfolio's total expense ratio was also lower than the
average total expense ratio of the funds included in the Portfolio's expense
peer group. The Board concluded that the Portfolio's management fee and total
expense ratio were competitive with those of its expense peer group.
29
<Page>
BREAKPOINTS AND ECONOMIES OF SCALE
The Board reviewed the structure of the Portfolio's management fee schedule
under the Management Agreement and noted that it includes a breakpoint. The
Board also reviewed the level of the Portfolio's management fee and noted that
the fee, as a percentage of the Portfolio's net assets, would decrease as net
assets increase because the management fee includes breakpoints. The Board
concluded that the Portfolio's management fee would reflect economies of scale
as assets increase.
PROFITABILITY OF ADVISER AND AFFILIATES
The Board considered and reviewed information concerning the costs incurred and
profits realized by the Adviser and its affiliates during the last two years
from their relationship with the Portfolio and the Morgan Stanley Fund Complex
and reviewed with the Controller of the Adviser the cost allocation methodology
used to determine the Adviser's profitability. Based on their review of the
information they received, the Board concluded that the profits earned by the
Adviser and its affiliates were not excessive in light of the advisory,
administrative and other services provided to the Portfolio.
FALL-OUT BENEFITS
The Board considered so-called "fall-out benefits" derived by the Adviser and
its affiliates from their relationship with the Portfolio and the Morgan Stanley
Fund Complex, such as "float" benefits derived from handling of checks for
purchases and redemptions of Portfolio shares through a broker-dealer affiliate
of the Adviser and "soft dollar" benefits (discussed in the next section). The
Board also considered that a broker-dealer affiliate of the Adviser receives
from the Portfolio 12b-1 fees for distribution and shareholder services. The
Board also considered that an affiliate of the Adviser, through a joint venture,
receives revenue in connection with trading done on behalf of the Portfolio
through an electronic trading system network ("ECN"). The Board concluded that
the float benefits and the above-referenced ECN-related revenue were relatively
small and that the 12b-1 fees were competitive with those of other broker-dealer
affiliates of investment advisers of mutual funds.
SOFT DOLLAR BENEFITS
The Board considered whether the Adviser realizes any benefits as a result of
brokerage transactions executed through "soft dollar" arrangements. Under such
arrangements, brokerage commissions paid by the Portfolio and/or other funds
managed by the Adviser would be used to pay for research that a securities
broker obtains from third parties, or to pay for both research and execution
services from securities brokers who effect transactions for the Portfolio. The
Adviser informed the Board that it does not use Portfolio commissions to pay for
third party research. It does use commissions to pay for research which is
bundled with execution services. The Board recognized that the receipt of such
research from brokers may reduce the Adviser's costs but concluded that the
receipt of such research strengthens the investment management resources of the
Adviser, which may ultimately benefit the Portfolio and other funds in the
Morgan Stanley Fund Complex.
30
<Page>
ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE PORTFOLIO'S
NEEDS
The Board considered whether the Adviser is financially sound and has the
resources necessary to perform its obligations under the Management Agreement.
The Board noted that the Adviser's operations remain profitable, although
increased expenses in recent years have reduced the Adviser's profitability. The
Board concluded that the Adviser has the financial resources necessary to
fulfill its obligations under the Management Agreement.
HISTORICAL RELATIONSHIP BETWEEN THE PORTFOLIO AND THE ADVISER
The Board also reviewed and considered the historical relationship between the
Portfolio and the Adviser, including the organizational structure of the
Adviser, the policies and procedures formulated and adopted by the Adviser for
managing the Portfolio's operations and the Board's confidence in the competence
and integrity of the senior managers and key personnel of the Adviser. The Board
concluded that it is beneficial for the Portfolio to continue its relationship
with the Adviser.
OTHER FACTORS AND CURRENT TRENDS
The Board considered the controls and procedures adopted and implemented by the
Adviser and monitored by the Portfolio's Chief Compliance Officer and concluded
that the conduct of business by the Adviser indicates a good faith effort on its
part to adhere to high ethical standards in the conduct of the Portfolio's
business.
GENERAL CONCLUSION
After considering and weighing all of the above factors, the Board concluded it
would be in the best interest of the Portfolio and its shareholders to approve
renewal of the Management Agreement for another year.
UTILITIES PORTFOLIO
NATURE, EXTENT AND QUALITY OF SERVICES
The Board reviewed and considered the nature and extent of the investment
advisory services provided by the Investment Adviser under the Advisory
Agreement, including portfolio management, investment research and equity and
fixed income securities trading. The Board also reviewed and considered the
nature and extent of the non-advisory, administrative services provided by the
Portfolio's Administrator under the Administration Agreement, including
accounting, clerical, bookkeeping, compliance, business management and planning,
and the provision of supplies, office space and utilities at the Adviser's
expense. (The Investment Adviser and the Administrator together are referred to
as the "Adviser" and the Advisory and Administration Agreements together are
referred to as the "Management Agreement.") The Board also compared the nature
of the services provided by the Adviser with similar services provided by
non-affiliated advisers as reported to the Board by Lipper Inc. ("Lipper").
The Board reviewed and considered the qualifications of the portfolio managers,
the senior administrative managers and other key personnel of the Adviser who
provide the administrative and investment advisory services to the Portfolio.
The Board determined that the Adviser's portfolio managers and key personnel are
well qualified by
31
<Page>
education and/or training and experience to perform the services in an efficient
and professional manner. The Board concluded that the nature and extent of the
advisory and administrative services provided were necessary and appropriate for
the conduct of the business and investment activities of the Portfolio. The
Board also concluded that the overall quality of the advisory and administrative
services was satisfactory.
PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the Portfolio's performance for the one-, three- and
five-year periods ended November 30, 2004, as shown in reports provided by
Lipper (the "Lipper Reports"), compared to the performance of comparable funds
selected by Lipper (the "performance peer group"), and noted that the
Portfolio's performance was lower than its performance peer group average for
the one- and five-year periods but better for the three-year period. The Board
also noted that the Portfolio's performance for the past year was close to the
performance of the performance peer group. The Board concluded that the
Portfolio's overall performance was competitive with its performance peer group.
FEES RELATIVE TO OTHER FUNDS MANAGED BY THE ADVISER WITH COMPARABLE INVESTMENT
STRATEGIES
The Board reviewed the advisory and administrative fees (together, the
"management fee") paid by the Portfolio under the Management Agreement. The
Board noted that the rate was comparable to the management fee rates charged by
the Adviser to any other funds it manages with investment strategies comparable
to those of the Portfolio.
FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the management fee rate and the total expense ratio of the
Portfolio. The Board noted that: (i) the Portfolio's management fee rate was
lower than the average management fee rate for funds, selected by Lipper (the
"expense peer group"), managed by other advisers with investment strategies
comparable to those of the Portfolio, as shown in the Lipper Report for the
Portfolio; and (ii) the Portfolio's total expense ratio was also lower than the
average total expense ratio of the funds included in the Portfolio's expense
peer group. The Board concluded that the Portfolio's management fee and total
expense ratio were competitive with those of its expense peer group.
BREAKPOINTS AND ECONOMIES OF SCALE
The Board reviewed the structure of the Portfolio's management fee schedule
under the Management Agreement and noted that it includes breakpoints. The Board
also reviewed the level of the Portfolio's management fee and noted that the
fee, as a percentage of the Portfolio's net assets, would decrease as net assets
increase because the management fee includes breakpoints. The Board concluded
that the Portfolio's management fee would reflect economies of scale as assets
increase.
PROFITABILITY OF ADVISER AND AFFILIATES
The Board considered and reviewed information concerning the costs incurred and
profits realized by the Adviser and its affiliates during the last two years
from their relationship with the Portfolio and the Morgan Stanley Fund
32
<Page>
Complex and reviewed with the Controller of the Adviser the cost allocation
methodology used to determine the Adviser's profitability. Based on their review
of the information they received, the Board concluded that the profits earned by
the Adviser and its affiliates were not excessive in light of the advisory,
administrative and other services provided to the Portfolio.
FALL-OUT BENEFITS
The Board considered so-called "fall-out benefits" derived by the Adviser and
its affiliates from their relationship with the Portfolio and the Morgan Stanley
Fund Complex, such as "float" benefits derived from handling of checks for
purchases and redemptions of Portfolio shares through a broker-dealer affiliate
of the Adviser and "soft dollar" benefits (discussed in the next section). The
Board also considered that a broker-dealer affiliate of the Adviser receives
from the Portfolio 12b-1 fees for distribution and shareholder services. The
Board also considered that an affiliate of the Adviser, through a joint venture,
receives revenue in connection with trading done on behalf of the Portfolio
through an electronic trading system network ("ECN"). The Board concluded that
the float benefits and the above-referenced ECN-related revenue were relatively
small and that the 12b-1 fees were competitive with those of other broker-dealer
affiliates of investment advisers of mutual funds.
SOFT DOLLAR BENEFITS
The Board considered whether the Adviser realizes any benefits as a result of
brokerage transactions executed through "soft dollar" arrangements. Under such
arrangements, brokerage commissions paid by the Portfolio and/or other funds
managed by the Adviser would be used to pay for research that a securities
broker obtains from third parties, or to pay for both research and execution
services from securities brokers who effect transactions for the Portfolio. The
Adviser informed the Board that it does not use Portfolio commissions to pay for
third party research. It does use commissions to pay for research which is
bundled with execution services. The Board recognized that the receipt of such
research from brokers may reduce the Adviser's costs but concluded that the
receipt of such research strengthens the investment management resources of the
Adviser, which may ultimately benefit the Portfolio and other funds in the
Morgan Stanley Fund Complex.
ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE PORTFOLIO'S
NEEDS
The Board considered whether the Adviser is financially sound and has the
resources necessary to perform its obligations under the Management Agreement.
The Board noted that the Adviser's operations remain profitable, although
increased expenses in recent years have reduced the Adviser's profitability. The
Board concluded that the Adviser has the financial resources necessary to
fulfill its obligations under the Management Agreement.
HISTORICAL RELATIONSHIP BETWEEN THE PORTFOLIO AND THE ADVISER
The Board also reviewed and considered the historical relationship between the
Portfolio and the Adviser, including the organizational structure of the
Adviser, the policies and procedures formulated and adopted by the Adviser for
managing the Portfolio's operations and the Board's confidence in the competence
and integrity of the
33
<Page>
senior managers and key personnel of the Adviser. The Board concluded that it is
beneficial for the Portfolio to continue its relationship with the Adviser.
OTHER FACTORS AND CURRENT TRENDS
The Board considered the controls and procedures adopted and implemented by the
Adviser and monitored by the Portfolio's Chief Compliance Officer and concluded
that the conduct of business by the Adviser indicates a good faith effort on its
part to adhere to high ethical standards in the conduct of the Portfolio's
business.
GENERAL CONCLUSION
After considering and weighing all of the above factors, the Board concluded it
would be in the best interest of the Portfolio and its shareholders to approve
renewal of the Management Agreement for another year.
DIVIDEND GROWTH PORTFOLIO
NATURE, EXTENT AND QUALITY OF SERVICES
The Board reviewed and considered the nature and extent of the investment
advisory services provided by the Investment Adviser under the Advisory
Agreement, including portfolio management, investment research and equity and
fixed income securities trading. The Board also reviewed and considered the
nature and extent of the non-advisory, administrative services provided by the
Portfolio's Administrator under the Administration Agreement, including
accounting, clerical, bookkeeping, compliance, business management and planning,
and the provision of supplies, office space and utilities. (The Investment
Adviser and the Administrator together are referred to as the "Adviser" and the
Advisory and Administration Agreements together are referred to as the
"Management Agreement.") The Board also compared the nature of the services
provided by the Adviser with similar services provided by non-affiliated
advisers as reported to the Board by Lipper Inc. ("Lipper").
The Board reviewed and considered the qualifications of the portfolio managers,
the senior administrative managers and other key personnel of the Adviser who
provide the administrative and investment advisory services to the Portfolio.
The Board determined that the Adviser's portfolio managers and key personnel are
well qualified by education and/or training and experience to perform the
services in an efficient and professional manner. The Board concluded that the
nature and extent of the advisory and administrative services provided were
necessary and appropriate for the conduct of the business and investment
activities of the Portfolio. The Board also concluded that the overall quality
of the advisory and administrative services was satisfactory.
PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the Portfolio's performance for the one-, three- and
five-year periods ended November 30, 2004, as shown in reports provided by
Lipper (the "Lipper Reports"), compared to the performance of comparable funds
selected by Lipper (the "performance peer group"), and noted that the
Portfolio's performance was better than its performance peer group average for
all three periods. The Board concluded that the Portfolio's performance was
satisfactory.
34
<Page>
FEES RELATIVE TO OTHER FUNDS MANAGED BY THE ADVISER WITH COMPARABLE INVESTMENT
STRATEGIES
The Board reviewed the advisory and administrative fees (together, the
"management fee") paid by the Portfolio under the Management Agreement. The
Board noted that the rate was comparable to the management fee rates charged by
the Adviser to any other funds it manages with investment strategies comparable
to those of its Portfolio.
FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the management fee rate and the total expense ratio of the
Portfolio. The Board noted that: (i) the Portfolio's management fee rate was
lower than the average management fee rate for funds, selected by Lipper (the
"expense peer group"), managed by other advisers with investment strategies
comparable to those of the Portfolio, as shown in the Lipper Report for the
Portfolio; and (ii) the Portfolio's total expense ratio was also lower than the
average total expense ratio of the funds included in the Portfolio's expense
peer group. The Board concluded that the Portfolio's management fee and total
expense ratio were competitive with those of its expense peer group.
BREAKPOINTS AND ECONOMIES OF SCALE
The Board reviewed the structure of the Portfolio's management fee schedule
under the Management Agreement and noted that it includes breakpoints. The Board
also reviewed the level of the Portfolio's management fee and noted that the
fee, as a percentage of the Portfolio's net assets, would decrease as net assets
increase because the management fee includes breakpoints. The Board concluded
that the Portfolio's management fee would reflect economies of scale as assets
increase.
PROFITABILITY OF ADVISER AND AFFILIATES
The Board considered and reviewed information concerning the costs incurred and
profits realized by the Adviser and its affiliates during the last two years
from their relationship with the Portfolio and the Morgan Stanley Fund Complex
and reviewed with the Controller of the Adviser the cost allocation methodology
used to determine the Adviser's profitability. Based on their review of the
information they received, the Board concluded that the profits earned by the
Adviser and its affiliates were not excessive in light of the advisory,
administrative and other services provided to the Portfolio.
FALL-OUT BENEFITS
The Board considered so-called "fall-out benefits" derived by the Adviser and
its affiliates from their relationship with the Portfolio and the Morgan Stanley
Fund Complex, such as "float" benefits derived from handling of checks for
purchases and redemptions of Portfolio shares through a broker-dealer affiliate
of the Adviser and "soft dollar" benefits (discussed in the next section). The
Board also considered that a broker-dealer affiliate of the Adviser receives
from the Portfolio 12b-1 fees for distribution and shareholder services. The
Board also considered that an affiliate of the Adviser, through a joint venture,
receives revenue in connection with trading done on behalf of the Portfolio
through an electronic trading system network ("ECN"). The Board concluded that
the float benefits and the
35
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above-referenced ECN-related revenue were relatively small and that the 12b-1
fees were competitive with those of other broker-dealer affiliates of investment
advisers of mutual funds.
SOFT DOLLAR BENEFITS
The Board considered whether the Adviser realizes any benefits as a result of
brokerage transactions executed through "soft dollar" arrangements. Under such
arrangements, brokerage commissions paid by the Portfolio and/or other funds
managed by the Adviser would be used to pay for research that a securities
broker obtains from third parties, or to pay for both research and execution
services from securities brokers who effect transactions for the Portfolio. The
Adviser informed the Board that it does not use Portfolio commissions to pay for
third party research. It does use commissions to pay for research which is
bundled with execution services. The Board recognized that the receipt of such
research from brokers may reduce the Adviser's costs but concluded that the
receipt of such research strengthens the investment management resources of the
Adviser, which may ultimately benefit the Portfolio and other funds in the
Morgan Stanley Fund Complex.
ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE PORTFOLIO'S
NEEDS
The Board considered whether the Adviser is financially sound and has the
resources necessary to perform its obligations under the Management Agreement.
The Board noted that the Adviser's operations remain profitable, although
increased expenses in recent years have reduced the Adviser's profitability. The
Board concluded that the Adviser has the financial resources necessary to
fulfill its obligations under the Management Agreement.
HISTORICAL RELATIONSHIP BETWEEN THE PORTFOLIO AND THE ADVISER
The Board also reviewed and considered the historical relationship between the
Portfolio and the Adviser, including the organizational structure of the
Adviser, the policies and procedures formulated and adopted by the Adviser for
managing the Portfolio's operations and the Board's confidence in the competence
and integrity of the senior managers and key personnel of the Adviser. The Board
concluded that it is beneficial for the Portfolio to continue its relationship
with the Adviser.
OTHER FACTORS AND CURRENT TRENDS
The Board considered the controls and procedures adopted and implemented by the
Adviser and monitored by the Portfolio's Chief Compliance Officer and concluded
that the conduct of business by the Adviser indicates a good faith effort on its
part to adhere to high ethical standards in the conduct of the Portfolio's
business.
GENERAL CONCLUSION
After considering and weighing all of the above factors, the Board concluded it
would be in the best interest of the Portfolio and its shareholders to approve
renewal of the Management Agreement for another year.
36
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EQUALLY-WEIGHTED S&P 500 INDEX PORTFOLIO
NATURE, EXTENT AND QUALITY OF SERVICES
The Board reviewed and considered the nature and extent of the investment
advisory services provided by the Investment Adviser under the Advisory
Agreement, including portfolio management, investment research and equity and
fixed income securities trading. The Board also reviewed and considered the
nature and extent of the non-advisory, administrative services provided by the
Portfolio's Administrator under the Administration Agreement, including
accounting, clerical, bookkeeping, compliance, business management and planning,
and the provision of supplies, office space and utilities. (The Investment
Adviser and the Administrator together are referred to as the "Adviser" and the
Advisory and Administration Agreements together are referred to as the
"Management Agreement.") The Board also compared the nature of the services
provided by the Adviser with similar services provided by non-affiliated
advisers as reported to the Board by Lipper Inc. ("Lipper").
The Board reviewed and considered the qualifications of the portfolio managers,
the senior administrative managers and other key personnel of the Adviser who
provide the administrative and investment advisory services to the Portfolio.
The Board determined that the Adviser's portfolio managers and key personnel are
well qualified by education and/or training and experience to perform the
services in an efficient and professional manner. The Board concluded that the
nature and extent of the advisory and administrative services provided were
necessary and appropriate for the conduct of the business and investment
activities of the Portfolio. The Board also concluded that the overall quality
of the advisory and administrative services was satisfactory.
PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the Portfolio's performance for the one-, three- and
five-year periods ended November 30, 2004, as shown in reports provided by
Lipper (the "Lipper Reports"), compared to the performance of comparable funds
selected by Lipper (the "performance peer group"), and noted that the
Portfolio's performance was better than its performance peer group average for
all three periods. The Board concluded that the Portfolio's performance was
satisfactory.
FEES RELATIVE TO OTHER FUNDS MANAGED BY THE ADVISER WITH COMPARABLE INVESTMENT
STRATEGIES
The Board reviewed the advisory and administrative fees (together, the
"management fee") paid by the Portfolio under the Management Agreement. The
Board noted that the rate was comparable to the management fee rates charged by
the Adviser to any other funds it manages with investment strategies comparable
to those of its Portfolio.
FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the management fee rate and the total expense ratio of the
Portfolio. The Board noted that: (i) the Portfolio's management fee rate was
lower than the average management fee rate for funds, selected by Lipper (the
"expense peer group"), managed by other advisers with investment strategies
comparable to those of the Portfolio, as shown in the Lipper Report for the
Portfolio; and (ii) the Portfolio's total expense ratio was also lower than the
average total expense ratio of the funds included in the Portfolio's expense
peer group. The Board
37
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concluded that the Portfolio's management fee and total expense ratio were
competitive with those of its expense peer group.
BREAKPOINTS AND ECONOMIES OF SCALE
The Board reviewed the structure of the Portfolio's management fee schedule
under the Management Agreement and noted that it does not include any
breakpoints. The Board recommended that the Adviser consider incorporating
breakpoints in the management fee schedule. The Adviser agreed to introduce a
breakpoint which would reduce the management fee from 0.20% to 0.10% on assets
above $2 billion. The Board concluded that the proposed new breakpoint in the
management fee would reflect economies of scale as assets increase.
PROFITABILITY OF ADVISER AND AFFILIATES
The Board considered and reviewed information concerning the costs incurred and
profits realized by the Adviser and its affiliates during the last two years
from their relationship with the Portfolio and the Morgan Stanley Fund Complex
and reviewed with the Controller of the Adviser the cost allocation methodology
used to determine the Adviser's profitability. Based on their review of the
information they received, the Board concluded that the profits earned by the
Adviser and its affiliates were not excessive in light of the advisory,
administrative and other services provided to the Portfolio.
FALL-OUT BENEFITS
The Board considered so-called "fall-out benefits" derived by the Adviser and
its affiliates from their relationship with the Portfolio and the Morgan Stanley
Fund Complex, such as "float" benefits derived from handling of checks for
purchases and redemptions of Portfolio shares through a broker-dealer affiliate
of the Adviser and "soft dollar" benefits (discussed in the next section). The
Board also considered that a broker-dealer affiliate of the Adviser receives
from the Portfolio 12b-1 fees for distribution and shareholder services. The
Board also considered that an affiliate of the Adviser, through a joint venture,
receives revenue in connection with trading done on behalf of the Portfolio
through an electronic trading system network ("ECN"). The Board concluded that
the float benefits and the above-referenced ECN-related revenue were relatively
small and that the 12b-1 fees were competitive with those of other broker-dealer
affiliates of investment advisers of mutual funds.
SOFT DOLLAR BENEFITS
The Board considered whether the Adviser realizes any benefits as a result of
brokerage transactions executed through "soft dollar" arrangements. Under such
arrangements, brokerage commissions paid by the Portfolio and/or other funds
managed by the Adviser would be used to pay for research that a securities
broker obtains from third parties, or to pay for both research and execution
services from securities brokers who effect transactions for the Portfolio. The
Adviser informed the Board that it does not use Portfolio commissions to pay for
third party research. It does use commissions to pay for research which is
bundled with execution services. The Board recognized that the receipt of such
research from brokers may reduce the Adviser's costs but concluded
38
<Page>
that the receipt of such research strengthens the investment management
resources of the Adviser, which may ultimately benefit the Portfolio and other
funds in the Morgan Stanley Fund Complex.
ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE PORTFOLIO'S
NEEDS
The Board considered whether the Adviser is financially sound and has the
resources necessary to perform its obligations under the Management Agreement.
The Board noted that the Adviser's operations remain profitable, although
increased expenses in recent years have reduced the Adviser's profitability. The
Board concluded that the Adviser has the financial resources necessary to
fulfill its obligations under the Management Agreement.
HISTORICAL RELATIONSHIP BETWEEN THE PORTFOLIO AND THE ADVISER
The Board also reviewed and considered the historical relationship between the
Portfolio and the Adviser, including the organizational structure of the
Adviser, the policies and procedures formulated and adopted by the Adviser for
managing the Portfolio's operations and the Board's confidence in the competence
and integrity of the senior managers and key personnel of the Adviser. The Board
concluded that it is beneficial for the Portfolio to continue its relationship
with the Adviser.
OTHER FACTORS AND CURRENT TRENDS
The Board considered the controls and procedures adopted and implemented by the
Adviser and monitored by the Portfolio's Chief Compliance Officer and concluded
that the conduct of business by the Adviser indicates a good faith effort on its
part to adhere to high ethical standards in the conduct of the Portfolio's
business.
GENERAL CONCLUSION
After considering and weighing all of the above factors, the Board concluded it
would be in the best interest of the Portfolio and its shareholders to approve
renewal of the Management Agreement for another year.
GROWTH PORTFOLIO
NATURE, EXTENT AND QUALITY OF SERVICES
The Board reviewed and considered the nature and extent of the investment
advisory services provided by the Investment Adviser under the Advisory
Agreement, including portfolio management, investment research and equity and
fixed income securities trading. The Board also reviewed and considered the
nature and extent of the non-advisory, administrative services provided by the
Portfolio's Administrator under the Administration Agreement, including
accounting, clerical, bookkeeping, compliance, business management and planning,
and the provision of supplies, office space and utilities. (The Investment
Adviser and the Administrator together are referred to as the "Adviser" and the
Advisory and Administration Agreements together are referred to as the
"Management Agreement.") The Board also compared the nature of the services
provided by the Adviser with similar services provided by non-affiliated
advisers as reported to the Board by Lipper Inc. ("Lipper").
39
<Page>
The Board reviewed and considered the qualifications of the portfolio managers,
the senior administrative managers and other key personnel of the Adviser who
provide the administrative and investment advisory services to the Portfolio.
The Board determined that the Adviser's portfolio managers and key personnel are
well qualified by education and/or training and experience to perform the
services in an efficient and professional manner. The Board concluded that the
nature and extent of the advisory and administrative services provided were
necessary and appropriate for the conduct of the business and investment
activities of the Portfolio. The Board also concluded that the overall quality
of the advisory and administrative services was satisfactory.
PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the Portfolio's performance for the one-, three- and
five-year periods ended November 30, 2004, as shown in reports provided by
Lipper (the "Lipper Reports"), compared to the performance of comparable funds
selected by Lipper (the "performance peer group"), and noted that the
Portfolio's performance was lower than its performance peer group average for
the three-year period but better for the one-and five-year periods. The Board
concluded that the Portfolio's overall performance was competitive with its
performance peer group.
FEES RELATIVE TO OTHER FUNDS MANAGED BY THE ADVISER WITH COMPARABLE INVESTMENT
STRATEGIES
The Board reviewed the advisory and administrative fees (together, the
"management fee") paid by the Portfolio under the Management Agreement. The
Board noted that the rate was comparable to the management fee rates charged by
the Adviser to any other funds it manages with investment strategies comparable
to those of the Portfolio.
FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the management fee rate and the total expense ratio of the
Portfolio. The Board noted that: (i) the Portfolio's management fee rate was
slightly higher than the average management fee rate for funds, selected by
Lipper (the "expense peer group"), managed by other advisers with investment
strategies comparable to those of the Portfolio, as shown in the Lipper Report
for the Portfolio; but (ii) the Portfolio's total expense ratio was lower than
the average total expense ratio of the funds included in the Portfolio's expense
peer group. The Board concluded that the management fee rate was competitive in
light of the fact that the Adviser managed the Portfolio so that the total
expense ratio of the Portfolio was less than the total expense ratio of the
funds in the expense peer group average.
BREAKPOINTS AND ECONOMIES OF SCALE
The Board reviewed the structure of the Portfolio's management fee schedule
under the Management Agreement and noted that it includes breakpoints. The Board
also reviewed the level of the Portfolio's management fee and noted that the
fee, as a percentage of the Portfolio's net assets, would decrease as net assets
increase because the management fee includes breakpoints. The Board concluded
that the Portfolio's management fee would reflect economies of scale as assets
increase.
40
<Page>
PROFITABILITY OF ADVISER AND AFFILIATES
The Board considered and reviewed information concerning the costs incurred and
profits realized by the Adviser and its affiliates during the last two years
from their relationship with the Portfolio and the Morgan Stanley Fund Complex
and reviewed with the Controller of the Adviser the cost allocation methodology
used to determine the Adviser's profitability. Based on their review of the
information they received, the Board concluded that the profits earned by the
Adviser and its affiliates were not excessive in light of the advisory,
administrative and other services provided to the Portfolio.
FALL-OUT BENEFITS
The Board considered so-called "fall-out benefits" derived by the Adviser and
its affiliates from their relationship with the Portfolio and the Morgan Stanley
Fund Complex, such as "float" benefits derived from handling of checks for
purchases and redemptions of Portfolio shares through a broker-dealer affiliate
of the Adviser and "soft dollar" benefits (discussed in the next section). The
Board also considered that a broker-dealer affiliate of the Adviser receives
from the Portfolio 12b-1 fees for distribution and shareholder services. The
Board also considered that an affiliate of the Adviser, through a joint venture,
receives revenue in connection with trading done on behalf of the Portfolio
through an electronic trading system network ("ECN"). The Board concluded that
the float benefits and the above-referenced ECN-related revenue were relatively
small and that the 12b-1 fees were competitive with those of other broker-dealer
affiliates of investment advisers of mutual funds.
SOFT DOLLAR BENEFITS
The Board considered whether the Adviser realizes any benefits as a result of
brokerage transactions executed through "soft dollar" arrangements. Under such
arrangements, brokerage commissions paid by the Portfolio and/or other funds
managed by the Adviser would be used to pay for research that a securities
broker obtains from third parties, or to pay for both research and execution
services from securities brokers who effect transactions for the Portfolio. The
Adviser informed the Board that it does not use Portfolio commissions to pay for
third party research. It does use commissions to pay for research which is
bundled with execution services. The Board recognized that the receipt of such
research from brokers may reduce the Adviser's costs but concluded that the
receipt of such research strengthens the investment management resources of the
Adviser, which may ultimately benefit the Portfolio and other funds in the
Morgan Stanley Fund Complex.
ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE PORTFOLIO'S
NEEDS
The Board considered whether the Adviser is financially sound and has the
resources necessary to perform its obligations under the Management Agreement.
The Board noted that the Adviser's operations remain profitable, although
increased expenses in recent years have reduced the Adviser's profitability. The
Board concluded that the Adviser has the financial resources necessary to
fulfill its obligations under the Management Agreement.
41
<Page>
HISTORICAL RELATIONSHIP BETWEEN THE PORTFOLIO AND THE ADVISER
The Board also reviewed and considered the historical relationship between the
Portfolio and the Adviser, including the organizational structure of the
Adviser, the policies and procedures formulated and adopted by the Adviser for
managing the Portfolio's operations and the Board's confidence in the competence
and integrity of the senior managers and key personnel of the Adviser. The Board
concluded that it is beneficial for the Portfolio to continue its relationship
with the Adviser.
OTHER FACTORS AND CURRENT TRENDS
The Board considered the controls and procedures adopted and implemented by the
Adviser and monitored by the Portfolio's Chief Compliance Officer and concluded
that the conduct of business by the Adviser indicates a good faith effort on its
part to adhere to high ethical standards in the conduct of the Portfolio's
business.
GENERAL CONCLUSION
After considering and weighing all of the above factors, the Board concluded it
would be in the best interest of the Portfolio and its shareholders to approve
renewal of the Management Agreement for another year.
AMERICAN OPPORTUNITIES PORTFOLIO
NATURE, EXTENT AND QUALITY OF SERVICES
The Board reviewed and considered the nature and extent of the investment
advisory services provided by the Investment Adviser under the Advisory
Agreement, including portfolio management, investment research and equity and
fixed income securities trading. The Board also reviewed and considered the
nature and extent of the non-advisory, administrative services provided by the
Portfolio's Administrator under the Administration Agreement, including
accounting, clerical, bookkeeping, compliance, business management and planning,
and the provision of supplies, office space and utilities at the Adviser's
expense. (The Investment Adviser and the Administrator together are referred to
as the "Adviser" and the Advisory and Administration Agreements together are
referred to as the "Management Agreement.") The Board also compared the nature
of the services provided by the Adviser with similar services provided by
non-affiliated advisers as reported to the Board by Lipper Inc. ("Lipper").
The Board reviewed and considered the qualifications of the portfolio managers,
the senior administrative managers and other key personnel of the Adviser who
provide the administrative and investment advisory services to the Portfolio.
The Board determined that the Adviser's portfolio managers and key personnel are
well qualified by education and/or training and experience to perform the
services in an efficient and professional manner. The Board concluded that the
nature and extent of the advisory and administrative services provided were
necessary and appropriate for the conduct of the business and investment
activities of the Portfolio. The Board also concluded that the overall quality
of the advisory and administrative services was satisfactory.
42
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PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the Portfolio's performance for the one-, three- and
five-year periods ended November 30, 2004, as shown in reports provided by
Lipper (the "Lipper Reports"), compared to the performance of comparable funds
selected by Lipper (the "performance peer group"), and noted that the
Portfolio's performance was better than its performance peer group average for
all three periods. The Board concluded that the Portfolio's performance was
satisfactory.
FEES RELATIVE TO OTHER FUNDS MANAGED BY THE ADVISER WITH COMPARABLE INVESTMENT
STRATEGIES
The Board reviewed the advisory and administrative fees (together, the
"management fee") paid by the Portfolio under the Management Agreement. The
Board noted that the rate was comparable to the management fee rates charged by
the Adviser to any other funds it manages with investment strategies comparable
to those of the Portfolio.
FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the management fee rate and the total expense ratio of the
Portfolio. The Board noted that: (i) the Portfolio's management fee rate was
lower than the average management fee rate for funds, selected by Lipper (the
"expense peer group"), managed by other advisers with investment strategies
comparable to those of the Portfolio, as shown in the Lipper Report for the
Portfolio; and (ii) the Portfolio's total expense ratio was also lower than the
average total expense ratio of the funds included in the Portfolio's expense
peer group. The Board concluded that the Portfolio's management fee and total
expense ratio were competitive with those of its expense peer group.
BREAKPOINTS AND ECONOMIES OF SCALE
The Board reviewed the structure of the Portfolio's management fee schedule
under the Management Agreement and noted that it includes breakpoints. The Board
also reviewed the level of the Portfolio's management fee and noted that the
fee, as a percentage of the Portfolio's net assets, would decrease as net assets
increase because the management fee includes breakpoints. The Board concluded
that the Portfolio's management fee would reflect economies of scale as assets
increase.
PROFITABILITY OF ADVISER AND AFFILIATES
The Board considered and reviewed information concerning the costs incurred and
profits realized by the Adviser and its affiliates during the last two years
from their relationship with the Portfolio and the Morgan Stanley Fund Complex
and reviewed with the Controller of the Adviser the cost allocation methodology
used to determine the Adviser's profitability. Based on their review of the
information they received, the Board concluded that the profits earned by the
Adviser and its affiliates were not excessive in light of the advisory,
administrative and other services provided to the Portfolio.
43
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FALL-OUT BENEFITS
The Board considered so-called "fall-out benefits" derived by the Adviser and
its affiliates from their relationship with the Portfolio and the Morgan Stanley
Fund Complex, such as "float" benefits derived from handling of checks for
purchases and redemptions of Portfolio shares through a broker-dealer affiliate
of the Adviser and "soft dollar" benefits (discussed in the next section). The
Board also considered that a broker-dealer affiliate of the Adviser receives
from the Portfolio 12b-1 fees for distribution and shareholder services. The
Board also considered that an affiliate of the Adviser, through a joint venture,
receives revenue in connection with trading done on behalf of the Portfolio
through an electronic trading system network ("ECN"). The Board concluded that
the float benefits and the above-referenced ECN-related revenue were relatively
small and that the 12b-1 fees were competitive with those of other broker-dealer
affiliates of investment advisers of mutual funds.
SOFT DOLLAR BENEFITS
The Board considered whether the Adviser realizes any benefits as a result of
brokerage transactions executed through "soft dollar" arrangements. Under such
arrangements, brokerage commissions paid by the Portfolio and/or other funds
managed by the Adviser would be used to pay for research that a securities
broker obtains from third parties, or to pay for both research and execution
services from securities brokers who effect transactions for the Portfolio. The
Adviser informed the Board that it does not use Portfolio commissions to pay for
third party research. It does use commissions to pay for research which is
bundled with execution services. The Board recognized that the receipt of such
research from brokers may reduce the Adviser's costs but concluded that the
receipt of such research strengthens the investment management resources of the
Adviser, which may ultimately benefit the Portfolio and other funds in the
Morgan Stanley Fund Complex.
ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE PORTFOLIO'S
NEEDS
The Board considered whether the Adviser is financially sound and has the
resources necessary to perform its obligations under the Management Agreement.
The Board noted that the Adviser's operations remain profitable, although
increased expenses in recent years have reduced the Adviser's profitability. The
Board concluded that the Adviser has the financial resources necessary to
fulfill its obligations under the Management Agreement.
HISTORICAL RELATIONSHIP BETWEEN THE PORTFOLIO AND THE ADVISER
The Board also reviewed and considered the historical relationship between the
Portfolio and the Adviser, including the organizational structure of the
Adviser, the policies and procedures formulated and adopted by the Adviser for
managing the Portfolio's operations and the Board's confidence in the competence
and integrity of the senior managers and key personnel of the Adviser. The Board
concluded that it is beneficial for the Portfolio to continue its relationship
with the Adviser.
44
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OTHER FACTORS AND CURRENT TRENDS
The Board considered the controls and procedures adopted and implemented by the
Adviser and monitored by the Portfolio's Chief Compliance Officer and concluded
that the conduct of business by the Adviser indicates a good faith effort on its
part to adhere to high ethical standards in the conduct of the Portfolio's
business.
GENERAL CONCLUSION
After considering and weighing all of the above factors, the Board concluded it
would be in the best interest of the Portfolio and its shareholders to approve
renewal of the Management Agreement for another year.
CAPITAL OPPORTUNITIES PORTFOLIO
NATURE, EXTENT AND QUALITY OF SERVICES
The Board reviewed and considered the nature and extent of the investment
advisory services provided by the Investment Adviser under the Advisory
Agreement, including portfolio management, investment research and equity and
fixed income securities trading. The Board also reviewed and considered the
nature and extent of the non-advisory, administrative services provided by the
Portfolio's Administrator under the Administration Agreement, including
accounting, clerical, bookkeeping, compliance, business management and planning,
and the provision of supplies, office space and utilities at the Adviser's
expense. (The Investment Adviser and the Administrator together are referred to
as the "Adviser" and the Advisory and Administration Agreements together are
referred to as the "Management Agreement.") The Board also compared the nature
of the services provided by the Adviser with similar services provided by
non-affiliated advisers as reported to the Board by Lipper Inc. ("Lipper").
The Board reviewed and considered the qualifications of the portfolio managers,
the senior administrative managers and other key personnel of the Adviser who
provide the administrative and investment advisory services to the Portfolio.
The Board determined that the Adviser's portfolio managers and key personnel are
well qualified by education and/or training and experience to perform the
services in an efficient and professional manner. The Board concluded that the
nature and extent of the advisory and administrative services provided were
necessary and appropriate for the conduct of the business and investment
activities of the Portfolio. The Board also concluded that the overall quality
of the advisory and administrative services was satisfactory.
PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the Portfolio's performance for the one-, three- and
five-year periods ended November 30, 2004, as shown in reports provided by
Lipper (the "Lipper Reports"), compared to the performance of comparable funds
selected by Lipper (the "performance peer group"), and noted that the
Portfolio's performance was lower than its performance peer group average for
the three- and five- year periods but better for the one-year period. The Board
concluded that the Portfolio's overall performance was competitive with its
performance peer group.
45
<Page>
FEES RELATIVE TO OTHER FUNDS MANAGED BY THE ADVISER WITH COMPARABLE INVESTMENT
STRATEGIES
The Board reviewed the advisory and administrative fees (together, the
"management fee") paid by the Portfolio under the Management Agreement. The
Board noted that the rate was comparable to the management fee rates charged by
the Adviser to any other funds it manages with investment strategies comparable
to those of the Portfolio.
FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the management fee rate and the total expense ratio of the
Portfolio. The Board noted that: (i) the Portfolio's management fee rate was
lower than the average management fee rate for funds, selected by Lipper (the
"expense peer group"), managed by other advisers with investment strategies
comparable to those of the Portfolio, as shown in the Lipper Report for the
Portfolio; and (ii) the Portfolio's total expense ratio was also lower than the
average total expense ratio of the funds included in the Portfolio's expense
peer group. The Board concluded that the Portfolio's management fee and total
expense ratio were competitive with those of its expense peer group.
BREAKPOINTS AND ECONOMIES OF SCALE
The Board reviewed the structure of the Portfolio's management fee schedule
under the Management Agreement and noted that it includes breakpoints. The Board
also reviewed the level of the Portfolio's management fee and noted that the
fee, as a percentage of the Portfolio's net assets, would decrease as net assets
increase because the management fee includes breakpoints. The Board concluded
that the Portfolio's management fee would reflect economies of scale as assets
increase.
PROFITABILITY OF ADVISER AND AFFILIATES
The Board considered and reviewed information concerning the costs incurred and
profits realized by the Adviser and its affiliates during the last two years
from their relationship with the Portfolio and the Morgan Stanley Fund Complex
and reviewed with the Controller of the Adviser the cost allocation methodology
used to determine the Adviser's profitability. Based on their review of the
information they received, the Board concluded that the profits earned by the
Adviser and its affiliates were not excessive in light of the advisory,
administrative and other services provided to the Portfolio.
FALL-OUT BENEFITS
The Board considered so-called "fall-out benefits" derived by the Adviser and
its affiliates from their relationship with the Portfolio and the Morgan Stanley
Fund Complex, such as "float" benefits derived from handling of checks for
purchases and redemptions of Portfolio shares through a broker-dealer affiliate
of the Adviser and "soft dollar" benefits (discussed in the next section). The
Board also considered that a broker-dealer affiliate of the Adviser receives
from the Portfolio 12b-1 fees for distribution and shareholder services. The
Board also considered that an affiliate of the Adviser, through a joint venture,
receives revenue in connection with trading done on behalf of the Portfolio
through an electronic trading system network ("ECN"). The Board concluded that
the float benefits and the
46
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above-referenced ECN-related revenue were relatively small and that the 12b-1
fees were competitive with those of other broker-dealer affiliates of investment
advisers of mutual funds.
SOFT DOLLAR BENEFITS
The Board considered whether the Adviser realizes any benefits as a result of
brokerage transactions executed through "soft dollar" arrangements. Under such
arrangements, brokerage commissions paid by the Portfolio and/or other funds
managed by the Adviser would be used to pay for research that a securities
broker obtains from third parties, or to pay for both research and execution
services from securities brokers who effect transactions for the Portfolio. The
Adviser informed the Board that it does not use Portfolio commissions to pay for
third party research. It does use commissions to pay for research which is
bundled with execution services. The Board recognized that the receipt of such
research from brokers may reduce the Adviser's costs but concluded that the
receipt of such research strengthens the investment management resources of the
Adviser, which may ultimately benefit the Portfolio and other funds in the
Morgan Stanley Fund Complex.
ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE PORTFOLIO'S
NEEDS
The Board considered whether the Adviser is financially sound and has the
resources necessary to perform its obligations under the Management Agreement.
The Board noted that the Adviser's operations remain profitable, although
increased expenses in recent years have reduced the Adviser's profitability. The
Board concluded that the Adviser has the financial resources necessary to
fulfill its obligations under the Management Agreement.
HISTORICAL RELATIONSHIP BETWEEN THE PORTFOLIO AND THE ADVISER
The Board also reviewed and considered the historical relationship between the
Portfolio and the Adviser, including the organizational structure of the
Adviser, the policies and procedures formulated and adopted by the Adviser for
managing the Portfolio's operations and the Board's confidence in the competence
and integrity of the senior managers and key personnel of the Adviser. The Board
concluded that it is beneficial for the Portfolio to continue its relationship
with the Adviser.
OTHER FACTORS AND CURRENT TRENDS
The Board considered the controls and procedures adopted and implemented by the
Adviser and monitored by the Portfolio's Chief Compliance Officer and concluded
that the conduct of business by the Adviser indicates a good faith effort on its
part to adhere to high ethical standards in the conduct of the Portfolio's
business.
GENERAL CONCLUSION
After considering and weighing all of the above factors, the Board concluded it
would be in the best interest of the Portfolio and its shareholders to approve
renewal of the Management Agreement for another year.
47
<Page>
GLOBAL EQUITY PORTFOLIO
NATURE, EXTENT AND QUALITY OF SERVICES
The Board reviewed and considered the nature and extent of the investment
advisory services provided by the Investment Adviser under the Advisory
Agreement, including portfolio management, investment research and equity and
fixed income securities trading. The Board also reviewed and considered the
nature and extent of the non-advisory, administrative services provided by the
Portfolio's Administrator under the Administration Agreement, including
accounting, clerical, bookkeeping, compliance, business management and planning,
and the provision of supplies, office space and utilities. (The Investment
Adviser and the Administrator together are referred to as the "Adviser" and the
Advisory and Administration Agreements together are referred to as the
"Management Agreement.") The Board also compared the nature of the services
provided by the Adviser with similar services provided by non-affiliated
advisers as reported to the Board by Lipper Inc. ("Lipper").
The Board reviewed and considered the qualifications of the portfolio managers,
the senior administrative managers and other key personnel of the Adviser who
provide the administrative and investment advisory services to the Portfolio.
The Board determined that the Adviser's portfolio managers and key personnel are
well qualified by education and/or training and experience to perform the
services in an efficient and professional manner. The Board concluded that the
nature and extent of the advisory and administrative services provided were
necessary and appropriate for the conduct of the business and investment
activities of the Portfolio. The Board also concluded that the overall quality
of the advisory and administrative services was satisfactory.
PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the Portfolio's performance for the one-, three- and
five-year periods ended November 30, 2004, as shown in reports (the "Lipper
Reports") provided by Lipper compared to the performance of comparable funds
selected by Lipper (the "performance peer group"), and noted that the
Portfolio's performance was lower than its performance peer group average for
all three periods. The Adviser informed the Board that, in order to try to
improve performance, the Portfolio's portfolio management team will leverage the
proprietary fundamental research of the Adviser's Global Research Group. The
Board concluded that this approach was reasonably designed to improve
performance.
FEES RELATIVE TO OTHER FUNDS MANAGED BY THE ADVISER WITH COMPARABLE INVESTMENT
STRATEGIES
The Board reviewed the advisory and administrative fees (together, the
"management fee") paid by the Portfolio under the Management Agreement. The
Board noted that the rate was comparable to the management fee rates charged by
the Adviser to any other funds it manages with investment strategies comparable
to those of the Portfolio.
FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the management fee rate and the total expense ratio of the
Portfolio. The Board noted that: (i) the Portfolio's management fee rate was
higher than the average management fee rate for funds, selected by
48
<Page>
Lipper (the "expense peer group"), managed by other advisers with investment
strategies comparable to those of the Portfolio, as shown in the Lipper Report
for the Portfolio; and (ii) the Portfolio's total expense ratio was also higher
than the average total expense ratio of the funds included in the Portfolio's
expense peer group. The Board considered that the Fund's management fee and
total expense ratio were close to those of its expense peer group. The Board
concluded that the management fee and total expense ratio were not excessive.
BREAKPOINTS AND ECONOMIES OF SCALE
The Board reviewed the structure of the Portfolio's management fee schedule
under the Management Agreement and noted that it does not include any
breakpoints. The Board considered that the Portfolio's assets were small and its
potential growth was uncertain. The Board concluded that it would be premature
to consider economies of scale as a factor in approving the Management
Agreement.
PROFITABILITY OF ADVISER AND AFFILIATES
The Board considered and reviewed information concerning the costs incurred and
profits realized by the Adviser and its affiliates during the last two years
from their relationship with the Portfolio and the Morgan Stanley Fund Complex
and reviewed with the Controller of the Adviser the cost allocation methodology
used to determine the Adviser's profitability. Based on their review of the
information they received, the Board concluded that the profits earned by the
Adviser and its affiliates were not excessive in light of the advisory,
administrative and other services provided to the Portfolio.
FALL-OUT BENEFITS
The Board considered so-called "fall-out benefits" derived by the Adviser and
its affiliates from their relationship with the Portfolio and the Morgan Stanley
Fund Complex, such as "float" benefits derived from handling of checks for
purchases and redemptions of Portfolio shares through a broker-dealer affiliate
of the Adviser and "soft dollar" benefits (discussed in the next section). The
Board also considered that a broker-dealer affiliate of the Adviser receives
from the Portfolio 12b-1 fees for distribution and shareholder services. The
Board also considered that an affiliate of the Adviser, through a joint venture,
receives revenue in connection with trading done on behalf of the Portfolio
through an electronic trading system network ("ECN"). The Board concluded that
the float benefits and the above-referenced ECN-related revenue were relatively
small and that the 12b-1 fees were competitive with those of other broker-dealer
affiliates of investment advisers of mutual funds.
SOFT DOLLAR BENEFITS
The Board considered whether the Adviser realizes any benefits as a result of
brokerage transactions executed through "soft dollar" arrangements. Under such
arrangements, brokerage commissions paid by the Portfolio and/or other funds
managed by the Adviser would be used to pay for research that a securities
broker obtains from third parties, or to pay for both research and execution
services from securities brokers who effect transactions for the Portfolio. The
Adviser informed the Board that it does not use Portfolio commissions to pay for
49
<Page>
third party research. It does use commissions to pay for research which is
bundled with execution services. The Board recognized that the receipt of such
research from brokers may reduce the Adviser's costs but concluded that the
receipt of such research strengthens the investment management resources of the
Adviser, which may ultimately benefit the Portfolio and other funds in the
Morgan Stanley Fund Complex.
ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE PORTFOLIO'S
NEEDS
The Board considered whether the Adviser is financially sound and has the
resources necessary to perform its obligations under the Management Agreement.
The Board noted that the Adviser's operations remain profitable, although
increased expenses in recent years have reduced the Adviser's profitability. The
Board concluded that the Adviser has the financial resources necessary to
fulfill its obligations under the Management Agreement.
HISTORICAL RELATIONSHIP BETWEEN THE PORTFOLIO AND THE ADVISER
The Board also reviewed and considered the historical relationship between the
Portfolio and the Adviser, including the organizational structure of the
Adviser, the policies and procedures formulated and adopted by the Adviser for
managing the Portfolio's operations and the Board's confidence in the competence
and integrity of the senior managers and key personnel of the Adviser. The Board
concluded that it is beneficial for the Portfolio to continue its relationship
with the Adviser.
OTHER FACTORS AND CURRENT TRENDS
The Board considered the controls and procedures adopted and implemented by the
Adviser and monitored by the Portfolio's Chief Compliance Officer and concluded
that the conduct of business by the Adviser indicates a good faith effort on its
part to adhere to high ethical standards in the conduct of the Portfolio's
business.
GENERAL CONCLUSION
After considering and weighing all of the above factors, the Board concluded it
would be in the best interest of the Portfolio and its shareholders to approve
renewal of the Management Agreement for another year.
DEVELOPING GROWTH PORTFOLIO
NATURE, EXTENT AND QUALITY OF SERVICES
The Board reviewed and considered the nature and extent of the investment
advisory services provided by the Investment Adviser under the Advisory
Agreement, including portfolio management, investment research and equity and
fixed income securities trading. The Board also reviewed and considered the
nature and extent of the non-advisory, administrative services provided by the
Portfolio's Administrator under the Administration Agreement, including
accounting, clerical, bookkeeping, compliance, business management and planning,
and the provision of supplies, office space and utilities. (The Investment
Adviser and the Administrator together are referred to as the "Adviser" and the
Advisory and Administration Agreements together are referred to as the
"Management
50
<Page>
Agreement.") The Board also compared the nature of the services provided by the
Adviser with similar services provided by non-affiliated advisers as reported to
the Board by Lipper Inc. ("Lipper").
The Board reviewed and considered the qualifications of the portfolio managers,
the senior administrative managers and other key personnel of the Adviser who
provide the administrative and investment advisory services to the Portfolio.
The Board determined that the Adviser's portfolio managers and key personnel are
well qualified by education and/or training and experience to perform the
services in an efficient and professional manner. The Board concluded that the
nature and extent of the advisory and administrative services provided were
necessary and appropriate for the conduct of the business and investment
activities of the Portfolio. The Board also concluded that the overall quality
of the advisory and administrative services was satisfactory.
PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the Portfolio's performance for the one-, three- and
five-year periods ended November 30, 2004, as shown in reports provided by
Lipper (the "Lipper Reports"), compared to the performance of comparable funds
selected by Lipper (the "performance peer group"), and noted that the
Portfolio's performance was lower than its performance peer group average for
the five-year period but better for the one- and three-year periods. The Board
concluded that the Portfolio's performance was satisfactory.
FEES RELATIVE TO OTHER FUNDS MANAGED BY THE ADVISER WITH COMPARABLE INVESTMENT
STRATEGIES
The Board reviewed the advisory and administrative fees (together, the
"management fee") paid by the Portfolio under the Management Agreement. The
Board noted that the rate was comparable to the management fee rates charged by
the Adviser to any other funds it manages with investment strategies comparable
to those of the Portfolio.
FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the management fee rate and the total expense ratio of the
Portfolio. The Board noted that: (i) the Portfolio's management fee rate was
lower than the average management fee rate for funds, selected by Lipper (the
"expense peer group"), managed by other advisers with investment strategies
comparable to those of the Portfolio, as shown in the Lipper Report for the
Portfolio; and (ii) the Portfolio's total expense ratio was also lower than the
average total expense ratio of the funds included in the Portfolio's expense
peer group. The Board concluded that the Portfolio's management fee and total
expense ratio were competitive with those of the Portfolio's expense peer group.
BREAKPOINTS AND ECONOMIES OF SCALE
The Board reviewed the structure of the Portfolio's management fee schedule
under the Management Agreement and noted that it includes a breakpoint. The
Board also reviewed the level of the Portfolio's management fee and noted that
the fee, as a percentage of the Portfolio's net assets, would decrease as net
assets increase because the management fee includes breakpoints. The Board
concluded that the Portfolio's management fee would reflect economies of scale
as assets increase.
51
<Page>
PROFITABILITY OF ADVISER AND AFFILIATES
The Board considered and reviewed information concerning the costs incurred and
profits realized by the Adviser and its affiliates during the last two years
from their relationship with the Portfolio and the Morgan Stanley Fund Complex
and reviewed with the Controller of the Adviser the cost allocation methodology
used to determine the Adviser's profitability. Based on their review of the
information they received, the Board concluded that the profits earned by the
Adviser and its affiliates were not excessive in light of the advisory,
administrative and other services provided to the Portfolio.
FALL-OUT BENEFITS
The Board considered so-called "fall-out benefits" derived by the Adviser and
its affiliates from their relationship with the Portfolio and the Morgan Stanley
Fund Complex, such as "float" benefits derived from handling of checks for
purchases and redemptions of Portfolio shares through a broker-dealer affiliate
of the Adviser and "soft dollar" benefits (discussed in the next section). The
Board also considered that a broker-dealer affiliate of the Adviser receives
from the Portfolio 12b-1 fees for distribution and shareholder services. The
Board also considered that an affiliate of the Adviser, through a joint venture,
receives revenue in connection with trading done on behalf of the Portfolio
through an electronic trading system network ("ECN"). The Board concluded that
the float benefits and the above-referenced ECN-related revenue were relatively
small and that the 12b-1 fees were competitive with those of other broker-dealer
affiliates of investment advisers of mutual funds.
SOFT DOLLAR BENEFITS
The Board considered whether the Adviser realizes any benefits as a result of
brokerage transactions executed through "soft dollar" arrangements. Under such
arrangements, brokerage commissions paid by the Portfolio and/or other funds
managed by the Adviser would be used to pay for research that a securities
broker obtains from third parties, or to pay for both research and execution
services from securities brokers who effect transactions for the Portfolio. The
Adviser informed the Board that it does not use Portfolio commissions to pay for
third party research. It does use commissions to pay for research which is
bundled with execution services. The Board recognized that the receipt of such
research from brokers may reduce the Adviser's costs but concluded that the
receipt of such research strengthens the investment management resources of the
Adviser, which may ultimately benefit the Portfolio and other funds in the
Morgan Stanley Fund Complex.
ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE PORTFOLIO'S
NEEDS
The Board considered whether the Adviser is financially sound and has the
resources necessary to perform its obligations under the Management Agreement.
The Board noted that the Adviser's operations remain profitable, although
increased expenses in recent years have reduced the Adviser's profitability. The
Board concluded that the Adviser has the financial resources necessary to
fulfill its obligations under the Management Agreement.
52
<Page>
HISTORICAL RELATIONSHIP BETWEEN THE PORTFOLIO AND THE ADVISER
The Board also reviewed and considered the historical relationship between the
Portfolio and the Adviser, including the organizational structure of the
Adviser, the policies and procedures formulated and adopted by the Adviser for
managing the Portfolio's operations and the Board's confidence in the competence
and integrity of the senior managers and key personnel of the Adviser. The Board
concluded that it is beneficial for the Portfolio to continue its relationship
with the Adviser.
OTHER FACTORS AND CURRENT TRENDS
The Board considered the controls and procedures adopted and implemented by the
Adviser and monitored by the Portfolio's Chief Compliance Officer and concluded
that the conduct of business by the Adviser indicates a good faith effort on its
part to adhere to high ethical standards in the conduct of the Portfolio's
business.
GENERAL CONCLUSION
After considering and weighing all of the above factors, the Board concluded it
would be in the best interest of the Portfolio and its shareholders to approve
renewal of the Management Agreement for another year.
53
<Page>
MONEY MARKET
PORTFOLIO OF INVESTMENTS - JUNE 30, 2005 (UNAUDITED)
<Table>
<Caption>
ANNUALIZED
PRINCIPAL YIELD
AMOUNT IN ON DATE OF
THOUSANDS PURCHASE MATURITY VALUE
- -------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER (82.9%)
ASSET-BACKED - AUTO (9.9%)
$ 1,130 DaimlerChrysler Revolving Auto
Conduit LLC Series I 3.39% 08/24/05 $ 1,124,288
2,600 DaimlerChrysler Revolving Auto
Conduit LLC Series II 3.12 07/11/05 - 07/18/05 2,597,158
4,400 FCAR Owner Trust 3.13 - 3.32 07/20/05 - 09/15/05 4,383,204
1,250 New Center Asset Trust 3.22 08/08/05 1,245,778
------------
9,350,428
------------
ASSET-BACKED - CONSUMER (5.3%)
1,500 Mont Blanc Capital Corp. 3.21 08/17/05 1,493,772
3,514 Thames Asset Global Securitization - 144A* 3.29 - 3.30 07/15/05 - 07/18/05 3,509,093
------------
5,002,865
------------
ASSET-BACKED - CORPORATE (9.2%)
2,390 Amsterdam Funding Corp. - 144A* 3.08 - 3.11 07/07/05 - 07/12/05 2,388,388
1,820 Blue Ridge Asset Funding Corp. - 144A* 3.30 07/01/05 1,820,000
1,700 Cafco LLC - 144A* 3.32 08/12/05 1,693,435
2,000 Ciesco LLC 3.30 08/17/05 1,991,436
775 Eureka Securitization Inc. - 144A* 3.08 07/07/05 774,603
------------
8,667,862
------------
ASSET-BACKED - MORTGAGE (3.0%)
2,877 Sydney Capital Corp. - 144A* 3.39 - 3.41 09/14/05 - 09/20/05 2,855,727
------------
ASSET-BACKED - SECURITIES (12.4%)
1,025 Amstel Funding Corp. - 144A* 2.94 07/18/05 1,023,596
1,400 Cancara Asset Securitisation LLC - 144A* 3.19 08/10/05 1,395,084
1,500 Clipper Receivables Co., LLC - 144A* 3.10 07/21/05 1,497,433
3,600 Galaxy Funding Inc. - 144A* 3.08 - 3.21 07/19/05 - 08/15/05 3,589,602
1,245 Galleon Capital, LLC - 144A* 3.09 07/05/05 1,244,574
3,000 Golden Fish LLC - 144A* 3.32 - 3.35 08/09/05 - 08/15/05 2,988,100
------------
11,738,389
------------
FINANCE - CONSUMER (2.1%)
2,000 American Express Credit Corp. 3.14 07/26/05 1,995,667
------------
INSURANCE (1.0%)
1,000 American General Finance Corp. 3.27 08/25/05 995,050
------------
INTERNATIONAL BANKS (40.0%)
1,000 Banque Generale du Luxembourg 3.13 07/25/05 997,927
1,200 Barclays U.S. Funding Corp. 3.28 08/18/05 1,194,784
4,550 CBA (Delaware) Finance Inc. 3.07 - 3.14 07/08/05 - 07/25/05 4,546,243
925 Danske Corp. 3.01 07/15/05 923,892
4,285 DnB NOR Bank ASA 3.11 - 3.30 07/14/05 - 09/23/05 4,270,575
3,845 HBOS Treasury Services plc 3.09 - 3.28 07/06/05 - 08/24/05 3,836,123
4,000 KBC Financial Products
International Ltd. - 144A* 3.28 09/01/05 - 09/12/05 3,975,625
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
54
<Page>
<Table>
<Caption>
ANNUALIZED
PRINCIPAL YIELD
AMOUNT IN ON DATE OF
THOUSANDS PURCHASE MATURITY VALUE
- -------------------------------------------------------------------------------------------------------------------
$ 700 KfW International Finance Inc. 3.03% 07/05/05 $ 699,766
1,400 Nordea North America Inc. 3.42 09/16/05 1,389,849
3,775 Skandinaviska Enskilda Banken AB - 144A* 3.10 - 3.32 07/13/05 - 08/19/05 3,764,741
2,310 Societe Generale N.A. Inc. 3.29 - 3.41 09/06/05 - 10/12/05 2,292,539
1,750 Spintab AB 3.03 07/05/05 1,749,415
1,300 Svenska Handelsbanken Inc. 3.35 08/03/05 1,296,020
1,800 Swedbank 3.03 07/01/05 1,800,000
1,000 Toronto-Dominion Holdings (U.S.A.) Inc. 3.18 08/15/05 996,056
3,173 UBS Finance (Delaware) LLC 3.32 - 3.44 09/27/05 - 10/14/05 3,144,146
1,025 UniCredit (Delaware) Inc. 3.07 07/11/05 1,024,132
------------
37,901,833
------------
TOTAL COMMERCIAL PAPER
(COST $78,507,821) 78,507,821
------------
U.S. GOVERNMENT AGENCIES (1.8%)
1,700 Federal National Mortgage Assoc.
(COST $1,696,206) 3.11 07/24/05 1,696,206
------------
FLOATING RATE NOTES (5.5%)
BANKING
2,500 Wells Fargo & Co. 3.30 03/03/06 2,502,319
750 American Express Credit Corp. 3.18 08/11/05 750,089
2,000 General Electric Capital Corp. 3.15 02/03/06 2,002,830
------------
TOTAL FLOATING RATE NOTES
(COST $5,255,238) 5,255,238
------------
CERTIFICATES OF DEPOSIT (3.1%)
3,000 Citibank N.A.
(COST $3,000,000) 3.10 - 3.21 07/25/05 - 08/22/05 3,000,000
------------
BANKER'S ACCEPTANCE (3.3%)
3,110 JP Morgan Chase Bank
(COST $3,096,885) 3.13 - 3.29 07/11/05 - 09/12/05 3,096,885
------------
SHORT TERM BANK NOTE (3.4%)
3,200 Bank of America N.A.
(COST $3,200,000) 2.92 08/03/05 3,200,000
------------
TOTAL INVESTMENTS
(COST $94,756,150) 100.0% 94,756,150
LIABILITIES IN EXCESS OF OTHER ASSETS 0.0 (25,684)
----- ------------
NET ASSETS 100.0% $ 94,730,466
===== ============
</Table>
- ----------
* RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS
(a) COST IS THE SAME FOR FEDERAL INCOME TAX PURPOSES.
SEE NOTES TO FINANCIAL STATEMENTS
55
<Page>
<Table>
MATURITY SCHEDULE*
1 - 30 Days 46%
31 - 60 Days 32
61 - 90 Days 19
91 - 120 Days 3
---
100%
===
</Table>
- ----------
* AS A PERCENTAGE OF TOTAL MARKET VALUE.
SEE NOTES TO FINANCIAL STATEMENTS
56
<Page>
FLEXIBLE INCOME
PORTFOLIO OF INVESTMENTS - JUNE 30, 2005 (UNAUDITED)
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------
GOVERNMENT AND CORPORATE BONDS (89.7%)
FOREIGN (14.6)
ARGENTINA (0.4%)
GOVERNMENT OBLIGATIONS
$ 157 Republic of Argentina 1.33% 12/31/38 $ 56,729
17 Republic of Argentina 1.33 12/31/38 6,285
188 Republic of Argentina 8.28 12/31/33 174,080
18 Republic of Argentina 8.28 12/31/33 16,734
90 Republic of Argentina (c) 13.969 04/10/49 26,550
------------
TOTAL ARGENTINA 280,378
------------
AUSTRALIA (0.3%)
OTHER METALS/MINERALS (0.0%)
70 Murrin Murrin Holdings Property Ltd. (c) (h) 9.375 08/31/07 0
------------
PROPERTY - CASUALTY INSURERS (0.3%)
200 Mantis Reef Ltd. - 144A* 4.692 11/14/08 200,759
------------
TOTAL AUSTRALIA 200,759
------------
BELGIUM (0.2%)
CABLE/SATELLITE TV
145 Telenet Group Holding NV - 144A* 11.50@@ 06/15/14 113,462
------------
BRAZIL (1.3%)
GOVERNMENT OBLIGATIONS
359 Federal Republic of Brazil 8.00 04/15/14 369,901
77 Federal Republic of Brazil 8.875 10/14/19 81,813
15 Federal Republic of Brazil 11.00 08/17/40 18,065
280 Federal Republic of Brazil 14.50 10/15/09 365,400
------------
TOTAL BRAZIL 835,179
------------
CANADA (2.3%)
ALUMINUM (0.3%)
170 Novelis, Inc. - 144A* 7.25 02/15/15 171,487
------------
BROADCASTING (0.3%)
187 Canwest Media Inc. 8.00 09/15/12 197,327
------------
DRUGSTORE CHAINS (0.3%)
45 Jean Coutu Group (PJC) Inc. (The) 7.625 08/01/12 46,687
170 Jean Coutu Group (PJC) Inc. (The) 8.50 08/01/14 168,725
------------
215,412
------------
FOREST PRODUCTS (0.2%)
140 Tembec Industries Inc. 8.50 02/01/11 108,850
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
57
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------
OTHER METALS/MINERALS (0.1%)
$ 60 Brascan Corp. 7.125% 06/15/12 $ 67,589
------------
OTHER TRANSPORTATION (0.3%)
130 CHC Helicopter Corp. 7.375 05/01/14 130,325
80 CHC Helicopter Corp. - 144A* 7.375 05/01/14 80,200
------------
210,525
------------
PULP & PAPER (0.5%)
100 Abitibi-Consolidated Inc. 6.00 06/20/13 92,500
140 Abitibi-Consolidated Inc. 8.85 08/01/30 134,750
80 Bowater Canada Finance 7.95 11/15/11 85,100
------------
312,350
------------
TELECOMMUNICATION EQUIPMENT (0.2%)
125 Nortel Networks Ltd. 6.125 02/15/06 126,406
------------
WIRELESS TELECOMMUNICATIONS (0.1%)
65 Rogers Wireless Communications Inc. 7.50 03/15/15 71,012
------------
TOTAL CANADA 1,480,958
------------
FRANCE (0.4%)
CHEMICALS: SPECIALTY (0.2%)
140 Rhodia SA 8.875 06/01/11 135,450
------------
MAJOR TELECOMMUNICATIONS (0.2%)
95 France Telecom S.A. 8.75 03/01/31 132,865
------------
MISCELLANEOUS MANUFACTURING (0.0%)
25 CIE Generale de Geophysique SA - 144A* 7.50 05/15/15 26,187
------------
TOTAL FRANCE 294,502
------------
GERMANY (0.3%)
CABLE/SATELLITE TV
155 Kabel Deutschland - 144A* 10.625 07/01/14 168,950
------------
INDONESIA (0.4%)
PULP & PAPER
264 Tjiwi Kimia Finance BV - 144A* 0.00 04/29/27 63,270
83 Tjiwi Kimia Finance BV - 144A* 4.19 04/29/15 69,660
213 Tjiwi Kimia Finance BV - 144A* 4.19 04/29/18 136,606
------------
TOTAL INDONESIA 269,536
------------
IRELAND (0.1%)
INVESTMENT MANAGERS
85 JSG Funding PLC 9.625 10/01/12 85,425
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
58
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------
ISRAEL (0.3%)
ELECTRICAL PRODUCTS
$ 167 Ormat Funding Corp. 8.25% 12/30/20 $ 169,377
------------
JAPAN (4.0%)
GOVERNMENT OBLIGATIONS
JPY 178,000 Japan (Government of) 0.50 06/20/06 1,611,935
110,000 Japan (Government of) 0.50 09/20/06 997,185
------------
TOTAL JAPAN 2,609,120
------------
LUXEMBOURG (0.2%)
TELECOMMUNICATIONS
$ 30 Telecom Italia Capital SpA 4.00 11/15/08 29,570
80 Telecom Italia Capital SpA - 144A* 4.00 01/15/10 77,813
------------
TOTAL LUXEMBOURG 107,383
------------
MEXICO (1.0%)
GOVERNMENT OBLIGATIONS (0.7%)
305 United Mexican States Corp. 8.375 01/14/11 355,782
39 United Mexican States Corp. 11.50 05/15/26 62,693
40 United Mexican States Corp. (Series MTN) 8.30 08/15/31 49,900
------------
468,375
------------
OIL & GAS PRODUCTION ((0.1%)
30 Pemex Project Funding Master Trust 9.50 09/15/27 39,266
20 Pemex Project Funding Master Trust - 144A* 9.50 09/15/27 26,178
------------
65,444
------------
TELECOMMUNICATIONS (0.2%)
100 Axtel SA 11.00 12/15/13 109,500
------------
TOTAL MEXICO 643,319
------------
NETHERLANDS (0.2%)
TELECOMMUNICATIONS
75 Deutsche Telekom International Finance NV 8.75 06/15/30 101,864
------------
QATAR (0.4%)
GAS DISTRIBUTORS (0.2%)
105 Ras Laffan Liquid Natural Gas Co. Ltd. - 144A* 8.294 03/15/14 125,517
------------
GOVERNMENT OBLIGATION (0.2%)
100 State of Qatar 9.75 06/15/30 156,020
------------
TOTAL QATAR 281,537
------------
</Table>
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<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------
RUSSIA (1.3%)
GOVERNMENT OBLIGATIONS (1.2%)
$ 45 Federal Republic of Russia 5.00% 03/31/30 $ 50,349
70 Federal Republic of Russia 8.25 03/31/10 76,538
201 Federal Republic of Russia 11.00 07/24/18 301,044
190 Federal Republic of Russia 12.75 06/24/28 344,188
------------
772,119
------------
OIL & GAS PIPELINES (0.1%)
75 Gaz Capital 8.625 04/28/34 94,350
------------
TOTAL RUSSIA 866,469
------------
TURKEY (0.8%)
GOVERNMENT OBLIGATIONS
100 Citigroup Inc. - 144A*+++ (Issued 09/17/04) 0.00 02/23/06 136,790
70 Citigroup Inc. - 144A*+++ (Issued 09/27/04) 0.00 02/23/06 101,416
90 Republic of Turkey 11.00 01/14/13 114,075
155 Republic of Turkey 11.50 01/23/12 198,788
------------
TOTAL TURKEY 551,069
------------
UNITED KINGDOM (0.3%)
ADVERTISING/MARKETING SERVICES (0.1%)
70 WPP Finance (UK) Corp. 5.875 06/15/14 74,138
------------
FINANCE/RENTAL/LEASING (0.2%)
130 Nationwide Building Society - 144A* 4.25 02/01/10 129,810
------------
TOTAL UNITED KINGDOM 203,948
------------
VENEZUELA (0.4%)
GOVERNMENT OBLIGATIONS
70 Republic of Venezuela 8.50 10/08/14 72,870
200 Republic of Venezuela 9.375 01/13/34 210,000
------------
TOTAL VENEZUELA 282,870
------------
TOTAL FOREIGN
(COST $9,496,631) 9,546,105
------------
UNITED STATES (75.1%)
CORPORATE BONDS (39.8%)
ADVERTISING/MARKETING SERVICES (0.1%)
35 Interpublic Group of Companies, Inc. (The) 5.40 11/15/09 33,461
------------
</Table>
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60
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------
AEROSPACE & DEFENSE (0.6%)
$ 165 K&F Acquisition Inc. 7.75% 11/15/14 $ 169,537
100 Northrop Grumman Corp. 4.079 11/16/06 99,744
45 Raytheon Co. 8.30 03/01/10 52,201
78 Systems 2001 Asset Trust LLC - 144A* 6.664 09/15/13 85,176
------------
406,658
------------
AIR FREIGHT/COURIERS (0.1%)
30 Fedex Corp. 2.65 04/01/07 29,231
40 Fedex Corp. 7.25 02/15/11 45,354
------------
74,585
------------
AIRLINES (0.3%)
191 Continental Airlines, Inc. 6.648 09/15/17 188,224
30 Southwest Airlines Co. (Series 01-1) 5.496 11/01/06 30,527
------------
218,751
------------
APPAREL/FOOTWEAR (0.4%)
200 Levi Strauss & Co. 7.73 04/01/12 190,000
60 Oxford Industries, Inc. 8.875 06/01/11 64,500
------------
254,500
------------
APPAREL/FOOTWEAR RETAIL (0.1%)
85 Brown Shoe Co., Inc. - 144A* 8.75 05/01/12 89,037
------------
AUTO PARTS: O.E.M. (0.5%)
100 ArvinMeritor, Inc. 8.75 03/01/12 104,750
50 Lear Corp. (Series B) 8.11 05/15/09 51,744
20 Meritor Automotive Inc. 6.80 02/15/09 19,900
154 TRW Automotive, Inc. 9.375 02/15/13 171,325
------------
347,719
------------
BEVERAGES: ALCOHOLIC (0.2%)
100 Fosters Finance Corp. - 144A* 5.125 06/15/15 100,585
------------
BROADCASTING (0.1%)
74 Salem Communications Holdings Corp. (Series B) 9.00 07/01/11 80,105
------------
BUILDING PRODUCTS (0.7%)
35 Interface Inc. 7.30 04/01/08 35,875
165 Interface Inc. 9.50 02/01/14 169,125
175 Nortek Inc. 8.50 09/01/14 163,625
70 NTK Holdings Inc. - 144A* 10.75@@ 03/01/14 33,250
55 PLY Gem Industries, Inc. 9.00 02/15/12 46,750
------------
448,625
------------
</Table>
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<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------
CABLE/SATELLITE TV (1.4%)
$ 70 Cablevision Systems Corp. (Series B) 7.89**% 04/01/09 $ 70,525
135 Charter Communications Holdings LLC 10.75 10/01/09 104,962
85 Charter Communications Holdings/Charter Capital 11.75@@ 05/15/11 56,737
180 Comcast Cable Communications Inc. 6.75 01/30/11 198,818
115 Cox Communications, Inc. 4.625 01/15/10 114,812
210 Echostar DBS Corp. 6.375 10/01/11 209,212
75 Intelsat Bermuda Ltd. - 144A* 7.805** 01/15/12 76,687
60 Renaissance Media Group LLC 10.00 04/15/08 59,700
------------
891,453
------------
CASINO/GAMING (1.2%)
840 Aladdin Gaming Holdings/Capital Corp. LLC
(Series B) (a) (c) (h) 13.50 03/01/10 0
115 Harrah's Operating Co., Inc. 7.875 12/15/05 117,012
150 Isle of Capri Casinos 7.00 03/01/14 151,500
7 Mandalay Resort Group 9.375 02/15/10 7,857
335 MGM Mirage Inc. 6.00 10/01/09 338,350
299 Resort At Summerlin LP/Ras Co.
(Series B) (a) (c) (h) 13.00@ 12/15/07 0
165 Station Casinos, Inc. 6.00 04/01/12 168,300
30 Station Casinos, Inc. - 144A* 6.875 03/01/16 30,975
------------
813,994
------------
CHEMICALS: AGRICULTURAL (0.0%)
14 IMC Global Inc. (Series B) 10.875 06/01/08 15,820
------------
CHEMICALS: MAJOR DIVERSIFIED (0.3%)
55 Huntsman Advanced Materials Corp. 11.00 07/15/10 62,425
98 Huntsman ICI Chemicals 10.125 07/01/09 101,307
45 ICI Wilmington Inc. 4.375 12/01/08 44,693
------------
208,425
------------
CHEMICALS: SPECIALTY (2.0%)
161 Equistar Chemical Funding 10.125 09/01/08 175,087
35 Equistar Chemical Funding 10.625 05/01/11 38,806
100 Innophos Inc. - 144A* 8.875 08/15/14 102,500
55 Innophos Inc. - 144A* 10.771 02/15/15 50,875
80 ISP Chemco 10.25 07/01/11 87,600
135 ISP Holdings Inc. (Series B) 10.625 12/15/09 145,800
40 Koppers Industry Inc. 9.875 10/15/13 43,400
175 Millennium America, Inc. 7.00 11/15/06 179,812
79 Millennium America, Inc. 9.25 06/15/08 85,912
100 Nalco Co. 7.75 11/15/11 107,000
</Table>
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62
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------
$ 115 Nalco Co. 8.875% 11/15/13 $ 123,912
160 Rockwood Specialties, Inc. 10.625 05/15/11 177,200
------------
1,317,904
------------
COAL (0.1%)
35 Foundation PA Coal Co. 7.25 08/01/14 36,925
------------
CONSTRUCTION MATERIALS (0.2%)
120 RMCC Acquisition Co. - 144A* 9.50 11/01/12 115,200
------------
CONSUMER SUNDRIES (0.1%)
80 Amscan Holdings, Inc. 8.75 05/01/14 73,600
------------
CONTAINERS/PACKAGING (1.5%)
60 Graham Packaging Company Inc. - 144A* 8.50 10/15/12 60,900
120 Graham Packaging Company Inc. - 144A* 9.875 10/15/14 120,900
225 Graphic Packaging International Corp. 9.50 08/15/13 227,812
345 Owens-Illinois Inc. 7.50 05/15/10 363,975
95 Pliant Corp. 13.00 06/01/10 77,425
125 Sealed Air Corp. - 144A* 5.625 07/15/13 128,654
------------
979,666
------------
DEPARTMENT STORES (0.1%)
65 Penny (JC) Co., Inc. 7.40 04/01/37 70,525
------------
DRUGSTORE CHAINS (0.1%)
14 CVS Corp. - 144A* 6.204 10/10/25 15,893
55 Rite Aid Corp. 8.125 05/01/10 56,925
------------
72,818
------------
ELECTRIC UTILITIES (3.1%)
80 AES Corp. (The) 7.75 03/01/14 87,200
11 AES Corp. (The) 8.875 02/15/11 12,320
16 AES Corp. (The) 9.375 09/15/10 18,200
60 AES Corp. (The) - 144A* 9.00 05/15/15 67,650
60 Allegheny Energy, Inc. 7.75 08/01/05 60,210
140 Arizona Public Service Co. 5.80 06/30/14 150,657
15 CC Funding Trust I 6.90 02/16/07 15,630
65 Cincinnati Gas & Electric Co. 5.70 09/15/12 69,582
65 CMS Energy Corp. 7.50 01/15/09 68,737
75 CMS Energy Corp. 8.50 04/15/11 84,000
60 Consolidated Natural Gas Co. 5.00 12/01/14 60,811
10 Consolidated Natural Gas Co. (Series A) 5.00 03/01/14 10,162
60 Consolidated Natural Gas Co. (Series C) 6.25 11/01/11 65,546
75 Detroit Edison Co. (The) - 144A* 4.80 02/15/15 75,577
45 Entergy Gulf States, Inc. 3.60 06/01/08 44,082
</Table>
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63
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------
$ 100 Entergy Gulf States, Inc. 3.73**% 12/01/09 $ 100,332
80 Exelon Corp. 6.75 05/01/11 88,951
30 IPALCO Enterprises, Inc. 8.625 11/14/11 33,900
135 Monongahela Power Co. 5.00 10/01/06 136,133
115 MSW Energy Holdings/Finance 7.375 09/01/10 118,450
25 MSW Energy Holdings/Finance 8.50 09/01/10 26,563
190 Nevada Power Co. 9.00 08/15/13 214,700
55 Pacific Gas & Electric Co. 6.05 03/01/34 60,831
30 Panhandle Eastern Pipe Line Co. (Series B) 2.75 03/15/07 29,229
15 PSEG Energy Holdings Inc. 7.75 04/16/07 15,563
100 PSEG Energy Holdings Inc. 8.625 02/15/08 106,750
125 Reliant Energy, Inc. 6.75 12/15/14 122,813
20 Texas Eastern Transmission, LP 7.00 07/15/32 24,538
40 TNP Enterprises, Inc. 10.25 04/01/10 42,220
35 Wisconsin Electric Power Co. 3.50 12/01/07 34,476
------------
2,045,813
------------
ELECTRICAL PRODUCTS (0.4%)
35 Cooper Industries Inc. 5.25 07/01/07 35,656
150 Rayovac Corp. 8.50 10/01/13 157,500
70 Rayovac Corp. - 144A* 7.375 02/01/15 68,075
------------
261,231
------------
ELECTRONIC COMPONENTS (0.2%)
140 Sanmina-SCI Corp. - 144A* 6.75 03/01/13 134,400
------------
ENVIRONMENTAL SERVICES (0.5%)
200 Allied Waste North America, Inc. 6.375 04/15/11 193,000
25 Allied Waste North America, Inc. 8.50 12/01/08 26,344
42 Allied Waste North America, Inc. 9.25 09/01/12 45,570
50 Allied Waste North America, Inc. (Series B) 8.875 04/01/08 52,750
------------
317,664
------------
FINANCE/RENTAL/LEASING (1.1%)
35 CIT Group, Inc. 2.875 09/29/06 34,518
30 CIT Group, Inc. 3.65 11/23/07 29,595
145 Ford Motor Credit Co. 7.25 10/25/11 139,702
105 Ford Motor Credit Co. 7.375 10/28/09 102,698
135 MBNA America Bank 7.125 11/15/12 155,446
125 MBNA Corp. 3.64 05/05/08 125,835
50 MBNA Corp. 6.125 03/01/13 54,570
25 SLM Corp. 4.00 01/15/10 24,721
45 SLM Corp. (Series MTNA) 5.00 10/01/13 46,172
------------
713,257
------------
</Table>
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64
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------
FINANCIAL CONGLOMERATES (1.4%)
$ 120 Chase Manhattan Corp. 6.00% 02/15/09 $ 126,950
10 Chase Manhattan Corp. 7.00 11/15/09 11,010
40 Citicorp 6.75 08/15/05 40,141
50 Citigroup Inc. 5.625 08/27/12 53,485
20 Citigroup Inc. 5.75 05/10/06 20,304
45 Citigroup Inc. 6.00 02/21/12 49,208
50 Citigroup Inc. 6.625 06/15/32 59,892
20 General Electric Capital Corp. 4.25 12/01/10 19,949
85 General Electric Capital Corp. (Series MTNA) 6.75 03/15/32 105,249
305 General Motors Acceptance Corp. 6.875 09/15/11 281,886
150 General Motors Acceptance Corp. 8.00 11/01/31 134,192
--------------
902,266
--------------
FOOD RETAIL (0.6%)
130 Albertson's Inc. 7.45 08/01/29 148,477
40 CA FM Lease Trust - 144A* 8.50 07/15/17 46,064
145 Delhaize America, Inc. 8.125 04/15/11 163,355
40 Safeway Inc. 7.25 02/01/31 46,464
--------------
404,360
--------------
FOOD: MAJOR DIVERSIFIED (0.4%)
4 Dole Food Company, Inc. 8.875 03/15/11 4,290
25 General Mills Inc. 3.875 11/30/07 24,806
30 Kraft Foods Inc. 5.25 06/01/07 30,597
215 Kraft Foods Inc. 5.625 11/01/11 228,381
--------------
288,074
--------------
FOOD: MEAT/FISH/DAIRY (1.1%)
85 Michael Foods Inc. (Series B) 8.00 11/15/13 86,913
160 Pilgrim's Pride Corp. 9.625 09/15/11 175,600
60 PPC Escrow Corp. 9.25 11/15/13 66,900
300 Smithfield Foods Inc. 7.00 08/01/11 317,250
70 Smithfield Foods Inc. 7.625 02/15/08 73,150
20 Smithfield Foods Inc. (Series B) 8.00 10/15/09 21,700
--------------
741,513
--------------
FOREST PRODUCTS (0.0%)
13 Weyerhaeuser Co. 6.125 03/15/07 13,371
--------------
GAS DISTRIBUTORS (0.7%)
130 Dynegy Holdings, Inc. 6.875 04/01/11 129,025
130 Dynegy Holdings, Inc. - 144A* 9.875 07/15/10 144,300
120 Nisource Finance Corp. 3.854** 11/23/09 120,590
</Table>
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65
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------
$ 45 Sempra Energy 4.621% 05/17/07 $ 45,233
--------------
439,148
--------------
HOME BUILDING (0.5%)
65 Beazer Homes USA, Inc. - 144A* 6.875 07/15/15 64,675
80 Tech Olympic USA, Inc. 10.375 07/01/12 84,000
100 Tech Olympic USA, Inc. (Issued 02/03/03) 9.00 07/01/10 103,375
50 Tech Olympic USA, Inc. (Issued 11/27/02) 9.00 07/01/10 51,688
--------------
303,738
--------------
HOME FURNISHINGS (0.2%)
50 Mohawk Industries, Inc. (Series D) 7.20 04/15/12 57,224
40 Tempur-Pedic Inc. 10.25 08/15/10 44,200
--------------
101,424
--------------
HOSPITAL/NURSING MANAGEMENT (0.8%)
85 Community Health System Inc. 6.50 12/15/12 86,913
45 HCA, Inc. 6.30 10/01/12 46,304
85 HCA, Inc. 7.875 02/01/11 93,737
110 Medcath Holdings Corp. 9.875 07/15/12 123,475
115 Tenet Healthcare Corp. 7.375 02/01/13 114,138
65 Tenet Healthcare Corp. 9.875 07/01/14 70,038
--------------
534,605
--------------
HOTELS/RESORTS/CRUISELINES (0.3%)
120 Hyatt Equities LLC - 144A* 6.875 06/15/07 123,882
50 Marriott International, Inc. (Series E) 7.00 01/15/08 53,164
--------------
177,046
--------------
HOUSEHOLD/PERSONAL CARE (0.2%)
75 Clorox Co. (The) 3.525** 12/14/07 75,152
50 Del Laboratories, Inc. 8.00 02/01/12 43,250
--------------
118,402
--------------
INDUSTRIAL MACHINERY (0.3%)
35 Flowserve Corp. 12.25 08/15/10 37,975
50 Goodman Global Holding Company, Inc. - 144A* 6.41** 06/15/12 49,500
140 Goodman Global Holding Company, Inc. - 144A* 7.875 12/15/12 130,200
--------------
217,675
--------------
INDUSTRIAL SPECIALTIES (0.4%)
165 Johnsondiversy, Inc. 9.625 05/15/12 168,300
115 UCAR Finance, Inc. 10.25 02/15/12 121,613
--------------
289,913
--------------
</Table>
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66
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------
INSURANCE BROKERS/SERVICES (0.8%)
$ 290 Farmers Exchange Capital - 144A* 7.05% 07/15/28 $ 314,531
185 Marsh & McLennan Companies, Inc. 5.875 08/01/33 176,921
--------------
491,452
--------------
INVESTMENT BANKS/BROKERS (0.4%)
55 Goldman Sachs Group Inc. (The) 6.60 01/15/12 61,210
180 Refco Finance Holdings 9.00 08/01/12 191,700
--------------
252,910
--------------
MAJOR BANKS (0.3%)
20 Bank of New York (The) 5.20 07/01/07 20,390
70 FleetBoston Financial Corp. 7.25 09/15/05 70,495
35 HSBC Finance Corp. 6.75 05/15/11 38,896
70 Wachovia Corp. 4.95 11/01/06 70,772
--------------
200,553
--------------
MANAGED HEALTH CARE (0.6%)
210 Aetna, Inc. 7.875 03/01/11 245,408
90 Health Net, Inc. 9.875 04/15/11 107,516
30 WellPoint Health Networks Inc. 6.375 06/15/06 30,651
--------------
383,575
--------------
MEDIA CONGLOMERATES (0.4%)
40 AOL Time Warner Inc. 7.625 04/15/31 50,114
55 News America Holdings, Inc. 7.75 02/01/24 66,205
30 News America Inc. 7.125 04/08/28 34,364
100 Time Warner, Inc. 6.625 05/15/29 111,777
--------------
262,460
--------------
MEDICAL DISTRIBUTORS (0.2%)
100 AmerisourceBergen Corp. 8.125 09/01/08 109,000
--------------
MEDICAL SPECIALTIES (0.1%)
50 Fisher Scientific International, Inc. 6.75 08/15/14 52,500
--------------
MEDICAL/NURSING SERVICES (0.5%)
85 DaVita Inc. - 144A* 6.625 03/15/13 88,188
181 Fresenius Medical Care Capital Trust 7.875 06/15/11 195,480
25 Fresenius Medical Care Capital Trust II (Units) 7.875 02/01/08 26,188
25 National Nephrology Assoc. Inc. - 144A* 9.00 11/01/11 28,188
--------------
338,044
--------------
METAL FABRICATIONS (0.6%)
60 General Cable Corp. 9.50 11/15/10 64,500
170 Hexcell Corp. 6.75 02/01/15 170,850
</Table>
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67
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------
$ 150 Trimas Corp. 9.875% 06/15/12 $ 126,750
--------------
362,100
--------------
MISCELLANEOUS COMMERCIAL SERVICES (0.9%)
221 Advanstar Communications, Inc. 10.768 08/15/08 237,200
150 Iron Mountain Inc. 7.75 01/15/15 151,500
140 Iron Mountain Inc. 8.625 04/01/13 145,600
60 Vertis Inc. - 144A* 13.50 12/07/09 45,075
--------------
579,375
--------------
MISCELLANEOUS MANUFACTURING (0.4%)
290 Associated Materials Inc. 11.25@@ 03/01/14 185,600
70 Propex Fabrics Inc. 10.00 12/01/12 66,850
--------------
252,450
--------------
MOTOR VEHICLES (0.6%)
50 DaimlerChrysler North American Holdings Co. 7.30 01/15/12 55,945
30 General Motors Corp. 7.125 07/15/13 27,000
345 General Motors Corp. 8.375 07/15/33 289,800
--------------
372,745
--------------
MOVIES/ENTERTAINMENT (0.1%)
65 AMC Entertainment Inc. 7.518 08/15/10 67,519
--------------
MULTI-LINE INSURANCE (0.4%)
160 AIG Sun America Global Finance VI - 144A* 6.30 05/10/11 174,597
30 American General Finance Corp. (Series MTNH) 4.625 09/01/10 30,175
45 Hartford Financial Services Group, Inc. (The) (Note 4) 2.375 06/01/06 44,206
15 International Lease Finance Corp. 2.95 05/23/06 14,873
30 International Lease Finance Corp. 3.75 08/01/07 29,756
--------------
293,607
--------------
OIL & GAS PIPELINES (0.9%)
220 El Paso Production Holdings 7.75 06/01/13 235,950
95 Pacific Energy Partners/Finance 7.125 06/15/14 99,394
40 Southern Natural Gas 8.875 03/15/10 44,077
205 Williams Companies, Inc. (The) 7.875 09/01/21 234,213
--------------
613,634
--------------
OIL & GAS PRODUCTION (1.6%)
160 Chesapeake Energy Corp. 7.50 09/15/13 174,000
50 Chesapeake Energy Corp. - 144A* 6.625 01/15/16 51,875
160 Hilcorp Energy/Finance - 144A* 10.50 09/01/10 177,600
35 Kerr-McGee Corp. 7.875 09/15/31 40,030
40 Magnum Hunter Resources, Inc. 9.60 03/15/12 44,600
170 Pemex Project Funding Master Trust - 144A* 4.71** 06/15/10 175,780
</Table>
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68
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------
$ 80 Pemex Project Funding Master Trust - 144A* 9.50% 09/15/27 $ 104,800
60 Plains E & P Corp. 7.125 06/15/14 64,500
200 Vintage Petroleum, Inc. 7.875 05/15/11 212,000
--------------
1,045,185
--------------
OIL REFINING/MARKETING (0.7%)
210 CITGO Petroleum Corp. 6.00 10/15/11 210,525
170 Husky Oil Ltd. 8.90 08/15/28 188,838
65 Tesoro Petroleum Corp. 9.625 04/01/12 72,231
--------------
471,594
--------------
OILFIELD SERVICES/EQUIPMENT (0.4%)
20 Hanover Compressor Co. 8.625 12/15/10 21,250
50 Hanover Compressor Co. 9.00 06/01/14 53,500
100 Hanover Equipment Trust 2001 A (Series A) 8.50 09/01/08 104,500
60 Hanover Equipment Trust 2001 B (Series B) 8.75 09/01/11 64,050
--------------
243,300
--------------
PHARMACEUTICALS: MAJOR (0.3%)
55 VWR International Inc. 6.875 04/15/12 54,450
70 VWR International Inc. 8.00 04/15/14 67,025
90 Warner Chilcott Corp. - 144A* 8.75 02/01/15 87,975
--------------
209,450
--------------
PROPERTY - CASUALTY INSURERS (0.1%)
85 St. Paul Travelers 5.01 08/16/07 86,102
--------------
PUBLISHING: BOOKS/MAGAZINES (0.9%)
59 Dex Media East/Finance 12.125 11/15/12 70,948
95 Dex Media West/Finance 9.875 08/15/13 108,775
20 Houghton Mifflin Co. 8.25 02/01/11 20,850
130 Houghton Mifflin Co. 9.875 02/01/13 139,425
50 Houghton Mifflin Co. 11.50@@ 10/15/13 36,750
175 PRIMEDIA, Inc. 8.875 05/15/11 184,188
--------------
560,936
--------------
PULP & PAPER (0.2%)
115 Georgia-Pacific Corp. 8.875 02/01/10 131,100
--------------
RAILROADS (0.4%)
25 Burlington North Santa Fe Railway Co. 4.575 01/15/21 25,223
70 Norfolk Southern Corp. 7.35 05/15/07 73,917
30 Union Pacific Corp. 3.625 06/01/10 28,859
100 Union Pacific Corp. - 144A* 5.214 09/30/14 103,239
30 Union Pacific Corp. (Series MTNE) 6.79 11/09/07 31,763
--------------
263,001
--------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
69
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS (0.3%)
$ 24 HMH Properties, Inc. (Series B) 7.875% 08/01/08 $ 24,480
105 Host Marriott LP 7.125 11/01/13 109,988
85 Host Marriott LP - 144A* 6.375 03/15/15 84,575
--------------
219,043
--------------
REGIONAL BANKS (0.2%)
AUD 200 KFW International Inc. 6.25 07/15/05 152,099
--------------
SAVINGS BANKS (0.1%)
$ 25 Household Finance Corp. 4.125 12/15/08 24,859
15 Household Finance Corp. 6.375 10/15/11 16,421
--------------
41,280
--------------
SPECIALTY STORES (0.9%)
130 Autonation, Inc. 9.00 08/01/08 142,675
115 General Nutrition Centers Inc. 8.50 12/01/10 92,575
150 Petro Stopping Centers LP/Petro Financial Corp. 9.00 02/15/12 151,500
210 Sonic Automotive, Inc. 8.625 08/15/13 213,150
--------------
599,900
--------------
SPECIALTY TELECOMMUNICATIONS (1.3%)
85 American Tower Corp. 7.125 10/15/12 90,313
90 American Tower Corp. 7.50 05/01/12 96,525
31 Panamsat Corp. 9.00 08/15/14 33,984
190 Panamsat Holding Corp. 10.375@@ 11/01/14 131,575
125 Qwest Communications International - 144A* 7.268** 02/15/09 123,438
220 Qwest Services Corp. 13.50 12/15/10 255,200
25 Qwest Services Corp. 14.00 12/15/14 30,438
90 Satelites Mexicanos SA (c) 10.125 11/01/04 48,150
20 U.S. West Communications Corp. 5.625 11/15/08 19,750
--------------
829,373
--------------
STEEL (0.5%)
165 Amsted Industries Inc. - 144A* 10.25 10/15/11 179,025
135 United States Steel Corp. 9.75 05/15/10 146,475
--------------
325,500
--------------
TELECOMMUNICATIONS (0.4%)
130 AT&T Corp. 9.75 11/15/31 169,813
184 Exodus Communications, Inc. (a) (c) (h) 11.625 07/15/10 0
433 Rhythms Netconnections, Inc. (a) (c) (h) 12.75 04/15/09 0
55 Sprint Capital Corp. 8.75 03/15/32 76,750
--------------
246,563
--------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
70
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------
TOBACCO (0.3%)
$ 35 Altria Group, Inc. 7.00% 11/04/13 $ 39,231
110 Altria Group, Inc. 7.75 01/15/27 132,468
--------------
171,699
--------------
TRUCKS/CONSTRUCTION/FARM MACHINERY (0.6%)
175 Caterpillar Financial Services Corp. 3.35** 08/20/07 175,304
25 Commercial Vehicle Group Inc. - 144A* 8.00 07/01/13 25,531
122 Manitowoc Inc. (The) 10.50 08/01/12 138,470
60 NMHG Holding Co. 10.00 05/15/09 63,300
--------------
402,605
--------------
WHOLESALE DISTRIBUTORS (0.4%)
150 Buhrmann US, Inc. 8.25 07/01/14 150,750
115 Nebraska Book Company, Inc. 8.625 03/15/12 107,813
--------------
258,563
--------------
WIRELESS TELECOMMUNICATIONS (0.7%)
45 AT&T Wireless Services, Inc. 8.75 03/01/31 63,269
75 Rural Cellular Corp. 7.91** 03/15/10 77,625
110 SBA Communications Corp. 8.50 12/01/12 119,075
97 SBA Communications Corp. 9.75@@ 12/15/11 89,725
110 Ubiquitel Operating Co. 9.875 03/01/11 121,275
--------------
470,969
--------------
TOTAL CORPORATE BONDS
(COST $26,995,926) 26,014,442
--------------
ASSET-BACKED SECURITIES (10.1%)
FINANCE/RENTAL/LEASING (9.1%)
475 Ace Securities Corp. 2005-HE4 A2A 3.436 07/25/35 473,052
400 Aegis Asset Backed Securities Trust 2005-3 A1 3.42 08/25/35 400,000
650 BA Master Credit Card Trust 2001-A A 3.34** 06/15/08 651,053
345 Bear Stearns Asset Backed Securities, Inc.
2004-HE5 1A1 3.504** 08/25/31 344,879
325 Capital Auto Receivables Asset Trust 2005-1 A3 3.28** 04/15/08 325,413
16 Chase Funding Mortgage Loan 2004-1 1A 3.424** 11/25/18 15,780
316 Equifirst Mortgage Loan Trust 2005-1 A1 3.37** 04/25/35 316,600
525 GE Capital Credit Card Master Note Trust 2004-1 A 3.27** 06/15/10 525,783
300 GSAMP Trust 2005 -HE3 3.42 06/25/35 300,000
450 Long Beach Mortgage Loan Trust 2005-WL1 2A1 3.498 06/25/35 450,000
600 MBNA Master Credit Card Trust 3.36** 02/16/10 602,159
450 Merrill Auto Trust Securitization 2005-1 A2B 3.31 04/25/08 450,351
428 Novastar Home Equity Loan 2005-1 A2A 3.43 06/25/35 428,624
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
71
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------------------------
$ 325 Park Place Securities Inc. 2005-WCW2 A2A 3.41% 07/25/35 $ 325,000
354 Structured Asset Securities Corp. 2005-WMC1 A1 3.394** 01/25/35 354,298
--------------
5,962,992
--------------
INVESTMENT TRUSTS/MUTUAL FUNDS (1.0%)
596 Targeted Return Index - 144A* 8.218 08/01/15 630,805
--------------
TOTAL ASSET-BACKED SECURITIES
(COST $6,572,786) 6,593,797
--------------
MORTGAGE-BACKED SECURITIES (4.2%)
Federal Home Loan Mortgage Corp. (0.5%)
294 7.50 11/01/29 - 06/01/32 315,198
--------------
Federal National Mortgage Assoc. (3.5%)
922 6.50 07/01/29 - 11/01/33 957,062
334 7.00 04/01/31 - 05/01/32 352,584
263 7.50 02/01/31 - 03/01/32 280,590
548 8.00 02/01/12 - 06/01/31 588,536
114 8.50 06/01/30 123,829
--------------
2,302,601
--------------
Government National Mortgage Assoc. (0.2%)
111 7.50 04/15/26 - 08/15/29 118,822
38 8.00 02/15/26 41,056
--------------
159,878
--------------
TOTAL MORTGAGE-BACKED SECURITIES
(COST $2,750,892) 2,777,677
--------------
U.S. GOVERNMENT AGENCY & OBLIGATIONS (21.0%)
270 Federal Home Loan Mortgage Corp. 5.125 11/07/13 271,052
U.S. Treasury Bonds
1,925 6.125 08/15/29 2,458,512
565 6.375 08/15/27 732,712
185 8.125 08/15/21 268,626
460 (b) 8.75 05/15/17 660,621
U.S. Treasury Notes
1,000 3.875 02/15/13 1,001,524
3,950 4.25 08/15/13 4,049,986
705 8.75 08/15/20 1,061,025
U.S. Treasury Strips
700 0.00 02/15/06 685,511
5,150 0.00 08/15/17 - 02/15/27 2,579,886
--------------
TOTAL U.S. GOVERNMENT AGENCY & OBLIGATIONS
(COST $12,879,538) 13,769,455
--------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
72
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------
TOTAL UNITED STATES
(COST $49,199,142) $ 49,155,371
--------------
TOTAL GOVERNMENT & CORPORATE BONDS
(COST $58,695,773) 58,701,476
--------------
CONVERTIBLE BOND (0.2%)
TELECOMMUNICATIONS EQUIPMENT
$ 130 Nortel Networks Corp. (Cost $124,913) 4.25% 09/01/08 121,875
--------------
<Caption>
NUMBER OF
SHARES
- ----------
COMMON STOCKS (e) (0.3%)
APPAREL/FOOTWEAR RETAIL (0.0%)
50,166 County Seat Stores Corp. (d) (h) 0
--------------
CASINO/GAMING (0.0%)
787 Fitzgeralds Gaming Corp.+ (h) 0
--------------
FOOD: SPECIALTY/CANDY (0.0%)
100 SFAC New Holdings Inc.++ (d) (h) 0
18 SFFB New Holdings Inc. (d) (h) 0
--------------
0
--------------
MEDICAL/NURSING SERVICES (0.0%)
34,888 Raintree Healthcare Corp. (d) (h) 0
--------------
RESTAURANTS (0.0%)
10,137 Catalina Restaurant Group (d) (h) 24,633
--------------
SPECIALTY TELECOMMUNICATIONS (0.0%)
1,171 Birch Telecom Inc. (d) (h) 12
16,679 PFB Telecom NV (Series B) (d) (h) 0
--------------
12
--------------
TEXTILES (0.0%)
11,192 U.S. Leather, Inc. (d) (h) 0
--------------
TELECOMMUNICATIONS (0.0%)
352 Viatel Holdings Bermuda Ltd. (d) 25
--------------
WIRELESS TELECOMMUNICATIONS (0.3%)
2,475 NII Holdings, Inc. (Class B) (d) 158,251
46 USA Mobility, Inc. (d) 1,350
4,516 Vast Solutions, Inc. (Class B1) (d) (h) 0
4,516 Vast Solutions, Inc. (Class B2) (d) (h) 0
4,516 Vast Solutions, Inc. (Class B3) (d) (h) 0
--------------
159,601
--------------
TOTAL COMMON STOCKS
(COST $3,223,974) 184,271
--------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
73
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------
NON-CONVERTIBLE PREFERRED STOCKS (0.4%)
BROADCASTING (0.1%)
4 Paxson Communications Corp.@ $ 26,455
--------------
ELECTRIC UTILITIES (0.3%)
180 TNP Enterprises, Inc. (Series D)@ 204,300
--------------
RESTAURANTS (0.0%)
20 Catalina Restaurant Group (Units)^(h) 18,183
--------------
TOTAL NON-CONVERTIBLE PREFERRED STOCKS
(COST $249,016) 248,938
--------------
<Caption>
NUMBER OF EXPIRATION
WARRANTS DATE
- ---------- ----------------
WARRANTS (e) (0.0%)
CASINO/GAMING (0.0%)
9,000 Aladdin Gaming Enterprises, Inc. - 144A* (h) 03/01/10 0
250 Resort At Summerlin LP - 144A* (h) 12/15/07 0
--------------
0
--------------
ELECTRIC UTILITIES (0.0%)
125 TNP Enterprises, Inc. - 144A* (h) 04/01/11 3,000
--------------
RESTAURANTS (0.0%)
4,250 Catalina Restaurant Group (d) (h) 07/10/12 0
--------------
TOTAL WARRANTS
(COST $3,842) 3,000
--------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
74
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (9.0%)
REPURCHASE AGREEMENT
$ 5,708 Joint repurchase agreement account
(dated 06/30/05; proceeds $5,708,531) (g)
(COST $5,708,000) 3.35% 07/01/05 $ 5,708,000
--------------
195 The Bank of New York
(dated 06/30/05; proceeds $194,621) (f)
(COST $194,604) 3.125 07/01/05 194,604
--------------
TOTAL SHORT-TERM INVESTMENTS
(COST $5,902,604) 5,902,604
--------------
TOTAL INVESTMENTS
(COST $68,200,122) (i) (j) 99.6% 65,162,164
OTHER ASSETS IN EXCESS OF LIABILITIES 0.4 289,453
-------- --------------
NET ASSETS 100.0% $ 65,451,617
======== ==============
</Table>
- ----------
* RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS.
** FLOATING RATE SECURITY. RATE SHOWN IS THE RATE IN EFFECT AT JUNE 30,
2005.
+ RESALE IS RESTRICTED; ACQUIRED (12/12/98) AT A COST BASIS OF $3,549.
++ RESALE IS RESTRICTED; ACQUIRED (06/10/99) AT A COST BASIS OF $1.
+++ TURKISH CURRENCY INDEX CREDIT LINKED UNSECURED NOTE.
^ CONSISTS OF ONE OR MORE CLASS OF SECURITIES TRADED TOGETHER AS A UNIT;
BONDS OR PREFERRED STOCK WITH ATTACHED WARRANTS.
@ PAYMENT-IN-KIND SECURITY.
@@ CURRENTLY A ZERO COUPON BOND AND WILL PAY INTEREST AT THE RATE SHOWN
AT A FUTURE DATE.
(a) ISSUER IN BANKRUPTCY.
(b) ALL OR A PORTION OF THESE SECURITIES HAVE BEEN PHYSICALLY SEGREGATED
IN CONNECTION WITH OPEN FUTURES CONTRACTS IN THE AMOUNT OF $31,300.
(c) NON-INCOME PRODUCING SECURITY; BOND IN DEFAULT.
(d) ACQUIRED THROUGH EXCHANGE OFFER.
(e) NON-INCOME PRODUCING SECURITIES.
(f) COLLATERALIZED BY FEDERAL NATIONAL MORTGAGE ASSOCIATION 4.126% DUE
07/01/18 VALUED AT $198,496.
(g) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(h) SECURITIES WITH A TOTAL MARKET VALUE EQUAL TO $45,816 HAVE BEEN VALUED
AT THEIR FAIR VALUE AS DETERMINED IN GOOD FAITH UNDER PROCEDURES
ESTABLISHED BY AND UNDER THE GENERAL SUPERVISION OF THE FUND'S
DIRECTORS.
(i) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN AN AMOUNT EQUAL TO
$33,362,218 IN CONNECTION WITH FORWARD FOREIGN CURRENCY CONTRACTS AND
OPEN FUTURES CONTRACTS.
(j) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE
AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED
APPRECIATION IS $2,486,635 AND THE AGGREGATE GROSS UNREALIZED
DEPRECIATION IS $5,524,593, RESULTING IN NET UNREALIZED DEPRECIATION
OF $3,037,958.
BOND INSURANCE:
FSA FINANCIAL SECURITY ASSURANCE INC.
SEE NOTES TO FINANCIAL STATEMENTS
75
<Page>
FUTURES CONTRACTS OPEN AT JUNE 30, 2005
<Table>
<Caption>
NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE UNREALIZED
CONTRACTS SHORT MONTH AND YEAR AMOUNT AT VALUE DEPRECIATION
- ------------------------------------------------------------------------------------------------
108 Short US Treasury Notes 5 Year,
September 2005 $ (11,760,188) $ (29,381)
80 Short US Treasury Notes 2 Year,
September 2005 (16,615,000) (1,962)
8 Short US Treasury Notes 10 Year,
September 2005 (907,750) (10,582)
26 Short US Treasury Bonds 20 Year,
September 2005 (3,087,500) (60,606)
-------------
Total unrealized depreciation $ (102,531)
=============
</Table>
FORWARD FOREIGN CURRENCY CONTRACT OPEN AT JUNE 30, 2005
<Table>
<Caption>
CONTRACT IN EXCHANGE DELIVERY UNREALIZED
TO DELIVER FOR DATE DEPRECIATION
- -----------------------------------------------------
AUD 200,000 $ 150,790 08/23/05 $ (782)
</Table>
CURRENCY ABBREVIATIONS:
AUD Australian Dollar.
JPY Japanese Yen.
SUMMMARY OF INVESTMENTS
LONG-TERM CREDIT ANALYSIS
<Table>
AAA 43.2%
AA 5.3
A 3.4
BBB 11.3
BB 13.5
B 22.2
NR 1.1
-----
100.0%*
=====
</Table>
- ----------
* DOES NOT INCLUDE OUTSTANDING SHORT FUTURES CONTRACTS WITH AN UNDERLYING
FACE AMOUNT OF $32,370,438 AND TOTAL UNREALIZED DEPRECIATION OF $102,531
AND AN OUTSTANDING FORWARD FOREIGN CURRENCY CONTRACT WITH UNREALIZED
DEPRECIATION OF $782.
SEE NOTES TO FINANCIAL STATEMENTS
76
<Page>
BALANCED GROWTH
PORTFOLIO OF INVESTMENTS - JUNE 30, 2005 (UNAUDITED)
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (67.9%)
AEROSPACE & DEFENSE (1.5%)
13,400 Northrop Grumman Corp. $ 740,350
17,520 Raytheon Co. 685,382
--------------
1,425,732
--------------
BEVERAGES: NON-ALCOHOLIC (1.0%)
22,690 Coca-Cola Co. (The) 947,308
--------------
BIOTECHNOLOGY (0.7%)
18,000 Chiron Corp.* 628,020
--------------
BROADCASTING (1.4%)
41,450 Clear Channel Communications, Inc. 1,282,049
--------------
CHEMICALS: MAJOR DIVERSIFIED (2.6%)
54,080 Bayer AG (ADR) (Germany) 1,799,782
14,460 Dow Chemical Co. (The) 643,904
--------------
2,443,686
--------------
COMPUTER PROCESSING HARDWARE (1.0%)
41,150 Hewlett-Packard Co. 967,437
--------------
DEPARTMENT STORES (0.8%)
13,350 Kohl's Corp.* 746,399
--------------
DISCOUNT STORES (1.7%)
8,210 Target Corp. 446,706
23,500 Wal-Mart Stores, Inc. 1,132,700
--------------
1,579,406
--------------
ELECTRIC UTILITIES (2.8%)
16,470 American Electric Power Co., Inc. 607,249
9,620 Entergy Corp. 726,791
10,910 Exelon Corp. 560,010
14,600 FirstEnergy Corp. 702,406
--------------
2,596,456
--------------
FINANCE/RENTAL/LEASING (1.5%)
18,750 Freddie Mac 1,223,063
8,700 MBNA Corp. 227,592
--------------
1,450,655
--------------
FINANCIAL CONGLOMERATES (5.2%)
34,650 Citigroup, Inc. 1,601,870
53,796 JPMorgan Chase & Co. 1,900,075
12,690 Prudential Financial, Inc. 833,225
11,170 State Street Corp. 538,953
--------------
4,874,123
--------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
77
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------
FINANCIAL PUBLISHING/SERVICES (0.4%)
9,400 Equifax, Inc. $ 335,674
--------------
FOOD: MAJOR DIVERSIFIED (2.0%)
15,130 Kraft Foods Inc. (Class A) 481,285
21,130 Unilever N.V. (NY Registered Shares) (Netherlands) 1,369,858
--------------
1,851,143
--------------
FOOD: SPECIALTY/CANDY (0.7%)
16,800 Cadbury Schweppes PLC (ADR) (United Kingdom) 643,944
--------------
HOTELS/RESORTS/CRUISELINES (0.4%)
5,300 Marriott International, Inc. (Class A) 361,566
--------------
HOUSEHOLD/PERSONAL CARE (0.7%)
10,620 Kimberly-Clark Corp. 664,706
--------------
INDUSTRIAL CONGLOMERATES (2.9%)
41,790 General Electric Co. 1,448,024
7,010 Ingersoll-Rand Co. Ltd. (Class A) (Bermuda) 500,164
12,840 Siemens AG (ADR) (Germany) 932,826
--------------
2,881,014
--------------
INDUSTRIAL MACHINERY (0.2%)
3,770 Parker Hannifin Corp. 233,778
--------------
INTEGRATED OIL (5.2%)
20,810 BP PLC (ADR) (United Kingdom) 1,298,128
20,710 ConocoPhillips 1,190,618
16,410 Exxon Mobil Corp. 943,083
22,080 Royal Dutch Petroleum Co. (NY Registered Shares) (Netherlands) 1,432,992
--------------
4,864,821
--------------
INVESTMENT BANKS/BROKERS (3.8%)
2,700 Goldman Sachs Group, Inc. (The) 275,454
12,190 Lehman Brothers Holdings Inc. 1,210,223
25,270 Merrill Lynch & Co., Inc. 1,390,103
65,640 Schwab (Charles) Corp. (The) 740,419
--------------
3,616,199
--------------
LIFE/HEALTH INSURANCE (0.2%)
17,800 Aegon N.V. (NY Registered Shares) (Netherlands) 229,086
--------------
MAJOR BANKS (1.5%)
21,450 Bank of America Corp. 978,335
8,390 PNC Financial Services Group 456,919
--------------
1,435,254
--------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
78
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------
MAJOR TELECOMMUNICATIONS (2.4%)
22,120 France Telecom S.A. (ADR) (France) $ 644,577
23,930 Sprint Corp. 600,404
29,340 Verizon Communications Inc. 1,013,697
--------------
2,258,678
--------------
MANAGED HEALTH CARE (1.3%)
11,520 CIGNA Corp. 1,232,986
--------------
MEDIA CONGLOMERATES (3.4%)
40,810 Disney (Walt) Co. (The) 1,027,596
91,360 Time Warner, Inc.* 1,526,626
20,300 Viacom Inc. (Class B) (Non-Voting) 650,006
--------------
3,204,228
--------------
MEDICAL SPECIALTIES (1.2%)
8,200 Applera Corp. - Applied Biosystems Group 161,294
11,160 Bausch & Lomb, Inc. 926,280
--------------
1,087,574
--------------
MOTOR VEHICLES (0.8%)
31,280 Honda Motor Co., Ltd. (ADR) (Japan) 769,801
--------------
MULTI-LINE INSURANCE (0.6%)
7,270 Hartford Financial Services Group, Inc. (The) 543,651
--------------
OIL REFINING/MARKETING (1.0%)
11,880 Valero Energy Corp. 939,827
--------------
OILFIELD SERVICES/EQUIPMENT (1.5%)
18,100 Schlumberger Ltd. (Netherlands Antilles) 1,374,514
--------------
PACKAGED SOFTWARE (0.9%)
38,170 Symantec Corp.* 829,816
--------------
PHARMACEUTICALS: MAJOR (8.7%)
75,820 Bristol-Myers Squibb Co. 1,893,984
12,190 GlaxoSmithKline PLC (ADR) (United Kingdom) 591,337
17,060 Lilly (Eli) & Co. 950,413
24,320 Roche Holdings Ltd. (ADR) (Switzerland) 1,532,160
18,900 Sanofi-Aventis (ADR) (France) 774,711
73,810 Schering-Plough Corp. 1,406,819
22,980 Wyeth 1,022,610
--------------
8,172,034
--------------
PRECIOUS METALS (0.9%)
21,420 Newmont Mining Corp. 836,023
--------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
79
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------
PROPERTY - CASUALTY INSURERS (2.4%)
14,750 Chubb Corp. (The) $ 1,262,748
26,426 St. Paul Travelers Companies, Inc. (The) 1,044,620
--------------
2,307,368
--------------
RAILROADS (0.3%)
10,640 Norfolk Southern Corp. 329,414
--------------
RESTAURANTS (0.3%)
10,580 McDonald's Corp. 293,595
--------------
SEMICONDUCTORS (1.5%)
31,940 Intel Corp. 832,356
56,980 Micron Technology, Inc.* 581,766
--------------
1,414,122
--------------
TELECOMMUNICATION EQUIPMENT (1.1%)
56,280 Motorola, Inc. 1,027,673
--------------
TOBACCO (0.7%)
10,130 Altria Group, Inc. 655,006
--------------
WIRELESS TELECOMMUNICATIONS (0.7%)
21,560 Nextel Communications, Inc. (Class A)* 696,604
--------------
TOTAL COMMON STOCKS
(COST $52,002,610) 64,031,370
--------------
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
- ---------- -------- --------
CORPORATE BONDS (8.5%)
ADVERTISING/MARKETING SERVICES (0.1%)
$ 50 WPP Finance (UK) Corp. (United Kingdom) 5.875% 06/15/14 52,955
--------------
AEROSPACE & DEFENSE (0.2%)
55 Northrop Grumman Corp. 4.079 11/16/06 54,859
25 Raytheon Co. 8.30 03/01/10 29,001
112 Systems 2001 Asset Trust LLC - 144A**
(Cayman Islands) 6.664 09/15/13 122,653
--------------
206,513
--------------
AIR FREIGHT/COURIERS (0.1%)
50 Fedex Corp. 2.65 04/01/07 48,717
--------------
AIRLINES (0.2%)
105 America West Airlines, Inc. (Series 01-1) 7.10 04/02/21 110,752
45 Southwest Airlines Co. (Series 01-1) 5.496 11/01/06 45,791
--------------
156,543
--------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
80
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------
BEVERAGES: ALCOHOLIC (0.2%)
$ 75 Fosters Finance Corp. - 144A** (Australia) 5.125% 06/15/15 $ 75,439
75 Miller Brewing Co. - 144A** 4.25 08/15/08 74,726
--------------
150,165
--------------
CABLE/SATELLITE TV (0.2%)
10 Comcast Cable Communications Inc. 6.75 01/30/11 11,045
55 Comcast Corp. 6.50 01/15/15 61,416
10 Comcast Corp. 7.625 02/15/08 10,746
65 Cox Communications, Inc. 4.625 01/15/10 64,894
55 TCI Communications, Inc. 7.875 02/15/26 68,885
--------------
216,986
--------------
CASINO/GAMING (0.0%)
40 Harrahs Operating Co. Inc. - 144A** 5.625 06/01/15 40,819
--------------
CHEMICALS: MAJOR DIVERSIFIED (0.0%)
40 ICI Wilmington Inc. 4.375 12/01/08 39,727
--------------
CONTAINERS/PACKAGING (0.1%)
80 Sealed Air Corp. - 144A** 5.625 07/15/13 82,338
--------------
DRUGSTORE CHAINS (0.2%)
180 CVS Corp. 5.625 03/15/06 181,891
14 CVS Corp. - 144A** 6.204 10/10/25 15,893
--------------
197,784
--------------
ELECTRIC UTILITIES (0.9%)
70 Arizona Public Service Co. 5.80 06/30/14 75,329
20 Arizona Public Service Co. 6.75 11/15/06 20,680
60 Carolina Power & Light Co. 5.125 09/15/13 62,047
40 CC Funding Trust I 6.90 02/16/07 41,679
35 Cincinnati Gas & Electric Co. 5.70 09/15/12 37,466
40 Consolidated Natural Gas Co. 5.00 12/01/14 40,540
15 Consolidated Natural Gas Co. (Series A) 5.00 03/01/14 15,242
60 Consolidated Natural Gas Co. (Series C) 6.25 11/01/11 65,546
45 Consumers Energy Co. 4.80 02/17/09 45,598
60 Detroit Edison Co. (The) 6.125 10/01/10 64,827
30 Entergy Gulf States, Inc. 3.60 06/01/08 29,388
45 Entergy Gulf States, Inc. 3.73 12/01/09 45,149
40 Exelon Corp. 6.75 05/01/11 44,475
95 FPL Group Capital Inc. 3.25 04/11/06 94,543
65 Pacific Gas & Electric Co. 6.05 03/01/34 71,891
15 Panhandle Eastern Pipe Line Co. (Series B) 2.75 03/15/07 14,614
45 Public Service Electric & Gas Co. (Series MTNB) 5.00 01/01/13 46,506
20 South Carolina Electric & Gas Co. 5.30 05/15/33 20,852
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
81
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------
$ 20 Texas Eastern Transmission, LP 7.00% 07/15/32 $ 24,538
25 Wisconsin Electric Power Co. 3.50 12/01/07 24,626
--------------
885,536
--------------
ELECTRICAL PRODUCTS (0.1%)
70 Cooper Industries Inc. 5.25 07/01/07 71,313
--------------
ELECTRONICS/APPLIANCES (0.0%)
40 LG Electronics Inc. - 144A** (South Korea) 5.00 06/17/10 40,152
--------------
FINANCE/RENTAL/LEASING (0.6%)
55 CIT Group, Inc. 2.875 09/29/06 54,243
105 Countrywide Home Loans, Inc. (Series MTN) 3.25 05/21/08 102,020
10 Ford Motor Credit Co. 7.25 10/25/11 9,635
110 MBNA Corp. 6.125 03/01/13 120,054
95 Nationwide Building Society - 144A**
(United Kingdom) 4.25 02/01/10 94,861
70 Residential Capital Corp. - 144A** 6.375 06/30/10 70,411
45 SLM Corp. 4.00 01/15/10 44,498
75 SLM Corp. (Series MTNA) 5.00 10/01/13 76,954
--------------
572,676
--------------
FINANCIAL CONGLOMERATES (0.7%)
105 Bank One Corp. (Series MTNA) 6.00 02/17/09 110,758
95 Chase Manhattan Corp. 6.00 02/15/09 100,502
40 Citicorp 6.75 08/15/05 40,141
90 Citigroup Inc. 5.625 08/27/12 96,273
60 Citigroup Inc. 5.75 05/10/06 60,911
90 Citigroup Inc. 6.00 02/21/12 98,416
40 General Electric Capital Corp. 4.25 12/01/10 39,899
10 General Electric Capital Corp. (Series MTNA) 5.875 02/15/12 10,828
100 General Electric Capital Corp. (Series MTNA) 6.75 03/15/32 123,822
20 General Motors Acceptance Corp. 4.50 07/15/06 19,731
--------------
701,281
--------------
FOOD RETAIL (0.2%)
90 Albertson's Inc. 7.45 08/01/29 102,792
40 Safeway Inc. 7.25 02/01/31 46,464
--------------
149,256
--------------
FOOD: MAJOR DIVERSIFIED (0.1%)
20 General Mills Inc. 3.875 11/30/07 19,845
25 Kraft Foods Inc. 5.25 06/01/07 25,498
40 Kraft Foods Inc. 5.625 11/01/11 42,489
--------------
87,832
--------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
82
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------
FOREST PRODUCTS (0.0%)
$ 30 Weyerhaeuser Co. 6.00% 08/01/06 $ 30,542
11 Weyerhaeuser Co. 6.125 03/15/07 11,314
--------------
41,856
--------------
GAS DISTRIBUTORS (0.2%)
45 Nisource Finance Corp. 3.854 11/23/09 45,221
65 Ras Laffan Liquid Natural Gas Co. Ltd. - 144A**
(Qatar) 8.294 03/15/14 77,701
30 Sempra Energy 4.621 05/17/07 30,155
--------------
153,077
--------------
HOME FURNISHINGS (0.0%)
35 Mohawk Industries, Inc. (Series D) 7.20 04/15/12 40,057
--------------
HOTELS/RESORTS/CRUISELINES (0.2%)
70 Hyatt Equities LLC - 144A** 6.875 06/15/07 72,264
110 Marriott International, Inc. (Series E) 7.00 01/15/08 116,961
--------------
189,225
--------------
HOUSEHOLD/PERSONAL CARE (0.1%)
85 Clorax Co. 3.525 12/14/07 85,172
--------------
INDUSTRIAL CONGLOMERATES (0.2%)
80 Hutchison Whampoa International Ltd. - 144A**
(Cayman Islands) 6.50 02/13/13 87,012
50 Textron Financial Corp. 4.125 03/03/08 49,970
--------------
136,982
--------------
INSURANCE BROKERS/SERVICES (0.4%)
200 Farmers Exchange Capital - 144A** 7.05 07/15/28 216,918
110 Marsh & McLennan Companies, Inc. 5.375 07/15/14 109,765
--------------
326,683
--------------
INVESTMENT BANKS/BROKERS (0.1%)
50 Goldman Sachs Group Inc. (The) 5.25 10/15/13 51,681
30 Goldman Sachs Group Inc. (The) 6.60 01/15/12 33,387
--------------
85,068
--------------
MAJOR BANKS (0.2%)
30 Bank of New York Co., Inc. (The) 5.20 07/01/07 30,586
65 FleetBoston Financial Corp. 7.25 09/15/05 65,460
55 HSBC Finance Corp. 6.75 05/15/11 61,122
--------------
157,168
--------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
83
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------
MAJOR TELECOMMUNICATIONS (0.5%)
$ 75 Deutsche Telekom International Finance NV
(Netherlands) 8.75% 06/15/30 $ 101,864
70 France Telecom S.A. (France) 8.75 03/01/31 97,900
20 Sprint Capital Corp. 8.75 03/15/32 27,909
60 Telecom Italia Capital SpA - 144A**
(Luxembourg) 4.00 01/15/10 58,360
45 Telecom Italia Capital SpA (Luxembourg) 4.00 11/15/08 44,355
160 Verizon New England Inc. 6.50 09/15/11 174,237
--------------
504,625
--------------
MANAGED HEALTH CARE (0.2%)
115 Aetna, Inc. 7.875 03/01/11 134,390
60 WellPoint Health Networks Inc. 6.375 06/15/06 61,302
5 WellPoint Inc. 3.75 12/14/07 4,938
--------------
200,630
--------------
MEDIA CONGLOMERATES (0.1%)
30 News America Holdings, Inc. 7.75 02/01/24 36,112
15 News America, Inc. 7.28 06/30/28 17,492
20 Time Warner, Inc. 6.625 05/15/29 22,355
35 Time Warner, Inc. 7.70 05/01/32 44,418
--------------
120,377
--------------
MOTOR VEHICLES (0.2%)
35 DaimlerChrysler North American Holdings Co. 7.30 01/15/12 39,161
35 DaimlerChrysler North American Holdings Co. 8.50 01/18/31 44,474
95 Ford Motor Co. 7.45 07/16/31 79,510
55 General Motors Corp. 8.375 07/15/33 46,200
--------------
209,345
--------------
MULTI-LINE INSURANCE (0.4%)
180 AIG Sun America Global Finance VI - 144A** 6.30 05/10/11 196,422
80 American General Finance Corp. (Series MTNH) 4.625 09/01/10 80,467
20 AXA Financial Inc. 6.50 04/01/08 21,191
30 Hartford Financial Services Group, Inc. (The) (Note 4) 2.375 06/01/06 29,471
30 International Lease Finance Corp. 3.75 08/01/07 29,756
--------------
357,307
--------------
OIL & GAS PRODUCTION (0.3%)
40 Pemex Project Funding Master Trust 7.375 12/15/14 44,960
210 Pemex Project Funding Master Trust 8.625 02/01/22 259,350
--------------
304,310
--------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
84
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------
OTHER METALS/MINERALS (0.1%)
$ 40 Brascan Corp. (Canada) 7.125% 06/15/12 $ 45,059
--------------
PROPERTY - CASUALTY INSURERS (0.3%)
200 Mantis Reef Ltd. - 144A** (Australia) 4.692 11/14/08 200,759
70 St. Paul Travelers 5.01 08/16/07 70,908
--------------
271,667
--------------
PULP & PAPER (0.1%)
50 Sappi Papier Holding AG - 144A** (Austria) 6.75 06/15/12 53,507
--------------
RAILROADS (0.2%)
45 Burlington North Santa Fe Railway Co. 4.575 01/15/21 45,402
45 Norfolk Southern Corp. 7.35 05/15/07 47,518
35 Union Pacific Corp. 6.625 02/01/08 37,005
10 Union Pacific Corp. 6.65 01/15/11 11,138
25 Union Pacific Corp. (Series MTNE) 6.79 11/09/07 26,469
--------------
167,532
--------------
REAL ESTATE DEVELOPMENT (0.2%)
172 World Financial Properties - 144A** 6.91 09/01/13 186,899
--------------
REAL ESTATE INVESTMENT TRUSTS (0.0%)
10 EOP Operating L.P. 4.75 03/15/14 9,821
25 EOP Operating L.P. 6.763 06/15/07 26,119
--------------
35,940
--------------
REGIONAL BANKS (0.1%)
110 Marshall & Isley Bank (Series BKNT) 3.80 02/08/08 109,191
--------------
SAVINGS BANKS (0.3%)
40 Household Finance Corp. 4.125 12/15/08 39,775
20 Household Finance Corp. 5.875 02/01/09 21,011
25 Household Finance Corp. 6.375 10/15/11 27,369
65 Household Finance Corp. 6.40 06/17/08 68,890
55 Washington Mutual Bank 5.50 01/15/13 57,685
45 Washington Mutual Inc. 8.25 04/01/10 51,733
--------------
266,463
--------------
TOBACCO (0.1%)
45 Altria Group, Inc. 7.00 11/04/13 50,440
50 Altria Group, Inc. 7.75 01/15/27 60,213
--------------
110,653
--------------
TRUCKS/CONSTRUCTION/FARM MACHINERY (0.1%)
95 Caterpillar Financial Services Corp. (Series MTNF) 3.35 08/20/07 95,165
20 Caterpillar Financial Services Corp. (Series MTNF) 3.625 11/15/07 19,760
--------------
114,925
--------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
85
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATIONS (0.0%)
$ 30 AT&T Wireless Services, Inc. 8.75% 03/01/31 $ 42,179
--------------
TOTAL CORPORATE BONDS
(COST $7,655,975) 8,016,490
--------------
FOREIGN GOVERNMENT OBLIGATIONS (0.2%)
10 United Mexican States (Mexico) (Series MTNA) 8.00 09/24/22 12,275
125 United Mexican States (Mexico) (Series MTN) 8.30 08/15/31 155,937
50 United Mexican States (Mexico) 8.375 01/14/11 58,325
--------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(COST $210,812) 226,537
--------------
MORTGAGE-BACKED SECURITIES (1.8%)
Federal Home Loan Mortgage Corp.
279 6.50 03/01/33 289,796
1 7.50 08/01/30 1,515
252 Federal Home Loan Mortgage Corp. (Gold) 7.50 09/01/25 - 06/01/32 269,477
Federal National Mortgage Assoc.
294 6.50 01/01/32 305,018
185 7.00 05/01/31 - 09/01/32 194,866
125 7.50 08/01/29 - 01/01/31 133,228
373 8.00 12/01/28 - 01/01/32 401,454
81 Government National Mortgage Association 7.50 08/15/23 - 10/15/29 86,700
--------------
TOTAL MORTGAGE-BACKED SECURITIES
(COST $1,663,232) 1,682,054
--------------
U.S. GOVERNMENT AGENCIES & OBLIGATIONS (15.5%)
290 Federal Home Loan Mortgage Corp. 5.125 11/07/13 291,130
755 Federal National Mortgage Assoc.+ 4.25 05/15/09 763,367
U.S. Treasury Bonds
410 6.375 08/15/27 531,703
1,540 7.625 02/15/25 2,219,165
200 8.125 08/15/19 283,469
540 8.125 08/15/21 784,097
200 8.50 02/15/20 293,406
425 8.75 08/15/20 639,625
U.S. Treasury Note
1,675 3.875 02/15/13 1,677,553
5,725 4.25 08/15/13 5,869,917
300 5.625 02/15/06 304,231
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
86
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------------
U.S. Treasury Strip
$ 1,860 0.00% 02/15/25 $ 794,328
425 0.00 02/15/27 166,896
--------------
TOTAL U.S. GOVERNMENT AGENCIES & OBLIGATIONS
(COST $13,809,372) 14,618,887
--------------
ASSET-BACKED SECURITIES (4.5%)
FINANCE/RENTAL/LEASING
150 American Express Credit Account Master Trust
2002-3 A 3.33 12/15/09 150,389
300 American Express Credit Account Master Trust
2003-3 A 3.33 11/15/10 300,959
22 Asset Backed Funding Certificates
2004-HE1 A1 3.444 06/25/22 22,147
175 Bank of America Corp. 4.00 08/18/09 175,055
100 Capital Auto Receivables Asset Trust 2004-2 A 3.35 02/15/08 99,105
175 Capital Auto Receivables Asset Trust 2005-1 A4 4.05 07/15/09 175,328
150 Caterpillar Financial Asset Trust 2005-A A3 3.90 02/25/09 149,851
215 Chase Credit Card Master Trust 2001-4 A 5.50 11/17/08 218,671
75 CIT Equipment Collateral 2004-EF1 A3 3.50 09/20/08 74,116
200 Citibank Credit Card Issuance Trust 2000-A1 A1 6.90 10/15/07 201,955
100 CNH Equipment Trust 2005-A A3 4.02 04/15/09 100,061
125 Daimler Chrysler Auto Trust 2005-B A3 4.04 09/08/09 125,208
125 Ford Credit Auto Owner Trust 2005B A3 4.17 01/15/09 125,377
150 GE Dealer Floorplan Master Note Trust 2004-1 A 3.31 07/20/08 150,093
200 Harley-Davidson Motorcycle Trust 2005-1 A2 3.76 12/17/12 198,911
125 Harley-Davidson Motorcycle Trust 2005-2 A2 4.07 02/15/12 125,178
100 Honda Auto Receivables Owner Trust 2005-2 A3 3.93 01/15/09 99,971
150 Honda Auto Receivables Owner Trust 2005-3 A3 3.87 04/20/09 149,880
100 Hyundai Auto Reveivables Trust 3.98 11/16/09 99,940
100 MBNA Master Credit Card Trust 1999-B A 5.90 08/15/11 106,434
200 Merrill Auto Trust Securitization 2005-1 A3 4.10 08/25/09 200,125
125 National City Auto Receivables Trust 2004-A A4 2.88 05/15/11 122,128
175 Nissan Auto Receivables Owner Trust 2005-B A3 3.99 07/15/09 175,134
50 TXU Electric Delivery Transition Bond Co. LLC
2004-1 A2 4.81 11/17/14 51,292
200 USAA Auto Owner Trust 2004-2 A-4 3.58 02/15/11 198,361
200 USAA Auto Owner Trust 2004-3 A3 3.16 02/17/09 197,978
125 USAA Auto Owner Trust 2005-1 A3 3.90 07/15/09 124,903
125 Volkswagen Auto Lease Trust 2005-A A3 3.82 05/20/08 124,830
75 Wachovia Auto Owner Trust 2004-B A3 2.91 04/20/09 74,058
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
87
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------------
$ 75 Wachovia Auto Owner Trust 2005-A A3 4.06% 09/21/09 $ 75,156
75 World Omni Auto Receivables Trust 2004-A A3 3.29 11/12/08 74,408
--------------
TOTAL ASSET-BACKED SECURITIES
(COST $4,264,402) 4,267,002
--------------
SHORT-TERM INVESTMENTS (2.2%)
U.S. GOVERNMENT OBLIGATION (a) (0.2%)
200 U.S. Treasury Bill***
(COST $199,796) 2.819 07/14/05 199,796
--------------
REPURCHASE AGREEMENT (2.0%)
1,846 Joint repurchase agreement account
(dated 06/30/05; proceeds $1,846,172) (b)
(COST $1,846,000) 3.35 07/01/05 1,846,000
--------------
TOTAL SHORT-TERM INVESTMENTS
(COST $2,045,796) 2,045,796
--------------
TOTAL INVESTMENTS
(COST $81,652,199) (c) (d) 100.6% 94,888,136
LIABILITIES IN EXCESS OF OTHER ASSETS (0.6) (520,091)
----- --------------
NET ASSETS 100.0% $ 94,368,045
===== ==============
</Table>
- ----------
ADR AMERICAN DEPOSITARY RECEIPT.
* NON-INCOME PRODUCING SECURITY.
** RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS.
*** A PORTION OF THIS SECURITY IS PHYSICALLY SEGREGATED IN CONNECTION WITH
OPEN FUTURES CONTRACTS IN THE AMOUNT OF $55,800.
+ SECURITY PURCHASED ON A FORWARD COMMITMENT BASIS.
(a) PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN
ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD.
(b) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(c) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN AN AMOUNT EQUAL TO
$12,380,360 IN CONNECTION WITH SECURITIES PURCHASED ON A FORWARD
COMMITMENT BASIS AND OPEN FUTURES CONTRACTS.
(d) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE
AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED
APPRECIATION IS $14,784,973 AND THE AGGREGATE GROSS UNREALIZED
DEPRECIATION IS $1,662,715, RESULTING IN NET UNREALIZED APPRECIATION
OF $13,122,258.
SEE NOTES TO FINANCIAL STATEMENTS
88
<Page>
FUTURES CONTRACTS OPEN AT JUNE 30, 2005:
<Table>
<Caption>
UNREALIZED
NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE APPRECIATION/
CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE (DEPRECIATION)
- ------------------------------------------------------------------------------------------
23 Short U.S. Treasury Notes 2 year,
September 2005 $ (4,776,813) $ 5,942
20 Short U.S. Treasury Notes 5 year,
September 2005 (2,177,813) (1,592)
26 Short U.S. Treasury Notes 10 year,
September 2005 (2,950,188) (31,790)
13 Short U.S. Treasury Bond 20 year,
September 2005 (1,543,750) (28,352)
--------------
Net unrealized depreciation $ (55,792)
==============
<Caption>
PERCENT OF
TYPE OF INVESTMENT VALUE NET ASSETS
- --------------------------------------------------------------------
Common Stocks $ 64,031,370 67.9%
U.S. Government Agencies and Obligations 14,618,887 15.5
Corporate Bonds 8,016,490 8.5
Asset Backed Securities 4,267,002 4.5
Short-Term Investments 2,045,796 2.2
Mortgage -Backed Securities 1,682,054 1.8
Foreign Government Obligations 226,537 0.2
------------ -----
$ 94,888,136* 100.6%
============ =====
</Table>
- ----------
* DOES NOT INCLUDE OPEN SHORT FUTURES CONTRACTS WITH AN UNDERLYING FACE
AMOUNT OF $11,448,564 WITH NET DEPRECIATION OF $55,792.
SEE NOTES TO FINANCIAL STATEMENTS
89
<Page>
UTILITIES
PORTFOLIO OF INVESTMENTS - JUNE 30, 2005 (UNAUDITED)
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (96.4%)
ELECTRIC UTILITIES (51.0%)
112,000 AES Corp. (The)* $ 1,834,560
55,000 Allegheny Energy, Inc.* 1,387,100
33,500 Cinergy Corp. 1,501,470
35,000 Constellation Energy Group, Inc. 2,019,150
25,000 Dominion Resources, Inc. 1,834,750
64,710 Duke Energy Corp. 1,923,828
60,000 Edison International 2,433,000
29,500 Entergy Corp. 2,228,725
50,000 Exelon Corp. 2,566,500
60,000 FPL Group, Inc. 2,523,600
70,000 NSTAR 2,158,100
60,000 PG&E Corp. 2,252,400
29,400 Pinnacle West Capital Corp. 1,306,830
55,000 PNM Resources Inc. 1,584,550
40,000 PPL Corp. 2,375,200
52,000 Reliant Energy, Inc.* 643,760
54,000 SCANA Corp. 2,306,340
40,000 Sempra Energy 1,652,400
40,000 Southern Co. (The) 1,386,800
30,000 TXU Corp. 2,492,700
40,000 Wisconsin Energy Corp. 1,560,000
50,000 Xcel Energy, Inc. 976,000
--------------
40,947,763
--------------
ELECTRICAL PRODUCTS (1.0%)
120,000 Active Power, Inc.* 390,000
40,000 FuelCell Energy, Inc.* 408,400
--------------
798,400
--------------
ENERGY (23.7%)
40,000 AGL Resources, Inc. 1,546,000
38,000 Burlington Resources, Inc. 2,099,120
30,000 Equitable Resources, Inc. 2,040,000
35,600 KeySpan Corp. 1,448,920
25,000 Kinder Morgan, Inc. 2,080,000
60,500 MDU Resources Group, Inc. 1,704,285
35,000 New Jersey Resources Corp. 1,688,750
60,000 NRG Energy Inc.* 2,256,000
35,000 Questar Corp. 2,306,500
97,000 Williams Companies, Inc. (The) 1,843,000
--------------
19,012,575
--------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
90
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS (20.7%)
29,160 ALLTEL Corp. $ 1,816,085
115,000 American Tower Corp. (Class A)* 2,417,300
52,500 BellSouth Corp. 1,394,925
30,625 CenturyTel, Inc. 1,060,544
48,000 Citizens Communications Co. 645,120
40,000 Nextel Communications, Inc. (Class A)* 1,292,400
75,000 SBA Communications Corp.* 1,012,500
45,272 SBC Communications, Inc. 1,075,210
100,000 Sprint Corp. (FON Group) 2,509,000
36,400 Telefonica S.A. (ADR) (Spain) 1,779,960
23,394 Verizon Communications Inc. 808,263
35,000 Vodafone Group PLC (ADR) (United Kingdom) 851,200
--------------
16,662,507
--------------
TOTAL COMMON STOCKS
(COST $45,162,258) 77,421,245
--------------
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
- ---------- -------- --------
CORPORATE BONDS (1.9%)
ELECTRIC UTILITIES (0.8%)
$ 45 Appalachian Power Co. (Series G) 3.60% 05/15/08 44,203
25 Carolina Power & Light Co. 5.125 09/15/13 25,853
45 Cleco Power LLC 5.375 05/01/13 46,454
60 Commonwealth Edison Co. (Series 98) 6.15 03/15/12 66,431
35 Duquesne Light Co. (Series O) 6.70 04/15/12 39,409
10 Entergy Gulf States, Inc. 3.60 06/01/08 9,796
10 Entergy Gulf States, Inc. 3.73 12/01/09 10,033
45 Exelon Corp. 6.75 05/01/11 50,035
25 FirstEnergy Corp. (Series B) 6.45 11/15/11 27,353
15 Indianapolis Power & Light Co. - 144A** 6.30 07/01/13 16,354
60 Jersey Central Power & Light Co. (Series MTN) 6.45 05/15/06 61,204
20 Pacific Gas & Electric Co. 6.05 03/01/34 22,120
65 Pinnacle West Capital Corp. 6.40 04/01/06 65,888
55 Public Service Co. of New Mexico (Series B) 7.50 08/01/18 65,582
50 Public Service Electric & Gas Co. (Series MTNB) 5.00 01/01/13 51,673
30 Texas-New Mexico Power Co. 6.25 01/15/09 31,627
20 TXU Energy Co. 7.00 03/15/13 22,338
--------------
656,353
--------------
ENERGY (0.0%)
15 Panhandle Eastern Pipe Line Co. 4.80 08/15/08 15,197
10 Panhandle Eastern Pipe Line Co. (Series B) 2.75 03/15/07 9,743
--------------
24,940
--------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
91
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS (1.1%)
$ 10 AT&T Corp. 9.05% 11/15/11 $ 11,575
60 AT&T Wireless Services, Inc. 7.875 03/01/11 69,811
35 AT&T Wireless Services, Inc. 8.75 03/01/31 49,209
60 Bellsouth Corp. 4.20 09/15/09 59,844
30 British Telecommunications PLC (United Kingdom) 8.375 12/15/10 35,559
70 Deutsche Telekom International Finance Corp.
(Netherlands) 8.75 06/15/30 95,073
60 France Telecom S.A. (France) 8.75 03/01/31 83,915
180 GTE Corp. 7.90 02/01/27 195,074
30 SBC Communications, Inc. 5.75 05/02/06 30,433
20 SBC Communications, Inc. 6.45 06/15/34 22,565
35 Sprint Capital Corp. 8.375 03/15/12 42,154
35 Sprint Capital Corp. 8.75 03/15/32 48,841
45 Telecom Italia Capital SpA (Luxembourg) 4.00 11/15/08 44,355
50 Vodafone Airtouch PLC (United Kingdom) 7.75 02/15/10 57,145
--------------
845,553
--------------
TOTAL CORPORATE BONDS
(COST $1,423,052) 1,526,846
--------------
U.S. GOVERNMENT & AGENCIES OBLIGATIONS (0.1%)
30 U.S. Treasury Bond 6.125 08/15/29 38,314
15 U.S. Treasury Bond 6.375 08/15/27 19,453
100 U.S. Treasury Strip 0.00 02/15/25 42,734
--------------
TOTAL U.S. GOVERNMENT & AGENCIES OBLIGATIONS
(COST $86,458) 100,501
--------------
SHORT-TERM INVESTMENT (1.4%)
REPURCHASE AGREEMENT
1,170 Joint repurchase agreement account
3.35% due 07/01/05 (dated 06/30/05;
proceeds $1,170,109) (a)
(COST $1,170,000) 1,170,000
--------------
TOTAL INVESTMENTS
(COST $47,841,768) (b) 99.8% 80,218,592
OTHER ASSETS IN EXCESS OF LIABILITIES 0.2 130,521
----- --------------
NET ASSETS 100.0% $80,349,113
===== ==============
</Table>
- ----------
ADR AMERICAN DEPOSITARY RECEIPT.
* NON-INCOME PRODUCING SECURITY.
** RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS.
(a) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(b) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE
AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED
APPRECIATION IS $32,479,101 AND THE AGGREGATE GROSS UNREALIZED
DEPRECIATION IS $109,410, RESULTING IN NET UNREALIZED APPRECIATION OF
$32,369,691.
SEE NOTES TO FINANCIAL STATEMENTS
92
<Page>
UTILITIES
SUMMARY OF INVESTMENTS - JUNE 30, 2005 (UNAUDITED)
<Table>
<Caption>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------
Electric Utilities $ 41,604,116 51.8%
Energy 19,037,515 23.7
Telecommunications 17,508,060 21.8
Repurchase Agreement 1,170,000 1.4
Electrical Products 798,400 1.0
U.S. Government & Agencies Obligations 100,501 0.1
-------------- ----
$ 80,218,592 99.8%
============== ====
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
93
<Page>
DIVIDEND GROWTH
PORTFOLIO OF INVESTMENTS - JUNE 30, 2005 (UNAUDITED)
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------
COMMON STOCKS (98.3%)
AEROSPACE & DEFENSE (0.9%)
53,063 Northrop Grumman Corp. $ 2,931,731
-------------
APPAREL/FOOTWEAR (1.8%)
99,428 V.F. Corp. 5,689,270
-------------
AUTO PARTS: O.E.M. (1.3%)
73,051 Johnson Controls, Inc. 4,114,963
-------------
BEVERAGES:
NON-ALCOHOLIC (1.6%)
127,041 Coca-Cola Co. (The) 5,303,962
-------------
BIOTECHNOLOGY (0.4%)
17,207 Genentech, Inc.* 1,381,378
-------------
CASINO/GAMING (0.5%)
42,008 Las Vegas Sands Corp.* 1,501,786
-------------
CHEMICALS: AGRICULTURAL (1.1%)
57,081 Monsanto Co. 3,588,682
-------------
CHEMICALS: MAJOR
DIVERSIFIED (1.9%)
113,338 Dow Chemical Co. (The) 5,046,941
26,377 Rohm & Haas Co. 1,222,310
-------------
6,269,251
-------------
COMPUTER
COMMUNICATIONS (1.4%)
181,443 Juniper Networks, Inc.* 4,568,735
-------------
COMPUTER PROCESSING
HARDWARE (2.9%)
87,112 Apple Computer, Inc.* 3,206,593
152,491 Dell, Inc.* 6,024,919
-------------
9,231,512
-------------
DATA PROCESSING
SERVICES (0.8%)
60,275 First Data Corp. 2,419,438
-------------
DISCOUNT STORES (3.7%)
218,124 Target Corp. 11,868,127
-------------
DRUGSTORE CHAINS (2.7%)
297,002 CVS Corp. 8,633,848
-------------
ELECTRIC UTILITIES (3.5%)
147,648 Exelon Corp. $ 7,578,772
87,579 FPL Group, Inc. 3,683,573
-------------
11,262,345
-------------
FINANCE/RENTAL/LEASING (0.8%)
29,159 Freddie Mac 1,902,042
30,100 MBNA Corp. 787,416
-------------
2,689,458
-------------
FINANCIAL CONGLOMERATES (4.9%)
189,789 Citigroup, Inc. 8,773,945
77,210 JPMorgan Chase & Co. 2,727,057
16,795 Prudential Financial, Inc. 1,102,760
42,759 UBS AG (ADR) (Switzerland) 3,328,788
-------------
15,932,550
-------------
FINANCIAL PUBLISHING/
SERVICES (0.8%)
58,111 McGraw-Hill Companies, Inc.
(The) 2,571,412
-------------
FOOD: MAJOR DIVERSIFIED (3.3%)
198,032 PepsiCo, Inc. 10,679,866
-------------
HOME IMPROVEMENT
CHAINS (1.3%)
107,568 Home Depot, Inc. (The) 4,184,395
-------------
HOTELS/RESORTS/
CRUISELINES (0.6%)
33,298 Carnival Corp. (Panama) 1,816,406
-------------
HOUSEHOLD/PERSONAL
CARE (4.1%)
112,200 Avon Products, Inc. 4,246,770
172,685 Procter & Gamble Co. (The) 9,109,134
-------------
13,355,904
-------------
INDUSTRIAL
CONGLOMERATES (9.9%)
131,200 3M Co. 9,485,760
289,423 General Electric Co. 10,028,507
239,246 United Technologies Corp. 12,285,282
-------------
31,799,549
-------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
94
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------
INFORMATION TECHNOLOGY
SERVICES (1.7%)
71,918 International Business
Machines Corp. $ 5,336,316
-------------
INTEGRATED OIL (7.1%)
169,800 BP PLC (ADR)
(United Kingdom) 10,592,124
214,929 Exxon Mobil Corp. 12,351,970
-------------
22,944,094
-------------
INTERNET SOFTWARE/
SERVICES (1.0%)
88,197 Yahoo!, Inc.* 3,056,026
-------------
INVESTMENT BANKS/
BROKERS (2.5%)
32,683 Goldman Sachs Group Inc.
(The) 3,334,320
88,298 Merrill Lynch & Co., Inc. 4,857,273
-------------
8,191,593
-------------
INVESTMENT MANAGERS (1.6%)
183,092 Mellon Financial Corp. 5,252,909
-------------
LIFE/HEALTH INSURANCE (1.5%)
103,652 Lincoln National Corp. 4,863,352
-------------
MAJOR BANKS (3.2%)
223,996 Bank of America Corp. 10,216,458
-------------
MAJOR
TELECOMMUNICATIONS (1.8%)
165,517 Verizon Communications Inc. 5,718,612
-------------
MANAGED HEALTH CARE (3.0%)
79,027 Caremark Rx, Inc.* 3,518,282
120,756 UnitedHealth Group, Inc. 6,296,218
-------------
9,814,500
-------------
MEDIA CONGLOMERATES (0.5%)
102,212 News Corp. (Class B) 1,723,294
-------------
MEDICAL SPECIALTIES (2.2%)
8,758 Alcon, Inc. (Switzerland) 957,687
41,008 Fisher Scientific International,
Inc.* 2,661,419
67,900 Medtronic, Inc. $ 3,516,541
-------------
7,135,647
-------------
MULTI-LINE INSURANCE (0.7%)
37,040 American International Group,
Inc. 2,152,024
-------------
OFFICE EQUIPMENT/
SUPPLIES (2.4%)
179,589 Pitney Bowes, Inc. 7,821,101
-------------
OIL & GAS PRODUCTION (1.3%)
120,241 XTO Energy Inc. 4,086,992
-------------
OILFIELD SERVICES/
EQUIPMENT (1.0%)
52,444 Halliburton Co. 2,507,872
8,500 Schlumberger Ltd.
(Netherlands Antilles) 645,490
-------------
3,153,362
-------------
OTHER CONSUMER
SERVICES (0.7%)
65,118 eBay, Inc.* 2,149,545
-------------
PACKAGED SOFTWARE (2.6%)
246,561 Microsoft Corp. 6,124,575
48,426 SAP AG (ADR) (Germany) 2,096,846
-------------
8,221,421
-------------
PHARMACEUTICALS: MAJOR (7.6%)
49,663 Abbott Laboratories 2,433,984
160,836 Bristol-Myers Squibb Co. 4,017,683
88,919 Johnson & Johnson 5,779,735
174,396 Pfizer, Inc. 4,809,842
169,388 Wyeth 7,537,766
-------------
24,579,010
-------------
PROPERTY - CASUALTY
INSURERS (0.2%)
8,140 Progressive Corp. (The) 804,313
-------------
SEMICONDUCTORS (3.4%)
204,420 Intel Corp. 5,327,185
78,203 Marvell Technology Group,
Ltd. (Bermuda)* 2,974,842
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
95
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------
89,022 Texas Instruments Inc. $ 2,498,847
-------------
10,800,874
-------------
TELECOMMUNICATION
EQUIPMENT (0.8%)
77,070 QUALCOMM Inc. 2,544,081
-------------
TOBACCO (0.7%)
36,989 Altria Group, Inc. 2,391,709
-------------
TRUCKS/CONSTRUCTION/
FARM MACHINERY (0.6%)
27,201 Deere & Co. 1,781,393
-------------
TOTAL COMMON STOCKS
(COST $250,331,922) 316,533,194
-------------
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ------------------------------------------------------------------------
SHORT-TERM INVESTMENT (1.7%)
REPURCHASE AGREEMENT
$ 5,483 Joint repurchase agreement
account 3.35% due 07/01/05
(dated 06/30/05; proceeds
$5,483,510) (a)
(COST $5,483,000) $ 5,483,000
-------------
TOTAL INVESTMENTS
(COST $255,814,922) (b) 100.0% 322,016,194
LIABILITIES IN EXCESS OF OTHER
ASSETS (0.0) (15,129)
----- -------------
NET ASSETS 100.0% $ 322,001,065
===== =============
</Table>
- ----------
ADR AMERICAN DEPOSITARY RECEIPT.
* NON-INCOME PRODUCING SECURITY.
(a) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(b) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE
AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED
APPRECIATION IS $71,166,118 AND THE AGGREGATE GROSS UNREALIZED
DEPRECIATION IS $4,964,846, RESULTING IN NET UNREALIZED APPRECIATION OF
$66,201,272.
SEE NOTES TO FINANCIAL STATEMENTS
96
<Page>
DIVIDEND GROWTH
SUMMARY OF INVESTMENTS - JUNE 30, 2005 (UNAUDITED)
<Table>
<Caption>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ------------------------------------------------------------------------
Industrial Conglomerates $ 31,799,549 9.9%
Pharmaceuticals: Major 24,579,010 7.6
Integrated Oil 22,944,094 7.1
Financial Conglomerates 15,932,550 4.9
Household/Personal Care 13,355,904 4.1
Discount Stores 11,868,127 3.7
Electric Utilities 11,262,345 3.5
Semiconductors 10,800,874 3.4
Food: Major Diversified 10,679,866 3.3
Major Banks 10,216,458 3.2
Managed Health Care 9,814,500 3.0
Computer Processing
Hardware 9,231,512 2.9
Drugstore Chains 8,633,848 2.7
Packaged Software 8,221,421 2.6
Investment Banks/Brokers 8,191,593 2.5
Office Equipment/Supplies 7,821,101 2.4
Medical Specialties 7,135,647 2.2
Chemicals: Major Diversified 6,269,251 1.9
Major Telecommunications 5,718,612 1.8
Apparel/Footwear 5,689,270 1.8
Repurchase Agreement 5,483,000 1.7
Information Technology
Services 5,336,316 1.7
Beverages: Non-Alcoholic 5,303,962 1.6
Investment Managers 5,252,909 1.6
Life/Health Insurance $ 4,863,352 1.5%
Computer Communications 4,568,735 1.4
Home Improvement Chains 4,184,395 1.3
Auto Parts: O.E.M. 4,114,963 1.3
Oil & Gas Production 4,086,992 1.3
Chemicals: Agricultural 3,588,682 1.1
Oilfield Services/Equipment 3,153,362 1.0
Internet Software/Services 3,056,026 1.0
Aerospace & Defense 2,931,731 0.9
Finance/Rental/Leasing 2,689,458 0.8
Financial Publishing/
Services 2,571,412 0.8
Telecommunication
Equipment 2,544,081 0.8
Data Processing
Services 2,419,438 0.8
Tobacco 2,391,709 0.7
Multi-Line Insurance 2,152,024 0.7
Other Consumer Services 2,149,545 0.7
Hotels/Resorts/Cruiselines 1,816,406 0.6
Trucks/Construction/Farm
Machinery 1,781,393 0.6
Media Conglomerates 1,723,294 0.5
Casino/Gaming 1,501,786 0.5
Biotechnology 1,381,378 0.4
Property - Casualty Insurers 804,313 0.2
--------------- -----
$ 322,016,194 100.0%
=============== =====
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
97
<Page>
EQUALLY-WEIGHTED S&P 500
PORTFOLIO OF INVESTMENTS - JUNE 30, 2005 (UNAUDITED)
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------
COMMON STOCKS (99.3%)
ADVERTISING/MARKETING
SERVICES (0.4%)
36,133 Interpublic Group of Companies,
Inc. (The)* $ 440,100
5,441 Omnicom Group, Inc. 434,518
-------------
874,618
-------------
AEROSPACE & DEFENSE (1.6%)
6,805 Boeing Co. 449,130
4,008 General Dynamics Corp. 439,036
10,503 Goodrich Corp. 430,203
5,760 L-3 Communications
Holdings, Inc. 441,101
6,801 Lockheed Martin Corp. 441,181
7,797 Northrop Grumman Corp. 430,784
11,034 Raytheon Co. 431,650
9,071 Rockwell Collins, Inc. 432,505
-------------
3,495,590
-------------
AGRICULTURAL COMMODITIES/
MILLING (0.2%)
20,550 Archer-Daniels-Midland Co. 439,359
-------------
AIR FREIGHT/COURIERS (0.4%)
5,036 FedEx Corp. 407,966
6,195 United Parcel Service, Inc.
(Class B) 428,446
-------------
836,412
-------------
AIRLINES (0.4%)
119,179 Delta Air Lines, Inc.* 448,113
31,255 Southwest Airlines Co. 435,382
-------------
883,495
-------------
ALTERNATIVE POWER
GENERATION (0.2%)
141,861 Calpine Corp.* 482,327
-------------
ALUMINUM (0.2%)
15,567 Alcoa, Inc. 406,766
-------------
APPAREL/FOOTWEAR (1.3%)
11,010 Cintas Corp. 424,986
13,350 Coach, Inc.* 448,160
13,691 Jones Apparel Group, Inc. $ 424,969
10,801 Liz Claiborne, Inc. 429,448
4,975 Nike, Inc. (Class B) 430,835
10,485 Reebok International Ltd. 438,588
7,414 V.F. Corp. 424,229
-------------
3,021,215
-------------
APPAREL/FOOTWEAR RETAIL (0.8%)
20,991 Gap, Inc. (The) 414,572
20,154 Limited Brands, Inc. 431,699
6,367 Nordstrom, Inc. 432,765
17,920 TJX Companies, Inc. (The) 436,352
-------------
1,715,388
-------------
AUTO PARTS: O.E.M. (1.0%)
28,575 Dana Corp. 428,911
84,898 Delphi Corp. 394,776
7,169 Eaton Corp. 429,423
7,486 Johnson Controls, Inc. 421,686
65,637 Visteon Corp. 395,791
-------------
2,070,587
-------------
AUTOMOTIVE AFTERMARKET (0.4%)
22,784 Cooper Tire & Rubber Co. 423,099
29,594 Goodyear Tire & Rubber Co.
(The)* 440,951
-------------
864,050
-------------
BEVERAGES: ALCOHOLIC (0.6%)
9,500 Anheuser-Busch Companies,
Inc. 434,625
7,418 Brown-Forman Corp.
(Class B) 448,492
7,475 Molson Coors Brewing Co.
(Class B) 463,450
-------------
1,346,567
-------------
BEVERAGES: NON-ALCOHOLIC (0.6%)
9,983 Coca-Cola Co. (The) 416,790
19,641 Coca-Cola Enterprises Inc. 432,298
15,274 Pepsi Bottling Group, Inc.
(The) 436,989
-------------
1,286,077
-------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
98
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------
BIOTECHNOLOGY (1.4%)
7,219 Amgen Inc.* $ 436,461
12,236 Biogen Idec Inc.* 421,530
12,270 Chiron Corp.* 428,100
6,987 Genzyme Corp.* 419,849
9,667 Gilead Sciences, Inc.* 425,251
16,179 MedImmune, Inc.* 432,303
8,142 Millipore Corp.* 461,896
-------------
3,025,390
-------------
BROADCASTING (0.4%)
14,654 Clear Channel
Communications, Inc. 453,248
16,378 Univision Communications,
Inc. (Class A)* 451,214
-------------
904,462
-------------
BUILDING PRODUCTS (0.4%)
10,086 American Standard
Companies, Inc. 422,805
13,065 Masco Corp. 414,944
-------------
837,749
-------------
CABLE/SATELLITE TV (0.2%)
13,930 Comcast Corp. (Class A)* 427,651
-------------
CASINO/GAMING (0.4%)
5,924 Harrah's Entertainment, Inc. 426,943
14,812 International Game Technology 416,958
-------------
843,901
-------------
CHEMICALS: AGRICULTURAL (0.2%)
6,505 Monsanto Co. 408,969
-------------
CHEMICALS: MAJOR
DIVERSIFIED (1.2%)
9,336 Dow Chemical Co. (The) 415,732
9,368 Du Pont (E.I.) de
Nemours & Co. 402,918
7,535 Eastman Chemical Co. 415,555
15,055 Engelhard Corp. 429,820
31,013 Hercules Inc.* 438,834
9,084 Rohm & Haas Co. 420,953
-------------
2,523,812
-------------
CHEMICALS: SPECIALTY (0.8%)
7,082 Air Products & Chemicals,
Inc. $ 427,045
13,246 Great Lakes Chemical Corp. 416,852
9,161 Praxair, Inc. 426,903
7,649 Sigma-Aldrich Corp. 428,650
-------------
1,699,450
-------------
COMMERCIAL PRINTING/
FORMS (0.2%)
12,772 Donnelley (R.R.) & Sons Co. 440,762
-------------
COMPUTER
COMMUNICATIONS (0.6%)
52,416 Avaya Inc.* 436,101
22,517 Cisco Systems, Inc.* 430,300
13,354 QLogic Corp.* 412,238
-------------
1,278,639
-------------
COMPUTER PERIPHERALS (0.6%)
30,476 EMC Corp.* 417,826
6,607 Lexmark International, Inc.
(Class A)* 428,332
14,639 Network Appliance, Inc.* 413,845
5,600 Seagate Technology, Inc.
(Escrow) (a) 0
-------------
1,260,003
-------------
COMPUTER PROCESSING
HARDWARE (1.1%)
11,491 Apple Computer, Inc.* 422,984
10,797 Dell, Inc.* 426,589
126,371 Gateway, Inc.* 417,024
18,392 Hewlett-Packard Co. 432,396
11,872 NCR Corp.* 416,945
113,636 Sun Microsystems, Inc.* 423,862
-------------
2,539,800
-------------
CONSTRUCTION MATERIALS (0.2%)
6,693 Vulcan Materials Co. 434,978
-------------
CONTAINERS/PACKAGING (1.0%)
11,461 Ball Corp. 412,138
15,756 Bemis Company, Inc. 418,164
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
99
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------
19,632 Pactiv Corp.* $ 423,659
8,427 Sealed Air Corp.* 419,580
11,837 Temple-Inland Inc. 439,745
-------------
2,113,286
-------------
CONTRACT DRILLING (0.8%)
7,339 Nabors Industries, Ltd.
(Bermuda)* 444,890
6,971 Noble Corp. (Cayman Islands) 428,786
14,225 Rowan Companies, Inc.* 422,625
7,617 Transocean Inc.
(Cayman Islands)* 411,090
-------------
1,707,391
-------------
DATA PROCESSING
SERVICES (1.6%)
8,456 Affiliated Computer Services,
Inc. (Class A)* 432,102
10,282 Automatic Data Processing,
Inc. 431,536
9,936 Computer Sciences Corp.* 434,203
32,794 Convergys Corp.* 466,331
10,898 First Data Corp. 437,446
10,260 Fiserv, Inc.* 440,667
14,352 Paychex, Inc. 467,014
12,572 SunGard Data Systems Inc.* 442,157
-------------
3,551,456
-------------
DEPARTMENT STORES (1.0%)
17,647 Dillard's, Inc. (Class A) 413,293
6,011 Federated Department
Stores, Inc. 440,486
7,791 Kohl's Corp.* 435,595
10,958 May Department Stores Co. 440,073
8,349 Penney (J.C.) Co., Inc. 438,990
-------------
2,168,437
-------------
DISCOUNT STORES (1.4%)
31,189 Big Lots, Inc.* 412,942
9,455 Costco Wholesale Corp. 423,773
21,631 Dollar General Corp. 440,407
17,334 Family Dollar Stores, Inc. 452,417
2,917 Sears Holdings Corp.* 437,171
8,081 Target Corp. $ 439,687
8,987 Wal-Mart Stores, Inc. 433,173
-------------
3,039,570
-------------
DRUGSTORE CHAINS (0.4%)
14,887 CVS Corp. 432,765
9,401 Walgreen Co. 432,352
-------------
865,117
-------------
ELECTRIC UTILITIES (5.4%)
27,763 AES Corp. (The)* 454,758
17,279 Allegheny Energy, Inc.* 435,776
8,070 Ameren Corp. 446,271
12,294 American Electric Power Co.,
Inc. 453,280
34,631 CenterPoint Energy, Inc. 457,476
10,047 Cinergy Corp. 450,307
30,183 CMS Energy Corp.* 454,556
9,578 Consolidated Edison, Inc. 448,634
7,959 Constellation Energy Group,
Inc. 459,155
6,057 Dominion Resources, Inc. 444,523
9,351 DTE Energy Co. 437,346
15,474 Duke Energy Corp. 460,042
11,434 Edison International 463,649
6,051 Entergy Corp. 457,153
9,033 Exelon Corp. 463,664
9,331 FirstEnergy Corp. 448,914
10,528 FPL Group, Inc. 442,808
12,130 PG&E Corp. 455,360
10,043 Pinnacle West Capital Corp. 446,411
7,484 PPL Corp. 444,400
9,847 Progress Energy, Inc. 445,478
7,664 Public Service Enterprise
Group, Inc. 466,124
12,836 Southern Co. (The) 445,024
23,429 TECO Energy, Inc. 443,042
5,313 TXU Corp. 441,457
22,471 Xcel Energy, Inc. 438,634
-------------
11,704,242
-------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
100
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------
ELECTRICAL PRODUCTS (0.8%)
18,446 American Power Conversion
Corp. $ 435,141
6,608 Cooper Industries Ltd.
(Class A) (Bermuda) 422,251
6,663 Emerson Electric Co. 417,304
15,711 Molex Inc. 409,114
-------------
1,683,810
-------------
ELECTRONIC COMPONENTS (0.6%)
15,407 Jabil Circuit, Inc.* 473,457
77,683 Sanmina-SCI Corp.* 424,926
104,957 Solectron Corp.* 397,787
-------------
1,296,170
-------------
ELECTRONIC EQUIPMENT/
INSTRUMENTS (1.5%)
17,754 Agilent Technologies, Inc.* 408,697
278,336 JDS Uniphase Corp.* 423,071
8,734 Rockwell Automation, Inc. 425,433
13,011 Scientific-Atlanta, Inc. 432,876
39,798 Symbol Technologies, Inc. 392,806
17,898 Tektronix, Inc. 416,486
16,120 Thermo Electron Corp.* 433,144
30,904 Xerox Corp.* 426,166
-------------
3,358,679
-------------
ELECTRONIC PRODUCTION
EQUIPMENT (0.7%)
26,022 Applied Materials, Inc. 421,036
9,426 KLA-Tencor Corp. 411,916
16,645 Novellus Systems, Inc.* 411,298
31,960 Teradyne, Inc.* 382,561
-------------
1,626,811
-------------
ELECTRONICS/APPLIANCE
STORES (0.6%)
6,435 Best Buy Co., Inc. 441,119
25,975 Circuit City Stores - Circuit
City Group 449,108
17,971 RadioShack Corp. 416,388
-------------
1,306,615
-------------
ELECTRONICS/APPLIANCES (0.6%)
15,745 Eastman Kodak Co. $ 422,753
29,008 Maytag Corp. 454,265
6,064 Whirlpool Corp. 425,147
-------------
1,302,165
-------------
ENGINEERING &
CONSTRUCTION (0.2%)
7,154 Fluor Corp. 411,999
-------------
ENVIRONMENTAL SERVICES (0.4%)
53,565 Allied Waste Industries, Inc.* 424,770
15,086 Waste Management, Inc. 427,537
-------------
852,307
-------------
FINANCE/RENTAL/LEASING (1.9%)
5,865 Capital One Financial Corp. 469,259
10,408 CIT Group, Inc. 447,232
11,247 Countrywide Financial Corp. 434,247
7,311 Fannie Mae 426,962
6,588 Freddie Mac 429,735
20,792 MBNA Corp. 543,919
24,930 Providian Financial Corp.* 439,516
12,128 Ryder System, Inc. 443,885
8,834 SLM Corp. 448,767
-------------
4,083,522
-------------
FINANCIAL CONGLOMERATES (1.1%)
8,109 American Express Co. 431,642
9,143 Citigroup, Inc. 422,681
12,188 JPMorgan Chase & Co. 430,480
10,906 Principal Financial Group, Inc. 456,961
6,861 Prudential Financial, Inc. 450,493
8,947 State Street Corp. 431,693
-------------
2,623,950
-------------
FINANCIAL PUBLISHING/
SERVICES (0.6%)
12,444 Equifax, Inc. 444,375
10,109 McGraw-Hill Companies, Inc.
(The) 447,323
9,537 Moody's Corp. 428,784
-------------
1,320,482
-------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
101
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------
FOOD DISTRIBUTORS (0.2%)
11,869 SYSCO Corp. $ 429,539
-------------
FOOD RETAIL (0.8%)
20,454 Albertson's, Inc. 422,989
25,288 Kroger Co.* 481,231
18,850 Safeway Inc. 425,822
13,407 Supervalu, Inc.* 437,202
-------------
1,767,244
-------------
FOOD: MAJOR DIVERSIFIED (1.3%)
14,036 Campbell Soup Co. 431,888
18,210 ConAgra Foods Inc. 421,744
8,580 General Mills, Inc. 401,458
12,104 Heinz (H.J.) Co. 428,724
9,665 Kellogg Co. 429,513
7,886 PepsiCo, Inc. 425,292
22,154 Sara Lee Corp. 438,871
-------------
2,977,490
-------------
FOOD: SPECIALTY/CANDY (0.6%)
6,878 Hershey Foods Corp. 427,124
13,107 McCormick & Co., Inc.
(Non-Voting) 428,337
6,334 Wrigley (Wm.) Jr. Co. 436,033
-------------
1,291,494
-------------
FOREST PRODUCTS (0.4%)
18,415 Louisiana-Pacific Corp. 452,641
6,477 Weyerhaeuser Co. 412,261
-------------
864,902
-------------
GAS DISTRIBUTORS (1.2%)
90,674 Dynegy, Inc. (Class A)* 440,676
10,818 KeySpan Corp. 440,293
10,661 Nicor Inc. 438,913
17,826 NiSource, Inc. 440,837
9,818 Peoples Energy Corp. 426,690
10,958 Sempra Energy 452,675
-------------
2,640,084
-------------
HOME BUILDING (0.6%)
6,199 Centex Corp. 438,083
5,692 KB Home $ 433,901
5,113 Pulte Homes, Inc. 430,770
-------------
1,302,754
-------------
HOME FURNISHINGS (0.4%)
16,689 Leggett & Platt, Inc. 443,594
18,697 Newell Rubbermaid, Inc. 445,736
-------------
889,330
-------------
HOME IMPROVEMENT
CHAINS (0.6%)
10,929 Home Depot, Inc. (The) 425,138
7,507 Lowe's Companies, Inc. 437,058
9,508 Sherwin-Williams Co. 447,732
-------------
1,309,928
-------------
HOSPITAL/NURSING
MANAGEMENT (0.8%)
7,747 HCA, Inc. 439,022
17,045 Health Management Associates,
Inc. (Class A) 446,238
10,923 Manor Care, Inc. 433,971
34,464 Tenet Healthcare Corp.* 421,839
-------------
1,741,070
-------------
HOTELS/RESORTS/
CRUISELINES (0.8%)
7,749 Carnival Corp. (Panama) 422,708
18,119 Hilton Hotels Corp. 432,138
6,348 Marriott International, Inc.
(Class A) 433,061
7,502 Starwood Hotels & Resorts
Worldwide, Inc. 439,392
-------------
1,727,299
-------------
HOUSEHOLD/PERSONAL
CARE (1.5%)
10,077 Alberto-Culver Co. (Class B) 436,636
11,692 Avon Products, Inc. 442,542
7,712 Clorox Co. (The) 429,713
8,914 Colgate-Palmolive Co. 444,898
8,340 Gillette Co. (The) 422,254
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
102
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------
11,692 International Flavors &
Fragrances, Inc. $ 423,484
6,738 Kimberly-Clark Corp. 421,731
7,957 Procter & Gamble Co. (The) 419,732
-------------
3,440,990
-------------
INDUSTRIAL CONGLOMERATES (1.7%)
5,717 3M Co. 413,339
8,010 Danaher Corp. 419,243
11,843 General Electric Co.** 410,360
11,536 Honeywell International, Inc. 422,564
5,891 Ingersoll-Rand Co. Ltd.
(Class A) (Bermuda) 420,323
4,494 ITT Industries, Inc. 438,749
5,779 Textron, Inc. 438,337
14,186 Tyco International Ltd.
(Bermuda) 414,231
8,204 United Technologies Corp. 421,275
-------------
3,798,421
-------------
INDUSTRIAL MACHINERY (0.4%)
5,267 Illinois Tool Works Inc. 419,675
7,099 Parker Hannifin Corp. 440,209
-------------
859,884
-------------
INDUSTRIAL SPECIALTIES (0.4%)
13,123 Ecolab Inc. 424,660
6,603 PPG Industries, Inc. 414,404
-------------
839,064
-------------
INFORMATION TECHNOLOGY
SERVICES (0.8%)
19,854 Citrix Systems, Inc.* 430,038
22,425 Electronic Data Systems
Corp. 431,681
5,756 International Business
Machines Corp. 427,095
62,124 Unisys Corp.* 393,245
-------------
1,682,059
-------------
INSURANCE BROKERS/
SERVICES (0.4%)
17,704 AON Corp. 443,308
15,768 Marsh & McLennan Companies,
Inc. $ 436,774
-------------
880,082
-------------
INTEGRATED OIL (0.8%)
3,938 Amerada Hess Corp. 419,436
7,457 Chevron Corp. 416,995
7,247 ConocoPhillips 416,630
7,222 Exxon Mobil Corp. 415,048
-------------
1,668,109
-------------
INTERNET SOFTWARE/
SERVICES (0.4%)
50,259 Siebel Systems, Inc. 447,305
12,108 Yahoo!, Inc.* 419,542
-------------
866,847
-------------
INVESTMENT BANKS/
BROKERS (1.4%)
4,164 Bear Stearns Companies, Inc.
(The) 432,806
33,493 E*TRADE Group, Inc.* 468,567
4,236 Goldman Sachs Group Inc.
(The) 432,157
4,533 Lehman Brothers Holdings
Inc. 450,036
7,875 Merrill Lynch & Co., Inc. 433,204
8,559 Morgan Stanley (Note 4) 449,091
37,491 Schwab (Charles) Corp. (The) 422,898
-------------
3,088,759
-------------
INVESTMENT MANAGERS (1.0%)
15,045 Federated Investors, Inc.
(Class B) 451,500
6,129 Franklin Resources, Inc. 471,810
27,623 Janus Capital Group, Inc. 415,450
15,528 Mellon Financial Corp. 445,498
7,179 Price (T.) Rowe Group, Inc. 449,405
-------------
2,233,663
-------------
LIFE/HEALTH INSURANCE (1.2%)
10,058 AFLAC, Inc. 435,310
8,863 Jefferson-Pilot Corp. 446,872
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
103
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------
9,218 Lincoln National Corp. $ 432,509
9,829 MetLife, Inc. 441,715
8,201 Torchmark Corp. 428,092
23,953 UnumProvident Corp. 438,819
-------------
2,623,317
-------------
MAJOR BANKS (2.3%)
9,430 Bank of America Corp. 430,102
14,917 Bank of New York Co., Inc.
(The) 429,311
10,963 BB&T Corp. 438,191
7,534 Comerica, Inc. 435,465
17,847 Huntington Bancshares, Inc. 430,827
13,115 KeyCorp 434,762
12,494 National City Corp. 426,295
8,124 PNC Financial Services
Group 442,433
12,927 Regions Financial Corp. 437,967
5,857 SunTrust Banks, Inc. 423,110
8,689 Wachovia Corp. 430,974
7,156 Wells Fargo & Co. 440,666
-------------
5,200,103
-------------
MAJOR
TELECOMMUNICATIONS (1.2%)
7,239 ALLTEL Corp. 450,845
22,340 AT&T Corp. 425,354
16,144 BellSouth Corp. 428,946
18,198 SBC Communications, Inc. 432,203
17,619 Sprint Corp. (FON Group) 442,061
12,554 Verizon Communications Inc. 433,741
-------------
2,613,150
-------------
MANAGED HEALTH CARE (1.2%)
5,294 Aetna, Inc. 438,449
9,893 Caremark Rx, Inc.* 440,436
4,120 CIGNA Corp. 440,964
11,156 Humana, Inc.* 443,339
8,481 UnitedHealth Group, Inc. 442,199
6,314 WellPoint Inc.* 439,707
-------------
2,645,094
-------------
MEDIA CONGLOMERATES (0.8%)
16,470 Disney (Walt) Co. (The) $ 414,715
25,868 News Corp Inc. (Class A) 418,544
26,208 Time Warner, Inc.* 437,936
13,135 Viacom Inc. (Class B)
(Non-Voting) 420,583
-------------
1,691,778
-------------
MEDICAL DISTRIBUTORS (0.6%)
6,451 AmerisourceBergen Corp. 446,087
7,387 Cardinal Health, Inc. 425,343
10,275 McKesson Corp. 460,217
-------------
1,331,647
-------------
MEDICAL SPECIALTIES (3.4%)
20,708 Applera Corp. - Applied
Biosystems Group 407,326
6,264 Bard (C.R.), Inc. 416,619
5,876 Bausch & Lomb, Inc. 487,708
11,872 Baxter International, Inc. 440,451
8,184 Becton, Dickinson & Co. 429,414
11,885 Biomet, Inc. 411,696
15,164 Boston Scientific Corp.* 409,428
6,927 Fisher Scientific International,
Inc.* 449,562
6,069 Guidant Corp. 408,444
11,343 Hospira, Inc.* 442,377
8,261 Medtronic, Inc. 427,837
14,852 Pall Corp. 450,907
22,437 PerkinElmer, Inc. 424,059
10,994 St. Jude Medical, Inc.* 479,448
8,945 Stryker Corp. 425,424
11,102 Waters Corp.* 412,661
5,444 Zimmer Holdings, Inc.* 414,669
-------------
7,338,030
-------------
MISCELLANEOUS COMMERCIAL
SERVICES (0.2%)
20,695 Sabre Holdings Corp.
(Class A) 412,865
-------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
104
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------
MISCELLANEOUS
MANUFACTURING (0.2%)
11,963 Dover Corp. $ 435,214
-------------
MOTOR VEHICLES (0.6%)
38,986 Ford Motor Co. 399,217
12,325 General Motors Corp. 419,050
8,861 Harley-Davidson, Inc. 439,506
-------------
1,257,773
-------------
MULTI-LINE INSURANCE (0.8%)
7,916 American International Group,
Inc. 459,920
5,759 Hartford Financial Services
Group, Inc. (The) (Note 4) 430,658
5,517 Loews Corp. 427,568
7,893 Safeco Corp. 428,906
-------------
1,747,052
-------------
OFFICE EQUIPMENT/
SUPPLIES (0.4%)
8,014 Avery Dennison Corp. 424,421
10,198 Pitney Bowes, Inc. 444,123
-------------
868,544
-------------
OIL & GAS PIPELINES (0.6%)
38,076 El Paso Corp. 438,636
5,293 Kinder Morgan, Inc. 440,378
22,506 Williams Companies, Inc.
(The) 427,614
-------------
1,306,628
-------------
OIL & GAS PRODUCTION (1.8%)
5,329 Anadarko Petroleum Corp. 437,777
6,731 Apache Corp. 434,823
7,797 Burlington Resources, Inc. 430,706
8,812 Devon Energy Corp. 446,592
7,832 EOG Resources, Inc. 444,858
5,781 Kerr-McGee Corp. 441,148
5,488 Occidental Petroleum Corp. 422,192
6,756 Unocal Corp. 439,478
12,934 XTO Energy Inc. 439,627
-------------
3,937,201
-------------
OIL REFINING/MARKETING (0.8%)
6,324 Ashland, Inc. $ 454,506
8,004 Marathon Oil Corp. 427,173
3,789 Sunoco, Inc. 430,734
5,500 Valero Energy Corp. 435,105
-------------
1,747,518
-------------
OILFIELD SERVICES/
EQUIPMENT (1.0%)
8,530 Baker Hughes Inc. 436,395
8,172 BJ Services Co. 428,867
9,675 Halliburton Co. 462,659
9,063 National-Oilwell, Inc.* 430,855
5,752 Schlumberger Ltd.
(Netherlands Antilles) 436,807
-------------
2,195,583
-------------
OTHER CONSUMER
SERVICES (0.8%)
5,696 Apollo Group, Inc.
(Class A)* 445,541
7,428 Block (H.&R.), Inc. 433,424
19,703 Cendant Corp. 440,756
11,557 eBay, Inc.* 381,497
-------------
1,701,218
-------------
OTHER CONSUMER
SPECIALTIES (0.2%)
4,870 Fortune Brands, Inc. 432,456
-------------
OTHER METALS/MINERALS (0.2%)
4,494 Phelps Dodge Corp. 415,695
-------------
PACKAGED SOFTWARE (2.6%)
14,032 Adobe Systems, Inc. 401,596
11,930 Autodesk, Inc. 410,034
24,706 BMC Software, Inc.* 443,473
16,038 Computer Associates
International, Inc. 440,724
60,018 Compuware Corp.* 431,529
9,767 Intuit Inc.* 440,589
10,950 Mercury Interactive Corp.* 420,042
17,479 Microsoft Corp.** 434,178
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
105
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------
70,930 Novell, Inc.* $ 439,766
35,637 Oracle Corp.* 470,408
66,131 Parametric Technology
Corp.* 421,916
20,597 Symantec Corp.* 447,779
18,194 VERITAS Software Corp.* 443,934
-------------
5,645,968
-------------
PERSONNEL SERVICES (0.4%)
14,925 Monster Worldwide Inc.* 428,049
17,576 Robert Half International, Inc. 438,873
-------------
866,922
-------------
PHARMACEUTICALS: GENERIC
DRUGS (0.4%)
22,346 Mylan Laboratories, Inc. 429,937
14,255 Watson Pharmaceuticals,
Inc.* 421,378
-------------
851,315
-------------
PHARMACEUTICALS: MAJOR (1.6%)
8,896 Abbott Laboratories 435,993
17,393 Bristol-Myers Squibb Co. 434,477
6,607 Johnson & Johnson 429,455
7,514 Lilly (Eli) & Co. 418,605
13,649 Merck & Co., Inc. 420,389
15,280 Pfizer, Inc. 421,422
22,692 Schering-Plough Corp. 432,510
9,967 Wyeth 443,532
-------------
3,436,383
-------------
PHARMACEUTICALS: OTHER (0.6%)
5,195 Allergan, Inc. 442,822
10,821 Forest Laboratories, Inc.* 420,396
45,857 King Pharmaceuticals, Inc.* 477,830
-------------
1,341,048
-------------
PRECIOUS METALS (0.4%)
11,410 Freeport-McMoRan Copper &
Gold, Inc. (Class B) 427,190
10,997 Newmont Mining Corp. 429,213
-------------
856,403
-------------
PROPERTY - CASUALTY
INSURERS (1.4%)
9,581 ACE Ltd. (Cayman Islands) $ 429,708
7,306 Allstate Corp. (The) 436,534
5,185 Chubb Corp. (The) 443,888
10,747 Cincinnati Financial Corp. 425,151
4,418 Progressive Corp. (The) 436,543
11,461 St. Paul Travelers Companies,
Inc. (The) 453,053
5,832 XL Capital Ltd. (Class A)
(Cayman Islands) 434,017
-------------
3,058,894
-------------
PUBLISHING: BOOKS/
MAGAZINES (0.2%)
9,021 Meredith Corp. 442,570
-------------
PUBLISHING: NEWSPAPERS (1.0%)
12,426 Dow Jones & Co., Inc. 440,502
5,861 Gannett Co., Inc. 416,893
7,089 Knight-Ridder, Inc. 434,839
13,674 New York Times Co. (The)
(Class A) 425,945
12,209 Tribune Co. 429,513
-------------
2,147,692
-------------
PULP & PAPER (0.6%)
13,298 Georgia-Pacific Corp. 422,876
12,972 International Paper Co. 391,884
14,857 MeadWestvaco Corp. 416,590
-------------
1,231,350
-------------
RAILROADS (0.8%)
8,687 Burlington Northern Santa Fe
Corp. 408,984
9,960 CSX Corp. 424,894
13,350 Norfolk Southern Corp. 413,316
6,581 Union Pacific Corp. 426,449
-------------
1,673,643
-------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
106
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------
REAL ESTATE INVESTMENT
TRUSTS (1.4%)
10,741 Apartment Investment &
Management Co. (Class A) $ 439,522
11,281 Archstone-Smith Trust 435,672
12,896 Equity Office Properties Trust 426,858
11,790 Equity Residential 434,108
11,712 Plum Creek Timber Co., Inc. 425,146
10,485 ProLogis 421,916
5,956 Simon Property Group, Inc. 431,750
-------------
3,014,972
-------------
RECREATIONAL PRODUCTS (0.8%)
10,147 Brunswick Corp. 439,568
7,629 Electronic Arts, Inc.* 431,878
21,286 Hasbro, Inc. 442,536
24,083 Mattel, Inc. 440,719
-------------
1,754,701
-------------
REGIONAL BANKS (2.2%)
16,955 AmSouth Bancorporation 440,830
9,787 Compass Bancshares, Inc. 440,415
10,579 Fifth Third Bancorp 435,961
10,348 First Horizon National Corp. 436,686
4,125 M&T Bank Corp. 433,785
9,781 Marshall & Ilsley Corp. 434,765
15,523 North Fork Bancorporation,
Inc. 436,041
9,496 Northern Trust Corp. 432,923
14,912 Synovus Financial Corp. 427,527
14,897 U.S. Bancorp 434,992
5,850 Zions Bancorporation 430,151
-------------
4,784,076
-------------
RESTAURANTS (1.0%)
13,326 Darden Restaurants, Inc. 439,491
15,164 McDonald's Corp. 420,801
8,090 Starbucks Corp.* 417,929
9,370 Wendy's International, Inc. 446,481
8,247 Yum! Brands, Inc. 429,504
-------------
2,154,206
-------------
SAVINGS BANKS (0.6%)
6,589 Golden West Financial Corp. $ 424,200
19,632 Sovereign Bancorp, Inc. 438,579
10,807 Washington Mutual, Inc. 439,737
-------------
1,302,516
-------------
SEMICONDUCTORS (3.2%)
25,216 Advanced Micro Devices,
Inc.* 437,245
21,122 Altera Corp.* 418,638
11,497 Analog Devices, Inc. 428,953
158,762 Applied Micro Circuits Corp.* 406,431
12,287 Broadcom Corp. (Class A)* 436,311
20,901 Freescale Semiconductor Inc.
(Class B)* 442,683
16,215 Intel Corp. 422,563
11,677 Linear Technology Corp. 428,429
55,456 LSI Logic Corp.* 470,821
11,452 Maxim Integrated Products,
Inc. 437,581
41,295 Micron Technology, Inc.* 421,622
20,840 National Semiconductor
Corp. 459,105
16,312 NVIDIA Corp.* 435,857
49,579 PMC - Sierra, Inc.* 462,572
16,097 Texas Instruments Inc. 451,843
16,595 Xilinx, Inc. 423,173
-------------
6,983,827
-------------
SERVICES TO THE HEALTH
INDUSTRY (1.0%)
8,416 Express Scripts, Inc.
(Class A)* 420,632
18,579 IMS Health Inc. 460,202
8,781 Laboratory Corp. of America
Holdings* 438,172
8,351 Medco Health Solutions Inc.* 445,609
8,192 Quest Diagnostics Inc. 436,388
-------------
2,201,003
-------------
SPECIALTY INSURANCE (0.6%)
6,160 Ambac Financial Group, Inc. 429,722
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
107
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------
7,391 MBIA Inc. $ 438,360
6,978 MGIC Investment Corp. 455,105
-------------
1,323,187
-------------
SPECIALTY STORES (1.6%)
21,621 AutoNation, Inc.* 443,663
4,678 AutoZone, Inc.* 432,528
10,128 Bed Bath & Beyond Inc.* 423,148
19,458 Office Depot, Inc.* 444,421
14,381 OfficeMax Inc. 428,122
19,863 Staples, Inc. 423,479
13,318 Tiffany & Co. 436,298
16,658 Toys 'R' Us, Inc.* 441,104
-------------
3,472,763
-------------
SPECIALTY
TELECOMMUNICATIONS (0.6%)
12,730 CenturyTel, Inc. 440,840
32,503 Citizens Communications Co. 436,840
120,485 Qwest Communications
International, Inc.* 446,999
-------------
1,324,679
-------------
STEEL (0.5%)
18,810 Allegheny Technologies Inc. 414,949
8,089 Nucor Corp. 369,020
10,676 United States Steel Corp. 366,934
-------------
1,150,903
-------------
TELECOMMUNICATION
EQUIPMENT (1.8%)
19,935 ADC Telecommunications,
Inc. 433,985
33,519 Andrew Corp.* 427,702
184,004 CIENA Corp.* 384,568
17,790 Comverse Technology, Inc.* 420,734
26,460 Corning Inc.* 439,765
148,059 Lucent Technologies Inc.* 430,852
24,150 Motorola, Inc. 440,979
12,593 QUALCOMM, Inc. 415,695
50,606 Tellabs, Inc.* 440,272
-------------
3,834,552
-------------
TOBACCO (0.6%)
6,565 Altria Group, Inc. $ 424,493
5,341 Reynolds American, Inc. 420,871
9,568 UST, Inc. 436,875
-------------
1,282,239
-------------
TOOLS/HARDWARE (0.6%)
4,903 Black & Decker Corp. 440,535
12,608 Snap-On, Inc. 432,454
9,610 Stanley Works (The) 437,639
-------------
1,310,628
-------------
TRUCKS/CONSTRUCTION/FARM
MACHINERY (1.0%)
4,407 Caterpillar Inc. 420,031
5,940 Cummins Inc. 443,183
6,473 Deere & Co. 423,917
12,957 Navistar International Corp.* 414,624
6,081 PACCAR, Inc. 413,508
-------------
2,115,263
-------------
WHOLESALE DISTRIBUTORS (0.4%)
10,020 Genuine Parts Co. 411,722
7,844 Grainger (W.W.), Inc. 429,773
-------------
841,495
-------------
WIRELESS
TELECOMMUNICATIONS (0.2%)
13,683 Nextel Communications, Inc.
(Class A)* 442,098
-------------
TOTAL COMMON STOCKS
(COST $140,581,322) 216,409,200
-------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
108
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ------------------------------------------------------------------------
SHORT-TERM INVESTMENT (0.6%)
REPURCHASE AGREEMENT
$ 1,410 Joint repurchase agreement
account 3.35% due 07/01/05
(dated 06/30/05; proceeds
$1,410,131) (b)
(COST $1,410,000) $ 1,410,000
-------------
TOTAL INVESTMENTS
(COST $141,991,322) (c) (d) 99.9% 217,819,200
OTHER ASSETS IN EXCESS OF
LIABILITIES 0.1 116,635
----- -------------
NET ASSETS 100.0% $ 217,935,835
===== =============
</Table>
- ----------
* NON-INCOME PRODUCING SECURITY.
** A PORTION OF THIS SECURITY IS PHYSICALLY SEGREGATED IN CONNECTION WITH
OPEN FUTURES CONTRACTS IN THE AMOUNT OF $72,000.
(a) A SECURITY WITH TOTAL MARKET VALUE EQUAL TO $0 HAS BEEN VALUED AT ITS
FAIR VALUE AS DETERMINED IN GOOD FAITH UNDER PROCEDURES ESTABLISHED BY
AND UNDER THE GENERAL SUPERVISION OF THE FUND'S TRUSTEES.
(b) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(c) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN AN AMOUNT EQUAL TO
$1,554,535 IN CONNECTION WITH OPEN FUTURES CONTRACTS.
(d) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE
AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED
APPRECIATION IS $79,644,373, AND THE AGGREGATE GROSS UNREALIZED
DEPRECIATION IS $3,816,495, RESULTING IN NET UNREALIZED APPRECIATION OF
$75,827,878.
FUTURES CONTRACTS OPEN AT JUNE 30, 2005:
<Table>
<Caption>
UNREALIZED
NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE APPRECIATION/
CONTRACTS LONG/SHORT MONTH, AND YEAR AMOUNT AT VALUE DEPRECIATION
- --------------------------------------------------------------------------------
2 Long S&P Midcap 400 Index
September 2005 $ 688,350 $ 6,340
2 Long S&P 500 Index
September 2005 597,750 (5,794)
--------
Net unrealized appreciation $ 546
========
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
109
<Page>
EQUALLY-WEIGHTED S&P 500
SUMMARY OF INVESTMENTS - JUNE 30, 2005 (UNAUDITED)
<Table>
<Caption>
PERCENT OF
SECTOR VALUE NET ASSETS
- ------------------------------------------------------------------------
Commercial Services $ 35,964,093 16.5%
Communications 25,674,071 11.8
Consumer Durables 15,992,166 7.3
Consumer Non-Durables 15,645,062 7.2
Consumer Services 14,826,653 6.8
Distribution Services 14,646,072 6.7
Electronic Technology 12,669,472 5.8
Energy Minerals 12,040,777 5.5
Finance 11,746,330 5.4
Health Services 9,255,290 4.2
Health Technology 9,113,857 4.2
Industrial Services 7,352,828 3.4
Non-Energy Minerals 6,587,167 3.0
Process Industries 6,473,908 3.0
Producer Manufacturing 4,379,927 2.0
Retail Trade 4,129,647 1.9
Technology Services 3,915,649 1.8
Transportation 3,393,550 1.6
Utilities 2,602,681 1.2
Repurchase Agreement 1,410,000 0.6
--------------- ----
$ 217,819,200* 99.9%
=============== ====
</Table>
- ----------
* DOES NOT INCLUDE OUTSTANDING LONG FUTURES CONTRACTS WITH AN UNDERLYING FACE
AMOUNT OF $1,286,100 WITH NET UNREALIZED APPRECIATION OF $546.
SEE NOTES TO FINANCIAL STATEMENTS
110
<Page>
GROWTH
PORTFOLIO OF INVESTMENTS - JUNE 30, 2005 (UNAUDITED)
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------
COMMON STOCKS (97.0%)
ADVERTISING/MARKETING
SERVICES (2.7%)
10,800 Getty Images, Inc.* $ 802,008
10,800 Lamar Advertising Co.
(Class A)* 461,916
-------------
1,263,924
-------------
AIR FREIGHT/COURIERS (1.3%)
9,970 C.H. Robinson Worldwide,
Inc. 580,254
-------------
BIOTECHNOLOGY (2.7%)
15,200 Genentech, Inc.* 1,220,256
-------------
CASINO/GAMING (4.4%)
39,400 International Game
Technology 1,109,110
7,700 Station Casinos, Inc. 511,280
8,945 Wynn Resorts, Ltd.* 422,830
-------------
2,043,220
-------------
CHEMICALS: AGRICULTURAL (2.8%)
20,500 Monsanto Co. 1,288,835
-------------
COMPUTER PERIPHERALS (0.0%)
20,100 Seagate Technology Inc.
(Escrow) (a) 0
-------------
COMPUTER PROCESSING
HARDWARE (3.7%)
42,919 Dell, Inc.* 1,695,730
-------------
DATA PROCESSING
SERVICES (1.0%)
14,150 Paychex, Inc. 460,441
-------------
DISCOUNT STORES (6.3%)
32,500 Costco Wholesale Corp. 1,456,650
9,500 Sears Holdings Corp.* 1,423,765
-------------
2,880,415
-------------
FINANCIAL
CONGLOMERATES (2.5%)
18,700 Brascan Corp. (Class A)
(Canada) 713,592
9,870 Citigroup, Inc. 456,290
-------------
1,169,882
-------------
FINANCIAL PUBLISHING/
SERVICES (1.1%)
11,580 Moody's Corp. $ 520,637
-------------
FOOD: SPECIALTY/CANDY (1.0%)
6,700 Wrigley (Wm.) Jr. Co. 461,228
-------------
GAS DISTRIBUTORS (1.2%)
8,700 Questar Corp. 573,330
-------------
HOME BUILDING (1.5%)
8,300 Pulte Homes, Inc. 699,275
-------------
HOME IMPROVEMENT
CHAINS (3.0%)
35,175 Home Depot, Inc. (The) 1,368,308
-------------
HOTELS/RESORTS/
CRUISELINES (3.5%)
29,400 Carnival Corp. (Panama) 1,603,770
-------------
HOUSEHOLD/PERSONAL
CARE (1.7%)
9,600 Gillette Co. (The) 486,048
5,805 Procter & Gamble Co.
(The) 306,214
-------------
792,262
-------------
INSURANCE BROKERS/
SERVICES (1.0%)
16,800 Marsh & McLennan
Companies, Inc. 465,360
-------------
INTERNET RETAIL (1.3%)
18,200 Amazon.com, Inc.* 602,056
-------------
INTERNET SOFTWARE/
SERVICES (7.6%)
7,435 Google, Inc. (Class A)* 2,187,005
37,740 Yahoo!, Inc.* 1,307,691
-------------
3,494,696
-------------
INVESTMENT BANKS/
BROKERS (2.2%)
3,425 Chicago Mercantile Exchange
Holdings, Inc. 1,012,088
-------------
MANAGED HEALTH CARE (3.7%)
32,400 UnitedHealth Group, Inc. 1,689,336
-------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
111
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------
MEDICAL DISTRIBUTORS (1.0%)
10,200 Patterson Companies, Inc.* $ 459,816
-------------
MEDICAL SPECIALTIES (4.8%)
8,900 Alcon, Inc. (Switzerland) 973,215
7,200 Guidant Corp. 484,560
17,100 St. Jude Medical, Inc.* 745,731
-------------
2,203,506
-------------
MISCELLANEOUS COMMERCIAL
SERVICES (2.1%)
12,400 Corporate Executive Board
Co. (The) 971,292
-------------
MOTOR VEHICLES (1.5%)
14,000 Harley-Davidson, Inc. 694,400
-------------
OIL & GAS PRODUCTION (2.7%)
41,740 Ultra Petroleum Corp.
(Canada)* 1,267,226
-------------
OTHER CONSUMER
SERVICES (6.5%)
17,300 Apollo Group, Inc.
(Class A)* 1,353,206
49,136 eBay, Inc.* 1,621,979
-------------
2,975,185
-------------
OTHER METALS/MINERALS (1.1%)
11,400 Cameco Corp. (Canada) 510,150
-------------
PACKAGED SOFTWARE (0.8%)
27,300 Red Hat, Inc.* 357,630
-------------
PERSONNEL SERVICES (0.3%)
4,600 Monster Worldwide, Inc.* 131,928
-------------
PHARMACEUTICALS: MAJOR (1.5%)
10,600 Johnson & Johnson 689,000
-------------
PROPERTY - CASUALTY
INSURERS (1.7%)
289 Berkshire Hathaway, Inc.
(Class A)* 804,432
-------------
RECREATIONAL PRODUCTS (3.6%)
23,600 Electronic Arts, Inc.* 1,335,996
8,700 Shanda Interactive
Entertainment Ltd. (ADS)
(Cayman Islands)* $ 320,073
-------------
1,656,069
-------------
RESTAURANTS (1.0%)
8,700 Starbucks Corp.* 449,442
-------------
SEMICONDUCTORS (1.5%)
17,660 Marvell Technology Group Ltd.
(Bermuda)* 671,786
-------------
SPECIALTY
TELECOMMUNICATIONS (1.4%)
30,631 Crown Castle International
Corp.* 622,422
-------------
TELECOMMUNICATION
EQUIPMENT (3.2%)
28,200 Corning, Inc.* 468,684
30,838 QUALCOMM, Inc. 1,017,962
-------------
1,486,646
-------------
TOBACCO (1.5%)
10,700 Altria Group, Inc. 691,862
-------------
WIRELESS
TELECOMMUNICATIONS (4.6%)
23,900 America Movil S.A. de C.V.
(Series L) (ADR) (Mexico) 1,424,679
21,600 Nextel Communications, Inc.
(Class A)* 697,896
-------------
2,122,575
-------------
TOTAL COMMON STOCKS
(COST $40,360,281) 44,650,670
-------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
112
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ------------------------------------------------------------------------
SHORT-TERM INVESTMENT (2.4%)
REPURCHASE AGREEMENT
$ 1,102 Joint repurchase agreement
account 3.35% due 07/01/05
(dated 06/30/05; proceeds
$1,102,103) (b)
(COST $1,102,000) $ 1,102,000
-------------
TOTAL INVESTMENTS
(COST $41,462,281) (c) 99.4% 45,752,670
OTHER ASSETS IN EXCESS OF
LIABILITIES 0.6 266,256
----- -------------
NET ASSETS 100.0% $ 46,018,926
===== =============
</Table>
- ----------
ADR AMERICAN DEPOSITARY RECEIPT.
ADS AMERICAN DEPOSITARY SHARE.
* NON-INCOME PRODUCING SECURITY.
(a) A SECURITY WITH TOTAL MARKET VALUE EQUAL TO $0 HAS BEEN VALUED AT ITS
FAIR VALUE AS DETERMINED IN GOOD FAITH UNDER PROCEDURES ESTABLISHED BY
AND UNDER THE GENERAL SUPERVISION OF THE FUND'S TRUSTEES.
(b) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(c) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE
AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED
APPRECIATION IS $5,548,951 AND THE AGGREGATE GROSS UNREALIZED
DEPRECIATION IS $1,258,562, RESULTING IN NET UNREALIZED APPRECIATION OF
$4,290,389.
SEE NOTES TO FINANCIAL STATEMENTS
113
<Page>
GROWTH
SUMMARY OF INVESTMENTS - JUNE 30, 2005 (UNAUDITED)
<Table>
<Caption>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ------------------------------------------------------------------------
Internet Software/Services $ 3,494,696 7.6%
Other Consumer Services 2,975,185 6.5
Discount Stores 2,880,415 6.3
Medical Specialties 2,203,506 4.8
Wireless Telecommunications 2,122,575 4.6
Casino/Gaming 2,043,220 4.4
Computer Processing
Hardware 1,695,730 3.7
Managed Health Care 1,689,336 3.7
Recreational Products 1,656,069 3.6
Hotels/Resorts/Cruiselines 1,603,770 3.5
Telecommunication
Equipment 1,486,646 3.2
Home Improvement
Chains 1,368,308 3.0
Chemicals: Agricultural 1,288,835 2.8
Oil & Gas Production 1,267,226 2.7
Advertising/Marketing
Services 1,263,924 2.7
Biotechnology 1,220,256 2.7
Financial Conglomerates 1,169,882 2.5
Repurchase Agreement 1,102,000 2.4
Investment Banks/Brokers 1,012,088 2.2
Miscellaneous Commercial
Services 971,292 2.1
Property - Casualty Insurers $ 804,432 1.7%
Household/Personal Care 792,262 1.7
Home Building 699,275 1.5
Motor Vehicles 694,400 1.5
Tobacco 691,862 1.5
Pharmaceuticals: Major 689,000 1.5
Semiconductors 671,786 1.5
Specialty
Telecommunications 622,422 1.4
Internet Retail 602,056 1.3
Air Freight/Couriers 580,254 1.3
Gas Distributors 573,330 1.2
Financial Publishing/
Services 520,637 1.1
Other Metals/Minerals 510,150 1.1
Insurance Brokers/Services 465,360 1.0
Food: Specialty/Candy 461,228 1.0
Data Processing Services 460,441 1.0
Medical Distributors 459,816 1.0
Restaurants 449,442 1.0
Packaged Software 357,630 0.8
Personnel Services 131,928 0.3
--------------- ----
$ 45,752,670 99.4%
=============== ====
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
114
<Page>
AMERICAN OPPORTUNITIES
PORTFOLIO OF INVESTMENTS - JUNE 30, 2005 (UNAUDITED)
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------
COMMON STOCKS (95.7%)
ADVERTISING/MARKETING
SERVICES (1.5%)
43,400 Getty Images, Inc.* $ 3,222,884
-------------
APPAREL/FOOTWEAR
RETAIL (0.9%)
59,000 Chico's FAS, Inc.* 2,022,520
-------------
BIOTECHNOLOGY (4.5%)
26,500 Amgen Inc.* 1,602,190
43,100 Genentech, Inc.* 3,460,068
38,300 Genzyme Corp.* 2,301,447
60,111 Gilead Sciences, Inc.* 2,644,283
-------------
10,007,988
-------------
CASINO/GAMING (2.4%)
48,800 Station Casinos, Inc. 3,240,320
43,200 Wynn Resorts, Ltd.* 2,042,064
-------------
5,282,384
-------------
CHEMICALS: AGRICULTURAL (3.4%)
63,300 Monsanto Co. 3,979,671
37,200 Potash Corp. of
Saskatchewan, Inc. (Canada) 3,555,576
-------------
7,535,247
-------------
COAL (0.6%)
24,500 Peabody Energy Corp. 1,274,980
-------------
COMPUTER PROCESSING
HARDWARE (4.4%)
71,700 Apple Computer, Inc.* 2,639,277
179,100 Dell, Inc.* 7,076,241
-------------
9,715,518
-------------
DATA PROCESSING
SERVICES (0.8%)
48,700 CheckFree Corp.* 1,658,722
-------------
DISCOUNT STORES (4.1%)
165,300 Target Corp. 8,993,973
-------------
ELECTRONICS/APPLIANCE
STORES (1.5%)
49,500 Best Buy Co., Inc. 3,393,225
-------------
FINANCIAL PUBLISHING/
SERVICES (1.5%)
74,700 Moody's Corp. $ 3,358,512
-------------
FOOD: MAJOR DIVERSIFIED (3.7%)
36,500 Campbell Soup Co. 1,123,105
38,500 Kellogg Co. 1,710,940
100,370 PepsiCo, Inc. 5,412,954
-------------
8,246,999
-------------
HOME IMPROVEMENT
CHAINS (1.7%)
95,400 Home Depot, Inc. (The) 3,711,060
-------------
HOTELS/RESORTS/
CRUISELINES (3.1%)
125,700 Carnival Corp. (Panama) 6,856,935
-------------
HOUSEHOLD/
PERSONAL CARE (2.2%)
45,300 Gillette Co. (The) 2,293,539
49,700 Procter & Gamble Co. (The) 2,621,675
-------------
4,915,214
-------------
INDUSTRIAL CONGLOMERATES (3.2%)
160,300 General Electric Co. 5,554,395
28,800 United Technologies Corp. 1,478,880
-------------
7,033,275
-------------
INFORMATION TECHNOLOGY
SERVICES (0.7%)
32,600 Cognizant Technology
Solutions Corp. (Class A)* 1,536,438
-------------
INTEGRATED OIL (1.7%)
78,700 Suncor Energy, Inc. (Canada) 3,724,084
-------------
INTERNET SOFTWARE/
SERVICES (8.1%)
37,525 Google, Inc. (Class A)* 11,037,979
198,900 Yahoo!, Inc.* 6,891,885
-------------
17,929,864
-------------
INVESTMENT BANKS/
BROKERS (4.1%)
4,000 Chicago Mercantile Exchange
Holding Inc. 1,182,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
115
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------
45,175 Goldman Sachs
Group Inc. (The) $ 4,608,753
31,450 Legg Mason, Inc. 3,274,260
-------------
9,065,013
-------------
MAJOR
TELECOMMUNICATIONS (2.1%)
182,100 Sprint Corp. 4,568,889
-------------
MANAGED HEALTH CARE (5.1%)
45,800 Caremark Rx, Inc.* 2,039,016
174,700 UnitedHealth Group, Inc. 9,108,858
-------------
11,147,874
-------------
MEDICAL SPECIALTIES (5.2%)
59,800 Alcon, Inc. (Switzerland) 6,539,130
71,400 Medtronic, Inc. 3,697,806
27,700 St. Jude Medical, Inc.* 1,207,997
-------------
11,444,933
-------------
MISCELLANEOUS COMMERCIAL
SERVICES (0.5%)
24,900 Bright Horizons Family
Solutions, Inc.* 1,013,928
-------------
MULTI-LINE INSURANCE (1.0%)
29,400 Hartford Financial Services
Group, Inc. (The) (Note 4) 2,198,532
-------------
OIL & GAS PRODUCTION (2.7%)
198,160 Ultra Petroleum
Corp. (Canada)* 6,016,138
-------------
OTHER CONSUMER
SERVICES (5.7%)
67,115 Apollo Group, Inc. (Class A)* 5,249,735
220,500 eBay, Inc.* 7,278,705
-------------
12,528,440
-------------
OTHER METALS/MINERALS (1.2%)
57,800 Cameco Corporation (Canada) 2,586,550
-------------
PACKAGED SOFTWARE (0.9%)
69,300 Adobe Systems, Inc. 1,983,366
-------------
PERSONNEL SERVICES (0.1%)
11,200 Monster Worldwide, Inc.* 321,216
-------------
PHARMACEUTICALS: MAJOR (5.0%)
151,000 Johnson & Johnson $ 9,815,000
68,600 Schering-Plough Corp. 1,307,516
-------------
11,122,516
-------------
PROPERTY-CASUALTY
INSURERS (1.0%)
757 Berkshire Hathaway,
Inc. (Class A)* 2,107,109
-------------
RECREATIONAL PRODUCTS (0.7%)
42,000 Shanda Interactive
Entertainment Ltd. (ADS)
(Cayman Islands)* 1,545,180
-------------
SEMICONDUCTORS (4.9%)
233,800 Intel Corp. 6,092,828
123,600 Marvell Technology
Group Ltd. (Bermuda)* 4,701,744
-------------
10,794,572
-------------
SPECIALTY
TELECOMMUNICATIONS (1.1%)
119,068 Crown Castle
International Corp.* 2,419,462
-------------
TELECOMMUNICATION
EQUIPMENT (1.3%)
55,100 Corning, Inc.* 915,762
61,500 QUALCOMM Inc. 2,030,115
-------------
2,945,877
-------------
WIRELESS
TELECOMMUNICATIONS (3.1%)
49,600 America Movil S.A. de C.V.
(Series L) (ADR) (Mexico) 2,956,656
118,300 Nextel Communications, Inc.
(Class A)* 3,822,273
-------------
6,778,929
-------------
TOTAL COMMON STOCKS
(COST $182,547,402) 211,008,346
-------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
116
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ------------------------------------------------------------------------
SHORT-TERM INVESTMENT (2.6%)
REPURCHASE AGREEMENT
$ 5,695 Joint repurchase agreement
account 3.35% due 07/01/05
(dated 06/30/05; proceeds
$5,695,530) (a)
(COST $5,695,000) $ 5,695,000
-------------
TOTAL INVESTMENTS
(COST $188,242,402) (b) 98.3% 216,703,346
OTHER ASSETS IN EXCESS OF
LIABILITIES 1.7 3,673,529
----- -------------
NET ASSETS 100.0% $ 220,376,875
===== =============
</Table>
- ----------
ADR AMERICAN DEPOSITARY RECEIPT.
ADS AMERICAN DEPOSITARY SHARES.
* NON-INCOME PRODUCING SECURITY.
(a) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(b) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE
AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED
APPRECIATION IS $31,314,796 AND THE AGGREGATE GROSS UNREALIZED
DEPRECIATION IS $2,853,852, RESULTING IN NET UNREALIZED APPRECIATION OF
$28,460,944.
SEE NOTES TO FINANCIAL STATEMENTS
117
<Page>
AMERICAN OPPORTUNITIES
SUMMARY OF INVESTMENTS - JUNE 30, 2005 (UNAUDITED)
<Table>
<Caption>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ------------------------------------------------------------------------
Internet Software/Services $ 17,929,864 8.1%
Other Consumer Services 12,528,440 5.7
Medical Specialties 11,444,933 5.2
Managed Health Care 11,147,874 5.1
Pharmaceuticals: Major 11,122,516 5.0
Semiconductors 10,794,572 4.9
Biotechnology 10,007,988 4.5
Computer Processing
Hardware 9,715,518 4.4
Investment Banks/Brokers 9,065,013 4.1
Discount Stores 8,993,973 4.1
Food: Major Diversified 8,246,999 3.7
Chemicals: Agricultural 7,535,247 3.4
Industrial Conglomerates 7,033,275 3.2
Hotels/Resorts/Cruiselines 6,856,935 3.1
Wireless Telecommunications 6,778,929 3.1
Oil & Gas Production 6,016,138 2.7
Repurchase Agreement 5,695,000 2.6
Casino/Gaming 5,282,384 2.4
Household/Personal Care 4,915,214 2.2
Major Telecommunications 4,568,889 2.1
Integrated Oil 3,724,084 1.7
Home Improvement Chains 3,711,060 1.7
Electronics/
Appliance Stores 3,393,225 1.5
Financial Publishing/
Services $ 3,358,512 1.5%
Advertising/Marketing
Services 3,222,884 1.5
Telecommunication
Equipment 2,945,877 1.3
Other Metals/Minerals 2,586,550 1.2
Specialty
Telecommunications 2,419,462 1.1
Multi-Line Insurance 2,198,532 1.0
Property - Casualty Insurers 2,107,109 1.0
Apparel/Footwear Retail 2,022,520 0.9
Packaged Software 1,983,366 0.9
Data Processing Services 1,658,722 0.8
Recreational Products 1,545,180 0.7
Information Technology
Services 1,536,438 0.7
Coal 1,274,980 0.6
Miscellaneous Commercial
Services 1,013,928 0.5
Personnel Services 321,216 0.1
--------------- ----
$ 216,703,346 98.3%
=============== ====
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
118
<Page>
CAPITAL OPPORTUNITIES
PORTFOLIO OF INVESTMENTS - JUNE 30, 2005 (UNAUDITED)
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------
COMMON STOCKS (99.2%)
ADVERTISING/MARKETING
SERVICES (6.0%)
19,300 Getty Images, Inc.* $ 1,433,218
17,000 Lamar Advertising Co.
(Class A)* 727,090
-------------
2,160,308
-------------
AIR FREIGHT/COURIERS (1.8%)
11,200 C.H. Robinson Worldwide,
Inc. 651,840
-------------
CASINO/GAMING (7.6%)
31,900 International Game
Technology 897,985
20,200 Station Casinos, Inc. 1,341,280
10,405 Wynn Resorts, Ltd.* 491,845
-------------
2,731,110
-------------
CHEMICALS: AGRICULTURAL (3.1%)
17,730 Monsanto Co. 1,114,685
-------------
COMPUTER PROCESSING
HARDWARE (2.0%)
17,900 Dell, Inc.* 707,229
-------------
CONSTRUCTION MATERIALS (1.2%)
8,000 Rinker Group Ltd. (ADR)
(Australia) 424,720
-------------
DISCOUNT STORES (5.0%)
15,800 Costco Wholesale Corp. 708,156
7,300 Sears Holdings Corp.* 1,094,051
-------------
1,802,207
-------------
ELECTRONIC PRODUCTION
EQUIPMENT (2.1%)
23,000 Tessera Technologies,
Inc.* 768,430
-------------
FINANCIAL CONGLOMERATES (1.5%)
13,750 Brascan Corp. (Class A)
(Canada) 524,700
-------------
FINANCIAL PUBLISHING/
SERVICES (0.0%)
205 Moody's Corp. 9,217
-------------
GAS DISTRIBUTORS (1.0%)
5,600 Questar Corp. $ 369,040
-------------
HOME BUILDING (1.5%)
683 NVR, Inc.* 553,230
-------------
HOTELS/RESORTS/
CRUISELINES (3.9%)
25,700 Carnival Corp. (Panama) 1,401,935
-------------
INTERNET RETAIL (0.9%)
10,000 Amazon.com, Inc.* 330,800
-------------
INTERNET SOFTWARE/
SERVICES (8.3%)
6,650 Google, Inc. (Class A)* 1,956,098
29,700 Yahoo!, Inc.* 1,029,105
-------------
2,985,203
-------------
INVESTMENT BANKS/
BROKERS (5.0%)
3,330 Chicago Mercantile
Exchange Holding Inc. 984,015
20,283 Greenhill & Co., Inc. 821,664
-------------
1,805,679
-------------
MANAGED HEALTH CARE (1.4%)
9,800 UnitedHealth Group, Inc. 510,972
-------------
MEDICAL DISTRIBUTORS (1.5%)
11,900 Patterson Companies, Inc.* 536,452
-------------
MEDICAL SPECIALTIES (1.8%)
600 Alcon, Inc. (Switzerland) 65,610
8,600 Dade Behring Holdings Inc. 559,086
-------------
624,696
-------------
MISCELLANEOUS COMMERCIAL
SERVICES (5.3%)
24,050 Corporate Executive Board
Co. (The) 1,883,837
-------------
OIL & GAS PRODUCTION (5.3%)
62,100 Ultra Petroleum Corp.
(Canada)* 1,885,356
-------------
OTHER CONSUMER SERVICES (5.9%)
42,900 eBay, Inc.* 1,416,129
8,200 Strayer Education, Inc. 707,332
-------------
2,123,461
-------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
119
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------
OTHER METALS/MINERALS (1.1%)
8,500 Cameco Corporation
(Canada) $ 380,375
-------------
PACKAGED SOFTWARE (2.9%)
31,700 Red Hat, Inc.* 415,270
29,800 Salesforce.com Inc.* 610,304
-------------
1,025,574
-------------
PERSONNEL SERVICES (2.3%)
28,800 Monster Worldwide, Inc.* 825,984
-------------
PROPERTY - CASUALTY
INSURERS (2.9%)
236 Berkshire Hathaway, Inc.
(Class A)* 656,906
590 White Mountains Insurance
Group, Ltd. (Bermuda) 372,231
-------------
1,029,137
-------------
REAL ESTATE INVESTMENT
TRUSTS (1.5%)
14,700 Plum Creek Timber Co., Inc. 533,610
-------------
RECREATIONAL PRODUCTS (4.3%)
19,600 Electronic Arts, Inc.* 1,109,556
11,700 Shanda Interactive
Entertainment Ltd. (ADS)
(Cayman Islands)* 430,443
-------------
1,539,999
-------------
RESTAURANTS (1.7%)
10,120 P.F. Chang's China Bistro,
Inc.* 596,878
-------------
SEMICONDUCTORS (1.5%)
13,800 Marvell Technology Group
Ltd. (Bermuda)* 524,952
-------------
SERVICES TO THE HEALTH
INDUSTRY (1.0%)
7,075 Stericycle, Inc.* 356,014
-------------
SPECIALTY
TELECOMMUNICATIONS (2.4%)
41,518 Crown Castle International
Corp.* 843,646
-------------
TELECOMMUNICATION
EQUIPMENT (1.3%)
14,300 QUALCOMM Inc. $ 472,043
-------------
WHOLESALE DISTRIBUTORS (1.0%)
10,200 SCP Pool Corp. 357,918
-------------
WIRELESS
TELECOMMUNICATIONS (3.2%)
19,100 America Movil S.A. de C.V.
(Series L) (ADR) (Mexico) 1,138,551
-------------
TOTAL COMMON STOCKS
(COST $30,441,022) 35,529,788
-------------
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS
- -------------
SHORT-TERM INVESTMENT (0.7%)
REPURCHASE AGREEMENT
$ 276 Joint repurchase aggreement
3.35% due 07/01/05
(dated 06/30/05;
proceeds $276,026) (a)
(COST $276,000) 276,000
-------------
TOTAL INVESTMENTS
(COST $30,717,022) (b) 99.9% 35,805,788
OTHER ASSETS IN EXCESS OF
LIABILITIES 0.1 21,012
----- -------------
NET ASSETS 100.0% $ 35,826,800
===== =============
</Table>
- ----------
ADR AMERICAN DEPOSITARY RECEIPT.
ADS AMERICAN DEPOSITARY SHARES.
* NON-INCOME PRODUCING SECURITY.
(a) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(b) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE
AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED
APPRECIATION IS $6,141,048 AND THE AGGREGATE GROSS UNREALIZED
DEPRECIATION IS $1,052,282, RESULTING IN NET UNREALIZED APPRECIATION OF
$5,088,766.
SEE NOTES TO FINANCIAL STATEMENTS
120
<Page>
CAPITAL OPPORTUNITIES
SUMMARY OF INVESTMENTS - JUNE 30, 2005 (UNAUDITED)
<Table>
<Caption>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ------------------------------------------------------------------------
Internet Software/Services $ 2,985,203 8.3%
Casino/Gaming 2,731,110 7.6
Advertising/Marketing
Services 2,160,308 6.0
Other Consumer Services 2,123,461 5.9
Oil & Gas Production 1,885,356 5.3
Miscellaneous Commercial
Services 1,883,837 5.3
Investment Banks/Brokers 1,805,679 5.0
Discount Stores 1,802,207 5.0
Recreational Products 1,539,999 4.3
Hotels/Resorts/Cruiselines 1,401,935 3.9
Wireless Telecommunications 1,138,551 3.2
Chemicals: Agricultural 1,114,685 3.1
Property - Casualty Insurers 1,029,137 2.9
Packaged Software 1,025,574 2.9
Specialty
Telecommunications 843,646 2.4
Personnel Services 825,984 2.3
Electronic Production
Equipment 768,430 2.1
Computer Processing
Hardware 707,229 2.0
Air Freight/Couriers $ 651,840 1.8%
Medical Specialties 624,696 1.8
Restaurants 596,878 1.7
Home Building 553,230 1.5
Medical Distributors 536,452 1.5
Real Estate Investment Trusts 533,610 1.5
Semiconductors 524,952 1.5
Financial Conglomerates 524,700 1.5
Managed Health Care 510,972 1.4
Telecommunication
Equipment 472,043 1.3
Construction Materials 424,720 1.2
Other Metals/Minerals 380,375 1.1
Gas Distributors 369,040 1.0
Wholesale Distributors 357,918 1.0
Services to the Health
Industry 356,014 1.0
Internet Retail 330,800 0.9
Repurchase Agreement 276,000 0.7
Financial Publishing/Services 9,217 0.0
--------------- ----
$ 35,805,788 99.9%
=============== ====
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
121
<Page>
GLOBAL EQUITY
PORTFOLIO OF INVESTMENTS - JUNE 30, 2005 (UNAUDITED)
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------
COMMON STOCKS (95.9%)
BELGIUM+ (0.8%)
BEVERAGES: ALCOHOLIC
10,000 InBev NV $ 338,261
-------------
FINANCIAL CONGLOMERATES
8,000 Fortis 221,371
-------------
TOTAL BELGIUM 559,632
-------------
BRAZIL (0.2%)
WIRELESS TELECOMMUNICATIONS
33,763 Telesp Celular Participacoes
S.A. (ADR)* 144,168
-------------
CANADA (0.5%)
INTEGRATED OIL
8,000 Suncor Energy, Inc. 377,790
-------------
CHINA+ (0.1%)
ELECTRIC UTILITIES
100,000 Huaneng Power International,
Inc. (Class H) 73,234
-------------
FINLAND (1.8%)
PULP & PAPER
20,000 Stora Enso Oyj
(Registered Shares)+ 255,165
-------------
TELECOMMUNICATION EQUIPMENT
62,270 Nokia Corp. (ADR) 1,036,173
-------------
TOTAL FINLAND 1,291,338
-------------
FRANCE+ (8.8%)
ADVERTISING/MARKETING SERVICES
12,000 Publicis Groupe 353,105
-------------
BUILDING PRODUCTS
6,000 Compagnie de Saint-Gobain 331,614
-------------
ELECTRICAL PRODUCTS
4,000 Schneider Electric S.A. 300,687
-------------
ENGINEERING & CONSTRUCTION
6,000 Vinci S.A. 499,181
-------------
FOOD DISTRIBUTORS
8,000 Sodexho Alliance S.A. 246,679
-------------
FOOD: MAJOR DIVERSIFIED
4,000 Groupe Danone $ 350,755
-------------
HOTELS/RESORTS/CRUISELINES
8,000 Accor S.A. Ltd. 373,717
-------------
HOUSEHOLD/PERSONAL CARE
8,000 L'Oreal S.A. 573,899
-------------
INFORMATION TECHNOLOGY SERVICES
13,000 CapGemini S.A.* 411,538
-------------
INTEGRATED OIL
3,122 Total S.A. 731,207
-------------
INTERNET SOFTWARE/SERVICES
10,000 Business Objects S.A.* 264,054
-------------
MAJOR BANKS
3,000 Societe Generale 303,918
-------------
MAJOR TELECOMMUNICATIONS
10,000 France Telecom S.A. 290,554
-------------
MEDIA CONGLOMERATES
10,000 Vivendi Universal S.A. 313,200
-------------
MOTOR VEHICLES
4,000 PSA Peugeot Citroen 236,211
-------------
MULTI-LINE INSURANCE
25,000 Axa 621,813
-------------
REGIONAL BANKS
10,000 Credit Agricole S.A. 252,698
-------------
TOTAL FRANCE 6,454,830
-------------
GERMANY+ (7.7%)
AIR FREIGHT/COURIERS
10,000 Deutsche Post AG
(Registered Shares) 233,524
-------------
AIRLINES
20,000 Deutsche Lufthansa AG
(Registered Shares) 244,994
-------------
APPAREL/FOOTWEAR
2,500 Adidas-Salomon AG 417,102
-------------
AUTO PARTS: O.E.M.
4,000 Continental AG 287,591
-------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
122
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------
CHEMICALS: MAJOR DIVERSIFIED
8,000 BASF AG $ 530,305
-------------
ELECTRIC UTILITIES
5,000 E.ON AG 443,955
7,000 RWE AG 449,961
-------------
893,916
-------------
FINANCIAL CONGLOMERATES
12,000 Hypo Real Estate Holding AG 455,621
-------------
INDUSTRIAL CONGLOMERATES
8,000 MAN AG 331,110
3,000 Siemens AG
(Registered Shares) 218,120
-------------
549,230
-------------
MAJOR BANKS
18,000 Commerzbank AG 389,210
8,000 Deutsche Bank AG
(Registered Shares) 623,840
-------------
1,013,050
-------------
MAJOR TELECOMMUNICATIONS
20,000 Deutsche Telekom AG
(Registered Shares) 369,659
-------------
PACKAGED SOFTWARE
2,700 SAP AG 469,045
-------------
SEMICONDUCTORS
20,000 Infineon Technologies AG* 185,712
-------------
TOTAL GERMANY 5,649,749
-------------
IRELAND+ (0.3%)
MAJOR TELECOMMUNICATIONS
100,000 Eircom Group PLC 222,978
-------------
ITALY+ (0.4%)
INVESTMENT BANKS/BROKERS
15,000 Mediobanca SpA 280,220
-------------
JAPAN+ (7.7%)
ELECTRONIC COMPONENTS
3,000 Hoya Corp. 344,543
-------------
ELECTRONIC EQUIPMENT/INSTRUMENTS
7,000 Canon, Inc. $ 366,556
38,000 Konica Minolta Holdings, Inc. 352,756
21,000 Ricoh Co., Ltd. 326,225
-------------
1,045,537
-------------
ELECTRONICS/APPLIANCES
10,000 Fuji Photo Film Co., Ltd. 325,240
-------------
FINANCIAL CONGLOMERATES
80 Mizuho Financial Group, Inc. 360,174
-------------
FOOD RETAIL
3,000 Ito-Yokado Co., Ltd. 98,914
-------------
GAS DISTRIBUTORS
150,000 Tokyo Gas Co., Ltd. 559,897
-------------
HOUSEHOLD/PERSONAL CARE
10,000 Kao Corp. 235,545
-------------
INDUSTRIAL MACHINERY
5,900 Fanuc Ltd. 373,793
-------------
INVESTMENT BANKS/BROKERS
17,400 Nomura Holdings, Inc. 206,544
-------------
MAJOR TELECOMMUNICATIONS
50 Nippon Telegraph & Telephone
Corp. (NTT) 214,245
-------------
MOTOR VEHICLES
8,000 Toyota Motor Corp. 285,942
-------------
PHARMACEUTICALS: MAJOR
15,000 Takeda Pharmaceutical
Co., Ltd. 741,429
-------------
RAILROADS
90 East Japan Railway Co. 461,260
-------------
RECREATIONAL PRODUCTS
4,000 Nintendo Co., Ltd. 416,564
-------------
TOTAL JAPAN 5,669,627
-------------
NETHERLANDS+ (3.0%)
AIR FREIGHT/COURIERS
10,000 TNT NV 253,240
-------------
ELECTRONIC PRODUCTION EQUIPMENT
15,000 ASML Holding NV* 234,512
-------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
123
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------
FINANCIAL CONGLOMERATES
15,000 ING Groep NV
(Share Certificates) $ 422,055
-------------
INTEGRATED OIL
5,000 Royal Dutch Petroleum Co. 325,455
-------------
LIFE/HEALTH INSURANCE
25,000 Aegon NV 322,331
-------------
PERSONNEL SERVICES
25,000 Vedior NV
(Share Certificates) 351,578
-------------
SEMICONDUCTORS
20,000 STMicroelectronics NV 318,355
-------------
TOTAL NETHERLANDS 2,227,526
-------------
NORWAY+ (1.1%)
INTEGRATED OIL
25,000 Statoil ASA 507,782
-------------
MAJOR TELECOMMUNICATIONS
40,000 Telenor ASA 317,381
-------------
TOTAL NORWAY 825,163
-------------
PHILIPPINES (0.3%)
SPECIALTY TELECOMMUNICATIONS
7,000 Philippine Long Distance
Telephone Co. (ADR) 203,350
-------------
SINGAPORE (1.5%)
ELECTRONIC COMPONENTS
83,760 Flextronics International Ltd.* 1,106,470
-------------
SOUTH KOREA (0.3%)
WIRELESS TELECOMMUNICATIONS
10,000 SK Telecom Co., Ltd. (ADR) 204,000
-------------
SPAIN+ (0.4%)
APPAREL/FOOTWEAR RETAIL
12,000 Industria de Diseno
Textil, S.A. 308,221
-------------
SWEDEN+ (0.4%)
TELECOMMUNICATION EQUIPMENT
80,000 Telefonaktiebolaget LM
Ericsson (B Shares) 255,400
-------------
SWITZERLAND+ (1.4%)
FINANCIAL CONGLOMERATES
6,000 UBS AG
(Registered Shares) $ 466,977
-------------
MAJOR BANKS
5,000 Credit Suisse Group
(Registered Shares) 196,180
-------------
PHARMACEUTICALS: MAJOR
8,000 Novartis AG
(Registered Shares) 380,005
-------------
TOTAL SWITZERLAND 1,043,162
-------------
UNITED KINGDOM (6.9%)
ADVERTISING/MARKETING
SERVICES
40,000 WPP Group PLC+ 410,177
-------------
AIRLINES
40,000 British Airways PLC+* 187,976
-------------
FOOD: SPECIALTY/CANDY
50,000 Cadbury Schweppes PLC+ 475,783
-------------
HOTELS/RESORTS/CRUISELINES
10,000 Carnival PLC+ 567,721
-------------
INTEGRATED OIL
7,256 BP PLC (ADR) 452,629
-------------
INVESTMENT MANAGERS
60,000 Amvescap PLC+ 355,765
-------------
MAJOR BANKS
12,000 Royal Bank of Scotland
Group PLC+ 361,226
10,000 Standard Chartered PLC+ 182,196
-------------
543,422
-------------
MEDICAL SPECIALTIES
25,000 Smith & Nephew PLC+ 245,970
-------------
MISCELLANEOUS COMMERCIAL
SERVICES
80,000 Group 4 Securicor PLC+ 209,655
-------------
OTHER METALS/MINERALS
20,000 BHP Billiton PLC+ 256,427
10,300 Rio Tinto PLC+ 313,474
-------------
569,901
-------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
124
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------
PHARMACEUTICALS: MAJOR
16,000 GlaxoSmithKline PLC+ $ 385,891
-------------
WIRELESS TELECOMMUNICATIONS
251,534 Vodafone Group PLC+ 610,964
-------------
TOTAL UNITED KINGDOM 5,015,854
-------------
UNITED STATES (52.3%)
AEROSPACE & DEFENSE
17,210 Northrop Grumman Corp. 950,852
24,180 Raytheon Co. 945,922
-------------
1,896,774
-------------
AGRICULTURAL COMMODITIES/MILLING
53,615 Archer-Daniels-Midland Co. 1,146,289
-------------
BEVERAGES: NON-ALCOHOLIC
23,960 Coca-Cola Co. (The) 1,000,330
-------------
BIOTECHNOLOGY
23,915 Gilead Sciences, Inc.* 1,052,021
-------------
CHEMICALS: AGRICULTURAL
13,530 Monsanto Co. 850,631
-------------
CHEMICALS: MAJOR DIVERSIFIED
17,050 Dow Chemical Co. (The) 759,237
-------------
COMPUTER COMMUNICATIONS
54,130 Cisco Systems, Inc.* 1,034,424
-------------
COMPUTER PROCESSING HARDWARE
26,360 Apple Computer, Inc.* 970,312
-------------
DISCOUNT STORES
20,735 Costco Wholesale Corp. 929,343
-------------
ELECTRICAL PRODUCTS
14,205 Emerson Electric Co. 889,659
-------------
ELECTRONIC PRODUCTION EQUIPMENT
64,300 Applied Materials, Inc. 1,040,374
-------------
ENVIRONMENTAL SERVICES
31,860 Waste Management, Inc. 902,912
-------------
FINANCIAL CONGLOMERATES
24,980 American Express Co. 1,329,685
28,080 Citigroup, Inc. 1,298,138
37,045 JPMorgan Chase & Co. 1,308,429
-------------
3,936,252
-------------
FOOD: MAJOR DIVERSIFIED
23,645 Kellogg Co. $ 1,050,784
5,461 TreeHouse Foods, Inc.* 155,693
-------------
1,206,477
-------------
FOOD: MEAT/FISH/DAIRY
27,305 Dean Foods Co.* 962,228
-------------
HOUSEHOLD/PERSONAL CARE
20,265 Gillette Co. (The) 1,026,017
-------------
INDUSTRIAL CONGLOMERATES
25,770 General Electric Co. 892,931
-------------
INFORMATION TECHNOLOGY SERVICES
13,890 International Business
Machines Corp. 1,030,638
-------------
INTEGRATED OIL
28,900 Exxon Mobil Corp. 1,660,883
-------------
MAJOR BANKS
28,570 Bank of America Corp. 1,303,078
-------------
MAJOR TELECOMMUNICATIONS
45,535 SBC Communications, Inc. 1,081,456
-------------
MEDIA CONGLOMERATES
53,450 Time Warner, Inc.* 893,150
-------------
MEDICAL SPECIALTIES
14,250 Bard (C.R.), Inc. 947,768
15,805 Fisher Scientific International,
Inc.* 1,025,745
-------------
1,973,513
-------------
OIL & GAS PRODUCTION
32,110 Burlington Resources, Inc. 1,773,756
-------------
PHARMACEUTICALS: MAJOR
14,550 Johnson & Johnson 945,750
16,660 Lilly (Eli) & Co. 928,129
34,810 Pfizer, Inc. 960,060
-------------
2,833,939
-------------
SEMICONDUCTORS
39,220 Intel Corp. 1,022,073
-------------
SPECIALTY STORES
23,180 Bed Bath & Beyond Inc.* 968,460
-------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
125
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------
TELECOMMUNICATION EQUIPMENT
69,480 Corning, Inc.* $ 1,154,758
61,590 Motorola, Inc. 1,124,633
-------------
2,279,391
TRUCKS/CONSTRUCTION/FARM
MACHINERY
10,135 Caterpillar, Inc. 965,967
-------------
TOTAL UNITED STATES 38,282,515
-------------
TOTAL COMMON STOCKS
(COST $64,289,089) 70,195,227
-------------
PREFERRED STOCKS (0.4%)
GERMANY+
BROADCASTING
15,500 ProSiebenSat.1 Media AG
(COST $228,843) 266,119
-------------
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ------------------------------------------------------------------------
SHORT-TERM INVESTMENT (3.7%)
REPURCHASE AGREEMENT
$ 2,719 Joint repurchase agreement
account 3.35% due
07/01/05 (dated 06/30/05;
proceeds $2,719,253) (a)
(COST $2,719,000) $ 2,719,000
-------------
TOTAL INVESTMENTS
(COST $67,236,932) (b) 100.0% 73,180,346
OTHER ASSETS IN EXCESS OF
LIABILITIES 0.0 21,429
----- -------------
NET ASSETS 100.0% $ 73,201,775
===== =============
</Table>
- ----------
ADR AMERICAN DEPOSITARY RECEIPT.
* NON-INCOME PRODUCING SECURITY.
+ SECURITIES WITH TOTAL MARKET VALUE EQUAL TO $28,654,251 HAVE BEEN VALUED
AT THEIR FAIR VALUE AS DETERMINED IN GOOD FAITH UNDER PROCEDURES
ESTABLISHED BY AND UNDER THE GENERAL SUPERVISION OF THE FUND'S TRUSTEES.
(a) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(b) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE
AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED
APPRECIATION IS $10,505,084 AND THE AGGREGATE GROSS UNREALIZED
DEPRECIATION IS $4,561,670, RESULTING IN NET UNREALIZED APPRECIATION OF
$5,943,414.
SEE NOTES TO FINANCIAL STATEMENTS
126
<Page>
GLOBAL EQUITY
SUMMARY OF INVESTMENTS - JUNE 30, 2005 (UNAUDITED)
<Table>
<Caption>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ------------------------------------------------------------------------
Financial Conglomerates $ 5,862,450 8.0%
Pharmaceuticals: Major 4,341,264 5.9
Integrated Oil 4,055,746 5.5
Telecommunication
Equipment 3,570,964 4.9
Major Banks 3,359,648 4.6
Repurchase Agreement 2,719,000 3.7
Major Telecommunications 2,496,273 3.4
Medical Specialties 2,219,483 3.0
Aerospace & Defense 1,896,774 2.6
Household/Personal Care 1,835,461 2.5
Oil & Gas Production 1,773,756 2.4
Food: Major Diversified 1,557,232 2.1
Semiconductors 1,526,140 2.1
Electronic Components 1,451,013 2.0
Information Technology
Services 1,442,176 2.0
Industrial Conglomerates 1,442,161 2.0
Chemicals: Major Diversified 1,289,542 1.8
Electronic Production
Equipment 1,274,886 1.7
Media Conglomerates 1,206,350 1.7
Electrical Products 1,190,346 1.6
Agricultural Commodities/
Milling 1,146,289 1.6
Biotechnology 1,052,021 1.4
Electronic Equipment/
Instruments 1,045,537 1.4
Computer Communications 1,034,424 1.4
Beverages: Non-Alcoholic 1,000,330 1.4
Computer Processing
Hardware 970,312 1.3
Specialty Stores 968,460 1.3
Electric Utilities 967,150 1.3
Trucks/Construction/
Farm Machinery 965,967 1.3
Food: Meat/Fish/Dairy 962,228 1.3
Wireless Telecommunications 959,132 1.3
Hotels/Resorts/Cruiselines 941,438 1.3
Discount Stores $ 929,343 1.3%
Environmental Services 902,912 1.2
Chemicals: Agricultural 850,631 1.2
Advertising/Marketing
Services 763,282 1.0
Multi-Line Insurance 621,813 0.9
Other Metals/Minerals 569,901 0.8
Gas Distributors 559,897 0.8
Motor Vehicles 522,153 0.7
Engineering & Construction 499,181 0.7
Air Freight/Couriers 486,764 0.7
Investment Banks/Brokers 486,764 0.7
Food: Specialty/Candy 475,783 0.7
Packaged Software 469,045 0.6
Railroads 461,260 0.6
Airlines 432,970 0.6
Apparel/Footwear 417,102 0.6
Recreational Products 416,564 0.6
Industrial Machinery 373,793 0.5
Investment Managers 355,765 0.5
Personnel Services 351,578 0.5
Beverages: Alcoholic 338,261 0.5
Building Products 331,614 0.5
Electronics/Appliances 325,240 0.4
Life/Health Insurance 322,331 0.4
Apparel/Footwear Retail 308,221 0.4
Auto Parts: O.E.M 287,591 0.4
Broadcasting 266,119 0.4
Internet Software/Services 264,054 0.4
Pulp & Paper 255,165 0.3
Regional Banks 252,698 0.3
Food Distributors 246,679 0.3
Miscellaneous Commercial
Services 209,655 0.3
Specialty
Telecommunications 203,350 0.3
Food Retail 98,914 0.1
--------------- -----
$ 73,180,346 100.0%
=============== =====
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
127
<Page>
DEVELOPING GROWTH
PORTFOLIO OF INVESTMENTS - JUNE 30, 2005 (UNAUDITED)
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------
COMMON STOCKS (97.7%)
ADVERTISING/MARKETING
SERVICES (4.9%)
22,225 Getty Images, Inc.* $ 1,650,429
25,600 Lamar Advertising Co.
(Class A)* 1,094,912
-------------
2,745,341
-------------
AIR FREIGHT/COURIERS (2.9%)
18,850 C.H. Robinson Worldwide, Inc. 1,097,070
10,900 Expeditors International of
Washington, Inc. 542,929
-------------
1,639,999
-------------
APPAREL/FOOTWEAR RETAIL (2.2%)
15,850 Chico's FAS, Inc.* 543,338
12,000 Urban Outfitters, Inc.* 680,280
-------------
1,223,618
-------------
BIOTECHNOLOGY (1.8%)
8,100 Affymetrix, Inc.* 436,833
16,700 Gen-Probe Inc.* 605,041
-------------
1,041,874
-------------
BROADCASTING (0.7%)
14,300 Univision Communications, Inc.
(Class A)* 393,965
-------------
CASINO/GAMING (7.7%)
46,500 International Game
Technology 1,308,975
18,500 Penn National Gaming, Inc.* 675,250
24,175 Station Casinos, Inc. 1,605,220
15,940 Wynn Resorts, Ltd.* 753,484
-------------
4,342,929
-------------
CHEMICALS: AGRICULTURAL (0.9%)
8,300 Monsanto Co. 521,821
-------------
COMPUTER PERIPHERALS (0.9%)
18,500 Network Appliance, Inc.* 522,995
-------------
CONSTRUCTION MATERIALS (1.5%)
15,800 Rinker Group Ltd. (ADR)
(Australia) 838,822
-------------
CONTAINERS/PACKAGING (1.0%)
10,800 Sealed Air Corp.* 537,732
-------------
DATA PROCESSING
SERVICES (1.0%)
8,300 Global Payments Inc. $ 562,740
-------------
DISCOUNT STORES (1.5%)
26,900 BJ's Wholesale Club, Inc.* 873,981
-------------
ELECTRONIC EQUIPMENT/
INSTRUMENTS (0.9%)
21,789 Dolby Laboratories Inc.
(Class A)* 480,665
-------------
ELECTRONIC PRODUCTION
EQUIPMENT (1.5%)
25,900 Tessera Technologies, Inc.* 865,319
-------------
FINANCIAL CONGLOMERATES (1.5%)
21,550 Brascan Corp. (Class A)
(Canada) 822,348
-------------
FINANCIAL PUBLISHING/
SERVICES (0.0%)
540 Moody's Corp. 24,278
-------------
GAS DISTRIBUTORS (1.1%)
9,500 Questar Corp. 626,050
-------------
HOME BUILDING (2.0%)
1,396 NVR, Inc.* 1,130,760
-------------
INSURANCE BROKERS/
SERVICES (1.0%)
14,000 ChoicePoint, Inc.* 560,700
-------------
INTERNET RETAIL (1.3%)
22,100 Amazon.com, Inc.* 731,068
-------------
INTERNET SOFTWARE/
SERVICES (2.2%)
33,600 Akamai Technologies, Inc.* 441,168
7,000 Netease.com Inc. (ADR)
(Cayman Islands)* 399,770
13,900 SINA Corp.
(Cayman Island)* 387,810
-------------
1,228,748
-------------
INVESTMENT BANKS/BROKERS (3.7%)
32,300 Ameritrade Holding Corp.* 600,457
5,115 Chicago Mercantile Exchange
Holding Inc. 1,511,483
-------------
2,111,940
-------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
128
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------
INVESTMENT MANAGERS (1.7%)
34,381 Calamos Asset Management
Inc. (Class A) $ 936,538
-------------
MEDICAL DISTRIBUTORS (1.4%)
17,500 Patterson Companies, Inc.* 788,900
-------------
MEDICAL SPECIALTIES (5.7%)
5,350 Cooper Companies, Inc. (The) 325,601
11,900 Dade Behring Holdings Inc. 773,619
6,356 Fisher Scientific International,
Inc.* 412,504
6,400 INAMED Corp.* 428,608
9,678 Kinetic Concepts, Inc.* 580,680
16,300 St. Jude Medical, Inc.* 710,843
-------------
3,231,855
-------------
MEDICAL/NURSING SERVICES (0.9%)
20,875 VCA Antech, Inc.* 506,219
-------------
MISCELLANEOUS COMMERCIAL
SERVICES (6.6%)
29,750 Corporate Executive Board
Co. (The) 2,330,318
27,420 Iron Mountain Inc.* 850,568
11,200 Laureate Education Inc.* 536,032
-------------
3,716,918
-------------
MOTOR VEHICLES (1.5%)
16,800 Harley-Davidson, Inc. 833,280
-------------
MOVIES/ENTERTAINMENT (0.7%)
7,100 International Speedway Corp.
(Class A) 399,446
-------------
OIL & GAS PRODUCTION (3.8%)
69,790 Ultra Petroleum Corp.
(Canada)* 2,118,825
-------------
OTHER CONSUMER SERVICES (4.9%)
14,700 Career Education Corp.* 538,167
12,000 ITT Educational Services,
Inc.* 641,040
12,000 Strayer Education, Inc. 1,035,120
10,800 Weight Watchers International,
Inc.* 557,388
-------------
2,771,715
-------------
OTHER METALS/MINERALS (1.6%)
20,350 Cameco Corporation
(Canada) $ 910,663
-------------
PACKAGED SOFTWARE (2.6%)
43,500 Red Hat, Inc.* 569,850
44,400 Salesforce.com Inc.* 909,312
-------------
1,479,162
-------------
PERSONNEL SERVICES (2.3%)
44,700 Monster Worldwide, Inc.* 1,281,996
-------------
PROPERTY - CASUALTY
INSURERS (1.4%)
1,235 White Mountains Insurance
Group, Ltd. (Bermuda) 779,162
-------------
REAL ESTATE DEVELOPMENT (2.1%)
13,775 CB Richard Ellis Group, Inc.
(Class A) 604,172
6,800 St. Joe Co. (The) 554,472
-------------
1,158,644
-------------
REAL ESTATE INVESTMENT
TRUSTS (1.4%)
21,800 Plum Creek Timber Co., Inc. 791,340
-------------
RECREATIONAL PRODUCTS (2.8%)
31,266 Activision, Inc.* 516,514
9,700 Polaris Industries Inc. 523,800
15,000 Shanda Interactive
Entertainment Ltd. (ADS)
(Cayman Islands)* 551,850
-------------
1,592,164
-------------
RESTAURANTS (3.0%)
24,700 Cheesecake Factory,
Inc. (The)* 857,831
14,100 P.F. Chang's China Bistro,
Inc.* 831,618
-------------
1,689,449
-------------
SEMICONDUCTORS (1.5%)
21,700 Marvell Technology Group
Ltd. (Bermuda)* 825,468
-------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
129
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------
SERVICES TO THE HEALTH
INDUSTRY (1.5%)
16,475 Stericycle, Inc.* $ 829,022
-------------
SPECIALTY STORES (1.9%)
12,700 Bed Bath & Beyond Inc.* 530,606
11,400 Tractor Supply Co.* 559,740
-------------
1,090,346
-------------
SPECIALTY
TELECOMMUNICATIONS (2.3%)
63,582 Crown Castle International
Corp.* 1,291,986
-------------
WHOLESALE DISTRIBUTORS (1.0%)
15,600 SCP Pool Corp. 547,404
-------------
WIRELESS
TELECOMMUNICATIONS (2.9%)
25,350 NII Holdings, Inc. (Class B)* 1,620,879
-------------
TOTAL COMMON STOCKS
(COST $48,234,500) 55,019,074
-------------
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ------------------------------------------------------------------------
SHORT-TERM INVESTMENT (0.3%)
REPURCHASE AGREEMENT
$ 188 Joint repurchase agreement
account 3.35% due
07/01/05 (dated 06/30/05;
proceeds $188,017) (a)
(COST $188,000) $ 188,000
-------------
TOTAL INVESTMENTS
(COST $48,422,500) (b) 98.0% 55,207,074
OTHER ASSETS IN EXCESS OF
LIABILITIES 2.0 1,122,841
----- -------------
NET ASSETS 100.0% $ 56,329,915
===== =============
</Table>
- ----------
ADR AMERICAN DEPOSITARY RECEIPT.
ADS AMERICAN DEPOSITARY SHARES.
* NON-INCOME PRODUCING SECURITY.
(a) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(b) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE
AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED
APPRECIATION IS $8,131,707 AND THE AGGREGATE GROSS UNREALIZED
DEPRECIATION IS $1,347,133 RESULTING IN NET UNREALIZED APPRECIATION OF
$6,784,574.
SEE NOTES TO FINANCIAL STATEMENTS
130
<Page>
DEVELOPING GROWTH
SUMMARY OF INVESTMENTS - JUNE 30, 2005 (UNAUDITED)
<Table>
<Caption>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ------------------------------------------------------------------------
Casino/Gaming $ 4,342,929 7.7%
Miscellaneous Commercial
Services 3,716,918 6.6
Medical Specialties 3,231,855 5.7
Other Consumer Services 2,771,715 4.9
Advertising/Marketing
Services 2,745,341 4.9
Oil & Gas Production 2,118,825 3.8
Investment Banks/Brokers 2,111,940 3.7
Restaurants 1,689,449 3.0
Air Freight/Couriers 1,639,999 2.9
Wireless Telecommunications 1,620,879 2.9
Recreational Products 1,592,164 2.8
Packaged Software 1,479,162 2.6
Specialty
Telecommunications 1,291,986 2.3
Personnel Services 1,281,996 2.3
Internet Software/Services 1,228,748 2.2
Apparel/Footwear Retail 1,223,618 2.2
Real Estate Development 1,158,644 2.1
Home Building 1,130,760 2.0
Specialty Stores 1,090,346 1.9
Biotechnology 1,041,874 1.8
Investment Managers 936,538 1.7
Other Metals/Minerals 910,663 1.6
Discount Stores 873,981 1.5
Electronic Production
Equipment 865,319 1.5
Construction Materials $ 838,822 1.5%
Motor Vehicles 833,280 1.5
Services to the Health
Industry 829,022 1.5
Semiconductors 825,468 1.5
Financial Conglomerates 822,348 1.5
Real Estate Investment Trusts 791,340 1.4
Medical Distributors 788,900 1.4
Property - Casualty Insurers 779,162 1.4
Internet Retail 731,068 1.3
Gas Distributors 626,050 1.1
Data Processing Services 562,740 1.0
Insurance Brokers/Services 560,700 1.0
Wholesale Distributors 547,404 1.0
Containers/Packaging 537,732 1.0
Computer Peripherals 522,995 0.9
Chemicals: Agricultural 521,821 0.9
Medical/Nursing Services 506,219 0.9
Electronic Equipment/
Instruments 480,665 0.9
Movies/Entertainment 399,446 0.7
Broadcasting 393,965 0.7
Repurchase Agreement 188,000 0.3
Financial Publishing/Services 24,278 0.0
--------------- ----
$ 55,207,074 98.0%
=============== ====
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
131
<Page>
MORGAN STANLEY SELECT DIMENSIONS INVESTMENT SERIES
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 2005 (UNAUDITED)
<Table>
<Caption>
MONEY FLEXIBLE BALANCED
MARKET INCOME GROWTH
---------------- ---------------- ----------------
ASSETS:
Investments in securities, at value* $ 94,756,150 $ 65,162,164 $ 94,888,136
Investment in affiliates -- -- --
Cash 20,683 100,000 756
Receivable for:
Investments sold -- 276,288 298,721
Interest/principal paydowns 71,929 842,094 369,089
Dividends -- -- 121,469
Shares of beneficial interest sold 218,016 23,162 5,383
Foreign withholding taxes reclaimed -- -- --
Prepaid expenses and other assets 3,588 2,560 3,537
---------------- ---------------- ----------------
TOTAL ASSETS 95,070,366 66,406,268 95,687,091
---------------- ---------------- ----------------
LIABILITIES:
Payable for:
Investments purchased -- 703,953 1,199,843
Shares of beneficial interest redeemed 274,779 62,262 26,785
Investment advisory fee 34,934 17,309 40,823
Variation margin -- 33,937 16,125
Distribution fee 7,501 5,354 5,434
Administration fee 3,882 4,471 6,280
Payable to bank -- 10,549 --
Unrealized depreciation on open forward foreign currency contracts -- 782 --
Accrued expenses and other payables 18,804 116,034 23,756
---------------- ---------------- ----------------
TOTAL LIABILITIES 339,900 954,651 1,319,046
---------------- ---------------- ----------------
NET ASSETS $ 94,730,466 $ 65,451,617 $ 94,368,045
================ ================ ================
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 94,730,431 $ 88,557,117 $ 82,731,199
Accumulated undistributed net investment income (loss) 35 (257,591) (191,056)
Accumulated net realized gain (loss) -- (19,706,517) (1,352,243)
Net unrealized appreciation (depreciation) -- (3,141,392) 13,180,145
---------------- ---------------- ----------------
NET ASSETS $ 94,730,466 $ 65,451,617 $ 94,368,045
================ ================ ================
*COST $ 94,756,150 $ 68,200,122 $ 81,652,199
================ ================ ================
CLASS X SHARES:
Net Assets $ 57,124,501 $ 39,409,494 $ 67,960,539
Shares Outstanding (unlimited authorized shares of $.01 par value) 57,124,498 5,283,155 4,202,013
NET ASSET VALUE PER SHARE $ 1.00 $ 7.46 $ 16.17
================ ================ ================
CLASS Y SHARES:
Net Assets $ 37,605,965 $ 26,042,123 $ 26,407,506
Shares Outstanding (unlimited authorized shares of $.01 par value) 37,605,932 3,507,556 1,636,382
NET ASSET VALUE PER SHARE $ 1.00 $ 7.42 $ 16.14
================ ================ ================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
132
<Page>
<Table>
<Caption>
EQUALLY-
DIVIDEND WEIGHTED
UTILITIES GROWTH S&P 500
---------------- ---------------- ----------------
ASSETS:
Investments in securities, at value* $ 80,218,592 $ 322,016,194 $ 217,819,200
Investment in affiliates -- -- --
Cash 240 927 331
Receivable for:
Investments sold -- 2,017,395 --
Interest/principal paydowns 26,704 510 131
Dividends 176,233 233,305 234,543
Shares of beneficial interest sold 22,500 1,350 59,056
Foreign withholding taxes reclaimed 385 14,038 --
Prepaid expenses and other assets 2,678 13,250 9,602
---------------- ---------------- ----------------
TOTAL ASSETS 80,447,332 324,296,969 218,122,863
---------------- ---------------- ----------------
LIABILITIES:
Payable for:
Investments purchased -- 1,838,616 --
Shares of beneficial interest redeemed 36,035 254,294 100,126
Investment advisory fee 36,885 139,360 21,566
Variation margin -- -- 4,413
Distribution fee 3,346 11,585 18,333
Administration fee 5,177 21,652 14,377
Payable to bank -- -- --
Unrealized depreciation on open forward foreign currency contracts -- -- --
Accrued expenses and other payables 16,776 30,397 28,213
---------------- ---------------- ----------------
TOTAL LIABILITIES 98,219 2,295,904 187,028
---------------- ---------------- ----------------
NET ASSETS $ 80,349,113 $ 322,001,065 $ 217,935,835
================ ================ ================
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 83,918,985 $ 406,714,303 $ 136,959,318
Accumulated undistributed net investment income (loss) (7,028) -- 1,268,738
Accumulated net realized gain (loss) (35,939,668) (150,914,510) 3,879,355
Net unrealized appreciation (depreciation) 32,376,824 66,201,272 75,828,424
---------------- ---------------- ----------------
NET ASSETS $ 80,349,113 $ 322,001,065 $ 217,935,835
================ ================ ================
*COST $ 47,841,768 $ 255,814,922 $ 141,991,322
================ ================ ================
CLASS X SHARES:
Net Assets $ 63,645,191 $ 266,831,65 $ 128,060,475
Shares Outstanding (unlimited authorized shares of $.01 par value) 3,063,365 17,215,501 5,346,931
NET ASSET VALUE PER SHARE $ 20.78 $ 15.50 $ 23.95
================ ================ ================
CLASS Y SHARES:
Net Assets $ 16,703,922 $ 55,169,406 $ 89,875,360
Shares Outstanding (unlimited authorized shares of $.01 par value) 804,525 3,564,614 3,782,999
NET ASSET VALUE PER SHARE $ 20.76 $ 15.48 $ 23.76
================ ================ ================
<Caption>
AMERICAN CAPITAL
GROWTH OPPORTUNITIES OPPORTUNITIES
---------------- ---------------- ----------------
ASSETS:
Investments in securities, at value* $ 45,752,670 $ 214,504,814 $ 35,805,788
Investment in affiliates -- 2,198,532 --
Cash 337 540 245
Receivable for:
Investments sold 995,195 4,149,679 542,380
Interest/principal paydowns -- 530 --
Dividends 10,647 86,480 8,827
Shares of beneficial interest sold 16,596 791 50
Foreign withholding taxes reclaimed -- 4,019 813
Prepaid expenses and other assets 1,927 9,743 1,037
---------------- ---------------- ----------------
TOTAL ASSETS 46,777,372 220,955,128 36,359,140
---------------- ---------------- ----------------
LIABILITIES:
Payable for:
Investments purchased 669,817 322,958 458,924
Shares of beneficial interest redeemed 39,953 101,348 29,260
Investment advisory fee 18,809 100,415 19,795
Variation margin -- -- --
Distribution fee 3,116 8,112 2,783
Administration fee 3,009 14,740 2,364
Payable to bank -- -- --
Unrealized depreciation on open forward foreign currency contracts -- -- --
Accrued expenses and other payables 23,742 30,680 19,214
---------------- ---------------- ----------------
TOTAL LIABILITIES 758,446 578,253 532,340
---------------- ---------------- ----------------
NET ASSETS $ 46,018,926 $ 220,376,875 $ 35,826,800
================ ================ ================
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 77,269,220 $ 451,179,431 $ 118,708,163
Accumulated undistributed net investment income (loss) (26,695) 170,687 (86,858)
Accumulated net realized gain (loss) (35,513,988) (259,435,286) (87,883,271)
Net unrealized appreciation (depreciation) 4,290,389 28,462,043 5,088,766
---------------- ---------------- ----------------
NET ASSETS $ 46,018,926 $ 220,376,875 $ 35,826,800
================ ================ ================
*COST $ 41,462,281 $ 188,242,402 $ 30,717,022
================ ================ ================
CLASS X SHARES:
Net Assets $ 30,377,600 $ 181,435,553 $ 22,256,159
Shares Outstanding (unlimited authorized shares of $.01 par value) 2,003,460 12,230,974 2,288,699
NET ASSET VALUE PER SHARE $ 15.16 $ 14.83 $ 9.72
================ ================ ================
CLASS Y SHARES:
Net Assets $ 15,641,326 $ 38,941,322 $ 13,570,641
Shares Outstanding (unlimited authorized shares of $.01 par value) 1,040,635 2,635,710 1,412,967
NET ASSET VALUE PER SHARE $ 15.03 $ 14.77 $ 9.60
================ ================ ================
<Caption>
DEVELOPING
GLOBAL EQUITY GROWTH
---------------- ----------------
ASSETS:
Investments in securities, at value* $ 73,180,346 $ 55,207,074
Investment in affiliates -- --
Cash 3,160 720
Receivable for:
Investments sold -- 2,032,591
Interest/principal paydowns -- --
Dividends 82,638 29,037
Shares of beneficial interest sold 732 534
Foreign withholding taxes reclaimed 52,417 --
Prepaid expenses and other assets 5,647 3,782
---------------- ----------------
TOTAL ASSETS 73,324,940 57,273,738
---------------- ----------------
LIABILITIES:
Payable for:
Investments purchased -- 800,361
Shares of beneficial interest redeemed 33,938 80,688
Investment advisory fee 56,367 19,406
Variation margin -- --
Distribution fee 1,736 1,829
Administration fee 4,902 3,696
Payable to bank -- 16,980
Unrealized depreciation on open forward foreign currency contracts -- --
Accrued expenses and other payables 26,222 20,863
---------------- ----------------
TOTAL LIABILITIES 123,165 943,823
---------------- ----------------
NET ASSETS $ 73,201,775 $ 56,329,915
================ ================
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 67,104,531 $ 83,941,493
Accumulated undistributed net investment income (loss) 427,183 (46,201)
Accumulated net realized gain (loss) (275,958) (34,349,951)
Net unrealized appreciation (depreciation) 5,946,019 6,784,574
---------------- ----------------
NET ASSETS $ 73,201,775 $ 56,329,915
================ ================
*COST $ 67,236,932 $ 48,422,500
================ ================
CLASS X SHARES:
Net Assets $ 64,842,252 $ 47,346,556
Shares Outstanding (unlimited authorized shares of $.01 par value) 4,294,999 2,292,578
NET ASSET VALUE PER SHARE $ 15.10 $ 20.65
================ ================
CLASS Y SHARES:
Net Assets $ 8,359,523 $ 8,983,359
Shares Outstanding (unlimited authorized shares of $.01 par value) 556,754 440,477
NET ASSET VALUE PER SHARE $ 15.01 $ 20.39
================ ================
</Table>
133
<Page>
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 (UNAUDITED)
<Table>
<Caption>
MONEY FLEXIBLE BALANCED
MARKET INCOME GROWTH
---------------- ---------------- ----------------
INVESTMENT INCOME:
INCOME
Interest $ 1,327,541 $ 1,969,298 $ 713,947
Interest and dividends from affiliates -- -- --
Dividends -- 18,903 728,210*
---------------- ---------------- ----------------
TOTAL INCOME 1,327,541 1,988,201 1,442,157
---------------- ---------------- ----------------
EXPENSES
Investment advisory fee 216,583 107,118 253,376
Distribution fee (Class Y shares) 43,126 32,583 32,984
Administration fee 24,065 26,923 38,981
Shareholder reports and notices 8,610 8,431 7,739
Professional fees 10,926 20,931 9,966
Custodian fees 5,848 20,039 17,762
Trustees' fees and expenses 573 387 563
Transfer agent fees and expenses 250 250 250
Other 2,546 25,138 8,222
---------------- ---------------- ----------------
TOTAL EXPENSES 312,527 241,800 369,843
---------------- ---------------- ----------------
NET INVESTMENT INCOME (LOSS) 1,015,014 1,746,401 1,072,314
---------------- ---------------- ----------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
NET REALIZED GAIN (LOSS) ON:
Investments -- 402,270 5,057,370
Futures contracts -- (235,391) (277,883)
Foreign exchange transactions -- 108,454 --
---------------- ---------------- ----------------
NET REALIZED GAIN -- 275,333 4,779,487
---------------- ---------------- ----------------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments -- (922,898) (3,405,120)
Futures contracts -- (51,288) (9,561)
Translation of forward foreign currency contracts, other assets and
liabilities denominated in foreign currencies -- 5,179 --
---------------- ---------------- ----------------
NET APPRECIATION (DEPRECIATION) -- (969,007) (3,414,681)
---------------- ---------------- ----------------
NET GAIN (LOSS) -- (693,674) 1,364,806
---------------- ---------------- ----------------
NET INCREASE (DECREASE) $ 1,015,014 $ 1,052,727 $ 2,437,120
================ ================ ================
</Table>
- ----------
* NET OF FOREIGN WITHHOLDING TAX OF $27,077, $12,543, $12,229, $6,210, $27,438,
$1,369, $70,724 AND $1,287, RESPECTIVELY.
SEE NOTES TO FINANCIAL STATEMENTS
134
<Page>
<Table>
<Caption>
EQUALLY-
DIVIDEND WEIGHTED
UTILITIES GROWTH S&P 500
---------------- ---------------- ----------------
INVESTMENT INCOME:
INCOME
Interest $ 72,735 $ 131,298 $ 41,574
Interest and dividends from affiliates -- -- --
Dividends 1,083,568* 3,178,427* 1,595,732
---------------- ---------------- ----------------
TOTAL INCOME 1,156,303 3,309,725 1,637,306
---------------- ---------------- ----------------
EXPENSES
Investment advisory fee 219,545 867,612 128,422
Distribution fee (Class Y shares) 19,306 70,912 103,988
Administration fee 30,813 135,742 85,615
Shareholder reports and notices 8,065 22,001 22,378
Professional fees 9,090 12,399 10,930
Custodian fees 3,360 12,178 18,696
Trustees' fees and expenses 437 2,133 1,592
Transfer agent fees and expenses 250 250 250
Other 3,407 7,821 14,595
---------------- ---------------- ----------------
TOTAL EXPENSES 294,273 1,131,048 386,466
---------------- ---------------- ----------------
NET INVESTMENT INCOME (LOSS) 862,030 2,178,677 1,250,840
---------------- ---------------- ----------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
NET REALIZED GAIN (LOSS) ON:
Investments 3,362,240 16,396,339 4,366,126
Futures contracts -- -- 76,281
Foreign exchange transactions -- -- --
---------------- ---------------- ----------------
NET REALIZED GAIN 3,362,240 16,396,339 4,442,407
---------------- ---------------- ----------------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments 4,351,308 (23,398,759) (4,972,240)
Futures contracts -- -- (62,311)
Translation of forward foreign currency contracts, other assets and
liabilities denominated in foreign currencies -- -- --
---------------- ---------------- ----------------
NET APPRECIATION (DEPRECIATION) 4,351,308 (23,398,759) (5,034,551)
---------------- ---------------- ----------------
NET GAIN (LOSS) 7,713,548 (7,002,420) (592,144)
---------------- ---------------- ----------------
NET INCREASE (DECREASE) $ 8,575,578 $ (4,823,743) $ 658,696
================ ================ ================
<Caption>
AMERICAN CAPITAL
GROWTH OPPORTUNITIES OPPORTUNITIES
---------------- ---------------- ----------------
INVESTMENT INCOME:
INCOME
Interest $ 13,632 $ 133,814 $ 6,560
Interest and dividends from affiliates -- 8,526 --
Dividends 136,937* 846,739* 78,894*
---------------- ---------------- ----------------
TOTAL INCOME 150,569 989,079 85,454
---------------- ---------------- ----------------
EXPENSES
Investment advisory fee 107,745 623,502 119,444
Distribution fee (Class Y shares) 15,689 49,488 16,359
Administration fee 17,239 91,534 14,262
Shareholder reports and notices 7,256 21,242 6,316
Professional fees 11,114 11,886 9,465
Custodian fees 9,678 12,260 6,326
Trustees' fees and expenses 242 1,404 199
Transfer agent fees and expenses 250 250 250
Other 1,032 6,673 1,315
---------------- ---------------- ----------------
TOTAL EXPENSES 170,245 818,239 173,936
---------------- ---------------- ----------------
NET INVESTMENT INCOME (LOSS) (19,676) 170,840 (88,482)
---------------- ---------------- ----------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
NET REALIZED GAIN (LOSS) ON:
Investments 733,992 2,202,355 2,535,046
Futures contracts -- -- --
Foreign exchange transactions -- 1,762 --
---------------- ---------------- ----------------
NET REALIZED GAIN 733,992 2,204,117 2,535,046
---------------- ---------------- ----------------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments (675,980) (6,387,991) (1,966,810)
Futures contracts -- -- --
Translation of forward foreign currency contracts, other assets and
liabilities denominated in foreign currencies -- (915) --
---------------- ---------------- ----------------
NET APPRECIATION (DEPRECIATION) (675,980) (6,388,906) (1,966,810)
---------------- ---------------- ----------------
NET GAIN (LOSS) 58,012 (4,184,789) 568,236
---------------- ---------------- ----------------
NET INCREASE (DECREASE) $ 38,336 $ (4,013,949) $ 479,754
================ ================ ================
<Caption>
GLOBAL DEVELOPING
EQUITY GROWTH
---------------- ----------------
INVESTMENT INCOME:
INCOME
Interest $ 26,572 $ 8,510
Interest and dividends from affiliates -- --
Dividends 845,704* 130,205*
---------------- ----------------
TOTAL INCOME 872,276 138,715
---------------- ----------------
EXPENSES
Investment advisory fee 350,260 118,174
Distribution fee (Class Y shares) 10,280 10,676
Administration fee 30,458 22,509
Shareholder reports and notices 9,489 5,647
Professional fees 10,971 11,749
Custodian fees 8,450 17,055
Trustees' fees and expenses 451 133
Transfer agent fees and expenses 250 250
Other 8,271 514
---------------- ----------------
TOTAL EXPENSES 428,880 186,707
---------------- ----------------
NET INVESTMENT INCOME (LOSS) 443,396 (47,992)
---------------- ----------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
NET REALIZED GAIN (LOSS) ON:
Investments 2,841,560 5,482,485
Futures contracts -- --
Foreign exchange transactions (30,302) --
---------------- ----------------
NET REALIZED GAIN 2,811,258 5,482,485
---------------- ----------------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments (3,759,311) (3,813,984)
Futures contracts -- --
Translation of forward foreign currency contracts, other assets and
liabilities denominated in foreign currencies (9,472) --
---------------- ----------------
NET APPRECIATION (DEPRECIATION) (3,768,783) (3,813,984)
---------------- ----------------
NET GAIN (LOSS) (957,525) 1,668,501
---------------- ----------------
NET INCREASE (DECREASE) $ (514,129) $ 1,620,509
================ ================
</Table>
135
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
MONEY MARKET FLEXIBLE INCOME
----------------------------------- -----------------------------------
FOR THE SIX FOR THE YEAR FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED MONTHS ENDED ENDED
JUNE 30, 2005 DECEMBER 31, 2004 JUNE 30, 2005 DECEMBER 31, 2004
--------------- ----------------- --------------- -----------------
(UNAUDITED) (UNAUDITED)
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) $ 1,015,014 $ 891,776 $ 1,746,401 $ 3,526,533
Net realized gain (loss) -- -- 275,333 (54,178)
Net change in unrealized appreciation/depreciation -- -- (969,007) 1,234,876
--------------- ----------------- --------------- -----------------
NET INCREASE (DECREASE) 1,015,014 891,776 1,052,727 4,707,231
--------------- ----------------- --------------- -----------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class X shares (676,360) (660,775) (1,857,499) (3,999,321)
Class Y shares (338,655) (231,005) (1,159,879) (1,962,637)
Net realized gain
Class X shares -- -- -- --
Class Y shares -- -- -- --
--------------- ----------------- --------------- -----------------
TOTAL DIVIDENDS AND DISTRIBUTIONS (1,015,015) (891,780) (3,017,378) (5,961,958)
--------------- ----------------- --------------- -----------------
Net increase (decrease) from transactions in shares of
beneficial interest (6,682,420) (29,500,076) (3,168,791) (2,384,666)
--------------- ----------------- --------------- -----------------
TOTAL INCREASE (DECREASE) (6,682,421) (29,500,080) (5,133,442) (3,639,393)
NET ASSETS:
Beginning of period 101,412,887 130,912,967 70,585,059 74,224,452
--------------- ----------------- --------------- -----------------
END OF PERIOD $ 94,730,466 $ 101,412,887 $ 65,451,617 $ 70,585,059
=============== ================= =============== =================
ACCUMULATED UNDISTRIBUTED NET INVESTMENT
INCOME (NET INVESTMENT LOSS) $ 35 $ 36 $ (257,591) $ 1,013,386
=============== ================= =============== =================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
136
<Page>
<Table>
<Caption>
BALANCED GROWTH UTILITIES
----------------------------------- -----------------------------------
FOR THE SIX FOR THE YEAR FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED MONTHS ENDED ENDED
JUNE 30, 2005 DECEMBER 31, 2004 JUNE 30, 2005 DECEMBER 31, 2004
--------------- ----------------- --------------- -----------------
(UNAUDITED) (UNAUDITED)
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) $ 1,072,314 $ 2,029,479 $ 862,030 $ 1,615,827
Net realized gain (loss) 4,779,487 7,293,308 3,362,240 3,923,834
Net change in unrealized appreciation/depreciation (3,414,681) 1,087,476 4,351,308 10,826,751
--------------- ----------------- --------------- -----------------
NET INCREASE (DECREASE) 2,437,120 10,410,263 8,575,578 16,366,412
--------------- ----------------- --------------- -----------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class X shares (848,130) (1,745,020) (707,168) (1,337,452)
Class Y shares (290,192) (517,526) (161,584) (280,659)
Net realized gain
Class X shares -- -- -- --
Class Y shares -- -- -- --
--------------- ----------------- --------------- -----------------
TOTAL DIVIDENDS AND DISTRIBUTIONS (1,138,322) (2,262,546) (868,752) (1,618,111)
--------------- ----------------- --------------- -----------------
Net increase (decrease) from transactions in shares of
beneficial interest (9,755,178) (12,373,214) (6,060,358) (13,214,499)
--------------- ----------------- --------------- -----------------
TOTAL INCREASE (DECREASE) (8,456,380) (4,225,497) 1,646,468 1,533,802
NET ASSETS:
Beginning of period 102,824,425 107,049,922 78,702,645 77,168,843
--------------- ----------------- --------------- -----------------
END OF PERIOD $ 94,368,045 $ 102,824,425 $ 80,349,113 $ 78,702,645
=============== ================= =============== =================
ACCUMULATED UNDISTRIBUTED NET INVESTMENT
INCOME (NET INVESTMENT LOSS) $ (191,056) $ (125,048) $ (7,028) $ (306)
=============== ================= =============== =================
<Caption>
DIVIDEND GROWTH EQUALLY-WEIGHTED S&P 500
----------------------------------- -----------------------------------
FOR THE SIX FOR THE YEAR FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED MONTHS ENDED ENDED
JUNE 30, 2005 DECEMBER 31, 2004 JUNE 30, 2005 DECEMBER 31, 2004
--------------- ----------------- --------------- -----------------
(UNAUDITED) (UNAUDITED)
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) $ 2,178,677 $ 5,717,506 $ 1,250,840 $ 1,998,371
Net realized gain (loss) 16,396,339 23,968,536 4,442,407 4,539,624
Net change in unrealized appreciation/depreciation (23,398,759) (607,109) (5,034,551) 25,181,978
--------------- ----------------- --------------- -----------------
NET INCREASE (DECREASE) (4,823,743) 29,078,933 658,696 31,719,973
--------------- ----------------- --------------- -----------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class X shares (1,872,115) (4,953,801) (1,219,500) (1,140,613)
Class Y shares (311,568) (760,026) (707,938) (441,970)
Net realized gain
Class X shares -- -- (1,943,203) --
Class Y shares -- -- (1,375,866) --
--------------- ----------------- --------------- -----------------
TOTAL DIVIDENDS AND DISTRIBUTIONS (2,183,683) (5,713,827) (5,246,507) (1,582,583)
--------------- ----------------- --------------- -----------------
Net increase (decrease) from transactions in shares of
beneficial interest (37,398,573) (64,541,240) (695,849) 2,508,241
--------------- ----------------- --------------- -----------------
TOTAL INCREASE (DECREASE) (44,405,999) (41,176,134) (5,283,660) 32,645,631
NET ASSETS:
Beginning of period 366,407,064 407,583,198 223,219,495 190,573,864
--------------- ----------------- --------------- -----------------
END OF PERIOD $ 322,001,065 $ 366,407,064 $ 217,935,835 $ 223,219,495
=============== ================= =============== =================
ACCUMULATED UNDISTRIBUTED NET INVESTMENT
INCOME (NET INVESTMENT LOSS) $ -- $ 5,006 $ 1,268,738 $ 1,945,336
=============== ================= =============== =================
</Table>
137
<Page>
<Table>
<Caption>
GROWTH AMERICAN OPPORTUNITIES
---------------------------------- ----------------------------------
FOR THE SIX FOR THE YEAR FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED MONTHS ENDED ENDED
JUNE 30, 2005 DECEMBER 31, 2004 JUNE 30, 2005 DECEMBER 31, 2004
-------------- ----------------- -------------- -----------------
(UNAUDITED) (UNAUDITED)
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) $ (19,676) $ 146,548 $ 170,840 $ 1,523,351
Net realized gain (loss) 733,992 3,944,191 2,204,117 19,613,051
Net change in unrealized appreciation/depreciation (675,980) (898,297) (6,388,906) (1,729,238)
-------------- ----------------- -------------- -----------------
NET INCREASE (DECREASE) 38,336 3,192,442 (4,013,949) 19,407,164
-------------- ----------------- -------------- -----------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class X shares (113,999) (76,820) (1,350,336) (813,707)
Class Y shares (39,568) (3,537) (182,665) (63,498)
Net realized gain
Class X shares -- -- -- --
Class Y shares -- -- -- --
-------------- ----------------- -------------- -----------------
TOTAL DIVIDENDS AND DISTRIBUTIONS (153,567) (80,357) (1,533,001) (877,205)
-------------- ----------------- -------------- -----------------
Net increase (decrease) from transactions in shares of
beneficial interest 1,161,790 (5,345,903) (30,081,842) (68,880,465)
-------------- ----------------- -------------- -----------------
TOTAL INCREASE (DECREASE) 1,046,559 (2,233,818) (35,628,792) (50,350,506)
NET ASSETS:
Beginning of period 44,972,367 47,206,185 256,005,667 306,356,173
-------------- ----------------- -------------- -----------------
END OF PERIOD $ 46,018,926 $ 44,972,367 $ 220,376,875 $ 256,005,667
============== ================= ============== =================
ACCUMULATED UNDISTRIBUTED NET INVESTMENT
INCOME (NET INVESTMENT LOSS) $ (26,695) $ 146,548 $ 170,687 $ 1,532,848
============== ================= ============== =================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
138
<Page>
<Table>
<Caption>
CAPITAL OPPORTUNITIES GLOBAL EQUITY
---------------------------------- ----------------------------------
FOR THE SIX FOR THE YEAR FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED MONTHS ENDED ENDED
JUNE 30, 2005 DECEMBER 31, 2004 JUNE 30, 2005 DECEMBER 31, 2004
-------------- ----------------- -------------- -----------------
(UNAUDITED) (UNAUDITED)
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) $ (88,482) $ (149,171) $ 443,396 $ 522,507
Net realized gain (loss) 2,535,046 5,644,119 2,811,258 7,765,089
Net change in unrealized appreciation/depreciation (1,966,810) 2,128,100 (3,768,783) (1,992,900)
-------------- ----------------- -------------- -----------------
NET INCREASE (DECREASE) 479,754 7,623,048 (514,129) 6,294,696
-------------- ----------------- -------------- -----------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class X shares -- -- (450,564) (187,657)
Class Y shares -- -- (38,510) (6,397)
Net realized gain
Class X shares -- -- -- --
Class Y shares -- -- -- --
-------------- ----------------- -------------- -----------------
TOTAL DIVIDENDS AND DISTRIBUTIONS -- -- (489,074) (194,054)
-------------- ----------------- -------------- -----------------
Net increase (decrease) from transactions in shares of
beneficial interest (4,040,631) (5,009,990) (7,484,597) (15,611,453)
-------------- ----------------- -------------- -----------------
TOTAL INCREASE (DECREASE) (3,560,877) 2,613,058 (8,487,800) (9,510,811)
NET ASSETS:
Beginning of period 39,387,677 36,774,619 81,689,575 91,200,386
-------------- ----------------- -------------- -----------------
END OF PERIOD $ 35,826,800 $ 39,387,677 $ 73,201,775 $ 81,689,575
============== ================= ============== =================
ACCUMULATED UNDISTRIBUTED NET INVESTMENT
INCOME (NET INVESTMENT LOSS) $ (86,858) $ 1,624 $ 427,183 $ 472,861
============== ================= ============== =================
<Caption>
DEVELOPING GROWTH
----------------------------------
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JUNE 30, 2005 DECEMBER 31, 2004
-------------- -----------------
(UNAUDITED)
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) $ (47,992) $ (130,385)
Net realized gain (loss) 5,482,485 10,331,339
Net change in unrealized appreciation/depreciation (3,813,984) 1,649,421
-------------- -----------------
NET INCREASE (DECREASE) 1,620,509 11,850,375
-------------- -----------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class X shares -- --
Class Y shares -- --
Net realized gain
Class X shares -- --
Class Y shares -- --
-------------- -----------------
TOTAL DIVIDENDS AND DISTRIBUTIONS -- --
-------------- -----------------
Net increase (decrease) from transactions in shares of
beneficial interest (6,592,684) (11,342,279)
-------------- -----------------
TOTAL INCREASE (DECREASE) (4,972,175) 508,096
NET ASSETS:
Beginning of period 61,302,090 60,793,994
-------------- -----------------
END OF PERIOD $ 56,329,915 $ 61,302,090
============== =================
ACCUMULATED UNDISTRIBUTED NET INVESTMENT
INCOME (NET INVESTMENT LOSS) $ (46,201) $ 1,791
============== =================
</Table>
139
<Page>
SUMMARY OF TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
<Table>
<Caption>
MONEY MARKET FLEXIBLE INCOME
---------------------------------- ----------------------------------
FOR THE SIX FOR THE YEAR FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED MONTHS ENDED ENDED
JUNE 30, 2005 DECEMBER 31, 2004 JUNE 30, 2005 DECEMBER 31, 2004
-------------- ----------------- -------------- -----------------
(UNAUDITED) (UNAUDITED)
CLASS X SHARES
SHARES
Sold 10,483,732 37,685,076 84,257 288,951
Reinvestment of dividends and distributions 676,360 660,775 249,588 527,610
Redeemed (21,980,356) (62,131,314) (738,984) (1,955,037)
-------------- ----------------- -------------- -----------------
NET DECREASE - CLASS X (10,820,264) (23,785,463) (405,139) (1,138,476)
============== ================= ============== =================
AMOUNT
Sold $ 10,483,732 $ 37,685,076 $ 634,364 $ 2,190,958
Reinvestment of dividends and distributions 676,360 660,775 1,857,499 3,999,321
Redeemed (21,980,356) (62,131,314) (5,569,960) (14,847,279)
-------------- ----------------- -------------- -----------------
NET DECREASE - CLASS X $ (10,820,264) $ (23,785,463) $ (3,078,097) $ (8,657,000)
============== ================= ============== =================
CLASS Y SHARES
SHARES
Sold 17,464,208 35,158,148 316,343 1,352,342
Reinvestment of dividends and distributions 338,655 231,005 156,337 259,727
Redeemed (13,665,019) (41,103,766) (482,974) (786,215)
-------------- ----------------- -------------- -----------------
NET INCREASE (DECREASE) - CLASS Y 4,137,844 (5,714,613) (10,294) 825,854
============== ================= ============== =================
AMOUNT
Sold $ 17,464,208 $ 35,158,148 $ 2,375,983 $ 10,264,647
Reinvestment of dividends and distributions 338,655 231,005 1,159,879 1,962,637
Redeemed (13,665,019) (41,103,766) (3,626,556) (5,954,950)
-------------- ----------------- -------------- -----------------
NET INCREASE (DECREASE) - CLASS Y $ 4,137,844 $ (5,714,613) $ (90,694) $ 6,272,334
============== ================= ============== =================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
140
<Page>
<Table>
<Caption>
BALANCED GROWTH UTILITIES
---------------------------------- ----------------------------------
FOR THE SIX FOR THE YEAR FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED MONTHS ENDED ENDED
JUNE 30, 2005 DECEMBER 31, 2004 JUNE 30, 2005 DECEMBER 31, 2004
-------------- ----------------- -------------- -----------------
(UNAUDITED) (UNAUDITED)
CLASS X SHARES
SHARES
Sold 49,593 182,919 65,036 94,493
Reinvestment of dividends and distributions 53,008 115,168 35,257 79,241
Redeemed (634,147) (1,283,677) (387,297) (945,802)
-------------- ----------------- -------------- -----------------
NET DECREASE - CLASS X (531,546) (985,590) (287,004) (772,068)
============== ================= ============== =================
AMOUNT
Sold $ 789,570 $ 2,757,310 $ 1,251,753 $ 1,577,053
Reinvestment of dividends and distributions 848,130 1,745,020 707,168 1,337,452
Redeemed (10,141,956) (19,230,565) (7,512,343) (15,529,676)
-------------- ----------------- -------------- -----------------
NET DECREASE - CLASS X $ (8,504,256) $ (14,728,235) $ (5,553,422) $ (12,615,171)
============== ================= ============== =================
CLASS Y SHARES
SHARES
Sold 63,211 384,916 52,728 153,046
Reinvestment of dividends and distributions 18,166 34,166 8,051 16,608
Redeemed (160,441) (263,108) (88,378) (207,468)
-------------- ----------------- -------------- -----------------
NET INCREASE (DECREASE) - CLASS Y (79,064) 155,974 (27,599) (37,814)
============== ================= ============== =================
AMOUNT
Sold $ 1,010,711 $ 5,760,801 $ 1,024,346 $ 2,522,900
Reinvestment of dividends and distributions 290,192 517,526 161,584 280,659
Redeemed (2,551,825) (3,923,306) (1,692,866) (3,402,887)
-------------- ----------------- -------------- -----------------
NET INCREASE (DECREASE) - CLASS Y $ (1,250,922) $ 2,355,021 $ (506,936) $ (599,328)
============== ================= ============== =================
<Caption>
DIVIDEND GROWTH EQUALLY-WEIGHTED S&P 500
---------------------------------- -----------------------------------
FOR THE SIX FOR THE YEAR FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED MONTHS ENDED ENDED
JUNE 30, 2005 DECEMBER 31, 2004 JUNE 30, 2005 DECEMBER 31, 2004
-------------- ----------------- -------------- -----------------
(UNAUDITED) (UNAUDITED)
CLASS X SHARES
SHARES
Sold 197,903 585,391 161,164 604,921
Reinvestment of dividends and distributions 120,356 324,040 132,054 51,356
Redeemed (2,522,058) (5,503,008) (766,076) (1,603,447)
-------------- ----------------- -------------- -----------------
NET DECREASE - CLASS X (2,203,799) (4,593,577) (472,858) (947,170)
-------------- ----------------- -------------- -----------------
AMOUNT
Sold $ 3,092,490 $ 8,741,228 $ 3,863,124 $ 13,301,341
Reinvestment of dividends and distributions 1,872,115 4,953,801 3,162,703 1,140,613
Redeemed (39,377,078) (82,348,524) (18,347,011) (35,266,843)
-------------- ----------------- -------------- -----------------
NET DECREASE - CLASS X $ (34,412,473) $ (68,653,495) $ (11,321,184) $ (20,824,889)
-------------- ----------------- -------------- -----------------
CLASS Y SHARES
SHARES
Sold 158,410 836,368 659,674 1,404,141
Reinvestment of dividends and distributions 20,057 49,628 87,702 20,044
Redeemed (370,165) (609,582) (300,365) (353,978)
-------------- ----------------- -------------- -----------------
NET INCREASE (DECREASE) - CLASS Y (191,698) 276,414 447,011 1,070,207
-------------- ----------------- -------------- -----------------
AMOUNT
Sold $ 2,469,340 $ 12,480,219 $ 15,641,903 $ 30,602,353
Reinvestment of dividends and distributions 311,568 760,026 2,083,804 441,970
Redeemed (5,767,008) (9,127,990) (7,100,372) (7,711,193)
-------------- ----------------- -------------- -----------------
NET INCREASE (DECREASE) - CLASS Y $ (2,986,100) $ 4,112,255 $ 10,625,335 $ 23,333,130
============== ================= ============== =================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
141
<Page>
<Table>
<Caption>
GROWTH AMERICAN OPPORTUNITIES
---------------------------------- ----------------------------------
FOR THE SIX FOR THE YEAR FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED MONTHS ENDED ENDED
JUNE 30, 2005 DECEMBER 31, 2004 JUNE 30, 2005 DECEMBER 31, 2004
-------------- ----------------- -------------- -----------------
(UNAUDITED) (UNAUDITED)
CLASS X SHARES
SHARES
Sold 29,355 74,011 74,024 294,249
Reinvestment of dividends and distributions 7,520 5,298 91,054 57,424
Redeemed (270,886) (692,429) (1,988,066) (4,841,589)
-------------- ----------------- -------------- -----------------
NET DECREASE - CLASS X (234,011) (613,120) (1,822,988) (4,489,916)
============== ================= ============== =================
AMOUNT
Sold $ 433,115 $ 1,062,006 $ 1,085,794 $ 4,131,293
Reinvestment of dividends and distributions 113,999 76,820 1,350,336 813,707
Redeemed (3,952,204) (9,833,826) (29,052,230) (67,866,315)
-------------- ----------------- -------------- -----------------
NET DECREASE - CLASS X $ (3,405,090) $ (8,695,000) $ (26,616,100) $ (62,921,315)
============== ================= ============== =================
CLASS Y SHARES
SHARES
Sold 406,138 344,824 57,160 341,328
Reinvestment of dividends and distributions 2,633 246 12,367 4,500
Redeemed (93,173) (107,687) (308,235) (775,389)
-------------- ----------------- -------------- -----------------
NET INCREASE (DECREASE) - CLASS Y 315,598 237,383 (238,708) (429,561)
============== ================= ============== =================
AMOUNT
Sold $ 5,877,073 $ 4,859,789 $ 830,306 $ 4,768,395
Reinvestment of dividends and distributions 39,568 3,537 182,665 63,498
Redeemed (1,349,761) (1,514,229) (4,478,713) (10,791,043)
-------------- ----------------- -------------- -----------------
NET INCREASE (DECREASE) - CLASS Y $ 4,566,880 $ 3,349,097 $ (3,465,742) $ (5,959,150)
============== ================= ============== =================
</Table>
142
<Page>
<Table>
<Caption>
CAPITAL OPPORTUNITIES GLOBAL EQUITY
---------------------------------- ----------------------------------
FOR THE SIX FOR THE YEAR FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED MONTHS ENDED ENDED
JUNE 30, 2005 DECEMBER 31, 2004 JUNE 30, 2005 DECEMBER 31, 2004
-------------- ----------------- -------------- -----------------
(UNAUDITED) (UNAUDITED)
CLASS X SHARES
SHARES
Sold 50,482 213,276 56,576 178,142
Reinvestment of dividends and distributions -- -- 29,839 13,104
Redeemed (421,365) (825,656) (584,639) (1,299,648)
-------------- ----------------- -------------- -----------------
NET DECREASE - CLASS X (370,883) (612,380) (498,224) (1,108,402)
============== ================= ============== =================
AMOUNT
Sold $ 468,444 $ 1,784,560 $ 862,160 $ 2,537,436
Reinvestment of dividends and distributions -- -- 450,564 187,657
Redeemed (3,900,364) (6,926,163) (8,854,440) (18,510,485)
-------------- ----------------- -------------- -----------------
NET DECREASE - CLASS X $ (3,431,920) $ (5,141,603) $ (7,541,716) $ (15,785,392)
============== ================= ============== =================
CLASS Y SHARES
SHARES
Sold 64,682 394,029 35,066 178,690
Reinvestment of dividends and distributions -- -- 2,566 449
Redeemed (131,561) (378,563) (33,809) (165,283)
-------------- ----------------- -------------- -----------------
NET INCREASE (DECREASE) - CLASS Y (66,879) 15,466 3,823 13,856
============== ================= ============== =================
AMOUNT
Sold $ 591,923 $ 3,257,263 $ 523,138 $ 2,526,862
Reinvestment of dividends and distributions -- -- 38,510 6,397
Redeemed (1,200,634) (3,125,650) (504,529) (2,359,320)
-------------- ----------------- -------------- -----------------
NET INCREASE (DECREASE) - CLASS Y $ (608,711) $ 131,613 $ 57,119 $ 173,939
============== ================= ============== =================
<Caption>
DEVELOPING GROWTH
----------------------------------
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JUNE 30, 2005 DECEMBER 31, 2004
-------------- -----------------
(UNAUDITED)
CLASS X SHARES
SHARES
Sold 34,316 94,520
Reinvestment of dividends and distributions -- --
Redeemed (358,242) (778,488)
-------------- -----------------
NET DECREASE - CLASS X (323,926) (683,968)
============== =================
AMOUNT
Sold $ 678,583 $ 1,639,068
Reinvestment of dividends and distributions -- --
Redeemed (7,045,425) (13,552,390)
-------------- -----------------
NET DECREASE - CLASS X $ (6,366,842) $ (11,913,322)
============== =================
CLASS Y SHARES
SHARES
Sold 27,864 126,054
Reinvestment of dividends and distributions -- --
Redeemed (39,378) (93,254)
-------------- -----------------
NET INCREASE (DECREASE) - CLASS Y (11,514) 32,800
============== =================
AMOUNT
Sold $ 536,818 $ 2,186,269
Reinvestment of dividends and distributions -- --
Redeemed (762,660) (1,615,226)
-------------- -----------------
NET INCREASE (DECREASE) - CLASS Y $ (225,842) $ 571,043
============== =================
</Table>
143
<Page>
MORGAN STANLEY SELECT DIMENSIONS INVESTMENT SERIES
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2005 (UNAUDITED)
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Select Dimensions Investment Series (the "Fund") is registered
under the Investment Company Act of 1940 as amended (the "Act"), as a
diversified, open-end management investment company. The Fund, which consists of
11 separate portfolios ("Portfolios"), was organized on June 2, 1994, as a
Massachusetts business trust and commenced operations on November 9, 1994, with
the exception of Capital Opportunities which commenced operations on January 21,
1997.
On July 24, 2000, the Fund commenced offering one additional class of shares
(Class Y shares). The two classes are identical except that Class Y shares incur
distribution expenses. Class X shares are generally available to holders of
contracts offered before May 1, 2000. Class Y shares are available to holders of
contracts offered on or after July 24, 2000.
The investment objectives of each Portfolio are as follows:
<Table>
<Caption>
PORTFOLIO INVESTMENT OBJECTIVE
- --------------------------------------------------------------------------------------------------------------------------
Money Market Seeks high current income, preservation of capital and liquidity.
Flexible Income Seeks, as a primary objective, to earn a high level of current income and, as a secondary
objective, to maximize total return, but only when consistent with its primary objective.
Balanced Growth Seeks to provide capital growth with reasonable current income.
Utilities Seeks both capital appreciation and current income.
Dividend Growth Seeks to provide reasonable current income and long-term growth of income and capital.
Equally-Weighted S&P 500 Seeks to achieve a high level of total return on its assets through a combination of capital
appreciation and current income.
Growth Seeks long-term growth of capital.
American Opportunities Seeks long-term capital growth consistent with an effort to reduce volatility.
Capital Opportunities Seeks long-term capital growth.
Global Equity Seeks to obtain total return on its assets primarily through long-term capital growth and to a
lesser extent from income.
Developing Growth Seeks long-term capital growth.
</Table>
144
<Page>
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- Money Market: securities are valued at amortized
cost which approximates market value. All remaining Portfolios: (1) an equity
portfolio security listed or traded on the New York Stock Exchange ("NYSE") or
American Stock Exchange or other exchange is valued at its latest sale price
prior to the time when assets are valued; if there were no sales that day, the
security is valued at the mean between the last reported bid and asked price;
(2) an equity portfolio security listed or traded on the Nasdaq is valued at the
Nasdaq Official Closing Price; if there were no sales that day, the security is
valued at the mean between the last reported bid and asked price; (3) all other
portfolio securities for which over-the-counter market quotations are readily
available are valued at the mean between the last reported bid and asked price.
In cases where a security is traded on more than one exchange, the security is
valued on the exchange designated as the primary market; (4) for equity
securities traded on foreign exchanges, the last reported sale price or the
latest bid price may be used if there were no sales on a particular day; (5)
futures are valued at the latest price published by the commodities exchange on
which they trade; (6) when market quotations are not readily available or Morgan
Stanley Investment Advisors Inc. (the "Investment Adviser") determines that the
latest sale price, the bid price or the mean between the last reported bid and
asked price do not reflect a security's market value, portfolio securities are
valued at their fair value as determined in good faith under procedures
established by and under the general supervision of the Fund's Trustees.
Occasionally, developments affecting the closing prices of securities and other
assets may occur between the times at which valuations of such securities are
determined (that is, close of the foreign market on which the securities trade)
and the close of business on the NYSE. If developments occur during such periods
that are expected to materially affect the value of such securities, such
valuations may be adjusted to reflect the estimated fair value of such
securities as of the close of the NYSE, as determined in good faith by the
Fund's Trustees or by the Investment Adviser using a pricing service and/or
procedures approved by the Trustees of the Fund; (7) certain portfolio
securities may be valued by an outside pricing service approved by the Fund's
Trustees; and (8) short-term debt securities having a maturity date of more than
sixty days at time of purchase are valued on a mark-to-market basis until sixty
days prior to maturity and thereafter at amortized cost based on their value on
the 61st day. Short-term debt securities having a maturity date of sixty days or
less at the time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date
except certain dividends on foreign securities which are recorded as soon as the
Fund is informed after the
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<Page>
ex-dividend date. Interest income is accrued daily except where collection is
not expected. The Fund amortizes premiums and accretes discounts over the life
of the respective securities.
C. REPURCHASE AGREEMENTS -- Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other affiliated
entities managed by the Investment Manager, may transfer uninvested cash
balances into one or more joint repurchase agreement accounts. These balances
are invested in one or more repurchase agreements and are collateralized by
cash, or U.S. Treasury or federal agency obligations. The Fund may also invest
directly with institutions in repurchase agreements. The Fund's custodian
receives the collateral, which is marked-to-market daily to determine that the
value of the collateral does not decrease below the repurchase price plus
accrued interest.
D. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
E. FUTURES CONTRACTS -- A futures contract is an agreement between two parties
to buy and sell financial instruments or contracts based on financial indices at
a set price on a future date. Upon entering into such a contract, the Fund is
required to pledge to the broker cash, U.S. government securities or other
liquid portfolio securities equal to the minimum initial margin requirements of
the applicable futures exchange. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in the value of the contract which is known as variation margin.
Such receipts or payments are recorded by the Fund as unrealized gains or
losses. Upon closing of the contract, the Fund realizes a gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed.
F. FOREIGN CURRENCY TRANSLATION AND FORWARD FOREIGN CURRENCY CONTRACTS -- The
books and records of the Fund are maintained in U.S. dollars as follows: (1) the
foreign currency market value of investment securities, other assets and
liabilities and forward foreign currency contracts ("forward contracts") are
translated at the exchange rates prevailing at the end of the period; and (2)
purchases, sales, income and expenses are translated at the exchange rates
prevailing on the respective dates of such transactions. The resultant exchange
gains and losses are recorded as realized and unrealized gain/loss on foreign
exchange transactions. Pursuant to U.S. Federal income tax regulations, certain
foreign exchange gains/losses included in realized and unrealized gain/loss are
included in or are a reduction of ordinary income for federal income tax
purposes. The Fund does not isolate that portion of the results of operations
arising as a result of changes in the foreign exchange rates from the changes in
the market prices of the
146
<Page>
securities. Forward contracts are valued daily at the appropriate exchange
rates. The resultant unrealized exchange gains and losses are recorded as
unrealized foreign currency gain or loss. The Fund records realized gains or
losses on delivery of the currency or at the time the forward contract is
extinguished (compensated) by entering into a closing transaction prior to
delivery.
G. FEDERAL INCOME TAX POLICY -- It is the Fund's policy to comply individually
for each Portfolio with the requirements of the Internal Revenue Code applicable
to regulated investment companies and to distribute substantially all of its
taxable income to its shareholders. Accordingly, no federal income tax provision
is required.
H. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends and
distributions to its shareholders on the ex-dividend date.
I. EXPENSES -- Direct expenses are charged to the respective Portfolio and
general Fund expenses are allocated on the basis of relative net assets or
equally among the Portfolios.
J. USE OF ESTIMATES -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
2. INVESTMENT ADVISORY/ADMINISTRATION AGREEMENTS
Pursuant to an Investment Advisory Agreement, the Fund pays the Investment
Adviser an advisory fee, accrued daily and payable monthly, by applying the
annual rates listed below to each Portfolio's net assets determined at the close
of each business day.
Money Market -- 0.45% to the portion of daily net assets not exceeding $250
million; 0.375% to the portion of daily net assets exceeding $250 million but
not exceeding $750 million; 0.325% to the portion of daily net assets exceeding
$750 million but not exceeding $1.25 billion; 0.30% to the portion of daily net
assets exceeding $1.25 billion but not exceeding $1.5 billion; and 0.275% to the
portion of daily net assets in excess of $1.5 billion.
Flexible Income -- 0.32%.
Balanced Growth -- 0.52% to the portion of daily net assets not exceeding $500
million and 0.495% to the portion of daily net assets exceeding $500 million.
Utilities -- 0.57% to the portion of daily net assets not exceeding $500
million; 0.47% to the portion of daily net assets exceeding $500 million but not
exceeding $1 billion; 0.445% to the portion of daily net assets
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<Page>
exceeding $1 billion but not exceeding $1.5 billion; 0.42% to the portion of
daily net assets exceeding $1.5 billion but not exceeding $2.5 billion; 0.395%
to the portion of daily net assets exceeding $2.5 billion but not exceeding $3.5
billion; 0.37% to the portion of daily net assets exceeding $3.5 billion but not
exceeding $5 billion; and 0.345% to the portion of daily net assets in excess of
$5.0 billion.
Dividend Growth -- 0.545% to the portion of daily net assets not exceeding $250
million; 0.42% to the portion of daily net assets exceeding $250 million, but
not exceeding $1 billion; 0.395% to the portion of daily net assets exceeding $1
billion but not exceeding $2 billion and 0.37% to the portion of daily net
assets in excess of $2 billion.
Equally-Weighted S&P 500 -- Effective June 1, 2005, 0.12% to the portion of
daily net assets not exceeding $2 billion and 0.10% to the portion of daily net
assets exceeding $2 billion. (Prior to June 1, 2005, 0.12%)
Growth -- 0.50% to the portion of daily net assets not exceeding $1 billion;
0.45% to the portion of daily net assets exceeding $1 billion but not exceeding
$2 billion; 0.40% to the portion of daily net assets exceeding $2 billion , but
not exceeding $3 billion and 0.35% to the portion of daily net assets exceeding
$3 billion.
American Opportunities -- 0.545% to the portion of daily net assets not
exceeding $250 million; 0.42% to the portion of daily net assets exceeding $250
million but not exceeding $2.5 billion; 0.395% to the portion of daily net
assets exceeding $2.5 billion but not exceeding $3.5 billion; 0.37% to the
portion of daily net assets exceeding $3.5 billion but not exceeding $4.5
billion; and 0.345% to the portion of daily net assets in excess of $4.5
billion.
Capital Opportunities -- 0.67% to the portion of daily net assets not exceeding
$500 million; 0.645% to the portion of daily net assets exceeding $500 million
but not exceeding $2 billion; 0.62% to the portion of daily net assets exceeding
$2 billion but not exceeding $3 billion and 0.595% to the portion of daily net
assets in excess of $3 billion.
Global Equity -- 0.92%.
Developing Growth -- 0.42% to the portion of daily net assets not exceeding $500
million and 0.395% to the portion of daily net assets exceeding $500 million.
Pursuant to an Administration Agreement with Morgan Stanley Services Company
Inc. (the "Administrator"), an affiliate of the Investment Adviser, each
Portfolio pays an administration fee, accrued daily and payable monthly, by
applying the annual rate of 0.08% (Money Market 0.05%) to the Fund's daily net
assets.
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<Page>
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the
"Distributor"), an affiliate of the Investment Adviser and Administrator. The
Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1
under the Act. Under the Plan, Class Y shares of each Portfolio bear a
distribution fee which is accrued daily and paid monthly at the annual rate of
0.25% of the average daily net assets of the class.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
Purchases and sales/maturities of portfolio securities, excluding short-term
investments (except for the Money Market Portfolio), for the six months ended
June 30, 2005 were as follows:
<Table>
<Caption>
U.S. GOVERNMENT SECURITIES OTHER
---------------------------------- ----------------------------------
PURCHASES SALES/MATURITIES PURCHASES SALES/MATURITIES
---------------- ---------------- ---------------- ----------------
Money Market $ 8,056,148 $ 18,583,972 $ 309,251,311 $ 306,705,000
Flexible Income 6,108,389 5,251,090 15,484,547 16,073,147
Balanced Growth 14,618,252 17,646,892 17,833,133 21,744,735
Utilities 174,057 151,221 11,036,467 16,064,907
Dividend Growth -- -- 72,481,914 106,856,757
Equally-Weighted S&P 500 -- -- 18,530,967 22,602,280
Growth -- -- 23,581,185 23,847,504
American Opportunities -- -- 119,811,049 150,836,458
Capital Opportunities -- -- 22,027,881 25,581,986
Global Equity -- -- 9,762,472 18,804,002
Developing Growth -- -- 34,074,909 41,917,124
</Table>
Equally-Weighted S&P 500 had transactions in Morgan Stanley common stock, an
affiliate of the Investment Adviser, Administrator and Distributor:
<Table>
<Caption>
NET REALIZED
PURCHASES SALES GAINS (LOSSES) INCOME VALUE
--------- --------- -------------- -------- ---------
$ 61,998 $ 34,591 $ 3,211 $ 4,132 $ 449,091
</Table>
The following Portfolios had transactions in Hartford Financial Services Group,
Inc., an affiliate of the Fund:
<Table>
<Caption>
NET REALIZED
PURCHASES SALES GAINS (LOSSES) INCOME VALUE
----------- --------- -------------- -------- -----------
Balanced Growth -- $ 276,879 $ 208,336 $ 6,392 $ 573,122
American Opportunities $ 2,185,308 -- -- 8,526 2,198,532
Equally-Weighted S&P 500 -- 52,702 9,858 3,595 430,658
</Table>
149
<Page>
The following Portfolios had transactions with other Morgan Stanley funds during
the six months ended June 30, 2005:
<Table>
<Caption>
NET REALIZED
PURCHASES SALES GAINS (LOSSES)
---------- ---------- --------------
Balanced Growth $ 6,718 $ 2,011 $ 459
Utilities 127,656 296,737 (5,199)
Dividend Growth 100,320 433,654 246,402
Growth 14,087 196,418 12,577
American Opportunities 754,057 118,560 593
Capital Opportunities 4,788 -- --
Developing Growth 73,940 -- --
</Table>
For the six months ended June 30, 2005, Dividend Growth and Developing Growth
had open payables of $501,226 and $39,075, respectively and Dividend Growth,
American Opportunities and Developing Growth had open receivables of $717,290,
$1,121,442 and $1,119,935, respectively, with Morgan Stanley & Co., Inc., an
affiliate of the Investment Adviser, Administrator and Distributor.
For the six months ended June 30, 2005, the following Portfolios incurred
brokerage commissions with Morgan Stanley & Co., Inc., for portfolio
transactions executed on behalf of the Portfolio:
<Table>
<Caption>
DIVIDEND AMERICAN GLOBAL CAPITAL DEVELOPING
UTILITIES GROWTH OPPORTUNITIES EQUITY OPPORTUNITIES GROWTH GROWTH
--------- -------- ------------- ------- ------------- ------ ----------
$ 22,414 $ 24,785 $ 27,064 $ 8,093 $ 500 $ 19 $ 1,081
======== ======== ======== ======= ===== ==== =======
</Table>
Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and
Distributor, is the Fund's transfer agent.
5. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
Some of the Portfolios may enter into forward contracts to facilitate settlement
of foreign currency denominated portfolio transactions or to manage foreign
currency exposure associated with foreign currency denominated securities.
Forward contracts involve elements of market risk in excess of the amounts
reflected in the Statement of Assets and Liabilities. The Portfolios bear the
risk of an unfavorable change in the foreign exchange rates underlying the
forward contracts. Risks may also arise upon entering into these contracts from
the potential inability of the counterparties to meet the terms of their
contracts.
150
<Page>
Some of the Portfolios may purchase and sell interest rate and index futures
("futures contracts") to facilitate trading, increase or decrease the
Portfolio's market exposure, seek higher investment returns, or to seek to
protect against a decline in the value of the Portfolio's securities or an
increase in prices of securities that may be purchased.
These futures contracts involve elements of market risk in excess of the amount
reflected in the Statement of Assets and Liabilities. The Portfolio bears the
risk of an unfavorable change in the value of the underlying securities.
6. FEDERAL INCOME TAX STATUS
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for tax purposes are reported as distributions of paid-in-capital.
As of December 31, 2004, the following Portfolios had a net capital loss
carryforward which may be used to offset future capital gains to the extent
provided by regulations:
<Table>
<Caption>
(AMOUNTS IN THOUSANDS)
----------------------------------------------------------------------------------------------
AVAILABLE THROUGH DECEMBER 31, 2006 2007 2008 2009 2010 2011 2012 TOTAL
- ------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Flexible Income $ 153 $ 941 $ 1,681 $ 2,688 $ 6,782 $ 6,161 $ 1,399 $ 19,805
Balanced Growth -- -- -- -- 5,086 -- -- 5,086
Utilities -- -- -- 16,752 21,143 -- -- 37,895
Dividend Growth -- -- 61,265 21,046 58,750 21,222 -- 162,283
Growth -- -- -- 15,102 16,400 3,145 115 34,762
American Opportunities -- -- -- 186,323 74,785 -- -- 261,108
Capital Opportunities -- -- -- 32,842 57,567 -- -- 90,409
Global Equity -- -- -- 424 2,663 -- -- 3,087
Developing Growth -- -- -- 21,430 18,312 -- -- 39,742
</Table>
151
<Page>
At December 31, 2004, the primary reason(s) for significant temporary book/tax
differences were as follows:
<Table>
<Caption>
TEMPORARY DIFFERENCES
-------------------------
POST- LOSS
OCTOBER DEFERRALS FROM
LOSSES WASH SALES
-------- --------------
Flexible Income -
Balanced Growth -
Utilities -
Dividend Growth -
Equally-Weighted S&P 500 -
Growth -
American Opportunities -
Capital Opportunities -
Global Equity -
Developing Growth -
</Table>
Additionally, the following Portfolios had other temporary differences: Flexible
Income -- interest on bonds in default; Flexible Income and Balanced Growth --
capital loss deferrals on straddles; Flexible Income, Balanced Growth and
Equally-Weighted S&P 500 -- capital gain/loss from the mark-to-market of futures
contracts; Equally-Weighted S&P 500, Capital Opportunities and Developing Growth
- -- tax adjustments on real estate investment trusts held and sold, respectively,
by the Portfolios, and Flexible Income, Balanced Growth and Utilities -- book
amortization of premiums/discounts on debt securities.
152
<Page>
(This page has been left blank intentionally.)
153
<Page>
MORGAN STANLEY SELECT DIMENSIONS INVESTMENT SERIES
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<Table>
<Caption>
NET ASSET
FOR THE YEAR VALUE NET NET REALIZED TOTAL FROM DIVIDENDS
ENDED BEGINNING INVESTMENT AND UNREALIZED INVESTMENT TO
DECEMBER 31 OF PERIOD INCOME (LOSS)* GAIN (LOSS) OPERATIONS SHAREHOLDERS
- ------------ -------------- -------------- -------------- -------------- --------------
MONEY MARKET
CLASS X SHARES
2000(a) $ 1.00 $ 0.06 -- $ 0.06 $ (0.06)
2001 1.00 0.04 -- 0.04 (0.04)
2002 1.00 0.01 -- 0.01 (0.01)
2003 1.00 0.01 -- 0.01 (0.01)
2004 1.00 0.01 -- 0.01 (0.01)
2005(c) 1.00 0.01 -- 0.01 (0.01)
CLASS Y SHARES
2000(b) 1.00 0.03 -- 0.03 (0.03)
2001 1.00 0.04 -- 0.04 (0.04)
2002 1.00 0.01 -- 0.01 (0.01)
2003 1.00 0.00 -- 0.00 (0.00)
2004 1.00 0.01 -- 0.01 (0.01)
2005(c) 1.00 0.01 -- 0.01 (0.01)
FLEXIBLE INCOME
CLASS X SHARES
2000(a) 8.96 0.76 $ (1.15) (0.39) (0.65)
2001 7.83 0.56 (0.88) (0.32) (0.42)
2002 6.99 0.51 0.08 0.59 (0.35)
2003 7.23 0.34 0.62 0.96 (0.39)
2004 7.80 0.38 0.14 0.52 (0.64)
2005(c) 7.68 0.20 (0.08) 0.12 (0.34)
CLASS Y SHARES
2000(b) 8.58 0.33 (0.73) (0.40) (0.33)
2001 7.81 0.52 (0.86) (0.34) (0.41)
2002 6.97 0.48 0.10 0.58 (0.33)
2003 7.22 0.32 0.61 0.93 (0.37)
2004 7.78 0.36 0.13 0.49 (0.62)
2005(c) 7.65 0.19 (0.09) 0.10 (0.33)
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
154
<Page>
<Table>
<Caption>
TOTAL NET ASSET NET ASSETS
FOR THE YEAR DISTRIBUTIONS DIVIDENDS VALUE END OF
ENDED TO AND END OF TOTAL PERIOD
DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS PERIOD RETURN+ (000'S)
- ------------ -------------- -------------- -------------- -------------- --------------
MONEY MARKET
CLASS X SHARES
2000(a) -- $ (0.06) $ 1.00 5.98% $ 118,274
2001 -- (0.04) 1.00 3.88 175,957
2002 -- (0.01) 1.00 1.34 152,479
2003 -- (0.01) 1.00 0.65 91,730
2004 -- (0.01) 1.00 0.86 67,945
2005(c) -- (0.01) 1.00 1.10(1) 57,124
CLASS Y SHARES
2000(b) -- (0.03) 1.00 2.58(1) 2,673
2001 -- (0.04) 1.00 3.62 31,189
2002 -- (0.01) 1.00 1.09 41,006
2003 -- (0.00) 1.00 0.40 39,183
2004 -- (0.01) 1.00 0.61 33,468
2005(c) -- (0.01) 1.00 0.97(1) 37,606
FLEXIBLE INCOME
CLASS X SHARES
2000(a) $ (0.09)++ (0.74) 7.83 (4.74) 69,443
2001 (0.10)++ (0.52) 6.99 (4.06) 56,745
2002 -- (0.35) 7.23 8.67 54,669
2003 -- (0.39) 7.80 13.54 53,270
2004 -- (0.64) 7.68 7.00 43,658
2005(c) -- (0.34) 7.46 1.54(1) 39,410
CLASS Y SHARES
2000(b) (0.04)++ (0.37) 7.81 (4.68)(1) 602
2001 (0.09)++ (0.50) 6.97 (4.41) 3,859
2002 -- (0.33) 7.22 8.59 14,626
2003 -- (0.37) 7.78 13.15 20,955
2004 -- (0.62) 7.65 6.61 26,927
2005(c) -- (0.33) 7.42 1.56(1) 26,042
<Caption>
RATIOS TO AVERAGE
NET ASSETS**
----------------------------------
FOR THE YEAR NET PORTFOLIO
ENDED INVESTMENT TURNOVER
DECEMBER 31 EXPENSES INCOME (LOSS) RATE
- ------------ -------------- -------------- ---------------
MONEY MARKET
CLASS X SHARES
2000(a) 0.55% 5.80% N/A
2001 0.52 3.63 N/A
2002 0.52 1.34 N/A
2003 0.54 0.66 N/A
2004 0.55 0.84 N/A
2005(c) 0.56(2) 2.20(2) N/A
CLASS Y SHARES
2000(b) 0.80(2) 5.55(2) N/A
2001 0.77 3.38 N/A
2002 0.77 1.09 N/A
2003 0.79 0.41 N/A
2004 0.80 0.59 N/A
2005(c) 0.81(2) 1.95(2) N/A
FLEXIBLE INCOME
CLASS X SHARES
2000(a) 0.47 8.92 33%
2001 0.49 7.48 114
2002 0.50 7.26 115
2003 0.57 4.49 258
2004 0.69 4.96 201
2005(c) 0.63(2) 5.31(2) 38(1)
CLASS Y SHARES
2000(b) 0.72(2) 9.23(2) 33
2001 0.74 7.23 114
2002 0.75 7.01 115
2003 0.82 4.24 258
2004 0.94 4.71 201
2005(c) 0.88(2) 5.06(2) 38(1)
</Table>
155
<Page>
<Table>
<Caption>
NET ASSET
FOR THE YEAR VALUE NET NET REALIZED TOTAL FROM DIVIDENDS
ENDED BEGINNING INVESTMENT AND UNREALIZED INVESTMENT TO
DECEMBER 31 OF PERIOD INCOME (LOSS)* GAIN (LOSS) OPERATIONS SHAREHOLDERS
- ------------ -------------- -------------- -------------- -------------- --------------
BALANCED GROWTH
CLASS X SHARES
2000(a) $ 14.63 $ 0.47 $ 0.42 $ 0.89 $ (0.51)
2001 14.90 0.44 (0.28) 0.16 (0.44)
2002 14.62 0.36 (2.02) (1.66) (0.38)
2003 12.58 0.27 2.19 2.46 (0.33)
2004 14.71 0.31 1.28 1.59 (0.35)
2005(c) 15.95 0.18 0.24 0.42 (0.20)
CLASS Y SHARES
2000(b) 13.67 0.18 1.25 1.43 (0.22)
2001 14.88 0.39 (0.27) 0.12 (0.41)
2002 14.59 0.32 (2.01) (1.69) (0.34)
2003 12.56 0.23 2.19 2.42 (0.30)
2004 14.68 0.27 1.28 1.55 (0.31)
2005(c) 15.92 0.16 0.24 0.40 (0.18)
UTILITIES
CLASS X SHARES
2000(a) 26.25 0.38 (0.79) (0.41) (0.40)
2001 23.99 0.43 (6.45) (6.02) (0.45)
2002 17.10 0.47 (3.93) (3.46) (0.48)
2003 13.16 0.35 2.31 2.66 (0.36)
2004 15.46 0.36 3.37 3.73 (0.37)
2005(c) 18.82 0.22 1.97 2.19 (0.23)
CLASS Y SHARES
2000(b) 26.06 0.15 (2.04) (1.89) (0.18)
2001 23.99 0.40 (6.48) (6.08) (0.40)
2002 17.09 0.44 (3.93) (3.49) (0.45)
2003 13.15 0.31 2.31 2.62 (0.32)
2004 15.45 0.32 3.37 3.69 (0.33)
2005(c) 18.81 0.20 1.95 2.15 (0.20)
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
156
<Page>
<Table>
<Caption>
TOTAL NET ASSET NET ASSETS
FOR THE YEAR DISTRIBUTIONS DIVIDENDS VALUE END OF
ENDED TO AND END OF TOTAL PERIOD
DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS PERIOD RETURN+ (000'S)
- ------------ -------------- -------------- -------------- -------------- --------------
BALANCED GROWTH
CLASS X SHARES
2000(a) $ (0.11) $ (0.62) $ 14.90 6.37% $ 120,911
2001 -- (0.44) 14.62 1.21 116,002
2002 -- (0.38) 12.58 (11.49) 84,846
2003 -- (0.33) 14.71 19.84 84,151
2004 -- (0.35) 15.95 10.93 75,517
2005(c) -- (0.20) 16.17 2.62(1) 67,961
CLASS Y SHARES
2000(b) -- (0.22) 14.88 10.55(1) 1,455
2001 -- (0.41) 14.59 0.86 8,463
2002 -- (0.34) 12.56 (11.66) 12,327
2003 -- (0.30) 14.68 19.51 22,898
2004 -- (0.31) 15.92 10.68 27,308
2005(c) -- (0.18) 16.14 2.50(1) 26,408
UTILITIES
CLASS X SHARES
2000(a) (1.45) (1.85) 23.99 (1.91) 196,489
2001 (0.42) (0.87) 17.10 (25.51) 118,964
2002 0.00 (0.48) 13.16 (20.37) 66,825
2003 -- (0.36) 15.46 20.47 63,728
2004 -- (0.37) 18.82 24.44 63,052
2005(c) -- (0.23) 20.78 11.67(1) 63,645
CLASS Y SHARES
2000(b) -- (0.18) 23.99 (7.26)(1) 5,494
2001 (0.42) (0.82) 17.09 (25.69) 12,471
2002 -- (0.45) 13.15 (20.58) 10,749
2003 -- (0.32) 15.45 20.20 13,440
2004 -- (0.33) 18.81 24.15 15,650
2005(c) -- (0.20) 20.76 11.48(1) 16,704
<Caption>
RATIOS TO AVERAGE
NET ASSETS**
----------------------------------
FOR THE YEAR NET PORTFOLIO
ENDED INVESTMENT TURNOVER
DECEMBER 31 EXPENSES INCOME (LOSS) RATE
- ------------ -------------- -------------- ---------------
BALANCED GROWTH
CLASS X SHARES
2000(a) 0.64% 3.29% 39%
2001 0.64 2.95 71
2002 0.66 2.58 161
2003 0.68 2.01 124
2004 0.69 2.04 62
2005(c) 0.69(2) 2.38(2) 34(1)
CLASS Y SHARES
2000(b) 0.86(2) 2.90(2) 39
2001 0.89 2.70 71
2002 0.91 2.33 161
2003 0.93 1.76 124
2004 0.94 1.79 62
2005(c) 0.94(2) 2.13(2) 34(1)
UTILITIES
CLASS X SHARES
2000(a) 0.69 1.43 32
2001 0.69 2.15 49
2002 0.70 3.22 77
2003 0.71 2.51 91
2004 0.71 2.19 29
2005(c) 0.71(2) 2.29(2) 15(1)
CLASS Y SHARES
2000(b) 0.95(2) 1.40(2) 32
2001 0.94 1.90 49
2002 0.95 2.97 77
2003 0.96 2.26 91
2004 0.96 1.94 29
2005(c) 0.96(2) 2.04(2) 15(1)
</Table>
157
<Page>
<Table>
<Caption>
NET ASSET
FOR THE YEAR VALUE NET NET REALIZED TOTAL FROM DIVIDENDS
ENDED BEGINNING INVESTMENT AND UNREALIZED INVESTMENT TO
DECEMBER 31 OF PERIOD INCOME (LOSS)* GAIN (LOSS) OPERATIONS SHAREHOLDERS
- ------------ -------------- -------------- -------------- -------------- --------------
DIVIDEND GROWTH
CLASS X SHARES
2000(a) $ 19.92 $ 0.33 $ 0.05 $ 0.38 $ (0.37)
2001 15.85 0.27 (1.13) (0.86) (0.28)
2002 14.71 0.26 (2.88) (2.62) (0.26)
2003 11.83 0.24 3.00 3.24 (0.24)
2004 14.83 0.23 0.99 1.22 (0.24)
2005(c) 15.81 0.10 (0.30) (0.20) (0.11)
CLASS Y SHARES
2000(b) 14.14 0.10 1.73 1.83 (0.13)
2001 15.84 0.23 (1.13) (0.90) (0.25)
2002 14.69 0.23 (2.88) (2.65) (0.23)
2003 11.81 0.20 3.01 3.21 (0.21)
2004 14.81 0.20 0.98 1.18 (0.20)
2005(c) 15.79 0.08 (0.30) (0.22) (0.09)
EQUALLY-WEIGHTED S&P 500
CLASS X SHARES
2000(a) 20.54 0.26 1.95 2.21 (0.09)
2001 20.75 0.22 (0.56) (0.34) (0.19)
2002 19.12 0.19 (3.22) (3.03) (0.21)
2003 15.88 0.19 5.59 5.78 (0.21)
2004 21.13 0.23 3.27 3.50 (0.18)
2005(c) 24.45 0.15 (0.05) 0.10 (0.23)
CLASS Y SHARES
2000(b) 18.74 0.09 1.89 1.98 --
2001 20.72 0.16 (0.55) (0.39) (0.18)
2002 19.05 0.16 (3.22) (3.06) (0.20)
2003 15.79 0.15 5.56 5.71 (0.19)
2004 20.99 0.18 3.23 3.41 (0.15)
2005(c) 24.25 0.12 (0.05) 0.07 (0.19)
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
158
<Page>
<Table>
<Caption>
TOTAL NET ASSET NET ASSETS
FOR THE YEAR DISTRIBUTIONS DIVIDENDS VALUE END OF
ENDED TO AND END OF TOTAL PERIOD
DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS PERIOD RETURN+ (000'S)
- ------------ -------------- -------------- -------------- -------------- --------------
DIVIDEND GROWTH
CLASS X SHARES
2000(a) $ (4.08) $ (4.45) $ 15.85 5.36% $ 619,469
2001 -- (0.28) 14.71 (5.45) 527,738
2002 -- (0.26) 11.83 (17.92) 341,673
2003 -- (0.24) 14.83 27.73 356,056
2004 -- (0.24) 15.81 8.29 307,093
2005(c) -- (0.11) 15.50 (1.29)(1) 266,832
CLASS Y SHARES
2000(b) -- (0.13) 15.84 13.02(1) 2,780
2001 -- (0.25) 14.69 (5.71) 22,602
2002 -- (0.23) 11.81 (18.15) 29,318
2003 -- (0.21) 14.81 27.48 51,527
2004 -- (0.20) 15.79 8.03 59,314
2005(c) -- (0.09) 15.48 (1.42)(1) 55,169
EQUALLY-WEIGHTED S&P 500
CLASS X SHARES
2000(a) (1.91) (2.00) 20.75 11.98 186,887
2001 (1.10) (1.29) 19.12 (1.83) 181,881
2002 -- (0.21) 15.88 (15.97) 121,065
2003 (0.32) (0.53) 21.13 37.14 143,019
2004 -- (0.18) 24.45 16.65 142,320
2005(c) (0.37) (0.60) 23.95 0.43(1) 128,060
CLASS Y SHARES
2000(b) -- -- 20.72 10.57(1) 890
2001 (1.10) (1.28) 19.05 (2.04) 10,985
2002 -- (0.20) 15.79 (16.21) 18,843
2003 (0.32) (0.51) 20.99 36.87 47,554
2004 -- (0.15) 24.25 16.33 80,900
2005(c) (0.37) (0.56) 23.76 0.31(1) 89,875
<Caption>
RATIOS TO AVERAGE
NET ASSETS**
----------------------------------
FOR THE YEAR NET PORTFOLIO
ENDED INVESTMENT TURNOVER
DECEMBER 31 EXPENSES INCOME (LOSS) RATE
- ------------ -------------- -------------- ---------------
DIVIDEND GROWTH
CLASS X SHARES
2000(a) 0.63% 2.01% 41%
2001 0.62 1.79 22
2002 0.64 1.89 22
2003 0.66 1.85 42
2004 0.65 1.54 44
2005(c) 0.62(2) 1.33(2) 22(1)
CLASS Y SHARES
2000(b) 0.88(2) 1.45(2) 41
2001 0.87 1.54 22
2002 0.89 1.64 22
2003 0.91 1.60 42
2004 0.90 1.29 44
2005(c) 0.87(2) 1.08(2) 22(1)
EQUALLY-WEIGHTED S&P 500
CLASS X SHARES
2000(a) 0.54 1.31 8
2001 0.54 1.12 6
2002 0.54 1.09 8
2003 0.55 1.11 24
2004 0.50 1.07 20
2005(c) 0.26(2) 1.27(2) 9(1)
CLASS Y SHARES
2000(b) 0.78(2) 1.02(2) 8
2001 0.79 0.87 6
2002 0.79 0.84 8
2003 0.80 0.86 24
2004 0.75 0.82 20
2005(c) 0.51(2) 1.02(2) 9(1)
</Table>
159
<Page>
<Table>
<Caption>
NET ASSET
FOR THE YEAR VALUE NET NET REALIZED TOTAL FROM DIVIDENDS
ENDED BEGINNING INVESTMENT AND UNREALIZED INVESTMENT TO
DECEMBER 31 OF PERIOD INCOME (LOSS)* GAIN (LOSS) OPERATIONS SHAREHOLDERS
- ------------ -------------- -------------- -------------- -------------- --------------
GROWTH
CLASS X SHARES
2000(a) $ 23.27 $ (0.02) $ (2.47) $ (2.49) --
2001 19.42 (0.01) (2.90) (2.91) --
2002 15.48 0.01 (4.32) (4.31) --
2003 11.17 0.03 2.97 3.00 $ (0.01)
2004 14.16 0.05 1.03 1.08 (0.03)
2005(c) 15.21 0.00 0.01 0.01 (0.06)
CLASS Y SHARES
2000(b) 23.90 (0.03) (4.47) (4.50) --
2001 19.40 (0.05) (2.90) (2.95) --
2002 15.42 (0.02) (4.30) (4.32) --
2003 11.10 (0.01) 2.96 2.95 --
2004 14.05 0.03 1.01 1.04 (0.01)
2005(c) 15.08 (0.02) 0.01 (0.01) (0.04)
AMERICAN OPPORTUNITIES
CLASS X SHARES
2000(a) 32.60 0.05 (1.39) (1.34) --
2001 28.57 0.09 (7.97) (7.88) (0.05)
2002 14.99 0.04 (3.26) (3.22) (0.09)
2003 11.68 0.04 2.36 2.40 (0.05)
2004 14.03 0.08 1.08 1.16 (0.05)
2005(c) 15.14 0.01 (0.21) (0.20) (0.11)
CLASS Y SHARES
2000(b) 29.89 0.05 (1.39) (1.34) --
2001 28.55 0.03 (7.95) (7.92) (0.05)
2002 14.93 0.01 (3.25) (3.24) (0.06)
2003 11.63 0.01 2.34 2.35 (0.02)
2004 13.96 0.05 1.06 1.11 (0.02)
2005(c) 15.05 0.00 (0.21) (0.21) (0.07)
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
160
<Page>
<Table>
<Caption>
TOTAL NET ASSET NET ASSETS
FOR THE YEAR DISTRIBUTIONS DIVIDENDS VALUE END OF
ENDED TO AND END OF TOTAL PERIOD
DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS PERIOD RETURN+ (000'S)
- ------------ -------------- -------------- -------------- -------------- --------------
GROWTH
CLASS X SHARES
2000(a) $ (1.36) $ (1.36) $ 19.42 (11.68)% $ 132,909
2001 (1.03) (1.03) 15.48 (15.23) 80,096
2002 -- -- 11.17 (27.84) 39,834
2003 -- (0.01) 14.16 26.90 40,356
2004 -- (0.03) 15.21 7.64 34,038
2005(c) -- (0.06) 15.16 0.05(1) 30,378
CLASS Y SHARES
2000(b) -- -- 19.40 (18.83)(1) 2,536
2001 (1.03) (1.03) 15.42 (15.46) 4,383
2002 -- -- 11.10 (28.02) 3,520
2003 -- -- 14.05 26.58 6,850
2004 -- (0.01) 15.08 7.38 10,934
2005(c) -- (0.04) 15.03 (0.08)(1) 15,641
AMERICAN OPPORTUNITIES
CLASS X SHARES
2000(a) (2.69) (2.69) 28.57 (4.42) 832,971
2001 (5.65) (5.70) 14.99 (29.47) 463,012
2002 -- (0.09) 11.68 (21.56) 274,710
2003 -- (0.05) 14.03 20.57 260,230
2004 -- (0.05) 15.14 8.29 212,736
2005(c) -- (0.11) 14.83 (1.31)(1) 12,230
CLASS Y SHARES
2000(b) -- -- 28.55 (4.48)(1) 13,930
2001 (5.65) (5.70) 14.93 (29.67) 30,768
2002 -- (0.06) 11.63 (21.73) 30,035
2003 -- (0.02) 13.96 20.25 46,126
2004 -- (0.02) 15.05 7.96 43,269
2005(c) -- (0.07) 14.77 (1.40)(1) 38,941
<Caption>
RATIOS TO AVERAGE
NET ASSETS**
----------------------------------
FOR THE YEAR NET PORTFOLIO
ENDED INVESTMENT TURNOVER
DECEMBER 31 EXPENSES INCOME (LOSS) RATE
- ------------ -------------- -------------- ---------------
GROWTH
CLASS X SHARES
2000(a) 0.88% (0.10)% 68%
2001 0.86 (0.04) 81
2002 0.91 0.08 135
2003 0.93 0.21 128
2004 0.93 0.37 168
2005(c) 0.72(2) (0.02)(2) 55(1)
CLASS Y SHARES
2000(b) 1.14(2) (0.34)(2) 68
2001 1.11 (0.29) 81
2002 1.16 (0.17) 135
2003 1.18 (0.04) 128
2004 1.18 0.12 168
2005(c) 0.97(2) (0.27)(2) 55(1)
AMERICAN OPPORTUNITIES
CLASS X SHARES
2000(a) 0.64 0.17 426
2001 0.65 0.46 393
2002 0.66 0.27 309
2003 0.67 0.33 261
2004 0.67 0.60 134
2005(c) 0.67(2) 0.19(2) 54(1)
CLASS Y SHARES
2000(b) 0.88(2) 0.40(2) 426
2001 0.90 0.21 393
2002 0.91 0.02 309
2003 0.92 0.08 261
2004 0.92 0.35 134
2005(c) 0.92(2) (0.06)(2) 54(1)
</Table>
161
<Page>
<Table>
<Caption>
NET ASSET
FOR THE YEAR VALUE NET NET REALIZED TOTAL FROM DIVIDENDS
ENDED BEGINNING INVESTMENT AND UNREALIZED INVESTMENT TO
DECEMBER 31 OF PERIOD INCOME (LOSS)* GAIN (LOSS) OPERATIONS SHAREHOLDERS
- ------------ -------------- -------------- -------------- -------------- --------------
CAPITAL OPPORTUNITIES
CLASS X SHARES
2000(a) $ 22.66 $ (0.09) $ (5.64) $ (5.73) --
2001 15.38 (0.07) (5.52) (5.59) --
2002 9.79 (0.05) (4.24) (4.29) --
2003 5.50 (0.04) 2.33 2.29 --
2004 7.79 (0.03) 1.79 1.76 --
2005(c) 9.55 (0.02) 0.19 0.17 --
CLASS Y SHARES
2000(b) 24.41 (0.05) (8.99) (9.04) --
2001 15.37 (0.09) (5.53) (5.62) --
2002 9.75 (0.07) (4.22) (4.29) --
2003 5.46 (0.05) 2.31 2.26 --
2004 7.72 (0.05) 1.78 1.73 --
2005(c) 9.45 (0.03) 0.18 0.15 --
GLOBAL EQUITY
CLASS X SHARES
2000(a) 19.63 0.13 (1.19) (1.06) $ (0.06)
2001 17.26 0.04 (2.88) (2.84) (0.11)
2002 12.79 0.04 (2.26) (2.22) (0.01)
2003 10.56 0.04 3.62 3.66 (0.05)
2004 14.17 0.09 1.06 1.15 (0.03)
2005(c) 15.29 0.09 (0.17) (0.08) (0.11)
CLASS Y SHARES
2000(b) 18.85 0.00 (1.61) (1.61) --
2001 17.24 (0.01) (2.86) (2.87) (0.10)
2002 12.75 0.01 (2.26) (2.25) --
2003 10.50 0.01 3.60 3.61 (0.02)
2004 14.09 0.06 1.05 1.11 (0.01)
2005(c) 15.19 0.07 (0.18) (0.11) (0.07)
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
162
<Page>
<Table>
<Caption>
TOTAL NET ASSET NET ASSETS
FOR THE YEAR DISTRIBUTIONS DIVIDENDS VALUE END OF
ENDED TO AND END OF TOTAL PERIOD
DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS PERIOD RETURN+ (000'S)
- ------------ -------------- -------------- -------------- -------------- --------------
CAPITAL OPPORTUNITIES
CLASS X SHARES
2000(a) $ (1.55) $ (1.55) $ 15.38 (27.56)% $ 116,991
2001 -- -- 9.79 (36.39) 55,488
2002 -- -- 5.50 (43.82) 22,097
2003 -- -- 7.79 41.64 25,473
2004 -- -- 9.55 22.59 25,408
2005(c) -- -- 9.72 1.78(1) 22,256
CLASS Y SHARES
2000(b) -- -- 15.37 (36.83)(1) 4,895
2001 -- -- 9.75 (36.56) 11,410
2002 -- -- 5.46 (44.00) 6,537
2003 -- -- 7.72 41.39 11,302
2004 -- -- 9.45 22.41 13,980
2005(c) -- -- 9.60 1.59(1) 13,571
GLOBAL EQUITY
CLASS X SHARES
2000(a) (1.25) (1.31) 17.26 (5.93) 171,523
2001 (1.52) (1.63) 12.79 (17.22) 118,747
2002 -- (0.01) 10.56 (17.37) 75,611
2003 -- (0.05) 14.17 34.71 83,607
2004 -- (0.03) 15.29 8.17 73,290
2005(c) -- (0.11) 15.10 (0.55)(1) 64,842
CLASS Y SHARES
2000(b) -- -- 17.24 (8.54)(1) 883
2001 (1.52) (1.62) 12.75 (17.38) 3,825
2002 -- -- 10.50 (17.57) 3,951
2003 -- (0.02) 14.09 34.33 7,593
2004 -- (0.01) 15.19 7.89 8,399
2005(c) -- (0.07) 15.01 (0.73)(1) 8,360
<Caption>
RATIOS TO AVERAGE
NET ASSETS**
-------------------------------
FOR THE YEAR NET PORTFOLIO
ENDED INVESTMENT TURNOVER
DECEMBER 31 EXPENSES INCOME (LOSS) RATE
- ------------ -------------- -------------- --------------
CAPITAL OPPORTUNITIES
CLASS X SHARES
2000(a) 0.79% (0.41)% 21%
2001 0.80 (0.63) 16
2002 0.90 (0.71) 103
2003 0.87 (0.57) 184
2004 0.90 (0.32) 118
2005(c) 0.88(2) (0.40)(2) 62(1)
CLASS Y SHARES
2000(b) 1.02(2) (0.62)(2) 21
2001 1.05 (0.88) 16
2002 1.15 (0.96) 103
2003 1.12 (0.82) 184
2004 1.15 (0.57) 118
2005(c) 1.13(2) (0.65)(2) 62(1)
GLOBAL EQUITY
CLASS X SHARES
2000(a) 1.06 0.68 68
2001 1.07 0.29 89
2002 1.08 0.35 44
2003 1.08 0.35 72
2004 1.11 0.64 48
2005(c) 1.10(2) 1.19(2) 13(1)
CLASS Y SHARES
2000(b) 1.29(2) 0.02(2) 68
2001 1.32 0.04 89
2002 1.33 0.10 44
2003 1.33 0.10 72
2004 1.36 0.39 48
2005(c) 1.35(2) 0.94(2) 13(1)
</Table>
163
<Page>
<Table>
<Caption>
NET ASSET
FOR THE YEAR VALUE NET NET REALIZED TOTAL FROM DIVIDENDS
ENDED BEGINNING INVESTMENT AND UNREALIZED INVESTMENT TO
DECEMBER 31 OF PERIOD INCOME (LOSS)* GAIN (LOSS) OPERATIONS SHAREHOLDERS
- ------------ -------------- -------------- -------------- -------------- --------------
Developing Growth
CLASS X SHARES
2000(a) $ 40.04 $ 0.22 $ (7.89) $ (7.67) --
2001 25.93 (0.01) (6.25) (6.26) $ (0.22)
2002 16.01 (0.03) (4.41) (4.44) --
2003 11.57 (0.03) 4.82 4.79 --
2004 16.36 (0.03) 3.68 3.65 --
2005(c) 20.01 (0.01) 0.65 0.64 --
CLASS Y SHARES
2000(b) 29.79 0.09 (3.98) (3.89) --
2001 25.90 (0.05) (6.25) (6.30) (0.21)
2002 15.95 (0.06) (4.40) (4.46) --
2003 11.49 (0.07) 4.80 4.73 --
2004 16.22 (0.07) 3.64 3.57 --
2005(c) 19.79 (0.04) 0.64 0.60 --
</Table>
- ----------
(a) PRIOR TO JULY 24, 2000, THE FUND ISSUED ONE CLASS OF SHARES. ALL SHARES OF
THE FUND HELD PRIOR TO MAY 1, 2000 HAVE BEEN DESIGNATED CLASS X SHARES.
(b) FOR THE PERIOD JULY 24, 2000 (ISSUED DATE) THROUGH DECEMBER 31, 2000.
(c) FOR THE SIX MONTHS ENDED JUNE 30, 2005 (UNAUDITED).
* THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
** REFLECTS OVERALL PORTFOLIO RATIOS FOR INVESTMENT INCOME AND NON-CLASS
SPECIFIC EXPENSES.
+ CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE
PERIOD.
++ DISTRIBUTION FROM PAID-IN CAPITAL.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS
164
<Page>
<Table>
<Caption>
TOTAL NET ASSET NET ASSETS
FOR THE YEAR DISTRIBUTIONS DIVIDENDS VALUE END OF
ENDED TO AND END OF TOTAL PERIOD
DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS PERIOD RETURN+ (000'S)
- ------------ -------------- -------------- -------------- -------------- --------------
Developing Growth
CLASS X SHARES
2000(a) $ (6.44) $ (6.44) $ 25.93 (21.61)% $ 142,640
2001 (3.44) (3.66) 16.01 (25.49) 85,513
2002 -- -- 11.57 (27.73) 45,892
2003 -- -- 16.36 41.40 53,996
2004 -- -- 20.01 22.31 52,359
2005(c) -- -- 20.65 3.20(1) 47,347
CLASS Y SHARES
2000(b) -- -- 25.90 (13.06)(1) 1,716
2001 (3.44) (3.65) 15.95 (25.67) 2,973
2002 -- -- 11.49 (27.96) 2,602
2003 -- -- 16.22 41.17 6,798
2004 -- -- 19.79 21.95 8,943
2005(c) -- -- 20.39 3.08(1) 8,983
<Caption>
RATIOS TO AVERAGE
NET ASSETS**
-------------------------------
FOR THE YEAR NET PORTFOLIO
ENDED INVESTMENT TURNOVER
DECEMBER 31 EXPENSES INCOME (LOSS) RATE
- ------------ -------------- -------------- --------------
Developing Growth
CLASS X SHARES
2000(a) 0.56% 0.66% 207%
2001 0.59 (0.05) 196
2002 0.61 (0.26) 251
2003 0.62 (0.20) 193
2004 0.64 (0.19) 89
2005(c) 0.63(2) (0.14)(2) 60(1)
CLASS Y SHARES
2000(b) 0.83(2) 0.74(2) 207
2001 0.84 (0.30) 196
2002 0.86 (0.51) 251
2003 0.87 (0.45) 193
2004 0.88 (0.43) 89
2005(c) 0.88(2) (0.39)(2) 60(1)
</Table>
165
<Page>
Trustees
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael E. Nugent
Fergus Reid
Officers
Charles A. Fiumefreddo
CHAIRMAN OF THE BOARD
Mitchell M. Merin
PRESIDENT
Ronald E. Robison
EXECUTIVE VICE PRESIDENT AND PRINCIPAL EXECUTIVE OFFICER
Joseph J. McAlinden
VICE PRESIDENT
Barry Fink
VICE PRESIDENT
Amy R. Doberman
VICE PRESIDENT
Carsten Otto
CHIEF COMPLIANCE OFFICER
Stefanie V. Chang
VICE PRESIDENT
Francis J. Smith
TREASURER AND CHIEF FINANCIAL OFFICER
Thomas F. Caloia
VICE PRESIDENT
Mary E. Mullin
SECRETARY
Transfer Agent
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
Independent Registered Public Accounting Firm
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
Investment Adviser
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
The financial statements included herein have been taken from the records of the
fund without examination by the independent auditors and accordingly they do not
express an opinion thereon.
This report is submitted for the general information of shareholders of the
Fund. For more detailed information about the Fund, its fees and expenses and
other pertinent information, please read its Prospectus. The Fund's Statement of
Additional Information contains additional information about the Fund, including
its trustees. It is available without charge, by calling (800) 869-NEWS.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective Prospectus. Read the
Prospectus carefully before investing.
Investments and services offered through Morgan Stanley DW Inc., member SIPC.
Morgan Stanley Funds are distributed by Morgan Stanley Distributors Inc.
Morgan Stanley Distributors Inc., member NASD.
<Page>
PRSRT STD
U.S. POSTAGE
PAID
HUDSON, MA 01749
PERMIT NO. 6
RA05-00690P-Y06/05
<Page>
Item 2. Code of Ethics.
Not applicable for semiannual reports.
Item 3. Audit Committee Financial Expert.
Not applicable for semiannual reports.
Item 4. Principal Accountant Fees and Services
Not applicable for semiannual reports.
Item 5. Audit Committee of Listed Registrants.
Not applicable for semiannual reports.
Item 6.
Refer to Item 1.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable for semiannual reports.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Applicable only to reports filed by closed-end funds.
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.
<Page>
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) Code of Ethics - Not applicable for semiannual reports.
(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Morgan Stanley Select Dimensions Investment Series
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
August 23, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
August 23, 2005
/s/ Francis Smith
Francis Smith
Principal Financial Officer
August 23, 2005