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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, 2006
Date of reporting period: June 30, 2006
Item 1 - Report to Shareholders
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MORGAN STANLEY
SELECT DIMENSIONS INVESTMENT SERIES
SEMI-ANNUAL REPORT
JUNE 30, 2006
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Morgan Stanley Select Dimensions Investment Series
TABLE OF CONTENTS
Letter to the Shareholders 1
Fund Performance 16
Expense Example 18
Investment Advisory Agreement Approval 23
Portfolio of Investments:
Money Market 27
Flexible Income 30
Balanced Growth 49
Utilities 62
Dividend Growth 66
Equally-Weighted S&P 500 70
Growth 82
Focus Growth 85
Capital Opportunities 88
Global Equity 90
Developing Growth 94
Financial Statements
Statements of Assets and Liabilities 98
Statements of Operations 100
Statements of Changes in Net Assets 102
Notes to Financial Statements 110
Financial Highlights 120
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Morgan Stanley Select Dimensions Investment Series
LETTER TO THE SHAREHOLDERS - JUNE 30, 2006
Dear Shareholder,
During the first half of 2006, rising interest rates, high commodity prices,
mounting inflationary pressures and a slowing U.S. economy posed a formidable
challenge to the global economy's advance. Investors' growing discomfort with
these uncertainties culminated in a worldwide stock market correction in the
final months of the period. On the whole, the domestic stock markets registered
flat to modest gains, as did the bond markets. International stocks, however,
fared much better.
Domestic Equity Overview
The U.S. stock market advanced in the first quarter of 2006, but gave back some
of its gain in the second quarter. The six-month period ended June 30, 2006
began on a positive note, with strong gains in January driven by higher growth
and higher risk segments of the market, such as small-cap and technology stocks.
Minutes from the Federal Open Market Committee's (the "Fed's") December 13
meeting had bolstered hopes that the Fed might be nearing the end of its current
rate tightening cycle. Investors also responded positively to encouraging labor
market data, improved consumer confidence, and the continuation of robust
mergers-and-acquisitions and corporate restructuring activity.
The market's strength was particularly impressive given that it faced a number
of headwinds. Oil prices resumed their upward climb, as geopolitical
developments emanating from Iran and Nigeria raised concern about potential
supply disruptions, and fourth-quarter gross domestic product (GDP) growth came
in well below expectations. Despite investors' eagerness for the contrary, the
Fed raised the target federal funds rate for the fourteenth consecutive time and
left the door open for further rate hikes.
In February, stocks traded flat. More positive economic data and well-received
Congressional testimony from the new Federal Reserve Board Chairman Ben S.
Bernanke buoyed sentiment. However, a number of companies reported disappointing
quarterly earnings and offered lackluster outlooks. Consumer confidence also
fell. Conditions improved in March and April, due to relatively tame inflation
numbers and a growing belief that the economy would resume its robust pace in
early 2006. Favorable economic data -- notably in employment, durable goods
orders and consumer confidence -- seemed to support this more optimistic view.
However, inflation concerns began to mount. Rising oil prices and a sharp
increase in other commodity prices drove interest rates upward, as the yield on
the 10-year Treasury rose above 5 percent for the first time since June 2002.
Amid growing uncertainty, stock markets soured in May. The Fed's sixteenth
consecutive increase and its accompanying comments sent the markets tumbling.
The April and May Consumer Price Index reports exacerbated inflation concerns,
which were already heightened in light of the recent sharp rise in
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commodity prices. Investors also began to acknowledge the possibility of
economic slowdown over the remainder of the year, particularly as consumer
sentiment showed signs of deterioration. Declining investor sentiment continued
into June, although stocks rallied significantly in the final days of the
period. As was expected, the Fed raised rates again on June 29, but its language
suggested that additional rate hikes might become unnecessary.
Fixed Income Overview
The first six months of 2006 provided few surprises in the bond market. As was
widely expected, the Federal Open Market Committee (the "Fed") continued to
raise the target federal funds rate by 25 basis points at each of its meetings
during the first half of the year, bringing the rate to 5.25 percent at the end
of June. In the Fed's view, the U.S. economy remains on solid footing, and core
inflation is still relatively low, though most measures of core inflation are
either at or above the high end of the range viewed as acceptable by the Fed.
Also as expected, longtime Fed Chairman Alan Greenspan retired in January after
a term of more than 18 years. Ben S. Bernanke replaced Greenspan as Chairman,
and in his first Congressional testimony in the role acknowledged some risks to
the Fed's relatively contained inflation forecast, as well as the potential for
upward pressure on inflation in the event of continued high energy prices and
other building inflationary pressures.
Comments made by Fed members after their May and June meetings indicated that
they will rely heavily on economic data in making future decisions concerning
the direction of interest rates. In fact, based on these comments it appears
that the Fed will be driven by the weight of the economic data more so now than
perhaps at anytime over the past few years.
Within the government sector, U.S. Treasuries underperformed over the six-month
period because of their high sensitivity to fluctuating interest rates and their
relatively low yields. Yield spreads (a measure of market risk) of agency
debentures and mortgages remained tight relative to Treasuries. Early in the
period, lower-coupon mortgages outperformed higher-coupon mortgages. As is
typical during periods of rising interest rates, prepayment speeds on mortgages
slowed, making the higher yield offered by these issues more attractive. This
trend reversed course in the second half of the period, as higher coupon, longer
dated mortgage-backed issues outperformed their lower-coupon counterparts.
Due mainly to concerns over inflation and increased risk in the corporate
market, the credit sector had trouble keeping pace with other fixed income
sectors, and posted its lowest six-month return since 1999. Within the
investment-grade portion of the sector, lower-rated issues (BBB- and A-rated)
outpaced higher-rated issues
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(AA-rated and above). Industrials posted the highest returns, followed by
utilities and financials. Overall, longer-dated corporate issues underperformed
shorter-dated issues.
The high-yield market performed well during the reporting period, especially in
the first quarter of the year, as continued economic strength, a strong equity
market and increased investor appetite for risk combined support the market.
Gains in high yield came despite declining Treasury prices, tight credit
spreads, moderate new bond issuance and outflows from mutual funds. High-yield
market returns slowed in the second quarter as rising market volatility,
concerns about inflation and increased issuance dampened performance. The end
result was modestly positive returns for the six-month period.
Within the high-yield asset class, the riskiest segment of the market --
securities rated CCC and below -- outperformed high-rated securities throughout
the reporting period. Industry sector returns, however, varied considerably. The
strongest performing sectors included transportation (due to strong gains by the
auto component), manufacturing, telecommunication services, retail and cable.
The worst performers included the energy, broadcasting, information technology,
health care and utilities sectors. Forest products, the leading sector in the
first quarter, turned in poor performance in the second quarter.
International Equity Overview
Despite early signs of slowing in the U.S. economy, the global economy continued
to roar ahead in the six months ended June 30, 2006. Following a period of
protracted sluggishness, Europe had something of a boom. Unemployment declined,
industrial output grew and observers believed with increasing certainty that the
European Central Bank would likely raise interest rates. In May, the European
purchasing managers' indexes for both the services and manufacturing sectors
advanced sharply, hitting six-year highs. Sentiment for the region brightened as
this economic cycle appeared sustainable and was expected to fuel domestic
demand amid improving consumer confidence. After a strong performance in 2005,
conditions in Japan turned more turbulent in early 2006 as a scandal plagued one
of Japan's best known Internet companies. Although Japanese stocks gained back
some ground in March and April as the Bank of Japan lifted its ultra-loose
monetary policy, the market declined precipitously at the end of the period in
concert with the global market correction. Investors across all regions began to
contend with the rising possibility that the combination of additional rate
hikes in the U.S. and anticipated tightening in both Japan and Europe will
likely slow global economic growth. Within this framework, international
developed markets were volatile, as gains made in the first quarter were
tempered by a sharp correction in the month of June.
Emerging markets followed a similar course, beginning 2006 with a double-digit
gain in the first quarter and outperforming major developed markets. Favorable
valuations relative to the developed world and
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stronger underlying economies enticed investors. Appetites for emerging markets
equities reached record highs in April with year-to-date inflows surpassing
levels greater than the whole of 2005. However, after reaching new highs, the
emerging markets -- along with other global markets -- sold off in May as global
risk aversion spiked due to concerns about slowing global growth and rising
inflation and interest rates in the U.S. Tumbling from a new high on May 8,
emerging markets were down an average of 15 percent during the global sell-off.
Nevertheless, similar to past corrections, the asset class rebounded strongly
off its low as the global markets stabilized. Emerging market economies have
become more resilient to external shocks thanks to the adoption of better
macroeconomic fundamentals, stronger fiscal performance and the de-leveraging of
corporate balance sheets.
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.
Balanced Growth Portfolio
For the six-month period ended June 30, 2006, Balanced Growth Portfolio Class X
shares produced a total return of 1.91 percent versus 6.56 percent for the
Russell 1000(R) Value Index(1), and -1.15 percent for the Lehman Brothers U.S.
Government/Credit Index(2). For the same period, the Portfolio's Class Y shares
returned 1.79 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 stock portion of the Portfolio, telecommunication services stocks
detracted most from returns relative to the Russell 1000 Value Index. After
several years of declining performance, the telecommunication services sector
began to show signs of progress during the period. However, our selections did
not perform as well as those stocks that led the sector's turnaround. The
Portfolio's health care representation was another significant laggard on a
relative basis. Negative company-specific news at
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(1) 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.
(2) THE LEHMAN BROTHERS U.S. GOVERNMENT/CREDIT INDEX TRACKS THE PERFORMANCE OF
GOVERNMENT AND CORPORATE OBLIGATIONS, INCLUDING U.S. GOVERNMENT AGENCY AND
TREASURY SECURITIES AND CORPORATE AND YANKEE BONDS. 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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selected health care equipment and services companies proved detrimental to the
Portfolio's exposure there. Additionally, large-cap pharmaceuticals -- which
comprise a major portion of the Portfolio's health care position -- generated
lackluster performance. Stock selection in the industrials sector also hampered
relative gains, as the Portfolio's holdings in capital goods and aerospace and
defense did not keep pace with other stronger performing stocks in the sector.
Also within the industrials sector, the Portfolio's lack of exposure to the
transportation industry had a negative impact on relative performance.
Although the Portfolio underperformed the Russell 1000 Value Index during the
six-month period, it did achieve positive returns on an absolute basis across
all stock market sectors except technology. On a relative basis, the Portfolio
benefited from an underweight in the utilities sector. The sector has not
performed as well as it did in 2005, and investors rotated away from utility
stocks in pursuit of higher yields in fixed income investments. (The rising
interest rate environment makes utility stock yields less attractive relative to
certain fixed income investments.) Elsewhere, the Portfolio was well positioned
within the consumer discretionary sector. Select holdings in the retail and
media industries combined with minimal exposure to the weak performing auto and
apparel industries added to relative gains during the period.
The Portfolio's fixed income investments focused on higher-quality securities.
While this defensive posture provided some performance support over the period,
much of that support was offset by the underperformance of higher-rated bonds
relative to lower-rated segments of the market. The Portfolio benefited from
strong security selection among corporate issues.
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, 2006, Capital Opportunities Portfolio
Class X shares produced a total return of 2.48 percent versus -0.32 percent for
the Russell 3000(R) Growth Index(3). For the same period, the Portfolio's Class
Y shares returned 2.34 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 APPLICABLE SALES CHARGES
BY YOUR INSURANCE COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE.
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(3) 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.
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During this period, the Portfolio's outperformance against the Russell 3000
Growth Index was a result of both stock selection and sector allocation
decisions. The top contributing sectors relative to the Russell benchmark's
sector returns were autos and transportation, technology and health care. Within
the autos and transportation sector, stock selection had the most significant
positive impact on performance, particularly in the transportation logistics
area. Additionally, the Portfolio benefited from an overweight allocation
relative to the benchmark. In the technology sector, holdings in the
semiconductor, computer technology and computer services software and systems
industries, as well as an underweight allocation relative to the benchmark,
proved advantageous. Positive stock selection in health care services and
biotech companies boosted performance within the health care sector. The
Portfolio's performance was also enhanced by an avoidance of health care
management companies and an underweight allocation in the health care sector
overall.
In contrast, the Portfolio was slightly weakened by activity in the consumer
discretionary, producer durables and consumer staples sectors. Stock selection
in consumer discretionary, particularly in commercial services, leisure time and
consumer electronics companies, detracted from relative performance, as did an
underweight allocation in the sector overall. Within the producer durables
sector, an underweight sector allocation combined with stock selection in
homebuilding firms and an avoidance of aerospace companies collectively hindered
returns. Finally, an underweight in the consumer staples sector deterred the
Portfolio's overall advance.
At the close of this period, consumer discretionary was the largest weighted
sector within the Portfolio, and also represented the greatest overweight
relative to the Russell 3000 Growth Index.
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, 2006, Developing Growth Portfolio Class
X shares produced a total return of 4.21 percent versus 2.56 percent for the
Russell Midcap(R) Growth Index(4). For the same period, the Portfolio's Class Y
shares returned 4.10 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.
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(4) THE RUSSELL MIDCAP (R) GROWTH INDEX MEASURES THE PERFORMANCE OF THOSE
RUSSELL MIDCAP (R) INDEX 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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The Portfolio outperformed the Russell Midcap Growth Index primarily due to
strong stock selection. Among the top contributors to the Portfolio were the
autos and transportation, the multi-industry ("other") and utilities sectors.
Within the autos and transportation sector, stock selection had a significant
positive impact on performance, particularly in the transportation logistics
area. Additionally, the Portfolio benefited from an overweight allocation to the
autos and transportation sector. Stock selection in the "other" category, which
includes multi-sector companies, also propelled returns. In the utilities
sector, the Portfolio's investments in selected wireless companies along with an
overweight sector allocation yielded strong results.
In contrast, relative to the Russell Midcap Growth Index, the main areas of
weakness for the Portfolio were the materials and processing, consumer
discretionary and other energy sectors. Within the material and processing
sector, an underweight allocation, stock selection in real estate and building
materials firms and an avoidance of steel companies all detracted from
performance. A large overweight allocation in the consumer discretionary sector
negatively affected the Portfolio, although stock selection within the sector
was neutral, with gains in retail and casino and gambling holdings offsetting
losses in commercial services firms. Lastly, a lack of exposure to coal and oil
well equipment stocks hindered relative returns in the energy sector.
At the close of this period, consumer discretionary was the largest weighted
sector within the Portfolio, and also represented the greatest overweight
relative to the Russell Midcap Growth Index.
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.
Dividend Growth Portfolio
For the six-month period ended June 30, 2006, Dividend Growth Portfolio Class X
shares produced a total return of -0.15 percent versus 2.71 percent for the S&P
500(R) Index(5). For the same period, the Portfolio's Class Y shares returned
- -0.28 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.
Broadly speaking, the high quality, dividend paying stocks in which the
Portfolio seeks to invest were out of favor with investors during the period.
Especially in the first quarter, investors demonstrated a preference for
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(5) 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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the riskier segments of the stock market at the expense of more established,
less volatile companies. On a sector basis, relative to the S&P 500 Index, our
stock selection in health care was a "perfect storm" of lagging performance
across all industries, including health care providers and services,
pharmaceuticals, health care equipment and biotechnology. We attribute this
widespread weakness in part to company or industry specific negative events and
in part to investors locking in profits on 2005's gains. Although an underweight
in technology helped the Portfolio, stock selection within the sector was a
detractor from relative performance. Our selections in communications equipment
and computer hardware and peripherals significantly underperformed some of the
Index's better performing stocks in these groups. The Portfolio's industrials
holdings also had a net negative effect on relative returns. While the
Portfolio's sizeable allocation to industrial conglomerates did have positive
performance during the period, other industrial companies experienced much
larger gains. Within the sector, the more economically sensitive industries --
such as road and rail, machinery, electrical equipment and air freight and
logistics -- outperformed, and the Portfolio had little to no exposure to these
groups.
However, the Portfolio did achieve notable positive performance elsewhere. The
largest contributor to the Portfolio's relative return was an overweight to the
energy sector. Energy stocks continued to lead the broad market, as ongoing high
commodity prices supported strong profits for many energy companies. An
underweight in the technology sector -- one of the S&P 500 Index's two negative
performing sectors during the period -- also benefited the Portfolio's return on
a relative basis. A combination of sluggish demand from businesses and the
expectation of consumers retrenching contributed to weakness across a number of
technology industry groups, especially semiconductors and semiconductor capital
equipment, software and services, and hardware and equipment. Stock selection in
the materials sector -- although representing a very small portion of the
Portfolio -- had a large positive impact on relative returns. Here, the
Portfolio's exposure to the chemicals and metals and mining industries added
materially to gains.
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.
Equally-Weighted S&P 500 Portfolio
For the six-month period ended June 30, 2006, Equally-Weighted S&P 500 Portfolio
Class X shares produced a total return of 4.02 percent versus 4.04 percent for
the Standard & Poor's Equal Weight Index(6). For the same period, the
Portfolio's Class Y shares returned 3.84 percent. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS.
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(6) THE STANDARD & POOR'S 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 SALES CHARGES OR
FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST
DIRECTLY IN AN INDEX.
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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 its exposure to the industrials, materials and
energy sectors during the reporting period. Growth in the global economy
provided a favorable backdrop for the economically sensitive industrials sector,
particularly in the transportation industry. Significant global demand for raw
materials supported rising commodity prices, which bolstered materials stocks.
The energy sector was also among the Portfolio's leading contributors as the
high price of oil and natural gas continued to drive earnings growth for many
energy companies.
Conversely, the health care sector was the Portfolio's largest detractor from
returns. Here, health care equipment and services and biotechnology stocks were
notable laggards. The Portfolio also lost ground in the technology sector,
primarily due to semiconductors stocks. Concerns about languishing sales and
price wars led the group lower. Software and services and hardware and equipment
stocks also declined amid weak demand for software and personal computers from
both consumers and corporations. The consumer discretionary sector was another
area of weakness as the beleaguered auto components industry suffered a
bankruptcy during the period.
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.
Flexible Income Portfolio
For the six-month period ended June 30, 2006, Flexible Income Class X shares
produced a total return of 0.67 percent versus -0.17 percent for the Lehman
Brothers Intermediate U.S. Government/Credit Index(7). For the same period, the
Portfolio's Class Y shares returned 0.69 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 APPLICABLE SALES CHARGES
BY YOUR INSURANCE COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE.
During the period, we kept the Portfolio's overall duration* well below that of
the Lehman Brothers Intermediate U.S. Government/Credit Index. This posture was
beneficial as interest rates rose across the market, especially in the short-
and intermediate-portions of the yield curve.
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(7) 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.
* A MEASURE OF THE SENSITIVITY OF A BOND'S PRICE TO CHANGES IN INTEREST
RATES, EXPRESSED IN YEARS. EACH YEAR OF DURATION REPRESENTS AN EXPECTED 1
PERCENT CHANGE IN THE PRICE OF A BOND FOR EVERY 1 PERCENT CHANGE IN
INTEREST RATES. THE LONGER A BOND'S DURATION, THE GREATER THE EFFECT OF
INTEREST-RATE MOVEMENTS ON ITS PRICE. TYPICALLY, FUNDS WITH SHORTER
DURATIONS PERFORM BETTER IN RISING-INTEREST-RATE ENVIRONMENTS, WHILE FUNDS
WITH LONGER DURATIONS PERFORM BETTER WHEN RATES DECLINE.
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Our focus on higher-coupon mortgage backed securities with slow prepayments
boosted the Portfolio's yield, and benefited performance. Gains from these
securities were offset, however, by a large underweight in lower- and
current-coupon issues, which detracted from the Portfolio's relative
performance.
Within the credit section of the Portfolio, we employed a defensive strategy
with a focus on higher-quality securities in both the investment-grade and
high-yield markets. While this defensive posture provided some performance
support over the period, much of that support was offset by the underperformance
of higher-rated bonds relative to lower-rated segments of the market. The
Portfolio benefited from strong security selection among corporate issues.
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.
Focus Growth Portfolio (formerly American Opportunities Portfolio)
For the six-month period ended June 30, 2006, Focus Growth Portfolio Class X
shares produced a total return of -4.22 percent versus -0.93 percent for the
Russell 1000(R) Growth Index(8). For the same period, the Portfolio's Class Y
shares returned -4.33 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 underperformed the Russell 1000 Growth Index primarily due to
stock selection, although sector allocation decisions did provide a positive
effect to overall relative returns.
Relative to the Russell 1000 Growth Index, the Portfolio lost the most ground in
the consumer discretionary, health care and producer durables sectors. Within
the consumer discretionary sector, stock selection in commercial services,
leisure time and consumer electronics companies detracted from performance.
Unfavorable stock selection in homebuilding firms, combined with an avoidance of
aerospace companies and an underweight allocation in the producer durables
sector, dampened relative gains. In the health care sector, stock selection in
health care management services and medical and dental instruments and supplies
firms negatively affected performance, although an underweight allocation in
health care did manage to slightly offset languishing returns within this
sector.
- ----------
(8) 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.
10
<Page>
In contrast, the Portfolio was helped by the activity within the financial
services sector, where stock selection in diversified financial services,
information technology and other securities brokerage and services boosted
relative performance. In the autos and transportation sector, an overweight
allocation combined with stock selection, particularly in transportation
logistics companies, also yielded strong results. Finally, the Portfolio's
overweight allocation in the energy sector proved advantageous, although stock
selection did mildly detract from the gains made in this sector.
At the close of the period, consumer discretionary was the largest weighted
sector within the Portfolio, and also represented the greatest overweight
relative to the Russell 1000 Growth Index.
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.
Global Equity Portfolio
For the six-month period ended June 30, 2006, Global Equity Portfolio Class X
shares produced a total return of 5.91 percent versus 6.06 percent for the MSCI
World Index(9). For the same period, the Portfolio's Class Y shares returned
5.78 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.
We attribute the Portfolio's performance lag relative to the MSCI World Index to
two main factors. First, as value stocks outperformed growth stocks during the
six-month period, the Portfolio's growth orientation faced a headwind. Second,
sector allocation had a negative influence on the Portfolio's results relative
to the index. (We note that the Portfolio's overall allocations were the result
of individual security selections, rather than of "top-down" decisions about the
relative merits of sectors and countries.) The best performing groups were
energy and materials -- so called "cyclicals" because of their strong
correlations to economic cycles. The Portfolio, however, held less exposure to
these sectors and therefore did not participate fully in their advance. At the
same time, the Portfolio's overweights in the technology and health care sectors
further dampened gains, as these sectors had negative returns in the broad
market.
However, the Portfolio did well relative to the index across a number of areas.
Although sector allocation detracted from relative results, stock selection
benefited the Portfolio, particularly in retail and financials.
- ----------
(9) 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.
11
<Page>
On a country basis, an underweight in the U.S. and Japan added to relative
returns as these markets underperformed the global average. A considerable
weight in the emerging markets bolstered relative performance as well. The
region posted respectable gains during the period.
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, 2006, Growth Portfolio Class X shares
produced a total return of -3.08 percent versus -0.93 percent for the Russell
1000(R) Growth Index(10). For the same period, the Portfolio's Class Y shares
returned -3.17 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 this period, the Portfolio's underperformance against the Russell 1000
Growth Index was caused by stock selection, although overall sector allocations
did offset some of the negative returns. The sectors that detracted the most
from the Portfolio were the consumer discretionary, producer durables and health
care sectors. Within the consumer discretionary sector, stock selection
contributed to underperformance, particularly in commercial services, leisure
time and consumer electronics companies. The sector's overweight allocation
within the Portfolio also moderately hampered performance. In the producer
durables sector, exposure to homebuilding firms, an avoidance of aerospace
companies and the sector underweight all served to diminish returns. The
Portfolio's health care exposure also suffered due to stock selection in medical
and dental instruments and supplies firms, despite the positive effects produced
by an underweight allocation within this sector.
The primary sources of positive relative returns for the Portfolio included the
autos and transportation, multi-industry ("other") and technology sectors. In
the autos and transportation sector, an overweight allocation and stock
selection, particularly in transportation logistics companies, positively
influenced performance. Stock selection in the "other" category, which includes
multi-sector companies, also added to relative returns. Finally, an underweight
allocation in the technology sector boosted gains, while stock selection mildly
dampened the sector's advance.
- ----------
(10) 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.
12
<Page>
At the close of this period, consumer discretionary was the largest weighted
sector within the Portfolio, and also represented the greatest overweight
relative to the Russell Index.
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.
Money Market Portfolio
AN INVESTMENT IN A MONEY MARKET FUND 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, 2006, Money Market Portfolio had net assets of more than $120
million with an average portfolio maturity of 29 days. For the seven-day period
ended June 30, 2006, the Portfolio provided an effective annualized yield of
4.80 percent and a current yield of 4.69 percent, while its 30-day moving
average yield for June was 4.63 percent. For the six-month period ended June 30,
2006 the Portfolio's Class X shares returned 2.11 percent. PAST PERFORMANCE IS
NO GUARANTEE OF FUTURE RESULTS.
For the seven-day period ended June 30, 2006, the Portfolio's Class Y shares
provided an effective annualized yield of 4.54 percent and a current yield of
4.44 percent, while its 30-day moving average yield for June was 4.38 percent.
For the six-month period ended June 30, 2006, the Portfolio's Class Y shares
returned 1.99 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 APPLICABLE SALES CHARGES
BY YOUR INSURANCE COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE.
Our strategy in managing the Portfolio remained consistent with its 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 avoiding the use of derivatives or
structured notes that might fluctuate excessively with changing interest rates.
We also took advantage of the rising yields available on money market
securities. As short-term interest rates climbed, we reinvested the proceeds of
maturing short-term holdings into higher-yielding securities.
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.
13
<Page>
Utilities Portfolio
For the six-month period ended June 30, 2006, Utilities Portfolio Class X shares
produced a total return of 4.29 percent versus 2.71 percent for the S&P 500(R)
Index(11). For the same period, the Portfolio's Class Y shares returned 4.11
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.
A combined weighting of 41 percent among the telecommunications services and
natural gas/energy sectors contributed to the Portfolio's superior returns
relative to the S&P Index. In addition, stock selection within certain wireless
and coal companies further enhanced overall performance.
At the close of this period, the Portfolio was well diversified across the
utilities sector. Electric utilities represented 57 percent of the equity
allocation, while natural gas/energy represented 25 percent and
telecommunications services represented 18 percent. The average cash position
over the six-month period was in the range of 1.0 to 2.0 percent. We note that
the Portfolio's holdings and allocations may be modified at any time, in
response to our analysis of broader trends or company specific fundamentals.
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.
PROXY VOTING POLICY AND PROCEDURES AND PROXY VOTING RECORD
You may obtain a copy of the Portfolios' Proxy Voting Policy 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. It is also
available on the Securities and Exchange Commission's Web site at
http://www.sec.gov.
You may obtain information regarding how the Portfolios voted proxies relating
to portfolio securities during the most recent twelve-month period ended June 30
without charge 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.
- ----------
(11) 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.
14
<Page>
FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS
Each Morgan Stanley fund provides a complete schedule of portfolio holdings in
its semiannual and annual reports within 60 days of the end of the fund's second
and fourth fiscal quarters. The semiannual reports and the annual reports are
filed electronically with the Securities and Exchange Commission (SEC) on Form
N-CSRS and Form N-CSR, respectively. Morgan Stanley also delivers the semiannual
and annual reports to fund shareholders and makes these reports available on its
public web site, www.morganstanley.com. Each Morgan Stanley fund also files a
complete schedule of portfolio holdings with the SEC for the fund's first and
third fiscal quarters on Form N-Q. Morgan Stanley does not deliver the reports
for the first and third fiscal quarters to shareholders, nor are the reports
posted to the Morgan Stanley public web site. You may, however, obtain the Form
N-Q filings (as well as the Form N-CSR and N-CSRS filings) by accessing the
SEC's web site, http://www.sec.gov. You may also review and copy them at the
SEC's public reference room in Washington, DC. Information on the operation of
the SEC's public reference room may be obtained by calling the SEC at (800)
SEC-0330. You can also request copies of these materials, upon payment of a
duplicating fee, by electronic request at the SEC's e-mail address
(publicinfo@sec.gov) or by writing the public reference section of the SEC,
Washington, DC 20549-0102.
15
<Page>
Morgan Stanley Select Dimensions Investment Series
FUND PERFORMANCE - JUNE 30, 2006
AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED JUNE 30, 2006(1)
SINCE DATE OF
CLASS X 1 YEAR 5 YEARS 10 YEARS INCEPTION INCEPTION
- ------- ------ ------- -------- --------- ---------
Balanced Growth 7.46% 4.91% 7.65% 9.03% 11/9/94
Capital Opportunities 23.46 (0.05) N/A 3.05 1/21/97
Developing Growth 19.85 6.92 7.86 12.01 11/9/94
Dividend Growth 6.80 2.27 7.17 10.38 11/9/94
Equally-Weighted S&P 500 11.67 7.95 11.00 12.43 11/9/94
Flexible Income 2.00 6.58 3.76 4.31 11/9/94
Focus Growth 11.02 0.31 7.93 10.55 11/9/94
Global Equity 17.84 5.36 6.60 7.54 11/9/94
Growth 11.94 0.97 5.81 7.25 11/9/94
Money Market 3.77 1.82 3.51 3.82 11/9/94
Utilities 8.59 4.62 9.20 10.76 11/9/94
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH
LESS THAN THEIR ORIGINAL COST. THE TABLE DOES NOT REFLECT THE DEDUCTION OF TAXES
THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND
SHARES. PERFORMANCE FOR CLASS X SHARES WILL VARY FROM THE PERFORMANCE OF CLASS Y
SHARES DUE TO DIFFERENCES IN EXPENSES.
- ----------
(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.
16
<Page>
AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED JUNE 30, 2006(1)
SINCE DATE OF
CLASS Y 1 YEAR 5 YEARS 10 YEARS INCEPTION INCEPTION
- ------- ------ ------- -------- --------- ---------
Balanced Growth 7.15% 4.64% N/A 6.23% 7/24/00
Capital Opportunities 23.13 (0.30) N/A (11.46) 7/24/00
Developing Growth 19.57 6.66 N/A (0.21) 7/24/00
Dividend Growth 6.54 2.03 N/A 4.00 7/24/00
Equally-Weighted S&P 500 11.35 7.68 N/A 8.40 7/24/00
Flexible Income 1.75 6.31 N/A 3.60 7/24/00
Focus Growth 10.77 0.07 N/A (4.83) 7/24/00
Global Equity 17.55 5.09 N/A 0.88 7/24/00
Growth 11.64 0.73 N/A (4.75) 7/24/00
Money Market 3.51 1.57 N/A 2.15 7/24/00
Utilities 8.33 4.36 N/A (0.23) 7/24/00
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH
LESS THAN THEIR ORIGINAL COST. THE TABLE DOES NOT REFLECT THE DEDUCTION OF TAXES
THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND
SHARES. PERFORMANCE FOR CLASS Y SHARES WILL VARY FROM THE PERFORMANCE OF CLASS X
SHARES DUE TO DIFFERENCES IN EXPENSES.
- ----------
(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.
17
<Page>
Morgan Stanley Select Dimensions Investment Series
EXPENSE EXAMPLE - JUNE 30, 2006
As a shareholder of the Portfolio, you incur two types of costs: (1) insurance
company charges; and (2) ongoing costs, including advisory fees; distribution
and service (12b-1) fees; and other Portfolio expenses. This example is intended
to help you understand your ongoing costs (in dollars) of investing in the
Portfolio and to compare these costs with the ongoing costs of investing in
other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period 01/01/06 - 06/30/06.
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.
18
<Page>
MONEY MARKET
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
01/01/06 -
01/01/06 06/30/06 06/30/06
------------- ------------- ---------------
CLASS X
Actual (2.11% return) $1,000.00 $1,021.10 $2.87
Hypothetical (5% annual return
before expenses) $1,000.00 $1,022.09 $2.87
CLASS Y
Actual (1.99% return) $1,000.00 $1,019.90 $4.13
Hypothetical (5% annual return
before expenses) $1,000.00 $1,020.84 $4.13
- ----------
* EXPENSES ARE EQUAL TO THE PORTFOLIO'S ANNUALIZED EXPENSE RATIOS OF 0.57%
AND 0.82% FOR CLASS X CLASS Y SHARES, RESPECTIVELY, MULTIPLIED BY THE
AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 182**/365 (TO REFLECT
THE ONE-HALF YEAR PERIOD).
** ADJUSTED TO REFLECT NON-BUSINESS DAY ACCRUALS.
FLEXIBLE INCOME TRUST
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
01/01/06 -
01/01/06 06/30/06 06/30/06
------------- ------------- ---------------
CLASS X
Actual (0.67% return) $1,000.00 $1,006.70 $2.79
Hypothetical (5% annual return
before expenses) $1,000.00 $1,022.02 $2.81
CLASS Y
Actual (0.69% return) $1,000.00 $1,006.90 $4.03
Hypothetical (5% annual return
before expenses) $1,000.00 $1,020.78 $4.06
- ----------
* EXPENSES ARE EQUAL TO THE PORTFOLIO'S ANNUALIZED EXPENSE RATIOS OF 0.56%
AND 0.81% FOR CLASS X AND CLASS Y SHARES, RESPECTIVELY, MULTIPLIED BY THE
AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT
THE ONE-HALF YEAR PERIOD).
BALANCED GROWTH
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
01/01/06 -
01/01/06 06/30/06 06/30/06
------------- ------------- ---------------
CLASS X
Actual (1.91% return) $1,000.00 $1,019.10 $3.55
Hypothetical (5% annual return
before expenses) $1,000.00 $1,021.27 $3.56
CLASS Y
Actual (1.79% return) $1,000.00 $1,017.90 $4.80
Hypothetical (5% annual return
before expenses) $1,000.00 $1,020.03 $4.81
- ----------
* EXPENSES ARE EQUAL TO THE PORTFOLIO'S ANNUALIZED EXPENSE RATIOS OF 0.71%
AND 0.96% FOR CLASS X AND CLASS Y SHARES, RESPECTIVELY, MULTIPLIED BY THE
AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT
THE ONE-HALF YEAR PERIOD).
19
<Page>
UTILITIES
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
01/01/06 -
01/01/06 06/30/06 06/30/06
------------- ------------- ---------------
CLASS X
Actual (4.29% return) $1,000.00 $1,042.90 $3.75
Hypothetical (5% annual return
before expenses) $1,000.00 $1,021.12 $3.71
CLASS Y
Actual (4.11% return) $1,000.00 $1,041.10 $5.01
Hypothetical (5% annual return
before expenses) $1,000.00 $1,019.89 $4.96
- ----------
* EXPENSES ARE EQUAL TO THE PORTFOLIO'S ANNUALIZED EXPENSE RATIOS OF 0.74%
AND 0.99% FOR CLASS X AND CLASS Y SHARES, RESPECTIVELY, MULTIPLIED BY THE
AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT
THE ONE-HALF YEAR PERIOD).
DIVIDEND GROWTH
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
01/01/06 -
01/01/06 06/30/06 06/30/06
------------- ------------- ---------------
CLASS X
Actual (-0.15% return) $1,000.00 $ 998.50 $3.22
Hypothetical (5% annual return
before expenses) $1,000.00 $1,021.57 $3.26
CLASS Y
Actual (-0.28% return) $1,000.00 $ 997.20 $4.46
Hypothetical (5% annual return
before expenses) $1,000.00 $1,020.33 $4.51
- ----------
* EXPENSES ARE EQUAL TO THE PORTFOLIO'S ANNUALIZED EXPENSE RATIOS OF 0.65%
AND 0.90% FOR CLASS X AND CLASS Y SHARES, 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
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
01/01/06 -
01/01/06 06/30/06 06/30/06
------------- ------------- ---------------
CLASS X
Actual (4.02% return) $1,000.00 $1,040.20 $1.32
Hypothetical (5% annual return
before expenses) $1,000.00 $1,023.51 $1.30
CLASS Y
Actual (3.84% return) $1,000.00 $1,038.40 $2.58
Hypothetical (5% annual return
before expenses) $1,000.00 $1,022.27 $2.56
- ----------
* EXPENSES ARE EQUAL TO THE PORTFOLIO'S ANNUALIZED EXPENSE RATIOS OF 0.26%
AND 0.51% FOR CLASS X AND CLASS Y SHARES, 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 *
------------- ------------- ---------------
01/01/06 -
01/01/06 06/30/06 06/30/06
------------- ------------- ---------------
CLASS X
Actual (-3.08% return) $1,000.00 $ 969.20 $3.32
Hypothetical (5% annual return before expenses) $1,000.00 $1,021.42 $3.41
CLASS Y
Actual (-3.17% return) $1,000.00 $ 968.30 $4.58
Hypothetical (5% annual return before expenses) $1,000.00 $1,020.18 $4.66
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE PORTFOLIO'S ANNUALIZED EXPENSE RATIOS OF 0.68%
AND 0.93% FOR CLASS X AND CLASS Y SHARES, RESPECTIVELY, MULTIPLIED BY THE
AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT
THE ONE-HALF YEAR PERIOD).
FOCUS GROWTH
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
01/01/06 -
01/01/06 06/30/06 06/30/06
------------- ------------- ---------------
CLASS X
Actual (-4.22% return) $1,000.00 $ 957.80 $3.35
Hypothetical (5% annual return before expenses) $1,000.00 $1,021.37 $3.46
CLASS Y
Actual (-4.33% return) $1,000.00 $ 956.70 $4.56
Hypothetical (5% annual return before expenses) $1,000.00 $1,020.13 $4.71
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE PORTFOLIO'S ANNUALIZED EXPENSE RATIOS OF 0.69%
AND 0.94% FOR CLASS X AND CLASS Y SHARES, RESPECTIVELY, MULTIPLIED BY THE
AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT
THE ONE-HALF YEAR PERIOD).
CAPITAL OPPORTUNITIES
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
01/01/06 -
01/01/06 06/30/06 06/30/06
------------- ------------- ---------------
CLASS X
Actual (2.48% return) $1,000.00 $1,024.80 $4.32
Hypothetical (5% annual return before expenses) $1,000.00 $1,020.53 $4.31
CLASS Y
Actual (2.34% return) $1,000.00 $1,023.40 $5.57
Hypothetical (5% annual return before expenses) $1,000.00 $1,019.29 $5.56
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE PORTFOLIO'S ANNUALIZED EXPENSE RATIOS OF 0.86%
AND 1.11% FOR CLASS X AND CLASS Y SHARES, RESPECTIVELY, MULTIPLIED BY THE
AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT
THE ONE-HALF YEAR PERIOD).
21
<Page>
GLOBAL EQUITY
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
01/01/06 -
01/01/06 06/30/06 06/30/06
------------- ------------- ---------------
CLASS X
Actual (5.91% return) $1,000.00 $1,059.10 $5.56
Hypothetical (5% annual return before expenses) $1,000.00 $1,019.39 $5.46
CLASS Y
Actual (5.78% return) $1,000.00 $1,057.80 $6.84
Hypothetical (5% annual return before expenses) $1,000.00 $1,018.15 $6.71
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE PORTFOLIO'S ANNUALIZED EXPENSE RATIOS OF 1.09%
AND 1.34% FOR CLASS X AND CLASS Y SHARES, RESPECTIVELY, MULTIPLIED BY THE
AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT
THE ONE-HALF YEAR PERIOD).
DEVELOPING GROWTH
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
01/01/06 -
01/01/06 06/30/06 06/30/06
------------- ------------- ---------------
CLASS X
Actual (4.21% return) $1,000.00 $1,042.10 $3.04
Hypothetical (5% annual return before expenses) $1,000.00 $1,021.82 $3.01
CLASS Y
Actual (4.10% return) $1,000.00 $1,041.00 $4.30
Hypothetical (5% annual return before expenses) $1,000.00 $1,020.58 $4.26
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE PORTFOLIO'S ANNUALIZED EXPENSE RATIOS OF 0.60%
AND 0.85% FOR CLASS X AND CLASS Y SHARES, RESPECTIVELY, MULTIPLIED BY THE
AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT
THE ONE-HALF YEAR PERIOD).
22
<Page>
Morgan Stanley Select Dimensions Investment Series
INVESTMENT ADVISORY AGREEMENT APPROVAL - JUNE 30, 2006
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 Portfolios'
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 Investment 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 advisory and administrative services to the Portfolios. 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 each
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
On a regular basis, the Board reviews the performance of all funds in the Morgan
Stanley Fund Complex, including the Portfolios, compared to their peers, paying
specific attention to the underperforming funds. In addition, the Board
specifically reviewed each Portfolio's performance for the one-, three- and
five-year periods ended November 30, 2005, as shown in reports provided by
Lipper (the "Lipper Reports"), compared to the performance of comparable funds
selected by Lipper (the "performance peer group") for each Portfolio. The Board
also discussed with the Adviser the performance goals and the actual results
achieved in managing each Portfolio. When a fund underperforms its performance
peer group, the Board discusses with the Adviser the causes of the
underperformance and, where necessary, specific changes to the fund's investment
strategy or investment personnel.
With respect to the Balanced Growth, Utilities, Equally-Weighted S&P 500, Focus
Growth, Capital Opportunities, Developing Growth, Growth and Flexible Income
Portfolios, the Board concluded that each Portfolio's performance was
competitive with that of its performance peer group.
With respect to the Dividend Growth and Money Market Portfolios, the Board
considered that adherence to the Portfolios' investment strategies may result in
periods of underperformance, but that, over time, adherence to the Portfolios'
investment strategies is appropriate. The Board concluded that the performance
of the Portfolios was acceptable.
With respect to the Global Equity Portfolio, the Board concluded that the
Portfolio can reasonably be expected to be competitive with that of its
performance peer group based on recent action taken or proposed to be taken by
the Adviser with respect to the Portfolio's investment strategy and/or
investment personnel.
23
<Page>
FEES RELATIVE TO OTHER PROPRIETARY FUNDS MANAGED BY THE ADVISER WITH COMPARABLE
INVESTMENT STRATEGIES
The Board reviewed the advisory and administrative fee (together, the
"management fee") rate paid by each Portfolio under the Management Agreement.
With respect to the Dividend Growth, Balanced Growth, Equally-Weighted S&P 500,
Focus Growth, Capital Opportunities, Flexible Income and Money Market
Portfolios, the Board noted that the management fee rates were comparable to the
management fee rates charged by the Adviser to other proprietary funds it
manages with investment strategies comparable to those of the Portfolios.
With respect to the Utilities, Developing Growth and Growth Portfolios, the
Board noted that the management fee rates were comparable to the management fee
rates charged by the Adviser to other proprietary funds it manages with
investment strategies comparable to those of the Portfolios taking into account
the scope of the services provided.
With respect to the Global Equity Portfolio, the Board noted that the Adviser
did not manage any other proprietary funds 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 total expense ratio of each
Portfolio as compared to the average management fee rate and average total
expense ratio for funds, selected by Lipper (the "expense peer group"), managed
by other advisers with investment strategies comparable to those of the
Portfolios, as shown in the Lipper Reports. The Board concluded that each
Portfolio's management fee rate and total expense ratio were competitive with
those of its expense peer group.
BREAKPOINTS AND ECONOMIES OF SCALE
The Board reviewed the structure of each Portfolio's management fee schedule
under the Management Agreement.
With respect to the Dividend Growth, Balanced Growth, Utilities,
Equally-Weighted S&P 500, Focus Growth, Capital Opportunities, Developing
Growth, Growth and Money Market Portfolios, the Board noted that each
Portfolio's management fee schedule includes one or more breakpoints. The Board
also reviewed the level of each Portfolio's management fee and noted that each
fee, as a percentage of the Portfolio's net assets, would decrease as net assets
increase because each management fee includes one or more breakpoints. The Board
concluded that each Portfolio's management fee would reflect economies of scale
as assets increase.
With respect to the Global Equity and Flexible Income Portfolios, the Board
noted that the management fee schedules do not include breakpoints. The Board
noted that the Portfolios' assets were relatively small. The Board concluded
that it would be premature to consider economies of scale as a factor in
approving the Management Agreement at the present time.
24
<Page>
PROFITABILITY OF THE ADVISER AND AFFILIATES
The Board considered information concerning the costs incurred and profits
realized by the Adviser and affiliates during the last year from their
relationship with each Portfolio and during the last two years from their
relationship with the Morgan Stanley Fund Complex and reviewed with the Adviser
the cost allocation methodology used to determine the profitability of the
Adviser and affiliates. Based on its review of the information it received, the
Board concluded that the profits earned by the Adviser and affiliates were not
excessive in light of the advisory, administrative and other services provided
to the Portfolios.
FALL-OUT BENEFITS
The Board considered so-called "fall-out benefits" derived by the Adviser and
affiliates from their relationship with the Portfolio and the Morgan Stanley
Fund Complex. The Board considered the "float" benefits derived from handling of
checks for purchases and sales 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 each Portfolio 12b-1 fees for
distribution and shareholder services. The Board concluded that the float
benefits were relatively small and the 12b-1 fees were competitive with those of
other broker-dealers.
With respect to the Dividend Growth, Balanced Growth, Global Equity, Utilities,
Equally-Weighted S&P 500, Focus Growth, Capital Opportunities, Developing Growth
and Growth Portfolios, the Board considered "soft dollar" benefits (discussed in
the next section). The Board also considered that an affiliate of the Adviser
sold a joint venture that owned an electronic trading system network ("ECN"),
which may be used by the Adviser for trading on behalf of the Portfolios. As
part of the sale of the joint venture, the affiliate receives a 10-year payout
based on the revenue stream from trading on the ECN. Although the affiliate
disgorges the portion of the payout that is comprised of commissions received
from trades executed by the Adviser on the ECN to a charitable organization, the
Board considered the fact that trades by the Adviser would increase order flow,
and, thus, result in a potential fall-out benefit to the affiliate. The Board
concluded that the affiliate disgorged revenues in connection with the
ECN-related revenue and the potential fall-out benefit from increased order flow
was relatively small.
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 Portfolios 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 Portfolios.
With respect to the Dividend Growth, Balanced Growth, Global Equity, Utilities,
Focus Growth, Capital Opportunities, Developing Growth and Growth Portfolios,
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 Portfolios and other funds in the
Morgan Stanley Fund Complex.
25
<Page>
With respect to the Equally-Weighted S&P 500 Portfolio, the Adviser informed the
Board that the Portfolio's commissions are used to pay for execution services
only.
With respect to the Flexible Income and Money Market Portfolios, the Board noted
that each Portfolio invests only in fixed income securities, which do not
generate soft dollars.
ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE PORTFOLIOS'
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 PORTFOLIOS AND THE ADVISER
The Board also reviewed and considered the historical relationship between each
Portfolio and the Adviser, including the organizational structure of the
Adviser, the policies and procedures formulated and adopted by the Adviser for
managing the Portfolios' 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 each 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 Fund'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 each Portfolio's business.
GENERAL CONCLUSION
After considering and weighing all of the above factors, the Board concluded
that it would be in the best interest of each Portfolio and its shareholders to
approve renewal of the Management Agreement for another year.
26
<Page>
Money Market
PORTFOLIO OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
<Table>
<Caption>
ANNUALIZED
PRINCIPAL YIELD
AMOUNT IN ON DATE OF
THOUSANDS PURCHASE MATURITY VALUE
- ------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER (85.2%)
ASSET-BACKED - AUTO (2.6%)
$3,073 DaimlerChrysler Revolving Auto Conduit LLC 5.16 - 5.34% 08/01/06 - 08/02/06 $ 3,059,273
-----------
ASSET-BACKED - CONSUMER (16.7%)
3,315 Bryant Park Funding LLC 5.17 - 5.43 07/20/06 - 09/15/06 3,289,453
1,910 Gemini Securitization Corp., LLC 5.30 07/05/06 1,908,875
3,570 Mont Blanc Capital Corp. 5.26 - 5.46 07/07/06 - 09/07/06 3,548,216
1,000 Old Line Funding Corp.* 5.21 07/06/06 999,278
1,105 Ranger Funding Co., LLC * 5.10 07/07/06 1,104,064
3,200 Regency Markets No 1 LLC * 5.04 - 5.24 07/17/06 - 07/20/06 3,192,206
1,285 Thames Asset Global Securitization * 5.27 - 5.35 07/20/06 - 08/14/06 1,279,041
4,774 Thunder Bay Funding LLC 5.06 - 5.30 07/07/06 - 08/15/06 4,760,050
-----------
20,081,183
-----------
ASSET-BACKED - CORPORATE (12.9%)
2,950 Amsterdam Funding Corp. 5.11 - 5.23 07/10/06 - 08/03/06 2,937,794
5,265 CAFCO LLC * 5.11 - 5.18 07/26/06 - 08/03/06 5,244,124
5,904 Nieuv Amesterdam Receivable Corp. 5.33 - 5.49 07/26/06 - 09/25/06 5,840,025
1,500 Variable Funding Co. LLC 5.31 07/10/06 1,498,013
-----------
15,519,956
-----------
ASSET-BACKED - DIVERSIFIED (6.2%)
4,700 CRC Funding LLC. * 5.11 - 5.12 07/14/06 - 08/11/06 4,683,647
1,000 Falcon Asset Securitization Co. LLC 5.17 07/14/06 998,140
1,083 Fairway Finance Corp. * 5.42 - 5.45 08/21/06 - 08/23/06 1,074,582
659 Jupiter Securitization Corp. * 5.21 08/09/06 655,316
-----------
7,411,685
-----------
ASSET-BACKED - MORTGAGE (4.9%)
5,964 Sydney Capital Corp.* 5.17 - 5.51 07/17/06 - 09/14/06 5,925,577
-----------
ASSET-BACKED - SECURITIES (14.6%)
2,413 Cancara Asset Securitisation LLC * 5.01 - 5.23 07/11/06 - 07/13/06 2,409,352
500 Clipper Receivable Co., LLC 5.26 07/20/06 498,617
5,196 Golden Fish LLC * 5.22 - 5.47 07/20/06 - 08/22/06 5,176,777
5,100 Grampian Funding LLC * 5.08 - 5.45 07/03/06 - 10/25/06 5,071,239
3,446 Scaldis Capital LLC * 5.02 - 5.10 07/14/06 - 07/17/06 3,439,394
1,000 Solitaire Funding LLC * 5.10 07/05/06 999,435
-----------
17,594,814
-----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
27
<Page>
<Table>
<Caption>
ANNUALIZED
PRINCIPAL YIELD
AMOUNT IN ON DATE OF
THOUSANDS PURCHASE MATURITY VALUE
- -------------------------------------------------------------------------------------------------------------------------
INSURANCE (3.1%)
$2,300 Irish Life & Permanent PLC 4.98 - 5.19% 07/18/06 - 07/26/06 $ 2,293,973
1,500 Prudential Funding LLC 5.14 08/15/06 1,490,494
------------
3,784,467
------------
INTERNATIONAL BANKS (23.2%)
1,900 Bank of Ireland 5.14 - 5.21 08/23/06 - 09/22/06 1,883,587
5,300 Barclays US Funding Corp. 5.13 07/18/06 - 07/25/06 5,283,296
560 BNP Paribas Finance, Inc. 4.95 07/13/06 559,089
1,000 CBA (Delaware) Finance Inc. 5.09 07/03/06 999,718
1,200 Danske Corp. * 4.98 - 5.27 07/11/06 - 07/13/06 1,198,163
5,350 DnB NOR Bank ASA 4.97 - 5.24 07/10/06 - 08/02/06 5,336,200
700 Fortis Banque Luxembourg 5.11 07/05/06 699,604
550 ING (U.S.) Funding LLC 5.20 08/08/06 547,010
3,060 KBC Financial Products International Ltd. 4.75 - 5.11 07/12/06 - 08/07/06 3,045,249
1,175 Nordea North America Inc. 5.22 - 5.29 07/06/06 - 08/01/06 1,171,967
2,200 Societe General N.A. Inc. 5.20 07/11/06 - 08/16/06 2,194,270
2,815 Spintab AB 5.08 - 5.13 07/05/06 - 08/04/06 2,807,071
700 Spintab AB * 5.22 08/01/06 696,878
700 Svenska Handelsbanken Inc. 5.09 07/06/06 699,509
750 Svenska Handelsbanken Inc. * 5.38 09/11/06 742,035
------------
27,863,646
------------
INVESTMENT BANKS/BROKERS (1.0%)
1,185 Merrill Lynch & Co. 5.20 07/06/06 1,184,146
------------
TOTAL COMMERCIAL PAPER
(COST $102,424,747) 102,424,747
------------
FLOATING RATE NOTES (7.6%)
DOMESTIC BANKS
2,000 American Express Credit Corp. 5.39+ 07/19/06~ 2,000,784
4,000 SunTrust Bank 5.27+ 07/26/06~ 4,000,000
1,605 U.S. Bank, N.A., Cincinnati 5.13+ 07/28/06~ 1,605,001
1,500 Wells Fargo Bank, N. A. 5.26+ 07/24/06~ 1,500,000
------------
TOTAL FLOATING RATE NOTES
(COST $9,105,785) 9,105,785
------------
REPURCHASE AGREEMENT (2.8%)
3,400 Barclays Capital Inc.
(dated 06/30/06; proceeds $3,401,507) (b)
(COST $3,400,000) 5.32 07/03/06 3,400,000
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
28
<Page>
<Table>
<Caption>
ANNUALIZED
PRINCIPAL YIELD
AMOUNT IN ON DATE OF
THOUSANDS PURCHASE MATURITY VALUE
- -------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCIES (2.1%)
$ 910 Freddie Mac 5.22% 08/01/06 $ 905,929
1,615 Federal National Mortgage Assoc. 5.10 07/03/06 1,614,543
------------
TOTAL U.S. GOVERNMENT AGENCIES
(COST $2,520,472) 2,520,472
------------
BANKERS' ACCEPTANCE (1.8%)
DOMESTIC BANKS
2,112 J.P. Morgan Chase Bank
(Cost $2,092,849) 5.14 - 5.48 07/31/06 - 09/25/06 2,092,849
------------
CERTIFICATE OF DEPOSIT (0.8%)
DOMESTIC BANKS
1,000 Citibank N.A. (Cost $1,000,000) 5.30 09/14/06 1,000,000
------------
TOTAL INVESTMENTS
(COST $120,543,853) (a) 100.3% 120,543,853
LIABILITIES IN EXESS OF OTHER ASSETS (0.3) (327,231)
----- ------------
NET ASSETS 100.0% $120,216,622
===== ============
</Table>
- ----------
* RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS
+ RATE SHOWN IS THE RATE IN EFFECT AT JUNE 30, 2006.
~ DATE OF NEXT INTEREST RATE RESET.
(a) COST IS THE SAME FOR FEDERAL INCOME TAX PURPOSES.
(b) COLLATERIZED BY FEDERAL NATIONAL MORTGAGE ASSOC. 5.50% DUE 01/01/36 VALUED
AT $3,468,001.
MATURITY SCHEDULE*
1-30 Days 60%
31-60 Days 21
61-90 Days 18
91-120 Days 1
---
100%
===
- ----------
* AS A PERCENTAGE OF TOTAL MARKET VALUE.
SEE NOTES TO FINANCIAL STATEMENTS
29
<Page>
Flexible Income
PORTFOLIO OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------
GOVERNMENT & CORPORATE BONDS (94.0%)
FOREIGN (15.9%)
ARGENTINA (0.2%)
GOVERNMENT OBLIGATIONS
ARS 682 Republic of Argentina (0.00)**% 12/15/35 $ 17,574
230 Republic of Argentina @@@@ 5.83 12/31/33 86,710
$ 15 Republic of Argentina (i) (0.00)** 12/15/35 1,348
6 Republic of Argentina (d) (i) @@@@ 8.28 12/31/33 4,989
60 Republic of Argentina (c) 13.969 04/10/49 24,300
--------
TOTAL ARGENTINA 134,921
--------
AUSTRALIA (0.3%)
OTHER METALS/MINERALS (0.0%)
70 Murrin Holdings Property Ltd. (c)(i) 9.375 08/31/07 0
--------
PROPERTY - CASUALTY INSURERS (0.3%)
200 Mantis Reef Ltd. - 144A* 4.692 11/14/08 193,957
--------
TOTAL AUSTRALIA 193,957
--------
BERMUDA (0.1%)
CABLE/SATELLITE TV
75 Intelsat Bermuda Ltd. 9.609 01/15/12 76,125
--------
BRAZIL (1.1%)
GOVERNMENT OBLIGATIONS
171 Federal Republic of Brazil 8.00 01/15/18 180,833
77 Federal Republic of Brazil 8.875 10/14/19 85,971
280 Federal Republic of Brazil 14.50 10/15/09 349,020
--------
TOTAL BRAZIL 615,824
--------
CANADA (2.5%)
COMMERCIAL PRINTING/FORMS (0.4%)
255 Quebecor World Capital Corp. - 144A* 8.75 03/15/16 233,962
--------
DRUGSTORE CHAINS (0.3%)
185 Jean Coutu Group PJC Inc. (The) 7.625 08/01/12 180,375
--------
MEDIA CONGLOMERATES (0.0%)
1 Canwest Media Inc. 8.00 09/15/12 595
--------
OIL & GAS PIPELINES (0.5%)
315 Kinder Morgan Finance Co. 5.70 01/05/16 273,986
--------
OTHER METALS/MINERALS (0.2%)
90 Brascan Corp. 7.125 06/15/12 94,929
--------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
30
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------
OTHER TRANSPORTATION (0.3%)
$ 140 CHC Helicopter Corp. 7.375% 05/01/14 $ 135,100
----------
PULP & PAPER (0.8%)
250 Abitibi-Consolidated Inc. 8.85 08/01/30 212,500
265 Bowater Canada Finance 7.95 11/15/11 253,075
----------
465,575
----------
TOTAL CANADA 1,384,522
----------
DENMARK (0.3%)
TELECOMMUNICATIONS
80 Nordic Telecommunications Holdings - 144A* 8.875 05/01/16 82,600
EUR 60 TDC AS 6.50 04/19/12 78,463
----------
TOTAL DENMARK 161,063
----------
ECUADOR (0.1%)
GOVERNMENT OBLIGATION
$ 50 Republic of Ecuador - 144A* 9.00 08/15/30 48,625
----------
FRANCE (0.2%)
OILFIELD SERVICES/EQUIPMENTS (0.0%)
25 CIE Generale de Geophysique S.A. 7.50 05/15/15 24,562
----------
TELECOMMUNICATIONS (0.2%)
95 France Telecom S.A. 8.50 03/01/31 114,638
----------
TOTAL FRANCE 139,200
----------
INDONESIA (0.4%)
PULP & PAPER
264 Tjiwi Kimia Finance BV - 144A* 0.00** 04/29/27 54,043
70 Tjiwi Kimia Finance BV - 144A* 6.00** 04/29/15 53,680
213 Tjiwi Kimia Finance BV - 144A* 6.00** 04/29/18 124,866
----------
TOTAL INDONESIA 232,589
----------
JAPAN (4.4%)
GOVERNMENT OBLIGATIONS
JPY 110,000 Japan (Government of) 0.50 09/20/06 961,755
170,000 Japan (Government of) 0.50 03/20/07 1,486,211
----------
TOTAL JAPAN 2,447,966
----------
ISRAEL (0.3%)
ELECTRICAL PRODUCTS
$ 160 Ormat Funding Corp. 8.25 12/30/20 164,678
----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
31
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------
LUXEMBOURG (0.2%)
TELECOMMUNICATIONS
$ 30 Telecom Italia Capital SpA 4.00% 11/15/08 $ 28,795
80 Telecom Italia Capital SpA 4.00 01/15/10 74,922
----------
TOTAL LUXEMBOURG 103,717
----------
MEXICO (2.2%)
GOVERNMENT OBLIGATIONS (1.6%)
MXN 1,000 United Mexican States Corp. 8.00 12/17/15 82,247
$ 340 United Mexican States Corp. 8.375 01/14/11 371,450
MXN 4,060 United Mexican States Corp. 10.00 12/05/24 375,091
$ 39 United Mexican States Corp. 11.50 05/15/26 57,623
----------
886,411
----------
OIL & GAS PRODUCTION (0.5%)
80 Pemex Project Funding Master Trust 9.50 09/15/27 96,200
170 Pemex Project Funding Master Trust - 144A* 6.629** 06/15/10 173,995
----------
270,195
----------
TELECOMMUNICATIONS (0.1%)
66 Axtel SA 11.00 12/15/13 72,600
----------
TOTAL MEXICO 1,229,206
----------
NETHERLANDS (0.2%)
TELECOMMUNICATIONS
40 Deutsche Telekom International Finance Corp. BV 8.25 06/15/30 46,312
40 Telefonica Europe BV 8.25 09/15/30 45,304
----------
TOTAL NETHERLANDS 91,616
----------
QATAR (0.2%)
GOVERNMENT OBLIGATION
100 State of Qatar 9.75 06/15/30 139,500
----------
RUSSIA (1.6%)
GOVERNMENT OBLIGATIONS (1.4%)
98 Federal Republic of Russia 8.25 03/31/10 101,812
15 Federal Republic of Russia 5.00 03/31/30 15,994
201 Federal Republic of Russia 11.00 07/24/18 277,631
190 Federal Republic of Russia 12.75 06/24/28 322,525
100 Russian Agricultural Bank - 144A* 7.175 05/16/13 99,375
----------
817,337
----------
</Table>
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32
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------
OIL & GAS PIPELINES (0.2%)
$ 75 Gaz Capital 8.625% 04/28/34 $ 86,047
----------
TOTAL RUSSIA 903,384
----------
SOUTH AFRICA (0.1%)
GOVERNMENT OBLIGATION
ZAR 165 Republic of South Africa 13.50 09/15/15 29,906
----------
TURKEY (0.8%)
GOVERNMENT OBLIGATIONS
$ 110 Citigroup, Inc. - 144A* @@@ 0.00 06/28/07 89,630
100 JP Morgan Chase - 144A* @@@ 0.00 06/27/07 67,440
90 Republic of Turkey 11.00 01/14/13 103,050
150 Republic of Turkey 11.50 01/23/12 172,125
----------
TOTAL TURKEY 432,245
----------
UNITED KINGDOM (0.1%)
ADVERTISING/MARKETING SERVICES
70 WPP Finance Corp. 5.875 06/15/14 67,933
----------
VENEZUELA (0.6%)
GOVERNMENT OBLIGATIONS
70 Republic of Venezuela 8.50 10/08/14 74,200
160 Republic of Venezuela 9.375 01/13/34 188,000
80 Republic of Venezuela 10.75 09/19/13 95,640
----------
TOTAL VENEZUELA 357,840
----------
TOTAL FOREIGN
(COST $9,229,525) 8,954,817
----------
UNITED STATES (78.1%)
CORPORATE BONDS (31.7%)
ADVERTISING/MARKETING SERVICES (0.1%)
65 Interpublic Group of Companies, Inc. (The) 5.40 11/15/09 59,962
----------
AEROSPACE & DEFENSE (0.6%)
165 K&F Acquisition Inc. 7.75 11/15/14 163,350
100 Northrop Grumman Corp. 4.079 11/16/06 99,438
77 Systems 2001 Asset Trust - 144A* 6.664 09/15/13 79,522
----------
342,310
----------
AIR FREIGHT/COURIERS (0.1%)
40 Fedex Corp. 7.25 02/15/11 42,205
----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
33
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------
AIRLINES (0.0%)
$ 30 Southwest Airlines Co. (Series 01-1) 5.496% 11/01/06 $ 30,027
--------
APPAREL/FOOTWEAR (0.6%)
125 Levi Strauss & Co. 9.74** 04/01/12 127,812
200 Phillips-Van Heusen Corp. 7.25 02/15/11 199,000
--------
326,812
--------
APPAREL/FOOTWEAR RETAIL (0.1%)
60 Limited Brands, Inc. 6.95 03/01/33 57,372
--------
AUTO PARTS: O.E.M. (0.2%)
100 ArvinMeritor, Inc. 8.75 03/01/12 98,000
--------
BEVERAGES: ALCOHOLIC (0.2%)
100 Fosters Finance Ltd. - 144A* 5.125 06/15/15 91,774
--------
BROADCASTING (0.1%)
74 Salem Communications Holdings Corp. (Series B) 9.00 07/01/11 77,515
--------
BUILDING PRODUCTS (0.1%)
35 Interface Inc. 7.30 04/01/08 35,350
--------
CABLE/SATELLITE TV (1.1%)
170 Cablevision Systems Corp. (Series B) 9.62** 04/01/09 181,050
101 Charter Communications Holdings LLC 11.00 10/01/15 88,880
140 Comcast Cable Communications Inc. 6.75 01/30/11 144,611
140 Echostar DBS Corp. 6.375 10/01/11 134,400
65 Echostar DBS Corp. 6.625 10/01/14 61,262
--------
610,203
--------
CASINO/GAMING (1.2%)
840 Aladdin Gaming Holdings/Capital Corp. LLC
(Series B) (a) (c) (i) 13.50 03/01/10 0
200 Isle of Capri Casinos 7.00 03/01/14 189,750
335 MGM Mirage Inc. 6.00 10/01/09 327,462
299 Resort At Summerlin LP/Ras Co. (Series B) (a) (c) (i) 13.00+ 12/15/07 0
165 Station Casinos, Inc. 6.00 04/01/12 155,306
30 Station Casinos, Inc. 6.875 03/01/16 28,125
--------
700,643
--------
CHEMICALS: MAJOR DIVERSIFIED (0.7%)
98 Huntsman ICI Chemicals 10.125 07/01/09 99,960
45 ICI Wilmington Inc. 4.375 12/01/08 43,452
255 Westlake Chemical Corp. 6.625 01/15/16 236,831
--------
380,243
--------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
34
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------
CHEMICALS: SPECIALTY (1.3%)
$ 161 Equistar Chemical Funding 10.125% 09/01/08 $170,257
35 Equistar Chemical Funding 10.625 05/01/11 37,756
300 Innophos, Inc. 8.875 08/15/14 297,000
74 Innophos, Inc. 13.17**+ 02/15/15 74,543
26 Koppers Industry Inc. 9.875 10/15/13 28,015
100 Nalco Co. 7.75 11/15/11 100,250
--------
707,821
--------
COAL (0.1%)
35 Foundation PA Coal Co. 7.25 08/01/14 34,300
--------
COMPUTER PROCESSING HARDWARE (0.1%)
65 Hewlett-Packard Co. 5.345 05/22/09 65,054
--------
CONTAINERS/PACKAGING (1.3%)
100 Graham Packaging Company Inc. 8.50 10/15/12 98,500
150 Graphic Packaging International Corp. 9.50 08/15/13 149,250
390 Owens-Illinois, Inc. 7.50 05/15/10 383,175
125 Sealed Air Corp. - 144A* 5.625 07/15/13 119,273
--------
750,198
--------
DATA PROCESSING SERVICES (0.2%)
105 Sungard Data Systems Inc. - 144A* 9.125 08/15/13 109,462
--------
DEPARTMENT STORES (0.4%)
240 BON-TON Department Stores Inc. - 144A* 10.25 03/15/14 223,800
--------
DRUGSTORE CHAINS (0.1%)
55 Rite Aid Corp. 8.125 05/01/10 55,550
--------
ELECTRIC UTILITIES (2.9%)
80 AES Corp. (The) 7.75 03/01/14 80,800
11 AES Corp. (The) 8.875 02/15/11 11,605
16 AES Corp. (The) 9.375 09/15/10 17,200
60 AES Corp. (The) - 144A* 9.00 05/15/15 64,800
140 Arizona Public Service Co. 5.80 06/30/14 135,539
55 CC Funding Trust I 6.90 02/16/07 55,317
90 Cincinnati Gas & Electric Co. 5.70 09/15/12 88,321
60 Consolidated Natural Gas Co. 5.00 12/01/14 55,284
70 Consolidated Natural Gas Co. (Series C) 6.25 11/01/11 70,764
70 Consumers Energy Co. 4.80 02/17/09 68,113
50 Detroit Edison Co. (The) 6.125 10/01/10 50,439
45 Entergy Gulf States, Inc. 3.60 06/01/08 43,010
100 Entergy Gulf States, Inc. 5.631** 12/01/09 99,038
205 IPALCO Enterprises, Inc. 8.375 11/14/08 211,662
30 IPALCO Enterprises, Inc. 8.625 11/14/11 31,950
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
35
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------
$ 135 Monongahela Power Co. 5.00% 10/01/06 $ 134,690
115 MSW Energy Holdings/Finance 7.375 09/01/10 115,575
25 MSW Energy Holdings/Finance 8.50 09/01/10 25,875
70 Ohio Power Company - IBC (Series K) 6.00 06/01/16 69,153
30 Panhandle Eastern Pipe Line Co. (Series B) 2.75 03/15/07 29,366
100 PSEG Energy Holdings Inc. 8.625 02/15/08 103,000
50 Texas Eastern Transmission, LP 7.00 07/15/32 53,610
35 Wisconsin Electric Power Co. 3.50 12/01/07 33,994
----------
1,649,105
----------
ELECTRICAL PRODUCTS (0.2%)
35 Cooper Industries Inc. 5.25 07/01/07 34,692
65 Cooper Industries, Inc. 5.25 11/15/12 62,940
----------
97,632
----------
ENVIRONMENTAL SERVICES (0.1%)
42 Allied Waste North America, Inc. 9.25 09/01/12 44,730
----------
FINANCE/RENTAL/LEASING (0.6%)
35 CIT Group, Inc. 2.875 09/29/06 34,791
30 CIT Group, Inc. 3.65 11/23/07 29,179
125 MBNA Corp. 5.58** 05/05/08 125,966
150 Residential Capital Corp. 6.375 06/30/10 148,087
----------
338,023
----------
FINANCIAL CONGLOMERATES (1.1%)
120 Chase Manhattan Corp. 6.00 02/15/09 120,788
10 Chase Manhattan Corp. 7.00 11/15/09 10,374
20 General Electric Capital Corp. 4.25 12/01/10 18,954
510 General Motors Acceptance Corp. 6.875 09/15/11 487,141
----------
637,257
----------
FOOD RETAIL (0.3%)
37 CA FM Lease Trust - 144A* 8.50 07/15/17 39,199
145 Delhaize America, Inc. 8.125 04/15/11 153,219
----------
192,418
----------
FOOD: MAJOR DIVERSIFIED (0.2%)
60 ConAgra Foods, Inc. 7.00 10/01/28 61,184
25 ConAgra Foods, Inc. 8.25 09/15/30 28,890
25 General Mills Inc. 3.875 11/30/07 24,354
----------
114,428
----------
FOOD: MEAT/FISH/DAIRY (0.8%)
85 Michael Foods Inc. (Series B) 8.00 11/15/13 83,937
115 Pilgrim's Pride Corp. 9.625 09/15/11 120,175
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
36
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------
$ 60 PPC Escrow Corp. 9.25% 11/15/13 $ 60,150
125 Smithfield Foods Inc. 7.00 08/01/11 121,563
70 Smithfield Foods Inc. 7.625 02/15/08 70,700
20 Smithfield Foods Inc. (Series B) 8.00 10/15/09 20,300
--------
476,825
--------
GAS DISTRIBUTORS (0.3%)
120 NiSource Finance Corp. 5.764** 11/23/09 120,241
45 Sempra Energy 4.621 05/17/07 44,571
--------
164,812
--------
HOME BUILDING (0.2%)
50 Tech Olympic USA, Inc. 10.375 07/01/12 48,250
45 Tech Olympic USA, Inc. (Issued 02/03/03) 9.00 07/01/10 43,988
--------
92,238
--------
HOME FURNISHINGS (0.2%)
50 Mohawk Industries, Inc. (Series D) 7.20 04/15/12 51,590
40 Tempur-Pedic Inc. 10.25 08/15/10 42,400
--------
93,990
--------
HOSPITAL/NURSING MANAGEMENT (0.6%)
125 Columbia/HCA Healthcare Corp. 7.69 06/15/25 118,749
55 Medcath Holdings Corp. 9.875 07/15/12 57,063
115 Tenet Healthcare Corp. 7.375 02/01/13 105,513
55 Tenet Healthcare Corp. 9.875 07/01/14 55,275
--------
336,600
--------
HOTELS/RESORTS/CRUISELINES (0.2%)
120 Hyatt Equities LLC - 144A* 6.875 06/15/07 120,740
--------
HOUSEHOLD/PERSONAL CARE (0.1%)
75 Clorox Co. (The) 5.444** 12/14/07 75,114
--------
INDUSTRIAL MACHINERY (0.1%)
32 Goodman Global Holding Company, Inc. (Series B) 8.329** 06/15/12 32,160
--------
INDUSTRIAL SPECIALTIES (0.3%)
165 Johnsondiversy, Inc. 9.625 05/15/12 165,000
--------
INSURANCE BROKERS/SERVICES (0.8%)
290 Farmers Exchange Capital - 144A* 7.05 07/15/28 278,247
185 Marsh & McLennan Companies, Inc. 5.875 08/01/33 161,178
--------
439,425
--------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
37
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------
MAJOR BANKS (1.1%)
$ 150 USB Capital IX 6.189% 03/29/49 $146,833
440 Wachovia Capital Trust III 5.80 08/29/49 427,408
70 Wachovia Corp. 4.95 11/01/06 69,827
--------
644,068
--------
MAJOR TELECOMMUNICATIONS (0.5%)
130 AT&T Corp. 8.00 11/15/31 149,690
60 SBC Communications, Inc. 6.15 09/15/34 55,240
55 Sprint Capital Corp. 8.75 03/15/32 66,514
--------
271,444
--------
MANAGED HEALTH CARE (0.3%)
135 Health Net, Inc. 9.875 04/15/11 151,694
--------
MEDIA CONGLOMERATES (0.5%)
55 News America Holdings, Inc. 7.75 02/01/24 59,097
30 News America Inc. 7.125 04/08/28 30,009
90 News America, Inc. 6.40 12/15/35 83,504
85 Viacom, Inc. - 144A* 6.875 04/30/36 82,284
--------
254,894
--------
MEDICAL DISTRIBUTORS (0.1%)
70 AmerisourceBergen Corp. - 144A* 5.625 09/15/12 67,200
--------
MEDICAL/NURSING SERVICES (0.4%)
181 Fresenius Medical Care Capital Trust 7.875 06/15/11 183,715
25 Fresenius Medical Care Capital Trust II (Units)~ 7.875 02/01/08 25,438
--------
209,153
--------
METAL FABRICATIONS (0.1%)
60 General Cable Corp. 9.50 11/15/10 63,900
--------
MISCELLANEOUS COMMERCIAL SERVICES (0.3%)
55 Iron Mountain Inc. 7.75 01/15/15 52,800
140 Iron Mountain Inc. 8.625 04/01/13 140,700
--------
193,500
--------
MISCELLANEOUS MANUFACTURING (0.1%)
70 Propex Fabrics Inc. 10.00 12/01/12 64,400
--------
MOTOR VEHICLES (1.7%)
55 DaimlerChrysler North American Holdings Co. 8.50 01/18/31 62,447
1,065 General Motors Corp. 8.375 07/15/33 862,650
--------
925,097
--------
MULTI-LINE INSURANCE (0.4%)
160 AIG Sun America Global Finance VI - 144A* 6.30 05/10/11 163,660
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
38
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------
$ 30 American General Finance Corp. (Series MTNH) 4.625% 09/01/10 $ 28,754
35 AXA Financial, Inc. 6.50 04/01/08 35,341
--------
227,755
--------
OIL & GAS PIPELINES (1.1%)
85 Colorado Interstate Gas Co. - 144A* 6.80 11/15/15 82,352
140 El Paso Production Holdings 7.75 06/01/13 141,750
25 Kinder Morgan Energy Partners, L.P. 5.125 11/15/14 22,861
95 Pacific Energy Partners/Finance 7.125 06/15/14 96,425
70 Plains All American Pipeline L.P. - 144A* 6.70 05/15/36 68,446
175 Williams Companies, Inc. (The) 7.875 09/01/21 178,500
--------
590,334
--------
OIL & GAS PRODUCTION (1.6%)
375 Chesapeake Energy Corp. 7.50 09/15/13 377,813
90 Chesapeake Energy Corp. 7.625 07/15/13 91,013
75 Hilcorp Energy/Finance - 144A* 7.75 11/01/15 72,000
78 Hilcorp Energy/Finance - 144A* 10.50 09/01/10 84,435
40 Magnum Hunter Resources, Inc. 9.60 03/15/12 42,400
270 Pogo Producing Co. 6.875 10/01/17 251,438
--------
919,099
--------
OIL REFINING/MARKETING (0.3%)
170 Husky Oil Ltd. 8.90 08/15/28 179,605
--------
OILFIELD SERVICES/EQUIPMENT (0.3%)
50 Hanover Compressor Co. 9.00 06/01/14 52,500
62 Hanover Equipment Trust 2001 A (Series A) 8.50 09/01/08 63,860
60 Hanover Equipment Trust 2001 B (Series B) 8.75 09/01/11 62,100
--------
178,460
--------
PHARMACEUTICALS: MAJOR (0.2%)
90 Warner Chilcott Corp. 8.75 02/01/15 93,150
--------
PROPERTY - CASUALTY INSURERS (0.1%)
85 St. Paul Travelers Companies, Inc. (The) 5.01 08/16/07 84,052
--------
PUBLISHING: BOOKS/MAGAZINES (0.5%)
95 Dex Media West/Finance 9.875 08/15/13 103,431
50 Houghton Mifflin Co. 8.25 02/01/11 50,875
100 Houghton Mifflin Co. 9.875 02/01/13 104,250
--------
258,556
--------
PULP & PAPER (0.1%)
35 Glatfelter P.H. - 144A* 7.125 05/01/16 34,724
--------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
39
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------
RAILROADS (0.2%)
$ 70 Norfolk Southern Corp. 7.35% 05/15/07 $ 70,938
30 Union Pacific Corp. (Series MTNE) 6.79 11/09/07 30,397
--------
101,335
--------
REAL ESTATE INVESTMENT TRUSTS (0.5%)
85 Host Marriott LP 6.375 03/15/15 80,325
210 Host Marriott LP 7.125 11/01/13 210,263
--------
290,588
--------
RESTAURANTS (0.0%)
15 Tricon Global Restaurants, Inc. 8.875 04/15/11 16,723
SAVINGS BANKS (0.0%)
--------
25 Household Finance Corp. 4.125 12/15/08 24,174
--------
SPECIALTY STORES (1.1%)
290 Linens' n Things, Inc. - 144A* 10.702** 01/15/14 276,225
365 Sonic Automotive, Inc. 8.625 08/15/13 363,175
--------
639,400
--------
SPECIALTY TELECOMMUNICATIONS (0.6%)
85 American Tower Corp. 7.125 10/15/12 85,213
90 American Tower Corp. 7.50 05/01/12 91,350
125 Qwest Communications International 8.67** 02/15/09 127,969
433 Rhythms Netconnections, Inc. (a)(c)(i) 12.75 04/15/09 0
20 U.S. West Communications Corp. 5.625 11/15/08 19,600
--------
324,132
--------
TELECOMMUNICATIONS (0.1%)
181 Exodus Communications, Inc. (a)(c)(i) 11.625 07/15/10 0
40 NTL Cable PLC(United Kingdom) 8.75 04/15/14 39,900
--------
39,900
--------
TOBACCO (0.6%)
265 Reynolds American Inc. - 144A* 7.25 06/01/13 260,363
100 RJ Reynolds Tobacco Holdings - 144A* 6.50 07/15/10 97,250
--------
357,613
--------
TRUCKS/CONSTRUCTION/FARM MACHINERY (0.5%)
175 Caterpillar Financial Services Corp. (Series MTNF) 5.259** 08/20/07 175,162
122 Manitowoc Inc. (The) 10.50 08/01/12 132,980
--------
308,142
--------
WHOLESALE DISTRIBUTORS (0.1%)
40 Nebraska Book Company, Inc. 8.625 03/15/12 37,400
--------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
40
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATIONS (0.7%)
$ 110 Ubiquitel Operating Co. 9.875% 03/01/11 $ 120,175
265 Wind Acquisition Finance SA - 144A* 10.75 12/01/15 282,888
-----------
403,063
-----------
TOTAL CORPORATE BONDS
(COST $19,446,953) 17,822,653
-----------
ASSET-BACKED SECURITIES** (12.1%)
FINANCE/RENTAL/LEASING
203 Ace Securities Corp. 2005-HE4 A2A 4.928 07/25/35 202,751
106 Aegis Asset Backed Securities Trust 2005-3 A1 4.918 08/25/35 106,004
242 Aegis Asset Backed Securities Trust 2005-4 1A1 4.928 10/25/35 242,040
650 American Express Credit Account Master Trust 2002-3 A 5.309 12/15/09 650,980
133 Ameriquest Mortgage Securities Inc. 2005-R4 A2B 4.958 07/25/35 132,650
237 Bear Stearns Asset Backed Securities, Inc. 2005-AQ1 2A1 5.038 03/25/35 237,056
127 Bear Stearns Asset Backed 2005-HE8 A1 4.938 08/25/35 126,836
325 Capital Auto Receivables Asset Trust 2005-1 A3 4.808 04/15/08 324,840
171 Carrington Mortgage Loan Trust 2005-NC4 A1 4.968 09/25/35 171,248
82 Countrywide Asset-Backed Certificates 2004-3 3A2 5.018 12/25/32 82,560
409 Countrywide Asset-Backed Certificates 2005-16 2AF1 4.528 05/25/36 409,462
171 Credit-Based Asset Servicing & Securities 2005-CB4 AV1 4.918 08/25/35 170,770
196 Credit-Based Asset Servicing & Securities 2005-CB5 AV1 4.928 08/25/35 195,683
32 Equifirst Mortgage Loan Trust 2005-1 A1 4.878 04/25/35 32,153
196 First Franklin Mortgage Series 2005-FF7 A2 4.918 08/25/35 196,489
525 GE Capital Credit Card Master Note Trust 2004-1 A 5.249 06/15/10 525,541
52 GSAMP Trust 2005-HE3 A2A 4.908 06/25/35 51,692
199 GSAMP Trust 2005-HE4 A2A 4.938 08/01/35 199,080
175 Impac CMB Trust 2004-3 1A 5.068 06/25/34 175,049
40 Long Beach Mortgage Loan Trust 2005-WL1 2A1 4.928 06/25/35 39,801
600 MBNA Master Credit Card Trust 5.339 02/16/10 601,334
218 Merrill Auto Trust Securitization 2005-1 A2B 4.969 04/25/08 217,686
73 Merrill Lynch Mortgage Investment Inc 2005-SL1 5.018 06/25/35 73,363
50 Novastar Home Equity Loan 2005-1 A2A 4.938 06/25/35 49,874
182 Option One Mtge Loan Trust 2004-3 A3 5.118 11/25/34 182,499
45 Park Place Securities Inc. 2005-WCW2 A2A 4.908 07/25/35 44,583
239 RAAC Series 2006-SP1 A1 4.80 09/25/45 239,523
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
41
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------
$ 202 Securitized Asset-Backed Receivables
LLC 2004-NC3 A2 5.208% 09/25/34 $ 202,501
141 Specialty Underwriting & Residential Finance
2004-BC2 A2 5.088 05/25/35 141,265
43 Structured Asset Investment Loan 2003-BC13 5.158 11/25/33 43,504
252 Structured Asset Secs 2005-GEL1 A 5.168 12/25/34 252,427
375 Structured Asset Securities Corp. 5.16 06/25/35 375,397
31 Structured Asset Securities Corp. 2005-WMC1 A1 4.898 01/25/35 30,828
94 Terwin Mortgage Trust 2005-8HE A1-144A* 4.938 07/25/35 94,563
----------
TOTAL ASSET-BACKED SECURITIES
(COST $6,819,122) 6,822,032
----------
U.S. GOVERNMENT OBLIGATIONS (12.4%)
U. S. Treasury Bonds (8.6%)
2,050 6.125 08/15/29 2,279,986
565 6.375 08/15/27 641,496
100 7.625 02/15/25 127,031
185 8.125 08/15/21 238,549
460 8.75 05/15/17 593,652
705 (b) 8.75 08/15/20 944,370
----------
4,825,084
----------
U. S. Treasury Notes (0.6%)
345 ++ 3.875 02/15/13 321,255
----------
U. S. Treasury Strips (3.2%)
1,900 0.00 08/15/22 808,805
1,750 0.00 08/15/17 980,464
----------
1,789,269
----------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $7,374,178) 6,935,608
COLLATERALIZED MORTGAGE OBLIGATIONS (11.2%) ----------
U.S GOVERNMENT AGENCIES (0.7%)
407 Freddie Mac 5.473** 09/25/45 408,594
----------
Federal National Mortgage Assoc. (0.2%)
206 IO 6.50 12/01/29 30,586
164 IO 7.00 11/01/19 25,093
184 IO 7.00 12/01/34 35,720
255 IO 8.00 06/01/35 48,645
----------
140,044
----------
Total U.S. Government Agencies 548,638
----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
42
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------
PRIVATE ISSUES (10.3%)
Countrywide Alternative Loan Trust
$ 1,812 2004-20 X (IO) 0.00**% 10/25/34 $ 36,234
1,754 2005-81 X1 (IO) 0.00** 02/25/37 95,897
1,829 2006-OA1 2X (IO) 0.00** 03/20/46 88,989
2,840 2005-59R A (IO) 1.39** 12/20/35 73,786
2,495 2005-58R A (IO) 2.04** 12/20/35 125,229
394 2006-OA5 1A2 5.62** 04/25/46 395,072
291 2006-OA6 1A4B 5.48 07/25/46 290,687
447 2005-76 2A2 5.84 02/25/36 452,259
390 2005-76 2A2 6.183 11/25/35 398,700
DSLA Mortgage Loan Trust
418 2006-AR1 2A1A 5.083** 04/19/47 417,623
Greenpoint Mortgage Fund
407 2006-AR2 3A2 5.642** 03/25/36 407,467
1,196 2005-AR3 X1 (IO) 0.00** 08/25/45 36,615
1,622 2005-AR4 X4 (IO) 0.00** 10/25/45 50,172
GS Mortgage Securities Corp.
1,105 2006-OA1R A (IO) 1.91** 08/25/35 46,431
Harborview Mortgage Loan Trust
1 2006-1 PO1 (PO) 0.00** 03/19/37 537
1,724 2006-1 X1 (IO) 1.22** 03/19/37 84,573
2,730 2005-2 X1 (IO) 0.87** 05/19/35 66,108
1,723 2005-3 X2 (IO) 0.57** 06/19/35 37,966
297 2006-1 2A1A (IO) 5.491** 03/19/37 297,166
Indymac Index Mortgage Loan Trust
1,476 2005-AR12 AX2 (IO) 0.30** 07/25/35 45,654
Luminent Mortgage Trust
298 2006-1 A1 5.562** 04/25/36 298,371
Residential Accredit Loans, Inc.
166 2006-Q01 1A1 5.582 02/25/46 166,451
150 2006-Q01 2A1 5.592 02/25/46 150,298
400 2006-Q01 5.58 07/26/46 400,000
Structured Asset Mortgage Investments, Inc.
239 2006-AR3 3A1 5.512 02/25/36 239,442
Washington Mutual
250 2005-AR15 A1B1 5.572** 11/25/45 250,782
257 2005-AR19 A1B1 5.572** 12/25/45 257,308
224 2005-AR17 A1B1 5.572** 12/25/45 224,298
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
43
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------
Wmalt Mortgage Pas
$ 319 2006-AR2 A1A 5.221% 04/25/46 $ 321,601
-----------
Total Private Issues 5,755,716
-----------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(COST $6,357,589) 6,304,354
-----------
U.S. GOVERNMENT AGENCIES-MORTGAGE-BACKED SECURITIES (10.7%)
Federal Home Loan Mortgage Corp. (0.4%)
208 7.50 12/01/31 - 06/01/32 214,930
-----------
Federal National Mortgage Assoc. (10.1%)
375 0.60 07/25/36 387,656
550 1.354 07/01/36 568,734
375 5.358 07/01/36 387,773
575 6.156 05/01/36 593,988
582 6.50 07/01/29 - 11/01/33 587,477
2,343 7.00 04/01/31 - 08/01/36 2,400,066
164 7.50 02/01/31 - 03/01/32 169,205
404 8.00 02/01/12 - 06/01/31 425,152
112 8.50 06/01/30 120,650
-----------
5,640,701
-----------
Government National Mortgage Assoc. (0.2%)
85 7.50 04/15/26 - 08/15/29 88,690
36 8.00 06/15/26 38,428
-----------
127,118
-----------
TOTAL U.S. GOVERNMENT AGENCIES-MORTGAGE-BACKED SECURITIES
(COST $6,058,048) 5,982,749
-----------
TOTAL UNITED STATES
(COST $46,055,890) 43,867,396
-----------
TOTAL GOVERNMENT & CORPORATE BONDS
(COST $55,285,415) 52,822,213
-----------
CONVERTIBLE BOND (0.2%)
TELECOMMUNICATION EQUIPMENT
105 Nortel Networks Corp.
(COST $102,132) 4.25 09/01/08 99,487
-----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
44
<Page>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------------------------
COMMON STOCKS (0.0%)
CASINO/GAMING (0.0%)
787 Fitzgeralds Gaming Corp. @ (e)(i) $ 0
------
ELECTRIC UTILITIES (0.0%)
13 PNM Resources Inc. (d) 324
1 SW Acquisition LP (0.03% Ownership interest acquired
09/25/05) (d)(e)(f)(i) 1
------
325
------
FOOD:
SPECIALTY/CANDY (e)(i)(0.0%)
18 SFAC New Holdings Inc. (d) 0
100 SFAC New Holdings Inc. @@ (d) 0
------
0
------
MEDICAL/NURSING SERVICES (0.0%)
34,888 Raintree Healthcare Corp. (d)(e)(i) 0
RESTAURANTS (0.0%)
------
10,137 Catalina Restaurant Group (d)(e)(i) 101
------
SPECIALTY TELECOMMUNICATIONS (e)(0.0%)
1,171 Birch Telecom Inc. (d)(i) 12
16,679 PFB Telecom NV (Series B) (d)(i) 0
109 XO Holdings, Inc. (d) 479
------
491
------
TELECOMMUNICATIONS (0.0%)
352 Viatel Holdings Bermuda Ltd. (d)(e) 25
------
TEXTILES (0.0%)
11,192 U.S. Leather, Inc. (d)(e)(i) 0
------
WIRELESS TELECOMMUNICATIONS (0.0%)
46 USA Mobility, Inc. (d) 764
4,516 Vast Solutions, Inc. (Class B1) (d)(e)(i) 0
4,516 Vast Solutions, Inc. (Class B2) (d)(e)(i) 0
4,516 Vast Solutions, Inc. (Class B3) (d)(e)(i) 0
------
764
------
TOTAL COMMON STOCKS
(COST $2,379,377) 1,706
------
SEE NOTES TO FINANCIAL STATEMENTS
45
<Page>
<Table>
<Caption>
NUMBER OF EXPIRATION
WARRANTS DATE VALUE
- ----------------------------------------------------------------------------------
WARRANTS (e)(0.0%)
CASINO/GAMING (0.0%)
9,000 Aladdin Gaming Enterprises, Inc. - 144A* (i) 03/01/10 $ 0
250 Resort At Summerlin LP - 144A* (i) 12/15/07 0
-----------
0
-----------
SPECIALTY TELECOMMUNICATIONS (0.0%)
219 XO Holdings, Inc. (Series A)(d) 01/16/10 188
164 XO Holdings, Inc. (Series B)(d) 01/16/10 80
164 XO Holdings, Inc. (Series C)(d) 01/16/10 60
-----------
328
-----------
TOTAL WARRANTS
(COST $251) 328
-----------
</Table>
<Table>
<Caption>
CURRENCY
AMOUNT
- ---------
PUT OPTION PURCHASED (0.1%)
EUR 190 June/2007 @ $94.25 (Cost $19,272) 33,250
-----------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
- --------- ------ ---------
SHORT-TERM INVESTMENT (5.7%)
REPURCHASE AGREEMENT
$3,184 Joint repurchase agreement account
(dated 06/30/06; proceeds $3,185,384) (g)
(COST $3,184,000) 5.215% 07/03/06 3,184,000
-----------
TOTAL INVESTMENTS
(COST $60,970,447) (h) (j) 100.0% 56,140,984
OTHER ASSETS IN EXCESS OF LIABILITIES 0.0 18,194
----- -----------
NET ASSETS 100.0% $56,159,178
===== ===========
</Table>
- ----------
IO INTEREST ONLY SECURITY.
PO PRINCIPAL ONLY SECURITY.
* RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS.
** FLOATING RATE SECURITY, RATE SHOWN IS THE RATE IN EFFECT AT JUNE 30, 2006.
~ CONSISTS OF ONE OR MORE CLASS OF SECURITIES TRADED TOGETHER AS A UNIT;
BONDS OR PREFERRED STOCK WITH ATTACHED WARRANTS.
+ PAYMENT-IN-KIND SECURITY.
+++ SECURITY PURCHASED ON A FORWARD COMMITMENT BASIS.
@ RESALE IS RESTRICTED ACQUIRED (12/22/98) AT A COST BASIS OF $3,549.
SEE NOTES TO FINANCIAL STATEMENTS
46
<Page>
- ----------
@@ RESALE IS RESTRICTED. ACQUIRED (06/10/99) AT A COST BASIS OF $1.
@@@ TURKISH CURRENCY INDEX CREDIT LINKED UNSECURED NOTE.
@@@@ CAPITAL APPRECIATION BOND.
(a) ISSUER IN BANKRUPTCY.
(b) A PORTION OF THIS SECURITY HAS BEEN PHYSICALLY SEGREGATED IN CONNECTION
WITH OPEN FUTURES CONTRACTS.
(c) NON-INCOME PRODUCING SECURITY; BOND IN DEFAULT.
(d) ACQUIRED THROUGH EXCHANGE OFFER.
(e) NON-INCOME PRODUCING SECURITIES.
(f) RESALE IS RESTRICTED. NO TRANSACTION ACTIVITY DURING THE YEAR.
(g) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(h) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN AMOUNT EQUAL TO
$23,380,857 IN CONNECTION WITH SECURITIES PURCHASED ON A FORWARD
COMMITMENT BASIS, FORWARD FOREIGN CURRENCY CONTRACTS and open futures
contracts.
(i) SECURITIES WITH A TOTAL MARKET VALUE EQUAL TO $6,450 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.
(j) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE
AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED
APPRECIATION IS $485,281 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION
IS $5,314,744, RESULTING IN NET UNREALIZED DEPRECIATION OF $4,829,463.
FUTURES CONTRACTS OPEN AT JUNE 30, 2006:
<Table>
<Caption>
UNREALIZED
NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE APPRECIATION
CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE (DEPRECIATION)
- --------------------------------------------------------------------------------------
91 Long U.S. Treasury Note 10 Year
September 2006 $ 9,542,204 $(44,638)
24 Short U.S. Treasury Note 5 Year
September 2006 (2,481,750) 9,114
45 Short U.S. Treasury Bond 20 Year
September 2006 (4,799,531) (2,374)
26 Short U.S. Treasury Note 10 Year
September 2006 (5,272,313) 19,051
--------
Net Unrealized Depreciation $(18,847)
========
</Table>
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT JUNE 30, 2006:
UNREALIZED
CONTRACTS IN EXCHANGE DELIVERY APPRECIATION
TO DELIVER FOR DATE (DEPRECIATION)
- --------------------------------------------------------
EUR 61,000 $ 76,849 09/27/06 $(1,622)
JPY 25,000,000 $222,622 08/07/06 2,889
-------
Net Unrealized Appreciation $ 1,267
=======
SEE NOTES TO FINANCIAL STATEMENTS
47
<Page>
CURRENCY ABBREVIATIONS:
- -----------------------
ARS ARGENTINA PESO.
EUR EURO.
JPY JAPANESE YEN.
MXN MEXICAN NEW PESO.
ZAR SOUTH AFRICAN RAND.
SUMMARY OF INVESTMENTS
LONG-TERM CREDIT ANALYSIS
AAA 51.6%
AA 5.1
A 5.2
BBB 9.4
BB 12.6
B 15.3
NR 0.8
-----
100.0%*
=====
- ----------
* DOES NOT INCLUDE OPEN LONG FUTURES CONTRACTS WITH AN UNDERLYING FACE AMOUNT
OF $9,542,204 AND UNREALIZED DEPRECIATION OF $44,638 AND OPEN SHORT FUTURES
CONTRACTS WITH AN UNDERLYING FACE AMOUNT OF $12,553,594 AND UNREALIZED
APPRECIATION OF $25,791 AND OPEN FORWARD FOREIGN CURRENCY CONTRACTS WITH
UNREALIZED APPRECIATION OF $1,267.
SEE NOTES TO FINANCIAL STATEMENTS
48
<Page>
Balanced Growth
PORTFOLIO OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS (68.4%)
AEROSPACE & DEFENSE (1.5%)
9,650 Northrop Grumman Corp. $ 618,179
14,720 Raytheon Co. 656,070
----------
1,274,249
----------
BEVERAGES: ALCOHOLIC (0.6%)
8,310 Diageo PLC (ADR) (United Kingdom) 561,341
----------
BEVERAGES: NON-ALCOHOLIC (1.2%)
23,490 Coca-Cola Co. (The) 1,010,540
----------
BROADCASTING (1.5%)
41,010 Clear Channel Communications, Inc. 1,269,259
----------
CABLE/SATELLITE TV (0.4%)
10,800 Comcast Corp. (Class A)* 353,592
----------
CHEMICALS: MAJOR DIVERSIFIED (2.9%)
38,380 Bayer AG (ADR) (Germany) 1,762,026
16,900 Du Pont (E.I.) de Nemours & Co. 703,040
----------
2,465,066
----------
COMPUTER PROCESSING HARDWARE (0.2%)
5,690 Hewlett-Packard Co. 180,259
----------
DEPARTMENT STORES (0.3%)
5,100 Kohl's Corp.* 301,512
----------
DISCOUNT STORES (1.2%)
20,500 Wal-Mart Stores, Inc. 987,485
----------
ELECTRIC UTILITIES (2.5%)
16,880 American Electric Power Co., Inc. 578,140
11,780 Entergy Corp. 833,435
13,200 FirstEnergy Corp. 715,572
----------
2,127,147
----------
FINANCE/RENTAL/LEASING (1.3%)
19,570 Freddie Mac 1,115,686
----------
FINANCIAL CONGLOMERATES (5.3%)
35,150 Citigroup, Inc. 1,695,636
49,986 JPMorgan Chase & Co. 2,099,412
11,970 State Street Corp. 695,337
----------
4,490,385
----------
FOOD: MAJOR DIVERSIFIED (1.5%)
6,600 ConAgra Foods Inc. 145,926
49,140 Unilever N.V. (NY Registered Shares) (Netherlands) 1,108,107
----------
1,254,033
----------
SEE NOTES TO FINANCIAL STATEMENTS
49
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
FOOD: SPECIALTY/CANDY (0.7%)
16,290 Cadbury Schweppes PLC (ADR) (United Kingdom) $ 632,378
----------
HOUSEHOLD/PERSONAL CARE (0.7%)
11,050 Procter & Gamble Co. (The) 614,380
----------
INDUSTRIAL CONGLOMERATES (3.5%)
45,250 General Electric Co. 1,491,440
9,940 Ingersoll-Rand Co. Ltd. (Class A) (Bermuda) 425,233
12,200 Siemens AG (ADR) (Germany) 1,059,204
----------
2,975,877
----------
INSURANCE BROKERS/SERVICES (1.2%)
39,100 Marsh & McLennan Companies, Inc. 1,051,399
----------
INTEGRATED OIL (4.4%)
14,370 BP PLC (ADR) (United Kingdom) 1,000,296
18,370 ConocoPhillips 1,203,786
6,840 Exxon Mobil Corp. 419,634
16,440 Royal Dutch Shell PLC (ADR) (Class A) (United Kingdom) 1,101,151
----------
3,724,867
----------
INVESTMENT BANKS/BROKERS (3.2%)
2,600 Goldman Sachs Group, Inc. (The) 391,118
19,100 Merrill Lynch & Co., Inc. 1,328,596
62,400 Schwab (Charles) Corp. (The) 997,152
----------
2,716,866
----------
LIFE/HEALTH INSURANCE (0.3%)
16,570 Aegon N.V. (NY Registered Shares) (Netherlands) 282,850
----------
MAJOR BANKS (2.3%)
24,007 Bank of America Corp. 1,154,737
10,900 PNC Financial Services Group 764,853
----------
1,919,590
----------
MAJOR TELECOMMUNICATIONS (4.0%)
7,577 Embarq Corp.* 310,581
27,120 France Telecom S.A. (ADR) (France) 592,843
64,857 Sprint Nextel Corp. 1,296,491
36,888 Verizon Communications Inc. 1,235,379
----------
3,435,294
----------
MANAGED HEALTH CARE (0.5%)
3,920 CIGNA Corp. 386,159
----------
SEE NOTES TO FINANCIAL STATEMENTS
50
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
MEDIA CONGLOMERATES (3.8%)
34,370 Disney (Walt) Co. (The) $1,031,100
87,780 Time Warner, Inc. 1,518,594
19,610 Viacom, Inc. (Class B)* 702,822
----------
3,252,516
----------
MEDICAL SPECIALTIES (0.4%)
9,880 Applera Corp. - Applied Biosystems Group 319,618
----------
MOTOR VEHICLES (0.7%)
17,780 Honda Motor Co., Ltd. (ADR) (Japan) 565,760
----------
MULTI-LINE INSURANCE (0.7%)
7,240 Hartford Financial Services Group, Inc. (The) (Note 4) 612,504
----------
OIL REFINING/MARKETING (0.2%)
2,300 Marathon Oil Corp. 191,590
----------
OILFIELD SERVICES/EQUIPMENT (0.9%)
11,860 Schlumberger Ltd. (Netherlands Antilles) 772,205
----------
OTHER CONSUMER SERVICES (0.0%)
1,500 H&R Block, Inc. 35,790
----------
PACKAGED SOFTWARE (1.3%)
70,570 Symantec Corp.* 1,096,658
----------
PHARMACEUTICALS: MAJOR (10.6%)
27,170 Abbott Laboratories 1,184,884
55,230 Bristol-Myers Squibb Co. 1,428,248
11,590 GlaxoSmithKline PLC (ADR) (United Kingdom) 646,722
21,960 Lilly (Eli) & Co. 1,213,729
34,000 Pfizer, Inc. 797,980
15,020 Roche Holdings Ltd. (ADR) (Switzerland) 1,247,411
10,360 Sanofi-Aventis (ADR) (France) 504,532
61,900 Schering-Plough Corp. 1,177,957
18,290 Wyeth 812,259
----------
9,013,722
----------
PRECIOUS METALS (0.9%)
14,630 Newmont Mining Corp. 774,366
----------
PROPERTY - CASUALTY INSURERS (3.3%)
2,500 ACE Ltd. (Cayman Islands) 126,475
20,940 Chubb Corp. (The) 1,044,906
25,476 St. Paul Travelers Companies, Inc. (The) 1,135,720
8,300 XL Capital Ltd. (Class A) (Cayman Islands) 508,790
----------
2,815,891
----------
SEE NOTES TO FINANCIAL STATEMENTS
51
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------
REGIONAL BANKS (0.5%)
12,000 Fifth Third Bancorp $ 443,400
-----------
RESTAURANTS (0.4%)
9,230 McDonald's Corp. 310,128
-----------
SEMICONDUCTORS (1.3%)
30,289 Intel Corp. 573,977
33,670 Micron Technology, Inc.* 507,070
-----------
1,081,047
-----------
SPECIALTY INSURANCE (0.7%)
5,900 MGIC Investment Corp. 383,500
4,900 PMI Group, Inc. (The) 218,442
-----------
601,942
-----------
SPECIALTY STORES (0.3%)
6,890 Office Depot, Inc.* 261,820
-----------
TELECOMMUNICATION EQUIPMENT (0.4%)
15,480 Motorola, Inc. 311,922
-----------
TOBACCO (0.8%)
8,880 Altria Group, Inc. 652,058
-----------
TOTAL COMMON STOCKS
(COST $49,127,819) 58,243,151
-----------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
- --------- ------ ---------
CORPORATE BONDS (7.3%)
ADVERTISING/MARKETING SERVICES (0.1%)
$ 45 WPP Finance (UK) Corp. (United Kingdom) 5.875% 06/15/14 43,672
-----------
AEROSPACE & DEFENSE (0.2%)
55 Northrop Grumman Corp. 4.079 11/16/06 54,691
10 Raytheon Co. 6.15 11/01/08 10,103
90 Systems 2001 Asset Trust - 144A**
(Cayman Islands) 6.664 09/15/13 92,245
-----------
157,039
-----------
AIR FREIGHT/COURIERS (0.1%)
50 Fedex Corp. 2.65 04/01/07 48,831
-----------
AIRLINES (0.2%)
100 America West Airlines, Inc. (Series 01-1) 7.10 04/02/21 103,300
45 Southwest Airlines Co. (Series 01-1) 5.496 11/01/06 45,041
-----------
148,341
-----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
52
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------
APPAREL/FOOTWEAR RETAIL (0.1%)
$ 45 Limited Brands, Inc. 6.95% 03/01/33 $ 43,029
--------
BEVERAGES: ALCOHOLIC (0.2%)
70 FBG Finance Ltd. - 144A** (Australia) 5.125 06/15/15 64,242
70 Miller Brewing Co. - 144A** 4.25 08/15/08 67,997
--------
132,239
--------
CABLE/SATELLITE TV (0.1%)
10 Comcast Cable Communications Inc. 6.75 01/30/11 10,329
10 Comcast Corp. 7.625 02/15/08 10,253
55 TCI Communications, Inc. 7.875 02/15/26 59,377
--------
79,959
--------
CASINO/GAMING (0.1%)
110 Harrah's Operating Co., Inc. 5.625 06/01/15 101,915
25 Harrah's Operating Co., Inc. 6.50 06/01/16 24,403
--------
126,318
--------
CHEMICALS: MAJOR DIVERSIFIED (0.0%)
40 ICI Wilmington Inc. 4.375 12/01/08 38,624
--------
COMPUTER PROCESSING HARDWARE (0.1%)
45 Hewlett-Packard Co. 5.339+ 05/22/09 45,037
--------
CONTAINERS/PACKAGING (0.1%)
90 Sealed Air Corp. - 144A** 5.625 07/15/13 85,877
--------
ELECTRIC UTILITIES (1.0%)
70 Ameren Corp. 4.263 05/15/07 69,082
70 Arizona Public Service Co. 5.80 06/30/14 67,770
20 Arizona Public Service Co. 6.75 11/15/06 20,064
70 Carolina Power & Light Co. 5.125 09/15/13 66,875
75 CC Funding Trust I 6.90 02/16/07 75,432
45 Cincinnati Gas & Electric Co. 5.70 09/15/12 44,160
30 Consolidated Natural Gas Co. 5.00 12/01/14 27,642
65 Consolidated Natural Gas Co. (Series C) 6.25 11/01/11 65,709
45 Consumers Energy Co. 4.80 02/17/09 43,787
40 Detroit Edison Co. (The) 6.125 10/01/10 40,351
30 Entergy Gulf States, Inc. 3.60 06/01/08 28,673
45 Entergy Gulf States, Inc. 5.631+ 12/01/09 44,567
65 Ohio Power Company - IBC (Series K) 6.00 06/01/16 64,214
35 Pacific Gas & Electric Co. 6.05 03/01/34 33,141
15 Panhandle Eastern Pipe Line Co. (Series B) 2.75 03/15/07 14,683
45 Public Service Electric & Gas Co. (Series MTNB) 5.00 01/01/13 43,020
35 Texas Eastern Transmission, LP 7.00 07/15/32 37,527
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
53
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------
$ 55 Wisconsin Electric Power Co. 3.50% 12/01/07 $ 53,419
--------
840,116
--------
ELECTRICAL PRODUCTS (0.2%)
70 Cooper Industries Inc. 5.25 07/01/07 69,384
65 Cooper Industries, Inc. 5.25 11/15/12 62,940
--------
132,324
--------
ELECTRONICS/APPLIANCES (0.1%)
45 LG Electronics Inc. - 144A** (South Korea) 5.00 06/17/10 42,741
--------
FINANCE/RENTAL/LEASING (0.6%)
55 CIT Group, Inc. 2.875 09/29/06 54,672
95 Countrywide Home Loans, Inc. (Series MTN) 3.25 05/21/08 90,935
35 DaimlerChrysler North American Holdings Co. 8.50 01/18/31 39,739
85 Nationwide Building Society - 144A** (United Kingdom) 4.25 02/01/10 80,996
135 Residential Capital Corp. 6.375 06/30/10 133,278
45 SLM Corp. 4.00 01/15/10 42,532
80 SLM Corp. (Series MTNA) 5.00 10/01/13 75,505
--------
517,657
--------
FINANCIAL CONGLOMERATES (0.3%)
105 Bank One Corp. (Series MTNA) 6.00 02/17/09 105,843
40 General Electric Capital Corp. 4.25 12/01/10 37,907
10 General Electric Capital Corp. (Series MTNA) 5.875 02/15/12 10,065
100 General Electric Capital Corp. (Series MTNA) 6.75 03/15/32 107,078
--------
260,893
--------
FOOD RETAIL (0.1%)
55 Fred Meyer, Inc. 7.45 03/01/08 56,372
--------
FOOD: MAJOR DIVERSIFIED (0.1%)
30 ConAgra Foods, Inc. 7.00 10/01/28 30,592
30 ConAgra Foods, Inc. 8.25 09/15/30 34,668
25 Kraft Foods Inc. 5.25 06/01/07 24,854
--------
90,114
--------
FOREST PRODUCTS (0.0%)
5 Weyerhaeuser Co. 6.125 03/15/07 5,003
--------
GAS DISTRIBUTORS (0.1%)
45 NiSource Finance Corp. 5.764+ 11/23/09 45,090
45 Sempra Energy 4.621 05/17/07 44,571
--------
89,661
--------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
54
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------
HOME FURNISHINGS (0.0%)
$ 40 Mohawk Industries, Inc. (Series D) 7.20% 04/15/12 $ 41,272
--------
HOTELS/RESORTS/CRUISELINES (0.1%)
70 Hyatt Equities LLC - 144A** 6.875 06/15/07 70,432
--------
HOUSEHOLD/PERSONAL CARE (0.1%)
85 Clorox Co. (The) 5.444+ 12/14/07 85,130
--------
INDUSTRIAL CONGLOMERATES (0.1%)
50 Textron Financial Corp. 4.125 03/03/08 48,733
65 Textron Financial Corp. 5.125 02/03/11 63,376
--------
112,109
--------
INSURANCE BROKERS/SERVICES (0.3%)
200 Farmers Exchange Capital - 144A** 7.05 07/15/28 191,894
110 Marsh & McLennan Companies, Inc. 5.375 07/15/14 102,582
--------
294,476
--------
MAJOR BANKS (0.2%)
30 Bank of New York Co., Inc. (The) 5.20 07/01/07 29,845
55 HSBC Finance Corp. 6.75 05/15/11 57,113
45 Popular North America Inc. (Series MTN) 5.65 04/15/09 44,665
--------
131,623
--------
MAJOR TELECOMMUNICATIONS (0.5%)
40 Deutsche Telekom International Finance Corp. BV
(Netherlands) 8.25 06/15/30 46,312
75 France Telecom S.A. (France) 8.50 03/01/31 90,504
45 SBC Communications, Inc. 6.15 09/15/34 41,430
15 Sprint Capital Corp. 8.75 03/15/32 18,140
35 Telecom Italia Capital SA (Luxembourg) 4.00 11/15/08 33,594
60 Telecom Italia Capital SA (Luxembourg) 4.00 01/15/10 56,192
40 Telefonica Europe BV (Netherlands) 8.25 09/15/30 45,304
60 Verizon New England Inc. 6.50 09/15/11 60,084
--------
391,560
--------
MANAGED HEALTH CARE (0.0%)
5 WellPoint Inc. 3.75 12/14/07 4,860
--------
MEDIA CONGLOMERATES (0.2%)
30 News America Holdings, Inc. 7.75 02/01/24 32,235
20 News America, Inc. 6.40 12/15/35 18,556
15 News America, Inc. 7.28 06/30/28 15,206
65 Viacom, Inc. - 144A** 6.875 04/30/36 62,923
--------
128,920
--------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
55
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------
MULTI-LINE INSURANCE (0.4%)
$ 180 AIG Sun America Global Finance VI - 144A** 6.30% 05/10/11 $184,118
80 American General Finance Corp. (Series MTNH) 4.625 09/01/10 76,676
35 AXA Financial, Inc. 6.50 04/01/08 35,341
30 International Lease Finance Corp. 3.75 08/01/07 29,377
--------
325,512
--------
OIL & GAS PIPELINES (0.1%)
25 Kinder Morgan Energy Partners, L.P. 5.125 11/15/14 22,861
65 Plains All American Pipeline L.P. - 144A** 6.70 05/15/36 63,557
--------
86,418
--------
OTHER METALS/MINERALS (0.1%)
70 Brascan Corp. (Canada) 7.125 06/15/12 73,834
--------
PROPERTY - CASUALTY INSURERS (0.5%)
200 Mantis Reef Ltd. - 144A** (Australia) 4.692 11/14/08 193,957
45 Platinum Underwriters Finance Holdings, Ltd. (Series B) 7.50 06/01/17 44,225
55 Platinum Underwriters Holdings, Ltd. (Series B) (Bermuda) 6.371 11/16/07 54,492
70 St. Paul Travelers Companies, Inc. (The) 5.01 08/16/07 69,219
100 XLLIAC Global Funding - 144A** 4.80 08/10/10 96,128
--------
458,021
--------
PULP & PAPER (0.0%)
50 Sappi Papier Holding AG - 144A** (Austria) 6.75 06/15/12 46,831
--------
RAILROADS (0.2%)
37 Burlington North Santa Fe Railway Co. 4.575 01/15/21 34,726
45 Burlington North Santa Fe Railway Co. 6.125 03/15/09 45,516
45 Norfolk Southern Corp. 7.35 05/15/07 45,603
35 Union Pacific Corp. 6.625 02/01/08 35,472
25 Union Pacific Corp. (Series MTNE) 6.79 11/09/07 25,331
--------
186,648
--------
REAL ESTATE DEVELOPMENT (0.2%)
156 World Financial Properties - 144A** 6.91 09/01/13 161,356
--------
REAL ESTATE INVESTMENT TRUSTS (0.0%)
10 EOP Operating LP 4.75 03/15/14 9,084
10 EOP Operating LP 7.875 07/15/31 11,007
25 EOP Operating LP 6.763 06/15/07 25,203
--------
45,294
--------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
56
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------------
REGIONAL BANKS (0.1%)
$ 110 Marshall & Ilsley Bank (Series BKNT) 3.80% 02/08/08 $ 106,881
----------
RESTAURANTS (0.0%)
30 Tricon Global 8.875 04/15/11 33,445
----------
SAVINGS BANKS (0.2%)
40 Household Finance Corp. 4.125 12/15/08 38,679
20 Household Finance Corp. 5.875 02/01/09 20,135
15 Household Finance Corp. 6.375 10/15/11 15,346
65 Household Finance Corp. 6.40 06/17/08 65,894
55 Washington Mutual Bank 5.50 01/15/13 53,457
45 Washington Mutual Inc. 8.25 04/01/10 48,291
----------
241,802
----------
TRUCKS/CONSTRUCTION/FARM MACHINERY (0.1%)
20 Caterpillar Financial Services Corp. (Series MTNF) 3.625 11/15/07 19,474
80 Caterpillar Financial Services Corp. (Series MTNF) 5.259+ 08/20/07 80,074
----------
99,548
----------
WIRELESS TELECOMMUNICATIONS (0.1%)
70 Vodafone Group PLC (United Kingdom) 5.59+ 12/28/07 70,014
----------
TOTAL CORPORATE BONDS
(COST $6,279,136) 6,179,833
----------
FOREIGN GOVERNMENT OBLIGATION (0.1%)
45 United Mexican States (Mexico) (Series MTN)
(COST $51,294) 8.30 08/15/31 52,088
----------
U.S GOVERNMENT OBLIGATIONS (9.3%)
U.S. Treasury Bonds
410 6.375 08/15/27 465,510
1,540 7.625 02/15/25 1,956,282
740 8.125 08/15/19 - 08/15/21 949,571
200 8.50 02/15/20 261,625
425 8.75 08/15/20 569,301
U.S. Treasury Notes
275 3.875 02/15/13 256,072
1,615 4.25 08/15/13 - 11/15/13 1,531,223
1,570 ++ 4.25 08/15/13 1,490,144
420 4.50 02/28/11 409,664
----------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $8,077,775) 7,889,392
----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
57
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES (7.0%)
Federal Home Loan Mortgage Corp. Gold
$ 184 6.50% 03/01/33 $ 185,446
211 7.50 09/01/25 - 06/01/32 218,464
Federal National Mortgage Assoc.
237 6.50 01/01/32 239,335
250 7.00 +++ 255,734
760 7.00 05/01/31 - 08/01/35 778,790
308 7.50 08/01/29 - 09/01/35 319,651
244 8.00 12/01/28 - 01/01/32 258,104
Federal National Mortgage Assoc. (ARM)
249 0.78 05/01/36 257,777
250 1.354 07/01/36 258,516
175 5.358 07/01/36 180,961
106 5.663 07/01/33 106,588
251 6.104 03/01/36 256,253
537 6.154 01/01/36 554,254
250 6.156 05/01/36 258,256
249 6.157 03/01/36 256,012
570 6.163 01/01/36 585,613
350 6.265 04/01/36 361,701
524 6.448 04/01/36 547,899
Government National Mortgage Assoc.
59 7.50 08/15/23 - 10/15/29 61,320
----------
TOTAL MORTGAGE-BACKED SECURITIES
(COST $5,977,863) 5,940,674
----------
ASSET-BACKED SECURITIES (5.9%)
FINANCE/RENTAL/LEASING
150 American Express Credit Account Master
Trust 2002-3 A 5.309+ 12/15/09 150,226
300 American Express Credit Account Master
Trust 2003-3 A 5.309+ 11/15/10 300,713
175 Banc of America Securities Auto Trust
2005-WF1 A3 3.99 08/18/09 172,275
100 Capital Auto Receivables Asset Trust 2004-2 A 3.35 02/15/08 99,138
175 Capital Auto Receivables Asset Trust 2005-1 A4 4.05 07/15/09 172,486
150 Caterpillar Financial Asset Trust 2005-A A3 3.90 02/25/09 147,970
175 Caterpillar Financial Asset Trust 2006-A A3 5.57 05/25/10 174,984
215 Chase Credit Card Master Trust 2001-4 A 5.50 11/17/08 215,193
50 CIT Equipment Collateral 2004-EF1 A3 3.50 09/20/08 49,285
100 CNH Equipment Trust 2005-A A3 4.02 04/15/09 98,714
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
58
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------
$ 225 CNH Equipment Trust 2005-B A3 4.27% 01/15/10 $ 221,135
125 DaimlerChrysler Auto Trust 2005-B A3 4.04 09/08/09 123,361
125 Ford Credit Auto Owner Trust 2005-B A3 4.17 01/15/09 123,786
100 Ford Credit Auto Owner Trust 2006-A A3 5.05 03/15/10 99,199
150 GE Dealer Floorplan Master Note Trust 2004-1 A 5.317+ 07/20/08 150,079
175 GE Equipment Small Ticket LLC -2005-2A 4.88 10/22/09 173,287
200 Harley-Davidson Motorcycle Trust 2005-1 A2 3.76 12/17/12 195,079
125 Harley-Davidson Motorcycle Trust 2005-2 A2 4.07 02/15/12 121,342
100 Hertz Vehicle Financing LLC 2005-2A A2 4.93 02/25/10 98,311
100 Honda Auto Receivables Owner Trust 2005-2 A3 3.93 01/15/09 98,714
150 Honda Auto Receivables Owner Trust 2005-3 A3 3.87 04/20/09 147,429
125 Honda Auto Receivables Owner Trust 2005-6 A3 4.85 10/19/09 123,809
100 Hyundai Auto Receivables Trust 2005-A A3 3.98 11/16/09 98,019
100 MBNA Master Credit Card Trust 1999-B A 5.90 08/15/11 101,086
200 Merrill Auto Trust Securitization 2005-1 A3 4.10 08/25/09 196,877
125 National City Auto Receivables Trust 2004-A A4 2.88 05/15/11 120,981
175 Nissan Auto Receivables Owner Trust 2005-B A3 3.99 07/15/09 172,436
50 TXU Electric Delivery Transition Bond Co. LLC 2004-1 A2 4.81 11/17/14 47,982
200 USAA Auto Owner Trust 2004-2 A-4 3.58 02/15/11 195,602
157 USAA Auto Owner Trust 2004-3 A3 3.16 02/17/09 155,208
125 USAA Auto Owner Trust 2005-1 A3 3.90 07/15/09 123,518
125 Volkswagen Auto Lease Trust 2005-A A3 3.82 05/20/08 123,983
175 Volkswagen Auto Loan Enhanced Trust 2005-1 A3 4.80 07/20/09 173,530
54 Wachovia Auto Owner Trust 2004-B A3 2.91 04/20/09 53,382
75 Wachovia Auto Owner Trust 2005-A A3 4.06 09/21/09 73,935
125 Wachovia Auto Owner Trust 2005-B A3 4.79 04/20/10 123,671
53 World Omni Auto Receivables Trust 2004-A A3 3.29 11/12/08 52,099
----------
TOTAL ASSET-BACKED SECURITIES
(COST $5,123,553) 5,068,824
----------
COLLATERALIZED MORTGAGE OBLIGATIONS (0.8%)
181 Federal Home Loan Mortgage Corp. Whole Loan 2005-S001 2A2 5.472+ 09/25/45 181,597
248 Federal National Mortgage Assoc. 2006-28 1A1 5.432+ 03/25/36 248,380
3,040 Federal National Mortgage Assoc. 2006-28 1P (IO) 0.72+ 03/25/36 79,805
365 Federal National Mortgage Assoc. 2005-68 XI (IO) 6.00 08/25/35 148,519
----------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(COST $568,484) 658,301
----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
59
<Page>
<Table>
<Caption>
NUMBER OF
CONTRACTS VALUE
- --------------------------------------------------------------------------------------------
PUT OPTION PURCHASED (0.0%)
35 90 day Euro $ June/2007 @ $94.25
(COST $8,884) $ 15,313
-----------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
- --------- ------ --------
SHORT-TERM INVESTMENTS (3.2%)
U.S. GOVERNMENT OBLIGATION (a) (0.1%)
$ 100 U.S. Treasury Bill
(COST $99,858) 4.26% 07/13/06 99,858
-----------
REPURCHASE AGREEMENT (3.1%)
2,659 Joint repurchase agreement account
(dated 06/30/06; proceeds $2,660,157) (b)
(COST $2,659,000) 5.22 07/03/06 2,659,000
-----------
TOTAL SHORT-TERM INVESTMENTS
(COST $2,758,858) 2,758,858
-----------
TOTAL INVESTMENTS
(COST $77,973,666) (c) (d) 102.0% 86,806,434
LIABILITIES IN EXCESS OF OTHER ASSETS (2.0) (1,672,108)
----- -----------
NET ASSETS 100.0% $85,134,326
===== ===========
</Table>
- ----------
ADR AMERICAN DEPOSITARY RECEIPT.
ARM ADJUSTABLE RATE MORTGAGE.
IO INTEREST ONLY SECURITY.
* NON-INCOME PRODUCING SECURITY.
** RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS.
+ FLOATING RATE SECURITY; RATE SHOWN IS THE RATE IN EFFECT AT JUNE 30, 2006.
++ SECURITY PURCHASED ON A FORWARD COMMITMENT BASIS.
+++ SECURITY PURCHASED ON A FORWARD COMMITMENT BASIS WITH APPROXIMATE PRINCIPAL
AMOUNT AND NO DEFINITE MATURITY DATE; THE ACTUAL PRINCIPAL AMOUNT AND
MATURITY DATE WILL BE DETERMINED UPON SETTLEMENT.
(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
$6,432,361, 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 $11,726,520 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION
IS $2,893,752, RESULTING IN NET UNREALIZED APPRECIATION OF $8,832,768.
SEE NOTES TO FINANCIAL STATEMENTS
60
<Page>
FUTURES CONTRACTS OPEN AT JUNE 30, 2006:
<Table>
<Caption>
UNREALIZED
NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE APPRECIATION
CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE (DEPRECIATION)
- ---------------------------------------------------------------------------------------
14 Long U.S. Treasury Note 5 Year,
September 2006 $ 1,447,668 $(4,210)
4 Long U.S. Treasury Note 10 Year,
September 2006 419,438 2,364
3 Long U.S. Treasury Bond 20 Year,
September 2006 319,969 (492)
10 Short U.S. Treasury Note 2 Year,
September 2006 (2,027,813) (632)
-------
Net Unrealized Depreciation $(2,970)
=======
</Table>
SUMMARY OF INVESTMENTS
PERCENT OF
TYPES OF INVESTMENTS VALUE NET ASSETS
- --------------------------------------------------------------
Common Stocks $58,243,151 68.4%
U.S. Government Obligations 7,889,392 9.3
Corporate Bonds 6,179,833 7.3
Mortgage-Backed Securities 5,940,674 7.0
Asset Backed Securities 5,068,824 5.9
Short-Term Investments 2,758,858 3.2
Collateralized Mortgage Obligations 658,301 0.8
Foreign Government Obligation 52,088 0.1
Put Option Purchased 15,313 0.0
----------- -----
$86,806,434* 102.0%
=========== =====
- ----------
* DOES NOT INCLUDE OPEN LONG FUTURES CONTRACTS WITH AN UNDERLYING FACE AMOUNT
OF $2,187,075 WITH NET UNREALIZED DEPRECIATION OF $2,338 AND OPEN SHORT
FUTURES CONTRACTS WITH AN UNDERLYING FACE AMOUNT OF $2,027,813 WITH A
DEPRECIATION OF $632.
SEE NOTES TO FINANCIAL STATEMENTS
61
<Page>
Utilities
PORTFOLIO OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS (97.4%)
ALTERNATIVE POWER GENERATION (1.0%)
25,000 Distributed Energy Systems* $ 129,250
40,000 FuelCell Energy, Inc.* 383,200
20,000 Plug Power, Inc.* 93,400
4,000 Suntech Power Holdings Co. Ltd. (ADR) (China)* 113,000
-----------
718,850
-----------
CABLE/SATELLITE TV (0.6%)
10,000 Rogers Communications, Inc. (Class B) 404,000
-----------
ELECTRIC UTILITIES (52.7%)
92,000 AES Corp. (The)* 1,697,400
35,000 Allegheny Energy, Inc.* 1,297,450
28,000 Ameren Corp. 1,414,000
32,000 American Electric Power Co., Inc. 1,096,000
23,000 Consolidated Edison, Inc. 1,022,120
17,000 Constellation Energy Group, Inc. 926,840
22,000 Dominion Resources, Inc. 1,645,380
35,000 DPL, Inc. 938,000
58,710 Duke Energy Corp. 1,724,313
53,000 Edison International 2,067,000
29,500 Entergy Corp. 2,087,125
35,000 Exelon Corp. 1,989,050
35,000 FirstEnergy Corp. 1,897,350
54,000 FPL Group, Inc. 2,234,520
20,000 Mirant Corp.* 536,000
28,000 NSTAR 800,800
53,000 PG&E Corp. 2,081,840
16,400 Pinnacle West Capital Corp. 654,524
33,000 PNM Resources Inc. 823,680
71,000 PPL Corp. 2,293,300
49,000 SCANA Corp. 1,890,420
44,000 Southern Co. (The) 1,410,200
39,000 TXU Corp. 2,331,810
42,000 Wisconsin Energy Corp. 1,692,600
-----------
36,551,722
-----------
ELECTRONIC EQUIPMENT/INSTRUMENTS (0.9%)
10,000 Itron, Inc.* 592,600
-----------
ENERGY (24.7%)
48,000 AGL Resources, Inc. 1,829,760
5,000 Anadarko Petroleum Corp. 238,450
24,000 El Paso Corp. 360,000
SEE NOTES TO FINANCIAL STATEMENTS
62
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
40,000 Equitable Resources, Inc. $ 1,340,000
7,600 KeySpan Corp. 307,040
11,000 Kinder Morgan, Inc. 1,098,790
50,500 MDU Resources Group, Inc. 1,848,805
31,000 New Jersey Resources Corp. 1,450,180
8,000 Nexen, Inc. 452,320
37,000 NRG Energy, Inc.* 1,782,660
18,000 Peabody Energy Corp. 1,003,500
22,000 Questar Corp. 1,770,780
45,000 Sempra Energy 2,046,600
70,000 Williams Companies, Inc. (The) 1,635,200
-----------
17,164,085
-----------
TELECOMMUNICATIONS (16.5%)
24,160 ALLTEL Corp. 1,542,132
49,000 American Tower Corp. (Class A)* 1,524,880
55,272 AT&T Inc. 1,541,536
45,500 BellSouth Corp. 1,647,100
12,625 CenturyTel, Inc. 469,019
73,025 Sprint Nextel Corp. 1,459,770
21,400 Telefonica de Espana S.A. (ADR) (Spain) 1,064,436
49,000 Telefonos de Mexico S.A. (Series L) (ADR) (Mexico) 1,020,670
21,000 Valor Communications Group, Inc. 240,450
29,394 Verizon Communications, Inc. 984,405
-----------
11,494,398
-----------
WIRELESS TELECOMMUNICATIONS (1.0%)
10,000 America Movil S.A. de C.V. (Series L) (ADR) (Mexico) 332,600
6,000 NII Holdings, Inc.* 338,280
-----------
670,880
-----------
TOTAL COMMON STOCKS
(COST $41,178,152) 67,596,535
-----------
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
- --------------------------------------------------------------------------------
CORPORATE BONDS (0.5%)
ELECTRIC UTILITIES (0.5%)
$20 Carolina Power & Light Co. 5.125% 09/15/13 19,107
45 Cleco Power LLC 5.375 05/01/13 42,936
50 Commonwealth Edison Co. (Series 98) 6.15 03/15/12 50,558
35 Duquesne Light Co. (Series O) 6.70 04/15/12 36,273
10 Entergy Gulf States, Inc. 3.60 06/01/08 9,558
SEE NOTES TO FINANCIAL STATEMENTS
63
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------
$ 10 Entergy Gulf States, Inc. 5.631% 12/01/09 $ 9,904
25 FirstEnergy Corp. (Series B) 6.45 11/15/11 25,467
15 Indianapolis Power & Light Co. - 144A** 6.30 07/01/13 15,080
55 Public Service Co. of New Mexico (Series B) 7.50 08/01/18 58,575
30 Public Service Electric & Gas Co. (Series MTNB) 5.00 01/01/13 28,680
20 TXU Energy Co. 7.00 03/15/13 20,442
-----------
316,580
-----------
ENERGY (0.0%)
15 Panhandle Eastern Pipe Line Co. 4.80 08/15/08 14,631
10 Panhandle Eastern Pipe Line Co. (Series B) 2.75 03/15/07 9,789
-----------
24,420
-----------
TELECOMMUNICATIONS (0.0%)
10 AT&T Corp. 7.30 11/15/11 10,627
20 Sprint Capital Corp. 8.375 03/15/12 22,123
-----------
32,750
-----------
TOTAL CORPORATE BONDS
(COST $375,763) 373,750
-----------
U.S. GOVERNMENT OBLIGATION (0.0%)
75 U.S. Treasury Strip (Cost $25,353) 0.00 02/15/25 28,016
-----------
SHORT-TERM INVESTMENT (1.3%)
REPURCHASE AGREEMENT
878 Joint repurchase agreement account (dated 06/30/06;
proceeds $878,382) (a)
(COST $878,000) 5.215 07/03/06 878,000
-----------
TOTAL INVESTMENTS
(COST $42,457,268) (b) 99.2% 68,876,301
OTHER ASSETS IN EXCESS OF LIABILITIES 0.8 524,078
----- -----------
NET ASSETS 100.0% $69,400,379
===== ===========
</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 FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS
$26,846,999 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $427,966,
RESULTING IN NET UNREALIZED APPRECIATION OF $26,419,033.
SEE NOTES TO FINANCIAL STATEMENTS
64
<Page>
SUMMARY OF INVESTMENTS
PERCENT OF
INDUSTRY VALUE NET ASSETS
- --------------------------------------------------------------------------------
Electric Utilities $36,868,302 53.2%
Energy 17,188,505 24.7
Telecommunications 11,527,148 16.5
Repurchase Agreement 878,000 1.3
Alternative Power Generation 718,850 1.0
Wireless Telecommunications 670,880 1.0
Electronic Equipment/Instruments 592,600 0.9
Cable/Satellite TV 404,000 0.6
U.S. Government Obligation 28,016 0.0
----------- ----
$68,876,301 99.2%
=========== ====
SEE NOTES TO FINANCIAL STATEMENTS
65
<Page>
Dividend Growth
PORTFOLIO OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS (96.7%)
AEROSPACE & DEFENSE (1.3%)
52,963 Northrop Grumman Corp. $ 3,392,810
-----------
APPAREL/FOOTWEAR (2.5%)
2,599 J. Crew Group, Inc.* 71,343
17,300 NIKE, Inc. (Class B) 1,401,300
75,228 V.F. Corp. 5,109,486
-----------
6,582,129
-----------
BEVERAGES: ALCOHOLIC (1.3%)
51,100 Diageo PLC (ADR) (United Kingdom) 3,451,805
-----------
BIOTECHNOLOGY (1.5%)
23,207 Genentech, Inc.* 1,898,333
33,500 Gilead Sciences, Inc.* 1,981,860
-----------
3,880,193
-----------
CHEMICALS: AGRICULTURAL (1.5%)
45,781 Monsanto Co. 3,854,302
-----------
COMPUTER
COMMUNICATIONS (1.6%)
210,600 Cisco Systems, Inc.* 4,113,018
-----------
COMPUTER PROCESSING
HARDWARE (1.1%)
19,912 Apple Computer, Inc.* 1,137,373
74,400 Dell, Inc.* 1,816,104
-----------
2,953,477
-----------
CONTRACT DRILLING (0.7%)
21,600 Transocean Inc. (Cayman Islands)* 1,734,912
-----------
DATA PROCESSING
SERVICES (1.4%)
80,700 Automatic Data Processing, Inc. 3,659,745
-----------
DISCOUNT STORES (2.8%)
8,500 Sears Holdings Corp.* 1,316,140
124,524 Target Corp. 6,085,488
-----------
7,401,628
-----------
DRUGSTORE CHAINS (2.3%)
197,402 CVS Corp. 6,060,241
-----------
ELECTRIC UTILITIES (1.3%)
62,548 Exelon Corp. $ 3,554,603
-----------
FINANCIAL CONGLOMERATES (8.2%)
142,400 American Express Co. 7,578,528
121,589 Citigroup, Inc. 5,865,453
87,110 JPMorgan Chase & Co. 3,658,620
42,059 UBS AG (Switzerland) 4,613,872
-----------
21,716,473
-----------
FINANCIAL PUBLISHING/ SERVICES (1.5%)
79,311 McGraw-Hill Companies, Inc. (The) 3,983,792
-----------
FOOD: MAJOR DIVERSIFIED (4.0%)
175,232 PepsiCo, Inc. 10,520,929
-----------
FOOD: SPECIALTY/CANDY (0.8%)
37,200 Hershey Co. (The) 2,048,604
-----------
HOTELS/RESORTS/ CRUISELINES (1.6%)
71,000 Starwood Hotels & Resorts Worldwide, Inc. 4,284,140
-----------
HOUSEHOLD/PERSONAL
CARE (2.7%)
127,685 Procter & Gamble Co. (The) 7,099,286
-----------
INDUSTRIAL
CONGLOMERATES (8.5%)
106,700 3M Co. 8,618,159
129,123 General Electric Co. 4,255,894
155,036 United Technologies Corp. 9,832,383
-----------
22,706,436
-----------
INSURANCE BROKERS/ SERVICES (0.5%)
50,300 Marsh & McLennan Companies, Inc. 1,352,567
-----------
INTEGRATED OIL (5.8%)
103,000 BP PLC (ADR)
(United Kingdom) 7,169,830
134,129 Exxon Mobil Corp. 8,228,814
-----------
15,398,644
-----------
SEE NOTES TO FINANCIAL STATEMENTS
66
<Page>
Dividend Growth
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
INTERNET SOFTWARE/SERVICES (2.8%)
8,500 Google, Inc. (Class A)* $ 3,564,305
115,297 Yahoo!, Inc.* 3,804,801
-----------
7,369,106
-----------
INVESTMENT BANKS/BROKERS (3.4%)
32,583 Goldman Sachs Group, Inc. (The) 4,901,461
60,798 Merrill Lynch & Co., Inc. 4,229,109
-----------
9,130,570
-----------
INVESTMENT MANAGERS (2.3%)
183,092 Mellon Financial Corp. 6,303,858
-----------
LIFE/HEALTH INSURANCE (2.7%)
72,852 Lincoln National Corp. 4,111,767
62,000 MetLife, Inc. 3,175,020
-----------
7,286,787
-----------
MAJOR BANKS (1.0%)
52,496 Bank of America Corp. 2,525,058
-----------
MAJOR
TELECOMMUNICATIONS (1.7%)
29,800 ALLTEL Corp. 1,902,134
139,000 Sprint Nextel Corp. 2,778,610
-----------
4,680,744
-----------
MANAGED HEALTH CARE (2.3%)
76,227 Caremark Rx, Inc. 3,801,441
56,756 UnitedHealth Group Inc. 2,541,534
-----------
6,342,975
-----------
MEDIA CONGLOMERATES (0.8%)
118,900 Time Warner, Inc. 2,056,970
-----------
MEDICAL SPECIALTIES (4.0%)
21,258 Alcon, Inc. (Switzerland) 2,094,976
62,500 Baxter International, Inc. 2,297,500
36,408 Fisher Scientific International Inc.* 2,659,604
74,600 Medtronic, Inc. 3,500,232
-----------
10,552,312
-----------
OFFICE EQUIPMENT/SUPPLIES (1.6%)
99,989 Pitney Bowes, Inc. $ 4,129,546
-----------
OIL & GAS PRODUCTION (2.4%)
143,541 XTO Energy Inc. 6,354,560
-----------
OIL REFINING/MARKETING (1.6%)
64,300 Valero Energy Corp. 4,277,236
-----------
OILFIELD SERVICES/EQUIPMENT (2.9%)
63,744 Halliburton Co. 4,730,442
44,500 Schlumberger Ltd. (Netherlands Antilles) 2,897,395
-----------
7,627,837
-----------
OTHER CONSUMER
SERVICES (0.5%)
44,000 eBay, Inc.* 1,288,760
-----------
PACKAGED SOFTWARE (2.3%)
44,700 Adobe Systems, Inc.* 1,357,092
327,400 Oracle Corp.* 4,744,026
-----------
6,101,118
-----------
PHARMACEUTICALS: MAJOR (4.4%)
37,919 Johnson & Johnson 2,272,106
80,300 Pfizer, Inc. 1,884,641
169,388 Wyeth 7,522,521
-----------
11,679,268
-----------
PROPERTY - CASUALTY
INSURERS (0.5%)
21,100 XL Capital Ltd. (Class A) (Cayman Islands) 1,293,430
-----------
REGIONAL BANKS (0.5%)
33,300 Fifth Third Bancorp 1,230,435
-----------
SEMICONDUCTORS (2.6%)
95,400 Intel Corp. 1,807,830
18,400 Marvell Technology Group, Ltd. (Bermuda)* 815,672
139,522 Texas Instruments Inc. 4,226,121
-----------
6,849,623
-----------
SEE NOTES TO FINANCIAL STATEMENTS
67
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
TELECOMMUNICATION
EQUIPMENT (1.5%)
45,600 Nokia Corp. (ADR) (Finland) $ 923,856
78,870 QUALCOMM, Inc. 3,160,321
------------
4,084,177
------------
TOBACCO (2.0%)
72,789 Altria Group, Inc. 5,344,896
------------
TOTAL COMMON STOCKS
(COST $213,439,824) 256,259,000
------------
NUMBER OF
WARRANTS
- ---------
WARRANT (0.1%)
AEROSPACE & DEFENSE
20,712 Raytheon Co (06/16/11)
(COST $252,686)* 262,007
------------
PRINCIPAL
AMOUNT IN
THOUSANDS
- ---------
SHORT-TERM INVESTMENT (3.3%)
REPURCHASE AGREEMENT
$ 8,771 Joint repurchase agreement
account 5.215% due
07/03/06 (dated 06/30/06;
proceeds $8,774,812) (a)
(COST $8,771,000) 8,771,000
------------
TOTAL INVESTMENTS
(COST $222,463,510) (b) 100.1% 265,292,007
LIABILITIES IN EXCESS OF OTHER ASSETS (0.1) (276,430)
----- ------------
NET ASSETS 100.0% $265,015,577
===== ============
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 $46,997,959 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION
IS $4,169,462, RESULTING IN NET UNREALIZED APPRECIATION OF $42,828,497.
SEE NOTES TO FINANCIAL STATEMENTS
68
<Page>
Dividend Growth
SUMMARY OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ----------------------------------------------------------
Industrial Conglomerates $ 22,706,436 8.5%
Financial Conglomerates 21,716,473 8.2
Integrated Oil 15,398,644 5.8
Pharmaceuticals: Major 11,679,268 4.4
Medical Specialties 10,552,312 4.0
Food: Major Diversified 10,520,929 4.0
Investment Banks/Brokers 9,130,570 3.4
Repurchase Agreement 8,771,000 3.3
Oilfield Services/Equipment 7,627,837 2.9
Discount Stores 7,401,628 2.8
Internet Software/Services 7,369,106 2.8
Life/Health Insurance 7,286,787 2.7
Household/Personal Care 7,099,286 2.7
Semiconductors 6,849,623 2.6
Apparel/Footwear 6,582,129 2.5
Oil & Gas Production 6,354,560 2.4
Packaged Software 6,101,118 2.3
Investment Managers 6,303,858 2.3
Managed Health Care 6,342,975 2.3
Drugstore Chains 6,060,241 2.3
Tobacco 5,344,896 2.0
Major Telecommunications 4,680,744 1.7
Hotels/Resorts/Cruiselines 4,284,140 1.6
Oil Refining/Marketing 4,277,236 1.6
Office Equipment/Supplies $ 4,129,546 1.6%
Computer Communications 4,113,018 1.6
Telecommunication Equipment 4,084,177 1.5
Financial Publishing/Services 3,983,792 1.5
Biotechnology 3,880,193 1.5
Chemicals: Agricultural 3,854,302 1.5
Data Processing Services 3,659,745 1.4
Aerospace & Defense 3,654,817 1.4
Electric Utilities 3,554,603 1.3
Beverages: Alcoholic 3,451,805 1.3
Computer Processing Hardware 2,953,477 1.1
Major Banks 2,525,058 1.0
Media Conglomerates 2,056,970 0.8
Food: Specialty/Candy 2,048,604 0.8
Contract Drilling 1,734,912 0.7
Insurance Brokers/Services 1,352,567 0.5
Property - Casualty Insurers 1,293,430 0.5
Other Consumer Services 1,288,760 0.5
Regional Banks 1,230,435 0.5
------------ -----
$265,292,007 100.1%
============ =====
SEE NOTES TO FINANCIAL STATEMENTS
69
<Page>
Equally-Weighted S&P 500
PORTFOLIO OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS (96.7%)
ADVERTISING/MARKETING SERVICES (0.3%)
47,393 Interpublic Group of Companies, Inc. (The)* $ 395,732
4,565 Omnicom Group, Inc. 406,696
----------
802,428
----------
AEROSPACE & DEFENSE (1.5%)
4,748 Boeing Co. 388,909
6,143 General Dynamics Corp. 402,121
9,693 Goodrich Corp. 390,531
5,415 L-3 Communications Holdings, Inc. 408,399
5,695 Lockheed Martin Corp. 408,559
6,363 Northrop Grumman Corp. 407,614
9,111 Raytheon Co. 406,077
7,526 Rockwell Collins, Inc. 420,478
----------
3,232,688
----------
AGRICULTURAL COMMODITIES/MILLING (0.2%)
10,393 Archer-Daniels-Midland Co. 429,023
----------
AIR FREIGHT/COURIERS (0.4%)
3,704 FedEx Corp. 432,849
5,123 United Parcel Service, Inc. (Class B) 421,777
----------
854,626
----------
AIRLINES (0.1%)
24,917 Southwest Airlines Co. 407,891
----------
ALUMINUM (0.2%)
13,498 Alcoa, Inc. 436,795
----------
APPAREL/FOOTWEAR (0.9%)
13,625 Coach, Inc.* 407,388
12,752 Jones Apparel Group, Inc. 405,386
10,834 Liz Claiborne, Inc. 401,508
4,885 Nike, Inc. (Class B) 395,685
6,199 V.F. Corp. 421,036
----------
2,031,003
----------
APPAREL/FOOTWEAR RETAIL (0.7%)
23,077 Gap, Inc. (The) $ 401,540
15,742 Limited Brands, Inc. 402,838
11,329 Nordstrom, Inc. 413,509
17,822 TJX Companies, Inc. (The) 407,411
----------
1,625,298
----------
AUTO PARTS: O.E.M. (0.3%)
5,609 Eaton Corp. 422,919
5,048 Johnson Controls, Inc. 415,047
----------
837,966
----------
AUTOMOTIVE AFTERMARKET (0.3%)
36,656 Cooper Tire & Rubber Co. 408,348
34,803 Goodyear Tire & Rubber Co. (The)* 386,313
----------
794,661
----------
BEVERAGES: ALCOHOLIC (0.7%)
8,923 Anheuser-Busch Companies, Inc. 406,800
5,532 Brown-Forman Corp. (Class B) 395,261
16,318 Constellation Brands Inc. (Class A)* 407,950
6,010 Molson Coors Brewing Co. (Class B) 407,959
----------
1,617,970
----------
BEVERAGES: NON-ALCOHOLIC (0.5%)
9,400 Coca-Cola Co. (The) 404,388
21,209 Coca-Cola Enterprises Inc. 432,027
13,051 Pepsi Bottling Group, Inc. (The) 419,590
----------
1,256,005
----------
BIOTECHNOLOGY (1.1%)
6,072 Amgen Inc.* 396,077
8,778 Biogen Idec Inc.* 406,685
6,388 Genzyme Corp.* 389,987
7,018 Gilead Sciences, Inc.* 415,185
SEE NOTES TO FINANCIAL STATEMENTS
70
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
13,638 MedImmune, Inc.* $ 369,590
6,464 Millipore Corp.* 407,167
----------
2,384,691
----------
BROADCASTING (0.4%)
13,602 Clear Channel Communications, Inc. 420,982
11,361 Univision Communications, Inc. (Class A)* 380,594
----------
801,576
----------
BUILDING PRODUCTS (0.4%)
9,829 American Standard Companies, Inc. 425,301
14,301 Masco Corp. 423,882
----------
849,183
----------
CABLE/SATELLITE TV (0.2%)
12,387 Comcast Corp. (Class A)* 405,550
----------
CASINO/GAMING (0.4%)
5,638 Harrah's Entertainment, Inc. 401,313
11,149 International Game Technology 422,993
----------
824,306
----------
CHEMICALS: AGRICULTURAL (0.2%)
5,231 Monsanto Co. 440,398
----------
CHEMICALS: MAJOR DIVERSIFIED (1.0%)
10,688 Dow Chemical Co. (The) 417,153
9,945 Du Pont (E.I.) de Nemours & Co. 413,712
7,723 Eastman Chemical Co. 417,042
27,023 Hercules Inc.* 412,371
8,501 Rohm & Haas Co. 426,070
----------
2,086,348
----------
CHEMICALS: SPECIALTY (0.8%)
6,497 Air Products & Chemicals, Inc. 415,288
6,621 Ashland Inc. 441,621
7,694 Praxair, Inc. 415,476
5,732 Sigma-Aldrich Corp. 416,372
----------
1,688,757
----------
COMMERCIAL PRINTING/FORMS (0.2%)
13,445 Donnelley (R.R.) & Sons Co. $ 429,568
----------
COMPUTER COMMUNICATIONS (0.7%)
35,472 Avaya Inc.* 405,090
20,563 Cisco Systems, Inc.* 401,595
24,248 Juniper Networks, Inc.* 387,726
23,182 QLogic Corp.* 399,658
----------
1,594,069
----------
COMPUTER PERIPHERALS (0.6%)
33,818 EMC Corp.* 370,983
7,538 Lexmark International, Inc. (Class A)* 420,847
11,762 Network Appliance, Inc.* 415,199
5,600 Seagate Technology Inc. (Escrow) (a)* 0
----------
1,207,029
----------
COMPUTER PROCESSING HARDWARE (1.2%)
7,056 Apple Computer, Inc.* 403,039
16,839 Dell, Inc.* 411,040
255,443 Gateway, Inc.* 485,342
12,293 Hewlett-Packard Co. 389,442
11,260 NCR Corp.* 412,566
93,578 Sun Microsystems, Inc.* 388,349
----------
2,489,778
----------
CONSTRUCTION MATERIALS (0.2%)
5,606 Vulcan Materials Co. 437,268
----------
CONTAINERS/PACKAGING (1.0%)
11,383 Ball Corp. 421,626
13,498 Bemis Company, Inc. 413,309
17,051 Pactiv Corp.* 422,012
7,809 Sealed Air Corp. 406,693
9,998 Temple-Inland Inc. 428,614
----------
2,092,254
----------
CONTRACT DRILLING (0.8%)
12,524 Nabors Industries, Ltd. (Bermuda)* 423,185
5,877 Noble Corp. (Cayman Islands) 437,366
SEE NOTES TO FINANCIAL STATEMENTS
71
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
11,336 Rowan Companies, Inc. $ 403,448
5,325 Transocean Inc. (Cayman Islands)* 427,704
-----------
1,691,703
-----------
DATA PROCESSING SERVICES (1.3%)
8,306 Affiliated Computer Services, Inc. (Class A)* 428,672
9,046 Automatic Data Processing, Inc. 410,236
7,350 Computer Sciences Corp.* 356,034
21,650 Convergys Corp.* 422,175
8,826 First Data Corp. 397,523
9,243 Fiserv, Inc.* 419,262
10,522 Paychex, Inc. 410,148
-----------
2,844,050
-----------
DEPARTMENT STORES (0.8%)
13,217 Dillard's, Inc. (Class A) 420,961
11,571 Federated Department Stores, Inc. 423,499
7,064 Kohl's Corp.* 417,624
6,194 Penney (J.C.) Co., Inc. 418,157
-----------
1,680,241
-----------
DISCOUNT STORES (1.3%)
24,994 Big Lots, Inc.* 426,898
7,556 Costco Wholesale Corp. 431,674
27,934 Dollar General Corp. 390,517
16,826 Family Dollar Stores, Inc. 411,059
2,616 Sears Holdings Corp.* 405,061
8,271 Target Corp. 404,204
8,407 Wal-Mart Stores, Inc. 404,965
-----------
2,874,378
-----------
DRUGSTORE CHAINS (0.4%)
13,453 CVS Corp. 413,007
9,402 Walgreen Co. 421,586
-----------
834,593
-----------
ELECTRIC UTILITIES (4.8%)
23,209 AES Corp. (The)* 428,206
11,245 Allegheny Energy, Inc.* 416,852
8,033 Ameren Corp. $ 405,667
11,890 American Electric Power Co., Inc. 407,233
32,807 CenterPoint Energy, Inc. 410,088
31,607 CMS Energy Corp.* 408,995
9,183 Consolidated Edison, Inc. 408,093
7,452 Constellation Energy Group, Inc. 406,283
5,487 Dominion Resources, Inc. 410,373
9,967 DTE Energy Co. 406,056
13,962 Duke Energy Corp. 410,064
10,014 Edison International 390,546
5,714 Entergy Corp. 404,266
7,017 Exelon Corp. 398,776
7,681 FirstEnergy Corp. 416,387
9,846 FPL Group, Inc. 407,427
10,390 PG&E Corp. 408,119
10,210 Pinnacle West Capital Corp. 407,481
12,732 PPL Corp. 411,244
9,463 Progress Energy, Inc. 405,679
6,216 Public Service Enterprise Group, Inc. 411,002
12,493 Southern Co. (The) 400,401
27,222 TECO Energy, Inc. 406,697
6,961 TXU Corp. 416,198
21,132 Xcel Energy, Inc. 405,312
-----------
10,207,445
-----------
ELECTRICAL PRODUCTS (0.8%)
21,309 American Power Conversion Corp. 415,312
4,708 Cooper Industries Ltd. (Class A) (Bermuda) 437,467
4,962 Emerson Electric Co. 415,865
12,024 Molex Inc. 403,646
-----------
1,672,290
-----------
ELECTRONIC COMPONENTS (0.8%)
15,467 Jabil Circuit, Inc. 395,955
7,533 SanDisk Corp.* 384,032
89,461 Sanmina-SCI Corp.* 411,521
123,451 Solectron Corp.* 422,202
-----------
1,613,710
-----------
SEE NOTES TO FINANCIAL STATEMENTS
72
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT/INSTRUMENTS (1.4%)
12,179 Agilent Technologies, Inc.* $ 384,369
167,832 JDS Uniphase Corp.* 424,615
6,111 Rockwell Automation, Inc. 440,053
38,498 Symbol Technologies, Inc. 415,393
13,317 Tektronix, Inc. 391,786
11,525 Thermo Electron Corp.* 417,666
29,711 Xerox Corp.* 413,280
-----------
2,887,162
-----------
ELECTRONIC PRODUCTION EQUIPMENT (0.8%)
24,917 Applied Materials, Inc. 405,649
9,749 KLA-Tencor Corp. 405,266
16,776 Novellus Systems, Inc.* 414,367
28,284 Teradyne, Inc.* 393,996
-----------
1,619,278
-----------
ELECTRONICS/APPLIANCE STORES (0.6%)
7,796 Best Buy Co., Inc. 427,533
13,777 Circuit City Stores - Circuit City Group 375,010
27,536 RadioShack Corp. 385,504
-----------
1,188,047
-----------
ELECTRONICS/APPLIANCES (0.6%)
17,379 Eastman Kodak Co. 413,273
4,866 Harman International Industries, Inc. 415,410
4,976 Whirlpool Corp. 411,266
-----------
1,239,949
-----------
ENGINEERING & CONSTRUCTION (0.2%)
4,615 Fluor Corp. 428,872
-----------
ENVIRONMENTAL SERVICES (0.4%)
37,399 Allied Waste Industries, Inc.* 424,853
11,688 Waste Management, Inc. 419,365
-----------
844,218
-----------
FINANCE/RENTAL/LEASING (1.4%)
4,846 Capital One Financial Corp. $414,091
7,871 CIT Group, Inc. 411,575
11,135 Countrywide Financial Corp. 424,021
8,596 Fannie Mae 413,468
7,064 Freddie Mac 402,719
7,441 Ryder System, Inc. 434,778
7,665 SLM Corp. 405,632
-----------
2,906,284
-----------
FINANCIAL CONGLOMERATES (1.2%)
7,675 American Express Co. 408,464
8,399 Citigroup, Inc. 405,168
10,113 JPMorgan Chase & Co. 424,746
7,596 Principal Financial Group, Inc.* 422,717
5,371 Prudential Financial, Inc. 417,327
6,898 State Street Corp. 400,705
-----------
2,479,127
-----------
FINANCIAL PUBLISHING/SERVICES (0.6%)
11,655 Equifax, Inc. 400,233
7,625 McGraw-Hill Companies, Inc. (The) 383,004
7,703 Moody's Corp. 419,505
-----------
1,202,742
-----------
FOOD DISTRIBUTORS (0.2%)
13,343 SYSCO Corp. 407,762
-----------
FOOD RETAIL (0.8%)
20,712 Kroger Co. 452,764
16,404 Safeway Inc. 426,504
13,651 Supervalu, Inc. 419,086
6,532 Whole Foods Market, Inc. 422,228
-----------
1,720,582
-----------
FOOD: MAJOR DIVERSIFIED (1.3%)
11,529 Campbell Soup Co. 427,841
18,361 ConAgra Foods Inc. 405,962
8,052 General Mills, Inc. 415,966
SEE NOTES TO FINANCIAL STATEMENTS
73
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
9,884 Heinz (H.J.) Co. $ 407,418
8,574 Kellogg Co. 415,239
6,803 PepsiCo, Inc. 408,452
23,724 Sara Lee Corp. 380,058
----------
2,860,936
----------
FOOD: MEAT/FISH/DAIRY (0.4%)
11,313 Dean Foods Co.* 420,730
27,991 Tyson Foods, Inc. (Class A) 415,946
----------
836,676
----------
FOOD: SPECIALTY/CANDY (0.6%)
7,416 Hershey Co. (The) 408,399
12,319 McCormick & Co., Inc. (Non-Voting) 413,302
9,000 Wrigley (Wm.) Jr. Co. 408,240
----------
1,229,941
----------
FOREST PRODUCTS (0.4%)
18,378 Louisiana-Pacific Corp. 402,478
6,878 Weyerhaeuser Co. 428,156
----------
830,634
----------
GAS DISTRIBUTORS (1.2%)
78,107 Dynegy, Inc. (Class A)* 427,245
10,103 KeySpan Corp. 408,161
9,926 Nicor Inc. 411,929
18,512 NiSource, Inc. 404,302
11,070 Peoples Energy Corp. 397,524
9,152 Sempra Energy 416,233
----------
2,465,394
----------
HOME BUILDING (1.0%)
8,264 Centex Corp. 415,679
16,470 D.R. Horton, Inc. 392,315
8,932 KB Home 409,532
9,048 Lennar Corp. (Class A) 401,460
14,526 Pulte Homes, Inc. 418,204
----------
2,037,190
----------
HOME FURNISHINGS (0.4%)
16,240 Leggett & Platt, Inc. 405,675
15,798 Newell Rubbermaid, Inc. 408,062
----------
813,737
----------
HOME IMPROVEMENT CHAINS (0.6%)
11,004 Home Depot, Inc. (The) $ 393,833
6,476 Lowe's Companies, Inc. 392,899
8,755 Sherwin-Williams Co. 415,687
----------
1,202,419
----------
HOSPITAL/NURSING MANAGEMENT (0.7%)
9,358 HCA, Inc. 403,798
19,611 Health Management Associates, Inc. (Class A) 386,533
8,733 Manor Care, Inc. 409,752
54,812 Tenet Healthcare Corp.* 382,588
----------
1,582,671
----------
HOTELS/RESORTS/CRUISELINES (0.8%)
10,106 Carnival Corp. (Panama) 421,824
15,390 Hilton Hotels Corp. 435,229
11,291 Marriott International, Inc. (Class A) 430,413
7,180 Stanwood Hotels & Resorts Worldwide, Inc. 433,241
----------
1,720,707
----------
HOUSEHOLD/PERSONAL CARE (1.5%)
8,701 Alberto-Culver Co. 423,913
13,422 Avon Products, Inc. 416,082
6,634 Clorox Co. (The) 404,475
6,692 Colgate-Palmolive Co. 400,851
10,591 Estee Lauder Companies, Inc. (The) (Class A) 409,554
11,685 International Flavors & Fragrances, Inc. 411,779
6,676 Kimberly-Clark Corp. 411,909
7,483 Procter & Gamble Co. (The) 416,055
----------
3,294,618
----------
INDUSTRIAL CONGLOMERATES (1.7%)
5,045 3M Co. 407,485
6,356 Danaher Corp. 408,818
11,970 General Electric Co. ** 394,531
SEE NOTES TO FINANCIAL STATEMENTS
74
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
10,398 Honeywell International, Inc. $ 419,039
9,846 Ingersoll-Rand Co. Ltd. (Class A) (Bermuda) 421,211
8,215 ITT Industries, Inc. 406,643
4,755 Textron, Inc. 438,316
15,116 Tyco International Ltd. (Bermuda) 415,690
6,577 United Technologies Corp. 417,113
----------
3,728,846
----------
INDUSTRIAL MACHINERY (0.4%)
8,421 Illinois Tool Works Inc. 399,998
5,378 Parker Hannifin Corp. 417,333
----------
817,331
----------
INDUSTRIAL SPECIALTIES (0.4%)
10,500 Ecolab Inc. 426,090
6,274 PPG Industries, Inc. 414,084
----------
840,174
----------
INFORMATION TECHNOLOGY SERVICES (0.8%)
11,010 Citrix Systems, Inc.* 441,941
16,888 Electronic Data Systems Corp. 406,325
5,340 International Business Machines Corp. 410,219
63,679 Unisys Corp.* 399,904
----------
1,658,389
----------
INSURANCE BROKERS/SERVICES (0.4%)
11,869 AON Corp. 413,279
14,796 Marsh & McLennan Companies, Inc. 397,864
----------
811,143
----------
INTEGRATED OIL (1.0%)
6,918 Chevron Corp. 429,331
6,640 ConocoPhillips 435,119
6,907 Exxon Mobil Corp. 423,744
8,753 Hess Corp. 462,596
8,262 Murphy Oil Corp. 461,515
----------
2,212,305
----------
INTERNET RETAIL (0.2%)
11,575 Amazon.com, Inc.* $ 447,721
----------
INTERNET SOFTWARE/SERVICES (0.6%)
1,040 Google, Inc. (Class A)* 436,103
18,411 VeriSign, Inc.* 426,583
13,378 Yahoo!, Inc.* 441,474
----------
1,304,160
----------
INVESTMENT BANKS/BROKERS (1.6%)
9,688 Ameriprise Financial, Inc. 432,763
3,090 Bear Stearns Companies, Inc. (The) 432,847
19,158 E *TRADE Group, Inc.* 437,186
2,821 Goldman Sachs Group, Inc. (The) 424,363
6,411 Lehman Brothers Holdings Inc. 417,677
6,039 Merrill Lynch & Co., Inc. 420,073
7,127 Morgan Stanley (Note 4) 450,498
26,170 Schwab (Charles) Corp. (The) 418,197
----------
3,433,604
----------
INVESTMENT MANAGERS (1.1%)
13,208 Federated Investors, Inc. (Class B) 416,052
4,776 Franklin Resources, Inc. 414,605
23,491 Janus Capital Group, Inc. 420,489
3,964 Legg Mason, Inc. 394,497
11,483 Mellon Financial Corp. 395,360
10,850 Price (T.) Rowe Group, Inc. 410,239
----------
2,451,242
----------
LIFE/HEALTH INSURANCE (1.2%)
8,742 AFLAC, Inc. 405,191
12,387 Genworth Financial Inc. (Class A) 431,563
7,259 Lincoln National Corp. 409,698
8,108 MetLife, Inc. 415,211
6,957 Torchmark Corp. 422,429
22,365 UnumProvident Corp. 405,477
----------
2,489,569
----------
SEE NOTES TO FINANCIAL STATEMENTS
75
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
MAJOR BANKS (2.3%)
8,565 Bank of America Corp. $ 411,977
12,772 Bank of New York Co., Inc. (The) 411,258
9,629 BB&T Corp. 400,470
7,520 Comerica, Inc. 390,965
17,087 Huntington Bancshares, Inc. 402,911
11,548 KeyCorp 412,033
11,273 National City Corp. 407,970
5,863 PNC Financial Services Group 411,407
12,027 Regions Financial Corp. 398,334
5,288 SunTrust Banks, Inc. 403,263
7,750 Wachovia Corp. 419,120
6,094 Wells Fargo & Co. 408,786
----------
4,878,494
----------
MAJOR TELECOMMUNICATIONS (1.2%)
6,556 ALLTEL Corp. 418,469
14,615 AT&T, Inc. 407,612
11,257 BellSouth Corp. 407,503
10,251 Embarq Corp.* 420,188
19,726 Sprint Nextel Corp. 394,323
12,482 Verizon Communications, Inc. 418,022
----------
2,466,117
----------
MANAGED HEALTH CARE (1.4%)
10,353 Aetna, Inc.* 413,395
8,570 Caremark Rx, Inc.* 427,386
4,346 CIGNA Corp. 428,124
7,953 Coventry Health Care, Inc.* 436,938
8,073 Humana, Inc.* 433,520
9,170 UnitedHealth Group Inc. 410,633
5,716 WellPoint Inc.* 415,953
----------
2,965,949
----------
MEDIA CONGLOMERATES (1.0%)
15,627 CBS Corp. (Class B) 422,710
13,791 Disney (Walt) Co. (The) 413,730
21,501 News Corp (Class A) 412,389
23,948 Time Warner, Inc. 414,300
11,394 Viacom, Inc. (Class B)* 408,361
----------
2,071,490
----------
MEDICAL DISTRIBUTORS (0.8%)
9,834 AmerisourceBergen Corp. $ 412,241
6,122 Cardinal Health, Inc. 393,828
8,858 McKesson Corp. 418,806
11,718 Patterson Companies, Inc.* 409,310
----------
1,634,185
----------
MEDICAL SPECIALTIES (3.0%)
13,356 Applera Corp. - Applied Biosystems Group 432,067
5,683 Bard (C.R.), Inc. 416,337
8,123 Bausch & Lomb, Inc. 398,352
10,688 Baxter International, Inc. 392,891
6,652 Becton, Dickinson & Co. 406,637
11,464 Biomet, Inc. 358,709
20,217 Boston Scientific Corp.* 340,454
5,800 Fisher Scientific International Inc.* 423,690
9,456 Hospira, Inc.* 406,041
8,083 Medtronic, Inc. 379,254
14,610 Pall Corp. 409,080
19,424 PerkinElmer, Inc. 405,962
11,803 St. Jude Medical, Inc.* 382,653
9,062 Stryker Corp. 381,601
9,559 Waters Corp.* 424,420
6,159 Zimmer Holdings, Inc.* 349,338
----------
6,307,486
----------
MISCELLANEOUS COMMERCIAL SERVICES (0.4%)
10,006 Cintas Corp. 397,839
18,953 Sabre Holdings Corp. (Class A) 416,966
----------
814,805
----------
MISCELLANEOUS MANUFACTURING (0.2%)
8,853 Dover Corp. 437,604
----------
MOTOR VEHICLES (0.6%)
60,711 Ford Motor Co. 420,727
15,865 General Motors Corp. 472,618
7,656 Harley-Davidson, Inc. 420,238
----------
1,313,583
----------
SEE NOTES TO FINANCIAL STATEMENTS
76
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
MULTI-LINE INSURANCE (0.8%)
6,784 American International Group, Inc. $ 400,595
4,896 Hartford Financial Services Group, Inc. (The) (Note 4) 414,202
11,935 Loews Corp. 423,096
7,337 Safeco Corp. 413,440
----------
1,651,333
----------
OFFICE EQUIPMENT/ SUPPLIES (0.4%)
6,971 Avery Dennison Corp. 404,736
9,712 Pitney Bowes, Inc. 401,106
----------
805,842
----------
OIL & GAS PIPELINES (0.6%)
27,555 El Paso Corp. 413,325
4,062 Kinder Morgan, Inc. 405,753
18,725 Williams Companies, Inc. (The) 437,416
----------
1,256,494
----------
OIL & GAS PRODUCTION (1.7%)
8,423 Anadarko Petroleum Corp. 401,693
6,730 Apache Corp. 459,323
13,534 Chesapeake Energy Corp. 409,404
7,348 Devon Energy Corp. 443,893
6,443 EOG Resources, Inc. 446,758
7,913 Kerr-McGee Corp. 548,767
4,199 Occidental Petroleum Corp. 430,607
10,149 XTO Energy Inc. 449,296
----------
3,589,741
----------
OIL REFINING/MARKETING (0.6%)
5,448 Marathon Oil Corp. 453,818
6,346 Sunoco, Inc. 439,714
6,769 Valero Energy Corp. 450,274
----------
1,343,806
----------
OILFIELD SERVICES/ EQUIPMENT (1.2%)
5,081 Baker Hughes Inc. 415,880
11,370 BJ Services Co. 423,646
5,457 Halliburton Co. $ 404,964
6,665 National OilwellVarco, Inc.* 422,028
6,973 Schlumberger Ltd. (Netherlands Antilles) 454,012
8,326 Weatherford International Ltd. (Bermuda)* 413,136
----------
2,533,666
----------
OTHER CONSUMER SERVICES (0.8%)
7,451 Apollo Group, Inc. (Class A)* 384,993
17,372 Block (H.& R.), Inc. 414,496
25,227 Cendant Corp. 410,948
13,413 eBay, Inc.* 392,867
----------
1,603,304
----------
OTHER CONSUMER SPECIALTIES (0.2%)
5,758 Fortune Brands, Inc. 408,876
----------
OTHER METALS/MINERALS (0.2%)
5,071 Phelps Dodge Corp. 416,633
----------
PACKAGED SOFTWARE (2.2%)
13,948 Adobe Systems, Inc.* 423,461
11,031 Autodesk, Inc.* 380,128
18,657 BMC Software, Inc.* 445,902
19,015 CA Inc. 390,758
57,448 Compuware Corp.* 384,902
7,446 Intuit Inc.* 449,664
18,378 Microsoft Corp. ** 428,207
68,957 Novell, Inc.* 457,185
28,623 Oracle Corp.* 414,747
32,675 Parametric Technology Corp.* 415,299
25,981 Symantec Corp.* 403,745
----------
4,593,998
----------
PERSONNEL SERVICES (0.4%)
9,865 Monster Worldwide, Inc.* 420,841
10,091 Robert Half International, Inc. 423,822
----------
844,663
----------
SEE NOTES TO FINANCIAL STATEMENTS
77
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
PHARMACEUTICALS: GENERIC DRUGS (0.5%)
7,956 Barr Pharmaceuticals Inc.* $ 379,422
19,452 Mylan Laboratories, Inc. 389,040
16,524 Watson Pharmaceuticals, Inc.* 384,679
----------
1,153,141
----------
PHARMACEUTICALS: MAJOR (1.5%)
9,494 Abbott Laboratories 414,033
16,130 Bristol-Myers Squibb Co. 417,122
6,585 Johnson & Johnson 394,573
7,487 Lilly (Eli) & Co. 413,806
11,803 Merck & Co., Inc. 429,983
17,335 Pfizer, Inc. 406,852
21,099 Schering-Plough Corp. 401,514
9,212 Wyeth 409,105
----------
3,286,988
----------
PHARMACEUTICALS: OTHER (0.6%)
3,880 Allergan, Inc. 416,169
10,762 Forest Laboratories, Inc.* 416,382
25,149 King Pharmaceuticals, Inc.* 427,533
----------
1,260,084
----------
PRECIOUS METALS (0.4%)
8,347 Freeport-McMoRan Copper & Gold, Inc. (Class B) 462,507
8,113 Newmont Mining Corp. 429,421
----------
891,928
----------
PROPERTY - CASUALTY INSURERS (1.3%)
8,357 ACE Ltd. (Cayman Islands) 422,780
7,590 Allstate Corp. (The) 415,401
8,079 Chubb Corp. (The) 403,142
8,699 Cincinnati Financial Corp. 408,940
15,327 Progressive Corp. (The) 394,057
9,256 St. Paul Travelers Companies, Inc. (The) 412,632
6,559 XL Capital Ltd. (Class A) (Cayman Islands) 402,066
----------
2,859,018
----------
PUBLISHING: BOOKS/MAGAZINES (0.2%)
8,316 Meredith Corp. $ 411,975
----------
PUBLISHING: NEWSPAPERS (1.0%)
11,688 Dow Jones & Co., Inc. 409,197
7,362 Gannett Co., Inc. 411,757
3,370 McClatchy Co. (The) (Class A) 135,213
17,058 New York Times Co. (The) (Class A) 418,603
8,642 Scripps (E.W.) Co. (Class A) 372,816
12,724 Tribune Co. 412,639
----------
2,160,225
----------
PULP & PAPER (0.4%)
12,847 International Paper Co. 414,958
15,093 MeadWestvaco Corp. 421,547
----------
836,505
----------
RAILROADS (0.8%)
5,258 Burlington Northern Santa Fe Corp. 416,697
6,312 CSX Corp. 444,617
8,055 Norfolk Southern Corp. 428,687
4,525 Union Pacific Corp. 420,644
----------
1,710,645
----------
REAL ESTATE INVESTMENT TRUSTS (2.1%)
9,355 Apartment Investment & Management Co. (Class A) 406,475
8,136 Archstone-Smith Trust 413,878
4,612 Boston Properties, Inc. 416,925
11,298 Equity Office Properties Trust 412,490
9,129 Equity Residential 408,340
11,270 Kimco Realty Corp. 411,242
11,460 Plum Creek Timber Co., Inc. 406,830
7,907 ProLogis 412,113
5,529 Public Storage, Inc. 419,651
5,024 Simon Property Group, Inc. 416,691
4,281 Vornado Realty Trust 417,612
----------
4,542,247
----------
SEE NOTES TO FINANCIAL STATEMENTS
78
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
RECREATIONAL PRODUCTS (0.8%)
11,897 Brunswick Corp.* $ 395,575
9,602 Electronic Arts, Inc.* 413,270
22,427 Hasbro, Inc. 406,153
24,176 Mattel, Inc.* 399,146
----------
1,614,144
----------
REGIONAL BANKS (2.3%)
15,275 AmSouth Bancorporation 404,024
11,601 Commerce Bancorp, Inc. 413,808
7,357 Compass Bancshares, Inc. 409,049
10,819 Fifth Third Bancorp 399,762
10,241 First Horizon National Corp. 411,688
3,496 M&T Bank Corp. 412,248
8,988 Marshall & Ilsley Corp. 411,111
13,606 North Fork Bancorporation, Inc. 410,493
7,398 Northern Trust Corp. 409,109
15,240 Synovus Financial Corp. 408,127
12,984 U.S. Bancorp 400,946
5,058 Zions Bancorporation 394,221
----------
4,884,586
----------
RESTAURANTS (1.0%)
11,266 Darden Restaurants, Inc.* 443,880
12,256 McDonald's Corp.* 411,802
11,094 Starbucks Corp.* 418,909
6,815 Wendy's International, Inc. 397,246
7,824 Yum! Brands, Inc. 393,312
----------
2,065,149
----------
SAVINGS BANKS (0.6%)
5,622 Golden West Financial Corp. 417,152
19,546 Sovereign Bancorp, Inc. 396,973
9,119 Washington Mutual, Inc. 415,644
----------
1,229,769
----------
SEMICONDUCTORS (2.8%)
15,841 Advanced Micro Devices, Inc.* 386,837
22,691 Altera Corp.* 398,227
12,311 Analog Devices, Inc. 395,676
12,633 Broadcom Corp. (Class A)* $ 379,622
14,281 Freescale Semiconductor Inc. (Class B)* 419,861
22,194 Intel Corp. 420,576
11,834 Linear Technology Corp. 396,321
45,945 LSI Logic Corp.* 411,208
12,629 Maxim Integrated Products, Inc. 405,517
24,841 Micron Technology, Inc.* 374,105
16,516 National Semiconductor Corp. 393,907
18,751 NVIDIA Corp.* 399,209
43,532 PMC - Sierra, Inc.* 409,201
13,740 Texas Instruments Inc. 416,185
16,969 Xilinx, Inc. 384,348
----------
5,990,800
----------
SERVICES TO THE HEALTH INDUSTRY (1.0%)
5,966 Express Scripts, Inc.* 428,001
15,538 IMS Health Inc. 417,195
6,627 Laboratory Corp. of America Holdings* 412,398
7,859 Medco Health Solutions Inc.* 450,164
7,087 Quest Diagnostics Inc. 424,653
----------
2,132,411
----------
SPECIALTY INSURANCE (0.6%)
5,152 Ambac Financial Group, Inc. 417,827
7,012 MBIA Inc. 410,553
6,306 MGIC Investment Corp. 409,890
----------
1,238,270
----------
SPECIALTY STORES (1.3%)
19,433 AutoNation, Inc.* 416,644
4,389 AutoZone, Inc.* 387,110
11,137 Bed Bath & Beyond Inc.* 369,414
10,091 Office Depot, Inc.* 383,458
9,773 OfficeMax Inc. 398,250
16,417 Staples, Inc. 399,261
12,215 Tiffany & Co. 403,339
----------
2,757,476
----------
SEE NOTES TO FINANCIAL STATEMENTS
79
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
SPECIALTY TELECOMMUNICATIONS (0.6%)
11,058 CenturyTel, Inc. $ 410,805
32,806 Citizens Communications Co. 428,118
52,954 Qwest Communications International, Inc.* 428,398
------------
1,267,321
------------
STEEL (0.6%)
6,266 Allegheny Technologies Inc. 433,858
8,035 Nucor Corp. 435,899
6,453 United States Steel Corp. 452,484
------------
1,322,241
------------
TELECOMMUNICATION EQUIPMENT (1.7%)
24,630 ADC Telecommunications, Inc.* 415,261
43,909 Andrew Corp.* 389,034
98,581 CIENA Corp.* 474,175
20,197 Comverse Technology, Inc.* 399,295
18,353 Corning, Inc.* 443,959
166,457 Lucent Technologies Inc.* 402,826
19,973 Motorola, Inc. 402,456
9,241 QUALCOMM, Inc. 370,287
28,363 Tellabs, Inc.* 377,512
------------
3,674,805
------------
TOBACCO (0.6%)
5,730 Altria Group, Inc. 420,754
3,661 Reynolds American, Inc. 422,113
9,218 UST, Inc. 416,561
------------
1,259,428
------------
TOOLS/HARDWARE (0.6%)
4,883 Black & Decker Corp. 412,418
10,398 Snap-On, Inc. 420,287
8,893 Stanley Works (The) 419,927
------------
1,252,632
------------
TRUCKS/CONSTRUCTION/FARM MACHINERY (1.0%)
5,831 Caterpillar Inc. 434,293
3,820 Cummins Inc. 466,995
5,026 Deere & Co. 419,621
16,749 Navistar International Corp.* $ 412,193
5,288 PACCAR, Inc. 435,625
------------
2,168,727
------------
WHOLESALE DISTRIBUTORS (0.4%)
9,875 Genuine Parts Co. 411,393
5,704 Grainger (W.W.), Inc. 429,112
------------
840,505
------------
TOTAL COMMON STOCKS
(COST $125,199,012) 206,218,058
------------
NUMBER OF
WARRANTS
- ---------
WARRANT (0.0%)
AEROSPACE & DEFENSE
111 Raytheon Co. (06/16/11)
(COST $1,354*) 1,404
------------
PRINCIPAL
AMOUNT IN
THOUSANDS
- ---------
SHORT-TERM INVESTMENT (3.3%)
REPURCHASE AGREEMENT
$ 6,989 Joint repurchase agreement account 5.215% due
07/03/06 (dated 06/30/06; proceeds $6,992,037) (b)
(COST $6,989,000) 6,989,000
------------
TOTAL INVESTMENTS
(COST $132,189,366) (c) (d) 100.0% 213,208,462
OTHER ASSETS IN EXCESS OF LIABILITIES 0.0 65,200
----- ------------
NET ASSETS 100.0% $213,273,662
===== ============
- ----------
* NON-INCOME PRODUCING SECURITY.
** A PORTION OF THIS SECURITY IS PHYSICALLY SEGREGATED IN CONNECTION WITH OPEN
FUTURES CONTRACTS IN THE AMOUNT OF $175,500.
(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
GENERAL SUPERVISION OF THE FUND'S TRUSTEES.
(b) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
SEE NOTES TO FINANCIAL STATEMENTS
80
<Page>
- ----------
(c) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN AN AMOUNT EQUAL TO
$3,941,232 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 $84,609,901 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION
IS $3,590,805, RESULTING IN NET UNREALIZED APPRECIATION OF $81,019,096.
FUTURES CONTRACTS OPEN AT JUNE 30, 2006:
NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE UNREALIZED
CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE APPRECIATION
- -------------------------------------------------------------------------------
20 Long S&P Midcap 400 Mini Index
September 2006 $1,543,200 $ 65,256
15 Long S&P 500 Mini Index
September 2006 959,550 17,825
3 Long S&P 500 Index
September 2006 959,550 13,335
2 Long S&P Midcap 400 Index
September 2006 771,600 20,640
--------
Total Unrealized Appreciation $117,056
========
SUMMARY OF INVESTMENTS
PERCENT OF
SECTOR VALUE NET ASSETS
- --------------------------------------------------------------------------------
Finance $ 35,854,686 16.8%
Electronic Technology 24,310,723 11.4
Health Technology 14,392,390 6.8
Consumer Non-Durables 14,386,577 6.7
Retail Trade 14,330,755 6.7
Utilities 12,672,839 5.9
Commercial Services 12,064,282 5.7
Producer Manufacturing 11,317,789 5.3
Technology Services 10,400,597 4.9
Consumer Durables 9,474,772 4.4
Process Industries 8,413,459 3.9
Energy Minerals 7,145,852 3.4
Repurchase Agreement 6,989,000 3.3
Industrial Services 6,754,953 3.2
Health Services 6,681,031 3.1
Non-Energy Minerals 4,335,499 2.0
Consumer Services 4,094,206 1.9
Communications 3,733,438 1.8
Transportation 2,973,162 1.4
Distribution Services 2,882,452 1.4
------------ -----
$213,208,462* 100.0%
============ =====
- ----------
* DOES NOT INCLUDE OPEN LONG FUTURES CONTRACTS WITH AN UNDERLYING FACE AMOUNT
OF $4,233,900 WITH NET UNREALIZED APPRECIATION OF $117,056.
SEE NOTES TO FINANCIAL STATEMENTS
81
<Page>
Growth
PORTFOLIO OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS (99.8%)
ADVERTISING/MARKETING
SERVICES (1.5%)
12,318 Getty Images, Inc.* $ 782,316
----------
AIR FREIGHT/COURIERS (4.4%)
19,240 C.H. Robinson Worldwide, Inc. 1,025,492
22,000 Expeditors International of Washington, Inc. 1,232,220
----------
2,257,712
----------
APPAREL/FOOTWEAR (2.0%)
33,670 Coach, Inc.* 1,006,733
----------
BIOTECHNOLOGY (2.0%)
12,359 Genentech, Inc.* 1,010,966
----------
BROADCASTING (2.0%)
52,400 Grupo Televisa S.A. - CPO (ADR) (Mexico) 1,011,844
----------
CASINO/GAMING (1.7%)
22,600 International Game Technology 857,444
----------
CHEMICALS: AGRICULTURAL (4.6%)
27,920 Monsanto Co. 2,350,585
----------
COMPUTER PERIPHERALS (0.0%)
20,100 Seagate Technology Inc. (Escrow) (a)* 0
----------
COMPUTER PROCESSING
HARDWARE (3.9%)
14,616 Apple Computer, Inc.* 834,866
47,019 Dell Inc.* 1,147,734
----------
1,982,600
----------
CONSTRUCTION MATERIALS (1.4%)
12,854 Cemex S.A. de C.V. - CPO (ADR) (Mexico)* 732,292
----------
DATA PROCESSING SERVICES (4.4%)
33,800 First Data Corp. 1,522,352
18,750 Paychex, Inc. 730,875
----------
2,253,227
----------
DISCOUNT STORES (8.0%)
28,050 Costco Wholesale Corp. $1,602,496
16,100 Sears Holdings Corp.* 2,492,924
4,095,420
FINANCIAL
CONGLOMERATES (7.8%)
27,517 American Express Co. 1,464,455
62,550 Brookfield Asset Management Inc. (Class A) (Canada) 2,540,781
----------
4,005,236
----------
FINANCIAL PUBLISHING/
SERVICES (3.9%)
14,329 McGraw-Hill Companies, Inc. (The) 719,746
23,445 Moody's Corp. 1,276,815
----------
1,996,561
----------
HOME BUILDING (2.3%)
41,300 Pulte Homes, Inc. 1,189,027
----------
HOTELS/RESORTS/
CRUISELINES (1.5%)
20,364 Marriott International, Inc. (Class A) 776,276
----------
INTERNET RETAIL (2.8%)
37,400 Amazon.com, Inc.* 1,446,632
----------
INTERNET SOFTWARE/
SERVICES (11.6%)
17,411 Akamai Technologies, Inc.* 630,104
6,860 Google, Inc. (Class A)* 2,876,604
73,340 Yahoo!, Inc.* 2,420,220
----------
5,926,928
----------
INVESTMENT BANKS/
BROKERS (1.7%)
1,800 Chicago Mercantile Exchange Holdings, Inc. 884,070
----------
MANAGED HEALTH CARE (2.0%)
23,100 UnitedHealth Group Inc. 1,034,418
----------
SEE NOTES TO FINANCIAL STATEMENTS
82
<Page>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------------------------
MEDICAL SPECIALTIES (1.3%)
16,100 Dade Behring Holdings, Inc. $ 670,404
-----------
MISCELLANEOUS COMMERCIAL
SERVICES (4.0%)
12,796 Corporate Executive Board Co. (The) 1,282,159
20,366 Iron Mountain Inc.* 761,281
-----------
2,043,440
-----------
OIL & GAS PRODUCTION (4.8%)
40,940 Ultra Petroleum Corp. (Canada)* 2,426,514
-----------
OTHER CONSUMER
SERVICES (7.0%)
20,300 Apollo Group, Inc. (Class A)* 1,048,901
85,836 eBay Inc.* 2,514,136
-----------
3,563,037
-----------
PERSONNEL SERVICES (1.6%)
18,534 Monster Worldwide Inc.* 790,660
-----------
PROPERTY - CASUALTY
INSURERS (2.9%)
477 Berkshire Hathaway Inc. (Class B)* 1,451,511
-----------
RECREATIONAL PRODUCTS (2.1%)
25,100 Electronic Arts Inc.* 1,080,304
-----------
SPECIALTY
TELECOMMUNICATIONS (1.6%)
23,631 Crown Castle International Corp.* 816,215
-----------
TOBACCO (2.0%)
13,987 Altria Group, Inc. 1,027,065
-----------
WIRELESS
TELECOMMUNICATIONS (3.0%)
46,300 America Movil S.A. de C.V. (Series L) (ADR) (Mexico) 1,539,938
-----------
TOTAL COMMON STOCKS
(COST $44,940,405) 51,009,375
-----------
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (0.5%)
REPURCHASE AGREEMENT
$282 Joint repurchase agreement
account 5.215% due
07/03/06 (dated 06/30/06;
proceeds $282,123) (b)
(COST $282,000) $ 282,000
-----------
TOTAL INVESTMENTS
(COST $45,222,405) (c) 100.3% 51,291,375
LIABILITIES IN EXCESS OF OTHER ASSETS (0.3) (169,577)
----- -----------
NET ASSETS 100.0% $51,121,798
===== ===========
- ----------
ADR AMERICAN DEPOSITARY RECEIPT.
* 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 $9,218,001 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION
IS $3,149,031, RESULTING IN NET UNREALIZED APPRECIATION OF $6,068,970.
SEE NOTES TO FINANCIAL STATEMENTS
83
<Page>
Growth
SUMMARY OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
PERCENT OF
INDUSTRY VALUE NET ASSETS
- --------------------------------------------------------------------------------
Internet Software/Services $ 5,926,928 11.6%
Discount Stores 4,095,420 8.0
Financial Conglomerates 4,005,236 7.8
Other Consumer Services 3,563,037 7.0
Oil & Gas Production 2,426,514 4.8
Chemicals: Agricultural 2,350,585 4.6
Air Freight/Couriers 2,257,712 4.4
Data Processing Services 2,253,227 4.4
Miscellaneous Commercial Services 2,043,440 4.0
Financial Publishing/Services 1,996,561 3.9
Computer Processing Hardware 1,982,600 3.9
Wireless Telecommunications 1,539,938 3.0
Property - Casualty Insurers 1,451,511 2.9
Internet Retail 1,446,632 2.8
Home Building 1,189,027 2.3
Recreational Products $ 1,080,304 2.1%
Managed Health Care 1,034,418 2.0
Tobacco 1,027,065 2.0
Broadcasting 1,011,844 2.0
Biotechnology 1,010,966 2.0
Apparel/Footwear 1,006,733 2.0
Investment Banks/Brokers 884,070 1.7
Casino/Gaming 857,444 1.7
Specialty Telecommunications 816,215 1.6
Personnel Services 790,660 1.6
Advertising/Marketing Services 782,316 1.5
Hotels/Resorts/Cruiselines 776,276 1.5
Construction Materials 732,292 1.4
Medical Specialties 670,404 1.3
Repurchase Agreement 282,000 0.5
Computer Peripherals 0 0.0
----------- -----
$51,291,375 100.3%
=========== =====
SEE NOTES TO FINANCIAL STATEMENTS
84
<Page>
Focus Growth
PORTFOLIO OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS (97.8%)
ADVERTISING/MARKETING SERVICES (2.0%)
60,726 Getty Images, Inc.* $ 3,856,708
-----------
Air FreIGHT/COURIERS (6.2%)
99,143 C.H. Robinson Worldwide, Inc. 5,284,322
120,000 Expeditors International of Washington, Inc. 6,721,200
-----------
12,005,522
-----------
BIOTECHNOLOGY (1.9%)
45,503 Genentech, Inc.* 3,722,145
-----------
BROADCASTING (2.4%)
239,714 Grupo Televisa S.A. - CPO (ADR) (Mexico) 4,628,877
-----------
CHEMICALS: AGRICULTURAL (4.8%)
108,800 Monsanto Co. 9,159,872
-----------
COMPUTER PROCESSING HARDWARE (4.4%)
75,740 Apple Computer, Inc.* 4,326,269
171,214 Dell Inc.* 4,179,334
-----------
8,505,603
-----------
DATA PROCESSING SERVICES (3.8%)
160,571 First Data Corp. 7,232,118
-----------
DISCOUNT STORES (8.8%)
119,714 Costco Wholesale Corp. 6,839,261
65,143 Sears Holdings Corp.* 10,086,742
-----------
16,926,003
-----------
FINANCIAL CONGLOMERATES (9.2%)
135,360 American Express Co. 7,203,859
259,714 Brookfield Asset Management Inc. (Class A) (Canada) 10,549,583
-----------
17,753,442
-----------
FINANCIAL PUBLISHING/SERVICES (3.5%)
124,419 Moody's Corp. 6,775,859
-----------
HOME BUILDING (2.6%)
175,429 Pulte Homes, Inc. $ 5,050,601
-----------
INTERNET RETAIL (2.9%)
146,857 Amazon.com, Inc.* 5,680,429
-----------
INTERNET SOFTWARE/SERVICES (10.6%)
25,597 Google, Inc. (Class A)* 10,733,590
294,114 Yahoo!, Inc.* 9,705,762
-----------
20,439,352
-----------
INVESTMENT BANKS/BROKERS (2.1%)
8,011 Chicago Mercantile Exchange Holdings, Inc. 3,934,603
-----------
MANAGED HEALTH CARE (1.9%)
82,571 UnitedHealth Group Inc. 3,697,529
-----------
MISCELLANEOUS COMMERCIAL SERVICES (2.6%)
50,286 Corporate Executive Board Co. (The) 5,038,657
-----------
OIL & GAS PRODUCTION (7.3%)
237,829 Ultra Petroleum Corp. (Canada)* 14,096,125
-----------
OTHER CONSUMER SERVICES (6.9%)
81,300 Apollo Group, Inc. (Class A)* 4,200,771
313,729 eBay, Inc.* 9,189,122
-----------
13,389,893
-----------
PERSONNEL SERVICES (2.0%)
90,980 Monster Worldwide, Inc.* 3,881,207
-----------
PROPERTY - CASUALTY INSURERS (3.2%)
2,051 Berkshire Hathaway, Inc. (Class B)* 6,241,193
-----------
RECREATIONAL PRODUCTS (2.8%)
126,000 Electronic Arts, Inc.* 5,423,040
-----------
SEE NOTES TO FINANCIAL STATEMENTS
85
<Page>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------------------------
SPECIALTY TELECOMMUNICATIONS (2.1%)
113,534 Crown Castle International Corp.* $ 3,921,464
------------
WIRELESS TELECOMMUNICATIONS (3.8%)
222,286 America Movil S.A. de C.V.
(Series L) (ADR) (Mexico) 7,393,232
------------
TOTAL COMMON STOCKS
(COST $177,205,469) 188,753,474
------------
PRINCIPAL
AMOUNT IN
THOUSANDS
- ---------
SHORT-TERM INVESTMENT (3.2%)
REPURCHASE AGREEMENT
$6,094 Joint repurchase agreement account 5.215%
due 07/03/06 (dated 06/30/06; proceeds
$6,096,648) (a) (COST $6,094,000) 6,094,000
------------
TOTAL INVESTMENTS
(COST $183,299,469) (b) 101.0% 194,847,474
LIABILITIES IN EXCESS OF OTHER ASSETS (1.0) (1,918,123)
----- ------------
NET ASSETS 100.0% $192,929,351
===== ============
- ----------
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 $22,621,458 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION
IS $11,073,453, RESULTING IN NET UNREALIZED APPRECIATION OF $11,548,005.
SEE NOTES TO FINANCIAL STATEMENTS
86
<Page>
Focus Growth
SUMMARY OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
PERCENT OF
INDUSTRY VALUE NET ASSETS
- --------------------------------------------------------------------------------
Internet Software/Services $ 20,439,352 10.6%
Financial Conglomerates 17,753,442 9.2
Discount Stores 16,926,003 8.8
Oil & Gas Production 14,096,125 7.3
Other Consumer Services 13,389,893 6.9
Air Freight/Couriers 12,005,522 6.2
Chemicals: Agricultural 9,159,872 4.8
Computer Processing Hardware 8,505,603 4.4
Wireless Telecommunications 7,393,232 3.8
Data Processing Services 7,232,118 3.8
Financial Publishing/ Services 6,775,859 3.5
Property - Casualty Insurers 6,241,193 3.2
Repurchase Agreement $ 6,094,000 3.2%
Internet Retail 5,680,429 2.9
Recreational Products 5,423,040 2.8
Home Building 5,050,601 2.6
Miscellaneous Commercial Services 5,038,657 2.6
Broadcasting 4,628,877 2.4
Investment Banks/Brokers 3,934,603 2.1
Specialty Telecommunications 3,921,464 2.1
Personnel Services 3,881,207 2.0
Advertising/Marketing Services 3,856,708 2.0
Biotechnology 3,722,145 1.9
Managed Health Care 3,697,529 1.9
------------ -----
$194,847,474 101.0%
============ =====
SEE NOTES TO FINANCIAL STATEMENTS
87
<Page>
Capital Opportunities
PORTFOLIO OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS (98.6%)
ADVERTISING/MARKETING SERVICES (2.7%)
15,915 Getty Images, Inc.* $1,010,762
----------
AIR FREIGHT/COURIERS (6.4%)
20,580 C.H. Robinson Worldwide, Inc. 1,096,914
23,506 Expeditors International of Washington, Inc. 1,316,571
----------
2,413,485
----------
BROADCASTING (1.9%)
36,621 Grupo Televisa S.A. - CPO (ADR) (Mexico) 707,152
----------
CASINO/GAMING (2.6%)
14,321 Station Casinos, Inc. 974,974
----------
CHEMICALS: AGRICULTURAL (4.4%)
19,609 Monsanto Co. 1,650,882
----------
DATA PROCESSING SERVICES (2.8%)
23,485 First Data Corp. 1,057,764
----------
DISCOUNT STORES (7.7%)
20,856 Costco Wholesale Corp. 1,191,503
10,987 Sears Holdings Corp.* 1,701,227
----------
2,892,730
----------
FINANCIAL CONGLOMERATES (7.5%)
19,875 American Express Co. 1,057,748
43,677 Brookfield Asset Mangemnet Inc. (Class A) (Canada) 1,774,160
----------
2,831,908
----------
FINANCIAL PUBLISHING/SERVICES (2.5%)
17,290 Moody's Corp. 941,613
----------
HOME BUILDING (3.2%)
16,156 Desarrolladora Homex S.A. de C.V. (ADR) (Mexico)* 530,078
5,871 M.D.C. Holdings, Inc. 304,881
754 NVR, Inc.* 370,403
----------
1,205,362
----------
INTERNET RETAIL (2.3%)
22,227 Amazon.com, Inc.* $ 859,740
----------
INTERNET SOFTWARE/SERVICES (12.8%)
25,151 Akamai Technologies, Inc.* 910,214
5,053 Google, Inc. (Class A)* 2,118,874
54,361 Yahoo!, Inc.* 1,793,913
----------
4,823,001
----------
INVESTMENT BANKS/BROKERS (2.7%)
16,931 Greenhill & Co., Inc. 1,028,728
----------
MEDICAL SPECIALTIES (2.3%)
20,759 Dade Behring Holdings, Inc. 864,405
----------
MISCELLANEOUS COMMERCIAL SERVICES (7.6%)
19,789 Corporate Executive Board Co. (The) 1,982,858
24,260 Iron Mountain Inc.* 906,839
----------
2,889,697
----------
OIL & GAS PRODUCTION (8.0%)
51,014 Ultra Petroleum Corp. (Canada)* 3,023,600
----------
OTHER CONSUMER SERVICES (6.7%)
63,765 eBay, Inc.* 1,867,677
6,731 Strayer Education, Inc. 653,715
----------
2,521,392
----------
PERSONNEL SERVICES (2.0%)
17,881 Monster Worldwide, Inc.* 762,803
----------
PROPERTY - CASUALTY INSURERS (2.8%)
344 Berkshire Hathaway, Inc. (Class B)* 1,046,792
----------
RECREATIONAL PRODUCTS (2.0%)
17,603 Electronic Arts, Inc.* 757,633
----------
SERVICES TO THE HEALTH INDUSTRY (2.3%)
13,342 Stericycle, Inc.* 868,564
----------
SEE NOTES TO FINANCIAL STATEMENTS
88
<Page>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------------------------
SPECIALTY
TELECOMMUNICATIONS (2.6%)
28,111 Crown Castle International Corp.* $ 970,954
-----------
WIRELESS
TELECOMMUNICATIONS (2.8%)
32,365 America Movil S.A. de C.V.
(Series L) (ADR) (Mexico) 1,076,459
-----------
TOTAL COMMON STOCKS
(Cost $29,507,483) 37,180,400
-----------
PRINCIPAL
AMOUNT IN
THOUSANDS
- ---------
SHORT-TERM INVESTMENT (2.1%)
REPURCHASE AGREEMENT
$802 Joint repurchase agreement
account 5.215% due
07/03/06 (dated 06/30/06;
proceeds $802,349) (a)
(COST $802,000) 802,000
-----------
TOTAL INVESTMENTS
(COST $30,309,483) (b) 100.7% 37,982,400
LIABILITIES IN EXCESS OF OTHER ASSETS (0.7) (262,052)
----- -----------
NET ASSETS 100.0% $37,720,348
===== ===========
- ----------
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 $9,252,371 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION
IS $1,579,454, RESULTING IN NET UNREALIZED APPRECIATION OF $7,672,917.
SUMMARY OF INVESTMENTS
PERCENT OF
INDUSTRY VALUE NET ASSETS
- --------------------------------------------------------------------------------
Internet Software/Services $ 4,823,001 12.8%
Oil & Gas Production 3,023,600 8.0
Discount Stores 2,892,730 7.7
Miscellaneous Commercial Services 2,889,697 7.6
Financial Conglomerates 2,831,908 7.5
Other Consumer Services 2,521,392 6.7
Air Freight/Couriers 2,413,485 6.4
Chemicals: Agricultural 1,650,882 4.4
Home Building 1,205,362 3.2
Data Processing Services 1,057,764 2.8
Wireless Telecommunications 1,076,459 2.8
Property - Casualty Insurers 1,046,792 2.8
Investment Banks/Brokers 1,028,728 2.7
Advertising/Marketing Services 1,010,762 2.7
Casino/Gaming 974,974 2.6
Specialty Telecommunications 970,954 2.6
Financial Publishing/Services 941,613 2.5
Services to the Health Industry 868,564 2.3
Medical Specialties 864,405 2.3
Internet Retail 859,740 2.3
Repurchase Agreement 802,000 2.1
Personnel Services 762,803 2.0
Recreational Products 757,633 2.0
Broadcasting 707,152 1.9
----------- -----
$37,982,400 100.7%
=========== =====
SEE NOTES TO FINANCIAL STATEMENTS
89
<Page>
Global Equity
PORTFOLIO OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS (97.7%)
AUSTRALIA (3.7%)
BEVERAGES: ALCOHOLIC
404,900 McGuigan Simeon Wines Ltd. $ 752,203
----------
DATA PROCESSING SERVICES
191,000 Computershare Ltd. 1,114,167
----------
OTHER CONSUMER SERVICES
146,000 A.B.C. Learning Centres Ltd. 694,353
----------
TOTAL AUSTRALIA 2,560,723
----------
BERMUDA (3.9%)
INSURANCE BROKERS/SERVICES
33,900 Willis Group Holdings Ltd. 1,088,190
----------
MULTI-LINE INSURANCE
37,700 Axis Capital Holdings Ltd. 1,078,597
----------
SEMICONDUCTORS
11,800 Marvell Technology Group, Ltd. 523,094
----------
TOTAL BERMUDA 2,689,881
----------
BRITISH VIRGIN ISLANDS (1.5%)
ELECTRONIC EQUIPMENT/INSTRUMENTS
48,200 Nam Tai Electronics, Inc. 1,078,234
----------
CANADA (2.1%)
BIOTECHNOLOGY
61,000 Angiotech Pharmaceuticals, Inc. 716,750
----------
FOOD: SPECIALTY/CANDY
81,700 SunOpta Inc. 758,176
----------
TOTAL CANADA 1,474,926
----------
DENMARK (1.7%)
MAJOR BANKS
30,700 Danske Bank A/S 1,168,321
----------
GERMANY (6.2%)
APPAREL/FOOTWEAR
21,200 Adidas AG 1,013,314
----------
FINANCE/RENTAL/LEASING
18,200 Grenkeleasing AG 1,210,162
----------
FINANCIAL CONGLOMERATES
22,200 Hypo Real Estate Holding AG $1,348,105
----------
MEDICAL SPECIALTIES
4,500 Fresenius AG 744,012
----------
TOTAL GERMANY 4,315,593
----------
GREECE (1.2%)
REGIONAL BANKS
30,776 EFG Eurobank Ergasias 853,179
----------
HONG KONG (5.5%)
AGRICULTURAL COMMODITIES/MILLING
1,638,600 Global Bio-chem Technology Group Co., Ltd. 696,199
----------
APPAREL/FOOTWEAR RETAIL
274,500 Esprit Holdings Ltd. 2,240,672
----------
WHOLESALE DISTRIBUTORS
448,800 Li & Fung Ltd. 907,192
----------
TOTAL HONG KONG 3,844,063
----------
ISRAEL (1.5%)
PHARMACEUTICALS: OTHER
33,700 Teva Pharmaceutical Industries Ltd. (ADR) 1,064,583
----------
ITALY (3.2%)
MAJOR BANKS
281,700 UniCredito Italiano SpA 2,204,484
----------
JAPAN (3.6%)
HOME BUILDING
25,200 Daito Trust Construction Co., Ltd. 1,396,207
----------
INDUSTRIAL MACHINERY
64,800 OSG Corp. 1,091,231
----------
TOTAL JAPAN 2,487,438
----------
MEXICO (1.2%)
BEVERAGES: NON-ALCOHOLIC
9,900 Fomento Economico Mexicano, S.A. de C.V. (ADR) (Units)+ 828,828
----------
SEE NOTES TO FINANCIAL STATEMENTS
90
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
SINGAPORE (4.6%)
AIRLINES
159,100 Singapore Airlines Ltd. $1,276,580
----------
ELECTRONIC COMPONENTS
65,860 Flextronics International Ltd. 699,433
----------
MARINE SHIPPING
1,521,000 Cosco Corp Ltd. 1,210,804
----------
TOTAL SINGAPORE 3,186,817
----------
SOUTH AFRICA (1.1%)
PHARMACEUTICALS: GENERIC DRUGS
156,500 Aspen Pharmacare
Holdings Ltd. 794,472
----------
SPAIN (9.0%)
APPAREL/FOOTWEAR RETAIL
25,200 Industria de Diseno Textil, S.A. 1,062,722
----------
BROADCASTING
44,600 Antena 3 de Television S.A. 1,018,556
47,000 Gestevision Telecinco S.A. 1,126,854
----------
2,145,410
----------
MAJOR BANKS
41,265 Banco Bilbao Vizcaya Argentaria, S.A. 848,470
77,700 Banco Santander Central Hispano S.A. 1,134,634
----------
1,983,104
----------
MAJOR TELECOMMUNICATIONS
63,928 Telefonica S.A. 1,064,316
----------
TOTAL SPAIN 6,255,552
----------
SWITZERLAND (2.0%)
FINANCIAL CONGLOMERATES
12,800 UBS AG (Registered Shares) 1,401,765
----------
TAIWAN (1.7%)
SEMICONDUCTORS
126,483 Taiwan Semiconductor Manufacturing Co., Ltd. (ADR) $1,161,112
----------
UNITED KINGDOM (8.9%)
BEVERAGES: ALCOHOLIC
77,800 SABMiller PLC 1,401,385
----------
INVESTMENT MANAGERS
27,249 Man Group PLC 1,283,353
451,000 RAB Capital PLC 696,080
----------
1,979,433
----------
MAJOR BANKS
51,000 Standard Chartered PLC 1,244,343
----------
PHARMACEUTICALS: OTHER
105,500 Shire PLC 1,538,599
----------
TOTAL UNITED KINGDOM 6,163,760
----------
UNITED STATES (35.1%)
APPAREL/FOOTWEAR
26,000 Under Armour, Inc. (Class A) 1,108,120
----------
BIOTECHNOLOGY
21,600 Amgen Inc. 1,408,968
13,100 Genentech, Inc. 1,071,580
11,915 Gilead Sciences, Inc. 704,891
----------
3,185,439
----------
BROADCASTING
47,300 XM Satellite Radio Holdings Inc. (Class A) 692,945
----------
COMPUTER PROCESSING HARDWARE
24,460 Apple Computer, Inc. 1,397,155
----------
ELECTRIC UTILITIES
20,100 Constellation Energy Group 1,095,852
----------
ELECTRONIC COMPONENTS
26,100 Amphenol Corp. (Class A) 1,460,556
----------
FINANCIAL CONGLOMERATES
15,000 Prudential Financial, Inc. 1,165,500
----------
SEE NOTES TO FINANCIAL STATEMENTS
91
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
FOOD: MAJOR DIVERSIFIED
13,500 PepsiCo, Inc. $ 810,540
-----------
HOSPITAL/NURSING MANAGEMENT
22,600 United Surgical Partners International, Inc. 679,582
-----------
INVESTMENT BANKS/BROKERS
10,500 Goldman Sachs Group, Inc. (The) 1,579,515
15,100 Merrill Lynch & Co., Inc. 1,050,356
-----------
2,629,871
-----------
INVESTMENT TRUSTS/MUTUAL FUNDS
31,200 KKR Private Equity Investors LP (Units)+ 683,280
-----------
LIFE/HEALTH INSURANCE
24,500 AFLAC, Inc. 1,135,575
-----------
MEDIA CONGLOMERATES
94,100 News Corp. (Class A) 1,804,838
-----------
MEDICAL SPECIALTIES
21,150 Bard (C.R.), Inc. 1,549,449
15,805 Fisher Scientific International Inc. 1,154,555
-----------
2,704,004
-----------
MEDICAL/NURSING SERVICES
33,100 Matria Healthcare, Inc. 709,002
-----------
MISCELLANEOUS COMMERCIAL SERVICES
27,200 FTI Consulting Inc. 728,144
-----------
MISCELLANEOUS MANUFACTURING
19,100 Mine Safety Appliances Co. 767,820
-----------
SPECIALTY STORES
32,200 Staples, Inc. 783,104
-----------
TELECOMMUNICATION EQUIPMENT
37,580 Corning, Inc. 909,060
-----------
TOTAL UNITED STATES 24,450,387
-----------
TOTAL COMMON STOCKS
(COST $62,824,646) 67,984,118
-----------
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENT(2.2%)
REPURCHASE AGREEMENT
$1,517 Joint repurchase agreement account 5.215% due
07/03/06 (dated 06/30/06; proceeds $1,517,659)
(a) (COST $1,517,000) $ 1,517,000
-----------
TOTAL INVESTMENTS
(COST $64,341,646)(b) 99.9% 69,501,118
OTHER ASSETS IN EXCESS OF LIABILITIES 0.1 105,971
----- -----------
NET ASSETS 100.0% $69,607,089
===== ===========
ADR AMERICAN DEPOSITARY RECEIPT.
* NON-INCOME PRODUCING SECURITY.
+ CONSISTS OF ONE OR MORE CLASS OF SECURITIES TRADED TOGETHER AS A UNIT;
STOCKS WITH ATTACHED WARRANTS.
(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 $7,759,502 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION
IS $2,600,030, RESULTING IN NET UNREALIZED APPRECIATION OF $5,159,472.
SEE NOTES TO FINANCIAL STATEMENTS
92
<Page>
Global Equity
SUMMARY OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
PERCENT OF
INDUSTRY VALUE NET ASSETS
- --------------------------------------------------------------------------------
Major Banks $ 6,600,252 9.5%
Financial Conglomerates 3,915,370 5.6
Biotechnology 3,902,189 5.6
Medical Specialties 3,448,016 5.0
Apparel/Footwear Retail 3,303,394 4.7
Broadcasting 2,838,355 4.1
Investment Banks/Brokers 2,629,871 3.8
Pharmaceuticals: Other 2,603,182 3.7
Electronic Components 2,159,989 3.1
Beverages: Alcoholic 2,153,588 3.1
Apparel/Footwear 2,121,434 3.1
Investment Managers 1,979,433 2.8
Media Conglomerates 1,804,838 2.6
Semiconductors 1,684,206 2.4
Repurchase Agreement 1,517,000 2.2
Computer Processing Hardware 1,397,155 2.0
Home Building 1,396,207 2.0
Airlines 1,276,580 1.8
Marine Shipping 1,210,804 1.7
Finance/Rental/Leasing 1,210,162 1.7
Life/Health Insurance 1,135,575 1.6
Data Processing Services 1,114,167 1.6
Electric Utilities 1,095,852 1.6
Industrial Machinery 1,091,231 1.6
Insurance Brokers/Services 1,088,190 1.6
Multi-Line Insurance $ 1,078,597 1.6%
Electronic Equipment/Instruments 1,078,234 1.6
Major Telecommunications 1,064,316 1.5
Telecommunication Equipment 909,060 1.3
Wholesale Distributors 907,192 1.3
Regional Banks 853,179 1.2
Beverages: Non-Alcoholic 828,828 1.2
Food: Major Diversified 810,540 1.2
Pharmaceuticals: Generic Drugs 794,472 1.1
Specialty Stores 783,104 1.1
Miscellaneous Manufacturing 767,820 1.1
Food: Specialty/Candy 758,176 1.1
Miscellaneous Commercial Services 728,144 1.1
Medical/Nursing Services 709,002 1.0
Agricultural Commodities/Milling 696,199 1.0
Other Consumer Services 694,353 1.0
Investment Trusts/Mutual Funds 683,280 1.0
Hospital/Nursing Management 679,582 1.0
----------- ----
$69,501,118 99.9%
=========== ====
SEE NOTES TO FINANCIAL STATEMENTS
93
<Page>
Developing Growth
PORTFOLIO OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS (98.9%)
ADVERTISING/MARKETING
SERVICES (4.1%)
23,146 Getty Images, Inc.* $1,470,002
15,200 Lamar Advertising Co. (Class A)* 818,672
----------
2,288,674
----------
AIR FREIGHT/COURIERS (6.9%)
33,100 C.H. Robinson Worldwide, Inc. 1,764,230
38,000 Expeditors International of Washington, Inc. 2,128,380
----------
3,892,610
----------
APPAREL/FOOTWEAR (2.0%)
37,113 Coach, Inc.* 1,109,679
----------
APPAREL/FOOTWEAR RETAIL (1.9%)
19,700 Abercrombie & Fitch Co. (Class A) 1,091,971
----------
BIOTECHNOLOGY (2.9%)
21,267 Gen-Probe Inc.* 1,147,993
10,200 Techne Corp.* 519,384
----------
1,667,377
----------
BROADCASTING (2.0%)
57,482 Grupo Televisa S.A. - CPO (ADR) (Mexico) 1,109,977
----------
CASINO/GAMING (5.7%)
23,800 International Game Technology 902,972
21,875 Station Casinos, Inc. 1,489,250
11,700 Wynn Resorts, Ltd.* 857,610
----------
3,249,832
----------
CONSTRUCTION MATERIALS (1.3%)
15,100 Florida Rock Industries, Inc. 750,017
----------
ELECTRONIC PRODUCTION
EQUIPMENT (1.0%)
20,700 Tessera Technologies, Inc.* 569,250
----------
FINANCIAL CONGLOMERATES (2.8%)
29,668 Brookfield Asset Management Inc. (Class A) (Canada) $1,205,114
12,200 Leucadia National Corp. 356,118
----------
1,561,232
----------
GAS DISTRIBUTORS (1.1%)
7,500 Questar Corp. 603,675
----------
HOME BUILDING (3.2%)
23,050 Desarrolladora Homex S.A. de C.V. (ADR) (Mexico)* 756,271
9,300 M.D.C. Holdings, Inc. 482,949
1,151 NVR, Inc.* 565,429
----------
1,804,649
----------
HOTELS/RESORTS/
CRUISELINES (3.6%)
16,910 Choice Hotels International, Inc. 1,024,746
58,134 Intercontinental Hotels (ADR) (United Kingdom) 1,023,167
----------
2,047,913
----------
INSURANCE BROKERS/
SERVICES (2.8%)
18,200 Brown & Brown, Inc. 531,804
24,785 ChoicePoint, Inc.* 1,035,269
----------
1,567,073
----------
INTERNET RETAIL (2.9%)
41,800 Amazon.com, Inc.* 1,616,824
----------
INTERNET SOFTWARE/
SERVICES (3.3%)
36,949 Akamai Technologies, Inc.* 1,337,184
24,275 Netease.com Inc. (ADR) (Cayman Islands)* 542,061
----------
1,879,245
----------
INVESTMENT BANKS/
BROKERS (1.7%)
2,000 Chicago Mercantile Exchange Holdings, Inc. 982,300
----------
SEE NOTES TO FINANCIAL STATEMENTS
94
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
INVESTMENT MANAGERS (2.8%)
39,381 Calamos Asset Management Inc. (Class A) $ 1,141,655
25,800 Janus Capital Group, Inc. 461,820
-----------
1,603,475
-----------
MEDICAL SPECIALTIES (2.4%)
32,000 Dade Behring Holdings, Inc. 1,332,480
-----------
MISCELLANEOUS COMMERCIAL
SERVICES (6.7%)
23,625 Corporate Executive Board Co. (The) 2,367,225
37,955 Iron Mountain Inc.* 1,418,758
-----------
3,785,983
-----------
MISCELLANEOUS
MANUFACTURING (1.8%)
30,200 Pentair, Inc. 1,032,538
-----------
OIL & GAS PRODUCTION (7.6%)
32,148 Southwestern Energy Co.* 1,001,732
55,590 Ultra Petroleum Corp. (Canada)* 3,294,819
-----------
4,296,551
-----------
OTHER CONSUMER
SERVICES (5.2%)
21,700 Apollo Group, Inc. (Class A)* 1,121,239
34,100 Expedia, Inc.* 510,477
12,658 ITT Educational Services, Inc.* 833,023
11,600 Weight Watchers International, Inc. 474,324
-----------
2,939,063
-----------
PACKAGED SOFTWARE (1.4%)
34,600 Red Hat, Inc.* 809,640
-----------
PERSONNEL SERVICES (3.1%)
40,859 Monster Worldwide Inc.* 1,743,045
-----------
PULP & PAPER (1.0%)
19,833 MeadWestvaco Corp. 553,936
-----------
REAL ESTATE DEVELOPMENT (2.2%)
32,925 CB Richard Ellis Group, Inc. (Class A)* $ 819,832
9,077 St. Joe Co. (The) 422,444
-----------
1,242,276
-----------
RECREATIONAL PRODUCTS (1.9%)
93,388 Activision, Inc.* 1,062,755
-----------
RESTAURANTS (1.8%)
17,600 Wendy's International, Inc. 1,025,904
-----------
SERVICES TO THE HEALTH
INDUSTRY (2.4%)
20,682 Stericycle, Inc.* 1,346,398
-----------
SPECIALTY STORES (1.3%)
8,609 AutoZone, Inc.* 759,314
-----------
SPECIALTY
TELECOMMUNICATIONS (2.7%)
43,782 Crown Castle International Corp.* 1,512,230
-----------
TOBACCO (2.1%)
23,180 Loews Corp.- Carolina Group 1,190,757
-----------
WIRELESS
TELECOMMUNICATIONS (3.3%)
33,100 NII Holdings, Inc.* 1,866,178
-----------
TOTAL COMMON STOCKS
(COST $46,095,824) 55,894,821
-----------
SEE NOTES TO FINANCIAL STATEMENTS
95
<Page>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- -------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (1.1%)
REPURCHASE AGREEMENT
$649 Joint repurchase agreement
account 5.215% due
07/03/06 (dated 06/30/06;
proceeds $649,282) (a)
(COST $649,000) $ 649,000
-----------
TOTAL INVESTMENTS
(COST $46,744,824) (b) 100.0% 56,543,821
LIABILITIES IN EXCESS OF OTHER ASSETS (0.0) (8,883)
----- -----------
NET ASSETS 100.0% $56,534,938
===== ===========
- ----------
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 $12,515,655 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION
IS $2,716,658, RESULTING IN NET UNREALIZED APPRECIATION OF $9,798,997.
SEE NOTES TO FINANCIAL STATEMENTS
96
<Page>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- --------------------------------------------------------------------------------
Oil & Gas Production $ 4,296,551 7.6%
Air Freight/Couriers 3,892,610 6.9
Miscellaneous Commercial Services 3,785,983 6.7
Casino/Gaming 3,249,832 5.7
Other Consumer Services 2,939,063 5.2
Advertising/Marketing Services 2,288,674 4.1
Hotels/Resorts/Cruiselines 2,047,913 3.6
Internet Software/Services 1,879,245 3.3
Wireless Telecommunications 1,866,178 3.3
Home Building 1,804,649 3.2
Personnel Services 1,743,045 3.1
Biotechnology 1,667,377 2.9
Internet Retail 1,616,824 2.9
Investment Managers 1,603,475 2.8
Insurance Brokers/Services 1,567,073 2.8
Financial Conglomerates 1,561,232 2.8
Specialty Telecommunications 1,512,230 2.7
Services to the Health Industry $ 1,346,398 2.4%
Medical Specialties 1,332,480 2.4
Real Estate Development 1,242,276 2.2
Tobacco 1,190,757 2.1
Broadcasting 1,109,977 2.0
Apparel/Footwear 1,109,679 2.0
Apparel/Footwear Retail 1,091,971 1.9
Recreational Products 1,062,755 1.9
Miscellaneous Manufacturing 1,032,538 1.8
Restaurants 1,025,904 1.8
Investment Banks/Brokers 982,300 1.7
Packaged Software 809,640 1.4
Specialty Stores 759,314 1.3
Construction Materials 750,017 1.3
Repurchase Agreement 649,000 1.1
Gas Distributors 603,675 1.1
Electronic Production Equipment 569,250 1.0
Pulp & Paper 553,936 1.0
----------- -----
$56,543,821 100.0%
=========== =====
SEE NOTES TO FINANCIAL STATEMENTS
97
<Page>
MORGAN STANLEY SELECT DIMENSIONS INVESTMENT SERIES
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
FOR THE SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
<Table>
<Caption>
FLEXIBLE BALANCED
MONEY MARKET INCOME GROWTH UTILITIES
------------ ------------ ----------- ------------
ASSETS:
Investments in securities, at value* $120,543,853 $ 56,140,984 $86,193,930 $ 68,876,301
Investment in affiliates** -- -- 612,504 --
Cash 1,137 -- -- 685
Receivable for:
Investments sold -- 220,581 198,220 1,067,173
Interest 24,562 672,562 278,455 6,786
Dividends -- 138 67,165 140,724
Shares of beneficial interest sold 113,018 -- -- --
Foreign withholding taxes reclaimed -- -- -- --
Variation margin -- -- 5,875 --
Unrealized appreciation on open forward foreign currency
contracts -- 2,889 -- --
Prepaid expenses and other assets 2,610 3,828 2,420 2,152
------------ ------------ ----------- ------------
TOTAL ASSETS 120,685,180 57,040,982 87,358,569 70,093,821
------------ ------------ ----------- ------------
LIABILITIES:
Payable for:
Investments purchased -- 641,624 1,966,829 584,665
Shares of beneficial interest redeemed 385,235 19,311 166,185 44,570
Investment advisory fee 43,763 14,853 36,270 32,381
Variation margin -- 84,247 -- --
Distribution fee 13,796 5,132 5,737 3,209
Administration fee 4,863 3,713 5,580 4,545
Transfer agent fee 250 250 250 250
Payable to bank -- 8,607 -- --
Unrealized depreciation on open forward foreign currency
contracts -- 1,622 -- --
Accrued expenses and other payables 20,651 102,445 43,392 23,822
------------ ------------ ----------- ------------
TOTAL LIABILITIES 468,558 881,804 2,224,243 693,442
------------ ------------ ----------- ------------
NET ASSETS $120,216,622 $ 56,159,178 $85,134,326 $ 69,400,379
============ ============ =========== ============
COMPOSITION OF NET ASSETS:
Paid-in-capital $120,216,582 $ 82,045,535 $73,272,611 $ 68,164,857
Accumulated undistributed net investment income (loss) 40 (306,402) (176,647) (6,878)
Accumulated net realized gain (loss) -- (20,731,015) 3,208,564 (25,176,632)
Net unrealized appreciation (depreciation) -- (4,848,940) 8,829,798 26,419,032
------------ ------------ ----------- ------------
NET ASSETS $120,216,622 $ 56,159,178 $85,134,326 $ 69,400,379
============ ============ =========== ============
*COST $120,543,853 $ 60,970,447 $77,635,186 $ 42,457,268
============ ============ =========== ============
CLASS X SHARES:
Net Assets $ 50,936,666 $ 31,270,432 $56,634,292 $ 53,590,872
Shares Outstanding (unlimited authorized shares of $.01
par value) 50,936,664 4,393,471 3,519,663 2,425,331
NET ASSET VALUE PER SHARE $ 1.00 $ 7.12 $ 16.09 $ 22.10
============ ============ =========== ============
CLASS Y SHARES:
Net Assets $ 69,279,956 $ 24,888,746 $28,500,034 $ 15,809,507
Shares Outstanding (unlimited authorized shares of $.01
par value) 69,279,918 3,507,236 1,775,279 715,978
NET ASSET VALUE PER SHARE $ 1.00 $ 7.10 $ 16.05 $ 22.08
============ ============ =========== ============
</Table>
- ----------
** COST $338,480 AND $302,377, RESPECTIVELY.
SEE NOTES TO FINANCIAL STATEMENTS
98
<Page>
<Table>
<Caption>
EQUALLY-
DIVIDEND WEIGHTED
GROWTH S&P 500 GROWTH FOCUS GROWTH
------------- ------------ ------------ -------------
ASSETS:
Investments in securities, at value* $ 265,292,007 $212,343,762 $ 51,291,375 $ 194,847,474
Investment in affiliates** -- 864,700 -- --
Cash 72 833 399 22,619
Receivable for:
Investments sold 3,466,007 -- 132,099 1,449,185
Interest 1,271 1,013 -- 883
Dividends 165,483 227,187 21,469 37,719
Shares of beneficial interest sold -- -- -- --
Foreign withholding taxes reclaimed 13,042 -- -- --
Variation margin -- 8,400 -- --
Unrealized appreciation on open forward foreign currency
contracts -- -- -- --
Prepaid expenses and other assets 11,217 7,098 1,682 9,803
------------- ------------ ------------ -------------
TOTAL ASSETS 268,949,099 213,452,993 51,447,024 196,367,683
============= ============ ============ =============
LIABILITIES:
Payable for:
Investments purchased 3,524,617 -- 251,797 2,985,131
Shares of beneficial interest redeemed 222,043 77,724 25,371 301,451
Investment advisory fee 116,896 20,840 20,431 84,909
Variation margin -- -- -- --
Distribution fee 10,882 21,187 4,879 7,773
Administration fee 17,374 13,893 3,269 12,464
Transfer agent fee 250 250 250 250
Payable to bank -- -- -- --
Unrealized depreciation on open forward foreign currency
contracts -- -- -- --
Accrued expenses and other payables 41,460 45,437 19,229 46,354
------------- ------------ ------------ -------------
TOTAL LIABILITIES 3,933,522 179,331 325,226 3,438,332
------------- ------------ ------------ -------------
NET ASSETS $ 265,015,577 $213,273,662 $ 51,121,798 $ 192,929,351
============= ============ ============ =============
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 332,056,525 $121,992,498 $ 76,956,581 $ 399,346,321
Accumulated undistributed net investment income (loss) 638 1,385,153 (23,885) (189,033)
Accumulated net realized gain (loss) (109,870,083) 8,759,859 (31,879,868) (217,776,090)
Net unrealized appreciation (depreciation) 42,828,497 81,136,152 6,068,970 11,548,153
------------- ------------ ------------ -------------
NET ASSETS $ 265,015,577 $213,273,662 $ 51,121,798 $ 192,929,351
============= ============ ============ =============
*COST $ 222,463,510 $131,886,989 $ 45,222,405 $ 183,299,469
============= ============ ============ =============
CLASS X SHARES:
Net Assets $ 211,626,206 $108,249,232 $ 26,481,170 $ 154,411,046
Shares Outstanding (unlimited authorized shares of $.01
par value) 12,956,487 4,337,719 1,560,176 9,380,471
NET ASSET VALUE PER SHARE $ 16.33 $ 24.96 $ 16.97 $ 16.46
============= ============ ============ =============
CLASS Y SHARES:
Net Assets $ 53,389,371 $105,024,430 $ 24,640,628 $ 38,518,305
Shares Outstanding (unlimited authorized shares of $.01
par value) 3,273,439 4,246,748 1,468,165 2,354,779
NET ASSET VALUE PER SHARE $ 16.31 $ 24.73 $ 16.78 $ 16.36
============= ============ ============ =============
<Caption>
CAPITAL GLOBAL DEVELOPING
OPPORTUNITIES EQUITY GROWTH
------------- ----------- ------------
ASSETS:
Investments in securities, at value* $ 37,982,400 $69,501,118 $ 56,543,821
Investment in affiliates** -- -- --
Cash 146 -- 928
Receivable for:
Investments sold 205,090 -- 269,936
Interest 116 220 94
Dividends 4,165 152,223 33,537
Shares of beneficial interest sold 2,341 18,930 2,779
Foreign withholding taxes reclaimed -- 24,476 --
Variation margin -- -- --
Unrealized appreciation on open forward foreign currency
contracts -- -- --
Prepaid expenses and other assets 1,865 4,880 1,971
------------ ----------- ------------
TOTAL ASSETS 38,196,123 69,701,847 56,853,066
============ =========== ============
LIABILITIES:
Payable for:
Investments purchased 419,054 -- 227,834
Shares of beneficial interest redeemed 13,487 6,537 42,022
Investment advisory fee 20,361 43,760 19,123
Variation margin -- -- --
Distribution fee 3,281 1,957 2,284
Administration fee 2,431 4,547 3,642
Transfer agent fee 250 250 250
Payable to bank -- 9,560 --
Unrealized depreciation on open forward foreign currency
contracts -- -- --
Accrued expenses and other payables 16,911 28,147 22,973
------------ ----------- ------------
TOTAL LIABILITIES 475,775 94,758 318,128
------------ ----------- ------------
NET ASSETS $ 37,720,348 $69,607,089 $ 56,534,938
============ =========== ============
COMPOSITION OF NET ASSETS:
Paid-in-capital $112,519,749 $56,858,208 $ 73,304,315
Accumulated undistributed net investment income (loss) (80,927) 239,877 188,174
Accumulated net realized gain (loss) (82,391,391) 7,349,065 (26,756,548)
Net unrealized appreciation (depreciation) 7,672,917 5,159,939 9,798,997
------------ ----------- ------------
NET ASSETS $ 37,720,348 $69,607,089 $ 56,534,938
============ =========== ============
*COST $ 30,309,483 $64,341,646 $ 46,744,824
============ =========== ============
CLASS X SHARES:
Net Assets $ 21,392,475 $59,916,789 $ 45,116,604
Shares Outstanding (unlimited authorized shares of $.01
par value) 1,783,259 3,665,454 1,822,900
NET ASSET VALUE PER SHARE $ 12.00 $ 16.35 $ 24.75
============ =========== ============
CLASS Y SHARES:
Net Assets $ 16,327,873 $ 9,690,300 $ 11,418,334
Shares Outstanding (unlimited authorized shares of $.01
par value) 1,381,531 596,568 468,342
NET ASSET VALUE PER SHARE $ 11.82 $ 16.24 $ 24.38
============ =========== ============
</Table>
99
<Page>
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
<Table>
<Caption>
MONEY FLEXIBLE BALANCED
MARKET INCOME GROWTH UTILITIES
---------- ----------- ----------- -----------
INVESTMENT INCOME:
INCOME
Interest $2,213,370 $ 1,638,679 $ 703,348 $ 52,308
Interest and dividends from affiliates -- 534 6,090 --
Dividends -- 143 705,815* 984,143*
---------- ----------- ----------- -----------
TOTAL INCOME 2,213,370 1,639,356 1,415,253 1,036,451
---------- ----------- ----------- -----------
EXPENSES
Investment advisory fee 207,729 93,832 230,934 206,604
Administration fee 23,081 23,458 35,528 28,997
Distribution fee (Class Y shares) 52,148 31,516 34,911 20,060
Professional fees 10,937 17,180 12,475 10,931
Custodian fees 7,086 16,959 18,440 4,972
Shareholder reports and notices 7,620 5,005 9,660 11,764
Trustees' fees and expenses 523 342 555 460
Transfer agent fees and expenses 250 250 250 250
Other 5,260 7,589 8,524 4,664
---------- ----------- ----------- -----------
TOTAL EXPENSES 314,634 196,131 351,277 288,702
---------- ----------- ----------- -----------
NET INVESTMENT INCOME (LOSS) 1,898,736 1,443,225 1,063,976 747,749
---------- ----------- ----------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
NET REALIZED GAIN (LOSS) ON:
Investments -- (10,800) 4,219,297 3,564,549
Futures contracts -- 142,026 (18,205) --
Foreign exchange transactions -- (171,153) -- --
---------- ----------- ----------- -----------
NET REALIZED GAIN (LOSS) -- (39,927) 4,201,092 3,564,549
---------- ----------- ----------- -----------
NET CHANGE IN UNREALIZED APPRECIATION/
DEPRECIATION ON:
Investments -- (1,015,605) (3,544,144) (1,290,549)
Future contracts -- (5,944) 21,602 --
Translation of forward foreign currency
contracts, other assets and liabilities
denominated in foreign currencies -- (363) -- --
---------- ----------- ----------- -----------
NET DEPRECIATION -- (1,021,912) (3,522,542) (1,290,549)
---------- ----------- ----------- -----------
NET GAIN (LOSS) -- (1,061,839) 678,550 2,274,000
---------- ----------- ----------- -----------
NET INCREASE (DECREASE) $1,898,736 $ 381,386 $ 1,742,526 $ 3,021,749
========== =========== =========== ===========
</Table>
- ----------
* NET OF FOREIGN WITHHOLDING TAX OF $33,985, $3,441, $50,994, $33,985,
$4,892, $8,601, $1,680, $68,648, AND $1,405, RESPECTIVELY.
SEE NOTES TO FINANCIAL STATEMENTS
100
<Page>
<Table>
<Caption>
EQUALLY-
DIVIDEND WEIGHTED FOCUS
GROWTH S&P 500 GROWTH GROWTH
------------ ----------- ----------- ------------
INVESTMENT INCOME:
INCOME
Interest $ 196,010 $ 65,590 $ 18,033 $ 135,709
Interest and dividends from affiliates -- 8,090 -- 13,280
Dividends 2,841,702* 1,706,535* 163,819* 446,132*
------------ ----------- ----------- ------------
TOTAL INCOME 3,037,712 1,780,215 181,852 595,121
------------ ----------- ----------- ------------
EXPENSES
Investment advisory fee 757,751 132,933 130,230 576,952
Administration fee 114,816 88,622 20,837 84,690
Distribution fee (Class Y shares) 68,944 131,179 29,004 51,043
Professional fees 12,238 11,039 10,764 13,677
Custodian fees 11,468 19,965 4,885 8,194
Shareholder reports and notices 24,084 16,420 7,352 39,978
Trustees' fees and expenses 1,891 1,368 320 1,395
Transfer agent fees and expenses 250 250 250 250
Other 10,436 19,482 2,038 7,645
------------ ----------- ----------- ------------
TOTAL EXPENSES 1,001,878 421,258 205,680 783,824
------------ ----------- ----------- ------------
NET INVESTMENT INCOME (LOSS) 2,035,834 1,358,957 (23,828) (188,703)
------------ ----------- ----------- ------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
NET REALIZED GAIN (LOSS) ON:
Investments 28,318,371 9,226,559 1,772,923 33,027,494
Futures contracts -- 49,790 -- --
Foreign exchange transactions (5,820) -- -- 17,934
------------ ----------- ----------- ------------
NET REALIZED GAIN (LOSS) 28,312,551 9,276,349 1,772,923 33,045,428
------------ ----------- ----------- ------------
NET CHANGE IN UNREALIZED APPRECIATION/
DEPRECIATION ON:
Investments (30,090,051) (1,983,405) (3,386,466) (41,748,581)
Future contracts -- 134,202 -- --
Translation of forward foreign currency
contracts, other assets and liabilities
denominated in foreign currencies -- -- -- (861)
------------ ----------- ----------- ------------
NET DEPRECIATION (30,090,051) (1,849,203) (3,386,466) (41,749,442)
------------ ----------- ----------- ------------
NET GAIN (LOSS) (1,777,500) 7,427,146 (1,613,543) (8,704,014)
------------ ----------- ----------- ------------
NET INCREASE (DECREASE) $ 258,334 $ 8,786,103 $(1,637,371) $ (8,892,717)
============ =========== =========== ============
<Caption>
CAPITAL GLOBAL DEVELOPING
OPPORTUNITIES EQUITY GROWTH
------------- ----------- -----------
INVESTMENT INCOME:
INCOME
Interest $ 18,145 $ 17,688 $ 16,812
Interest and dividends from affiliates -- -- --
Dividends 93,154* 688,361* 367,744*
----------- ----------- -----------
TOTAL INCOME 111,299 706,049 384,556
----------- ----------- -----------
EXPENSES
Investment advisory fee 133,487 332,349 126,490
Administration fee 15,939 29,641 24,093
Distribution fee (Class Y shares) 20,772 12,023 14,273
Professional fees 9,353 12,822 11,437
Custodian fees 3,811 8,619 7,185
Shareholder reports and notices 5,712 12,073 8,720
Trustees' fees and expenses 245 449 370
Transfer agent fees and expenses 250 250 250
Other 2,610 6,396 3,491
----------- ----------- -----------
TOTAL EXPENSES 192,179 414,622 196,309
----------- ----------- -----------
NET INVESTMENT INCOME (LOSS) (80,880) 291,427 188,247
----------- ----------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
NET REALIZED GAIN (LOSS) ON:
Investments 2,596,919 7,314,201 3,670,421
Futures contracts -- -- --
Foreign exchange transactions -- 34,876 --
----------- ----------- -----------
NET REALIZED GAIN (LOSS) 2,596,919 7,349,077 3,670,421
----------- ----------- -----------
NET CHANGE IN UNREALIZED APPRECIATION/
DEPRECIATION ON:
Investments (1,574,766) (3,199,203) (1,282,633)
Future contracts -- -- --
Translation of forward foreign currency
contracts, other assets and liabilities
denominated in foreign currencies -- (2,778) --
----------- ----------- -----------
NET DEPRECIATION (1,574,766) (3,201,981) (1,282,633)
----------- ----------- -----------
NET GAIN (LOSS) 1,022,153 4,147,096 2,387,788
----------- ----------- -----------
NET INCREASE (DECREASE) $ 941,273 $ 4,438,523 $ 2,576,035
=========== =========== ===========
</Table>
- ----------
* NET OF FOREIGN WITHHOLDING TAX OF $33,985, $3,441, $50,994, $33,985,
$4,892, $8,601, $1,680, $68,648, AND $1,405, RESPECTIVELY.
101
<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, 2006 DECEMBER 31, 2005 JUNE 30, 2006 DECEMBER 31, 2005
------------- ----------------- ------------- -----------------
(UNAUDITED) (UNAUDITED)
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 1,898,736 $ 2,423,482 $ 1,443,225 $ 3,287,640
Net realized gain (loss) -- -- (39,927) 146,613
Net change in unrealized
appreciation/depreciation -- -- (1,021,912) (1,654,643)
------------ ------------ ----------- -----------
NET INCREASE 1,898,736 2,423,482 381,386 1,779,610
------------ ------------ ----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income
Class X shares (1,062,284) (1,554,481) (1,283,828) (2,853,279)
Class Y shares (836,468) (868,981) (946,372) (1,823,025)
Net realized gain
Class X shares -- -- -- --
Class Y shares -- -- -- --
------------ ------------ ----------- -----------
TOTAL DIVIDENDS AND DISTRIBUTIONS (1,898,752) (2,423,462) (2,230,200) (4,676,304)
------------ ------------ ----------- -----------
Net increase (decrease) from
transactions in shares of
beneficial interest 31,177,028 (12,373,297) (3,371,608) (6,308,765)
------------ ------------ ----------- -----------
TOTAL INCREASE (DECREASE) 31,177,012 (12,373,277) (5,220,422) (9,205,459)
NET ASSETS:
Beginning of period 89,039,610 101,412,887 61,379,600 70,585,059
------------ ------------ ----------- -----------
END OF PERIOD $120,216,622 $ 89,039,610 $56,159,178 $61,379,600
============ ============ =========== ===========
ACCUMULATED UNDISTRIBUTED NET
INVESTMENT INCOME (LOSS) $ 40 $ 56 $ (306,402) $ 480,573
============ ============ =========== ===========
SEE NOTES TO FINANCIAL STATEMENTS
102
<Page>
<Caption>
BALANCED GROWTH UTILITIES
--------------------------------- ---------------------------------
FOR THE SIX FOR THE YEAR FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED MONTHS ENDED ENDED
JUNE 30, 2006 DECEMBER 31, 2005 JUNE 30, 2006 DECEMBER 31, 2005
------------- ----------------- ------------- -----------------
(UNAUDITED) (UNAUDITED)
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 1,063,976 $ 1,921,217 $ 747,749 $ 1,627,272
Net realized gain (loss) 4,201,092 9,685,731 3,564,549 10,568,009
Net change in unrealized
appreciation/depreciation (3,522,542) (4,242,486) (1,290,549) (315,935)
----------- ------------ ----------- ------------
NET INCREASE 1,742,526 7,364,462 3,021,749 11,879,346
----------- ------------ ----------- ------------
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income
Class X shares (794,360) (1,507,473) (612,284) (1,313,166)
Class Y shares (346,334) (532,905) (158,587) (304,838)
Net realized gain
Class X shares (2,930,307) -- -- --
Class Y shares (1,471,942) -- -- --
----------- ------------ ----------- ------------
TOTAL DIVIDENDS AND DISTRIBUTIONS (5,542,943) (2,040,378) (770,871) (1,618,004)
----------- ------------ ----------- ------------
Net increase (decrease) from
transactions in shares of
beneficial interest (3,698,628) (15,515,138) (8,940,181) (12,874,305)
----------- ------------ ----------- ------------
TOTAL INCREASE (DECREASE) (7,499,045) (10,191,054) (6,689,303) (2,612,963)
NET ASSETS:
Beginning of period 92,633,371 102,824,425 76,089,682 78,702,645
----------- ------------ ----------- ------------
END OF PERIOD $85,134,326 $ 92,633,371 $69,400,379 $ 76,089,682
=========== ============ =========== ============
ACCUMULATED UNDISTRIBUTED NET
INVESTMENT INCOME (LOSS) $ (176,647) $ (99,929) $ (6,878) $ 16,244
=========== ============ =========== ============
<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, 2006 DECEMBER 31, 2005 JUNE 30, 2006 DECEMBER 31, 2005
------------- ----------------- ------------- -----------------
(UNAUDITED) (UNAUDITED)
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 2,035,834 $ 3,958,751 $ 1,358,957 $ 2,611,872
Net realized gain (loss) 28,312,551 29,123,199 9,276,349 11,527,484
Net change in unrealized
appreciation/depreciation (30,090,051) (16,681,483) (1,849,203) 2,122,380
------------ ------------ ------------ ------------
NET INCREASE 258,334 16,400,467 8,786,103 16,261,736
------------ ------------ ------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income
Class X shares (1,695,227) (3,377,533) (1,392,883) (1,219,310)
Class Y shares (348,255) (572,922) (1,139,754) (707,827)
Net realized gain
Class X shares -- -- (5,833,944) (1,943,393)
Class Y shares -- -- (5,717,915) (1,375,977)
------------ ------------ ------------ ------------
TOTAL DIVIDENDS AND DISTRIBUTIONS (2,043,482) (3,950,455) (14,084,496) (5,246,507)
------------ ------------ ------------ ------------
Net increase (decrease) from
transactions in shares of
beneficial interest (38,777,016) (73,279,335) (2,700,879) (12,961,790)
------------ ------------ ------------ ------------
TOTAL INCREASE (DECREASE) (40,562,164) (60,829,323) (7,999,272) (1,946,561)
NET ASSETS:
Beginning of period 305,577,741 366,407,064 221,272,934 223,219,495
------------ ------------ ------------ ------------
END OF PERIOD $265,015,577 $305,577,741 $213,273,662 $221,272,934
============ ============ ============ ============
ACCUMULATED UNDISTRIBUTED NET
INVESTMENT INCOME (LOSS) $ 638 $ 8,286 $ 1,385,153 $ 2,558,833
============ ============ ============ ============
</Table>
103
<Page>
<Table>
<Caption>
GROWTH FOCUS GROWTH
--------------------------------- ---------------------------------
FOR THE SIX FOR THE YEAR FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED MONTHS ENDED ENDED
JUNE 30, 2006 DECEMBER 31, 2005 JUNE 30, 2006 DECEMBER 31, 2005
------------- ----------------- ------------- -----------------
(UNAUDITED) (UNAUDITED)
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) $ (23,828) $ (15,139) $ (188,703) $ 52,595
Net realized gain 1,772,923 2,602,183 33,045,428 10,800,250
Net change in unrealized
appreciation/depreciation (3,386,466) 4,489,067 (41,749,442) 18,446,646
----------- ----------- ------------ ------------
NET INCREASE (DECREASE) (1,637,371) 7,076,111 (8,892,717) 29,299,491
----------- ----------- ------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income
Class X shares -- (113,999) (35,137) (1,350,337)
Class Y shares -- (39,568) -- (182,664)
Net realized gain
Class X shares -- -- -- --
Class Y shares -- -- -- --
----------- ----------- ------------ ------------
TOTAL DIVIDENDS AND DISTRIBUTIONS -- (153,567) (35,137) (1,533,001)
----------- ----------- ------------ ------------
Net increase (decrease) from transactions
in shares of beneficial interest (112,980) 977,238 (27,681,904) (54,233,048)
----------- ----------- ------------ ------------
TOTAL INCREASE (DECREASE) (1,750,351) 7,899,782 (36,609,758) (26,466,558)
NET ASSETS:
Beginning of period 52,872,149 44,972,367 229,539,109 256,005,667
----------- ----------- ------------ ------------
END OF PERIOD $51,121,798 $52,872,149 $192,929,351 $229,539,109
=========== =========== ============ ============
ACCUMULATED UNDISTRIBUTED NET INVESTMENT
INCOME (LOSS) $ (23,885) $ (57) $ (189,033) $ 34,807
=========== =========== ============ ============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
104
<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, 2006 DECEMBER 31, 2005 JUNE 30, 2006 DECEMBER 31, 2005
------------- ----------------- ------------- -----------------
(UNAUDITED) (UNAUDITED)
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) $ (80,880) $ (155,320) $ 291,427 $ 603,656
Net realized gain 2,596,919 5,418,673 7,349,077 8,080,636
Net change in unrealized
appreciation/depreciation (1,574,766) 2,192,107 (3,201,981) (1,352,882)
----------- ----------- ------------ ------------
NET INCREASE (DECREASE) 941,273 7,455,460 4,438,523 7,331,410
----------- ----------- ------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income
Class X shares -- -- (460,965) (450,564)
Class Y shares -- -- (53,742) (38,510)
Net realized gain
Class X shares -- -- (4,401,631) --
Class Y shares -- -- (716,087) --
----------- ----------- ------------ ------------
TOTAL DIVIDENDS AND DISTRIBUTIONS -- -- (5,632,425) (489,074)
----------- ----------- ------------ ------------
Net increase (decrease) from transactions
in shares of beneficial interest (3,204,914) (6,859,148) (2,551,365) (15,179,555)
----------- ----------- ------------ ------------
TOTAL INCREASE (DECREASE) (2,263,641) 596,312 (3,745,267) (8,337,219)
NET ASSETS:
Beginning of period 39,983,989 39,387,677 73,352,356 81,689,575
----------- ----------- ------------ ------------
END OF PERIOD $37,720,348 $39,983,989 $ 69,607,089 $ 73,352,356
=========== =========== ============ ============
ACCUMULATED UNDISTRIBUTED NET INVESTMENT
INCOME (LOSS) $ (80,927) $ (47) $ 239,877 $ 463,157
=========== =========== ============ ============
<Caption>
DEVELOPING GROWTH
---------------------------------
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JUNE 30, 2006 DECEMBER 31, 2005
------------- -----------------
(UNAUDITED)
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) $ 188,247 $ (113,555)
Net realized gain 3,670,421 9,390,269
Net change in unrealized
appreciation/depreciation (1,282,633) 483,072
----------- ------------
NET INCREASE (DECREASE) 2,576,035 9,759,786
----------- ------------
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 (5,861,512) (11,241,461)
----------- ------------
TOTAL INCREASE (DECREASE) (3,285,477) (1,481,675)
NET ASSETS:
Beginning of period 59,820,415 61,302,090
----------- ------------
END OF PERIOD $56,534,938 $ 59,820,415
=========== ============
ACCUMULATED UNDISTRIBUTED NET INVESTMENT
INCOME (LOSS) $ 188,174 $ (73)
=========== ============
</Table>
105
<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, 2006 DECEMBER 31, 2005 JUNE 30, 2006 DECEMBER 31, 2005
------------- ----------------- ------------- -----------------
(UNAUDITED) (UNAUDITED)
CLASS X SHARES
SHARES
Sold 18,259,767 25,422,553 72,010 143,276
Reinvestment of dividends and distributions 1,062,284 1,554,481 177,638 384,390
Redeemed (20,415,255) (42,891,928) (722,874) (1,349,263)
------------ ------------ ----------- ------------
NET DECREASE - CLASS X (1,093,204) (15,914,894) (473,226) (821,597)
============ ============ =========== ============
AMOUNT
Sold $ 18,259,767 $ 25,422,553 $ 524,577 $ 1,070,048
Reinvestment of dividends and distributions 1,062,284 1,554,481 1,283,828 2,853,279
Redeemed (20,415,255) (42,891,928) (5,248,390) (10,076,678)
------------ ------------ ----------- ------------
NET DECREASE - CLASS X $ (1,093,204) $(15,914,894) $(3,439,985) $ (6,153,351)
============ ============ =========== ============
CLASS Y SHARES
SHARES
Sold 49,827,216 30,390,244 624,105 617,267
Reinvestment of dividends and distributions 836,468 868,981 131,350 246,385
Redeemed (18,393,452) (27,717,628) (746,013) (883,707)
------------ ------------ ----------- ------------
NET INCREASE (DECREASE) - CLASS Y 32,270,232 3,541,597 9,442 (20,055)
============ ============ =========== ============
AMOUNT
Sold $ 49,827,216 $ 30,390,244 $ 4,514,734 $ 4,596,574
Reinvestment of dividends and distributions 836,468 868,981 946,372 1,823,025
Redeemed (18,393,452) (27,717,628) (5,392,729) (6,575,013)
------------ ------------ ----------- ------------
NET INCREASE (DECREASE) - CLASS Y $ 32,270,232 $ 3,541,597 $ 68,377 $ (155,414)
============ ============ =========== ============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
106
<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, 2006 DECEMBER 31, 2005 JUNE 30, 2006 DECEMBER 31, 2005
------------- ----------------- ------------- -----------------
(UNAUDITED) (UNAUDITED)
CLASS X SHARES
SHARES
Sold 35,836 153,509 18,300 109,433
Reinvestment of dividends and distributions 230,133 92,265 28,095 62,808
Redeemed (577,496) (1,148,143) (412,087) (731,587)
----------- ------------ ----------- ------------
NET DECREASE - CLASS X (311,527) (902,369) (365,692) (559,346)
=========== ============ =========== ============
AMOUNT
Sold $ 612,220 $ 2,504,210 $ 403,450 $ 2,198,991
Reinvestment of dividends and distributions 3,724,667 1,507,473 612,284 1,313,166
Redeemed (9,876,140) (18,690,123) (9,011,587) (14,922,675)
----------- ------------ ----------- ------------
NET DECREASE - CLASS X $(5,539,253) $(14,678,440) $(7,995,853) $(11,410,518)
=========== ============ =========== ============
CLASS Y SHARES
SHARES
Sold 102,255 159,591 19,075 86,563
Reinvestment of dividends and distributions 112,730 32,645 7,283 14,571
Redeemed (100,622) (246,766) (69,824) (173,814)
----------- ------------ ----------- ------------
NET INCREASE (DECREASE) - CLASS Y 114,363 (54,530) (43,466) (72,680)
=========== ============ =========== ============
AMOUNT
Sold $ 1,740,867 $ 2,614,737 $ 416,919 $ 1,755,196
Reinvestment of dividends and distributions 1,818,276 532,905 158,587 304,838
Redeemed (1,718,518) (3,984,340) (1,519,834) (3,523,821)
----------- ------------ ----------- ------------
NET INCREASE (DECREASE) - CLASS Y $ 1,840,625 $ (836,698) $ (944,328) $ (1,463,787)
=========== ============ =========== ============
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, 2006 DECEMBER 31, 2005 JUNE 30, 2006 DECEMBER 31, 2005
------------- ----------------- ------------- -----------------
(UNAUDITED) (UNAUDITED)
CLASS X SHARES
SHARES
Sold 72,707 290,573 74,550 258,801
Reinvestment of dividends and distributions 102,511 212,823 289,536 132,054
Redeemed (2,360,145) (4,781,282) (697,501) (1,539,510)
------------ ------------ ------------ ------------
NET DECREASE - CLASS X (2,184,927) (4,277,886) (333,415) (1,148,655)
============ ============ ============ ============
AMOUNT
Sold $ 1,216,737 $ 4,570,165 $ 1,998,044 $ 6,289,680
Reinvestment of dividends and distributions 1,695,227 3,377,533 7,226,827 3,162,703
Redeemed (39,467,844) (75,728,076) (18,733,706) (37,656,881)
------------ ------------ ------------ ------------
NET DECREASE - CLASS X $(36,555,880) $(67,780,378) $ (9,508,835) $(28,204,498)
============ ============ ============ ============
CLASS Y SHARES
SHARES
Sold 76,041 266,223 400,263 1,133,459
Reinvestment of dividends and distributions 21,104 36,130 277,302 87,702
Redeemed (230,695) (651,676) (401,463) (586,503)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) - CLASS Y (133,550) (349,323) 276,102 634,658
============ ============ ============ ============
AMOUNT
Sold $ 1,271,978 $ 4,212,365 $ 10,682,395 $ 27,352,074
Reinvestment of dividends and distributions 348,247 572,922 6,857,669 2,083,804
Redeemed (3,841,361) (10,284,244) (10,732,108) (14,193,170)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) - CLASS Y $ (2,221,136) $ (5,498,957) $ 6,807,956 $ 15,242,708
============ ============ ============ ============
</Table>
107
<Page>
Morgan Stanley Select Dimensions Investment Series
<Table>
<Caption>
GROWTH FOCUS GROWTH
--------------------------------- ---------------------------------
FOR THE SIX FOR THE YEAR FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED MONTHS ENDED ENDED
JUNE 30, 2006 DECEMBER 31, 2005 JUNE 30, 2006 DECEMBER 31, 2005
------------- ----------------- ------------- -----------------
(UNAUDITED) (UNAUDITED)
CLASS X SHARES
SHARES
Sold 38,353 45,621 64,162 160,189
Reinvestment of dividends and distributions -- 7,520 2,135 91,054
Redeemed (256,223) (512,566) (1,540,040) (3,450,991)
----------- ----------- ------------ ------------
NET DECREASE - CLASS X (217,870) (459,425) (1,473,743) (3,199,748)
=========== =========== ============ ============
AMOUNT
Sold $ 670,852 $ 701,221 $ 1,099,729 $ 2,445,263
Reinvestment of dividends and distributions -- 113,999 35,137 1,350,336
Redeemed (4,465,719) (7,862,509) (26,235,244) (52,562,192)
----------- ----------- ------------ ------------
NET DECREASE - CLASS X $(3,794,867) $(7,047,289) $(25,100,378) $(48,766,593)
=========== =========== ============ ============
CLASS Y SHARES
SHARES
Sold 314,548 751,355 52,704 106,325
Reinvestment of dividends and distributions -- 2,633 -- 12,367
Redeemed (101,126) (224,282) (206,467) (484,568)
----------- ----------- ------------ ------------
NET INCREASE (DECREASE) - CLASS Y 213,422 529,706 (153,763) (365,876)
=========== =========== ============ ============
AMOUNT
Sold $ 5,438,308 $11,461,513 $ 897,353 $ 1,644,441
Reinvestment of dividends and distributions -- 39,568 -- 182,665
Redeemed (1,756,421) (3,476,554) (3,478,879) (7,293,561)
----------- ----------- ------------ ------------
NET INCREASE (DECREASE) - CLASS Y $ 3,681,887 $ 8,024,527 $ (2,581,526) $ (5,466,455)
=========== =========== ============ ============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
108
<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, 2006 DECEMBER 31, 2005 JUNE 30, 2006 DECEMBER 31, 2005
------------- ----------------- ------------- -----------------
(UNAUDITED) (UNAUDITED)
CLASS X SHARES
SHARES
Sold 65,009 118,513 47,725 96,667
Reinvestment of dividends and distributions -- -- 297,407 29,839
Redeemed (338,175) (721,670) (512,710) (1,086,697)
----------- ----------- ----------- ------------
NET DECREASE - CLASS X (273,166) (603,157) (167,578) (960,191)
=========== =========== =========== ============
AMOUNT
Sold $ 790,173 $ 1,200,955 $ 864,441 $ 1,498,231
Reinvestment of dividends and distributions -- -- 4,862,596 450,564
Redeemed (4,085,737) (7,112,174) (9,256,676) (16,883,416)
----------- ----------- ----------- ------------
NET DECREASE - CLASS X $(3,295,564) $(5,911,219) $(3,529,639) $(14,934,621)
=========== =========== =========== ============
CLASS Y SHARES
SHARES
Sold 144,737 155,416 40,805 53,393
Reinvestment of dividends and distributions -- -- 47,403 2,566
Redeemed (139,138) (259,330) (29,599) (70,931)
----------- ----------- ----------- ------------
NET INCREASE (DECREASE) - CLASS Y 5,599 (103,914) 58,609 (14,972)
=========== =========== =========== ============
AMOUNT
Sold $ 1,748,260 $ 1,600,462 $ 737,708 $ 812,220
Reinvestment of dividends and distributions -- -- 769,829 38,510
Redeemed (1,657,610) (2,548,391) (529,263) (1,095,664)
----------- ----------- ----------- ------------
NET INCREASE (DECREASE) - CLASS Y $ 90,650 $ (947,929) $ 978,274 $ (244,934)
=========== =========== =========== ============
<Caption>
DEVELOPING GROWTH
---------------------------------
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JUNE 30, 2006 DECEMBER 31, 2005
------------- -----------------
(UNAUDITED)
CLASS X SHARES
SHARES
Sold 27,772 66,506
Reinvestment of dividends and distributions -- --
Redeemed (272,310) (615,572)
----------- ------------
NET DECREASE - CLASS X (244,538) (549,066)
=========== ============
AMOUNT
Sold $ 697,043 $ 1,391,587
Reinvestment of dividends and distributions -- --
Redeemed (6,858,568) (12,779,261)
----------- ------------
NET DECREASE - CLASS X $(6,161,525) $(11,387,674)
=========== ============
CLASS Y SHARES
SHARES
Sold 48,227 68,441
Reinvestment of dividends and distributions -- --
Redeemed (36,769) (63,548)
----------- ------------
NET INCREASE (DECREASE) - CLASS Y 11,458 4,893
=========== ============
AMOUNT
Sold $ 1,210,092 $ 1,442,286
Reinvestment of dividends and distributions -- --
Redeemed (910,079) (1,296,073)
----------- ------------
NET INCREASE (DECREASE) - CLASS Y $ 300,013 $ 146,213
=========== ============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
109
<Page>
Morgan Stanley Select Dimensions Investment Series
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2006 (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:
PORTFOLIO INVESTMENT OBJECTIVE
- --------------------------------------------------------------------------------
Money Market Seeks high current income, preservation of capital and
liquidity.
Flexible Income Seeks, as a primary objective, to earn a high level of
current income and, as a secondary objective, to
maximize total return, but only to the extent
consistent with its primary objective.
Balanced Growth Seeks to provide capital growth with reasonable
current income.
Utilities Seeks both capital appreciation and current income.
Dividend Growth Seeks to provide reasonable current income and
long-term growth of income and capital.
Equally-Weighted Seeks to achieve a high level of total return on its
S&P 500 assets through a combination of capital appreciation
and current income.
Growth Seeks long-term growth of capital.
Focus Growth (formerly Seeks long-term capital growth consistent with an
American Opportunities) 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.
110
<Page>
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- Money Market: Portfolio securities are valued at
amortized cost which approximates market value, in accordance with Rule 2a-7
under the Act. 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) listed
options are valued at the latest sale price on the exchange on which they are
listed unless no sales of such options have taken place that day, in which case
they are valued at the mean between their latest bid and asked price; (7) when
market quotations are not readily available including circumstances under which
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; (8) certain portfolio
securities may be valued by an outside pricing service approved by the Fund's
Trustees; and (9) 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.
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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 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 Adviser, 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. OPTION -- When the Fund writes a call option, an amount equal to the premium
received is included in the Fund's Statement of Assets and Liabilities as a
liability which is subsequently marked-to-market to reflect the current market
value of the option written. If a written option either expires or the Fund
enters into a closing purchase transaction, the Fund realizes a gain or loss
without regard to any unrealized gain or loss on the underlying security or
currency and the liability related to such option is extinguished. If a written
call option is exercised, the Fund realizes a gain or loss from the sale of the
underlying security or currency and the proceeds from such sale are increased by
the premium originally received.
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When the Fund purchases a call or put option, the premium paid is recorded as an
investment and is subsequently marked-to-market to reflect the current market
value. If a purchased option expires, the Fund will realize a loss to the extent
of the premium paid. If the Fund enters into a closing sale transation, a gain
or loss is realized for the difference between the proceeds from the sale and
the cost of the option. If a put option is exercised, the cost of the security
or currency sold upon exercise will be increased by the premium originally paid.
If a call option is exercised, the cost of the security purchased upon exercise
will be increased by the premium originally paid.
G. 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 securities held. 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.
H. 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.
I. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends and
distributions to its shareholders on the ex-dividend date.
J. 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.
K. 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.
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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 the daily net assets not exceeding $250
million; 0.375% to the portion of the daily net assets exceeding $250 million
but not exceeding $750 million; 0.325% to the portion of the daily net assets
exceeding $750 million but not exceeding $1.25 billion; 0.30% to the portion of
the daily net assets exceeding $1.25 billion but not exceeding $1.5 billion and
0.275% to the portion of the daily net assets in excess of $1.5 billion.
Flexible Income -- 0.32%.
Balanced Growth -- 0.52% to the portion of the daily net assets not exceeding
$500 million and 0.495% to the portion of the daily net assets in excess of $500
million.
Utilities -- 0.57% to the portion of the daily net assets not exceeding $500
million; 0.47% to the portion of the daily net assets exceeding $500 million but
not exceeding $1 billion; 0.445% to the portion of the daily net assets
exceeding $1 billion but not exceeding $1.5 billion; 0.42% to the portion of the
daily net assets exceeding $1.5 billion but not exceeding $2.5 billion; 0.395%
to the portion of the daily net assets exceeding $2.5 billion but not exceeding
$3.5 billion; 0.37% to the portion of the daily net assets exceeding $3.5
billion but not exceeding $5 billion and 0.345% to the portion of the daily net
assets in excess of $5 billion.
Dividend Growth -- 0.545% to the portion of the daily net assets not exceeding
$250 million; 0.42% to the portion of the daily net assets exceeding $250
million but not exceeding $1 billion; 0.395% to the portion of the daily net
assets exceeding $1 billion but not exceeding $2 billion and 0.37% to the
portion of the daily net assets in excess of $2 billion.
Equally-Weighted S&P 500 -- 0.12% to the portion of the daily net assets not
exceeding $2 billion and 0.10% to the portion of the daily net assets in excess
of $2 billion.
Growth -- 0.50% to the portion of the daily net assets not exceeding $1 billion;
0.45% to the portion of the daily net assets exceeding $1 billion but not
exceeding $2 billion; 0.40% to the portion of the daily net assets exceeding $2
billion but not exceeding $3 billion and 0.35% to the portion of the daily net
assets in excess of $3 billion.
Focus Growth -- 0.545% to the portion of the daily net assets not exceeding $250
million; 0.42% to the portion of the daily net assets exceeding $250 million but
not exceeding $2.5 billion; 0.395% to the portion of the daily net assets
exceeding $2.5 billion but not exceeding $3.5 billion; 0.37% to the portion of
the daily net assets exceeding $3.5 billion but not exceeding $4.5 billion and
0.345% to the portion of the daily net assets in excess of $4.5 billion.
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Capital Opportunities -- 0.67% to the portion of the daily net assets not
exceeding $500 million; 0.645% to the portion of the daily net assets exceeding
$500 million but not exceeding $2 billion; 0.62% to the portion of the daily net
assets exceeding $2 billion but not exceeding $3 billion and 0.595% to the
portion of the daily net assets in excess of $3 billion.
Global Equity -- 0.77%. (Prior to June 1, 2006, 0.92%)
Developing Growth -- 0.42% to the portion of the daily net assets not exceeding
$500 million and 0.395% to the portion of the daily net assets in excess of $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 each Portfolio's daily
net assets.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the
"Distributor"), an affiliate of the Investment Adviser and Administrator. The
Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1
under the Act. Under the Plan, Class Y shares of each Portfolio bear a
distribution fee which is accrued daily and paid monthly at the annual rate of
0.25% of the average daily net assets of the class.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
Purchases and sales/prepayments/maturities of portfolio securities, excluding
short-term investments (except for the Money Market Portfolio), for the six
months ended June 30, 2006 were as follows:
<Table>
<Caption>
U.S. GOVERNMENT SECURITIES OTHER
-------------------------------- ---------------------------------
SALES/PREPAYMENTS/ SALES/PREPAYMENTS/
PURCHASES MATURITIES PURCHASES MATURITIES
----------- ------------------ ------------ ------------------
Money Market $15,125,006 $12,615,248 $492,467,032 $464,522,180
Flexible Income 2,421,637 5,943,250 16,147,819 14,506,306
Balanced Growth 10,709,965 10,427,060 7,897,536 12,935,877
Utilities -- 45,703 7,980,894 16,378,675
Dividend Growth -- -- 133,869,746 169,398,306
Equally-Weighted S&P 500 -- -- 18,028,544 33,957,175
Growth -- -- 20,778,584 20,205,350
Focus Growth -- -- 165,991,648 191,010,779
Capital Opportunities -- -- 14,130,046 17,067,695
Global Equity -- -- 25,711,157 34,619,633
Developing Growth -- -- 21,721,008 26,897,553
</Table>
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<Page>
Equally-Weighted S&P 500 had transactions in Morgan Stanley common stock, an
affiliate of the Investment Adviser, Administrator and Distributor:
NET REALIZED
PURCHASES SALES GAINS INCOME VALUE
- --------- ------- ------------ ------ --------
$34,884 $34,420 $4,115 $4,102 $450,498
The following Portfolios had transactions in Hartford Financial Services Group,
Inc., an affiliate of the Fund:
<Table>
<Caption>
NET REALIZED
PURCHASES SALES GAINS INCOME VALUE
--------- ---------- ------------ ------- --------
Flexible Income -- $ 45,534 $ 52 $ 534 --
Balanced Growth -- 49,035 9,759 6,090 $612,504
Focus Growth $213,299 2,668,083 161,292 13,280 --
Equally-Weighted S&P 500 31,806 48,716 9,604 3,988 414,202
</Table>
The following Portfolios had transactions with other Morgan Stanley funds during
the six months ended June 30, 2006:
NET REALIZED
PURCHASES SALES GAINS (LOSSES)
---------- ---------- --------------
Utilities -- $ 112,020 $ 36,856
Dividend Growth $ 202,933 69,356 (18,144)
Growth 32,787 532,797* 173,426
Focus Growth 4,214,853 1,628,734 585,353
Global Equity 33,606 -- --
Capital Opportunities -- 646,370 188,460
Developing Growth 219,425 554,352* 135,968
- ----------
* INCLUDED IN THE AFOREMENTIONED, WERE OPEN TRADES WITH OTHER MORGAN STANLEY
FUNDS IN THE AMOUNT OF $10,123 AND $11,134 WITH REALIZED GAINS OF $195 AND
$215, RESPECTIVELY.
For the six months ended June 30, 2006, the following Portfolios incurred
brokerage commissions with Morgan Stanley & Co., Inc., an affiliate of the
Investment Adviser, Administrator and Distributor, for portfolio transactions
executed on behalf of the Portfolio:
DIVIDEND FOCUS GLOBAL CAPITAL DEVELOPING
UTILITIES GROWTH GROWTH EQUITY OPPORTUNITIES GROWTH
- --------- -------- ------- ------- ------------- ----------
$14,623 $50,848 $44,415 $10,280 $253 $550
======= ======= ======= ======= ==== ====
For the six months ended June 30, 2006, Dividend Growth had open payables of
$262,308 and Dividend Growth and Utilities had open receivables of $250,331 and
$67,272, respectively, with Morgan Stanley & Co., Inc., an affiliate of the
Investment Adviser, Administrator and Distributor.
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<Page>
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 Statements 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.
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 Statements of Assets and Liabilities. The Portfolio bears the
risk of an unfavorable change in the value of the underlying securities. Risk
may also arise upon entering into these contracts from potential inability of
the counterparties to meet the terms of their contracts.
6. FEDERAL INCOME TAX STATUS
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require 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.
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<Page>
As of December 31, 2005, 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 2013 TOTAL
- --------------------- ---- ---- ------- -------- ------- ------- ------ ---- --------
Flexible Income $153 $941 $ 1,681 $ 2,688 $ 6,782 $ 6,161 $1,199 $582 $ 20,187
Utilities -- -- -- 6,663 21,143 -- -- -- 27,806
Dividend Growth -- -- 34,940 21,046 58,750 21,222 -- -- 135,958
Growth -- -- -- 13,972 16,400 3,145 60 -- 33,577
Focus Growth -- -- -- 176,036 74,785 -- -- -- 250,821
Capital Opportunities -- -- -- 27,418 57,567 -- -- -- 84,985
Developing Growth -- -- -- 12,092 18,312 -- -- -- 30,404
</Table>
At December 31, 2005, the primary reason(s) for significant temporary book/tax
differences were as follows:
TEMPORARY DIFFERENCES
-----------------------------
LOSS
POST-OCTOBER DEFERRALS FROM
LOSSES WASH SALES
------------ --------------
Flexible Income - -
Balanced Growth -
Utilities -
Dividend Growth -
Equally-Weighted S&P 500 -
Growth - -
Capital Opportunities -
Global Equity -
Developing Growth -
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 -- tax adjustment on real estate investment
trusts (REITs) held by the Portfolio and Flexible Income and Balanced Growth &
Utilities -- to book amortization of premiums/discounts on debt securities.
7. NEW ACCOUNTING PRONOUNCEMENT
In July 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation 48, Accounting for Uncertainty in Income Taxes -- an
interpretation of FASB Statement 109 (FIN 48). FIN 48 clarifies the accounting
for income taxes by prescribing the minimum recognition threshold a tax position
must meet before being recognized in the financial statements. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The Fund will
adopt FIN 48 during 2007 and the impact to the Fund's financial statements, if
any, is currently being assessed.
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(This page has been intentionally left blank.)
<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
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 1.00 0.03 -- 0.03 (0.03)
2006 (a) 1.00 0.02 -- 0.02 (0.02)
CLASS Y SHARES
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 1.00 0.02 -- 0.02 (0.02)
2006 (a) 1.00 0.02 -- 0.02 (0.02)
FLEXIBLE INCOME
CLASS X SHARES
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 7.68 0.38 (0.17) 0.21 (0.54)
2006 (a) 7.35 0.18 (0.13) 0.05 (0.28)
CLASS Y SHARES
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 7.65 0.36 (0.16) 0.20 (0.52)
2006 (a) 7.33 0.17 (0.13) 0.04 (0.27)
BALANCED GROWTH
CLASS X SHARES
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 15.95 0.34 0.95 1.29 (0.36)
2006 (a) 16.88 0.21 0.11 0.32 (1.11)
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
120
<Page>
<Table>
<Caption>
RATIOS TO AVERAGE
NET ASSETS**
TOTAL NET ASSET NET ASSETS ---------------------
FOR THE YEAR DISTRIBUTIONS DIVIDENDS VALUE END OF NET PORTFOLIO
ENDED TO AND END OF TOTAL PERIOD INVESTMENT TURNOVER
DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS PERIOD RETURN+ (000'S) EXPENSES INCOME RATE
- --------------- ------------- ------------- --------- ------- ---------- -------- ---------- ---------
MONEY MARKET
CLASS X SHARES
2001 -- $(0.04) $ 1.00 3.88% $175,957 0.52% 3.63% N/A
2002 -- (0.01) 1.00 1.34 152,479 0.52 1.34 N/A
2003 -- (0.01) 1.00 0.65 91,730 0.54 0.66 N/A
2004 -- (0.01) 1.00 0.86 67,945 0.55 0.84 N/A
2005 -- (0.03) 1.00 2.73 52,030 0.57 2.68 N/A
2006 (a) -- (0.02) 1.00 2.11(1) 50,937 0.57(2) 4.22(2) N/A
CLASS Y SHARES
2001 -- (0.04) 1.00 3.62 31,189 0.77 3.38 N/A
2002 -- (0.01) 1.00 1.09 41,006 0.77 1.09 N/A
2003 -- (0.00) 1.00 0.40 39,183 0.79 0.41 N/A
2004 -- (0.01) 1.00 0.61 33,468 0.80 0.59 N/A
2005 -- (0.02) 1.00 2.48 37,010 0.82 2.43 N/A
2006 (a) -- (0.02) 1.00 1.99(1) 69,280 0.82(2) 3.97(2) N/A
FLEXIBLE INCOME
CLASS X SHARES
2001 $(0.10)++ (0.52) 6.99 (4.06) 56,745 0.49 7.48 114%
2002 -- (0.35) 7.23 8.67 54,669 0.50 7.26 115
2003 -- (0.39) 7.80 13.54 53,270 0.57 4.49 258
2004 -- (0.64) 7.68 7.00 43,658 0.69 4.96 201
2005 -- (0.54) 7.35 2.88 35,755 0.60 5.11 83
2006 (a) -- (0.28) 7.12 0.67(1) 31,270 0.56(2) 5.03(2) 32(1)
CLASS Y SHARES
2001 (0.09)++ (0.50) 6.97 (4.41) 3,859 0.74 7.23 114
2002 -- (0.33) 7.22 8.59 14,626 0.75 7.01 115
2003 -- (0.37) 7.78 13.15 20,955 0.82 4.24 258
2004 -- (0.62) 7.65 6.61 26,927 0.94 4.71 201
2005 -- (0.52) 7.33 2.62 25,624 0.85 4.86 83
2006 (a) -- (0.27) 7.10 0.69(1) 24,889 0.81(2) 4.78(2) 32(1)
BALANCED GROWTH
CLASS X SHARES
2001 -- (0.44) 14.62 1.21 116,002 0.64 2.95 71
2002 -- (0.38) 12.58 (11.49) 84,846 0.66 2.58 161
2003 -- (0.33) 14.71 19.84 84,151 0.68 2.01 124
2004 -- (0.35) 15.95 10.93 75,517 0.69 2.04 62
2005 -- (0.36) 16.88 8.21 64,663 0.70 2.07 55
2006 (a) -- (1.11) 16.09 1.91(1) 56,634 0.71(2) 2.48(2) 21(1)
</Table>
121
<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 Y SHARES
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 15.92 0.30 0.95 1.24 (0.32)
2006 (a) 16.84 0.19 0.11 0.30 (1.09)
UTILITIES
CLASS X SHARES
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 18.82 0.43 2.62 3.05 (0.44)
2006 (a) 21.43 0.23 0.68 0.91 (0.24)
CLASS Y SHARES
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 18.81 0.38 2.62 3.00 (0.39)
2006 (a) 21.42 0.20 0.68 0.88 (0.22)
DIVIDEND GROWTH
CLASS X SHARES
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 15.81 0.20 0.67 0.87 (0.20)
2006 (a) 16.48 0.12 (0.14) (0.02) (0.13)
CLASS Y SHARES
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 15.79 0.16 0.66 0.82 (0.16)
2006 (a) 16.45 0.10 (0.13) (0.03) (0.11)
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
122
<Page>
<Table>
<Caption>
RATIOS TO AVERAGE
NET ASSETS**
TOTAL NET ASSET NET ASSETS ---------------------
FOR THE YEAR DISTRIBUTIONS DIVIDENDS VALUE END OF NET PORTFOLIO
ENDED TO AND END OF TOTAL PERIOD INVESTMENT TURNOVER
DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS PERIOD RETURN+ (000'S) EXPENSES INCOME RATE
- --------------- ------------- ------------- --------- ------- ---------- -------- ---------- ---------
BALANCED GROWTH
CLASS Y SHARES
2001 -- $(0.41) $14.59 0.86% $ 8,463 0.89% 2.70% 71%
2002 -- (0.34) 12.56 (11.66) 12,327 0.91 2.33 161
2003 -- (0.30) 14.68 19.51 22,898 0.93 1.76 124
2004 -- (0.31) 15.92 10.68 27,308 0.94 1.79 62
2005 -- (0.32) 16.84 7.89 27,970 0.95 1.82 55
2006 (a) -- (1.09) 16.05 1.79(1) 28,500 0.96(2) 2.23(2) 21(1)
UTILITIES
CLASS X SHARES
2001 $(0.42) (0.87) 17.10 (25.51) 118,964 0.69 2.15 49
2002 -- (0.48) 13.16 (20.37) 66,825 0.70 3.22 77
2003 -- (0.36) 15.46 20.47 63,728 0.71 2.51 91
2004 -- (0.37) 18.82 24.44 63,052 0.71 2.19 29
2005 -- (0.44) 21.43 16.28 59,823 0.72 2.12 38
2006 (a) -- (0.24) 22.10 4.29(1) 53,591 0.74(2) 2.12(2) 11(1)
CLASS Y SHARES
2001 (0.42) (0.82) 17.09 (25.69) 12,471 0.94 1.90 49
2002 -- (0.45) 13.15 (20.58) 10,749 0.95 2.97 77
2003 -- (0.32) 15.45 20.20 13,440 0.96 2.26 91
2004 -- (0.33) 18.81 24.15 15,650 0.96 1.94 29
2005 -- (0.39) 21.42 16.00 16,267 0.97 1.87 38
2006 (a) -- (0.22) 22.08 4.11(1) 15,810 0.99(2) 1.87(2) 11(1)
DIVIDEND GROWTH
CLASS X SHARES
2001 -- (0.28) 14.71 (5.45) 527,738 0.62 1.79 22
2002 -- (0.26) 11.83 (17.92) 341,673 0.64 1.89 22
2003 -- (0.24) 14.83 27.73 356,056 0.66 1.85 42
2004 -- (0.24) 15.81 8.29 307,093 0.65 1.54 44
2005 -- (0.20) 16.48 5.57 249,516 0.63 1.26 38
2006 (a) -- (0.13) 16.33 (0.15)(1) 211,626 0.65(2) 1.47(2) 48(1)
CLASS Y SHARES
2001 -- (0.25) 14.69 (5.71) 22,602 0.87 1.54 22
2002 -- (0.23) 11.81 (18.15) 29,318 0.89 1.64 22
2003 -- (0.21) 14.81 27.48 51,527 0.91 1.60 42
2004 -- (0.20) 15.79 8.03 59,314 0.90 1.29 44
2005 -- (0.16) 16.45 5.32 56,061 0.88 1.01 38
2006 (a) -- (0.11) 16.31 (0.28)(1) 53,389 0.90(2) 1.22(2) 48(1)
</Table>
123
<Page>
<Table>
<Caption>
NET ASSET
VALUE NET NET REALIZED TOTAL FROM DIVIDENDS
FOR THE YEAR BEGINNING INVESTMENT AND UNREALIZED INVESTMENT TO
ENDED DECEMBER 31 OF PERIOD INCOME (LOSS)* GAIN (LOSS) OPERATIONS SHAREHOLDERS
- ------------------------ --------- -------------- -------------- ---------- ------------
EQUALLY-WEIGHTED S&P 500
CLASS X SHARES
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 24.45 0.32 1.54 1.86 (0.23)
2006 (a) 25.71 0.18 0.85 1.03 (0.34)
CLASS Y SHARES
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 24.25 0.26 1.53 1.79 (0.19)
2006 (a) 25.48 0.14 0.84 0.98 (0.29)
GROWTH
CLASS X SHARES
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 15.21 0.01 2.35 2.36 (0.06)
2006 (a) 17.51 0.00 (0.54) (0.54) --
CLASS Y SHARES
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 15.08 (0.03) 2.32 2.29 (0.04)
2006 (a) 17.33 (0.02) (0.53) (0.55) --
FOCUS GROWTH
CLASS X SHARES
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 15.14 0.01 2.15 2.16 (0.11)
2006 (a) 17.19 (0.01) (0.72) (0.73) (0.00)
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
124
<Page>
<Table>
<Caption>
RATIOS TO AVERAGE
NET ASSETS**
TOTAL NET ASSET NET ASSETS ------------------------
DISTRIBUTIONS DIVIDENDS VALUE END OF NET PORTFOLIO
FOR THE YEAR TO AND END OF TOTAL PERIOD INVESTMENT TURNOVER
ENDED DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS PERIOD RETURN+ (000'S) EXPENSES INCOME (LOSS) RATE
- ------------------------ ------------- ------------- --------- ------- --------- -------- ------------- ---------
EQUALLY-WEIGHTED S&P 500
CLASS X SHARES
2001 $(1.10) $(1.29) $19.12 (1.83)% $181,881 0.54% 1.12% 6%
2002 -- (0.21) 15.88 (15.97) 121,065 0.54 1.09 8
2003 (0.32) (0.53) 21.13 37.14 143,019 0.55 1.11 24
2004 -- (0.18) 24.45 16.65 142,320 0.50 1.07 20
2005 (0.37) (0.60) 25.71 7.81 120,117 0.27 1.30 17
2006 (a) (1.44) (1.78) 24.96 4.02(1) 108,249 0.26(2) 1.35(2) 8(1)
CLASS Y SHARES
2001 (1.10) (1.28) 19.05 (2.04) 10,985 0.79 0.87 6
2002 -- (0.20) 15.79 (16.21) 18,843 0.79 0.84 8
2003 (0.32) (0.51) 20.99 36.87 47,554 0.80 0.86 24
2004 -- (0.15) 24.25 16.33 80,900 0.75 0.82 20
2005 (0.37) (0.56) 25.48 7.57 101,156 0.52 1.05 17
2006 (a) (1.44) (1.73) 24.73 3.84(1) 105,024 0.51(2) 1.10(2) 8(1)
GROWTH
CLASS X SHARES
2001 (1.03) (1.03) 15.48 (15.23) 80,096 0.86 (0.04) 81
2002 -- -- 11.17 (27.84) 39,834 0.91 0.08 135
2003 -- (0.01) 14.16 26.90 40,356 0.93 0.21 128
2004 -- (0.03) 15.21 7.64 34,038 0.93 0.37 168
2005 -- (0.06) 17.51 15.55 31,126 0.70 0.05 83
2006 (a) -- -- 16.97 (3.08)(1) 26,481 0.68(2) 0.02(2) 39(1)
CLASS Y SHARES
2001 (1.03) (1.03) 15.42 (15.46) 4,383 1.11 (0.29) 81
2002 -- -- 11.10 (28.02) 3,520 1.16 (0.17) 135
2003 -- -- 14.05 26.58 6,850 1.18 (0.04) 128
2004 -- (0.01) 15.08 7.38 10,934 1.18 0.12 168
2005 -- (0.04) 17.33 15.21 21,746 0.95 (0.20) 83
2006 (a) -- -- 16.78 (3.17)(1) 24,641 0.93(2) (0.23)(2) 39(1)
FOCUS GROWTH
CLASS X SHARES
2001 (5.65) (5.70) 14.99 (29.47) 463,012 0.65 0.46 393
2002 -- (0.09) 11.68 (21.56) 274,710 0.66 0.27 309
2003 -- (0.05) 14.03 20.57 260,230 0.67 0.33 261
2004 -- (0.05) 15.14 8.29 212,736 0.67 0.60 134
2005 -- (0.11) 17.19 14.39 186,633 0.67 0.06 73
2006 (a) -- (0.00) 16.46 (4.22)(1) 154,411 0.69(2) (0.13)(2) 80(1)
</Table>
125
<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
- ------------ --------- -------------- -------------- ---------- ------------
FOCUS GROWTH
CLASS Y SHARES
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 15.05 (0.03) 2.15 2.12 (0.07)
2006(a) 17.10 (0.03) (0.71) (0.74) --
CAPITAL OPPORTUNITIES
CLASS X SHARES
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 9.55 (0.03) 2.19 2.16 --
2006(a) 11.71 (0.02) 0.31 0.29 --
CLASS Y SHARES
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 9.45 (0.06) 2.16 2.10 --
2006(a) 11.55 (0.03) 0.30 0.27 --
GLOBAL EQUITY
CLASS X SHARES
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 15.29 0.13 1.49 1.62 (0.11)
2006(a) 16.80 0.07 0.93 1.00 (0.14)
CLASS Y SHARES
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 15.19 0.09 1.47 1.56 (0.07)
2006(a) 16.68 0.05 0.92 0.97 (0.10)
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
126
<Page>
<Table>
<Caption>
RATIOS TO AVERAGE
NET ASSETS**
TOTAL NET ASSET NET ASSETS ------------------------
FOR THE YEAR DISTRIBUTIONS DIVIDENDS VALUE END OF NET PORTFOLIO
ENDED TO AND END OF TOTAL PERIOD INVESTMENT TURNOVER
DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS PERIOD RETURN+ (000'S) EXPENSES INCOME (LOSS) RATE
- ------------ ------------- ------------- --------- ------- ---------- -------- ------------- ---------
FOCUS GROWTH
CLASS Y SHARES
2001 $(5.65) $(5.70) $14.93 (29.67)% $ 30,768 0.90% 0.21% 393%
2002 -- (0.06) 11.63 (21.73) 30,035 0.91 0.02 309
2003 -- (0.02) 13.96 20.25 46,126 0.92 0.08 261
2004 -- (0.02) 15.05 7.96 43,269 0.92 0.35 134
2005 -- (0.07) 17.10 14.16 42,906 0.92 (0.19) 73
2006(a) -- -- 16.36 (4.33)(1) 38,518 0.94(2) (0.38)(2) 80(1)
CAPITAL OPPORTUNITIES
CLASS X SHARES
2001 -- -- 9.79 (36.39) 55,488 0.80 (0.63) 16
2002 -- -- 5.50 (43.82) 22,097 0.90 (0.71) 103
2003 -- -- 7.79 41.64 25,473 0.87 (0.57) 184
2004 -- -- 9.55 22.59 25,408 0.90 (0.32) 118
2005 -- -- 11.71 22.62 24,087 0.89 (0.33) 87
2006(a) -- -- 12.00 2.48(1) 21,392 0.86(2) (0.30)(2) 36(1)
CLASS Y SHARES
2001 -- -- 9.75 (36.56) 11,410 1.05 (0.88) 16
2002 -- -- 5.46 (44.00) 6,537 1.15 (0.96) 103
2003 -- -- 7.72 41.39 11,302 1.12 (0.82) 184
2004 -- -- 9.45 22.41 13,980 1.15 (0.57) 118
2005 -- -- 11.55 22.22 15,897 1.14 (0.58) 87
2006(a) -- -- 11.82 2.34(1) 16,328 1.11(2) (0.55)(2) 36(1)
GLOBAL EQUITY
CLASS X SHARES
2001 (1.52) (1.63) 12.79 (17.22) 118,747 1.07 0.29 89
2002 -- (0.01) 10.56 (17.37) 75,611 1.08 0.35 44
2003 -- (0.05) 14.17 34.71 83,607 1.08 0.35 72
2004 -- (0.03) 15.29 8.17 73,290 1.11 0.64 48
2005 -- (0.11) 16.80 10.64 64,377 1.12 0.83 75
2006(a) (1.31) (1.45) 16.35 5.91(1) 59,917 1.09(2) 0.82(2) 35(1)
CLASS Y SHARES
2001 (1.52) (1.62) 12.75 (17.38) 3,825 1.32 0.04 89
2002 -- -- 10.50 (17.57) 3,951 1.33 0.10 44
2003 -- (0.02) 14.09 34.33 7,593 1.33 0.10 72
2004 -- (0.01) 15.19 7.89 8,399 1.36 0.39 48
2005 -- (0.07) 16.68 10.32 8,975 1.37 0.58 75
2006(a) (1.31) (1.41) 16.24 5.78(1) 9,690 1.34(2) 0.57(2) 35(1)
</Table>
127
<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
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 20.01 (0.03) 3.78 3.75 --
2006 (a) 23.76 0.08 0.91 0.99 --
CLASS Y SHARES
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 19.79 (0.08) 3.72 3.64 --
2006 (a) 23.43 0.05 0.90 0.95 --
</Table>
- ----------
(a) FOR THE SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED).
* THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
++ DISTRIBUTION FROM PAID-IN CAPITAL.
SEE NOTES TO FINANCIAL STATEMENTS
128
<Page>
<Table>
<Caption>
RATIOS TO AVERAGE
NET ASSETS**
TOTAL NET ASSET NET ASSETS ------------------------
FOR THE YEAR DISTRIBUTIONS DIVIDENDS VALUE END OF NET PORTFOLIO
ENDED TO AND END OF TOTAL PERIOD INVESTMENT TURNOVER
DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS PERIOD RETURN+ (000'S) EXPENSES INCOME (LOSS) RATE
- ----------------- ------------- ------------- --------- ------- ---------- -------- ------------- ---------
DEVELOPING GROWTH
CLASS X SHARES
2001 $(3.44) $(3.66) $16.01 (25.49)% $85,513 0.59% (0.05)% 196%
2002 -- -- 11.57 (27.73) 45,892 0.61 (0.26) 251
2003 -- -- 16.36 41.40 53,996 0.62 (0.20) 193
2004 -- -- 20.01 22.31 52,359 0.64 (0.19) 135
2005 -- -- 23.76 18.69 49,116 0.63 (0.15) 102
2006 (a) -- -- 24.75 4.21(1) 45,117 0.60(2) 0.68(2) 36(1)
CLASS Y SHARES
2001 (3.44) (3.65) 15.95 (25.67) 2,973 0.84 (0.30) 196
2002 -- -- 11.49 (27.96) 2,602 0.86 (0.51) 251
2003 -- -- 16.22 41.17 6,798 0.87 (0.45) 193
2004 -- -- 19.79 21.95 8,943 0.89 (0.44) 135
2005 -- -- 23.43 18.40 10,704 0.88 (0.40) 102
2006 (a) -- -- 24.38 4.10(1) 11,418 0.85(2) 0.43(2) 36(1)
</Table>
- ----------
** 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.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
129
w<Page>
Trustees
Michael Bozic Dr. Manuel H. Johnson
Charles A. Fiumefreddo Joseph J. Kearns
Edwin J. Garn Michael E. Nugent
Wayne E. Hedien Fergus Reid
James F. Higgins
Officers
Michael E. Nugent
CHAIRMAN OF THE BOARD
Ronald E. Robison
PRESIDENT AND PRINCIPAL EXECUTIVE OFFICER
J. David Germany
VICE PRESIDENT
Dennis F. Shea
VICE PRESIDENT
Barry Fink
VICE PRESIDENT
Amy R. Doberman
VICE PRESIDENT
Carsten Otto
CHIEF COMPLIANCE OFFICER
Stefanie V. Chang Yu
VICE PRESIDENT
Francis J. Smith
TREASURER AND CHIEF FINANCIAL OFFICER
Mary E. Mullin
SECRETARY
Independent Registered Public Accounting
Transfer Agent Firm
Morgan Stanley Trust Deloitte & Touche LLP
Harborside Financial Center, Plaza Two Two World Financial Center
Jersey City, New Jersey 07311 New York, New York 10281
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>
RA06-00730P-Y06/06
#40474
<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 second fiscal quarter of the period covered
by this 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.
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Morgan Stanley Select Dimensions Investment Series
/s/ Ronald E. Robison
- ---------------------------------
Ronald E. Robison
Principal Executive Officer
August 10, 2006
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 10, 2006
/s/ Francis Smith
- ---------------------------------
Francis Smith
Principal Financial Officer
August 10, 2006