<Page>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-21248
Morgan Stanley Allocator Fund
(Exact name of registrant as specified in charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip code)
Ronald E. Robison
1221 Avenue of the Americas, New York, New York 10020
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-762-4000
Date of fiscal year end: January 31, 2007
Date of reporting period: July 31, 2006
Item 1 - Report to Shareholders
<Page>
Welcome, Shareholder:
In this report, you'll learn about how your investment in Morgan Stanley
Allocator Fund performed during the semiannual period. We will provide an
overview of the market conditions, and discuss some of the factors that affected
performance during the reporting period. In addition, this report includes the
Fund's financial statements and a list of Fund investments.
THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS FOR THE FUND BEING
OFFERED.
MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE
IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. THE FUND IS
SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT MARKET VALUES OF
SECURITIES OWNED BY THE FUND WILL DECLINE AND, THEREFORE, THE VALUE OF THE
FUND'S SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE
MONEY INVESTING IN THIS FUND. PLEASE SEE THE PROSPECTUS FOR MORE COMPLETE
INFORMATION ON INVESTMENT RISKS.
<Page>
FUND REPORT
FOR THE SIX MONTHS ENDED JULY 31, 2006
TOTAL RETURN FOR THE 6 MONTHS ENDED JULY 31, 2006
<Table>
<Caption>
LEHMAN LIPPER
BROTHERS U.S. FLEXIBLE
S&P 500(R) AGGREGATE PORTFOLIO
CLASS A CLASS B CLASS C CLASS D INDEX(1) INDEX(2) FUNDS INDEX(3)
-0.66% -1.03% -0.94% -0.48% 0.67% 0.61% 0.18%
</Table>
THE PERFORMANCE OF THE FUND'S FOUR SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE FUND'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL
DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY APPLICABLE SALES CHARGES.
SUCH COSTS WOULD LOWER PERFORMANCE. SEE PERFORMANCE SUMMARY FOR STANDARDIZED
PERFORMANCE AND BENCHMARK INFORMATION.
MARKET CONDITIONS
Equity market returns were relatively volatile during the six-month reporting
period, retreating in the second quarter of 2006 as concerns over inflation and
rising rates weighed heavily on investors. As the Federal Open Market Committee
(the "Fed') hinted at further rate increases on the horizon, domestic equity
markets began to retreat in the second week of May, and remained in negative
territory through the close of the period. Although the S&P 500(R) Index reached
a cyclical high in May, stocks barely managed positive returns for the six-month
period ended July 31, 2006. Including dividends, the equity benchmark index
returned 0.67 percent. After a long period of outperformance, small- and mid-cap
stocks lagged large-cap stocks over the period. Value-oriented stocks
outperformed growth-oriented stocks across all market-cap segments of the
market.
The sharp equity correction that began in the second week of May helped support
the performance of defensive sectors for the period. Telecommunication services,
consumer staples and utilities posted positive returns across all market caps.
The telecommunications sector, in particular, posted impressive double-digit
returns across both the large- and mid-cap segments. In contrast, information
technology stocks struggled during the period, with semiconductors among the
most lagging industries. A slowing housing market and rising interest rates
exerted pressure on U.S. homebuilders over the six-month period. Concerns over a
supply glut in housing stocks and declining demand for new and existing homes
weighed heavily on the group.
PERFORMANCE ANALYSIS
Morgan Stanley Allocator Fund underperformed the S&P 500(R) Index, the Lehman
Brothers U.S. Aggregate Index and the Lipper Flexible Portfolio Funds Index for
the six months ended July 31, 2006, assuming no deduction of applicable sales
charges.
Over the entire period, on average, the Fund held approximately 80 percent of
its assets in stocks and other equity securities and the remainder in fixed
income, convertible securities and cash. While the Fund's emphasis on stocks
proved beneficial as stocks outperformed bonds, sector allocation within the
Fund's equity portion hindered overall performance.
Compared to consensus expectations, management believed that, in general, both
U.S. and global growth would remain durable, inflation pressures would continue
to build, and therefore, interest rates would be higher.
2
<Page>
Until a material turn in the data, however, the portfolio management team
expected cyclical sectors to outperform. As such, in January 2006, the Fund
reduced its holdings in the more defensive names within the consumer staples
sector and increased its weighting in the more cyclical materials sector. This
reallocation at the start of the year served the Fund well, as consumer staples
underperformed and materials outperformed the broader market during the first
half of the period under review.
Throughout the first half of the period, the Fund's largest sector overweight
was in the technology sector, with a focus on semiconductors. Despite the
support from economic fundamentals, the semiconductor industry underperformed
the broad market and the Fund's allocation to this industry group was a drag on
performance. The Fund neutralized the position in the second half of the period
and rotated into defensive sectors in anticipation of an increase in volatility
and a correction in stock prices.
With the Fed continuing to raise interest rates throughout the period, the Fund
reduced its exposure to interest rate sensitive sectors, particularly those
exposed to a softening housing market. This positioning resulted in a
significant underweight in the banking sector -- specifically those companies
with greater exposure to the mortgage lending business. The Fund benefited from
this position as the thrifts and mortgage sector underperformed the broad
market.
THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM AS
DISCUSSED HEREIN OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE FUND IN
THE FUTURE.
TOP 10 HOLDINGS
U.S. Treasury Bonds/Notes 4.5%
iShares Lehman 1-3 Year Treasury Bond Fund 4.3
Exxon Mobil Corp. 2.9
General Electric Co. 2.5
Citigroup, Inc. 2.1
Altria Group, Inc. 1.8
Proctor & Gamble Co. (The) 1.7
JPMorgan Chase & Co. 1.3
Pfizer, Inc. 1.3
Johnson & Johnson 1.3
PORTFOLIO COMPOSITION*
Common Stocks 75.3%
Short-Term Paper 15.5
Other Securities 1.2
U.S. Government Agencies & Obligations 5.2
Convertible Corp Nt/Bd 1.6
Corporate Notes/Bonds 1.2
* DOES NOT INCLUDE OPEN LONG FUTURES WITH AN UNDERLYING FACE AMOUNT OF
$4,771,406 AND OPEN SHORT FUTURES WITH AN UNDERLYING FACE AMOUNT OF
$4,399,282 WITH NET UNREALIZED APPRECIATION OF $2,268.
DATA AS OF JULY 31, 2006. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR TOP 10
HOLDINGS ARE AS A PERCENTAGE OF NET ASSETS AND ALL PERCENTAGES FOR PORTFOLIO
COMPOSITION ARE AS A PERCENTAGE OF TOTAL INVESTMENTS. THESE DATA ARE PROVIDED
FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED A RECOMMENDATION TO BUY
OR SELL THE SECURITIES MENTIONED. MORGAN STANLEY IS A FULL-SERVICE SECURITIES
FIRM ENGAGED IN SECURITIES TRADING AND BROKERAGE ACTIVITIES, INVESTMENT BANKING,
RESEARCH AND ANALYSIS, FINANCING AND FINANCIAL ADVISORY SERVICES.
3
<Page>
INVESTMENT STRATEGY
THE FUND'S "INVESTMENT ADVISER," MORGAN STANLEY INVESTMENT ADVISORS INC.,
ACTIVELY ALLOCATES THE FUND'S ASSETS AMONG THE THREE MAJOR ASSET CATEGORIES OF
EQUITY SECURITIES (INCLUDING DEPOSITARY RECEIPTS), FIXED-INCOME SECURITIES AND
MONEY MARKET INSTRUMENTS, THE COMBINATION OF WHICH WILL BE VARIED FROM TIME TO
TIME BOTH WITH RESPECT TO INDUSTRY SECTOR WEIGHTINGS AND TYPES OF SECURITIES IN
RESPONSE TO CHANGING MARKET AND ECONOMIC TRENDS. THERE IS NO LIMIT AS TO THE
PERCENTAGE OF ASSETS THAT MAY BE ALLOCATED TO ANY ONE ASSET CLASS. THE FUND MAY
INVEST 100 PERCENT OF ITS ASSETS IN ANY ONE OF THE THREE MAJOR ASSET CATEGORIES
MENTIONED ABOVE AT ANY TIME. IT IS ANTICIPATED THAT THERE WILL BE SIGNIFICANT
FLUCTUATIONS IN THE ALLOCATIONS OVER TIME AND THUS, THE FUND MAY EXHIBIT HIGHER
VOLATILITY THAN OTHER FUNDS.
FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS
EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN
ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND
AND FOURTH FISCAL QUARTERS. 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.
PROXY VOTING POLICY AND PROCEDURES AND PROXY VOTING RECORD
YOU MAY OBTAIN A COPY OF THE FUND'S 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 FUND 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.
HOUSEHOLDING NOTICE
TO REDUCE PRINTING AND MAILING COSTS, THE FUND ATTEMPTS TO ELIMINATE DUPLICATE
MAILINGS TO THE SAME ADDRESS. THE FUND DELIVERS A SINGLE COPY OF CERTAIN
SHAREHOLDER DOCUMENTS, INCLUDING SHAREHOLDER REPORTS, PROSPECTUSES AND PROXY
MATERIALS, TO INVESTORS WITH THE SAME LAST NAME WHO RESIDE AT THE SAME ADDRESS.
YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME
UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE
DOCUMENTS BY CALLING (800) 350-6414, 8:00 A.M. TO 8:00 P.M., ET. ONCE OUR
CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING
INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS.
4
<Page>
PERFORMANCE SUMMARY
AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED JULY 31, 2006
<Table>
<Caption>
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS D SHARES@@
SINCE 02/26/03) (SINCE 02/26/03) (SINCE 02/26/03) (SINCE 02/26/03)
SYMBOL ALRAX ALRBX ALRCX ALRDX
- --------------- --------------- ---------------- ---------------- -----------------
1 YEAR 4.07%(4) 3.28%(4) 3.28%(4) 4.33%(4)
(1.39)(5) (1.72)(5) 2.28 --
SINCE INCEPTION 8.37(4) 7.56(4) 7.57(4) 8.65(4)
6.68(5) 7.07(5) 7.57(5) --
</Table>
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF
FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES
SHOWN. FOR 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 FUND SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. THE TABLE DOES NOT REFLECT THE DEDUCTION
OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF
FUND SHARES. PERFORMANCE FOR CLASS A, CLASS B, CLASS C, AND CLASS D SHARES WILL
VARY DUE TO DIFFERENCES IN SALES CHARGES AND EXPENSES.
* THE MAXIMUM FRONT-END SALES CHARGE FOR CLASS A IS 5.25%.
** THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B IS 5.0%.
THE CDSC DECLINES TO 0% AFTER SIX YEARS.
+ THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE FOR CLASS C IS 1.0% FOR SHARES
REDEEMED WITHIN ONE YEAR OF PURCHASE.
@@ CLASS D HAS NO SALES CHARGE.
(1) THE STANDARD & POOR'S 500 INDEX (S&P 500(R)) IS A BROAD-BASED INDEX, THE
PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 500 WIDELY-HELD COMMON
STOCKS CHOSEN FOR MARKET SIZE, LIQUIDITY AND INDUSTRY GROUP REPRESENTATION.
INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR
FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST
DIRECTLY IN AN INDEX.
(2) THE LEHMAN BROTHERS U.S. AGGREGATE INDEX TRACKS THE PERFORMANCE OF U.S.
GOVERNMENT AGENCY AND TREASURY SECURITIES, INVESTMENT-GRADE CORPORATE DEBT
SECURITIES, AGENCY MORTGAGE-BACKED SECURITIES, ASSET-BACKED SECURITIES AND
COMMERCIAL MORTGAGE-BASED SECURITIES. INDEXES ARE UNMANAGED AND THEIR
RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER
PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
(3) THE LIPPER FLEXIBLE PORTFOLIO FUNDS INDEX IS AN EQUALLY WEIGHTED
PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN
THE LIPPER FLEXIBLE PORTFOLIO FUNDS CLASSIFICATION. THE INDEX, WHICH IS
ADJUSTED FOR CAPITAL GAINS DISTRIBUTIONS AND INCOME DIVIDENDS, IS UNMANAGED
AND SHOULD NOT BE CONSIDERED AN INVESTMENT. THERE ARE CURRENTLY 30 FUNDS
REPRESENTED IN THIS INDEX.
(4) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT
THE DEDUCTION OF ANY SALES CHARGES.
(5) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND THE DEDUCTION OF
THE MAXIMUM APPLICABLE SALES CHARGE. SEE THE FUND'S CURRENT PROSPECTUS FOR
COMPLETE DETAILS ON FEES AND SALES CHARGES.
5
<Page>
EXPENSE EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments and redemption fees;
and (2) ongoing costs, including advisory fees; distribution and service (12b-1)
fees; and other Fund expenses. This example is intended to help you understand
your ongoing costs (in dollars) of investing in the Fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period 02/01/06 - 07/31/06.
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 transactional costs, such as sales
charges (loads) and redemption fees. 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 transactional costs
were included, your costs would have been higher.
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
02/01/06 -
02/01/06 07/31/06 07/31/06
------------- ------------- ---------------
CLASS A
Actual (-0.66% return) $1,000.00 $ 993.40 $ 6.87
Hypothetical (5% annual return before expenses) $1,000.00 $1,017.90 $ 6.95
CLASS B
Actual (-1.03% return) $1,000.00 $ 989.70 $10.56
Hypothetical (5% annual return before expenses) $1,000.00 $1,014.18 $10.69
CLASS C
Actual (-0.94% return) $1,000.00 $ 990.60 $10.22
Hypothetical (5% annual return before expenses) $1,000.00 $1,014.53 $10.34
CLASS D
Actual (-0.48% return) $1,000.00 $ 995.20 $ 5.64
Hypothetical (5% annual return before expenses) $1,000.00 $1,019.14 $ 5.71
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIOS OF 1.39%, 2.14%,
2.07% AND 1.14% FOR CLASS A, CLASS B, CLASS C AND CLASS D SHARES,
RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD,
MULTIPLIED BY 181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD).
6
<Page>
INVESTMENT ADVISORY AGREEMENT APPROVAL
NATURE, EXTENT AND QUALITY OF SERVICES
The Board reviewed and considered the nature and extent of the investment
advisory services provided by the Investment Adviser under the Advisory
Agreement, including portfolio management, investment research and equity and
fixed income securities trading. The Board also reviewed and considered the
nature and extent of the non-advisory, administrative services provided by the
Fund's Administrator under the Administration Agreement, including accounting,
clerical, bookkeeping, compliance, business management and planning, and the
provision of supplies, office space and utilities at the 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 Fund. The Board
determined that the Adviser's portfolio managers and key personnel are well
qualified by education and/or training and experience to perform the services in
an efficient and professional manner. The Board concluded that the nature and
extent of the advisory and administrative services provided were necessary and
appropriate for the conduct of the business and investment activities of the
Fund. 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 Fund, compared to their peers, paying
specific attention to the underperforming funds. In addition, the Board
specifically reviewed the Fund's performance for the one-year period ended
November 30, 2005 and for the period February 28, 2003 to November 30, 2005, as
shown in a report provided by Lipper (the "Lipper Report"), compared to the
performance of comparable funds selected by Lipper (the "performance peer
group"). The Board also discussed with the Adviser the performance goals and the
actual results achieved in managing the Fund. 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. The Board concluded that the Fund 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 Fund's investment strategy and/or investment personnel.
FEES RELATIVE TO OTHER PROPRIETARY FUNDS MANAGED BY THE ADVISER WITH COMPARABLE
INVESTMENT STRATEGIES
The Board noted that the Adviser did not manage any other proprietary funds with
investment strategies comparable to those of the Fund.
7
<Page>
FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the advisory and administrative fee (together, the
"management fee") rate and total expense ratio of the Fund 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 Fund, as shown in the Lipper Report. The
Board concluded that the Fund'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 the Fund's management fee schedule under the
Management Agreement and noted that it does not include any breakpoints. The
Board considered that the Fund's 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.
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 the Fund 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 Fund.
FALL-OUT BENEFITS
The Board considered so-called "fall-out benefits" derived by the Adviser and
affiliates from their relationship with the Fund and the Morgan Stanley Fund
Complex, such as sales charges on sales of Class A shares and "float" benefits
derived from handling of checks for purchases and sales of Fund shares, through
a broker-dealer affiliate of the Adviser and "soft dollar" benefits (discussed
in the next section). The Board also considered that a broker-dealer affiliate
of the Adviser receives from the Fund 12b-1 fees for distribution and
shareholder services. 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 Fund. 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 float benefits were relatively small, the sales charges and
12b-1 fees were competitive with those of other broker-dealers, the affiliate
disgorged revenues in connection with the ECN-related revenue and the potential
fall-out benefit from increased order flow was relatively small.
8
<Page>
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 Fund 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 Fund. The Adviser
informed the Board that it does not use Fund 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 Fund and other funds in the Morgan Stanley Fund
Complex.
ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE FUND'S NEEDS
The Board considered whether the Adviser is financially sound and has the
resources necessary to perform its obligations under the Management Agreement.
The Board noted that the Adviser's operations remain profitable, although
increased expenses in recent years have reduced the Adviser's profitability. The
Board concluded that the Adviser has the financial resources necessary to
fulfill its obligations under the Management Agreement.
HISTORICAL RELATIONSHIP BETWEEN THE FUND AND THE ADVISER
The Board also reviewed and considered the historical relationship between the
Fund and the Adviser, including the organizational structure of the Adviser, the
policies and procedures formulated and adopted by the Adviser for managing the
Fund's operations and the Board's confidence in the competence and integrity of
the senior managers and key personnel of the Adviser. The Board concluded that
it is beneficial for the Fund 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 the Fund'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 the Fund and its shareholders to
approve renewal of the Management Agreement for another year.
9
<Page>
MORGAN STANLEY ALLOCATOR FUND
PORTFOLIO OF INVESTMENTS - JULY 31, 2006 (UNAUDITED)
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
Common Stocks (75.5%)
AEROSPACE & DEFENSE (1.4%)
5,261 Boeing Co. $ 407,307
2,648 General Dynamics Corp. 177,469
818 Goodrich Corp. 33,023
801 L-3 Communications Holdings, Inc. 58,994
2,403 Lockheed Martin Corp. 191,471
2,332 Northrop Grumman Corp. 154,355
2,964 Raytheon Co. 133,587
1,152 Rockwell Collins, Inc. 61,482
----------
1,217,688
----------
AGRICULTURAL COMMODITIES/MILLING (1.7%)
9,571 Archer-Daniels-Midland Co. 421,124
18,972 Cermaq ASA (Norway) 264,804
91,900 Fjord Seafood ASA (Norway)* 124,989
2,662 MGP Ingredients, Inc. 61,306
532,518 Pan Fish ASA (Norway)* 588,566
----------
1,460,789
----------
AIR FREIGHT/COURIERS (0.8%)
2,092 FedEx Corp. 219,053
7,606 United Parcel Service, Inc. (Class B) 524,129
----------
743,182
----------
AIRLINES (1.0%)
6,682 Alaska Air Group, Inc.* 248,103
12,075 Delta Air Lines, Inc.* 8,453
52,452 Flyi Inc.* 525
14,000 Frontier Airlines Holdings, Inc.* 90,720
6,863 JetBlue Airways Corp.* 73,365
17,629 Mesa Air Group, Inc.* 149,141
7,219 SkyWest, Inc. 175,061
9,133 Southwest Airlines Co. 164,303
----------
909,671
----------
ALUMINUM (0.4%)
12,943 Alcoa, Inc. 387,643
----------
APPAREL/FOOTWEAR (0.5%)
4,163 Coach, Inc.* 119,520
1,286 Jones Apparel Group, Inc. 38,066
1,172 Liz Claiborne, Inc. 41,430
SEE NOTES TO FINANCIAL STATEMENTS
10
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
2,081 NIKE, Inc. (Class B) $164,399
976 V.F. Corp. 66,192
--------
429,607
--------
AUTO PARTS: O.E.M. (0.1%)
803 Eaton Corp. 51,472
--------
BEVERAGES: ALCOHOLIC (1.0%)
11,195 Anheuser-Busch Companies, Inc. 539,039
116 Boston Beer Company, Inc. (The) (Class A)* 3,416
112 Brown-Forman Corp. (Class A) 8,280
1,209 Brown-Forman Corp. (Class B) 88,801
121 Compania Cervecerias Unidas S.A. (ADR) (Chile) 2,758
2,893 Constellation Brands Inc. (Class A)* 70,763
505 Diageo PLC (United Kingdom) 8,876
1,862 Foster's Group Ltd. (Australia) 7,672
207 Heineken NV (Netherlands) 9,723
882 Molson Coors Brewing Co. (Class B) 63,019
43 Pernod-Ricard SA (France) 8,943
9 Pyramid Breweries Inc.* 21
100 Redhook Ale Brewery, Inc.* 387
5,640 SABMiller PLC (United Kingdom) 113,251
--------
924,949
--------
BEVERAGES: NON-ALCOHOLIC (0.6%)
11,432 Coca-Cola Co. (The) 508,724
1,689 Coca-Cola Enterprises Inc. 36,246
755 Pepsi Bottling Group, Inc. (The) 25,104
--------
570,074
--------
BIOTECHNOLOGY (1.6%)
814 Affymetrix, Inc.* 17,558
4,965 Biogen Idec Inc.* 209,126
951 Cephalon, Inc.* 62,519
556 Charles River Laboratories International, Inc.* 19,738
2,111 Enzo Biochem, Inc.* 27,211
3,627 Genzyme Corp.* 247,652
6,467 Gilead Sciences, Inc.* 397,591
390 Invitrogen Corp.* 24,098
1,847 Martek Biosciences Corp.* 51,587
3,760 MedImmune, Inc.* 95,429
5,936 Millennium Pharmaceuticals, Inc.* 58,292
SEE NOTES TO FINANCIAL STATEMENTS
11
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
172 Millipore Corp.* $ 10,776
1,830 PDL BioPharma Inc.* 32,958
3,848 Regeneron Pharmaceuticals, Inc.* 52,564
471 Techne Corp.* 23,404
1,662 Vertex Pharmaceuticals Inc.* 55,710
----------
1,386,213
----------
BUILDING PRODUCTS (0.1%)
986 American Standard Companies, Inc. 38,089
2,247 Masco Corp. 60,062
----------
98,151
----------
CASINO/GAMING (0.2%)
1,227 Harrah's Entertainment, Inc. 73,755
2,255 International Game Technology 87,178
----------
160,933
----------
CHEMICALS: SPECIALTY (0.2%)
1,443 Aventine Renewable Energy Holdings, Inc.* 42,713
1,395 Cambrex Corp. 29,727
2,271 VeraSun Energy Corp.* 55,640
5,242 Xethanol Corp.* 39,630
----------
167,710
----------
COAL (0.1%)
1,170 CONSOL Energy, Inc. 48,157
----------
COMMERCIAL PRINTING/FORMS (0.1%)
1,493 Donnelley (R.R.) & Sons Co. 43,581
----------
COMPUTER COMMUNICATIONS (0.0%)
193 QLogic Corp.* 3,376
----------
COMPUTER PERIPHERALS (0.1%)
2,614 EMC Corp.* 26,532
129 Lexmark International, Inc. (Class A)* 6,972
426 Network Appliance, Inc.* 12,648
----------
46,152
----------
COMPUTER PROCESSING HARDWARE (0.3%)
947 Apple Computer, Inc.* 64,358
2,718 Dell Inc.* 58,926
335 Gateway, Inc.* 536
3,179 Hewlett-Packard Co. 101,442
SEE NOTES TO FINANCIAL STATEMENTS
12
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
217 NCR Corp.* $ 6,974
3,878 Sun Microsystems, Inc.* 16,869
----------
249,105
----------
CONTAINERS/PACKAGING (0.3%)
1,590 Ball Corp. 60,897
1,601 Bemis Company, Inc. 49,151
2,127 Pactiv Corp.* 52,133
1,244 Sealed Air Corp. 58,767
1,678 Temple-Inland Inc. 71,382
----------
292,330
----------
CONTRACT DRILLING (0.3%)
1,852 Nabors Industries, Ltd. (Bermuda)* 65,413
839 Noble Corp. (Cayman Islands) 60,198
664 Rowan Companies, Inc. 22,490
1,978 Transocean Inc. (Cayman Islands)* 152,761
----------
300,862
----------
DATA PROCESSING SERVICES (0.1%)
141 Affiliated Computer Services, Inc. (Class A)* 7,181
633 Automatic Data Processing, Inc. 27,700
224 Computer Sciences Corp.* 11,735
168 Convergys Corp.* 3,205
847 First Data Corp. 34,600
220 Fiserv, Inc.* 9,605
373 Paychex, Inc. 12,749
----------
106,775
----------
DISCOUNT STORES (1.2%)
3,693 Costco Wholesale Corp. 194,843
20,213 Wal-Mart Stores, Inc. 899,479
----------
1,094,322
----------
DRUGSTORE CHAINS (1.7%)
10,689 CVS Corp. 349,744
6,200 Longs Drug Stores Corp. 254,944
61,855 Rite Aid Corp.* 261,028
13,212 Walgreen Co. 618,057
----------
1,483,773
----------
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
ELECTRIC UTILITIES (2.6%)
4,080 AES Corp. (The)* $ 81,029
1,028 Allegheny Energy, Inc.* 42,199
1,278 Ameren Corp. 65,817
2,479 American Electric Power Co., Inc. 89,541
2,026 CenterPoint Energy, Inc. 27,837
1,375 CMS Energy Corp.* 19,264
1,560 Consolidated Edison, Inc. 73,117
1,116 Constellation Energy Group 64,628
2,161 Dominion Resources, Inc. 169,595
1,110 DTE Energy Co. 46,975
7,585 Duke Energy Corp. 229,977
2,082 Edison International 86,153
1,262 Entergy Corp. 97,300
4,183 Exelon Corp. 242,196
2,059 FirstEnergy Corp. 115,304
2,537 FPL Group, Inc. 109,446
2,171 PG&E Corp. 90,487
605 Pinnacle West Capital Corp. 26,021
2,373 PPL Corp. 80,729
1,543 Progress Energy, Inc. 67,198
1,487 Public Service Enterprise Group 100,268
4,713 Southern Co. (The) 159,205
1,286 TECO Energy, Inc. 20,499
2,802 TXU Corp. 179,972
2,524 Xcel Energy, Inc. 50,581
----------
2,335,338
----------
ELECTRICAL PRODUCTS (0.4%)
1,159 American Power Conversion Corp. 19,564
615 Cooper Industries Ltd. (Class A) (Bermuda) 52,988
2,725 Emerson Electric Co. 215,057
721 Molex Inc. 22,870
----------
310,479
----------
ELECTRONIC COMPONENTS (0.1%)
904 Jabil Circuit, Inc. 20,882
222 SanDisk Corp.* 10,359
3,106 Sanmina-SCI Corp.* 10,747
4,767 Solectron Corp.* 14,396
----------
56,384
----------
SEE NOTES TO FINANCIAL STATEMENTS
14
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT/INSTRUMENTS (0.2%)
2,183 Agilent Technologies, Inc.* $ 62,084
1,175 Rockwell Automation, Inc. 72,827
1,409 Symbol Technologies, Inc. 15,569
450 Tektronix, Inc. 12,272
504 Thermo Electron Corp.* 18,653
1,046 Xerox Corp.* 14,738
----------
196,143
----------
ELECTRONIC PRODUCTION EQUIPMENT (0.3%)
11,867 Applied Materials, Inc. 186,787
1,477 KLA-Tencor Corp. 62,315
1,001 Novellus Systems, Inc.* 25,335
1,522 Teradyne, Inc.* 19,999
----------
294,436
----------
ELECTRONICS/APPLIANCES (0.1%)
3,134 Eastman Kodak Co. 69,732
403 Harman International Industries, Inc. 32,321
----------
102,053
----------
ENERGY (0.5%)
24,000 Powershares Wilderhill Clean Energy Portfolio 421,440
----------
ENGINEERING & CONSTRUCTION (0.1%)
2,396 Abengoa S. A. (Spain) 56,224
551 Fluor Corp. 48,394
----------
104,618
----------
ENVIRONMENTAL SERVICES (0.2%)
1,545 Allied Waste Industries, Inc.* 15,697
591 Republic Services, Inc. 23,735
661 Waste Connections, Inc.* 24,708
3,773 Waste Management, Inc. 129,716
----------
193,856
----------
FINANCE/RENTAL/LEASING (0.1%)
1,497 CIT Group, Inc. 68,727
443 Ryder System, Inc. 22,327
----------
91,054
----------
FINANCIAL CONGLOMERATES (3.8%)
38,353 Citigroup, Inc. 1,852,833
26,059 JPMorgan Chase & Co. 1,188,812
SEE NOTES TO FINANCIAL STATEMENTS
15
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
1,577 Principal Financial Group, Inc. $ 85,158
2,788 Prudential Financial, Inc. 219,248
----------
3,346,051
----------
FINANCIAL PUBLISHING/SERVICES (0.2%)
888 Equifax, Inc. 28,665
1,875 Moody's Corp. 102,900
----------
131,565
----------
FOOD DISTRIBUTORS (0.2%)
4,987 Sysco Corp. 137,641
----------
FOOD RETAIL (0.4%)
5,507 Kroger Co. (The) 126,276
3,531 Safeway Inc. 99,150
1,665 SUPERVALU, Inc. 45,138
1,111 Whole Foods Market, Inc. 63,894
----------
334,458
----------
FOOD: MAJOR DIVERSIFIED (1.3%)
1,451 Campbell Soup Co. 53,223
4,044 ConAgra Foods, Inc. 86,946
2,796 General Mills, Inc. 145,112
2,612 Heinz (H.J.) Co. 109,626
1,900 Kellogg Co. 91,523
9,269 PepsiCo, Inc. 587,469
6,032 Sara Lee Corp. 101,941
----------
1,175,840
----------
FOOD: MEAT/FISH/DAIRY (0.1%)
1,069 Dean Foods Co.* 40,120
1,780 Leroy Seafood Group ASA (Norway) 36,256
----------
76,376
----------
FOOD: SPECIALTY/CANDY (0.3%)
960 Cosan SA Industria e Comercio (Brazil)* 62,067
1,381 Hershey Co. (The) 75,914
1,048 McCormick & Co., Inc. (Non-Voting) 36,743
1,739 Wrigley (Wm.) Jr. Co. 79,751
----------
254,475
----------
FOREST PRODUCTS (0.3%)
1,634 Louisiana-Pacific Corp. 32,680
3,733 Weyerhaeuser Co. 218,978
----------
251,658
----------
SEE NOTES TO FINANCIAL STATEMENTS
16
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
GAS DISTRIBUTORS (0.2%)
2,793 Dynegy, Inc. (Class A)* $ 15,725
1,108 KeySpan Corp. 44,619
266 Nicor Inc. 11,656
1,659 NiSource, Inc. 37,742
243 Peoples Energy Corp. 10,257
1,624 Sempra Energy 78,374
----------
198,373
----------
HOSPITAL/NURSING MANAGEMENT (0.1%)
1,240 HCA, Inc. 60,958
751 Health Management Associates, Inc. (Class A) 15,268
261 Manor Care, Inc. 13,063
1,540 Tenet Healthcare Corp.* 9,117
----------
98,406
----------
HOTELS/RESORTS/CRUISELINES (0.5%)
2,899 Carnival Corp. (Panama) 112,945
2,169 Hilton Hotels Corp. 51,904
2,177 Marriott International, Inc. (Class A) 76,587
3,132 Starwood Hotels & Resorts Worldwide, Inc. 164,681
----------
406,117
----------
HOUSEHOLD/PERSONAL CARE (2.5%)
623 Alberto-Culver Co. 30,365
3,658 Avon Products, Inc. 106,045
1,238 Clorox Co. (The) 74,206
4,178 Colgate-Palmolive Co. 247,839
981 Estee Lauder Companies, Inc. (The) (Class A) 36,611
3,745 Kimberly-Clark Corp. 228,632
26,387 Procter & Gamble Co. (The) 1,482,949
----------
2,206,647
----------
INDUSTRIAL CONGLOMERATES (4.3%)
4,930 3M Co. 347,072
1,299 Danaher Corp. 84,695
67,835 General Electric Co.+ 2,217,526
5,499 Honeywell International, Inc. 212,811
1,783 Ingersoll-Rand Co. Ltd. (Class A) (Bermuda) 63,831
991 ITT Corp. 50,095
853 Textron, Inc. 76,693
SEE NOTES TO FINANCIAL STATEMENTS
17
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
13,249 Tyco International Ltd. (Bermuda) $ 345,666
6,697 United Technologies Corp. 416,486
----------
3,814,875
----------
INDUSTRIAL MACHINERY (0.1%)
1,234 Illinois Tool Works Inc. 56,431
642 Parker Hannifin Corp. 46,378
----------
102,809
----------
INFORMATION TECHNOLOGY SERVICES (0.2%)
216 Citrix Systems, Inc.* 6,862
614 Electronic Data Systems Corp. 14,675
1,716 International Business Machines Corp. 132,836
407 Unisys Corp.* 2,084
----------
156,457
----------
INSURANCE BROKERS/SERVICES (0.2%)
1,835 AON Corp. 62,812
3,050 Marsh & McLennan Companies, Inc. 82,442
----------
145,254
----------
INTEGRATED OIL (4.8%)
13,026 Chevron Corp. 856,850
9,763 ConocoPhillips 670,132
37,586 Exxon Mobil Corp. 2,546,076
1,401 Hess Corp. 74,113
1,042 Murphy Oil Corp. 53,621
----------
4,200,792
----------
INTERNET SOFTWARE/SERVICES (0.1%)
164 Google, Inc. (Class A)* 63,402
318 VeriSign, Inc.* 5,702
1,469 Yahoo!, Inc.* 39,869
----------
108,973
----------
INVESTMENT BANKS/BROKERS (0.5%)
635 CBOT Holdings, Inc. (Class A)* 79,565
292 Chicago Mercantile Exchange Holdings, Inc. 134,670
1,663 International Securities Exchange Holdings, Inc. 67,667
2,200 Nasdaq Stock Market Inc.* 60,566
1,024 NYSE Group Inc.* 63,683
----------
406,151
----------
SEE NOTES TO FINANCIAL STATEMENTS
18
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
INVESTMENT TRUSTS/MUTUAL FUNDS (5.4%)
46,905 iShares Lehman 1-3 Year Treasury Bond Fund $3,749,586
15,500 streetTRACKS Gold Trust* 978,980
----------
4,728,566
----------
LIFE/HEALTH INSURANCE (0.7%)
2,775 AFLAC, Inc. 122,488
2,126 Genworth Financial Inc. (Class A) 72,922
1,618 Lincoln National Corp. 91,708
4,295 MetLife, Inc. 223,340
583 Torchmark Corp. 35,254
1,657 UnumProvident Corp. 26,893
----------
572,605
----------
MAJOR BANKS (2.8%)
20,661 Bank of America Corp. 1,064,661
1,138 Comerica, Inc. 66,630
9,952 Wachovia Corp. 533,726
10,644 Wells Fargo & Co. 769,987
----------
2,435,004
----------
MAJOR TELECOMMUNICATIONS (2.5%)
2,323 ALLTEL Corp. 128,160
22,744 AT&T Inc. 682,093
10,545 BellSouth Corp. 413,048
909 Embarq Corp. 41,132
18,525 Sprint Nextel Corp. 366,795
16,959 Verizon Communications, Inc. 573,553
----------
2,204,781
----------
MANAGED HEALTH CARE (0.6%)
1,754 Aetna, Inc. 55,233
1,367 Caremark Rx, Inc. 72,178
370 CIGNA Corp. 33,763
488 Coventry Health Care, Inc.* 25,718
492 Humana, Inc.* 27,518
4,249 UnitedHealth Group Inc. 203,230
2,010 WellPoint Inc.* 149,745
----------
567,385
----------
MEDICAL DISTRIBUTORS (0.2%)
628 AmerisourceBergen Corp. 27,004
1,284 Cardinal Health, Inc. 86,028
SEE NOTES TO FINANCIAL STATEMENTS
19
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
927 McKesson Corp. $ 46,712
428 Patterson Companies, Inc.* 14,235
----------
173,979
----------
MEDICAL SPECIALTIES (1.5%)
1,430 Applera Corp. - Applied Biosystems Group 45,974
677 Bard (C.R.), Inc. 48,047
364 Bausch & Lomb, Inc. 17,217
4,216 Baxter International, Inc. 177,072
1,645 Becton, Dickinson & Co. 108,438
1,592 Biomet, Inc. 52,440
7,697 Boston Scientific Corp.* 130,926
370 Fisher Scientific International, Inc.* 27,421
975 Hospira, Inc.* 42,598
7,858 Medtronic, Inc. 396,986
725 Pall Corp. 18,908
428 PerkinElmer, Inc. 7,717
2,418 St. Jude Medical, Inc.* 89,224
1,892 Stryker Corp. 86,105
341 Waters Corp.* 13,872
1,624 Zimmer Holdings, Inc.* 102,702
----------
1,365,647
----------
MISCELLANEOUS COMMERCIAL SERVICES (0.1%)
1,504 ABM Industries Inc. 24,816
950 Cintas Corp. 33,535
156 Sabre Holdings Corp. (Class A) 3,229
----------
61,580
----------
MISCELLANEOUS MANUFACTURING (0.1%)
1,098 Dover Corp. 51,760
----------
MULTI-LINE INSURANCE (1.3%)
14,469 American International Group, Inc. 877,834
1,693 Hartford Financial Services Group, Inc. (The) 143,634
2,300 Loews Corp. 85,238
687 SAFECO Corp. 36,906
----------
1,143,612
----------
OFFICE EQUIPMENT/SUPPLIES (0.1%)
759 Avery Dennison Corp. 44,500
1,570 Pitney Bowes, Inc. 64,872
----------
109,372
----------
SEE NOTES TO FINANCIAL STATEMENTS
20
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
OIL & GAS PIPELINES (0.2%)
4,137 El Paso Corp. $ 66,192
605 Kinder Morgan, Inc. 61,710
3,524 Williams Companies, Inc. (The) 85,457
----------
213,359
----------
OIL & GAS PRODUCTION (1.3%)
2,693 Anadarko Petroleum Corp. 123,178
1,927 Apache Corp. 135,796
2,500 Chesapeake Energy Corp. 82,250
2,578 Devon Energy Corp. 166,642
1,420 EOG Resources, Inc. 105,293
1,400 Green Plains Renewable Energy Inc.* 45,500
1,224 Kerr-McGee Corp. 85,925
2,539 Occidental Petroleum Corp. 273,577
2,169 XTO Energy, Inc. 101,921
----------
1,120,082
----------
OIL REFINING/MARKETING (0.6%)
2,119 Marathon Oil Corp. 192,066
2,650 Pacific Ethanol Inc.* 49,688
773 Sunoco, Inc. 53,754
3,632 Valero Energy Corp. 244,906
----------
540,414
----------
OILFIELD SERVICES/EQUIPMENT (1.2%)
2,076 Baker Hughes Inc. 165,976
1,927 BJ Services Co. 69,892
6,238 Halliburton Co. 208,100
1,071 National-Oilwell Varco, Inc.* 71,800
7,131 Schlumberger Ltd. (Netherlands Antilles) 476,707
2,253 Weatherford International Ltd. (Bermuda)* 105,531
----------
1,098,006
----------
OTHER CONSUMER SERVICES (0.5%)
2,667 Apollo Group, Inc. (Class A)* 126,202
5,920 Block (H.&R.), Inc. 134,680
7,037 Cendant Corp. 105,625
1,756 Central Parking Corp. 27,007
1,318 eBay Inc.* 31,724
1,233 Rollins, Inc. 26,053
----------
451,291
----------
SEE NOTES TO FINANCIAL STATEMENTS
21
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
OTHER METALS/MINERALS (0.3%)
3,043 Phelps Dodge Corp. $ 265,776
----------
OTHER TRANSPORTATION (0.2%)
400 Aeroports de Paris (ADP) (France)* 24,642
42,000 Beijing Capital International Airport Co., Ltd. (China) 26,161
380 Fraport AG (Germany) 27,638
8,500 Grupo Aeroportuario del Pacifico SA de CV (B Shares)
(Mexico) 25,334
7,800 Grupo Aeroportuario del Sureste S.A.B. de C.V.
(B Shares) (Mexico) 26,504
2,600 Japan Airport Terminal Co., Ltd. (Japan) 26,513
----------
156,792
----------
PACKAGED SOFTWARE (0.4%)
686 Adobe Systems, Inc.* 19,558
277 Autodesk, Inc.* 9,448
258 BMC Software, Inc.* 6,042
547 CA Inc. 11,465
465 Compuware Corp.* 3,250
406 Intuit Inc.* 12,533
9,706 Microsoft Corp. 233,235
463 Novell, Inc.* 3,005
4,153 Oracle Corp.* 62,170
136 Parametric Technology Corp.* 2,103
1,205 Symantec Corp.* 20,931
----------
383,740
----------
PERSONNEL SERVICES (0.1%)
1,471 Monster Worldwide, Inc.* 58,840
2,099 Robert Half International, Inc. 67,924
----------
126,764
----------
PHARMACEUTICALS: GENERIC DRUGS (0.1%)
565 Barr Pharmaceuticals Inc.* 28,114
1,103 Mylan Laboratories, Inc. 24,222
552 Watson Pharmaceuticals, Inc.* 12,359
----------
64,695
----------
PHARMACEUTICALS: MAJOR (5.0%)
9,098 Abbott Laboratories 434,611
11,667 Bristol-Myers Squibb Co. 279,658
17,648 Johnson & Johnson 1,103,882
6,732 Lilly (Eli) & Co. 382,176
12,864 Merck & Co., Inc. 518,033
SEE NOTES TO FINANCIAL STATEMENTS
22
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
44,130 Pfizer, Inc. $1,146,939
8,837 Schering-Plough Corp. 180,628
8,028 Wyeth 389,117
----------
4,435,044
----------
PHARMACEUTICALS: OTHER (0.3%)
821 Allergan, Inc. 88,545
8,971 ArQule, Inc.* 46,290
1,758 Forest Laboratories, Inc.* 81,413
1,299 King Pharmaceuticals, Inc.* 22,109
10,032 Savient Pharmaceuticals Inc.* 59,189
----------
297,546
----------
PRECIOUS METALS (0.5%)
2,792 Freeport-McMoRan Copper & Gold, Inc. (Class B) 152,332
6,449 Newmont Mining Corp. 330,382
----------
482,714
----------
PROPERTY - CASUALTY INSURERS (0.8%)
1,844 ACE Ltd. (Cayman Islands) 95,021
3,655 Allstate Corp. (The) 207,677
2,254 Chubb Corp. (The) 113,647
977 Cincinnati Financial Corp. 46,075
1,114 Progressive Corp. (The) 26,948
3,929 St. Paul Travelers Companies, Inc. (The) 179,948
977 XL Capital Ltd. (Class A) (Cayman Islands) 62,235
----------
731,551
----------
PULP & PAPER (0.4%)
7,432 International Paper Co. 255,141
2,725 MeadWestvaco Corp. 71,177
----------
326,318
----------
RAILROADS (0.6%)
2,577 Burlington Northern Santa Fe Corp. 177,581
1,492 CSX Corp. 90,535
2,797 Norfolk Southern Corp. 121,446
1,827 Union Pacific Corp. 155,295
----------
544,857
----------
REAL ESTATE DEVELOPMENT (0.0%)
3,500 AIRPORT FACILITIES Co., Ltd. (Japan) 23,905
----------
SEE NOTES TO FINANCIAL STATEMENTS
23
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS (0.9%)
625 Apartment Investment & Management Co. (Class A) $ 30,056
1,385 Archstone-Smith Trust 72,671
588 Boston Properties, Inc. 57,742
2,639 Equity Office Properties Trust 100,044
1,898 Equity Residential 88,276
1,311 Kimco Realty Corp. 51,444
1,179 Plum Creek Timber Co., Inc. 40,157
1,591 ProLogis 88,062
535 Public Storage, Inc. 42,955
1,187 Simon Property Group, Inc. 101,524
765 Vornado Realty Trust 79,981
--------
752,912
--------
RECREATIONAL PRODUCTS (0.2%)
1,073 Brunswick Corp. 31,729
1,946 Hasbro, Inc. 36,390
4,376 Mattel, Inc. 78,943
--------
147,062
--------
REGIONAL BANKS (0.4%)
11,564 U.S. Bancorp 370,048
--------
RESTAURANTS (0.6%)
819 Darden Restaurants, Inc. 27,682
7,202 McDonald's Corp. 254,879
4,767 Starbucks Corp.* 163,317
666 Wendy's International, Inc. 40,067
1,602 Yum! Brands, Inc. 72,090
--------
558,035
--------
SEMICONDUCTORS (2.2%)
3,552 Advanced Micro Devices, Inc.* 68,873
2,757 Altera Corp.* 47,724
2,726 Analog Devices, Inc. 88,132
3,274 Broadcom Corp. (Class A)* 78,543
3,000 Freescale Semiconductor Inc. (Class B)* 85,560
43,835 Intel Corp. 789,030
2,246 Linear Technology Corp. 72,658
2,826 LSI Logic Corp.* 23,173
2,403 Maxim Integrated Products, Inc. 70,600
4,892 Micron Technology, Inc.* 76,266
SEE NOTES TO FINANCIAL STATEMENTS
24
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
2,532 National Semiconductor Corp. $ 58,894
2,570 NVIDIA Corp.* 56,874
1,609 PMC - Sierra, Inc.* 8,222
11,856 Texas Instruments Inc. 353,072
2,505 Xilinx, Inc. 50,826
----------
1,928,447
----------
SERVICES TO THE HEALTH INDUSTRY (0.2%)
449 Express Scripts, Inc.* 34,586
621 IMS Health Inc. 17,040
379 Laboratory Corp. of America Holdings* 24,415
930 Medco Health Solutions, Inc.* 55,177
490 Quest Diagnostics Inc. 29,459
399 Stericycle, Inc.* 26,805
----------
187,482
----------
SPECIALTY INSURANCE (0.1%)
590 Ambac Financial Group, Inc. 49,035
754 MBIA Inc. 44,343
----------
93,378
----------
SPECIALTY TELECOMMUNICATIONS (0.2%)
696 CenturyTel, Inc. 26,845
1,908 Citizens Communications Co. 24,480
9,241 Qwest Communications International, Inc.* 73,836
2,402 Windstream Corp. 30,095
----------
155,256
----------
STEEL (0.5%)
1,282 Allegheny Technologies, Inc. 81,907
4,611 Nucor Corp. 245,167
1,641 United States Steel Corp. 103,498
----------
430,572
----------
TELECOMMUNICATION EQUIPMENT (1.4%)
1,243 ADC Telecommunications, Inc.* 15,202
1,733 Andrew Corp.* 14,644
2,081 Comverse Technology, Inc.* 40,330
25,202 Motorola, Inc. 573,598
16,664 QUALCOMM, Inc. 587,573
----------
1,231,347
----------
SEE NOTES TO FINANCIAL STATEMENTS
25
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------------------------------------------
TOBACCO (2.0%)
19,472 Altria Group, Inc. $1,557,176
801 Reynolds American, Inc. 101,551
1,509 UST, Inc. 76,280
----------
1,735,007
----------
TRUCKS/CONSTRUCTION/FARM MACHINERY (0.5%)
3,583 Caterpillar Inc. 253,927
247 Cummins Inc. 28,899
1,282 Deere & Co. 93,035
364 Navistar International Corp.* 8,139
890 PACCAR, Inc. 71,868
----------
455,868
----------
WHOLESALE DISTRIBUTORS (0.0%)
482 Grainger (W.W.), Inc. 29,927
----------
Total Common Stocks
(COST $59,629,921) 66,587,720
----------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
- --------- ------ --------
Corporate Bonds (1.2%)
ADVERTISING/MARKETING SERVICES (0.0%)
$ 10 Interpublic Group of Companies, Inc. (The) 5.40% 11/15/09 9,075
10 WPP Finance (UK) Corp. - (United Kingdom) 5.875 06/15/14 9,803
----------
18,878
----------
AEROSPACE & DEFENSE (0.1%)
15 Northrop Grumman Corp. 4.079 11/16/06 14,936
15 Systems 2001 Asset Trust - 144A**
(Cayman Islands) 6.664 09/15/13 16,030
----------
30,966
----------
AIR FREIGHT/COURIERS (0.0%)
10 Fedex Corp. 7.25 02/15/11 10,638
----------
APPAREL/FOOTWEAR RETAIL (0.0%)
5 Limited Brands, Inc. 6.95 03/01/33 4,821
----------
BEVERAGES: ALCOHOLIC (0.0%)
15 FBG Finance Ltd. - 144A** (Australia) 5.125 06/15/15 13,956
15 Miller Brewing Co. - 144A** 4.25 08/15/08 14,612
----------
28,568
----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
26
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------
CABLE/SATELLITE TV (0.1%)
$20 Comcast Cable Communications Inc. 6.75% 01/30/11 $ 20,788
20 Echostar DBS Corp. 6.375 10/01/11 19,600
--------
40,388
--------
CHEMICALS: MAJOR DIVERSIFIED (0.0%)
15 ICI Wilmington Inc. 4.375 12/01/08 14,561
--------
CONTAINERS/PACKAGING (0.0%)
5 Sealed Air Corp. - 144A** 5.625 07/15/13 4,841
--------
ELECTRIC UTILITIES (0.1%)
5 Detroit Edison Co. (The) 6.125 10/01/10 5,094
10 Entergy Gulf States - 144A** 6.02@@ 12/08/08 10,019
10 Entergy Gulf States, Inc. 3.60 06/01/08 9,611
10 Entergy Gulf States, Inc. 5.631@@ 12/01/09 9,909
20 Monongahela Power Co. 5.00 10/01/06 19,975
5 Panhandle Eastern Pipe Line Co. (Series B) 2.75 03/15/07 4,910
30 PSEG Energy Holdings Inc. 8.625 02/15/08 31,012
10 Texas Eastern Transmission, LP 7.00 07/15/32 10,774
15 Wisconsin Electric Power Co. 3.50 12/01/07 14,631
--------
115,935
--------
ELECTRICAL PRODUCTS (0.0%)
15 Cooper Industries, Inc. 5.25 11/15/12 14,684
--------
ELECTRONICS/APPLIANCES (0.0%)
10 LG Electronics Inc. - 144A** (South Korea) 5.00 06/17/10 9,573
--------
FINANCE/RENTAL/LEASING (0.1%)
20 Countrywide Home Loans, Inc. (Series MTN) 3.25 05/21/08 19,246
25 MBNA Corp. (Series MTNF) 5.58@@ 05/05/08 25,196
20 Nationwide Building Society - 144A**
(United Kingdom) 4.25 02/01/10 19,199
20 Residential Capital Corp. 6.375 06/30/10 19,950
15 SLM Corp. 4.00 01/15/10 14,287
--------
97,878
--------
FINANCIAL CONGLOMERATES (0.1%)
45 General Electric Capital Corp. 5.45 01/15/13 44,714
25 General Motors Acceptance Corp. 6.875 09/15/11 24,233
--------
68,947
--------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
27
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------
FOOD: MAJOR DIVERSIFIED (0.0%)
$ 10 ConAgra Foods, Inc. 7.00% 10/01/28 $10,337
-------
GAS DISTRIBUTORS (0.0%)
20 Nisource Finance Corp. 5.764@@ 11/23/09 20,047
10 Sempra Energy 4.621 05/17/07 9,929
-------
29,976
-------
HOME FURNISHINGS (0.0%)
10 Mohawk Industries, Inc. (Series D) 7.20 04/15/12 10,386
-------
HOTELS/RESORTS/CRUISELINES (0.1%)
25 Hyatt Equities LLC - 144A** 6.875 06/15/07 25,171
10 Starwood Hotels & Resorts Worldwide, Inc. 7.375 05/01/07 10,113
-------
35,284
-------
HOUSEHOLD/PERSONAL CARE (0.0%)
20 Clorox Co. (The) 5.444@@ 12/14/07 20,035
-------
INSURANCE BROKERS/SERVICES (0.1%)
100 Farmers Exchange Capital - 144A** 7.05 07/15/28 97,224
-------
MAJOR TELECOMMUNICATIONS (0.1%)
15 AT&T Corp. 8.00 11/15/31 17,553
5 Deutsche Telekom International Finance
Corp. BV (Netherlands) 8.25 06/15/30 5,866
15 France Telecom S.A. (France) 8.50 03/01/31 18,559
10 SBC Communications, Inc. 6.15 09/15/34 9,325
10 Sprint Capital Corp. 8.75 03/15/32 12,215
15 Telecom Italia Capital SpA (Luxembourg) 4.00 01/15/10 14,130
10 Telefonica Europe BV (Netherlands) 8.25 09/15/30 11,607
-------
89,255
-------
MANAGED HEALTH CARE (0.1%)
20 Health Net, Inc. 9.875 04/15/11 22,615
10 WellPoint Inc. 4.25 12/15/09 9,607
-------
32,222
-------
MEDIA CONGLOMERATES (0.0%)
10 News America, Inc. 7.28 06/30/28 10,282
-------
MEDICAL DISTRIBUTORS (0.0%)
10 AmerisourceBergen Corp. 5.625 09/15/12 9,607
-------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
28
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------
MOTOR VEHICLES (0.0%)
$ 5 DaimlerChrysler North American Holdings Co. 8.50% 01/18/31 $ 5,791
30 General Motors Corp. 8.375 07/15/33 24,750
----------
30,541
----------
MULTI-LINE INSURANCE (0.1%)
35 AIG Sun America Global
Finance VI - 144A** 6.30 05/10/11 36,115
10 American General Finance Corp.
(Series MTNI) 4.625 05/15/09 9,767
10 AXA Financial, Inc. 6.50 04/01/08 10,119
----------
56,001
----------
OTHER METALS/MINERALS (0.0%)
15 Brascan Corp. (Canada) 7.125 06/15/12 15,774
----------
PROPERTY - CASUALTY INSURERS (0.1%)
10 Platinum Underwriters Finance Holdings,
Ltd. (Series B) 7.50 06/01/17 9,936
10 Platinum Underwriters Holdings, Ltd.
(Series B) (Bermuda) 6.371 11/16/07 9,922
20 St. Paul Travelers Companies, Inc. (The) 5.01 08/16/07 19,797
25 XLLIAC Global Funding - 144A** 4.80 08/10/10 24,223
----------
63,878
----------
PULP & PAPER (0.0%)
5 Abitibi-Consolidated Inc. (Canada) 8.85 08/01/30 4,281
25 Bowater Canada Finance (Canada) 7.95 11/15/11 23,875
----------
28,156
----------
RAILROADS (0.0%)
5 Union Pacific Corp. 6.625 02/01/08 5,078
----------
REGIONAL BANKS (0.0%)
15 Marshall & Ilsley Bank (Series BKNT) 3.80 02/08/08 14,631
----------
SAVINGS BANKS (0.1%)
35 Household Finance Corp. 8.00 07/15/10 37,979
13 Washington Mutual Inc. 8.25 04/01/10 14,021
----------
52,000
----------
TRUCKS/CONSTRUCTION/FARM MACHINERY (0.0%)
20 Caterpillar Financial Services Corp.
(Series MTNF) 5.259@@ 08/20/07 20,024
----------
Total Corporate Bonds
(COST $1,112,461) 1,091,369
----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
29
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------
U.S. Government& Agencies Obligations (5.2%)
Federal National Mortgage Assoc.
$ 85 7.00% 07/01/29 $ 87,242
38 7.00 04/01/32 38,913
359 7.00 11/01/34 368,856
7 7.00 12/01/35 7,394
75 Federal National Mortgage Assoc. ARM 1.354 07/01/36 77,304
U.S. Treasury Bonds
1,125 6.125 08/15/29 1,271,514
85 6.375 08/15/27 98,049
50 8.125 08/15/21 65,336
U.S. Treasury Notes
400 3.50 11/15/06 398,219
2,130 5.625 05/15/08 2,153,215
----------
Total U.S. Government & Agencies Obligations
(COST $4,695,023) 4,566,042
----------
Convertible Bonds (1.6%)
AIRLINES (0.7%)
350 Continental Airlines Inc. 5.00 06/15/23 541,188
----------
ELECTRONIC EQUIPMENT/INSTRUMENTS (0.3%)
300 JDS Uniphase Corp. 0.00 11/15/10 271,500
----------
INTERNET RETAIL (0.3%)
300 Amazon.com, Inc. 4.75 02/01/09 293,250
----------
OILFIELD SERVICES/EQUIPMENT (0.4%)
200 Schlumberger Ltd. 2.125 06/01/23 346,000
----------
Total Convertible Bonds
(COST $1,068,003) 1,451,938
----------
Asset-Backed Securities (0.5%)
FINANCE/RENTAL/LEASING
150 American Express Credit Account Master
Trust 2002-3 A 5.479@@ 12/15/09 150,233
58 Capital Auto Receivables Asset
Trust 2003-3 A3B 5.449@@ 01/15/08 57,943
100 GE Capital Credit Card Master Note
Trust 2004-1 A 5.419 06/15/10 100,108
100 GE Capital Credit Card Master Note
Trust 2004-2 A 5.409@@ 09/15/10 100,112
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
30
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
$25 TXU Electric Delivery Transition Bond Co.
LLC 2004-1 A2 4.81% 11/17/14 $ 24,235
--------
Total Asset-Backed Securities
(COST $433,183) 432,631
--------
Collateralized Mortgage Obligations (0.4%)
67 Greenpoint Mortgage Funding
Trust 2006-AR2 3A2 5.705@@ 03/25/36 67,238
49 Harborview Mortgage Loan
Trust 2006-1 2A1A 5.61@@ 03/19/37 49,392
64 Structured Asset Mortgage Investments
Inc. 2006-AR1 2A2 5.695@@ 02/25/36 64,642
69 Structured Asset Mortgage Investments
Inc. 2006-AR2 A2 5.695@@ 02/25/36 69,415
46 Washington Mutual Bank
2005-AR6 2AB3 5.655@@ 04/25/45 46,544
45 Washington Mutual Bank
2005-AR15 A1B1 5.635@@ 11/25/45 44,897
--------
Total Collateralized Mortgage Obligations
(COST $341,201) 342,128
--------
</Table>
<Table>
<Caption>
NUMBER OF
SHARES
- ---------
Convertible Preferred Stock (0.3%)
LIFE/HEALTH INSURANCE
8,800 MetLife, Inc. (Series B) $1.5938
(COST $227,920) 241,648
--------
</Table>
<Table>
<Caption>
NUMBER OF
CONTRACTS
- ---------
Put Option Purchased (0.0%)
5,000 VIX Index August/2006 @ $125
(COST $10,150) 12,000
--------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
31
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------
Short-Term Investments (15.6%)
U.S. Government Agencies &
Obligations (0.6%) (a)
$ 500 Federal National Mortgage Assoc. 5.18% 08/03/06 $ 498,417
50 U.S. Treasury Bills+ 5.09 07/11/06 48,848
-----------
Total U.S. Government Agencies & Obligations
(COST $547,265) 547,265
-----------
Repurchase Agreement (15.0%)
13,165 Joint repurchase agreement account
(dated 07/31/06; proceeds $13,166,927) (b)
(COST $13,165,000) 5.27 08/01/06 13,165,000
-----------
Total Short-Term Investments
(COST $13,712,265) 13,712,265
-----------
Total Investments
(COST $81,230,127) (c) (d) 100.3% 88,437,741
Liabilities in Excess of Other Assets (0.3) (266,793)
----- -----------
Net Assets 100.0% $88,170,948
===== ===========
</Table>
- ----------
ADR AMERICAN DEPOSITARY RECEIPT.
ARM ADJUSTABLE RATE MORTGAGE.
* NON-INCOME PRODUCING SECURITY.
** RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS.
+ A PORTION OF THIS SECURITIES HAS BEEN PHYSICALLY SEGREGATED IN CONNECTION
WITH OPEN FUTURES CONTRACTS IN THE AMOUNT OF $11,610.
@@ RATE SHOWN IS THE RATE IN EFFECT AT JULY 31, 2006.
(a) PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO
REFLECT A MONEY MARKET EQUIVALENT YIELD.
(b) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(c) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN AN AMOUNT EQUAL TO
$9,097,493 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 $8,972,559 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION
IS $1,764,945, RESULTING IN NET UNREALIZED APPRECIATION OF $7,207,614.
SEE NOTES TO FINANCIAL STATEMENTS
32
<Page>
FUTURES CONTRACTS OPEN AT JULY 31, 2006:
<Table>
<Caption>
UNREALIZED
NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE APPRECIATION
CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE (DEPRECIATION)
- ---------------------------------------------------------------------------------------
45 Long US Treasury Notes 10 Year,
September 2006 $ 4,771,406 $ 31,912
7 Short US Treasury Notes 2 Year,
September 2006 (1,424,281) 331
14 Short US Treasury Notes 5 Year,
September 2006 (1,459,063) (7,218)
14 Short US Treasury Bonds 30 Year,
September 2006 (1,515,938) (22,757)
--------
Net Unrealized Appreciation $ 2,268
========
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
33
<Page>
MORGAN STANLEY ALLOCATOR FUND
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
JULY 31, 2006 (UNAUDITED)
Assets:
Investments in securities, at value
(cost $81,230,127) (including repurchase
agreement of $13,165,000) $88,437,741
Cash 3,361
Receivable for:
Investments sold 401,889
Interest 96,272
Dividends 71,253
Shares of beneficial interest sold 9,675
Variation margin 531
Prepaid expenses and other assets 5,722
-----------
Total Assets 89,026,444
-----------
Liabilities:
Payable for:
Investments purchased 398,811
Shares of beneficial interest redeemed 226,737
Distribution fee 67,038
Investment advisory fee 50,589
Transfer agent fee 8,641
Administration fee 6,040
Accrued expenses and other payables 97,640
-----------
Total Liabilities 855,496
-----------
Net Assets $88,170,948
===========
Composition of Net Assets:
Paid-in-capital $75,172,691
Net unrealized appreciation 7,209,882
Accumulated undistributed net investment income 94,721
Accumulated undistributed net realized gain 5,693,654
-----------
Net Assets $88,170,948
===========
Class A Shares:
Net Assets $11,427,041
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 1,015,438
Net Asset Value Per Share $ 11.25
===========
Maximum Offering Price Per Share,
(NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE) $ 11.87
===========
Class B Shares:
Net Assets $65,395,101
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 5,922,404
Net Asset Value Per Share $ 11.04
===========
Class C Shares:
Net Assets $ 9,979,563
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 903,764
Net Asset Value Per Share $ 11.04
===========
Class D Shares:
Net Assets $ 1,369,243
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 120,984
Net Asset Value Per Share $ 11.32
===========
Statement of Operations
FOR THE SIX MONTHS ENDED JULY 31, 2006 (UNAUDITED)
Net Investment Income:
Income
Dividends (net of $2,393 foreign withholding tax) $ 721,948
Interest 338,579
-----------
Total Income 1,060,527
-----------
Expenses
Distribution fee (Class A shares) 14,976
Distribution fee (Class B shares) 357,578
Distribution fee (Class C shares) 50,539
Investment advisory fee 322,513
Shareholder reports and notices 46,216
Transfer agent fees and expenses 43,526
Administration fee 38,509
Professional fees 37,093
Custodian fees 26,685
Registration fees 23,725
Trustees' fees and expenses 672
Other 8,586
-----------
Total Expenses 970,618
Less: expense offset (205)
-----------
Net Expenses 970,413
-----------
Net Investment Income 90,114
-----------
Net Realized and Unrealized Gain (Loss):
Net Realized Gain (Loss) on:
Investments 6,855,445
Futures contracts (165,015)
Option contracts (527,275)
Foreign exchange transactions 74,992
-----------
Net Realized Gain 6,238,147
-----------
Net Change in Unrealized Appreciation/Depreciation on:
Investments (7,062,671)
Futures contracts 22,612
Option contracts 1,850
-----------
Net Depreciation (7,038,209)
-----------
Net Loss (800,062)
-----------
Net Decrease $ (709,948)
===========
SEE NOTES TO FINANCIAL STATEMENTS
34
<Page>
Statements of Changes in Net Assets
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JULY 31, 2006 JANUARY 31, 2006
------------- ----------------
(UNAUDITED)
Increase (Decrease) in Net Assets:
Operations:
Net investment income (loss) $ 90,114 $ (187,463)
Net realized gain 6,238,147 1,661,513
Net change in unrealized appreciation/depreciation (7,038,209) 7,857,167
------------ ------------
Net Increase (Decrease) (709,948) 9,331,217
------------ ------------
Dividends and Distributions to Shareholders from:
Net investment income
Class A shares -- (30,703)
Class B shares -- (106,787)
Class C shares -- (20,999)
Class D shares -- (8,201)
Net realized gain
Class A shares (24,564) (280,315)
Class B shares (150,159) (1,746,235)
Class C shares (23,036) (267,702)
Class D shares (3,741) (61,375)
------------ ------------
Total Dividends and Distributions (201,500) (2,522,317)
------------ ------------
Net decrease from transactions in shares of beneficial interest (16,722,128) (55,804,778)
------------ ------------
Net Decrease (17,633,576) (48,995,878)
Net Assets:
Beginning of period 105,804,524 154,800,402
------------ ------------
End of Period
(INCLUDING ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME OF
$94,721 AND $4,607, RESPECTIVELY) $ 88,170,948 $105,804,524
============ ============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
35
<Page>
MORGAN STANLEY ALLOCATOR FUND
NOTES TO FINANCIAL STATEMENTS - JULY 31, 2006 (UNAUDITED)
1. Organization and Accounting Policies
Morgan Stanley Allocator Fund (the "Fund") is registered under the Investment
Company Act of 1940, as amended (the "Act"), as a diversified, open-end
management investment company. The Fund's investment objective is selecting
securities to maximize total investment return through different stages of an
economic cycle. The Fund was organized as a Massachusetts business trust on
October 25, 2002 and commenced operations on February 26, 2003.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within eighteen
months, six years and one year, respectively. Class D shares are not subject to
a sales charge. Additionally, Class A shares, Class B shares and Class C shares
incur distribution expenses.
The Fund will assess a 2% redemption fee, on Class A shares, Class B shares,
Class C shares, and Class D shares, which is paid directly to the Fund, for
shares redeemed within seven days of purchase, subject to certain exceptions.
The redemption fee is designed to protect the Fund and its remaining
shareholders from the effects of short-term trading.
The following is a summary of significant accounting policies:
A. Valuation of Investments -- (1) an equity portfolio security listed or traded
on the New York Stock Exchange ("NYSE") or American Stock Exchange or other
exchange is valued at its latest sale price prior to the time when assets are
valued; if there were no sales that day, the security is valued at the mean
between the last reported bid and asked price; (2) an equity portfolio security
listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price;
if there were no sales that day, the security is valued at the mean between the
last reported bid and asked price; (3) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the mean
between the last reported bid and asked price. In cases where a security is
traded on more than one exchange, the security is valued on the exchange
designated as the primary market; (4) for equity securities traded on foreign
exchanges, the last reported sale price or the latest bid price may be used if
there were no sales on a particular day; (5) 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;(6) futures are valued at the
latest price published by the commodities exchange on which they trade; (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
36
<Page>
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.
B. Accounting for Investments -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date.
Discounts are accreted and premiums are amortized over the life of the
respective securities. Interest income is accrued daily.
C. Repurchase Agreements -- Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other affiliated
entities managed by the Investment 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, 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. 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 and the
liability related to such option is extinguished.
37
<Page>
If a written call option is exercised, the Fund realizes a gain or loss from the
sale of the underlying security and the proceeds from such sale are increased by
the premium originally received.
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 transaction, 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.
F. Futures Contracts -- A futures contract is an agreement between two parties
to buy and sell financial instruments or contracts based on financial indices at
a set price on a future date. Upon entering into such a contract, the Fund is
required to pledge to the broker cash, U.S. Government securities or other
liquid portfolio securities equal to the minimum initial margin requirements of
the applicable futures exchange. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in the value of the contract. Such receipts or payments known as
variation margin are recorded by the Fund as unrealized gains and losses. Upon
closing of the contract, the Fund realizes a gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed.
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. 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.
38
<Page>
H. Federal Income Tax Policy -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Accordingly, no federal income tax provision is required.
I. Dividends and Distributions to Shareholders -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.
J. Use of Estimates -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
2. Investment Advisory/Administration Agreements
Pursuant to an Investment Advisory Agreement with the Investment Adviser, the
Fund pays an advisory fee, accrued daily and payable monthly, by applying the
following annual rate of 0.67% to the net assets of the Fund determined as of
the close of each business day.
Pursuant to an Administration Agreement with Morgan Stanley Services Company
Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Fund
pays an administration fee, accrued daily and payable monthly, by applying the
annual rate of 0.08% to the Fund's daily net assets.
3. Plan of Distribution
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the
"Distributor"), an affiliate of the Investment Adviser and Administrator. The
Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1
under the Act. The Plan provides that the Fund will pay the Distributor a fee
which is accrued daily and paid monthly at the following annual rates: (i) Class
A -- up to 0.25% of the average daily net assets of Class A; (ii) Class B -- up
to 1.0% of the average daily net assets of Class B; and (iii) Class C -- up to
1.0% of the average daily net assets of Class C.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts totaled $2,332,140
at July 31, 2006.
39
<Page>
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Financial Advisors and other authorized
financial representatives at the time of sale may be reimbursed in the
subsequent calendar year. For the six months ended July 31, 2006, the
distribution fee was accrued for Class A shares and Class C shares at the annual
rate of 0.25% and 0.93%, respectively.
The Distributor has informed the Fund that for the six months ended July 31,
2006, it received contingent deferred sales charges from certain redemptions of
the Fund's Class B shares and Class C shares of $148,528 and $35, respectively
and received $10,838 in front-end sales charges from sales of the Fund's Class A
shares. The respective shareholders pay such charges which are not an expense of
the Fund.
4. Security Transactions and Transactions with Affiliates
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the six months ended July 31, 2006 aggregated
$68,064,077 and $97,213,888, respectively. Included in the aforementioned
transactions are purchases and sales of U.S. Government Securities of $3,569,778
and $5,095,479, respectively.
For the six months ended July 31, 2006, the Fund incurred brokerage commissions
of $37,388 with Morgan Stanley & Co., Inc., an affiliate of the Investment
Adviser, Administrator and Distributor, for portfolio transactions executed on
behalf of the Fund.
Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and
Distributor, is the Fund's transfer agent.
The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan")
which allows each independent Trustee to defer payment of all, or a portion, of
the fees they receive for serving on the Board of Trustees. Each eligible
Trustee generally may elect to have their deferred amounts credited with a
return equal to the total return on one or more of the Morgan Stanley funds that
are offered as investment options under the Compensation Plan.
Appreciation/depreciation and distributions received from these investments are
recorded with an offsetting increase/decrease in the deferred compensation
obligation and do not affect the net asset value of the Fund.
40
<Page>
5. Shares of Beneficial Interest
Transactions in shares of beneficial interest were as follows:
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JULY 31, 2006 JANUARY 31, 2006
-------------------------- --------------------------
(UNAUDITED)
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
CLASS A SHARES
Sold 71,215 $ 805,525 130,412 $ 1,398,758
Conversion from Class B 42,843 487,700 446,198 4,656,810
Reinvestment of distributions 1,974 21,856 26,104 284,217
Redeemed (219,686) (2,513,495) (945,211) (10,159,118)
---------- ------------ ---------- ------------
Net decrease -- Class A (103,654) (1,198,414) (342,497) (3,819,333)
---------- ------------ ---------- ------------
CLASS B SHARES
Sold 34,482 391,153 193,023 2,051,630
Conversion to Class A (43,573) (487,700) (450,707) (4,656,810)
Reinvestment of distributions 12,612 137,093 157,594 1,696,218
Redeemed (1,120,222) (12,550,717) (3,903,323) (41,668,802)
---------- ------------ ---------- ------------
Net decrease -- Class B (1,116,701) (12,510,171) (4,003,413) (42,577,764)
---------- ------------ ---------- ------------
CLASS C SHARES
Sold 9,654 107,964 59,450 636,808
Reinvestment of distributions 1,980 21,524 24,827 267,182
Redeemed (185,136) (2,058,798) (612,837) (6,563,942)
---------- ------------ ---------- ------------
Net decrease -- Class C (173,502) (1,929,310) (528,560) (5,659,952)
---------- ------------ ---------- ------------
CLASS D SHARES
Sold 9,600 110,878 12,403 135,637
Reinvestment of distributions 276 3,073 5,753 62,699
Redeemed (105,032) (1,198,184) (366,432) (3,946,065)
---------- ------------ ---------- ------------
Net decrease -- Class D (95,156) (1,084,233) (348,276) (3,747,729)
---------- ------------ ---------- ------------
Net decrease in Fund (1,489,013) $(16,722,128) (5,222,746) $(55,804,778)
========== ============ ========== ============
</Table>
6. Expense Offset
The expense offset represents a reduction of the transfer agent fees and
expenses for earnings on cash balances maintained by the Fund.
7. Purposes of and Risks Relating to Certain Financial Instruments
For hedging and investment purposes, the Fund may engage in transactions in
listed and over-the-counter options and interest rate futures or in the case of
forward contracts, to facilitate settlement of foreign
41
<Page>
currency denominated portfolio transactions or to manage foreign currency
exposure associated with foreign currency denominated securities ("derivative
instruments").
These derivative instruments involve elements of market risk in excess of the
amounts reflected in the Statement of Assets and Liabilities. The Fund bears the
risk of an unfavorable change in the underlying securities or currencies. Risks
may also arise upon entering into these contracts from the potential inability
of the counterparties to meet the terms of their contracts.
8. Federal Income Tax Status
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for tax purposes are reported as distributions of paid-in-capital.
As of January 31, 2006, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on wash sales and straddles,
mark-to-market of open futures contracts and tax adjustment on real estate
investment trusts held by the Fund.
9. Legal Matters
The Investment Adviser, certain affiliates of the Investment Adviser, certain
officers of such affiliates and certain investment companies advised by the
Investment Adviser or its affiliates, including the Fund, are named as
defendants in a consolidated class action. This consolidated action also names
as defendants certain individual Trustees and Directors of the Morgan Stanley
funds. The consolidated amended complaint, filed in the United States District
Court Southern District of New York on April 16, 2004, generally alleges that
defendants, including the Fund, violated their statutory disclosure obligations
and fiduciary duties by failing properly to disclose (i) that the Investment
Adviser and certain affiliates of the Investment Adviser allegedly offered
economic incentives to brokers and others to recommend the funds advised by the
Investment Adviser or its affiliates to investors rather than funds managed by
other companies, and (ii) that the funds advised by the Investment Adviser or
its affiliates, including the Fund, allegedly paid excessive commissions to
brokers in return for their efforts to recommend these funds to investors. The
complaint seeks, among other things, unspecified compensatory damages,
rescissionary damages, fees and costs. The defendants have moved to dismiss the
action. On March 9, 2005, Plaintiffs sought leave to supplement their complaint
to assert claims on behalf of other investors, which motion defendants opposed.
On April 14, 2006, the Court
42
<Page>
granted defendants' motion to dismiss in its entirety. Additionally, the Court
denied Plaintiff's motion to supplement their complaint. This matter is now
concluded.
10. 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.
43
<Page>
MORGAN STANLEY ALLOCATOR FUND
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<Table>
<Caption>
FOR THE YEAR ENDED FOR THE PERIOD
FOR THE SIX JANUARY 31, FEBRUARY 26, 2003*
MONTHS ENDED ------------------ THROUGH
JULY 31, 2006 2006 2005 JANUARY 31, 2004
------------- ------- -------- ------------------
(UNAUDITED)
Class A Shares
Selected Per Share Data:
Net asset value, beginning of period $ 11.34 $ 10.62 $ 11.39 $ 10.00
------- ------- ------- -------
Income (loss) from investment operations:
Net investment income++ 0.05 0.05 0.09 0.05
Net realized and unrealized gain (loss) (0.12) 0.91 0.32 1.67
------- ------- ------- -------
Total income (loss) from investment operations (0.07) 0.96 0.41 1.72
------- ------- ------- -------
Less dividends and distributions from:
Net investment income -- (0.02) (0.10) --
Net realized gain (0.02) (0.22) (1.08) (0.33)
------- ------- ------- -------
Total dividends and distributions (0.02) (0.24) (1.18) (0.33)
------- ------- ------- -------
Net asset value, end of period $ 11.25 $ 11.34 $ 10.62 $ 11.39
======= ======= ======= =======
Total Return+ (0.66)%(1) 9.25% 3.57% 17.16%(1)
Ratios to Average Net Assets(3):
Total expenses (before expense offset) 1.39%(2) 1.38% 1.23% 1.23%(2)
Net investment income 0.81%(2) 0.49% 0.84% 0.47%(2)
Supplemental Data:
Net assets, end of period, in thousands $11,427 $12,691 $15,527 $22,141
Portfolio turnover rate 75%(1) 64% 126% 239%(1)
</Table>
- ----------
* COMMENCEMENT OF OPERATIONS.
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
44
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED FOR THE PERIOD
FOR THE SIX JANUARY 31, FEBRUARY 26, 2003*
MONTHS ENDED ------------------ THROUGH
JULY 31, 2006 2006 2005 JANUARY 31, 2004
------------- ------- -------- ------------------
(UNAUDITED)
Class B Shares
Selected Per Share Data:
Net asset value, beginning of period $ 11.17 $ 10.54 $ 11.31 $ 10.00
------- ------- -------- --------
Income (loss) from investment operations:
Net investment income (loss)++ 0.00 (0.03) 0.01 (0.03)
Net realized and unrealized gain (loss) (0.11) 0.89 0.31 1.67
------- ------- -------- --------
Total income (loss) from investment operations (0.11) 0.86 0.32 1.64
------- ------- -------- --------
Less dividends and distributions from:
Net investment income -- (0.01) (0.01) --
Net realized gain (0.02) (0.22) (1.08) (0.33)
------- ------- -------- --------
Total dividends and distributions (0.02) (0.23) (1.09) (0.33)
------- ------- -------- --------
Net asset value, end of period $ 11.04 $ 11.17 $ 10.54 $ 11.31
======= ======= ======= ========
Total Return+ (1.03)%(1) 8.37% 2.84% 16.36%(1)
Ratios to Average Net Assets(3):
Total expenses (before expense offset) 2.14%(2) 2.13% 1.98% 2.02%(2)
Net investment income (loss) 0.06%(2) (0.26)% 0.09% (0.32)%(2)
Supplemental Data:
Net assets, end of period, in thousands $65,395 $78,623 $116,344 $157,175
Portfolio turnover rate 75%(1) 64% 126% 239%(1)
</Table>
- ----------
* COMMENCEMENT OF OPERATIONS.
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
45
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED FOR THE PERIOD
FOR THE SIX JANUARY 31, FEBRUARY 26, 2003*
MONTHS ENDED ------------------ THROUGH
JULY 31, 2006 2006 2005 JANUARY 31, 2004
------------- ------- -------- ------------------
(UNAUDITED)
Class C Shares
Selected Per Share Data:
Net asset value, beginning of period $11.17 $ 10.54 $ 11.31 $ 10.00
------ ------- ------- -------
Income (loss) from investment operations:
Net investment income (loss)++ 0.01 (0.03) 0.01 (0.03)
Net realized and unrealized gain (loss) (0.12) 0.90 0.32 1.67
------ ------- ------- -------
Total income (loss) from investment operations (0.11) 0.87 0.33 1.64
------ ------- ------- -------
Less dividends and distributions from:
Net investment income -- (0.02) (0.02) --
Net realized gain (0.02) (0.22) (1.08) (0.33)
------ ------- ------- -------
Total dividends and distributions (0.02) (0.24) (1.10) (0.33)
------ ------- ------- -------
Net asset value, end of period $11.04 $ 11.17 $ 10.54 $ 11.31
====== ======= ======= =======
Total Return+ (0.94)%(1) 8.41% 2.76% 16.36%(1)
Ratios to Average Net Assets(3):
Total expenses (before expense offset) 2.07%(2) 2.13% 1.96% 2.02%(2)
Net investment income (loss) 0.13%(2) (0.26)% 0.11% (0.32)%(2)
Supplemental Data:
Net assets, end of period, in thousands $9,980 $12,029 $16,920 $21,927
Portfolio turnover rate 75%(1) 64% 126% 239%(1)
</Table>
- ----------
* COMMENCEMENT OF OPERATIONS.
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
46
<Page>
<Table>
<Caption>
FOR THE YEAR FOR THE PERIOD
FOR THE SIX ENDED JANUARY 31, FEBRUARY 26, 2003*
MONTHS ENDED ----------------- THROUGH
JULY 31, 2006 2006 2005 JANUARY 31, 2004
------------- ------ ------ ------------------
(UNAUDITED)
Class D Shares
Selected Per Share Data:
Net asset value, beginning of period $11.39 $10.65 $11.42 $ 10.00
------ ------ ------ -------
Income (loss) from investment operations:
Net investment income++ 0.06 0.08 0.12 0.07
Net realized and unrealized gain (loss) (0.11) 0.90 0.32 1.68
------ ------ ------ -------
Total income (loss) from investment operations (0.05) 0.98 0.44 1.75
------ ------ ------ -------
Less dividends and distributions from:
Net investment income -- (0.02) (0.13) --
Net realized gain (0.02) (0.22) (1.08) (0.33)
------ ------ ------ -------
Total dividends and distributions (0.02) (0.24) (1.21) (0.33)
------ ------ ------ -------
Net asset value, end of period $11.32 $11.39 $10.65 $ 11.42
====== ====== ====== =======
Total Return+ (0.48)%(1) 9.44% 3.84% 17.46%(1)
Ratios to Average Net Assets(3):
Total expenses (before expense offset) 1.14%(2) 1.13% 0.98% 1.02%(2)
Net investment income 1.06%(2) 0.74% 1.09% 0.68%(2)
Supplemental Data:
Net assets, end of period, in thousands $1,369 $2,462 $6,009 $13,006
Portfolio turnover rate 75%(1) 64% 126% 239%(1)
</Table>
- ----------
* COMMENCEMENT OF OPERATIONS.
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE
PERIOD.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
47
<Page>
TRUSTEES
Frank L. Bowman
Michael Bozic
Kathleen A. Dennis
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael F. Klein
Michael E. Nugent
W. Allen Reed
Fergus Reid
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
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT ADVISER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
The financial statements included herein have been taken from the records of the
Fund without examination by the independent auditors and accordingly they do not
express an opinion thereon.
This report is submitted for the general information of the shareholders of the
Fund. For more detailed information about the Fund, its fees and expenses and
other pertinent information, please read its Prospectus. The Fund's Statement of
Additional Information contains additional information about the Fund, including
its trustees. It is available, without charge, by calling (800) 869-NEWS.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective Prospectus. Read the
Prospectus carefully before investing.
Investments and services offered through Morgan Stanley DW Inc., member SIPC.
Morgan Stanley Distributors Inc., member NASD.
(C) 2006 Morgan Stanley
[Morgan Stanley LOGO]
MORGAN STANLEY FUNDS
Morgan Stanley
Allocator Fund
Semiannual Report
July 31, 2006
[Morgan Stanley LOGO]
ALRSAR-39947RPT-RA06-00838P-Y07/06
<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 Allocator Fund
/s/ Ronald E. Robison
- -------------------------------------
Ronald E. Robison
Principal Executive Officer
September 21, 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
September 21, 2006
/s/ Francis Smith
- -------------------------------------
Francis Smith
Principal Financial Officer
September 21, 2006