N-CSRS 1 a2172394zn-csrs.txt N-CSRS 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: 811-03692 Morgan Stanley Variable Investment Series (Exact name of registrant as specified in charter) 1221 Avenue of the Americas, New York, New York 10020 (Address of principal executive offices) (Zip code) Ronald E. Robison 1221 Avenue of the Americas, New York, New York 10020 (Name and address of agent for service) Registrant's telephone number, including area code: 212-762-4000 Date of fiscal year end: December 31, 2006 Date of reporting period: June 30, 2006 Item 1 - Report to Shareholders MORGAN STANLEY VARIABLE INVESTMENT SERIES SEMI-ANNUAL REPORT JUNE 30, 2006 Morgan Stanley Variable Investment Series TABLE OF CONTENTS Letter to the Shareholders 1 Fund Performance 20 Expense Example 22 Investment Advisory Agreement Approval 28 Portfolio of Investments: Money Market 33 Limited Duration 35 Income Plus 46 High Yield 53 Utilities 64 Income Builder 68 Dividend Growth 75 Global Dividend Growth 79 European Equity 85 Equity 89 S&P 500 Index 92 Global Advantage 105 Aggressive Equity 109 Strategist 111 Financial Statements: Statements of Assets and Liabilities 124 Statements of Operations 127 Statements of Changes in Net Assets 130 Notes to Financial Statements 142 Financial Highlights 154
Morgan Stanley Variable Investment Series LETTER TO THE SHAREHOLDERS - JUNE 30, 2006 Dear Shareholder, During the first half of 2006, rising interest rates, high commodity prices, mounting inflationary pressures and a slowing U.S. economy posed a formidable challenge to the global economy's advance. Investors' growing discomfort with these uncertainties culminated in a worldwide stock market correction in the final months of the period. On the whole, the domestic stock markets registered flat to modest gains, as did the bond markets. International stocks, however, fared much better. Domestic Equity Overview The U.S. stock market advanced in the first quarter of 2006, but gave back some of its gain in the second quarter. The six-month period ended June 30, 2006 began on a positive note, with strong gains in January driven by higher growth and higher risk segments of the market, such as small-cap and technology stocks. Minutes from the Federal Open Market Committee's (the "Fed's") December 13 meeting had bolstered hopes that the Fed might be nearing the end of its current rate tightening cycle. Investors also responded positively to encouraging labor market data, improved consumer confidence, and the continuation of robust merger-and-acquisition and corporate restructuring activity. The market's strength was particularly impressive given that it faced a number of headwinds. Oil prices resumed their upward climb, as geopolitical developments emanating from Iran and Nigeria raised concern about potential supply disruptions, and fourth-quarter gross domestic product (GDP) growth came in well below expectations. Despite investors' eagerness for the contrary, the Fed raised the target federal funds rate for the fourteenth consecutive time and left the door open for further rate hikes. In February, stocks traded flat. More positive economic data and well-received Congressional testimony from the new Federal Reserve Board Chairman Ben S. Bernanke buoyed sentiment. However, a number of companies reported disappointing quarterly earnings and offered lackluster outlooks. Consumer confidence also fell. Conditions improved in March and April, due to relatively tame inflation numbers and a growing belief that the economy would resume its robust pace in early 2006. Favorable economic data -- notably in employment, durable goods orders and consumer confidence -- seemed to support this more optimistic view. However, inflation concerns began to mount. Rising oil prices and a sharp increase in other commodity prices drove interest rates upward, as the yield on the 10-year Treasury rose above 5 percent for the first time since June 2002. Amid growing uncertainty, stock markets soured in May. The Fed's sixteenth consecutive increase and its accompanying comments sent the markets tumbling. The April and May Consumer Price Index reports exacerbated inflation concerns, which were already heightened in light of the recent sharp rise in commodity prices. Investors also began to acknowledge the possibility of economic slowdown over the remainder of the year, particularly as consumer sentiment showed signs of deterioration. Declining investor sentiment continued into June, although stocks rallied significantly in the final days of the period. As was expected, the Fed raised rates again on June 29, but its language suggested that additional rate hikes might become unnecessary. Fixed Income Overview The first six months of 2006 provided few surprises in the bond market. As was widely expected, the Fed continued to raise the target federal funds rate by 25 basis points at each of its meetings during the first half of the year, bringing the rate to 5.25 percent at the end of June. In the Fed's view, the U.S. economy remained on solid footing, and core inflation was still relatively low, though most measures of core inflation were either at or above the high end of the range viewed as acceptable by the Fed. Also as expected, longtime Fed Chairman Alan Greenspan retired in January after a term of more than 18 years. Ben S. Bernanke replaced Greenspan as Chairman, and in his first Congressional testimony in the role acknowledged some risks to the Fed's relatively contained inflation forecast, as well as the potential for upward pressure on inflation in the event of continued high energy prices and other building inflationary pressures. Comments made by Fed members after their May and June meetings indicated that they would rely heavily on economic data in making future decisions concerning the direction of interest rates. In fact, based on these comments it appears that the Fed will be driven by the weight of the economic data more so now than perhaps at anytime over the past few years. Within the government sector, U.S. Treasuries underperformed over the six-month period because of their high sensitivity to fluctuating interest rates and their relatively low yields. Yield spreads (a measure of market risk) of agency debentures and mortgages remained tight relative to Treasuries. Early in the period, lower-coupon mortgages outperformed higher-coupon mortgages. As is typical during periods of rising interest rates, prepayment speeds on mortgages slowed, making the higher yield offered by these issues more attractive. This trend reversed course in the second half of the period, as higher coupon, longer dated mortgage-backed issues outperformed their lower-coupon counterparts. Due mainly to concerns over inflation and increased risk in the corporate market, the credit sector had trouble keeping pace with other fixed income sectors, and posted its lowest six-month return since 1999. Within the investment-grade portion of the sector, lower-rated issues (BBB- and A-rated) outpaced higher-rated issues (AA-rated and above). Industrials posted the highest returns, followed by utilities and financials. Overall, longer-dated corporate issues underperformed shorter-dated issues. 2 The high-yield market performed well during the reporting period, especially in the first quarter of the year, as continued economic strength, a strong equity market and increased investor appetite for risk combined support the market. Gains in high yield came despite declining Treasury prices, tight credit spreads, moderated new bond issuance and outflows from mutual funds. High-yield market returns slowed in the second quarter as rising market volatility, concerns about inflation and increased issuance dampened performance. The end result was modestly positive returns for the six-month period. Within the high-yield asset class, the riskiest segment of the market -- securities rated CCC and below -- outperformed high-rated securities throughout the reporting period. Industry sector returns, however, varied considerably. The strongest performing sectors included transportation (due to strong gains by the auto component), manufacturing, telecommunication services, retail and cable. The worst performers included the energy, broadcasting, information technology, health care and utilities sectors. Forest products, the leading sector in the first quarter, turned in poor performance in the second quarter. International Equity Overview Despite early signs of slowing in the U.S. economy, the global economy continued to roar ahead in the six months ended June 30, 2006. Following a period of protracted sluggishness, Europe had something of a boom. Unemployment declined, industrial output grew and observers believed with increasing certainty that the European Central Bank would likely raise interest rates. In May, the European purchasing managers' indexes for both the services and manufacturing sectors advanced sharply, hitting six-year highs. Sentiment for the region brightened as this economic cycle appeared sustainable and was expected to fuel domestic demand amid improving consumer confidence. After a strong performance in 2005, conditions in Japan turned more turbulent in early 2006 as a scandal plagued one of Japan's best known Internet companies. Although Japanese stocks gained back some ground in March and April, the market declined precipitously at the end of the period in concert with the global market correction. Investors across all regions began to contend with the rising possibility that the combination of additional rate hikes in the U.S. and anticipated tightening in both Japan and Europe will likely slow global economic growth. Within this framework, international developed markets were volatile, as gains made in the first quarter were tempered by a sharp correction in the month of June. Emerging markets followed a similar course, beginning 2006 with a double-digit gain in the first quarter and outperforming major developed markets. Favorable valuations relative to the developed world and stronger underlying economies enticed investors. Appetites for emerging markets equities reached record highs in April with year-to-date inflows surpassing levels greater than the whole of 2005. However, after 3 reaching new highs, the emerging markets -- along with other global markets -- sold off in May as global risk aversion spiked due to concerns about slowing global growth and rising inflation and interest rates in the U.S. Tumbling from a new high on May 8, emerging markets were down an average of 15 percent during the global sell-off. Nevertheless, similar to past corrections, the asset class rebounded strongly off its low as the global markets stabilized. Emerging market economies have become more resilient to external shocks thanks to the adoption of better macroeconomic fundamentals, stronger fiscal performance and the de-leveraging of corporate balance sheets. Aggressive Equity Portfolio For the six-month period ended June 30, 2006, Aggressive Equity Portfolio Class X shares produced a total return of 2.40 percent versus - 0.32 percent for the Russell 3000(R) Growth Index(1). For the same period, the Portfolio's Class Y shares returned 2.35 percent. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY CHARGES BY YOUR INSURANCE COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE. During the period, the Portfolio outperformed the Russell 3000 Growth Index due to both stock selection and sector allocation decisions. Within the autos and transportation sector, an overweight allocation benefited the Portfolio, and a selection of securities, particularly in the transportation logistics area, had a very favorable impact on relative returns. Another source of positive returns came from the technology sector, where an overall sector underweight and stock selection in the semiconductor, computer technology and computer services industries boosted performance. The health care sector also yielded strong results relative to the Index, due to stock selection in health care services and biotechnology firms as well as a lack of exposure to health care management companies. Additionally, an underweight allocation in this sector proved advantageous to the Portfolio. Conversely, areas of weakness for the Portfolio included the consumer discretionary sector, in which stock selection in the commercial services, leisure time and consumer electronics companies tempered relative performance. To a lesser extent, the sector's large overweight allocation also hindered returns. Meanwhile, stock selection and an underweight allocation in producer durables put downward pressure on the ---------- (1) THE RUSSELL 3000(R) GROWTH INDEX MEASURES THE PERFORMANCE OF THOSE COMPANIES IN THE RUSSELL 3000(R) INDEX WITH HIGHER PRICE-TO-BOOK RATIOS AND HIGHER FORECASTED GROWTH VALUES. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. 4 Portfolio's returns. Likewise, an underweight allocation within the consumer staples sector deterred the Portfolio's advance. At the close of this period, consumer discretionary was the largest weighted sector within the Portfolio, and also represented the greatest overweight relative to the Russell 3000 Growth Index. THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE PORTFOLIO IN THE FUTURE Dividend Growth Portfolio For the six-month period ended June 30, 2006, Dividend Growth Portfolio Class X shares produced a total return of - 0.34 percent versus 2.71 percent for the S&P 500(R) Index(2). For the same period, the Portfolio's Class Y shares returned - 0.47 percent. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY CHARGES BY YOUR INSURANCE COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE. Broadly speaking, the high quality, dividend paying stocks in which the Portfolio seeks to invest were out of favor with investors during the period. Especially in the first quarter, investors demonstrated a preference for the riskier segments of the stock market at the expense of more established, less volatile companies. On a sector basis, relative to the S&P 500 Index, our stock selection in health care was a "perfect storm" of lagging performance across all industries, including health care providers and services, pharmaceuticals, health care equipment and biotechnology. We attribute this widespread weakness in part to company- or industry-specific negative events and in part to investors locking in profits on 2005's gains. Although an underweight in technology helped the Portfolio, stock selection within the sector was a detractor from relative performance. Our selections in communications equipment and computer hardware and peripherals significantly underperformed some of the index's better performing stocks in these groups. The Portfolio's industrials holdings also had a net negative effect on relative returns. While the Portfolio's sizeable allocation to industrial conglomerates did have positive performance during the period, other industrial companies experienced much larger gains. Within the sector, the more economically sensitive ---------- (2) THE STANDARD & POOR'S 500(R) INDEX (S&P 500(R)) IS A BROAD-BASED INDEX, THE PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 500 WIDELY-HELD COMMON STOCKS CHOSEN FOR MARKET SIZE, LIQUIDITY AND INDUSTRY GROUP REPRESENTATION. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. 5 industries -- such as road and rail, machinery, electrical equipment and air freight and logistics -- outperformed, and the Portfolio had little to no exposure to these groups. However, the Portfolio did achieve notable positive performance elsewhere. The largest contributor to the Portfolio's relative return was an overweight to the energy sector. Energy stocks continued to lead the broad market, as ongoing high commodity prices supported strong profits for many energy companies. An underweight in the technology sector -- one of the S&P 500 Index's two negative performing sectors during the period -- also benefited the Portfolio's return on a relative basis. A combination of sluggish demand from businesses and the expectation of consumers retrenching contributed to weakness across a number of technology industry groups, especially semiconductors and semiconductor capital equipment, software and services, and hardware and equipment. Stock selection in the materials sector -- although representing a very small portion of the Portfolio -- had a large positive impact on relative returns. Here, the Portfolio's exposure to the chemicals and metals and mining industries added materially to gains. THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE PORTFOLIO IN THE FUTURE. Equity Portfolio For the six-month period ended June 30, 2006, Equity Portfolio Class X shares produced a total return of - 1.34 percent versus - 0.32 percent for the Russell 3000(R) Growth Index(3). For the same period, the Portfolio's Class Y shares returned - 1.48 percent. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY CHARGES BY YOUR INSURANCE COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE. The Portfolio's overall underperformance against the Russell 3000 Growth Index was primarily due to stock selection, although sector allocation decisions helped to mitigate lagging returns. Among the Portfolio's chief detractors was the consumer discretionary sector, where an overweight allocation and stock selection in the commercial services, leisure time and consumer electronic industries hindered performance. A combination of unfavorable stock selection in homebuilding firms, a lack of exposure to aerospace companies and an underweight allocation to the producer durables sector added downward pressure on the Portfolio's return. ---------- (3) THE RUSSELL 3000(R) GROWTH INDEX MEASURES THE PERFORMANCE OF THOSE COMPANIES IN THE RUSSELL 3000(R) INDEX WITH HIGHER PRICE-TO-BOOK RATIOS AND HIGHER FORECASTED GROWTH VALUES. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. 6 Stock selection in medical and dental instruments and supplies companies generated weak returns within the health care sector, although the Portfolio did benefit slightly from an underweight allocation. There were some sources of positive relative returns for the Portfolio, including the financial services sector, in which strong stock selection in the diversified financial services, information services and securities brokerage and services industries provided favorable performance. Another area of strength was stock selection within the autos and transportation sector, particularly in the transportation logistics area. Meanwhile, the Portfolio's energy sector yielded strong results due to an overweight allocation, even though stock selection did mildly impair the Portfolio's gains. At the close of this period, consumer discretionary was the largest weighted sector within the Portfolio, and also represented the greatest overweight relative to the Russell 3000 Growth Index. THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE PORTFOLIO IN THE FUTURE. European Equity Portfolio For the six-month period ended June 30, 2006, European Equity Portfolio Class X shares produced a total return of 11.57 percent versus 13.58 percent for the MSCI Europe Index(4). For the same period, the Portfolio's Class Y shares returned 11.42 percent. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY CHARGES BY YOUR INSURANCE COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE. Among the Portfolio's primary detractors during the six-month period was stock selection in the food and staples retailing, pharmaceuticals, and food, beverage and tobacco sectors. Negative company-specific events dampened the Portfolio's returns within these groups relative to the MSCI Europe Index. An underweight in the utilities sector -- based on the sector's lack of compelling valuations, by our measures -- also diminished results. Here, widespread merger and acquisition activity continued to draw investors' favor, particularly in the earlier part of the year. The Portfolio's longstanding overweight in telecommunication services also contributed to lagging performance. The group continued to be hampered by an aggressive regulatory environment, significant pricing competition and continued technology-related uncertainty. ---------- (4) THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EUROPE INDEX MEASURES THE PERFORMANCE FOR A DIVERSE RANGE OF GLOBAL STOCK MARKETS WITHIN AUSTRIA, BELGIUM, DENMARK, FINLAND, FRANCE, GERMANY, GREECE, IRELAND, ITALY, THE NETHERLANDS, NORWAY, SPAIN, SWEDEN, SWITZERLAND, PORTUGAL, AND THE UNITED KINGDOM. THE PERFORMANCE OF THE INDEX IS LISTED IN U.S. DOLLARS AND ASSUMES REINVESTMENT OF NET DIVIDENDS. "NET DIVIDENDS" REFLECTS A REDUCTION IN DIVIDENDS AFTER TAKING INTO ACCOUNT WITHHOLDING OF TAXES BY CERTAIN FOREIGN COUNTRIES REPRESENTED IN THE INDEX. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. 7 Nonetheless, the Portfolio did well in other areas. Stock selection in the technology sector, especially within hardware and equipment, boosted relative gains as the Portfolio was less exposed to one of the index's weaker performing stocks. Stock selection in media also had a positive influence due to company-specific events. Finally, in the capital goods sector, selection specifically within mining and oil-related stocks turned out to be advantageous. THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE PORTFOLIO IN THE FUTURE. Global Advantage Portfolio For the six-month period ended June 30, 2006, Global Advantage Portfolio Class X shares produced a total return of 3.15 percent, underperforming the Morgan Stanley Capital International (MSCI) World Index(5) which produced a total return of 6.06 percent for the same period. For the same period, the Portfolio's Class Y shares returned 3.02 percent. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY CHARGES BY YOUR INSURANCE COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE. We attribute the Portfolio's performance lag relative to the MSCI World Index to two main factors. First, as value stocks outperformed growth stocks during the six-month period, the Portfolio's growth-orientation faced a headwind. Second, the global markets demonstrated a considerable dispersion in sector returns. (We note that the Portfolio's overall allocations were the result of individual security selections, rather than of "top-down" decisions about the relative merits of sectors and countries.) The best performing groups were energy and materials -- so called "cyclicals" because of their strong correlations to economic cycles. The Portfolio, however, held less exposure to these sectors and therefore did not participate fully in their advance. At the same time, the Portfolio's overweight in the technology sector further dampened gains, as the sector had a negative return in the broad market. However, the Portfolio did well relative to the index across a number of areas. Although sector allocation detracted from relative results, stock selection benefited the Portfolio, especially in the retail and technology groups. On a country basis, an underweight in the U.S. and Japan added to relative returns as these markets underperformed the global average. A considerable weight in the emerging markets bolstered relative performance as well. The region posted respectable gains during the period. ---------- (5) THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) WORLD INDEX MEASURES PERFORMANCE FROM A DIVERSE RANGE OF GLOBAL STOCK MARKETS INCLUDING THE U.S., CANADA, EUROPE, AUSTRALIA, NEW ZEALAND, AND THE FAR EAST. THE PERFORMANCE OF THE INDEX IS LISTED IN U.S. DOLLARS AND ASSUMES REINVESTMENT OF NET DIVIDENDS. "NET DIVIDENDS" REFLECTS A REDUCTION IN DIVIDENDS AFTER TAKING INTO ACCOUNT WITHHOLDING OF TAXES BY CERTAIN FOREIGN COUNTRIES REPRESENTED IN THE INDEX. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. 8 THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE PORTFOLIO IN THE FUTURE. Global Dividend Growth Portfolio For the six-month period ended June 30, 2006, Global Dividend Growth Portfolio Class X shares produced a total return of 5.10 percent versus 6.06 percent for the MSCI World Index(6). For the same period, the Portfolio's Class Y shares returned 4.94 percent. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY CHARGES BY YOUR INSURANCE COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE. Relative to the MSCI World Index, stock selection in the financials sector was the largest detractor from performance over the six-month period. Within this sector, the Portfolio's holdings in the insurance group had particularly disappointing returns. In addition, the Portfolio's zero exposure to the real estate group, which produced strong returns for the benchmark, hampered relative gains. Relative performance was also negatively affected by the Portfolio's stocks within the telecommunication services sector, in which the Portfolio held a significant overweight position. During the period, the sector was generally out of favor with investors due to ongoing concerns about regulation, competition and capital expenditure, in particular. However, we continue to believe that the market has overreacted to these issues, and therefore maintained the Portfolio's overweight in this sector. Stock selection in consumer staples was another detractor from relative performance as some of the Portfolio's larger positions produced lackluster returns. Nonetheless, we continue to find consumer staples stocks attractive for their ability to consistently generate substantial levels of free cash flow. Conversely, the Portfolio's stock selection and a long-held underweight position in the information technology sector were positive contributors to performance. Based on what we considered to be unattractive valuations, the Portfolio was not exposed to some of the larger names in the index that declined sharply. Stock selection within the health care sector contributed positively to performance, and the Portfolio benefited from an underweight position in the consumer discretionary sector. ---------- (6) THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) WORLD INDEX MEASURES PERFORMANCE FROM A DIVERSE RANGE OF GLOBAL STOCK MARKETS INCLUDING THE U.S., CANADA, EUROPE, AUSTRALIA, NEW ZEALAND, AND THE FAR EAST. THE PERFORMANCE OF THE INDEX IS LISTED IN U.S. DOLLARS AND ASSUMES REINVESTMENT OF NET DIVIDENDS. "NET DIVIDENDS" REFLECTS A REDUCTION IN DIVIDENDS AFTER TAKING INTO ACCOUNT WITHHOLDING OF TAXES BY CERTAIN FOREIGN COUNTRIES REPRESENTED IN THE INDEX. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. 9 THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE PORTFOLIO IN THE FUTURE. High Yield Portfolio For the six-month period ended June 30, 2006, High Yield Portfolio Class X shares produced a total return of 2.70 percent versus 3.49 percent for the CSFB High Yield Index(7). For the same period, the Portfolio's Class Y shares returned 2.57 percent. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY CHARGES BY YOUR INSURANCE COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE. Early in the reporting period, we reduced risk in the Portfolio by increasing its overall credit quality. This defensive positioning versus the benchmark was the main reason for the Portfolio's relative underperformance, as it kept the Portfolio from participating fully in the general outperformance of lower-quality securities. Security selection in the Portfolio provided more mixed results. Selected issues in the forest products and food/tobacco sectors detracted from returns. On a more positive note, security selection in transportation and utilities contributed to overall returns during the period. THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE PORTFOLIO IN THE FUTURE. Income Builder Portfolio For the six-month period ended June 30, 2006, Income Builder Portfolio Class X shares produced a total return of 2.72 percent versus 6.56 percent for the Russell 1000(R) Value Index(8) and - 1.15 percent for the Lehman Brothers U.S. Government/Credit Index(9). For the same period, the Portfolio's Class Y shares returned 2.68 percent. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. ---------- (7) THE CREDIT SUISSE FIRST BOSTON (CSFB) HIGH YIELD INDEX IS DESIGNED TO MIRROR THE INVESTIBLE UNIVERSE OF THE US DOLLAR-DENOMINATED HIGH YIELD DEBT MARKET. 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. (8) THE RUSSELL 1000(R) VALUE INDEX MEASURES THE PERFORMANCE OF THOSE COMPANIES IN THE RUSSELL 1000(R) INDEX WITH LOWER PRICE -TO-BOOK RATIOS AND LOWER FORECASTED GROWTH VALUES. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. (9) THE LEHMAN BROTHERS U.S. GOVERNMENT/CREDIT INDEX TRACKS THE PERFORMANCE OF GOVERNMENT AND CORPORATE OBLIGATIONS, INCLUDING U.S. GOVERNMENT AGENCY AND TREASURY SECURITIES AND CORPORATE AND YANKEE BONDS. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. 10 THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY CHARGES BY YOUR INSURANCE COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE. Within the stock portion of the Portfolio, telecommunication services stocks detracted most from returns relative to the Russell 1000 Value Index. After several years of declining performance, the telecommunication services sector began to show signs of progress during the period. However, our selections did not perform as well as those stocks that led the sector's turnaround. The Portfolio's health care representation was another significant laggard on a relative basis. Negative company specific news at selected health care equipment and services companies proved detrimental to the Portfolio's exposure there. Additionally, large-cap pharmaceuticals -- which comprise a major portion of the Portfolio's health care position -- generated lackluster performance. Stock selection in the industrials sector also hampered relative gains, as the Portfolio's holdings in capital goods and aerospace and defense did not keep pace with other stronger performing stocks in the sector. Also within the industrials sector, the Portfolio's lack of exposure to the transportation industry had a negative impact on relative performance. Although the Portfolio underperformed the Russell 1000 Value Index during the six-month period, it did achieve positive returns on an absolute basis across all stock market sectors except technology. On a relative basis, the Portfolio benefited from an underweight in the utilities sector. The sector has not performed as well as it did in 2005, and investors rotated away from utility stocks in pursuit of higher yields in fixed income investments. (The rising interest rate environment makes utility stock yields less attractive relative to certain fixed income investments.) Elsewhere, the Portfolio was well positioned within the consumer discretionary sector. Select holdings in the retail and media industries combined with minimal exposure to the weak performing auto and apparel industries added to relative gains during the period. The Portfolio's fixed income investments focused on higher-quality securities. While this defensive posture provided some performance support over the period, much of that support was offset by the underperformance of higher-rated bonds relative to lower-rated segments of the market. The Portfolio benefited from strong security selection among corporate issues. The Portfolio's investments in convertible securities made gains in the energy, information technology, and industrials sectors. Within the consumer discretionary sector, media holdings were standouts as both stock selection and a resulting overweight in media contributed positively. However, security selection in the financials sector had a negative impact. 11 THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE PORTFOLIO IN THE FUTURE. Income Plus Portfolio For the six-month period ended June 30, 2006, Income Plus Portfolio Class X shares produced a total return of - 0.78 percent versus - 0.72 percent for the Lehman Brothers U.S. Aggregate Index(10). For the same period, the Portfolio's Class Y shares returned - 1.00 percent. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY CHARGES BY YOUR INSURANCE COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE. Within the corporate sector, we employed a defensive strategy with a focus on higher-quality securities. While this defensive posture provided some performance support over the period, much of that support was offset by the underperformance of higher-rated bonds relative to lower-rated segments of the market. The Portfolio benefited from strong security selection among corporate issues. During the period, we kept the Portfolio's overall duration* well below that of the Lehman Brothers U.S. Aggregate Index. This posture was beneficial as interest rates rose across the market, especially in the short- and intermediate-portions of the yield curve. THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE PORTFOLIO IN THE FUTURE. * A MEASURE OF THE SENSITIVITY OF A BOND'S PRICE TO CHANGES IN INTEREST RATES, EXPRESSED IN YEARS. EACH YEAR OF DURATION REPRESENTS AN EXPECTED 1 PERCENT CHANGE IN THE PRICE OF A BOND FOR EVERY 1 PERCENT CHANGE IN INTEREST RATES. THE LONGER A BOND'S DURATION, THE GREATER THE EFFECT OF INTEREST-RATE MOVEMENTS ON ITS PRICE. TYPICALLY, FUNDS WITH SHORTER DURATIONS PERFORM BETTER IN RISING INTEREST-RATE ENVIRONMENTS, WHILE FUNDS WITH LONGER DURATIONS PERFORM BETTER WHEN RATES DECLINE. -------------------------- (10) 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. 12 Limited Duration Portfolio For the six-month period ended June 30, 2006, Limited Duration Portfolio Class X shares produced a total return of 1.36 percent versus 0.65 percent for the Lehman Brothers U.S. Credit Index (1-5 Year)(11). For the same period, the Portfolio's Class Y shares returned 1.34 percent. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY CHARGES BY YOUR INSURANCE COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE. During the period, we kept the Portfolio's overall duration* well below that of the Lehman Brothers U.S. Credit Index (1-5 Year). This posture was beneficial as interest rates rose across the market, especially in the short- and intermediate-portions of the yield curve. Our focus on higher-coupon mortgage backed securities with slow prepayments boosted the Portfolio's yield, and benefited performance. Gains from these securities were offset, however, by a large underweight in lower- and current-coupon issues, which detracted from the Portfolio's relative performance. Within the corporate sector, we employed a defensive strategy with a focus on higher-quality securities. While this defensive posture provided some performance support over the period, much of that support was offset by the underperformance of higher-rated bonds relative to lower-rated segments of the market. The Portfolio benefited from strong security selection among corporate issues. THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE PORTFOLIO IN THE FUTURE. * A MEASURE OF THE SENSITIVITY OF A BOND'S PRICE TO CHANGES IN INTEREST RATES, EXPRESSED IN YEARS. EACH YEAR OF DURATION REPRESENTS AN EXPECTED 1 PERCENT CHANGE IN THE PRICE OF A BOND FOR EVERY 1 PERCENT CHANGE IN INTEREST RATES. THE LONGER A BOND'S DURATION, THE GREATER THE EFFECT OF INTEREST-RATE MOVEMENTS ON ITS PRICE. TYPICALLY, FUNDS WITH SHORTER DURATIONS PERFORM BETTER IN RISING INTEREST-RATE ENVIRONMENTS, WHILE FUNDS WITH LONGER DURATIONS PERFORM BETTER WHEN RATES DECLINE. ---------- (11) THE LEHMAN BROTHERS U.S. CREDIT INDEX (1-5 YEAR) INCLUDES U.S. CORPORATE AND SPECIFIED FOREIGN DEBENTURES AND SECURED NOTES WITH MATURITIES OF ONE TO FIVE YEARS. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. 13 Money Market Portfolio AN INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH MONEY MARKET FUNDS SEEK TO PRESERVE THE VALUE OF AN INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN SUCH FUNDS. As of June 30, 2006, Money Market Portfolio had net assets of approximately $252 million with an average portfolio maturity of 25 days. For the seven-day period ended June 30, 2006, the Portfolio's Class X shares provided an effective annualized yield of 4.75 percent and a current yield of 4.64 percent, while its 30-day moving average yield for June was 4.62 percent. For the six-month period ended June 30, 2006, the Portfolio's Class X shares returned 2.13 percent. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. For the seven-day period ended June 30, 2006, the Portfolio's Class Y shares provided an effective annualized yield of 4.48 percent and a current yield of 4.39 percent, while its 30-day moving average yield for June was 4.37 percent. For the six-month period ended June 30, 2006, the Portfolio's Class Y shares returned 2.00 percent. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY CHARGES BY YOUR INSURANCE COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE. Our strategy in managing the Portfolio remained consistent with its long-term focus on maintaining preservation of capital and liquidity. We adhered to a conservative approach in managing the Portfolio that emphasized purchasing high-quality money market obligations and avoiding the use of derivatives or structured notes that might fluctuate excessively with changing interest rates. We also took advantage of the rising yields available on money market securities. As short-term interest rates climbed, we reinvested the proceeds of maturing short-term holdings into higher-yielding securities. THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE PORTFOLIO IN THE FUTURE. 14 S&P 500 Index Portfolio For the six-month period ended June 30, 2006, S&P 500 Index Portfolio Class X shares produced a total return of 2.60 percent versus 2.71 percent for the S&P 500(R) Index(12). For the same period, the Portfolio's Class Y shares returned 2.46 percent. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY CHARGES BY YOUR INSURANCE COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE. For the period overall, the sectors with the best absolute performance were telecommunication services, energy, industrials and materials. However, given that the S&P 500 Index is market-capitalization weighted (and that the Portfolio seeks to mirror the composition of the Index), the overall contribution of each sector was also influenced by its proportional size within the Index as a whole. As such, the largest contributors to the Portfolio's return were energy, industrials and financials. Energy stocks continued to lead the market, supported by high oil prices. Growth in the global economy provided a favorable backdrop for the economically sensitive industrials sector. Gains in the financials sector were driven by those companies that were exposed to the robust pace of merger and acquisition activity and ongoing strength in capital markets. Conversely, only two sectors had negative returns for the six-month period. In the health care sector, health care equipment and services and biotechnology stocks were notable laggards. The technology sector lost ground primarily in the semiconductors industry. Concerns about languishing sales and price wars led the group lower. Software and services and hardware and equipment stocks also declined amid weak demand for software and personal computers from both consumers and corporations. THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE PORTFOLIO IN THE FUTURE. ---------- (12) THE STANDARD & POOR'S 500(R) INDEX (S&P 500(R)) IS A BROAD-BASED INDEX, THE PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 500 WIDELY-HELD COMMON STOCKS CHOSEN FOR MARKET SIZE, LIQUIDITY AND INDUSTRY GROUP REPRESENTATION. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. 15 Strategist Portfolio For the six-month period ended June 30, 2006, Strategist Portfolio Class X shares produced a total return of 5.49 percent versus 2.71 percent for the S&P 500(R) Index(13) and - 1.15 percent for the Lehman Brothers U.S. Government/Credit Index(14). For the same period, the Portfolio's Class Y shares returned 5.36 percent. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY CHARGES BY YOUR INSURANCE COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE. Strategist Portfolio's flexible investment strategy allows investment across stocks, bonds, cash and other investment classes. To determine the specific allocation among asset classes throughout the period, we rigorously evaluated a comprehensive array of quantitative and qualitative factors. The quantitative analysis comprised an extensive "top-down" asset class review of many macroeconomic variables, with primary focus on three core factors: monetary policy and its impact on liquidity, inflation trend changes and corporate profitability trends. A second, more qualitative process then broadened the analysis to determine which individual sectors and industries would offer the best opportunities, in our view, given the macroeconomic climate. Individual holdings were then selected to provide desired exposure to asset classes and sectors. As the result of our investment discipline, Strategist Portfolio shifted throughout the first six months of 2006 to take into account the deteriorating outlook for inflation and the vigilance of the Federal Reserve. In our view, a more defensive and risk-averse strategy seemed appropriate in light of these developments. We initially reduced the Portfolio's fixed income exposure in March from 25 percent of total net assets to 20 percent, and subsequently lowered the equity exposure in May from 65 percent to 60 percent. The Portfolio's cash allocation was raised from 10 percent to 20 percent during the reporting period. We also made a number of changes in the Portfolio's sector and industry exposures throughout the six-month period, reflecting many of the concerns cited previously. We viewed a number of cyclical industries, which had rewarded the Portfolio well in 2005, as increasingly vulnerable. Generally, we reduced the Portfolio's exposure to the most economically sensitive sectors and reinvested proceeds in more stable industries. As such, during the reporting period, we reduced the Portfolio's largest sector weight, ---------- (13) THE STANDARD & POOR'S 500(R) INDEX (S&P 500(R)) IS A BROAD-BASED INDEX, THE PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 500 WIDELY-HELD COMMON STOCKS CHOSEN FOR MARKET SIZE, LIQUIDITY AND INDUSTRY GROUP REPRESENTATION. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. (14) THE LEHMAN BROTHERS U.S. GOVERNMENT/CREDIT INDEX TRACKS THE PERFORMANCE OF GOVERNMENT AND CORPORATE OBLIGATIONS, INCLUDING U.S. GOVERNMENT AGENCY AND TREASURY SECURITIES AND CORPORATE AND YANKEE BONDS. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. 16 information technology, from a significant overweight versus the benchmark S&P 500 Index to a modest overweight. We also eliminated an overweight position in industrials, moving to an underweight position versus the benchmark. Proceeds were reallocated to consumer staples, where the Portfolio's modest overweight position doubled to a more substantial position. Exposure to telecommunications services -- specifically the traditionally defensive telephone utility companies -- was also increased from a modest underweight position to an equal weight with the S&P 500 Index. We kept the fixed income component of the Portfolio generally defensive throughout the period under review. As fixed income sectors sold off, short-term debt was reallocated to mortgage securities and corporate and government bonds. At the end of June, the fixed income portion of the portfolio averaged an effective duration* of 4.54 years, slightly below the benchmark duration as measured by the Lehman Brothers Government/Credit Index. The Portfolio held approximately a quarter of its fixed income assets in government-issued bonds, about a third of its assets in corporates, and the balance in mortgages and short-term paper at the close of the period. THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE PORTFOLIO IN THE FUTURE. * A MEASURE OF THE SENSITIVITY OF A BOND'S PRICE TO CHANGES IN INTEREST RATES, EXPRESSED IN YEARS. EACH YEAR OF DURATION REPRESENTS AN EXPECTED 1 PERCENT CHANGE IN THE PRICE OF A BOND FOR EVERY 1 PERCENT CHANGE IN INTEREST RATES. THE LONGER A BOND'S DURATION, THE GREATER THE EFFECT OF INTEREST-RATE MOVEMENTS ON ITS PRICE. TYPICALLY, FUNDS WITH SHORTER DURATIONS PERFORM BETTER IN RISING-INTEREST-RATE ENVIRONMENTS, WHILE FUNDS WITH LONGER DURATIONS PERFORM BETTER WHEN RATES DECLINE. 17 Utilities Portfolio For the six-month period ended June 30, 2006, Utilities Portfolio Class X shares produced a total return of 4.61 percent versus 2.71 percent for the S&P 500(R) Index(15). For the same period, the Portfolio's Class Y shares returned 4.48 percent. Past performance is no guarantee of future results. THE PERFORMANCE OF THE PORTFOLIO'S TWO SHARE CLASSES VARIES BECAUSE EACH HAS DIFFERENT EXPENSES. THE PORTFOLIO'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY CHARGES BY YOUR INSURANCE COMPANY. SUCH COSTS WOULD LOWER PERFORMANCE. A combined weighting of 41 percent among the telecommunications services and natural gas/energy sectors contributed to the Portfolio's superior returns relative to the S&P 500 Index. In addition, stock selection within certain wireless and coal companies further enhanced overall performance. At the close of this period, the Portfolio was well diversified across the utilities sector. Electric utilities represented 59 percent of the equity allocation, while natural gas/energy represented 23 percent and telecommunications services represented 18 percent. The average cash position over the six-month period was in the range of 1.0 to 2.0 percent. We note that the Portfolio's holdings and allocations may be modified at any time, in response to our analysis of broader trends or company specific fundamentals. THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE PORTFOLIO IN THE FUTURE. ---------- (15) THE STANDARD & POOR'S 500(R) INDEX (S&P 500(R)) IS A BROAD-BASED INDEX, THE PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 500 WIDELY-HELD COMMON STOCKS CHOSEN FOR MARKET SIZE, LIQUIDITY AND INDUSTRY GROUP REPRESENTATION. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. 18 Proxy Voting Policy and Procedures and Proxy Voting Record You may obtain a copy of the Portfolios' Proxy Voting Policy and Procedures without charge, upon request, by calling toll free (800) 869-NEWS or by visiting the Mutual Fund Center on our Web site at www.morganstanley.com. It is also available on the Securities and Exchange Commission's Web site at http://www.sec.gov. You may obtain information regarding how the Portfolios voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 without charge by visiting the Mutual Fund Center on our Web site at www.morganstanley.com. This information is also available on the Securities and Exchange Commission's Web site at http://www.sec.gov. 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. 19 Morgan Stanley Variable Investment Series FUND PERFORMANCE - JUNE 30, 2006 AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED JUNE 30, 2006(1)
SINCE DATE OF CLASS X 1 YEAR 5 YEARS 10 YEARS INCEPTION INCEPTION ------- ------ ------- -------- --------- --------- Aggressive Equity 23.47% 4.71% N/A 5.06% 5/4/1999 Dividend Growth 6.72 2.29 6.53% 8.84 3/1/1990 Equity 16.38 2.43 9.00 12.02 3/9/1984 European Equity 24.51 5.93 8.72 11.50 3/1/1991 Global Advantage 13.16 3.13 N/A 0.18 5/18/1998 Global Dividend Growth 13.02 7.64 7.85 8.76 2/23/1994 High Yield 4.55 1.75 (3.95) 3.58 3/9/1984 Income Builder 8.19 5.82 N/A 6.95 1/21/1997 Income Plus (0.69) 5.44 6.24 7.36 3/1/1987 Limited Duration 2.30 3.01 N/A 3.49 5/4/1999 Money Market 3.83 1.84 3.54 4.99 3/9/1984 S & P 500 Index 8.37 2.09 N/A 2.91 5/18/1998 Strategist 12.57 6.68 9.18 9.36 3/1/1987 Utilities 8.14 1.73 6.38 8.36 3/1/1990
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH LESS THAN THEIR ORIGINAL COST. THE TABLE DOES NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PERFORMANCE FOR CLASS X SHARES WILL VARY FROM THE PERFORMANCE OF CLASS Y SHARES DUE TO DIFFERENCES IN EXPENSES. ---------- (1) Figure assumes reinvestment of all distributions for the underlying fund based on net asset value (NAV). It does not reflect the deduction of insurance expenses, an annual contract maintenance fee, or surrender charges. 20 AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED JUNE 30, 2006(1)
SINCE DATE OF CLASS Y 1 YEAR 5 YEARS 10 YEARS INCEPTION INCEPTION ------- ------ ------- -------- --------- --------- Aggressive Equity 23.17% 4.44% N/A (0.77)% 6/5/2000 Dividend Growth 6.46 2.05 N/A 3.12 6/5/2000 Equity 16.10 2.18 N/A (2.31) 6/5/2000 European Equity 24.22 5.67 N/A 0.69 6/5/2000 Global Advantage 12.93 2.87 N/A (3.12) 6/5/2000 Global Dividend Growth 12.76 7.38 N/A 5.38 6/5/2000 High Yield 4.29 1.49 N/A (7.45) 6/5/2000 Income Builder 8.02 5.56 N/A 5.56 6/5/2000 Income Plus (1.04) 5.17 N/A 6.25 6/5/2000 Limited Duration 2.05 2.78 N/A 3.31 6/5/2000 Money Market 3.57 1.59 N/A 2.25 6/5/2000 S & P 500 Index 8.16 1.83 N/A (1.38) 6/5/2000 Strategist 12.30 6.41 N/A 4.03 6/5/2000 Utilities 7.88 1.46 N/A (0.36) 6/5/2000
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH LESS THAN THEIR ORIGINAL COST. THE TABLE DOES NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PERFORMANCE FOR CLASS Y SHARES WILL VARY FROM THE PERFORMANCE OF CLASS X SHARES DUE TO DIFFERENCES IN EXPENSES. ---------- (1) Figure assumes reinvestment of all distributions for the underlying fund based on net asset value (NAV). It does not reflect the deduction of insurance expenses, an annual contract maintenance fee, or surrender charges. 21 Morgan Stanley Variable Investment Series EXPENSE EXAMPLE - JUNE 30, 2006 As a shareholder of the Portfolios, you incur two types of costs: (1) insurance company charges; and (2) ongoing costs, including advisory fees; distribution and service (12b-1) fees; and other Portfolios expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolios and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period 01/01/06 - 06/30/06. Actual Expenses The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table below provides information about hypothetical expenses based on the Portfolios' actual expense ratios and an assumed rate of return of 5% per year before expenses, which is not the Portfolios' actual returns. 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 Portfolios and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any insurance company charges. Therefore, the second line of the table is useful in comparing ongoing costs, and will not help you determine the relative total cost of owning different funds. In addition, if these insurance company charges were included, your costs would have been higher. 22 MONEY MARKET
BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD * ------------- ------------- ------------------- 01/01/06 06/30/06 01/01/06 - 06/30/06 ------------- ------------- ------------------- CLASS X Actual (2.13% return) $1,000.00 $1,021.30 $2.77 Hypothetical (5% annual return before expenses) $1,000.00 $1,022.19 $2.77 CLASS Y Actual (2.00% return) $1,000.00 $1,020.00 $4.03 Hypothetical (5% annual return before expenses) $1,000.00 $1,020.94 $4.03
---------- * EXPENSES ARE EQUAL TO THE PORTFOLIO'S ANNUALIZED EXPENSE RATIOS OF 0.55% AND 0.80% FOR CLASS X AND CLASS Y SHARES, RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 182**/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). ** ADJUSTED TO REFLECT NON-BUSINESS DAY ACCRUALS. LIMITED DURATION
BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD * ------------- ------------- ------------------- 01/01/06 06/30/06 01/01/06 - 06/30/06 ------------- ------------- ------------------- CLASS X Actual (1.36% return) $1,000.00 $1,013.60 $2.25 Hypothetical (5% annual return before expenses) $1,000.00 $1,022.56 $2.26 CLASS Y Actual (1.34% return) $1,000.00 $1,013.40 $3.49 Hypothetical (5% annual return before expenses) $1,000.00 $1,021.32 $3.51
---------- * EXPENSES ARE EQUAL TO THE PORTFOLIO'S ANNUALIZED EXPENSE RATIOS OF 0.45% AND 0.70% FOR CLASS X AND CLASS Y SHARES, RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). INCOME PLUS
BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD * ------------- ------------- ------------------- 01/01/06 06/30/06 01/01/06 - 06/30/06 ------------- ------------- ------------------- CLASS X Actual (-0.78% return) $1,000.00 $ 992.20 $2.72 Hypothetical (5% annual return before expenses) $1,000.00 $1,022.07 $2.76 CLASS Y Actual (-1.00% return) $1,000.00 $ 990.00 $3.95 Hypothetical (5% annual return before expenses) $1,000.00 $1,020.83 $4.01
---------- * EXPENSES ARE EQUAL TO THE PORTFOLIO'S ANNUALIZED EXPENSE RATIOS OF 0.55%, AND 0.80% FOR CLASS X AND CLASS Y SHARES, RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). 23 HIGH YIELD
BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD * ------------- ------------- ------------------- 01/01/06 06/30/06 01/01/06 - 06/30/06 ------------- ------------- ------------------- CLASS X Actual (2.70% return) $1,000.00 $1,027.00 $4.57 Hypothetical (5% annual return before expenses) $1,000.00 $1,020.28 $4.56 CLASS Y Actual (2.57% return) $1,000.00 $1,025.70 $5.83 Hypothetical (5% annual return before expenses) $1,000.00 $1,019.04 $5.81
---------- * EXPENSES ARE EQUAL TO THE PORTFOLIO'S ANNUALIZED EXPENSE RATIOS OF 0.91% AND 1.16% FOR CLASS X AND CLASS Y SHARES, RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). UTILITIES
BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD * ------------- ------------- ------------------- 01/01/06 06/30/06 01/01/06 - 06/30/06 ------------- ------------- ------------------- CLASS X Actual (4.61% return) $1,000.00 $1,046.10 $3.60 Hypothetical (5% annual return before expenses) $1,000.00 $1,021.27 $3.56 CLASS Y Actual (4.48% return) $1,000.00 $1,044.80 $4.87 Hypothetical (5% annual return before expenses) $1,000.00 $1,020.03 $4.81
---------- * EXPENSES ARE EQUAL TO THE PORTFOLIO'S ANNUALIZED EXPENSE RATIOS OF 0.71% AND 0.96% FOR CLASS X AND CLASS Y SHARES, RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). INCOME BUILDER
BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD * ------------- ------------- ------------------- 01/01/06 06/30/06 01/01/06 - 06/30/06 ------------- ------------- ------------------- CLASS X Actual (2.72% return) $1,000.00 $1,027.20 $4.22 Hypothetical (5% annual return before expenses) $1,000.00 $1,020.63 $4.21 CLASS Y Actual (2.68% return) $1,000.00 $1,026.80 $5.48 Hypothetical (5% annual return before expenses) $1,000.00 $1,019.39 $5.46
---------- * EXPENSES ARE EQUAL TO THE PORTFOLIO'S ANNUALIZED EXPENSE RATIOS OF 0.84% AND 1.09% FOR CLASS X AND CLASS Y SHARES, RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). 24 DIVIDEND GROWTH
BEGINNING ENDING EXPENSES PAID ACCOUNT ACCOUNT DURING VALUE VALUE PERIOD * --------- --------- ------------- 01/01/06 - 01/01/06 06/30/06 06/30/06 --------- --------- ------------- CLASS X Actual (-0.34% return) $1,000.00 $ 996.60 $2.87 Hypothetical (5% annual return before expenses) $1,000.00 $1,021.92 $2.91 CLASS Y Actual (-0.47% return) $1,000.00 $ 995.30 $4.11 Hypothetical (5% annual return before expenses) $1,000.00 $1,020.68 $4.16
---------- * EXPENSES ARE EQUAL TO THE PORTFOLIO'S ANNUALIZED EXPENSE RATIOS OF 0.58% AND 0.83% FOR CLASS X AND CLASS Y SHARES, RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). GLOBAL DIVIDEND GROWTH
BEGINNING ENDING EXPENSES PAID ACCOUNT ACCOUNT DURING VALUE VALUE PERIOD * --------- --------- ------------- 01/01/06 - 01/01/06 06/30/06 06/30/06 --------- --------- ------------- CLASS X Actual (5.10% return) $1,000.00 $1,051.00 $4.22 Hypothetical (5% annual return before expenses) $1,000.00 $1,020.68 $4.16 CLASS Y Actual (4.94% return) $1,000.00 $1,049.40 $5.49 Hypothetical (5% annual return before expenses) $1,000.00 $1,019.44 $5.41
---------- * EXPENSES ARE EQUAL TO THE PORTFOLIO'S ANNUALIZED EXPENSE RATIOS OF 0.83%, AND 1.08% FOR CLASS X AND CLASS Y SHARES, RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). EUROPEAN EQUITY
BEGINNING ENDING EXPENSES PAID ACCOUNT ACCOUNT DURING VALUE VALUE PERIOD * --------- --------- ------------- 01/01/06 - 01/01/06 06/30/06 06/30/06 --------- --------- ------------- CLASS X Actual (11.57% return) $1,000.00 $1,115.70 $5.25 Hypothetical (5% annual return before expenses) $1,000.00 $1,019.84 $5.01 CLASS Y Actual (11.42% return) $1,000.00 $1,114.20 $6.55 Hypothetical (5% annual return before expenses) $1,000.00 $1,018.60 $6.26
---------- * EXPENSES ARE EQUAL TO THE PORTFOLIO'S ANNUALIZED EXPENSE RATIOS OF 1.00% AND 1.25% FOR CLASS X AND CLASS Y SHARES, RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). IF THE FUND HAD BORNE ALL OF ITS EXPENSES, THE ANNUALIZED EXPENSE RATIOS WOULD HAVE BEEN 1.08% AND 1.33% FOR CLASS X AND CLASS Y SHARES, RESPECTIVELY. 25 EQUITY
BEGINNING ENDING EXPENSES PAID ACCOUNT ACCOUNT DURING VALUE VALUE PERIOD * --------- --------- ------------- 01/01/06 - 01/01/06 06/30/06 06/30/06 --------- --------- ------------- CLASS X Actual (-1.34% return) $1,000.00 $ 986.60 $2.61 Hypothetical (5% annual return before expenses) $1,000.00 $1,022.17 $2.66 CLASS Y Actual (-1.48% return) $1,000.00 $ 985.20 $3.84 Hypothetical (5% annual return before expenses) $1,000.00 $1,020.93 $3.91
---------- * EXPENSES ARE EQUAL TO THE PORTFOLIO'S ANNUALIZED EXPENSE RATIOS OF 0.53%, AND 0.78% FOR CLASS X AND CLASS Y SHARES, RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). S&P 500 INDEX
BEGINNING ENDING EXPENSES PAID ACCOUNT ACCOUNT DURING VALUE VALUE PERIOD * --------- --------- ------------- 01/01/06 - 01/01/06 06/30/06 06/30/06 --------- --------- ------------- CLASS X Actual (2.60% return) $1,000.00 $1,026.00 $1.36 Hypothetical (5% annual return before expenses) $1,000.00 $1,023.46 $1.35 CLASS Y Actual (2.46% return) $1,000.00 $1,024.60 $2.61 Hypothetical (5% annual return before expenses) $1,000.00 $1,022.22 $2.61
---------- * EXPENSES ARE EQUAL TO THE PORTFOLIO'S ANNUALIZED EXPENSE RATIOS OF 0.27% AND 0.52% FOR CLASS X AND CLASS Y SHARES, RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). GLOBAL ADVANTAGE
BEGINNING ENDING EXPENSES PAID ACCOUNT ACCOUNT DURING VALUE VALUE PERIOD * --------- --------- ------------- 01/01/06 - 01/01/06 06/30/06 06/30/06 --------- --------- ------------- CLASS X Actual (3.15% return) $1,000.00 $1,031.50 $4.89 Hypothetical (5% annual return before expenses) $1,000.00 $1,019.98 $4.86 CLASS Y Actual (3.02% return) $1,000.00 $1,030.20 $6.14 Hypothetical (5% annual return before expenses) $1,000.00 $1,018.74 $6.11
---------- * EXPENSES ARE EQUAL TO THE PORTFOLIO'S ANNUALIZED EXPENSE RATIOS OF 0.97% AND 1.22% FOR CLASS X AND CLASS Y SHARES, RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). 26 AGGRESSIVE EQUITY
BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD * ------------- ------------- --------------- 01/01/06 - 01/01/06 06/30/06 06/30/06 ------------- ------------- --------------- CLASS X Actual (2.40% return) $1,000.00 $1,024.00 $4.37 Hypothetical (5% annual return before expenses) $1,000.00 $1,020.48 $4.36 CLASS Y Actual (2.35% return) $1,000.00 $1,023.50 $5.62 Hypothetical (5% annual return before expenses) $1,000.00 $1,019.24 $5.61
---------- * EXPENSES ARE EQUAL TO THE PORTFOLIO'S ANNUALIZED EXPENSE RATIOS OF 0.87% AND 1.12% FOR CLASS X AND CLASS Y SHARES, RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). STRATEGIST
BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD * ------------- ------------- --------------- 01/01/06 - 01/01/06 06/30/06 06/30/06 ------------- ------------- --------------- CLASS X Actual (5.49% return) $1,000.00 $1,054.90 $2.80 Hypothetical (5% annual return before expenses) $1,000.00 $1,022.07 $2.76 CLASS Y Actual (5.36% return) $1,000.00 $1,053.60 $4.07 Hypothetical (5% annual return before expenses) $1,000.00 $1,020.83 $4.01
* EXPENSES ARE EQUAL TO THE PORTFOLIO'S ANNUALIZED EXPENSE RATIOS OF 0.55% AND 0.80% FOR CLASS X AND CLASS Y SHARES, RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). 27 Morgan Stanley Variable Investment Series INVESTMENT ADVISORY AGREEMENT APPROVAL - JUNE 30, 2006 NATURE, EXTENT AND QUALITY OF SERVICES The Board reviewed and considered the nature and extent of the investment advisory services provided by the Investment Adviser under the Advisory Agreement, including portfolio management, investment research and fixed income securities trading. The Board reviewed similar information and factors regarding each Sub-Adviser, to the extent applicable. The Board also reviewed and considered the nature and extent of the non-advisory, administrative services provided by the Portfolios' Administrator under the Administration Agreement, including accounting, clerical, bookkeeping, compliance, business management and planning, and the provision of supplies, office space and utilities at the Investment Adviser's expense. (The Investment Adviser, the Sub-Advisers and the Administrator together are referred to as the "Adviser" and the Advisory and Administration Agreements together are referred to as the "Management Agreement.") The Board also compared the nature of the services provided by the Adviser with similar services provided by non-affiliated advisers as reported to the Board by Lipper Inc. ("Lipper"). The Board reviewed and considered the qualifications of the portfolio managers, the senior administrative managers and other key personnel of the Adviser who provide the advisory and administrative services to the Portfolios. The Board determined that the Adviser's portfolio managers and key personnel are well qualified by education and/or training and experience to perform the services in an efficient and professional manner. The Board concluded that the nature and extent of the advisory and administrative services provided were necessary and appropriate for the conduct of the business and investment activities of each Portfolio. The Board also concluded that the overall quality of the advisory and administrative services was satisfactory. PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS On a regular basis, the Board reviews the performance of all funds in the Morgan Stanley Fund Complex, including the Portfolios, compared to their peers, paying specific attention to the underperforming funds. In addition, the Board specifically reviewed each Portfolio's performance for the one-, three- and five-year periods ended November 30, 2005, as shown in reports provided by Lipper (the "Lipper Reports"), compared to the performance of comparable funds selected by Lipper (the "performance peer group") for each Portfolio. The Board discussed with the Adviser the performance goals and the actual results achieved in managing each Portfolio. When a fund underperforms its performance peer group, the Board discusses with the Adviser the causes of the underperformance and, where necessary, specific changes to the fund's investment strategy or investment personnel. With respect to the Strategist, Income Builder, Utilities, S&P 500 Index, Aggressive Equity, Equity and Income Plus Portfolios, the Board concluded that each Portfolio's performance was competitive with that of its performance peer group. 28 With respect to the Dividend Growth and Money Market Portfolios, the Board considered that adherence to the Portfolios' investment strategies may result in periods of underperformance, but that, over time, adherence to the Portfolios' investment strategies is appropriate. The Board concluded that the performance of the Portfolios was acceptable. With respect to the European Equity, Global Advantage, Global Dividend Growth, High Yield and Limited Duration Portfolios, the Board concluded that each Portfolio can reasonably be expected to be competitive with that of its performance peer group based on recent action taken or proposed to be taken by the Adviser with respect to each Portfolio's investment strategy and/or investment personnel. FEES RELATIVE TO OTHER PROPRIETARY FUNDS MANAGED BY THE ADVISER WITH COMPARABLE INVESTMENT STRATEGIES The Board reviewed the advisory and administrative fee (together, the "management fee") rate paid by each Portfolio under the Management Agreement. With respect to the Dividend Growth, Strategist, Income Builder, European Equity, Global Advantage, S&P 500 Index, Aggressive Equity and Money Market Portfolios, the Board noted that the management fee rates were comparable to the management fee rates charged by the Adviser to other proprietary funds it manages with investment strategies comparable to those of the Portfolios. With respect to the Global Dividend Growth, Utilities, High Yield, Income Plus and Limited Duration Portfolios, the Board noted that the management fee rates were comparable to the management fee rates charged by the Adviser to other proprietary funds it manages with investment strategies comparable to those of the Portfolios taking into account the scope of the services provided. With respect to the Equity Portfolio, the Board noted that the Adviser did not manage any other funds with investment strategies comparable to those of the Portfolio. FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS The Board reviewed the management fee rate and total expense ratio of each Portfolio as compared to the average management fee rate and average total expense ratio for funds, selected by Lipper (the "expense peer group"), managed by other advisers with investment strategies comparable to those of the Portfolios, as shown in the Lipper Reports. The Board concluded that each Portfolio's management fee rate and total expense ratio were competitive with those of its expense peer group. 29 BREAKPOINTS AND ECONOMIES OF SCALE The Board reviewed the structure of each Portfolio's management fee schedule under the Management Agreement and noted that each Portfolio's management fee schedule, except the Limited Duration Portfolio, includes one or more breakpoints. The Board also reviewed the level of each Portfolio's management fee and noted that each fee, as a percentage of the Portfolio's net assets, would decrease as net assets increase because each management fee includes one or more breakpoints. The Board concluded that each Portfolio's management fee would reflect economies of scale as assets increase. With respect to the Limited Duration Portfolio, the Board noted that the management fee schedule does not include any breakpoints. The Board noted that the Portfolio'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 each Portfolio and during the last two years from their relationship with the Morgan Stanley Fund Complex and reviewed with the Adviser the cost allocation methodology used to determine the profitability of the Adviser and affiliates. Based on its review of the information it received, the Board concluded that the profits earned by the Adviser and affiliates were not excessive in light of the advisory, administrative and other services provided to the Portfolios. FALL-OUT BENEFITS The Board considered so-called "fall-out benefits" derived by the Adviser and affiliates from their relationship with the Portfolio and the Morgan Stanley Fund Complex. The Board considered the "float" benefits derived from handling of checks for purchases and sales of Portfolio shares, through a broker-dealer affiliate of the Adviser. The Board also considered that a broker-dealer affiliate of the Adviser receives from each Portfolio 12b-1 fees for distribution and shareholder services. The Board concluded that the float benefits were relatively small and the 12b-1 fees were competitive with those of other broker-dealers. With respect to the Dividend Growth, Strategist, Income Builder, European Equity, Global Advantage, Global Dividend Growth, Utilities, S&P 500 Index, Aggressive Equity and Equity Portfolios, the Board considered "soft dollar" benefits (discussed in the next section). The Board also considered that an affiliate of the Adviser sold a joint venture that owned an electronic trading system network ("ECN"), which may be used by the Adviser for trading on behalf of the Portfolios. As part of the sale of the joint venture, the affiliate receives a 10-year payout based on the revenue stream from trading on the ECN. Although the 30 affiliate disgorges the portion of the payout that is comprised of commissions received from trades executed by the Adviser on the ECN to a charitable organization, the Board considered the fact that trades by the Adviser would increase order flow, and, thus, result in a potential fall-out benefit to the affiliate. The Board concluded that the affiliate disgorged revenues in connection with the ECN-related revenue and the potential fall-out benefit from increased order flow was relatively small. SOFT DOLLAR BENEFITS The Board considered whether the Adviser realizes any benefits as a result of brokerage transactions executed through "soft dollar" arrangements. Under such arrangements, brokerage commissions paid by the Portfolios and/or other funds managed by the Adviser would be used to pay for research that a securities broker obtains from third parties, or to pay for both research and execution services from securities brokers who effect transactions for the Portfolios. With respect to the Dividend Growth, Strategist, Income Builder, European Equity, Global Advantage, Global Dividend Growth, Utilities, Aggressive Equity and Equity Portfolios, the Adviser informed the Board that it does not use Portfolio commissions to pay for third party research. It does use commissions to pay for research which is bundled with execution services. The Board recognized that the receipt of such research from brokers may reduce the Adviser's costs but concluded that the receipt of such research strengthens the investment management resources of the Adviser, which may ultimately benefit the Portfolios and other funds in the Morgan Stanley Fund Complex. With respect to the S&P 500 Index Portfolio, the Adviser informed the Board that the Portfolio's commissions are used to pay for execution services only. With respect to the High Yield, Income Plus, Limited Duration and Money Market Portfolios, the Board noted that each Portfolio invests only in fixed income securities, which do not generate soft dollars. ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE PORTFOLIOS' NEEDS The Board considered whether the Adviser is financially sound and has the resources necessary to perform its obligations under the Management Agreement. The Board noted that the Adviser's operations remain profitable, although increased expenses in recent years have reduced the Adviser's profitability. The Board concluded that the Adviser has the financial resources necessary to fulfill its obligations under the Management Agreement. HISTORICAL RELATIONSHIP BETWEEN THE PORTFOLIOS AND THE ADVISER The Board also reviewed and considered the historical relationship between each Portfolio and the Adviser, including the organizational structure of the Adviser, the policies and procedures formulated and adopted 31 by the Adviser for managing the Portfolios' operations and the Board's confidence in the competence and integrity of the senior managers and key personnel of the Adviser. The Board concluded that it is beneficial for each Portfolio to continue its relationship with the Adviser. OTHER FACTORS AND CURRENT TRENDS The Board considered the controls and procedures adopted and implemented by the Adviser and monitored by the Fund's Chief Compliance Officer and concluded that the conduct of business by the Adviser indicates a good faith effort on its part to adhere to high ethical standards in the conduct of each Portfolio's business. GENERAL CONCLUSION After considering and weighing all of the above factors, the Board concluded that it would be in the best interest of each Portfolio and its shareholders to approve renewal of the Management Agreement for another year. 32 Morgan Stanley Variable Investment Series - Money Market PORTFOLIO OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
ANNUALIZED PRINCIPAL YIELD AMOUNT IN ON DATE OF MATURITY THOUSANDS DESCRIPTION PURCHASE DATE VALUE ------------------------------------------------------------------------------------------------------------ COMMERCIAL PAPER (78.7%) ASSET-BACKED - AUTO (6.5%) $ 7,000 DaimlerChrysler Revolving Auto Conduit LLC 5.16% 07/31/06 $ 6,970,133 5,267 DaimlerChrysler Revolving Auto Conduit LLC-A1 5.11 - 5.24 07/17/06 - 07/19/06 5,254,160 4,270 New Center Asset Trust 5.21 07/07/06 4,266,299 ------------ 16,490,592 ------------ ASSET-BACKED - MORTGAGE (5.0%) 10,000 Mortgage Interest Networking Trust-A1 5.22 07/10/06 9,987,000 2,500 Mortgage Interest Networking Trust 5.32 07/17/06 2,494,111 ------------ 12,481,111 ------------ BANKING (4.6%) 11,500 Citigroup Funding Inc. 5.14 07/12/06 - 07/13/06 11,481,156 ------------ FINANCE - CORPORATE (4.8%) 12,200 CIT Group Inc. 5.13 - 5.25 07/20/06 - 07/26/06 12,165,161 ------------ FINANCE - CONSUMER (2.9%) 7,250 HSBC Finance Corp. 5.13 07/11/06 7,239,709 ------------ INSURANCE (2.6%) 6,655 ING America Insurance Holdings Inc. 5.06 07/06/06 6,650,360 ------------ INTERNATIONAL BANKS (49.6%) 2,000 Bank of Nova Scotia 5.27 07/13/06 1,996,500 12,600 Barclays US Funding Corp. 5.11 - 5.13 07/18/06 - 07/25/06 12,562,899 7,500 BNP Paribas Finance, Inc. 5.17 - 5.24 07/17/06 - 08/07/06 7,464,947 8,300 CBA (Delaware) Finance Inc. 5.10 - 5.30 07/03/06 - 07/06/06 8,297,073 7,950 Dexia Delaware LLC 5.09 - 5.21 07/06/06 - 07/25/06 7,936,941 10,836 DnB NOR Bank A.S.A. 5.04 - 5.33 07/10/06 - 08/02/06 10,815,468 5,900 HBOS Treasury Services plc 5.16 - 5.24 07/13/06 - 08/10/06 5,875,059 5,300 ING (U.S.) Funding LLC 5.07 07/07/06 5,295,539 5,000 Natexis Banques Populaires U.S. Finance Co. LLC 4.83 07/24/06 4,984,922 12,380 Nordea North America, Inc. 5.14 - 5.19 07/05/06 - 09/05/06 12,314,089 6,675 Sanpaolo IMI U.S. Financial Co. 5.28 07/03/06 6,673,042 6,000 Santander Central Hispano Finance (Del) Inc. 5.20 08/15/06 5,961,375 10,850 Societe Generale N.A., Inc. 4.97 - 5.23 07/11/06 - 10/06/06 10,786,496 8,800 Spintab AB 5.14 - 5.39 07/25/06 - 09/13/06 8,745,468 7,000 Svenska Handelsbanken Inc. 5.09 07/05/06 6,996,057 8,500 UBS Finance (Delaware) LLC 5.10 - 5.16 07/12/06 8,489,536 ------------ 125,195,411 ------------ INVESTMENT BANKS/BROKERS (2.7%) 6,685 Merrill Lynch & Company Inc. 5.25 07/06/06 6,680,137 ------------ TOTAL COMMERCIAL PAPER (COST $198,383,637) 198,383,637 ------------
SEE NOTES TO FINANCIAL STATEMENTS 33
ANNUALIZED PRINCIPAL YIELD AMOUNT IN ON DATE OF MATURITY THOUSANDS DESCRIPTION PURCHASE DATE VALUE -------------------------------------------------------------------------------------------------------------- FLOATING RATE NOTES (14.3%) $ 5,000 General Electric Capital Corp. 5.53+% 09/18/06+++ $ 5,001,523 9,700 State Street Bank & Trust Co. 5.22 - 5.30+ 09/01/06 - 09/15/06+++ 9,700,943 10,000 U.S. Bank, N.A., Cincinnati 5.28+ 07/31/06+++ 9,999,437 8,000 Wells Fargo & Co. 5.42+ 09/15/06+++ 8,002,253 3,500 Wells Fargo Bank, N.A. 5.30+ 07/03/06+++ 3,500,000 ------------ TOTAL FLOATING RATE NOTES (COST $36,204,156) 36,204,156 ------------ BANKERS' ACCEPTANCES (2.3%) 5,890 JP Morgan Chase & Co. (COST $5,848,466) 4.88 - 5.36 07/07/06 - 09/20/06 5,848,466 ------------ CERTIFICATES OF DEPOSIT (3.4%) DOMESTIC BANKS 8,600 First Tennessee Bank, N.A. (COST $8,600,000) 5.16 07/14/06 8,600,000 ------------ REPURCHASE AGREEMENT (1.9%) 4,700 Barclays Capital Inc. (dated 06/30/06; proceeds $4,702,084) (a) (COST $4,700,000) 5.32 07/03/06 4,700,000 ------------ TOTAL INVESTMENTS (COST $253,736,259) (b) 100.6% 253,736,259 LIABILITIES IN EXCESS OF OTHER ASSETS (0.6) (1,576,178) ----- ------------ NET ASSETS 100.0% $252,160,081 ===== ============
---------- (a) COLLATERALIZED BY FEDERAL NATIONAL MORTGAGE ASSOC. 5.50% DUE 12/22/15 VALUED AT $4,794,416. (b) COST IS THE SAME FOR FEDERAL INCOME TAX PURPOSES. + RATE SHOWN IS THE RATE IN EFFECT AT JUNE 30, 2006. +++ DATE OF NEXT INTEREST RATE RESET.
SUMMARY OF INVESTMENTS PERCENT OF MATURITY SCHEDULE MARKET VALUE 1-30 Days 67.6% 31-60 Days 18.4 61-90 Day 13.5 91-120 Days 0.5 121+ Days 0.0 ----- 100.0% =====
SEE NOTES TO FINANCIAL STATEMENTS 34 Morgan Stanley Variable Investment Series - Limited Duration PORTFOLIO OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ---------------------------------------------------------------------------------------- CORPORATE BONDS (34.3%) AEROSPACE & DEFENSE (0.3%) $ 230 McDonnell Douglas Corp. 6.875% 11/01/06 $230,718 195 Northrop Grumman Corp. 4.079 11/16/06 193,904 30 Raytheon Co. 6.15 11/01/08 30,309 111 Raytheon Co. 6.75 08/15/07 112,108 -------- 567,039 -------- AIR FREIGHT/COURIERS (0.1%) 130 Fedex Corp. 2.65 04/01/07 126,961 -------- AIRLINES (0.2%) 258 Southwest Airlines Co. (Series 01-1) 5.496 11/01/06 258,232 -------- AUTO PARTS: O.E.M. (0.2%) 290 Johnson Controls, Inc. 5.00 11/15/06 289,025 -------- BEVERAGES: ALCOHOLIC (0.3%) 415 Miller Brewing Co. - 144A* 4.25 08/15/08 403,124 -------- BUILDING PRODUCTS (0.1%) 145 Masco Corp. 4.625 08/15/07 142,751 -------- CABLE/SATELLITE TV (0.6%) 490 Comcast Cable Communications, Inc. 6.875 06/15/09 504,501 242 Cox Communications Inc. 5.869+ 12/14/07 243,268 150 Cox Communications Inc. 7.75 08/15/06 150,260 -------- 898,029 -------- CASINO/GAMING (0.3%) 415 Harrahs Operating Co. Inc. 7.125 06/01/07 418,808 -------- CHEMICALS: MAJOR DIVERSIFIED (0.1%) 135 ICI Wilmington Inc. 4.375 12/01/08 130,357 -------- COMPUTER PROCESSING HARDWARE (0.1%) 240 Hewlett-Packard Co. 5.345 05/22/09 240,198 -------- CONTAINERS/PACKAGING (0.1%) 90 Sealed Air Corp. - 144A* 6.95 05/15/09 92,556 -------- DEPARTMENT STORES (0.5%) 230 Federated Department Stores, Inc. 6.625 09/01/08 233,791 525 May Department Stores Co., Inc. 3.95 07/15/07 514,863 -------- 748,654 -------- DRUGSTORE CHAINS (0.1%) 175 CVS Corp. 3.875 11/01/07 170,417 --------
SEE NOTES TO FINANCIAL STATEMENTS 35
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ------------------------------------------------------------------------------------------ ELECTRIC UTILITIES (4.6%) $ 330 Ameren Corp. 4.263% 05/15/07 $ 325,673 520 Appalachian Power Co. (Series G) 3.60 05/15/08 500,285 470 Baltimore Gas & Electric Co. 6.625 03/15/08 476,428 710 Carolina Power & Light Company Inc. 6.80 08/15/07 718,156 410 CC Funding Trust I 6.90 02/16/07 412,362 248 Columbus Southern Power Co. 4.40 12/01/10 234,160 345 Commonwealth Edison Co. 3.70 02/01/08 334,278 1,050 Consolidated Natural Gas Co. (Series B) 5.375 11/01/06 1,048,554 245 Consumers Energy Co. 4.80 02/17/09 238,395 330 Dominion Resources Inc. 5.687+ 05/15/08 329,120 240 Duke Energy Corp. 3.75 03/05/08 232,737 170 Entergy Gulf States, Inc. 3.60 06/01/08 162,481 220 Entergy Gulf States, Inc. 5.631+ 12/01/09 217,884 45 Entergy Gulf States, Inc. - 144A* 6.02+ 12/08/08 45,069 495 FPL Group Capital Inc. 5.551 02/16/08 493,411 570 Pacific Gas & Electric Co. 3.60 03/01/09 541,473 230 Panhandle Eastern Pipe Line Co. (Series B) 2.75 03/15/07 225,136 390 Peco Energy Co. 3.50 05/01/08 375,359 330 Southwestern Public Service Co. (Series A) 5.551 03/01/09 333,284 200 Wisconsin Electric Power Co. 3.50 12/01/07 194,250 ---------- 7,438,495 ---------- ELECTRICAL PRODUCTS (0.3%) 420 Cooper Industries Inc. 5.25 07/01/07 416,301 ---------- ENVIRONMENTAL SERVICES (0.1%) 60 USA Waste Services, Inc. 7.125 10/01/07 60,862 130 WMX Technologies, Inc. 7.00 10/15/06 130,453 ---------- 191,315 ---------- FINANCE/RENTAL/LEASING (2.4%) 560 American Honda Finance Corp. - 144A* 3.85 11/06/08 538,169 330 CIT Group, Inc. 2.875 09/29/06 328,030 370 CIT Group, Inc. 4.75 08/15/08 363,125 540 Countrywide Home Loans, Inc. (Series MTN) 3.25 05/21/08 516,896 250 MBNA Corp. 5.58+ 05/05/08 251,932 815 Nationwide Buildings Society - 144A* (United Kingdom) 2.625 01/30/07 801,412 490 Residential Capital Corp. 6.125 11/21/08 484,585 525 SLM Corp. 4.00 01/15/10 496,204 ---------- 3,780,353 ----------
SEE NOTES TO FINANCIAL STATEMENTS 36
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ---------------------------------------------------------------------------------------- FINANCIAL CONGLOMERATES (2.7%) $ 95 Bank One Corp. (Series MTNA) 6.00% 02/17/09 $ 95,762 150 Chase Manhattan Corp. 6.00 02/15/09 150,985 55 Chase Manhattan Corp. 7.00 11/15/09 57,055 315 Citicorp 6.375 11/15/08 320,772 195 Citigroup Global Markets Inc. 5.41+ 12/12/06 195,087 170 Citigroup Inc. 3.625 02/09/09 162,003 555 Citigroup Inc. 5.50 08/09/06 555,070 120 General Electric Capital Corp. 4.25 12/01/10 113,722 965 General Electric Capital Corp. 5.375 03/15/07 963,984 410 ING Security Life Institutional - 144A* 2.70 02/15/07 401,758 515 Pricoa Global Funding I - 144A* 3.90 12/15/08 494,014 340 Prudential Funding LLC (Series MTN) - 144A* 6.60 05/15/08 345,292 475 Prudential Insurance Co. - 144A* 6.375 07/23/06 475,194 ---------- 4,330,698 ---------- FOOD RETAIL (0.8%) 1,045 Kroger Co. 7.625 09/15/06 1,048,250 230 Safeway Inc. 7.50 09/15/09 240,360 ---------- 1,288,610 ---------- FOOD: MAJOR DIVERSIFIED (0.8%) 440 General Mills Inc. 3.875 11/30/07 428,631 200 Kraft Foods Inc. 4.00 10/01/08 192,821 675 Kraft Foods Inc. 5.25 06/01/07 671,065 ---------- 1,292,517 ---------- FOREST PRODUCTS (0.0%) 30 Weyerhaeuser Co. 6.125 03/15/07 30,021 ---------- GAS DISTRIBUTORS (0.6%) 175 Keyspan Corp. 4.90 05/16/08 172,516 180 NiSource Finance Corp. 5.764+ 11/23/09 180,362 10 Ras Laffan Liquid Natural Gas Co. Ltd. - 144A*(Qatar) 7.628 09/15/06 9,618 650 Sempra Energy 4.75 05/15/09 632,447 ---------- 994,943 ---------- HOME FURNISHINGS (0.2%) 305 Mohawk Industries, Inc. (Class C) 6.50 04/15/07 306,480 ---------- HOTELS/RESORTS/CRUISELINES (0.3%) 285 Hyatt Equities LLC - 144A* 6.875 06/15/07 286,757 130 Starwood Hotels & Resorts Worldwide, Inc. 7.375+ 05/01/07 131,462 ---------- 418,219 ----------
SEE NOTES TO FINANCIAL STATEMENTS 37
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ---------------------------------------------------------------------------------------- HOUSEHOLD/PERSONAL CARE (0.3%) $ 425 Clorox Co. (The) 5.444+% 12/14/07 $ 425,648 ---------- INDUSTRIAL CONGLOMERATES (0.2%) 415 Textron Financial Corp. 4.125 03/03/08 404,485 ---------- INSURANCE BROKERS/SERVICES (0.5%) 800 Marsh & McLennan Companies Inc. 5.375 03/15/07 795,975 ---------- INTEGRATED OIL (0.5%) 725 Conoco Funding Co. (Canada) 5.45 10/15/06 724,460 ---------- INVESTMENT BANKS/BROKERS (1.0%) 775 Goldman Sachs Group Inc. (The) 4.125 01/15/08 758,685 35 Lehman Brothers Holdings, Inc. 5.20+ 04/20/07 35,051 775 Lehman Brothers Holdings, Inc. 8.25 06/15/07 793,505 ---------- 1,587,241 ---------- INVESTMENT MANAGERS (0.9%) 1,100 TIAA Global Markets - 144A* 3.875 01/22/08 1,070,420 455 TIAA Global Markets - 144A* 5.00 03/01/07 452,593 ---------- 1,523,013 ---------- LIFE/HEALTH INSURANCE (2.0%) 1,205 Genworth Financial, Inc. 5.479+ 06/15/07 1,207,163 545 John Hancock Financial Services, Inc. 5.625 12/01/08 545,954 695 Met Life Global Funding I - 144A*(Note 4) 3.375 10/05/07 671,895 175 MetLife, Inc. (Note 4) 5.25 12/01/06 174,664 300 Monumental Global Funding II - 144A* 3.85 03/03/08 291,235 350 Monumental Global Funding II - 144A* 4.375 07/30/09 337,360 ---------- 3,228,271 ---------- MAJOR BANKS (3.5%) 720 ABN Amro Bank (Netherlands) 5.222+ 05/11/07 720,561 445 Bank of America Corp. 3.375 02/17/09 421,914 300 Bank of America Corp. 4.75 10/15/06 299,285 320 Bank of America Corp. 5.25 02/01/07 319,266 215 Bank of New York Co., Inc. (The) 5.20 07/01/07 213,892 840 Branch Banking & Trust Corp. (Series BKNT) 5.341+ 06/04/07 840,812 285 Huntington National Bank 2.75 10/16/06 282,777 510 Key Bank NA 7.125 08/15/06 510,754 310 Popular North America Inc. (Series MTN) 5.65 04/15/09 307,693 820 Suntrust Bank Atlanta 7.25 09/15/06 822,297 235 Wachovia Corp. 3.625 02/17/09 223,672 720 Wachovia Corp. 4.95 11/01/06 718,218 ---------- 5,681,141 ----------
SEE NOTES TO FINANCIAL STATEMENTS 38
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ----------------------------------------------------------------------------------------------- MAJOR TELECOMMUNICATIONS (0.9%) $ 300 Deutsche Telekom International Finance Corp. (Netherlands) 8.00+% 06/15/10 $ 322,343 285 Telecom Italia Capital SPA (Luxembourg) 4.00 11/15/08 273,548 660 Verizon Global Funding Corp. 6.125 06/15/07 662,579 150 Verizon Global Funding Corp. 7.25 12/01/10 157,237 ---------- 1,415,707 ---------- MANAGED HEALTH CARE (0.2%) 175 UnitedHealth Group Inc. 4.125 08/15/09 167,360 105 UnitedHealth Group Inc. 5.20 01/17/07 104,745 ---------- 272,105 ---------- MEDIA CONGLOMERATES (0.5%) 400 Time Warner, Inc. 6.15 05/01/07 401,452 160 Viacom Inc. - 144A* 5.691+ 06/16/09 160,051 300 Viacom Inc. - 144A* 5.75 04/30/11 294,971 ---------- 856,474 ---------- MEDICAL SPECIALTIES (0.3%) 495 Baxter International Inc. 5.196 02/16/08 490,859 ---------- MOTOR VEHICLES (0.3%) 155 DaimlerChrysler North American Holdings Co. 4.05 06/04/08 149,931 335 DaimlerChrysler North American Holdings Co 5.74 03/13/09 335,478 ---------- 485,409 ---------- MULTI-LINE INSURANCE (1.3%) 180 American General Finance Corp. (Series MTNF) 5.875 07/14/06 180,020 690 American General Finance Corp. (Series MTNH) 4.625 09/01/10 661,334 120 AXA Financial, Inc. 6.50 04/01/08 121,170 500 Hartford Financial Services Group, Inc. (The) 5.55 08/16/08 498,628 190 International Lease Finance Corp. 3.75 08/01/07 186,057 415 International Lease Finance Corp. 4.625 06/02/08 407,198 ---------- 2,054,407 ---------- OIL & GAS PIPELINES (0.3%) 500 Enbridge Energy Partners, L.P. 4.00 01/15/09 477,388 ---------- OTHER CONSUMER SERVICES (0.2%) 400 Cendant Corp. 6.25 01/15/08 403,739 ---------- OTHER METALS/MINERALS (0.1%) 210 Brascan Corp. (Canada) 8.125 12/15/08 220,610 ---------- PROPERTY - CASUALTY INSURERS (1.2%) 580 Allstate Finance Global Funding II - 144A*(Note 4) 2.625 10/22/06 574,901 595 Mantis Reef Ltd. - 144A*(Australia) 4.692 11/14/08 577,021
SEE NOTES TO FINANCIAL STATEMENTS 39
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ----------------------------------------------------------------------------------------------- $ 195 Platinum Underwriters Holdings, Ltd. (Series B) (Bermuda) 6.371% 11/16/07 $ 193,200 285 St. Paul Travelers Companies, Inc. (The) 5.01 08/16/07 281,822 375 XLLIAC Global Funding - 144A* 4.80 08/10/10 360,482 ---------- 1,987,426 ---------- PULP & PAPER (0.3%) 275 International Paper Co. 3.80 04/01/08 265,760 260 Sappi Papier Holding AG - 144A*(Austria) 6.75 06/15/12 243,521 ---------- 509,281 ---------- RAILROADS (0.8%) 315 Burlington North Santa Fe Railway Co. 6.125 03/15/09 318,610 165 Norfolk Southern Corp. 7.35 05/15/07 167,211 160 Union Pacific Corp. 3.625 06/01/10 148,153 670 Union Pacific Corp. (Series MTNE) 6.79 11/09/07 678,873 ---------- 1,312,847 ---------- REAL ESTATE DEVELOPMENT (0.5%) 632 World Financial Properties - 144A* (Series 1996 WFP-B) 6.91 09/01/13 651,878 186 World Financial Properties - 144A* 6.95 09/01/13 192,501 ---------- 844,379 ---------- REGIONAL BANKS (0.8%) 530 Santander Central Hispano Issuances Ltd. (Cayman Islands) 7.625 11/03/09 564,717 400 US Bank NA 2.85 11/15/06 396,165 310 US Bancorp 5.10 07/15/07 308,084 ---------- 1,268,966 ---------- SAVINGS BANKS (0.9%) 155 Household Finance Corp. 4.125 12/15/08 149,881 670 Household Finance Corp. 6.40 06/17/08 679,220 100 Sovereign Bank (Series CD) 4.00 02/01/08 97,433 165 Washington Mutual Inc. 7.50 08/15/06 165,350 350 Washington Mutual Inc. 8.25 04/01/10 375,596 ---------- 1,467,480 ---------- TRUCKS/CONSTRUCTION/FARM MACHINERY (0.7%) 405 Caterpillar Financial Services Corp. (Series MTNF) 3.625 11/15/07 394,351 435 John Deere Capital Corp. 3.375 10/01/07 422,746 270 John Deere Capital Corp. 4.50 08/22/07 266,554 ---------- 1,083,651 ----------
SEE NOTES TO FINANCIAL STATEMENTS 40
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ------------------------------------------------------------------------------------------------ WIRELESS TELECOMMUNICATIONS (0.3%) $ 510 Vodafone Group PLC (United Kingdom) 5.59+% 12/28/07 $ 510,100 ----------- TOTAL CORPORATE BONDS (COST $56,081,034) 55,005,165 ----------- U.S. GOVERNMENT AGENCIES & OBLIGATION(15.7%) 8,100 Federal Home Loan Mortgage Corp. 2.75 08/15/06 8,074,534 7,410 Federal Home Loan Mortgage Corp. 3.625 02/15/07 7,324,815 10,000 U.S. Treasury Note 3.125 05/15/07 9,819,540 ----------- TOTAL U.S. GOVERNMENT AGENCIES & OBLIGATION (COST $25,422,255) 25,218,889 ----------- ASSET-BACKED SECURITIES (15.4%) FINANCE/RENTAL/LEASING 250 Aegis Asset Backed Securities Trust 2004-2 B1 7.323+ 06/25/34 253,540 1,700 BMW Vehicle Owner Trust 2005-A A3 4.04 02/25/09 1,682,141 1,500 Capital Auto Receivables Asset Trust 2006-1 A3 5.03 10/15/09 1,487,035 800 Capital One Multi-Asset Execution Trust 2005-A2 A2 4.05 02/15/11 780,563 900 Caterpillar Financial Asset Trust 2005-A A3 3.90 02/25/09 887,822 1,050 Caterpillar Financial Asset Trust 2006-A A3 5.57 05/25/10 1,049,901 1,300 Chase Manhattan Auto Owner Trust 2004-A A4 2.83 09/15/10 1,261,464 301 CIT Equipment Collateral 2004-EF1 A3 3.50 09/20/08 295,712 650 CNH Equipment Trust 2005-A A3 4.02 04/15/09 641,641 271 Fifth Third Auto Trust 2004-A A3 3.19 02/20/08 269,724 1,050 GE Equipment Small Ticket LLC -2005-2A 4.88+ 10/22/09 1,039,722 209 Harley-Davidson Motorcycle Trust 2002-2 A2 3.09 06/15/10 204,839 931 Harley-Davidson Motorcycle Trust 2003-3 A2 2.76 05/15/11 913,240 900 Harley-Davidson Motorcycle Trust 2004-2 A2 3.56 02/15/12 882,497 750 Harley-Davidson Motorcycle Trust 2005-2 A2 4.07 02/15/12 728,051 850 Harley-Davidson Motorcycle Trust 2005-3 A2 4.41 06/15/12 833,240 625 Hertz Vehicle Financing LLC 2005-2A A2 4.93 02/25/10 614,445 150 Home Equity Asset Trust 2004-3 B1 7.422+ 08/25/34 153,046 1,150 Honda Auto Receivables Owner Trust 2005-5 A3 4.61 07/15/09 1,137,291 850 Honda Auto Receivables Owner Trust 2005-6 A3 4.85 10/19/09 841,901 1,025 Merrill Auto Trust Securitization 2005-1 A3 4.10 08/25/09 1,008,996 825 National City Auto Receivables Trust 2004-A A4 2.88 05/15/11 798,471 1,100 Nissan Auto Receivables Owner Trust 2004-A A4 2.76 07/15/09 1,067,405 1,175 Nissan Auto Receivables Owner Trust 2005-B A3 3.99 07/15/09 1,157,787 450 Park Place Securities Inc. 2004-MCW1 M7 7.173+ 10/25/34 460,996 250 Structured Asset Investment Loan Trust 2003-BC4 M2 7.323+ 06/25/33 251,109
SEE NOTES TO FINANCIAL STATEMENTS 41
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ---------------------------------------------------------------------------------------------------------- $ 864 TXU Electric Delivery Transition Bond Company LLC 2004-1 A1 3.52% 11/15/11 $ 834,311 1,200 USAA Auto Owner Trust 2005-3 A3 4.55 02/16/10 1,185,359 575 Wachovia Auto Owner Trust 2005-A A3 4.06 09/21/09 566,834 1,398 Whole Auto Loan Trust 2003-1 A4 2.58 03/15/10 1,382,320 ----------- TOTAL ASSET-BACKED SECURITIES (COST $25,044,083) 24,671,403 ----------- U.S. GOVERNMENT AGENCIES - MORTGAGE-BACKED SECURITIES (11.7%) 527 Federal Home Loan Mortgage Corp. PC Gold 7.50 02/01/27 - 08/01/32 545,645 400 Federal Home Loan Mortgage Corp. (ARM) 3.527 07/01/34 392,068 559 Federal Home Loan Mortgage Corp. (ARM) 4.146 08/01/34 550,906 1,011 Federal Home Loan Mortgage Corp. (ARM) 4.346 10/01/33 986,346 994 Federal Home Loan Mortgage Corp. (ARM) 4.376 07/01/35 974,624 393 Federal National Mortgage Assoc. (ARM) 3.583 07/01/34 388,896 206 Federal National Mortgage Assoc. (ARM) 3.757 06/01/34 205,529 540 Federal National Mortgage Assoc. (ARM) 4.109 09/01/34 532,214 700 Federal National Mortgage Assoc. (ARM) 4.194 05/01/35 688,207 650 Federal National Mortgage Assoc. (ARM) 4.308 04/01/35 637,166 642 Federal National Mortgage Assoc. (ARM) 4.338 05/01/35 632,153 1,068 Federal National Mortgage Assoc. (ARM) 4.506 05/01/35 1,045,924 477 Federal National Mortgage Assoc. (ARM) 4.519 04/01/35 469,640 683 Federal National Mortgage Assoc. (ARM) 4.759 07/01/35 666,020 969 Federal National Mortgage Assoc. (ARM) 4.775 09/01/35 947,160 667 Federal National Mortgage Assoc. (ARM) 5.663 07/01/33 670,613 948 Federal National Mortgage Assoc. 6.50 01/01/32 - 11/01/33 956,102 1,200 Federal National Mortgage Assoc. 7.00 *** 1,226,625 4,385 Federal National Mortgage Assoc. 7.00 11/01/24 - 05/01/36 4,493,816 1,658 Federal National Mortgage Assoc. 7.50 03/01/24 - 08/01/32 1,716,692 ----------- TOTAL U.S. GOVERNMENT AGENCIES - MORTGAGE-BACKED SECURITIES (COST $19,163,054) 18,726,346 ----------- COLLATERALIZED MORTGAGE OBLIGATIONS (15.1%) U.S. GOVERNMENT AGENCIES (2.3%) 1,600 Federal Home Loan Mortgage Corp. 2644 AU (PAC) 3.50 05/15/22 1,563,803 814 Federal Home Loan Mortgage Corp. 2182 ZC 7.50+ 09/15/29 846,377 824 Federal National Mortgage Assoc. 2005-27 NA (PAC) 5.50 01/25/24 819,601 533 Federal National Mortgage Assoc. 2005-52 PA (PAC) 6.50 06/25/35 546,637 ----------- Total U.S. Government Agencies 3,776,418 -----------
SEE NOTES TO FINANCIAL STATEMENTS 42
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ----------------------------------------------------------------------------------------------- PRIVATE ISSUES (12.8%) $ 622 Bear Stearns Alt-A Trust 2003-3 3A 5.672+% 10/25/33 $ 623,932 162 Countrywide Alternative Loan Trust 2006-OA6N N1 5.25 07/25/46 161,457 956 Countrywide Alternative Loan Trust 2006-OA1 1A2 5.566+ 03/20/46 957,028 5,053 Countrywide Alternative Loan Trust 2006-OA12X (IO) 1.636+ 03/20/46 245,891 3,509 Countrywide Alternative Loan Trust 2005-81 X1 (IO) 1.428+ 02/25/37 191,916 823 Countrywide Home Loans 2006-OA4 A2 5.592+ 04/25/46 825,281 6,804 Countrywide Home Loans 2004-25 1X (IO) 1.203+ 02/25/35 160,520 121 DSLA NIM Corp. 2006-1 N1 5.926+ 04/20/46 121,021 785 Greenpoint Mortgage Funding Trust 2006-AR2 4A1 6.143+ 03/25/36 805,411 3,094 Greenpoint Mortgage Funding Trust 2005-AR3 X1 (IO) 1.273+ 08/25/45 94,767 4,583 Greenpoint Mortgage Funding Trust 2005-AR4 X4 (IO) 1.176+ 10/25/45 141,790 768 Harborview Mortgage Loan Trust 2005-12 2A11 6.143+ 10/19/35 787,540 1,653 Harborview Mortgage Loan Trust 2005-16 4A1A 6.143+ 01/19/36 1,691,401 865 Harborview Mortgage Loan Trust 2006-1 2A1A 5.491+ 03/19/37 866,734 5,170 Harborview Mortgage Loan Trust 2005-3 X2 (IO) 0.566+ 06/19/35 113,899 4,777 Harborview Mortgage Loan Trust 2006-1 X1 (IO) 1.215+ 03/19/37 234,387 8,869 Harborview Mortgage Loan Trust 2005-16 X3 (IO) 1.152+ 01/19/36 243,887 3,221 Harborview Mortgage Loan Trust 2005-16 X1 (IO) 1.48+ 01/19/36 99,659 5,459 Harborview Mortgage Loan Trust 2005-2X (IO) 0.872+ 05/19/35 132,217 7,125 Harborview Mortgage Loan Trust 2006-5 X2 (IO) 2.032+ 07/19/47 307,266 1,908 Harborview Mortgage Loan Trust 2006-1 PO1 (PO) 0.00 03/19/37 1,432 37 Harborview Mortgage Loan Trust 2006-5 PO2 (PO) 0.00 07/19/47 18 98 Harborview NIM Corp. 2006-BU1 N1 5.926 02/20/46 97,473 4,099 Indymac Index Mortgage Loan Trust 2005-AR12 AX2 (IO) 0.304+ 07/25/35 126,818 171 Lehman XS Net Interest Margin Notes 2006-GP1 A1 6.25 05/28/46 172,053 818 Luminent Mortgage Trust 2006-1 A1 5.562+ 04/25/36 820,521 859 Luminent Mortgage Trust 2006-2 A1B 5.602+ 02/25/46 860,323 1,049 Mortgageit Trust 2006-1 2A1B 5.602+ 04/25/36 1,053,942 423 Residential Accredit Loans Inc. 2006-Q01 1A1 5.592+ 02/25/46 424,600 457 Residential Accredit Loans Inc. 2006-Q01 2A1 5.582+ 02/25/46 457,741 1,285 Residential Accredit Loans Inc. 2006-Q02 A2 5.592+ 02/25/46 1,288,215 147 Residential Accredit Loans Inc. 2006-Q04 N1 6.048 04/25/46 147,189 985 Structured Asset Mortgage Investments Inc. 2006-AR1 2A2 5.632+ 02/25/36 987,440 1,369 Structured Asset Mortgage Investments Inc. 2006-AR3 11A2 5.592+ 04/25/36 1,370,190 805 Structured Asset Mortgage Investments Inc. 2006-AR3 AR3 5.632+ 02/25/36 808,802 2,840 Washington Mutual Mortgage Pass-Through Certificates 2004-AR8 X (IO) 0.574+ 06/25/44 54,135
SEE NOTES TO FINANCIAL STATEMENTS 43
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ------------------------------------------------------------------------------------------------- $ 4,968 Washington Mutual Mortgage Pass-Through Certificates 2004-AR10 X (IO) 0.571+% 07/25/44 $ 92,363 7,213 Washington Mutual Mortgage Pass-Through Certificates 2004-AR12 X (IO) 0.432+ 10/25/44 120,595 925 Washington Mutual Mortgage Pass-Through Certificates 2005-AR8 2AB3 5.682+ 07/25/45 928,108 954 Washington Mutual Mortgage Pass-Through Certificates 2005-AR13 A1B3 5.682+ 10/25/45 959,479 915 Washington Mutual Mortgage Pass-Through Certificates 2005-AR15 A1B3 5.662+ 11/25/45 921,396 ------------ Total Private Issues 20,498,837 ------------ TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost $24,692,802) 24,275,255 ------------ FOREIGN GOVERNMENT OBLIGATION(0.1%) 190 United Mexican States (Mexico) (Cost $214,767) 8.375 01/14/11 207,575 ------------ SHORT-TERM INVESTMENTS (A)(6.0%) U.S. Government Agency & Obligations 9,500 Federal Home Loan Bank 4.95 07/03/06 9,497,388 75 U.S. Treasury Bill** 4.26 07/13/06 74,894 25 U.S. Treasury Bill 4.625 07/13/06 24,961 25 U.S. Treasury Bill 4.64 07/13/06 24,961 ------------ TOTAL SHORT-TERM INVESTMENTS (Cost $9,622,204) 9,622,204 ------------ TOTAL INVESTMENTS (Cost $160,240,199) (b)(c) 98.3% 157,726,837 OTHER ASSETS IN EXCESS OF LIABILITIES 1.7 2,646,984 ----- ------------ NET ASSETS 100.0% $160,373,821 ===== ============
SEE NOTES TO FINANCIAL STATEMENTS 44 ---------- PC PARTICIPATION CERTIFICATE. IO INTEREST ONLY SECURITY. PO PRINCIPAL ONLY SECURITY. ARM ADJUSTABLE RATE MORTGAGE. INTEREST RATE SHOWN IS THE RATE IN EFFECT AS OF JUNE 30, 2006. PAC PLANNED AMORTIZATION CLASS. * RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. ** A PORTION OF THIS SECURITY HAS BEEN PHYSICALLY SEGREGATED IN CONNECTION WITH OPEN FUTURES CONTRACTS IN THE AMOUNT OF $64,120. *** SECURITY WAS PURCHASED ON A FORWARD COMMITMENT BASIS WITH AN APPROXIMATE PRINCIPAL AMOUNT AND NO DEFINITE MATURITY DATE; THE ACTUAL PRINCIPAL AMOUNT AND MATURITY DATE WILL BE DETERMINED UPON SETTLEMENT. + FLOATING RATE SECURITY; RATE SHOWN IS THE RATE IN EFFECT AT JUNE 30, 2006. (a) PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (b) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN AN AMOUNT EQUAL TO $72,946,275 IN CONNECTION WITH SECURITIES PURCHASED ON A FORWARD COMMITMENT BASIS AND OPEN FUTURES CONTRACTS. (c) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $1,395,540 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $3,908,902, RESULTING IN NET UNREALIZED DEPRECIATION OF $2,513,362. FUTURES CONTRACTS OPEN AT JUNE 30, 2006:
UNREALIZED NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE APPRECIATION CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE (DEPRECIATION) -------------------------------------------------------------------------------------------- 292 Long U.S. Treasury Notes 2 Year, September 2006 $ 59,212,128 $(213,271) 119 Short U.S. Treasury Notes 5 Year, September 2006 (12,305,344) 53,095 --------- Net Unrealized Depreciation $(160,176) =========
LONG TERM CREDIT ANALYSIS* AAA 65.8% AA 10.0 A 14.2 BBB 9.8 BB 0.2 ----- B 100.0% =====
---------- * Does not include open long futures contracts with an underlying face amount of $59,212,128 with unrealized depreciation of $213,271 and open short futures contracts with an underlying face amount of $12,305,344 with unrealized appreciation of $53,095. SEE NOTES TO FINANCIAL STATEMENTS 45 Morgan Stanley Variable Investment Series - Income Plus PORTFOLIO OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ---------------------------------------------------------------------------------------- CORPORATE BONDS (60.2%) ADVERTISING/MARKETING SERVICES (0.7%) $ 935 Interpublic Group of Companies, Inc. (The) 5.40% 11/15/09 $ 862,538 2,130 WPP Finance (UK) Corp. (United Kingdom) 5.875 06/15/14 2,067,118 ---------- 2,929,656 ---------- AEROSPACE & DEFENSE (0.7%) 2,739 Raytheon Co. 6.15 11/01/08 2,767,253 ---------- AIR FREIGHT/COURIERS (1.1%) 4,179 FedEx Corp. (Series 97-A) 7.50 01/15/18 4,515,835 ---------- AIRLINES (1.4%) 2,348 America West Airlines, Inc. (Class A) 6.85 07/02/09 2,349,821 1,435 America West Airlines, Inc. (Series 01-1) 7.10 04/02/21 1,479,251 1,865 Southwest Airlines Co. (Series 01-1) 5.496 11/01/06 1,866,679 ---------- 5,695,751 ---------- APPAREL/FOOTWEAR RETAIL (0.4%) 1,825 Limited Brands, Inc. 6.95 03/01/33 1,745,060 ---------- BEVERAGES: ALCOHOLIC (0.6%) 2,635 FBG Finance Ltd. - 144A*(Australia) 5.125 06/15/15 2,418,237 ---------- CABLE/SATELLITE TV (1.1%) 1,650 Comcast Cable Communications Inc. 6.75 01/30/11 1,704,344 1,125 Echostar DBS Corp. 6.375 10/01/11 1,080,000 970 Echostar DBS Corp. 6.625 10/01/14 914,225 445 TCI Communications, Inc. 7.875 02/15/26 480,414 ---------- 4,178,983 ---------- CASINO/GAMING (1.2%) 3,965 Harrah's Operating Co., Inc. 5.625 06/01/15 3,673,576 1,205 Harrah's Operating Co., Inc. 6.50 06/01/16 1,176,240 ---------- 4,849,816 ---------- COMPUTER PROCESSING HARDWARE (0.4%) 1,645 Hewlett-Packard Co. 5.339+ 05/22/09 1,646,359 ---------- CONTAINERS/PACKAGING (0.6%) 2,435 Sealed Air Corp. - 144A* 5.625 07/15/13 2,323,440 ---------- DEPARTMENT STORES (1.1%) 2,275 Federated Department Stores, Inc. 6.625 09/01/08 2,312,497 1,875 May Department Stores Co., Inc. 5.95 11/01/08 1,878,645 ---------- 4,191,142 ---------- DISCOUNT STORES (0.1%) 386 Wal-Mart Stores, Inc. (Series 92A1) 7.49 06/21/07 391,064 ----------
SEE NOTES TO FINANCIAL STATEMENTS 46
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ------------------------------------------------------------------------------------------ DRUGSTORE CHAINS (0.2%) $ 970 CVS Corp. 3.875% 11/01/07 $ 944,595 ----------- ELECTRIC UTILITIES (8.3%) 2,700 Ameren Corp. 4.263 05/15/07 2,664,598 2,640 Arizona Public Service Co. 5.80 06/30/14 2,555,887 1,625 Arizona Public Service Co. 6.75 11/15/06 1,630,172 1,185 CC Funding Trust I 6.90 02/16/07 1,191,826 1,695 Cincinnati Gas & Electric Co. 5.70 09/15/12 1,663,371 1,005 Consolidated Natural Gas Co. 5.00 12/01/14 926,006 2,445 Consolidated Natural Gas Co. (Series C) 6.25 11/01/11 2,471,675 2,410 Consumers Energy Co. 4.80 02/17/09 2,345,024 1,655 Detroit Edison Co. (The) 6.125 10/01/10 1,669,519 2,170 Duquesne Light Co. (Series O) 6.70 04/15/12 2,248,945 940 Entergy Gulf States, Inc. 3.60 06/01/08 898,427 1,875 Entergy Gulf States, Inc. 5.631+ 12/01/09 1,856,964 2,425 Entergy Gulf States - 144A* 6.02+ 12/08/08 2,428,710 1,210 Monongahela Power Co. 5.00 10/01/06 1,207,222 2,385 Ohio Power Company - IBC (Series K) 6.00 06/01/16 2,356,158 1,175 Pacific Gas & Electric Co. 6.05 03/01/34 1,112,583 2,250 Panhandle Eastern Pipe Line Co. (Series B) 2.75 03/15/07 2,202,422 1,475 Texas Eastern Transmission, LP 7.00 07/15/32 1,581,507 ----------- 33,011,016 ----------- ELECTRICAL PRODUCTS (0.9%) 1,945 Cooper Industries Inc. 5.25 07/01/07 1,927,872 1,580 Cooper Industries Inc. 5.25 11/15/12 1,529,930 ----------- 3,457,802 ----------- ENVIRONMENTAL SERVICES (1.4%) 5,155 Waste Management, Inc. 7.375 08/01/10 5,442,402 ----------- FINANCE/RENTAL/LEASING (4.4%) 2,100 CIT Group, Inc. 2.875 09/29/06 2,087,465 325 CIT Group, Inc. 7.375 04/02/07 329,107 4,250 Countrywide Home Loans, Inc. (Series MTN) 3.25 05/21/08 4,068,159 3,345 MBNA Corp. 5.58+ 05/05/08 3,370,854 5,115 Residential Capital Corp. 6.375 06/30/10 5,049,758 2,625 SLM Corp. (Series MTNA) 5.00+ 10/01/13 2,477,514 ----------- 17,382,857 ----------- FINANCIAL CONGLOMERATES (4.5%) 3,785 American Express Co. 5.50 09/12/06 3,785,719 330 Bank One Corp. (Series MTNA) 6.00 02/17/09 332,649 4,440 General Electric Capital Corp. (Series MTNA) 6.75 03/15/32 4,754,263
SEE NOTES TO FINANCIAL STATEMENTS 47
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ------------------------------------------------------------------------------------- $ 3,560 General Motors Acceptance Corp. 6.875% 09/15/11 $ 3,400,434 5,290 JPMorgan Chase & Co. 6.75 02/01/11 5,503,748 ----------- 17,776,813 ----------- FOOD RETAIL (0.3%) 920 Delhaize America Inc. 9.00 04/15/31 1,013,481 ----------- FOOD: MAJOR DIVERSIFIED (0.6%) 1,300 ConAgra Foods, Inc. 7.00 10/01/28 1,325,648 1,040 ConAgra Foods, Inc. 8.25 09/15/30 1,201,839 ----------- 2,527,487 ----------- FOOD: MEAT/FISH/DAIRY (0.1%) 350 Pilgrim's Pride Corp. 9.625 09/15/11 365,750 ----------- GAS DISTRIBUTORS (1.1%) 815 Keyspan Corp. 4.90 05/16/08 803,433 1,870 Nisource Finance Corp. 5.764+ 11/23/09 1,873,757 1,785 Sempra Energy 4.621 05/17/07 1,767,978 ----------- 4,445,168 ----------- HOME FURNISHINGS (0.5%) 1,970 Mohawk Industries, Inc. (Series D) 7.20 04/15/12 2,032,660 ----------- INDUSTRIAL CONGLOMERATES (0.9%) 3,775 United Technologies Corp. 4.375 05/01/10 3,617,454 ----------- INSURANCE BROKERS/SERVICES (2.6%) 2,505 Farmers Exchange Capital - 144A* 7.05 07/15/28 2,403,475 3,105 Farmers Insurance Exchange - 144A* 8.625 05/01/24 3,453,269 4,570 Marsh & McLennan Companies, Inc. 5.375 07/15/14 4,261,808 ----------- 10,118,552 ----------- INVESTMENT BANKS/BROKERS (0.1%) 515 Goldman Sachs Group Inc. (The) 5.25 10/15/13 494,196 ----------- MAJOR BANKS (2.6%) 1,660 HSBC Finance Corp. 6.75 05/15/11 1,723,764 1,800 Huntington National Bank (Series BKNT) 4.375 01/15/10 1,729,231 1,580 Popular North America Inc. (Series MTN) 5.65 04/15/09 1,568,242 5,000 Well Fargo Bank NA 7.55 06/21/10 5,343,900 ----------- 10,365,137 ----------- MAJOR TELECOMMUNICATIONS (4.9%) 3,510 AT & T Corp. 8.00+ 11/15/31 4,041,635 1,465 Deutsche Telekom International Finance Corp. BV (Netherlands) 8.25+ 06/15/30 1,696,180 2,660 France Telecom S.A. (France) 8.50+ 03/01/31 3,209,859
SEE NOTES TO FINANCIAL STATEMENTS 48
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE -------------------------------------------------------------------------------------------- $ 1,000 GTE Corp. 7.90% 02/01/27 $ 1,042,748 2,165 SBC Communications, Inc. 6.15 09/15/34 1,993,255 2,005 Sprint Capital Corp. 8.75 03/15/32 2,424,731 3,645 Telecom Italia Capital SA (Luxembourg) 4.00 01/15/10 3,413,648 1,385 Telefonica Europe BV (Netherlands) 8.25 09/15/30 1,568,662 ----------- 19,390,718 ----------- MANAGED HEALTH CARE (1.3%) 3,920 Anthem, Inc. 6.80 08/01/12 4,086,522 850 UnitedHealth Group Inc. 5.20 01/17/07 847,935 ----------- 4,934,457 ----------- MEDIA CONGLOMERATES (0.5%) 562 News America, Inc. 7.30 04/30/28 571,457 1,140 News America, Inc. 7.28 06/30/28 1,155,673 430 Viacom, Inc. - 144A* 6.875 04/30/36 416,260 ----------- 2,143,390 ----------- MOTOR VEHICLES (2.5%) 1,490 DaimlerChrysler North American Holdings Co. 8.00 06/15/10 1,583,192 1,750 DaimlerChrysler North American Holdings Co. 8.50 01/18/31 1,986,950 8,085 General Motors Corp. 8.375 07/15/33 6,548,850 ----------- 10,118,992 ----------- MULTI-LINE INSURANCE (3.9%) 4,400 American General Finance Corp. (Series MTNF) 5.875 07/14/06 4,400,497 500 American General Finance Corp. (Series MTNH) 4.625 09/01/10 479,227 4,900 Hartford Financial Services Group, Inc. (The) 7.90 06/15/10 5,264,589 5,000 Nationwide Financial Services, Inc. 8.00 03/01/27 5,227,945 ----------- 15,372,258 ----------- OIL & GAS PIPELINES (1.0%) 885 Kinder Morgan Energy Partners, L.P. 5.125 11/15/14 809,267 2,665 Kinder Morgan Finance Co. (Canada) 5.70 01/05/16 2,318,012 945 Plains All American Pipeline L.P. - 144A* 6.70 05/15/36 924,021 ----------- 4,051,300 ----------- OTHER METALS/MINERALS (0.6%) 2,435 Brascan Corp. (Canada) 7.125 06/15/12 2,568,363 ----------- PROPERTY - CASUALTY INSURERS (1.5%) 2,500 Mantis Reef Ltd. - 144A*(Australia) 4.692 11/14/08 2,424,457 2,945 Platinum Underwriters Finance Inc. (Series B) 7.50 06/01/17 2,894,314 825 Platinum Underwriters Holdings, Ltd. (Series B) (Bermuda) 6.371 11/16/07 817,386 ----------- 6,136,157 -----------
SEE NOTES TO FINANCIAL STATEMENTS 49
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ----------------------------------------------------------------------------------------------- PULP & PAPER (1.6%) $ 1,855 Abitibi-Consolidated Inc. (Canada) 8.85% 08/01/30 $ 1,576,750 3,175 Bowater Canada Finance (Canada) 7.95 11/15/11 3,032,125 1,705 Sappi Papier Holding AG - 144A*(Austria) 6.75 06/15/12 1,596,939 ------------ 6,205,814 ------------ RAILROADS (1.9%) 3,215 Burlington Northern Santa Fe Corp. (Series 95-A) 7.97 01/01/15 3,523,877 1,470 Norfolk Southern Corp. 7.35 05/15/07 1,489,697 1,575 Union Pacific Corp. 6.625 02/01/08 1,596,225 790 Union Pacific Corp. (Series MTNE) 6.79 11/09/07 800,462 ------------ 7,410,261 ------------ REAL ESTATE DEVELOPMENT (0.4%) 1,460 World Financial Properties - 144A* 6.91 09/01/13 1,507,067 186 World Financial Properties - 144A* 6.95 09/01/13 192,501 ------------ 1,699,568 ------------ RESTAURANTS (0.3%) 1,085 Tricon Global 8.875 04/15/11 1,209,597 ------------ SAVINGS BANKS (1.9%) 500 Household Finance Corp. 4.125 11/16/09 476,250 1,140 Household Finance Corp. 6.375 10/15/11 1,166,307 1,915 Household Finance Corp. 8.00 07/15/10 2,066,143 3,630 Washington Mutual Inc. 8.25 04/01/10 3,895,469 ------------ 7,604,169 ------------ TOTAL CORPORATE BONDS (COST $240,863,662) 239,493,010 ------------ ASSET-BACKED SECURITIES (4.8%) FINANCE/RENTAL/LEASING 1,069 CIT Equipment Collateral 2004-EF1 A3 3.50 09/20/08 1,051,419 2,406 DaimlerChrysler Auto Trust 2003-B A4 2.86 03/09/09 2,366,340 1,750 Ford Credit Auto Owner Trust 2005-B A3 4.17 01/15/09 1,733,008 2,200 Harley-Davidson Motorcycle Trust 2004-2 A2 3.56 02/15/12 2,157,216 1,400 Honda Auto Receivables Owner Trust 2005-2 A3 3.93 01/15/09 1,381,995 3,500 MBNA Credit Card Master Note Trust 2004-A4 2.70 09/15/09 3,426,567 2,425 TXU Electric Delivery Transition Bond Co. LLC 2004-1 A2 4.81 11/17/14 2,327,111 719 USAA Auto Owner Trust 2004-2 A3 3.03 06/16/08 714,054 2,100 USAA Auto Owner Trust 2005-1 A3 3.90 07/15/09 2,075,099 1,700 Volkswagen Auto Lease Trust 2005-A A3 3.82 05/20/08 1,686,173 ------------ TOTAL ASSET-BACKED SECURITIES (COST $19,297,130) 18,918,982 ------------
SEE NOTES TO FINANCIAL STATEMENTS 50
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE --------------------------------------------------------------------------------------------------------------- U.S. GOVERNMENT AGENCIES & OBLIGATIONS (13.4%) $ 3 Federal Home Loan Mortgage Corp. 11.50% 05/01/19 $ 3,573 Federal Home Loan Mortgage Corp. Gold 6 6.50 12/01/28 6,450 48 8.50 01/01/22 - 12/01/24 51,957 Federal National Mortgage Assoc. 211 7.50 06/01/28 - 04/01/32 218,091 1,913 8.00 08/01/29 - 04/01/32 2,019,824 2 9.00 06/01/21 - 01/01/25 2,356 Government National Mortgage Assoc. 1 7.50 04/15/24 1,014 628 8.00 10/15/24 - 11/15/29 667,376 105 8.50 06/15/17 - 03/01/28 113,125 103 9.00 07/15/24 - 11/15/24 111,819 6 10.00 05/15/16 - 04/15/19 6,946 U.S. Treasury Bond 28,950 6.125 - 6.375 08/15/27 32,361,424 U.S. Treasury Note 3,535 +++ 4.25 08/15/13 3,355,196 15,330 4.25 08/15/13 - 11/15/13 14,517,405 ------------ TOTAL U.S. GOVERNMENT AGENCIES & OBLIGATIONS (COST $56,490,214) 53,436,556 ------------ FOREIGN GOVERNMENT OBLIGATIONS (1.2%) 20,405 Mexican Fixed Rate Bond 10.00 12/05/24 1,885,200 2,545 United Mexican States (Mexico) (Series MTNA) 8.00 09/24/22 2,844,038 ------------ TOTAL FOREIGN GOVERNMENT OBLIGATIONS (COST $4,551,215) 4,729,238 ------------ SHORT-TERM INVESTMENTS (a)(20.1%) U.S. GOVERNMENT AGENCY & OBLIGATION 79,100 Federal Home Loan Bank 4.95 07/03/06 79,078,248 700 U.S. Treasury Bill** 4.26 07/13/06 699,006 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $79,777,254) 79,777,254 ------------ TOTAL INVESTMENTS (COST $400,979,475) (b)(c) 99.7% 396,355,040 OTHER ASSETS IN EXCESS OF LIABILITIES 0.3 1,331,556 ----- ------------ NET ASSETS 100.0% $397,686,596 ===== ============
SEE NOTES TO FINANCIAL STATEMENTS 51 ---------- FSA FINANCIAL SECURITY ASSURANCE INC. * RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. ** A PORTION OF THIS SECURITY HAS BEEN PHYSICALLY SEGREGATED IN CONNECTION WITH OPEN FUTURES CONTRACTS IN THE AMOUNT OF $403,920. + FLOATING RATE SECURITY, RATE SHOWN IS THE RATE IN EFFECT AT JUNE 30, 2006. +++ SECURITY PURCHASED ON A FORWARD COMMITMENT BASIS. (a) PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (b) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN A AMOUNT EQUAL TO $115,283,780 IN CONNECTION WITH OPEN FUTURES CONTRACTS. (c) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $4,052,529 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $8,676,964 RESULTING IN NET UNREALIZED DEPRECIATION OF $4,624,435. FUTURES CONTRACTS OPEN AT JUNE 30, 2006:
UNREALIZED NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE APPRECIATION CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE (DEPRECIATION) --------------------------------------------------------------------------------------- 716 Long U.S. Treasury Bond 10 year, September 2006 $75,079,316 $(348,888) 5 Short U.S. Treasury Note 5 year, September 2006 (517,031) 1,158 15 Short U.S. Treasury Bond 2 year, September 2006 (1,599,844) 3,240 171 Short U.S. Treasury Note 2 year, September 2006 (34,675,595) 64,389 --------- Net Unrealized Depreciation $(280,101) =========
LONG-TERM CREDIT ANALYSIS* AAA 39.3% AA 5.6 A 20.7 BBB 29.2 BB 2.4 B 2.8 ----- 100.0% =====
---------- * DOES NOT INCLUDE OPEN LONG FUTURES CONTRACTS WITH AN UNDERLYING FACE AMOUNT OF $75,079,316 WITH UNREALIZED DEPRECIATION OF $348,888 AND OPEN SHORT FUTURES CONTRACTS WITH AN UNDERLYING FACE AMOUNT OF $36,792,470 WITH UNREALIZED APPRECIATION OF $68,787. SEE NOTES TO FINANCIAL STATEMENTS 52 Morgan Stanley Variable Investment Series - High Yield PORTFOLIO OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ------------------------------------------------------------------------------------ CORPORATE BONDS (94.4%) ADVERTISING/MARKETING SERVICES (0.1%) $ 75 Advanstar Communications, Inc. 10.75% 08/15/10 $ 80,812 ---------- AEROSPACE & DEFENSE (1.0%) 650 K&F Acquisition Inc. 7.75 11/15/14 643,500 ---------- ALUMINUM (1.0%) 665 Novelis, Inc. - 144A*(Canada) 7.50** 02/15/15 641,725 ---------- APPAREL/FOOTWEAR (2.0%) 825 Levi Strauss & Co. 9.74** 04/01/12 843,562 180 Oxford Industries, Inc. 8.875 06/01/11 180,900 205 Phillips-Van Heusen Corp. 7.25 02/15/11 203,975 ---------- 1,228,437 ---------- APPAREL/FOOTWEAR RETAIL (0.6%) 330 Brown Shoe Co., Inc. 8.75 05/01/12 340,725 ---------- AUTO PARTS: O.E.M. (1.1%) 180 ArvinMeritor, Inc. 8.75 03/01/12 176,400 470 TRW Automotive, Inc. 9.375 02/15/13 501,725 ---------- 678,125 ---------- BROADCASTING (0.8%) 375 LIN Television Corp. 6.50 05/15/13 344,062 160 LIN Television Corp. (Series B) 6.50 05/15/13 146,800 ---------- 490,862 ---------- BUILDING PRODUCTS (2.0%) 115 Interface Inc. 7.30 04/01/08 116,150 455 Interface Inc. 9.50 02/01/14 472,062 145 Interface Inc. 10.375 02/01/10 159,319 505 Nortek Inc. 8.50 09/01/14 491,112 ---------- 1,238,643 ---------- CABLE/SATELLITE TV (3.5%) 600 Cablevision Systems Corp. (Series B) 9.62** 04/01/09 639,000 182 CCH I LLC 11.00 10/01/15 160,160 245 Echostar DBS Corp. 6.375 10/01/11 235,200 350 Echostar DBS Corp. 6.625 10/01/14 329,875 45 Intelsat Bermuda Ltd. 8.25 01/15/13 44,888 440 Intelsat Bermuda Ltd. 8.625 01/15/15 443,300 330 Intelsat Bermuda Ltd. 9.613** 01/15/12 334,950 ---------- 2,187,373 ----------
SEE NOTES TO FINANCIAL STATEMENTS 53
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE --------------------------------------------------------------------------------------------------- CASINO/GAMING (4.9%) $ 4,485 Aladdin Gaming Holdings/Capital Corp. LLC (Series B) (a)(b)(f) 13.50% 03/01/10 $ 0 680 Isle of Capri Casinos 7.00 03/01/14 645,150 555 Las Vegas Sands Corp. 6.375 02/15/15 517,538 1,225 MGM Mirage Inc. 6.00 10/01/09 1,197,438 7,210 Resort At Summerlin LP/Ras Co. (Series B) (a)(b)(f) 13.00+ 12/15/07 0 700 Station Casinos, Inc. 6.00 04/01/12 658,875 ---------- 3,019,001 ---------- CHEMICALS: MAJOR DIVERSIFIED (1.2%) 437 Huntsman ICI Chemicals 10.125 07/01/09 445,740 290 Westlake Chemical Corp. 6.625 01/15/16 269,338 ---------- 715,078 ---------- CHEMICALS: SPECIALTY (4.8%) 490 Equistar Chemical Funding 10.125 09/01/08 518,175 185 Equistar Chemical Funding 10.625 05/01/11 199,569 335 Innophos, Inc. 8.875 08/15/14 331,650 314 Innophos, Inc. 13.17**+ 02/15/15 316,007 175 Koppers Industry Inc. 9.875 10/15/13 188,563 318 Millennium America, Inc. 9.25 06/15/08 327,540 275 Nalco Co. 7.75 11/15/11 275,688 385 Nalco Co. 8.875 11/15/13 389,813 420 Rockwood Specialties, Inc. 10.625 05/15/11 450,975 ---------- 2,997,980 ---------- COAL (1.2%) 140 Foundation PA Coal Co. 7.25 08/01/14 137,200 635 Massey Energy Co. - 144A* 6.875 12/15/13 593,725 ---------- 730,925 ---------- COMMERCIAL PRINTING/FORMS (0.6%) 430 Quebecor World Capital Corp. - 144A*(Canada) 8.75 03/15/16 394,525 ---------- CONTAINERS/PACKAGING (3.3%) 360 Graham Packaging Company Inc. 8.50 10/15/12 354,600 415 Graham Packaging Company Inc. 9.875 10/15/14 412,925 495 Graphic Packaging International Corp. 9.50 08/15/13 492,525 400 Owens-Brockway Glass Containers Corp. 8.75 11/15/12 418,500 60 Owens-Illinois, Inc. 7.35 05/15/08 60,750 285 Owens-Illinois, Inc. 7.50 05/15/10 280,013 ---------- 2,019,313 ----------
SEE NOTES TO FINANCIAL STATEMENTS 54
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ------------------------------------------------------------------------------------- DATA PROCESSING SERVICES (0.6%) $ 35 Sungard Data Systems Inc. - 144A* 8.525% 08/15/13 $ 36,794 345 Sungard Data Systems Inc. - 144A* 9.125 08/15/13 359,663 ---------- 396,457 ---------- DRUGSTORE CHAINS (1.0%) 320 Jean Coutu Group PJC Inc. (Canada) 7.625 08/01/12 312,000 305 Rite Aid Corp. 8.125 05/01/10 308,050 ---------- 620,050 ---------- ELECTRIC UTILITIES (6.3%) 370 AES Corp. (The) 7.75 03/01/14 373,700 42 AES Corp. (The) 8.875 02/15/11 44,310 54 AES Corp. (The) 9.375 09/15/10 58,050 150 AES Corp. (The) - 144A* 9.00 05/15/15 162,000 595 CMS Energy Corp. 7.50 01/15/09 605,413 275 IPALCO Enterprises, Inc. 8.375 11/14/08 283,938 115 IPALCO Enterprises, Inc. 8.625 11/14/11 122,475 365 Monongahela Power Co. 5.00 10/01/06 364,162 415 MSW Energy Holdings/Finance 7.375 09/01/10 417,075 80 MSW Energy Holdings/Finance 8.50 09/01/10 82,800 290 Nevada Power Co. 8.25 06/01/11 311,437 271 Nevada Power Co. 9.00 08/15/13 294,671 785 PSEG Energy Holdings Inc. 8.625 02/15/08 808,550 ---------- 3,928,581 ---------- ELECTRICAL PRODUCTS (1.0%) 602 Ormat Funding Corp. 8.25 12/30/20 619,966 ---------- ENVIRONMENTAL SERVICES (1.3%) 280 Allied Waste North America, Inc. 5.75 02/15/11 262,500 120 Allied Waste North America, Inc. 6.375 04/15/11 115,800 355 Allied Waste North America, Inc. 7.875 04/15/13 356,775 55 Allied Waste North America, Inc. 8.50 12/01/08 57,200 9 Allied Waste North America, Inc. 9.25 09/01/12 9,585 ---------- 801,860 ---------- FINANCE/RENTAL/LEASING (1.1%) 380 Ford Motor Credit Corp. 5.80 01/12/09 347,352 350 Residential Capital Corp. 6.375 06/30/10 345,536 ---------- 692,888 ---------- FINANCIAL CONGLOMERATES (1.6%) 460 General Motors Acceptance Corp. 4.375 12/10/07 441,384 600 General Motors Acceptance Corp. 6.875 09/15/11 573,107 ---------- 1,014,491 ----------
SEE NOTES TO FINANCIAL STATEMENTS 55
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ------------------------------------------------------------------------------------- FOOD RETAIL (1.7%) $ 365 Albertson's, Inc. 7.25% 05/01/13 $ 349,123 145 Albertson's, Inc. 7.50 02/15/11 143,995 200 CA FM Lease Trust - 144A* 8.50 07/15/17 212,326 350 Delhaize America, Inc. 8.125 04/15/11 369,839 ---------- 1,075,283 ---------- FOOD: MEAT/FISH/DAIRY (3.7%) 325 Michael Foods Inc. (Series B) 8.00 11/15/13 320,938 710 Pilgrim's Pride Corp. 9.625 09/15/11 741,950 470 PPC Escrow Corp. 9.25 11/15/13 471,175 170 Smithfield Foods Inc. 7.00 08/01/11 165,325 75 Smithfield Foods Inc. 7.75 05/15/13 73,875 535 Smithfield Foods Inc. (Series B) 8.00 10/15/09 543,025 ---------- 2,316,288 ---------- FOREST PRODUCTS (1.4%) 375 Covalence Specialty Material - 144A* 10.25 03/01/16 361,875 220 Crown Americas Inc. - 144A* 7.625 11/15/13 217,250 EUR 200 Crown Euro Holdings SA (France) 6.25 09/01/11 266,609 ---------- 845,734 ---------- GAS DISTRIBUTORS (0.1%) $ 45 Northwest Pipeline Corp. 8.125 03/01/10 47,025 ---------- HOME BUILDING (0.5%) 165 Tech Olympic USA, Inc. 10.375 07/01/12 159,225 180 Tech Olympic USA, Inc. (Issued 02/03/03) 9.00 07/01/10 175,950 ---------- 335,175 ---------- HOME FURNISHINGS (0.5%) 270 Tempur-Pedic Inc. 10.25 08/15/10 286,200 ---------- HOSPITAL/NURSING MANAGEMENT (2.9%) 515 Community Health System Inc. 6.50 12/15/12 491,181 395 HCA, Inc. 6.30 10/01/12 373,481 200 HCA, Inc. 8.70 02/10/10 210,266 90 HCA, Inc. 8.75 09/01/10 95,334 405 Medcath Holdings Corp. 9.875 07/15/12 420,188 165 Tenet Healthcare Corp. 7.375 02/01/13 151,388 85 Tenet Healthcare Corp. 9.875 07/01/14 85,425 ---------- 1,827,263 ---------- HOTELS/RESORTS/CRUISELINES (0.3%) 190 Starwood Hotels & Resorts Worldwide, Inc. 7.875 05/01/12 199,263 ----------
SEE NOTES TO FINANCIAL STATEMENTS 56
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ------------------------------------------------------------------------------------------------- INDUSTRIAL MACHINERY (0.2%) $ 100 Goodman Global Holding Company, Inc. (Series B) 8.329**% 06/15/12 $ 100,500 ---------- INDUSTRIAL SPECIALTIES (1.6%) 560 Johnsondiversy, Inc. 9.625 05/15/12 560,000 405 UCAR Finance, Inc. 10.25 02/15/12 429,300 ---------- 989,300 ---------- MEDIA CONGLOMERATES (1.1%) 671 Canwest Media Inc. (Canada) 8.00 09/15/12 667,646 ---------- MEDICAL DISTRIBUTORS (1.2%) 745 AmerisourceBergen Corp. - 144A* 5.625 09/15/12 715,200 ---------- MEDICAL SPECIALTIES (1.0%) 655 Fisher Scientific International, Inc. 6.125 07/01/15 634,531 ---------- MEDICAL/NURSING SERVICES (1.6%) 330 DaVita Inc. 6.625 03/15/13 315,150 570 Fresenius Medical Care Capital Trust 7.875 06/15/11 578,550 95 Fresenius Medical Care Capital Trust II (Units)++ 7.875 02/01/08 96,663 ---------- 990,363 ---------- METAL FABRICATIONS (1.1%) 215 General Cable Corp. 9.50 11/15/10 228,975 460 Hexcell Corp. 6.75 02/01/15 432,400 ---------- 661,375 ---------- MISCELLANEOUS COMMERCIAL SERVICES (1.4%) 295 Iron Mountain Inc. 7.75 01/15/15 283,200 585 Iron Mountain Inc. 8.625 04/01/13 587,925 ---------- 871,125 ---------- MISCELLANEOUS MANUFACTURING (0.3%) 205 Propex Fabrics Inc. 10.00 12/01/12 188,600 ---------- MOTOR VEHICLES (1.9%) 470 Ford Motor Co. 7.45 07/16/31 341,925 175 General Motors Corp. 7.125 07/15/13 144,813 820 General Motors Corp. 8.375 07/15/33 664,200 ---------- 1,150,938 ---------- MOVIES/ENTERTAINMENT (0.5%) 285 AMC Entertainment Inc. 9.42** 08/15/10 294,975 ---------- OIL & GAS PIPELINES (3.5%) 295 Colorado Interstate Gas Co. - 144A* 6.80 11/15/15 285,809 495 El Paso Production Holdings 7.75 06/01/13 501,187 375 Pacific Energy Partners/Finance 7.125 06/15/14 380,625
SEE NOTES TO FINANCIAL STATEMENTS 57
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE --------------------------------------------------------------------------------------------- $ 155 Southern Natural Gas 8.875% 03/15/10 $ 164,494 835 Williams Companies, Inc. (The) 7.875 09/01/21 851,700 ---------- 2,183,815 ---------- OIL & GAS PRODUCTION (4.4%) 510 Chaparral Energy Inc. - 144A* 8.50 12/01/15 510,000 125 Chesapeake Energy Corp. 6.375 06/15/15 116,562 185 Chesapeake Energy Corp. 6.625 01/15/16 172,975 565 Chesapeake Energy Corp. 7.50 09/15/13 569,237 28 Chesapeake Energy Corp. 7.75 01/15/15 28,210 100 Chesepeaks Energy Corp. 7.625 07/15/13 101,125 385 Hilcorp Energy/Finance - 144A* 7.75 11/01/15 369,600 280 Hilcorp Energy/Finance - 144A* 10.50 09/01/10 303,100 140 Magnum Hunter Resources, Inc. 9.60 03/15/12 148,400 410 Pogo Producing Co. 6.875 10/01/17 381,812 ---------- 2,701,021 ---------- OIL REFINING/MARKETING (0.6%) 345 Husky Oil Ltd. 8.90 08/15/28 364,492 ---------- OILFIELD SERVICES/EQUIPMENT (1.4%) 175 Compagnie Generale de Geophysique S.A. 7.50 05/15/15 171,938 135 Hanover Compressor Co. 8.625 12/15/10 140,400 185 Hanover Compressor Co. 9.00 06/01/14 194,250 128 Hanover Equipment Trust 2001 A (Series A) 8.50 09/01/08 131,840 210 Hanover Equipment Trust 2001 B (Series B) 8.75 09/01/11 217,350 ---------- 855,778 ---------- OTHER METALS/MINERALS (0.0%) 355 Murrin Holdings Property Ltd. (Australia) (b)(f) 9.375 08/31/07 0 ---------- OTHER TRANSPORTATION (1.1%) 710 CHC Helicopter Corp. (Canada) 7.375 05/01/14 685,150 ---------- PHARMACEUTICALS: MAJOR (1.4%) 490 VWR International Inc. 6.875 04/15/12 470,400 400 Warner Chilctt Corp. - 144A* 8.75 02/01/15 414,000 ---------- 884,400 ---------- PUBLISHING: BOOKS/MAGAZINES (2.2%) 206 Dex Media East/Finance 12.125 11/15/12 232,265 327 Dex Media West/Finance 9.875 08/15/13 356,020 335 Houghton Mifflin Co. 8.25 02/01/11 340,862 395 Houghton Mifflin Co. 9.875 02/01/13 411,787 ---------- 1,340,934 ----------
SEE NOTES TO FINANCIAL STATEMENTS 58
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ---------------------------------------------------------------------------------------------- PULP & PAPER (0.5%) $ 255 Abitibi-Consolidated Inc. (Canada) 6.00% 06/20/13 $ 207,825 110 P.H. Glatfelter - 144A* 7.125 05/01/16 109,133 ---------- 316,958 ---------- REAL ESTATE INVESTMENT TRUSTS (1.7%) 540 Host Marriott LP 6.375 03/15/15 510,300 550 Host Marriott LP 7.125 11/01/13 550,687 ---------- 1,060,987 ---------- SERVICES TO THE HEALTH INDUSTRY (1.0%) 270 National Mentor Holdings Inc. - 144A* 11.25 07/01/14 276,075 345 Omnicare Inc. 6.75 12/15/13 330,337 ---------- 606,412 ---------- SPECIALTY STORES (2.9%) 495 Linens' n Things, Inc. - 144A* 10.702** 01/15/14 471,487 580 Petro Stopping Centers LP/Petro Financial Corp. 9.00 02/15/12 578,550 770 Sonic Automotive, Inc. 8.625 08/15/13 766,150 ---------- 1,816,187 ---------- SPECIALTY TELECOMMUNICATIONS (3.0%) 320 American Tower Corp. 7.125 10/15/12 320,800 310 American Tower Corp. 7.50 05/01/12 314,650 98 Panamsat Corp. 9.00 08/15/14 99,960 735 Panamsat Holding Corp. 10.375++ 11/01/14 546,980 445 Qwest Communications International 8.67** 02/15/09 455,569 4,679 Rhythms Netconnections, Inc. (a)(b)(f) 12.75 04/15/09 0 100 U.S. West Communications Corp. 5.625 11/15/08 98,000 ---------- 1,835,959 ---------- STEEL (1.2%) 705 Amsted Industries Inc. - 144A* 10.25 10/15/11 757,875 ---------- TELECOMMUNICATIONS (1.2%) 357 Axtel SA (Mexico) 11.00 12/15/13 392,700 615 Exodus Communications, Inc. (a)(b)(f) 11.625 07/15/10 0 135 Nordic Tel Company - 144A*(Denmark) 8.875 05/01/16 139,387 65 NTL Cable PLC (Great Britain) 8.75 04/15/14 64,837 EUR 110 TDC AS (Denmark) 6.50 04/19/12 143,849 ---------- 740,773 ---------- TOBACCO (1.1%) $ 730 RJ Reynolds Tobacco Holdings - 144A* 6.50 07/15/10 709,925 ---------- TRUCKS/CONSTRUCTION/FARM MACHINERY (0.6%) 347 Manitowoc Inc. (The) 10.50 08/01/12 378,230 ----------
SEE NOTES TO FINANCIAL STATEMENTS 59
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ----------------------------------------------------------------------------------------------- WHOLESALE DISTRIBUTORS (1.1%) $ 160 Buhrmann US, Inc. 7.875% 03/01/15 $ 158,800 375 Buhrmann US, Inc. 8.25 07/01/14 375,000 150 Nebraska Book Company, Inc. 8.625 03/15/12 140,250 ----------- 674,050 ----------- WIRELESS TELECOMMUNICATIONS (1.5%) 415 Ubiquitel Operating Co. 9.875 03/01/11 453,387 460 Wind Acquisition Finance SA - 144A* (Luxembourg) 10.75 12/01/15 491,050 ----------- 944,437 ----------- TOTAL CORPORATE BONDS (COST $75,712,904) 58,535,484 -----------
NUMBER OF SHARES --------- COMMON STOCKS (d)(0.8%) CASINO/GAMING (0.0%) 2,000 Fitzgeralds Gaming Corp. (+) (f) 0 ------ FOOD: SPECIALTY/CANDY (F)(0.0%) 436 SFAC New Holdings Inc. (c) 0 2,375 SFAC New Holdings Inc. (++) (c) 0 120,000 Specialty Foods Acquisition Corp. - 144A* 0 ------ 0 ------ MEDICAL/NURSING SERVICES (0.0%) 418,663 Raintree Healthcare Corp. (c)(f) 0 ------ RESTAURANTS (f)(0.0%) 7,750 American Restaurant Group Holdings, Inc. - 144A* 0 37,167 American Restaurant Group Holdings, Inc. (c) 0 4,366 American Restaurant Group Holdings, Inc. (c) 19,953 92,158 Catalina Restaurant Group (c) 922 ------ 20,875 ------ SPECIALTY TELECOMMUNICATIONS (0.0%) 12,688 Birch Telecom Inc. (+++) (c)(f) 127 131,683 PFB Telecom NV (Series B) (c)(f) 0 565 XO Holdings, Inc. (c) 2,486 ------ 2,613 ------ TELECOMMUNICATIONS (0.0%) 2,251 Viatel Holdings Bermuda Ltd. (c) 157 ------ TEXTILES (0.0%) 298,461 U.S. Leather, Inc. (c)(f) 0 ------
SEE NOTES TO FINANCIAL STATEMENTS 60
NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- WIRELESS TELECOMMUNICATIONS (0.8%) 8,000 NII Holdings, Inc. (Class B) (c) $451,040 521 USA Mobility, Inc. (c) 8,648 38,444 Vast Solutions, Inc. (Class B1) (c)(f) 0 38,444 Vast Solutions, Inc. (Class B2) (c)(f) 0 38,444 Vast Solutions, Inc. (Class B3) (c)(f) 0 -------- 459,688 -------- TOTAL COMMON STOCKS (COST $48,387,613) 483,333 --------
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE --------- ------ -------- CONVERTIBLE BOND(0.6%) TELECOMMUNICATION EQUIPMENT $ 370 Nortel Networks Corp. (Canada) (COST $359,989) 4.25% 09/01/08 350,575 ------- FOREIGN GOVERNMENT OBLIGATION(0.5%) MXN 3,245 Mexican Fixed Rate Bonds (COST $321,504) 10.00 12/05/24 299,802 -------
NUMBER OF EXPIRATION WARRANTS DATE --------- ---------- WARRANTS (d)(0.0%) CASINO/GAMING (f)(0.0%) 83,500 Aladdin Gaming Enterprises, Inc. - 144A* 03/01/10 0 6,000 Resort At Summerlin LP - 144A* 12/15/07 0 ----- 0 ----- PERSONNEL SERVICES (0.0%) 42,250 Comforce Corp. - 144A*(f) 12/01/09 0 ----- RESTAURANTS (0.0%) 1,500 American Restaurant Group Holdings, Inc. - 144A*(f) 08/15/08 0 ----- SPECIALTY TELECOMMUNICATIONS (0.0%) 1,132 XO Holdings, Inc. (Series A)(c) 01/16/10 973 849 XO Holdings, Inc. (Series B)(c) 01/16/10 416 849 XO Holdings, Inc. (Series C)(c) 01/16/10 310 ----- 1,699 ----- TOTAL WARRANTS (COST $128,480) 1,699 -----
SEE NOTES TO FINANCIAL STATEMENTS 61
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ----------------------------------------------------------------------------------- SHORT-TERM INVESTMENT (1.9%) REPURCHASE AGREEMENT $ 1,180 The Bank of New York (dated 06/30/06; proceeds $1,180,533) (e) (COST $1,180,043) 5.188% 07/03/06 $ 1,180,043 ----------- TOTAL INVESTMENTS (COST $126,090,533) (g) 98.2% 60,850,936 OTHE ASSETS IN EXCESS OF LIABILITIES 1.8 1,143,188 -------- ----------- NET ASSETS 100.0% $61,994,124 ======== ===========
---------- * RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. ** FLOATING RATE SECURITY. RATE SHOWN IS THE RATE IN EFFECT AT JUNE 30 2006. (+) RESALE IS RESTRICTED; ACQUIRED (12/22/98) AT A COST BASIS OF $9,020. (++) RESALE IS RESTRICTED; ACQUIRED (06/10/99) AT A COST BASIS OF $24. (+++) RESALE IS RESTRICTED; ACQUIRED (BETWEEN 03/06/98 AND 08/25/98) AT A COST BASIS OF $6,473,685. + PAYMENT-IN-KIND SECURITY. +++ CURRENTLY A ZERO COUPON BOND AND IS SCHEDULED TO PAY INTEREST AT THE RATE SHOWN AT A FUTURE SPECIFIED DATE. ++ CONSISTS OF ONE OR MORE CLASS OF SECURITIES TRADED TOGETHER AS A UNIT; BONDS OR PREFERRED STOCK WITH ATTACHED WARRANTS. (a) ISSUER IN BANKRUPTCY. (b) NON-INCOME PRODUCING SECURITY; BOND IN DEFAULT. (c) ACQUIRED THROUGH EXCHANGE OFFER. (d) NON-INCOME PRODUCING SECURITIES. (e) COLLATERALIZED BY FEDERAL NATIONAL MORTGAGE ASSOC. 5.50% DUE 06/01/36 VALUED AT $1,203,644. (f) SECURITIES WITH TOTAL MARKET VALUE EQUAL TO $21,002 HAVE BEEN VALUED AT THEIR FAIR VALUE AS DETERMINED IN GOOD FAITH UNDER PROCEDURES ESTABLISHED BY AND UNDER THE GENERAL SUPERVISION OF THE FUND'S TRUSTEES. (g) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $1,025,984 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $66,265,581, RESULTING IN NET UNREALIZED DEPRECIATION OF $65,239,597. SEE NOTES TO FINANCIAL STATEMENTS 62 FORWARD FOREIGN CONTRACT OPEN AT JUNE 30, 2006:
CONTRACTS IN EXCHANGE DELIVERY UNREALIZED TO DELIVER FOR DATE DEPRECIATION --------------------------------------------------- EUR 333,000 $419,520 09/27/06 $(8,857) =======
CURRENCY ABBREVIATIONS: EUR EURO. MXN MEXICAN NEW PESO.
SUMMARY OF INVESTMENTS LONG-TERM CREDIT ANALYSIS* A 1.9% BBB 1.6 BB 27.8 B 49.8 CCC 16.8 NR 2.1 ----- 100.0% =====
---------- * DOES NOT INCLUDE OPEN FORWARD FOREIGN CURRENCY CONTRACT WITH UNREALIZED DEPRECIATION OF $8,857. SEE NOTES TO FINANCIAL STATEMENTS 63 Morgan Stanley Variable Investment Series - Utilities PORTFOLIO OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- COMMON STOCKS (97.8%) ALTERNATIVE POWER GENERATION (1.0%) 66,000 Distributed Energy Systems* $ 341,220 95,000 FuelCell Energy, Inc.* 910,100 45,000 Plug Power, Inc.* 210,150 10,000 Suntech Power Holdings Co. Ltd. (ADR) (China)* 282,500 ----------- 1,743,970 ----------- CABLE/SATELLITE TV (0.5%) 22,000 Rogers Communications, Inc. (Class B) 888,800 ----------- ELECTRIC UTILITIES (55.6%) 230,000 AES Corp. (The)* 4,243,500 87,000 Allegheny Energy, Inc.* 3,225,090 69,000 Ameren Corp. 3,484,500 82,000 American Electric Power Co., Inc. 2,808,500 58,000 Consolidated Edison, Inc. 2,577,520 43,000 Constellation Energy Group, Inc. 2,344,360 55,000 Dominion Resources, Inc. 4,113,450 86,000 DPL, Inc. 2,304,800 142,432 Duke Energy Corp. 4,183,228 133,000 Edison International 5,187,000 74,000 Entergy Corp. 5,235,500 88,000 Exelon Corp. 5,001,040 88,000 FirstEnergy Corp. 4,770,480 135,000 FPL Group, Inc. 5,586,300 50,000 Mirant Corp.* 1,340,000 91,000 NRG Energy, Inc.* 4,384,380 73,000 NSTAR 2,087,800 130,000 PG & E Corp. 5,106,400 39,000 Pinnacle West Capital Corp. 1,556,490 85,000 PNM Resources Inc. 2,121,600 177,000 PPL Corp. 5,717,100 121,000 SCANA Corp. 4,668,180 108,000 Southern Co. (The) 3,461,400 97,000 TXU Corp. 5,799,630 104,000 Wisconsin Energy Corp. 4,191,200 ----------- 95,499,448 ----------- ELECTRONIC EQUIPMENT/INSTRUMENTS (0.8%) 24,000 Itron, Inc.* 1,422,240 ----------- ENERGY (22.3%) 118,000 AGL Resources, Inc. 4,498,160 13,000 Anadarko Petroleum Corp. 619,970 60,000 El Paso Corp. 900,000
SEE NOTES TO FINANCIAL STATEMENTS 64
NUMBER OF SHARES VALUE --------------------------------------------------------------------------------- 100,000 Equitable Resources, Inc. $ 3,350,000 21,000 KeySpan Corp. 848,400 27,000 Kinder Morgan, Inc. 2,697,030 124,000 MDU Resources Group, Inc. 4,539,640 77,000 New Jersey Resources Corp. 3,602,060 21,000 Nexen, Inc. 1,187,340 46,000 Peabody Energy Corp. 2,564,500 55,000 Questar Corp. 4,426,950 111,000 Sempra Energy 5,048,280 172,000 Williams Companies, Inc. (The) 4,017,920 ------------ 38,300,250 ------------ TELECOMMUNICATIONS (16.7%) 59,932 ALLTEL Corp. 3,825,460 134,946 AT&T Inc. 3,763,644 113,000 BellSouth Corp. 4,090,600 32,750 CenturyTel, Inc. 1,216,662 112,000 Crown Castle International Corp.* 3,868,480 183,750 Sprint Nextel Corp. 3,673,163 54,860 Telefonica de Espana S.A. (ADR) (Spain) 2,728,736 121,000 Telefonos de Mexico S.A. (Series L) (ADR) (Mexico) 2,520,430 61,000 Valor Communications Group, Inc. 698,450 71,120 Verizon Communications, Inc. 2,381,809 ------------ 28,767,434 ------------ WIRELESS TELECOMMUNICATIONS (0.9%) 22,000 America Movil S.A. de C.V. (Series L) (ADR) (Mexico) 731,720 13,000 NII Holdings, Inc.* 732,940 ------------ 1,464,660 ------------ TOTAL COMMON STOCKS (COST $100,510,376) 168,086,802 ------------
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE --------- ------ -------- CORPORATE BONDS (0.5%) ELECTRIC UTILITIES (0.5%) $ 60 Carolina Power & Light Co. 5.125% 09/15/13 57,322 120 Cleco Power LLC 5.375 05/01/13 114,496 110 Commonwealth Edison Co. (Series 98) 6.15 03/15/12 111,228 90 Duquesne Light Co. (Series O) 6.70 04/15/12 93,274 25 Entergy Gulf States, Inc. 3.60 06/01/08 23,894 35 Entergy Gulf States, Inc. 5.631+ 12/01/09 34,663
SEE NOTES TO FINANCIAL STATEMENTS 65
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE --------------------------------------------------------------------------------------------- $ 70 FirstEnergy Corp. (Series B) 6.45% 11/15/11 $ 71,306 40 Indianapolis Power & Light Co. - 144A** 6.30 07/01/13 40,215 145 Public Service Co. of New Mexico (Series B) 7.50 08/01/18 154,426 85 Public Service Electric & Gas Co. (Series MTNB) 5.00 01/01/13 81,260 45 TXU Energy Co. 7.00 03/15/13 45,994 ------------ 828,078 ------------ ENERGY (0.0%) 35 Panhandle Eastern Pipe Line Co. 4.80 08/15/08 34,139 25 Panhandle Eastern Pipe Line Co. (Series B) 2.75 03/15/07 24,471 ------------ 58,610 ------------ TELECOMMUNICATIONS (0.0%) 27 AT & T Corp. 7.30 11/15/11 28,693 50 Sprint Capital Corp. 8.375 03/15/12 55,308 ------------ 84,001 ------------ TOTAL CORPORATE BONDS (COST $976,094) 970,689 ------------ U.S. GOVERNMENT OBLIGATION (0.1%) 117 U.S. Treasury Bond (COST $139,616) 6.125 08/15/29 130,126 ------------ SHORT-TERM INVESTMENT (1.1%) REPURCHASE AGREEMENT 1,821 The Bank of New York (dated 06/30/06; proceeds $1,821,523) (a) (COST $1,820,736) 5.188 07/03/06 1,820,736 ------------ TOTAL INVESTMENTS (COST $103,446,822) (b) 99.5% 171,008,353 OTHER ASSETS IN EXCESS OF LIABILITIES 0.5 802,254 ----- ------------ NET ASSETS 100.0% $171,810,607 ===== ============
---------- ADR AMERICAN DEPOSITARY RECEIPT. * NON-INCOME PRODUCING SECURITY. ** RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. + FLOATING RATE SECURITY; RATE SHOWN IS THE RATE IN EFFECT AT JUNE 30, 2006. (a) COLLATERALIZED BY FEDERAL NATIONAL MORTAGE ASSOCIATION 5.50% DUE 06/01/36 VALUED AT $1,857,151. (b) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $68,442,483 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $880,952, RESULTING IN NET UNREALIZED APPRECIATION OF $67,561,531. SEE NOTES TO FINANCIAL STATEMENTS 66 Morgan Stanley Variable Investment Series - Utilities SUMMARY OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
PERCENT OF INDUSTRY VALUE NET ASSETS -------------------------------------------------------------------------------- Electric Utilities $ 96,327,526 56.1% Energy 38,358,860 22.3 Telecommunications 28,851,435 16.7 Repurchase Agreement 1,820,736 1.1 Alternative Power Generation 1,743,970 1.0 Wireless Telecommunications 1,464,660 0.9 Electronic Equipment/Instruments 1,422,240 0.8 Cable/Satellite TV 888,800 0.5 U.S. Government Obligation 130,126 0.1 ------------ ---- $171,008,353 99.5% ============ ====
SEE NOTES TO FINANCIAL STATEMENTS 67 Morgan Stanley Variable Investment Series - Income Builder PORTFOLIO OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
NUMBER OF SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS (63.8%) AEROSPACE & DEFENSE (1.4%) 8,690 Northrop Grumman Corp. $ 556,681 13,230 Raytheon Co. 589,661 ---------- 1,146,342 ---------- BEVERAGES: ALCOHOLIC (0.6%) 6,900 Diageo PLC (ADR) (United Kingdom) 466,095 ---------- BEVERAGES: NON-ALCOHOLIC (1.0%) 19,430 Coca-Cola Co. (The) 835,879 ---------- BROADCASTING (1.4%) 35,970 Clear Channel Communications, Inc. 1,113,272 ---------- CABLE/SATELLITE TV (0.4%) 9,500 Comcast Corp. (Class A)* 311,030 ---------- CHEMICALS: MAJOR DIVERSIFIED (2.8%) 34,640 Bayer AG (ADR) (Germany) 1,590,322 15,200 Du Pont (E.I.) de Nemours & Co. 632,320 ---------- 2,222,642 ---------- COMPUTER PROCESSING HARDWARE (0.2%) 5,221 Hewlett-Packard Co. 165,401 ---------- DEPARTMENT STORES (0.3%) 4,590 Kohl's Corp.* 271,361 ---------- DISCOUNT STORES (1.0%) 17,020 Wal-Mart Stores, Inc. 819,853 ---------- ELECTRIC UTILITIES (2.3%) 14,610 American Electric Power Co., Inc. 500,392 10,613 Entergy Corp. 750,870 11,220 FirstEnergy Corp. 608,236 ---------- 1,859,498 ---------- FINANCE/RENTAL/LEASING (1.2%) 17,550 Freddie Mac 1,000,526 ---------- FINANCIAL CONGLOMERATES (4.8%) 31,540 Citigroup, Inc. 1,521,490 42,148 JPMorgan Chase & Co. 1,770,216 10,010 State Street Corp. 581,481 ---------- 3,873,187 ---------- FOOD: MAJOR DIVERSIFIED (1.4%) 5,900 ConAgra Foods Inc. 130,449 43,640 Unilever N.V. (NY Registered Shares) (Netherlands) 984,082 ---------- 1,114,531 ----------
SEE NOTES TO FINANCIAL STATEMENTS 68
NUMBER OF SHARES VALUE ------------------------------------------------------------------------------ FOOD: SPECIALTY/CANDY (0.7%) 14,710 Cadbury Schweppes PLC (ADR) (United Kingdom) $ 571,042 ---------- HOUSEHOLD/PERSONAL CARE (0.7%) 10,150 Procter & Gamble Co. (The) 564,340 ---------- INDUSTRIAL CONGLOMERATES (3.2%) 40,570 General Electric Co. 1,337,187 8,982 Ingersoll-Rand Co. Ltd. (Class A) (Bermuda) 384,250 10,050 Siemens AG (ADR) (Germany) 872,541 ---------- 2,593,978 ---------- INSURANCE BROKERS/SERVICES (1.2%) 35,000 Marsh & McLennan Companies, Inc. 941,150 ---------- INTEGRATED OIL (3.9%) 11,700 BP PLC (ADR) (United Kingdom) 814,437 16,228 ConocoPhillips 1,063,421 5,600 Exxon Mobil Corp. 343,560 13,590 Royal Dutch Shell PLC (ADR) (Class A) (United Kingdom) 910,258 ---------- 3,131,676 ---------- INVESTMENT BANKS/BROKERS (3.0%) 2,320 Goldman Sachs Group, Inc. (The) 348,998 17,320 Merrill Lynch & Co., Inc. 1,204,779 51,410 Schwab (Charles) Corp. (The) 821,532 ---------- 2,375,309 ---------- LIFE/HEALTH INSURANCE (0.3%) 13,650 Aegon N.V. (NY Registered Shares) (Netherlands) 233,006 ---------- MAJOR BANKS (2.0%) 19,955 Bank of America Corp. 959,835 9,220 PNC Financial Services Group 646,967 ---------- 1,606,802 ---------- MAJOR TELECOMMUNICATIONS (3.7%) 6,976 Embarq Corp.* 285,946 23,280 France Telecom S.A. (ADR) (France) 508,901 54,306 Sprint Nextel Corp. 1,085,577 32,214 Verizon Communications, Inc. 1,078,847 ---------- 2,959,271 ---------- MANAGED HEALTH CARE (0.4%) 3,610 CIGNA Corp. 355,621 ---------- MEDIA CONGLOMERATES (3.5%) 31,610 Disney (Walt) Co. (The) 948,300 70,540 Time Warner, Inc. 1,220,342 17,635 Viacom, Inc. (Class B)(non-voting)* 632,038 ---------- 2,800,680 ----------
SEE NOTES TO FINANCIAL STATEMENTS 69
NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- MEDICAL SPECIALTIES (0.3%) 8,380 Applera Corp. - Applied Biosystems Group $ 271,093 ---------- MOTOR VEHICLES (0.6%) 15,980 Honda Motor Co., Ltd. (ADR) (Japan) 508,484 ---------- MULTI-LINE INSURANCE (0.7%) 6,290 Hartford Financial Services Group, Inc. (The) 532,134 ---------- OIL & GAS PIPELINES (0.6%) 19,900 Williams Companies, Inc. (The) 464,864 ---------- OIL REFINING/MARKETING (0.2%) 2,100 Marathon Oil Corp. 174,930 ---------- OILFIELD SERVICES/EQUIPMENT (0.9%) 10,600 Schlumberger Ltd. (Netherlands Antilles) 690,166 ---------- OTHER CONSUMER SERVICES (0.0%) 1,300 Block (H.&R.), Inc. 31,018 ---------- PACKAGED SOFTWARE (1.1%) 57,070 Symantec Corp.* 886,868 ---------- PHARMACEUTICALS: MAJOR (10.1%) 24,110 Abbott Laboratories 1,051,437 49,580 Bristol-Myers Squibb Co. 1,282,139 9,670 GlaxoSmithKline PLC (ADR) (United Kingdom) 539,586 20,020 Lilly (Eli)& Co. 1,106,505 31,400 Pfizer, Inc. 736,958 13,780 Roche Holdings Ltd. (ADR) (Switzerland) 1,144,429 9,190 Sanofi-Aventis (ADR) (France) 447,553 55,210 Schering-Plough Corp. 1,050,646 16,230 Wyeth 720,774 ---------- 8,080,027 ---------- PRECIOUS METALS (0.9%) 13,120 Newmont Mining Corp. 694,442 ---------- PROPERTY - CASUALTY INSURERS (3.0%) 2,300 ACE Ltd. (Cayman Islands) 116,357 17,260 Chubb Corp. (The) 861,274 22,603 St. Paul Travelers Companies, Inc. (The) 1,007,642 6,900 XL Capital Ltd. (Class A) (Cayman Islands) 422,970 ---------- 2,408,243 ---------- REGIONAL BANKS (0.5%) 10,800 Fifth Third Bancorp 399,060 ---------- RESTAURANTS (0.3%) 7,740 McDonald's Corp. 260,064 ----------
SEE NOTES TO FINANCIAL STATEMENTS 70
NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- SEMICONDUCTORS (1.2%) 27,889 Intel Corp. $ 528,497 30,200 Micron Technology, Inc.* 454,812 ----------- 983,309 ----------- SPECIALTY INSURANCE (0.7%) 5,200 MGIC Investment Corp. 338,000 4,400 PMI Group, Inc. (The) 196,152 ----------- 534,152 ----------- SPECIALTY STORES (0.3%) 6,150 Office Depot, Inc.* 233,700 ----------- TELECOMMUNICATION EQUIPMENT (0.3%) 13,915 Motorola, Inc. 280,387 ----------- TOBACCO (0.7%) 7,690 Altria Group, Inc. 564,677 ----------- TOTAL COMMON STOCKS (COST $44,470,437) 51,330,110 -----------
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE --------- ------ -------- CONVERTIBLE BONDS (14.7%) AIRLINES (1.9%) $ 1,500 Continental Airlines Inc. 4.50% 02/01/07 1,488,750 --------- CABLE/SATELLITE TV (1.2%) 1,000 Echostar Communications Corp. 5.75 05/15/08 985,000 --------- ELECTRIC UTILITIES (0.6%) 173 PG&E Corp. 9.50 06/30/10 494,131 --------- ELECTRONIC COMPONENTS (1.2%) 1,000 SCI Systems, Inc. 3.00 03/15/07 972,500 --------- ELECTRONIC PRODUCTION EQUIPMENT (1.3%) 1,100 Veeco Instruments, Inc. 4.125 12/21/08 1,075,250 --------- HOTELS/RESORTS/CRUISELINES (1.6%) 1,000 Hilton Hotels Corp. - 144A** 3.375 04/15/23 1,317,500 --------- HOUSEHOLD/PERSONAL CARE (1.6%) 1,000 Church & Dwight Co., Inc. - 144A** 5.25 08/15/33 1,265,000 --------- INTERNET RETAIL (1.1%) 901 Amazon.com, Inc. 4.75 02/01/09 868,339 --------- MEDIA CONGLOMERATES (1.5%) 1,080 Disney (Walt) Co. (The) 2.125 04/15/23 1,194,750 ---------
SEE NOTES TO FINANCIAL STATEMENTS 71
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE -------------------------------------------------------------------------------------- SEMICONDUCTORS (2.7%) $ 1,450 Intel Corp. - 144A** 2.95% 12/15/35 $ 1,227,062 950 Skyworks Solutions, Inc. 4.75 11/15/07 951,188 2,178,250 ----------- TOTAL CONVERTIBLE BONDS (COST $11,372,632) 11,839,470 ----------- CORPORATE BONDS (11.9%) AGRICULTURAL COMMODITIES/MILLING (1.8%) 1,460 Corn Products International Inc. 8.25 07/15/07 1,487,245 ----------- BROADCASTING (1.6%) 1,200 Clear Channel Communications, Inc. 8.00 11/01/08 1,248,300 ----------- BUILDING PRODUCTS (1.6%) 1,200 American Standard, Inc. 8.25 06/01/09 1,266,663 ----------- HOME BUILDING (1.5%) 1,200 Toll Corp. 8.25 02/01/11 1,239,000 ----------- HOTELS/RESORTS/CRUISELINES (2.6%) 2,000 Starwood Hotels & Resorts Worldwide, Inc. 7.875 05/01/12 2,097,500 ----------- MEDICAL/NURSING SERVICES (1.6%) 1,200 Roto-Rooter Inc. 8.75 02/24/11 1,266,000 ----------- PUBLISHING: NEWSPAPERS (1.2%) 1,000 Media General Inc. 6.95 09/01/06 1,000,867 ----------- TOTAL CORPORATE BONDS (COST $9,626,419) 9,605,575 -----------
NUMBER OF SHARES --------- CONVERTIBLE PREFERRED STOCKS (6.9%) FINANCIAL CONGLOMERATES (1.0%) 27,000 Citigroup Funding Inc. (Series GNW) 837,000 --------- INVESTMENT BANKS/BROKERS (1.2%) 38,000 Lehman Brothers Holdings Inc. (Series GIS) $1.5625 992,560 --------- LIFE/HEALTH INSURANCE (1.5%) 44,000 MetLife, Inc (Series B) $6.375 (Note 4) 1,213,080 --------- PHARMACEUTICALS: MAJOR (0.4%) 6,200 Schering-Plough Corp. $3.00 312,046 --------- PROPERTY - CASUALTY INSURERS (0.9%) 30,000 Travelers Property Casualty Corp. $1.125 735,600 ---------
SEE NOTES TO FINANCIAL STATEMENTS 72
NUMBER OF SHARES VALUE ----------------------------------------------------------------------------------- REAL ESTATE INVESTMENT TRUSTS (0.6%) 9,000 Equity Residential Properties Trust (Series E) $1.75 $ 443,250 ---------- TELECOMMUNICATION EQUIPMENT (1.3%) 1,000 Lucent Technologies Capital Trust I $7.50 1,015,000 ---------- TOTAL CONVERTIBLE PREFERRED STOCKS (COST $5,232,042) 5,548,536 ----------
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE --------- ------ -------- SHORT-TERM INVESTMENT(2.3%) REPURCHASE AGREEMENT $1,849 The Bank of New York (dated 06/30/06; proceeds $1,850,060) (a) (COST $1,849,261) 5.188% 07/03/06 1,849,261 ----------- TOTAL INVESTMENTS (COST $72,550,791)(b) 99.6% 80,172,952 OTHER ASSETS IN EXCESS OF LIABILITIES 0.4 320,372 ----- ----------- NET ASSETS 100.0% $80,493,324 ===== ===========
---------- ADR AMERICAN DEPOSITARY RECEIPT. * NON-INCOME PRODUCING SECURITY. ** RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. (a) COLLATERALIZED BY FEDERAL NATIONAL MORTGAGE ASSOC. 5.50% DUE 06/01/36 VALUED AT $1,886,246. (b) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $10,526,926 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $2,864,765, RESULTING IN NET UNREALIZED APPRECIATION OF $7,622,161. SEE NOTES TO FINANCIAL STATEMENTS 73 Morgan Stanley Variable Investment Series - Income Builder SUMMARY OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
PERCENT OF INDUSTRY VALUE NET ASSETS -------------------------------------------------------------------------------- Pharmaceuticals: Major $ 8,392,073 10.5% Financial Conglomerates 4,710,187 5.8 Media Conglomerates 3,995,430 5.0 Investment Banks/Brokers 3,367,869 4.2 Hotels/Resorts/Cruiselines 3,415,000 4.2 Semiconductors 3,161,559 3.9 Property - Casualty Insurers 3,143,843 3.9 Integrated Oil 3,131,676 3.9 Major Telecommunications 2,959,271 3.7 Industrial Conglomerates 2,593,978 3.2 Broadcasting 2,361,572 3.0 Electric Utilities 2,353,629 2.9 Chemicals: Major Diversified 2,222,642 2.8 Repurchase Agreement 1,849,261 2.3 Household/Personal Care 1,829,340 2.3 Major Banks 1,606,802 2.0 Airlines 1,488,750 1.9 Life/Health Insurance 1,446,086 1.8 Agricultural Commodities/Milling 1,487,245 1.8 Cable/Satellite TV 1,296,030 1.6 Telecommunication Equipment 1,295,387 1.6 Building Products 1,266,663 1.6 Medical/Nursing Services 1,266,000 1.6 Home Building 1,239,000 1.5 Aerospace & Defense 1,146,342 1.4 Food: Major Diversified 1,114,531 1.4 Electronic Production Equipment 1,075,250 1.3 Finance/Rental/Leasing $ 1,000,526 1.2% Publishing: Newspapers 1,000,867 1.2 Electronic Components 972,500 1.2 Insurance Brokers/Services 941,150 1.2 Packaged Software 886,868 1.1 Internet Retail 868,339 1.1 Beverages: Non-Alcoholic 835,879 1.0 Discount Stores 819,853 1.0 Precious Metals 694,442 0.9 Oilfield Services/Equipment 690,166 0.9 Food: Specialty/Candy 571,042 0.7 Tobacco 564,677 0.7 Specialty Insurance 534,152 0.7 Multi-Line Insurance 532,134 0.7 Motor Vehicles 508,484 0.6 Beverages: Alcoholic 466,095 0.6 Oil & Gas Pipelines 464,864 0.6 Real Estate Investment Trusts 443,250 0.6 Regional Banks 399,060 0.5 Managed Health Care 355,621 0.4 Department Stores 271,361 0.3 Medical Specialties 271,093 0.3 Restaurants 260,064 0.3 Specialty Stores 233,700 0.3 Oil Refining/Marketing 174,930 0.2 Computer Processing Hardware 165,401 0.2 Other Consumer Services 31,018 0.0 ----------- ---- $80,172,952 99.6% =========== ====
SEE NOTES TO FINANCIAL STATEMENTS 74 Morgan Stanley Variable Investment Series - Dividend Growth PORTFOLIO OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- COMMON STOCKS (97.6%) AEROSPACE & DEFENSE (1.3%) 126,677 Northrop Grumman Corp. $ 8,114,929 ----------- APPAREL/FOOTWEAR (2.5%) 6,164 J. Crew Group, Inc.* 169,202 41,000 Nike, Inc. (Class B) 3,321,000 182,608 V.F. Corp. 12,402,735 ----------- 15,892,937 ----------- BEVERAGES: ALCOHOLIC (1.3%) 121,800 Diageo PLC (ADR) (United Kingdom) 8,227,590 ----------- BIOTECHNOLOGY (1.5%) 55,448 Genentech, Inc.* 4,535,646 79,900 Gilead Sciences, Inc.* 4,726,884 ----------- 9,262,530 ----------- CHEMICALS: AGRICULTURAL (1.5%) 109,392 Monsanto Co. 9,209,712 ----------- COMPUTER COMMUNICATIONS (1.6%) 501,500 Cisco Systems, Inc.* 9,794,295 ----------- COMPUTER PROCESSING HARDWARE (1.1%) 47,113 Apple Computer, Inc.* 2,691,095 176,900 Dell, Inc.* 4,318,129 ----------- 7,009,224 ----------- CONTRACT DRILLING (0.7%) 51,500 Transocean Inc. (Cayman Islands)* 4,136,480 ----------- DATA PROCESSING SERVICES (1.4%) 192,300 Automatic Data Processing, Inc. 8,720,805 ----------- DISCOUNT STORES (2.9%) 20,200 Sears Holdings Corp.* 3,127,768 305,986 Target Corp. 14,953,536 ----------- 18,081,304 ----------- DRUGSTORE CHAINS (2.3%) 472,003 CVS Corp. $14,490,492 ----------- ELECTRIC UTILITIES (1.4%) 151,354 Exelon Corp. 8,601,448 ----------- FINANCIAL CONGLOMERATES (8.3%) 338,300 American Express Co. 18,004,326 290,209 Citigroup, Inc. (Note 4) 13,999,682 211,182 JPMorgan Chase & Co. 8,869,644 100,065 UBS AG (Switzerland) 10,977,130 ----------- 51,850,782 ----------- FINANCIAL PUBLISHING/SERVICES (1.5%) 189,981 McGraw-Hill Companies, Inc. (The) 9,542,746 ----------- FOOD: MAJOR DIVERSIFIED (4.1%) 425,356 PepsiCo, Inc. 25,538,374 ----------- FOOD: SPECIALTY/CANDY (0.8%) 88,000 Hershey Co. (The) 4,846,160 ----------- HOTELS/RESORTS/CRUISELINES (1.6%) 169,000 Starwood Hotels & Resorts Worldwide, Inc. 10,197,460 ----------- HOUSEHOLD/PERSONAL CARE (2.7%) 305,146 Procter & Gamble Co. (The) 16,966,118 ----------- INDUSTRIAL CONGLOMERATES (8.6%) 255,900 3M Co. 20,669,043 310,606 General Electric Co. 10,237,574 369,524 United Technologies Corp. 23,435,212 ----------- 54,341,829 ----------- INSURANCE BROKERS/SERVICES (0.5%) 119,300 Marsh & McLennan Companies, Inc. 3,207,977 ----------- INTEGRATED OIL (6.0%) 254,255 BP PLC (ADR) (United Kingdom) 17,698,690 328,207 Exxon Mobil Corp. 20,135,499 ----------- 37,834,189 -----------
SEE NOTES TO FINANCIAL STATEMENTS 75
NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- INTERNET SOFTWARE/SERVICES (2.7%) 19,600 Google, Inc. (Class A)* $ 8,218,868 274,134 Yahoo!, Inc.* 9,046,422 ----------- 17,265,290 ----------- INVESTMENT BANKS/BROKERS (3.5%) 77,615 Goldman Sachs Group, Inc. (The) 11,675,624 145,377 Merrill Lynch & Co., Inc. 10,112,424 ----------- 21,788,048 ----------- INVESTMENT MANAGERS (2.4%) 441,499 Mellon Financial Corp. 15,200,811 ----------- LIFE/HEALTH INSURANCE (2.7%) 167,615 Lincoln National Corp. 9,460,191 148,600 MetLife, Inc.(Note 4) 7,609,806 ----------- 17,069,997 ----------- MAJOR BANKS (0.9%) 122,796 Bank of America Corp. 5,906,488 ----------- MAJOR TELECOMMUNICATIONS (1.8%) 71,400 ALLTEL Corp. 4,557,462 329,900 Sprint Nextel Corp. 6,594,701 ----------- 11,152,163 ----------- MANAGED HEALTH CARE (2.4%) 182,514 Caremark Rx, Inc. 9,101,973 135,969 UnitedHealth Group Inc. 6,088,692 ----------- 15,190,665 ----------- MEDIA CONGLOMERATES (0.8%) 284,500 Time Warner, Inc. 4,921,850 ----------- MEDICAL SPECIALTIES (4.0%) 50,593 Alcon, Inc. (Switzerland) 4,985,940 149,200 Baxter International, Inc. 5,484,592 87,139 Fisher Scientific International Inc.* 6,365,504 177,872 Medtronic, Inc. 8,345,754 ----------- 25,181,790 -----------
NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- OFFICE EQUIPMENT/SUPPLIES (1.6%) 238,930 Pitney Bowes, Inc. $ 9,867,809 ----------- OIL & GAS PRODUCTION (2.4%) 345,762 XTO Energy Inc. 15,306,884 ----------- OIL REFINING/MARKETING (1.6%) 153,500 Valero Energy Corp. 10,210,820 ----------- OILFIELD SERVICES/EQUIPMENT (2.9%) 152,841 Halliburton Co. 11,342,331 105,900 Schlumberger Ltd. (Netherlands Antilles) 6,895,149 ----------- 18,237,480 ----------- OTHER CONSUMER SERVICES (0.5%) 105,400 eBay, Inc.* 3,087,166 ----------- PACKAGED SOFTWARE (2.3%) 106,300 Adobe Systems, Inc.* 3,227,268 781,600 Oracle Corp.* 11,325,384 ----------- 14,552,652 ----------- PHARMACEUTICALS: MAJOR (4.4%) 90,615 Johnson & Johnson 5,429,651 190,200 Pfizer, Inc. 4,463,994 404,380 Wyeth 17,958,516 ----------- 27,852,161 ----------- PROPERTY - CASUALTY INSURERS (0.5%) 50,300 XL Capital Ltd. (Class A) (Cayman Islands) 3,083,390 ----------- REGIONAL BANKS (0.5%) 79,500 Fifth Third Bancorp 2,937,525 ----------- SEMICONDUCTORS (2.6%) 227,800 Intel Corp. 4,316,810 43,700 Marvell Technology Group, Ltd. (Bermuda)* 1,937,221 333,405 Texas Instruments Inc. 10,098,837 ----------- 16,352,868 -----------
SEE NOTES TO FINANCIAL STATEMENTS 76
NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- TELECOMMUNICATION EQUIPMENT (1.5%) 108,900 Nokia Corp. (ADR) (Finland) $ 2,206,314 187,975 QUALCOMM, Inc. 7,532,158 ------------ 9,738,472 ------------ TOBACCO (2.0%) 175,144 Altria Group, Inc. 12,860,824 ------------ TOTAL COMMON STOCKS (COST $506,128,672) 613,632,534 ------------
NUMBER OF WARRANTS ------------------------------------------------------------------- WARRANT(0.0%) AEROSPACE & DEFENSE (0.0%) 23,773 Raytheon Co* (COST $290,030) 300,728 ------------
PRINCIPAL AMOUNT IN THOUSANDS ------------------------------------------------------------------- SHORT-TERM INVESTMENT(a)(2.4%) U.S. GOVERNMENT AGENCY $ 15,100 Federal Home Loan Banks 4.95% due 07/03/06 (COST $15,095,848) 15,095,848 ------------ TOTAL INVESTMENTS (COST $521,514,550)(b) 100.0% 629,029,110 LIABILITIES IN EXCESS OF OTHER ASSETS (0.0) (127,115) ----- ------------ NET ASSETS 100.0% $628,901,995 ===== ============
---------- ADR AMERICAN DEPOSITARY RECEIPT. * NON-INCOME PRODUCING SECURITY. (A) PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $116,933,910 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $9,419,350, RESULTING IN NET UNREALIZED APPRECIATION OF $107,514,560. SEE NOTES TO FINANCIAL STATEMENTS 77 Morgan Stanley Variable Investment Series - Dividend Growth SUMMARY OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
PERCENT OF INDUSTRY VALUE NET ASSETS -------------------------------------------------------------------------------- Industrial Conglomerates $ 54,341,829 8.6% Financial Conglomerates 51,850,782 8.3 Integrated Oil 37,834,189 6.0 Pharmaceuticals: Major 27,852,161 4.4 Food: Major Diversified 25,538,374 4.1 Medical Specialties 25,181,790 4.0 Investment Banks/Brokers 21,788,048 3.5 Oilfield Services/Equipment 18,237,480 2.9 Discount Stores 18,081,304 2.9 Internet Software/Services 17,265,290 2.7 Life/Health Insurance 17,069,997 2.7 Household/Personal Care 16,966,118 2.7 Semiconductors 16,352,868 2.6 Apparel/Footwear 15,892,937 2.5 Oil & Gas Production 15,306,884 2.4 Investment Managers 15,200,811 2.4 Managed Health Care 15,190,665 2.4 U.S. Government Agency 15,095,848 2.4 Packaged Software 14,552,652 2.3 Drugstore Chains 14,490,492 2.3 Tobacco 12,860,824 2.0 Major Telecommunications 11,152,163 1.8 Oil Refining/Marketing 10,210,820 1.6 Hotels/Resorts/Cruiselines $ 10,197,460 1.6% Office Equipment/Supplies 9,867,809 1.6 Computer Communications 9,794,295 1.6 Telecommunication Equipment 9,738,472 1.5 Financial Publishing/Services 9,542,746 1.5 Biotechnology 9,262,530 1.5 Chemicals: Agricultural 9,209,712 1.5 Data Processing Services 8,720,805 1.4 Electric Utilities 8,601,448 1.4 Aerospace & Defense 8,415,657 1.3 Beverages: Alcoholic 8,227,590 1.3 Computer Processing Hardware 7,009,224 1.1 Major Banks 5,906,488 0.9 Media Conglomerates 4,921,850 0.8 Food: Specialty/Candy 4,846,160 0.8 Contract Drilling 4,136,480 0.7 Insurance Brokers/Services 3,207,977 0.5 Other Consumer Services 3,087,166 0.5 Property - Casualty Insurers 3,083,390 0.5 Regional Banks 2,937,525 0.5 ------------ ----- $629,029,110 100.0% ============ =====
SEE NOTES TO FINANCIAL STATEMENTS 78 Morgan Stanley Variable Investment Series - Global Dividend Growth PORTFOLIO OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- COMMON STOCKS (96.1%) AUSTRALIA (2.1%) BEVERAGES: ALCOHOLIC 306,931 Foster's Group Ltd. $ 1,247,600 ----------- CONSTRUCTION MATERIALS 215,322 Boral Ltd. 1,302,447 ----------- MAJOR BANKS 85,511 National Australia Bank Ltd. 2,234,180 ----------- TOTAL AUSTRALIA 4,784,227 ----------- BERMUDA (4.1%) APPAREL/FOOTWEAR 47,500 Yue Yuen Industrial (Holdings) Ltd. 130,568 ----------- INDUSTRIAL CONGLOMERATES 69,448 Ingersoll - Rand Ltd. (Class A) 2,970,985 234,964 Tyco International Ltd. 6,461,510 ----------- 9,432,495 ----------- TOTAL BERMUDA 9,563,063 ----------- CAYMAN ISLANDS (1.4%) PROPERTY - CASUALTY INSURERS 54,639 XL Capital Ltd. (Class A) 3,349,371 ----------- FRANCE (7.8%) CONSTRUCTION MATERIALS 27,396 Lafarge S.A. 3,438,319 ----------- INTEGRATED OIL 61,616 Total S.A. 4,053,662 ----------- MAJOR BANKS 61,909 BNP Paribas S.A. 5,925,353 ----------- MAJOR TELECOMMUNICATIONS 55,255 France Telecom S.A. 1,187,703 ----------- PHARMACEUTICALS: MAJOR 37,449 Sanofi-Aventis 3,653,705 ----------- TOTAL FRANCE 18,258,742 ----------- GERMANY (1.6%) CHEMICALS: MAJOR DIVERSIFIED 16,188 BASF AG $ 1,299,521 ----------- MOTOR VEHICLES 50,260 Bayerische Motoren Werke (BMW) AG 2,510,287 ----------- TOTAL GERMANY 3,809,808 ----------- IRELAND (2.7%) FOOD: SPECIALTY/CANDY 130,447 Kerry Group PLC (A Shares) 2,802,283 ----------- MAJOR BANKS 192,434 Bank of Ireland 3,432,612 ----------- TOTAL IRELAND 6,234,895 ----------- ITALY (1.9%) INTEGRATED OIL 150,452 ENI SpA 4,430,580 ----------- JAPAN (8.2%) ELECTRICAL PRODUCTS 202,500 Sumitomo Electric Industries, Ltd. 2,965,918 ----------- ELECTRONIC EQUIPMENT/INSTRUMENTS 76,750 Canon Inc. 3,762,715 ----------- HOUSEHOLD/PERSONAL CARE 100,000 Kao Corp. 2,617,321 ----------- MOTOR VEHICLES 196,000 Nissan Motor Co., Ltd. 2,141,047 ----------- PHARMACEUTICALS: MAJOR 66,200 Takeda Pharmaceutical Co., Ltd. 4,119,060 ----------- PHARMACEUTICALS: OTHER 59,700 Astellas Pharma Inc. 2,191,209 ----------- PROPERTY - CASUALTY INSURERS 113,000 Mitsui Sumitomo Insurance Co., Ltd. 1,419,042 ----------- TOTAL JAPAN 19,216,312 -----------
SEE NOTES TO FINANCIAL STATEMENTS 79
NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- NETHERLANDS (5.3%) ENGINEERING & CONSTRUCTION 25,705 Chicago Bridge & Iron Company N.V. $ 620,776 ----------- FOOD: MAJOR DIVERSIFIED 147,661 Unilever NV (Share Certificate) 3,347,674 ----------- INDUSTRIAL CONGLOMERATES 33,452 Koninklijke (Royal) Philips Electronics NV 1,044,995 ----------- INTEGRATED OIL 79,637 Royal Dutch Shell PLC (ADR) (Class A) (United Kingdom) 5,334,086 ----------- PUBLISHING: BOOKS/MAGAZINES 83,373 Wolters Kluwer NV (Share Certificates) 1,969,069 ----------- TOTAL NETHERLANDS 12,316,600 ----------- NEW ZEALAND (0.5%) MAJOR TELECOMMUNICATIONS 491,564 Telecom Corporation of New Zealand Ltd. 1,208,233 ----------- SINGAPORE (0.3%) OTHER TRANSPORTATION 714,000 ComfortDelGro Corp. Ltd. 690,182 ----------- SOUTH KOREA (0.8%) WIRELESS TELECOMMUNICATIONS 82,630 SK Telecom Co., Ltd. (ADR) 1,935,195 ----------- SPAIN (2.1%) MAJOR BANKS 124,183 Banco Bilbao Vizcaya Argentaria, S.A. 2,553,388 ----------- MAJOR TELECOMMUNICATIONS 147,916 Telefonica S.A. 2,462,605 ----------- TOTAL SPAIN 5,015,993 ----------- SWITZERLAND (2.9%) CHEMICALS: AGRICULTURAL 20,281 Syngenta AG (Registered Shares)* $ 2,693,415 ----------- FINANCIAL CONGLOMERATES 27,270 UBS AG (Registered Shares) 2,986,417 ----------- PHARMACEUTICALS: MAJOR 19,743 Novartis AG (Registered Shares) 1,068,149 ----------- TOTAL SWITZERLAND 6,747,981 ----------- TAIWAN (0.7%) MAJOR TELECOMMUNICATIONS 88,270 Chunghwa Telecom Co., Ltd. (ADR) 1,630,347 ----------- UNITED KINGDOM (19.2%) ADVERTISING/MARKETING SERVICES 112,100 WPP Group PLC 1,356,161 ----------- AEROSPACE & DEFENSE 468,850 Rolls-Royce Group PLC* 3,587,817 31,709,128 Rolls-Royce Group PLC (B Shares) 59,197 ----------- 3,647,014 ----------- BEVERAGES: ALCOHOLIC 137,866 Diageo PLC 2,317,693 ----------- FINANCIAL CONGLOMERATES 988,697 Old Mutual Plc 2,983,406 ----------- FOOD RETAIL 705,900 Morrison (W.M.) Supermarkets PLC 2,537,808 ----------- FOOD: SPECIALTY/CANDY 515,684 Cadbury Schweppes PLC 4,970,887 ----------- INVESTMENT MANAGERS 103,434 Amvescap PLC 946,856 ----------- MAJOR BANKS 284,170 Barclays PLC 3,227,722 114,993 Royal Bank of Scotland Group PLC 3,779,193 ----------- 7,006,915 -----------
SEE NOTES TO FINANCIAL STATEMENTS 80
NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- PHARMACEUTICALS: MAJOR 234,891 GlaxoSmithKline PLC $ 6,560,347 ------------ PUBLISHING: BOOKS/MAGAZINES 392,369 Reed Elsevier PLC 3,959,892 ------------ TOBACCO 131,521 Imperial Tobacco Group PLC 4,057,396 ------------ WIRELESS TELECOMMUNICATIONS 2,085,431 Vodafone Group PLC 4,442,554 ------------ TOTAL UNITED KINGDOM 44,786,929 ------------ UNITED STATES (34.5%) AEROSPACE & DEFENSE 64,169 Boeing Co. 5,256,083 18,310 Northrop Grumman Corp. 1,172,939 ------------ 6,429,022 ------------ ALUMINUM 59,565 Alcoa, Inc. 1,927,523 ------------ COMPUTER PERIPHERALS 277,840 EMC Corp.* 3,047,905 ------------ COMPUTER PROCESSING HARDWARE 67,724 Hewlett-Packard Co. 2,145,496 ------------ DATA PROCESSING SERVICES 54,745 First Data Corp. 2,465,715 ------------ ELECTRIC UTILITIES 33,495 American Electric Power Co., Inc. 1,147,204 33,712 Dominion Resources, Inc. 2,521,320 ------------ 3,668,524 ------------ FINANCE/RENTAL/LEASING 69,923 Freddie Mac 3,986,310 ------------ FINANCIAL CONGLOMERATES 147,368 Citigroup, Inc. 7,109,032 ------------ INFORMATION TECHNOLOGY SERVICES 62,834 International Business Machines Corp. 4,826,908 ------------ INSURANCE BROKERS/SERVICES 81,543 Marsh & McLennan Companies, Inc. $ 2,192,691 ------------ INTEGRATED OIL 63,991 Chevron Corp. 3,971,281 ------------ INVESTMENT BANKS/BROKERS 45,015 Merrill Lynch & Co., Inc. 3,131,243 ------------ INVESTMENT MANAGERS 80,445 Mellon Financial Corp. 2,769,721 ------------ MAJOR TELECOMMUNICATIONS 46,647 AT&T, Inc. 1,300,985 67,376 Verizon Communications, Inc. 2,256,422 ------------ 3,557,407 ------------ MANAGED HEALTH CARE 37,551 UnitedHealth Group Inc. 1,681,534 ------------ MULTI-LINE INSURANCE 19,378 American International Group, Inc. 1,144,271 ------------ PHARMACEUTICALS: MAJOR 106,398 Bristol-Myers Squibb Co. 2,751,452 153,108 Pfizer, Inc. 3,593,445 248,509 Schering-Plough Corp. 4,729,126 103,881 Wyeth 4,613,355 ------------ 15,687,378 ------------ PROPERTY - CASUALTY INSURERS 86,055 St. Paul Travelers Companies, Inc. (The) 3,836,332 ------------ PUBLISHING: NEWSPAPERS 33,431 New York Times Co. (The) (Class A) 820,397 ------------ TOBACCO 83,373 Altria Group, Inc. 6,122,079 ------------ TOTAL UNITED STATES 80,520,769 ------------ TOTAL COMMON STOCKS (COST $173,356,849) 224,499,227 ------------
SEE NOTES TO FINANCIAL STATEMENTS 81
PRINCIPAL AMOUNT IN THOUSANDS VALUE -------------------------------------------------------------------------------- SHORT-TERM INVESTMENT(a)(1.5%) U.S. GOVERNMENT AGENCY $3,600 Federal Home Loan Banks 4.95% due 07/03/06 (COST $3,599,010) $ 3,599,010 ------------ TOTAL INVESTMENTS (COST $176,955,859)(b) 97.6% 228,098,237 OTHER ASSETS IN EXCESS OF LIABILITIES 2.4 5,632,700 ----- ------------ NET ASSETS 100.0% $233,730,937 ===== ============
---------- ADR AMERICAN DEPOSITARY RECEIPT. * NON-INCOME PRODUCING SECURITY. (a) PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (b) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $57,257,732 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $6,115,354, RESULTING IN NET UNREALIZED APPRECIATION OF $51,142,378. SEE NOTES TO FINANCIAL STATEMENTS 82 Morgan Stanley Variable Investment Series - Global Dividend Growth SUMMARY OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
PERCENT OF INDUSTRY VALUE NET ASSETS -------------------------------------------------------------------------------- Pharmaceuticals: Major $ 31,088,639 13.3% Major Banks 21,152,448 9.0 Integrated Oil 17,789,609 7.6 Financial Conglomerates 13,078,855 5.6 Industrial Conglomerates 10,477,490 4.5 Tobacco 10,179,475 4.4 Aerospace & Defense 10,076,036 4.3 Major Telecommunications 10,046,295 4.3 Property - Casualty Insurers 8,604,745 3.7 Food: Specialty/Candy 7,773,170 3.3 Wireless Telecommunications 6,377,749 2.7 Publishing: Books/Magazines 5,928,961 2.5 Information Technology Services 4,826,908 2.1 Construction Materials 4,740,766 2.0 Motor Vehicles 4,651,334 2.0 Finance/Rental/Leasing 3,986,310 1.7 Electronic Equipment/Instruments 3,762,715 1.6 Investment Managers 3,716,577 1.6 Electric Utilities 3,668,524 1.6 U.S. Government Agency 3,599,010 1.5 Beverages: Alcoholic $ 3,565,293 1.5% Food: Major Diversified 3,347,674 1.4 Investment Banks/Brokers 3,131,243 1.3 Computer Peripherals 3,047,905 1.3 Electrical Products 2,965,918 1.3 Chemicals: Agricultural 2,693,415 1.2 Household/Personal Care 2,617,321 1.1 Food Retail 2,537,808 1.1 Data Processing Services 2,465,715 1.1 Insurance Brokers/Services 2,192,691 0.9 Pharmaceuticals: Other 2,191,209 0.9 Computer Processing Hardware 2,145,496 0.9 Aluminum 1,927,523 0.8 Managed Health Care 1,681,534 0.7 Advertising/Marketing Services 1,356,161 0.6 Chemicals: Major Diversified 1,299,521 0.6 Multi-Line Insurance 1,144,271 0.5 Publishing: Newspapers 820,397 0.4 Other Transportation 690,182 0.3 Engineering & Construction 620,776 0.3 Apparel/Footwear 130,568 0.1 ------------ ---- $228,098,237* 97.6% ============ ====
---------- * DOES NOT INCLUDE OPEN FORWARD FOREIGN CURRENCY CONTRACTS WITH NET UNREALIZED DEPRECIATION OF $39,458. SEE NOTES TO FINANCIAL STATEMENTS 83 FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT JUNE 30, 2006
UNREALIZED CONTRACTS IN EXCHANGE DELIVERY APPRECIATION TO DELIVER FOR DATE (DEPRECIATION) ---------------------------------------------------------- AUD 142,037 $ 105,462 07/05/06 $ (85) CHF 177,833 $ 142,426 07/03/06 (2,910) EUR 679,662 $ 851,685 07/03/06 (17,399) GBP 524,730 $ 951,126 07/03/06 (18,785) JPY 46,720,197 $ 407,396 07/05/06 (890) NZD 44,207 $ 26,918 07/05/06 22 $ 128,847 HKD 1,000,758 07/03/06 0 $ 56,092 SGD 89,613 07/03/06 524 $ 46,983 SGD 74,468 07/03/06 65 -------- Net Unrealized Depreciation $(39,458) ========
CURRENCY ABBREVIATIONS: ----------------------- AUD AUSTRALIAN DOLLAR. GBP BRITISH POUND. EUR EURO. HKD HONG KONG DOLLAR. JPY JAPANESE YEN. NZD NEW ZEALAND DOLLAR. SGD SINGAPORE DOLLAR. CHF SWISS FRANC. SEE NOTES TO FINANCIAL STATEMENTS 84 Morgan Stanley Variable Investment Series - European Equity PORTFOLIO OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- COMMON STOCKS (100.0%) FINLAND (2.4%) TELECOMMUNICATION EQUIPMENT 210,047 Nokia Oyj $ 4,286,650 ----------- FRANCE (13.2%) CONSTRUCTION MATERIALS 10,408 Lafarge S.A. 1,306,250 ----------- ELECTRICAL PRODUCTS 17,923 Schneider Electric S.A. 1,867,828 ----------- GAS DISTRIBUTORS 12,010 Gaz de France (GDF) 403,126 ----------- INTEGRATED OIL 104,520 Total S.A. 6,876,278 ----------- MAJOR BANKS 72,401 BNP Paribas S.A. 6,929,550 ----------- MAJOR TELECOMMUNICATIONS 126,380 France Telecom S.A. 2,716,531 ----------- MOTOR VEHICLES 9,240 Renault S.A. 992,476 ----------- PHARMACEUTICALS: MAJOR 26,567 Sanofi-Aventis 2,592,004 ----------- TOTAL FRANCE 23,684,043 ----------- GERMANY (12.2%) INDUSTRIAL CONGLOMERATES 27,174 Siemens AG (Registered Shares) 2,363,865 ----------- MAJOR BANKS 81,169 Commerzbank AG 2,951,810 22,647 Deutsche Bank AG (Registered Shares) 2,548,367 ----------- 5,500,177 ----------- MAJOR TELECOMMUNICATIONS 100,689 Deutsche Telekom AG (Registered Shares) 1,619,688 ----------- MEDICAL/NURSING SERVICES 11,567 Fresenius Medical Care AG & Co. KGaA $ 1,329,390 ----------- MOTOR VEHICLES 55,419 Bayerische Motoren Werke (BMW) AG 2,767,959 ----------- MULTI-LINE INSURANCE 27,522 Allianz AG (Registered Shares) 4,346,963 13,974 Muenchener Rueckver AG (Registered Shares) 1,908,540 ----------- 6,255,503 ----------- PACKAGED SOFTWARE 10,460 SAP AG 2,206,908 ----------- TOTAL GERMANY 22,043,490 ----------- GREECE (2.6%) MAJOR BANKS 63,866 National Bank of Greece S.A. 2,521,829 63,866 National Bank of Greece S.A. (Rights)* 201,714 ----------- 2,723,543 ----------- REGIONAL BANKS 72,682 EFG Eurobank Ergasias 2,014,906 ----------- TOTAL GREECE 4,738,449 ----------- ITALY (5.2%) INTEGRATED OIL 134,834 ENI SpA 3,970,654 ----------- MAJOR BANKS 374,075 Banca Monte dei Paschi di Siena SpA 2,248,150 407,346 UniCredito Italiano SpA 3,187,745 ----------- 5,435,895 ----------- TOTAL ITALY 9,406,549 ----------- NETHERLANDS (9.6%) AIR FREIGHT/COURIERS 92,305 TNT NV 3,302,491 -----------
SEE NOTES TO FINANCIAL STATEMENTS 85
NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- ELECTRONIC PRODUCTION EQUIPMENT 122,290 ASML Holding NV* $ 2,476,936 ----------- FINANCIAL CONGLOMERATES 49,870 ING Groep NV (Share Certificates) 1,959,614 ----------- INTEGRATED OIL 110,011 Royal Dutch Shell PLC (Class A) 3,699,649 ----------- MAJOR TELECOMMUNICATIONS 171,212 Koninklijke (Royal) KPN NV 1,924,384 ----------- PUBLISHING: BOOKS/MAGAZINES 166,092 Wolters Kluwer NV (Share Certificates) 3,922,693 ----------- TOTAL NETHERLANDS 17,285,767 ----------- NORWAY (0.9%) PULP & PAPER 113,246 Norske Skogindustrier ASA 1,659,499 ----------- SPAIN (5.5%) MAJOR BANKS 320,788 Banco Bilbao Vizcaya Argentaria, S.A. 6,595,881 ----------- MAJOR TELECOMMUNICATIONS 114,448 Telefonica S.A. 1,905,408 ----------- TOBACCO 28,539 Altadis, S.A. 1,348,775 ----------- TOTAL SPAIN 9,850,064 ----------- SWEDEN (5.5%) INDUSTRIAL MACHINERY 78,547 Atlas Copco AB (A Shares) 2,181,679 309,840 Sandvik AB 3,603,741 ----------- 5,785,420 ----------- MAJOR BANKS 86,537 ForeningsSparbanken AB 2,271,407 ----------- TELECOMMUNICATION EQUIPMENT 581,247 Telefonaktiebolaget LM Ericsson (B Shares) 1,921,184 ----------- TOTAL SWEDEN 9,978,011 ----------- SWITZERLAND (11.9%) CHEMICALS: SPECIALTY 29,105 Ciba Specialty Chemicals AG (Registered Shares) $ 1,621,041 ----------- MAJOR BANKS 84,903 Credit Suisse Group (Registered Shares) 4,746,130 ----------- MEDICAL SPECIALTIES 6,470 Nobel Biocare Holding AG Bearer 1,534,748 ----------- PHARMACEUTICALS: MAJOR 102,223 Novartis AG (Registered Shares) 5,530,535 28,292 Roche Holding AG 4,672,943 ----------- 10,203,478 ----------- PROPERTY - CASUALTY INSURERS 46,385 Swiss Re (Registered Shares) 3,239,293 ----------- TOTAL SWITZERLAND 21,344,690 ----------- UNITED KINGDOM (31.0%) APPAREL/FOOTWEAR 117,122 Burberry Group PLC 930,900 ----------- ELECTRIC UTILITIES 664,960 International Power PLC 3,496,824 ----------- FINANCIAL CONGLOMERATES 738,002 Old Mutual Plc 2,226,931 ----------- FOOD RETAIL 1,404,769 Morrison (W.M.) Supermarkets PLC 5,050,338 459,296 Tesco PLC 2,835,536 ----------- 7,885,874 ----------- FOOD: SPECIALTY/CANDY 530,218 Cadbury Schweppes PLC 5,110,987 ----------- HOUSEHOLD/PERSONAL CARE 70,870 Reckitt Benckiser PLC 2,646,121 ----------- INTEGRATED OIL 618,841 BP PLC 7,212,073 -----------
SEE NOTES TO FINANCIAL STATEMENTS 86
NUMBER OF SHARES VALUE ------------------------------------------------------------------------------- MAJOR BANKS 315,858 HSBC Holdings PLC $ 5,555,161 ----------- MULTI-LINE INSURANCE 139,926 Aviva PLC 1,979,883 ----------- OTHER METALS/MINERALS 63,852 Anglo American PLC 2,617,773 54,157 Rio Tinto PLC 2,861,968 ----------- 5,479,741 ----------- PHARMACEUTICALS: MAJOR 31,696 AstraZeneca PLC 1,912,276 185,153 GlaxoSmithKline PLC 5,171,198 ----------- 7,083,474 ----------- SEMICONDUCTORS 536,247 ARM Holdings PLC 1,122,533 ----------- WIRELESS TELECOMMUNICATIONS 2,441,832 Vodafone Group PLC 5,201,788 ----------- TOTAL UNITED KINGDOM 55,932,290 ----------- TOTAL INVESTMENTS (COST $135,849,398)(a) 100.0% 180,209,502 LIABILITIES IN EXCESS OF OTHER ASSETS (0.0) (28,872) ----- ------------ NET ASSETS 100.0% $180,180,630 ===== ============
---------- * NON-INCOME PRODUCING SECURITY. (a) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $45,504,846AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $1,144,742, RESULTING IN NET UNREALIZED APPRECIATION OF $44,360,104. FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT JUNE 30, 2006:
UNREALIZED CONTRACTS IN EXCHANGE DELIVERY APPRECIATION TO DELIVER FOR DATE (DEPRECIATION) ------------------------------------------------------------- $ 707,820 EUR 564,778 07/05/2006 $ 14,361 CHF 2,500,000 DKK 11,980,750 08/08/2006 6,941 EUR 3,702,842 GBP 2,552,480 08/08/2006 (25,728) EUR 1,500,000 GBP 1,031,775 08/08/2006 (14,529) SEK 14,500,000 GBP 1,075,564 08/08/2006 (30,806) SEK 13,000,000 EUR 1,399,535 08/08/2006 (17,076) -------- Net Unrealized Depreciation $(66,837) ========
CURRENCY ABBREVIATIONS: GBP BRITISH POUND. DKK DANISH KRONE. EUR EURO. SEK SWEDISH KRONA. CHF SWISS FRANC.
SEE NOTES TO FINANCIAL STATEMENTS 87 Morgan Stanley Variable Investment Series - European Equity SUMMARY OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
PERCENT OF INDUSTRY VALUE NET ASSETS -------------------------------------------------------------------------------- Major Banks $ 39,757,744 22.1% Integrated Oil 21,758,654 12.1 Pharmaceuticals: Major 19,878,956 11.0 Multi-Line Insurance 8,235,386 4.6 Major Telecommunications 8,166,011 4.5 Food Retail 7,885,874 4.4 Telecommunication Equipment 6,207,834 3.5 Industrial Machinery 5,785,420 3.2 Other Metals/Minerals 5,479,741 3.0 Wireless Telecommunications 5,201,788 3.0 Food: Specialty/Candy 5,110,987 2.8 Financial Conglomerates 4,186,545 2.3 Publishing: Books/ Magazines 3,922,693 2.2 Motor Vehicles 3,760,435 2.1 Electric Utilities 3,496,824 1.9 Air Freight/Couriers 3,302,491 1.8 Property - Casualty Insurers $ 3,239,293 1.8% Household/Personal Care 2,646,121 1.5 Electronic Production Equipment 2,476,936 1.4 Industrial Conglomerates 2,363,865 1.3 Packaged Software 2,206,908 1.2 Regional Banks 2,014,906 1.1 Electrical Products 1,867,828 1.0 Pulp& Paper 1,659,499 0.9 Chemicals: Specialty 1,621,041 0.9 Medical Specialties 1,534,748 0.9 Tobacco 1,348,775 0.8 Medical/Nursing Services 1,329,390 0.7 Construction Materials 1,306,250 0.7 Semiconductors 1,122,533 0.6 Apparel/Footwear 930,900 0.5 Gas Distributors 403,126 0.2 ------------ ----- $180,209,502* 100.0% ============ =====
---------- * DOES NOT INCLUDE OPEN FORWARD FOREIGN CURRENCY CONTRACTS WITH NET UNREALIZED DEPRECIATION OF $66,837. SEE NOTES TO FINANCIAL STATEMENTS 88 Morgan Stanley Variable Investment Series - Equity PORTFOLIO OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- COMMON STOCKS (97.5%) ADVERTISING/MARKETING SERVICES (2.6%) 221,074 Getty Images, Inc.* $14,040,410 ----------- AIR FREIGHT/COURIERS (6.3%) 285,882 C.H. Robinson Worldwide, Inc. 15,237,511 326,514 Expeditors International of Washington, Inc. 18,288,049 ----------- 33,525,560 ----------- BROADCASTING (1.9%) 508,698 Grupo Televisa S.A. - CPO (ADR) (Mexico) 9,822,958 ----------- CASINO/GAMING (2.6%) 198,938 Station Casinos, Inc. 13,543,699 ----------- CHEMICALS: AGRICULTURAL (4.3%) 272,382 Monsanto Co. 22,931,841 ----------- DATA PROCESSING SERVICES (2.8%) 326,223 First Data Corp. 14,693,084 ----------- DISCOUNT STORES (7.6%) 289,705 Costco Wholesale Corp. 16,550,847 152,626 Sears Holdings Corp.* 23,632,610 ----------- 40,183,457 ----------- FINANCIAL CONGLOMERATES (7.4%) 276,078 American Express Co. 14,692,871 606,716 Brookfield Asset Management Inc. (Class A) (Canada) 24,644,804 ----------- 39,337,675 ----------- FINANCIAL PUBLISHING/SERVICES (2.5%) 242,058 Moody's Corp. 13,182,479 ----------- HOME BUILDING (3.2%) 224,424 Desarrolladora Homex S.A. de C.V. (ADR) (Mexico)* 7,363,351 81,556 M.D.C. Holdings, Inc. 4,235,203 10,477 NVR, Inc.* 5,146,826 ----------- 16,745,380 ----------- INTERNET RETAIL (2.3%) 308,747 Amazon.com, Inc.* $11,942,334 ----------- INTERNET SOFTWARE/SERVICES (12.7%) 349,372 Akamai Technologies, Inc.* 12,643,773 70,196 Google, Inc. (Class A)* 29,435,289 755,119 Yahoo!, Inc.* 24,918,927 ----------- 66,997,989 ----------- INVESTMENT BANKS/BROKERS (2.7%) 235,192 Greenhill & Co., Inc. 14,290,266 ----------- MEDICAL SPECIALTIES (2.3%) 288,358 Dade Behring Holdings, Inc. 12,007,227 ----------- MISCELLANEOUS COMMERCIAL SERVICES (7.5%) 267,927 Corporate Executive Board Co. (The) 26,846,285 336,991 Iron Mountain Inc.* 12,596,723 ----------- 39,443,008 ----------- OIL & GAS PRODUCTION (7.9%) 708,632 Ultra Petroleum Corp. (Canada)* 42,000,619 ----------- OTHER CONSUMER SERVICES (6.6%) 885,753 eBay, Inc.* 25,943,705 93,498 Strayer Education, Inc. 9,080,526 ----------- 35,024,231 ----------- PERSONNEL SERVICES (2.0%) 248,385 Monster Worldwide, Inc.* 10,596,104 ----------- PROPERTY - CASUALTY INSURERS (2.7%) 4,783 Berkshire Hathaway, Inc. (Class B)* 14,554,669 ----------- RECREATIONAL PRODUCTS (2.0%) 244,522 Electronic Arts, Inc.* 10,524,227 -----------
SEE NOTES TO FINANCIAL STATEMENTS 89
NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- SERVICES TO THE HEALTH INDUSTRY (2.3%) 185,337 Stericycle, Inc.* $ 12,065,439 ------------ SPECIALTY TELECOMMUNICATIONS (2.5%) 390,486 Crown Castle International Corp.* 13,487,386 ------------ WIRELESS TELECOMMUNICATIONS (2.8%) 449,576 America Movil S.A. de C.V. (Series L) (ADR) (Mexico) 14,952,898 ------------ TOTAL COMMON STOCKS (COST $460,517,417) 515,892,940 ------------
PRINCIPAL AMOUNT IN THOUSANDS --------- SHORT-TERM INVESTMENTS (3.0%) U.S. GOVERNMENT AGENCY(3.0%) $15,900 Federal Home Loan Banks 4.95% due 07/03/06 (a) (COST $15,895,628) 15,895,627 ------------ REPURCHASE AGREEMENT (0.0%) 167 The Bank of New York 5.188% due 07/03/06 (dated 06/30/06; proceeds $167,929) (b) (COST $167,856) 167,856 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $16,063,484) 16,063,483 ------------ TOTAL INVESTMENTS (COST $476,580,901) (C) 100.5% 531,956,423 LIABILITIES IN EXCESS OF OTHER ASSETS (0.5) (2,942,088) ----- ------------ NET ASSETS 100.0% $529,014,335 ===== ============
---------- ADR AMERICAN DEPOSITARY RECEIPT. * NON-INCOME PRODUCING SECURITY. (a) PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (b) COLLATERALIZED BY FEDERAL NATIONAL MORTGAGE ASSOC. 5.50% DUE 06/01/36 VALUED AT $171,213. (c) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $78,187,843 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $22,812,321, RESULTING IN NET UNREALIZED DEPRECIATION OF $55,375,522. SEE NOTES TO FINANCIAL STATEMENTS 90 Morgan Stanley Variable Investment Series - Equity SUMMARY OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
PERCENT OF INDUSTRY VALUE NET ASSETS -------------------------------------------------------------------------------- Internet Software/Services $ 66,997,989 12.7% Oil & Gas Production 42,000,619 7.9 Discount Stores 40,183,457 7.6 Miscellaneous Commercial Services 39,443,008 7.5 Financial Conglomerates 39,337,675 7.4 Other Consumer Services 35,024,231 6.6 Air Freight/Couriers 33,525,560 6.3 Chemicals: Agricultural 22,931,841 4.3 Home Building 16,745,380 3.2 U.S. Government Agency 15,895,627 3.0 Wireless Telecommunications 14,952,898 2.8 Data Processing Services 14,693,084 2.8 Property - Casualty Insurers 14,554,669 2.7 Investment Banks/Brokers 14,290,266 2.7 Advertising/Marketing Services $ 14,040,410 2.6% Casino/Gaming 13,543,699 2.6 Specialty Telecommunications 13,487,386 2.5 Financial Publishing/Services 13,182,479 2.5 Services to the Health Industry 12,065,439 2.3 Medical Specialties 12,007,227 2.3 Internet Retail 11,942,334 2.3 Personnel Services 10,596,104 2.0 Recreational Products 10,524,227 2.0 Broadcasting 9,822,958 1.9 Repurchase Agreement 167,856 0.0 ------------ ----- $531,956,423 100.5% ============ =====
SEE NOTES TO FINANCIAL STATEMENTS 91 Morgan Stanley Variable Investment Series - S&P 500 Index PORTFOLIO OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- COMMON STOCKS (98.2%) ADVERTISING/MARKETING SERVICES (0.2%) 9,769 Interpublic Group of Companies, Inc. (The)* $ 81,571 3,821 Omnicom Group, Inc. 340,413 ---------- 421,984 ---------- AEROSPACE & DEFENSE (1.6%) 17,906 Boeing Co. 1,466,680 9,040 General Dynamics Corp. 591,758 2,775 Goodrich Corp. 111,805 2,731 L-3 Communications Holdings, Inc. 205,972 7,931 Lockheed Martin Corp. 568,970 7,698 Northrop Grumman Corp. 493,134 9,992 Raytheon Co. 445,343 3,822 Rockwell Collins, Inc. 213,535 ---------- 4,097,197 ---------- AGRICULTURAL COMMODITIES/MILLING (0.2%) 14,656 Archer-Daniels-Midland Co. 605,000 ---------- AIR FREIGHT/COURIERS (1.1%) 6,818 FedEx Corp. 796,751 24,290 United Parcel Service, Inc. (Class B) 1,999,796 ---------- 2,796,547 ---------- AIRLINES (0.1%) 15,816 Southwest Airlines Co. 258,908 ---------- ALUMINUM (0.2%) 19,485 Alcoa, Inc. 630,535 ---------- APPAREL/FOOTWEAR (0.3%) 8,621 Coach, Inc.* 257,768 2,521 Jones Apparel Group, Inc. 80,143 2,340 Liz Claiborne, Inc. 86,720 4,209 Nike, Inc. (Class B) 340,929 1,967 V.F. Corp. 133,599 ---------- 899,159 ---------- APPAREL/FOOTWEAR RETAIL (0.3%) 12,317 Gap, Inc. (The) 214,316 7,682 Limited Brands, Inc. 196,582 4,823 Nordstrom, Inc. 176,040 10,235 TJX Companies, Inc. (The) 233,972 ---------- 820,910 ---------- AUTO PARTS: O.E.M. (0.2%) 3,364 Eaton Corp. 253,646 4,366 Johnson Controls, Inc. 358,972 ---------- 612,618 ---------- AUTOMOTIVE AFTERMARKET (0.0%) 1,374 Cooper Tire & Rubber Co. 15,306 3,968 Goodyear Tire & Rubber Co. (The)* 44,045 ---------- 59,351 ---------- BEVERAGES: ALCOHOLIC (0.4%) 17,306 Anheuser-Busch Companies, Inc. 788,981 1,862 Brown-Forman Corp. (Class B) 133,040 4,454 Constellation Brands Inc. (Class A)* 111,350 1,290 Molson Coors Brewing Co. (Class B) 87,565 ---------- 1,120,936 ---------- BEVERAGES: NON-ALCOHOLIC (0.8%) 45,897 Coca-Cola Co. (The) 1,974,489 6,797 Coca-Cola Enterprises Inc. 138,455 3,003 Pepsi Bottling Group, Inc. (The) 96,546 ---------- 2,209,490 ---------- BIOTECHNOLOGY (1.2%) 26,408 Amgen Inc.* 1,722,594 7,701 Biogen Idec Inc.* 356,787 5,815 Genzyme Corp.* 355,006 10,190 Gilead Sciences, Inc.* 602,840 5,571 MedImmune, Inc.* 150,974 1,186 Millipore Corp.* 74,706 ---------- 3,262,907 ----------
SEE NOTES TO FINANCIAL STATEMENTS 92
NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- BROADCASTING (0.2%) 11,270 Clear Channel Communications, $ 348,806 Inc. 4,990 Univision Communications, 167,165 Inc. (Class A)* ---------- 515,971 ---------- BUILDING PRODUCTS (0.2%) 3,958 American Standard Companies, Inc. 171,262 8,895 Masco Corp. 263,648 ---------- 434,910 ---------- CABLE/SATELLITE TV (0.6%) 47,316 Comcast Corp. (Class A)* 1,549,126 ---------- CASINO/GAMING (0.2%) 4,137 Harrah's Entertainment, Inc. 294,472 7,577 International Game 287,471 Technology ---------- 581,943 ---------- CHEMICALS: AGRICULTURAL (0.2%) 6,059 Monsanto Co. 510,107 ---------- CHEMICALS: MAJOR DIVERSIFIED (0.8%) 21,537 Dow Chemical Co. (The) 840,589 20,631 Du Pont (E.I.) de Nemours & Co. 858,250 1,831 Eastman Chemical Co. 98,874 2,545 Hercules Inc.* 38,837 3,255 Rohm & Haas Co. 163,140 ---------- 1,999,690 ---------- CHEMICALS: SPECIALTY (0.3%) 5,020 Air Products & Chemicals, 320,878 Inc. 1,591 Ashland Inc. 106,120 7,236 Praxair, Inc. 390,744 1,499 Sigma-Aldrich Corp. 108,887 ---------- 926,629 ---------- COMMERCIAL PRINTING/ FORMS (0.1%) 4,839 Donnelley (R.R.) & Sons Co. 154,606 ---------- COMPUTER COMMUNICATIONS (1.2%) 9,205 Avaya Inc.* 105,121 136,708 Cisco Systems, Inc.* 2,669,907 11,900 Juniper Networks, Inc.* 190,281 3,611 QLogic Corp.* 62,254 ---------- 3,027,563 ---------- COMPUTER PERIPHERALS (0.4%) 52,953 EMC Corp.* 580,894 2,358 Lexmark International, Inc. (Class A)* 131,647 8,379 Network Appliance, Inc.* 295,779 4,225 Seagate Technology Inc. (Escrow) (a) 0 ---------- 1,008,320 ---------- COMPUTER PROCESSING HARDWARE (1.8%) 19,046 Apple Computer, Inc.* 1,087,908 50,871 Dell Inc.* 1,241,761 5,917 Gateway, Inc.* 11,242 62,470 Hewlett-Packard Co. 1,979,050 4,076 NCR Corp.* 149,345 78,329 Sun Microsystems, Inc.* 325,065 ---------- 4,794,371 ---------- CONSTRUCTION MATERIALS (0.1%) 2,253 Vulcan Materials Co. 175,734 ---------- CONTAINERS/PACKAGING (0.2%) 2,345 Ball Corp. 86,859 2,348 Bemis Company, Inc. 71,896 3,161 Pactiv Corp.* 78,235 1,827 Sealed Air Corp. 95,150 2,474 Temple-Inland Inc. 106,060 ---------- 438,200 ---------- CONTRACT DRILLING (0.4%) 6,951 Nabors Industries, Ltd. (Bermuda)* 234,874 3,085 Noble Corp. (Cayman Islands) 229,586 2,468 Rowan Companies, Inc. 87,836
SEE NOTES TO FINANCIAL STATEMENTS 93
NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- 7,276 Transocean Inc. (Cayman Islands)* $ 584,408 ---------- 1,136,704 ---------- DATA PROCESSING SERVICES (0.8%) 2,655 Affiliated Computer Services, Inc. (Class A)* 137,024 12,907 Automatic Data Processing, Inc. 585,332 4,206 Computer Sciences Corp.* 203,739 3,138 Convergys Corp.* 61,191 17,144 First Data Corp. 772,166 3,935 Fiserv, Inc.* 178,492 7,484 Paychex, Inc. 291,726 ---------- 2,229,670 ---------- DEPARTMENT STORES (0.5%) 1,384 Dillard's, Inc. (Class A) 44,080 12,394 Federated Department Stores, Inc. 453,620 7,624 Kohl's Corp.* 450,731 5,259 Penney (J.C.) Co., Inc. 355,035 ---------- 1,303,466 ---------- DISCOUNT STORES (1.8%) 2,553 Big Lots, Inc.* 43,605 10,553 Costco Wholesale Corp. 602,893 6,982 Dollar General Corp. 97,608 3,478 Family Dollar Stores, Inc. 84,968 2,172 Sears Holdings Corp.* 336,312 19,335 Target Corp. 944,901 55,993 Wal-Mart Stores, Inc. 2,697,183 ---------- 4,807,470 ---------- DRUGSTORE CHAINS (0.6%) 18,328 CVS Corp. 562,669 22,621 Walgreen Co. 1,014,326 ---------- 1,576,995 ---------- ELECTRIC UTILITIES (3.1%) 14,743 AES Corp. (The)* 272,008 3,658 Allegheny Energy, Inc.* 135,602 4,599 Ameren Corp. 232,250 8,821 American Electric Power Co., Inc. 302,119 6,960 CenterPoint Energy, Inc. 87,000 4,952 CMS Energy Corp.* 64,079 5,488 Consolidated Edison, Inc. 243,887 4,007 Constellation Energy Group, Inc. 218,462 7,783 Dominion Resources, Inc. 582,091 3,981 DTE Energy Co. 162,186 27,656 Duke Energy Corp. 812,257 7,296 Edison International 284,544 4,657 Entergy Corp. 329,483 14,970 Exelon Corp. 850,745 7,386 FirstEnergy Corp. 400,395 9,053 FPL Group, Inc. 374,613 7,762 PG&E Corp. 304,891 2,221 Pinnacle West Capital Corp. 88,640 8,521 PPL Corp. 275,228 5,665 Progress Energy, Inc. 242,859 5,631 Public Service Enterprise Group, Inc. 372,322 16,618 Southern Co. (The) 532,607 4,675 TECO Energy, Inc. 69,844 10,355 TXU Corp. 619,125 9,080 Xcel Energy, Inc. 174,154 ---------- 8,031,391 ---------- ELECTRICAL PRODUCTS (0.4%) 3,799 American Power Conversion Corp. 74,043 2,069 Cooper Industries Ltd. (Class A) (Bermuda) 192,251 9,192 Emerson Electric Co. 770,382 3,179 Molex Inc. 106,719 ---------- 1,143,395 ---------- ELECTRONIC COMPONENTS (0.2%) 3,988 Jabil Circuit, Inc. 102,093 4,341 SanDisk Corp.* 221,304 11,932 Sanmina-SCI Corp.* 54,887 20,478 Solectron Corp.* 70,035 ---------- 448,319 ----------
SEE NOTES TO FINANCIAL STATEMENTS 94
NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- ELECTRONIC EQUIPMENT/ INSTRUMENTS (0.5%) 9,536 Agilent Technologies, Inc.* $ 300,956 37,731 JDS Uniphase Corp.* 95,459 3,975 Rockwell Automation, Inc. 286,240 5,683 Symbol Technologies, Inc. 61,320 1,873 Tektronix, Inc. 55,104 3,666 Thermo Electron Corp.* 132,856 20,564 Xerox Corp.* 286,045 ----------- 1,217,980 ----------- ELECTRONIC PRODUCTION EQUIPMENT (0.3%) 35,020 Applied Materials, Inc. 570,126 4,443 KLA-Tencor Corp. 184,695 2,850 Novellus Systems, Inc.* 70,395 4,439 Teradyne, Inc.* 61,835 ----------- 887,051 ----------- ELECTRONICS/APPLIANCE STORES (0.2%) 9,016 Best Buy Co., Inc. 494,437 3,366 Circuit City Stores - Circuit City Group 91,623 3,030 RadioShack Corp. 42,420 ----------- 628,480 ----------- ELECTRONICS/APPLIANCES (0.2%) 6,432 Eastman Kodak Co. 152,953 1,495 Harman International Industries, Inc. 127,628 1,746 Whirlpool Corp. 144,307 ----------- 424,888 ----------- ENGINEERING & CONSTRUCTION (0.1%) 1,961 Fluor Corp. 182,236 ----------- ENVIRONMENTAL SERVICES (0.2%) 5,404 Allied Waste Industries, Inc.* 61,389 12,208 Waste Management, Inc. 438,023 ----------- 499,412 ----------- FINANCE/RENTAL/LEASING (1.5%) 6,786 Capital One Financial Corp. 579,864 4,448 CIT Group, Inc. 232,586 13,607 Countrywide Financial Corp. 518,155 21,675 Fannie Mae 1,042,567 15,474 Freddie Mac 882,173 1,366 Ryder System, Inc. 79,815 9,201 SLM Corp. 486,917 ----------- 3,822,077 ----------- FINANCIAL CONGLOMERATES (4.5%) 27,631 American Express Co. 1,470,522 111,327 Citigroup, Inc. (Note 4) 5,370,414 77,810 JPMorgan Chase & Co. 3,268,020 6,203 Principal Financial Group, Inc. 345,197 11,018 Prudential Financial, Inc. 856,099 7,443 State Street Corp. 432,364 ----------- 11,742,616 ----------- FINANCIAL PUBLISHING/ SERVICES (0.3%) 2,879 Equifax, Inc. 98,865 8,013 McGraw-Hill Companies, Inc. (The) 402,493 5,470 Moody's Corp. 297,896 ----------- 799,254 ----------- FOOD DISTRIBUTORS (0.2%) 13,851 SYSCO Corp. 423,287 ----------- FOOD RETAIL (0.4%) 16,202 Kroger Co. 354,176 10,080 Safeway Inc. 262,080 4,580 Supervalu, Inc. 140,606 3,137 Whole Foods Market, Inc. 202,775 ----------- 959,637 ----------- FOOD: MAJOR DIVERSIFIED (1.5%) 4,150 Campbell Soup Co. 154,007 11,631 ConAgra Foods Inc. 257,161 7,971 General Mills, Inc. 411,782 7,502 Heinz (H.J.) Co. 309,232 5,461 Kellogg Co. 264,476
SEE NOTES TO FINANCIAL STATEMENTS 95
NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- 37,006 PepsiCo, Inc. $2,221,840 17,023 Sara Lee Corp. 272,708 ---------- 3,891,206 ---------- FOOD: MEAT/FISH/DAIRY (0.1%) 3,046 Dean Foods Co.* 113,281 5,636 Tyson Foods, Inc. (Class A) 83,751 ---------- 197,032 ---------- FOOD: SPECIALTY/CANDY (0.2%) 3,977 Hershey Co. (The) 219,013 2,967 McCormick & Co., Inc. (Non-Voting) 99,543 4,972 Wrigley (Wm.) Jr. Co. 225,530 ---------- 544,086 ---------- FOREST PRODUCTS (0.1%) 2,378 Louisiana-Pacific Corp. 52,078 5,514 Weyerhaeuser Co. 343,247 ---------- 395,325 ---------- GAS DISTRIBUTORS (0.3%) 8,059 Dynegy, Inc. (Class A)* 44,083 3,918 KeySpan Corp. 158,287 994 Nicor Inc. 41,251 6,106 NiSource, Inc. 133,355 860 Peoples Energy Corp. 30,883 5,783 Sempra Energy 263,011 ---------- 670,870 ---------- HOME BUILDING (0.2%) 2,718 Centex Corp. 136,715 6,088 D.R. Horton, Inc. 145,016 1,688 KB Home 77,395 3,121 Lennar Corp. (Class A) 138,479 4,769 Pulte Homes, Inc. 137,300 ---------- 634,905 ---------- HOME FURNISHINGS (0.1%) 4,083 Leggett & Platt, Inc. 101,993 6,199 Newell Rubbermaid, Inc. 160,120 ---------- 262,113 ---------- HOME IMPROVEMENT CHAINS (1.1%) 46,288 Home Depot, Inc. (The) 1,656,647 17,374 Lowe's Companies, Inc. 1,054,081 2,495 Sherwin-Williams Co. 118,463 ---------- 2,829,191 ---------- HOSPITAL/NURSING MANAGEMENT (0.2%) 9,138 HCA, Inc. 394,305 5,379 Health Management Associates, Inc. (Class A) 106,020 1,769 Manor Care, Inc. 83,001 10,540 Tenet Healthcare Corp.* 73,569 ---------- 656,895 ---------- HOTELS/RESORTS/CRUISELINES (0.4%) 9,727 Carnival Corp. (Panama) 406,005 7,403 Hilton Hotels Corp. 209,357 7,323 Marriott International, Inc. (Class A) 279,153 4,865 Starwood Hotels & Resorts Worldwide, Inc. 293,554 ---------- 1,188,069 ---------- HOUSEHOLD/PERSONAL CARE (2.4%) 1,703 Alberto-Culver Co. 82,970 10,084 Avon Products, Inc. 312,604 3,378 Clorox Co. (The) 205,957 11,526 Colgate-Palmolive Co. 690,407 2,661 Estee Lauder Companies, Inc. (The) (Class A) 102,901 1,770 International Flavors & Fragrances, Inc. 62,375 10,296 Kimberly-Clark Corp. 635,263 73,486 Procter & Gamble Co. (The) 4,085,822 ---------- 6,178,299 ----------
SEE NOTES TO FINANCIAL STATEMENTS 96
NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- INDUSTRIAL CONGLOMERATES (5.2%) 16,884 3M Co. $ 1,363,721 5,283 Danaher Corp. 339,803 232,863 General Electric Co.** 7,675,164 18,541 Honeywell International, Inc. 747,202 7,356 Ingersoll-Rand Co. Ltd. (Class A) (Bermuda) 314,690 4,142 ITT Industries, Inc. 205,029 2,913 Textron, Inc. 268,520 45,608 Tyco International Ltd. (Bermuda) 1,254,220 22,638 United Technologies Corp. 1,435,702 ----------- 13,604,051 ----------- INDUSTRIAL MACHINERY (0.2%) 9,275 Illinois Tool Works Inc. 440,563 2,694 Parker Hannifin Corp. 209,054 ----------- 649,617 ----------- INDUSTRIAL SPECIALTIES (0.2%) 4,078 Ecolab Inc. 165,485 3,709 PPG Industries, Inc. 244,794 ----------- 410,279 ----------- INFORMATION TECHNOLOGY SERVICES (1.2%) 4,079 Citrix Systems, Inc.* 163,731 11,610 Electronic Data Systems Corp. 279,337 34,720 International Business Machines Corp. 2,667,190 7,681 Unisys Corp.* 48,237 ----------- 3,158,495 ----------- INSURANCE BROKERS/SERVICES (0.2%) 7,136 AON Corp. 248,476 12,304 Marsh & McLennan Companies, Inc. 330,855 ----------- 579,331 ----------- INTEGRATED OIL (5.5%) 49,637 Chevron Corp. 3,080,472 36,965 ConocoPhillips 2,422,316 135,492 Exxon Mobil Corp. 8,312,434 5,400 Hess Corp. 285,390 3,720 Murphy Oil Corp. 207,799 ----------- 14,308,411 ----------- INTERNET RETAIL (0.1%) 6,924 Amazon.com, Inc.* 267,820 ----------- INTERNET SOFTWARE/SERVICES (1.1%) 4,615 Google, Inc. (Class A)* 1,935,208 5,490 VeriSign, Inc.* 127,203 28,079 Yahoo!, Inc.* 926,607 ----------- 2,989,018 ----------- INVESTMENT BANKS/BROKERS (2.4%) 5,473 Ameriprise Financial, Inc. 244,479 2,701 Bear Stearns Companies, Inc. (The) 378,356 9,550 E*TRADE Group, Inc.* 217,931 9,675 Goldman Sachs Group, Inc. (The) 1,455,410 11,990 Lehman Brothers Holdings Inc. 781,149 20,692 Merrill Lynch & Co., Inc. 1,439,336 23,986 Morgan Stanley (Note 4) 1,516,155 23,106 Schwab (Charles) Corp. (The) 369,234 ----------- 6,402,050 ----------- INVESTMENT MANAGERS (0.5%) 1,890 Federated Investors, Inc. (Class B) 59,535 3,435 Franklin Resources, Inc. 298,192 4,739 Janus Capital Group, Inc. 84,828 2,953 Legg Mason, Inc. 293,883 9,261 Mellon Financial Corp. 318,856 5,948 Price (T.) Rowe Group, Inc. 224,894 ----------- 1,280,188 ----------- LIFE/HEALTH INSURANCE (0.9%) 11,166 AFLAC, Inc. 517,544 8,170 Genworth Financial Inc. (Class A) 284,643
SEE NOTES TO FINANCIAL STATEMENTS 97
NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- 6,430 Lincoln National Corp. $ 362,909 16,989 MetLife, Inc. (Note 4) 870,007 2,247 Torchmark Corp. 136,438 6,699 UnumProvident Corp. 121,453 ----------- 2,292,994 ----------- MAJOR BANKS (4.9%) 102,196 Bank of America Corp. 4,915,628 17,283 Bank of New York Co., Inc. (The) 556,513 12,290 BB&T Corp. 511,141 3,637 Comerica, Inc. 189,088 5,493 Huntington Bancshares, Inc. 129,525 9,052 KeyCorp 322,975 12,148 National City Corp. 439,636 6,629 PNC Financial Services Group 465,157 10,214 Regions Financial Corp. 338,288 8,143 SunTrust Banks, Inc. 620,985 36,021 Wachovia Corp. 1,948,016 37,623 Wells Fargo & Co. 2,523,751 ----------- 12,960,703 ----------- MAJOR TELECOMMUNICATIONS (3.1%) 8,714 ALLTEL Corp. 556,215 87,067 AT&T Inc. 2,428,299 40,507 BellSouth Corp. 1,466,353 3,338 Embarq Corp.* 136,825 66,713 Sprint Nextel Corp. 1,333,593 65,329 Verizon Communications, Inc. 2,187,868 ----------- 8,109,153 ----------- MANAGED HEALTH CARE (1.5%) 12,697 Aetna, Inc. 506,991 9,908 Caremark Rx, Inc. 494,112 2,682 CIGNA Corp. 264,204 3,594 Coventry Health Care, Inc.* 197,454 3,687 Humana, Inc.* 197,992 30,165 UnitedHealth Group Inc. 1,350,789 14,275 WellPoint Inc.* 1,038,792 ----------- 4,050,334 ----------- MEDIA CONGLOMERATES (2.0%) 17,299 CBS Corp. (Class B) 467,938 49,151 Disney (Walt) Co. (The) 1,474,530 52,974 News Corp (Class A) 1,016,041 95,894 Time Warner, Inc. 1,658,966 16,147 Viacom, Inc. (Class B)* 578,708 ----------- 5,196,183 ----------- MEDICAL DISTRIBUTORS (0.5%) 4,701 AmerisourceBergen Corp. 197,066 9,354 Cardinal Health, Inc. 601,743 6,811 McKesson Corp. 322,024 3,105 Patterson Companies, Inc.* 108,458 ----------- 1,229,291 ----------- MEDICAL SPECIALTIES (1.7%) 4,144 Applera Corp. - Applied Biosystems Group 134,058 2,319 Bard (C.R.), Inc. 169,890 1,204 Bausch & Lomb, Inc. 59,044 14,664 Baxter International, Inc. 539,049 5,531 Becton, Dickinson & Co. 338,110 5,511 Biomet, Inc. 172,439 26,981 Boston Scientific Corp.* 454,360 2,780 Fisher Scientific International Inc.* 203,079 3,498 Hospira, Inc.* 150,204 27,030 Medtronic, Inc. 1,268,248 2,796 Pall Corp. 78,288 2,836 PerkinElmer, Inc. 59,272 8,083 St. Jude Medical, Inc.* 262,051 6,548 Stryker Corp. 275,736 2,318 Waters Corp.* 102,919 5,541 Zimmer Holdings, Inc.* 314,286 ----------- 4,581,033 ----------- MISCELLANEOUS COMMERCIAL SERVICES (0.1%) 3,088 Cintas Corp. 122,779 2,973 Sabre Holdings Corp. (Class A) 65,406 ----------- 188,185 -----------
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NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- MISCELLANEOUS MANUFACTURING (0.1%) 4,566 Dover Corp. $ 225,697 ---------- MOTOR VEHICLES (0.4%) 42,010 Ford Motor Co. 291,129 12,665 General Motors Corp. 377,290 6,016 Harley-Davidson, Inc. 330,218 ---------- 998,637 ---------- MULTI-LINE INSURANCE (1.7%) 58,168 American International Group, Inc. 3,434,820 6,786 Hartford Financial Services Group, Inc. (The) 574,096 9,092 Loews Corp. 322,311 2,669 Safeco Corp. 150,398 ---------- 4,481,625 ---------- OFFICE EQUIPMENT/SUPPLIES (0.1%) 2,458 Avery Dennison Corp. 142,711 4,971 Pitney Bowes, Inc. 205,302 ---------- 348,013 ---------- OIL & GAS PIPELINES (0.3%) 15,408 El Paso Corp. 231,120 2,334 Kinder Morgan, Inc. 233,143 13,328 Williams Companies, Inc. (The) 311,342 ---------- 775,605 ---------- OIL & GAS PRODUCTION (1.5%) 10,268 Anadarko Petroleum Corp. 489,681 7,398 Apache Corp. 504,914 8,606 Chesapeake Energy Corp. 260,332 9,853 Devon Energy Corp. 595,220 5,422 EOG Resources, Inc. 375,961 5,084 Kerr-McGee Corp. 352,575 9,591 Occidental Petroleum Corp. 983,557 8,154 XTO Energy Inc. 360,978 ---------- 3,923,218 ---------- OIL REFINING/MARKETING (0.7%) 8,116 Marathon Oil Corp. 676,063 2,970 Sunoco, Inc. 205,791 13,783 Valero Energy Corp. 916,845 ---------- 1,798,699 ---------- OILFIELD SERVICES/EQUIPMENT (1.6%) 7,631 Baker Hughes Inc. 624,597 7,200 BJ Services Co. 268,272 11,560 Halliburton Co. 857,868 3,918 National Oilwell-Varco, Inc.* 248,088 26,422 Schlumberger Ltd. (Netherlands Antilles) 1,720,336 7,808 Weatherford International Ltd. (Bermuda)* 387,433 ---------- 4,106,594 ---------- OTHER CONSUMER SERVICES (0.6%) 3,134 Apollo Group, Inc. (Class A)* 161,934 7,355 Block (H.& R.), Inc. 175,490 22,399 Cendant Corp. 364,880 25,894 eBay Inc.* 758,435 ---------- 1,460,739 ---------- OTHER CONSUMER SPECIALTIES (0.1%) 3,284 Fortune Brands, Inc. 233,197 ---------- OTHER METALS/MINERALS (0.1%) 4,564 Phelps Dodge Corp. 374,978 ---------- PACKAGED SOFTWARE (2.9%) 13,408 Adobe Systems, Inc.* 407,067 5,189 Autodesk, Inc.* 178,813 4,766 BMC Software, Inc.* 113,907 10,218 CA Inc. 209,980 8,451 Compuware Corp.* 56,622 3,826 Intuit Inc.* 231,052 196,465 Microsoft Corp. 4,577,635 7,592 Novell, Inc.* 50,335 86,992 Oracle Corp.* 1,260,514 2,495 Parametric Technology Corp.* 31,711 23,180 Symantec Corp.* 360,217 ---------- 7,477,853 ----------
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NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- PERSONNEL SERVICES (0.1%) 2,879 Monster Worldwide Inc.* $ 122,818 3,847 Robert Half International, Inc. 161,574 ----------- 284,392 ----------- PHARMACEUTICALS: GENERIC DRUGS (0.1%) 2,378 Barr Pharmaceuticals Inc.* 113,407 4,708 Mylan Laboratories, Inc. 94,160 2,284 Watson Pharmaceuticals, Inc.* 53,172 ----------- 260,739 ----------- PHARMACEUTICALS: MAJOR (6.0%) 34,178 Abbott Laboratories 1,490,503 44,034 Bristol-Myers Squibb Co. 1,138,719 66,310 Johnson & Johnson 3,973,295 25,308 Lilly (Eli) & Co. 1,398,773 48,875 Merck & Co., Inc. 1,780,516 164,091 Pfizer, Inc. 3,851,216 33,167 Schering-Plough Corp. 631,168 30,141 Wyeth 1,338,562 ----------- 15,602,752 ----------- PHARMACEUTICALS: OTHER (0.3%) 3,419 Allergan, Inc. 366,722 7,298 Forest Laboratories, Inc.* 282,360 5,411 King Pharmaceuticals, Inc.* 91,987 ----------- 741,069 ----------- PRECIOUS METALS (0.3%) 4,221 Freeport-McMoRan Copper & Gold, Inc. (Class B) 233,886 10,053 Newmont Mining Corp. 532,105 ----------- 765,991 ----------- PROPERTY - CASUALTY INSURERS (1.2%) 7,282 ACE Ltd. (Cayman Islands) 368,396 14,229 Allstate Corp. (The) (Note 4) 778,753 9,203 Chubb Corp. (The) 459,230 3,864 Cincinnati Financial Corp. 181,647 17,523 Progressive Corp. (The) 450,516 15,592 St. Paul Travelers Companies, Inc. (The) 695,091 4,038 XL Capital Ltd. (Class A) (Cayman Islands) 247,529 ----------- 3,181,162 ----------- PUBLISHING: BOOKS/MAGAZINES (0.0%) 953 Meredith Corp. 47,212 ----------- PUBLISHING: NEWSPAPERS (0.3%) 1,323 Dow Jones & Co., Inc. 46,318 5,320 Gannett Co., Inc. 297,548 780 McClatchy Co. (The) (Class A) 31,314 3,306 New York Times Co. (The) (Class A) 81,129 1,905 Scripps (E.W.) Co. (Class A) 82,182 5,761 Tribune Co. 186,829 ----------- 725,320 ----------- PULP & PAPER (0.2%) 11,039 International Paper Co. 356,560 4,057 MeadWestvaco Corp. 113,312 ----------- 469,872 ----------- RAILROADS (0.8%) 8,166 Burlington Northern Santa Fe Corp. 647,156 4,962 CSX Corp. 349,523 9,285 Norfolk Southern Corp. 494,148 6,032 Union Pacific Corp. 560,735 ----------- 2,051,562 ----------- REAL ESTATE INVESTMENT TRUSTS (0.9%) 2,177 Apartment Investment & Management Co. (Class A) 94,591 4,786 Archstone-Smith Trust 243,464 2,000 Boston Properties, Inc. 180,800 8,199 Equity Office Properties Trust 299,345 6,512 Equity Residential 291,282 4,738 Kimco Realty Corp. 172,890 4,128 Plum Creek Timber Co., Inc. 146,544 5,486 ProLogis 285,930
SEE NOTES TO FINANCIAL STATEMENTS 100
NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- 1,853 Public Storage, Inc. $ 140,643 4,105 Simon Property Group, Inc. 340,469 2,663 Vornado Realty Trust 259,776 ---------- 2,455,734 ---------- RECREATIONAL PRODUCTS (0.2%) 2,118 Brunswick Corp. 70,424 6,856 Electronic Arts Inc.* 295,082 3,855 Hasbro, Inc. 69,814 8,722 Mattel, Inc. 144,000 ---------- 579,320 ---------- REGIONAL BANKS (1.4%) 7,750 AmSouth Bancorporation 204,988 3,685 Commerce Bancorp, Inc. 131,444 2,892 Compass Bancshares, Inc. 160,795 12,462 Fifth Third Bancorp 460,471 2,760 First Horizon National Corp. 110,952 1,767 M&T Bank Corp. 208,365 5,045 Marshall & Ilsley Corp. 230,758 10,417 North Fork Bancorporation, Inc. 314,281 4,151 Northern Trust Corp. 229,550 7,228 Synovus Financial Corp. 193,566 39,859 U.S. Bancorp 1,230,846 2,376 Zions Bancorporation 185,185 ---------- 3,661,201 ---------- RESTAURANTS (0.8%) 2,888 Darden Restaurants, Inc. 113,787 27,905 McDonald's Corp. 937,608 17,187 Starbucks Corp.* 648,981 2,603 Wendy's International, Inc. 151,729 6,090 Yum! Brands, Inc. 306,144 ---------- 2,158,249 ---------- SAVINGS BANKS (0.6%) 5,730 Golden West Financial Corp. 425,166 8,429 Sovereign Bancorp, Inc. 171,184 21,515 Washington Mutual, Inc. 980,654 ---------- 1,577,004 ---------- SEMICONDUCTORS (2.3%) 10,841 Advanced Micro Devices, Inc.* 264,737 8,046 Altera Corp.* 141,207 8,088 Analog Devices, Inc. 259,948 10,129 Broadcom Corp. (Class A)* 304,376 9,087 Freescale Semiconductor Inc. (Class B)* 267,158 130,267 Intel Corp. 2,468,560 6,800 Linear Technology Corp. 227,732 8,884 LSI Logic Corp.* 79,512 7,182 Maxim Integrated Products, Inc. 230,614 15,141 Micron Technology, Inc.* 228,023 7,561 National Semiconductor Corp. 180,330 7,894 NVIDIA Corp.* 168,063 4,630 PMC - Sierra, Inc.* 43,522 34,891 Texas Instruments Inc. 1,056,848 7,692 Xilinx, Inc. 174,224 ---------- 6,094,854 ---------- SERVICES TO THE HEALTH INDUSTRY (0.4%) 3,293 Express Scripts, Inc.* 236,240 4,472 IMS Health Inc. 120,073 2,793 Laboratory Corp. of America Holdings* 173,808 6,755 Medco Health Solutions Inc.* 386,926 3,639 Quest Diagnostics Inc. 218,049 ---------- 1,135,096 ---------- SPECIALTY INSURANCE (0.2%) 2,368 Ambac Financial Group, Inc. 192,045 3,017 MBIA Inc. 176,645 1,958 MGIC Investment Corp. 127,270 ---------- 495,960 ---------- SPECIALTY STORES (0.5%) 3,321 AutoNation, Inc.* 71,202 1,198 AutoZone, Inc.* 105,664 6,320 Bed Bath & Beyond Inc.* 209,634 6,443 Office Depot, Inc.* 244,834
SEE NOTES TO FINANCIAL STATEMENTS 101
NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- 1,593 OfficeMax Inc. $ 64,915 16,306 Staples, Inc. 396,562 3,138 Tiffany & Co. 103,617 ------------ 1,196,428 ------------ SPECIALTY TELECOMMUNICATIONS (0.2%) 2,601 CenturyTel, Inc. 96,627 7,277 Citizens Communications Co. 94,965 35,055 Qwest Communications International, Inc.* 283,595 ------------ 475,187 ------------ STEEL (0.3%) 1,953 Allegheny Technologies Inc. 135,226 6,976 Nucor Corp. 378,448 2,439 United States Steel Corp. 171,023 ------------ 684,697 ------------ TELECOMMUNICATION EQUIPMENT (1.5%) 2,625 ADC Telecommunications, Inc.* 44,258 3,575 Andrew Corp.* 31,675 13,158 CIENA Corp.* 63,290 4,524 Comverse Technology, Inc.* 89,439 34,880 Corning, Inc.* 843,747 100,324 Lucent Technologies Inc.* 242,784 55,312 Motorola, Inc. 1,114,537 37,536 QUALCOMM, Inc. 1,504,068 10,035 Tellabs, Inc.* 133,566 ------------ 4,067,364 ------------ TOBACCO (1.5%) 46,762 Altria Group, Inc. 3,433,734 1,919 Reynolds American, Inc. 221,261 3,614 UST, Inc. 163,317 ------------ 3,818,312 ------------ TOOLS/HARDWARE (0.1%) 1,702 Black & Decker Corp. 143,751 1,301 Snap-On, Inc. 52,586 1,583 Stanley Works (The) 74,749 ------------ 271,086 ------------ TRUCKS/CONSTRUCTION/FARM MACHINERY (0.8%) 14,996 Caterpillar Inc. 1,116,902 1,040 Cummins Inc. 127,140 5,253 Deere & Co. 438,573 1,382 Navistar International Corp.* 34,011 3,734 PACCAR, Inc. 307,607 ------------ 2,024,233 ------------ WHOLESALE DISTRIBUTORS (0.1%) 3,867 Genuine Parts Co. 161,099 1,709 Grainger (W.W.), Inc. 128,568 ------------ 289,667 ------------ TOTAL COMMON STOCKS (COST $209,652,466) 257,201,485 ------------
PRINCIPAL AMOUNT IN THOUSANDS --------- SHORT-TERM INVESTMENT(1.7%) REPURCHASE AGREEMENT $4,379 The Bank of New York 5.188% due 07/03/06 (dated 06/30/06; proceeds $4,380,894) (b) (COST $4,379,001) 4,379,001 ------------ TOTAL INVESTMENTS (COST $214,031,467)(c)(d) 99.9% 261,580,486 OTHER ASSETS IN EXCESS OF LIABILITIES 0.1 282,897 ----- ------------ NET ASSETS 100.0% $261,863,383 ===== ============
SEE NOTES TO FINANCIAL STATEMENTS 102 ---------- * NON-INCOME PRODUCING SECURITY. ** A PORTION OF THIS SECURITY HAS BEEN PHYSICALLY SEGREGATED IN CONNECTION WITH OPEN FUTURES CONTRACTS IN THE AMOUNT OF $220,500. (a) A SECURITY WITH TOTAL MARKET VALUE EQUAL TO $0 HAS BEEN VALUED AT ITS FAIR VALUE AS DETERMINED IN GOOD FAITH UNDER PROCEDURES ESTABLISHED BY AND UNDER GENERAL SUPERVISION OF THE FUND'S TRUSTEES. (b) COLLATERALIZED BY FEDERAL NATIONAL MORTGAGE ASSOC. 5.50% DUE 06/01/36 VALUED AT $4,466,581. (c) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN AN AMOUNT EQUAL TO $4,203,075 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 $70,290,540 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $22,741,521, RESULTING IN NET UNREALIZED APPRECIATION OF $47,549,019. FUTURES CONTRACTS OPEN AT JUNE 30, 2006:
DESCRIPTION, DELIVERY UNDERLYING NUMBER OF LONG/ MONTH AND FACE AMOUNT UNREALIZED CONTRACTS SHORT YEAR AT VALUE APPRECIATION --------------------------------------------------------------------------------- 55 Long S&P 500 Index, E-Mini September 2006 $3,518,350 $40,838 3 Long S&P 500 Index, September 2006 959,550 13,335 ------- Total Unrealized Appreciation $54,173 =======
SEE NOTES TO FINANCIAL STATEMENTS 103 Morgan Stanley Variable Investment Series - S&P 500 Index SUMMARY OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
PERCENT OF SECTOR VALUE NET ASSETS -------------------------------------------------------------------------------- Finance $ 54,932,645 21.0% Electronic Technology 25,643,019 9.8 Health Technology 24,448,500 9.3 Energy Minerals 20,030,328 7.6 Producer Manufacturing 19,042,534 7.3 Consumer Non-Durables 18,858,520 7.2 Technology Services 15,855,036 6.1 Retail Trade 14,390,397 5.5 Consumer Services 13,422,812 5.1 Utilities 8,702,261 3.3 Communications 8,584,340 3.3 Industrial Services 6,700,551 2.6 Health Services 5,842,325 2.2 Process Industries 5,359,777 2.0 Transportation 5,107,017 2.0 Repurchase Agreement 4,379,001 1.7 Consumer Durables 3,463,497 1.3 Non-Energy Minerals 3,027,260 1.2 Distribution Services 1,942,245 0.7 Commercial Services 1,848,421 0.7 ------------ ---- $261,580,486* 99.9% ============ ====
---------- * DOES NOT INCLUDE OPEN LONG FUTURES CONTRACTS WITH AN UNDERLYING FACE AMOUNT OF $4,477,900 WITH A TOTAL UNREALIZED APPRECIATION OF $54,173. SEE NOTES TO FINANCIAL STATEMENTS 104 Morgan Stanley Variable Investment Series - Global Advantage PORTFOLIO OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- COMMON STOCKS (97.5%) AUSTRALIA (3.6%) BEVERAGES: ALCOHOLIC 139,800 McGuigan Simeon Wines Ltd. $ 259,713 ---------- DATA PROCESSING SERVICES 75,200 Computershare Ltd. 438,667 ---------- OTHER CONSUMER SERVICES 57,000 A.B.C. Learning Centres Ltd. 271,083 ---------- TOTAL AUSTRALIA 969,463 ---------- BERMUDA (2.4%) MULTI-LINE INSURANCE 15,100 Axis Capital Holdings Ltd. 432,011 ---------- SEMICONDUCTORS 5,146 Marvell Technology Group, Ltd.* 228,122 ---------- TOTAL BERMUDA 660,133 ---------- BRITISH VIRGIN ISLANDS (1.6%) ELECTRONIC EQUIPMENT/ INSTRUMENTS 19,200 Nam Tai Electronics, Inc. 429,504 ---------- CANADA (2.1%) BIOTECHNOLOGY 22,900 Angiotech Pharmaceuticals, Inc* 269,075 ---------- FOOD: SPECIALTY/CANDY 32,000 SunOpta Inc.* 296,960 ---------- TOTAL CANADA 566,035 ---------- DENMARK (1.7%) MAJOR BANKS 12,200 Danske Bank A/S 464,284 ---------- GERMANY (5.9%) APPAREL/FOOTWEAR 8,808 Adidas AG 421,003 ---------- FINANCE/RENTAL/LEASING 5,234 Grenkeleasing AG 348,021 ---------- FINANCIAL CONGLOMERATES 8,754 Hypo Real Estate Holding AG $ 531,591 ---------- MEDICAL SPECIALTIES 1,800 Fresenius AG 297,605 ---------- TOTAL GERMANY 1,598,220 ---------- GREECE (1.2%) REGIONAL BANKS 11,980 EFG Eurobank Ergasias 332,112 ---------- HONG KONG (5.5%) AGRICULTURAL COMMODITIES/MILLING 644,000 Global Bio-chem Technology Group Co., Ltd. 273,619 ---------- APPAREL/FOOTWEAR RETAIL 104,500 Esprit Holdings Ltd. 853,006 ---------- WHOLESALE DISTRIBUTORS 178,200 Li & Fung Ltd. 360,209 ---------- TOTAL HONG KONG 1,486,834 ---------- ISRAEL (1.5%) PHARMACEUTICALS: OTHER 13,200 Teva Pharmaceutical Industries Ltd. (ADR) 416,988 ---------- ITALY (3.1%) MAJOR BANKS 108,000 UniCredito Italiano SpA 845,169 ---------- JAPAN (3.6%) HOME BUILDING 9,900 Daito Trust Construction Co., Ltd. 548,510 ---------- INDUSTRIAL MACHINERY 25,500 OSG Corp. 429,420 ---------- TOTAL JAPAN 977,930 ---------- MEXICO (1.2%) BEVERAGES: NON-ALCOHOLIC 3,900 Fomento Economico Mexicano, S.A. de C.V. (ADR) (Units)+ 326,508 ----------
SEE NOTES TO FINANCIAL STATEMENTS 105
NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- SINGAPORE (4.6%) AIRLINES 62,000 Singapore Airlines Ltd. $ 497,473 ---------- ELECTRONIC COMPONENTS 25,900 Flextronics International Ltd.* 275,058 ---------- MARINE SHIPPING 601,000 Cosco Corp Ltd. 478,431 ---------- TOTAL SINGAPORE 1,250,962 ---------- SOUTH AFRICA (1.2%) PHARMACEUTICALS: GENERIC DRUGS 61,700 Aspen Pharmacare Holdings Ltd.* 313,220 ---------- SPAIN (9.0%) APPAREL/FOOTWEAR RETAIL 10,200 Industria de Diseno Textil, S.A. (Inditex) 430,150 ---------- BROADCASTING 17,800 Antena 3 Television S.A. 406,509 18,800 Gestevision Telecinco S.A. 450,742 ---------- 857,251 ---------- MAJOR BANKS 15,331 Banco Bilbao Vizcaya Argentaria, S.A. 315,228 30,384 Banco Santander Central Hispano S.A. 443,690 ---------- 758,918 ---------- MAJOR TELECOMMUNICATIONS 24,938 Telefonica S.A. 415,185 ---------- TOTAL SPAIN 2,461,504 ---------- SWITZERLAND (2.0%) FINANCIAL CONGLOMERATES 5,033 UBS AG (Registered Shares) 551,178 ---------- TAIWAN (1.5%) SEMICONDUCTORS 45,114 Taiwan Semiconductor Manufacturing Co. Ltd. (ADR) $ 414,142 ---------- UNITED KINGDOM (8.8%) BEVERAGES: ALCOHOLIC 29,900 SABMiller PLC 538,578 ---------- INVESTMENT MANAGERS 10,671 Man Group PLC 502,574 176,000 RAB Capital PLC 271,641 ---------- 774,215 ---------- MAJOR BANKS 20,169 Standard Chartered PLC 492,101 ---------- PHARMACEUTICALS: OTHER 41,548 Shire PLC 605,931 ---------- TOTAL UNITED KINGDOM 2,410,825 ---------- UNITED STATES (37.0%) APPAREL/FOOTWEAR 10,100 Under Armour, Inc. (Class A)* 430,462 ---------- BIOTECHNOLOGY 8,611 Amgen Inc.* 561,695 5,141 Genentech, Inc.* 420,534 4,700 Gilead Sciences, Inc.* 278,052 ---------- 1,260,281 ---------- BROADCASTING 18,500 XM Satellite Radio Holdings Inc. (Class A)* 271,025 ---------- COMPUTER PROCESSING HARDWARE 9,665 Apple Computer, Inc.* 552,065 ---------- ELECTRIC UTILITIES 8,000 Constellation Energy Group, Inc. 436,160 ----------
SEE NOTES TO FINANCIAL STATEMENTS 106
NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- ELECTRONIC COMPONENTS 10,300 Amphenol Corp. (Class A) $ 576,388 ----------- FINANCIAL CONGLOMERATES 5,950 Prudential Financial, Inc. 462,315 ----------- FOOD: MAJOR DIVERSIFIED 5,300 PepsiCo, Inc. 318,212 ----------- HOSPITAL/NURSING MANAGEMENT 8,900 United Surgical Partners International, Inc.* 267,623 ----------- INSURANCE BROKERS/SERVICES 13,500 Willis Group Holdings Ltd. 433,350 ----------- INVESTMENT BANKS/BROKERS 4,100 Goldman Sachs Group, Inc. (The) 616,763 6,009 Merrill Lynch & Co., Inc. 417,986 ----------- 1,034,749 ----------- INVESTMENT TRUSTS/MUTUAL FUNDS 12,200 KKR Private Equity Investors LP (Units)*+ 267,180 ----------- LIFE/HEALTH INSURANCE 9,700 AFLAC, Inc. 449,595 ----------- MEDIA CONGLOMERATES 37,516 News Corp (Class A) 719,557 ----------- MEDICAL SPECIALTIES 8,400 Bard (C.R.), Inc. 615,384 6,200 Fisher Scientific International Inc.* 452,910 ----------- 1,068,294 ----------- MEDICAL/NURSING SERVICES 12,900 Matria Healthcare, Inc.* 276,318 ----------- MISCELLANEOUS COMMERCIAL SERVICES 10,700 FTI Consulting Inc.* 286,439 ----------- MISCELLANEOUS MANUFACTURING 7,500 Mine Safety Appliances Co. 301,500 ----------- SPECIALTY STORES 12,640 Staples, Inc. $ 307,405 ----------- TELECOMMUNICATION EQUIPMENT 14,741 Corning, Inc.* 356,585 ----------- TOTAL UNITED STATES 10,075,503 ----------- TOTAL COMMON STOCKS (COST $25,846,746) 26,550,514 -----------
PRINCIPAL AMOUNT IN THOUSANDS --------- SHORT-TERM INVESTMENT (1.9%) REPURCHASE AGREEMENT $ 524 The Bank of New York 5.1875% due 07/03/06 (dated 06/30/06; proceeds $524,596) (a) (COST $524,369) 524,369 ----------- TOTAL INVESTMENTS (COST $26,371,115) (b) 99.4% 27,074,883 OTHER ASSETS IN EXCESS OF LIABILITIES 0.6 171,206 ----- ----------- NET ASSETS 100.0% $27,246,089 ===== ===========
ADR AMERICAN DEPOSITARY RECEIPT. * NON-INCOME PRODUCING SECURITY. (+) CONSISTS OF ONE OR MORE CLASS OF SECURITIES TRADED TOGETHER AS A UNIT; STOCKS WITH ATTACHED WARRANTS. (A) COLLATERIZED BY FEDERAL NATIONAL MORTGAGE ASSOC. 5.50% DUE 06/01/36 VALUED AT $534,856. (B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $1,927,978 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $1,224,210, RESULTING IN NET UNREALIZED APPRECIATION OF $703,768. SEE NOTES TO FINANCIAL STATEMENTS 107 Morgan Stanley Variable Investment Series - Global Advantage SUMMARY OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
PERCENT OF INDUSTRY VALUE NET ASSETS -------------------------------------------------------------------------------- Major Banks $ 2,560,473 9.4% Financial Conglomerates 1,545,084 5.7 Biotechnology 1,529,356 5.6 Medical Specialties 1,365,899 5.0 Apparel/Footwear Retail 1,283,156 4.7 Broadcasting 1,128,276 4.1 Investment Banks/Brokers 1,034,749 3.8 Pharmaceuticals: Other 1,022,919 3.8 Apparel/Footwear 851,465 3.1 Electronic Components 851,446 3.1 Beverages: Alcoholic 798,292 2.9 Investment Managers 774,215 2.8 Media Conglomerates 719,557 2.6 Semiconductors 642,265 2.4 Computer Processing Hardware 552,065 2.0 Home Building 548,510 2.0 Repurchase Agreement 524,369 1.9 Airlines 497,473 1.8 Marine Shipping 478,430 1.8 Life/Health Insurance 449,595 1.7 Data Processing Services 438,667 1.6 Electric Utilities 436,160 1.6 Insurance Brokers/Services 433,350 1.6 Multi-Line Insurance 432,011 1.6 Electronic Equipment/Instruments 429,504 1.6 Industrial Machinery $ 429,420 1.6% Major Telecommunications 415,184 1.5 Wholesale Distributors 360,208 1.3 Telecommunication Equipment 356,585 1.3 Finance/Rental/Leasing 348,021 1.3 Regional Banks 332,112 1.2 Beverages: Non-Alcoholic 326,508 1.2 Food: Major Diversified 318,212 1.2 Pharmaceuticals: Generic Drugs 313,220 1.2 Specialty Stores 307,405 1.1 Miscellaneous Manufacturing 301,500 1.1 Food: Specialty/Candy 296,960 1.1 Miscellaneous Commercial Services 286,439 1.1 Medical/Nursing Services 276,318 1.0 Agricultural Commodities/Milling 273,619 1.0 Other Consumer Services 271,083 1.0 Hospital/Nursing Management 267,623 1.0 Investment Trusts/Mutual Funds 267,180 1.0 ----------- ---- $27,074,883 99.4% =========== ====
SEE NOTES TO FINANCIAL STATEMENTS 108 Morgan Stanley Variable Investment Series - Aggressive Equity PORTFOLIO OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- COMMON STOCKS (99.0%) ADVERTISING/MARKETING SERVICES (2.7%) 27,800 Getty Images, Inc.* $1,765,578 ---------- AIR FREIGHT/COURIERS (6.4%) 36,000 C.H. Robinson Worldwide, Inc. 1,918,800 41,200 Expeditors International of Washington, Inc. 2,307,612 ---------- 4,226,412 ---------- BROADCASTING (1.9%) 64,123 Grupo Televisa S.A. - CPO (ADR) (Mexico) 1,238,215 ---------- CASINO/GAMING (2.6%) 25,100 Station Casinos, Inc. 1,708,808 ---------- CHEMICALS: AGRICULTURAL (4.4%) 34,310 Monsanto Co. 2,888,559 ---------- DATA PROCESSING SERVICES (2.8%) 41,100 First Data Corp. 1,851,144 ---------- DISCOUNT STORES (7.7%) 36,625 Costco Wholesale Corp. 2,092,386 19,200 Sears Holdings Corp.* 2,972,928 ---------- 5,065,314 ---------- FINANCIAL CONGLOMERATES (7.6%) 35,025 American Express Co. 1,864,031 76,400 Brookfield Asset Management Inc. (Class A) (Canada) 3,103,368 ---------- 4,967,399 ---------- FINANCIAL PUBLISHING/SERVICES (2.5%) 30,008 Moody's Corp. 1,634,236 ---------- HOME BUILDING (3.2%) 28,300 Desarrolladora Homex S.A. de C.V. (ADR) (Mexico)* 928,523 10,300 M.D.C. Holdings, Inc. 534,879 1,324 NVR, Inc.* 650,415 ---------- 2,113,817 ---------- INTERNET RETAIL (2.3%) 39,000 Amazon.com, Inc.* $1,508,520 ---------- INTERNET SOFTWARE/SERVICES (12.9%) 44,323 Akamai Technologies, Inc.* 1,604,049 8,825 Google, Inc. (Class A)* 3,700,587 95,400 Yahoo!, Inc.* 3,148,200 ---------- 8,452,836 ---------- INVESTMENT BANKS/BROKERS (2.7%) 29,580 Greenhill & Co., Inc. 1,797,281 ---------- MEDICAL SPECIALTIES (2.3%) 36,300 Dade Behring Holdings, Inc. 1,511,532 ---------- MISCELLANEOUS COMMERCIAL SERVICES (7.7%) 34,600 Corporate Executive Board Co. (The) 3,466,920 42,600 Iron Mountain Inc.* 1,592,388 ---------- 5,059,308 OIL & GAS PRODUCTION (8.0%) 89,180 Ultra Petroleum Corp. (Canada)* 5,285,699 ---------- OTHER CONSUMER SERVICES (6.7%) 112,000 eBay, Inc.* 3,280,480 11,800 Strayer Education, Inc. 1,146,016 ---------- 4,426,496 ---------- PERSONNEL SERVICES (2.0%) 31,592 Monster Worldwide, Inc.* 1,347,715 ---------- PROPERTY - CASUALTY INSURERS (2.8%) 607 Berkshire Hathaway, Inc. (Class B)* 1,847,101 ---------- RECREATIONAL PRODUCTS (2.0%) 30,800 Electronic Arts, Inc.* 1,325,632 ---------- SERVICES TO THE HEALTH INDUSTRY (2.3%) 23,360 Stericycle, Inc.* 1,520,736 ----------
SEE NOTES TO FINANCIAL STATEMENTS 109
NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- SPECIALTY TELECOMMUNICATIONS (2.6%) 49,197 Crown Castle International Corp.* $ 1,699,264 ----------- WIRELESS TELECOMMUNICATIONS (2.9%) 56,600 America Movil S.A. de C.V. (Series L) (ADR) (Mexico) 1,882,516 ----------- TOTAL COMMON STOCKS (COST $52,588,153) 65,124,118 -----------
PRINCIPAL AMOUNT IN THOUSANDS --------- SHORT-TERM INVESTMENT(1.7%) REPURCHASE AGREEMENT $1,111 The Bank of New York 5.188% due 07/03/06 (dated 06/30/06; proceeds $1,111,728) (a) (COST $1,111,248) 1,111,248 ----------- TOTAL INVESTMENTS (COST $53,699,401)(b) 100.7% 66,235,366 LIABILITIES IN EXCESS OF OTHER ASSETS (0.7) (440,456) ----- ----------- NET ASSETS 100.0% $65,794,910 ===== ===========
---------- ADR AMERICAN DEPOSITARY RECEIPT. * NON-INCOME PRODUCING SECURITY. (a) COLLATERALIZED BY FEDERAL NATIONAL MORTGAGE ASSOC. 5.50% DUE 06/01/36 VALUED AT $1,133,473. (b) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $15,006,114 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $2,470,149, RESULTING IN NET UNREALIZED APPRECIATION OF $12,535,965. SUMMARY OF INVESTMENTS
PERCENT OF INDUSTRY VALUE NET ASSETS -------------------------------------------------------------------------------- Internet Software/Services $ 8,452,836 12.9% Oil & Gas Production 5,285,699 8.0 Discount Stores 5,065,314 7.7 Miscellaneous Commercial Services 5,059,308 7.7 Financial Conglomerates 4,967,399 7.6 Other Consumer Services 4,426,496 6.7 Air Freight/Couriers 4,226,412 6.4 Chemicals: Agricultural 2,888,559 4.4 Home Building 2,113,817 3.2 Wireless Telecommunications 1,882,516 2.9 Data Processing Services 1,851,144 2.8 Property - Casualty Insurers 1,847,101 2.8 Investment Banks/Brokers 1,797,281 2.7 Advertising/Marketing Services 1,765,578 2.7 Casino/Gaming 1,708,808 2.6 Specialty Telecommunications 1,699,264 2.6 Financial Publishing/Services 1,634,236 2.5 Services to the Health Industry 1,520,736 2.3 Medical Specialties 1,511,532 2.3 Internet Retail 1,508,520 2.3 Personnel Services 1,347,715 2.0 Recreational Products 1,325,632 2.0 Broadcasting 1,238,215 1.9 Repurchase Agreement 1,111,248 1.7 ----------- ----- $66,235,366 100.7% =========== =====
SEE NOTES TO FINANCIAL STATEMENTS 110 Morgan Stanley Variable Investment Series - Strategist PORTFOLIO OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- COMMON STOCKS (59.2%) ADVERTISING/MARKETING SERVICES (0.8%) 34,020 Omnicom Group, Inc. $ 3,030,842 ----------- AEROSPACE & DEFENSE (1.8%) 63,080 Northrop Grumman Corp. 4,040,905 55,445 Raytheon Co. 2,471,184 ----------- 6,512,089 ----------- AGRICULTURAL COMMODITIES/MILLING (1.3%) 115,130 Archer-Daniels-Midland Co. 4,752,566 ----------- BEVERAGES: NON-ALCOHOLIC (0.8%) 66,605 Coca-Cola Co. (The) 2,865,347 ----------- BIOTECHNOLOGY (2.3%) 68,950 Celgene Corp.* 3,270,298 38,460 Gilead Sciences, Inc.* 2,275,294 82,560 Vertex Pharmaceuticals Inc.* 3,030,778 ----------- 8,576,370 ----------- CHEMICALS: MAJOR DIVERSIFIED (0.6%) 53,890 Dow Chemical Co. (The) 2,103,327 ----------- COMPUTER COMMUNICATIONS (0.8%) 154,380 Cisco Systems, Inc.* 3,015,041 ----------- COMPUTER PERIPHERALS (0.5%) 170,145 EMC Corp.* 1,866,491 ----------- COMPUTER PROCESSING HARDWARE (0.9%) 54,237 Apple Computer, Inc.* 3,098,017 ----------- DEPARTMENT STORES (0.8%) 50,605 Kohl's Corp.* 2,991,768 ----------- DISCOUNT STORES (1.1%) 71,705 Costco Wholesale Corp. 4,096,507 ----------- ELECTRICAL PRODUCTS (0.8%) 36,060 Emerson Electric Co. 3,022,189 ----------- ELECTRONICS/APPLIANCES (1.0%) 79,800 Sony Corp. (ADR) (Japan) 3,514,392 ----------- ENVIRONMENTAL SERVICES (1.4%) 143,650 Waste Management, Inc. 5,154,162 ----------- FINANCIAL CONGLOMERATES (3.2%) 69,330 American Express Co. 3,689,743 88,775 Citigroup, Inc. 4,282,506 90,005 JPMorgan Chase & Co. 3,780,210 ----------- 11,752,459 -----------
SEE NOTES TO FINANCIAL STATEMENTS 111
NUMBER OF SHARES VALUE ----------------------------------------------------------------------------------------------- FOOD: MAJOR DIVERSIFIED (2.0%) 84,965 Kellogg Co. $4,114,855 106,545 Kraft Foods Inc. (Class A) 3,292,240 ---------- 7,407,095 ---------- HOUSEHOLD/PERSONAL CARE (0.8%) 49,980 Colgate-Palmolive Co. 2,993,802 ---------- INDUSTRIAL CONGLOMERATES (1.3%) 79,090 General Electric Co. 2,606,806 45,690 Ingersoll-Rand Co. Ltd. (Class A) (Bermuda) 1,954,618 ---------- 4,561,424 ---------- INFORMATION TECHNOLOGY SERVICES (0.9%) 41,782 International Business Machines Corp. 3,209,693 ---------- INTEGRATED OIL (1.6%) 56,325 Exxon Mobil Corp. 3,455,539 35,240 Royal Dutch Shell PLC (ADR) (Class A) (United Kingdom) 2,360,375 ---------- 5,815,914 ---------- INTERNET SOFTWARE/SERVICES (1.1%) 116,665 Yahoo!, Inc.* 3,849,945 ---------- INVESTMENT BANKS/BROKERS (1.2%) 278,800 Schwab (Charles) Corp. (The) 4,455,224 ---------- MAJOR BANKS (2.1%) 95,160 Bank of America Corp. 4,577,196 45,470 Wells Fargo & Co. 3,050,128 ---------- 7,627,324 ---------- MAJOR TELECOMMUNICATIONS (0.4%) 45,615 AT&T Inc. 1,272,202 ---------- MARINE SHIPPING (0.6%) 46,070 Tidewater, Inc. 2,266,644 ---------- MEDIA CONGLOMERATES (1.3%) 97,815 Disney (Walt) Co. (The) 2,934,450 108,840 Time Warner, Inc. 1,882,932 ---------- 4,817,382 ---------- MEDICAL SPECIALTIES (2.6%) 44,235 Bard (C.R.), Inc. 3,240,656 40,895 Fisher Scientific International Inc.* 2,987,380 106,260 St. Jude Medical, Inc.* 3,444,949 ---------- 9,672,985 ---------- MOTOR VEHICLES (2.3%) 716,270 Ford Motor Co. 4,963,751 109,635 Honda Motor Co., Ltd. (ADR) (Japan) 3,488,586 ---------- 8,452,337 ----------
SEE NOTES TO FINANCIAL STATEMENTS 112
NUMBER OF SHARES VALUE ------------------------------------------------------------------------------------------------ OILFIELD SERVICES/EQUIPMENT (1.7%) 37,020 Halliburton Co. $ 2,747,254 81,740 Smith International, Inc. 3,634,978 ----------- 6,382,232 ----------- OTHER CONSUMER SERVICES (0.4%) 88,040 Expedia, Inc.* 1,317,959 ----------- OTHER METALS/MINERALS (0.7%) 27,320 Southern Copper Corp. 2,435,032 ----------- PACKAGED SOFTWARE (2.8%) 159,340 Microsoft Corp. 3,712,622 326,280 Oracle Corp.* 4,727,797 95,800 Sybase, Inc.* 1,858,520 ----------- 10,298,939 ----------- PHARMACEUTICALS: MAJOR (2.6%) 53,100 Johnson & Johnson 3,181,752 52,910 Lilly (Eli) & Co. 2,924,336 79,860 Wyeth 3,546,583 ----------- 9,652,671 ----------- PROPERTY - CASUALTY INSURERS (1.0%) 65,320 Allstate Corp. (The) (Note 4) 3,574,964 ----------- RECREATIONAL PRODUCTS (0.9%) 195,360 Mattel, Inc. 3,225,394 ----------- SEMICONDUCTORS (2.2%) 88,920 Freescale Semiconductor Inc. (Class B)* 2,614,248 191,050 Intel Corp. 3,620,397 200,280 Taiwan Semiconductor Manufacturing Co. Ltd. (ADR) (Taiwan) 1,838,566 ----------- 8,073,211 ----------- SPECIALTY TELECOMMUNICATIONS (1.7%) 375,540 Citizens Communications Co. 4,900,797 127,670 Valor Communications Group, Inc. 1,461,821 ----------- 6,362,618 ----------- STEEL (3.4%) 87,000 Nucor Corp. 4,719,750 108,740 United States Steel Corp. 7,624,849 ----------- 12,344,599 ----------- TELECOMMUNICATION EQUIPMENT (2.2%) 100,635 Corning, Inc.* 2,434,361 129,240 Motorola, Inc. 2,604,186 142,870 Nokia Corp. (ADR) (Finland) 2,894,546 ----------- 7,933,093 ----------- TOBACCO (2.4%) 69,630 Altria Group, Inc. 5,112,931 82,330 UST, Inc. 3,720,493 ----------- 8,833,424 -----------
SEE NOTES TO FINANCIAL STATEMENTS 113
NUMBER OF SHARES VALUE ------------------------------------------------------------------------------------------------- TRUCKS/CONSTRUCTION/FARM MACHINERY (0.9%) 45,645 Caterpillar Inc. $ 3,399,640 ------------ TOTAL COMMON STOCKS (COST $160,783,665) 216,587,314 ------------
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE ------------------------------------------------------------------------------------------------- CORPORATE BONDS (5.3%) ADVERTISING/MARKETING SERVICES (0.0%) $150 WPP Finance (UK) Corp. (United Kingdom) 5.875% 06/15/14 145,572 ------- AEROSPACE & DEFENSE (0.1%) 150 Northrop Grumman Corp. 4.079 11/16/06 149,157 89 Raytheon Co. 6.15 11/01/08 89,918 281 Systems 2001 Asset Trust - 144A** (Cayman Islands) 6.664 09/15/13 289,459 ------- 528,534 ------- AIR FREIGHT/COURIERS (0.0%) 140 Fedex Corp. 2.65 04/01/07 136,727 ------- AIRLINES (0.1%) 341 America West Airlines, Inc. (Series 01-1) 7.10 04/02/21 351,219 125 Southwest Airlines Co. (Series 01-1) 5.496 11/01/06 125,113 ------- 476,332 ------- APPAREL/FOOTWEAR RETAIL (0.0%) 115 Limited Brands, Inc. 6.95 03/01/33 109,963 ------- BEVERAGES: ALCOHOLIC (0.1%) 205 FBG Finance Ltd. - 144A** (Australia) 5.125 06/15/15 188,136 195 Miller Brewing Co. - 144A** 4.25 08/15/08 189,419 ------- 377,555 ------- CABLE/SATELLITE TV (0.1%) 110 Comcast Cable Communications Inc. 6.75 01/30/11 113,623 25 Comcast Corp. 7.625 02/15/08 25,632 160 TCI Communications, Inc. 7.875 02/15/26 172,733 ------- 311,988 ------- CASINO/GAMING (0.1%) 310 Harrah's Operating Co., Inc. 5.625 06/01/15 287,215 85 Harrah's Operating Co., Inc. 6.50 06/01/16 82,971 ------- 370,186 ------- CHEMICALS: MAJOR DIVERSIFIED (0.0%) 105 ICI Wilmington Inc. 4.375 12/01/08 101,389 ------- COMPUTER PROCESSING HARDWARE (0.0%) 125 Hewlett-Packard Co. 5.339+ 05/22/09 125,103 -------
SEE NOTES TO FINANCIAL STATEMENTS 114
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE -------------------------------------------------------------------------------------------------- CONTAINERS/PACKAGING (0.1%) $260 Sealed Air Corp. - 144A** 5.625% 07/15/13 $ 248,088 ---------- DEPARTMENT STORES (0.1%) 275 May Department Stores Co., Inc. 5.95 11/01/08 275,535 ---------- ELECTRIC UTILITIES (0.6%) 195 Ameren Corp. 4.263 05/15/07 192,443 210 Arizona Public Service Co. 5.80 06/30/14 203,309 50 Arizona Public Service Co. 6.75 11/15/06 50,159 185 Carolina Power & Light Co. 5.125 09/15/13 176,741 225 CC Funding Trust I 6.90 02/16/07 226,296 130 Cincinnati Gas & Electric Co. 5.70 09/15/12 127,574 95 Consolidated Natural Gas Co. (Series A) 5.00 12/01/14 87,533 185 Consolidated Natural Gas Co. (Series C) 6.25 11/01/11 187,018 125 Consumers Energy Co. (Series H) 4.80 02/17/09 121,630 90 Detroit Edison Co. (The) 6.125 10/01/10 90,789 85 Entergy Gulf States, Inc. 3.60 06/01/08 81,241 130 Entergy Gulf States, Inc. 5.631+ 12/01/09 128,750 190 Ohio Power Company - IBC (Series K) 6.00 06/01/16 187,702 85 Pacific Gas & Electric Co. 6.05 03/01/34 80,485 45 Panhandle Eastern Pipe Line Co. (Series B) 2.75 03/15/07 44,048 125 Public Service Electric & Gas Co. (Series MTNB) 5.00 01/01/13 119,500 100 Texas Eastern Transmission, LP 7.00 07/15/32 107,221 145 Wisconsin Electric Power Co. 3.50 12/01/07 140,831 ---------- 2,353,270 ---------- ELECTRICAL PRODUCTS (0.1%) 215 Cooper Industries, Inc. 5.25 07/01/07 213,107 175 Cooper Industries, Inc. 5.25 11/15/12 169,454 ---------- 382,561 ---------- ELECTRONICS/APPLIANCES (0.0%) 130 LG Electronics Inc. - 144A** (South Korea) 5.00 06/17/10 123,474 ---------- FINANCE/RENTAL/LEASING (0.5%) 255 Bank of America Corp. (Series MTNF) 5.58+ 05/05/08 256,971 150 CIT Group, Inc. 2.875 09/29/06 149,105 260 Countrywide Home Loans, Inc. (Series MTNL) 3.25 05/21/08 248,876 100 DaimlerChrysler North American Holdings Co. 8.50 01/18/31 113,540 260 Nationwide Building Society - 144A** (United Kingdom) 4.25 02/01/10 247,752 375 Residential Capital Corp. 6.375 06/30/10 370,217 170 SLM Corp. 4.00 01/15/10 160,676 195 SLM Corp. (Series MTNA) 5.00 10/01/13 184,044 ---------- 1,731,181 ----------
SEE NOTES TO FINANCIAL STATEMENTS 115
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE -------------------------------------------------------------------------------------------- FINANCIAL CONGLOMERATES (0.2%) $295 Chase Manhattan Corp. 6.00% 02/15/09 $ 296,937 125 CIT Group Inc. (Series MTN) 4.75 08/15/08 122,677 125 General Electric Capital Corp. (Series MTNA) 4.25 12/01/10 118,461 290 General Electric Capital Corp. (Series MTNA) 6.75 03/15/32 310,526 ---------- 848,601 ---------- FOOD RETAIL (0.0%) 150 Fred Meyer, Inc. 7.45 03/01/08 153,740 ---------- FOOD: MAJOR DIVERSIFIED (0.1%) 85 ConAgra Foods, Inc. 7.00 10/01/28 86,677 90 ConAgra Foods, Inc. 8.25 09/15/30 104,005 ---------- 190,682 ---------- GAS DISTRIBUTORS (0.1%) 130 NiSource Finance Corp. 5.764+ 11/23/09 130,261 15 Ras Laffan Liquid Natural Gas Co. Ltd. - 144A** (Qatar) 7.628 09/15/06 15,571 125 Sempra Energy 4.621 05/17/07 123,808 ---------- 269,640 ---------- HOME FURNISHINGS (0.0%) 115 Mohawk Industries, Inc. (Series D) 7.20 04/15/12 118,658 ---------- HOTELS/RESORTS/CRUISELINES (0.1%) 170 Hyatt Equities LLC - 144A** 6.875 06/15/07 171,048 ---------- HOUSEHOLD/PERSONAL CARE (0.1%) 240 Clorox Co. (The) 5.444+ 12/14/07 240,366 ---------- INDUSTRIAL CONGLOMERATES (0.1%) 135 Textron Financial Corp. 4.125 03/03/08 131,579 185 Textron Financial Corp. (Series MTN) 5.125 02/03/11 180,378 ---------- 311,957 ---------- INSURANCE BROKERS/SERVICES (0.2%) 375 Farmers Exchange Capital - 144A** 7.05 07/15/28 359,802 315 Marsh & McLennan Companies, Inc. 5.375 07/15/14 293,757 ---------- 653,559 ---------- INVESTMENT BANKS/BROKERS (0.0%) 30 Goldman Sachs Group Inc. (The) 5.25 10/15/13 28,788 ---------- MAJOR BANKS (0.4%) 75 Bank of New York Co., Inc. (The) 5.20 07/01/07 74,613 115 HSBC Finance Corp. 6.75 05/15/11 119,417 125 Popular North America Inc. (Series MTN) 5.65 04/15/09 124,070 315 USB Capital IX ++++ 6.189+ 04/15/42 308,348 970 Wachovia Capital Trust III ++++ 5.80+ 03/15/42 942,241 ---------- 1,568,689 ----------
SEE NOTES TO FINANCIAL STATEMENTS 116
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE -------------------------------------------------------------------------------------------- MAJOR TELECOMMUNICATIONS (0.3%) $120 Deutsche Telekom International Finance Corp. BV (Netherlands) 8.25% 06/15/30 $ 138,936 210 France Telecom S.A. (France) 8.50 03/01/31 253,410 125 SBC Communications, Inc. 6.15 09/15/34 115,084 60 Sprint Capital Corp. 8.75 03/15/32 72,561 110 Telecom Italia Capital SA (Luxembourg) 4.00 11/15/08 105,580 165 Telecom Italia Capital SA (Luxembourg) 4.00 01/15/10 154,527 110 Telefonica Europe BV (Netherlands) 8.25 09/15/30 124,587 ---------- 964,685 ---------- MANAGED HEALTH CARE (0.0%) 40 WellPoint Inc. 3.75 12/14/07 38,880 ---------- MEDIA CONGLOMERATES (0.1%) 195 News America, Inc. 6.40 12/15/35 180,926 190 Viacom, Inc. - 144A** 6.875 04/30/36 183,929 ---------- 364,855 ---------- MULTI-LINE INSURANCE (0.4%) 490 AIG Sun America Global Finance VI - 144A** 6.30 05/10/11 501,210 290 American General Finance Corp. (Series MTNF) 5.875 07/14/06 290,033 325 AXA Financial, Inc. 6.50 04/01/08 328,168 45 International Lease Finance Corp. 3.75 08/01/07 44,066 225 Two-Rock Pass Through - 144A**(Bahamas) ++ 6.102+ 12/31/49 221,719 ---------- 1,385,196 ---------- OIL & GAS PIPELINES (0.1%) 70 Kinder Morgan Energy Partners, L.P. 5.125 11/15/14 64,010 195 Plains All American Pipeline L.P. - 144A** 6.70 05/15/36 190,671 ---------- 254,681 ---------- OTHER METALS/MINERALS (0.1%) 185 Brascan Corp. (Canada) 7.125 06/15/12 195,132 ---------- PROPERTY - CASUALTY INSURERS (0.3%) 300 Mantis Reef Ltd. - 144A**(Australia) 4.692 11/14/08 290,935 120 Platinum Underwriters Finance Holdings, Ltd. (Series B) 7.50 06/01/17 117,935 150 Platinum Underwriters Holdings, Ltd. (Series B) (Bahamas) 6.371 11/16/07 148,616 210 St. Paul Travelers Companies, Inc. (The) 5.01 08/16/07 207,658 260 XLLIAC Global Funding - 144A** 4.80 08/10/10 249,934 ---------- 1,015,078 ---------- PULP & PAPER (0.0%) 140 Sappi Papier Holding AG - 144A**(Austria) 6.75 06/15/12 131,127 ----------
SEE NOTES TO FINANCIAL STATEMENTS 117
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ------------------------------------------------------------------------------------------------ RAILROADS (0.1%) $ 103 Burlington North Santa Fe Railway Co. 4.575% 01/15/21 $ 96,460 130 Burlington North Santa Fe Railway Co. 6.125 03/15/09 131,490 120 Norfolk Southern Corp. 7.35 05/15/07 121,608 60 Union Pacific Corp. (Series MTNE) 6.79 11/09/07 60,795 ----------- 410,353 ----------- REAL ESTATE DEVELOPMENT (0.1%) 469 World Financial Properties - 144A** (series 1996WFP-B) 6.91 09/01/13 484,068 ----------- REAL ESTATE INVESTMENT TRUSTS (0.1%) 260 EOP Operating LP 6.763 06/15/07 262,108 ----------- REGIONAL BANKS (0.1%) 300 Marshall & Ilsley Bank (Series BKNT) 3.80 02/08/08 291,492 ----------- RESTAURANTS (0.0%) 85 Yum! Brands, Inc. 8.875 04/15/11 94,761 ----------- SAVINGS BANKS (0.2%) 170 Household Finance Corp. 4.125 12/15/08 164,385 95 Household Finance Corp. 5.875 02/01/09 95,640 75 Household Finance Corp. 6.375 10/15/11 76,731 100 Household Finance Corp. 6.40 06/17/08 101,376 100 Sovereign Bank (Series CD) 4.00 02/01/08 97,433 165 Washington Mutual Bank 5.50 01/15/13 160,372 120 Washington Mutual Inc. 8.25 04/01/10 128,776 ----------- 824,713 ----------- TRUCKS/CONSTRUCTION/FARM MACHINERY (0.1%) 55 Caterpillar Financial Services Corp. (Series MTNF) 3.625 11/15/07 53,554 220 Caterpillar Financial Services Corp. (Series MTNF) 5.259+ 08/20/07 220,203 ----------- 273,757 ----------- WIRELESS TELECOMMUNICATIONS (0.1%) 195 Vodafone Group PLC (United Kingdom) 5.59+ 12/28/07 195,038 ----------- TOTAL CORPORATE BONDS (COST $19,944,952) 19,539,110 ----------- U.S. GOVERNMENT OBLIGATIONS (5.5%) U.S. Treasury Bonds 4,150 6.125 08/15/29 4,615,580 200 6.375 08/15/27 227,078 2,875 8.125 08/15/19 3,640,696 3,250 8.125 08/15/21 4,190,725
SEE NOTES TO FINANCIAL STATEMENTS 118
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ------------------------------------------------------------------------------------------------------- U.S. Treasury Notes $1,400 3.125% 05/15/07 $ 1,374,736 500 4.00 11/15/12 470,118 805 4.25 08/15/13 763,996 1,275 +++ 4.25 08/15/13 1,210,092 3,900 4.25 11/15/13 3,691,900 ---------- TOTAL U.S. GOVERNMENT OBLIGATIONS (COST $20,554,064) 20,184,921 ---------- U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES (4.3%) 92 Federal Home Loan Mortgage Corp. 7.50 01/01/30 - 04/01/31 95,162 Federal Home Loan Mortgage Corp. PC Gold 5 6.50 05/01/29 - 12/01/31 4,668 230 8.00 01/01/30 - 12/01/30 242,584 Federal National Mortgage Assoc. 3 6.50 11/01/29 3,223 2,591 7.00 10/01/27 - 11/01/35 2,654,065 150 7.00 # 153,328 1,293 7.50 09/01/29 - 09/01/35 1,339,417 861 8.00 11/01/29 - 06/01/31 908,653 Federal National Mortgage Assoc. ARM 748 0.78 05/01/36 773,330 725 1.354 07/01/36 749,695 300 5.164 07/01/33 301,998 450 5.358 07/01/36 465,328 829 5.973 03/01/36 845,636 1,536 6.03 01/01/36 1,578,608 1,464 6.034 01/01/36 1,511,602 723 6.039 03/01/36 742,435 750 6.156 05/01/36 774,767 850 6.265 04/01/36 878,418 1,473 6.448 04/01/36 1,539,336 ---------- TOTAL U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES (COST $15,630,500) 15,562,253 ---------- ASSET BACKED SECURITIES (3.9%) FINANCE/RENTAL/LEASING 500 American Express Credit Account Master Trust 2002-3 A 5.309+ 12/15/09 500,754 850 American Express Credit Account Master Trust 2003-3 A 5.309+ 11/15/10 852,021 23 Asset Backed Funding Certificates 2005-WF1 A2A 5.403+ 01/25/35 23,159
SEE NOTES TO FINANCIAL STATEMENTS 119
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ----------------------------------------------------------------------------------------------- $500 Banc of America Securities Auto Trust 2005-WF1 A3 3.99% 08/18/09 $ 492,215 228 Capital Auto Receivables Asset Trust 2003-3 A3B 5.279+ 01/15/08 228,343 500 Capital Auto Receivables Asset Trust 2005-1 A4 4.05 07/15/09 492,818 425 Caterpillar Financial Asset Trust 2005-A A3 3.90 02/25/09 419,249 475 Caterpillar Financial Asset Trust 2006-A A3 5.57 05/25/10 474,955 400 Chase Credit Card Master Trust 2001-4 A 5.50 11/17/08 400,359 134 CIT Equipment Collateral 2004-EF1 A3 3.50 09/20/08 131,427 325 CNH Equipment Trust 2005-A A3 4.02 04/15/09 320,821 375 DaimlerChrysler Auto Trust 2005-B A3 4.04 09/08/09 370,083 41 Equifirst Mortgage Loan Trust 2005-1 A1 5.383+ 04/25/35 41,340 325 Ford Credit Auto Owner Trust 2005-B A3 4.17 01/15/09 321,844 300 Ford Credit Auto Owner Trust 2006-A A3 5.05 03/15/10 297,596 400 GE Capital Credit Card Master Note Trust 2004-2 A 5.239+ 09/15/10 400,444 350 GE Dealer Floorplan Master Note Trust 2004-1 A 5.317+ 07/20/08 350,184 600 Harley-Davidson Motorcycle Trust 2005-1 A2 3.76 12/17/12 585,238 350 Harley-Davidson Motorcycle Trust 2005-2 A2 4.07 02/15/12 339,757 200 Harley-Davidson Motorcycle Trust 2005-3 A2 4.41 06/15/12 196,056 300 Hertz Vehicle Financing LLC 2005-2A A2 4.93 02/25/10 294,934 250 Honda Auto Receivables Owner Trust 2005-2 A3 3.93 01/15/09 246,785 425 Honda Auto Receivables Owner Trust 2005-3 A3 3.87 04/20/09 417,716 400 Honda Auto Receivables Owner Trust 2005-6 A3 4.85 10/19/09 396,189 300 Hyundai Auto Receivables Trust 2005-A A3 3.98 11/16/09 294,056 575 MBNA Credit Card Master Note Trust 2003-A3 A3 5.319+ 08/16/10 576,462 525 Merrill Auto Trust Securitization 2005-1 A3 4.10 08/25/09 516,803 375 National City Auto Receivables Trust 2004-A A4 2.88 05/15/11 362,942 550 Nissan Auto Receivables Owner Trust 2005-B A3 3.99 07/15/09 541,943 66 Novastar Home Equity Loan 2005-1 A2A 5.443+ 06/25/35 65,624 125 TXU Electric Delivery Transition Bond Co. LLC 2004-1 A2 4.81 11/17/14 119,954 650 USAA Auto Owner Trust 2004-2 A-4 3.58 02/15/11 635,706 471 USAA Auto Owner Trust 2004-3 A3 3.16 02/17/09 465,624 375 USAA Auto Owner Trust 2005-1 A3 3.90 07/15/09 370,553 350 Volkswagen Auto Lease Trust 2005-A A3 3.82 05/20/08 347,153 350 Volkswagen Auto Loan Enhanced Trust 2005-1 A3 4.80 07/20/09 347,059 144 Wachovia Auto Owner Trust 2004-B A3 2.91 04/20/09 142,352 250 Wachovia Auto Owner Trust 2005-A A3 4.06 09/21/09 246,450 400 Wachovia Auto Owner Trust 2005-B A3 4.79 04/20/10 395,746 140 World Omni Auto Receivables Trust 2004-A A3 3.29 11/12/08 138,929 ----------- TOTAL ASSET-BACKED SECURITIES (COST $14,311,999) 14,161,643 -----------
SEE NOTES TO FINANCIAL STATEMENTS 120
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ----------------------------------------------------------------------------------------------- FOREIGN GOVERNMENT OBLIGATIONS (0.1%) $ 200 United Mexican States (Mexico) (Series MTN) 8.30% 08/15/31 $ 231,500 110 United Mexican States (Mexico) (Series MTNA) 8.00 09/24/22 122,925 ---------- TOTAL FOREIGN GOVERNMENT OBLIGATIONS (COST $343,290) 354,425 ---------- COLLATERALIZED MORTGAGE OBLIGATIONS (0.5%) 720 Federal National Mortgage Assoc. 2006 - 28 1A1 5.432+ 03/25/36 720,302 8,395 Federal National Mortgage Assoc. 2006 - 28 1P (IO) 0.717+ 03/25/36 220,375 1,023 Federal National Mortgage Assoc. 2005 - 68 XI (IO) 6.00 08/25/35 415,854 498 Freddie Mac Whole Loan 2005-5001 2A2 5.472+ 09/25/45 499,393 ---------- TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (COST $1,616,875) 1,855,924 ----------
NUMBER OF CONTRACTS --------- PUT OPTION PURCHASED (0.0%) 253 90 day Euro $ June/2007 @ $94.25 (COST $25,652) 44,187 ----------
PRINCIPAL AMOUNT IN THOUSANDS --------- SHORT-TERM INVESTMENTS (21.3%) U.S. GOVERNMENT AGENCY & OBLIGATION (a) (21.3%) $78,000 Federal National Mortgage Assoc. 4.95 07/03/06 77,978,550 100 U.S. Treasury Bills*** 4.26 07/13/06 99,858 ------------ TOTAL U.S. GOVERNMENT AGENCY & OBLIGATION (COST $78,078,408) 78,078,408 ------------ REPURCHASE AGREEMENT (0.0%) 105 The Bank of New York (dated 06/30/06; proceeds $104,661) (b) (COST $104,616) 5.188 07/03/06 104,616 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $78,183,024) 78,183,024 ------------ TOTAL INVESTMENTS (COST $311,394,021) (c) (d) 100.1% 366,472,801 LIABILITIES IN EXCESS OF OTHER ASSETS (0.1) (513,357) ----- ------------ NET ASSETS 100.0% $365,959,444 ===== ============
SEE NOTES TO FINANCIAL STATEMENTS 121 ---------- ADR AMERICAN DEPOSITARY RECEIPT. ARM ADJUSTABLE RATE MORTGAGE. IO INTEREST - ONLY SECURITY. PC PARTICIPATION CERTIFICATE. * NON-INCOME PRODUCING SECURITY. ** RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. *** A PORTION OF THIS SECURITY HAS BEEN PHYSICALLY SEGREGATED IN CONNECTION WITH OPEN FUTURES CONTRACTS IN AN AMOUNT EQUAL TO $5,040. ++ FOREIGN ISSUED SECURITY WITH PERPETUAL MATURITY. ++++ SECURITY ISSUED WITH PERPETUAL MATURITY. + VARIABLE RATE SECURITY; RATE SHOWN IS THE RATE IN EFFECT AT JUNE 30, 2006. +++ SECURITY WAS PURCHASED ON FORWARD COMMITMENT BASIS. # SECURITY WAS PURCHASED ON A FORWARD COMMITMENT BASIS WITH AN APPROXIMATE PRINCIPAL AMOUNT AND NO DEFINITE MATURITY DATE; THE ACTUAL PRINCIPAL AMOUNT AND MATURITY DATE WILL BE DETERMINED UPON SETTLEMENT. (a) PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (b) COLLATERALIZED BY FEDERAL NATIONAL MORTGAGE ASSOC. 5.50% DUE 06/01/36 VALUED AT $106,708. (c) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN A AMOUNT EQUAL TO $15,196,528 IN CONNECTION WITH SECURITIES PURCHASED ON A FORWARD COMMITMENT BASIS AND OPEN FUTURES CONTRACTS. (d) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $63,024,541 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $7,945,761, RESULTING IN NET UNREALIZED APPRECIATION OF $55,078,780. FUTURES CONTRACTS OPEN AT JUNE 30, 2006:
UNREALIZED NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE APPRECIATION CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE (DEPRECIATION) ------------------------------------------------------------------------------------------------------- 62 Long U.S. Treasury Notes 10 Year, September 2006 $6,501,282 $(25,660) 37 Long U.S. Treasury Notes 5 Year, September 2006 3,826,031 (16,772) 2 Short U.S. Treasury Bonds 20 Year, September 2006 (213,313) 361 16 Short U.S. Treasury Notes 2 Year, September 2006 (3,244,500) (5,700) -------- Net Unrealized Depreciation $(47,771) ========
SEE NOTES TO FINANCIAL STATEMENTS 122 Morgan Stanley Variable Investment Series - Strategist SUMMARY OF INVESTMENTS - JUNE 30, 2006 (UNAUDITED)
PERCENT OF MARKET PORTFOLIO COMPOSITION* MARKET VALUE VALUE -------------------------------------------------------------------------------- Common Stocks $216,587,314 59.1% Short-Term Investments 78,183,024 21.3 U.S. Government Agencies and Obligations 35,747,174 9.8 Corporate Bonds 19,539,110 5.3 Asset-Backed Securities 14,161,643 3.9 Collateralized Mortgage Obligations 1,855,924 0.5 Foreign Government Obligations 354,425 0.1 Put Options Purchased 44,187 0.0 ------------ ----- TOTAL INVESTMENTS $366,472,801 100.0% ============ =====
---------- * DOES NOT INCLUDE OPEN LONG FUTURES CONTRACTS WITH AN UNDERLYING FACE AMOUNT OF $10,327,313 WITH UNREALIZED DEPRECIATION OF $42,432 AND OPEN SHORT FUTURES CONTRACTS WITH AN UNDERLYING FACE AMOUNT OF $3,457,813 WITH NET UNREALIZED DEPRECIATION OF $5,339. SEE NOTES TO FINANCIAL STATEMENTS 123 Morgan Stanley Variable Investment Series FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES JUNE 30, 2006 (UNAUDITED)
MONEY LIMITED INCOME MARKET DURATION PLUS ------------ ------------ ------------ ASSETS: Investments in securities, at value* $253,736,259 $156,305,377 $396,355,040 Investment in affiliates** -- 1,421,460 -- Cash 14,083 46,619 77,873 Receivable for: Investments sold -- 2,871,385 532,664 Interest 106,844 1,117,864 4,846,084 Shares of beneficial interest sold 425,477 29,740 93,943 Dividends -- -- -- Variation margin -- 17,738 284,830 Principal paydowns -- 72,053 -- Foreign withholding taxes reclaimed -- -- -- Unrealized appreciation on open forward foreign currency contracts -- -- -- Prepaid expenses and other assets 7,992 9,300 12,280 ------------ ------------ ------------ TOTAL ASSETS 254,290,655 161,891,536 402,202,714 ------------ ------------ ------------ LIABILITIES: Payable for: Investments purchased -- 1,249,601 3,935,570 Shares of beneficial interest redeemed 1,961,423 166,480 323,954 Investment advisory fee 91,926 39,734 138,190 Administration fee 10,220 10,596 26,322 Distribution fee (Class Y) 21,871 25,083 41,660 Transfer agent fee 250 250 250 Variation margin -- -- -- Payable to bank -- -- -- Unrealized depreciation on open forward foreign currency contracts -- -- -- Accrued expenses and other payables 44,884 25,971 50,172 ------------ ------------ ------------ TOTAL LIABILITIES 2,130,574 1,517,715 4,516,118 ------------ ------------ ------------ NET ASSETS $252,160,081 $160,373,821 $397,686,596 ============ ============ ============ COMPOSITION OF NET ASSETS: Paid-in-capital $252,160,040 $172,965,032 $427,670,470 Accumulated undistributed net investment income (loss) 41 (2,205,280) (2,267,554) Accumulated undistributed net realized gain (loss) -- (7,712,393) (22,809,743) Net unrealized appreciation (depreciation) -- (2,673,538) (4,906,577) ------------ ------------ ------------ NET ASSETS $252,160,081 $160,373,821 $397,686,596 ============ ============ ============ *COST $253,736,259 $158,797,309 $400,979,475 ============ ============ ============ CLASS X SHARES: Net Assets $142,793,480 $ 39,066,744 $195,124,118 Shares Outstanding (unlimited authorized shares of $.01 par value) 142,793,476 4,134,338 19,262,915 NET ASSET VALUE PER SHARE $ 1.00 $ 9.45 $ 10.13 ============ ============ ============ CLASS Y SHARES: Net Assets $109,366,601 $121,307,077 $202,562,478 Shares Outstanding (unlimited authorized shares of $.01 par value) 109,366,563 12,855,022 20,026,991 NET ASSET VALUE PER SHARE $ 1.00 $ 9.44 $ 10.11 ============ ============ ============
---------- ** COST OF $1,442,890, $1,100,000 AND $21,912,158, RESPECTIVELY. SEE NOTES TO FINANCIAL STATEMENTS 124
HIGH INCOME DIVIDEND YIELD UTILITIES BUILDER GROWTH ------------- ------------ ----------- ------------- ASSETS: Investments in securities, at value* $ 60,850,936 $171,008,353 $78,959,872 $ 607,419,622 Investment in affiliates** -- -- 1,213,080 21,609,488 Cash -- -- -- 12,072 Receivable for: Investments sold -- 1,919,270 131,987 8,204,697 Interest 1,267,106 20,113 320,261 -- Shares of beneficial interest sold 128 37,803 6,602 201,186 Dividends 1,563 348,038 85,574 393,366 Variation margin -- -- -- -- Principal paydowns -- -- -- -- Foreign withholding taxes reclaimed -- -- -- 77,788 Unrealized appreciation on open forward foreign currency contracts -- -- -- -- Prepaid expenses and other assets 23,354 4,636 3,590 16,941 ------------- ------------ ----------- ------------- TOTAL ASSETS 62,143,087 173,338,213 80,720,966 637,935,160 ------------- ------------ ----------- ------------- LIABILITIES: Payable for: Investments purchased -- 1,274,969 125,409 8,342,705 Shares of beneficial interest redeemed 62,256 116,099 13,407 297,124 Investment advisory fee 21,739 79,899 44,186 242,612 Administration fee 4,141 11,214 5,276 41,319 Distribution fee (Class Y) 6,648 6,489 9,023 27,142 Transfer agent fee 250 250 250 250 Variation margin -- -- -- -- Payable to bank -- -- -- -- Unrealized depreciation on open forward foreign currency contracts 8,857 -- -- -- Accrued expenses and other payables 45,072 38,686 30,091 82,013 ------------- ------------ ----------- ------------- TOTAL LIABILITIES 148,963 1,527,606 227,642 9,033,165 ------------- ------------ ----------- ------------- NET ASSETS $ 61,994,124 $171,810,607 $80,493,324 $ 628,901,995 ============= ============ =========== ============= COMPOSITION OF NET ASSETS: Paid-in-capital $ 381,070,451 $ 98,499,345 $71,142,436 $ 803,084,729 Accumulated undistributed net investment income (loss) 165,697 (16,200) (552,048) (2) Accumulated undistributed net realized gain (loss) (253,993,409) 5,765,931 2,280,775 (281,697,292) Net unrealized appreciation (depreciation) (65,248,615) 67,561,531 7,622,161 107,514,560 ------------- ------------ ----------- ------------- NET ASSETS $ 61,994,124 $171,810,607 $80,493,324 $ 628,901,995 ============= ============ =========== ============= *COST $ 126,090,533 $103,446,822 $71,450,791 $ 499,602,392 ============= ============ =========== ============= CLASS X SHARES: Net Assets $ 29,956,061 $139,810,853 $36,286,235 $ 496,289,421 Shares Outstanding (unlimited authorized shares of $.01 par value) 26,614,856 8,188,278 2,929,901 33,252,925 NET ASSET VALUE PER SHARE $ 1.13 $ 17.07 $ 12.38 $ 14.92 ============= ============ =========== ============= CLASS Y SHARES: Net Assets $ 32,038,063 $ 31,999,754 $44,207,089 $ 132,612,574 Shares Outstanding (unlimited authorized shares of $.01 par value) 28,435,762 1,875,170 3,577,849 8,897,670 NET ASSET VALUE PER SHARE $ 1.13 $ 17.06 $ 12.36 $ 14.90 ============= ============ =========== ============= GLOBAL DIVIDEND EUROPEAN GROWTH EQUITY EQUITY ------------ ------------ ------------- ASSETS: Investments in securities, at value* $228,098,237 $180,209,502 $ 531,956,423 Investment in affiliates** -- -- -- Cash 547,104+ -- -- Receivable for: Investments sold 5,116,379 -- 2,856,813 Interest -- -- 24 Shares of beneficial interest sold 17,033 14,971 593,814 Dividends 491,947 265,279 58,326 Variation margin -- -- -- Principal paydowns -- -- -- Foreign withholding taxes reclaimed 94,231 251,856 -- Unrealized appreciation on open forward foreign currency contracts 611 21,302 -- Prepaid expenses and other assets 8,906 7,267 29,826 ------------ ------------ ------------- TOTAL ASSETS 234,374,448 180,770,177 535,495,226 ------------ ------------ ------------- LIABILITIES: Payable for: Investments purchased 232,512 -- 5,866,570 Shares of beneficial interest redeemed 145,863 81,288 313,355 Investment advisory fee 128,168 115,152 178,799 Administration fee 15,304 11,612 34,057 Distribution fee (Class Y) 14,007 8,245 23,420 Transfer agent fee 250 250 250 Variation margin -- -- -- Payable to bank -- 211,266 -- Unrealized depreciation on open forward foreign currency contracts 40,069 88,139 -- Accrued expenses and other payables 67,338 73,595 64,440 ------------ ------------ ------------- TOTAL LIABILITIES 643,511 589,547 6,480,891 ------------ ------------ ------------- NET ASSETS $233,730,937 $180,180,630 $ 529,014,335 ============ ============ ============= COMPOSITION OF NET ASSETS: Paid-in-capital $165,197,474 $158,895,138 $ 881,478,480 Accumulated undistributed net investment income (loss) 2,623,586 2,737,513 9,789 Accumulated undistributed net realized gain (loss) 14,767,247 (25,744,980) (407,849,456) Net unrealized appreciation (depreciation) 51,142,630 44,292,959 55,375,522 ------------ ------------ ------------- NET ASSETS $233,730,937 $180,180,630 $ 529,014,335 ============ ============ ============= *COST $176,955,859 $135,849,398 $ 476,580,901 ============ ============ ============= CLASS X SHARES: Net Assets $165,070,230 $139,080,765 $ 411,550,419 Shares Outstanding (unlimited authorized shares of $.01 par value) 10,753,229 6,404,627 14,669,164 NET ASSET VALUE PER SHARE $ 15.35 $ 21.72 $ 28.06 ============ ============ ============= CLASS Y SHARES: Net Assets $ 68,660,707 $ 41,099,865 $ 117,463,916 Shares Outstanding (unlimited authorized shares of $.01 par value) 4,506,037 1,901,732 4,208,984 NET ASSET VALUE PER SHARE $ 15.24 $ 21.61 $ 27.91 ============ ============ =============
---------- + INCLUDES FOREIGN CURRENCY AT VALUE OF $363,463 WITH COST OF $360,056. 125
S&P 500 GLOBAL AGGRESSIVE INDEX ADVANTAGE EQUITY STRATEGIST ------------ ------------ ------------ ------------ ASSETS: Investments in securities, at value* $253,045,157 $ 27,074,883 $ 66,235,366 $362,897,837 Investment in affiliates** 8,535,329 -- -- 3,574,964 Cash -- 143,637+ -- -- Receivable for: Investments sold -- -- 361,353 10,417,351 Interest 631 -- 160 714,079 Shares of beneficial interest sold 181,934 27,632 6,335 43,791 Dividends 295,905 32,187 7,146 325,659 Variation margin -- -- -- 34,380 Principal paydowns -- -- -- -- Foreign withholding taxes reclaimed -- 14,948 -- -- Unrealized appreciation on open forward foreign currency contracts -- -- -- -- Prepaid expenses and other assets 9,131 2,595 2,006 14,521 ------------ ------------ ------------ ------------ TOTAL ASSETS 262,068,087 27,295,882 66,612,366 378,022,582 ------------ ------------ ------------ ------------ LIABILITIES: Payable for: Investments purchased -- -- 726,849 11,719,006 Shares of beneficial interest redeemed 72,036 8,715 16,618 113,034 Investment advisory fee 25,663 12,634 35,235 125,823 Administration fee 17,108 1,773 4,207 23,966 Distribution fee (Class Y) 34,911 2,063 6,384 20,080 Transfer agent fee 250 250 250 250 Variation margin 11,200 -- -- -- Payable to bank 338 -- -- -- Accrued expenses and other payables 43,198 24,358 27,913 60,979 ------------ ------------ ------------ ------------ TOTAL LIABILITIES 204,704 49,793 817,456 12,063,138 ------------ ------------ ------------ ------------ NET ASSETS $261,863,383 $ 27,246,089 $ 65,794,910 $365,959,444 ============ ============ ============ ============ COMPOSITION OF NET ASSETS: Paid-in-capital $255,072,699 $ 45,803,798 $ 94,806,157 $284,418,801 Accumulated undistributed net investment income (loss) 2,056,561 103,195 (142,417) (474,998) Accumulated undistributed net realized gain (loss) (42,869,069) (19,367,642) (41,404,795) 26,984,632 Net unrealized appreciation 47,603,192 706,738 12,535,965 55,031,009 ------------ ------------ ------------ ------------ NET ASSETS $261,863,383 $ 27,246,089 $ 65,794,910 $365,959,444 ============ ============ ============ ============ *COST $208,022,300 $ 26,371,115 $ 53,699,401 $309,887,804 ============ ============ ============ ============ CLASS X SHARES: Net Assets $ 90,181,243 $ 17,057,824 $ 33,774,753 $267,135,794 Shares Outstanding (unlimited authorized shares of $.01 par value) 7,800,530 1,914,629 2,394,820 17,364,604 NET ASSET VALUE PER SHARE $ 11.56 $ 8.91 $ 14.10 $ 15.38 ============ ============ ============ ============ CLASS Y SHARES: Net Assets $171,682,140 $ 10,188,265 $ 32,020,157 $ 98,823,650 Shares Outstanding (unlimited authorized shares of $.01 par value) 14,945,190 1,148,339 2,298,717 6,432,511 NET ASSET VALUE PER SHARE $ 11.49 $ 8.87 $ 13.93 $ 15.36 ============ ============ ============ ============
---------- (+) INCLUDES FOREIGN CURRENCY AT VALUE OF $143,637, WITH COST OF $141,109. ** COST OF $6,009,167 AND $1,506,217, RESPECTIVELY. SEE NOTES TO FINANCIAL STATEMENTS 126 STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
MONEY LIMITED INCOME HIGH MARKET DURATION PLUS YIELD ---------- ---------- ------------ ---------- INVESTMENT INCOME: INCOME Interest $5,771,594 $3,565,551 $ 11,346,655 $2,520,468 Interest and dividends from affiliates -- 26,361 -- -- Dividends -- -- -- 1,563 ---------- ---------- ------------ ---------- TOTAL INCOME 5,771,594 3,591,912 11,346,655 2,522,031 ---------- ---------- ------------ ---------- EXPENSES Investment advisory fee 543,630 245,593 872,300 139,258 Administration fee 60,431 65,491 166,152 26,525 Distribution fee (Class Y shares) 123,880 154,182 250,574 41,985 Professional fees 17,035 14,006 19,630 93,901 Custodian fees 10,906 11,481 27,055 6,385 Shareholder reports and notices 15,441 16,990 33,552 23,818 Trustees' fees and expenses 1,726 1,187 3,101 473 Transfer agent fees and expenses 250 250 250 250 Other 9,843 14,843 21,430 10,697 ---------- ---------- ------------ ---------- TOTAL EXPENSES 783,142 524,023 1,394,044 343,292 ---------- ---------- ------------ ---------- Less: amounts waived/reimbursed -- -- -- -- ---------- ---------- ------------ ---------- NET EXPENSES 783,142 524,023 1,394,044 343,292 ---------- ---------- ------------ ---------- NET INVESTMENT INCOME 4,988,452 3,067,889 9,952,611 2,178,739 ---------- ---------- ------------ ---------- NET REALIZED AND UNREALIZED GAIN (LOSS): NET REALIZED GAIN (LOSS) ON: Investments -- (291,799) 471,251 (417,705) Futures contracts -- 22,885 (1,144,405) -- Foreign exchange transactions -- -- -- (6,843) ---------- ---------- ------------ ---------- NET REALIZED LOSS -- (268,914) (673,154) (424,548) ---------- ---------- ------------ ---------- NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON: Investments -- (545,508) (12,573,977) (118,692) Futures contracts -- (125,384) (620,224) -- Translation of forward foreign currency contracts, other assets and liabilities denominated in foreign currencies -- -- (2,041) (13,551) ---------- ---------- ------------ ---------- NET DEPRECIATION -- (670,892) (13,196,242) (132,243) ---------- ---------- ------------ ---------- NET LOSS -- (939,806) (13,869,396) (556,791) ---------- ---------- ------------ ---------- NET INCREASE (DECREASE) $4,988,452 $2,128,083 $ (3,916,785) $1,621,948 ========== ========== ============ ==========
SEE NOTES TO FINANCIAL STATEMENTS 127
INCOME DIVIDEND UTILITIES BUILDER GROWTH ----------- ----------- ------------ INVESTMENT INCOME: INCOME Interest $ 111,258 $ 591,452 $ 345,906 Interest and dividends from affiliates -- 35,063 288,227 Dividends 2,441,605* 773,589* 6,572,538* ----------- ----------- ------------ TOTAL INCOME 2,552,863 1,400,104 7,206,671 ----------- ----------- ------------ EXPENSES Investment advisory fee 509,522 279,106 1,590,688 Administration fee 71,512 33,326 273,471 Distribution fee (Class Y shares) 40,353 56,438 174,337 Professional fees 21,706 12,854 19,294 Custodian fees 8,274 7,114 19,164 Shareholder reports and notices 11,458 13,954 50,661 Trustees' fees and expenses 1,320 561 5,371 Transfer agent fees and expenses 250 250 250 Other 9,012 2,596 32,204 ----------- ----------- ------------ TOTAL EXPENSES 673,407 406,199 2,165,440 ----------- ----------- ------------ Less: amounts waived/reimbursed -- -- -- ----------- ----------- ------------ NET EXPENSES 673,407 406,199 2,165,440 ----------- ----------- ------------ NET INVESTMENT INCOME (LOSS) 1,879,456 993,905 5,041,231 ----------- ----------- ------------ NET REALIZED AND UNREALIZED GAIN (LOSS): NET REALIZED GAIN (LOSS) ON: Investments 10,106,782 2,943,813 70,524,980 Futures contracts -- -- -- Foreign exchange transactions -- (1,365) (13,823) ----------- ----------- ------------ NET REALIZED GAIN (LOSS) 10,106,782 2,942,448 70,511,157 ----------- ----------- ------------ NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON: Investments (3,873,932) (1,692,001) (76,155,840) Futures contracts -- -- -- Translation of forward foreign currency contracts, other assets and liabilities denominated in foreign currencies -- -- -- ----------- ----------- ------------ NET APPRECIATION (DEPRECIATION) (3,873,932) (1,692,001) (76,155,840) ----------- ----------- ------------ NET GAIN (LOSS) 6,232,850 1,250,447 (5,644,683) ----------- ----------- ------------ NET INCREASE (DECREASE) $ 8,112,306 $ 2,244,352 $ (603,452) =========== =========== ============
---------- * NET OF $8,509, $28,561, $74,849, $208,139, $451,798, $33,516, $26,421, $2,843 AND $41,399, FOREIGN WITHHOLDING TAX, RESPECTIVELY. SEE NOTES TO FINANCIAL STATEMENTS 128
GLOBAL DIVIDEND EUROPEAN S&P 500 GROWTH EQUITY EQUITY INDEX ----------- ----------- ------------- ----------- INVESTMENT INCOME: INCOME Interest $ 107,742 $ 33,912 $ 362,973 $ 72,077 Interest and dividends from affiliates -- -- 139,771 Dividends 3,683,992* 3,693,080* 1,338,944* 2,421,089 ----------- ----------- ------------- ----------- TOTAL INCOME 3,791,734 3,726,992 1,701,917 2,632,937 ----------- ----------- ------------- ----------- EXPENSES Investment advisory fee 827,684 814,104 1,207,091 163,649 Administration fee 98,828 74,860 229,922 109,099 Distribution fee (Class Y shares) 88,931 51,609 151,815 218,202 Professional fees 20,309 19,799 19,584 11,653 Custodian fees 34,969 52,560 14,660 42,467 Shareholder reports and notices 30,298 29,690 39,517 18,967 Trustees' fees and expenses 1,773 1,317 4,395 1,956 Transfer agent fees and expenses 250 250 250 250 Other 14,919 13,622 17,022 24,983 ----------- ----------- ------------- ----------- TOTAL EXPENSES 1,117,961 1,057,811 1,684,256 591,226 ----------- ----------- ------------- ----------- Less: amounts waived/reimbursed -- (70,418) -- -- ----------- ----------- ------------- ----------- NET EXPENSES 1,117,961 987,393 1,684,256 591,226 ----------- ----------- ------------- ----------- NET INVESTMENT INCOME (LOSS) 2,673,773 2,739,599 17,661 2,041,711 ----------- ----------- ------------- ----------- NET REALIZED AND UNREALIZED GAIN (LOSS): NET REALIZED GAIN (LOSS) ON: Investments 15,223,532 13,156,315 95,402,464 (4,087,228) Futures contracts -- -- -- (126,989) Foreign exchange transactions 60,773 135,521 -- -- ----------- ----------- ------------- ----------- NET REALIZED GAIN (LOSS) 15,284,305 13,291,836 95,402,464 (4,214,217) ----------- ----------- ------------- ----------- NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON: Investments (5,370,838) 4,683,925 (102,841,573) 9,169,654 Futures contracts -- -- -- 90,728 Translation of forward foreign currency contracts, other assets and liabilities denominated in foreign currencies 9,721 (54,441) -- -- ----------- ----------- ------------- ----------- NET APPRECIATION (DEPRECIATION) (5,361,117) 4,629,484 (102,841,573) 9,260,382 ----------- ----------- ------------- ----------- NET GAIN (LOSS) 9,923,188 17,921,320 (7,439,109) 5,046,165 ----------- ----------- ------------- ----------- NET INCREASE (DECREASE) $12,596,961 $20,660,919 $ (7,421,448) $ 7,087,876 =========== =========== ============= =========== GLOBAL AGGRESSIVE ADVANTAGE EQUITY STRATEGIST ----------- ----------- ------------ INVESTMENT INCOME: INCOME Interest $ 20,208 $ 33,697 $ 3,198,709 Interest and dividends from affiliates -- -- 45,724 Dividends 270,671* 158,181* 2,172,566* ----------- ----------- ------------ TOTAL INCOME 290,879 191,878 5,416,999 ----------- ----------- ------------ EXPENSES Investment advisory fee 83,305 226,483 798,709 Administration fee 11,692 27,043 152,135 Distribution fee (Class Y shares) 13,395 39,638 123,625 Professional fees 13,760 12,998 19,251 Custodian fees 14,788 7,174 23,604 Shareholder reports and notices 10,721 15,503 29,743 Trustees' fees and expenses 209 466 2,749 Transfer agent fees and expenses 250 250 250 Other 6,689 3,636 16,195 ----------- ----------- ------------ TOTAL EXPENSES 154,809 333,191 1,166,261 ----------- ----------- ------------ Less: amounts waived/reimbursed -- -- -- ----------- ----------- ------------ NET EXPENSES 154,809 333,191 1,166,261 ----------- ----------- ------------ NET INVESTMENT INCOME (LOSS) 136,070 (141,313) 4,250,738 ----------- ----------- ------------ NET REALIZED AND UNREALIZED GAIN (LOSS): NET REALIZED GAIN (LOSS) ON: Investments 3,029,959 3,927,678 27,888,500 Futures contracts -- -- (181,311) Foreign exchange transactions 44,922 -- -- ----------- ----------- ------------ NET REALIZED GAIN (LOSS) 3,074,881 3,927,678 27,707,189 ----------- ----------- ------------ NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON: Investments (2,224,210) (2,155,315) (11,093,407) Futures contracts -- -- (61,132) Translation of forward foreign currency contracts, other assets and liabilities denominated in foreign currencies 3,836 -- -- ----------- ----------- ------------ NET APPRECIATION (DEPRECIATION) (2,220,374) (2,155,315) (11,154,539) ----------- ----------- ------------ NET GAIN (LOSS) 854,507 1,772,363 16,552,650 ----------- ----------- ------------ NET INCREASE (DECREASE) $ 990,577 $ 1,631,050 $ 20,803,388 =========== =========== ============
129 STATEMENTS OF CHANGES IN NET ASSETS
MONEY MARKET LIMITED DURATION --------------------------- --------------------------- FOR THE YEAR FOR THE YEAR FOR THE SIX ENDED FOR THE SIX ENDED MONTHS ENDED DECEMBER 31, MONTHS ENDED DECEMBER 31, JUNE 30, 2006 2005 JUNE 30, 2006 2005 ------------- ------------ ------------- ------------ (UNAUDITED) (UNAUDITED) INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income $ 4,988,452 $ 6,682,122 $ 3,067,889 $ 5,217,069 Net realized gain (loss) -- -- (268,914) (468,420) Net change in unrealized appreciation/depreciation -- -- (670,892) (1,888,326) ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) 4,988,452 6,682,122 2,128,083 2,860,323 ------------ ------------ ------------ ------------ DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME: Class X Shares (3,015,491) (4,328,127) (927,836) (1,854,147) Class Y Shares (1,973,142) (2,353,861) (2,694,494) (4,660,246) ------------ ------------ ------------ ------------ TOTAL DIVIDENDS (4,988,633) (6,681,988) (3,622,330) (6,514,393) ------------ ------------ ------------ ------------ Net increase (decrease) from transactions in shares of beneficial interest 9,872,159 (26,228,771) (7,023,871) (6,001,684) ------------ ------------ ------------ ------------ TOTAL INCREASE (DECREASE) 9,871,978 (26,228,637) (8,518,118) (9,655,754) NET ASSETS: Beginning of period 242,288,103 268,516,740 168,891,939 178,547,693 ------------ ------------ ------------ ------------ END OF PERIOD $252,160,081 $242,288,103 $160,373,821 $168,891,939 ============ ============ ============ ============ ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME (LOSS) $ 41 $ 222 $ (2,205,280) $ (1,650,839) ============ ============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS 130
INCOME PLUS HIGH YIELD --------------------------- --------------------------- FOR THE YEAR FOR THE YEAR FOR THE SIX ENDED FOR THE SIX ENDED MONTHS ENDED DECEMBER 31, MONTHS ENDED DECEMBER 31, JUNE 30, 2006 2005 JUNE 30, 2006 2005 ------------- ------------ ------------- ------------ (UNAUDITED) (UNAUDITED) INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income $ 9,952,611 $ 21,002,765 $ 2,178,739 $ 5,248,269 Net realized gain (loss) (673,154) 12,520,337 (424,548) (15,872,694) Net change in unrealized appreciation/depreciation (13,196,242) (19,192,968) (132,243) 11,785,380 ------------ ------------ ----------- ------------ NET INCREASE (DECREASE) (3,916,785) 14,330,134 1,621,948 1,160,955 ------------ ------------ ----------- ------------ DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME: Class X Shares (5,568,371) (13,561,436) (1,155,031) (2,938,838) Class Y Shares (5,039,946) (9,072,366) (1,148,290) (2,642,462) ------------ ------------ ----------- ------------ TOTAL DIVIDENDS (10,608,317) (22,633,802) (2,303,321) (5,581,300) ------------ ------------ ----------- ------------ Net increase (decrease) from transactions in shares of beneficial interest (21,013,114) (30,770,936) (8,100,754) (13,340,144) ------------ ------------ ----------- ------------ TOTAL INCREASE (DECREASE) (35,538,216) (39,074,604) (8,782,127) (17,760,489) NET ASSETS: Beginning of period 433,224,812 472,299,416 70,776,251 88,536,740 ------------ ------------ ----------- ------------ END OF PERIOD $397,686,596 $433,224,812 $61,994,124 $ 70,776,251 ============ ============ =========== ============ ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME (LOSS) $ (2,267,554) $ (1,611,848) $ 165,697 $ 290,279 ============ ============ =========== ============ UTILITIES --------------------------- FOR THE YEAR FOR THE SIX ENDED MONTHS ENDED DECEMBER 31, JUNE 30, 2006 2005 ------------- ------------ (UNAUDITED) INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income $ 1,879,456 $ 4,471,414 Net realized gain (loss) 10,106,782 27,792,726 Net change in unrealized appreciation/depreciation (3,873,932) (5,137,320) ------------ ------------ NET INCREASE (DECREASE) 8,112,306 27,126,820 ------------ ------------ DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME: Class X Shares (1,585,066) (3,771,455) Class Y Shares (315,381) (694,016) ------------ ------------ TOTAL DIVIDENDS (1,900,447) (4,465,471) ------------ ------------ Net increase (decrease) from transactions in shares of beneficial interest (21,881,749) (33,617,391) ------------ ------------ TOTAL INCREASE (DECREASE) (15,669,890) (10,956,042) NET ASSETS: Beginning of period 187,480,497 198,436,539 ------------ ------------ END OF PERIOD $171,810,607 $187,480,497 ============ ============ ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME (LOSS) $ (16,200) $ 4,791 ============ ============
131
INCOME BUILDER DIVIDEND GROWTH --------------------------------- --------------------------------- FOR THE SIX FOR THE YEAR FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED MONTHS ENDED ENDED JUNE 30, 2006 DECEMBER 31, 2005 JUNE 30, 2006 DECEMBER 31, 2005 ------------- ----------------- ------------- ----------------- (UNAUDITED) (UNAUDITED) INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income (loss) $ 993,905 $ 2,139,794 $ 5,041,231 $ 9,895,310 Net realized gain 2,942,448 7,726,364 70,511,157 74,155,589 Net change in unrealized appreciation/depreciation (1,692,001) (3,879,798) (76,155,840) (44,392,543) ----------- ------------ ------------ ------------- NET INCREASE (DECREASE) 2,244,352 5,986,360 (603,452) 39,658,356 ----------- ------------ ------------ ------------- DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income Class X Shares (515,729) (1,168,913) (4,133,259) (8,350,791) Class Y Shares (563,548) (1,161,891) (908,844) (1,526,671) Net realized gain Class X Shares -- -- -- -- Class Y Shares -- -- -- -- ----------- ------------ ------------ ------------- TOTAL DIVIDENDS AND DISTRIBUTIONS (1,079,277) (2,330,804) (5,042,103) (9,877,462) ----------- ------------ ------------ ------------- Net decrease from transactions in shares of beneficial interest (6,151,061) (15,794,785) (91,288,611) (181,522,284) ----------- ------------ ------------ ------------- TOTAL DECREASE (4,985,986) (12,139,229) (96,934,166) (151,741,390) NET ASSETS: Beginning of period 85,479,310 97,618,539 725,836,161 877,577,551 ----------- ------------ ------------ ------------- END OF PERIOD $80,493,324 $ 85,479,310 $628,901,995 $ 725,836,161 =========== ============ ============ ============= ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME (LOSS) $ (552,048) $ (466,676) $ (2) $ 870 =========== ============ ============ =============
SEE NOTES TO FINANCIAL STATEMENTS 132
GLOBAL DIVIDEND GROWTH EUROPEAN EQUITY --------------------------------- --------------------------------- FOR THE SIX FOR THE YEAR FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED MONTHS ENDED ENDED JUNE 30, 2006 DECEMBER 31, 2005 JUNE 30, 2006 DECEMBER 31, 2005 ------------- ----------------- ------------- ----------------- (UNAUDITED) (UNAUDITED) INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income (loss) $ 2,673,773 $ 4,802,022 $ 2,739,599 $ 3,018,083 Net realized gain 15,284,305 15,808,787 13,291,836 23,642,426 Net change in unrealized appreciation/depreciation (5,361,117) (4,922,978) 4,629,484 (11,551,334) ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) 12,596,961 15,687,831 20,660,919 15,109,175 ------------ ------------ ------------ ------------ DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERSFROM: Net investment income Class X Shares (3,431,090) (3,212,516) (2,468,499) (1,892,105) Class Y Shares (1,269,031) (1,016,465) (635,684) (395,805) Net realized gain Class X Shares (2,186,354) -- -- -- Class Y Shares (919,279) -- -- -- ------------ ------------ ------------ ------------ TOTAL DIVIDENDS AND DISTRIBUTIONS (7,805,754) (4,228,981) (3,104,183) (2,287,910) ------------ ------------ ------------ ------------ Net decrease from transactions in shares of beneficial interest (23,658,516) (40,218,030) (21,748,289) (49,465,088) ------------ ------------ ------------ ------------ TOTAL DECREASE (18,867,309) (28,759,180) (4,191,553) (36,643,823) NET ASSETS: Beginning of period 252,598,246 281,357,426 184,372,183 221,016,006 ------------ ------------ ------------ ------------ END OF PERIOD $233,730,937 $252,598,246 $180,180,630 $184,372,183 ============ ============ ============ ============ ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME (LOSS) $ 2,623,586 $ 4,649,934 $ 2,737,513 $ 3,102,097 ============ ============ ============ ============ EQUITY ----------------------------- FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED JUNE 30, 2006 JUNE 30, 2005 ------------- ------------- (UNAUDITED) INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income (loss) $ 17,661 $ (203,837) Net realized gain 95,402,464 41,261,475 Net change in unrealized appreciation/depreciation (102,841,573) 56,144,603 ------------- ------------- NET INCREASE (DECREASE) (7,421,448) 97,202,241 ------------- ------------- DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income Class X Shares -- -- Class Y Shares -- -- Net realized gain Class X Shares -- -- Class Y Shares -- -- ------------- ------------- TOTAL DIVIDENDS AND DISTRIBUTIONS -- -- ------------- ------------- Net decrease from transactions in shares of beneficial interest (73,029,068) (140,564,177) ------------- ------------- TOTAL DECREASE (80,450,516) (43,361,936) NET ASSETS: Beginning of period 609,464,851 652,826,787 ------------- ------------- END OF PERIOD $ 529,014,335 $ 609,464,851 ============= ============= ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME (LOSS) $ 9,789 $ (7,872) ============= =============
133
S&P 500 INDEX -------------------------------- FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED JUNE 30, 2006 DECEMBER 31, 2005 ------------- ----------------- (UNAUDITED) INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income (loss) $ 2,041,711 $ 4,056,542 Net realized gain (loss) (4,214,217) (13,220,131) Net change in unrealized appreciation/depreciation 9,260,382 21,006,259 ------------ ------------ NET INCREASE 7,087,876 11,842,670 ------------ ------------ DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income Class X Shares (1,518,687) (1,907,197) Class Y Shares (2,500,973) (2,393,740) Net realized gain Class X Shares -- -- Class Y Shares -- -- ------------ ------------ TOTAL DIVIDENDS AND DISTRIBUTIONS (4,019,660) (4,300,937) ------------ ------------ Net decrease from transactions in shares of beneficial interest (17,648,344) (28,127,212) ------------ ------------ TOTAL INCREASE (DECREASE) (14,580,128) (20,585,479) NET ASSETS: Beginning of period 276,443,511 297,028,990 ------------ ------------ END OF PERIOD $261,863,383 $276,443,511 ============ ============ ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME (LOSS) $ 2,056,561 $ 4,034,510 ============ ============
SEE NOTES TO FINANCIAL STATEMENTS 134
GLOBAL ADVANTAGE AGGRESSIVE EQUITY --------------------------------- --------------------------------- FOR THE SIX FOR THE YEAR FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED MONTHS ENDED ENDED JUNE 30, 2006 DECEMBER 31, 2005 JUNE 30, 2006 DECEMBER 31, 2005 ------------- ----------------- ------------- ----------------- (UNAUDITED) (UNAUDITED) INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income (loss) $ 136,070 $ 317,398 $ (141,313) $ (251,276) Net realized gain (loss) 3,074,881 1,937,264 3,927,678 8,161,466 Net change in unrealized appreciation/depreciation (2,220,374) (387,081) (2,155,315) 4,920,951 ----------- ----------- ----------- ------------ NET INCREASE 990,577 1,867,581 1,631,050 12,831,141 ----------- ----------- ----------- ------------ DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income Class X Shares (141,736) (59,993) -- -- Class Y Shares (58,622) (5,014) -- -- Net realized gain Class X Shares -- -- -- -- Class Y Shares -- -- -- -- ----------- ----------- ----------- ------------ TOTAL DIVIDENDS AND DISTRIBUTIONS (200,358) (65,007) -- -- ----------- ----------- ----------- ------------ Net decrease from transactions in shares of beneficial interest (3,388,491) (6,610,422) (3,248,930) (11,558,651) ----------- ----------- ----------- ------------ TOTAL INCREASE (DECREASE) (2,598,272) (4,807,848) (1,617,880) 1,272,490 NET ASSETS: Beginning of period 29,844,361 34,652,209 67,412,790 66,140,300 ----------- ----------- ----------- ------------ END OF PERIOD $27,246,089 $29,844,361 $65,794,910 $ 67,412,790 =========== =========== =========== ============ ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME (LOSS) $ 103,195 $ 167,483 $ (142,417) $ (1,104) ============ ============ =========== ============ STRATEGIST --------------------------------- FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED JUNE 30, 2006 DECEMBER 31, 2005 ------------- ----------------- (UNAUDITED) INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income (loss) $ 4,250,738 $ 7,263,945 Net realized gain (loss) 27,707,189 30,088,438 Net change in unrealized appreciation/depreciation (11,154,539) (5,714,488) ------------ ------------ NET INCREASE 20,803,388 31,637,895 ------------ ------------ DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income Class X Shares (3,327,395) (6,055,946) Class Y Shares (1,082,894) (1,698,757) Net realized gain Class X Shares (21,363,709) (27,439,402) Class Y Shares (7,921,211) (8,632,691) ------------ ------------ TOTAL DIVIDENDS AND DISTRIBUTIONS (33,695,209) (43,826,796) ------------ ------------ Net decrease from transactions in shares of beneficial interest (9,090,660) (44,249,741) ------------ ------------ TOTAL INCREASE (DECREASE) (21,982,481) (56,438,642) NET ASSETS: Beginning of period 387,941,925 444,380,567 ------------ ------------ END OF PERIOD $365,959,444 $387,941,925 ============ ============ ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME (LOSS) $ (474,998) $ (315,447) ============ ============
135 SUMMARY OF TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
MONEY MARKET LIMITED DURATION --------------------------------- --------------------------------- FOR THE SIX FOR THE YEAR FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED MONTHS ENDED ENDED JUNE 30, 2006 DECEMBER 31, 2005 JUNE 30, 2006 DECEMBER 31, 2005 ------------- ----------------- ------------- ----------------- (UNAUDITED) (UNAUDITED) CLASS X SHARES SHARES Sold 62,222,784 248,779,404 400,526 1,375,764 Reinvestment of dividends and distributions 3,015,491 4,328,127 97,701 192,830 Redeemed (66,796,919) (287,355,141) (859,413) (2,493,195) ------------ ------------- ------------ ------------ NET DECREASE - CLASS X (1,558,644) (34,247,610) (361,186) (924,601) ============ ============= ============ ============ AMOUNT Sold $ 62,222,784 $ 248,779,404 $ 3,809,911 $ 13,268,966 Reinvestment of dividends and distributions 3,015,491 4,328,127 927,836 1,854,147 Redeemed (66,796,919) (287,355,141) (8,179,515) (24,038,563) ------------ ------------- ------------ ------------ NET DECREASE - CLASS X $ (1,558,644) $ (34,247,610) $ (3,441,768) $ (8,915,450) ============ ============= ============ ============ CLASS Y SHARES SHARES Sold 47,047,515 92,195,390 1,074,802 3,904,285 Reinvestment of dividends and distributions 1,973,142 2,353,861 284,238 485,479 Redeemed (37,589,854) (86,530,412) (1,735,873) (4,088,244) ------------ ------------- ------------ ------------ NET INCREASE (DECREASE) - CLASS Y 11,430,803 8,018,839 (376,833) 301,520 ============ ============= ============ ============ AMOUNT Sold $ 47,047,515 $ 92,195,390 $ 10,222,898 $ 37,530,317 Reinvestment of dividends and distributions 1,973,142 2,353,861 2,694,494 4,660,246 Redeemed (37,589,854) (86,530,412) (16,499,495) (39,276,797) ------------ ------------- ------------ ------------ NET INCREASE (DECREASE) - CLASS Y $ 11,430,803 $ 8,018,839 $ (3,582,103) $ 2,913,766 ============ ============= ============ ============
SEE NOTES TO FINANCIAL STATEMENTS 136
INCOME PLUS HIGH YIELD --------------------------------- --------------------------------- FOR THE SIX FOR THE YEAR FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED MONTHS ENDED ENDED JUNE 30, 2006 DECEMBER 31, 2005 JUNE 30, 2006 DECEMBER 31, 2005 ------------- ----------------- ------------- ----------------- (UNAUDITED) (UNAUDITED) CLASS X SHARES SHARES Sold 715,504 4,705,113 883,115 13,496,739 Reinvestment of dividends and distributions 542,320 1,280,455 1,010,284 2,532,976 Redeemed (4,430,087) (11,282,428) (6,213,749) (25,804,416) ------------ ------------- ----------- ------------ NET DECREASE - CLASS X (3,172,263) (5,296,860) (4,320,350) (9,774,701) ============ ============= =========== ============ AMOUNT Sold $ 7,391,884 $ 50,009,352 $ 1,011,183 $ 15,776,348 Reinvestment of dividends and distributions 5,568,371 13,561,436 1,155,031 2,938,838 Redeemed (45,575,635) (119,766,664) (7,109,572) (30,174,500) ------------ ------------- ----------- ------------ NET DECREASE - CLASS X $(32,615,380) $ (56,195,876) $(4,943,358) $(11,459,314) ============ ============= =========== ============ CLASS Y SHARES SHARES Sold 2,508,773 8,294,112 584,010 3,906,738 Reinvestment of dividends and distributions 491,802 858,464 1,004,460 2,278,324 Redeemed (1,880,514) (6,749,152) (4,338,570) (7,824,487) ------------ ------------- ----------- ------------ NET INCREASE (DECREASE) - CLASS Y 1,120,061 2,403,424 (2,750,100) (1,639,425) ============ ============= =========== ============ AMOUNT Sold $ 25,880,869 $ 87,345,587 $ 669,454 $ 4,567,041 Reinvestment of dividends and distributions 5,039,946 9,072,366 1,148,290 2,642,462 Redeemed (19,318,549) (70,993,013) (4,975,140) (9,090,333) ------------ ------------- ----------- ------------ NET INCREASE (DECREASE) - CLASS Y $ 11,602,266 $ 25,424,940 $(3,157,396) $ (1,880,830) ============ ============= =========== ============ UTILITIES --------------------------------- FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED JUNE 30, 2006 DECEMBER 31, 2005 ------------- ----------------- (UNAUDITED) CLASS X SHARES SHARES Sold 311,647 1,335,907 Reinvestment of dividends and distributions 94,353 233,505 Redeemed (1,576,721) (3,624,937) ------------ ------------ NET DECREASE - CLASS X (1,170,721) (2,055,525) ============ ============ AMOUNT Sold $ 5,244,374 $ 21,469,598 Reinvestment of dividends and distributions 1,585,066 3,771,455 Redeemed (26,521,840) (57,867,442) ------------ ------------ NET DECREASE - CLASS X $(19,692,400) $(32,626,389) ============ ============ CLASS Y SHARES SHARES Sold 93,821 470,184 Reinvestment of dividends and distributions 18,778 42,933 Redeemed (242,851) (564,833) ------------ ------------ NET INCREASE (DECREASE) - CLASS Y (130,252) (51,716) ============ ============ AMOUNT Sold $ 1,572,763 $ 7,317,741 Reinvestment of dividends and distributions 315,381 694,016 Redeemed (4,077,493) (9,002,759) ------------ ------------ NET INCREASE (DECREASE) - CLASS Y $ (2,189,349) $ (991,002) ============ ============
137
INCOME BUILDER DIVIDEND GROWTH --------------------------------- --------------------------------- FOR THE SIX FOR THE YEAR FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED MONTHS ENDED ENDED JUNE 30, 2006 DECEMBER 31, 2005 JUNE 30, 2006 DECEMBER 31, 2005 ------------- ----------------- ------------- ----------------- (UNAUDITED) (UNAUDITED) CLASS X SHARES SHARES Sold 221,559 629,177 901,696 4,008,324 Reinvestment of dividends and distributions 41,577 98,176 273,482 575,026 Redeemed (569,636) (1,676,474) (6,513,716) (16,961,611) ----------- ------------ ------------ ------------- NET DECREASE - CLASS X (306,500) (949,121) (5,338,538) (12,378,261) =========== ============ ============ ============= AMOUNT Sold $ 2,757,390 $ 7,494,743 $ 13,776,261 $ 58,096,231 Reinvestment of dividends and distributions 515,729 1,168,913 4,133,259 8,350,791 Redeemed (7,088,151) (19,992,904) (99,585,538) (245,771,557) ----------- ------------ ------------ ------------- NET DECREASE - CLASS X $(3,815,032) $(11,329,248) $(81,676,018) $(179,324,535) =========== ============ ============ ============= CLASS Y SHARES SHARES Sold 181,803 582,980 308,617 1,726,250 Reinvestment of dividends and distributions 45,524 97,773 60,254 105,128 Redeemed (414,653) (1,056,647) (1,000,657) (1,971,609) ----------- ------------ ------------ ------------- NET INCREASE (DECREASE) - CLASS Y (187,326) (375,894) (631,786) (140,231) =========== ============ ============ ============= AMOUNT Sold $ 2,249,642 $ 6,854,269 $ 4,699,953 $ 24,773,295 Reinvestment of dividends and distributions 563,548 1,161,891 908,844 1,526,671 Redeemed (5,149,219) (12,481,697) (15,221,390) (28,497,715) ----------- ------------ ------------ ------------- NET INCREASE (DECREASE) - CLASS Y $(2,336,029) $ (4,465,537) $ (9,612,593) $ (2,197,749) =========== ============ ============ =============
SEE NOTES TO FINANCIAL STATEMENTS 138
GLOBAL DIVIDEND GROWTH EUROPEAN EQUITY --------------------------------- --------------------------------- FOR THE SIX FOR THE YEAR FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED MONTHS ENDED ENDED JUNE 30, 2006 DECEMBER 31, 2005 JUNE 30, 2006 DECEMBER 31, 2005 ------------- ----------------- ------------- ----------------- (UNAUDITED) (UNAUDITED) CLASS X SHARES SHARES Sold 395,078 1,618,860 235,723 958,531 Reinvestment of dividends and distributions 365,957 228,486 113,651 106,537 Redeemed (2,007,418) (4,639,595) (1,259,225) (3,423,101) ------------ ------------ ------------ ------------ NET DECREASE - CLASS X (1,246,383) (2,792,249) (909,851) (2,358,033) ============ ============ ============ ============ AMOUNT Sold $ 6,276,764 $ 23,506,784 $ 5,095,572 $ 17,855,271 Reinvestment of dividends and distributions 5,617,444 3,212,516 2,468,499 1,892,105 Redeemed (31,759,580) (67,321,070) (27,204,365) (63,569,633) ------------ ------------ ------------ ------------ NET DECREASE - CLASS X $(19,865,372) $(40,601,770) $(19,640,294) $(43,822,257) ============ ============ ============ ============ CLASS Y SHARES SHARES Sold 227,987 1,031,618 76,608 159,375 Reinvestment of dividends and distributions 143,590 72,813 29,416 22,400 Redeemed (608,272) (1,069,507) (204,150) (486,799) ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) - CLASS Y (236,695) 34,924 (98,126) (305,024) ============ ============ ============ ============ AMOUNT Sold $ 3,585,612 $ 14,785,462 $ 1,641,051 $ 2,935,315 Reinvestment of dividends and distributions 2,188,310 1,016,465 635,684 395,805 Redeemed (9,567,066) (15,418,187) (4,384,730) (8,973,951) ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) - CLASS Y $ (3,793,144) $ 383,740 $ (2,107,995) $ (5,642,831) ============ ============ ============ ============ EQUITY --------------------------------- FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED JUNE 30, 2006 DECEMBER 31, 2005 ------------- ----------------- (UNAUDITED) CLASS X SHARES SHARES Sold 456,931 1,880,891 Reinvestment of dividends and distributions -- -- Redeemed (2,853,993) (7,127,359) ------------ ------------- NET DECREASE - CLASS X (2,397,062) (5,246,468) ============ ============= AMOUNT Sold $ 13,130,945 $ 47,036,045 Reinvestment of dividends and distributions -- -- Redeemed (81,646,860) (176,395,272) ------------ ------------- NET DECREASE - CLASS X $(68,515,915) $(129,359,227) ============ ============= CLASS Y SHARES SHARES Sold 280,737 739,898 Reinvestment of dividends and distributions -- -- Redeemed (439,865) (1,187,566) ------------ ------------- NET INCREASE (DECREASE) - CLASS Y (159,128) (447,668) ============ ============= AMOUNT Sold $ 8,043,748 $ 18,309,719 Reinvestment of dividends and distributions -- -- Redeemed (12,556,901) (29,514,669) ------------ ------------- NET INCREASE (DECREASE) - CLASS Y $ (4,513,153) $ (11,204,950) ============ =============
139
S&P 500 INDEX --------------------------------- FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED JUNE 30, 2006 DECEMBER 31, 2005 ------------- ----------------- (UNAUDITED) CLASS X SHARES SHARES Sold 305,830 1,671,512 Reinvestment of dividends and distributions 131,374 175,779 Redeemed (1,701,851) (4,538,402) ------------ ------------ NET DECREASE - CLASS X (1,264,647) (2,691,111) ============ ============ AMOUNT Sold $ 3,609,726 $ 18,550,567 Reinvestment of dividends and distributions 1,518,687 1,907,197 Redeemed (20,126,646) (50,287,505) ------------ ------------ NET DECREASE - CLASS X $(14,998,233) $(29,829,741) ============ ============ CLASS Y SHARES SHARES Sold 1,028,821 4,166,002 Reinvestment of dividends and distributions 217,665 222,054 Redeemed (1,468,022) (4,238,508) ------------ ------------ NET INCREASE (DECREASE) - CLASS Y (221,536) 149,548 ============ ============ AMOUNT Sold $ 12,070,126 $ 45,558,498 Reinvestment of dividends and distributions 2,500,973 2,393,740 Redeemed (17,221,210) (46,249,709) ------------ ------------ NET INCREASE (DECREASE) - CLASS Y $ (2,650,111) $ 1,702,529 ============ ============
SEE NOTES TO FINANCIAL STATEMENTS 140
GLOBAL ADVANTAGE AGGRESSIVE EQUITY --------------------------------- --------------------------------- FOR THE SIX FOR THE YEAR FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED MONTHS ENDED ENDED JUNE 30, 2006 DECEMBER 31, 2005 JUNE 30, 2006 DECEMBER 31, 2005 ------------- ----------------- ------------- ----------------- (UNAUDITED) (UNAUDITED) CLASS X SHARES SHARES Sold 114,491 358,007 213,945 826,424 Reinvestment of dividends and distributions 15,907 7,556 -- -- Redeemed (422,968) (1,045,383) (516,114) (1,558,559) ----------- ----------- ----------- ------------ NET DECREASE - CLASS X (292,570) (679,820) (302,169) (732,135) =========== =========== =========== ============ AMOUNT Sold $ 1,049,893 $ 2,941,752 $ 3,059,928 $ 9,603,368 Reinvestment of dividends and distributions 141,736 59,993 -- -- Redeemed (3,874,051) (8,548,051) (7,377,077) (17,983,235) ----------- ----------- ----------- ------------ NET DECREASE - CLASS X $(2,682,422) $(5,546,306) $(4,317,149) $ (8,379,867) =========== =========== =========== ============ CLASS Y SHARES SHARES Sold 38,101 92,468 258,801 287,858 Reinvestment of dividends and distributions 6,609 635 -- -- Redeemed (121,981) (223,229) (184,410) (570,455) ----------- ----------- ----------- ------------ NET INCREASE (DECREASE) - CLASS Y (77,271) (130,126) 74,391 (282,597) =========== =========== =========== ============ AMOUNT Sold $ 346,690 $ 748,504 $ 3,656,882 $ 3,324,353 Reinvestment of dividends and distributions 58,622 5,014 -- -- Redeemed (1,111,381) (1,817,634) (2,588,663) (6,503,137) ----------- ----------- ----------- ------------ NET INCREASE (DECREASE) - CLASS Y $ (706,069) $(1,064,116) $ 1,068,219 $ (3,178,784) =========== =========== =========== ============ STRATEGIST --------------------------------- FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED JUNE 30, 2006 DECEMBER 31, 2005 ------------- ----------------- (UNAUDITED) CLASS X SHARES SHARES Sold 462,852 1,913,234 Reinvestment of dividends and distributions 1,596,869 2,189,787 Redeemed (2,752,710) (6,845,272) ------------ ------------- NET DECREASE - CLASS X (692,989) (2,742,251) ============ ============= AMOUNT Sold $ 7,726,671 $ 30,623,256 Reinvestment of dividends and distributions 24,691,104 33,495,348 Redeemed (46,058,205) (110,014,244) ------------ ------------- NET DECREASE - CLASS X $(13,640,430) $ (45,895,640) ============ ============= CLASS Y SHARES SHARES Sold 357,148 897,997 Reinvestment of dividends and distributions 583,508 676,749 Redeemed (624,704) (1,439,668) ------------ ------------- NET INCREASE (DECREASE) - CLASS Y 315,952 135,078 ============ ============= AMOUNT Sold $ 5,968,789 $ 14,293,901 Reinvestment of dividends and distributions 9,004,105 10,331,448 Redeemed (10,423,124) (22,979,450) ------------ ------------- NET INCREASE (DECREASE) - CLASS Y $ 4,549,770 $ 1,645,899 ============ =============
141 Morgan Stanley Variable Investment Series NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2006 (UNAUDITED) 1. ORGANIZATION AND ACCOUNTING POLICIES Morgan Stanley Variable Investment Series (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "Act"), as a diversified, open-end management investment company. The Fund is offered exclusively to life insurance companies in connection with particular life insurance and/or annuity contracts they offer. The Fund, organized on February 25, 1983 as a Massachusetts business trust, consists of fourteen Portfolios ("Portfolios") which commenced operations as follows:
COMMENCEMENT OF PORTFOLIO OPERATIONS ---------------------- ----------------- Money Market March 9, 1984 Limited Duration May 4, 1999 Income Plus March 1, 1987 High Yield March 9, 1984 Utilities March 1, 1990 Income Builder January 21, 1997 Dividend Growth March 1, 1990 Global Dividend Growth February 23, 1994 European Equity March 1, 1991 Equity March 9, 1984 S&P 500 Index May 18, 1998 Global Advantage May 18, 1998 Aggressive Equity May 4, 1999 Strategist March 1, 1987
On June 5, 2000, the Fund commenced offering one additional class of shares (Class Y shares). The two classes are identical except that Class Y shares incur distribution expenses. Class X shares are generally available to holders of contracts offered by Metropolitan Life Insurance Company and other contracts offered before May 1, 2000. Class Y shares are available to holders of contracts offered on or after June 5, 2000. The investment objectives of each Portfolio are as follows:
PORTFOLIO INVESTMENT OBJECTIVE ----------------- ------------------------------------------------------------ Money Market Seeks high current income, preservation of capital and liquidity. Limited Duration Seeks to provide a high level of current income consistent with the preservation of capital. Income Plus Seeks, as its primary objective, to provide a high level of current income and, as a secondary objective, capital appreciation, but only when consistent with its primary objective. High Yield Seeks, as its primary objective, to provide a high level of current income and, as a secondary objective, capital appreciation, but only when consistent with its primary objective. Utilities Seeks both capital appreciation and current income.
142
PORTFOLIO INVESTMENT OBJECTIVE ----------------- ------------------------------------------------------------ Income Builder Seeks, as its primary objective, to earn reasonable income and, as a secondary objective, growth of capital. Dividend Growth Seeks to provide reasonable current income and long-term growth of income and capital. Global Dividend Seeks to provide reasonable current income and long-term Growth growth of income and capital. European Equity Seeks to maximize the capital appreciation of its investments. Equity Seeks, as its primary objective, growth of capital and, as a secondary objective, income, but only when consistent with its primary objective. S&P 500 Index Seeks to provide investment results that, before expenses, correspond to the total return of the Standards & Poor's 500(R) Composite Stock Price Index. Global Advantage Seeks long-term capital growth. Aggressive Equity Seeks long-term capital growth. Strategist Seeks a high total investment return.
The following is a summary of significant accounting policies: A. VALUATION OF INVESTMENTS -- Money Market: Portfolio securities are valued at amortized cost which approximates market value, in accordance with Rule 2a-7 under the Act. All remaining Portfolios: (1) an equity portfolio security listed or traded on the New York Stock Exchange ("NYSE") or American Stock Exchange, or other exchange is valued at its latest sale price, prior to the time when assets are valued; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (2) an equity portfolio security listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (3) all other portfolio securities for which over-the-counter market quotations are readily available are valued at the mean between the last reported bid and asked price. In cases where a security is traded on more than one exchange, the security is valued on the exchange designated as the primary market; (4) for equity securities traded on foreign exchanges, the last reported sale price or the latest bid price may be used if there were no sales on a particular day; (5) 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, Morgan Stanley Investment Advisors Inc. (the "Investment Adviser") (and/or, in the case of Global 143 Dividend Growth and European Equity, Morgan Stanley Investment Management Limited, (the "Sub Adviser")) determines that the latest sale price, the bid price or the mean between the last reported bid and asked price do not reflect a security's market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Trustees. Occasionally, developments affecting the closing prices of securities and other assets may occur between the times at which valuation 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 valuation 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 of the Fund's portfolio securities may be valued by an outside pricing service approved by the Trustees and; (9) short-term debt securities having a maturity date of more than sixty days at the time of purchase are valued on a mark-to-market basis until sixty days prior to maturity and thereafter at amortized cost based on their value on the 61st day. Short-term debt securities having a maturity date of sixty days or less at the time of purchase are valued at amortized cost. B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on security transactions are determined by the identified cost method. Dividend income and other distributions are recorded on the ex-dividend date except for certain dividends on foreign securities which are recorded as soon as the Fund is informed after the ex-dividend date. Interest income is accrued daily except where collection is not expected. The Fund amortizes premiums and accretes discounts over the life of the respective securities. C. REPURCHASE AGREEMENTS -- The Fund may 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. OPTIONS -- 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 144 loss on the underlying security or currently and the liability related to such option is extinguished. If a written call option is exercised, the Fund realized a gain or loss from the sale of the underlying security or currency and the proceeds from such sale are increased by the premium originally received. 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 or losses. Upon closing of the contract, the Fund realizes a gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. G. FOREIGN CURRENCY TRANSLATION AND FORWARD FOREIGN CURRENCY CONTRACTS -- The books and records of the Fund are maintained in U.S. dollars as follows: (1) the foreign currency market value of investment securities, other assets and liabilities and forward foreign currency contracts ("forward contracts") are translated at the exchange rates prevailing at the end of the period; and (2) purchases, sales, income and expenses are translated at the exchange rates prevailing on the respective dates of such transactions. The resultant exchange gains and losses are recorded as realized and unrealized gain/loss on foreign exchange transactions. Pursuant to U.S. Federal income tax regulations, certain foreign exchange gains/losses included in realized and unrealized gain/loss are included in or are a reduction of ordinary income for federal income tax purposes. The Fund does not isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the changes in the market prices of the securities held. Forward contracts are valued daily at the appropriate exchange rates. The resultant unrealized exchange gains and losses are recorded as unrealized foreign currency gain or loss. The Fund 145 records realized gains or losses on delivery of the currency or at the time the forward contract is extinguished (compensated) by entering into a closing transaction prior to delivery. H. FEDERAL INCOME TAX POLICY -- It is the Fund's policy to comply individually for each Portfolio with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Accordingly, no federal income tax provision is required. I. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends and distributions to its shareholders on the ex-dividend date. J. EXPENSES -- Direct expenses are charged to the respective Portfolio and general Fund expenses are allocated on the basis of relative net assets or equally among the Portfolios. The expense offset represents a reduction of the custodian fees for earnings on cash balances maintained by a Portfolio. K. USE OF ESTIMATES -- The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. 2. INVESTMENT ADVISORY/ADMINISTRATION AND SUB-ADVISORY AGREEMENTS Pursuant to an Investment Advisory Agreement, the Fund pays the Investment Adviser an advisory fee, accrued daily and payable monthly, by applying the annual rates listed below to each Portfolios' net assets determined at the close of each business day. Money Market -- 0.45% to the portion of the daily net assets not exceeding $250 million; 0.375% to the portion of the daily net assets exceeding $250 million but not exceeding $750 million; 0.325% to the portion of the daily net assets exceeding $750 million but not exceeding $1.25 billion; 0.30% to the portion of the daily net assets exceeding $1.25 billion but not exceeding $1.5 billion and 0.275% to the portion of the daily net assets in excess of $1.5 billion. Limited Duration -- 0.30%. Income Plus -- 0.42% to the portion of the daily net assets not exceeding $500 million; 0.35% to the portion of the daily net assets exceeding $500 million but not exceeding $1.25 billion and 0.22% to the portion of the daily net assets in excess of $1.25 billion. High Yield -- 0.42% to the portion of the daily net assets not exceeding $500 million; 0.345% to the portion of the daily net assets exceeding $500 million but not exceeding $750 million; 0.295% to the portion of the daily 146 net assets exceeding $750 million but not exceeding $1 billion; 0.27% to the portion of the daily net assets exceeding $1 billion but not exceeding $2 billion; 0.245% to the portion of the daily net assets exceeding $2 billion but not exceeding $3 billion and 0.22% to the portion of the daily net assets in excess of $3 billion. Utilities -- 0.57% to the portion of the daily net assets not exceeding $500 million; 0.47% to the portion of the daily net assets exceeding $500 million but not exceeding $1 billion; 0.445% to the portion of the daily net assets exceeding $1 billion but not exceeding $1.5 billion; 0.42% to the portion of the daily net assets exceeding $1.5 billion but not exceeding $2.5 billion; 0.395% to the portion of the daily net assets exceeding $2.5 billion but not exceeding $3.5 billion; 0.37% to the portion of the daily net assets exceeding $3.5 billion but not exceeding $5 billion and 0.345% to the portion of the daily net assets in excess of $5 billion. Income Builder -- 0.67% to the portion of the daily net assets not exceeding $500 million and 0.645% to the portion of the daily net assets in excess of $500 million. Dividend Growth -- 0.545% to the portion of the daily net assets not exceeding $250 million; 0.42% to the portion of the daily net assets exceeding $250 million but not exceeding $1 billion; 0.395% to the portion of the daily net assets exceeding $1 billion but not exceeding $2 billion and 0.37% to the portion of the daily net assets in excess of $2 billion. Global Dividend Growth -- 0.67% to the portion of the daily net assets not exceeding $1 billion; 0.645% to the portion of the daily net assets exceeding $1 billion but not exceeding $1.5 billion; 0.62% to the portion of the daily net assets exceeding $1.5 billion but not exceeding $2.5 billion; 0.595% to the portion of the daily net assets exceeding $2.5 billion but not exceeding $3.5 billion; 0.57% to the portion of the daily net assets exceeding $3.5 billion but not exceeding $4.5 billion and 0.545% to the portion of the daily net assets in excess of $4.5 billion European Equity -- 0.87% to the portion of the daily net assets not exceeding $500 million; 0.82% to the portion of the daily net assets exceeding $500 million but not exceeding $2 billion; 0.77% to the portion of the daily net assets exceeding $2 billion but not exceeding $3 billion and 0.745% to the portion of the daily net assets in excess of $3 billion. Equity -- 0.42% to the portion of the daily net assets not exceeding $1 billion; 0.395% to the portion of the daily net assets exceeding $1 billion but not exceeding $2 billion and 0.37% to the portion of the daily net assets in excess of $2 billion. S&P 500 Index -- 0.12% to the portion of the daily net assets not exceeding $2 billion and 0.10% to the portion of the daily net assets in excess of $2 billion. 147 Global Advantage -- 0.57% to the portion of the daily net assets not exceeding $1.5 billion and 0.545% to the portion of the daily net assets in excess of $1.5 billion. Aggressive Equity -- 0.67% to the portion of the daily net assets not exceeding $500 million; 0.645% to the portion of the daily net assets exceeding $500 million but not exceeding $2 billion; 0.62% to the portion of the daily net assets exceeding $2 billion but not exceeding $3 billion and 0.595% to the portion of the daily net assets in excess of $3 billion. Strategist -- 0.42% to the portion of the daily net assets not exceeding $1.5 billion and 0.395% to the portion of the daily net assets in excess of $1.5 billion. Under the Sub-Advisory Agreements between the Investment Adviser and the Sub-Adviser, the Sub-Adviser provides Global Dividend Growth and European Equity with investment advice and portfolio management relating to the Portfolios' investments in securities, subject to the overall supervision of the Investment Adviser. As compensation for its services provided pursuant to the Sub-Advisory Agreements, the Investment Adviser paid the Sub-Adviser compensation in the amounts of $401,407 and $360,669, respectively, for the six months ended June 30, 2006. The Investment Adviser has agreed to cap European Equity and S&P 500 Index's operating expenses (except for distribution fees) by assuming the Portfolio's "other expenses" and/or waiving the Portfolio's advisory fees, and Morgan Stanley Services Inc. (the "Administrator") has agreed to waive the Portfolio's administrative fees, to the extent such operating expenses exceed 1.00% and 0.40%, respectively, of the average daily net assets of the Portfolio on an annualized basis. Pursuant to an Administration Agreement with the Administrator, an affiliate of the Investment Adviser and Sub-Adviser, each Portfolio pays an administration fee, accrued daily and payable monthly, by applying the annual rate of 0.08% (Money Market 0.05%) to the Portfolio's daily net assets. 3. PLAN OF DISTRIBUTION Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the Investment Adviser, Administrator and Sub-Adviser. The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. Under the Plan, Class Y shares of each Portfolio bear a distribution fee which is accrued daily and paid monthly at the annual rate of 0.25% of the average daily net assets of the class. 148 4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES Purchases and sales/prepayments/maturities of portfolio securities, excluding short-term investments (except Money Market), for the six months ended June 30, 2006 were as follows:
U.S. GOVERNMENT SECURITIES OTHER -------------------------------- ----------------------------------- SALES/PREPAYMENTS/ SALES/PREPAYMENTS/ PURCHASES MATURITIES PURCHASES MATURITIES ----------- ------------------ -------------- ------------------ Money Market $10,693,039 $10,713,413 $1,719,446,428 $1,712,508,000 Limited Duration 6,064,445 12,387,740 25,432,157 31,024,767 Income Plus 10,088,774 20,463,374 42,538,118 87,697,364 High Yield -- -- 8,000,762 14,914,888 Utilities 353,994 210,664 16,998,675 38,133,271 Income Builder -- -- 12,171,430 17,542,830 Dividend Growth -- -- 318,577,450 407,189,043 Global Dividend Growth -- -- 38,479,545 69,593,316 European Equity -- -- 35,352,656 56,081,938 Equity -- -- 476,102,299 553,040,693 S&P 500 Index -- -- 5,542,303 24,933,535 Global Advantage -- -- 24,861,750 28,324,144 Aggressive Equity -- -- 24,265,355 26,577,794 Strategist 17,685,666 29,188,714 39,197,902 100,788,737
The following Portfolios had transactions with the following affiliates of the Fund:
NET REALIZED PORTFOLIO ISSUER PURCHASES SALES GAINS INCOME VALUE ---------------- -------------------- ---------- ----------- ------------ -------- ----------- Limited Duration Allstate Corp. (The) -- -- -- $ 7,597 $ 574,901 MetLife, Inc. -- -- -- 18,764 846,559 Income Builder MetLife, Inc. -- -- -- 35,063 1,213,080 Dividend Growth Citigroup Inc.* $4,394,335 $12,052,633 $3,180,713 288,227 13,999,682 MetLife, Inc. 7,665,538 -- -- -- 7,609,806 S&P 500 Index Allstate Corp. (The) -- 81,633 21,943 10,539 778,753 MetLife, Inc. -- 69,783 12,764 -- 870,007 Morgan Stanley -- 131,620 584 13,933 1,516,155 Citigroup Inc.* -- 544,747 17,454 115,299 5,370,414 Global Advantage MetLife, Inc. -- 308,114 25,162 -- -- Strategist Allstate Corp. (The) -- -- -- 45,724 3,574,964
---------- * CITIGROUP INC. IS AN AFFILIATE OF DIVIDEND GROWTH AND S&P 500 INDEX ONLY. 149 The following Portfolios had transactions with other Morgan Stanley funds during the six months ended June 30, 2006:
NET REALIZED PURCHASES SALES GAINS (LOSSES) ----------- ---------- -------------- Utilities -- $ 209,061 $ 71,817 Dividend Growth $ 486,682 168,436 (44,064) European Equity -- 29,052 5,687 Equity 12,590,085 6,606,124 2,012,189 Global Advantage 144,035 142,080 45,195 Aggressive Equity -- 947,603 239,736
For the six months ended June 30, 2006, Dividend Growth, Utilities and Strategist had open payables of $623,782, $232,780 and $5,513,862, respectively, and Dividend Growth, Utilities and Strategist had open receivables of $2,849,777, $100,908 and $948,560, respectively, with Morgan Stanley & Co., an affiliate of the Investment Adviser, Sub-Adviser, Administrator and Distributor. For the six months ended June 30, 2006, the following Portfolios incurred brokerage commissions with Morgan Stanley & Co., Inc., an affiliate of the Investment Adviser, Sub-Adviser, Administrator and Distributor, for portfolio transactions executed on behalf of the Portfolio:
DIVIDEND GLOBAL AGGRESSIVE UTILITIES GROWTH EQUITY ADVANTAGE EQUITY STRATEGIST --------- -------- -------- --------- ---------- ---------- $32,087 $120,855 $100,306 $3,056 $387 $57,026 ======= ======== ======== ====== ==== =======
Morgan Stanley Trust, an affiliate of the Investment Adviser, Sub-Adviser, Administrator and Distributor, is the Fund's transfer agent. The Fund has an unfunded noncontributory defined benefit pension plan covering certain independent Trustees of the Fund who will have served as independent Trustees for at least five years at the time of retirement. Benefits under this plan are based on factors which include years of service and compensation. The Trustees voted to close the plan to new participants and eliminate the future benefits growth due to increases to compensation after July 31, 2003. 150 Aggregate pension costs for the six months ended June 30, 2006, included in Trustees' fees and expenses in the Statements of Operations and the accrued pension liability included in accrued expenses in the Statements of Assets and Liabilities are as follows: AGGREGATE PENSION COSTS
MONEY LIMITED HIGH INCOME DIVIDEND MARKET DURATION INCOME PLUS YIELD UTILITIES BUILDER GROWTH ------ -------- ----------- ----- --------- ------- -------- $238 $156 $400 $74 $161 $46 $780 ==== ==== ==== === ==== === ====
GLOBAL DIVIDEND EUROPEAN S&P 500 GLOBAL AGGRESSIVE GROWTH EQUITY EQUITY INDEX ADVANTAGE EQUITY STRATEGIST -------- -------- ------ ------- --------- ---------- ---------- $226 $185 $576 $228 $29 $56 $300 ==== ==== ==== ==== === === ====
ACCRUED PENSION LIABILITY
MONEY LIMITED HIGH INCOME DIVIDEND MARKET DURATION INCOME PLUS YIELD UTILITIES BUILDER GROWTH -------- -------- ----------- ------ --------- ------- -------- $11,939 $143 $7,613 $3,911 $6,037 $1,027 $11,485 ======= ==== ====== ====== ====== ====== =======
GLOBAL DIVIDEND EUROPEAN S&P 500 GLOBAL AGGRESSIVE GROWTH EQUITY EQUITY INDEX ADVANTAGE EQUITY STRATEGIST -------- -------- ------ ------- --------- ---------- ---------- $1,401 $1,774 $6,930 $319 $513 $997 $8,724 ====== ====== ====== ==== ==== ==== ======
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 he receives for serving on the Board of Trustees. Each eligible Trustee generally may elect to have the 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. 5. 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 151 reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for tax purposes are reported as distributions of paid-in-capital. As of December 31, 2005, the following Portfolios had a net capital loss carryforward which may be used to offset future capital gains to the extent provided by regulations:
AMOUNTS IN THOUSANDS ------------------------------------------------------------------------------------------ AVAILABLE THROUGH DECEMBER 31, 2006 2007 2008 2009 2010 2011 2012 2013 TOTAL ----------------- ------ ------- -------- -------- -------- ------- ------- ------- -------- Limited Duration -- -- -- -- $ 328 $ 1,546 $ 4,026 $ 1,267 $ 7,167 Income Plus -- -- -- -- 19,976 -- -- -- 19,976 High Yield $2,735 $10,786 $ 7,524 $ 47,273 63,495 81,458 24,098 15,755 253,124 Utilities -- -- -- 2,047 -- -- -- 2,047 Income Builder -- -- -- 12 521 -- -- 533 Dividend Growth -- -- 107,340 55,108 134,941 48,222 -- -- 345,611 European Equity -- -- -- 1,854 22,575 12,853 -- -- 37,282 Equity -- -- -- 372,446 130,806 -- -- -- 503,252 S&P 500 Index -- -- -- 6,878 14,114 -- 3,450 9,717 34,159 Global Advantage -- -- -- 8,263 14,172 -- -- -- 22,435 Aggressive Equity -- -- -- 32,235 13,085 -- -- -- 45,320
At December 31, 2005, the primary reason(s) for significant temporary book/tax differences were as follows:
TEMPORARY DIFFERENCES ------------------------ POST- LOSS OCTOBER DEFERRALS FROM LOSSES WASH SALES ------- -------------- Limited Duration X Income Plus X X High Yield X X Utilities X Income Builder X Dividend Growth X Global Dividend Growth X X European Equity X S&P 500 Index X X Global Advantage X X Aggressive Equity X Strategist X
Additionally, the following Portfolios had other temporary differences: Global Advantage -- income from the mark-to market of forward foreign currency contracts; Global Dividend Growth and European Equity -- 152 foreign tax credit pass-through; Limited Duration, Income Plus, S&P 500 Index and Strategist -- capital gain/loss from mark-to-market of futures contracts; High Yield -- income on bonds in default; Income Plus and Strategist -- capital loss deferrals on straddles. The following Portfolios had temporary and permanent differences attributable to book amortization of premiums/discounts on debt securities: Limited Duration, Income Plus, High Yield, Utilities, Income Builder and Strategist. 6. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS All of the Portfolios (except for Money Market, Income Plus, and S&P 500 Index) may enter into forward contracts to facilitate settlement of foreign currency denominated foreign securities. Forward contracts involve elements of market risk in excess of the amounts reflected in the Statements of Assets and Liabilities. The respective Portfolios bear the risk of an unfavorable change in the foreign exchange rates underlying the forward contracts. Risks may also arise upon entering into these forward contracts from the potential inability of the counterparties to meet the terms of their contracts. All Portfolios (except Money Market, High Yield, Income Builder, Dividend Growth and Equity) may invest in futures contracts. Futures contracts involve elements of market risk in excess of the amount reflected in the Statements of Assets and Liabilities. The respective Portfolios bear the risk of an unfavorable change in the value of the underlying securities. Risks may also arise upon entering into these futures contracts from the potential inability of the counterparties to meet the terms of their contracts. At June 30, 2006, European Equity's investments in securities of issuers in the United Kingdom and France represented 31.0% and 13.2%, respectively, of the Portfolio's net assets. These investments, which involve risks and considerations not present with respect to U.S. securities, may be affected by economic or political developments in these regions. At June 30, 2006, Global Dividend Growth and European Equity cash balances consisted principally of interest bearing deposits with J.P. Morgan Chase Bank, the custodian of each Portfolio. 7. PORTFOLIO LIQUIDATION On June 16, 2006, the shareholders of the Information Portfolio approved its liquidation. On June 23, 2006, the Portfolio was liquidated and the value of the Portfolio's shares were transferred to the Money Market Portfolio. 8. 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. 153 Morgan Stanley Variable Investment Series FINANCIAL HIGHLIGHTS
NET ASSET YEAR VALUE NET NET REALIZED TOTAL FROM DIVIDENDS ENDED BEGINNING INVESTMENT AND UNREALIZED INVESTMENT TO DECEMBER 31, OF PERIOD INCOME* GAIN (LOSS) OPERATIONS SHAREHOLDERS ---------------- --------- ------------ -------------- ---------- ------------ MONEY MARKET CLASS X SHARES 2001 $ 1.00 $0.039 -- $0.039 $(0.039)** 2002 1.00 0.013 -- 0.013 (0.013)** 2003 1.00 0.007 -- 0.007 (0.007)** 2004 1.00 0.009 -- 0.009 (0.009)** 2005 1.00 0.030 -- 0.030 (0.030) 2006(a) 1.00 0.020 -- 0.020 (0.020) CLASS Y SHARES 2001 1.00 0.036 -- 0.036 (0.036)** 2002 1.00 0.011 -- 0.011 (0.011)** 2003 1.00 0.004 -- 0.004 (0.004)** 2004 1.00 0.006 -- 0.006 (0.006)** 2005 1.00 0.030 -- 0.030 (0.030) 2006(a) 1.00 0.020 -- 0.020 (0.020) LIMITED DURATION CLASS X SHARES 2001 9.96 0.40 $ 0.26 0.66 (0.45) 2002 10.17 0.27 0.13 0.40 (0.36) 2003 10.17 0.21 0.01 0.22 (0.38) 2004 10.01 0.28 (0.14) 0.14 (0.41) 2005 9.74 0.31 (0.13) 0.18 (0.38) 2006(a) 9.54 0.19 (0.06) 0.13 (0.22) CLASS Y SHARES 2001 9.95 0.35 0.28 0.63 (0.42) 2002 10.16 0.24 0.14 0.38 (0.34) 2003 10.16 0.18 0.02 0.20 (0.36) 2004 10.00 0.25 (0.14) 0.11 (0.38) 2005 9.73 0.28 (0.14) 0.14 (0.35) 2006(a) 9.52 0.17 (0.04) 0.13 (0.21)
SEE NOTES TO FINANCIAL STATEMENTS 154
RATIOS TO AVERAGE NET ASSETS*** TOTAL NET ASSET NET ASSETS --------------------- YEAR DISTRIBUTIONS DIVIDENDS VALUE END OF NET PORTFOLIO ENDED TO AND END OF TOTAL PERIOD INVESTMENT TURNOVER DECEMBER 31, SHAREHOLDERS DISTRIBUTIONS PERIOD RETURN+ (000'S) EXPENSES INCOME RATE ---------------- ------------- ------------- --------- ------- ---------- -------- ---------- --------- MONEY MARKET CLASS X SHARES 2001 -- $(0.039) $ 1.00 3.94% $452,765 0.51% 3.69% N/A 2002 -- (0.013) 1.00 1.34 432,817 0.51 1.32 N/A 2003 -- (0.007) 1.00 0.67 251,779 0.52 0.69 N/A 2004 -- (0.009) 1.00 0.87 178,600 0.53 0.85 N/A 2005 -- (0.030) 1.00 2.79 144,352 0.54 2.74 N/A 2006(a) -- (0.020) 1.00 2.13(1) 142,793 0.55(2) 4.23(2) N/A CLASS Y SHARES 2001 -- (0.036) 1.00 3.68 105,952 0.76 3.44 N/A 2002 -- (0.011) 1.00 1.08 133,506 0.76 1.07 N/A 2003 -- (0.004) 1.00 0.42 93,808 0.77 0.44 N/A 2004 -- (0.006) 1.00 0.62 89,917 0.78 0.60 N/A 2005 -- (0.030) 1.00 2.53 97,936 0.79 2.49 N/A 2006(a) -- (0.020) 1.00 2.00(1) 109,367 0.80(2) 3.98(2) N/A LIMITED DURATION CLASS X SHARES 2001 -- (0.45) 10.17 6.72 25,858 0.61(3)# 3.84(3) 133% 2002 $(0.04) (0.40) 10.17 4.06 73,476 0.48 2.65 58 2003 -- (0.38) 10.01 2.23 64,576 0.51 2.02 215 2004 -- (0.41) 9.74 1.42 52,784 0.49 2.77 128 2005 -- (0.38) 9.54 1.87 42,872 0.45 3.17 56 2006(a) -- (0.22) 9.45 1.36(1) 39,067 0.45(2) 3.94(2) 20(1) CLASS Y SHARES 2001 -- (0.42) 10.16 6.49 25,050 0.86(3)# 3.59(3) 133 2002 (0.04) (0.38) 10.16 3.81 72,800 0.73 2.40 58 2003 -- (0.36) 10.00 1.98 125,616 0.76 1.77 215 2004 -- (0.38) 9.73 1.17 125,764 0.74 2.52 128 2005 -- (0.35) 9.52 1.51 126,020 0.70 2.92 56 2006(a) -- (0.21) 9.44 1.34(1) 121,307 0.70(2) 3.69(2) 20(1)
155
NET ASSET YEAR VALUE NET NET REALIZED TOTAL FROM DIVIDENDS ENDED BEGINNING INVESTMENT AND UNREALIZED INVESTMENT TO DECEMBER 31, OF PERIOD INCOME (LOSS)* GAIN (LOSS) OPERATIONS SHAREHOLDERS -------------- --------- -------------- -------------- ---------- ------------ INCOME PLUS CLASS X SHARES 2001 $10.22 $0.61 $ 0.34 $0.95 $(0.62) 2002 10.55 0.58 (0.02) 0.56 (0.64) 2003 10.47 0.56 0.30 0.86 (0.60) 2004 10.73 0.55 (0.01) 0.54 (0.59) 2005 10.68 0.51 (0.15) 0.36 (0.55) 2006 (a) 10.49 0.25 (0.34) (0.09) (0.27) CLASS Y SHARES 2001 10.21 0.57 0.36 0.93 (0.60) 2002 10.54 0.54 (0.01) 0.53 (0.61) 2003 10.46 0.54 0.29 0.83 (0.58) 2004 10.71 0.52 0.01 0.53 (0.57) 2005 10.67 0.48 (0.16) 0.32 (0.52) 2006 (a) 10.47 0.24 (0.34) (0.10) (0.26) HIGH YIELD CLASS X SHARES 2001 2.43 0.33 (1.09) (0.76) (0.34) 2002 1.33 0.26 (0.34) (0.08) (0.22) 2003 1.03 0.16 0.10 0.26 (0.11) 2004 1.18 0.09 0.02 0.11 (0.09) 2005 1.20 0.08 (0.06) 0.02 (0.08) 2006 (a) 1.14 0.04 (0.01) 0.03 (0.04) CLASS Y SHARES 2001 2.43 0.32 (1.08) (0.76) (0.34) 2002 1.33 0.24 (0.32) (0.08) (0.22) 2003 1.03 0.15 0.11 0.26 (0.11) 2004 1.18 0.09 0.02 0.11 (0.09) 2005 1.20 0.08 (0.06) 0.02 (0.08) 2006 (a) 1.14 0.04 (0.01) 0.03 (0.04)
SEE NOTES TO FINANCIAL STATEMENTS 156
RATIOS TO AVERAGE NET ASSETS*** TOTAL NET ASSET NET ASSETS --------------------- YEAR DISTRIBUTIONS DIVIDENDS VALUE END OF NET PORTFOLIO ENDED TO AND END OF TOTAL PERIOD INVESTMENT TURNOVER DECEMBER 31, SHAREHOLDERS DISTRIBUTIONS PERIOD RETURN+ (000'S) EXPENSES INCOME RATE -------------- ------------- ------------- --------- ---------- --------- -------- ---------- --------- INCOME PLUS CLASS X SHARES 2001 -- $(0.62) $10.55 9.57% $452,757 0.53% 5.82% 150% 2002 -- (0.64) 10.47 5.51 423,685 0.52 5.57 106 2003 -- (0.60) 10.73 8.45 363,555 0.53 5.30 72 2004 -- (0.59) 10.68 5.23 296,246 0.54 5.18 28 2005 -- (0.55) 10.49 3.33 235,256 0.54 4.80 57 2006 (a) -- (0.27) 10.13 (0.78)(1) 195,124 0.55(2) 4.91(2) 15(1) CLASS Y SHARES 2001 -- (0.60) 10.54 9.33 54,115 0.78 5.57 150 2002 -- (0.61) 10.46 5.26 102,262 0.77 5.32 106 2003 -- (0.58) 10.71 8.09 140,629 0.78 5.05 72 2004 -- (0.57) 10.67 5.07 176,054 0.79 4.93 28 2005 -- (0.52) 10.47 3.08 197,968 0.79 4.55 57 2006 (a) -- (0.26) 10.11 (1.00)(1) 202,562 0.80(2) 4.66(2) 15(1) HIGH YIELD CLASS X SHARES 2001 -- (0.34) 1.33 (33.75) 64,470 0.59 17.33 81 2002 -- (0.22) 1.03 (7.14) 45,503 0.73 21.71 48 2003 -- (0.11) 1.18 27.73 56,162 0.70 14.09 59 2004 -- (0.09) 1.20 9.84 48,990 0.66 7.60 55 2005 -- (0.08) 1.14 2.18 35,226 0.87 6.81 48 2006 (a) -- (0.04) 1.13 2.70(1) 29,956 0.91(2) 6.70(2) 13(1) CLASS Y SHARES 2001 -- (0.34) 1.33 (33.92) 6,163 0.84 17.08 81 2002 -- (0.22) 1.03 (7.36) 10,797 0.98 21.46 48 2003 -- (0.11) 1.18 27.43 35,306 0.95 13.84 59 2004 -- (0.09) 1.20 9.56 39,547 0.91 7.35 55 2005 -- (0.08) 1.14 1.92 35,551 1.12 6.56 48 2006 (a) -- (0.04) 1.13 2.57(1) 32,038 1.16(2) 6.45(2) 13(1)
157
NET ASSET VALUE NET NET REALIZED TOTAL FROM DIVIDENDS BEGINNING INVESTMENT AND UNREALIZED INVESTMENT TO YEAR ENDED DECEMBER 31, OF PERIOD INCOME (LOSS)* GAIN (LOSS) OPERATIONS SHAREHOLDERS ----------------------------- --------- -------------- -------------- ---------- ------------ UTILITIES CLASS X SHARES 2001 $21.69 $0.39 $(5.74) $(5.35) $(0.41) 2002 14.73 0.37 (3.72) (3.35) (0.38) 2003 11.00 0.34 1.54 1.88 (0.35) 2004 12.53 0.34 2.21 2.55 (0.35) 2005 14.73 0.37 1.77 2.14 (0.37) 2006 (a) 16.50 0.18 0.58 0.76 (0.19) CLASS Y SHARES 2001 21.68 0.35 (5.74) (5.39) (0.37) 2002 14.72 0.34 (3.72) (3.38) (0.35) 2003 10.99 0.31 1.55 1.86 (0.32) 2004 12.53 0.31 2.20 2.51 (0.32) 2005 14.72 0.33 1.77 2.10 (0.33) 2006 (a) 16.49 0.16 0.58 0.74 (0.17) INCOME BUILDER CLASS X SHARES 2001 10.86 0.47 (0.22) 0.25 (0.48) 2002 10.61 0.42 (1.22) (0.80) (0.42) 2003 9.38 0.32 1.60 1.92 (0.32) 2004 10.98 0.34 0.84 1.18 (0.42) 2005 11.74 0.29 0.52 0.81 (0.33) 2006 (a) 12.22 0.16 0.17 0.33 (0.17) CLASS Y SHARES 2001 10.85 0.42 (0.19) 0.23 (0.46) 2002 10.60 0.39 (1.22) (0.83) (0.40) 2003 9.36 0.31 1.58 1.89 (0.30) 2004 10.95 0.32 0.83 1.15 (0.39) 2005 11.71 0.26 0.53 0.79 (0.30) 2006 (a) 12.20 0.14 0.18 0.32 (0.16)
SEE NOTES TO FINANCIAL STATEMENTS 158
RATIOS TO AVERAGE NET ASSETS*** TOTAL NET ASSET NET ASSETS --------------------- DISTRIBUTIONS DIVIDENDS VALUE END OF NET PORTFOLIO TO AND END OF TOTAL PERIOD INVESTMENT TURNOVER YEAR ENDED DECEMBER 31, SHAREHOLDERS DISTRIBUTIONS PERIOD RETURN+ (000'S) EXPENSES INCOME RATE ----------------------------- ------------- ------------- --------- ------- ---------- -------- ---------- --------- UTILITIES CLASS X SHARES 2001 $(1.20) $(1.61) $14.73 (25.75)% $327,749 0.67% 2.19% 32% 2002 -- (0.38) 11.00 (22.87) 189,936 0.68 2.99 51 2003 -- (0.35) 12.53 17.34 175,191 0.70 2.94 35 2004 -- (0.35) 14.73 20.66 168,148 0.69 2.59 13 2005 -- (0.37) 16.50 14.62 154,413 0.70 2.31 29 2006 (a) -- (0.19) 17.07 4.61(1) 139,811 0.71(2) 2.15(2) 10(1) CLASS Y SHARES 2001 (1.20) (1.57) 14.72 (25.98) 24,550 0.92 1.94 32 2002 -- (0.35) 10.99 (23.08) 20,157 0.93 2.74 51 2003 -- (0.32) 12.53 17.17 25,933 0.95 2.69 35 2004 -- (0.32) 14.72 20.28 30,289 0.94 2.34 13 2005 -- (0.33) 16.49 14.35 33,068 0.95 2.06 29 2006 (a) -- (0.17) 17.06 4.48(1) 32,000 0.96(2) 1.90(2) 10(1) INCOME BUILDER CLASS X SHARES 2001 (0.02)+++ (0.50) 10.61 2.30 63,060 0.81 4.34 45 2002 (0.01)+++ (0.43) 9.38 (7.64) 49,505 0.80 4.20 75 2003 -- (0.32) 10.98 20.84 51,890 0.84 3.26 62 2004 -- (0.42) 11.74 10.96 49,126 0.82 3.07 38 2005 -- (0.33) 12.22 6.96 39,562 0.84 2.47 27 2006 (a) (0.17) 12.38 2.72(1) 36,286 0.84(2) 2.52(2) 15(1) CLASS Y SHARES 2001 (0.02)+++ (0.48) 10.60 2.10 7,147 1.06 3.88 45 2002 (0.01)+++ (0.41) 9.36 (7.96) 13,930 1.05 3.95 75 2003 -- (0.30) 10.95 20.51 42,443 1.09 3.04 62 2004 -- (0.39) 11.71 10.72 48,493 1.07 2.82 38 2005 -- (0.30) 12.20 6.71 45,918 1.09 2.22 27 2006 (a) (0.16) 12.36 2.68(1) 44,207 1.09(2) 2.27(2) 15(1)
159
NET ASSET YEAR VALUE NET NET REALIZED TOTAL FROM DIVIDENDS ENDED BEGINNING INVESTMENT AND UNREALIZED INVESTMENT TO DECEMBER 31, OF PERIOD INCOME (LOSS)* GAIN (LOSS) OPERATIONS SHAREHOLDERS ---------------------- --------- -------------- -------------- ---------- ------------ DIVIDEND GROWTH CLASS X SHARES 2001 $14.50 $0.26 $(1.02) $(0.76) $(0.26) 2002 13.48 0.25 (2.66) (2.41) (0.25) 2003 10.82 0.22 2.76 2.98 (0.23) 2004 13.57 0.22 0.92 1.14 (0.23) 2005 14.48 0.19 0.61 0.80 (0.19) 2006 (a) 15.09 0.12 (0.17) (0.05) (0.12) CLASS Y SHARES 2001 14.49 0.22 (1.01) (0.79) (0.23) 2002 13.47 0.22 (2.66) (2.44) (0.22) 2003 10.81 0.19 2.75 2.94 (0.20) 2004 13.55 0.19 0.92 1.11 (0.20) 2005 14.46 0.15 0.62 0.77 (0.16) 2006 (a) 15.07 0.10 (0.17) (0.07) (0.10) GLOBAL DIVIDEND GROWTH CLASS X SHARES 2001 12.73 0.21 (1.00) (0.79) (0.33) 2002 11.47 0.21 (1.62) (1.41) (0.19) 2003 9.87 0.18 2.94 3.12 (0.22) 2004 12.77 0.21 1.68 1.89 (0.20) 2005 14.46 0.27 0.63 0.90 (0.24) 2006 (a) 15.12 0.18 0.59 0.77 (0.33) CLASS Y SHARES 2001 12.71 0.15 (0.96) (0.81) (0.33) 2002 11.43 0.18 (1.61) (1.43) (0.18) 2003 9.82 0.15 2.91 3.06 (0.20) 2004 12.68 0.18 1.66 1.84 (0.18) 2005 14.34 0.23 0.64 0.87 (0.21) 2006 (a) 15.00 0.16 0.58 0.74 (0.29)
SEE NOTES TO FINANCIAL STATEMENTS 160
RATIOS TO AVERAGE NET ASSETS*** TOTAL NET ASSET NET ASSETS --------------------- YEAR DISTRIBUTIONS DIVIDENDS VALUE END OF NET PORTFOLIO ENDED TO AND END OF TOTAL PERIOD INVESTMENT TURNOVER DECEMBER 31, SHAREHOLDERS DISTRIBUTIONS PERIOD RETURN+ (000'S) EXPENSES INCOME RATE ---------------------- ------------- ------------- --------- ----------- ---------- -------- ---------- --------- DIVIDEND GROWTH CLASS X SHARES 2001 -- $(0.26) $13.48 (5.20)% $1,258,863 0.55% 1.86% 19% 2002 -- (0.25) 10.82 (18.01) 819,935 0.57 1.98 21 2003 -- (0.23) 13.57 27.89 865,039 0.59 1.92 42 2004 -- (0.23) 14.48 8.46 737,801 0.58 1.60 43 2005 -- (0.19) 15.09 5.61 582,259 0.57 1.30 38 2006 (a) -- (0.12) 14.92 (0.34)(1) 496,289 0.58(2) 1.53(2) 47(1) CLASS Y SHARES 2001 -- (0.23) 13.47 (5.42) 60,393 0.80 1.61 19 2002 -- (0.22) 10.81 (18.23) 70,844 0.82 1.73 21 2003 -- (0.20) 13.55 27.52 118,445 0.84 1.67 42 2004 -- (0.20) 14.46 8.21 139,777 0.83 1.35 43 2005 -- (0.16) 15.07 5.35 143,577 0.82 1.05 38 2006 (a) -- (0.10) 14.90 (0.47)(1) 132,613 0.83(2) 1.28(2) 47(1) GLOBAL DIVIDEND GROWTH CLASS X SHARES 2001 $(0.14) (0.47) 11.47 (6.25) 285,158 0.80 1.76 9 2002 -- (0.19) 9.87 (12.52) 201,022 0.81 1.96 17 2003 -- (0.22) 12.77 32.07 221,971 0.82 1.73 103 2004 -- (0.20) 14.46 14.93 213,836 0.81 1.58 21 2005 -- (0.24) 15.12 6.34 181,475 0.82 1.88 20 2006 (a) (0.21) (0.54) 15.35 5.10(1) 165,082 0.83(2) 2.24(2) 16(1) CLASS Y SHARES 2001 (0.14) (0.47) 11.43 (6.44) 10,494 1.05 1.51 9 2002 -- (0.18) 9.82 (12.72) 20,981 1.06 1.71 17 2003 -- (0.20) 12.68 31.64 47,524 1.07 1.48 103 2004 -- (0.18) 14.34 14.65 67,522 1.05 1.34 21 2005 -- (0.21) 15.00 6.17 71,123 1.07 1.63 20 2006 (a) (0.21) (0.50) 15.24 4.94(1) 68,666 1.08(2) 1.99(2) 16(1)
161
NET ASSET YEAR VALUE NET NET REALIZED TOTAL FROM DIVIDENDS ENDED BEGINNING INVESTMENT AND UNREALIZED INVESTMENT TO DECEMBER 31, OF PERIOD INCOME (LOSS)* GAIN (LOSS) OPERATIONS SHAREHOLDERS --------------- --------- -------------- -------------- ---------- ------------ EUROPEAN EQUITY CLASS X SHARES 2001 $25.37 $0.13 $(4.47) $(4.34) $(0.26) 2002 16.71 0.12 (3.66) (3.54) (0.20) 2003 12.97 0.17 3.57 3.74 (0.13) 2004 16.58 0.21 1.88 2.09 (0.20) 2005 18.47 0.30 1.28 1.58 (0.23) 2006 (a) 19.82 0.32 1.97 2.29 (0.39) CLASS Y SHARES 2001 25.33 0.05 (4.42) (4.37) (0.25) 2002 16.65 0.08 (3.63) (3.55) (0.19) 2003 12.91 0.13 3.56 3.69 (0.10) 2004 16.50 0.16 1.88 2.04 (0.17) 2005 18.37 0.25 1.26 1.51 (0.18) 2006 (a) 19.70 0.29 1.96 2.25 (0.34) EQUITY CLASS X SHARES 2001 39.68 0.15 (10.12) (9.97) (0.16) 2002 22.66 0.07 (4.87) (4.80) (0.08) 2003 17.78 0.07 3.97 4.04 (0.07) 2004 21.75 0.09 2.33 2.42 (0.10) 2005 24.07 -- 4.39 4.39 -- 2006 (a) 28.46 0.01 (0.41) (0.40) -- CLASS Y SHARES 2001 39.66 0.06 (10.09) (10.03) (0.10) 2002 22.64 0.03 (4.89) (4.86) (0.03) 2003 17.75 0.02 3.98 4.00 (0.03) 2004 21.72 0.05 2.31 2.36 (0.05) 2005 24.03 (0.06) 4.37 4.31 -- 2006 (a) 28.34 (0.03) (0.40) (0.43) --
SEE NOTES TO FINANCIAL STATEMENTS 162
RATIOS TO AVERAGE NET ASSETS*** TOTAL NET ASSET NET ASSETS ----------------------- YEAR DISTRIBUTIONS DIVIDENDS VALUE END OF NET PORTFOLIO ENDED TO AND END OF TOTAL PERIOD INVESTMENT TURNOVER DECEMBER 31, SHAREHOLDERS DISTRIBUTIONS PERIOD RETURN+ (000'S) EXPENSES INCOME RATE --------------- ------------- ------------- --------- ---------- ---------- ---------- ---------- --------- EUROPEAN EQUITY CLASS X SHARES 2001 $(4.06) $(4.32) $16.71 (17.76)% $ 316,196 1.02% 0.68% 82% 2002 -- (0.20) 12.97 (21.36) 193,153 1.05 0.82 92 2003 -- (0.13) 16.58 29.03 198,424 1.04 1.26 95 2004 -- (0.20) 18.47 12.74 178,683 1.04 1.24 103 2005 -- (0.23) 19.82 8.69 144,969 1.02(4) 1.60(4) 61 2006 (a) -- (0.39) 21.72 11.57(1) 139,081 1.00(2)(5) 2.98(5) 19(1) CLASS Y SHARES 2001 (4.06) (4.31) 16.65 (17.92) 20,858 1.27 0.43 82 2002 -- (0.19) 12.91 (21.53) 22,133 1.30 0.57 92 2003 -- (0.10) 16.50 28.70 36,568 1.29 1.01 95 2004 -- (0.17) 18.37 12.48 42,333 1.29 0.99 103 2005 -- (0.18) 19.70 8.36 39,404 1.27(4) 1.35(4) 61 2006 (a) -- (0.34) 21.61 11.42(1) 41,100 1.25(2)(5) 2.73(5) 19(1) EQUITY CLASS X SHARES 2001 (6.89) (7.05) 22.66 (26.87) 1,022,335 0.51 0.55 329 2002 -- (0.08) 17.78 (21.21) 622,133 0.51 0.36 223 2003 -- (0.07) 21.75 22.80 616,027 0.52 0.38 210 2004 -- (0.10) 24.07 11.14 537,086 0.53 0.41 137 2005 -- -- 28.46 18.16 485,662 0.53 0.02 72 2006 (a) -- -- 28.06 (1.34)(1) 411,550 0.53(2) 0.06 85(1) CLASS Y SHARES 2001 (6.89) (6.99) 22.64 (27.07) 61,110 0.76 0.30 329 2002 -- (0.03) 17.75 (21.45) 64,829 0.76 0.11 223 2003 -- (0.03) 21.72 22.55 100,400 0.77 0.13 210 2004 -- (0.05) 24.03 10.86 115,741 0.78 0.16 137 2005 -- -- 28.34 17.89 123,803 0.78 (0.23) 72 2006 (a) -- -- 27.91 (1.48)(1) 117,464 0.78(2) (0.19) 85(1)
163
NET ASSET YEAR VALUE NET NET REALIZED TOTAL FROM DIVIDENDS ENDED BEGINNING INVESTMENT AND UNREALIZED INVESTMENT TO DECEMBER 31, OF PERIOD INCOME* GAIN (LOSS) OPERATIONS SHAREHOLDERS ---------------- --------- ---------- -------------- ---------- ------------ S&P 500 INDEX CLASS X SHARES 2001 $12.05 $0.10 $(1.57) $(1.47) $(0.10) 2002 10.48 0.10 (2.45) (2.35) (0.09) 2003 8.04 0.12 2.11 2.23 (0.10) 2004 10.17 0.17 0.90 1.07 (0.10) 2005 11.14 0.18 0.33 0.51 (0.19) 2006(a) 11.46 0.10 0.20 0.30 (0.20) CLASS Y SHARES 2001 12.04 0.08 (1.58) (1.50) (0.10) 2002 10.44 0.08 (2.44) (2.36) (0.08) 2003 8.00 0.09 2.10 2.19 (0.08) 2004 10.11 0.15 0.88 1.03 (0.08) 2005 11.06 0.15 0.33 0.48 (0.16) 2006(a) 11.38 0.08 0.20 0.28 (0.17) GLOBAL ADVANTAGE CLASS X SHARES 2001 10.18 0.05 (2.36) (2.31) (0.06) 2002 7.17 0.05 (1.53) (1.48) (0.06) 2003 5.63 0.05 1.69 1.74 (0.07) 2004 7.30 0.06 0.85 0.91 (0.03) 2005 8.18 0.09 0.46 0.55 (0.02) 2006(a) 8.71 0.05 0.22 0.27 (0.07) CLASS Y SHARES 2001 10.16 0.02 (2.35) (2.33) (0.05) 2002 7.14 0.03 (1.52) (1.49) (0.04) 2003 5.61 0.04 1.68 1.71 (0.05) 2004 7.27 0.04 0.85 0.89 (0.02) 2005 8.14 0.07 0.45 0.52 -- 2006(a) 8.66 0.04 0.22 0.26 (0.05)
SEE NOTES TO FINANCIAL STATEMENTS 164
RATIOS TO AVERAGE NET ASSETS*** TOTAL NET ASSET NET ASSETS --------------------- YEAR DISTRIBUTIONS DIVIDENDS VALUE END OF NET PORTFOLIO ENDED TO AND END OF TOTAL PERIOD INVESTMENT TURNOVER DECEMBER 31, SHAREHOLDERS DISTRIBUTIONS PERIOD RETURN+ (000'S) EXPENSES INCOME RATE ---------------- ------------- ------------- --------- -------- ---------- -------- ---------- --------- S&P 500 INDEX CLASS X SHARES 2001 -- $(0.10) $10.48 (12.23)% $165,465 0.46% 0.95% 4% 2002 -- (0.09) 8.04 (22.48) 110,789 0.46 1.15 5 2003 -- (0.10) 10.17 27.85 135,767 0.46 1.31 0 2004 -- (0.10) 11.14 10.59 130,944 0.33 1.69 4 2005 -- (0.19) 11.46 4.64 103,899 0.28 1.59 5 2006(a) -- (0.20) 11.56 2.60(1) 90,181 0.27(2) 1.66(2) 2(1) CLASS Y SHARES 2001 -- (0.10) 10.44 (12.53) 46,134 0.71 0.70 4 2002 -- (0.08) 8.00 (22.67) 62,977 0.71 0.90 5 2003 -- (0.08) 10.11 27.54 133,144 0.71 1.06 0 2004 -- (0.08) 11.06 10.29 166,085 0.58 1.44 4 2005 -- (0.16) 11.38 4.43 172,544 0.53 1.34 5 2006(a) -- (0.17) 11.49 2.46(1) 171,682 0.52(2) 1.41(2) 2(1) GLOBAL ADVANTAGE CLASS X SHARES 2001 $(0.64) (0.70) 7.17 (23.33) 40,084 0.75 0.55 47 2002 -- (0.06) 5.63 (20.81) 22,866 0.80 0.72 119 2003 -- (0.07) 7.30 31.12 25,598 0.93 0.87 98 2004 -- (0.03) 8.18 12.54 23,620 0.84 0.79 111 2005 -- (0.02) 8.71 6.80 19,227 0.92 1.09 89 2006(a) -- (0.07) 8.91 3.15(1) 17,058 0.97(2) 1.02(2) 88(1) CLASS Y SHARES 2001 (0.64) (0.69) 7.14 (23.53) 5,869 1.00 0.30 47 2002 -- (0.04) 5.61 (20.94) 5,229 1.05 0.47 119 2003 -- (0.05) 7.27 30.75 9,308 1.18 0.62 98 2004 -- (0.02) 8.14 12.29 11,032 1.09 0.54 111 2005 -- -- 8.66 6.44 10,618 1.17 0.84 89 2006(a) -- (0.05) 8.87 3.02(1) 10,188 1.22(2) 0.77(2) 88(1)
165
NET ASSET YEAR VALUE NET NET REALIZED TOTAL FROM DIVIDENDS ENDED BEGINNING INVESTMENT AND UNREALIZED INVESTMENT TO DECEMBER 31, OF PERIOD INCOME (LOSS)* GAIN (LOSS) OPERATIONS SHAREHOLDERS ----------------- --------- -------------- -------------- ---------- ------------ AGGRESSIVE EQUITY CLASS X SHARES 2001 $14.31 $ 0.02 $(4.09) $(4.07) $(0.04) 2002 10.20 0.01 (2.31) (2.30) (0.03) 2003 7.87 0.01 2.04 2.05 0.00## 2004 9.92 (0.02) 1.28 1.26 0.00### 2005 11.18 (0.03) 2.62 2.59 -- 2006 (a) 13.77 (0.02) 0.35 0.33 -- CLASS Y SHARES 2001 14.29 (0.01) (4.08) (4.09) (0.03) 2002 10.17 (0.01) (2.31) (2.32) (0.01) 2003 7.84 (0.01) 2.03 2.02 -- 2004 9.86 (0.04) 1.27 1.23 -- 2005 11.09 (0.06) 2.58 2.52 -- 2006 (a) 13.61 (0.04) 0.36 0.32 -- STRATEGIST CLASS X SHARES 2001 16.66 0.38 (2.05) (1.67) (0.39) 2002 13.94 0.19 (1.56) (1.37) (0.21) 2003 12.36 0.18 3.03 3.21 (0.23) 2004 15.34 0.28 1.30 1.58 (0.32)++++ 2005 16.60 0.30 0.96 1.26 (0.32) 2006 (a) 16.05 0.19 0.69 0.88 (0.20) CLASS Y SHARES 2001 16.65 0.32 (2.03) (1.71) (0.35) 2002 13.93 0.16 (1.56) (1.40) (0.18) 2003 12.35 0.14 3.03 3.17 (0.20) 2004 15.32 0.24 1.30 1.54 (0.28)++++ 2005 16.58 0.26 0.96 1.22 (0.28) 2006 (a) 16.03 0.17 0.69 0.86 (0.18)
---------- (a) FOR SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED). * THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. ** INCLUDES CAPITAL GAIN DISTRIBUTION OF LESS THAN $0.001. *** REFLECTS OVERALL PORTFOLIO RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. + CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. +++ DISTRIBUTION FROM PAID-IN-CAPITAL. ++++ INCLUDES DISTRIBUTIONS FROM PAID-IN-CAPITAL OF $0.002. # DOES NOT REFLECT THE EFFECT OF EXPENSE OFFSET OF 0.06%. ## DISTRIBUTION OF INVESTMENT INCOME OF LESS THAN $0.001. ### DISTRIBUTION OF INVESTMENT INCOME OF $0.001. SEE NOTES TO FINANCIAL STATEMENTS 166
RATIOS TO AVERAGE NET ASSETS*** TOTAL NET ASSET NET ASSETS ------------------------ YEAR DISTRIBUTIONS DIVIDENDS VALUE END OF NET PORTFOLIO ENDED TO AND END OF TOTAL PERIOD INVESTMENT TURNOVER DECEMBER 31, SHAREHOLDERS DISTRIBUTIONS PERIOD RETURN+ (000'S) EXPENSES INCOME (LOSS) RATE ----------------- ------------- ------------- --------- ------- ---------- -------- ------------- --------- AGGRESSIVE EQUITY CLASS X SHARES 2001 -- $(0.04) $10.20 (28.46)% $ 69,418 0.84% 0.21% 409% 2002 -- (0.03) 7.87 (22.60) 39,724 0.84 0.07 268 2003 -- -- 9.92 26.06 42,363 0.87 0.10 195 2004 -- -- 11.18 12.71 38,347 0.85 (0.16) 185 2005 -- -- 13.77 23.17 37,130 0.86 (0.29) 85 2006 (a) -- -- 14.10 2.40(1) 33,775 0.87(2) (0.30)(2) 36(1) CLASS Y SHARES 2001 -- (0.03) 10.17 (28.61) 18,652 1.09 (0.04) 409 2002 -- (0.01) 7.84 (22.83) 17,575 1.09 (0.18) 268 2003 -- -- 9.86 25.77 26,519 1.12 (0.15) 195 2004 -- -- 11.09 12.47 27,793 1.10 (0.41) 185 2005 -- -- 13.61 22.72 30,283 1.11 (0.54) 85 2006 (a) -- -- 13.93 2.35(1) 32,020 1.12(2) (0.55)(2) 36(1) STRATEGIST CLASS X SHARES 2001 $(0.66) (1.05) 13.94 (10.18) $522,655 0.52 2.53 124 2002 -- (0.21) 12.36 (9.89) 372,254 0.52 1.47 124 2003 -- (0.23) 15.34 26.24 388,356 0.52 1.31 93 2004 -- (0.32) 16.60 10.37 345,215 0.53 1.79 55 2005 (1.49) (1.81) 16.05 8.32 289,876 0.54 1.84 46 2006 (a) (1.35) (1.55) 15.38 5.49(1) 267,136 0.55(2) 2.30(2) 17(1) CLASS Y SHARES 2001 (0.66) (1.01) 13.93 (10.40) 47,886 0.77 2.28 124 2002 -- (0.18) 12.35 (10.11) 57,651 0.77 1.22 124 2003 -- (0.20) 15.32 25.88 89,935 0.77 1.06 93 2004 -- (0.28) 16.58 10.12 99,165 0.78 1.54 55 2005 (1.49) (1.77) 16.03 8.06 98,066 0.79 1.59 46 2006 (a) (1.35) (1.53) 15.36 5.36(1) 98,824 0.80(2) 2.05(2) 17(1)
(1) NOT ANNUALIZED. (2) ANNUALIZED. (3) IF THE INVESTMENT ADVISER HAD NOT "CAPPED" ALL EXPENSES (EXCEPT FOR DISTRIBUTION FEES) FOR LIMITED DURATION, AT 0.50% OF ITS DAILY NET ASSETS FOR THE PERIOD JUNE 1, 2001 THROUGH DECEMBER 31, 2001, THE RATIOS OF EXPENSES AND NET INVESTMENT INCOME TO AVERAGE NET ASSETS WOULD HAVE BEEN 0.65% AND 3.80%, RESPECTIVELY, FOR CLASS X SHARES AND 0.90% AND 3.55%, RESPECTIVELY, FOR CLASS Y SHARES. (4) IF THE INVESTMENT ADVISER HAD NOT "CAPPED" ALL EXPENSES (EXCEPT FOR DISTRIBUTION FEES) FOR EUROPEAN EQUITY, AT 1.0% OF ITS DAILY NET ASSETS FOR THE PERIOD JUNE 1, 2005 THROUGH DECEMBER 31, 2005, THE RATIOS OF EXPENSES AND NET INVESTMENT INCOME TO AVERAGE NET ASSETS WOULD HAVE BEEN 1.06% AND 1.56%, RESPECTIVELY, FOR CLASS X SHARES AND 1.31% AND 1.31%, RESPECTIVELY, FOR CLASS Y SHARES. (5) IF THE INVESTMENT ADVISER HAD NOT "CAPPED" ALL EXPENSES (EXCEPT FOR DISTRIBUTION FEES) FOR EUROPEAN EQUITY, AT 1.0% OF ITS DAILY NET ASSETS FOR THE SIX MONTHS ENDED JUNE 30, 2006, THE RATIOS OF EXPENSES AND NET INVESTMENT INCOME TO AVERAGE NET ASSETS WOULD HAVE BEEN 1.08% AND 2.90%, RESPECTIVELY, FOR CLASS X SHARES AND 1.33% AND 2.65%, RESPECTIVELY, FOR CLASS Y SHARES. 167 Trustees Michael Bozic Dr. Manuel H. Johnson Charles A. Fiumefreddo Joseph J. Kearns Edwin J. Garn Michael E. Nugent Wayne E. Hedien Fergus Reid James F. Higgins Officers Michael E. Nugent CHAIRMAN OF THE BOARD Ronald E. Robison PRESIDENT AND PRINCIPAL EXECUTIVE OFFICER J. David Germany VICE PRESIDENT Dennis F. Shea VICE PRESIDENT Barry Fink VICE PRESIDENT Amy R. Doberman VICE PRESIDENT Carsten Otto CHIEF COMPLIANCE OFFICER Stefanie V. Chang Yu VICE PRESIDENT Francis J. Smith TREASURER AND CHIEF FINANCIAL OFFICER Mary E. Mullin SecRETARY
Independent Registered Public Transfer Agent Accounting Firm Morgan Stanley Trust Deloitte & Touche LLP Harborside Financial Center, Plaza Two Two World Financial Center Jersey City, New Jersey 07311 New York, New York 10281
Investment Adviser Morgan Stanley Investment Advisors Inc. 1221 Avenue of the Americas New York, New York 10020 Sub-Adviser (Global Dividend Growth and European Equity) Morgan Stanley Investment Management Limited 25 Cabot Square, Canary Wharf London, United Kingdom E14 4QA The financial statements included herein have been taken from the records of the Fund without examination by the independent auditors and accordingly they do not express an opinion thereon. This report is submitted for the general information of shareholders of the Fund. For more detailed information about the Fund, its fees and expenses and other pertinent information, please read its Prospectus. The Fund's Statement of Additional Information contains additional information about the Fund, including its trustees. It is available, without charge, by calling (800) 869-NEWS. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective Prospectus. Read the Prospectus carefully before investing. Investments and services offered through Morgan Stanley DW Inc., member SIPC. Morgan Stanley Funds are distributed by Morgan Stanley Distributors Inc. Morgan Stanley Distributors Inc., member NASD. #40113A RA06-00731P-Y06/06 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. 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. 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 Variable Investment Series /s/ Ronald E. Robison ------------------------------------- Ronald E. Robison Principal Executive Officer August 10, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Ronald E. Robison ------------------------------------- Ronald E. Robison Principal Executive Officer August 10, 2006 /s/ Francis Smith ------------------------------------- Francis Smith Principal Financial Officer August 10, 2006