THE DOW INDUSTRIALS(SM) ("DIAMONDS")(SM)
 
                            DIAMONDS TRUST SERIES 1
 
                            A UNIT INVESTMENT TRUST
 
                                 ANNUAL REPORT
 
                                OCTOBER 31, 2004
 
"Dow Jones Industrial Average", "DJIA", "Dow Jones", "The Dow", "THE DOW
INDUSTRIALS", and "DIAMONDS" are trademarks and service marks of Dow Jones &
Company, Inc. ("Dow Jones") and have been licensed for use for certain purposes
by PDR Services LLC and the American Stock Exchange LLC pursuant to a License
Agreement with Dow Jones. The Trust, based on the DJIA, is not sponsored,
endorsed, sold, or promoted by Dow Jones and Dow Jones makes no representation
regarding the advisability of investing in the Trust.

 
DIAMONDS TRUST SERIES 1
TRUST OVERVIEW
 
--------------------------------------------------------------------------------
 
OBJECTIVE:
To replicate the total return of the Dow Jones Industrial Average.
 
STRATEGY:
The Trust's holdings are comprised of the 30 stocks in the Dow Jones Industrial
Average, which is designed to capture the price performance of 30 US blue-chip
stocks that are generally considered leaders within their respective industries.
 
PERFORMANCE OVERVIEW:
The Diamonds Trust, Series 1 (the "Trust") seeks to match the total return of
the Dow Jones Industrial Average. To accomplish this, the Trust utilizes a full
replication approach. With this strategy, all 30 securities of the Dow Jones
Industrial Average are owned by the Trust. A replication management approach
results in low expected tracking error of the Trust relative to its benchmark.
 
For the fiscal year ended October 31, 2004, the Diamonds Trust (the "Trust")
advanced 4.27% versus the Dow Jones Industrials Index (the "Index", the "Dow")
gain of 4.45%. The Trust benefited from a strong December 2003 as it gained
7.00% for the month. With continued signs of a rebounding economy and the fed
funds target being maintained at one percent during that month's Federal Reserve
meeting, all indications pointed to strong earnings growth opportunities ahead.
The capture of Sadaam Hussein in December 2003 also served as a beacon of hope
amid the Middle East turmoil that helped to dampen concerns overhanging the
markets, for the time being, about some of the geopolitical risk. However, the
equity market proceeded to trade range-bound for the remainder of the fiscal
year, as improving conditions in the labor markets early on seemed to taper off
and disappoint. Surging oil prices, rising interest rates amid inflation fears,
and uncertainty surrounding the upcoming presidential election helped serve to
keep equities from moving with any conviction in either direction.
 
For the second consecutive fiscal year, the Dow Industrials lagged other major
U.S. benchmarks (S&P 500: 9.43%; S&P Midcap: 11.03%; and Russell 2000: 11.73%).
The biggest contributors to the Trust's performance included Exxon Mobil Corp.,
Boeing Co., and United Technologies. The biggest detractors to performance were
Intel Corp., Merck & Co., and Pfizer, Inc.
 
The performance information presented does not reflect the deduction of taxes
that a shareholder would pay on Trust distributions or the redemption of Trust
shares. Performance data quoted represents past performance and past performance
does not guarantee future results. An investment return and principal value of
an investment will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. Current performance may be lower or
higher than performance data quoted.
 
The S&P 500 Index is the Standard & Poor's composite index of 500 stocks, a
widely recognized, unmanaged index of common stock prices.
 
The S&P MidCap 400 Index is an unmanaged group of 400 domestic stocks chosen for
their market size, liquidity and industry group representation.
 
The Russell 2000 Index is an index that measures the performance of the 2,000
smallest companies in the Russell 3000 Index.
 
You can not invest directly in an index.
 
                                        1

 
DIAMONDS TRUST SERIES 1
SCHEDULE OF INVESTMENTS
OCTOBER 31, 2004
 
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COMMON STOCKS                                                  SHARES          VALUE
-----------------------------------------------------------------------------------------
                                                                     
3M Co. .....................................................  6,013,869    $  466,495,818
Alcoa, Inc. ................................................  6,013,869       195,450,742
Altria Group, Inc. .........................................  6,013,869       291,432,092
American Express Co. .......................................  6,013,869       319,156,028
American International Group, Inc. .........................  6,013,869       365,101,987
Boeing Co. .................................................  6,013,869       300,092,063
Caterpillar, Inc. ..........................................  6,013,869       484,357,009
Citigroup, Inc. ............................................  6,013,869       266,835,368
Coca-Cola Co. (The).........................................  6,013,869       244,523,914
Disney (Walt) Co. (The).....................................  6,013,869       151,669,776
Du Pont (E.I.) de Nemours...................................  6,013,869       257,814,564
Exxon Mobil Corp. ..........................................  6,013,869       296,002,632
General Electric Co. .......................................  6,013,869       205,193,210
General Motors Corp. .......................................  6,013,869       231,834,650
Hewlett-Packard Co. ........................................  6,013,869       112,218,796
Home Depot, Inc. ...........................................  6,013,869       247,049,739
Honeywell International, Inc. ..............................  6,013,869       202,547,108
Intel Corp. ................................................  6,013,869       133,868,724
International Business Machines Corp. ......................  6,013,869       539,744,743
J.P. Morgan Chase & Co. ....................................  6,013,869       232,135,343
Johnson & Johnson Co. ......................................  6,013,869       351,089,672
McDonald's Corp. ...........................................  6,013,869       175,304,281
Merck & Co., Inc. ..........................................  6,013,869       188,294,238
Microsoft Corp. ............................................  6,013,869       168,328,193
Pfizer Inc. ................................................  6,013,869       174,101,508
Procter & Gamble Co. .......................................  6,013,869       307,789,764
SBC Communications Inc. ....................................  6,013,869       151,910,331
United Technologies Corp. ..................................  6,013,869       558,207,321
Verizon Communications Inc. ................................  6,013,869       235,142,278
Wal-Mart Stores, Inc. ......................................  6,013,869       324,267,816
                                                                           --------------
Total Common Stocks -- (Cost $8,985,686,802)................               $8,177,959,708
                                                                           ==============

 
See accompanying notes to financial statements.
 
                                        2

 
DIAMONDS TRUST SERIES 1
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2004
 
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ASSETS
  Investments in securities, at value.......................    $8,177,959,708
  Cash......................................................        12,130,898
  Receivable for income related to DIAMONDS issued
     in-kind................................................           371,097
  Dividends receivable......................................        12,331,230
                                                                --------------
TOTAL ASSETS................................................     8,202,792,933
                                                                --------------
LIABILITIES
  Distribution payable......................................         6,400,141
  Accrued Trustee fees......................................           299,588
  Accrued expenses and other liabilities....................         5,202,558
                                                                --------------
TOTAL LIABILITIES...........................................        11,902,287
                                                                --------------
NET ASSETS..................................................    $8,190,890,646
                                                                ==============
NET ASSETS REPRESENTED BY:
  Paid in surplus...........................................    $9,306,840,593
  Undistributed net investment income.......................         5,063,559
  Accumulated net realized gain (loss) on investments.......      (313,286,412)
  Net unrealized appreciation (depreciation) on
     investments............................................      (807,727,094)
                                                                --------------
NET ASSETS..................................................    $8,190,890,646
                                                                ==============
NET ASSET VALUE PER DIAMOND.................................           $100.48
                                                                      --------
                                                                      --------
UNITS OF FRACTIONAL UNDIVIDED INTEREST
  ("DIAMONDS") OUTSTANDING, UNLIMITED UNITS AUTHORIZED,
     $0.00 PAR VALUE........................................        81,520,136
                                                                --------------
COST OF INVESTMENTS.........................................    $8,985,686,802
                                                                ==============

 
See accompanying notes to financial statements.
 
                                        3

 
DIAMONDS TRUST SERIES 1
STATEMENTS OF OPERATIONS
 
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                                           FOR THE YEAR ENDED    FOR THE YEAR ENDED    FOR THE YEAR ENDED
                                            OCTOBER 31, 2004      OCTOBER 31, 2003      OCTOBER 31, 2002
                                           ------------------    ------------------    ------------------
                                                                              
INVESTMENT INCOME
     Dividend income.....................    $ 145,895,782         $  120,911,703        $  71,072,353
                                             -------------         --------------        -------------
EXPENSES:
     Trustee expense.....................        4,708,689              3,480,020            2,450,305
     Marketing expense...................        4,019,534              3,230,848            1,549,601
     DJIA license fee....................        3,750,004              1,947,815            1,567,729
     Legal and audit services............           89,900                249,444               64,908
     SEC registration expense............           73,883                116,131               30,592
     Printing and postage expense........           43,194                338,844              151,203
     Miscellaneous expense...............              661                    715                  687
     Amortization of organization
          costs..........................               --                101,829              502,266
                                             -------------         --------------        -------------
Total expenses...........................       12,685,865              9,465,646            6,317,291
     Trustee earnings credit.............          (88,355)               (61,870)             (61,606)
                                             -------------         --------------        -------------
Net expenses after Trustee earnings
  credit.................................       12,597,510              9,403,776            6,255,685
                                             -------------         --------------        -------------
NET INVESTMENT INCOME....................      133,298,272            111,507,927           64,816,668
                                             -------------         --------------        -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
  INVESTMENTS
     Net realized gain on investment
       transactions......................      213,134,509            276,147,528          173,854,529
     Net increase in unrealized
       depreciation......................     (133,449,812)           636,501,507         (496,933,157)
                                             -------------         --------------        -------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
  ON INVESTMENTS.........................       79,684,697            912,649,035         (323,078,628)
                                             -------------         --------------        -------------
NET INCREASE (DECREASE) IN NET ASSETS
  FROM OPERATIONS........................    $ 212,982,969         $1,024,156,962        $(258,261,960)
                                             =============         ==============        =============

 
See accompanying notes to financial statements.
 
                                        4

 
DIAMONDS TRUST SERIES 1
STATEMENTS OF CHANGES IN NET ASSETS
 
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                                           FOR THE YEAR ENDED    FOR THE YEAR ENDED    FOR THE YEAR ENDED
                                            OCTOBER 31, 2004      OCTOBER 31, 2003      OCTOBER 31, 2002
                                           ------------------    ------------------    ------------------
                                                                              
INCREASE (DECREASE) IN NET ASSETS
  RESULTING FROM OPERATIONS:
     Net investment income...............    $  133,298,272        $  111,507,927        $   64,816,668
     Net realized gain on investment
       transactions......................       213,134,509           276,147,528           173,854,529
     Net increase in unrealized
          depreciation...................      (133,449,812)          636,501,507          (496,933,157)
                                             --------------        --------------        --------------
NET INCREASE (DECREASE) IN NET ASSETS
  RESULTING FROM OPERATIONS..............       212,982,969         1,024,156,962          (258,261,960)
                                             --------------        --------------        --------------
UNDISTRIBUTED NET INVESTMENT INCOME
  INCLUDED IN PRICE OF UNITS ISSUED AND
  REDEEMED, NET..........................        (1,282,877)             (398,863)              913,179
                                             --------------        --------------        --------------
DISTRIBUTIONS TO UNITHOLDERS FROM NET
  INVESTMENT INCOME......................      (130,617,261)         (110,187,836)          (62,477,206)
                                             --------------        --------------        --------------
NET INCREASE IN NET ASSETS FROM ISSUANCE
  AND REDEMPTION OF DIAMONDS.............     2,118,716,178           959,445,015         1,703,425,938
                                             --------------        --------------        --------------
NET INCREASE IN NET ASSETS DURING
  PERIOD.................................     2,199,799,009         1,873,015,278         1,383,599,951
NET ASSETS AT BEGINNING OF PERIOD........     5,991,091,637         4,118,076,359         2,734,476,408
                                             --------------        --------------        --------------
 
NET ASSETS END OF PERIOD*................    $8,190,890,646        $5,991,091,637        $4,118,076,359
                                             ==============        ==============        ==============
*INCLUDES UNDISTRIBUTED NET INVESTMENT
  INCOME.................................    $    5,063,559        $    2,382,548        $    1,062,457
                                             --------------        --------------        --------------

 
See accompanying notes to financial statements.
 
                                        5

 
DIAMONDS TRUST SERIES 1
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A DIAMOND OUTSTANDING DURING THE YEAR
 
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                                   FOR THE YEAR   FOR THE YEAR   FOR THE YEAR   FOR THE YEAR   FOR THE YEAR
                                      ENDED          ENDED          ENDED          ENDED          ENDED
                                     10/31/04       10/31/03       10/31/02       10/31/01       10/31/00
                                   ------------   ------------   ------------   ------------   ------------
                                                                                
NET ASSET VALUE, BEGINNING OF
  YEAR...........................   $    98.20     $    84.12     $    90.84     $   109.73     $   107.31
                                    ----------     ----------     ----------     ----------     ----------
INVESTMENT OPERATIONS:
     Net investment income(1)....         1.94           1.91           1.73           1.56           1.43
     Net realized and unrealized
       gain (loss) on
       investments...............         2.28          14.06          (6.77)        (18.86)          2.47
                                    ----------     ----------     ----------     ----------     ----------
TOTAL FROM INVESTMENT
  OPERATIONS.....................         4.22          15.97          (5.04)        (17.30)          3.90
                                    ----------     ----------     ----------     ----------     ----------
UNDISTRIBUTED NET INVESTMENT
  INCOME INCLUDED IN PRICE OF
  UNITS ISSUED AND REDEEMED,
  NET............................         0.00(5)       (0.01)          0.00(5)        0.00(5)        0.00(5)
                                    ----------     ----------     ----------     ----------     ----------
LESS DISTRIBUTIONS FROM:
     Net investment income.......        (1.94)         (1.88)         (1.68)         (1.59)         (1.48)
                                    ----------     ----------     ----------     ----------     ----------
NET ASSET VALUE, END OF YEAR.....   $   100.48     $    98.20     $    84.12     $    90.84     $   109.73
                                    ==========     ==========     ==========     ==========     ==========
TOTAL INVESTMENT RETURN(2).......         4.27%         19.22%         (5.71)%       (15.91)%         3.68%
RATIOS AND SUPPLEMENTAL DATA
Ratios to average net assets:
     Net investment income.......         1.89%          2.12%          1.85%          1.51%          1.34%
     Total expenses..............         0.18%          0.18%          0.18%          0.18%          0.36%
     Net expenses excluding
       trustee earnings credit...         0.18%          0.18%          0.18%          0.18%          0.18%
     Net expenses excluding
       rebates, trustee earnings
       credit and waivers(3).....         0.18%          0.18%          0.18%          0.17%          0.17%
     Portfolio turnover
       rate(4)...................        13.88%          8.71%          0.26%         12.66%         23.85%
NET ASSET VALUE, END OF YEAR
  (000'S)........................   $8,190,891     $5,991,092     $4,118,076     $2,734,476     $2,002,605

 
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(1) Per share numbers have been calculated using the average shares method,
    which more appropriately presents the per share data for the period.
 
(2) Total returns for periods of less than one year are not annualized and do
    not include transaction fees.
 
(3) Excludes expenses reimbursed by the Sponsor and Trustee from the period
    November 1, 1998 through February 29, 2000 and the Sponsor from the period
    March 1, 2000 through October 31, 2000.
 
(4) Portfolio turnover ratio excludes securities received or delivered from
    processing creations or redemptions of DIAMONDS.
 
(5) Amount shown represents less than $0.01.
 
See accompanying notes to financial statements.
 
                                        6

 
DIAMONDS TRUST SERIES 1
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2004
 
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NOTE 1 -- ORGANIZATION
DIAMONDS Trust Series 1 (the "Trust") is a unit investment trust created under
the laws of the State of New York and registered under the Investment Company
Act of 1940. The Trust was created to provide investors with the opportunity to
purchase units of beneficial interest in the Trust representing proportionate
undivided interests in the portfolio of securities consisting of substantially
all of the component common stocks, which comprise the Dow Jones Industrial
Average (the "DJIA"). Each unit of fractional undivided interest in the Trust is
referred to as a "DIAMOND". The Trust commenced operations on January 14, 1998
upon the initial issuance of 500,000 DIAMONDS (equivalent to ten "Creation
Units" -- see Note 4) in exchange for a portfolio of securities assembled to
reflect the intended portfolio composition of the Trust.
 
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that effect the reported amounts and disclosures in
the financial statements. Actual results could differ from these estimates. The
following is a summary of significant accounting policies followed by the Trust.
 
SECURITY VALUATION
Portfolio securities are valued based on the closing sale price on the exchange
which is deemed to be the principal market for the security, except for
securities listed on the NASDAQ which are valued at the NASDAQ official closing
price. If no closing sale price or official closing price is available, then the
security is valued at the previous closing sale price on the exchange which is
deemed to be the principal market for the security, or at the previous official
closing price if the security is listed on the NASDAQ. If there is no closing
sale price or official closing price available, valuation will be determined by
the Trustee in good faith based on available information.
 
INVESTMENT TRANSACTIONS
Investment transactions are recorded on the trade date. Realized gains and
losses from the sale or disposition of securities are recorded on the identified
cost basis. Dividend income is recorded on the ex-dividend date.
 
DISTRIBUTIONS TO UNITHOLDERS
The Trust declares and distributes dividends from net investment income to its
unitholders monthly. The Trust will distribute net realized capital gains, if
any, at least annually.
 
FEDERAL INCOME TAX
The Trust has qualified and intends to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986, as amended. By
so qualifying and electing, the Trust will not be subject to federal income
taxes to the extent it distributes its taxable income, including any net
realized capital gains, for each fiscal year. In addition, by distributing
during each calendar year substantially all of its net investment income and
capital gains, if any, the Trust will not be subject to federal excise tax.
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally
 
                                        7

DIAMONDS TRUST SERIES 1
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 2004
 
--------------------------------------------------------------------------------
 
accepted accounting principles. These differences are primarily due to differing
treatments for income equalization, in-kind transactions and losses deferred due
to wash sales. Net investment income per share calculations in the financial
highlights for all years presented exclude these differences.
 
During the fiscal year ended October 31, 2004, the Trust reclassified
$434,348,797 of non-taxable security gains realized in the in-kind redemption of
Creation Units (Note 4) as an increase to paid in surplus in the Statements of
Assets and Liabilities.
 
At October 31, 2004, the Trust had the following capital loss carryforwards
which may be used to offset any net realized gains, expiring October 31:
 

                                              
2007...........................................  $  9,197,094
2008...........................................    11,386,433
2010...........................................     2,065,467
2011...........................................    68,716,435
2012...........................................   221,460,584

 
The tax character of distributions paid during the year ended October 31, 2004,
2003, and 2002 were as follows:
 


DISTRIBUTIONS PAID FROM:                          2004           2003          2002
------------------------                      ------------   ------------   -----------
                                                                   
Ordinary Income.............................  $130,617,261   $110,187,836   $62,477,206
Long Term Capital Gain......................            --             --            --
Return of Capital...........................            --             --            --
                                              ------------   ------------   -----------
     Total..................................  $130,617,261   $110,187,836   $62,477,206

 
As of October 31, 2004, the components of distributable earnings (excluding
unrealized appreciation (depreciation) on a federal income tax basis were
undistributed ordinary income of $11,463,700 and undistributed long term capital
gain of $0.
 
NOTE 3 -- TRANSACTIONS WITH THE TRUSTEE AND SPONSOR
In accordance with the Trust Agreement, State Street Bank and Trust Company (the
"Trustee") maintains the Trust's accounting records, acts as custodian and
transfer agent to the Trust, and provides administrative services, including
filing of all required regulatory reports. The Trustee is also responsible for
determining the composition of the portfolio of securities which must be
delivered and/or received in exchange for the issuance and/or redemption of
Creation Units of the Trust, and for adjusting the composition of the Trust's
portfolio
 
                                        8

DIAMONDS TRUST SERIES 1
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 2004
 
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NOTE 3 -- TRANSACTIONS WITH THE TRUSTEE AND SPONSOR (CONTINUED)
from time to time to conform to changes in the composition and/or weighting
structure of the DJIA. For these services, the Trustee received a fee at the
following annual rates for the year ended October 31, 2004:
 


NET ASSET VALUE OF THE TRUST                FEE AS A PERCENTAGE OF NET ASSET VALUE OF THE TRUST
----------------------------                ---------------------------------------------------
                                         
$0 - $499,999,999                           10/100 of 1% per annum plus or minus the Adjustment
                                            Amount
$500,000,000 - $2,499,999,999               8/100 of 1% per annum plus or minus the Adjustment
                                            Amount
$2,500,000,000 - and above                  6/100 of 1% per annum plus or minus the Adjustment
                                            Amount

 
The Adjustment Amount is the sum of (a) the excess or deficiency of transaction
fees received by the Trustee, less the expenses incurred in processing orders
for creation and redemption of DIAMONDS and (b) the amounts earned by the
Trustee with respect to the cash held by the Trustee for the benefit of the
Trust. During the year ended October 31, 2004, the Adjustment Amount decreased
the Trust's expenses by $208,288.
 
PDR Services LLC (the "Sponsor", a wholly-owned subsidiary of the American Stock
Exchange LLC) agreed to reimburse the Trust for, or assume, the ordinary
operating expenses of the Trust which exceeded 18.00/100 of 1% per annum of the
daily net asset value of the Trust. The amounts of such reimbursements by the
Sponsor for the fiscal years ended October 31, 2002, October 31, 2003 and
October 31, 2004 were $0.
 
Dow Jones & Company, Inc. ("Dow Jones"), the American Stock Exchange LLC (the
"AMEX"), and PDR Services (the "Sponsor") have entered into a License Agreement
pursuant to which certain Dow Jones marks may be used in connection with the
Trust subject to the payment of license fees.
 
NOTE 4 -- TRUST TRANSACTIONS IN DIAMONDS
Transactions in DIAMONDS were as follows.
 


                                                          YEAR ENDED OCTOBER 31, 2004
                                                         -----------------------------
                                                          DIAMONDS         AMOUNTS
                                                         -----------   ---------------
                                                                 
DIAMONDS sold..........................................   72,900,000   $ 7,485,525,585
DIAMONDS issued upon dividend reinvestment.............       11,705         1,201,305
DIAMONDS redeemed......................................  (52,400,000)   (5,369,293,589)
Net income equalization................................           --         1,282,877
                                                         -----------   ---------------
Net Increase...........................................   20,511,705   $ 2,118,716,178
                                                         ===========   ===============

 
                                        9

DIAMONDS TRUST SERIES 1
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 2004
 
--------------------------------------------------------------------------------
 
NOTE 4 -- TRUST TRANSACTIONS IN DIAMONDS (CONTINUED)
 


                                                          YEAR ENDED OCTOBER 31, 2003
                                                         -----------------------------
                                                          DIAMONDS         AMOUNTS
                                                         -----------   ---------------
                                                                 
DIAMONDS sold..........................................   70,850,000   $ 6,167,457,123
DIAMONDS issued upon dividend reinvestment.............        4,321           385,016
DIAMONDS redeemed......................................  (58,800,000)   (5,208,795,987)
Net income equalization................................           --           398,863
                                                         -----------   ---------------
Net Increase...........................................   12,054,321   $   959,445,015
                                                         ===========   ===============

 


                                                          YEAR ENDED OCTOBER 31, 2002
                                                         -----------------------------
                                                          DIAMONDS         AMOUNTS
                                                         -----------   ---------------
                                                                 
DIAMONDS sold..........................................   85,000,000   $ 8,317,016,274
DIAMONDS issued upon dividend reinvestment.............        2,297           210,273
DIAMONDS redeemed......................................  (66,150,000)   (6,612,887,430)
Net income equalization................................           --          (913,179)
                                                         -----------   ---------------
Net Increase...........................................   18,852,297   $ 1,703,425,938
                                                         ===========   ===============

 
Except for under the Trust's dividend reinvestment plan, DIAMONDS are issued and
redeemed by the Trust only in Creation Unit size aggregations of 50,000
DIAMONDS. Such transactions are only permitted on an in-kind basis, with a
separate cash payment which is equivalent to the undistributed net investment
income per DIAMOND (income equalization) and a balancing cash component to
equate the transaction to the net asset value per unit of the Trust on the
transaction date. A transaction fee of $1,000 is charged in connection with each
creation or redemption of Creation Units through the DIAMONDS Clearing Process
per Participating party per day, regardless of the number of Creation Units
created or redeemed. Transaction fees are received by the Trustee and used to
offset the expense of processing orders.
 
NOTE 5 -- INVESTMENT TRANSACTIONS
For the fiscal year ended October 31, 2004, the Trust had gross in-kind
contributions, gross in-kind redemptions, purchases and sales of investment
securities of $6,761,423,192, $4,644,218,488, $988,307,215 and $993,544,047,
respectively. At October 31, 2004, the cost of investments for federal income
tax purposes was $8,986,147,201 accordingly, gross unrealized appreciation was
$113,734,724, and gross unrealized depreciation was $921,922,217, resulting in
net unrealized depreciation of $808,187,493.
 
NOTE 6 -- TAX INFORMATION (UNAUDITED)
For Federal income tax purposes, the percentage of Trust ordinary distributions
which qualify for the corporate dividends received deduction for the fiscal year
ended October 31, 2004 is 100%.
 
For the fiscal year ended October 31, 2004, certain dividends paid by the Trust
may be designated as qualified dividend income and subject to a maximum tax rate
of 15%, as provided for by the Jobs and Growth Tax
 
                                        10

DIAMONDS TRUST SERIES 1
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 2004
 
--------------------------------------------------------------------------------
 
Relief Reconciliation Act of 2003. Complete information will be reported in
conjunction with your 2004 Form 1099-DIV.
 
                                        11

 
DIAMONDS TRUST SERIES 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
--------------------------------------------------------------------------------
To the Trustee and Unitholders of
DIAMONDS Trust Series 1
 
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of DIAMONDS Trust Series 1 (the
"Trust") at October 31, 2004, and the results of its operations, the changes in
its net assets and the financial highlights for the periods indicated, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements and financial highlights (hereafter referred
to as "financial statements") are the responsibility of the Trustee; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by the Trustee, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at October 31, 2004 by
correspondence with the custodian, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 17, 2004
 
                                        12

 
OTHER INFORMATION (UNAUDITED)
On November 8, 2004, State Street Bank and Trust Company, as Trustee of the
Trust, declared a special dividend (the "Special Dividend") to be distributed to
Beneficial Owners of record as of November 17, 2004. The Special Dividend is
being declared in light of the special dividend paid by Microsoft Corporation,
the common shares of which are held by the Trust. The ex-date for the Special
Dividend is November 15, 2004, and the payment date is December 2, 2004.
 
The Special Dividend was declared by the Trustee pursuant to authority granted
it by an amendment, dated November 8, 2004 (the "Amendment"), to the Standard
Terms and Conditions of the Trust dated as of January 1, 2004. The Amendment
expands the circumstances under which the Trustee may declare a special dividend
to include circumstances where, in the Trustee's discretion, doing so would be
advantageous to the Beneficial Owners of Trust units.
 
                                        13

 
DIAMONDS TRUST SERIES 1
 
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SPONSOR
PDR Services LLC
c/o American Stock Exchange LLC
86 Trinity Place
New York, NY 10006
 
TRUSTEE
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
 
DISTRIBUTOR
ALPS Distributors, Inc.
1625 Broadway, Suite 2200
Denver, CO 80202
 
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP
125 High Street
Boston, MA 02110
 
LEGAL COUNSEL
Carter, Ledyard & Milburn
2 Wall Street
New York, NY 10005