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: 811-07683

Morgan Stanley Special Value Fund
(Exact name of registrant as specified in charter)

1221 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip code)

Ronald E. Robison
1221 Avenue of the Americas, New York, New York 10020
(Name and address of agent for service)

Registrant's telephone number, including area code: 212-762-4000

Date of fiscal year end: July 31, 2005

Date of reporting period: January 31, 2005

Item 1 - Report to Shareholders

Welcome, Shareholder:

In this report, you'll learn about how your investment in Morgan Stanley Special
Value Fund performed during the semiannual period. We will provide an overview
of the market conditions, and discuss some of the factors that affected
performance during the reporting period. In addition, this report includes the
Fund's financial statements and a list of Fund investments.

This material must be preceded or accompanied by a prospectus for the fund being
offered. Market forecasts provided in this report may not necessarily come to
pass. There is no assurance that the Fund will achieve its investment objective.
The Fund is subject to market risk, which is the possibility that market values
of securities owned by the Fund will decline and, therefore, the value of the
Fund's shares may be less than what you paid for them. Accordingly, you can lose
money investing in this Fund.

FUND REPORT

For the six-month period ended January 31, 2005

TOTAL RETURN FOR THE SIX MONTHS ENDED JANUARY 31, 2005

<Table>
<Caption>
LIPPER
RUSSELL SMALL-CAP
2000 VALUE
VALUE FUNDS
CLASS A CLASS B CLASS C CLASS D INDEX(1) INDEX(2)

12.50% 12.13% 12.07% 12.69% 14.24% 13.70%
</Table>

PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES
SHOWN. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT
MORGANSTANLEY.COM, OR SPEAK WITH YOUR FINANCIAL ADVISOR. INVESTMENT RETURNS AND
PRINCIPAL VALUE WILL FLUCTUATE AND FUND SHARES, WHEN REDEEMED, MAY BE WORTH MORE
OR LESS THAN THEIR ORIGINAL COST.

The performance of the Fund's four share classes varies because each has
different expenses. The Fund's total returns assume the reinvestment of all
distributions but do not reflect the deduction of any applicable sales charges.
Such costs would lower performance. See Performance Summary for standardized
performance information.

MARKET CONDITIONS

Performance for the equity markets was generally strong for the six months ended
January 31, 2005, with positive returns in all months except January. Although
the Federal Reserve raised interest rates several times over the six month
period, the market largely anticipated these changes and did not experience any
major disruption. A number of concerns weighed on investor confidence early in
the period, including apprehension about the possibility of continued terror
attacks and anxiety related to the unfolding events in Iraq. Investors also
worried about rising oil prices and the possibility of another protracted
outcome to the U.S. presidential election. Several of these concerns were
alleviated as oil prices fell from their highs at the end of October and the
presidential election came to a quick and decisive conclusion, setting the stage
for an equities rally in November and December. Stock performance was further
boosted during this time by a pickup in both IPO offerings and mergers and
acquisitions activity. In the last month of the period, however, investors
became cautious due to a number of concerns, including inflation, the potential
for more aggressive rate cuts by the Federal Reserve, and uncertainty about
upcoming elections in Iraq. These concerns caused stocks to fall and partially
offset the market's positive returns for the six months.

During the period, small- and mid-cap stocks outperformed their large-cap
counterparts, and value outperformed growth across the market capitalization
spectrum, though not as strongly among smaller cap issues. Within the benchmark
Russell 2000 Value Index, energy, health care, and basic resources were the
strongest-performing sectors; while technology, retail, and consumer durables
lagged.

PERFORMANCE ANALYSIS

Morgan Stanley Special Value Fund underperformed both the Russell 2000 Value
Index and the Lipper Small-Cap Value Funds Index for the six months ended
January 31, 2005, assuming no deduction of applicable sales charges. The Fund's
relative performance was hurt largely by stock selection in the basic resources,
health care and consumer durables sectors. While a number of the Fund's holdings
in the basic resources sector made gains, the Fund suffered in part from not
having enough exposure to the steel and other metals companies that performed
well during a period of strong demand and high prices. Within the top-performing
health care sector, the Fund

was negatively impacted by two pharmaceutical and biotechnology-related
holdings. Stock selection was also negative within the consumer durables sector,
primarily driven by weakness in an automotive-related holding which was
eliminated from the portfolio. In addition, the Fund was hurt by a lack of
exposure to stocks in the housing industry. Although interest rates were raised
during the period, many housing companies continued to report strong earnings as
new home construction remained high.

Other positions were more positive for performance over the period. In
particular, a number of holdings within the consumer non-durables sector helped
drive returns. Stock selection within utilities was also beneficial, as all
three of the Fund's holdings outperformed the benchmark sector return. An
underweighted position in technology stocks relative to the Russell 2000 Value
Index helped the Fund, due in part to the adverse effect that weakening demand
trends and declining margins had on many companies in the sector. Stock
selection in the sector was also positive, as two of the Fund's holdings
received offers to be acquired.

There is no guarantee that any sectors mentioned will continue to perform well
or be held by the Fund in the future.

INVESTMENT STRATEGY

THE FUND WILL NORMALLY INVEST AT LEAST 65 PERCENT OF ITS ASSETS IN COMMON STOCKS
OF SMALL COMPANIES THAT THE FUND'S "INVESTMENT ADVISER," MORGAN STANLEY
INVESTMENT ADVISORS INC., BELIEVES ARE UNDERVALUED RELATIVE TO THE MARKETPLACE
OR SIMILAR COMPANIES. COMPANIES WITHIN A CAPITALIZATION RANGE OF $100 MILLION TO
$1.5 BILLION ARE CONSIDERED SMALL COMPANIES. THE FUND MAY INVEST IN FOREIGN
SECURITIES (INCLUDING DEPOSITARY RECEIPTS) THAT ARE LISTED IN THE UNITED STATES
ON A NATIONAL SECURITIES EXCHANGE. IN DECIDING WHICH SECURITIES TO BUY, HOLD OR
SELL, THE INVESTMENT ADVISER PURSUES A VALUE-ORIENTED APPROACH THAT SEEKS TO
IDENTIFY SECURITIES WHOSE MARKET VALUE IS LESS THAN THEIR INTRINSIC VALUE.

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 BY FILING THE SCHEDULE ELECTRONICALLY WITH THE
SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON
FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON FORM N-CSR. 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

<Table>
<Caption>
TOP 10 HOLDINGS

Apria Healthcare Group, Inc. 3.4%
DRS Technologies, Inc. 2.6
AFC Enterprises, Inc. 2.4
Laidlaw International Inc. 2.2
LNR Property Corp. 2.1
TBC Corporation 1.9
Central Garden & Pet Co. 1.9
Denbury Resources Inc. 1.9
Terex Corp. 1.8
PNM Resources Inc. 1.8
</Table>

<Table>
<Caption>
TOP FIVE INDUSTRIES

Regional Banks 5.5%
Real Estate Investment Trusts 4.4
Oil & Gas Production 4.2
Wholesale Distributors 3.6
Specialty Insurance 3.6
</Table>

Data as of January 31, 2005. Subject to change daily. All percentages for top 10
holdings and top five industries are as a percentage of net assets. These data
are provided for informational purposes only and should not be deemed a
recommendation to buy or sell the securities mentioned. Morgan Stanley is a
full-service securities firm engaged in securities trading and brokerage
activities, investment banking, research and analysis, financing and financial
advisory services.

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. YOU MAY OBTAIN
COPIES OF A FUND'S FISCAL QUARTER FILINGS BY CONTACTING MORGAN STANLEY CLIENT
RELATIONS AT (800) 869-NEWS.

PROXY VOTING POLICIES AND PROCEDURES

A DESCRIPTION OF (1) THE FUND'S POLICIES AND PROCEDURES WITH RESPECT TO THE
VOTING OF PROXIES RELATING TO THE FUND'S PORTFOLIO SECURITIES AND (2) HOW THE
FUND VOTED PROXIES RELATING TO PORTFOLIO SECURITIES DURING THE MOST RECENT
12-MONTH PERIOD ENDED JUNE 30, 2004, IS AVAILABLE WITHOUT CHARGE, UPON REQUEST,
BY CALLING (800) 869-NEWS OR BY VISITING THE MUTUAL FUND CENTER ON OUR WEB SITE
AT WWW.MORGANSTANLEY.COM. THIS INFORMATION IS ALSO AVAILABLE ON THE SECURITIES
AND EXCHANGE COMMISSION'S WEB SITE AT HTTP://WWW.SEC.GOV.

HOUSEHOLDING NOTICE

TO REDUCE PRINTING AND MAILING COSTS, THE FUND ATTEMPTS TO ELIMINATE DUPLICATE
MAILINGS TO THE SAME ADDRESS. THE FUND DELIVERS A SINGLE COPY OF CERTAIN
SHAREHOLDER DOCUMENTS, INCLUDING SHAREHOLDER REPORTS, PROSPECTUSES AND PROXY
MATERIALS, TO INVESTORS WITH THE SAME LAST NAME WHO RESIDE AT THE SAME ADDRESS.
YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME
UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE
DOCUMENTS BY CALLING (800) 350-6414, 8:00 A.M. TO 8:00 P.M., ET. ONCE OUR
CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING
INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS.

EXPENSE EXAMPLE

As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments and redemption fees;
and (2) ongoing costs, including management fees; distribution and service
(12b-1) fees; and other Fund expenses. This example is intended to help you
understand your ongoing costs (in dollars) of investing in the Fund and to
compare these costs with the ongoing costs of investing in other mutual funds.

The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period 08/01/04 - 01/31/05.

ACTUAL EXPENSES

The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.

HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES

The second line of the table below provides information about hypothetical
expenses based on the Fund's actual expense ratio and an assumed rate of return
of 5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use this
information to compare the ongoing cost of investing in the Fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of the other funds.

Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) and redemption fees. Therefore, the second line of the table is
useful in comparing ongoing costs, and will not help you determine the relative
total cost of owning different funds. In addition, if these transactional costs
were included, your costs would have been higher.

<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
08/01/04 -
08/01/04 01/31/05 01/31/05
------------- ------------- ---------------

CLASS A
Actual (12.50% return)...................................... $1,000.00 $1,125.00 $ 6.75
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,018.85 $ 6.41
CLASS B
Actual (12.13% return)...................................... $1,000.00 $1,121.30 $10.75
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,015.07 $10.21
CLASS C
Actual (12.07% return)...................................... $1,000.00 $1,120.70 $10.74
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,015.07 $10.21
CLASS D
Actual (12.69% return)...................................... $1,000.00 $1,126.90 $ 5.41
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,020.11 $ 5.14
</Table>

- ------------------
* Expenses are equal to the Fund's annualized expense ratio of 1.26%, 2.01%,
2.01% and 1.01% respectively, multiplied by the average account value over
the period, multiplied by 184/365 (to reflect the one-half year period).

PERFORMANCE SUMMARY

AVERAGE ANNUAL TOTAL RETURNS -- PERIOD ENDED JANUARY 31, 2005

<Table>
<Caption>
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES(+) CLASS D SHARES(++)
(since 07/28/97) (since 10/29/96) (since 07/28/97) (since 07/28/97)
SYMBOL SVFAX SVFBX SVFCX SVFDX

1 YEAR 10.62%(3) 9.78%(3) 9.79%(3) 10.89%(3)
4.81(4) 4.78(4) 8.79(4) --
5 YEARS 15.33(3) 14.45(3) 14.48(3) 15.62(3)
14.09(4) 14.22(4) 14.48(4) --
SINCE INCEPTION 10.38(3) 11.22(3) 9.57(3) 10.63(3)
9.59(4) 11.22(4) 9.57(4) --
</Table>

Performance data quoted represents past performance, which is no guarantee of
future results and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
morganstanley.com or speak with your financial advisor. Investment returns and
principal value will fluctuate and fund shares, when redeemed, may be worth more
or less than their original cost. The table does not reflect the deduction of
taxes that a shareholder would pay on fund distributions or the redemption of
fund shares. Performance for Class A, Class B, Class C, and Class D shares will
vary due to differences in sales charges and expenses.

* The maximum front-end sales charge for Class A is 5.25%.

** The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%. The
CDSC declines to 0% after six years.

+ The maximum contingent deferred sales charge for Class C is 1.0% for shares
redeemed within one year of purchase.

++ Class D has no sales charge.

(1) The Russell 2000 Value Index measures the performance of those companies in
the Russell 2000 Index with lower price-to-book ratios and lower forecasted
growth values. Indexes are unmanaged and their returns do not include any
sales charges or fees. Such costs would lower performance. It is not
possible to invest directly in an index.

(2) The Lipper Small-Cap Value Funds Index is an equally weighted performance
index of the largest qualifying funds (based on net assets) in the Lipper
Small-Cap Value Funds classification. The Index, which is adjusted for
capital gains distributions and income dividends, is unmanaged and should
not be considered an investment. There are currently 30 funds represented
in this Index.

(3) Figure shown assumes reinvestment of all distributions and does not reflect
the deduction of any sales charges.

(4) Figure shown assumes reinvestment of all distributions and the deduction of
the maximum applicable sales charge. See the Fund's current prospectus for
complete details on fees and sales charges.

Morgan Stanley Special Value Fund
PORTFOLIO OF INVESTMENTS - JANUARY 31, 2005 (UNAUDITED)

<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------

Common Stocks (99.1%)
Advertising/Marketing
Services (1.0%)
173,100 R.H. Donnelley
Corp.*................ $ 10,247,520
--------------
Aerospace & Defense
(3.6%)
682,100 DRS Technologies,
Inc.*................. 27,693,260
239,000 Moog Inc. (Class A)*... 10,394,110
--------------
38,087,370
--------------
Agricultural
Commodities/ Milling
(1.9%)
344,200 Corn Products
International,
Inc. ................. 10,105,712
343,400 Delta & Pine Land
Co. .................. 10,109,696
--------------
20,215,408
--------------
Air Freight/Couriers
(1.4%)
751,500 Pacer International,
Inc.*................. 14,699,340
--------------
Apparel/Footwear Retail
(2.3%)
461,500 New York & Company,
Inc.*................. 8,076,250
412,800 Stage Stores, Inc.*.... 16,317,984
--------------
24,394,234
--------------
Biotechnology (0.5%)
637,100 Diversa Corp.*......... 4,854,702
--------------
Broadcasting (1.6%)
519,900 Nexstar Broadcasting
Group Inc. (Class
A)*................... 4,491,936
107,165 Saga Communications,
Inc. (Class A)*....... 1,821,805
1,290,600 Sinclair Broadcast
Group, Inc. (Class
A).................... 10,621,638
--------------
16,935,379
--------------
Chemicals: Major
Diversified (0.7%)
516,104 Hercules Inc.*......... 7,488,669
--------------
</Table>

<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------

Chemicals: Specialty
(2.5%)
328,300 Cytec Industries,
Inc................... $ 16,743,300
537,000 Schulman (A.), Inc..... 9,499,530
--------------
26,242,830
--------------
Commercial Printing/
Forms (1.0%)
243,200 Banta Corp............. 10,532,992
--------------
Computer Communications
(0.1%)
253,400 Adaptec, Inc.*......... 1,520,400
--------------
Consumer Sundries
(1.9%)
490,100 Central Garden & Pet
Co.*.................. 20,084,298
--------------
Containers/ Packaging
(0.8%)
617,742 Rock-Tenn Co. (Class
A).................... 8,568,082
--------------
Electric Utilities
(1.8%)
735,650 PNM Resources Inc...... 18,560,449
--------------
Electrical Products
(2.1%)
390,700 Acuity Brands, Inc..... 10,732,529
580,600 Belden CDT Inc......... 11,791,986
--------------
22,524,515
--------------
Electronic Components
(1.2%)
352,538 EMS Technologies
Inc.*................. 5,446,712
543,500 Methode Electronics,
Inc................... 6,810,055
--------------
12,256,767
--------------
Electronic Equipment/
Instruments (1.8%)
741,061 Creo Inc.*............. 11,983,179
244,700 Lipman Electronic
Engineering Ltd....... 7,174,604
--------------
19,157,783
--------------
Electronics/ Appliances
(1.0%)
752,300 Lo-Jack Corp.*......... 10,366,694
--------------
</Table>

See Notes to Financial Statements
7

Morgan Stanley Special Value Fund
PORTFOLIO OF INVESTMENTS - JANUARY 31, 2005 (UNAUDITED) continued

<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------

Finance/Rental/ Leasing
(0.7%)
519,100 Collegiate Funding
Services*............. $ 7,765,736
--------------
Financial Conglomerates
(1.2%)
648,800 Conseco Inc.*.......... 12,359,640
--------------
Food: Specialty/ Candy
(1.1%)
270,365 Ralcorp Holdings,
Inc. ................. 11,896,060
--------------
Gas Distributors (2.5%)
451,800 AGL Resources, Inc. ... 15,654,870
265,100 UGI Corp. ............. 11,046,717
--------------
26,701,587
--------------
Hotels/Resorts/
Cruiselines (1.7%)
922,300 Intrawest Corp. (ADR)
(Canada).............. 17,938,735
--------------
Industrial Machinery
(2.7%)
482,500 CIRCOR International,
Inc. ................. 11,025,125
556,200 Watts Water
Technologies, Inc. ... 17,826,210
--------------
28,851,335
--------------
Information Technology
Services (0.8%)
269,300 Intergraph Corp.*...... 8,000,903
--------------
Insurance Brokers/
Services (1.1%)
514,891 CCC Information
Services Group,
Inc.*................. 11,940,322
--------------
Life/Health Insurance
(1.6%)
357,700 Reinsurance Group of
America, Inc. ........ 16,819,054
--------------
</Table>

<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------

Medical Specialties
(2.3%)
190,240 Bio-Rad Laboratories,
Inc. (Class A)*....... $ 11,184,210
658,600 KV Pharmaceutical Co.
(Class A)*............ 13,534,230
--------------
24,718,440
--------------
Medical/Nursing
Services (3.4%)
1,090,300 Apria Healthcare Group,
Inc.*................. 35,761,840
--------------
Metal Fabrications
(0.7%)
585,630 General Cable Corp.*... 7,068,554
--------------
Miscellaneous
Commercial Services
(2.6%)
444,100 Geo Group Inc.
(The)*................ 13,300,795
474,400 MAXIMUS, Inc. ......... 14,269,952
--------------
27,570,747
--------------
Miscellaneous
Manufacturing (0.1%)
14,900 Ametek, Inc. .......... 569,180
--------------
Multi-Line Insurance
(1.0%)
492,500 Max Re Capital Ltd.
(ADR) (Bermuda)....... 10,539,500
--------------
Oil & Gas Production
(4.2%)
682,200 Denbury Resources
Inc.*................. 19,920,240
517,700 Remington Oil & Gas
Corp.*................ 15,142,725
226,290 St. Mary Land &
Exploration Co. ...... 9,732,733
--------------
44,795,698
--------------
</Table>

See Notes to Financial Statements
8

Morgan Stanley Special Value Fund
PORTFOLIO OF INVESTMENTS - JANUARY 31, 2005 (UNAUDITED) continued

<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------

Oilfield Services/
Equipment (3.2%)
1,016,600 Superior Energy
Services, Inc.*....... $ 16,184,272
459,090 Universal Compression
Holdings, Inc.*....... 17,867,783
--------------
34,052,055
--------------
Other Consumer Services
(1.2%)
681,600 MoneyGram
International,
Inc. ................. 13,223,040
--------------
Other Transportation
(2.2%)
1,073,100 Laidlaw International
Inc.*................. 23,361,387
--------------
Packaged Software
(2.1%)
392,750 Hummingbird Ltd.
(Canada)*............. 9,465,275
1,222,388 MSC. Software Corp.*... 12,602,820
--------------
22,068,095
--------------
Pharmaceuticals: Other
(0.9%)
260,900 Icon PLC (Sponsored
ADR) (Ireland)*....... 9,162,808
--------------
Precious Metals (0.6%)
405,100 Apex Silver Mines
Ltd.*................. 6,546,416
--------------
Property - Casualty
Insurers (2.2%)
434,600 Platinum Underwriters
Holdings Ltd. (ADR)
(Bermuda)............. 12,833,738
595,686 United America
Indemnity Ltd. (Class
A)*................... 10,722,348
--------------
23,556,086
--------------
Real Estate Development
(2.1%)
346,200 LNR Property Corp. .... 21,810,600
--------------
</Table>

<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------

Real Estate Investment
Trusts (4.4%)
932,100 Anthracite Capital,
Inc. ................. $ 11,175,879
252,700 Cousins Properties,
Inc. ................. 7,654,283
580,900 Falcon Financial
Investment Trust...... 4,356,750
260,200 Heritage Property
Investment Trust...... 7,660,288
1,092,300 MeriStar Hospitality
Corp.*................ 8,432,556
148,400 Parkway Properties,
Inc. ................. 6,900,600
--------------
46,180,356
--------------
Regional Banks (5.5%)
82,600 Alabama National
BanCorporation........ 5,141,850
324,500 Central Pacific
Financial Corp. ...... 11,909,150
242,777 Independent Bank
Corp. - Michigan...... 7,470,248
399,772 Integra Bank Corp. .... 8,994,870
520,600 Provident Bancorp
Inc. ................. 6,637,650
235,600 Provident Bankshares
Corp. ................ 7,791,292
265,100 R&G Financial Corp.
(Class B) (Puerto
Rico)................. 9,774,237
--------------
57,719,297
--------------
Restaurants (3.5%)
1,023,500 AFC Enterprises,
Inc.*................. 25,321,390
2,767,400 Denny's Corp.*......... 12,093,538
--------------
37,414,928
--------------
Savings Banks (2.3%)
666,346 First Niagara Financial
Group, Inc. .......... 9,095,623
214,304 MB Financial, Inc. .... 8,505,726
150,780 PFF Bancorp, Inc. ..... 6,474,493
--------------
24,075,842
--------------
</Table>

See Notes to Financial Statements
9

Morgan Stanley Special Value Fund
PORTFOLIO OF INVESTMENTS - JANUARY 31, 2005 (UNAUDITED) continued

<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------

Specialty Insurance
(3.6%)
255,300 NYMAGIC, Inc. ......... $ 5,922,960
476,086 Proassurance Corp.*.... 18,210,289
264,100 Triad Guaranty,
Inc.*................. 14,290,451
--------------
38,423,700
--------------
Steel (1.2%)
334,400 Reliance Steel &
Aluminum Co. ......... 12,830,928
--------------
Telecommunication
Equipment (0.5%)
284,500 ADTRAN, Inc. .......... 5,095,395
--------------
Textiles (1.3%)
416,500 Albany International
Corp. (Class A)....... 14,223,475
--------------
Tools/Hardware (0.7%)
195,600 Briggs & Stratton
Corp. ................ 7,587,324
--------------
Trucking (1.3%)
450,500 Overnite Corp. ........ 13,911,440
--------------
Trucks/Construction/Farm
Machinery (1.8%)
443,590 Terex Corp.*........... 19,096,550
--------------
Wholesale Distributors
(3.6%)
464,100 School Specialty,
Inc.*................. 18,048,849
799,900 TBC Corporation*....... 20,429,446
--------------
38,478,295
--------------
Total Common Stocks
(Cost $791,531,822).... 1,048,852,780
--------------
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ------------------------------------------------------

Short-Term Investments (0.9%)
Repurchase Agreements
$ 9,265 Joint repurchase
agreement account
2.48% due 02/01/05
(dated 01/31/05;
proceeds $9,265,640)
(a)
(Cost $9,265,000)..... $ 9,265,000
191 The Bank of New York
2.375% due 02/01/05
(dated 01/31/05;
proceeds $191,454) (b)
(Cost $191,441)....... 191,441
--------------
Total Short-Term
Investments
(Cost $9,456,441)...... 9,456,441
--------------
Total Investments
(Cost $800,988,263) (c)... 100.0% 1,058,309,221
Other Assets in Excess of
Liabilities............... 0.0 440,514
----- --------------
Net Assets................ 100.0% $1,058,749,735
===== ==============
</Table>

- ---------------------------------------------------

<Table>

ADR American Depository Receipt.
* Non-income producing security.
(a) Collateralized by federal agency and U.S. Treasury
obligations.
(b) Collateralized by Federal National Mortgage Assoc.
4.187% due 03/01/34 valued at $195,270.
(c) The aggregate cost for federal income tax purposes
approximates the aggregate cost for book purposes.
The aggregate gross unrealized appreciation is
$272,567,238 and the aggregate gross unrealized
depreciation is $15,246,280, resulting in net
unrealized appreciation of $257,320,958.
</Table>

See Notes to Financial Statements
10

Morgan Stanley Special Value Fund
SUMMARY OF INVESTMENTS (UNAUDITED) - JANUARY 31, 2005

<Table>
<Caption>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ------------------------------------------------------

Regional Banks.......... $ 57,719,297 5.5%
Real Estate Investment
Trusts................ 46,180,356 4.4
Oil & Gas Production.... 44,795,698 4.2
Wholesale
Distributors.......... 38,478,295 3.6
Specialty Insurance..... 38,423,700 3.6
Aerospace & Defense..... 38,087,370 3.6
Restaurants............. 37,414,928 3.5
Medical/Nursing
Services.............. 35,761,840 3.4
Oilfield
Services/Equipment.... 34,052,055 3.2
Industrial Machinery.... 28,851,335 2.7
Miscellaneous Commercial
Services.............. 27,570,747 2.6
Gas Distributors........ 26,701,587 2.5
Chemicals: Specialty.... 26,242,830 2.5
Medical Specialties..... 24,718,440 2.3
Apparel/Footwear
Retail................ 24,394,234 2.3
Savings Banks........... 24,075,842 2.3
Property -- Casualty
Insurers.............. 23,556,086 2.2
Other Transportation.... 23,361,387 2.2
Electrical Products..... 22,524,515 2.1
Packaged Software....... 22,068,095 2.1
Real Estate
Development........... 21,810,600 2.1
Agricultural
Commodities/Milling... 20,215,408 1.9
Consumer Sundries....... 20,084,298 1.9
Electronic
Equipment/Instruments... 19,157,783 1.8
Trucks/Construction/Farm
Machinery............. 19,096,550 1.8
Electric Utilities...... 18,560,449 1.8
Hotels/Resorts/
Cruiselines........... 17,938,735 1.7
</Table>

<Table>
<Caption>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ------------------------------------------------------

Broadcasting............ $ 16,935,379 1.6%
Life/Health Insurance... 16,819,054 1.6
Air Freight/Couriers.... 14,699,340 1.4
Textiles................ 14,223,475 1.3
Trucking................ 13,911,440 1.3
Other Consumer
Services.............. 13,223,040 1.2
Steel................... 12,830,928 1.2
Financial
Conglomerates......... 12,359,640 1.2
Electronic Components... 12,256,767 1.2
Insurance
Brokers/Services...... 11,940,322 1.1
Food: Specialty/Candy... 11,896,060 1.1
Multi-Line Insurance.... 10,539,500 1.0
Commercial
Printing/Forms........ 10,532,992 1.0
Electronics/Appliances... 10,366,694 1.0
Advertising/Marketing
Services.............. 10,247,520 1.0
Repurchase Agreement.... 9,456,441 0.9
Pharmaceuticals:
Other................. 9,162,808 0.9
Containers/Packaging.... 8,568,082 0.8
Information Technology
Services.............. 8,000,903 0.8
Finance/Rental/Leasing... 7,765,736 0.7
Tools/Hardware.......... 7,587,324 0.7
Chemicals: Major
Diversified........... 7,488,669 0.7
Metal Fabrications...... 7,068,554 0.7
Precious Metals......... 6,546,416 0.6
Telecommunication
Equipment............. 5,095,395 0.5
Biotechnology........... 4,854,702 0.5
Computer
Communications........ 1,520,400 0.1
Miscellaneous
Manufacturing......... 569,180 0.1
-------------- -----
$1,058,309,221 100.0%
============== =====
</Table>

11
See Notes to Financial Statements

Morgan Stanley Special Value Fund
FINANCIAL STATEMENTS

Statement of Assets and Liabilities
January 31, 2005 (unaudited)

<Table>

Assets:
Investments in securities, at value
(cost $800,988,263)............... $1,058,309,221
Receivable for:
Investments sold................ 5,643,533
Shares of beneficial interest
sold................................ 1,822,913
Dividends....................... 655,129
Prepaid expenses and other assets... 81,694
--------------
Total Assets.................... 1,066,512,490
--------------
Liabilities:
Payable for:
Investments purchased........... 4,928,415
Shares of beneficial interest
redeemed...................... 1,614,431
Investment advisory fee......... 587,831
Distribution fee................ 498,678
Administration fee.............. 71,740
Accrued expenses and other
payables.......................... 61,660
--------------
Total Liabilities............... 7,762,755
--------------
Net Assets...................... $1,058,749,735
==============
Composition of Net Assets:
Paid-in-capital..................... $784,606,835
Net unrealized appreciation......... 257,320,958
Accumulated net investment loss..... (1,197,968)
Accumulated undistributed net
realized gain..................... 18,019,910
--------------
Net Assets...................... $1,058,749,735
==============
Class A Shares:
Net Assets.......................... $127,848,723
Shares Outstanding (unlimited
authorized, $.01 par value)....... 6,397,441
Net Asset Value Per Share....... $19.98
==============
Maximum Offering Price Per
Share,
(net asset value plus 5.54% of
net asset value).............. $21.09
==============
Class B Shares:
Net Assets.......................... $508,987,846
Shares Outstanding (unlimited
authorized, $.01 par value)....... 26,972,423
Net Asset Value Per Share....... $18.87
==============
Class C Shares:
Net Assets.......................... $43,108,892
Shares Outstanding (unlimited
authorized, $.01 par value)....... 2,285,268
Net Asset Value Per Share....... $18.86
==============
Class D Shares:
Net Assets.......................... $378,804,274
Shares Outstanding (unlimited
authorized, $.01 par value)....... 18,629,949
Net Asset Value Per Share....... $20.33
==============
</Table>

Statement of Operations
For the six months ended January 31, 2005 (unaudited)

<Table>

Net Investment Loss:
Income
Dividends (net of $5,578 foreign
withholding tax)................... $ 6,713,635
Interest............................. 183,304
------------
Total Income..................... 6,896,939
------------
Expenses
Investment advisory fee.............. 3,587,564
Distribution fee (Class A shares).... 154,419
Distribution fee (Class B shares).... 2,594,816
Distribution fee (Class C shares).... 216,763
Transfer agent fees and expenses..... 1,208,231
Administration fee................... 213,940
Shareholder reports and notices...... 62,355
Registration fees.................... 29,808
Custodian fees....................... 29,423
Professional fees.................... 23,924
Trustees' fees and expenses.......... 6,293
Other................................ 34,094
------------
Total Expenses................... 8,161,630
------------
Net Investment Loss.............. (1,264,691)
------------
Net Realized and Unrealized Gain:
Net realized gain.................... 21,678,408
Net change in unrealized
appreciation....................... 98,827,836
------------
Net Gain......................... 120,506,244
------------
Net Increase......................... $119,241,553
============
</Table>

See Notes to Financial Statements
12

Morgan Stanley Special Value Fund
FINANCIAL STATEMENTS continued

Statement of Changes in Net Assets

<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JANUARY 31, 2005 JULY 31, 2004
---------------- -------------
(unaudited)

Increase (Decrease) in Net Assets:
Operations:
Net investment loss......................................... $ (1,264,691) $ (6,186,032)
Net realized gain........................................... 21,678,408 76,555,161
Net change in unrealized appreciation....................... 98,827,836 60,382,796
-------------- ------------
Net Increase............................................ 119,241,553 130,751,925
-------------- ------------
Distributions to Shareholders from Net Realized Gain:
Class A shares.............................................. (3,448,862) --
Class B shares.............................................. (14,818,651) --
Class C shares.............................................. (1,242,247) --
Class D shares.............................................. (9,690,268) --
-------------- ------------
Total Dividends......................................... (29,200,028) --
-------------- ------------

Net increase (decrease) from transactions in shares of
beneficial interest....................................... (13,737,826) 112,333,705
-------------- ------------
Net Increase............................................ 76,303,699 243,085,630
Net Assets:
Beginning of period......................................... 982,446,036 739,360,406
-------------- ------------
End of Period (Including an accumulated net investment loss
of $1,197,968 and accumulated undistributed investment
income of $66,723, respectively)............................ $1,058,749,735 $982,446,036
============== ============
</Table>

See Notes to Financial Statements
13

Morgan Stanley Special Value Fund
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2005 (UNAUDITED)

1. Organization and Accounting Policies

Morgan Stanley Special Value Fund (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Fund's investment objective is
long-term capital appreciation. The Fund was organized as a Massachusetts
business trust on June 21, 1996 and commenced operations on October 29, 1996. On
July 28, 1997, the Fund converted to a multiple class share structure.

The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.

The following is a summary of significant accounting policies:

A. Valuation of Investments -- (1) an equity portfolio security listed or traded
on the New York Stock Exchange ("NYSE") or American Stock Exchange or other
exchange is valued at its latest sale price prior to the time when assets are
valued; if there were no sales that day, the security is valued at the mean
between the last reported bid and asked price; (2) an equity portfolio security
listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price;
if there were no sales that day, the security is valued at the mean between the
last reported bid and asked price; (3) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the mean
between the last reported bid and asked price. In cases where a security is
traded on more than one exchange, the security is valued on the exchange
designated as the primary market; (4) for equity securities traded on foreign
exchanges, the last reported sale price or the latest bid price may be used if
there were no sales on a particular day; (5) when market quotations are not
readily available or Morgan Stanley Investment Advisors Inc. (the "Investment
Adviser") determines that the latest sale price, the bid price or the mean
between the last reported bid and asked price do not reflect a security's market
value, portfolio securities are valued at their fair value as determined in good
faith under procedures established by and under the general supervision of the
Fund's Trustees. Occasionally, developments affecting the closing prices of
securities and other assets may occur between the times at which valuations of
such securities are determined (that is, close of the foreign market on which
the securities trade) and the close of business on the NYSE. If developments
occur during such periods that are expected to materially affect the value of
such securities, such valuations may be adjusted to reflect the estimated fair
value of such securities as of the close of the NYSE, as determined in good
faith by the Fund's Trustees or by the Investment

Morgan Stanley Special Value Fund
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2005 (UNAUDITED) continued

Adviser using a pricing service and/or procedures approved by the Trustees of
the Fund; (6) certain portfolio securities may be valued by an outside pricing
service approved by the Fund's Trustees; and (7) short-term debt securities
having a maturity date of more than sixty days at time of purchase are valued on
a mark-to-market basis until sixty days prior to maturity and thereafter at
amortized cost based on their value on the 61st day. Short-term debt securities
having a maturity date of sixty days or less at the time of purchase are valued
at amortized cost.

B. Accounting for Investments -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date.
Discounts are accreted and premiums are amortized over the life of the
respective securities. Interest income is accrued daily.

C. Repurchase Agreements -- Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other affiliated
entities managed by the Investment Adviser, may transfer uninvested cash
balances into one or more joint repurchase agreement accounts. These balances
are invested in one or more repurchase agreements and are collateralized by
cash, U.S. Treasury or federal agency obligations. The Fund may also invest
directly with institutions in repurchase agreements. The Fund's custodian
receives the collateral, which is marked-to-market daily to determine that the
value of the collateral does not decrease below the repurchase price plus
accrued interest.

D. Multiple Class Allocations -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.

E. Federal Income Tax Policy -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Accordingly, no federal income tax provision is required.

F. Dividends and Distributions to Shareholders -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.

G. 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.

Morgan Stanley Special Value Fund
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2005 (UNAUDITED) continued

2. Investment Advisory/ Administration Agreements

Effective November 1, 2004, pursuant to an Investment Advisory Agreement, the
Fund pays a Adviser an advisory fee, accrued daily and payable monthly, by
applying the following annual rates to the net assets of the Fund determined as
of the close of each business day: 0.67% to the portion of daily net assets not
exceeding $500 million; 0.645% to the portion of daily net assets exceeding $500
million but not exceeding $1 billion; and 0.62% to the portion of daily net
assets exceeding $1 billion.

Effective November 1, 2004, pursuant to an Administration Agreement with Morgan
Stanley Services Company Inc. (the "Administrator"), an affiliate of the
Investment Adviser, the Fund pays an administration fee, accrued daily and
payable monthly, by applying the annual rate of 0.08% to the Fund's daily net
assets.

Prior to November 1, 2004, the Fund retained the Investment Adviser to provide
administrative services and to manage the investment of the Fund's assets
pursuant to an investment management agreement pursuant to which the fund paid
the Investment Adviser a monthly management fee accrued daily and payable
monthly, by applying the following annual rates to the net assets of the Fund
determined as of the close of each business day: 0.75% to the portion of daily
net assets not exceeding $500 million; 0.725% to the portion of daily net assets
exceeding $500 million but not exceeding $1 billion; and 0.70% to the portion of
daily net assets exceeding $1 billion.

3. Plan of Distribution

Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the
"Distributor"), an affiliate of the Investment Adviser. The Fund has adopted a
Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan
provides that the Fund will pay the Distributor a fee which is accrued daily and
paid monthly at the following annual rates: (i) Class A - up to 0.25% of the
average daily net assets of Class A; (ii) Class B - up to 1.0% of the average
daily net assets of Class B; and (iii) Class C - up to 1.0% of the average daily
net assets of Class C.

In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts totaled
$11,603,476 at January 31, 2005.

Morgan Stanley Special Value Fund
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2005 (UNAUDITED) continued

In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Financial Advisors or other selected
broker-dealer representatives may be reimbursed in the subsequent calendar year.
For the six months ended January 31, 2005, the distribution fee was accrued for
Class A shares and Class C shares at the annual rate of 0.25% and 1.0%,
respectively.

The Distributor has informed the Fund that for the six months ended January 31,
2005, it received contingent deferred sales charges from certain redemptions of
the Fund's Class A shares, Class B shares and Class C shares of $9,570, $395,942
and $2,676, respectively and received $8,136 in front-end sales charges from
sales of the Fund's Class A shares. The respective shareholders pay such charges
which are not an expense of the Fund.

4. Security Transactions and Transactions with Affiliates

The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the six months ended January 31, 2005 aggregated
$216,427,703 and $241,439,207, respectively. Included in the aforementioned are
purchases and sales of $1,640,622 and $820,770, respectively, with other Morgan
Stanley funds, including a realized gain of $392,253.

For the six months ended January 31, 2005, the Fund incurred brokerage
commissions of $268 with Morgan Stanley, & Co., Inc., an affiliate of the
Investment Adviser, Administrator and Distributor, for portfolio transactions
executed on behalf of the Fund.

Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and
Distributor, is the Fund's transfer agent. At January 31, 2005, the Fund had
transfer agent fees and expenses payable of approximately $17,000.

Effective April 1, 2004, the Fund began 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.

Morgan Stanley Special Value Fund
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2005 (UNAUDITED) continued

An affiliate company is a company in which the Fund has ownership of at least 5%
of the voting securities. Transactions with such companies during the six months
ended January 31, 2005 were as follows:

<Table>
<Caption>
REALIZED
ISSUER SHARES PURCHASES SALES LOSS VALUE
- ------ --------- ----------- ---------- ------------ ------------

Tower Automotive Inc. ..................... 2,954,000 $14,427,725 $3,113,696 $(11,314,030) *
Nexstar Broadcasting Group Inc. (Class
A)....................................... 519,900 2,415,794 1,207,851 (1,207,943) **
----------- ---------- ------------
$16,843,519 $4,321,547 $(12,521,973)
=========== ========== ============
</Table>

- ---------------------
* The security was not held as of January 31, 2005.
** As of January 31, 2005, the Fund held less than 5% of this security.

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 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 July 31, 2004, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on wash sales and tax adjustments on real
estate investment trusts held by the Fund.

6. Legal Matters

The Investment Adviser, certain affiliates of the Investment Adviser, certain
officers of such affiliates and certain investment companies advised by the
Investment Adviser or its affiliates, including the Fund, are named as
defendants in a consolidated class action. This consolidated action also names
as defendants certain individual Trustees and Directors of the Morgan Stanley
funds. The consolidated amended complaint generally alleges that defendants,
including the Fund, violated their statutory disclosure obligations and
fiduciary duties by failing properly to disclose (i) that the Investment Adviser
and certain affiliates of the Investment Adviser allegedly offered economic
incentives to brokers and others to recommend the funds advised by the
Investment Adviser or its affiliates to investors rather than funds managed by
other companies, and (ii) that the funds advised by the Investment Adviser or
its affiliates, including the Fund, allegedly paid excessive commissions to
brokers in return for their efforts to recommend these funds to investors. The
complaint seeks, among other things, unspecified compensatory damages,
rescissionary damages, fees and costs.

Morgan Stanley Special Value Fund
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2005 (UNAUDITED) continued

The defendants have moved to dismiss the action and intend to otherwise
vigorously defend it. On March 10, 2005, Plaintiffs sought leave to supplement
their complaint to assert claims on behalf of other investors. While the Fund
and Adviser believe that each has meritorious defenses, the ultimate outcome of
this matter is not presently determinable at this early stage of the litigation,
and no provision has been made in the Fund's financial statements for the
effect, if any, of this matter.

7. Shares of Beneficial Interest+

Transactions in shares of beneficial interest were as follows:

<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JANUARY 31, 2005 JULY 31, 2004
------------------------- --------------------------
(unaudited)
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- -------------

CLASS A SHARES
Sold............................................... 818,288 $ 15,707,485 2,939,710 $ 52,379,012
Reinvestment of distributions...................... 169,373 3,419,637 -- --
Redeemed........................................... (876,581) (17,017,165) (1,235,468) (22,208,895)
---------- ------------ ---------- -------------
Net increase - Class A............................. 111,080 2,109,957 1,704,242 30,170,117
---------- ------------ ---------- -------------
CLASS B SHARES
Sold............................................... 470,902 8,604,718 5,003,101 81,871,050
Reinvestment of distributions...................... 706,763 13,492,092 -- --
Redeemed........................................... (4,152,979) (75,584,797) (8,754,267) (148,160,118)
---------- ------------ ---------- -------------
Net decrease - Class B............................. (2,975,314) (53,487,987) (3,751,166) (66,289,068)
---------- ------------ ---------- -------------
CLASS C SHARES
Sold............................................... 41,623 756,063 586,390 9,614,978
Reinvestment of distributions...................... 60,296 1,150,443 -- --
Redeemed........................................... (281,961) (5,137,671) (645,699) (10,894,561)
---------- ------------ ---------- -------------
Net decrease - Class C............................. (180,042) (3,231,165) (59,309) (1,279,583)
---------- ------------ ---------- -------------
CLASS D SHARES
Sold............................................... 3,709,560 72,515,728 10,659,761 193,728,983
Reinvestment of distributions...................... 413,513 8,493,555 -- --
Redeemed........................................... (2,052,671) (40,137,914) (2,413,354) (43,996,744)
---------- ------------ ---------- -------------
Net increase - Class D............................. 2,070,402 40,871,369 8,246,407 149,732,239
---------- ------------ ---------- -------------
Net increase (decrease) in Fund.................... (973,874) $(13,737,826) 6,140,174 $ 112,333,705
========== ============ ========== =============
</Table>

- ---------------------
+ On March 12, 2004, the Fund suspended the offering of its shares to new
investors. The Fund may recommence offering its shares to new investors at
such time as the Investment Adviser determines that it would be consistent
with prudent portfolio management to do so.

Morgan Stanley Special Value Fund
FINANCIAL HIGHLIGHTS

Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:

<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED JULY 31
MONTHS ENDED -----------------------------------------------------
JANUARY 31, 2005 2004 2003 2002 2001 2000
---------------- --------- -------- -------- -------- --------
(unaudited)

Class A Shares
Selected Per Share Data:

Net asset value, beginning of period......... $ 18.24 $ 15.51 $13.56 $15.67 $11.79 $10.89
------- ------- ------ ------ ------ ------

Income (loss) from investment operations:
Net investment income (loss)++........... 0.01 (0.04) (0.02) 0.01 0.13 0.08
Net realized and unrealized gain
(loss)................................... 2.28 2.77 1.97 (1.76) 3.75 0.83
------- ------- ------ ------ ------ ------

Total income (loss) from investment
operations.................................. 2.29 2.73 1.95 (1.75) 3.88 0.91
------- ------- ------ ------ ------ ------

Less dividends and distributions from:
Net investment income.................... -- -- -- (0.06) -- --
Net realized gain........................ (0.55) -- -- (0.30) -- (0.01)
------- ------- ------ ------ ------ ------

Total dividends and distributions............ (0.55) -- -- (0.36) -- (0.01)
------- ------- ------ ------ ------ ------

Net asset value, end of period............... $ 19.98 $ 18.24 $15.51 $13.56 $15.67 $11.79
======= ======= ====== ====== ====== ======

Total Return+................................ 12.50%(1) 17.60 % 14.38 % (11.43)% 32.91% 8.32%

Ratios to Average Net Assets(3):
Expenses..................................... 1.26%(2) 1.23 % 1.25 % 1.19 % 1.18% 1.23%

Net investment income (loss)................. 0.08%(2) (0.23)% (0.11)% 0.12 % 0.87% 0.75%

Supplemental Data:
Net assets, end of period, in thousands...... $127,849 $114,636 $71,088 $56,064 $23,532 $7,105

Portfolio turnover rate...................... 21%(1) 44 % 47 % 72 % 85% 69%
</Table>

- ---------------------

<Table>

++ The per share amounts were computed using an average number
of shares outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated
based on the net asset value as of the last business day of
the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and
non-class specific expenses.
</Table>

20
See Notes to Financial Statements

Morgan Stanley Special Value Fund
FINANCIAL HIGHLIGHTS continued

<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED JULY 31
MONTHS ENDED ---------------------------------------------------------
JANUARY 31, 2005 2004 2003 2002 2001 2000
---------------- --------- --------- --------- --------- ---------
(unaudited)

Class B Shares
Selected Per Share Data:

Net asset value, beginning of period.... $17.31 $ 14.84 $ 13.08 $ 15.18 $ 11.51 $ 10.71
------ ------- ------- ------- ------- -------

Income (loss) from investment
operations:
Net investment income (loss)++...... (0.06) (0.17) (0.11) (0.09) 0.01 --
Net realized and unrealized gain
(loss).............................. 2.17 2.64 1.87 (1.71) 3.66 0.81
------ ------- ------- ------- ------- -------

Total income (loss) from investment
operations............................. 2.11 2.47 1.76 (1.80) 3.67 0.81
------ ------- ------- ------- ------- -------

Less distributions from net realized
gain................................... (0.55) -- -- (0.30) -- (0.01)
------ ------- ------- ------- ------- -------

Net asset value, end of period.......... $18.87 $ 17.31 $ 14.84 $ 13.08 $ 15.18 $ 11.51
====== ======= ======= ======= ======= =======

Total Return+........................... 12.13 %(1) 16.64 % 13.46 % (12.08)% 31.89% 7.53 %

Ratios to Average Net Assets(3):
Expenses................................ 2.01 %(2) 2.00 % 2.04 % 1.95 % 1.94% 2.00 %

Net investment income (loss)............ (0.67)%(2) (1.00)% (0.90)% (0.64)% 0.11% (0.02)%

Supplemental Data:
Net assets, end of period, in
thousands.............................. $508,988 $518,426 $500,124 $587,241 $474,538 $202,446

Portfolio turnover rate................. 21 %(1) 44 % 47 % 72 % 85% 69 %
</Table>

- ---------------------

<Table>

21
See Notes to Financial Statements

Morgan Stanley Special Value Fund
FINANCIAL HIGHLIGHTS continued

<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED JULY 31,
MONTHS ENDED ----------------------------------------------------
JANUARY 31, 2005 2004 2003 2002 2001 2000
---------------- -------- -------- -------- -------- --------
(unaudited)

Class C Shares
Selected Per Share Data:

Net asset value, beginning of period.......... $17.30 $14.84 $13.08 $15.20 $11.52 $10.72
------ ------ ------ ------ ------ ------

Income (loss) from investment operations:
Net investment income (loss)++............ (0.06) (0.17) (0.12) (0.10) 0.03 --
Net realized and unrealized gain (loss)... 2.17 2.63 1.88 (1.69) 3.65 0.81
------ ------ ------ ------ ------ ------

Total income (loss) from investment
operations................................... 2.11 2.46 1.76 (1.79) 3.68 0.81
------ ------ ------ ------ ------ ------

Less dividends and distributions from:
Net investment income..................... -- -- -- (0.03) -- --
Net realized gain......................... (0.55) -- -- (0.30) -- (0.01)
------ ------ ------ ------ ------ ------

Total dividends and distributions............. (0.55) -- -- (0.33) -- (0.01)
------ ------ ------ ------ ------ ------

Net asset value, end of period................ $18.86 $17.30 $14.84 $13.08 $15.20 $11.52
====== ====== ====== ====== ====== ======

Total Return+................................. 12.07 %(1) 16.64 % 13.46 % (12.03)% 31.94% 7.52%

Ratios to Average Net Assets(3):
Expenses...................................... 2.01 %(2) 2.00 % 2.04 % 1.95 % 1.92% 1.98%

Net investment income (loss).................. (0.67)%(2) (1.00)% (0.90)% (0.64)% 0.13% 0.00%

Supplemental Data:
Net assets, end of period, in thousands....... $43,109 $42,662 $37,454 $41,147 $21,280 $4,905

Portfolio turnover rate....................... 21 %(1) 44 % 47 % 72 % 85% 69%
</Table>

- ---------------------

<Table>

22
See Notes to Financial Statements

Morgan Stanley Special Value Fund
FINANCIAL HIGHLIGHTS continued

<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED JULY 31
MONTHS ENDED -------------------------------------------------------
JANUARY 31, 2005 2004 2003 2002 2001 2000
---------------- --------- --------- --------- -------- --------
(unaudited)

Class D Shares
Selected Per Share Data:

Net asset value, beginning of period....... $ 18.52 $ 15.72 $ 13.72 $ 15.81 $ 11.87 $10.94
-------- -------- -------- -------- ------- ------

Income (loss) from investment operations:
Net investment income++................ 0.03 0.00 0.01 0.05 0.23 0.09
Net realized and unrealized gain
(loss)................................. 2.33 2.80 1.99 (1.77) 3.71 0.85
-------- -------- -------- -------- ------- ------

Total income (loss) from investment
operations................................ 2.36 2.80 2.00 (1.72) 3.94 0.94
-------- -------- -------- -------- ------- ------

Less dividends and distributions from:
Net investment income.................. -- -- -- (0.07) -- --
Net realized gain...................... (0.55) -- -- (0.30) -- (0.01)
-------- -------- -------- -------- ------- ------

Total dividends and distributions.......... (0.55) -- -- (0.37) -- (0.01)
-------- -------- -------- -------- ------- ------

Net asset value, end of period............. $ 20.33 $ 18.52 $ 15.72 $ 13.72 $ 15.81 $11.87
======== ======== ======== ======== ======= ======

Total Return+.............................. 12.69%(1) 17.81% 14.58% (11.20)% 33.28% 8.56%

Ratios to Average Net Assets(3):
Expenses................................... 1.01%(2) 1.00% 1.04% 0.95 % 0.94% 1.00%

Net investment income...................... 0.33%(2) 0.00% 0.10% 0.36 % 1.11% 0.98%

Supplemental Data:
Net assets, end of period, in thousands.... $378,804 $306,722 $130,693 $103,561 $26,629 $1,875

Portfolio turnover rate.................... 21%(1) 44% 47% 72 % 85% 69%
</Table>

- ---------------------

<Table>

++ The per share amounts were computed using an average number
of shares outstanding during the period.
+ Calculated based on the net asset value as of the last
business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and
non-class specific expenses.
</Table>

23
See Notes to Financial Statements

TRUSTEES

Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael E. Nugent
Fergus Reid

OFFICERS

Charles A. Fiumefreddo
Chairman of the Board

Mitchell M. Merin
President

Ronald E. Robison
Executive Vice President and Principal Executive Officer

Joseph J. McAlinden
Vice President

Barry Fink
Vice President

Amy R. Doberman
Vice President

Carsten Otto
Chief Compliance Officer

Stefanie V. Chang
Vice President

Francis J. Smith
Treasurer and Chief Financial Officer

Thomas F. Caloia
Vice President

Mary E. Mullin
Secretary

TRANSFER AGENT

Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281

INVESTMENT ADVISER

Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020

The financial statements included herein have been taken from the records of the
Fund without examination by the independent auditors and accordingly they do not
express an opinion thereon.

This report is submitted for the general information of shareholders of the
Fund. For more detailed information about the Fund, its fees and expenses and
other pertinent information, please read its Prospectus. The Fund's Statement of
Additional Information contains additional information about the Fund, including
its trustees. It is available, without charge, by calling (800) 869-NEWS.

This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective Prospectus. Read the
Prospectus carefully before investing.
Investments and services offered through Morgan Stanley DW Inc., member SIPC.
Morgan Stanley Distributors Inc., member NASD.

[MORGAN STANLEY LOGO]

MORGAN STANLEY FUNDS

Morgan Stanley
Special Value Fund

Semiannual Report
January 31, 2005

[MORGAN STANLEY LOGO]

38424RPT-RA05-00193P-Y01/05

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 registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.

Item 12. Exhibits

(a) Code of Ethics - Not applicable for semiannual reports.

(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.

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 Special Value Fund

/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
March 22, 2005

Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.

/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
March 22, 2005

/s/ Francis Smith
Francis Smith
Principal Financial Officer
March 22, 2005