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, 2006

Date of reporting period: January 31, 2006

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. PLEASE SEE THE PROSPECTUS FOR MORE COMPLETE
INFORMATION ON INVESTMENT RISKS.

FUND REPORT

For the six months ended January 31, 2006

TOTAL RETURN FOR THE 6 MONTHS ENDED JANUARY 31, 2006

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

6.42% 6.06% 6.04% 6.57% 6.31% 7.86%
</Table>

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

MARKET CONDITIONS

The six-month reporting period was marked by two distinct performance phases.
Declining stock market performance characterized the first half of the reporting
period. In August and September, spiking oil prices led the markets lower, as
the Gulf Coast hurricanes exacerbated the existing supply-demand imbalance
caused by previous refining outages and ongoing geopolitical instability.
Falling consumer confidence and renewed concerns about future spending also took
a toll on the markets. The Federal Open Market Committee (the "Fed") continued
to raise the federal funds target rate, with no indication of ceasing in the
near future. Investor sentiment languished through October, as tax-loss selling,
mounting inflation worries (spurred by high energy and raw materials costs) and
bleak expectations for the holiday shopping season moved into the foreground.

Despite these difficulties, the stock market advanced in the second three months
of the period. In November, the market rose against a backdrop of energy price
relief, easing production costs, improved retail sales data and a better outlook
for consumer spending. December's market climate produced a flat performance
overall, but the Fed hinted that the end of the current monetary tightening
cycle was drawing near. The change in language helped drive strength in January.
In addition, investors saw evidence of the "January Effect," a historical trend
wherein the market rallies in the first month of the calendar year, particularly
in higher-volatility segments of the market such as small-cap stocks. Further
supporting the market was the continued strong pace of merger and acquisition
activity and corporate restructurings, and an influx of pension fund money.
However, January was not without some challenges. Geopolitical risks pushed oil
prices upward again and there was less good news on the corporate earnings
front.

In this environment, small-cap stocks performed well, slightly outperforming
mid- and large-caps during the overall period. Within the small-cap universe,
growth stocks fared better than value stocks -- a trend which is consistent with
the January Effect. Within the Russell 2000(R) Value Index, energy continued to
be the Index's best performing sector, supported by high commodity prices for
oil and natural gas. The technology sector was also among the Index's strongest
performers for the six-month period. Technology stocks benefited from investors'
increased risk appetites, improved business execution and expectations for a
pick-up in corporate IT spending. The basic materials sector also performed
well, largely in its steel and non-ferrous metals industry

groups. Rising commodity prices and strong demand from China were a tailwind for
those stocks. Sectors that lagged the overall index included utilities. Rising
interest rates made the yields of utilities stocks less attractive on a relative
basis, and investors rotated into more aggressive stocks during the latter half
of the reporting period. Furthermore, the higher costs of producing energy hurt
the profitability of some utilities companies. The consumer durables sector was
another area of weakness, primarily due to the flood of bad news from auto and
auto-related companies.

PERFORMANCE ANALYSIS

Morgan Stanley Special Value Fund Class A and Class D shares outperformed the
Russell 2000 Value Index and underperformed the Lipper Small-Cap Value Funds
Index, and Class B and Class C shares underperformed both Indexes for the six
months ended January 31, 2006, assuming no deduction of applicable sales
charges.

Positive influences on the Fund's performance relative to the Russell 2000 Value
Index included stock selection in consumer services. Within this sector, several
of the Fund's publishing and broadcasting holdings performed well, as did
lodging stocks. Consumer durables stocks also contributed positively to relative
results due to company-specific factors. Additionally, the Index's consumer
durables sector experienced downward pressure from troubles in the auto
industry, a cooling housing market (which hurt homebuilding stocks) and negative
performance in the recreation and toys industry. The Fund had virtually no
exposure to these languishing groups. That said, we note that these industry
weightings were driven by our bottom-up, valuation-conscious investment process,
not top-down forecasts about individual industries. Positioning within the
financials sector also served the Fund well. Resulting from our individual stock
picks, the Fund was underweighted in the flat-performing banks and real estate
investment trust areas of the market, and overweighted to the strong-performing
insurance industry; this positioning enhanced relative gains. Insurance stocks
benefited from dissipating fears about hurricane-related losses (particularly
for reinsurance companies), coupled with a more favorable pricing environment.

On the downside, stock selection in health care detracted from relative
performance. Specifically, negative company-specific news in the health care
services industry caused the Fund to fall short of the Index. In basic
materials, the Fund's lack of exposure to steel and non-ferrous metals -- one of
the broad market's better performing industries--slowed gains. Moreover, our
stock selection process led us to emphasize select chemicals companies, which
did not perform well during the period. A spike in raw materials costs and the
inability to pass costs through in their pricing squeezed the profit margins of
many chemical producers. The Fund's retail stocks also did not fare well,
largely in specialty and apparel retailers. We initiated positions in certain
stocks that met our value criteria and that we believed appeared poised for a
turnaround. However, our patience was not rewarded within the timeframe of the
reporting period.

There is no guarantee that any sectors mentioned will continue to perform as
discussed herein or that securities in such sectors will be held by the Fund in
the future.

<Table>
<Caption>
TOP 10 HOLDINGS

Apria Healthcare Group, Inc. 2.7%
Intrawest Corp. 2.4
Pacer International, Inc. 2.4
Belden CDT Inc. 2.1
Acuity Brands, Inc. 2.1
Corn Products International Inc. 2.1
MSC. Software Corp. 2.0
DRS Technologies, Inc. 2.0
Laidlaw International Inc. 1.9
MAXIMUS, Inc. 1.8
</Table>

<Table>
<Caption>
TOP FIVE INDUSTRIES

Miscellaneous Commercial Services 6.8%
Electrical Products 4.2
Real Estate Investment Trusts 4.0
Regional Banks 3.5
Aerospace & Defense 3.5
</Table>

Data as of January 31, 2006. 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.

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. THE
INVESTMENT ADVISER FOCUSES ON SECURITIES WITH MARKET-TO-BOOK RATIOS AND
PRICE-EARNINGS RATIOS THAT ARE LOWER THAN THOSE OF THE GENERAL MARKET AVERAGES
OR SIMILAR COMPANIES. THE INVESTMENT ADVISER ALSO MAY CONSIDER A COMPANY'S
DIVIDEND YIELD, GROWTH IN SALES, BALANCE SHEET, MANAGEMENT CAPABILITIES,
EARNINGS AND CASH FLOW, AS WELL AS OTHER FACTORS.

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 WASHINGTON, DC. INFORMATION ON THE OPERATION OF THE SEC'S
PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE SEC AT (800) SEC-0330. YOU
CAN ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT OF A DUPLICATING FEE,
BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS (PUBLICINFO@SEC.GOV) OR BY
WRITING THE PUBLIC REFERENCE SECTION OF THE SEC, WASHINGTON, DC 20549-0102.

PROXY VOTING POLICY AND PROCEDURES AND PROXY VOTING RECORD

YOU MAY OBTAIN A COPY OF THE FUND'S PROXY VOTING POLICY AND PROCEDURES WITHOUT
CHARGE, UPON REQUEST, BY CALLING TOLL FREE (800) 869-NEWS OR BY VISITING THE
MUTUAL FUND CENTER ON OUR WEB SITE AT WWW.MORGANSTANLEY.COM. IT IS ALSO
AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT
HTTP://WWW.SEC.GOV.

YOU MAY OBTAIN INFORMATION REGARDING HOW THE FUND VOTED PROXIES RELATING TO
PORTFOLIO SECURITIES DURING THE MOST RECENT TWELVE-MONTH PERIOD ENDED JUNE 30
WITHOUT CHARGE BY VISITING THE MUTUAL FUND CENTER ON OUR WEB SITE AT
WWW.MORGANSTANLEY.COM. THIS INFORMATION IS ALSO AVAILABLE ON THE SECURITIES AND
EXCHANGE COMMISSION'S WEB SITE AT HTTP://WWW.SEC.GOV.

HOUSEHOLDING NOTICE

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

PERFORMANCE SUMMARY

AVERAGE ANNUAL TOTAL RETURNS -- PERIOD ENDED JANUARY 31, 2006

<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 18.67%(3) 17.80%(3) 17.91%(3) 18.94%(3)
12.44(4) 12.80(4) 16.91(4) --
5 YEARS 12.23(3) 11.37(3) 11.40(3) 12.48(3)
11.02(4) 11.10(4) 11.40(4) --
SINCE INCEPTION 11.33(3) 11.91(3) 10.51(3) 11.58(3)
10.62(4) 11.91(4) 10.51(4) --
</Table>

</Table>

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

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

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

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

++ Class D has no sales charge.

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

(2) The 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.

EXPENSE EXAMPLE

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

The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period 08/01/05 - 01/31/06.

ACTUAL EXPENSES

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

HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES

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

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

<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
08/01/05 -
08/01/05 01/31/06 01/31/06
------------- ------------- ---------------

CLASS A
Actual (6.42% return)....................................... $1,000.00 $1,064.20 $ 6.87
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,018.55 $ 6.72
CLASS B
Actual (6.06% return)....................................... $1,000.00 $1,060.60 $10.75
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,014.77 $10.51
CLASS C
Actual (6.04% return)....................................... $1,000.00 $1,060.40 $10.75
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,014.77 $10.51
CLASS D
Actual (6.57% return)....................................... $1,000.00 $1,065.70 $ 5.57
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,019.81 $ 5.45
</Table>

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

* Expenses are equal to the Fund's annualized expense ratio of 1.32%, 2.07%,
2.07% and 1.07% for Class A, Class B, Class C and Class D shares,
respectively, multiplied by the average account value over the period,
multiplied by 184/365 (to reflect the one-half year period).

Morgan Stanley Special Value Fund
PORTFOLIO OF INVESTMENTS - JANUARY 31, 2006 (UNAUDITED)

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

Common Stocks (98.4%)
Advertising/Marketing
Services (1.4%)
203,500 ADVO, Inc. .............. $ 6,691,080
42,500 R.H. Donnelley Corp.*.... 2,788,850
------------
9,479,930
------------
Aerospace & Defense
(3.5%)
101,800 AAR Corp.*............... 2,425,894
267,400 DRS Technologies,
Inc. ................... 13,287,106
237,500 Moog Inc. (Class A)*..... 7,958,625
------------
23,671,625
------------
Agricultural Commodities/
Milling (2.9%)
517,200 Corn Products
International, Inc. .... 14,104,044
236,100 Delta & Pine Land Co. ... 5,557,794
------------
19,661,838
------------
Air Freight/Couriers
(2.4%)
551,000 Pacer International,
Inc. ................... 16,072,670
------------
Apparel/Footwear (0.7%)
411,400 Maidenform Brands,
Inc.*................... 4,595,338
------------
Apparel/Footwear Retail
(1.1%)
253,200 Stage Stores, Inc. ...... 7,517,508
------------
Automotive Aftermarket
(0.2%)
52,000 Tenneco Automotive
Inc.*................... 1,141,400
------------
Broadcasting (1.5%)
216,000 Live Nation Inc.*........ 3,834,000
761,000 Sinclair Broadcast Group,
Inc. (Class A)*......... 6,057,560
------------
9,891,560
------------
Chemicals: Major
Diversified (1.0%)
602,113 Hercules Inc.*........... 7,050,743
------------
</Table>

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

Chemicals: Specialty
(1.5%)
210,700 Cytec Industries,
Inc. ................... $ 10,450,720
------------
Coal (1.1%)
770,100 International Coal Group,
Inc.*................... 7,793,412
------------
Commercial Printing/
Forms (2.1%)
130,900 Banta Corp. ............. 6,691,608
517,300 Cenveo Inc.*............. 7,345,660
------------
14,037,268
------------
Computer Peripherals
(1.7%)
425,600 Electronics for Imaging,
Inc.*................... 11,767,840
------------
Consumer Sundries (0.9%)
124,000 Central Garden & Pet
Co.*.................... 6,147,920
------------
Containers/Packaging
(1.3%)
538,942 Rock-Tenn Co. (Class
A)...................... 7,534,409
68,600 TAL International Group,
Inc.*................... 1,465,296
------------
8,999,705
------------
Electric Utilities (1.7%)
249,000 Avista Corp. ............ 4,758,390
260,250 PNM Resources Inc. ...... 6,394,342
------------
11,152,732
------------
Electrical Products
(4.2%)
378,900 Acuity Brands, Inc. ..... 14,356,521
532,400 Belden CDT Inc. ......... 14,428,040
------------
28,784,561
------------
Electronic Components
(0.7%)
402,100 Methode Electronics,
Inc. ................... 4,945,830
------------
</Table>

8
See Notes to Financial Statements

Morgan Stanley Special Value Fund
PORTFOLIO OF INVESTMENTS - JANUARY 31, 2006 (UNAUDITED) continued

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

Electronic Equipment/
Instruments (1.4%)
310,800 Lipman Electronic
Engineering Ltd. (ADR)
(Israel)*............... $ 8,323,224
66,300 Paxar Corp.*............. 1,340,586
------------
9,663,810
------------
Engineering &
Construction (0.1%)
36,200 H&E Equipment Services,
Inc.*................... 836,220
------------
Finance/Rental/ Leasing
(1.5%)
494,500 Collegiate Funding
Services*............... 9,850,440
------------
Financial Conglomerates
(1.6%)
453,500 Conseco Inc.*............ 11,051,795
------------
Food: Specialty/ Candy
(1.9%)
465,600 NBTY, Inc.*.............. 9,633,264
78,565 Ralcorp Holdings,
Inc.*................... 3,087,605
------------
12,720,869
------------
Gas Distributors (1.9%)
211,800 AGL Resources, Inc. ..... 7,578,204
237,600 UGI Corp. ............... 5,101,272
------------
12,679,476
------------
Hotels/Resorts/Cruiselines
(2.4%)
577,800 Intrawest Corp. ......... 16,230,402
------------
Household/Personal Care
(1.4%)
456,400 Elizabeth Arden, Inc.*... 9,648,296
------------
Industrial Machinery
(2.6%)
293,865 CIRCOR International,
Inc. ................... 8,057,778
280,000 Watts Water Technologies,
Inc. ................... 9,430,400
------------
17,488,178
------------
</Table>

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

Insurance
Brokers/Services (1.5%)
385,391 CCC Information Services
Group, Inc.*............ $ 10,201,300
------------
Marine Shipping (0.7%)
142,400 American Commercial Lines
Inc.*................... 4,749,040
------------
Medical Specialties
(2.4%)
162,440 Bio-Rad Laboratories,
Inc. (Class A)*......... 10,948,456
161,100 West Pharmaceutical
Services, Inc. ......... 4,918,383
------------
15,866,839
------------
Medical/Nursing Services
(2.7%)
748,700 Apria Healthcare Group,
Inc.*................... 18,245,819
------------
Metal Fabrications (0.9%)
247,330 General Cable Corp.*..... 6,059,585
------------
Miscellaneous Commercial
Services (6.8%)
430,000 Gartner, Inc.*........... 5,916,800
382,400 Geo Group Inc. (The)*.... 9,353,504
314,100 MAXIMUS, Inc. ........... 12,287,592
310,750 ProQuest Co.*............ 9,244,813
180,700 The Brink's Co. ......... 9,613,240
------------
46,415,949
------------
Multi-Line Insurance
(1.4%)
365,500 Max Re Capital Ltd.
(Bermuda)............... 9,689,405
------------
Office Equipment/
Supplies (0.6%)
164,100 ACCO Brands Corp.*....... 4,053,270
------------
</Table>

9
See Notes to Financial Statements

Morgan Stanley Special Value Fund
PORTFOLIO OF INVESTMENTS - JANUARY 31, 2006 (UNAUDITED) continued

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

Oil & Gas Production
(3.2%)
379,100 Denbury Resources
Inc.*................... $ 11,285,807
240,780 St. Mary Land &
Exploration Co. ........ 10,507,639
------------
21,793,446
------------
Oilfield Services/
Equipment (3.2%)
379,370 Superior Energy Services,
Inc.*................... 10,299,896
241,290 Universal Compression
Holdings, Inc.*......... 11,581,920
------------
21,881,816
------------
Other Consumer Services
(1.3%)
338,000 Jackson Hewitt Tax
Service Inc.*........... 8,537,880
------------
Other Transportation
(2.0%)
487,200 Laidlaw International
Inc. ................... 13,251,840
------------
Packaged Software (2.9%)
266,950 Hummingbird Ltd.
(Canada)*............... 6,265,317
727,788 MSC. Software Corp.*..... 13,500,467
------------
19,765,784
------------
Personnel Services (1.8%)
433,522 Gevity HR, Inc. ......... 11,900,179
------------
Property - Casualty
Insurers (2.5%)
199,100 Platinum Underwriters
Holdings Ltd. (ADR)
(Bermuda)............... 6,102,415
518,786 United America Indemnity,
Ltd. (Class A)*......... 10,972,324
------------
17,074,739
------------
Real Estate Investment
Trusts (4.0%)
775,700 Anthracite Capital,
Inc. ................... 8,703,354
126,100 LaSalle Hotel
Properties.............. 4,819,542
742,300 MeriStar Hospitality
Corp.*.................. 7,615,998
141,300 Parkway Properties,
Inc. ................... 5,979,816
------------
27,118,710
------------
</Table>

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

Regional Banks (3.5%)
51,000 Alabama National
BanCorporation.......... $ 3,545,520
86,100 Central Pacific Financial
Corp. .................. 3,168,480
145,900 Greater Bay Bancorp...... 3,784,646
173,672 Integra Bank Corp. ...... 3,838,151
106,400 Provident Bankshares
Corp. .................. 3,908,072
295,930 Provident New York
Bancorp................. 3,293,701
47,100 Westamerica
Bancorporation.......... 2,534,922
------------
24,073,492
------------
Restaurants (2.7%)
656,400 AFC Enterprises, Inc. ... 10,357,992
1,997,100 Denny's Corp.*........... 8,208,081
------------
18,566,073
------------
Savings Banks (1.5%)
467,446 First Niagara Financial
Group, Inc. ............ 6,450,755
105,404 MB Financial, Inc. ...... 3,696,518
------------
10,147,273
------------
Specialty Insurance
(3.1%)
172,500 NYMAGIC, Inc. ........... 4,438,425
166,086 Proassurance Corp.*...... 8,501,942
185,400 Triad Guaranty, Inc.*.... 7,786,800
------------
20,727,167
------------
Specialty Stores (0.3%)
168,900 Pier 1 Imports, Inc. .... 1,827,498
------------
Specialty
Telecommunications (0.7%)
188,886 Syniverse Holdings
Inc.*................... 4,535,153
------------
Telecommunication
Equipment (0.8%)
264,038 EMS Technologies Inc.*... 4,536,173
61,600 Tekelec*................. 964,040
------------
5,500,213
------------
</Table>

10
See Notes to Financial Statements

Morgan Stanley Special Value Fund
PORTFOLIO OF INVESTMENTS - JANUARY 31, 2006 (UNAUDITED) continued

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

Textiles (1.4%)
258,400 Albany International
Corp. (Class A)......... $ 9,560,800
------------
Trucks/Construction/Farm
Machinery (1.8%)
174,228 Terex Corp.*............. 12,283,074
------------
Total Common Stocks
(Cost $469,057,388)...... 667,158,430
------------
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS
- -----------

Short-Term Investment (1.5%)
Repurchase Agreement
$10,502 Joint repurchase
agreement account 4.445%
due 02/01/06 (dated
01/31/06; proceeds
$10,503,297) (a)
(Cost $10,502,000)...... 10,502,000
------------
</Table>

<Table>

Total Investments
(Cost $479,559,388) (b)..... 99.9% 677,660,430
Other Assets in Excess of
Liabilities................. 0.1 669,602
------------
Net Assets.................. 100.0% $678,330,032
===== ============
</Table>

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

<Table>

ADR American Depositary Receipt.
* Non-income producing security.
(a) Collateralized by federal agency and U.S. Treasury
obligations.
(b) The aggregate cost for federal income tax purposes
approximates the aggregate cost for book purposes.
The aggregate gross unrealized appreciation is
$206,336,262 and the aggregate gross unrealized
depreciation is $8,235,220, resulting in net
unrealized appreciation of $198,101,042.
</Table>

11
See Notes to Financial Statements

Morgan Stanley Special Value
SUMMARY OF INVESTMENTS - JANUARY 31, 2006 (UNAUDITED)

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

Miscellaneous Commercial
Services............... $ 46,415,949 6.8%
Electrical Products..... 28,784,561 4.2
Real Estate Investment
Trusts................. 27,118,710 4.0
Regional Banks.......... 24,073,492 3.5
Aerospace & Defense..... 23,671,625 3.5
Oilfield
Services/Equipment..... 21,881,816 3.2
Oil & Gas Production.... 21,793,446 3.2
Specialty Insurance..... 20,727,167 3.1
Packaged Software....... 19,765,784 2.9
Agricultural
Commodities/ Milling... 19,661,838 2.9
Restaurants............. 18,566,073 2.7
Medical/Nursing
Services............... 18,245,819 2.7
Industrial Machinery.... 17,488,178 2.6
Property - Casualty
Insurers............... 17,074,739 2.5
Hotels/Resorts/Cruiselines.. 16,230,402 2.4
Air Freight/Couriers.... 16,072,670 2.4
Medical Specialties..... 15,866,839 2.4
Commercial
Printing/Forms......... 14,037,268 2.1
Other Transportation.... 13,251,840 2.0
Food: Specialty/Candy... 12,720,869 1.9
Gas Distributors........ 12,679,476 1.9
Trucks/Construction/Farm
Machinery.............. 12,283,074 1.8
Personnel Services...... 11,900,179 1.8
Computer Peripherals.... 11,767,840 1.7
Electric Utilities...... 11,152,732 1.7
Financial
Conglomerates.......... 11,051,795 1.6
Repurchase Agreement.... 10,502,000 1.5
Chemicals: Specialty.... 10,450,720 1.5
</Table>

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

Insurance
Brokers/Services....... $ 10,201,300 1.5%
Savings Banks........... 10,147,273 1.5
Broadcasting............ 9,891,560 1.5
Finance/Rental/Leasing... 9,850,440 1.5
Multi-Line Insurance.... 9,689,405 1.4
Electronic Equipment/
Instruments............ 9,663,810 1.4
Household/Personal
Care................... 9,648,296 1.4
Textiles................ 9,560,800 1.4
Advertising/Marketing
Services............... 9,479,930 1.4
Containers/Packaging.... 8,999,705 1.3
Other Consumer
Services............... 8,537,880 1.3
Coal.................... 7,793,412 1.1
Apparel/Footwear
Retail................. 7,517,508 1.1
Chemicals: Major
Diversified............ 7,050,743 1.0
Consumer Sundries....... 6,147,920 0.9
Metal Fabrications...... 6,059,585 0.9
Telecommunication
Equipment.............. 5,500,213 0.8
Electronic Components... 4,945,830 0.7
Marine Shipping......... 4,749,040 0.7
Apparel/Footwear........ 4,595,338 0.7
Specialty
Telecommunications..... 4,535,153 0.7
Office
Equipment/Supplies..... 4,053,270 0.6
Specialty Stores........ 1,827,498 0.3
Automotive
Aftermarket............ 1,141,400 0.2
Engineering &
Construction........... 836,220 0.1
------------ ----
$677,660,430 99.9%
============ ====
</Table>

12
See Notes to Financial Statements

Morgan Stanley Special Value Fund
FINANCIAL STATEMENTS

Statement of Assets and Liabilities
January 31, 2006 (unaudited)

<Table>

Assets:
Investments in securities, at value (cost $479,559,388)..... $677,660,430
Receivable for:
Investments sold........................................ 8,370,760
Dividends............................................... 454,070
Shares of beneficial interest sold...................... 106,308
Interest................................................ 1,297
Prepaid expenses and other assets........................... 80,719
------------
Total Assets............................................ 686,673,584
------------
Liabilities:
Payable for:
Investments purchased................................... 4,728,046
Shares of beneficial interest redeemed.................. 2,732,435
Distribution fee........................................ 352,113
Investment advisory fee................................. 348,145
Administration fee...................................... 46,616
Transfer agent fee...................................... 45,320
Accrued expenses and other payables......................... 90,877
------------
Total Liabilities....................................... 8,343,552
------------
Net Assets.............................................. $678,330,032
============
Composition of Net Assets:
Paid-in-capital............................................. $355,909,659
Net unrealized appreciation................................. 198,167,339
Accumulated net investment loss............................. (2,395,783)
Accumulated undistributed net realized gain................. 126,648,817
------------
Net Assets.............................................. $678,330,032
============
Class A Shares:
Net Assets.................................................. $278,993,009
Shares Outstanding (unlimited authorized, $.01 par value)... 13,646,405
Net Asset Value Per Share............................... $20.44
============
Maximum Offering Price Per Share,
(net asset value plus 5.54% of net asset value)......... $21.57
============
Class B Shares:
Net Assets.................................................. $297,402,044
Shares Outstanding (unlimited authorized, $.01 par value)... 15,689,430
Net Asset Value Per Share............................... $18.96
============
Class C Shares:
Net Assets.................................................. $38,942,539
Shares Outstanding (unlimited authorized, $.01 par value)... 2,052,702
Net Asset Value Per Share............................... $18.97
============
Class D Shares:
Net Assets.................................................. $62,992,440
Shares Outstanding (unlimited authorized, $.01 par value)... 3,011,899
Net Asset Value Per Share............................... $20.91
============
</Table>

13
See Notes to Financial Statements

Morgan Stanley Special Value Fund
FINANCIAL STATEMENTS continued

Statement of Operations
For the six months ended January 31, 2006 (unaudited)

<Table>

Net Investment Loss:
Income
Dividends (net of $6,381 foreign withholding tax)........... $ 4,155,404
Interest.................................................... 242,904
-------------
Total Income............................................ 4,398,308
-------------
Expenses
Investment advisory fee..................................... 2,890,813
Distribution fee (Class A shares)........................... 332,135
Distribution fee (Class B shares)........................... 1,601,788
Distribution fee (Class C shares)........................... 197,482
Transfer agent fees and expenses............................ 1,155,396
Administration fee.......................................... 350,935
Shareholder reports and notices............................. 97,880
Professional fees........................................... 73,275
Registration fees........................................... 40,812
Custodian fees.............................................. 30,698
Trustees' fees and expenses................................. 6,111
Other....................................................... 40,262
-------------
Total Expenses.......................................... 6,817,587
-------------
Net Investment Loss..................................... (2,419,279)
-------------
Net Realized and Unrealized Gain (Loss):
Net realized gain........................................... 127,846,467
Net change in unrealized appreciation....................... (93,772,953)
-------------
Net Gain................................................ 34,073,514
-------------
Net Increase................................................ $ 31,654,235
=============
</Table>

14
See Notes to Financial Statements

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, 2006 JULY 31, 2005
---------------- --------------
(unaudited)

Increase (Decrease) in Net Assets:
Operations:
Net investment loss......................................... $ (2,419,279) $ (1,578,109)
Net realized gain........................................... 127,846,467 98,543,959
Net change in unrealized appreciation....................... (93,772,953) 133,447,170
-------------- --------------
Net Increase............................................ 31,654,235 230,413,020
-------------- --------------
Distributions to Shareholders from Net Realized Gain:
Class A shares.............................................. (36,131,854) (3,448,862)
Class B shares.............................................. (46,359,387) (14,818,651)
Class C shares.............................................. (5,685,404) (1,242,247)
Class D shares.............................................. (8,323,369) (9,690,267)
-------------- --------------
Total Distributions..................................... (96,500,014) (29,200,027)
-------------- --------------

Net decrease from transactions in shares of beneficial
interest.................................................. (329,659,994) (110,823,224)
-------------- --------------
Net Increase (Decrease)................................. (394,505,773) 90,389,769
Net Assets:
Beginning of period......................................... 1,072,835,805 982,446,036
-------------- --------------
End of Period
(Including an accumulated net investment loss of $2,395,783
and
accumulated undistributed investment income of $23,496,
respectively)............................................... $ 678,330,032 $1,072,835,805
============== ==============
</Table>

15
See Notes to Financial Statements

Morgan Stanley Special Value Fund
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2006 (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 eighteen
months, six years and one year, respectively. Class D shares are not subject to
a sales charge. Additionally, Class A shares, Class B shares and Class C shares
incur distribution expenses.

Effective August 29, 2005, the Board of Trustees of the Fund approved the
implementation of a 2% redemption fee on Class A shares, Class B shares, Class C
shares, and Class D shares, which is paid directly to the Fund, for shares
redeemed within thirty days of purchase. The redemption fee is designed to
protect the Fund and its remaining shareholders from the effects of short-term
trading.

The following is a summary of significant accounting policies:

A. Valuation of Investments -- (1) an equity portfolio security listed or traded
on the New York Stock Exchange ("NYSE") or American Stock Exchange or other
exchange is valued at its latest sale price prior to the time when assets are
valued; if there were no sales that day, the security is valued at the mean
between the last reported bid and asked price; (2) an equity portfolio security
listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price;
if there were no sales that day, the security is valued at the mean between the
last reported bid and asked price; (3) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the mean
between the last reported bid and asked price. In cases where a security is
traded on more than one exchange, the security is valued on the exchange
designated as the primary market; (4) for equity securities traded on foreign
exchanges, the last reported sale price or the latest bid price may be used if
there were no sales on a particular day; (5) 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

Morgan Stanley Special Value Fund
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2006 (UNAUDITED) continued

assets may occur between the times at which valuations of such securities are
determined (that is, close of the foreign market on which the securities trade)
and the close of business on the NYSE. If developments occur during such periods
that are expected to materially affect the value of such securities, such
valuations may be adjusted to reflect the estimated fair value of such
securities as of the close of the NYSE, as determined in good faith by the
Fund's Trustees or by the Investment Adviser using a pricing service and/or
procedures approved by the Trustees of the Fund; (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.

Morgan Stanley Special Value Fund
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2006 (UNAUDITED) continued

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.

2. Investment Advisory/Administration Agreements

Pursuant to an Investment Advisory Agreement with the Investment Adviser, the
Fund pays an advisory fee, accrued daily and payable monthly, by applying the
following annual rates to the net assets of the Fund determined as of the close
of each business day: 0.670% 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.

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.

Effective November 18, 2005, the Investment Adviser has agreed to cap the Fund's
operating expenses (except for brokerage and 12b-1 fees) for one year by
assuming the Fund's "other expenses" and/or waiving the Fund's advisory fees,
and the Administrator has agreed to waive the Fund's administrative fees, to the
extent such operating expenses on an annualized basis exceed 1.06% of the
average daily net assets of the Fund.

3. Plan of Distribution

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

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

Morgan Stanley Special Value Fund
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2006 (UNAUDITED) continued

treat such expenses. The Distributor has advised the Fund that such excess
amounts totaled $8,279,328 at January 31, 2006.

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, 2006, 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,
2006, it received contingent deferred sales charges from certain redemptions of
the Fund's Class A shares, Class B shares and Class C shares of $4 , $345,107
and $997, respectively and received $9,083 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, 2006 aggregated
$121,218,316 and $546,994,970, respectively. Included in the aforementioned are
sales of $300,147,011 with other Morgan Stanley funds, including a net realized
gain of $57,449,833.

For the six months ended January 31, 2006, the Fund incurred brokerage
commissions of $1,657 with Morgan Stanley, & Co., Inc., an affiliate of the
Investment Adviser, Administrator and Distributor, for portfolio transactions
executed on behalf of the Fund.

Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and
Distributor, is the Fund's transfer agent.

The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan")
which allows each independent Trustee to defer payment of all, or a portion, of
the fees 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, 2006 (UNAUDITED) continued

5. Shares of Beneficial Interest+

Transactions in shares of beneficial interest were as follows:

<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JANUARY 31, 2006 JULY 31, 2005
--------------------------- ---------------------------
(unaudited)
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- -------------

CLASS A SHARES
Sold......................................... 467,454 $ 9,933,637 1,569,943 $ 31,233,037
Conversion from Class B...................... 1,082,156 21,577,303 6,628,612 129,867,637
Reinvestment of distributions................ 1,786,668 34,661,351 169,373 3,419,637
Redeemed..................................... (1,992,743) (41,795,836) (2,351,419) (47,094,946)
----------- ------------- ----------- -------------
Net increase - Class A....................... 1,343,535 24,376,455 6,016,509 117,425,365
----------- ------------- ----------- -------------
CLASS B SHARES
Sold......................................... 139,714 2,766,139 731,597 13,682,503
Conversion to Class A........................ (1,163,006) (21,577,304) (7,032,763) (129,867,637)
Reinvestment of distributions................ 2,327,594 41,896,689 706,762 13,492,092
Redeemed..................................... (2,426,362) (47,989,089) (7,541,843) (140,777,469)
----------- ------------- ----------- -------------
Net decrease - Class B....................... (1,122,060) (24,903,565) (13,136,247) (243,470,511)
----------- ------------- ----------- -------------
CLASS C SHARES
Sold......................................... 22,889 455,415 65,184 1,210,773
Reinvestment of distributions................ 287,869 5,187,393 60,296 1,150,443
Redeemed..................................... (277,919) (5,537,737) (570,927) (10,728,903)
----------- ------------- ----------- -------------
Net increase (decrease) - Class C............ 32,839 105,071 (445,447) (8,367,687)
----------- ------------- ----------- -------------
CLASS D SHARES
Sold......................................... 356,264 7,644,755 5,247,123 104,506,381
Reinvestment of distributions................ 348,458 6,913,399 413,513 8,493,555
Redeemed..................................... (15,505,893) (343,796,109) (4,407,113) (89,410,327)
----------- ------------- ----------- -------------
Net increase (decrease) - Class D............ (14,801,171) (329,237,955) 1,253,523 23,589,609
----------- ------------- ----------- -------------
Net decrease in Fund......................... (14,546,857) $(329,659,994) (6,311,662) $(110,823,224)
=========== ============= =========== =============
</Table>

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

<Table>

+ On March 12, 2004, the Fund suspended the offering of its
shares to new investors. On February 6, 2006, the Board was
notified that Management intends to reopen the Fund to new
investors as soon as practicable.
</Table>

6. Federal Income Tax Status

The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are

Morgan Stanley Special Value Fund
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2006 (UNAUDITED) continued

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, 2005, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on wash sales.

7. Legal Matters

The Investment Adviser, certain affiliates of the Investment Adviser, certain
officers of such affiliates and certain investment companies advised by the
Investment Adviser or its affiliates, including the Fund, are named as
defendants in a consolidated class action. This consolidated action also names
as defendants certain individual Trustees and Directors of the Morgan Stanley
funds. The consolidated amended complaint, filed in the United States District
Court Southern District of New York on April 16, 2004, generally alleges that
defendants, including the Fund, violated their statutory disclosure obligations
and fiduciary duties by failing properly to disclose (i) that the Investment
Adviser and certain affiliates of the Investment Adviser allegedly offered
economic incentives to brokers and others to recommend the funds advised by the
Investment Adviser or its affiliates to investors rather than funds managed by
other companies, and (ii) that the funds advised by the Investment Adviser or
its affiliates, including the Fund, allegedly paid excessive commissions to
brokers in return for their efforts to recommend these funds to investors. The
complaint seeks, among other things, unspecified compensatory damages,
rescissionary damages, fees and costs. The defendants have moved to dismiss the
action and intend to otherwise vigorously defend it. On March 9, 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 stage of the litigation, and no provision has been made in the Fund's
financial statements for the effect, if any, of this matter.

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, 2006 2005 2004 2003 2002 2001
---------------- -------- -------- ------- ------- -------
(unaudited)

Class A Shares
Selected Per Share Data:

Net asset value, beginning of period... $22.28 $18.24 $15.51 $13.56 $15.67 $11.79
------ ------ ------ ------ ------ ------

Income (loss) from investment
operations:
Net investment income (loss)++..... (0.03) 0.04 (0.04) (0.02) 0.01 0.13
Net realized and unrealized gain
(loss)............................. 1.29 4.55 2.77 1.97 (1.76) 3.75
------ ------ ------ ------ ------ ------

Total income (loss) from investment
operations............................ 1.26 4.59 2.73 1.95 (1.75) 3.88
------ ------ ------ ------ ------ ------

Less dividends and distributions from:
Net investment income.............. -- -- -- -- (0.06) --
Net realized gain.................. (3.10) (0.55) -- -- (0.30) --
------ ------ ------ ------ ------ ------

Total dividends and distributions...... (3.10) (0.55) -- -- (0.36) --
------ ------ ------ ------ ------ ------

Net asset value, end of period......... $20.44 $22.28 $18.24 $15.51 $13.56 $15.67
====== ====== ====== ====== ====== ======

Total Return+.......................... 6.42 %(1) 25.45% 17.60% 14.38% (11.43)% 32.91%

Ratios to Average Net Assets(3):

Expenses............................... 1.32 %(2) 1.27% 1.23% 1.25% 1.19% 1.18%

Net investment income (loss)........... (0.32)%(2) 0.14% (0.23)% (0.11)% 0.12% 0.87%

Supplemental Data:

Net assets, end of period, in
thousands............................. $278,993 $274,050 $114,636 $71,088 $56,064 $23,532

Portfolio turnover rate................ 14 %(1) 41% 44% 47% 72% 85%
</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>

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, 2006 2005 2004 2003 2002 2001
---------------- -------- -------- -------- -------- --------
(unaudited)

Class B Shares
Selected Per Share Data:

Net asset value, beginning of
period............................. $20.95 $17.31 $14.84 $13.08 $15.18 $11.51
------ ------ ------ ------ ------ ------

Income (loss) from investment
operations:
Net investment income
(loss)++........................ (0.11) (0.11) (0.17) (0.11) (0.09) 0.01
Net realized and unrealized gain
(loss).......................... 1.22 4.30 2.64 1.87 (1.71) 3.66
------ ------ ------ ------ ------ ------

Total income (loss) from investment
operations......................... 1.11 4.19 2.47 1.76 (1.80) 3.67
------ ------ ------ ------ ------ ------

Less distributions from net realized
gain............................... (3.10) (0.55) -- -- (0.30) --
------ ------ ------ ------ ------ ------

Net asset value, end of period...... $18.96 $20.95 $17.31 $14.84 $13.08 $15.18
====== ====== ====== ====== ====== ======

Total Return+....................... 6.06 %(1) 24.55% 16.64% 13.46% (12.08)% 31.89%

Ratios to Average Net Assets(3):

Expenses............................ 2.07 %(2) 2.04% 2.00% 2.04% 1.95% 1.94%

Net investment income (loss)........ (1.07)%(2) (0.63)% (1.00)% (0.90)% (0.64)% 0.11%

Supplemental Data:

Net assets, end of period, in
thousands.......................... $297,402 $352,265 $518,426 $500,124 $587,241 $474,538

Portfolio turnover rate............. 14 %(1) 41% 44% 47% 72% 85%
</Table>

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

<Table>

23
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, 2006 2005 2004 2003 2002 2001
---------------- ------- ------- ------- ------- -------
(unaudited)

Class C Shares
Selected Per Share Data:

Net asset value, beginning of period..... $20.97 $17.30 $14.84 $13.08 $15.20 $11.52
------ ------ ------ ------ ------ ------

Income (loss) from investment operations:
Net investment income (loss)++....... (0.11) (0.10) (0.17) (0.12) (0.10) 0.03
Net realized and unrealized gain
(loss)............................... 1.21 4.32 2.63 1.88 (1.69) 3.65
------ ------ ------ ------ ------ ------

Total income (loss) from investment
operations.............................. 1.10 4.22 2.46 1.76 (1.79) 3.68
------ ------ ------ ------ ------ ------

Less dividends and distributions from:
Net investment income................ -- -- -- -- (0.03) --
Net realized gain.................... (3.10) (0.55) -- -- (0.30) --
------ ------ ------ ------ ------ ------

Total dividends and distributions........ (3.10) (0.55) -- -- (0.33) --
------ ------ ------ ------ ------ ------

Net asset value, end of period........... $18.97 $20.97 $17.30 $14.84 $13.08 $15.20
====== ====== ====== ====== ====== ======

Total Return+............................ 6.04 %(1) 24.61% 16.64% 13.46% (12.03)% 31.94%

Ratios to Average Net Assets(3):

Expenses................................. 2.07 %(2) 1.93% 2.00% 2.04% 1.95% 1.92%

Net investment income (loss)............. (1.07)%(2) (0.52)% (1.00)% (0.90)% (0.64)% 0.13%

Supplemental Data:

Net assets, end of period, in
thousands............................... $38,943 $42,352 $42,662 $37,454 $41,147 $21,280

Portfolio turnover rate.................. 14 %(1) 41% 44% 47% 72% 85%
</Table>

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

<Table>

24
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, 2006 2005 2004 2003 2002 2001
---------------- -------- -------- -------- -------- -------
(unaudited)

Class D Shares
Selected Per Share Data:

Net asset value, beginning of
period.............................. $22.69 $18.52 $15.72 $13.72 $15.81 $11.87
------ ------ ------ ------ ------ ------

Income (loss) from investment
operations:
Net investment income++.......... (0.01) 0.08 0.00 0.01 0.05 0.23
Net realized and unrealized gain
(loss)........................... 1.33 4.64 2.80 1.99 (1.77) 3.71
------ ------ ------ ------ ------ ------

Total income (loss) from investment
operations.......................... 1.32 4.72 2.80 2.00 (1.72) 3.94
------ ------ ------ ------ ------ ------

Less dividends and distributions
from:
Net investment income............ -- -- -- -- (0.07) --
Net realized gain................ (3.10) (0.55) -- -- (0.30) --
------ ------ ------ ------ ------ ------

Total dividends and distributions.... (3.10) (0.55) -- -- (0.37) --
------ ------ ------ ------ ------ ------

Net asset value, end of period....... $20.91 $22.69 $18.52 $15.72 $13.72 $15.81
====== ====== ====== ====== ====== ======

Total Return+........................ 6.57 %(1) 25.77% 17.81% 14.58% (11.20)% 33.28%

Ratios to Average Net Assets(3):

Expenses............................. 1.07 %(2) 1.04% 1.00% 1.04% 0.95% 0.94%

Net investment income (loss)......... (0.07)%(2) 0.37% 0.00% 0.10% 0.36% 1.11%

Supplemental Data:

Net assets, end of period, in
thousands........................... $62,992 $404,168 $306,722 $130,693 $103,561 $26,629

Portfolio turnover rate.............. 14 %(1) 41% 44% 47% 72% 85%
</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>

25
See Notes to Financial Statements

(This Page Intentionally Left Blank)

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

Ronald E. Robison
President and Principal Executive Officer

J. David Germany
Vice President

Dennis F. Shea
Vice President

Barry Fink
Vice President

Amy R. Doberman
Vice President

Carsten Otto
Chief Compliance Officer

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

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

[MORGAN STANLEY LOGO]

MORGAN STANLEY FUNDS

Morgan Stanley
Special Value Fund

Semiannual Report
January 31, 2006

[MORGAN STANLEY LOGO]

38424RPT RA06-0023IP-Y01/06

Item 2. Code of Ethics.

Not applicable for semiannual reports.

Item 3. Audit Committee Financial Expert.

Not applicable for semiannual reports.

Item 4. Principal Accountant Fees and Services

Not applicable for semiannual reports.

Item 5. Audit Committee of Listed Registrants.

Not applicable for semiannual reports.

Item 6.

Refer to Item 1.

Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.

Not applicable for semiannual reports.

Item 8. Portfolio Managers of Closed-End Management Investment Companies

Applicable only to reports filed by closed-end funds.

Item 9. Closed-End Fund Repurchases

Applicable to reports filed by closed-end funds.

Item 10. Submission of Matters to a Vote of Security Holders

Not applicable.

Item 11. Controls and Procedures

(a) The Fund's principal executive officer and principal financial officer have
concluded that the Fund's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Fund in this Form N-CSR
was recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, based
upon such officers' evaluation of these controls and procedures as of a date
within 90 days of the filing date of the report.

(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the 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 23, 2006

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

/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
March 23, 2006

/s/ Francis Smith
Francis Smith
Principal Financial Officer
March 23, 2006