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, 2007

Date of reporting period: January 31, 2007

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, 2007

TOTAL RETURN FOR THE 6 MONTHS ENDED JANUARY 31, 2007

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

16.51% 16.01% 16.06% 16.64% 15.08% 14.09%
</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

Although the six-month reporting period began with some turbulence, the stock
market recovered and produced a strong return for the period overall. The summer
months in 2006 were especially volatile for stocks, which faced downward
pressure from recessionary fears, potentially rising inflation, declining retail
sales, weakening housing data, spiking oil prices and geopolitical tensions in
the Middle East.

Early in the third quarter, however, many of the uncertainties that had been
overhanging the market began to ease, and investor sentiment became more
positive. The Federal Open Market Committee (the "Fed") discontinued its rate
increases for the remainder of 2006. Oil prices declined from their July record
levels as the Israeli-Hezbollah conflict reached a peaceful accord and the U.S.
hurricane season appeared to be relatively quiet. Gasoline prices also fell,
providing some relief to consumers and buoying retail sales. Corporate earnings
reports, on the whole, had continued to be solid throughout 2006, and
merger-and-acquisition and corporate restructuring activity continued at a very
robust pace. Yet, evidence of a slowing economy persisted: housing trends
continued to show weakness, and third quarter gross domestic product (GDP)
growth came in below expectations. Nonetheless, in the final months of 2006,
stabilizing economic data bolstered the belief that a "soft landing" had taken
place -- in other words, the Fed was able to moderate the pace of economic
growth without causing a recession.

After their strong run-up in the fourth quarter of 2006, stocks appeared to have
little room to grow in early 2007, although economic news was generally positive
during the month of January. Payroll, jobs growth, and consumer sentiment data
were well received, and fourth quarter GDP exceeded expectations. Oil prices
continued to fall and commodity prices for other raw materials also retreated.
For those companies that had reported quarterly earnings prior to the end of the
reporting period, many were able to meet investors' expectations. Finally, the
Fed left the federal funds rate unchanged in its January meeting and in its
official statement began to suggest a more upbeat view of the economy.

Within the Russell 2000(R) Value Index, consumer-related sectors performed very
well, led by the consumer staples and retail sectors. Relief in gasoline prices,
driven by declining oil prices, and improving consumer confidence helped retail
sales data to recover with unexpected strength. The basic resources sector also
had a robust gain, primarily due

to strength in the basic chemicals and containers industries. Easing commodity
prices during the period translated to lower input costs (or the cost of raw
materials used in production), which was beneficial for basic resources
companies' profit margins.

However, the energy sector had a negative return during the period, as the
stocks were perceived as less favorable in an environment of falling oil prices.
The utilities and financial services sectors were also among the Russell 2000
Value Index's bottom three performing groups, although both sectors had positive
returns. The lagging performance of the utilities sector seemed largely driven
by a shift in investor preference. Utilities stocks had performed well for part
of the year in 2006, and in fourth quarter's strong rally, investors may have
rotated away from the utility sector in search of higher returns elsewhere. In
the financials sector, banks were a drag on returns. For most of the period, the
yield curve remained inverted, which meant the yield on short-term bonds was
higher than the yield on long-term bonds. This environment is especially
challenging for banks, whose profit margins depend directly on the spread
between the yields.

PERFORMANCE ANALYSIS

Morgan Stanley Special Value Fund outperformed the Russell 2000(R) Value Index
and the Lipper Small-Cap Value Funds Index for the six months ended January 31,
2007, assuming no deduction of applicable sales charges.

Stock selection in the heavy industry/transportation sector contributed to the
Fund's outperformance relative to the Russell 2000 Value Index during the
period. The sector represents a broad group of industries, but the Fund's
holdings in machinery, business services and miscellaneous industrials proved
especially beneficial. In the health care sector, stock selection in the health
care services and medical technology industries bolstered the Fund's performance
relative to the Russell 2000 Value Index. An underweight allocation in the
financial services sector, which was among the sectors with the smallest gains
in the Russell 2000 Value Index, was also a source of added value for the Fund's
relative return.

In contrast, other holdings proved detrimental to the Fund's performance
relative to the Russell 2000 Value Index during the period. Among the Fund's
areas of weakness was the consumer staples sector. The Fund owned only a few
holdings, but our selection of stocks was unable to keep pace with the very
strong returns of the sector overall. The telecommunication services sector was
only represented by a single holding in the Fund's portfolio, and its
performance lagged behind the returns of the telecom stocks in the Russell 2000
Value Index. Additionally, stock selection in the energy sector, which included
the Fund's holdings in exploration and production companies and equipment and
services companies, detracted from results due to individual company-specific
factors.

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

ACCO Brands Corp. 3.3%
Belden CDT Inc. 3.1
DRS Technologies, Inc. 3.0
MAXIMUS, Inc. 2.5
Apria Healthcare Group, Inc. 2.3
Electronics For Imaging, Inc. 1.9
MSC. Software Corp. 1.8
United America Indemnity, Ltd. (Class A)
(Cayman Islands) 1.8
Bio-Rad Laboratories, Inc. (Class A) 1.7
Max Re Capital Ltd. (Bermuda) 1.7
</Table>

<Table>
<Caption>
TOP FIVE INDUSTRIES

Miscellaneous Commercial Services 8.9%
Aerospace & Defense 4.7
Electrical Products 4.6
Restaurants 3.8
Real Estate Investment Trusts 3.3
</Table>

Data as of January 31, 2007. 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 80 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
$2 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.

FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS

EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN
ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND
AND FOURTH FISCAL QUARTERS. THE SEMIANNUAL REPORTS AND THE ANNUAL REPORTS ARE
FILED ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC) ON FORM
N-CSRS AND FORM N-CSR, RESPECTIVELY. MORGAN STANLEY ALSO DELIVERS THE SEMIANNUAL
AND ANNUAL REPORTS TO FUND SHAREHOLDERS AND MAKES THESE REPORTS AVAILABLE ON ITS
PUBLIC WEB SITE, WWW.MORGANSTANLEY.COM. EACH MORGAN STANLEY FUND ALSO FILES A
COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE FUND'S FIRST AND
THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES NOT DELIVER THE REPORTS
FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS, NOR ARE THE REPORTS
POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY, HOWEVER, OBTAIN THE FORM
N-Q FILINGS (AS WELL AS THE FORM N-CSR AND N-CSRS FILINGS) BY ACCESSING THE
SEC'S WEB SITE, HTTP://WWW.SEC.GOV. YOU MAY ALSO REVIEW AND COPY THEM AT THE
SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE OPERATION OF
THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE SEC AT (800)
SEC-0330. YOU CAN ALSO REQUEST COPIES

OF THESE MATERIALS, UPON PAYMENT OF A DUPLICATING FEE, BY ELECTRONIC REQUEST AT
THE SEC'S E-MAIL ADDRESS (PUBLICINFO@SEC.GOV) OR BY WRITING THE PUBLIC REFERENCE
SECTION OF THE SEC, WASHINGTON, DC 20549-0102.

PROXY VOTING POLICY AND PROCEDURES AND PROXY VOTING RECORD

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

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

HOUSEHOLDING NOTICE

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

PERFORMANCE SUMMARY

AVERAGE ANNUAL TOTAL RETURNS -- PERIOD ENDED JANUARY 31, 2007

<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 18.79%(3) 17.78%(3) 17.90%(3) 19.04%(3)
12.55(4) 13.56(4) 17.06(4) --
5 YEARS 13.30(3) 12.42(3) 12.46(3) 13.56(3)
12.09(4) 12.17(4) 12.46(4) --
10 YEARS -- 12.30(3) -- --
-- 12.30(4) -- --
SINCE INCEPTION 12.09(3) 12.62(3) 11.27(3) 12.34(3)
11.45(4) 12.62(4) 11.27(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 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. Effective April 2005, Class B shares
will generally convert to Class A shares approximately eight years after the
end of the calendar month in which the shares were purchased. Performance
for periods greater than eight years reflects this conversion (beginning
April 2005).

+ 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. The Index is unmanaged and its 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. The Fund is in the Lipper Small-Cap Value Funds
classification as of the date of this report.

(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 08/01/06 - 01/31/07.

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 *
------------- ------------- ---------------
08/01/06 -
08/01/06 01/31/07 01/31/07
------------- ------------- ---------------

CLASS A
Actual (16.51% return)...................................... $1,000.00 $1,165.10 $ 6.88
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,018.85 $ 6.41
CLASS B
Actual (16.01% return)...................................... $1,000.00 $1,160.10 $10.94
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,015.07 $10.21
CLASS C
Actual (16.06% return)...................................... $1,000.00 $1,160.60 $10.95
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,015.07 $10.21
CLASS D
Actual (16.64% return)...................................... $1,000.00 $1,166.40 $ 5.52
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,020.11 $ 5.14
</Table>

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

* Expenses are equal to the Fund's annualized expense ratios of 1.26%, 2.01%,
2.01% and 1.01% 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, 2007 (UNAUDITED)

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

Common Stocks (95.6%)
Aerospace & Defense
(4.7%)
87,700 AAR Corp.*............... $ 2,612,583
349,600 DRS Technologies,
Inc. ................... 19,367,840
214,000 Moog Inc. (Class A)*..... 8,343,860
------------
30,324,283
------------
Agricultural Commodities/
Milling (1.2%)
229,900 Corn Products
International, Inc. .... 7,874,075
------------
Air Freight/Couriers
(1.1%)
20,900 Forward Air Corp. ....... 655,842
207,000 Pacer International,
Inc. ................... 6,450,120
------------
7,105,962
------------
Apparel/Footwear (0.7%)
237,435 Maidenform Brands,
Inc.*................... 4,753,449
------------
Apparel/Footwear Retail
(2.6%)
223,500 Stage Stores, Inc. ...... 7,172,115
278,100 Tween Brands Inc.*....... 9,508,239
------------
16,680,354
------------
Broadcasting (1.1%)
581,100 Sinclair Broadcast Group,
Inc. (Class A).......... 6,839,547
------------
Chemicals: Major
Diversified (1.4%)
449,113 Hercules Inc.*........... 8,807,106
------------
Chemicals: Specialty
(1.4%)
155,800 Cytec Industries,
Inc. ................... 9,070,676
------------
Commercial Printing/
Forms (2.8%)
465,100 Cenveo Inc.*............. 10,874,038
118,600 Consolidated Graphics,
Inc.*................... 7,353,200
------------
18,227,238
------------
</Table>

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

Computer Peripherals
(1.9%)
539,900 Electronics for Imaging,
Inc.*................... $ 12,444,695
------------
Construction Materials
(0.6%)
336,000 Dayton Superior Corp.*... 3,847,200
------------
Consumer Sundries (0.9%)
135,000 Central Garden & Pet
Co.*.................... 6,046,650
------------
Containers/ Packaging
(2.0%)
221,142 Rock-Tenn Co. (Class
A)...................... 7,235,766
121,100 Silgan Holdings, Inc. ... 5,671,113
------------
12,906,879
------------
Electric Utilities (1.8%)
227,400 Avista Corp. ............ 5,719,110
197,750 PNM Resources Inc. ...... 6,027,420
------------
11,746,530
------------
Electrical Products
(4.6%)
169,700 Acuity Brands, Inc. ..... 9,844,297
458,400 Belden CDT Inc. ......... 19,825,800
------------
29,670,097
------------
Electronic Equipment/
Instruments (1.3%)
371,800 Paxar Corp.*............. 8,172,164
------------
Engineering &
Construction (0.9%)
234,200 Stantec Inc. (Canada)*... 5,529,462
------------
Finance/Rental/ Leasing
(1.0%)
245,823 TAL International Group,
Inc. ................... 6,479,894
------------
Financial Conglomerates
(2.4%)
486,100 Conseco Inc.*............ 9,649,085
116,200 National Financial
Partners Corp. ......... 5,705,420
------------
15,354,505
------------
</Table>

8
See Notes to Financial Statements

Morgan Stanley Special Value Fund
PORTFOLIO OF INVESTMENTS - JANUARY 31, 2007 (UNAUDITED) continued

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

Gas Distributors (1.4%)
82,900 AGL Resources, Inc. ..... $ 3,257,970
208,800 UGI Corp. ............... 5,723,208
------------
8,981,178
------------
Home Furnishings (1.0%)
182,500 Jarden Corp.*............ 6,692,275
------------
Industrial Machinery
(3.3%)
65,400 Actuant Corp. (Class
A)...................... 3,256,266
226,765 CIRCOR International,
Inc. ................... 8,183,949
224,600 Watts Water Technologies,
Inc. (Class A).......... 9,875,662
------------
21,315,877
------------
Information Technology
Services (1.7%)
489,900 Keane, Inc.*............. 5,962,083
218,939 MTC Technologies,
Inc.*................... 5,007,135
------------
10,969,218
------------
Insurance (0.6%)
183,700 Employers Holdings,
Inc.*................... 3,668,489
------------
Medical Specialties
(2.2%)
129,140 Bio-Rad Laboratories,
Inc. (Class A)*......... 11,111,206
65,400 West Pharmaceutical
Services, Inc. ......... 3,173,862
------------
14,285,068
------------
Medical/Nursing Services
(2.3%)
526,050 Apria Healthcare Group,
Inc.*................... 14,608,408
------------
Metal Fabrications (0.7%)
105,830 General Cable Corp.*..... 4,564,448
------------
</Table>

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

Miscellaneous Commercial
Services (8.9%)
150,300 Brink's Co. (The)........ $ 9,341,145
253,400 FTI Consulting Inc.*..... 6,945,694
323,700 Gartner, Inc.*........... 7,076,082
210,258 Geo Group Inc. (The)*.... 9,213,506
262,500 Global Imaging Systems,
Inc.*................... 5,053,125
533,810 MAXIMUS, Inc. ........... 16,094,372
127,300 Wright Express Corp.*.... 3,929,751
------------
57,653,675
------------
Multi-Line Insurance
(1.7%)
457,100 Max Re Capital Ltd.
(Bermuda)............... 10,970,400
------------
Office Equipment/
Supplies (3.3%)
888,613 Acco Brands Corp.*....... 21,442,232
------------
Oil & Gas Production
(2.1%)
229,500 Denbury Resources
Inc.*................... 6,357,150
202,980 St. Mary Land &
Exploration Co. ........ 7,305,250
------------
13,662,400
------------
Oilfield Services/
Equipment (2.2%)
188,670 Superior Energy Services,
Inc.*................... 5,720,474
136,990 Universal Compression
Holdings, Inc.*......... 8,279,676
------------
14,000,150
------------
Other Transportation
(1.5%)
325,700 Laidlaw International
Inc. ................... 9,676,547
------------
Packaged Software (1.8%)
756,688 MSC. Software Corp.*..... 11,880,002
------------
Personnel Services (1.1%)
332,442 Gevity HR, Inc. ......... 7,336,995
------------
</Table>

9
See Notes to Financial Statements

Morgan Stanley Special Value Fund
PORTFOLIO OF INVESTMENTS - JANUARY 31, 2007 (UNAUDITED) continued

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

Pharmaceuticals: Other
(2.4%)
389,520 Perrigo Co. ............. $ 6,730,906
369,100 Sciele Pharma, Inc.*..... 8,766,125
------------
15,497,031
------------
Property - Casualty
Insurers (2.9%)
233,800 Platinum Underwriters
Holdings Ltd.
(Bermuda)............... 6,978,930
471,986 United America Indemnity,
Ltd. (Class A) (Cayman
Islands)*............... 11,384,302
------------
18,363,232
------------
Real Estate Investment
Trusts (3.3%)
675,500 Anthracite Capital,
Inc. ................... 9,234,085
114,700 LaSalle Hotel
Properties.............. 5,460,867
123,800 Parkway Properties,
Inc. ................... 6,790,430
------------
21,485,382
------------
Regional Banks (3.1%)
46,500 Alabama National
BanCorporation.......... 3,269,880
158,000 Greater Bay Bancorp...... 4,414,520
163,172 Integra Bank Corp. ...... 4,041,770
93,600 Provident Bankshares
Corp. .................. 3,317,184
326,630 Provident New York
Bancorp................. 4,758,999
------------
19,802,353
------------
Restaurants (3.8%)
547,000 AFC Enterprises, Inc.*... 9,167,720
1,875,600 Denny's Corp.*........... 10,034,460
172,900 Landry's Restaurants,
Inc. ................... 5,178,355
------------
24,380,535
------------
</Table>

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

Savings Banks (1.9%)
413,346 First Niagara Financial
Group, Inc. ............ $ 5,989,383
160,804 MB Financial, Inc. ...... 5,936,884
------------
11,926,267
------------
Semiconductors (0.8%)
269,800 Microsemi Corp.*......... 4,910,360
------------
Specialty Insurance
(1.9%)
116,500 NYMAGIC, Inc. ........... 4,745,045
150,386 ProAssurance Corp.*...... 7,638,105
------------
12,383,150
------------
Specialty Stores (1.7%)
88,160 Guitar Center, Inc.*..... 4,033,320
247,500 Lithia Motors Inc. (Class
A)...................... 7,113,150
------------
11,146,470
------------
Specialty
Telecommunications (0.7%)
305,086 Syniverse Holdings
Inc.*................... 4,478,662
------------
Telecommunication
Equipment (1.6%)
32,300 ADTRAN, Inc. ............ 715,768
615,500 Tekelec*................. 9,478,700
------------
10,194,468
------------
Textiles (1.3%)
241,700 Albany International
Corp. (Class A)......... 8,203,298
------------
Total Common Stocks
(Cost $423,092,316)...... 616,359,336
------------
</Table>

10
See Notes to Financial Statements

Morgan Stanley Special Value Fund
PORTFOLIO OF INVESTMENTS - JANUARY 31, 2007 (UNAUDITED) continued

<Table>
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ------------------------------------------------------

Short-Term Investment (4.3%)
Repurchase Agreement
$27,879 Joint repurchase
agreement account 5.26%
due 02/01/07 (dated
01/31/07; proceeds
$27,883,073) (a)
(Cost $27,879,000)...... $ 27,879,000
------------
</Table>

<Table>

Total Investments
(Cost $450,971,316) (b)..... 99.9% 644,238,336
Other Assets in Excess of
Liabilities................. 0.1 643,312
----- ------------
Net Assets.................. 100.0% $644,881,648
===== ============
</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
$195,154,486 and the aggregate gross unrealized
depreciation is $1,887,466, resulting in net
unrealized appreciation of $193,267,020.
</Table>

11
See Notes to Financial Statements

Morgan Stanley Special Value Fund
SUMMARY OF INVESTMENTS - JANUARY 31, 2007 (UNAUDITED)

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

Miscellaneous Commercial
Services.................... $ 57,653,675 8.9%
Aerospace & Defense.......... 30,324,283 4.7
Electrical Products.......... 29,670,097 4.6
Repurchase Agreement......... 27,879,000 4.3
Restaurants.................. 24,380,535 3.8
Real Estate Investment
Trusts...................... 21,485,382 3.3
Office Equipment/Supplies.... 21,442,232 3.3
Industrial Machinery......... 21,315,877 3.3
Regional Banks............... 19,802,353 3.1
Property - Casualty
Insurers.................... 18,363,232 2.9
Commercial Printing/Forms.... 18,227,238 2.8
Apparel/Footwear Retail...... 16,680,354 2.6
Pharmaceuticals: Other....... 15,497,031 2.4
Financial Conglomerates...... 15,354,505 2.4
Medical/Nursing Services..... 14,608,408 2.3
Medical Specialties.......... 14,285,068 2.2
Oilfield
Services/Equipment.......... 14,000,150 2.2
Oil & Gas Production......... 13,662,400 2.1
Containers/Packaging......... 12,906,879 2.0
Computer Peripherals......... 12,444,695 1.9
Specialty Insurance.......... 12,383,150 1.9
Savings Banks................ 11,926,267 1.9
Packaged Software............ 11,880,002 1.8
Electric Utilities........... 11,746,530 1.8
Specialty Stores............. 11,146,470 1.7
</Table>

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

Multi-Line Insurance......... $ 10,970,400 1.7%
Information Technology
Services.................... 10,969,218 1.7
Telecommunication
Equipment................... 10,194,468 1.6
Other Transportation......... 9,676,547 1.5
Chemicals: Specialty......... 9,070,676 1.4
Gas Distributors............. 8,981,178 1.4
Chemicals: Major
Diversified................. 8,807,106 1.4
Textiles..................... 8,203,298 1.3
Electronic
Equipment/Instruments....... 8,172,164 1.3
Agricultural
Commodities/Milling......... 7,874,075 1.2
Personnel Services........... 7,336,995 1.1
Air Freight/Couriers......... 7,105,962 1.1
Broadcasting................. 6,839,547 1.1
Home Furnishings............. 6,692,275 1.0
Finance/Rental/Leasing....... 6,479,894 1.0
Consumer Sundries............ 6,046,650 0.9
Engineering & Construction... 5,529,462 0.9
Semiconductors............... 4,910,360 0.8
Apparel/Footwear............. 4,753,449 0.7
Metal Fabrications........... 4,564,448 0.7
Specialty
Telecommunications.......... 4,478,662 0.7
Construction Materials....... 3,847,200 0.6
Insurance.................... 3,668,489 0.6
------------ ----
$644,238,336 99.9%
============ ====
</Table>

12
See Notes to Financial Statements

Morgan Stanley Special Value Fund
FINANCIAL STATEMENTS

Statement of Assets and Liabilities
January 31, 2007 (unaudited)

<Table>

Assets:
Investments in securities, at value
(cost $450,971,316)........................................ $644,238,336
Cash........................................................ 431
Receivable for:
Investments sold........................................ 9,993,667
Dividends............................................... 331,450
Shares of beneficial interest sold...................... 301,439
Interest................................................ 4,073
Prepaid expenses and other assets........................... 10,906
------------
Total Assets............................................ 654,880,302
------------
Liabilities:
Payable for:
Investments purchased................................... 4,878,327
Shares of beneficial interest redeemed.................. 4,189,812
Investment advisory fee................................. 387,085
Distribution fee........................................ 325,951
Transfer agent fee...................................... 75,568
Administration fee...................................... 46,609
Accrued expenses and other payables......................... 95,302
------------
Total Liabilities....................................... 9,998,654
------------
Net Assets.............................................. $644,881,648
============
Composition of Net Assets:
Paid-in-capital............................................. $419,478,359
Net unrealized appreciation................................. 193,267,020
Accumulated net investment loss............................. (1,517,894)
Accumulated undistributed net realized gain................. 33,654,163
------------
Net Assets.............................................. $644,881,648
============
Class A Shares:
Net Assets.................................................. $309,995,308
Shares Outstanding (unlimited authorized, $.01 par value)... 17,283,409
Net Asset Value Per Share............................... $17.94
============
Maximum Offering Price Per Share,
(net asset value plus 5.54% of net asset value)......... $18.93
============
Class B Shares:
Net Assets.................................................. $243,378,968
Shares Outstanding (unlimited authorized, $.01 par value)... 15,207,867
Net Asset Value Per Share............................... $16.00
============
Class C Shares:
Net Assets.................................................. $38,340,966
Shares Outstanding (unlimited authorized, $.01 par value)... 2,392,500
Net Asset Value Per Share............................... $16.03
============
Class D Shares:
Net Assets.................................................. $53,166,406
Shares Outstanding (unlimited authorized, $.01 par value)... 2,865,901
Net Asset Value Per Share............................... $18.55
============
</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, 2007 (unaudited)

<Table>

Net Investment Loss:
Income
Dividends................................................... $ 3,035,653
Interest.................................................... 510,962
-----------
Total Income............................................ 3,546,615
-----------
Expenses
Investment advisory fee..................................... 2,153,407
Distribution fee (Class A shares)........................... 376,866
Distribution fee (Class B shares)........................... 1,268,746
Distribution fee (Class C shares)........................... 188,074
Transfer agent fees and expenses............................ 573,694
Administration fee.......................................... 259,274
Shareholder reports and notices............................. 166,096
Professional fees........................................... 31,429
Registration fees........................................... 30,422
Custodian fees.............................................. 22,437
Trustees' fees and expenses................................. 7,429
Other....................................................... 44,436
-----------
Total Expenses.......................................... 5,122,310

Less: expense offset........................................ (3,018)
-----------
Net Expenses............................................ 5,119,292
-----------
Net Investment Loss..................................... (1,572,677)
-----------
Net Realized and Unrealized Gain:
Net realized gain........................................... 55,850,794
Net change in unrealized appreciation....................... 43,049,138
-----------
Net Gain................................................ 98,899,932
-----------
Net Increase................................................ $97,327,255
===========
</Table>

14
See Notes to Financial Statements

Morgan Stanley Special Value Fund
FINANCIAL STATEMENTS continued

Statements of Changes in Net Assets

<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JANUARY 31, 2007 JULY 31, 2006
---------------- --------------
(unaudited)

Increase (Decrease) in Net Assets:
Operations:
Net investment loss......................................... $ (1,572,677) $ (3,827,003)
Net realized gain........................................... 55,850,794 188,915,674
Net change in unrealized appreciation....................... 43,049,138 (141,722,410)
------------- --------------
Net Increase............................................ 97,327,255 43,366,261
------------- --------------
Distributions to Shareholders from Net Realized Gain:
Class A shares.............................................. (82,437,851) (36,131,854)
Class B shares.............................................. (73,592,274) (46,359,388)
Class C shares.............................................. (11,094,944) (5,685,404)
Class D shares.............................................. (14,206,590) (8,323,369)
------------- --------------
Total Distributions..................................... (181,331,659) (96,500,015)
------------- --------------

Net increase (decrease) from transactions in shares of
beneficial interest....................................... 102,394,674 (393,210,673)
------------- --------------
Net Increase (Decrease)................................. 18,390,270 (446,344,427)
Net Assets:
Beginning of period......................................... 626,491,378 1,072,835,805
------------- --------------
End of Period
(Including accumulated net investment loss of $1,517,894 and
accumulated undistributed investment income of $54,783,
respectively)............................................... $ 644,881,648 $ 626,491,378
============= ==============
</Table>

15
See Notes to Financial Statements

Morgan Stanley Special Value Fund
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2007 (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 to
seek 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.

The Fund will assess a 2% redemption fee, on Class A shares, Class B shares,
Class C shares, and Class D shares, which is paid directly to the Fund, for
shares redeemed within thirty days of purchase, subject to certain exceptions.
The redemption fee is designed to protect the Fund and its remaining
shareholders from the effects of short-term trading.

The following is a summary of significant accounting policies:

A. Valuation of Investments -- (1) an equity portfolio security listed or traded
on the New York Stock Exchange ("NYSE") or American Stock Exchange or other
exchange is valued at its latest sale price prior to the time when assets are
valued; if there were no sales that day, the security is valued at the mean
between the last reported bid and asked price; (2) an equity portfolio security
listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price;
if there were no sales that day, the security is valued at the mean between the
last reported bid and asked price; (3) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the mean
between the last reported bid and asked price. In cases where a security is
traded on more than one exchange, the security is valued on the exchange
designated as the primary market; (4) for equity securities traded on foreign
exchanges, the last reported sale price or the latest bid price may be used if
there were no sales on a particular day; (5) when market quotations are not
readily available including circumstances under which Morgan Stanley Investment
Advisors Inc. (the "Investment Adviser") determines that the latest sale price,
the bid price or the mean between the last reported bid and asked price do not
reflect a security's market value, portfolio securities are valued at their fair
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

Morgan Stanley Special Value Fund
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2007 (UNAUDITED) continued

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

Morgan Stanley Special Value Fund
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2007 (UNAUDITED) continued

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.

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: 0.67% to the portion of the daily net assets not exceeding
$500 million; 0.645% to the portion of the daily net assets exceeding $500
million but not exceeding $1 billion; and 0.62% to the portion of the 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.

For the period November 18, 2005 through November 17, 2006, the Investment
Adviser has agreed to cap the Fund's operating expenses (except for brokerage
and 12b-1 fees) 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

Morgan Stanley Special Value Fund
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2007 (UNAUDITED) continued

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 $5,864,804 at January 31,
2007.

In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Financial Advisors and other authorized
financial representatives at the time of sale may be reimbursed in the
subsequent calendar year. For the six months ended January 31, 2007, 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,
2007, it received contingent deferred sales charges from certain redemptions of
the Fund's Class A shares, Class B shares and Class C shares of $190, $192,836
and $1,102, respectively and received $75,484 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, 2007 aggregated
$149,815,854 and $238,464,514, respectively. Included in the aforementioned are
purchases and sales with other Morgan Stanley funds of $629,475 and $7,158,380,
respectively, including net realized gains of $2,060,370.

For the six months ended January 31, 2007, the Fund had open receivables of
$279,908 with Morgan Stanley & Co., an affiliate of the Investment Adviser,
Administrator and Distributor.

For the six months ended January 31, 2007, the Fund incurred brokerage
commissions of $1,536 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 or she receives for serving on the Board of Trustees. Each eligible
Trustee generally may elect to have the deferred amounts

Morgan Stanley Special Value Fund
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2007 (UNAUDITED) continued

credited with a return equal to the total return on one or more of the Morgan
Stanley funds that are offered as investment options under the Compensation
Plan. Appreciation/depreciation and distributions received from these
investments are recorded with an offsetting increase/decrease in the deferred
compensation obligation and do not affect the net asset value of the Fund.

5. Expense Offset

The expense offset represents a reduction of the fees and expenses for interest
earned on cash balances maintained by the Fund with the transfer agent.

6. 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, 2007 JULY 31, 2006
------------------------- ---------------------------
(unaudited)
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ----------- -------------

CLASS A SHARES
Sold.............................................. 774,959 $ 15,781,514 1,308,267 $ 27,474,516
Conversion from Class B........................... 509,734 10,426,295 2,016,470 41,055,466
Reinvestment of distributions..................... 4,372,137 77,299,377 1,786,668 34,661,351
Redeemed.......................................... (1,966,756) (39,969,430) (3,820,940) (79,846,994)
---------- ------------ ----------- -------------
Net increase - Class A............................ 3,690,074 63,537,756 1,290,465 23,344,339
---------- ------------ ----------- -------------
CLASS B SHARES
Sold.............................................. 394,445 7,545,462 568,832 11,024,347
Conversion to Class A............................. (560,250) (10,426,295) (2,172,414) (41,055,466)
Reinvestment of distributions..................... 4,162,052 65,718,769 2,327,594 41,896,689
Redeemed.......................................... (1,878,891) (35,468,525) (4,444,991) (86,763,860)
---------- ------------ ----------- -------------
Net increase (decrease) - Class B................. 2,117,356 27,369,411 (3,720,979) (74,898,290)
---------- ------------ ----------- -------------
CLASS C SHARES
Sold.............................................. 111,255 1,954,759 114,039 2,227,793
Reinvestment of distributions..................... 619,390 9,792,559 287,869 5,187,393
Redeemed.......................................... (222,686) (4,195,283) (537,230) (10,512,921)
---------- ------------ ----------- -------------
Net increase (decrease) - Class C................. 507,959 7,552,035 (135,322) (3,097,735)
---------- ------------ ----------- -------------
CLASS D SHARES
Sold.............................................. 72,992 1,500,282 437,214 9,359,161
Reinvestment of distributions..................... 665,323 12,162,086 348,458 6,913,399
Redeemed.......................................... (446,061) (9,726,896) (16,025,095) (354,831,547)
---------- ------------ ----------- -------------
Net increase (decrease) - Class D................. 292,254 3,935,472 (15,239,423) (338,558,987)
---------- ------------ ----------- -------------
Net increase (decrease) in Fund................... 6,607,643 $102,394,674 (17,805,259) $(393,210,673)
========== ============ =========== =============
</Table>

Morgan Stanley Special Value Fund
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2007 (UNAUDITED) continued

7. 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, 2006, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on wash sales.

8. New Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation 48, Accounting for Uncertainty in Income Taxes -- an
interpretation of FASB Statement 109 (FIN 48). FIN 48 clarifies the accounting
for income taxes by prescribing the minimum recognition threshold a tax position
must meet before being recognized in the financial statements. FIN 48 is
effective for fiscal years beginning after December 15, 2006 and is to be
applied to all open tax years as of the effective date. The impact to the Fund's
financial statements, if any, is currently being assessed.

In addition, in September 2006, Statement of Financial Accounting Standards No.
157, Fair Value Measurements (SFAS 157), was issued and is effective for fiscal
years beginning after November 15, 2007. SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. Management is currently evaluating the impact the
adoption of SFAS 157 will have on the Fund's financial statement disclosures.

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, 2007 2006 2005 2004 2003 2002
---------------- --------- --------- --------- -------- --------
(unaudited)

Class A Shares
Selected Per Share Data:

Net asset value, beginning of period..... $20.84 $ 22.28 $ 18.24 $ 15.51 $ 13.56 $ 15.67
------ -------- -------- -------- ------- -------

Income (loss) from investment operations:
Net investment income (loss)++....... (0.02) (0.04) 0.04 (0.04) (0.02) 0.01
Net realized and unrealized gain
(loss)............................... 3.37 1.70 4.55 2.77 1.97 (1.76)
------ -------- -------- -------- ------- -------

Total income (loss) from investment
operations.............................. 3.35 1.66 4.59 2.73 1.95 (1.75)
------ -------- -------- -------- ------- -------

Less dividends and distributions from:
Net investment income................ -- -- -- -- -- (0.06)
Net realized gain.................... (6.25) (3.10) (0.55) -- -- (0.30)
------ -------- -------- -------- ------- -------

Total dividends and distributions........ (6.25) (3.10) (0.55) -- -- (0.36)
------ -------- -------- -------- ------- -------

Net asset value, end of period........... $17.94 $ 20.84 $ 22.28 $ 18.24 $ 15.51 $ 13.56
====== ======== ======== ======== ======= =======

Total Return+............................ 16.51 %(1) 8.50% 25.45% 17.60% 14.38% (11.43)%

Ratios to Average Net Assets(3):
Expenses (before expense offset)......... 1.26 %(2) 1.28% 1.27% 1.23% 1.25% 1.19%

Net investment income (loss)............. (0.17)%(2) (0.22)% 0.14% (0.23)% (0.11)% 0.12%

Supplemental Data:
Net assets, end of period, in
thousands............................... $309,995 $283,281 $274,050 $114,636 $71,088 $56,064

Portfolio turnover rate.................. 24 %(1) 28% 41% 44% 47% 72%
</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, 2007 2006 2005 2004 2003 2002
---------------- --------- --------- --------- --------- ---------
(unaudited)

Class B Shares
Selected Per Share Data:

Net asset value, beginning of
period............................. $19.25 $20.95 $17.31 $14.84 $13.08 $15.18
------ ------ ------ ------ ------ ------

Income (loss) from investment
operations:
Net investment loss++........... (0.09) (0.19) (0.11) (0.17) (0.11) (0.09)
Net realized and unrealized gain
(loss).......................... 3.09 1.59 4.30 2.64 1.87 (1.71)
------ ------ ------ ------ ------ ------

Total income (loss) from investment
operations......................... 3.00 1.40 4.19 2.47 1.76 (1.80)
------ ------ ------ ------ ------ ------

Less distributions from net realized
gain............................... (6.25) (3.10) (0.55) -- -- (0.30)
------ ------ ------ ------ ------ ------

Net asset value, end of period...... $16.00 $19.25 $20.95 $17.31 $14.84 $13.08
====== ====== ====== ====== ====== ======

Total Return+....................... 16.01 %(1) 7.68% 24.55% 16.64% 13.46% (12.08)%

Ratios to Average Net Assets(3):
Expenses (before expense offset).... 2.01 %(2) 2.03% 2.04% 2.00% 2.04% 1.95%

Net investment loss................. (0.92)%(2) (0.97)% (0.63)% (1.00)% (0.90)% (0.64)%

Supplemental Data:
Net assets, end of period, in
thousands.......................... $243,379 $251,970 $352,265 $518,426 $500,124 $587,241

Portfolio turnover rate............. 24 %(1) 28% 41% 44% 47% 72%
</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, 2007 2006 2005 2004 2003 2002
---------------- -------- -------- -------- -------- --------
(unaudited)

Class C Shares
Selected Per Share Data:

Net asset value, beginning of period.......... $19.27 $20.97 $17.30 $14.84 $13.08 $15.20
------ ------ ------ ------ ------ ------

Income (loss) from investment operations:
Net investment loss++..................... (0.09) (0.19) (0.10) (0.17) (0.12) (0.10)
Net realized and unrealized gain (loss)... 3.10 1.59 4.32 2.63 1.88 (1.69)
------ ------ ------ ------ ------ ------

Total income (loss) from investment
operations................................... 3.01 1.40 4.22 2.46 1.76 (1.79)
------ ------ ------ ------ ------ ------

Less dividends and distributions from:
Net investment income..................... -- -- -- -- -- (0.03)
Net realized gain......................... (6.25) (3.10) (0.55) -- -- (0.30)
------ ------ ------ ------ ------ ------

Total dividends and distributions............. (6.25) (3.10) (0.55) -- -- (0.33)
------ ------ ------ ------ ------ ------

Net asset value, end of period................ $16.03 $19.27 $20.97 $17.30 $14.84 $13.08
====== ====== ====== ====== ====== ======

Total Return+................................. 16.06 %(1) 7.72% 24.61% 16.64% 13.46% (12.03)%

Ratios to Average Net Assets(3):
Expenses (before expense offset).............. 2.01 %(2) 2.02% 1.93% 2.00% 2.04% 1.95%

Net investment loss........................... (0.92)%(2) (0.96)% (0.52)% (1.00)% (0.90)% (0.64)%

Supplemental Data:
Net assets, end of period, in thousands....... $38,341 $36,311 $42,352 $42,662 $37,454 $41,147

Portfolio turnover rate....................... 24 %(1) 28% 41% 44% 47% 72%
</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, 2007 2006 2005 2004 2003 2002
---------------- -------- --------- --------- --------- ---------
(unaudited)

Class D Shares
Selected Per Share Data:

Net asset value, beginning of period..... $21.34 $22.69 $18.52 $15.72 $13.72 $15.81
------ ------ ------ ------ ------ ------

Income (loss) from investment operations:
Net investment income++.............. 0.01 0.00 0.08 0.00 0.01 0.05
Net realized and unrealized gain
(loss)............................... 3.45 1.75 4.64 2.80 1.99 (1.77)
------ ------ ------ ------ ------ ------

Total income (loss) from investment
operations.............................. 3.46 1.75 4.72 2.80 2.00 (1.72)
------ ------ ------ ------ ------ ------

Less dividends and distributions from:
Net investment income................ -- -- -- -- -- (0.07)
Net realized gain.................... (6.25) (3.10) (0.55) -- -- (0.30)
------ ------ ------ ------ ------ ------

Total dividends and distributions........ (6.25) (3.10) (0.55) -- -- (0.37)
------ ------ ------ ------ ------ ------

Net asset value, end of period........... $18.55 $21.34 $22.69 $18.52 $15.72 $13.72
====== ====== ====== ====== ====== ======

Total Return+............................ 16.64%(1) 8.76% 25.77% 17.81% 14.58% (11.20)%

Ratios to Average Net Assets(3):

Expenses (before expense offset)......... 1.01%(2) 1.03% 1.04% 1.00% 1.04% 0.95%

Net investment income.................... 0.08%(2) 0.03% 0.37% 0.00% 0.10% 0.36%

Supplemental Data:
Net assets, end of period, in
thousands............................... $53,166 $54,930 $404,168 $306,722 $130,693 $103,561

Portfolio turnover rate.................. 24%(1) 28% 41% 44% 47% 72%
</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

Morgan Stanley Special Value Fund
RESULTS OF SPECIAL SHAREHOLDER MEETING (UNAUDITED)

On August 1, 2006, a Special Meeting of Shareholders of the Fund was scheduled
in order to vote on the proposals set forth below. The meeting was held on
August 1, 2006 and the voting results with respect to these proposals were as
follows:

(1) Election of Trustees:

<Table>
<Caption>
FOR WITHHOLD ABSTAIN BNV*
--------------------------------------

Frank L. Bowman............................................. 16,278,930 370,296 0 0
Kathleen A. Dennis.......................................... 16,291,246 357,980 0 0
James F. Higgins............................................ 16,285,026 364,200 0 0
Joseph J. Kearns............................................ 16,282,848 366,378 0 0
Michael F. Klein............................................ 16,276,622 372,604 0 0
W. Allen Reed............................................... 16,276,587 372,639 0 0
Fergus Reid................................................. 16,270,441 378,785 0 0
</Table>

The following Trustees were not standing for reelection at this meeting: Michael
Bozic, Dr. Manuel H. Johnson and Michael E. Nugent.

(2) Elimination of certain fundamental investment restrictions:

<Table>
<Caption>
FOR AGAINST ABSTAIN BNV*
------------------------------------------

Elimination of the fundamental policy restricting the Fund's
ability to pledge assets.................................. 14,288,352 405,580 291,595 1,663,699
Elimination of the fundamental policy restricting purchases
of securities on margin................................... 14,235,934 461,042 288,551 1,663,699
Elimination of the fundamental policy prohibiting
investments in oil, gas, and other types of minerals or
mineral leases............................................ 14,306,876 380,277 298,374 1,663,699
Elimination of the fundamental policy prohibiting or
restricting the purchase of securities of issuers in which
Trustees or Officers have an interest..................... 14,262,460 434,722 288,345 1,663,699
Elimination of the fundamental policy prohibiting
investments for purposes of exercising control............ 14,289,688 395,036 300,803 1,663,699
Elimination of the fundamental policy regarding investments
in unseasoned companies................................... 14,247,371 443,645 294,511 1,663,699
</Table>

(3) Modify certain fundamental investment restrictions:

<Table>
<Caption>
FOR AGAINST ABSTAIN BNV*
------------------------------------------

Modify fundamental policy regarding diversification......... 14,355,755 357,973 271,799 1,663,699
Modify fundamental policy regarding borrowing money......... 14,233,054 473,293 279,180 1,663,699
Modify fundamental policy regarding loans................... 14,258,810 449,040 277,677 1,663,699
Modify fundamental policy regarding investment in
commodities, commodity contracts and futures contracts.... 14,265,290 437,445 282,792 1,663,699
Modify fundamental policy regarding issuance of senior
securities................................................ 14,305,418 377,027 303,082 1,663,699
</Table>

Morgan Stanley Special Value Fund
RESULTS OF SPECIAL SHAREHOLDER MEETING (UNAUDITED) continued

(4) Reclassify certain fundamental policies as non-fundamental policies:

<Table>
<Caption>
FOR AGAINST ABSTAIN BNV*
------------------------------------------

Reclassification as non-fundamental the fundamental policy
regarding the short sale of securities.................... 14,238,649 458,512 288,366 1,663,699
Reclassification as non-fundamental the fundamental policy
prohibiting investments in other investment companies..... 14,306,360 390,367 288,800 1,663,699
</Table>

- ---------------------
* Broker "non-votes" are shares held in street name for which the broker
indicates that instructions have not been received from the beneficial owners
or other persons entitled to vote and for which the broker does not have
discretionary voting authority.

TRUSTEES

Frank L. Bowman
Michael Bozic
Kathleen A. Dennis
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael F. Klein
Michael E. Nugent
W. Allen Reed
Fergus Reid

OFFICERS

Michael E. Nugent
Chairman of the Board

Ronald E. Robison
President and Principal Executive Officer

J. David Germany
Vice President

Dennis F. Shea
Vice President

Barry Fink
Vice President

Amy R. Doberman
Vice President

Carsten Otto
Chief Compliance Officer

Stefanie V. Chang Yu
Vice President

Francis J. Smith
Treasurer and Chief Financial Officer

Mary E. Mullin
Secretary

TRANSFER AGENT

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

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

LEGAL COUNSEL

Clifford Chance US LLP
31 West 52nd Street
New York, NY 10019

COUNSEL TO THE INDEPENDENT TRUSTEES

Kramer Levin Naftalis & Frankel LLP
1177 Avenue of the Americas
New York, NY 10036

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.

Morgan Stanley Distributors Inc., member NASD

[MORGAN STANLEY LOGO]

MORGAN STANLEY FUNDS

Morgan Stanley
Special Value Fund

Semiannual Report
January 31, 2007

[MORGAN STANLEY LOGO]

SVFSAR RA07-00257P-Y01/07

Item 2. Code of Ethics.

Not applicable for semiannual reports.

Item 3. Audit Committee Financial Expert.

Not applicable for semiannual reports.

Item 4. Principal Accountant Fees and Services

Not applicable for semiannual reports.

Item 5. Audit Committee of Listed Registrants.

Not applicable for semiannual reports.

Item 6.

Refer to Item 1.

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

Not applicable for semiannual reports.

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

Applicable only to reports filed by closed-end funds.

Item 9. Closed-End Fund Repurchases

Applicable to reports filed by closed-end funds.

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

Not applicable.

Item 11. Controls and Procedures

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

(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the second fiscal quarter of the period covered
by this report that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting.

Item 12. Exhibits

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

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

Morgan Stanley Special Value Fund

/s/ Ronald E. Robison
- ------------------------------------
Ronald E. Robison
Principal Executive Officer
March 22, 2007

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, 2007

/s/ Francis Smith
- ------------------------------------
Francis Smith
Principal Financial Officer
March 22, 2007