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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)

522 Fifth Avenue, New York, New York 10036
- ---------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)

Ronald E. Robison 522 Fifth Avenue, New York, New York 10036
- ---------------------------------------------------------------------------
(Name and address of agent for service)

Registrant's telephone number, including area code: 212-296-6990
---------------------

Date of fiscal year end: July 31, 2008
-----------------

Date of reporting period: January 31, 2008
-----------------

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, 2008

TOTAL RETURN FOR THE 6 MONTHS ENDED JANUARY 31, 2008

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

- -10.23% -10.56% -10.55% -10.07% -8.89% -10.15%

</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

Broadly speaking, U.S. stocks declined in the six-month period ended January 31,
2008, with small-cap value stocks (as represented by the Russell 2000(R) Value
Index) among the weakest performing segments. Early in the period, stocks were
highly volatile as the subprime mortgage market's troubles spilled into the
broader economy, and global credit markets tightened in response. Investors
began to reassess risk, which fueled a rotation out of the higher yielding
segments of the bond market into the relative safety of U.S. Treasury bonds.
Moreover, market volatility further extended a slide in the U.S. dollar relative
to major currencies. In August and September, the Federal Open Market Committee
(the "Fed") began a series of reductions to both the discount rate (the rate at
which member banks borrow from the central bank) and the target federal funds
rate, which helped stabilize the financial markets and provided the system with
needed liquidity.

Weakening economic data coupled with high oil and other commodity prices,
contributed to a grim outlook for the U.S. economy that dragged the market lower
for the remainder of the period. Although the third quarter gross domestic
product (GDP) growth rate was better than expected at 4.9 percent, fourth
quarter GDP fell to a rate of 0.6 percent. Further disappointing investors
during the period were weak consumer spending, manufacturing and employment
data. Fallout from the subprime mortgage market and ongoing weakness in the
housing market also remained evident: large financial institutions continued to
post significant losses on investments related to these areas, and housing
inventories and home foreclosures continued to rise. Investors seemed to find
further validation of recession worries in responses from both the Fed and the
federal government. The Fed made additional reductions in its target federal
funds rate, including an emergency cut in January, and continued to indicate
that they believe risks to economic growth remained present. The federal
government put forth an economic stimulus package in recognition of the slowing
economy and the potential difficulties for consumers ahead.

In this environment, small-cap value stocks (in which the Fund invests) lagged
the broad market. As the risks to future economic growth intensified, investors
rotated into areas of the market which they believed were more likely to
withstand a downdraft in the economy. Growth-oriented and large-cap stocks
benefited from this trend because of their perceived ability to achieve growth
in the absence of a broader economic upswing. On a sector basis, sectors tied to
consumer spending or the economic cycle fared the worst. The consumer
discretionary, producer durables

and technology sectors had the lowest returns for the six-month period.
Conversely, the classic "defensive" sectors -- or those that are less reliant on
an economic tailwind to generate growth -- such as health care, utilities and
consumer staples performed well.

PERFORMANCE ANALYSIS

All share classes of Morgan Stanley Special Value Fund underperformed the
Russell 2000(R) Value Index for the six months ended January 31, 2008, assuming
no deduction of applicable sales charges. The Fund's Class A, B, and C shares
underperformed the Lipper Small-Cap Value Funds Index for the same period,
assuming no deduction of applicable sales charges, while the Class D shares
outperformed.

Among the Fund's weakest performing areas for the period, relative to the
Russell 2000 Value Index was the financial services sector, in which the Fund's
relative underweight position and stock selection both dampened relative
performance. In particular, the Fund held a significant underweight to banks and
therefore had less exposure to the group's rebound in January when investors
grew optimistic that the Fed's rate cuts would benefit the troubled banking
industry. Additionally, weak results of several holdings in insurance stocks and
a position in a real estate investment trust hampered the Fund's performance.
Overweight positions in the consumer discretionary and producer durables sectors
amplified the Fund's exposure to these sectors' declining performance, further
driving the Fund's overall relative underperformance.

In contrast, the Fund showed positive relative performance in other areas.
Notably, an overweight allocation and stock selection in the health care sector
bolstered returns. Two of the Fund's health care holdings generated standout
performance due to company specific reasons. Stock selection in the energy
sector was another positive contributor, led by good performance of some
exploration and production holdings. The technology sector was not a
particularly strong area for the Fund during the period under review, but the
Fund did avoid some of the worst performing names and its holdings declined less
severely than the Russell 2000 Value Index's technology sector. As a result, the
Fund held its value better than the Index within that sector.

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

MAXIMUS, Inc. 4.1%
DRS Technologies, Inc. 3.2
Belden Inc. 2.8
Sciele Pharma, Inc. 2.2
Rock-Tenn Co. (Class A) 2.1
Consolidated Graphics, Inc. 2.0
IKON Office Solutions, Inc. 1.9
Electronics for Imaging, Inc. 1.9
Brink's Co. (The) 1.9
Max Capital Group Ltd. (Bermuda) 1.9
</Table>

<Table>
<Caption>
TOP FIVE INDUSTRIES

Miscellaneous Commercial Services 10.0%
Aerospace & Defense 6.1
Property/Casualty Insurance 5.7
Electrical Products 4.1
Investment Company 3.7
</Table>

Data as of January 31, 2008. 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) 869-NEWS, 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, 2008

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 (6.82)%(3) (7.49)%(3) (7.54)%(3) (6.53)%(3)
(11.72) (4) (10.90) (4) (8.22) (4) --

5 YEARS 16.24 (3) 15.35 (3) 15.39 (3) 16.52 (3)
14.99 (4) 15.15 (4) 15.39 (4) --

10 YEARS 9.97 (3) 9.31 (3) 9.16 (3) 10.22 (3)
9.38 (4) 9.31 (4) 9.16 (4) --

SINCE INCEPTION 10.14 (3) 10.74 (3) 9.33 (3) 10.39 (3)
9.57 (4) 10.74 (4) 9.33 (4) --

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/msim 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 08/01/07 - 01/31/08.

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

CLASS A
Actual (-10.23% return)........................ $1,000.00 $ 897.70 $ 5.87
Hypothetical (5% annual return before
expenses).................................... $1,000.00 $1,018.95 $ 6.24
CLASS B
Actual (-10.56% return)........................ $1,000.00 $ 894.40 $ 9.43
Hypothetical (5% annual return before
expenses).................................... $1,000.00 $1,015.18 $10.03
CLASS C
Actual (-10.55% return)........................ $1,000.00 $ 894.50 $ 9.43
Hypothetical (5% annual return before
expenses).................................... $1,000.00 $1,015.18 $10.03
CLASS D
Actual (-10.07% return)........................ $1,000.00 $ 899.30 $ 4.68
Hypothetical (5% annual return before
expenses).................................... $1,000.00 $1,020.21 $ 4.98
</Table>

- ---------
* Expenses are equal to the Fund's annualized expense ratios of 1.23%, 1.98%,
1.98% and 0.98% for Class A, Class B, Class C and Class D shares,
respectively, multiplied by the average account value over the period,
multiplied by 184/366 (to reflect the one-half year period).

Morgan Stanley Special Value Fund
PORTFOLIO OF INVESTMENTS - JANUARY 31, 2008 (UNAUDITED)

NUMBER OF
SHARES VALUE
- -------------------------------------------------

Common Stocks (95.0%)

Aerospace & Defense
(6.1%)
213,480 AAR Corp.*.............. $ 6,289,121
263,200 DRS Technologies,
Inc. ................. 14,125,944
146,500 Moog Inc. (Class A)*.... 6,744,860
------------
27,159,925
------------
Agricultural
Commodities/
Milling (1.7%)
216,600 Corn Products
International, Inc. .. 7,321,080
------------

Air Freight/Couriers
(1.9%)
113,600 Forward Air Corp. ...... 3,521,600
282,900 Pacer International,
Inc. ................. 4,846,077
------------
8,367,677
------------
Apparel/Footwear Retail
(2.8%)
254,235 Maidenform Brands,
Inc.*................. 3,152,514
337,650 Stage Stores, Inc. ..... 4,041,671
164,300 Tween Brands Inc.*...... 5,262,529
------------
12,456,714
------------
Broadcasting (1.8%)
313,200 Lin TV Corp. (Class
A)*................... 4,087,260
432,300 Sinclair Broadcast
Group, Inc. (Class
A).................... 3,890,700
------------
7,977,960
------------
Chemicals: Major
Diversified (1.5%)
380,913 Hercules Inc. .......... 6,677,405
------------

Chemicals: Specialty
(1.4%)
113,100 Cytec Industries,
Inc. ................. 6,402,591
------------

Commercial
Printing/Forms (3.5%)
489,400 Cenveo Inc.*............ 7,605,276
156,100 Consolidated Graphics,
Inc.*................. 7,853,391
------------
15,458,667
------------
Computer Peripherals
(1.9%)
578,700 Electronics for Imaging,
Inc.*................. 8,541,612
------------

Construction Materials
(0.2%)
297,200 Dayton Superior Corp.*.. 722,196
------------

Consumer Sundries (0.3%)
199,100 Central Garden & Pet
Co.*.................. 1,093,059
------------

Containers/Packaging
(3.2%)
331,342 Rock-Tenn Co. (Class
A).................... 9,473,068
95,400 Silgan Holdings, Inc. .. 4,518,144
------------
13,991,212
------------
Electric Utilities
(1.7%)
268,900 Avista Corp. ........... 5,418,335
109,450 PNM Resources Inc. ..... 2,114,574
------------
7,532,909
------------
Electrical Products
(4.1%)
131,700 Acuity Brands, Inc. .... 5,993,667
289,207 Belden CDT Inc. ........ 12,233,456
------------
18,227,123
------------
Electronic Production
Equipment (1.0%)
283,200 Cognex Corp. ........... 4,332,960
------------

Engineering &
Construction (1.6%)
116,300 Aecom Technology
Corp.*................ 2,864,469
133,300 Stantec Inc.*........... 4,158,960
------------
7,023,429
------------
Finance/Rental/Leasing
(3.2%)
278,600 AerCap Holdings NV
(Netherlands)*........ 5,142,956
188,000 Dollar Thrifty
Automotive Group,
Inc.*................. 4,589,080
208,623 TAL International Group,
Inc. ................. 4,593,878
------------
14,325,914
------------
Financial Conglomerates
(2.4%)
613,600 Conseco Inc.*........... 7,387,744
90,400 National Financial
Partners Corp. ....... 3,263,440
------------
10,651,184
------------
</Table>

See Notes to Financial Statements

Morgan Stanley Special Value Fund
PORTFOLIO OF INVESTMENTS - JANUARY 31, 2008 (UNAUDITED) continued

NUMBER OF
SHARES VALUE
- -------------------------------------------------

Gas Distributors (0.8%)
139,600 UGI Corp. .............. $ 3,716,152
------------

Industrial Machinery
(2.2%)
182,100 Actuant Corp. (Class
A).................... 4,976,793
113,416 CIRCOR International,
Inc. ................. 4,812,241
------------
9,789,034
------------
Industrial Specialties
(2.2%)
119,500 Polypore International
Inc.*................. 2,219,115
444,900 Zep Inc. ............... 7,349,748
------------
9,568,863
------------
Information Technology
Services (2.0%)
307,639 MTC Technologies,
Inc.*................. 7,257,204
166,300 Ness Technologies
Inc.*................. 1,528,297
------------
8,785,501
------------
Medical Specialties
(1.5%)
69,540 Bio-Rad Laboratories,
Inc. (Class A)*....... 6,620,903
------------

Medical/Nursing Services
(1.8%)
206,750 Apria Healthcare Group,
Inc.*................. 4,387,235
242,100 Pharmerica Corp.*....... 3,592,764
------------
7,979,999
------------
Metal Fabrications
(0.6%)
43,230 General Cable Corp.*.... 2,507,772
------------

Miscellaneous Commercial
Services (10.0%)
137,900 Brink's Co. (The)....... 8,360,877
309,100 Gartner, Inc.*.......... 4,590,135
1,046,900 IKON Office Solutions,
Inc. ................. 8,563,642
513,010 MAXIMUS, Inc. .......... 18,098,993
177,000 Viad Corp. ............. 4,734,750
------------
44,348,397
------------
Miscellaneous
Manufacturing (0.7%)
91,200 Smith (A.O.) Corp. ..... 3,192,000
------------

Multi-Line Insurance
(1.9%)
291,600 Max Re Capital Ltd.
(Bermuda)............. 8,278,524
------------

Office
Equipment/Supplies
(1.7%)
561,163 ACCO Brands Corp.*...... 7,603,759
------------

Oil & Gas Production
(1.0%)
122,180 St. Mary Land &
Exploration Co. ...... 4,304,401
------------

Oilfield
Services/Equipment
(1.8%)
48,372 Exterran Holdings
Inc.*................. 3,155,789
122,870 Superior Energy
Services, Inc.*....... 4,925,858
------------
8,081,647
------------
Packaged Software (1.7%)
577,128 MSC. Software Corp.*.... 7,491,121
------------

Pharmaceuticals: Generic
Drugs (1.0%)
407,600 Valeant Pharmaceuticals
International*........ 4,614,032
------------

Pharmaceuticals: Other
(3.3%)
166,720 Perrigo Co. ............ 5,141,645
398,900 Sciele Pharma, Inc.*.... 9,541,688
------------
14,683,333
------------
Property - Casualty
Insurers (5.7%)
271,300 AmTrust Financial
Services, Inc. ....... 4,259,410
123,700 Argo Group
International*........ 5,051,908
303,200 Employers Holdings,
Inc. ................. 5,293,872
181,700 Platinum Underwriters
Holdings Ltd. (ADR)
(Bermuda)............. 6,132,375
221,724 United America
Indemnity, Ltd. (Class
A) (Cayman Islands)*.. 4,547,559
------------
25,285,124
------------
</Table>

See Notes to Financial Statements

Morgan Stanley Special Value Fund
PORTFOLIO OF INVESTMENTS - JANUARY 31, 2008 (UNAUDITED) continued

NUMBER OF
SHARES VALUE
- -------------------------------------------------

Publishing:
Books/Magazines (0.4%)
86,400 Dolan Media Company*.... $ 1,952,640
------------

Real Estate Investment
Trusts (1.4%)
348,100 Anthracite Capital,
Inc. ................. 2,614,231
128,700 LaSalle Hotel
Properties............ 3,527,667
------------
6,141,898
------------
Regional Banks (1.3%)
126,172 Integra Bank Corp. ..... 1,873,654
295,930 Provident New York
Bancorp............... 4,083,834
------------
5,957,488
------------
Restaurants (2.1%)
434,100 AFC Enterprises, Inc.*.. 4,024,107
1,506,580 Denny's Corp.*.......... 5,107,306
------------
9,131,413
------------
Savings Banks (0.5%)
76,604 MB Financial, Inc. ..... 2,382,384
------------

Semiconductors (0.9%)
237,727 Cirrus Logic, Inc.*..... 1,010,340
122,900 Microsemi Corp.*........ 2,792,288
------------
3,802,628
------------
Specialty Insurance
(1.6%)
123,786 ProAssurance Corp.*..... 7,142,452
------------

Specialty
Telecommunications
(1.6%)
455,886 Syniverse Holdings
Inc.*................. 7,198,440
------------

Telecommunication
Equipment (2.0%)
98,400 Adtran, Inc. ........... 2,047,704
582,900 Tekelec*................ 6,988,971
------------
9,036,675
------------
Textiles (1.5%)
182,600 Albany International
Corp. (Class A)....... 6,392,828
------------

Investment Trusts/Mutual
Funds (1.5%)
99,600 iShares Russell 2000
Value Index Fund
(ETF)................. 6,744,912
------------
Total Common Stocks
(Cost $368,103,182)..... 420,997,937
------------

</Table>

See Notes to Financial Statements

Morgan Stanley Special Value Fund
PORTFOLIO OF INVESTMENTS - JANUARY 31, 2008 (UNAUDITED) continued

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

Convertible Bond (1.0%)
Information Technology Services

$ 5,173 Epicor Software Corp.

2.375% due 05/15/27

(Cost $4,690,832)...... $ 4,571,639
-------------

<Caption>
NUMBER OF
SHARES (000)
- ------------

Short-Term Investment (3.7%)
Investment Company (a)
16,188 Morgan Stanley Institutional
Liquidity Money Market
Portfolio - Institutional Class
(Cost $16,187,923)............... 16,187,923
-------------

Total Investments (Cost
$388,981,937) (b)........... 99.7% 441,757,499
Other Assets in Excess of
Liabilities................. 0.3 1,547,675
----- -------------

Net Assets.................. 100.0% $ 443,305,174
===== =============

</Table>

- ----------

<Table>

ADR American Depositary Receipt.
ETF Exchanged Traded Fund.
* Non-income producing security.
(a) See Note 4 to the financial statements regarding investments in
Morgan Stanley Institutional Liquidity Money Market
Portfolio - Institutional Class.
(b) The aggregate cost for federal income tax purposes approximates
the aggregate cost for book purposes. The aggregate gross
unrealized appreciation is $89,882,625 and the aggregate gross
unrealized depreciation is $37,107,063 resulting in net
unrealized appreciation of $52,775,562.
</Table>

See Notes to Financial Statements

Morgan Stanley Special Value Fund
SUMMARY OF INVESTMENTS - JANUARY 31, 2008 (UNAUDITED)

<Table>
<Caption>
PERCENT OF
TOTAL
INDUSTRY VALUE INVESTMENTS
- -------------------------------------------------

Miscellaneous
Commercial
Services........... $ 44,348,397 10.0%
Aerospace & Defense.. 27,159,925 6.2
Property -- Casualty
Insurers........... 25,285,124 5.7
Electrical Products.. 18,227,123 4.1
Investment Company... 16,187,923 3.7
Commercial
Printing/Forms..... 15,458,667 3.5
Pharmaceuticals:
Other.............. 14,683,333 3.3
Finance/Rental/Leas-
ing................ 14,325,914 3.2
Containers/Packag-
ing................ 13,991,212 3.2
Information
Technology
Services........... 13,357,140 3.0
Apparel/Footwear
Retail............. 12,456,714 2.8
Financial
Conglomerates...... 10,651,184 2.4
Industrial
Machinery.......... 9,789,034 2.2
Industrial
Specialties........ 9,568,863 2.2
Restaurants.......... 9,131,413 2.1
Telecommunication
Equipment.......... 9,036,675 2.0
Computer
Peripherals........ 8,541,612 1.9
Air
Freight/Couriers... 8,367,677 1.9
Multi-Line
Insurance.......... 8,278,524 1.9
Oilfield
Services/Equip-
ment............... 8,081,647 1.8
Medical/Nursing
Services........... 7,979,999 1.8
Broadcasting......... 7,977,960 1.8
Office
Equipment/Sup-
plies.............. 7,603,759 1.7
Electric Utilities... 7,532,909 1.7
Packaged Software.... 7,491,121 1.7
Agricultural
Commodities/Mil-
ling............... 7,321,080 1.7
Specialty
Telecommunica-
tions.............. 7,198,440 1.6
Specialty Insurance.. 7,142,452 1.6
Engineering &
Construction....... 7,023,429 1.6
Investment
Trusts/Mutual
Funds.............. 6,744,912 1.5
Chemicals: Major
Diversified........ 6,677,405 1.5
Medical Specialties.. 6,620,903 1.5
Chemicals:
Specialty.......... 6,402,591 1.5
Textiles............. 6,392,828 1.4
Real Estate
Investment Trusts.. 6,141,898 1.4
Regional Banks....... 5,957,488 1.4
Pharmaceuticals:
Generic Drugs...... 4,614,032 1.0
Electronic Production
Equipment.......... 4,332,960 1.0
Oil & Gas
Production......... 4,304,401 1.0
Semiconductors....... 3,802,628 0.9
Gas Distributors..... 3,716,152 0.9
Miscellaneous
Manufacturing...... 3,192,000 0.7
Metal Fabrications... 2,507,772 0.6
Savings Banks........ 2,382,384 0.5
Publishing:
Books/Magazines.... 1,952,640 0.4
Consumer Sundries.... 1,093,059 0.3
Construction
Materials.......... 722,196 0.2
------------ -----
$441,757,499 100.0%
============ =====

</Table>

See Notes to Financial Statements

Morgan Stanley Special Value Fund
FINANCIAL STATEMENTS

Statement of Assets and Liabilities
January 31, 2008 (unaudited)

<Table>

Assets:
Investments in securities, at value
(cost $372,794,014)........................................... $425,569,576
Investment in affiliate, at value (cost $16,187,923)............ 16,187,923
Receivable for:
Investments sold............................................. 6,560,396
Shares of beneficial interest sold........................... 257,178
Dividends.................................................... 100,218
Dividends from affiliate..................................... 67,318
Interest..................................................... 26,263
Prepaid expenses and other assets............................... 45,014
------------
Total Assets................................................. 448,813,886
------------
Liabilities:
Payable for:
Investments purchased........................................ 2,609,626
Shares of beneficial interest redeemed....................... 2,337,188
Investment advisory fee...................................... 249,632
Distribution fee............................................. 196,555
Administration fee........................................... 30,304
Transfer agent fee........................................... 9,367
Accrued expenses and other payables............................. 76,040
------------
Total Liabilities............................................ 5,508,712
------------
Net Assets................................................... $443,305,174
============
Composition of Net Assets:
Paid-in-capital................................................. $373,253,898
Net unrealized appreciation..................................... 52,775,562
Accumulated net investment loss................................. (1,120,208)
Accumulated undistributed net realized gain..................... 18,395,922
------------
Net Assets................................................... $443,305,174
============
Class A Shares:
Net Assets...................................................... $237,391,097
Shares Outstanding (unlimited authorized, $.01 par value)....... 18,482,419
Net Asset Value Per Share.................................... $12.84
======
Maximum Offering Price Per Share,
(net asset value plus 5.54% of net asset value).............. $13.55
======
Class B Shares:
Net Assets...................................................... $141,049,261
Shares Outstanding (unlimited authorized, $.01 par value)....... 12,900,654
Net Asset Value Per Share.................................... $10.93
======
Class C Shares:
Net Assets...................................................... $28,378,865
Shares Outstanding (unlimited authorized, $.01 par value)....... 2,590,799
Net Asset Value Per Share.................................... $10.95
======
Class D Shares:
Net Assets...................................................... $36,485,951
Shares Outstanding (unlimited authorized, $.01 par value)....... 2,711,042
Net Asset Value Per Share.................................... $13.46
======

</Table>

See Notes to Financial Statements

Morgan Stanley Special Value Fund
FINANCIAL STATEMENTS continued

Statement of Operations
For the six months ended January 31, 2008 (unaudited)

<Table>

Net Investment Loss:
Income
Dividends (net of $42,875 foreign withholding tax)............. $ 2,315,253
Dividends from affiliate....................................... 704,000
Interest....................................................... 9,229
-------------
Total Income................................................ 3,028,482
-------------
Expenses
Investment advisory fee........................................ 1,844,428
Distribution fee (Class A shares).............................. 362,431
Distribution fee (Class B shares).............................. 914,108
Distribution fee (Class C shares).............................. 173,208
Transfer agent fees and expenses............................... 483,289
Administration fee............................................. 221,111
Shareholder reports and notices................................ 53,499
Professional fees.............................................. 30,873
Custodian fees................................................. 27,590
Registration fees.............................................. 27,158
Trustees' fees and expenses.................................... 6,323
Other.......................................................... 25,852
-------------
Total Expenses.............................................. 4,169,870
Less: amounts waived/reimbursed................................ (18,252)
Less: expenses offset.......................................... (3,170)
-------------
Net Expenses................................................ 4,148,448
-------------
Net Investment Loss......................................... (1,119,966)
-------------
Net Realized and Unrealized Gain (Loss):
Net Realized Gain.............................................. 52,915,891
Net Change in Unrealized Appreciation/Depreciation............. (107,963,592)
-------------
Net Loss.................................................... (55,047,701)
-------------
Net Decrease................................................... $ (56,167,667)
=============

</Table>

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, 2008 JULY 31, 2007
---------------- -------------
(unaudited)

Increase (Decrease) in Net Assets:
Operations:
Net investment loss................................. $ (1,119,966) $ (3,224,740)
Net realized gain................................... 52,915,891 114,543,461
Net change in unrealized appreciation/depreciation.. (107,963,592) 10,521,272
------------- -------------
Net Increase (Decrease).......................... (56,167,667) 121,839,993
------------- -------------
Distributions to Shareholders from Net Realized
Gain:
Class A shares...................................... (62,182,270) (82,437,851)
Class B shares...................................... (43,431,875) (73,592,274)
Class C shares...................................... (8,652,023) (11,094,944)
Class D shares...................................... (9,280,916) (14,206,590)
------------- -------------
Total Distributions.............................. (123,547,084) (181,331,659)
------------- -------------
Net increase from transactions in shares of
beneficial interest............................... 11,581,805 44,438,408
------------- -------------
Net Decrease..................................... (168,132,946) (15,053,258)
Net Assets:
Beginning of period................................. 611,438,120 626,491,378
------------- -------------
End of Period
(Including accumulated net investment losses of
$1,120,208 and $242, respectively).................. $ 443,305,174 $ 611,438,120
============= =============

</Table>

See Notes to Financial Statements

Morgan Stanley Special Value Fund
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2008 (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 or exchanged 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 of securities and other

Morgan Stanley Special Value Fund
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2008 (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; (7) investments in open-end mutual funds, including the Morgan Stanley
Institutional Liquidity Funds, are valued at net asset value as of the close of
each business day; and (8) 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 and are included in interest income. Interest income is
accrued daily.

C. 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.

D. Federal Income Tax Policy -- It is the Fund's policy to comply with the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no provision for federal income
taxes is required. The Fund files tax returns with the U.S. Internal Revenue
Service, New York State and New York City. The Fund adopted the provisions of
the Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN
48") Accounting for Uncertainty in Income Taxes on June 29, 2007. FIN 48 sets
forth a minimum threshold for financial statement recognition of the benefit of
a tax position taken or expected to be taken in a tax return. The implementation
of FIN 48 did not result in any unrecognized tax benefits in the accompanying
financial statements. If applicable, the Fund recognizes interest accrued
related to unrecognized tax benefits in interest expense and penalties in other
expenses in the Statement of Operations. Each of the tax years in the four year
period ended January 31, 2008, remains subject to examination by taxing
authorities.

Morgan Stanley Special Value Fund
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2008 (UNAUDITED) continued

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

F. 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 in excess of $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.

Under an agreement between the Administrator and State Street Bank and Trust
Company ("State Street"), State Street provides certain administrative services
to the Fund. For such services, the Administrator pays State Street a portion of
the fee the Administrator receives from 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 shares; (ii) Class
B -- up to 1.0% of the average daily net assets of Class B shares; and (iii)
Class C -- up to 1.0% of the average daily net assets of Class C shares.

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

Morgan Stanley Special Value Fund
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2008 (UNAUDITED) continued

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 $4,118,053 at January 31, 2008.

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, 2008, 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,
2008, it received contingent deferred sales charges from certain redemptions of
the Fund's Class A shares, Class B shares and Class C shares of $1,355, $97,847
and $1,400, respectively and received $21,582 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 Fund invests in Morgan Stanley Institutional Liquidity Money Market
Portfolio -- Institutional Class, an open-end management investment company
managed by the Investment Adviser. Investment advisory fees paid by the Fund are
reduced by an amount equal to the advisory and administrative service fees paid
by Morgan Stanley Institutional Liquidity Money Market Portfolio
- -- Institutional Class with respect to assets invested by the Fund in Morgan
Stanley Institutional Liquidity Money Market Portfolio -- Institutional Class.
For the six months ended January 31, 2008, advisory fees paid were reduced by
$18,252 relating to the Fund's investment in Morgan Stanley Institutional
Liquidity Money Market Portfolio -- Institutional Class. Income distributions
earned by the Fund are recorded as dividends from affiliate in the Statement of
Operations and totaled $704,000 for the six months ended January 31, 2008.
During the six months ended January 31, 2008, the cost of purchases and sales of
investments in Morgan Stanley Institutional Liquidity Money Market
Portfolio -- Institutional Class aggregated $107,360,504 and $122,094,824,
respectively.

The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the six months ended January 31, 2008 aggregated
$121,185,268 and $221,686,822, respectively. Included in the aforementioned are
purchases and sales with other Morgan Stanley funds of $125,472 and $59,477,036,
respectively, including realized gains of $4,214,457.

Morgan Stanley Special Value Fund
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2008 (UNAUDITED) continued

For the six months ended January 31, 2008, the Fund incurred brokerage
commissions of $551 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 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. 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, 2007, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on wash sales.

Morgan Stanley Special Value Fund
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2008 (UNAUDITED) continued

7. Shares of Beneficial Interest
Transactions in shares of beneficial interest were as follows:

<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JANUARY 31, 2008 JULY 31, 2007
------------------------- -------------------------
(unaudited)
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------

CLASS A SHARES
Sold.................................... 874,483 $ 14,280,393 1,499,154 $ 29,440,217
Conversion from Class B................. 497,175 8,064,304 1,143,301 22,458,320
Reinvestment of distributions........... 4,356,453 58,637,858 4,372,137 77,299,377
Redeemed................................ (4,069,510) (65,177,508) (3,784,109) (74,378,147)
---------- ------------ ---------- ------------
Net increase - Class A.................. 1,658,601 15,805,047 3,230,483 54,819,767
---------- ------------ ---------- ------------
CLASS B SHARES
Sold.................................... 116,644 1,729,658 569,660 10,475,054
Conversion to Class A................... (570,229) (8,064,304) (1,271,939) (22,458,320)
Reinvestment of distributions........... 3,472,139 39,825,439 4,162,052 15,718,769
Redeemed................................ (2,783,912) (39,837,542) (3,884,272) (69,321,825)
---------- ------------ ---------- ------------
Net increase (decrease) - Class B....... 234,642 (6,346,749) (424,499) (15,586,322)
---------- ------------ ---------- ------------
CLASS C SHARES
Sold.................................... 152,913 2,423,412 221,392 3,819,821
Reinvestment of distributions........... 714,687 8,211,750 619,390 9,792,559
Redeemed................................ (486,545) (6,495,910) (515,579) (9,137,247)
---------- ------------ ---------- ------------
Net increase - Class C.................. 381,055 4,139,252 325,203 4,475,133
---------- ------------ ---------- ------------
CLASS D SHARES
Sold.................................... 79,001 1,309,311 234,436 4,667,255
Reinvestment of distributions........... 558,312 7,872,193 665,323 12,162,086
Redeemed................................ (627,570) (11,197,249) (772,107) (16,099,511)
---------- ------------ ---------- ------------
Net increase (decrease) - Class D....... 9,743 (2,015,745) 127,652 729,830
---------- ------------ ---------- ------------
Net increase in Fund.................... 2,284,041 $ 11,581,805 3,258,839 $ 44,438,408
========== ============ ========== ============

</Table>

8. Accounting Pronouncement
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, 2008 2007 2006 2005 2004 2003
---------------- -------- -------- -------- -------- -------
(unaudited)

Class A Shares
Selected Per Share Data:

Net asset value, beginning of period......... $ 18.62 $ 20.84 $ 22.28 $ 18.24 $ 15.51 $ 13.56
------- ------- ------- ------- ------- -------

Income (loss) from investment operations:
Net investment income (loss)++............ (0.01) (0.04) (0.04) 0.04 (0.04) (0.02)
Net realized and unrealized gain (loss)... (1.71) 4.07 1.70 4.55 2.77 1.97
------ ----- ----- ----- ----- -----
Total income (loss) from investment
operations.................................. (1.72) 4.03 1.66 4.59 2.73 1.95
------ ----- ----- ----- ----- -----

Less distributions from net realized gain.... (4.06) (6.25) (3.10) (0.55) -- --
------ ------ ------ ------ ----- -----

Net asset value, end of period............... $ 12.84 $18.62 $20.84 $22.28 $18.24 $15.51
======= ======= ======= ====== ====== ======

Total Return+................................ (10.23)%(4) 20.93% 8.50% 25.45% 17.60% 14.38%

Ratios to Average Net Assets(1):
Total expenses (before expense offset)....... 1.23%(2)(3) 1.21%(2) 1.28% 1.27% 1.23% 1.25%

Net investment income (loss)................. (0.13)%(2)(3) (0.19)%(2) (0.22)% 0.14% (0.23)% (0.11)%

Supplemental Data:
Net assets, end of period, in thousands...... $237,391 $313,180 $283,281 $274,050 $114,636 $71,088

Portfolio turnover rate...................... 23%(4) 44% 28% 41% 44% 47%
</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) Reflects overall Fund ratios for investment income and non-class specific
expenses.
(2) Reflects waivers of certain Fund expenses in connection with the
investments in Morgan Stanley Institutional Liquidity Money Market
Portfolio - Institutional Class during the period. As a result of such
waivers the expenses as a percentage of its net assets had an effect of
less than 0.005%.
(3) Annualized.
(4) Not Annualized.
</Table>

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, 2008 2007 2006 2005 2004 2003
---------------- -------- -------- -------- -------- --------
(unaudited)

Class B Shares
Selected Per Share Data:

Net asset value, beginning of period......... $16.55 $19.25 $20.95 $17.31 $14.84 $13.08
------ ------ ------ ------ ------ ------

Income (loss) from investment operations:
Net investment loss++..................... (0.07) (0.17) (0.19) (0.11) (0.17) (0.11)
Net realized and unrealized gain (loss)... (1.49) 3.72 1.59 4.30 2.64 1.87
------- ----- ----- ----- ----- -----
Total income (loss) from investment
operations.................................. (1.56) 3.55 1.40 4.19 2.47 1.76
------- ----- ----- ----- ----- -----

Less distributions from net realized gain.... (4.06) (6.25) (3.10) (0.55) -- --
------ ------ ------ ------ ----- -----

Net asset value, end of period............... $10.93 $16.55 $19.25 $20.95 $17.31 $14.84
====== ====== ====== ====== ====== ======

Total Return+................................ (10.56)%(4) 20.00% 7.68% 24.55% 16.64% 13.46%

Ratios to Average Net Assets(1):
Total expenses (before expense offset)....... 1.98%(2)(3) 1.97%(2) 2.03% 2.04% 2.00% 2.04%

Net investment loss.......................... (0.88)%(2)(3) (0.95)%(2) (0.97)% (0.63)% (1.00)% (0.90)%

Supplemental Data:
Net assets, end of period, in thousands...... $141,049 $209,575 $251,970 $352,265 $518,426 $500,124

Portfolio turnover rate...................... 23%(4) 44% 28% 41% 44% 47%
</Table>

- ----------

<Table>

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, 2008 2007 2006 2005 2004 2003
---------------- ------- ------- ------- ------- -------
(unaudited)

Class C Shares
Selected Per Share Data:

Net asset value, beginning of period......... $16.57 $19.27 $20.97 $17.30 $14.84 $13.08
------ ------ ------ ------ ------ ------

Income (loss) from investment operations:
Net investment loss++..................... (0.07) (0.17) (0.19) (0.10) (0.17) (0.12)
Net realized and unrealized gain (loss)... (1.49) 3.72 1.59 4.32 2.63 1.88
------ ----- ----- ----- ----- -----
Total income (loss) from investment
operations.................................. (1.56) 3.55 1.40 4.22 2.46 1.76
------ ----- ----- ----- ----- -----

Less distributions from net realized gain.... (4.06) (6.25) (3.10) (0.55) -- --
------ ------ ------ ------ ----- -----

Net asset value, end of period............... $10.95 $16.57 $19.27 $20.97 $17.30 $14.84
====== ====== ====== ====== ====== ======

Total Return+................................ (10.55)%(4) 19.97% 7.72% 24.61% 16.64% 13.46%

Ratios to Average Net Assets(1):
Total expenses (before expense offset)....... 1.98%(2)(3) 1.97%(2) 2.02% 1.93% 2.00% 2.04%

Net investment loss.......................... (0.88)%(2)(3) (0.95)%(2)(0.96)% (0.52)% (1.00)% (0.90)%

Supplemental Data:
Net assets, end of period, in thousands...... $28,379 $36,613 $36,311 $42,352 $42,662 $37,454

Portfolio turnover rate...................... 23%(4) 44% 28% 41% 44% 47%
</Table>

- ----------

<Table>

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, 2008 2007 2006 2005 2004 2003
---------------- ------- ------- -------- -------- --------
(unaudited)

Class D Shares
Selected Per Share Data:

Net asset value, beginning of period......... $19.28 $21.34 $22.69 $18.52 $15.72 $13.72
------ ------ ------ ------ ------ ------

Income (loss) from investment operations:
Net investment income++................... 0.01 0.01 0.00 0.08 0.00 0.01
Net realized and unrealized gain (loss)... (1.77) 4.18 1.75 4.64 2.80 1.99
------ ------ ------ ------ ------ ------
Total income (loss) from investment
operations.................................. (1.76) 4.19 1.75 4.72 2.80 2.00
------ ------ ------ ------ ------ ------

Less distributions from net realized gain.... (4.06) (6.25) (3.10) (0.55) -- --
------ ------ ------ ------ ------ ------

Net asset value, end of period............... $13.46 $19.28 $21.34 $22.69 $18.52 $15.72
====== ====== ====== ====== ====== ======

Total Return+................................ (10.07)%(4) 21.23% 8.76% 25.77% 17.81% 14.58%

Ratios to Average Net Assets(1):
Total expenses (before expense offset)....... 0.98%(2)(3) 0.97%(2) 1.03% 1.04% 1.00% 1.04%

Net investment income........................ 0.12%(2)(3) 0.05%(2) 0.03% 0.37% 0.00% 0.10%

Supplemental Data:
Net assets, end of period, in thousands...... $36,486 $52,070 $54,930 $404,168 $306,722 $130,693

Portfolio turnover rate...................... 23%(4) 44% 28% 41% 44% 47%
</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) Reflects overall Fund ratios for investment income and non-class specific
expenses.
(2) Reflects waivers of certain Fund expenses in connection with the
investments in Morgan Stanley Institutional Liquidity Money Market
Portfolio - Institutional Class during the period. As a result of such
waivers the expenses as a percentage of its net assets had an effect of
less than 0.005%.
(3) Annualized.
(4) Not Annualized.
</Table>

See Notes to Financial Statements

(This Page Intentionally Left Blank)

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
Chairperson of the Board

Ronald E. Robison
President and Principal Executive Officer

J. David Germany
Vice President

Dennis F. Shea
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, New York 10019

COUNSEL TO THE INDEPENDENT TRUSTEES

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

INVESTMENT ADVISER

Morgan Stanley Investment Advisors Inc.
522 Fifth Avenue
New York, New York 10036

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 FINRA.

[MORGAN STANLEY LOGO]

MORGAN STANLEY FUNDS

Morgan Stanley
Special Value Fund

Semiannual Report
January 31, 2008

SVFSAN
IU08-01430P-Y01/08

Item 1 - Report to Shareholders

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 20, 2008

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 20, 2008

/s/ Francis Smith
- -------------------------------------------------------
Francis Smith
Principal Financial Officer
March 20, 2008

*Print the name and title of each signing officer under his or her signature.