<Page>
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: 811-10359
Morgan Stanley Mid-Cap 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: August 31, 2003
Date of reporting period: August 31, 2003
Item 1 - Report to Shareholders
<Page>
WELCOME, SHAREHOLDER:
IN THIS REPORT, YOU'LL LEARN ABOUT HOW YOUR INVESTMENT IN MORGAN STANLEY MID-CAP
VALUE FUND PERFORMED DURING THE ANNUAL 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 THE MARKET
VALUES OF SECURITIES OWNED BY THE FUND WILL DECLINE AND, THEREFORE, THE VALUE OF
THE FUND SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN
LOSE MONEY INVESTING IN THIS FUND.
<Page>
FUND REPORT
FOR THE YEAR ENDED AUGUST 31, 2003
TOTAL RETURN FOR THE 12-MONTH PERIOD ENDED AUGUST 31, 2003
<Table>
<Caption>
S&P LIPPER
MID-CAP MID-CAP CORE
CLASS A CLASS B CLASS C CLASS D 400 INDEX(1) FUNDS INDEX(2)
23.44% 22.45% 22.45% 23.63% 18.42% 20.49%
</Table>
THE PERFORMANCE OF THE FUND'S FOUR SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE FUND'S TOTAL RETURN FIGURES ASSUME THE REINVESTMENT OF
ALL DISTRIBUTIONS, BUT DO NOT REFLECT THE DEDUCTION OF ANY APPLICABLE SALES
CHARGES. SUCH COSTS WOULD LOWER PERFORMANCE. PAST PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS. SEE PERFORMANCE SUMMARY FOR STANDARDIZED PERFORMANCE
INFORMATION.
MARKET CONDITIONS
At the beginning of the 12-month period ended August 31, 2003, corporate
malfeasance, geopolitical and terrorism concerns and a sluggish economy all
weighed heavily on the market. Equities recovered briefly during October and
November; however, as investors responded positively to third-quarter earnings
announcements and the Federal Reserve cut short-term interest rates to levels
not seen since 1961, stocks went on to give back much of their gains during the
next three months amid ongoing concerns about Iraq.
Starting in mid-March, though, equity markets staged a powerful rally. Investors
reacted positively to the swift U.S. victory in Iraq as well as encouraging
economic data and reports of corporate earnings that exceeded expectations.
Long-term bond yields declined and mortgage rates fell to record lows (before
subsequently rising again), triggering an increase in refinancing activity. By
the end of the period, investor pessimism about exogenous issues had largely
been replaced by cautious optimism, buoyed by a nascent economic and capital
markets recovery.
PERFORMANCE ANALYSIS
The Fund's outperformance of its benchmark, the Standard & Poor's Mid-Cap 400
Index, was driven primarily by stock selection, particularly within the
technology, financial services, and utilities sectors. The Fund benefited from a
number of technology stocks that rallied strongly from the depressed levels at
which we'd initiated or increased positions. We focused on companies with strong
balance sheets, particularly software and semiconductor-related names that were
among the top contributors within the sector. Within financial services, the
Fund enjoyed solid performance in the areas of insurance and reinsurance as well
as credit and finance. Finally, a number of the Fund's utilities holdings
benefited from a reduction in liquidity fears as many companies took significant
steps to improve their balance sheets through debt refinancing or asset sales.
Sector allocations also contributed somewhat to relative performance during the
period, particularly the Fund's overweightings in technology and health care.
On the negative side, a slight overweighting in basic resources and
underweighting in retail were marginal detractors. Stock selection within a
number of consumer-oriented sectors, including retail and consumer services,
also hurt the Fund's relative performance.
During the period, we increased the Fund's focus on companies with high levels
of free cash flow. We view free cash flow as a valuable attribute because it
enables companies to initiate or increase dividends, repurchase stock or
reinvest in their businesses. We slightly increased the extent of the Fund's
technology overweighting, reflecting our more favorable outlook for growth in
business spending versus growth in consumer spending. We also increased exposure
to financial services and
2
<Page>
utilities, in each case moving from an underweighting to a slight overweighting.
We reduced exposure to consumer services and nondurables, and continued to
underweight consumer-related sectors generally. Finally, we moved from an
overweighting to a modest underweighting in health care, primarily by reducing
exposure to health care services and health technology.
TOP 10 HOLDINGS
<Table>
Gilead Sciences Inc. 1.7%
Williams Companies Inc. 1.5
Jones Apparel Group Inc. 1.3
The BISYS Group Inc. 1.2
SPX Corp. 1.2
Nationwide Financial Services Inc. 1.0
Siebel Systems Inc. 1.0
Noble Corp. 1.0
National Commerce Financial Corp. 1.0
Compuware Corp. 1.0
</Table>
TOP FIVE INDUSTRIES
<Table>
Regional Banks 5.6%
Biotechnology 5.5
Electric Utilities 4.5
Data Processing Services 4.1
Semiconductors 3.7
</Table>
SUBJECT TO CHANGE DAILY. ALL PERCENTAGES ARE AS A PERCENTAGE OF NET ASSETS.
PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED AS A
RECOMMENDATION TO BUY 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
1. THE FUND'S INVESTMENT MANAGER SEEKS TO IDENTIFY COMPANIES WHOSE EQUITY
APPEARS UNDERVALUED, AND MEASURES THE RELATIVE ATTRACTIVENESS OF THE FUND'S
CURRENT HOLDINGS AGAINST POTENTIAL PURCHASES.
2. TO IDENTIFY A LIST OF POTENTIAL INVESTMENTS, THE INVESTMENT MANAGER UTILIZES
A SCREENING PROCESS AND THEN APPLIES A FUNDAMENTAL ANALYSIS, WHICH INCLUDES
SUCH FACTORS AS EARNINGS GROWTH, EARNINGS ESTIMATE REVISIONS, GROWTH
STABILITY AND MARKET VALUATION IN ORDER TO ARRIVE AT OVERALL STOCK SELECTION.
ANNUAL 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 AND 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 AM TO 8:00 PM, ET.
ONCE OUR CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN
SENDING INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS.
PROXY VOTING POLICIES AND PROCEDURES
A DESCRIPTION OF THE FUND'S POLICIES AND PROCEDURES WITH RESPECT TO THE VOTING
OF PROXIES RELATING TO THE FUND'S PORTFOLIO SECURITIES IS AVAILABLE WITHOUT
CHARGE, UPON REQUEST, BY CALLING (800) 869-NEWS. THIS INFORMATION IS ALSO
AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEBSITE AT
http://www.sec.gov.
3
<Page>
PERFORMANCE SUMMARY
[CHART]
PERFORMANCE OF A $10,000 INVESTMENT
<Table>
<Caption>
($ IN THOUSANDS) CLASS A CLASS B CLASS C CLASS D S&P 400(1) LIPPER(2)
29-Oct-01 $ 9,475 $ 10,000 $ 10,000 $ 10,000 $ 10,000 $ 10,000
30-Nov-01 $ 10,006 $ 10,560 $ 10,560 $ 10,570 $ 10,600 $ 10,631
28-Feb-02 $ 9,829 $ 10,343 $ 10,343 $ 10,378 $ 11,103 $ 10,794
31-May-02 $ 9,592 $ 10,073 $ 10,072 $ 10,137 $ 11,642 $ 11,102
31-Aug-02 $ 7,770 $ 8,153 $ 8,152 $ 8,224 $ 9,794 $ 9,361
30-Nov-02 $ 8,017 $ 8,393 $ 8,392 $ 8,485 $ 9,840 $ 9,631
28-Feb-03 $ 7,125 $ 7,442 $ 7,442 $ 7,543 $ 9,033 $ 8,810
31-May-03 $ 8,577 $ 8,943 $ 8,942 $ 9,086 $ 10,580 $ 10,296
31-Aug-03 $ 9,592^ $ 9,584^ $ 9,982^ $ 10,167^ $ 11,598 $ 11,279
</Table>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH
LESS THAN THEIR ORIGINAL COST. THE GRAPH AND TABLE DO 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.
4
<Page>
AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED AUGUST 31, 2003
<Table>
<Caption>
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS D SHARES++
10/29/01 10/29/01 10/29/01 10/29/01
SYMBOL MDFAX MDFBX MDFCX MDFDX
- -----------------------------------------------------------------------------------------------------------
1 YEAR 23.44%(3) 22.45%(3) 22.45%(3) 23.63%(3)
16.96(4) 17.45(4) 21.45(4)
SINCE INCEPTION 0.67(3) (0.09)(3) (0.10)(3) 0.91(3)
(2.24)(4) (2.29)(4) (0.10)(4)
</Table>
- ----------
Notes on Performance
(1) THE STANDARD AND POOR'S MID-CAP 400 INDEX (S&P 400) IS A MARKET-VALUE
WEIGHTED INDEX, THE PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 400
DOMESTIC STOCKS CHOSEN FOR MARKET SIZE, LIQUIDITY AND INDUSTRY GROUP
REPRESENTATION. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY
SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT
POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
(2) THE LIPPER MID-CAP CORE FUNDS INDEX IS AN EQUALLY WEIGHTED PERFORMANCE
INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN THE LIPPER
MID-CAP CORE FUNDS CLASSIFICATION. THE INDEX, WHICH IS ADJUSTED FOR CAPITAL
GAINS DISTRIBUTIONS AND INCOME DIVIDENDS, IS UNMANAGED AND SHOULD NOT BE
CONSIDERED AN INVESTMENT. THERE ARE CURRENTLY 30 FUNDS REPRESENTED IN THIS
INDEX.
(3) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT
THE DEDUCTION OF ANY SALES CHARGES.
(4) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND THE DEDUCTION OF
THE MAXIMUM APPLICABLE SALES CHARGE. SEE THE FUND'S CURRENT PROSPECTUS FOR
COMPLETE DETAILS ON FEES AND SALES CHARGES.
* THE MAXIMUM FRONT-END SALES CHARGE FOR CLASS A IS 5.25%.
** THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B IS 5.0%.
THE CDSC DECLINES TO 0% AFTER SIX YEARS.
+ THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE FOR CLASS C IS 1% FOR SHARES
REDEEMED WITHIN ONE YEAR OF PURCHASE.
++ CLASS D HAS NO SALES CHARGE.
^ CLOSING VALUE ASSUMING A COMPLETE REDEMPTION ON AUGUST 31, 2003.
5
<Page>
MORGAN STANLEY MID-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS - AUGUST 31, 2003
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------------------------------
COMMON STOCKS (98.1%)
ADVERTISING/MARKETING SERVICES (0.4%)
69,021 DoubleClick Inc.* $ 777,867
19,100 Harte-Hanks Inc. 362,900
----------------
1,140,767
----------------
AEROSPACE & DEFENSE (1.3%)
57,126 Goodrich Corp. 1,486,990
26,275 Lockheed Martin Corp. 1,346,068
25,600 Raytheon Co. 820,736
----------------
3,653,794
----------------
AIR FREIGHT/COURIERS (0.1%)
9,937 CNF Inc. 295,129
----------------
APPAREL/FOOTWEAR (1.3%)
112,900 Jones Apparel Group, Inc. 3,487,481
----------------
APPAREL/FOOTWEAR RETAIL (1.0%)
45,700 Abercrombie & Fitch Co.
(Class A)* 1,391,108
45,895 Foot Locker, Inc. 760,480
41,400 Too, Inc.* 671,508
----------------
2,823,096
----------------
AUTO PARTS: O.E.M. (0.5%)
15,786 ArvinMeritor, Inc. 297,093
21,825 Lear Corp.* 1,212,379
----------------
1,509,472
----------------
BEVERAGES: ALCOHOLIC (0.3%)
27,100 Constellation Brands Inc.
(Class A)* 779,125
----------------
BIOTECHNOLOGY (5.5%)
31,074 Cephalon, Inc.* 1,378,132
68,425 Gilead Sciences, Inc.* 4,563,947
11,425 ICOS Corp.* 444,889
50,775 IDEC Pharmaceuticals Corp.* 1,764,431
55,400 Medicines Company (The)* 1,587,210
64,000 MGI Pharma, Inc.* 2,469,760
54,750 Trimeris, Inc.* 2,335,087
61,325 Vertex Pharmaceuticals, Inc.* 772,695
----------------
15,316,151
----------------
BROADCASTING (1.3%)
25,400 Citadel Broadcasting Co.* $ 560,832
32,700 Cox Radio, Inc. (Class A)* 789,378
73,425 Westwood One, Inc.* 2,356,942
----------------
3,707,152
----------------
CASINO/GAMING (0.8%)
26,950 GTECH Holdings Corp. 1,142,141
18,600 Harrah's Entertainment, Inc. 770,412
32,786 Park Place Entertainment
Corp.* 287,861
----------------
2,200,414
----------------
CHEMICALS: AGRICULTURAL (0.9%)
321,275 IMC Global Inc. 2,515,583
----------------
CHEMICALS: MAJOR DIVERSIFIED (0.5%)
39,249 Eastman Chemical Co. 1,405,507
5,049 Hercules Inc.* 56,549
----------------
1,462,056
----------------
CHEMICALS: SPECIALTY (0.2%)
16,200 Lubrizol Corp. (The) 550,800
----------------
COAL (0.2%)
20,800 Arch Coal, Inc. 477,360
----------------
COMPUTER COMMUNICATIONS (0.9%)
197,743 3Com Corp.* 1,127,135
14,400 Avocent Corp.* 420,480
24,300 Emulex Corp.* 588,303
36,100 McDATA Corp. (Class A)* 366,415
----------------
2,502,333
----------------
CONTAINERS/PACKAGING (1.4%)
99,400 Crown Holdings, Inc.* 737,548
66,088 Pactiv Corp.* 1,327,047
75,038 Sonoco Products Co. 1,708,615
----------------
3,773,210
----------------
CONTRACT DRILLING (1.8%)
20,400 ENSCO International Inc. 570,180
47,467 GlobalSantaFe Corp. 1,177,182
75,925 Noble Corp. (Cayman Islands)* 2,746,966
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
6
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------------------------------
29,875 Pride International, Inc.* $ 510,564
----------------
5,004,892
----------------
DATA PROCESSING SERVICES (4.1%)
116,300 Acxiom Corp.* 1,879,408
35,924 Affiliated Computer Services,
Inc. (Class A)* 1,782,190
184,286 BISYS Group, Inc. (The)* 3,381,648
9,000 Certergy Inc. 272,250
85,300 Concord EFS, Inc.* 1,181,405
67,625 DST Systems, Inc.* 2,677,950
1,600 Hewitt Associates, Inc.
(Class A)* 39,920
----------------
11,214,771
----------------
DEPARTMENT STORES (0.4%)
25,875 Federated Department
Stores, Inc. 1,130,737
----------------
DISCOUNT STORES (1.1%)
14,476 BJ's Wholesale Club, Inc.* 316,156
66,075 Dollar Tree Stores, Inc.* 2,592,122
----------------
2,908,278
----------------
ELECTRIC UTILITIES (4.5%)
207,800 Allegheny Energy, Inc. 1,926,306
40,750 American Electric Power
Co., Inc. 1,153,632
80,600 Aquila, Inc. 195,052
45,300 Constellation Energy
Group, Inc. 1,648,467
55,998 DQE, Inc. 825,970
85,476 Edison International* 1,612,077
52,451 Energy East Corp. 1,132,417
41,811 Exelon Corp. 2,462,668
20,500 FirstEnergy Corp. 599,830
12,400 PNM Resources Inc. 339,760
95,700 Reliant Resources, Inc.* 442,134
----------------
12,338,313
----------------
ELECTRICAL PRODUCTS (0.4%)
22,500 Cooper Industries Ltd.
(Class A) 1,145,025
----------------
ELECTRONIC COMPONENTS (2.0%)
96,000 Celestica, Inc.* $ 1,684,800
434,450 Solectron Corp.* 2,576,289
81,825 Vishay Intertechnology, Inc.* 1,347,658
----------------
5,608,747
----------------
ELECTRONIC DISTRIBUTORS (2.3%)
112,300 Avnet, Inc.* 2,027,015
33,750 CDW Corp. 1,741,838
74,099 Tech Data Corp.* 2,471,202
----------------
6,240,055
----------------
ELECTRONIC PRODUCTION EQUIPMENT (0.8%)
71,600 ASML Holding NV
(Netherlands)* 1,138,440
47,500 Cadence Design Systems,
Inc.* 675,450
12,300 Credence Systems Corp.* 141,327
14,150 Lam Research Corp.* 363,938
----------------
2,319,155
----------------
ELECTRONICS/APPLIANCE STORES (0.3%)
51,700 Hollywood Entertainment
Corp.* 898,029
----------------
ENGINEERING & CONSTRUCTION (0.3%)
23,100 Fluor Corp. 851,004
----------------
ENVIRONMENTAL SERVICES (0.7%)
45,374 Allied Waste Industries, Inc.* 501,836
41,600 Waste Connections, Inc.* 1,465,568
----------------
1,967,404
----------------
FINANCE/RENTAL/LEASING (2.1%)
195,900 AmeriCredit Corp.* 2,102,007
19,200 CapitalSource, Inc.* 337,920
24,200 CIT Group, Inc. 659,450
21,100 Countrywide Financial Corp. 1,431,635
38,425 GATX Corp. 813,842
26,739 United Rentals, Inc.* 451,354
----------------
5,796,208
----------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
7
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------------------------------
FINANCIAL CONGLOMERATES (0.4%)
22,700 State Street Corp. $ 997,665
----------------
FOOD DISTRIBUTORS (0.5%)
51,600 ARAMARK Corp. (Class B)* 1,290,000
----------------
FOOD RETAIL (1.0%)
87,338 Kroger Co.* 1,677,763
44,500 Safeway Inc.* 1,086,245
----------------
2,764,008
----------------
FOOD: MAJOR DIVERSIFIED (0.3%)
43,675 Sara Lee Corp. 828,952
----------------
FOOD: MEAT/FISH/DAIRY (0.4%)
34,824 Smithfield Foods, Inc.* 705,186
36,400 Tyson Foods, Inc. (Class A) 407,680
----------------
1,112,866
----------------
GAS DISTRIBUTORS (1.7%)
148,700 Dynegy, Inc. (Class A)* 459,483
50,686 Equitable Resources, Inc. 2,000,576
2,437 KeySpan Corp. 82,249
9,350 Nicor Inc. 317,807
59,073 Sempra Energy 1,757,422
----------------
4,617,537
----------------
HOME FURNISHINGS (0.5%)
55,200 Leggett & Platt, Inc. 1,278,432
----------------
HOSPITAL/NURSING MANAGEMENT (1.3%)
55,700 Community Health Care* 1,280,543
41,050 LifePoint Hospitals, Inc.* 1,182,651
23,949 Universal Health Services, Inc.
(Class B)* 1,192,181
----------------
3,655,375
----------------
HOUSEHOLD/PERSONAL CARE (0.4%)
53,600 Dial Corp. (The) 1,086,472
----------------
INDUSTRIAL CONGLOMERATES (1.2%)
64,976 SPX Corp.* 3,206,566
----------------
INDUSTRIAL MACHINERY (1.3%)
21,174 Flowserve Corp.* 445,713
28,749 Kennametal Inc. $ 1,130,411
26,400 Parker-Hannifin Corp. 1,307,328
15,300 Tecumseh Products Co.
(Class A) 600,066
----------------
3,483,518
----------------
INDUSTRIAL SPECIALTIES (0.7%)
93,587 GrafTech International Ltd..* 748,696
89,147 RPM International, Inc. 1,215,965
----------------
1,964,661
----------------
INFORMATION TECHNOLOGY SERVICES (1.0%)
162,536 BearingPoint, Inc.* 1,332,795
62,521 PeopleSoft, Inc.* 1,131,630
48,700 Wind River Systems, Inc.* 362,815
----------------
2,827,240
----------------
INSURANCE BROKERS/SERVICES (0.3%)
3,350 Gallagher (Arthur J.) & Co. 90,450
23,700 Willis Group Holdings Ltd. 687,063
----------------
777,513
----------------
INTERNET RETAIL (0.2%)
14,600 InterActiveCorp* 540,346
----------------
INTERNET SOFTWARE/SERVICES (1.7%)
65,900 Internet Security Systems,
Inc.* 823,091
276,204 Siebel Systems, Inc.* 2,784,136
80,100 VeriSign, Inc.* 1,199,097
----------------
4,806,324
----------------
INVESTMENT BANKS/BROKERS (1.9%)
10,700 Bear Stearns Companies,
Inc. (The) 748,786
156,200 E*TRADE Group, Inc.* 1,441,726
36,600 LaBranche & Co., Inc. 637,938
5,700 Legg Mason, Inc. 409,431
28,924 Lehman Brothers Holdings,
Inc. 1,901,175
----------------
5,139,056
----------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
8
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------------------------------
INVESTMENT MANAGERS (2.3%)
15,749 Affiliated Managers Group,
Inc.* $ 1,067,782
69,700 Amvescap PLC (ADR)
(United Kingdom) 1,117,988
69,575 Investors Financial Services
Corp. 2,079,597
62,060 Mellon Financial Corp. 1,945,581
7,599 Waddell & Reed Financial, Inc.
(Class A) 195,674
----------------
6,406,622
----------------
LIFE/HEALTH INSURANCE (1.0%)
48,200 Lincoln National Corp. 1,707,244
84,200 UnumProvident Corp. 1,187,220
----------------
2,894,464
----------------
MAJOR BANKS (0.7%)
37,463 Comerica, Inc. 1,848,424
----------------
MAJOR TELECOMMUNICATIONS (0.2%)
95,862 Cincinnati Bell Inc.* 541,620
----------------
MANAGED HEALTH CARE (2.8%)
34,425 Anthem, Inc.* 2,519,910
101,521 Caremark Rx, Inc.* 2,551,223
41,325 Coventry Health Care, Inc.* 1,939,796
19,000 Health Net Inc.* 604,770
----------------
7,615,699
----------------
MEDICAL SPECIALTIES (1.1%)
20,476 St. Jude Medical, Inc.* 1,066,185
84,800 STERIS Corp.* 1,986,016
----------------
3,052,201
----------------
METAL FABRICATIONS (0.3%)
19,025 Harsco Corp. 741,785
----------------
MISCELLANEOUS COMMERCIAL SERVICES (0.4%)
7,600 Fair Isaac Corp. 445,360
38,250 The Brink's Co. 625,388
----------------
1,070,748
----------------
MOVIES/ENTERTAINMENT (0.4%)
6,200 International Speedway Corp.
(Class A) $ 248,620
64,000 Metro-Goldwyn-Mayer Inc.* 926,720
----------------
1,175,340
----------------
MULTI-LINE INSURANCE (1.7%)
34,700 Hartford Financial Services
Group, Inc. (The) 1,846,734
94,725 Nationwide Financial Services,
Inc. (Class A) 2,794,388
----------------
4,641,122
----------------
OIL & GAS PIPELINES (1.7%)
16,126 Kinder Morgan Management,
LLC* 601,500
447,200 Williams Companies, Inc. (The) 4,082,936
----------------
4,684,436
----------------
OIL & GAS PRODUCTION (1.2%)
15,607 Apache Corp. 1,076,571
821 Cross Timbers Royalty Trust 18,341
110,966 XTO Energy Inc. 2,329,176
----------------
3,424,088
----------------
OIL REFINING/MARKETING (0.7%)
46,099 Valero Energy Corp. 1,816,301
----------------
OILFIELD SERVICES/EQUIPMENT (2.4%)
9,500 Baker Hughes Inc. 317,870
6,199 Cooper Cameron Corp.* 301,023
85,787 FMC Technologies, Inc.* 2,030,578
10,600 National-Oilwell, Inc.* 207,548
27,087 Schlumberger Ltd. 1,341,077
4,575 Smith International, Inc.* 178,837
18,200 Tidewater, Inc. 522,704
52,412 Varco International, Inc.* 904,107
20,862 Weatherford International
Ltd.* 783,994
----------------
6,587,738
----------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
9
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------------------------------
OTHER CONSUMER SERVICES (0.9%)
250,447 Bally Total Fitness Holding
Corp.* $ 2,424,327
----------------
OTHER METALS/MINERALS (0.3%)
48,697 Olin Corp. 886,772
----------------
PACKAGED SOFTWARE (3.1%)
3,775 Ascential Software Corp.* 66,063
94,825 BMC Software, Inc.* 1,392,031
456,262 Compuware Corp.* 2,714,759
51,900 Informatica Corp.* 461,391
61,400 NetIQ Corp.* 826,444
105,200 Network Associates, Inc.* 1,464,384
91,400 Quest Software, Inc.* 969,754
46,400 Sybase, Inc.* 784,624
----------------
8,679,450
----------------
PERSONNEL SERVICES (0.4%)
29,899 Manpower, Inc. 1,163,370
----------------
PHARMACEUTICALS: GENERIC DRUGS (0.4%)
14,399 Barr Laboratories, Inc.* 974,380
----------------
PHARMACEUTICALS: OTHER (1.2%)
13,800 Biovail Corp. (Canada)* 573,114
81,500 Endo Pharmaceuticals
Holdings, Inc.* 1,381,425
63,200 United Therapeutics Corp.* 1,448,544
----------------
3,403,083
----------------
PROPERTY - CASUALTY INSURERS (1.0%)
20,338 American Financial Group, Inc. 444,995
11,536 Everest Re Group, Ltd. (ADR)
(Bermuda) 845,589
34,549 Ohio Casualty Corp.* 476,776
34,113 Platinum Underwriters
Holdings Ltd. (Bermuda) 926,168
----------------
2,693,528
----------------
PUBLISHING: BOOKS/MAGAZINES (0.2%)
44,475 Reader's Digest Assoc., Inc.
(The) (Class A) 541,261
----------------
PUBLISHING: NEWSPAPERS (0.3%)
35,100 Belo Corp. (Series A) $ 818,532
----------------
PULP & PAPER (0.7%)
43,525 Bowater, Inc. 1,885,068
----------------
RECREATIONAL PRODUCTS (0.5%)
40,043 Activision, Inc.* 516,955
42,689 Hasbro, Inc. 789,747
----------------
1,306,702
----------------
REGIONAL BANKS (5.6%)
52,800 Banknorth Group, Inc. 1,483,680
64,553 Charter One Financial, Inc. 2,001,143
17,700 City National Corp. 915,090
25,900 Colonial BancGroup, Inc. (The) 379,435
41,900 Commerce Bancorp, Inc. 1,696,950
31,475 Compass Bancshares, Inc. 1,082,111
39,600 FirstMerit Corp. 1,003,068
32,425 Greater Bay Bancorp 666,982
47,624 Hibernia Corp. (Class A) 988,198
19,974 Mercantile Bankshares Corp. 815,938
109,351 National Commerce Financial
Corp. 2,733,775
200 Provident Financial Group, Inc. 5,342
30,876 Zions Bancorporation 1,719,793
----------------
15,491,505
----------------
RESTAURANTS (0.8%)
37,300 Brinker International, Inc.* 1,275,660
10,525 CBRL Group, Inc. 367,112
27,950 Darden Restaurants, Inc. 609,310
----------------
2,252,082
----------------
SAVINGS BANKS (1.6%)
53,700 Astoria Financial Corp. 1,725,918
21,900 GreenPoint Financial Corp. 741,972
7,725 Independence Community
Bank Corp. 255,311
89,400 Sovereign Bancorp, Inc. 1,759,392
----------------
4,482,593
----------------
SEMICONDUCTORS (3.7%)
116,144 Fairchild Semiconductor Corp.
(Class A)* 2,055,749
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
10
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------------------------------
39,800 GlobespanVirata, Inc.* $ 302,878
154,417 Integrated Device Technology,
Inc.* 2,154,117
33,164 Intersil Corp. (Class A)* 966,067
25,649 Microchip Technology Inc. 718,428
68,900 National Semiconductor
Corp.* 2,007,746
66,137 RF Micro Devices, Inc.* 583,328
162,700 Silicon Storage Technology,
Inc.* 1,371,561
----------------
10,159,874
----------------
SPECIALTY INSURANCE (1.9%)
69,374 PMI Group, Inc. (The) 2,454,452
56,672 Radian Group, Inc. 2,697,020
----------------
5,151,472
----------------
SPECIALTY STORES (2.3%)
43,326 Barnes & Noble, Inc.* 1,135,141
110,425 Borders Group, Inc.* 2,135,620
41,413 Linens 'N Things, Inc.* 1,196,836
26,750 Michaels Stores, Inc. 1,215,788
18,975 Pier 1 Imports, Inc. 390,316
9,062 Williams-Sonoma, Inc.* 277,388
----------------
6,351,089
----------------
STEEL (0.1%)
94,525 AK Steel Holding Corp.* 249,546
----------------
TELECOMMUNICATION EQUIPMENT (1.0%)
57,400 Andrew Corp.* 710,612
571,000 Lucent Technologies Inc.* 1,090,610
54,161 Polycom, Inc.* 929,403
15,074 Powerwave Technologies,
Inc.* 127,375
----------------
2,858,000
----------------
TOOLS/HARDWARE (0.6%)
51,800 Stanley Works (The) 1,567,986
----------------
TRUCKING (0.2%)
20,062 Yellow Corp.* 562,538
----------------
TRUCKS/CONSTRUCTION/FARM MACHINERY (1.8%)
63,675 AGCO Corp.* 1,405,944
99,800 Federal Signal Corp. $ 2,005,980
32,589 Navistar International Corp.* 1,457,706
----------------
4,869,630
----------------
WHOLESALE DISTRIBUTORS (0.2%)
14,000 Fisher Scientific
International, Inc.* 549,080
----------------
WIRELESS TELECOMMUNICATIONS (0.4%)
130,650 AT&T Wireless Services Inc.* 1,126,203
----------------
TOTAL COMMON STOCKS
(COST $223,044,281) 270,941,731
----------------
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS
- -----------
SHORT-TERM INVESTMENT (1.5%)
REPURCHASE AGREEMENT
$ 4,284 Joint repurchase agreement
account 1.05% due 09/02/03
(dated 08/29/03; proceeds
$4,284,500) (a)
(COST $4,284,000) 4,284,000
----------------
TOTAL INVESTMENTS
(COST $227,328,281) (b) 99.6% 275,225,731
OTHER ASSETS IN EXCESS OF
LIABILITIES 0.4 1,042,395
----- ----------------
NET ASSETS 100.0% $ 276,268,126
===== ================
</Table>
- ----------
ADR AMERICAN DEPOSITORY RECEIPT.
* NON-INCOME PRODUCING SECURITY.
(a) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(b) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $235,800,935. THE
AGGREGATE GROSS UNREALIZED APPRECIATION IS $41,145,806 AND THE AGGREGATE
GROSS UNREALIZED DEPRECIATION IS $1,721,010, RESULTING IN NET UNREALIZED
APPRECIATION OF $39,424,796.
SEE NOTES TO FINANCIAL STATEMENTS
11
<Page>
MORGAN STANLEY MID-CAP VALUE FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 2003
<Table>
ASSETS:
Investments in securities, at value (cost $227,328,281) $ 275,225,731
Receivable for:
Investments sold 5,111,042
Shares of beneficial interest sold 1,364,292
Dividends 201,325
Prepaid expenses and other assets 91,340
---------------
TOTAL ASSETS 281,993,730
---------------
LIABILITIES:
Payable for:
Investments purchased 5,252,675
Investment management fee 177,646
Shares of beneficial interest redeemed 142,615
Distribution fee 52,267
Accrued expenses and other payables 100,401
---------------
TOTAL LIABILITIES 5,725,604
---------------
NET ASSETS $ 276,268,126
===============
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 257,448,939
Net unrealized appreciation 47,897,450
Accumulated net realized loss (29,078,263)
---------------
NET ASSETS $ 276,268,126
===============
CLASS A SHARES:
Net Assets $ 3,172,748
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 313,753
NET ASSET VALUE PER SHARE $ 10.11
===============
Maximum Offering Price Per Share,
(net asset value plus 5.54% of net asset value) $ 10.67
===============
CLASS B SHARES:
Net Assets $ 56,822,517
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 5,691,894
NET ASSET VALUE PER SHARE $ 9.98
===============
CLASS C SHARES:
Net Assets $ 7,238,283
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 725,050
NET ASSET VALUE PER SHARE $ 9.98
===============
CLASS D SHARES:
Net Assets $ 209,034,578
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 20,590,998
NET ASSET VALUE PER SHARE $ 10.15
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
12
<Page>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 2003
<Table>
NET INVESTMENT LOSS:
INCOME
Dividends $ 2,112,052
Interest 100,909
---------------
TOTAL INCOME 2,212,961
---------------
EXPENSES
Investment management fee 1,633,679
Transfer agent fees and expenses 633,786
Distribution fee (Class A shares) 6,675
Distribution fee (Class B shares) 492,459
Distribution fee (Class C shares) 59,495
Professional fees 65,721
Registration fees 62,753
Custodian fees 55,902
Shareholder reports and notices 55,345
Trustees' fees and expenses 14,079
Other 6,793
---------------
TOTAL EXPENSES 3,086,687
---------------
NET INVESTMENT LOSS (873,726)
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss (15,371,350)
Net change in unrealized depreciation 70,528,599
---------------
NET GAIN 55,157,249
---------------
NET INCREASE $ 54,283,523
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR OCTOBER 29, 2001*
ENDED THROUGH
AUGUST 31, 2003 AUGUST 31, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss $ (873,726) $ (730,564)
Net realized loss (15,371,350) (13,706,913)
Net change in unrealized depreciation 70,528,599 (22,631,149)
----------------- -----------------
NET INCREASE (DECREASE) 54,283,523 (37,068,626)
----------------- -----------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A shares -- (2,609)
Class B shares -- (10,258)
Class C shares -- (946)
Class D shares -- (5,688)
----------------- -----------------
TOTAL DIVIDENDS -- (19,501)
----------------- -----------------
Net increase from transactions in shares of beneficial interest 63,479,985 195,492,745
----------------- -----------------
NET INCREASE 117,763,508 158,404,618
NET ASSETS:
Beginning of period 158,504,618 100,000
----------------- -----------------
END OF PERIOD $ 276,268,126 $ 158,504,618
================= =================
</Table>
- ----------
* Commencement of operations.
SEE NOTES TO FINANCIAL STATEMENTS
14
<Page>
MORGAN STANLEY MID-CAP VALUE FUND
NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2003
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Mid-Cap 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
above-average total return. The Fund seeks to achieve its objective by investing
primarily in a diversified portfolio of common stocks and other equity
securities of companies with market capitalizations in the range of companies
included in the S&P Mid-Cap 400 Index (effective September 30, 2003, the Russell
Midcap Value Index). The Fund was organized as a Massachusetts business trust on
April 12, 2001 and had no operations other than those relating to organizational
matters and the issuance of 2,500 shares of beneficial interest by each class
for $25,000 of each class to Morgan Stanley Investment Advisors Inc. (the
"Investment Manager") to effect the Fund's initial capitalization. The Fund
commenced operations on October 29, 2001.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) an equity portfolio security listed or traded
on the New York 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 equity portfolio securities for which over-the-counter
market quotations are readily available are valued at the mean between the last
reported bid and asked price. In cases where a security is traded on more than
one exchange, the security is valued on the exchange designated as the primary
market; (4) for equity securities traded on foreign exchanges, the last reported
sale price or the latest bid price may be used if there were no sales on a
particular day; (5) when market quotations are not readily available or the
Investment Manager 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; (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
15
<Page>
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 Manager, may transfer uninvested cash
balances into one or more joint repurchase agreement accounts. These balances
are invested in one or more repurchase agreements and are collateralized by
cash, U.S. Treasury or federal agency obligations. The Fund may also invest
directly with institutions in repurchase agreements. The Fund's custodian
receives the collateral, which is marked-to-market daily to determine that the
value of the collateral does not decrease below the repurchase price plus
accrued interest.
D. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
E. FEDERAL INCOME TAX POLICY -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Accordingly, no federal income tax provision is required.
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.
G. USE OF ESTIMATES -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, accrued daily and payable monthly, by applying the
annual rate of 0.80% to the net assets of the Fund determined as of the close of
each business day.
16
<Page>
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the
"Distributor"), an affiliate of the Investment Manager. 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 -- 1.0% of the average daily
net assets of Class B; and (iii) Class C -- up to 1.0% of the average daily net
assets of Class C.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts totaled $2,123,784
at August 31, 2003.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Financial Advisors or other selected
broker-dealer representatives may be reimbursed in the subsequent calendar year.
For the year ended August 31, 2003, the distribution fee was accrued for Class A
shares and Class C shares at the annual rate of 0.23% and 1.0%, respectively.
The Distributor has informed the Fund that for the year ended August 31, 2003,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class A shares, Class B shares and Class C shares of $25, $188,301 and
$7,725, respectively and received $19,338 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 year ended August 31, 2003 aggregated
$396,206,058 and $327,131,524, respectively.
For the year ended August 31, 2003 the Fund incurred brokerage commissions of
$33,526 with Morgan Stanley & Co., Inc., an affiliate of the Investment
Manager and Distributor, for portfolio transactions executed on behalf of the
Fund.
17
<Page>
Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is
the Fund's transfer agent. At August 31, 2003, the Fund had transfer agent fees
and expenses payable of approximately $15,300.
5. FEDERAL INCOME TAX STATUS
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for tax purposes are reported as distributions of paid-in-capital.
The tax character of distributions paid was as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
AUGUST 31, 2003 AUGUST 31, 2002
--------------- ---------------
Ordinary income -- $ 19,501
</Table>
As of August 31, 2003, the tax-basis components of accumulated earnings were as
follows:
<Table>
Net accumulated earnings --
Capital loss carryforward* $ (15,087,079)
Post-October losses (5,518,530)
Net unrealized appreciation 39,424,796
--------------
Total accumulated earnings $ 18,819,187
==============
</Table>
*As of August 31, 2003, the Fund had a net capital loss carryforward of
$15,087,079 of which $4,185 will expire on August 31, 2010 and $15,082,894 will
expire on August 31, 2011 to offset future capital gains to the extent provided
by regulations.
As of August 31, 2003, the Fund had temporary book/tax differences attributable
to post-October losses (capital losses incurred after October 31 within the
taxable year which are deemed to arise on the first business day of the Fund's
next taxable year) and capital loss deferrals on wash sales and permanent
book/tax differences primarily attributable to a net operating loss. To reflect
reclassifications arising from the permanent differences, paid-in-capital was
charged and net investment loss was credited $873,726.
18
<Page>
6. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR OCTOBER 29, 2001*
ENDED THROUGH
AUGUST 31, 2003 AUGUST 31, 2002
------------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- -------------- -------------- --------------
CLASS A SHARES
Sold 115,054 $ 961,173 456,608 $ 4,702,139
Reinvestment of dividends -- -- 230 2,454
Redeemed (173,866) (1,426,387) (86,773) (824,149)
-------------- -------------- -------------- --------------
Net increase (decrease) -- Class A (58,812) (465,214) 370,065 3,880,444
-------------- -------------- -------------- --------------
CLASS B SHARES
Sold 1,366,029 11,463,631 7,771,474 80,153,599
Reinvestment of dividends -- -- 851 9,080
Redeemed (2,293,090) (18,471,458) (1,155,870) (10,499,456)
-------------- -------------- -------------- --------------
Net increase (decrease) -- Class B (927,061) (7,007,827) 6,616,455 69,663,223
-------------- -------------- -------------- --------------
CLASS C SHARES
Sold 227,668 1,891,523 877,923 8,959,262
Reinvestment of dividends -- -- 83 884
Redeemed (282,157) (2,259,257) (100,967) (932,655)
-------------- -------------- -------------- --------------
Net increase (decrease) -- Class C (54,489) (367,734) 777,039 8,027,491
-------------- -------------- -------------- --------------
CLASS D SHARES
Sold 13,696,927 111,374,767 12,437,298 121,503,040
Reinvestment of dividends -- -- 435 4,643
Redeemed (4,701,478) (40,054,007) (844,684) (7,586,096)
-------------- -------------- -------------- --------------
Net increase -- Class D 8,995,449 71,320,760 11,593,049 113,921,587
-------------- -------------- -------------- --------------
Net increase in Fund 7,955,087 $ 63,479,985 19,356,608 $ 195,492,745
============== ============== ============== ==============
</Table>
- ----------
* Commencement of operations.
19
<Page>
MORGAN STANLEY MID-CAP VALUE FUND
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR OCTOBER 29, 2001*
ENDED THROUGH
AUGUST 31, 2003 AUGUST 31, 2002
--------------- -----------------
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 8.19 $ 10.00
--------------- ---------------
Income (loss) from investment operations:
Net investment loss++ (0.03) (0.04)
Net realized and unrealized gain (loss) 1.95 (1.76)
--------------- ---------------
Total income (loss) from investment operations 1.92 (1.80)
--------------- ---------------
Less dividends from net investment income - (0.01)
--------------- ---------------
Net asset value, end of period $ 10.11 $ 8.19
=============== ===============
TOTAL RETURN+ 23.44% (17.99)%(1)
RATIOS TO AVERAGE NET ASSETS(3):
Expenses 1.47% 1.45%(2)(4)
Net investment loss (0.39)% (0.58)%(2)(4)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 3,173 $ 3,053
Portfolio turnover rate 165% 121%(1)
</Table>
- ----------
* COMMENCEMENT OF OPERATIONS.
++ 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.
(4) IF THE FUND HAD BORNE ALL ITS EXPENSES THAT WERE REIMBURSED OR WAIVED BY
THE INVESTMENT MANAGER, THE ANNUALIZED EXPENSE AND NET INVESTMENT LOSS
RATIOS WOULD HAVE BEEN 1.66% AND (0.79)%, RESPECTIVELY.
SEE NOTES TO FINANCIAL STATEMENTS
20
<Page>
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR OCTOBER 29, 2001*
ENDED THROUGH
AUGUST 31, 2003 AUGUST 31, 2002
--------------- -----------------
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 8.15 $ 10.00
--------------- ---------------
Income (loss) from investment operations:
Net investment loss++ (0.09) (0.10)
Net realized and unrealized gain (loss) 1.92 (1.75)
--------------- ---------------
Total income (loss) from investment operations 1.83 (1.85)
--------------- ---------------
Less dividends from net investment income - 0.00#
--------------- ---------------
Net asset value, end of period $ 9.98 $ 8.15
=============== ===============
TOTAL RETURN+ 22.45% (18.47)%(1)
RATIOS TO AVERAGE NET ASSETS(3):
Expenses 2.24% 2.20%(2)(4)
Net investment loss (1.16)% (1.33)%(2)(4)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 56,823 $ 53,948
Portfolio turnover rate 165% 121%(1)
</Table>
- ----------
* COMMENCEMENT OF OPERATIONS.
++ 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.
# LESS THAN $0.005 PER SHARE.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(4) IF THE FUND HAD BORNE ALL ITS EXPENSES THAT WERE REIMBURSED OR WAIVED BY
THE INVESTMENT MANAGER, THE ANNUALIZED EXPENSE AND NET INVESTMENT LOSS
RATIOS WOULD HAVE BEEN 2.41% AND (1.54)%, RESPECTIVELY.
SEE NOTES TO FINANCIAL STATEMENTS
21
<Page>
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR OCTOBER 29, 2001*
ENDED THROUGH
AUGUST 31, 2003 AUGUST 31, 2002
--------------- -----------------
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 8.15 $ 10.00
--------------- ---------------
Income (loss) from investment operations:
Net investment loss++ (0.09) (0.10)
Net realized and unrealized gain (loss) 1.92 (1.75)
--------------- ---------------
Total income (loss) from investment operations 1.83 (1.85)
--------------- ---------------
Less dividends from net investment income - 0.00#
--------------- ---------------
Net asset value, end of period $ 9.98 $ 8.15
=============== ===============
TOTAL RETURN+ 22.45% (18.48)%(1)
RATIOS TO AVERAGE NET ASSETS(3):
Expenses 2.24% 2.20%(2)(4)
Net investment loss (1.16)% (1.33)%(2)(4)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 7,238 $ 6,354
Portfolio turnover rate 165% 121%(1)
</Table>
- ----------
* COMMENCEMENT OF OPERATIONS.
++ 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.
# LESS THAN $0.005 PER SHARE.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(4) IF THE FUND HAD BORNE ALL ITS EXPENSES THAT WERE REIMBURSED OR WAIVED BY
THE INVESTMENT MANAGER, THE ANNUALIZED EXPENSE AND NET INVESTMENT LOSS
RATIOS WOULD HAVE BEEN 2.41% AND (1.54)%, RESPECTIVELY.
SEE NOTES TO FINANCIAL STATEMENTS
22
<Page>
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR OCTOBER 29, 2001*
ENDED THROUGH
AUGUST 31, 2003 AUGUST 31, 2002
--------------- -----------------
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 8.21 $ 10.00
--------------- ---------------
Income (loss) from investment operations:
Net investment loss++ (0.01) (0.04)
Net realized and unrealized gain (loss) 1.95 (1.73)
--------------- ---------------
Total income (loss) from investment operations 1.94 (1.77)
--------------- ---------------
Less dividends from net investment income - (0.02)
--------------- ---------------
Net asset value, end of period $ 10.15 $ 8.21
=============== ===============
TOTAL RETURN+ 23.63% (17.76)%(1)
RATIOS TO AVERAGE NET ASSETS(3):
Expenses 1.24% 1.20%(2)(4)
Net investment loss (0.16)% (0.33)%(2)(4)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 209,035 $ 95,150
Portfolio turnover rate 165% 121%(1)
</Table>
- ----------
* COMMENCEMENT OF OPERATIONS.
++ 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.
(4) IF THE FUND HAD BORNE ALL ITS EXPENSES THAT WERE REIMBURSED OR WAIVED BY
THE INVESTMENT MANAGER, THE ANNUALIZED EXPENSE AND NET INVESTMENT LOSS
RATIOS WOULD HAVE BEEN 1.41% AND (0.54)%, RESPECTIVELY.
SEE NOTES TO FINANCIAL STATEMENTS
23
<Page>
MORGAN STANLEY MID-CAP VALUE FUND
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
MORGAN STANLEY MID-CAP VALUE FUND:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Mid-Cap Value Fund (the "Fund"), including the portfolio of investments,
as of August 31, 2003, and the related statements of operations for the year
then ended and the statement of changes in net assets and the financial
highlights for the year then ended and the period October 29, 2001 (commencement
of operations) through August 31, 2002. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of August 31, 2003, by correspondence with the custodian and
brokers; where replies were not received from brokers, we performed other
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Morgan
Stanley Mid-Cap Value Fund as of August 31, 2003, the results of its operations
for the year then ended, the changes in its net assets and the financial
highlights for the year then ended and the period October 29, 2001 (commencement
of operations) through August 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
Deloitte & Touche LLP
NEW YORK, NEW YORK
OCTOBER 15, 2003
24
<Page>
MORGAN STANLEY MID-CAP VALUE FUND
TRUSTEE AND OFFICER INFORMATION
INDEPENDENT TRUSTEES:
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- ------------------------------------ ----------- ------------ --------------------------------------------------------------
Michael Bozic (62) Trustee Since Retired; Director or Trustee of the Retail Funds and TCW/DW
c/o Mayer, Brown, Rowe & Maw LLP April 1994 Term Trust 2003 (since April 1994) and the Institutional Funds
Counsel to the Independent Directors (since July 2003); formerly Vice Chairman of Kmart Corporation
1675 Broadway (December 1998-October 2000), Chairman and Chief Executive
New York, NY Officer of Levitz Furniture Corporation (November 1995-
November 1998) and President and Chief Executive Officer of
Hills Department Stores (May 1991-July 1995); formerly
variously Chairman, Chief Executive Officer, President and
Chief Operating Officer (1987-1991) of the Sears Merchandise
Group of Sears, Roebuck & Co.
Edwin J. Garn (70) Trustee Since Director or Trustee of the Retail Funds and TCW/DW Term Trust
c/o Summit Ventures LLC January 1993 2003 (since January 1993) and the Institutional Funds (since
1 Utah Center July 2003); member of the Utah Regional Advisory Board of
201 S. Main Street Pacific Corp.; formerly United States Senator (R-Utah)
Salt Lake City, UT (1974-1992) and Chairman, Senate Banking Committee
(1980-1986), Mayor of Salt Lake City, Utah (1971-1974),
Astronaut, Space Shuttle Discovery (April 12-19, 1985), and
Vice Chairman, Huntsman Corporation (chemical company).
Wayne E. Hedien (69) Trustee Since Retired; Director or Trustee of the Retail Funds and TCW/DW
c/o Mayer, Brown, Rowe & Maw LLP September Term Trust 2003; (Since September 1997) and the Institutional
Counsel to the Independent Directors 1997 Funds (since July 2003); formerly associated with the Allstate
1675 Broadway Companies (1966-1994), most recently as Chairman of The
New York, NY Allstate Corporation (March 1993-December 1994) and Chairman
and Chief Executive Officer of its wholly-owned subsidiary,
Allstate Insurance Company (July 1989-December 1994).
<Caption>
NUMBER OF
PORTFOLIOS
IN FUND
COMPLEX
NAME, AGE AND ADDRESS OF OVERSEEN
INDEPENDENT TRUSTEE BY TRUSTEE*** OTHER DIRECTORSHIPS HELD BY TRUSTEE
- ------------------------------------ -------------- -----------------------------------------------------
Michael Bozic (62) 216 Director of Weirton Steel Corporation.
c/o Mayer, Brown, Rowe & Maw LLP
Counsel to the Independent Directors
1675 Broadway
New York, NY
Edwin J. Garn (70) 216 Director of Franklin Covey (time management systems),
c/o Summit Ventures LLC BMW Bank of North America, Inc. (industrial loan
1 Utah Center corporation), United Space Alliance (joint venture
201 S. Main Street between Lockheed Martin and the Boeing Company) and
Salt Lake City, UT Nuskin Asia Pacific (multilevel marketing); member of
the board of various civic and charitable
organizations.
Wayne E. Hedien (69) 216 Director of The PMI Group Inc. (private mortgage
c/o Mayer, Brown, Rowe & Maw LLP insurance); Trustee and Vice Chairman of The Field
Counsel to the Independent Directors Museum of Natural History; director of various other
1675 Broadway business and charitable organizations.
New York, NY
</Table>
25
<Page>
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- ------------------------------------ ----------- ------------ --------------------------------------------------------------
Dr. Manuel H. Johnson (54) Trustee Since Chairman of the Audit Committee and Director or Trustee of
c/o Johnson Smick International, Inc. July 1991 the Retail Funds and TCW/DW Term Trust 2003 (since July 1991)
2099 Pennsylvania Avenue, N.W. and the Institutional Funds (since July 2003); Senior Partner,
Suite 950 Johnson Smick International, Inc., a consulting firm;
Washington, D.C. Co-Chairman and a founder of the Group of Seven Council
(G7C), an international economic commission; formerly Vice
Chairman of the Board of Governors of the Federal Reserve
System and Assistant Secretary of the U.S. Treasury.
Joseph J. Kearns (61) Trustee Since Deputy Chairman of the Audit Committee and Director or
PMB754 July 2003 Trustee of the Retail Funds and TCW/DW Term Trust 2003 (since
23852 Pacific Coast Highway July 2003) and the Institutional Funds (since August 1994);
Malibu, CA previously Chairman of the Audit Committee of the
Institutional Funds (October 2001-July 2003); President,
Kearns & Associates LLC (investment consulting); formerly CFO
of the J. Paul Getty Trust.
Michael E. Nugent (67) Trustee Since Chairman of the Insurance Committee and Director or Trustee
c/o Triumph Capital, L.P. July 1991 of the Retail Funds and TCW/DW Term Trust 2003 (since July
445 Park Avenue 1991) and the Institutional Funds (since July 2001); General
New York, NY Partner of Triumph Capital, L.P., a private investment
partnership; formerly Vice President, Bankers Trust Company
and BT Capital Corporation (1984-1988).
Fergus Reid (71) Trustee Since Chairman of the Governance Committee and Director or Trustee
85 Charles Colman Blvd. July 2003 of the Retail Funds and TCW/DW Term Trust 2003 (since
Pawling, NY July 2003) and the Institutional Funds (since June 1992);
Chairman of Lumelite Plastics Corporation.
<Caption>
NUMBER OF
PORTFOLIOS
IN FUND
COMPLEX
NAME, AGE AND ADDRESS OF OVERSEEN
INDEPENDENT TRUSTEE BY TRUSTEE*** OTHER DIRECTORSHIPS HELD BY TRUSTEE
- ------------------------------------ -------------- -----------------------------------------------------
Dr. Manuel H. Johnson (54) 216 Director of NVR, Inc. (home construction); Chairman
c/o Johnson Smick International, Inc. and Trustee of the Financial Accounting Foundation
2099 Pennsylvania Avenue, N.W. (oversight organization of the Financial Accounting
Suite 950 Standards Board); Director of RBS Greenwich Capital
Washington, D.C. Holdings (financial holding company).
Joseph J. Kearns (61) 217 Director of Electro Rent Corporation (equipment
PMB754 leasing), The Ford Family Foundation, and the UCLA
23852 Pacific Coast Highway Foundation.
Malibu, CA
Michael E. Nugent (67) 216 Director of various business organizations.
c/o Triumph Capital, L.P.
445 Park Avenue
New York, NY
Fergus Reid (71) 217 Trustee and Director of certain investment companies
85 Charles Colman Blvd. in the JPMorgan Funds complex managed by JP Morgan
Pawling, NY Investment Management Inc.
</Table>
26
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
INTERESTED TRUSTEE REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- ------------------------------------ ----------- ------------ --------------------------------------------------------------
Charles A. Fiumefreddo (70) Chairman of Since Chairman and Director or Trustee of the Retail Funds and
c/o Morgan Stanley Trust the Board July 1991 TCW/DW Term Trust 2003 (since July 1991) and the Institutional
Harborside Financial Center, and Trustee Funds (since July 2003); formerly Chief Executive Officer of
Plaza Two, the Retail Funds and the TCW/DW Term Trust 2003 (until
Jersey City, NJ September 2002).
James F. Higgins (55) Trustee Since Director or Trustee of the Retail Funds and TCW/DW Term Trust
c/o Morgan Stanley Trust June 2000 2003 (since June 2000) and the Institutional Funds (since
Harborside Financial Center, July 2003); Senior Advisor of Morgan Stanley (since
Plaza Two, August 2000); Director of the Distributor and Dean Witter
Jersey City, NJ Realty Inc.; previously President and Chief Operating Officer
of the Private Client Group of Morgan Stanley
(May 1999-August 2000), and President and Chief Operating
Officer of Individual Securities of Morgan Stanley (February
1997-May 1999).
Philip J. Purcell (59) Trustee Since Director or Trustee of the Retail Funds and TCW/DW Term Trust
1585 Broadway April 1994 2003 (since April 1994) and the Institutional Funds (since
New York, NY July 2003); Chairman of the Board of Directors and Chief
Executive Officer of Morgan Stanley and Morgan Stanley DW
Inc.; Director of the Distributor; Chairman of the Board of
Directors and Chief Executive Officer of Novus Credit
Services Inc.; Director and/or officer of various Morgan
Stanley subsidiaries.
<Caption>
NUMBER OF
PORTFOLIOS
IN FUND
COMPLEX
NAME, AGE AND ADDRESS OF OVERSEEN
INTERESTED TRUSTEE BY TRUSTEE*** OTHER DIRECTORSHIPS HELD BY TRUSTEE
- ------------------------------------ -------------- -----------------------------------------------------
Charles A. Fiumefreddo (70) 216 None
c/o Morgan Stanley Trust
Harborside Financial Center,
Plaza Two,
Jersey City, NJ
James F. Higgins (55) 216 Director of AXA Financial, Inc. and The Equitable
c/o Morgan Stanley Trust Life Assurance Society of the United States
Harborside Financial Center, (financial services).
Plaza Two,
Jersey City, NJ
Philip J. Purcell (59) 216 Director of American Airlines, Inc. and its parent
1585 Broadway company, AMR Corporation.
New York, NY
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE TRUSTEE BEGAN SERVING THE FUNDS ADVISED BY
MORGAN STANLEY INVESTMENT ADVISORS INC. (THE "INVESTMENT MANAGER") (THE
"RETAIL FUNDS").
** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICES AS
DIRECTOR/TRUSTEE FOR THE RETAIL FUNDS AND THE FUNDS ADVISED BY MORGAN
STANLEY INVESTMENT MANAGEMENT INC., MORGAN STANLEY INVESTMENTS LP AND MORGAN
STANLEY AIP GP LP (THE "INSTITUTIONAL FUNDS") REFLECT THE EARLIEST DATE THE
DIRECTOR/TRUSTEE BEGAN SERVING THE RETAIL OR INSTITUTIONAL FUNDS AS
APPLICABLE.
*** THE FUND COMPLEX INCLUDES ALL OPEN-END AND CLOSED-END FUNDS (INCLUDING ALL
OF THEIR PORTFOLIOS) ADVISED BY THE INVESTMENT MANAGER AND ANY FUNDS THAT
HAVE AN INVESTMENT ADVISOR THAT IS AN AFFILIATED PERSON OF THE INVESTMENT
MANAGER (INCLUDING BUT NOT LIMITED TO MORGAN STANLEY INVESTMENT MANAGEMENT
INC. AND MORGAN STANLEY INVESTMENTS LP).
27
<Page>
OFFICERS:
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- ---------------------------- -------------- ------------------ ------------------------------------------------------------------
Mitchell M. Merin (50) President Since May 1999 President and Chief Operating Officer of Morgan Stanley
1221 Avenue of the Americas Investment Management Inc.; President, Director and Chief
New York, NY Executive Officer of the Investment Manager and Morgan Stanley
Services; Chairman, Chief Executive Officer and Director of the
Distributor; Chairman and Director of the Transfer Agent;
Director of various Morgan Stanley subsidiaries; President
Morgan Stanley Investments LP (since February 2003); President
of the Institutional Funds (since July 2003) and President of
the Retail Funds and TCW/DW Term Trust 2003 (since May 1999);
Trustee (since July 2003) and President (since December 2002) of
the Van Kampen Closed-End Funds; Trustee (since May 1999) and
President (since October 2002) of the Van Kampen Open-End Funds.
Ronald E. Robison (64) Executive Vice Since Chief Global Operations Officer and Managing Director of Morgan
1221 Avenue of the Americas President and April 2003 Stanley Investment Management Inc.; Managing DIrector of Morgan
New York, NY Principal Stanley & Co. Incorporated; Managing DIrector of Morgan Stanley;
Executive Managing Director, Chief Administrative Officer and Director of
Officer the Investment Manager and Morgan Stanley Services; Chief
Executive Officer and Director of the Transfer Agent; Executive
Vice President and Principal Executive Officer of the
Institutional Funds (since July 2003); and the TCW/DW Term Trust
2003 (since April 2003); previously President of the
Institutional Funds (March 2001-July 2003) and Director of the
Institutional Funds (March 2001-July 2003).
Barry Fink (48) Vice President Since General Counsel (since May 2000) and Managing Director (since
1221 Avenue of the Americas and General February 1997 December 2000) of Morgan Stanley Investment Management; Managing
New York, NY Counsel Director (since December 2000), Secretary (since February 1997)
and Director (since July 1998) of the Investment Manager and
Morgan Stanley Services; Assistant Secretary of Morgan Stanley
DW; Chief Legal Officer of Morgan Stanley Investments LP (since
July 2002); Vice President of the Institutional Funds (since
July 2003); Vice President and Secretary of the Distributor;
previously Secretary of the Retail Funds (February 1997-July
2003); previously Vice President and Assistant General Counsel
of the Investment Manager and Morgan Stanley Services (February
1997-December 2001).
Joseph J. McAlinden (60) Vice President Since July 1995 Managing Director and Chief Investment Officer of the Investment
1221 Avenue of the Americas Manager, Morgan Stanley Investment Management Inc. and Morgan
New York, NY Stanley Investments LP; Director of the Transfer Agent, Chief
Investment Officer of the Van Kampen Funds; Vice President of
the Institutional Funds (since July 2003) and the Retail Funds
(since July 1995).
Stefanie V. Chang (36) Vice President Since July 2003 Executive Director of Morgan Stanley & Co. and Morgan Stanley
1221 Avenue of the Americas Investment Management Inc. and Vice President of the
New York, NY Institutional Funds (since December 1997) and the Retail Funds
(since July 2003); formerly practiced law with the New York law
firm of Rogers & Wells (now Clifford Chance LLP).
</Table>
28
<Page>
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- ---------------------------- -------------- ----------------- ------------------------------------------------------------------
Francis Smith (38) Treasurer and Treasurer since Executive Director of the Investment Manager and Morgan Stanley
c/o Morgan Stanley Trust Chief Financial July 2003 and Services (since December 2001); previously Vice President of the
Harborside Financial Center, Officer Chief Financial Retail Funds (September 2002-July 2003); previously Vice
Plaza Two, Officer since President of the Investment Manager and Morgan Stanley Services
Jersey City, NJ September 2002 (August 2000-November 2001) and Senior Manager at
PricewaterhouseCoopers LLP (January 1998-August 2000).
Thomas F. Caloia (57) Vice President Since July 2003 Executive Director (since December 2002) and Assistant Treasurer
c/o Morgan Stanley Trust of the Investment Manager, the Distributor and Morgan Stanley
Harborside Financial Center, Services; previously Treasurer of the Retail Funds (April
Plaza Two, 1989-July 2003); formerly First Vice President of the Investment
Jersey City, NJ Manager, the Distributor and Morgan Stanley Services.
Mary E. Mullin (36) Secretary Since July 2003 Vice President of Morgan Stanley & Co. Incorporated and Morgan
1221 Avenue of the Americas Stanley Investment Management Inc.; Secretary of the
New York, NY Institutional Funds (since June 1999) and the Retail Funds
(since July 2003); formerly practiced law with the New York law
firms of McDermott, Will & Emery and Skadden, Arps, Slate,
Meagher & Flom LLP.
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE OFFICER BEGAN SERVING THE RETAIL FUNDS. EACH
OFFICER SERVES AN INDEFINITE TERM, UNTIL HIS OR HER SUCCESSOR IS ELECTED.
** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICE AS AN OFFICER
FOR THE RETAIL AND INSTITUTIONAL FUNDS REFLECT THE EARLIEST DATE THE OFFICER
BEGAN SERVING THE RETAIL OR INSTITUTIONAL FUNDS AS APPLICABLE.
29
<Page>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael E. Nugent
Philip J. Purcell
Fergus Reid
OFFICERS
Charles A. Fiumefreddo
CHAIRMAN OF THE BOARD
Mitchell M. Merin
PRESIDENT
Ronald E. Robison
EXECUTIVE VICE PRESIDENT and PRINCIPAL EXECUTIVE OFFICER
Barry Fink
VICE PRESIDENT and GENERAL COUNSEL
Joseph J. McAlinden
VICE PRESIDENT
Stefanie V. Chang
VICE PRESIDENT
Francis Smith
TREASURER and CHIEF FINANCIAL OFFICER
Thomas F. Caloia
VICE PRESIDENT
Mary E. Mullin
SECRETARY
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT MANAGER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
This report is submitted for the general information of the shareholders of the
Fund. For more detailed information about the Fund, its fees and expenses and
other pertinent information, please read its Prospectus. The Fund's Statement of
Additional Information contains additional information about the Fund, including
its trustees. It is available, without charge, by calling (800) 869-NEWS.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective Prospectus. Read the
Prospectus carefully before investing.
Investments and services offered through Morgan Stanley DW Inc., member SIPC.
Morgan Stanley Distributors Inc., member NASD.
(C) 2003 Morgan Stanley
[MORGAN STANLEY LOGO] 39917RPT-12333I03-AP-9/03
MORGAN STANLEY FUNDS
MORGAN STANLEY
MID-CAP
VALUE FUND
ANNUAL REPORT
AUGUST 31, 2003
[MORGAN STANLEY LOGO]
<Page>
Item 2. Code of Ethics.
(a) The Fund has adopted a code of ethics (the "Code of Ethics") that applies
to its principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the Fund or a third
party.
(b) No information need be disclosed pursuant to this paragraph.
(c) The Fund has amended its Code of Ethics during the period covered by the
shareholder report presented in Item 1 hereto
(d) The Fund has granted a waiver or an implicit waiver from a provision of
its Code of Ethics.
(e) Not applicable.
(f)
(1) The Fund's Code of Ethics is attached hereto as Exhibit A.
(2) Not applicable.
(3) Not applicable.
Item 3. Audit Committee Financial Expert.
The Fund's Board of Trustees has determined that it has two "audit committee
financial experts" serving on its audit committee, each of whom are
"independent" Trustees : Dr. Manuel H. Johnson and Joseph J. Kearns. Under
applicable securities laws, a person who is determined to be an audit committee
financial expert will not be deemed an "expert" for any purpose, including
without limitation for the purposes of Section 11 of the Securities Act of 1933,
as a result of being designated or identified as an audit committee financial
expert. The designation or identification of a person as an audit committee
financial expert does not impose on such person any duties, obligations, or
liabilities that are greater than the duties, obligations, and liabilities
imposed on such person as a member of the audit committee and Board of Trustees
in the absence of such designation or identification.
<Page>
Item 9 - 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.
There were no significant changes or corrective actions with regard to
significant deficiencies or material weaknesses in the Fund's internal controls
or in other factors that could significantly affect the Fund's internal controls
subsequent to the date of their evaluation.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
<Page>
Item 10 Exhibits
(a) The Code of Ethics for Principal Executive and Senior Financial Officers
is attached hereto.
(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.
Items 4 - 8 are not applicable
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 Mid-Cap Value Fund
Ronald E. Robison
Principal Executive Officer
October 20, 2003
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.
Ronald E. Robison
Principal Executive Officer
October 20, 2003
Francis Smith
Principal Financial Officer
October 20, 2003