<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: 811-10353
Morgan Stanley KLD Social Index 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: November 30, 2004
Date of reporting period: May 31, 2004
<Page>
Item 1 - Report to Shareholders
<Page>
WELCOME, SHAREHOLDER:
IN THIS REPORT, YOU'LL LEARN ABOUT HOW YOUR INVESTMENT IN MORGAN STANLEY KLD
SOCIAL INDEX 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.
<Page>
FUND REPORT
FOR THE SIX-MONTH PERIOD ENDED MAY 31, 2004
TOTAL RETURN FOR THE SIX-MONTH PERIOD ENDED MAY 31, 2004
<Table>
<Caption>
KLD LIPPER
LARGE CAP LARGE-CAP
SOCIAL(SM) CORE
CLASS A CLASS B CLASS C CLASS D INDEX(1) FUNDS INDEX(2)
5.93% 5.53% 5.56% 5.93% 5.81% 5.27%
</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
Equity markets performed well during the six-month period ended May 31, 2004,
after the strong rally that began in March 2003. The market during this period
can be characterized as having two distinct phases: the first, resembling the
rally seen earlier in the year and the second, showing a marked shift in
investor sentiment. During December 2003 and January 2004 the market rallied due
to low interest rates, low inflationary concerns -- largely because of slow job
growth and the capture of Saddam Hussein. The Federal Open Market Committee (the
Fed) stated that they would be "patient" with low interest rates in the absence
of clear inflationary pressures. Investors remained focused on high-beta sectors
as the threat of interest-rate hikes stayed low; as a result, information
technology and other economically sensitive sectors led the market, though all
sectors returned positive results.
January 2004 began promisingly on the heels of a strong earnings report by
Intel. While its earnings were strong, Intel's guidance on future margins led to
profit taking in the information technology sector; the profit taking spread to
other sectors in February after a weak University of Michigan consumer sentiment
report. Then investors began to shift assets toward more-defensive, more
attractively valued stocks after Fed Chairman Alan Greenspan indicated that
interest rates would likely rise in the future and after more mixed economic
data came out. As investors struggled with interest-rate uncertainty and the
mixed economic data, the market fluctuated without a discernible trend.
Large-cap stocks outperformed both small- and mid-cap issues as investors sought
dividend-paying stocks with stable earnings. Mid-cap stocks lagged both their
smaller and larger counterparts.
2
<Page>
PERFORMANCE ANALYSIS
Performance for Morgan Stanley KLD Social Index Fund was mixed during this
period. Share classes A and D outperformed both the KLD Large Cap Social(SM)
Index* (The KLD Index) and the Lipper Large-Cap Core Funds Index, while share
classes B & C only outperformed the noted Lipper Index. The Fund's investment
objective is to seek to provide investment results that, before expenses,
correspond to the total return of the KLD Large Cap Social(SM) Index. During the
period, the Index had a high exposure to the information technology sector and
so did the Fund. Unfortunately, information technology was the worst-performing
sector in the market and the Fund was hurt by such key holdings as Intel,
Veritas and Texas Instruments. Performance was also hurt by basic materials and
utilities companies.
On a more positive note, the Fund's holdings in several key sectors performed
well. Financials was one of the strongest-performing sectors, led by the
low-cost insurer American International Group (AIG). AIG was boosted by strong
profit reports in January and April. Additionally, the health care supply
company Johnson & Johnson and consumer staples supplier Procter & Gamble aided
the Fund's performance as investors sought their more-stable revenue streams.
* THE KLD LARGE CAP SOCIAL(SM) INDEX BEGINS WITH THE RUSSELL 1000 INDEX.
COMPANIES ON THE KLD LARGE CAP SOCIAL(SM) INDEX ARE COMPANIES THAT PASS KLD'S
MULTIPLE PROPRIETARY ENVIRONMENTAL AND SOCIAL SCREENS. INDEXES ARE UNMANAGED AND
THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. IT IS NOT POSSIBLE TO
INVEST DIRECTLY IN AN INDEX. THE KLD LARGE CAP SOCIAL(SM) INDEX (KLD INDEX) IS A
SERVICE MARK OF KLD RESEARCH & ANALYTICS, INC. (KLD). MORGAN STANLEY KLD SOCIAL
INDEX FUND IS NOT PROMOTED OR ENDORSED BY, OR IN ANY WAY AFFILIATED WITH KLD.
KLD IS NOT RESPONSIBLE FOR AND HAS NOT REVIEWED THE FUND OR ANY ASSOCIATED
LITERATURE OR PUBLICATIONS. KLD MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR
IMPLIED, AS TO THEIR ACCURACY OR COMPLETENESS, OR OTHERWISE. THE KLD INDEX IS
DERIVED FROM THE CONSTITUENTS OF THE RUSSELL 1000 INDEX. THE RUSSELL 1000 INDEX
IS A TRADEMARK/SERVICE MARK OF THE FRANK RUSSELL COMPANY (FRC). THE USE OF THE
RUSSELL 1000 INDEX AS THE UNIVERSE FOR THE KLD INDEX IN NO WAY SUGGESTS OR
IMPLIES AN OPINION BY FRC AS TO THE ATTRACTIVENESS OF THE KLD INDEX OR OF THE
INVESTMENT IN ANY OR ALL OF THE SECURITIES UPON WHICH THE RUSSELL 1000 INDEX OR
KLD INDEX ARE BASED.
3
<Page>
TOP 10 HOLDINGS
<Table>
Microsoft Corp. 3.2%
Intel Corp. 2.5
Johnson & Johnson 2.3
American Int'l. Group 2.1
Cisco Systems Inc. 2.1
IBM 2.0
Procter & Gamble 1.9
Merck & Co. 1.5
Coca-Cola Co. 1.5
Wells Fargo & Co. 1.4
</Table>
TOP FIVE INDUSTRIES
<Table>
Packaged Software 4.8%
Semiconductors 4.8
Major Banks 4.7
Household/Personal Care 3.9
Pharmaceuticals: Major 3.7
</Table>
DATA AS OF MAY 31, 2004. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES ARE AS A
PERCENTAGE OF NET ASSETS. 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% OF ITS ASSETS IN COMMON STOCKS OF
COMPANIES INCLUDED IN THE KLD INDEX, AN INDEX COMPRISED OF STOCKS THAT MEET
CERTAIN SOCIAL AND ENVIRONMENTAL CRITERIA. THE KLD INDEX IS A COMMON STOCK INDEX
COMPRISED OF THE STOCKS OF U.S. COMPANIES WHICH ARE WEIGHTED ACCORDING TO MARKET
CAPITALIZATION. THE KLD INDEX WAS DEVELOPED BY KLD RESEARCH & ANALYTICS, INC.
("KLD") BASED ON CERTAIN SOCIAL AND ENVIRONMENTAL CRITERIA. THE KLD INDEX IS
DERIVED BY KLD FROM THE CONSTITUENTS OF THE RUSSELL 1000(R) INDEX. THE RUSSELL
1000 INDEX MEASURES THE PERFORMANCE OF THE 1000 LARGEST COMPANIES IN THE UNITED
STATES AND IS CONSIDERED REPRESENTATIVE OF THE UNITED STATES LARGE
CAPITALIZATION SECURITIES MARKET. THE RUSSELL 1000 INDEX IS RECONSTITUTED
ANNUALLY ON JUNE 30.
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 (6397). THIS INFORMATION IS ALSO
AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT
http://www.sec.gov.
4
<Page>
PERFORMANCE SUMMARY
AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED MAY 31, 2004
<Table>
<Caption>
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS D SHARES++
(SINCE 07/13/01) (SINCE 07/13/01) (SINCE 07/13/01) (SINCE 07/13/01)
SYMBOL SIXAX SIXBX SIXCX SIXDX
1 YEAR 19.22%(3) 18.27%(3) 18.20%(3) 19.34%(3)
12.96(4) 13.27(4) 17.20(4) --
SINCE INCEPTION (1.38)(3) (2.17)(3) (2.15)(3) (1.21)(3)
(3.21)(4) (3.19)(4) (2.15)(4) --
</Table>
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS AND CURRENT PERFORMANCE MAY
BE LOWER OR HIGHER THAN THE FIGURES SHOWN. FOR MORE UP-TO-DATE INFORMATION,
INCLUDING MONTH-END PERFORMANCE FIGURES, PLEASE VISIT morganstanley.com OR SPEAK
WITH YOUR FINANCIAL ADVISOR. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL
FLUCTUATE AND FUND SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. THE TABLE DOES NOT REFLECT THE DEDUCTION OF TAXES THAT A
SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
PERFORMANCE FOR CLASS A, CLASS B, CLASS C, AND CLASS D SHARES WILL VARY DUE TO
DIFFERENCES IN SALES CHARGES AND EXPENSES.
* THE MAXIMUM FRONT-END SALES CHARGE FOR CLASS A IS 5.25%.
** THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B IS 5.0%.
THE CDSC DECLINES TO 0% AFTER SIX YEARS.
+ THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE FOR CLASS C IS 1% FOR SHARES
REDEEMED WITHIN ONE YEAR OF PURCHASE.
++ CLASS D HAS NO SALES CHARGE.
(1) THE KLD LARGE CAP SOCIAL(SM) INDEX BEGINS WITH THE RUSSELL 1000(R) INDEX.
COMPANIES ON THE KLD LARGE CAP SOCIAL(SM) INDEX ARE COMPANIES THAT PASS
KLD'S MULTIPLE PROPRIETARY ENVIRONMENTAL AND SOCIAL SCREENS. 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 LARGE-CAP CORE FUNDS INDEX IS AN EQUALLY WEIGHTED PERFORMANCE
INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN THE LIPPER
LARGE-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.
5
<Page>
MORGAN STANLEY KLD SOCIAL INDEX FUND
PORTFOLIO OF INVESTMENTS - MAY 31, 2004 (UNAUDITED)
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------------------------------------
COMMON STOCKS (92.8%)
ADVERTISING/
MARKETING SERVICES (0.3%)
271 Lamar Advertising Co.* $ 11,076
494 Omnicom Group, Inc. 39,456
---------------
50,532
---------------
AIR FREIGHT/COURIERS (1.0%)
261 C.H. Robinson Worldwide, Inc. 10,852
256 Expeditors International of
Washington, Inc. 11,633
741 FedEx Corp. 54,523
1,336 United Parcel Service, Inc.
(Class B) 95,818
---------------
172,826
---------------
AIRLINES (0.1%)
1,943 Southwest Airlines Co. 30,136
---------------
APPAREL/FOOTWEAR (0.2%)
490 Coach, Inc.* 21,369
340 Liz Claiborne, Inc. 11,662
300 V.F. Corp. 14,094
---------------
47,125
---------------
APPAREL/FOOTWEAR RETAIL (0.5%)
207 Chico's FAS, Inc.* 8,880
396 Foot Locker, Inc. 9,346
1,634 Gap, Inc. (The) 39,461
280 Nordstrom, Inc. 11,354
442 Ross Stores, Inc. 11,576
1,256 TJX Companies, Inc. (The) 31,287
---------------
111,904
---------------
AUTO PARTS: O.E.M. (0.5%)
290 Autoliv, Inc. 11,991
436 Dana Corp. 8,131
1,303 Delphi Corp. 13,278
287 Gentex Corp. 10,906
536 Johnson Controls, Inc. 28,901
200 Lear Corp. 11,846
---------------
85,053
---------------
BEVERAGES: NON-ALCOHOLIC (1.6%)
5,059 Coca-Cola Co. (The) $ 259,780
568 Coca-Cola Enterprises Inc. 15,648
412 Pepsi Bottling Group, Inc. (The) 11,948
---------------
287,376
---------------
BIOTECHNOLOGY (1.8%)
3,111 Amgen Inc.* 170,172
718 Biogen Idec Inc.* 44,624
155 Cephalon, Inc.* 8,350
487 Genzyme Corp.* 21,223
545 Gilead Sciences, Inc.* 35,676
158 Invitrogen Corp.* 10,973
654 MedImmune, Inc.* 15,742
750 Millennium
Pharmaceuticals, Inc.* 11,182
---------------
317,942
---------------
BROADCASTING (0.2%)
2,531 Sirius Satellite Radio Inc.* 7,593
479 Univision Communications Inc.
(Class A)* 15,591
354 XM Satellite Radio
Holdings Inc. (Class A)* 8,914
---------------
32,098
---------------
BUILDING PRODUCTS (0.3%)
597 American Standard
Companies, Inc.* 22,399
1,134 Masco Corp. 32,829
---------------
55,228
---------------
CABLE/SATELLITE TV (1.3%)
5,174 Comcast Corp. (Class A)* 149,787
6,803 Liberty Media Corp.
(Class A)* 74,697
---------------
224,484
---------------
CHEMICALS:
MAJOR DIVERSIFIED (0.1%)
274 Engelhard Corp. 8,294
298 Rohm & Haas Co. 11,485
---------------
19,779
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
6
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------------------------------------
CHEMICALS: SPECIALTY (0.4%)
524 Air Products & Chemicals, Inc. $ 26,184
772 Praxair, Inc. 28,556
256 Sigma-Aldrich Corp. 14,620
---------------
69,360
---------------
COMMERCIAL PRINTING/
FORMS (0.1%)
519 Donnelley (R.R.) & Sons Co. 15,705
---------------
COMPUTER
COMMUNICATIONS (2.3%)
1,063 Avaya Inc.* 16,827
16,841 Cisco Systems, Inc.* 373,028
1,093 Juniper Networks, Inc.* 22,855
---------------
412,710
---------------
COMPUTER PERIPHERALS (0.7%)
5,699 EMC Corp.* 64,057
331 Lexmark International, Inc.* 31,220
799 Network Appliance, Inc.* 15,820
300 Storage Technology Corp.* 8,475
127 Zebra Technologies Corp.
(Class A)* 10,272
---------------
129,844
---------------
COMPUTER PROCESSING
HARDWARE (2.4%)
917 Apple Computer, Inc.* 25,731
5,461 Dell Inc.* 192,118
7,350 Hewlett-Packard Co. 156,114
229 NCR Corp.* 11,047
7,851 Sun Microsystems, Inc.* 33,210
---------------
418,220
---------------
CONSTRUCTION MATERIALS (0.1%)
261 Vulcan Materials Co. 11,682
---------------
CONTAINERS/PACKAGING (0.2%)
387 Pactiv Corp.* 9,125
219 Sealed Air Corp.* 11,009
157 Temple-Inland, Inc. 10,255
---------------
30,389
---------------
CONTRACT DRILLING (0.1%)
555 ENSCO International Inc. $ 14,785
310 Patterson-UTI Energy, Inc. 9,505
---------------
24,290
---------------
DATA PROCESSING SERVICES (0.9%)
1,511 Automatic Data
Processing, Inc. 67,134
423 Ceridian Corp.* 9,475
236 DST Systems, Inc.* 11,337
493 Fiserv, Inc.* 18,645
825 Paychex, Inc. 30,946
773 SunGard Data Systems Inc.* 21,420
---------------
158,957
---------------
DEPARTMENT STORES (0.6%)
715 Kohl's Corp.* 34,005
651 May Department Stores Co. 18,658
649 Penney (J.C.) Co., Inc. 23,221
641 Sears, Roebuck & Co. 24,358
---------------
100,242
---------------
DISCOUNT STORES (1.0%)
1,106 Costco Wholesale Corp. 41,785
777 Dollar General Corp. 15,074
273 Dollar Tree Stores, Inc.* 7,617
414 Family Dollar Stores, Inc. 12,983
2,190 Target Corp. 97,893
---------------
175,352
---------------
DRUGSTORE CHAINS (0.7%)
980 CVS Corp. 40,846
2,402 Walgreen Co. 84,094
---------------
124,940
---------------
ELECTRIC UTILITIES (0.1%)
1,100 AES Corp. (The)* 10,274
600 Pepco Holdings, Inc. 11,040
---------------
21,314
---------------
ELECTRICAL PRODUCTS (0.5%)
461 American Power
Conversion Corp. 8,344
996 Emerson Electric Co. 59,461
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
7
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------------------------------------
253 Energizer Holdings, Inc.* $ 11,474
504 Molex Inc. 14,797
---------------
94,076
---------------
ELECTRONIC COMPONENTS (0.3%)
468 Jabil Circuit, Inc.* 13,249
305 QLogic Corp.* 9,363
378 SanDisk Corp.* 9,318
1,987 Solectron Corp.* 10,928
472 Vishay Intertechnology, Inc.* 8,907
---------------
51,765
---------------
ELECTRONIC DISTRIBUTORS (0.1%)
400 Arrow Electronics, Inc.* 10,892
209 CDW Corp. 14,684
---------------
25,576
---------------
ELECTRONIC EQUIPMENT/
INSTRUMENTS (0.6%)
285 Diebold, Inc. 14,002
3,639 JDS Uniphase Corp.* 12,555
360 Scientific-Atlanta, Inc. 12,391
727 Symbol Technologies, Inc. 10,709
460 Thermo Electron Corp.* 14,159
324 Waters Corp.* 14,930
1,843 Xerox Corp.* 24,954
---------------
103,700
---------------
ELECTRONIC PRODUCTION
EQUIPMENT (0.8%)
3,988 Applied Materials, Inc.* 79,600
627 Cadence Design
Systems, Inc.* 8,678
539 KLA-Tencor Corp.* 25,969
372 Lam Research Corp.* 9,348
391 Novellus Systems, Inc.* 13,016
357 Synopsys, Inc.* 10,567
---------------
147,178
---------------
ELECTRONICS/
APPLIANCE STORES (0.3%)
634 Best Buy Co., Inc. 33,450
429 RadioShack Corp. 13,037
---------------
46,487
---------------
ELECTRONICS/APPLIANCES (0.2%)
170 Harman International
Industries, Inc. $ 13,624
219 Whirlpool Corp. 14,570
---------------
28,194
---------------
FINANCE/RENTAL/LEASING (2.7%)
325 Allied Capital Corp. 8,785
543 Capital One Financial Corp. 38,043
503 CIT Group, Inc. 18,847
613 Countrywide Financial Corp. 39,538
337 Doral Financial Corp. 10,922
2,343 Fannie Mae 158,621
1,669 Freddie Mac 97,453
2,587 MBNA Corp. 65,710
698 Providian Financial Corp.* 9,493
960 SLM Corp. 36,797
---------------
484,209
---------------
FINANCIAL CONGLOMERATES (2.6%)
2,842 American Express Co. 144,089
5,403 J.P. Morgan Chase & Co. 199,047
750 Principal Financial Group, Inc. 26,212
1,364 Prudential Financial, Inc. 60,425
832 State Street Corp. 40,285
---------------
470,058
---------------
FINANCIAL PUBLISHING/
SERVICES (0.4%)
230 Dun & Bradstreet Corp.* 12,726
508 McGraw-Hill Companies,
Inc. (The) 39,583
334 Moody's Corp. 21,840
---------------
74,149
---------------
FOOD DISTRIBUTORS (0.3%)
1,627 SYSCO Corp. 61,012
---------------
FOOD RETAIL (0.6%)
811 Albertson's, Inc. 19,002
1,919 Kroger Co.* 32,028
1,078 Safeway Inc.* 24,320
408 Supervalu, Inc. 12,656
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
8
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------------------------------------
129 Whole Foods Market, Inc. $ 11,094
---------------
99,100
---------------
FOOD: MAJOR DIVERSIFIED (1.9%)
560 Campbell Soup Co. 14,286
905 General Mills, Inc. 41,675
978 Heinz (H.J.) Co. 36,519
568 Kellogg Co. 24,083
4,085 PepsiCo, Inc. 218,016
---------------
334,579
---------------
FOOD: MEAT/FISH/DAIRY (0.1%)
391 Dean Foods Co.* 13,802
---------------
FOOD: SPECIALTY/CANDY (0.4%)
232 Hershey Foods Corp. 20,585
349 McCormick & Co., Inc.
(Non-Voting) 12,372
100 Smucker (J.M.) Co. 4,890
406 Wrigley (Wm.) Jr. Co.
(Class A) 25,497
---------------
63,344
---------------
GAS DISTRIBUTORS (0.4%)
397 Equitable Resources, Inc. 19,215
487 KeySpan Corp. 17,240
811 NiSource, Inc. 16,431
300 Questar Corp. 10,995
---------------
63,881
---------------
HOME BUILDING (0.4%)
342 Centex Corp. 16,584
467 D.R. Horton, Inc. 13,496
130 KB HOME 8,564
298 Lennar Corp. (Class A) 13,678
271 Pulte Homes, Inc. 14,295
---------------
66,617
---------------
HOME FURNISHINGS (0.2%)
564 Leggett & Platt, Inc. 14,258
160 Mohawk Industries, Inc.* 11,878
704 Newell Rubbermaid, Inc. 16,593
---------------
42,729
---------------
HOME IMPROVEMENT
CHAINS (1.7%)
200 Fastenal Co. $ 10,352
5,460 Home Depot, Inc. (The) 196,123
1,876 Lowe's Companies, Inc. 100,497
---------------
306,972
---------------
HOSPITAL/
NURSING MANAGEMENT (0.2%)
608 Health Management Associates,
Inc. (Class A) 13,370
312 Manor Care, Inc. 9,775
192 Triad Hospitals, Inc.* 6,789
---------------
29,934
---------------
HOUSEHOLD/PERSONAL CARE (3.9%)
214 Alberto-Culver Co. (Class B) 10,062
565 Avon Products, Inc. 50,093
415 Clorox Co. (The) 21,729
1,311 Colgate-Palmolive Co. 74,989
310 Estee Lauder Companies, Inc.
(The) (Class A) 14,195
2,424 Gillette Co. (The) 104,450
1,259 Kimberly-Clark Corp. 82,968
3,111 Procter & Gamble Co. (The) 335,428
---------------
693,914
---------------
INDUSTRIAL CONGLOMERATES (1.0%)
1,848 3M Co. 156,267
400 ALLETE, Inc. 13,900
218 SPX Corp.* 9,531
---------------
179,698
---------------
INDUSTRIAL MACHINERY (0.3%)
650 Illinois Tool Works Inc. 58,422
---------------
INDUSTRIAL SPECIALTIES (0.1%)
510 Ecolab Inc. 15,560
---------------
INFORMATION TECHNOLOGY
SERVICES (2.3%)
471 Citrix Systems, Inc.* 9,915
186 Cognizant Technology
Solutions Corp.* 8,601
1,105 Electronic Data Systems Corp. 18,067
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
9
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------------------------------------
3,953 International Business
Machines Corp. $ 350,196
918 PeopleSoft, Inc.* 16,414
846 Unisys Corp.* 11,472
---------------
414,665
---------------
INSURANCE BROKERS/
SERVICES (0.5%)
594 AON Corp. 16,412
189 Gallagher (Arthur J.) & Co. 6,020
1,310 Marsh & McLennan
Companies, Inc. 57,797
---------------
80,229
---------------
INTERNET RETAIL (0.3%)
546 Amazon.com, Inc.* 26,366
1,055 InterActiveCorp* 32,979
---------------
59,345
---------------
INTERNET SOFTWARE/
SERVICES (0.6%)
900 BEA Systems, Inc.* 7,767
1,089 Siebel Systems, Inc.* 11,761
641 VeriSign, Inc.* 11,628
2,606 Yahoo! Inc.* 79,900
---------------
111,056
---------------
INVESTMENT BANKS/
BROKERS (1.4%)
577 AmeriTrade Holding Corp.* 6,861
300 Edwards (A.G.), Inc. 11,220
713 Goldman Sachs Group,
Inc. (The) 66,958
190 Legg Mason, Inc. 16,665
2,220 Merrill Lynch & Co., Inc. 126,096
2,559 Schwab (Charles) Corp. (The) 25,078
---------------
252,878
---------------
INVESTMENT MANAGERS (0.5%)
409 Franklin Resources, Inc. 20,565
100 Investors Financial
Services Corp. 3,912
633 Janus Capital Group, Inc. 10,362
1,102 Mellon Financial Corp. $ 32,443
267 Price (T.) Rowe Group, Inc. 12,859
---------------
80,141
---------------
LIFE/HEALTH INSURANCE (0.6%)
1,199 AFLAC, Inc. 48,679
376 Jefferson-Pilot Corp. 19,300
484 Lincoln National Corp. 22,985
693 UnumProvident Corp. 10,090
---------------
101,054
---------------
MAJOR BANKS (4.7%)
2,759 Bank One Corp. 133,674
1,430 BB&T Corp. 53,882
475 Comerica, Inc. 26,890
1,115 KeyCorp 35,022
1,378 National City Corp. 48,905
725 PNC Financial Services Group 40,027
426 Popular, Inc. 18,403
1,005 SouthTrust Corp. 34,039
734 SunTrust Banks, Inc. 47,769
170 UnionBanCal Corp. 9,790
3,034 Wachovia Corp. 143,235
4,094 Wells Fargo & Co. 240,727
---------------
832,363
---------------
MAJOR TELECOMMUNICATIONS (3.4%)
849 ALLTEL Corp. 42,985
1,888 AT&T Corp. 31,303
4,393 BellSouth Corp. 109,649
7,983 SBC Communications, Inc. 189,197
6,504 Verizon Communications Inc. 224,908
---------------
598,042
---------------
MANAGED HEALTH CARE (1.6%)
339 Aetna, Inc. 27,527
352 Anthem, Inc.* 31,163
1,081 Caremark Rx, Inc.* 33,727
337 CIGNA Corp. 22,849
190 Coventry Health Care, Inc.* 8,755
461 Humana, Inc.* 7,869
203 Oxford Health Plans, Inc. 11,524
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
10
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------------------------------------
230 PacifiCare Health
Systems, Inc.* $ 8,494
1,403 UnitedHealth Group Inc. 91,546
357 WellPoint Health
Networks, Inc.* 39,820
---------------
283,274
---------------
MEDIA CONGLOMERATES (1.6%)
4,898 Disney (Walt) Co. (The) 114,956
10,382 Time Warner Inc.* 176,909
---------------
291,865
---------------
MEDICAL DISTRIBUTORS (0.7%)
1,103 Cardinal Health, Inc. 74,684
131 Henry Schein, Inc.* 8,798
709 McKesson Corp. 24,390
155 Patterson Dental Co.* 11,768
---------------
119,640
---------------
MEDICAL SPECIALTIES (3.3%)
334 Apogent Technologies Inc.* 10,761
585 Applera Corp. - Applied
Biosystems Group 11,337
185 Bard (C.R.), Inc. 20,751
168 Bausch & Lomb, Inc. 10,251
1,415 Baxter International, Inc. 44,488
176 Beckman Coulter, Inc. 10,648
665 Becton, Dickinson & Co. 33,463
668 Biomet, Inc. 26,800
1,554 Boston Scientific Corp.* 68,842
242 DENTSPLY International, Inc. 11,957
773 Guidant Corp. 42,005
182 Hillenbrand Industries, Inc. 10,720
2,934 Medtronic, Inc. 140,539
452 St. Jude Medical, Inc.* 34,470
694 Stryker Corp. 35,290
244 Varian Medical Systems, Inc.* 20,228
604 Zimmer Holdings, Inc.* 51,551
---------------
584,101
---------------
MEDICAL/NURSING SERVICES (0.1%)
197 DaVita, Inc.* 9,145
290 Lincare Holdings, Inc.* $ 9,747
---------------
18,892
---------------
MISCELLANEOUS
COMMERCIAL SERVICES (0.1%)
188 Iron Mountain Inc.* 8,323
367 Sabre Holdings Corp. 9,358
---------------
17,681
---------------
MISCELLANEOUS
MANUFACTURING (0.1%)
190 Pentair, Inc. 11,643
---------------
MOTOR VEHICLES (0.2%)
757 Harley-Davidson, Inc. 43,520
---------------
MULTI-LINE INSURANCE (2.5%)
5,118 American International
Group, Inc. 375,149
665 Hartford Financial Services
Group, Inc. (The) 43,970
421 Safeco Corp. 17,661
---------------
436,780
---------------
OFFICE EQUIPMENT/
SUPPLIES (0.2%)
275 Avery Dennison Corp. 16,236
542 Pitney Bowes, Inc. 24,027
---------------
40,263
---------------
OIL & GAS PIPELINES (0.2%)
312 Kinder Morgan, Inc. 18,720
1,268 Williams Companies, Inc. (The) 15,102
---------------
33,822
---------------
OIL & GAS PRODUCTION (1.0%)
664 Anadarko Petroleum Corp. 36,201
812 Apache Corp. 32,772
1,178 Chesapeake Energy Corp. 15,550
591 Devon Energy Corp. 35,082
362 EOG Resources, Inc. 19,342
254 Noble Energy, Inc. 11,516
306 Pioneer Natural Resources Co. 9,471
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
11
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------------------------------------
200 Pogo Producing Co. $ 9,096
593 XTO Energy Inc. 14,973
---------------
184,003
---------------
OIL REFINING/MARKETING (0.2%)
227 Sunoco, Inc. 13,967
352 Valero Energy Corp. 23,271
---------------
37,238
---------------
OILFIELD SERVICES/
EQUIPMENT (0.3%)
965 Baker Hughes Inc. 32,839
287 Smith International, Inc.* 14,330
---------------
47,169
---------------
OTHER CONSUMER SERVICES (0.8%)
319 Apollo Group, Inc. (Class A)* 29,922
284 Career Education Corp.* 19,303
1,033 eBay Inc.* 91,730
---------------
140,955
---------------
PACKAGED SOFTWARE (4.8%)
579 Adobe Systems, Inc. 25,841
358 Autodesk, Inc. 12,838
664 BMC Software, Inc.* 11,713
1,069 Compuware Corp.* 8,499
465 Intuit Inc.* 18,219
247 Mercury Interactive Corp.* 11,841
21,829 Microsoft Corp.** 575,194
985 Novell, Inc.* 8,973
9,306 Oracle Corp.* 105,344
317 Red Hat, Inc.* 8,664
794 Symantec Corp.* 36,365
1,116 VERITAS Software Corp.* 29,686
---------------
853,177
---------------
PERSONNEL SERVICES (0.1%)
270 Manpower, Inc. 12,892
438 Robert Half International, Inc. 12,255
---------------
25,147
---------------
PHARMACEUTICALS:
GENERIC DRUGS (0.3%)
204 Barr Pharmaceuticals Inc.* 8,898
480 IVAX Corp.* 11,688
736 Mylan Laboratories, Inc. $ 16,420
317 Watson Pharmaceuticals, Inc.* 11,840
---------------
48,846
---------------
PHARMACEUTICALS: MAJOR (3.7%)
7,185 Johnson & Johnson 400,276
5,493 Merck & Co. Inc. 259,819
---------------
660,095
---------------
PHARMACEUTICALS: OTHER (0.6%)
330 Allergan, Inc. 29,337
835 Forest Laboratories, Inc.* 52,931
634 King Pharmaceuticals, Inc.* 8,470
203 Sepracor, Inc.* 9,031
---------------
99,769
---------------
PROPERTY - CASUALTY
INSURERS (0.9%)
268 Berkley (W.R.) Corp. 11,162
454 Chubb Corp. (The) 30,586
525 Cincinnati Financial Corp. 22,444
515 Progressive Corp. (The) 44,172
1,406 St. Paul Companies, Inc. (The) 55,790
---------------
164,154
---------------
PUBLISHING: NEWSPAPERS (0.4%)
372 New York Times Co. (The)
(Class A) 17,346
81 Scripps (E.W.) Co. (Class A) 8,615
578 Tribune Co. 27,912
18 Washington Post Co. (The)
(Class B) 17,113
---------------
70,986
---------------
PULP & PAPER (0.1%)
526 MeadWestvaco Corp. 14,528
---------------
RAILROADS (0.2%)
1,331 Norfolk Southern Corp. 32,250
---------------
REAL ESTATE
INVESTMENT TRUSTS (1.8%)
440 Archstone-Smith Trust 12,782
340 Boston Properties, Inc. 16,782
352 Catellus Development Corp. 8,599
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
12
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------------------------------------
199 Developers Diversified
Realty Corp. $ 6,844
492 Duke Realty Corp. 15,921
1,068 Equity Office Properties Trust 28,783
772 Equity Residential 22,728
636 General Growth Properties, Inc. 18,686
460 Health Care Property
Investors, Inc. 11,054
172 Hospitality Properties Trust 7,040
1,024 Host Marriott Corp.* 12,554
423 iStar Financial Inc. 16,180
380 Kimco Realty Corp. 17,461
340 Liberty Property Trust 13,563
300 New Plan Excel Realty Trust 7,143
629 Plum Creek Timber Co., Inc. 19,700
533 ProLogis Trust 17,088
315 Public Storage, Inc. 14,487
372 Rouse Co. (The) 16,982
408 Simon Property Group, Inc. 21,041
275 Vornado Realty Trust 15,029
---------------
320,447
---------------
RECREATIONAL PRODUCTS (0.4%)
259 Brunswick Corp. 10,490
572 Electronic Arts Inc.* 29,075
1,299 Mattel, Inc. 22,707
---------------
62,272
---------------
REGIONAL BANKS (2.7%)
908 AmSouth Bancorporation 23,136
100 Bank of Hawaii Corp. 4,345
575 Banknorth Group, Inc. 18,941
621 Charter One Financial, Inc. 27,299
113 City National Corp. 7,296
184 Commerce Bancorp, Inc. 11,316
427 Compass Bancshares, Inc. 17,955
1,227 Fifth Third Bancorp 66,614
382 First Horizon National Corp. 17,790
949 Hibernia Corp. (Class A) 22,776
458 North Fork Bancorporation, Inc. 17,633
557 Northern Trust Corp. 23,923
667 Regions Financial Corp. 25,359
733 Synovus Financial Corp. 18,875
186 TCF Financial Corp. $ 10,375
4,605 U.S. Bancorp 129,401
614 Union Planters Corp. 18,488
326 Zions Bancorporation 19,984
---------------
481,506
---------------
RESTAURANTS (0.8%)
450 Darden Restaurants, Inc. 10,125
3,051 McDonald's Corp. 80,546
272 Outback Steakhouse, Inc. 11,546
972 Starbucks Corp.* 39,502
237 Wendy's International, Inc. 8,956
---------------
150,675
---------------
SAVINGS BANKS (1.1%)
239 Astoria Financial Corp. 9,147
308 Golden West Financial Corp. 33,501
325 GreenPoint Financial Corp. 13,033
258 Independence Community
Bank Corp. 9,680
702 New York Community
Bancorp, Inc. 16,441
752 Sovereign Bancorp, Inc. 16,356
2,192 Washington Mutual, Inc. 95,747
---------------
193,905
---------------
SEMICONDUCTORS (4.8%)
936 Advanced Micro
Devices, Inc.* 14,555
4,232 Agere Systems, Inc. (Class B)* 10,368
947 Altera Corp.* 21,677
919 Analog Devices, Inc. 45,169
524 Broadcom Corp. (Class A)* 22,118
15,676 Intel Corp. 447,550
205 International Rectifier Corp.* 9,075
381 Intersil Corp. (Class A) 8,096
1,164 LSI Logic Corp.* 9,545
836 Maxim Integrated Products, Inc. 42,494
528 Microchip Technology Inc. 16,743
1,351 Micron Technology, Inc.* 20,306
888 National Semiconductor
Corp.* 19,243
400 NVIDIA Corp.* 9,432
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------------------------------------
700 PMC - Sierra, Inc.* $ 9,870
4,191 Texas Instruments Inc. 109,427
909 Xilinx, Inc. 33,160
---------------
848,828
---------------
SERVICES TO THE HEALTH
INDUSTRY (0.4%)
190 Express Scripts, Inc. (Class A)* 14,869
689 IMS Health Inc. 17,142
803 Medco Health Solutions Inc.* 28,129
259 Omnicare, Inc. 11,137
---------------
71,277
---------------
SPECIALTY INSURANCE (0.5%)
218 Ambac Financial Group, Inc. 15,075
463 Fidelity National Financial, Inc. 17,404
389 MBIA Inc. 21,547
179 MGIC Investment Corp. 13,067
245 PMI Group, Inc. (The) 10,577
224 Radian Group, Inc. 10,304
---------------
87,974
---------------
SPECIALTY STORES (0.8%)
185 AutoZone, Inc.* 16,049
758 Bed Bath & Beyond Inc.* 28,236
170 CarMax Inc.* 3,888
200 Michaels Stores, Inc. 10,450
823 Office Depot, Inc.* 13,448
356 PETSMART, Inc. 11,068
1,174 Staples, Inc. 32,379
326 Tiffany & Co. 11,531
550 Toys 'R' Us, Inc.* 8,646
229 Williams-Sonoma, Inc.* 7,317
---------------
143,012
---------------
SPECIALTY
TELECOMMUNICATIONS (0.2%)
549 American Tower Corp.
(Class A)* 7,593
368 CenturyTel, Inc. 11,000
743 Citizens Communications Co.* 9,436
171 NTL, Inc.* 10,106
---------------
38,135
---------------
STEEL (0.1%)
182 Nucor Corp. $ 11,985
---------------
TELECOMMUNICATION
EQUIPMENT (1.8%)
404 Comverse Technology, Inc.* 7,139
3,199 Corning Inc.* 39,636
9,990 Lucent Technologies Inc.* 35,664
5,584 Motorola, Inc. 110,396
1,895 QUALCOMM Inc. 127,098
1,057 Tellabs, Inc.* 8,393
---------------
328,326
---------------
TELECOMMUNICATIONS (0.3%)
3,087 Sprint Corp. (FON Group) 54,825
---------------
TOOLS/HARDWARE (0.1%)
206 Black & Decker Corp. (The) 12,346
168 Stanley Works (The) 7,316
---------------
19,662
---------------
TRUCKS/CONSTRUCTION/
FARM MACHINERY (0.2%)
603 Deere & Co. 39,617
---------------
WHOLESALE DISTRIBUTORS (0.2%)
138 Fisher Scientific
International, Inc.* 7,923
500 Genuine Parts Co. 18,820
200 Grainger (W.W.), Inc. 10,890
---------------
37,633
---------------
WIRELESS
TELECOMMUNICATIONS (0.8%)
5,410 AT&T Wireless Services Inc.* 76,606
2,190 Nextel Communications, Inc.
(Class A)* 50,655
165 Telephone & Data
Systems, Inc. 11,822
---------------
139,083
---------------
TOTAL COMMON STOCKS
(COST $16,198,307) 16,501,177
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
14
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ----------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (6.9%)
REPURCHASE AGREEMENT
$ 1,229 Joint repurchase agreement account
1.02% due 06/01/04 (dated 05/28/04; proceeds $1,229,139) (a)
(COST $1,229,000) $ 1,229,000
---------------
TOTAL INVESTMENTS
(COST $17,427,307) (b) (c) 99.7% 17,730,177
OTHER ASSETS IN EXCESS OF LIABILITIES 0.3 54,612
----- ---------------
NET ASSETS 100.0% $ 17,784,789
===== ===============
</Table>
- ----------
* NON-INCOME PRODUCING SECURITY.
** A PORTION OF THIS SECURITY HAS BEEN PHYSICALLY SEGREGATED IN CONNECTION
WITH OPEN FUTURES CONTRACTS IN THE AMOUNT OF $120,667.
(a) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(b) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN AN AMOUNT EQUAL TO
$853,633 IN CONNECTION WITH OPEN FUTURES CONTRACTS.
(c) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE
AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED
APPRECIATION IS $1,918,162 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION
IS $1,615,291, RESULTING IN NET UNREALIZED APPRECIATION OF $302,871.
FUTURES CONTRACTS OPEN AT MAY 31, 2004:
<Table>
<Caption>
NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE UNREALIZED
CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE APPRECIATION
- ------------------------------------------------------------------------------------------------
3 Long S&P 500 Index $ 840,225 $ 4,035
June 2004
2 Long S&P 500 Index E-Mini 112,030 282
June 2004
1 Long Nasdaq 100 Index 146,700 5,450
June 2004
1 Long Nasdaq 100 Index E-Mini 29,340 1,068
June 2004
--------
Total unrealized appreciation $ 10,835
========
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
15
<Page>
MORGAN STANLEY KLD SOCIAL INDEX FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2004 (UNAUDITED)
<Table>
ASSETS:
Investments in securities, at value
(cost $17,427,307) $ 17,730,177
Cash 3,043
Receivable for:
Shares of beneficial interest sold 77,429
Dividends 13,762
Prepaid expenses and other assets 13,182
Receivable from affiliate 41,245
----------------
TOTAL ASSETS 17,878,838
----------------
LIABILITIES:
Payable for:
Shares of beneficial interest redeemed 25,367
Distribution fee 10,175
Investment purchased 2,178
Variation margin 2,040
Accrued expenses and other payables 54,289
----------------
TOTAL LIABILITIES 94,049
----------------
NET ASSETS $ 17,784,789
================
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 20,424,681
Net unrealized appreciation 313,705
Accumulated undistributed net
investment income 45,870
Accumulated net realized loss (2,999,467)
----------------
NET ASSETS $ 17,784,789
================
CLASS A SHARES:
Net Assets $ 2,311,402
Shares Outstanding (UNLIMITED AUTHORIZED,
$.01 PAR VALUE) 248,140
NET ASSET VALUE PER SHARE $ 9.31
================
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 5.54%
OF NET ASSET VALUE) $ 9.83
================
CLASS B SHARES:
Net Assets $ 9,943,749
Shares Outstanding (UNLIMITED AUTHORIZED,
$.01 PAR VALUE) 1,071,705
NET ASSET VALUE PER SHARE $ 9.28
================
CLASS C SHARES:
Net Assets $ 1,909,349
Shares Outstanding (UNLIMITED AUTHORIZED,
$.01 PAR VALUE) 206,382
NET ASSET VALUE PER SHARE $ 9.25
================
CLASS D SHARES:
Net Assets $ 3,620,289
Shares Outstanding (UNLIMITED AUTHORIZED,
$.01 PAR VALUE) 387,843
NET ASSET VALUE PER SHARE $ 9.33
================
</Table>
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 31, 2004 (UNAUDITED)
<Table>
NET INVESTMENT INCOME:
INCOME
Dividends $ 105,226
Interest 7,742
----------------
TOTAL INCOME 112,968
----------------
EXPENSES
Distribution fee (Class A shares) 2,294
Distribution fee (Class B shares) 46,708
Distribution fee (Class C shares) 7,334
Investment management fee 30,336
Professional fees 26,127
Shareholder reports and notices 25,248
Registration fees 20,813
Transfer agent fees and expenses 11,246
Custodian fees 2,403
Other 25,883
----------------
TOTAL EXPENSES 198,392
Less: amounts waived/reimbursed (142,057)
----------------
NET EXPENSES 56,335
----------------
NET INVESTMENT INCOME 56,633
----------------
NET REALIZED AND UNREALIZED GAIN:
NET REALIZED GAIN ON:
Investments 124,121
Futures contracts 33,564
----------------
NET REALIZED GAIN 157,685
----------------
NET CHANGE IN UNREALIZED APPRECIATION/
DEPRECIATION ON:
Investments 667,841
Futures contracts (21,007)
----------------
NET APPRECIATION 646,834
----------------
NET GAIN 804,519
----------------
NET INCREASE $ 861,152
================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
16
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
MAY 31, 2004 NOVEMBER 30, 2003
------------ -----------------
(UNAUDITED)
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 56,633 $ 86,850
Net realized gain (loss) 157,685 (923,654)
Net change in unrealized appreciation 646,834 2,375,100
------------ ------------
NET INCREASE 861,152 1,538,296
------------ ------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A shares (19,635) (11,380)
Class B shares (26,629) (41,845)
Class C shares (4,720) (8,410)
Class D shares (31,016) (70,366)
------------ ------------
TOTAL DIVIDENDS (82,000) (132,001)
------------ ------------
Net increase from transactions in shares of beneficial interest 2,048,013 1,726,063
------------ ------------
NET INCREASE 2,827,165 3,132,358
NET ASSETS:
Beginning of period 14,957,624 11,825,266
------------ ------------
END OF PERIOD
(INCLUDING ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME OF $45,870
AND $71,237, RESPECTIVELY) $ 17,784,789 $ 14,957,624
============ ============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
17
<Page>
MORGAN STANLEY KLD SOCIAL INDEX FUND
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2004 (UNAUDITED)
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley KLD Social Index Fund (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a non-diversified,
open-end management investment company. The Fund's investment objective is to
provide investment results that before expenses corresponds to the total return
of the KLD Large Cap Social(SM) Index ("KLD Index"). The Fund was organized as a
Massachusetts business trust on April 6, 2001 and commenced operations on July
13, 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 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) futures are valued at the latest
price published by the commodities exchange on which they trade; (6) when market
quotations are not readily available or Morgan Stanley Investment Advisors Inc.
(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. Occasionally, developments affecting the
closing prices of securities and other assets may occur between the times at
which valuations of such securities are determined (that is, close of the
foreign market on which the securities trade) and the close of business on the
NYSE. If developments occur during such periods that are expected to materially
affect the value of such securities, such valuations may be adjusted to reflect
the estimated fair value of such securities as of the close of the NYSE, as
determined in good faith by the Fund's Trustees or by the Investment Manager
using a pricing service and/or procedures approved
18
<Page>
by the Trustees of the Fund; and (7) short-term debt securities having a
maturity date of more than sixty days at time of purchase are valued on a
mark-to-market basis until sixty days prior to maturity and thereafter at
amortized cost based on their value on the 61st day. Short-term debt securities
having a maturity date of sixty days or less at the time of purchase are valued
at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date.
Discounts are accreted and premiums are amortized over the life of the
respective securities. Interest income is accrued daily.
C. REPURCHASE AGREEMENTS -- Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other affiliated
entities managed by the Investment 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. FUTURES CONTRACTS -- A futures contract is an agreement between two parties
to buy and sell financial instruments or contracts based on financial indices at
a set price on a future date. Upon entering into such a contract, the Fund is
required to pledge to the broker cash, U.S. Government securities or other
liquid portfolio securities equal to the minimum initial margin requirements of
the applicable futures exchange. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in the value of the contract. Such receipts or payments known as
variation margin are recorded by the Fund as unrealized gains and losses. Upon
closing of the contract, the Fund realizes a gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed.
F. 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.
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.
19
<Page>
H. 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 0.20% to the average net assets of the Fund determined as of the
close of each business day. Prior to May 1, 2004, the annual rate was 0.40% of
the average net assets of the Fund.
The Investment Manager has agreed to waive its fee and assume all operating
expenses (except for distribution fees) until such time as the Fund has $50
million of net assets or December 31, 2004, whichever occurs first. Thereafter,
the Investment Manager has agreed to assume all operating expenses (except for
distribution fees) and to waive the compensation provided for in its Investment
Management Agreement to the extent that such expenses and compensation on an
annual basis exceed 0.40% of the daily net assets of the Fund. At May 31, 2004,
included in the Statement of Assets and Liabilities is a receivable from
affiliate, which represents expense reimbursements due to the Fund.
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 -- up to 1.0% of the average
daily net assets of Class B; and (iii) Class C -- up to 1.0% of the average
daily net assets of Class C.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts totaled $1,153,715
at May 31, 2004.
20
<Page>
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Financial Advisors or other selected
broker-dealer representatives may be reimbursed in the subsequent calendar year.
For the six months ended May 31, 2004, the distribution fee was accrued for
Class A shares and Class C shares at the annual rate of 0.20% and 0.85%,
respectively.
The Distributor has informed the Fund that for the six months ended May 31,
2004, it received contingent deferred sales charges from certain redemptions of
the Fund's Class A shares, Class B shares and Class C shares of $6, $10,730 and
$40, respectively and received $12,536 in front-end sales charges from sales of
the Fund's Class A shares. The respective shareholders pay such charges which
are not an expense of the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the six months ended May 31, 2004 aggregated
$3,438,935 and $1,234,567, respectively.
Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is
the Fund's transfer agent. At May 31, 2004, the Fund had transfer agent fees and
expenses payable of approximately $1,400.
Effective April 1, 2004, the Fund began an unfunded Deferred Compensation Plan
(the "Compensation Plan") which allows each independent Trustee to defer payment
of all, or a portion, of the fees he receives for serving on the Board of
Trustees. Each eligible Trustee generally may elect to have the deferred amounts
credited with a return equal to the total return on one or more of the Morgan
Stanley funds that are offered as investment options under the Compensation
Plan. Appreciation/depreciation and distributions received from these
investments are recorded with an offsetting increase/decrease in the deferred
compensation obligation and do not affect the net asset value of the Fund.
21
<Page>
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
MAY 31, 2004 NOVEMBER 30, 2003
----------------------------------- -----------------------------------
(UNAUDITED)
SHARES AMOUNT SHARES AMOUNT
--------------- --------------- --------------- ---------------
CLASS A SHARES
Sold 65,698 $ 611,840 182,321 $ 1,452,634
Reinvestment of dividends 2,171 19,479 1,546 11,206
Redeemed (56,631) (530,042) (44,830) (331,078)
--------------- --------------- --------------- ---------------
Net increase -- Class A 11,238 101,277 139,037 1,132,762
--------------- --------------- --------------- ---------------
CLASS B SHARES
Sold 180,225 1,652,606 344,034 2,744,983
Reinvestment of dividends 2,586 23,201 5,149 37,382
Redeemed (79,924) (733,422) (118,946) (914,768)
--------------- --------------- --------------- ---------------
Net increase -- Class B 102,887 942,385 230,237 1,867,597
--------------- --------------- --------------- ---------------
CLASS C SHARES
Sold 54,263 502,098 66,178 531,198
Reinvestment of dividends 462 4,129 984 7,124
Redeemed (19,365) (178,903) (24,046) (182,495)
--------------- --------------- --------------- ---------------
Net increase -- Class C 35,360 327,324 43,116 355,827
--------------- --------------- --------------- ---------------
CLASS D SHARES
Sold 118,543 1,103,811 230,463 1,880,364
Reinvestment of dividends 2,945 26,476 9,298 67,503
Redeemed (48,928) (453,260) (495,319) (3,577,990)
--------------- --------------- --------------- ---------------
Net increase (decrease) -- Class D 72,560 677,027 (255,558) (1,630,123)
--------------- --------------- --------------- ---------------
Net increase in Fund 222,045 $ 2,048,013 156,832 $ 1,726,063
=============== =============== =============== ===============
</Table>
6. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Fund may purchase and sell stock index futures ("futures contracts") for the
following reasons: to simulate full investment in the KLD Index while retaining
a cash balance for fund management purposes; to facilitate trading; to reduce
transaction costs; or to seek higher investment returns when a futures contract
is priced more attractively than stocks comprising the KLD Index.
These futures contracts involve elements of market risk in excess of the amount
reflected in the Statement of Assets and Liabilities. The Fund bears the risk of
an unfavorable change in the value of the underlying securities. Risks may also
arise upon entering into these contracts from the potential inability of the
counter parties to meet the terms of their contracts.
22
<Page>
7. FEDERAL INCOME TAX STATUS
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for tax purposes are reported as distributions of paid-in-capital.
As of November 30, 2003, the Fund had a net capital loss carryforward of
$3,123,322 of which $19,969 will expire on November 30, 2009, $2,198,221 will
expire on November 30, 2010 and $905,132 will expire on November 30, 2011 to
offset future capital gains to the extent provided by regulations.
As of November 30, 2003, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on wash sales and mark-to-market of open
contracts.
8. LEGAL MATTERS
The Investment Manager, certain affiliates of the Investment Manager, certain
officers of such affiliates and certain investment companies advised by the
Investment Manager or its affiliates, including the Fund, are named as
defendants in a number of similar class action complaints which were recently
consolidated. This consolidated action also names as defendants certain
individual Trustees and Directors of the Morgan Stanley funds. The consolidated
amended complaint generally alleges that defendants, including the Fund,
violated their statutory disclosure obligations and fiduciary duties by failing
properly to disclose (i) that the Investment Manager and certain affiliates of
the Investment Manager allegedly offered economic incentives to brokers and
others to recommend the funds advised by the Investment Manager or its
affiliates to investors rather than funds managed by other companies, and (ii)
that the funds advised by the Investment Manager or its affiliates, including
the Fund, allegedly paid excessive commissions to brokers in return for their
efforts to recommend these funds to investors. The complaint seeks, among other
things, unspecified compensatory damages, rescissionary damages, fees and costs.
The defendants have moved to dismiss the action and otherwise vigorously to
defend it. While the Fund believes that it has meritorious defenses, the
ultimate outcome of this matter is not presently determinable at this early
stage of the litigation, and no provision has been made in the Fund's financial
statements for the effect, if any, of this matter.
23
<Page>
MORGAN STANLEY KLD SOCIAL INDEX 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 SIX FOR THE YEAR FOR THE YEAR JULY 13, 2001*
MONTHS ENDED ENDED ENDED THROUGH
MAY 31, 2004 NOVEMBER 30, 2003 NOVEMBER 30, 2002 NOVEMBER 30, 2001
------------ ----------------- ----------------- -----------------
(UNAUDITED)
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 8.88 $ 7.73 $ 9.39 $ 10.00
---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income++ 0.05 0.10 0.09 0.03
Net realized and unrealized gain (loss) 0.46 1.17 (1.70) (0.64)
---------- ---------- ---------- ----------
Total income (loss) from investment operations 0.51 1.27 (1.61) (0.61)
---------- ---------- ---------- ----------
Less dividends from net investment income (0.08) (0.12) (0.05) -
---------- ---------- ---------- ----------
Net asset value, end of period $ 9.31 $ 8.88 $ 7.73 $ 9.39
========== ========== ========== ==========
TOTAL RETURN+ 5.93%(1) 16.72% (17.25)% (6.10)%(1)
RATIOS TO AVERAGE NET ASSETS(3)(4):
Expenses 0.20%(2) 0.20% 0.24% 0.25%(2)
Net investment income 1.16%(2) 1.29% 1.01% 0.85%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 2,311 $ 2,103 $ 756 $ 329
Portfolio turnover rate 8%(1) 24% 13% 3%(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 AS FOLLOWS:
<Table>
<Caption>
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO LOSS RATIO
----------------- ------- --------------
MAY 31, 2004 1.91% (0.55)%
NOVEMBER 30, 2003 2.14% (0.65)%
NOVEMBER 30, 2002 2.14% (0.89)%
NOVEMBER 30, 2001 2.35% (1.25)%
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
24
<Page>
<Table>
<Caption>
FOR THE PERIOD
FOR THE SIX FOR THE YEAR FOR THE YEAR JULY 13, 2001*
MONTHS ENDED ENDED ENDED THROUGH
MAY 31, 2004 NOVEMBER 30, 2003 NOVEMBER 30, 2002 NOVEMBER 30, 2001
------------ ----------------- ----------------- -----------------
(UNAUDITED)
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 8.82 $ 7.68 $ 9.36 $ 10.00
---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income++ 0.02 0.04 0.02 0.00
Net realized and unrealized gain (loss) 0.47 1.16 (1.69) (0.64)
---------- ---------- ---------- ----------
Total income (loss) from investment operations 0.49 1.20 (1.67) (0.64)
---------- ---------- ---------- ----------
Less dividends from net investment income (0.03) (0.06) (0.01) -
---------- ---------- ---------- ----------
Net asset value, end of period $ 9.28 $ 8.82 $ 7.68 $ 9.36
========== ========== ========== ==========
TOTAL RETURN+ 5.53%(1) 15.75% (17.90)% (6.40)%(1)
RATIOS TO AVERAGE NET ASSETS(3)(4):
Expenses 1.00%(2) 1.00% 1.00% 1.00%(2)
Net investment income 0.36%(2) 0.49% 0.25% 0.10%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 9,944 $ 8,547 $ 5,670 $ 4,413
Portfolio turnover rate 8%(1) 24% 13% 3%(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 AS FOLLOWS:
<Table>
<Caption>
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO LOSS RATIO
----------------- ------- --------------
MAY 31, 2004 2.71% (1.35)%
NOVEMBER 30, 2003 2.94% (1.45)%
NOVEMBER 30, 2002 2.90% (1.65)%
NOVEMBER 30, 2001 3.10% (2.00)%
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
25
<Page>
<Table>
<Caption>
FOR THE PERIOD
FOR THE SIX FOR THE YEAR FOR THE YEAR JULY 13, 2001*
MONTHS ENDED ENDED ENDED THROUGH
MAY 31, 2004 NOVEMBER 30, 2003 NOVEMBER 30, 2002 NOVEMBER 30, 2001
------------ ----------------- ----------------- -----------------
(UNAUDITED)
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 8.79 $ 7.66 $ 9.36 $ 10.00
---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income++ 0.02 0.04 0.02 0.00
Net realized and unrealized gain (loss) 0.47 1.16 (1.69) (0.64)
---------- ---------- ---------- ----------
Total income (loss) from investment operations 0.49 1.20 (1.67) (0.64)
---------- ---------- ---------- ----------
Less dividends from net investment income (0.03) (0.07) (0.03) -
---------- ---------- ---------- ----------
Net asset value, end of period $ 9.25 $ 8.79 $ 7.66 $ 9.36
========== ========== ========== ==========
TOTAL RETURN+ 5.56%(1) 15.81% (17.92)% (6.40)%(1)
RATIOS TO AVERAGE NET ASSETS(3)(4):
Expenses 0.85%(2) 1.00% 1.00% 1.00%(2)
Net investment income 0.51%(2) 0.49% 0.25% 0.10%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 1,909 $ 1,503 $ 980 $ 544
Portfolio turnover rate 8%(1) 24% 13% 3%(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 AS FOLLOWS:
<Table>
<Caption>
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO LOSS RATIO
----------------- ------- --------------
MAY 31, 2004 2.56% (1.20)%
NOVEMBER 30, 2003 2.94% (1.45)%
NOVEMBER 30, 2002 2.90% (1.65)%
NOVEMBER 30, 2001 3.10% (2.00)%
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
26
<Page>
<Table>
<Caption>
FOR THE PERIOD
FOR THE SIX FOR THE YEAR FOR THE YEAR JULY 13, 2001*
MONTHS ENDED ENDED ENDED THROUGH
MAY 31, 2004 NOVEMBER 30, 2003 NOVEMBER 30, 2002 NOVEMBER 30, 2001
------------ ----------------- ----------------- -----------------
(UNAUDITED)
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 8.90 $ 7.74 $ 9.40 $ 10.00
---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income++ 0.06 0.12 0.11 0.04
Net realized and unrealized gain (loss) 0.46 1.17 (1.71) (0.64)
---------- ---------- ---------- ----------
Total income (loss) from investment operations 0.52 1.29 (1.60) (0.60)
---------- ---------- ---------- ----------
Less dividends from net investment income (0.09) (0.13) (0.06) -
---------- ---------- ---------- ----------
Net asset value, end of period $ 9.33 $ 8.90 $ 7.74 $ 9.40
========== ========== ========== ==========
TOTAL RETURN+ 5.93%(1) 17.05% (17.17)% (6.00)%(1)
RATIOS TO AVERAGE NET ASSETS(3)(4):
Expenses 0.00%(2) 0.00% 0.00% 0.00%(2)
Net investment income 1.36%(2) 1.49% 1.25% 1.10%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 3,620 $ 2,805 $ 4,419 $ 13,634
Portfolio turnover rate 8%(1) 24% 13% 3%(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 AS FOLLOWS:
<Table>
<Caption>
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO LOSS RATIO
----------------- ------- --------------
MAY 31, 2004 1.71% (0.35)%
NOVEMBER 30, 2003 1.94% (0.45)%
NOVEMBER 30, 2002 1.90% (0.65)%
NOVEMBER 30, 2001 2.10% (1.00)%
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
27
<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
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
Joseph J. McAlinden
VICE PRESIDENT
Stefanie V. Chang
VICE PRESIDENT
Francis J. Smith
TREASURER and CHIEF FINANCIAL OFFICER
Thomas F. Caloia
VICE PRESIDENT
Mary E. Mullin
SECRETARY
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT MANAGER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
The financial statements included herein have been taken from the records of the
Fund without examination by the independent auditors and accordingly they do not
express an opinion thereon.
This report is submitted for the general information of the shareholders of the
Fund. For more detailed information about the Fund, its fees and expenses and
other pertinent information, please read its Prospectus. The Fund's Statement of
Additional Information contains additional information about the Fund, including
its trustees. It is available, without charge, by calling (800) 869-NEWS.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective Prospectus. Read the
Prospectus carefully before investing.
Investments and services offered through Morgan Stanley DW Inc., member SIPC.
Morgan Stanley Distributors Inc., member NASD.
(C) 2004 Morgan Stanley
[MORGAN STANLEY LOGO]
[GRAPHIC]
MORGAN STANLEY FUNDS
MORGAN STANLEY
KLD SOCIAL INDEX
FUND
SEMIANNUAL REPORT
MAY 31, 2004
[MORGAN STANLEY LOGO]
39908RPT-RA04-0034OP-Y05/04
<Page>
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. [Reserved.]
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable for semiannual reports.
Item 8. [Reserved.]
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.
<Page>
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 10 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.
<Page>
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 KLD Social Index Fund
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
July 20, 2004
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
July 20, 2004
/s/ Francis Smith
Francis Smith
Principal Financial Officer
July 20, 2004