<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, 2004
Date of reporting period: August 31, 2004
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 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 year ended August 31, 2004
TOTAL RETURN FOR THE 12-MONTH PERIOD ENDED AUGUST 31, 2004
<Table>
<Caption>
LIPPER
RUSSELL MID-CAP
MIDCAP S&P 400 CORE
VALUE MID-CAP FUNDS
CLASS A CLASS B CLASS C CLASS D INDEX(1) INDEX(2) INDEX(3)
9.50% 8.72% 8.82% 9.75% 21.12% 12.42% 10.91%
</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
U.S. equity returns were largely positive for the 12 months ended August 31,
2004, though the market's strength varied at different points during the review
period. Performance in the first half of the period was supported by improving
economic indicators and the Federal Reserve's willingness to keep interest rates
low. Investors' confidence improved with the signs of a growing economy and
rising corporate profits. A rising-interest-rate environment developed in the
last months of the period, however, and steadily rising oil prices further
served to dampen stocks and keep the market range-bound. Geopolitical concerns
over the conflict in Iraq and other regions added to an uncertainty that slowed
the market's progress in the second half of the period, as did concerns over the
upcoming domestic presidential elections and the ongoing threat of terrorism.
The financial sector performed especially strongly over the 12-month period as
banks benefited from a comparatively steep yield curve. The consumer
discretionary sector also outperformed its peers due to home refinancings that
allowed consumers to reduce debt and increase their spending. As the economy
continued to make a significant recovery, small- and mid-cap stocks generally
outperformed their larger peers.
PERFORMANCE ANALYSIS
Morgan Stanley Mid-Cap Value Fund underperformed the Russell Midcap Value Index,
the S&P 400 Mid-Cap Index and the Lipper Mid-Cap Core Funds Index for the 12
months ended August 31, 2004. The Fund's underperformance over the period was
driven largely by stock selection within the health care, consumer discretionary
and industrials sectors. Both an overweighted position in the health-care sector
relative to the Russell Midcap Value Index and stock selection within the sector
were detrimental to performance, as many pharmaceutical and health-care
companies suffered from an unfavorable environment over the period. Among these,
Watson Pharmaceuticals served as a particular drag on performance, as this
generic drug producer was hurt by news that earnings growth forecasts would have
to be revised when the company lost market share to competitors. Tenet
Healthcare was another security that hurt the Fund. Having suffered from
accounting problems in the past, this stock was again negatively affected by
signs that a turnaround for the company would take significantly longer than had
been expected as further issues relating to its accounting problems surfaced.
Both an underweighted position in the consumer discretionary sector relative to
the Russell Midcap Value Index and stock selection within the sector also
2
<Page>
hurt performance. The Interpublic Group was a disappointing holding for the
Fund, as this advertising group suffered from weak revenues and low growth in
spending for advertising during the period. Bally's Total Fitness was another
stock that hurt performance early in the period before the Fund sold its
holdings in this company. Although its overweighted position in the industrials
sector relative to the Russell Midcap Value Index was positive for the Fund,
stock selection within the sector was detrimental because the portfolio did not
include enough of the strongest-performing names within the sector.
Positions within other sectors nevertheless served as positive drivers for the
Fund over the 12 months under review. Stock selection within the
telecommunications services sector provided gains for the Fund, and an
underweighted position in the sector relative to the Russell Midcap Value Index
was also beneficial. Within the sector, Sprint PCS Corporation was a standout
performer as it bought back the tracking stock for the cellular portion of the
company and brought that under the parent name. Within the basic materials
sector, Lyondell Chemical was one of the top three contributors to performance,
as the company saw a turnaround during the period, with the economic recovery
supporting the improvement of both commodity prices and the market for the
products the company provides, and as the company also made an acquisition the
market viewed as positive. An overweighted position in the energy sector
affected the Fund positively as rising oil prices boosted the performance of
many energy companies. Among these, Valero Energy provided gains as the refining
and marketing company saw its profit margins greatly increase, and the oil and
gas exploration entity Transocean benefited similarly from high oil prices.
3
<Page>
TOP 10 HOLDINGS
<Table>
Goodrich Corp. 3.8%
Lyondell Chemical Co. 3.7
Sovereign Bancorp, Inc. 3.2
Hubbell, Inc. (Class B) 3.2
BISYS Group, Inc. (The) 3.1
International Flavors & Fragrances, Inc. 3.0
Bausch & Lomb, Inc. 3.0
Valassis Communications, Inc. 2.9
Assurant, Inc. 2.7
Sabre Holdings Corp. 2.5
</Table>
TOP FIVE INDUSTRIES
<Table>
Electric Utilities 8.4%
Medical Specialties 7.3
Specialty Insurance 4.8
Real Estate Investment Trusts 4.3
Specialty Stores 4.0
</Table>
DATA AS OF AUGUST 31, 2004. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR TOP 10
HOLDINGS AND TOP FIVE INDUSTRIES 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 STOCK AND
OTHER EQUITY SECURITIES, INCLUDING DEPOSITARY RECEIPTS AND SECURITIES
CONVERTIBLE INTO COMMON STOCK, OF COMPANIES TRADED ON A U.S. SECURITIES EXCHANGE
WITH MARKET CAPITALIZATIONS THAT FALL WITHIN THE RANGE OF COMPANIES INCLUDED IN
THE RUSSELL MIDCAP VALUE INDEX. AS OF JUNE 30, 2003, THESE MARKET
CAPITALIZATIONS RANGE BETWEEN $462.44 MILLION AND $10.38 BILLION. IN PURSUING
ITS INVESTMENT OBJECTIVE, THE FUND'S "INVESTMENT MANAGER," MORGAN STANLEY
INVESTMENT ADVISORS INC., SEEKS ATTRACTIVELY VALUED COMPANIES EXPERIENCING A
CHANGE THAT THE INVESTMENT MANAGER BELIEVES COULD HAVE A POSITIVE IMPACT ON A
COMPANY'S OUTLOOK, SUCH AS A CHANGE IN MANAGEMENT, INDUSTRY DYNAMICS OR
OPERATIONAL EFFICIENCY. IN DETERMINING WHETHER SECURITIES SHOULD BE SOLD, THE
INVESTMENT MANAGER CONSIDERS A NUMBER OF FACTORS, INCLUDING APPRECIATION TO FAIR
VALUE, FUNDAMENTAL CHANGE IN THE COMPANY OR CHANGES IN ECONOMIC OR MARKET
TRENDS. THE INVESTMENT MANAGER MAY PURCHASE STOCKS THAT TYPICALLY DO NOT PAY
DIVIDENDS.
FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS
EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN
ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND
AND FOURTH FISCAL QUARTERS BY FILING THE SCHEDULE ELECTRONICALLY WITH THE
SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON
FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON FORM N-CSR. MORGAN STANLEY ALSO
DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO FUND SHAREHOLDERS AND MAKES THESE
REPORTS AVAILABLE ON ITS PUBLIC WEBSITE, www.morganstanley.com. EACH MORGAN
STANLEY FUND
4
<Page>
ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE FUND'S
FIRST AND THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES NOT DELIVER THE
REPORTS FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS, NOR ARE THE
REPORTS POSTED TO THE MORGAN STANLEY PUBLIC WEBSITE. YOU MAY, HOWEVER, OBTAIN
THE FORM N-Q FILINGS (AS WELL AS THE FORM N-CSR AND N-CSRS FILINGS) BY ACCESSING
THE SEC'S WEBSITE, http://www.sec.gov. YOU MAY ALSO REVIEW AND COPY THEM AT THE
SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE OPERATION OF
THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE SEC AT (800)
SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT OF A
DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS
(publicinfo@sec.gov) OR BY WRITING THE PUBLIC REFERENCE SECTION OF THE SEC,
WASHINGTON, DC 20549-0102. YOU MAY OBTAIN COPIES OF A FUND'S FISCAL QUARTER
FILINGS BY CONTACTING MORGAN STANLEY CLIENT RELATIONS AT (800) 869-NEWS.
PROXY VOTING POLICIES AND PROCEDURES
A DESCRIPTION OF (1) THE FUND'S POLICIES AND PROCEDURES WITH RESPECT TO THE
VOTING OF PROXIES RELATING TO THE FUND'S PORTFOLIO SECURITIES AND (2) HOW THE
FUND VOTED PROXIES RELATING TO PORTFOLIO SECURITIES DURING THE MOST RECENT
12-MONTH PERIOD ENDED AUGUST 31, 2004, IS AVAILABLE WITHOUT CHARGE, UPON
REQUEST, BY CALLING (800) 869-NEWS OR BY VISITING THE MUTUAL FUND CENTER ON OUR
WEBSITE AT www.morganstanley.com. THIS INFORMATION IS ALSO AVAILABLE ON THE
SECURITIES AND EXCHANGE COMMISSION'S WEBSITE AT http://www.sec.gov.
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 WHO RESIDE AT THE SAME ADDRESS.
YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME
UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE
DOCUMENTS BY CALLING (800) 350-6414, 8:00 A.M. TO 8:00 P.M. ET. ONCE OUR
CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING
INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS.
5
<Page>
PERFORMANCE SUMMARY
[CHART]
PERFORMANCE OF A $10,000 INVESTMENT
($ IN THOUSANDS)
<Table>
<Caption>
CLASS A^ CLASS B^ CLASS C^ CLASS D^ RUSSELL(1) S&P 400(2) LIPPER(3)
29-Oct-01 $ 9,475 $ 10,000 $ 10,000 $ 10,000 $ 10,000 $ 10,000 $ 10,000
30-Nov-01 $ 10,006 $ 10,560 $ 10,560 $ 10,570 $ 10,568 $ 10,599 $ 10,631
28-Feb-02 $ 9,829 $ 10,343 $ 10,343 $ 10,378 $ 11,298 $ 11,102 $ 10,794
31-May-02 $ 9,592 $ 10,073 $ 10,072 $ 10,137 $ 11,850 $ 11,641 $ 11,102
31-Aug-02 $ 7,770 $ 8,153 $ 8,152 $ 8,224 $ 10,331 $ 9,793 $ 9,361
30-Nov-02 $ 8,017 $ 8,393 $ 8,392 $ 8,485 $ 10,187 $ 9,937 $ 9,631
28-Feb-03 $ 7,125 $ 7,442 $ 7,442 $ 7,543 $ 9,509 $ 9,030 $ 8,810
31-May-03 $ 8,577 $ 8,943 $ 8,942 $ 9,086 $ 11,171 $ 10,577 $ 10,296
31-Aug-03 $ 9,592 $ 9,983 $ 9,982 $ 10,167 $ 12,010 $ 11,595 $ 11,279
30-Nov-03 $ 10,038 $ 10,423 $ 10,423 $ 10,638 $ 13,162 $ 12,709 $ 12,229
29-Feb-04 $ 10,987 $ 11,394 $ 11,393 $ 11,660 $ 14,441 $ 13,520 $ 13,124
31-May-04 $ 10,607 $ 10,983 $ 10,983 $ 11,259 $ 14,208 $ 13,404 $ 12,879
31-Aug-04 $ 10,503 $ 10,553 $ 10,863 $ 11,159 $ 14,547 $ 13,036 $ 12,510
</Table>
ENDING VALUE
<Table>
<Caption>
CLASS A^ CLASS B^ CLASS C^ CLASS D^ RUSSELL(1) S&P 400(2) LIPPER(3)
------------ ------------ ------------ ------------ ------------ ------------ ------------
$ 10,503 $ 10,553 $ 10,863 $ 11,159 $ 14,547 $ 13,036 $ 12,510
</Table>
6
<Page>
AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED AUGUST 31, 2004
<Table>
<Caption>
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS D SHARES++
(SINCE 10/29/01) (SINCE 10/29/01) (SINCE 10/29/01) (SINCE 10/29/01)
SYMBOL MDFAX MDFBX MDFCX MDFDX
1 YEAR 9.50%(4) 8.72%(4) 8.82%(4) 9.75%(4)
3.75(5) 3.72(5) 7.82(5) --
SINCE INCEPTION 3.69(4) 2.93(4) 2.96(4) 3.94(4)
1.74(5) 1.92(5) 2.96(5) --
</Table>
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF
FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES
SHOWN. FOR THE MOST RECENT 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 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.
* 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 RUSSELL MIDCAP VALUE INDEX MEASURES THE PERFORMANCE OF THOSE RUSSELL
MIDCAP COMPANIES WITH LOWER PRICE-TO-BOOK RATIOS AND LOWER FORECASTED
GROWTH VALUES. THE STOCKS ARE ALSO MEMBERS OF THE RUSSELL 1000 VALUE INDEX.
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. THE FUND'S BENCHMARK WAS CHANGED FROM THE STANDARD
AND POOR'S MID-CAP 400 INDEX TO THE RUSSELL MIDCAP VALUE INDEX TO MORE
ACCURATELY REFLECT THE FUND'S INVESTABLE UNIVERSE.
(2) 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.
(3) 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.
(4) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT
THE DEDUCTION OF ANY SALES CHARGES.
(5) 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.
^ ENDING VALUE ASSUMING A COMPLETE REDEMPTION ON AUGUST 31, 2004.
7
<Page>
EXPENSE EXAMPLE
As a shareholder of the Fund, you incur ongoing costs, including management
fees; distribution and service (12b-1) fees; and other Fund expenses. This
example is intended to help you understand your ongoing costs (in dollars) of
investing in the Fund and to compare these costs with the ongoing costs of
investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period 03/01/04 - 08/31/04.
ACTUAL EXPENSES
The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table below provides information about hypothetical
expenses based on the Fund's actual expense ratio and an assumed rate of return
of 5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use this
information to compare the ongoing cost of investing in the Fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only. Therefore, the second line of the table is useful in
comparing ongoing costs, and will not help you determine the relative total cost
of owning different funds that have transactional costs, such as sales charges
(loads), and redemption fees, or exchange fees.
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
--------------- --------------- ---------------
03/01/04 -
03/01/04 08/31/04 08/31/04
--------------- --------------- ---------------
CLASS A
Actual (-4.40% return) $ 1,000.00 $ 956.00 $ 6.88
Hypothetical (5% return before expenses) $ 1,000.00 $ 1,018.10 $ 7.10
CLASS B
Actual (-4.74% return) $ 1,000.00 $ 952.60 $ 10.60
Hypothetical (5% return before expenses) $ 1,000.00 $ 1,014.28 $ 10.94
CLASS C
Actual (-4.65% return) $ 1,000.00 $ 953.50 $ 9.82
Hypothetical (5% return before expenses) $ 1,000.00 $ 1,015.08 $ 10.13
CLASS D
Actual (-4.30% return) $ 1,000.00 $ 957.00 $ 5.71
Hypothetical (5% return before expenses) $ 1,000.00 $ 1,019.30 $ 5.89
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 1.40%, 2.16%,
2.00% AND 1.16% RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER
THE PERIOD, MULTIPLIED BY 184/366 (TO REFLECT THE ONE-HALF YEAR PERIOD).
8
<Page>
MORGAN STANLEY MID-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS - AUGUST 31, 2004
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ---------------------------------------------------------------------------------------
COMMON STOCKS (98.4%)
ADVERTISING/MARKETING SERVICES (3.8%)
275,780 Interpublic Group of Companies, Inc. (The)* $ 2,909,479
312,040 Valassis Communications, Inc.* 8,818,250
--------------
11,727,729
--------------
AEROSPACE & DEFENSE (3.8%)
372,526 Goodrich Corp. 11,831,426
--------------
AUTO PARTS: O.E.M. (1.7%)
69,500 Magna International Inc.
(Class A) (Canada) 5,176,360
--------------
CHEMICALS: SPECIALTY (3.7%)
579,490 Lyondell Chemical Co. 11,410,158
--------------
CONTAINERS/PACKAGING (2.2%)
98,220 Temple-Inland, Inc. 6,706,462
--------------
CONTRACT DRILLING (3.7%)
166,447 GlobalSantaFe Corp.
(Cayman Islands) 4,640,542
219,370 Transocean Inc.
(Cayman Islands)* 6,734,659
--------------
11,375,201
--------------
DATA PROCESSING SERVICES (3.1%)
671,376 BISYS Group, Inc. (The)* 9,533,539
--------------
ELECTRIC UTILITIES (8.4%)
458,920 Allegheny Energy, Inc.* 6,741,535
253,396 Edison International 6,811,285
159,670 Pinnacle West Capital Corp. 6,739,671
177,480 Wisconsin Energy Corp. 5,812,470
--------------
26,104,961
--------------
ELECTRICAL PRODUCTS (3.2%)
227,140 Hubbell, Inc. (Class B) 9,801,091
--------------
ELECTRONIC PRODUCTION EQUIPMENT (1.9%)
481,800 Cadence Design Systems, Inc.* 5,988,774
--------------
ENGINEERING & CONSTRUCTION (2.3%)
163,500 Fluor Corp. $ 6,989,625
--------------
FINANCIAL CONGLOMERATES (1.9%)
347,340 Conseco Inc.* 5,904,780
--------------
FINANCIAL PUBLISHING/SERVICES (0.9%)
116,480 Equifax, Inc. 2,842,112
--------------
FOOD RETAIL (2.3%)
288,200 Albertson's, Inc. 7,083,956
--------------
HOTELS/RESORTS/CRUISELINES (1.4%)
98,030 Starwood Hotels & Resorts Worldwide, Inc. 4,332,926
--------------
HOUSEHOLD/PERSONAL CARE (3.0%)
238,590 International Flavors & Fragrances, Inc. 9,192,873
--------------
INFORMATION TECHNOLOGY SERVICES (1.5%)
587,026 BearingPoint, Inc.* 4,737,300
--------------
INTEGRATED OIL (1.8%)
69,600 Amerada Hess Corp. 5,602,800
--------------
INVESTMENT BANKS/BROKERS (1.8%)
160,980 Edwards (A.G.), Inc. 5,598,884
--------------
MAJOR BANKS (2.4%)
124,000 Comerica, Inc. 7,458,600
--------------
MEDICAL SPECIALTIES (7.3%)
344,520 Applera Corp. - Applied Biosystems Group 6,559,661
139,020 Bausch & Lomb, Inc. 9,168,369
285,650 Pall Corp. 6,958,434
--------------
22,686,464
--------------
MISCELLANEOUS COMMERCIAL SERVICES (2.5%)
339,160 Sabre Holdings Corp. 7,800,680
--------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
9
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ---------------------------------------------------------------------------------------
MULTI-LINE INSURANCE (1.7%)
303,230 Horace Mann Educators Corp. $ 5,145,813
--------------
OIL & GAS PIPELINES (2.5%)
947,000 El Paso Corp. 7,746,460
--------------
OIL REFINING/MARKETING (1.2%)
58,709 Valero Energy Corp. 3,876,555
--------------
PERSONNEL SERVICES (2.3%)
167,229 Manpower, Inc. 7,062,081
--------------
PHARMACEUTICALS:
GENERIC DRUGS (2.2%)
17,889 Mylan Laboratories, Inc. 311,626
232,310 Watson Pharmaceuticals, Inc.* 6,397,817
--------------
6,709,443
--------------
PROPERTY - CASUALTY INSURERS (1.2%)
94,590 ACE Ltd. (Bermuda) 3,646,445
--------------
PUBLISHING: BOOKS/MAGAZINES (2.5%)
262,330 Scholastic Corp.* 7,673,153
--------------
REAL ESTATE INVESTMENT TRUSTS (4.3%)
231,000 General Growth Properties, Inc. 6,969,270
115,000 Macerich Co. (The) 6,267,500
--------------
13,236,770
--------------
RESTAURANTS (1.9%)
277,530 Darden Restaurants, Inc. 5,830,905
--------------
SAVINGS BANKS (3.2%)
454,490 Sovereign Bancorp, Inc. 9,935,152
--------------
SERVICES TO THE HEALTH INDUSTRY (2.0%)
259,930 IMS Health Inc. 6,064,167
--------------
SPECIALTY INSURANCE (4.8%)
319,380 Assurant, Inc. 8,476,345
150,480 PMI Group, Inc. (The) 6,249,434
--------------
14,725,779
--------------
SPECIALTY STORES (4.0%)
253,950 Linens 'N Things, Inc.* $ 6,369,066
383,540 Office Depot, Inc.* 6,140,475
--------------
12,509,541
--------------
TOTAL COMMON STOCKS
(COST $288,147,644) 304,048,965
--------------
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS
- ------------
SHORT-TERM INVESTMENT (2.0%)
REPURCHASE AGREEMENT
$ 6,280 Joint repurchase agreement account 1.57%
due 09/01/04 (dated 08/31/04; proceeds
$6,280,274)(a) (COST $6,280,000) 6,280,000
--------------
TOTAL INVESTMENTS
(COST $294,427,644)(b) 100.4% 310,328,965
LIABILITIES IN EXCESS OF OTHER
ASSETS (0.4) (1,306,354)
----- --------------
NET ASSETS 100.0% $ 309,022,611
===== ==============
</Table>
- ----------
* NON-INCOME PRODUCING SECURITY.
(a) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(b) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $295,031,055.
THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $26,089,758 AND THE
AGGREGATE GROSS UNREALIZED DEPRECIATION IS $10,791,848, RESULTING IN
NET UNREALIZED APPRECIATION OF $15,297,910.
SEE NOTES TO FINANCIAL STATEMENTS
10
<Page>
MORGAN STANLEY MID-CAP VALUE FUND
SUMMARY OF INVESTMENTS - AUGUST 31, 2004
<Table>
<Caption>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- -------------------------------------------------------------------------------
Electric Utilities $ 26,104,961 8.4%
Medical Specialties 22,686,464 7.3
Specialty Insurance 14,725,779 4.8
Real Estate Investment Trusts 13,236,770 4.3
Specialty Stores 12,509,541 4.0
Aerospace & Defense 11,831,426 3.8
Advertising/Marketing Services 11,727,729 3.8
Chemicals: Specialty 11,410,158 3.7
Contract Drilling 11,375,201 3.7
Savings Banks 9,935,152 3.2
Electrical Products 9,801,091 3.2
Data Processing Services 9,533,539 3.1
Household/Personal Care 9,192,873 3.0
Miscellaneous Commercial Services 7,800,680 2.5
Oil & Gas Pipelines 7,746,460 2.5
Publishing: Books/Magazines 7,673,153 2.5
Major Banks 7,458,600 2.4
Food Retail 7,083,956 2.3
Personnel Services 7,062,081 2.3
Engineering & Construction 6,989,625 2.3
Pharmaceuticals: Generic Drugs $ 6,709,443 2.2%
Containers/Packaging 6,706,462 2.2
Repurchase Agreement 6,280,000 2.0
Services to the Health Industry 6,064,167 2.0
Electronic Production Equipment 5,988,774 1.9
Financial Conglomerates 5,904,780 1.9
Restaurants 5,830,905 1.9
Integrated Oil 5,602,800 1.8
Investment Banks/Brokers 5,598,884 1.8
Auto Parts: O.E.M 5,176,360 1.7
Multi-Line Insurance 5,145,813 1.7
Information Technology Services 4,737,300 1.5
Hotels/Resorts/Cruiselines 4,332,926 1.4
Oil Refining/Marketing 3,876,555 1.2
Property - Casualty Insurers 3,646,445 1.2
Financial Publishing/Services 2,842,112 0.9
------------- -----
$ 310,328,965 100.4%
============= =====
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
11
<Page>
MORGAN STANLEY MID-CAP VALUE FUND
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
AUGUST 31, 2004
<Table>
ASSETS:
Investments in securities, at value (cost $294,427,644) $ 310,328,965
Receivable for:
Investments sold 1,738,657
Shares of beneficial interest sold 458,497
Dividends 377,290
Prepaid expenses and other assets 19,145
---------------
Total Assets 312,922,554
---------------
LIABILITIES:
Payable for:
Investments purchased 3,285,891
Shares of beneficial interest redeemed 267,373
Investment management fee 213,400
Distribution fee 60,736
Accrued expenses and other payables 72,543
---------------
TOTAL LIABILITIES 3,899,943
---------------
NET ASSETS $ 309,022,611
===============
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 263,136,543
Net unrealized appreciation 15,901,321
Net investment loss (2,421)
Accumulated undistributed net realized gain 29,987,168
---------------
NET ASSETS $ 309,022,611
===============
CLASS A SHARES:
Net Assets $ 3,877,576
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 350,106
NET ASSET VALUE PER SHARE $ 11.08
===============
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE) $ 11.69
===============
CLASS B SHARES:
Net Assets $ 60,987,060
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 5,620,371
NET ASSET VALUE PER SHARE $ 10.85
===============
CLASS C SHARES:
Net Assets $ 8,119,074
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 747,633
NET ASSET VALUE PER SHARE $ 10.86
===============
CLASS D SHARES:
Net Assets $ 236,038,901
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 21,178,132
NET ASSET VALUE PER SHARE $ 11.15
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
12
<Page>
Statement of Operations
FOR THE YEAR ENDED AUGUST 31, 2004
<Table>
NET INVESTMENT LOSS:
INCOME
Dividends $ 3,840,094
Interest 107,192
---------------
TOTAL INCOME 3,947,286
---------------
EXPENSES
Investment management fee 2,510,907
Transfer agent fees and expenses 798,244
Distribution fee (Class A shares) 8,530
Distribution fee (Class B shares) 635,412
Distribution fee (Class C shares) 75,224
Registration fees 124,423
Shareholder reports and notices 109,303
Professional fees 68,260
Custodian fees 21,404
Trustees' fees and expenses 2,038
Other 11,985
---------------
TOTAL EXPENSES 4,365,730
---------------
NET INVESTMENT LOSS (418,444)
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain 59,481,420
Net change in unrealized appreciation (31,996,129)
---------------
NET GAIN 27,485,291
---------------
NET INCREASE $ 27,066,847
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
Statement of Changes in Net Assets
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
AUGUST 31, 2004 AUGUST 31, 2003
--------------- ---------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss $ (418,444) $ (873,726)
Net realized gain (loss) 59,481,420 (15,371,350)
Net change in unrealized appreciation/depreciation (31,996,129) 70,528,599
--------------- ---------------
NET INCREASE 27,066,847 54,283,523
Net increase from transactions in shares of beneficial interest 5,687,638 63,479,985
--------------- ---------------
NET INCREASE 32,754,485 117,763,508
NET ASSETS:
Beginning of period 276,268,126 158,504,618
--------------- ---------------
END OF PERIOD
(Including a net investment loss of $2,421 and $0, respectively) $ 309,022,611 $ 276,268,126
=============== ===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
14
<Page>
Morgan Stanley Mid-Cap Value Fund
NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 20041.
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 was organized as a Massachusetts business
trust on April 12, 2001 and 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 Stock Exchange ("NYSE") or American Stock Exchange or other
exchange is valued at its latest sale price prior to the time when assets are
valued; if there were no sales that day, the security is valued at the mean
between the last reported bid and asked price; (2) an equity portfolio security
listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price;
if there were no sales that day, the security is valued at the mean between the
last reported bid and asked price; (3) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the mean
between the last reported bid and asked price. In cases where a security is
traded on more than one exchange, the security is valued on the exchange
designated as the primary market; (4) for equity securities traded on foreign
exchanges, the last reported sale price or the latest bid price may be used if
there were no sales on a particular day; (5) when market quotations are not
readily available or Morgan Stanley Investment Advisors Inc. (the "Investment
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 by the Trustees of the Fund; (6) certain
portfolio securities may be valued by an outside pricing service approved by the
Fund's Trustees; and (7) short-term debt securities having a maturity date of
more than sixty days at time of purchase are valued on a mark-to-market basis
until sixty days prior to maturity and thereafter at amortized cost based on
their value on the 61st day. Short-term debt securities having a maturity date
of sixty days or less at the time of purchase are valued at amortized cost.
15
<Page>
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.
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
16
<Page>
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 $1,840,328
at August 31, 2004.
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, 2004, the distribution fee was accrued for Class A
shares and Class C shares at the annual rate of 0.24% and 0.92%, respectively.
The Distributor has informed the Fund that for the year ended August 31, 2004,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class B shares and Class C shares of $174,462 and $1,246, respectively
and received $49,468 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, 2004 aggregated
$461,713,810 and $456,093,595, respectively.
For the year ended August 31, 2004, the Fund incurred brokerage commissions of
$30,606 with Morgan Stanley & Co., an affiliate of the Investment Manager and
Distributor, for portfolio transactions executed on behalf of the Fund.
Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is
the Fund's transfer agent. At August 31, 2004, the Fund had transfer agent fees
and expenses payable of approximately $4,500.
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
17
<Page>
the deferred amounts credited with a return equal to the total return on one or
more of the Morgan Stanley funds that are offered as investment options under
the Compensation Plan. Appreciation/depreciation and distributions received from
these investments are recorded with an offsetting increase/decrease in the
deferred compensation obligation and do not affect the net asset value of the
Fund.
5. 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 August 31, 2004, the tax-basis components of accumulated earnings were as
follows:
<Table>
Undistributed ordinary income $ 23,372,472
Undistributed long-term gains 7,215,686
------------
Net accumulated earnings 30,588,158
Net unrealized appreciation 15,297,910
------------
Total accumulated earnings $ 45,886,068
============
</Table>
During the year ended August 31, 2004, the Fund utilized its net capital loss
carryforward of $15,087,682.
As of August 31, 2004, the Fund had temporary book/tax differences primarily
attributable to 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 $34, accumulated undistributed net realized gain was charged $415,989
and net investment loss was credited $416,023.
18
<Page>
6. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
AUGUST 31, 2004 AUGUST 31, 2003
-------------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- -------------- -------------- --------------
CLASS A SHARES
Sold 191,872 $ 2,117,784 115,054 $ 961,173
Redeemed (155,519) (1,682,332) (173,866) (1,426,387)
-------------- -------------- -------------- --------------
Net increase (decrease) -- Class A 36,353 435,452 (58,812) (465,214)
-------------- -------------- -------------- --------------
CLASS B SHARES
Sold 1,704,312 18,264,020 1,366,029 11,463,631
Redeemed (1,775,835) (19,169,149) (2,293,090) (18,471,458)
-------------- -------------- -------------- --------------
Net decrease -- Class B (71,523) (905,129) (927,061) (7,007,827)
-------------- -------------- -------------- --------------
CLASS C SHARES
Sold 199,107 2,139,241 227,668 1,891,523
Redeemed (176,524) (1,908,368) (282,157) (2,259,257)
-------------- -------------- -------------- --------------
Net increase (decrease) -- Class C 22,583 230,873 (54,489) (367,734)
-------------- -------------- -------------- --------------
CLASS D SHARES
Sold 6,072,743 66,771,159 13,696,927 111,374,767
Redeemed (5,485,609) (60,844,717) (4,701,478) (40,054,007)
-------------- -------------- -------------- --------------
Net increase -- Class D 587,134 5,926,442 8,995,449 71,320,760
-------------- -------------- -------------- --------------
Net increase in Fund 574,547 $ 5,687,638 7,955,087 $ 63,479,985
============== ============== ============== ==============
</Table>
7. 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
19
<Page>
paid excessive commissions to brokers in return for their efforts to recommend
these funds to investors. The complaint seeks, among other things, unspecified
compensatory damages, rescissionary damages, fees and costs. The defendants have
moved to dismiss the action and intend to otherwise vigorously defend it. 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.
20
<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 FOR THE YEAR OCTOBER 29, 2001*
ENDED ENDED THROUGH
AUGUST 31, 2004 AUGUST 31, 2003 AUGUST 31, 2002
--------------- --------------- -----------------
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 10.11 $ 8.19 $ 10.00
--------------- --------------- -----------------
Income (loss) from investment operations:
Net investment loss^ (0.02) (0.03) (0.04)
Net realized and unrealized gain (loss) 0.99 1.95 (1.76)
--------------- --------------- -----------------
Total income (loss) from investment operations 0.97 1.92 (1.80)
--------------- --------------- -----------------
Less dividends from net investment income -- -- (0.01)
--------------- --------------- -----------------
Net asset value, end of period $ 11.08 $ 10.11 $ 8.19
=============== =============== =================
TOTAL RETURN+ 9.50% 23.44% (17.99)%(1)
RATIOS TO AVERAGE NET ASSETS(3):
Expenses 1.40% 1.47% 1.45%(2)(4)
Net investment loss (0.14)% (0.39)% (0.58)%(2)(4)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 3,878 $ 3,173 $ 3,053
Portfolio turnover rate 151% 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
21
<Page>
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR FOR THE YEAR OCTOBER 29, 2001*
ENDED ENDED THROUGH
AUGUST 31, 2004 AUGUST 31, 2003 AUGUST 31, 2002
--------------- --------------- -----------------
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.98 $ 8.15 $ 10.00
--------------- --------------- -----------------
Income (loss) from investment operations:
Net investment loss^ (0.10) (0.09) (0.10)
Net realized and unrealized gain (loss) 0.97 1.92 (1.75)
--------------- --------------- -----------------
Total income (loss) from investment operations 0.87 1.83 (1.85)
--------------- --------------- -----------------
Less dividends from net investment income -- -- 0.00++
--------------- --------------- -----------------
Net asset value, end of period $ 10.85 $ 9.98 $ 8.15
=============== =============== =================
TOTAL RETURN+ 8.72% 22.45% (18.47)%(1)
RATIOS TO AVERAGE NET ASSETS(3):
Expenses 2.16% 2.24% 2.20%(2)(4)
Net investment loss (0.90)% (1.16)% (1.33)%(2)(4)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 60,987 $ 56,823 $ 53,948
Portfolio turnover rate 151% 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 FOR THE YEAR OCTOBER 29, 2001*
ENDED ENDED THROUGH
AUGUST 31, 2004 AUGUST 31, 2003 AUGUST 31, 2002
--------------- --------------- -----------------
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.98 $ 8.15 $ 10.00
--------------- --------------- -----------------
Income (loss) from investment operations:
Net investment loss^ (0.09) (0.09) (0.10)
Net realized and unrealized gain (loss) 0.97 1.92 (1.75)
--------------- --------------- -----------------
Total income (loss) from investment operations 0.88 1.83 (1.85)
--------------- --------------- -----------------
Less dividends from net investment income -- -- 0.00++
--------------- --------------- -----------------
Net asset value, end of period $ 10.86 $ 9.98 $ 8.15
=============== =============== =================
TOTAL RETURN+ 8.82% 22.45% (18.48)%(1)
RATIOS TO AVERAGE NET ASSETS(3):
Expenses 2.08% 2.24% 2.20%(2)(4)
Net investment loss (0.82)% (1.16)% (1.33)%(2)(4)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 8,119 $ 7,238 $ 6,354
Portfolio turnover rate 151% 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
23
<Page>
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR FOR THE YEAR OCTOBER 29, 2001*
ENDED ENDED THROUGH
AUGUST 31, 2004 AUGUST 31, 2003 AUGUST 31, 2002
--------------- --------------- -----------------
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 10.15 $ 8.21 $ 10.00
--------------- --------------- -----------------
Income (loss) from investment operations:
Net investment income (loss)^ 0.01 (0.01) (0.04)
Net realized and unrealized gain (loss) 0.99 1.95 (1.73)
--------------- --------------- -----------------
Total income (loss) from investment operations 1.00 1.94 (1.77)
--------------- --------------- -----------------
Less dividends from net investment income -- -- (0.02)
--------------- --------------- -----------------
Net asset value, end of period $ 11.15 $ 10.15 $ 8.21
=============== =============== =================
TOTAL RETURN+ 9.75% 23.63% (17.76)%(1)
RATIOS TO AVERAGE NET ASSETS(3):
Expenses 1.16% 1.24% 1.20%(2)(4)
Net investment income (loss) 0.10% (0.16)% (0.33)%(2)(4)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 236,039 $ 209,035 $ 95,150
Portfolio turnover rate 151% 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
24
<Page>
Morgan Stanley Mid-Cap Value Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004, and the related statements of operations for the year
then ended and changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the periods presented.
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 the standards of the Public Company
Accounting Oversight Board (United States). 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, 2004, by correspondence with the custodian and
brokers. 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, 2004, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the periods
presented, in conformity with accounting principles generally accepted in the
United States of America.
Deloitte & Touche LLP
NEW YORK, NEW YORK
OCTOBER 15, 2004
25
<Page>
Morgan Stanley Mid-Cap Value Fund
TRUSTEE AND OFFICER INFORMATION
INDEPENDENT TRUSTEES:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- ------------------------- ----------- ------------ ----------------------------------- ------------- --------------------
Michael Bozic (63) Trustee Since Private Investor; Director or 208 Director of Weirton
c/o Kramer Levin Naftalis April 1994 Trustee of the Retail Funds (since Steel Corporation.
& Frankel LLP April 1994) and the Institutional
Counsel to the Funds (since July 2003); formerly
Independent Trustees Vice Chairman of Kmart Corporation
919 Third Avenue (December 1998-October 2000),
New York, NY Chairman and Chief Executive
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 (71) Trustee Since Managing Director of Summit 208 Director of Franklin
c/o Summit Ventures LLC January 1993 Ventures LLC; Director or Trustee Covey (time
1 Utah Center of the Retail Funds (since January management systems),
201 S. Main Street 1993) and the Institutional Funds BMW Bank of North
Salt Lake City, UT (since July 2003); member of the America, Inc.
Utah Regional Advisory Board of (industrial loan
Pacific Corp.; formerly United corporation), United
States Senator (R-Utah) (1974-1992) Space Alliance
and Chairman, Senate Banking (joint venture
Committee (1980-1986), Mayor of between Lockheed
Salt Lake City, Utah (1971-1974), Martin and the
Astronaut, Space Shuttle Discovery Boeing Company) and
(April 12-19, 1985), and Vice Nuskin Asia Pacific
Chairman, Huntsman Corporation (multilevel
(chemical company). marketing); member
of the board of
various civic and
charitable
organizations.
Wayne E. Hedien (70) Trustee Since Retired; Director or Trustee of the 208 Director of The PMI
c/o Kramer Levin Naftalis September Retail Funds (since September 1997) Group Inc. (private
& Frankel LLP 1997 and the Institutional Funds (since mortgage insurance);
Counsel to the July 2003); formerly associated Trustee and Vice
Independent Trustees with the Allstate Companies Chairman of The
919 Third Avenue (1966-1994), most recently as Field Museum of
New York, NY Chairman of The Allstate Natural History;
Corporation (March 1993-December director of various
1994) and Chairman and Chief other business and
Executive Officer of its charitable
wholly-owned subsidiary, Allstate organizations.
Insurance Company (July
1989-December 1994).
</Table>
26
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- ------------------------- ----------- ------------ ----------------------------------- ------------- --------------------
Dr. Manuel H. Johnson Trustee Since Senior Partner, Johnson Smick 208 Director of NVR,
(55) July 1991 International, Inc., a consulting Inc. (home
c/o Johnson Smick firm; Chairman of the Audit construction);
International, Inc. Committee and Director or Trustee Chairman and Trustee
2099 Pennsylvania of the Retail Funds (since July of the Financial
Avenue, N.W. 1991) and the Institutional Funds Accounting
Suite 950 (since July 2003); Co-Chairman and Foundation
Washington, D.C. a founder of the Group of Seven (oversight
Council (G7C), an international organization of the
economic commission; formerly Vice Financial Accounting
Chairman of the Board of Governors Standards Board);
of the Federal Reserve System and Director of RBS
Assistant Secretary of the U.S. Greenwich Capital
Treasury. Holdings (financial
holding company).
Joseph J. Kearns (62) Trustee Since President, Kearns & Associates LLC 209 Director of Electro
PMB754 July 2003 (investment consulting); Deputy Rent Corporation
23852 Pacific Coast Chairman of the Audit Committee and (equipment leasing),
Highway Director or Trustee of the Retail The Ford Family
Malibu, CA Funds (since July 2003) and the Foundation, and the
Institutional Funds (since August UCLA Foundation.
1994); previously Chairman of the
Audit Committee of the
Institutional Funds (October 2001-
July 2003); formerly CFO of the J.
Paul Getty Trust.
Michael E. Nugent (68) Trustee Since General Partner of Triumph Capital, 208 Director of various
c/o Triumph Capital, L.P. July 1991 L.P., a private investment business
445 Park Avenue partnership; Chairman of the organizations.
New York, NY Insurance Committee and Director or
Trustee of the Retail Funds (since
July 1991) and the Institutional
Funds (since July 2001); formerly
Vice President, Bankers Trust
Company and BT Capital Corporation
(1984-1988).
Fergus Reid (72) Trustee Since Chairman of Lumelite Plastics 209 Trustee and Director
c/o Lumelite Plastics July 2003 Corporation; Chairman of the of certain
Corporation Governance Committee and Director investment companies
85 Charles Colman Blvd. or Trustee of the Retail Funds in the JPMorgan
Pawling, NY (since July 2003) and the Funds complex
Institutional Funds (since June managed by J.P.
1992). Morgan Investment
Management Inc.
</Table>
27
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
INTERESTED TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- ------------------------- ----------- ------------ ----------------------------------- ------------- --------------------
Charles A. Fiumefreddo Chairman of Since Chairman and Director or Trustee of 208 None
(71) the Board July 1991 the Retail Funds (since July 1991)
c/o Morgan Stanley Trust and Trustee and the Institutional Funds (since
Harborside Financial July 2003); formerly Chief
Center, Executive Officer of the Retail
Plaza Two, Funds (until September 2002).
Jersey City, NJ
James F. Higgins (56) Trustee Since Director or Trustee of the Retail 208 Director of AXA
c/o Morgan Stanley Trust June 2000 Funds (since June 2000) and the Financial, Inc. and
Harborside Financial Institutional Funds (since July The Equitable Life
Center, 2003); Senior Advisor of Morgan Assurance Society of
Plaza Two, Stanley (since August 2000); the United States
Jersey City, NJ Director of the Distributor and (financial
Dean Witter Realty Inc.; previously services).
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).
</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. 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.).
28
<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 (51) President Since May President and Chief Operating Officer of Morgan
1221 Avenue of the 1999 Stanley Investment Management Inc.; President,
Americas Director and Chief Executive Officer of the Investment
New York, NY Manager and Morgan Stanley Services; Chairman and
Director of the Distributor; Chairman and Director of
the Transfer Agent; Director of various Morgan Stanley
subsidiaries; President of the Institutional Funds
(since July 2003) and President of the Retail Funds
(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.
Barry Fink (49) Vice Since General Counsel (since May 2000) and Managing Director
1221 Avenue of the President February (since December 2000) of Morgan Stanley Investment
Americas 1997 Management; Managing Director (since December 2000),
New York, NY Secretary (since February 1997) and Director (since
July 1998) of the Investment Manager and Morgan
Stanley Services; Vice President of the Retail Funds;
Assistant Secretary of Morgan Stanley DW; Vice
President of the Institutional Funds (since July
2003); Managing Director, Secretary and Director of
the Distributor; previously Secretary (February
1997-July 2003) and General Counsel (February
1997-April 2004) of the Retail Funds; Vice President
and Assistant General Counsel of the Investment
Manager and Morgan Stanley Services (February
1997-December 2001).
Ronald E. Robison (65) Executive Since Principal Executive Officer-Office of the Funds (since
1221 Avenue of the Vice April 2003 November 2003); Managing Director of Morgan Stanley &
Americas President Co. Incorporated, Managing Director of Morgan Stanley;
New York, NY and Managing Director, Chief Administrative Officer and
Principal Director of the Investment Manager and Morgan Stanley
Executive Services; Chief Executive Officer and Director of the
Officer Transfer Agent; Managing Director and Director of the
Distributor; Executive Vice President and Principal
Executive Officer of the Institutional Funds (since
July 2003) and the Retail Funds (since April 2003);
Director of Morgan Stanley SICAV (since May 2004);
previously President and Director of the Retail Funds
(March 2001-July 2003) and Chief Global Operations
Officer and Managing Director of Morgan Stanley
Investment Management Inc.
Joseph J. McAlinden Vice Since July Managing Director and Chief Investment Officer of the
(61) President 1995 Investment Manager and Morgan Stanley Investment
1221 Avenue of the Management Inc., Director of the Transfer Agent, Chief
Americas Investment Officer of the Van Kampen Funds; Vice
New York, NY President of the Institutional Funds (since July 2003)
and the Retail Funds (since July 1995).
Amy R. Doberman (42) Vice Since July Managing Director and General Counsel, U.S. Investment
1221 Avenue of the President 2004 Management; Managing Director of Morgan Stanley
Americas Investment Management Inc. and the Investment Manager,
New York, NY Vice President of the Institutional and Retail Funds
(since July 2004); previously, Managing Director and
General Counsel - Americas, UBS Global Asset
Management (July 2000 - July 2004) and General
Counsel, Aeltus Investment Management, Inc. (January
1997 - July 2000).
Stefanie V. Chang (37) Vice Since July Executive Director of Morgan Stanley & Co.
1221 Avenue of the President 2003 Incorporated, Morgan Stanley Investment Management
Americas Inc., and the Investment Manager; Vice President of
New York, NY the 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 US LLP).
</Table>
29
<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 J. Smith (39) Treasurer Treasurer Executive Director of the Investment Manager and
c/o Morgan Stanley and since Morgan Stanley Services (since December 2001);
Trust Chief July 2003 previously, Vice President of the Retail Funds
Harborside Financial Financial and Chief (September 2002- July 2003), and Vice President of the
Center, Officer Financial Investment Manager and Morgan Stanley Services (August
Plaza Two, Officer 2000-November 2001) and Senior Manager at
Jersey City, NJ since PricewaterhouseCoopers LLP (January 1998-August 2000).
September
2002
Thomas F. Caloia (58) Vice Since July Executive Director (since December 2002) and Assistant
c/o Morgan Stanley Trust President 2003 Treasurer of the Investment Manager, the Distributor
Harborside Financial and Morgan Stanley Services; previously Treasurer of
Center, the Retail Funds (April 1989-July 2003); formerly
Plaza Two, First Vice President of the Investment Manager, the
Jersey City, NJ Distributor and Morgan Stanley Services.
Mary E. Mullin (37) Secretary Since July Executive Director of Morgan Stanley & Co.
1221 Avenue of the 2003 Incorporated, Morgan Stanley Investment Management
Americas Inc. and the Investment Manager; 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.
30
<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
Amy R. Doberman
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
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]
39917RPT-RA04-00642P-Y08/04
[GRAPHIC]
MORGAN STANLEY FUNDS
MORGAN STANLEY
MID-CAP
VALUE FUND
ANNUAL REPORT
AUGUST 31, 2004
[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) Not applicable.
(d) Not applicable.
(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 4. Principal Accountant Fees and Services.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
2004
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 34,615 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 452 (2) $ 5,067,400 (2)
TAX FEES $ 4,889 (3) $ 545,053 (4)
ALL OTHER FEES $ - $ -
TOTAL NON-AUDIT FEES $ 5,341 $ 5,612,453
TOTAL $ 39,956 $ 5,612,453
</Table>
2003
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 32,700 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 639 (2) $ 1,086,576 (2)
TAX FEES $ 4,952 (3) $ 252,500 (4)
ALL OTHER FEES $ - $ - (5)
TOTAL NON-AUDIT FEES $ 5,591 $ 1,339,076
TOTAL $ 38,291 $ 1,339,076
</Table>
N/A- Not applicable, as not required by Item 4.
(1) Covered Entities include the Adviser (excluding sub-advisors)
and any entity controlling, controlled by or under common
control with the Adviser that provides ongoing services to the
Registrant.
(2) Audit-Related Fees represent assurance and related services
provided that are reasonably related to the performance of the
audit of the financial statements of the Covered Entities' and
funds advised by the Adviser or its affiliates, specifically
data verification and agreed-upon procedures related to asset
securitizations and agreed-upon procedures engagements.
(3) Tax Fees represent tax compliance, tax planning and tax advice
services provided in connection with the preparation and
review of the Registrant's tax returns.
(4) Tax Fees represent tax compliance, tax planning and tax advice
services provided in connection with the review of Covered
Entities' tax returns.
(5) All other fees represent project management for future
business applications and improving business and operational
processes.
<Page>
(e)(1) The audit committee's pre-approval policies and procedures are as
follows:
AUDIT COMMITTEE
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS
AS ADOPTED JULY 31, 2003(1)
1. STATEMENT OF PRINCIPLES
The Audit Committee of the Board is required to review and, in its sole
discretion, pre-approve all Covered Services to be provided by the Independent
Auditors to the Fund and Covered Entities in order to assure that services
performed by the Independent Auditors do not impair the auditor's independence
from the Fund.
The SEC has issued rules specifying the types of services that an
independent auditor may not provide to its audit client, as well as the audit
committee's administration of the engagement of the independent auditor. The
SEC's rules establish two different approaches to pre-approving services, which
the SEC considers to be equally valid. Proposed services either: may be
pre-approved without consideration of specific case-by-case services by the
Audit Committee ("GENERAL PRE-APPROVAL"); or require the specific pre-approval
of the Audit Committee or its delegate ("SPECIFIC PRE-APPROVAL"). The Audit
Committee believes that the combination of these two approaches in this Policy
will result in an effective and efficient procedure to pre-approve services
performed by the Independent Auditors. As set forth in this Policy, unless a
type of service has received general pre-approval, it will require specific
pre-approval by the Audit Committee (or by any member of the Audit Committee to
which pre-approval authority has been delegated) if it is to be provided by the
Independent Auditors. Any proposed services exceeding pre-approved cost levels
or budgeted amounts will also require specific pre-approval by the Audit
Committee.
The appendices to this Policy describe the Audit, Audit-related, Tax and
All Other services that have the general pre-approval of the Audit Committee.
The term of any general pre-approval is 12 months from the date of pre-approval,
unless the Audit Committee considers and provides a different period and states
otherwise. The Audit Committee will annually review and pre-approve the services
that may be provided by the Independent Auditors without obtaining specific
pre-approval from the Audit Committee. The Audit Committee will add to or
subtract from the list of general pre-approved services from time to time, based
on subsequent determinations.
- ----------
(1) This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and
Procedures (the "POLICY"), adopted as of the date above, supercedes and
replaces all prior versions that may have been adopted from time to time.
<Page>
The purpose of this Policy is to set forth the policy and procedures by
which the Audit Committee intends to fulfill its responsibilities. It does not
delegate the Audit Committee's responsibilities to pre-approve services
performed by the Independent Auditors to management.
The Fund's Independent Auditors have reviewed this Policy and believes
that implementation of the Policy will not adversely affect the Independent
Auditors' independence.
2. DELEGATION
As provided in the Act and the SEC's rules, the Audit Committee may
delegate either type of pre-approval authority to one or more of its members.
The member to whom such authority is delegated must report, for informational
purposes only, any pre-approval decisions to the Audit Committee at its next
scheduled meeting.
3. AUDIT SERVICES
The annual Audit services engagement terms and fees are subject to the
specific pre-approval of the Audit Committee. Audit services include the annual
financial statement audit and other procedures required to be performed by the
Independent Auditors to be able to form an opinion on the Fund's financial
statements. These other procedures include information systems and procedural
reviews and testing performed in order to understand and place reliance on the
systems of internal control, and consultations relating to the audit. The Audit
Committee will approve, if necessary, any changes in terms, conditions and fees
resulting from changes in audit scope, Fund structure or other items.
In addition to the annual Audit services engagement approved by the Audit
Committee, the Audit Committee may grant general pre-approval to other Audit
services, which are those services that only the Independent Auditors reasonably
can provide. Other Audit services may include statutory audits and services
associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4,
etc.), periodic reports and other documents filed with the SEC or other
documents issued in connection with securities offerings.
The Audit Committee has pre-approved the Audit services in Appendix B.1.
All other Audit services not listed in Appendix B.1 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
4. AUDIT-RELATED SERVICES
<Page>
Audit-related services are assurance and related services that are
reasonably related to the performance of the audit or review of the Fund's
financial statements and, to the extent they are Covered Services, the Covered
Entities or that are traditionally performed by the Independent Auditors.
Because the Audit Committee believes that the provision of Audit-related
services does not impair the independence of the auditor and is consistent with
the SEC's rules on auditor independence, the Audit Committee may grant general
pre-approval to Audit-related services. Audit-related services include, among
others, accounting consultations related to accounting, financial reporting or
disclosure matters not classified as "Audit services"; assistance with
understanding and implementing new accounting and financial reporting guidance
from rulemaking authorities; agreed-upon or expanded audit procedures related to
accounting and/or billing records required to respond to or comply with
financial, accounting or regulatory reporting matters; and assistance with
internal control reporting requirements under Forms N-SAR and/or N-CSR.
The Audit Committee has pre-approved the Audit-related services in
Appendix B.2. All other Audit-related services not listed in Appendix B.2 must
be specifically pre-approved by the Audit Committee (or by any member of the
Audit Committee to which pre-approval has been delegated).
5. TAX SERVICES
The Audit Committee believes that the Independent Auditors can provide Tax
services to the Fund and, to the extent they are Covered Services, the Covered
Entities, such as tax compliance, tax planning and tax advice without impairing
the auditor's independence, and the SEC has stated that the Independent Auditors
may provide such services.
Pursuant to the preceding paragraph, the Audit Committee has pre-approved
the Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
6. ALL OTHER SERVICES
The Audit Committee believes, based on the SEC's rules prohibiting the
Independent Auditors from providing specific non-audit services, that other
types of non-audit services are permitted. Accordingly, the Audit Committee
believes it may grant general pre-approval to those permissible non-audit
services classified as All Other services that it believes are routine and
recurring services, would not impair the independence of the auditor and are
consistent with the SEC's rules on auditor independence.
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The Audit Committee has pre-approved the All Other services in Appendix
B.4. Permissible All Other services not listed in Appendix B.4 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
7. PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS
Pre-approval fee levels or budgeted amounts for all services to be
provided by the Independent Auditors will be established annually by the Audit
Committee. Any proposed services exceeding these levels or amounts will require
specific pre-approval by the Audit Committee. The Audit Committee is mindful of
the overall relationship of fees for audit and non-audit services in determining
whether to pre-approve any such services.
8. PROCEDURES
All requests or applications for services to be provided by the
Independent Auditors that do not require specific approval by the Audit
Committee will be submitted to the Fund's Chief Financial Officer and must
include a detailed description of the services to be rendered. The Fund's Chief
Financial Officer will determine whether such services are included within the
list of services that have received the general pre-approval of the Audit
Committee. The Audit Committee will be informed on a timely basis of any such
services rendered by the Independent Auditors. Requests or applications to
provide services that require specific approval by the Audit Committee will be
submitted to the Audit Committee by both the Independent Auditors and the Fund's
Chief Financial Officer, and must include a joint statement as to whether, in
their view, the request or application is consistent with the SEC's rules on
auditor independence.
The Audit Committee has designated the Fund's Chief Financial Officer to
monitor the performance of all services provided by the Independent Auditors and
to determine whether such services are in compliance with this Policy. The
Fund's Chief Financial Officer will report to the Audit Committee on a periodic
basis on the results of its monitoring. Both the Fund's Chief Financial Officer
and management will immediately report to the chairman of the Audit Committee
any breach of this Policy that comes to the attention of the Fund's Chief
Financial Officer or any member of management.
9. ADDITIONAL REQUIREMENTS
The Audit Committee has determined to take additional measures on an
annual basis to meet its responsibility to oversee the work of the Independent
Auditors and to assure the auditor's independence from the Fund, such as
reviewing a formal written statement from the Independent Auditors delineating
all relationships between the Independent Auditors and the Fund, consistent with
Independence Standards Board No.
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1, and discussing with the Independent Auditors its methods and procedures for
ensuring independence.
10. COVERED ENTITIES
Covered Entities include the Fund's investment adviser(s) and any entity
controlling, controlled by or under common control with the Fund's investment
adviser(s) that provides ongoing services to the Fund(s). Beginning with
non-audit service contracts entered into on or after May 6, 2003, the Fund's
audit committee must pre-approve non-audit services provided not only to the
Fund but also to the Covered Entities if the engagements relate directly to the
operations and financial reporting of the Fund. This list of Covered Entities
would include:
MORGAN STANLEY RETAIL FUNDS
Morgan Stanley Investment Advisors Inc.
Morgan Stanley & Co. Incorporated
Morgan Stanley DW Inc.
Morgan Stanley Investment Management
Morgan Stanley Investments LP
Van Kampen Asset Management Inc.
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
MORGAN STANLEY INSTITUTIONAL FUNDS
Morgan Stanley Investment Management Inc.
Morgan Stanley Investments LP
Morgan Stanley & Co. Incorporated
Morgan Stanley Distribution, Inc.
Morgan Stanley AIP GP LP
Morgan Stanley Alternative Investment Partners LP
(e)(2) Beginning with non-audit service contracts entered into on or after May
6, 2003, the audit committee also is required to pre-approve services to Covered
Entities to the extent that the services are determined to have a direct impact
on the operations or financial reporting of the Registrant. 100% of such
services were pre-approved by the audit committee pursuant to the Audit
Committee's pre-approval policies and procedures (attached hereto).
(f) Not applicable.
(g) See table above.
(h) The audit committee of the Board of Trustees has considered whether the
provision of services other than audit services performed by the auditors to the
Registrant and
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Covered Entities is compatible with maintaining the auditors' independence in
performing audit services.
Item 5. Audit Committee of Listed Registrants.
Applicable only for reports covering periods ending on or after the earlier of
(i) the first annual shareholder meeting after January 15, 2004 or (ii) October
31, 2004.
Item 6. Schedule of Investments
Refer to Item 1.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Applicable only to annual reports filed by closed-end funds.
Item 8. Closed-End Fund Repurchases
Applicable to reports filed by closed-end funds.
Item 9. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 10 - 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.
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(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 11 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.
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
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
October 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
October 20, 2004
/s/ Francis Smith
Francis Smith
Principal Financial Officer
October 20, 2004