<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: November 30, 2004
Item 1 - Report to Shareholders
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WELCOME, SHAREHOLDER:
IN THIS REPORT, YOU'LL LEARN ABOUT HOW YOUR INVESTMENT IN MORGAN STANLEY KLD
SOCIAL INDEX 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.
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Fund Report
For the year ended November 30, 2004
TOTAL RETURN FOR THE 12 MONTHS ENDED NOVEMBER 30, 2004
<Table>
<Caption>
KLD LARGE LIPPER
CAP LARGE-CAP
SOCIAL(SM) CORE FUNDS
CLASS A CLASS B CLASS C CLASS D INDEX(1) INDEX(2)
10.81% 9.97% 10.12% 11.04% 10.72% 10.06%
</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 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. SEE PERFORMANCE SUMMARY FOR
STANDARDIZED PERFORMANCE INFORMATION.
MARKET CONDITIONS
The U.S. equity markets returned mixed results for the 12 months ending November
30, 2004, facing uncertainty for much of the period but rallying in the final
four months. Early in the period, investors remained focused on high-beta
sectors (those with volatility greater than that of the Russell 1000 Index) as
the threat of interest-rate hikes stayed low, and information technology and
other economically sensitive sectors led the market. Investors began to shift
assets toward more-defensive stocks after Federal Reserve Board Chairman Alan
Greenspan indicated that interest rates would likely rise in the near future and
after more mixed economic data came out. In the second half of the period,
economic growth was generally stronger than expected. The measured pace at which
interest-rate hikes were implemented by the Federal Open Market Committee
beginning June 2004 prevented the shift from seriously affecting market
performance. The labor market saw some improvement during this time, though the
job recovery did not occur at the pace some had expected. Investor confidence
was affected by fears of terrorism during the period, but the completion of the
two major political conventions and the presidential election eventually
provided a bounce for the market. Although rising oil prices were a concern for
investors later in the period, the retreat from a high in oil prices at the end
of October further helped an equities rally at the end of the period.
While all sectors had positive returns for the 12 months under review, some
outperformed others. Energy was the strongest-performing sector, making
significant gains as a result of rising oil prices in the second half of the
period. Utilities also performed well, as these stocks were helped greatly by
rising rates and lower costs of capital resulting from improved balance sheets.
Technology stocks underperformed in comparison, hampered by weak IT spending for
the period.
PERFORMANCE ANALYSIS
Performance for the period was healthy. Classes A and D of the Fund outperformed
both the KLD Large Cap Social(SM) Index* (The KLD Index) and Lipper Large-Cap
Core Funds Index. While Class B of the Fund underperformed both benchmarks,
Class C only outperformed the Lipper Large-Cap Core Funds Index. A number of
holdings across various sectors contributed to the Fund's positive performance
for the period, as gains were not limited to any particular part of the
2
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market. Although the energy, utilities and basic materials sectors were the top
performers for the period, significant contributions were made by holdings in
financial services, technology and telecommunications as well. Among them,
Microsoft and Johnson & Johnson both made gains in April after their earnings
improved, surpassing expectations. AT&T Wireless was helped by the market's
positive reaction to its deal with Cingular. Some of the period's strongest
performers included Apple, Autodesk, Sirius Satellite, Valero Energy and eBay,
which all benefited the Fund to varying degrees. Apple benefited particularly
from impressive sales of its iPods over the period, while Valero was able to
capitalize on its refining margins. EBay was helped by a pickup in online sales
transactions, and Sirius made gains after signing radio talent Howard Stern.
While positive performance was driven by holdings across many sectors, the
stocks that hampered the Fund's gains were also not limited to any one sector.
Intel was one of the largest detractors from performance, as it suffered from
earnings disappointments early in the year. The technology stocks Cisco, Applied
Materials and Veritas were all hurt by a drop in overall technology spending and
unexpectedly low earnings for the sector as a whole. Within health care, Merck
became a hindrance on performance after suffering from problems that led to the
recall of its drug Vioxx.
* THE KLD LARGE CAP SOCIAL(SM) INDEX IS DERIVED FROM THE CONSTITUENTS OF 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.
THE INVESTMENT PERFORMANCE OF THE KLD SOCIAL INDEX DOES NOT INCLUDE ANY
EXPENSES, SALES CHARGES OR FEES. INDEXES ARE UNMANAGED AND SUCH COSTS WOULD
LOWER PERFORMANCE. AS A RESULT, THE FUND'S PERFORMANCE WILL NOT EXACTLY TRACK
THE PERFORMANCE OF THE INDEX. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
THERE IS NO GUARANTEE THAT ANY SECURITIES MENTIONED WILL CONTINUE TO PERFORM
WELL OR BE HELD BY THE FUND IN THE FUTURE.
3
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TOP 10 HOLDINGS
<Table>
Microsoft Corp. 3.2%
Johnson & Johnson 2.3
International Business Machines Corp. 2.1
American International Group, Inc. 1.9
Intel Corp. 1.9
Procter & Gamble Co. (The) 1.8
J.P. Morgan Chase & Co. 1.7
Cisco Systems, Inc. 1.6
Verizon Communications, Inc. 1.5
Wells Fargo & Co. 1.3
</Table>
TOP FIVE INDUSTRIES
<Table>
Packaged Software 4.8%
Major Banks 4.2
Major Telecommunications 4.0
Semiconductors 3.7
Household/Personal Care 3.5
</Table>
DATA AS OF NOVEMBER 30, 2004. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR TOP
10 HOLDINGS AND TOP FIVE INDUSTRIES ARE AS A PERCENTAGE OF NET ASSETS. THESE
DATA ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED A
RECOMMENDATION TO BUY OR SELL THE SECURITIES MENTIONED. MORGAN STANLEY IS A
FULL-SERVICE SECURITIES FIRM ENGAGED IN SECURITIES TRADING AND BROKERAGE
ACTIVITIES, INVESTMENT BANKING, RESEARCH AND ANALYSIS, FINANCING AND FINANCIAL
ADVISORY SERVICES.
INVESTMENT STRATEGY
THE FUND WILL NORMALLY INVEST AT LEAST 80 PERCENT OF ITS ASSETS IN COMMON STOCKS
OF 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 1,000 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.
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 WEB SITE, www.morganstanley.com. EACH MORGAN
STANLEY FUND ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC
FOR THE FUND'S FIRST AND THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES
NOT DELIVER THE REPORTS FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS,
NOR ARE THE REPORTS POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY,
HOWEVER, OBTAIN THE FORM N-Q FILINGS
4
<Page>
(AS WELL AS THE FORM N-CSR AND N-CSRS FILINGS) BY ACCESSING THE SEC'S WEB SITE,
http://www.sec.gov. YOU MAY ALSO REVIEW AND COPY THEM AT THE SEC'S PUBLIC
REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE OPERATION OF THE SEC'S
PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE SEC AT (800) SEC-0330. YOU
CAN ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT OF A DUPLICATING FEE,
BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS (publicinfo@sec.gov) OR BY
WRITING THE PUBLIC REFERENCE SECTION OF THE SEC, WASHINGTON, DC 20549-0102. 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 NOVEMBER 30, 2004, IS AVAILABLE WITHOUT CHARGE, UPON
REQUEST, BY CALLING (800) 869-NEWS OR BY VISITING THE MUTUAL FUND CENTER ON OUR
WEB SITE AT www.morganstanley.com. THIS INFORMATION IS ALSO AVAILABLE ON THE
SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT http://www.sec.gov.
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
<Table>
<Caption>
CLASS A^ CLASS B^ CLASS C^ CLASS D^ KLD INDEX(1) LIPPER(2)
------------- ------------- ------------- ------------- ------------- -------------
July 13, 2001 $ 9,475 $ 10,000 $ 10,000 $ 10,000 $ 10,000 $ 10,000
August 31, 2001 $ 8,783 $ 9,260 $ 9,260 $ 9,270 $ 9,272 $ 9,403
November 30, 2001 $ 8,897 $ 9,360 $ 9,360 $ 9,400 $ 9,407 $ 9,477
February 28, 2002 $ 8,524 $ 8,945 $ 8,946 $ 9,004 $ 9,015 $ 9,275
May 31, 2002 $ 8,334 $ 8,735 $ 8,736 $ 8,812 $ 8,822 $ 9,023
August 31, 2002 $ 7,048 $ 7,374 $ 7,382 $ 7,464 $ 7,485 $ 7,840
November 30, 2002 $ 7,362 $ 7,684 $ 7,683 $ 7,786 $ 7,848 $ 7,969
February 28, 2003 $ 6,638 $ 6,908 $ 6,914 $ 7,025 $ 7,080 $ 7,254
May 31, 2003 $ 7,635 $ 7,936 $ 7,946 $ 8,090 $ 8,203 $ 8,234
August 31, 2003 $ 8,061 $ 8,360 $ 8,361 $ 8,540 $ 8,683 $ 8,610
November 30, 2003 $ 8,593 $ 8,894 $ 8,898 $ 9,114 $ 9,258 $ 8,990
February 29, 2004 $ 9,210 $ 9,528 $ 9,524 $ 9,778 $ 9,939 $ 9,668
May 31, 2004 $ 9,102 $ 9,386 $ 9,392 $ 9,654 $ 9,796 $ 9,464
August 31, 2004 $ 8,878 $ 9,134 $ 9,148 $ 9,427 $ 9,529 $ 9,298
November 30, 2004 $ 9,522 $ 9,587 $ 9,798 $ 10,120 $ 10,250 $ 9,894
</Table>
6
<Page>
AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED NOVEMBER 30, 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 10.81%(3) 9.97%(3) 10.12%(3) 11.04%(3)
5.00(4) 4.97(4) 9.12(4) --
SINCE INCEPTION 0.15(3) (0.65)(3) (0.60)(3) 0.35(3)
(1.44)(4) (1.24)(4) (0.60)(4) --
</Table>
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF
FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES
SHOWN. FOR 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 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. THE 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.
^ ENDING VALUE ASSUMING A COMPLETE REDEMPTION ON NOVEMBER 30, 2004.
7
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Expense Example
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments and redemption fees;
and (2) ongoing costs, including 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 06/01/04 - 11/30/04.
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 and do not reflect any transactional costs, such as sales
charges (loads) and redemption fees. Therefore, the second line of the table is
useful in comparing ongoing costs, and will not help you determine the relative
total cost of owning different funds. In addition, if these transactional costs
were included, your costs would have been higher.
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
06/01/04 -
06/01/04 11/30/04 11/30/04
------------- ------------- ---------------
CLASS A
Actual (4.61% return) $ 1,000.00 $ 1,046.10 $ 1.28
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,023.75 $ 1.26
CLASS B
Actual (4.20% return) $ 1,000.00 $ 1,042.00 $ 5.11
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,020.00 $ 5.05
CLASS C
Actual (4.32% return) $ 1,000.00 $ 1,043.20 $ 5.11
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,020.00 $ 5.05
CLASS D
Actual (4.82% return) $ 1,000.00 $ 1,048.20 $ 0.00
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,025.00 $ 0.00
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.25%, 1.00%,
1.00% AND 0% RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER
THE PERIOD, MULTIPLIED BY 183/366 (TO REFLECT THE ONE-HALF YEAR PERIOD).
IF THE FUND HAD BORNE ALL OF ITS EXPENSES, THE ANNUALIZED EXPENSE RATIOS
WOULD HAVE BEEN 3.53%, 4.28%, 4.28% AND 3.28%, RESPECTIVELY.
8
<Page>
MORGAN STANLEY KLD SOCIAL INDEX FUND
PORTFOLIO OF INVESTMENTS - NOVEMBER 30, 2004
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------
COMMON STOCKS (91.5%)
ADVERTISING/MARKETING
SERVICES (0.3%)
271 Lamar Advertising Co.
(Class A)* $ 10,688
494 Omnicom Group, Inc. 40,014
---------------
50,702
---------------
AIR FREIGHT/COURIERS (1.1%)
261 C.H. Robinson Worldwide, Inc. 14,029
256 Expeditors International of
Washington, Inc. 13,635
761 FedEx Corp. 72,318
1,456 United Parcel Service, Inc.
(Class B) 122,522
---------------
222,504
---------------
AIRLINES (0.2%)
2,183 Southwest Airlines Co. 34,339
---------------
APPAREL/FOOTWEAR (0.2%)
490 Coach, Inc.* 24,421
340 Liz Claiborne, Inc. 13,964
---------------
38,385
---------------
APPAREL/FOOTWEAR RETAIL (0.7%)
207 Chico's FAS, Inc.* 7,990
540 Foot Locker, Inc. 14,029
1,634 Gap, Inc. (The) 35,703
1,054 Limited Brands, Inc. 25,760
280 Nordstrom, Inc. 12,250
442 Ross Stores, Inc. 11,890
1,256 TJX Companies, Inc. (The) 29,566
---------------
137,188
---------------
AUTO PARTS: O.E.M. (0.4%)
290 Autoliv, Inc. 13,554
436 Dana Corp. 7,129
1,574 Delphi Corp. 14,166
287 Gentex Corp. 9,276
536 Johnson Controls, Inc. 32,910
200 Lear Corp. 11,600
---------------
88,635
---------------
BEVERAGES: NON-ALCOHOLIC (1.2%)
5,374 Coca-Cola Co. (The) $ 211,252
568 Coca-Cola Enterprises Inc. 11,814
412 Pepsi Bottling Group, Inc. (The) 11,544
---------------
234,610
---------------
BIOTECHNOLOGY (1.9%)
3,301 Amgen Inc.* 198,192
865 Biogen Idec Inc.* 50,758
155 Cephalon, Inc.* 7,367
577 Genzyme Corp.* 32,318
1,090 Gilead Sciences, Inc.* 37,561
158 Invitrogen Corp.* 9,559
654 MedImmune, Inc.* 17,396
913 Millennium
Pharmaceuticals, Inc.* 11,522
104 OSI Pharmaceuticals Inc.* 4,948
---------------
369,621
---------------
BROADCASTING (0.3%)
3,209 Sirius Satellite Radio Inc.* 21,308
623 Univision Communications Inc.
(Class A)* 18,752
354 XM Satellite Radio Holdings Inc.
(Class A)* 13,066
---------------
53,126
---------------
BUILDING PRODUCTS (0.3%)
597 American Standard
Companies, Inc.* 23,247
1,134 Masco Corp. 39,996
---------------
63,243
---------------
CABLE/SATELLITE TV (1.4%)
5,456 Comcast Corp. (Class A)* 163,898
578 Cox Communications, Inc.
(Class A)* 20,039
6,981 Liberty Media Corp. (Class A)* 72,114
340 Liberty Media International, Inc.
(Class A)* 14,640
---------------
270,691
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
9
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------
CHEMICALS: MAJOR
DIVERSIFIED (0.2%)
801 Engelhard Corp. $ 23,942
298 Rohm & Haas Co. 13,139
---------------
37,081
---------------
CHEMICALS: SPECIALTY (0.4%)
579 Air Products & Chemicals, Inc. 33,148
828 Praxair, Inc. 37,177
256 Sigma-Aldrich Corp. 15,291
---------------
85,616
---------------
COMMERCIAL PRINTING/
FORMS (0.1%)
619 Donnelley (R.R.) & Sons Co. 21,479
---------------
COMPUTER
COMMUNICATIONS (2.0%)
1,213 Avaya Inc.* 19,918
17,228 Cisco Systems, Inc.* 322,336
1,482 Juniper Networks, Inc.* 40,799
305 QLogic Corp.* 10,489
---------------
393,542
---------------
COMPUTER PERIPHERALS (0.8%)
6,166 EMC Corp.* 82,748
331 Lexmark International, Inc.* 28,102
799 Network Appliance, Inc.* 24,098
300 Storage Technology Corp.* 8,742
190 Zebra Technologies Corp.
(Class A)* 9,553
---------------
153,243
---------------
COMPUTER PROCESSING
HARDWARE (2.8%)
968 Apple Computer, Inc.* 64,905
6,450 Dell Inc.* 261,354
7,775 Hewlett-Packard Co. 155,500
229 NCR Corp.* 13,678
8,482 Sun Microsystems, Inc.* 47,075
---------------
542,512
---------------
CONSTRUCTION MATERIALS (0.1%)
261 Vulcan Materials Co. 13,533
---------------
CONTAINERS/PACKAGING (0.2%)
387 Pactiv Corp.* $ 9,617
219 Sealed Air Corp.* 11,259
157 Temple-Inland, Inc. 9,355
---------------
30,231
---------------
CONTRACT DRILLING (0.2%)
555 ENSCO International Inc. 17,377
620 Patterson-UTI Energy, Inc. 12,400
215 Rowan Companies, Inc.* 5,569
---------------
35,346
---------------
DATA PROCESSING SERVICES (0.8%)
1,511 Automatic Data Processing, Inc. 68,796
591 Ceridian Corp.* 11,176
236 DST Systems, Inc.* 11,505
493 Fiserv, Inc.* 18,985
825 Paychex, Inc. 27,357
773 SunGard Data Systems Inc.* 20,492
---------------
158,311
---------------
DEPARTMENT STORES (0.6%)
764 Kohl's Corp.* 35,266
752 May Department Stores Co. 21,146
649 Penney (J.C.) Co., Inc. 25,052
641 Sears, Roebuck & Co. 33,351
---------------
114,815
---------------
DISCOUNT STORES (1.1%)
1,169 Costco Wholesale Corp. 56,813
777 Dollar General Corp. 15,346
273 Dollar Tree Stores, Inc.* 7,598
414 Family Dollar Stores, Inc. 12,130
2,326 Target Corp. 119,138
---------------
211,025
---------------
DRUGSTORE CHAINS (0.7%)
1,012 CVS Corp. 45,914
2,610 Walgreen Co. 99,650
---------------
145,564
---------------
ELECTRIC UTILITIES (0.2%)
1,606 AES Corp. (The)* 19,658
133 Allete Inc. 4,841
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
10
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------
600 Pepco Holdings, Inc. $ 12,804
---------------
37,303
---------------
ELECTRICAL PRODUCTS (0.6%)
461 American Power
Conversion Corp. 9,745
1,074 Emerson Electric Co. 71,765
253 Energizer Holdings, Inc.* 11,815
116 Hubbell, Inc. (Class B) 5,638
504 Molex Inc. 13,895
---------------
112,858
---------------
ELECTRONIC COMPONENTS (0.2%)
586 Jabil Circuit, Inc.* 14,685
378 SanDisk Corp.* 8,535
2,800 Solectron Corp.* 17,500
472 Vishay Intertechnology, Inc.* 6,896
---------------
47,616
---------------
ELECTRONIC DISTRIBUTORS (0.1%)
400 Arrow Electronics, Inc.* 9,812
209 CDW Corp. 13,736
---------------
23,548
---------------
ELECTRONIC EQUIPMENT/
INSTRUMENTS (0.5%)
285 Diebold, Inc. 15,162
4,254 JDS Uniphase Corp.* 13,485
360 Scientific-Atlanta, Inc. 10,663
381 Tektronix, Inc. 11,952
460 Thermo Electron Corp.* 13,915
1,995 Xerox Corp.* 30,564
---------------
95,741
---------------
ELECTRONIC PRODUCTION
EQUIPMENT (0.7%)
4,295 Applied Materials, Inc.* 71,469
770 Cadence Design
Systems, Inc.* 10,580
539 KLA-Tencor Corp.* 24,287
593 Lam Research Corp.* 15,424
391 Novellus Systems, Inc.* 10,533
357 Synopsys, Inc.* 6,294
---------------
138,587
---------------
ELECTRONICS/APPLIANCE
STORES (0.3%)
674 Best Buy Co., Inc. $ 38,000
631 Circuit City Stores - Circuit
City Group 9,838
597 RadioShack Corp. 18,847
---------------
66,685
---------------
ELECTRONICS/APPLIANCES (0.2%)
170 Harman International
Industries, Inc. 20,885
219 Whirlpool Corp. 14,136
---------------
35,021
---------------
FINANCE/RENTAL/LEASING (3.0%)
325 Allied Capital Corp. 8,977
610 Capital One Financial Corp. 47,934
539 CIT Group, Inc. 23,042
1,423 Countrywide Financial Corp. 47,258
337 Doral Financial Corp.
(Puerto Rico) 15,637
2,469 Fannie Mae 169,620
1,754 Freddie Mac 119,728
2,894 MBNA Corp. 76,865
809 Providian Financial Corp.* 12,984
138 Ryder System, Inc. 7,402
1,118 SLM Corp. 57,208
---------------
586,655
---------------
FINANCIAL CONGLOMERATES (3.2%)
2,875 American Express Co. 160,166
9,079 J.P. Morgan Chase & Co. 341,824
813 Principal Financial Group, Inc. 30,634
1,364 Prudential Financial, Inc. 66,768
832 State Street Corp. 37,074
---------------
636,466
---------------
FINANCIAL PUBLISHING/
SERVICES (0.4%)
230 Dun & Bradstreet Corp.* 13,653
508 McGraw-Hill Companies,
Inc. (The) 44,567
334 Moody's Corp. 26,970
---------------
85,190
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
11
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------
FOOD DISTRIBUTORS (0.3%)
1,627 SYSCO Corp. $ 56,538
---------------
FOOD RETAIL (0.5%)
974 Albertson's, Inc. 24,642
1,919 Kroger Co.* 31,049
1,206 Safeway Inc.* 23,252
408 Supervalu, Inc. 12,889
129 Whole Foods Market, Inc. 11,709
---------------
103,541
---------------
FOOD: MAJOR DIVERSIFIED (1.7%)
560 Campbell Soup Co. 15,977
738 General Mills, Inc. 33,572
978 Heinz (H.J.) Co. 36,342
621 Kellogg Co. 27,138
4,349 PepsiCo, Inc. 217,058
---------------
330,087
---------------
FOOD: MEAT/FISH/DAIRY (0.1%)
391 Dean Foods Co.* 12,383
---------------
FOOD: SPECIALTY/CANDY (0.4%)
464 Hershey Foods Corp. 24,035
349 McCormick & Co., Inc.
(Non-Voting) 12,721
100 Smucker (J.M.) Co. 4,548
406 Wrigley (Wm.) Jr. Co. 27,933
---------------
69,237
---------------
GAS DISTRIBUTORS (0.4%)
397 Equitable Resources, Inc. 23,621
487 KeySpan Corp. 19,246
811 NiSource, Inc. 17,672
300 Questar Corp. 15,243
---------------
75,782
---------------
HOME BUILDING (0.4%)
342 Centex Corp. 17,945
675 D.R. Horton, Inc. 23,767
130 KB Home 11,426
298 Lennar Corp. (Class A) 13,389
271 Pulte Homes, Inc. 14,975
---------------
81,502
---------------
HOME FURNISHINGS (0.2%)
564 Leggett & Platt, Inc. $ 16,836
160 Mohawk Industries, Inc.* 14,032
704 Newell Rubbermaid, Inc. 16,248
---------------
47,116
---------------
HOME IMPROVEMENT
CHAINS (1.8%)
200 Fastenal Co. 12,232
5,712 Home Depot, Inc. (The) 238,476
2,003 Lowe's Companies, Inc. 110,826
---------------
361,534
---------------
HOSPITAL/NURSING
MANAGEMENT (0.2%)
709 Health Management Associates,
Inc. (Class A) 15,662
312 Manor Care, Inc. 10,748
192 Triad Hospitals, Inc.* 7,045
---------------
33,455
---------------
HOUSEHOLD/PERSONAL CARE (3.5%)
214 Alberto-Culver Co. (Class B) 9,908
1,202 Avon Products, Inc. 45,123
415 Clorox Co. (The) 22,875
1,355 Colgate-Palmolive Co. 62,317
310 Estee Lauder Companies, Inc.
(The) (Class A) 13,528
2,556 Gillette Co. (The) 111,160
1,277 Kimberly-Clark Corp. 81,230
6,550 Procter & Gamble Co. (The) 350,294
---------------
696,435
---------------
INDUSTRIAL CONGLOMERATES (0.9%)
1,992 3M Co. 158,543
218 SPX Corp. 8,962
---------------
167,505
---------------
INDUSTRIAL MACHINERY (0.3%)
674 Illinois Tool Works Inc. 63,511
---------------
INDUSTRIAL SPECIALTIES (0.1%)
510 Ecolab Inc. 17,840
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
12
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------
INFORMATION TECHNOLOGY
SERVICES (2.5%)
471 Citrix Systems, Inc.* $ 11,120
372 Cognizant Technology
Solutions Corp.* 14,184
1,297 Electronic Data Systems Corp. 29,118
4,294 International Business
Machines Corp. 404,667
918 PeopleSoft, Inc.* 21,674
846 Unisys Corp.* 9,720
---------------
490,483
---------------
INSURANCE BROKERS/
SERVICES (0.2%)
189 Gallagher (Arthur J.) & Co. 5,793
1,333 Marsh & McLennan
Companies,Inc. 38,110
---------------
43,903
---------------
INTERNET RETAIL (0.3%)
788 Amazon.com, Inc.* 31,268
1,055 IAC/InterActiveCorp.* 26,048
---------------
57,316
---------------
INTERNET SOFTWARE/
SERVICES (0.8%)
900 BEA Systems, Inc.* 7,272
1,089 Siebel Systems, Inc.* 10,977
641 VeriSign, Inc.* 21,089
2,916 Yahoo! Inc.* 109,700
---------------
149,038
---------------
INVESTMENT BANKS/BROKERS (1.5%)
577 Ameritrade Holding Corp.* 8,038
300 Edwards (A.G.), Inc. 11,730
833 Goldman Sachs Group, Inc.
(The) 87,265
285 Legg Mason, Inc. 19,420
2,441 Merrill Lynch & Co., Inc. 135,988
2,559 Schwab (Charles) Corp. (The) 27,586
---------------
290,027
---------------
INVESTMENT MANAGERS (0.5%)
284 Eaton Vance Corp.
(Non-Voting) 13,618
409 Franklin Resources, Inc. $ 26,843
100 Investors Financial
Services Corp. 4,384
633 Janus Capital Group, Inc. 10,476
1,102 Mellon Financial Corp. 32,200
267 Price (T.) Rowe Group, Inc. 15,796
---------------
103,317
---------------
LIFE/HEALTH INSURANCE (0.5%)
1,295 AFLAC, Inc. 48,718
376 Jefferson-Pilot Corp. 18,495
484 Lincoln National Corp. 22,274
693 UnumProvident Corp. 10,790
---------------
100,277
---------------
MAJOR BANKS (4.2%)
1,430 BB&T Corp. 60,703
475 Comerica, Inc. 29,213
1,115 KeyCorp 37,118
1,514 National City Corp. 56,139
725 PNC Financial Services Group 39,440
852 Popular, Inc. 22,578
1,174 Regions Financial Corp. 41,078
835 SunTrust Banks, Inc. 59,536
170 UnionBanCal Corp. 10,511
4,097 Wachovia Corp. 212,020
4,300 Wells Fargo & Co. 265,611
---------------
833,947
---------------
MAJOR TELECOMMUNICATIONS (4.0%)
849 ALLTEL Corp. 48,130
2,022 AT&T Corp. 37,003
4,674 BellSouth Corp. 125,357
8,438 SBC Communications, Inc. 212,384
3,634 Sprint Corp. (FON Group) 82,891
7,059 Verizon Communications Inc. 291,043
---------------
796,808
---------------
MANAGED HEALTH CARE (2.0%)
388 Aetna, Inc. 45,982
352 Anthem, Inc.* 35,668
1,296 Caremark Rx, Inc.* 46,345
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------
360 CIGNA Corp. $ 25,207
190 Coventry Health Care, Inc.* 9,430
392 Health Net Inc.* 10,670
461 Humana, Inc.* 11,442
230 PacifiCare Health
Systems, Inc.* 11,132
1,701 UnitedHealth Group Inc. 140,928
396 WellPoint Health
Networks, Inc.* 49,540
---------------
386,344
---------------
MEDIA CONGLOMERATES (1.7%)
5,229 Disney (Walt) Co. (The) 140,555
11,176 Time Warner, Inc.* 197,927
---------------
338,482
---------------
MEDICAL DISTRIBUTORS (0.5%)
1,103 Cardinal Health, Inc. 57,665
131 Henry Schein, Inc.* 8,538
709 McKesson Corp. 20,951
310 Patterson Companies Inc.* 12,667
---------------
99,821
---------------
MEDICAL SPECIALTIES (3.2%)
585 Applera Corp. - Applied
Biosystems Group 11,992
370 Bard (C.R.), Inc. 22,167
168 Bausch & Lomb, Inc. 9,892
1,561 Baxter International, Inc. 49,406
176 Beckman Coulter, Inc. 11,521
665 Becton, Dickinson & Co. 36,429
668 Biomet, Inc. 31,977
1,685 Boston Scientific Corp.* 58,655
259 Cytyc Corp.* 6,951
242 DENTSPLY International, Inc. 12,732
325 Fisher Scientific
International, Inc.* 18,375
799 Guidant Corp. 51,799
182 Hillenbrand Industries, Inc. 10,010
3,088 Medtronic, Inc. 148,378
904 St. Jude Medical, Inc.* 34,478
729 Stryker Corp. $ 32,069
488 Varian Medical Systems, Inc.* 20,535
324 Waters Corp.* 15,118
621 Zimmer Holdings, Inc.* 50,674
---------------
633,158
---------------
MEDICAL/NURSING SERVICES (0.1%)
402 DaVita, Inc.* 13,355
290 Lincare Holdings, Inc.* 11,191
---------------
24,546
---------------
MISCELLANEOUS COMMERCIAL
SERVICES (0.2%)
400 Adesa Inc. 7,984
282 Iron Mountain Inc.* 8,497
600 Sabre Holdings Corp. 13,848
---------------
30,329
---------------
MISCELLANEOUS
MANUFACTURING (0.1%)
380 Pentair, Inc. 15,208
---------------
MOTOR VEHICLES (0.2%)
757 Harley-Davidson, Inc. 43,770
---------------
MULTI-LINE INSURANCE (2.2%)
5,855 American International
Group, Inc. 370,914
744 Hartford Financial
Services Group, Inc. (The) 47,616
421 Safeco Corp. 20,406
---------------
438,936
---------------
OFFICE EQUIPMENT/SUPPLIES (0.2%)
275 Avery Dennison Corp. 16,131
671 Pitney Bowes, Inc. 29,370
---------------
45,501
---------------
OIL & GAS PIPELINES (0.2%)
312 Kinder Morgan, Inc. 21,622
1,268 Williams Companies, Inc. (The) 21,137
---------------
42,759
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
14
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------
OIL & GAS PRODUCTION (1.3%)
664 Anadarko Petroleum Corp. $ 46,214
812 Apache Corp. 43,897
1,178 Chesapeake Energy Corp. 21,204
1,220 Devon Energy Corp. 50,532
362 EOG Resources, Inc. 27,175
190 Newfield Exploration Co.* 11,942
254 Noble Energy, Inc. 16,203
306 Pioneer Natural Resources Co. 10,771
200 Pogo Producing Co. 10,100
651 XTO Energy Inc. 23,664
---------------
261,702
---------------
OIL REFINING/MARKETING (0.3%)
227 Sunoco, Inc. 18,741
704 Valero Energy Corp. 32,940
---------------
51,681
---------------
OILFIELD SERVICES/
EQUIPMENT (0.1%)
145 National-Oilwell, Inc.* 5,249
287 Smith International, Inc.* 17,384
---------------
22,633
---------------
OTHER CONSUMER SERVICES (1.0%)
390 Apollo Group, Inc. (Class A)* 31,083
284 Career Education Corp.* 11,048
1,323 eBay Inc.* 148,771
---------------
190,902
---------------
PACKAGED SOFTWARE (4.8%)
608 Adobe Systems, Inc. 36,820
358 Autodesk, Inc. 23,417
664 BMC Software, Inc.* 12,337
1,069 Compuware Corp.* 6,168
465 Intuit Inc.* 19,456
247 Mercury Interactive Corp.* 11,266
23,379 Microsoft Corp.** 626,791
985 Novell, Inc.* 6,009
9,623 Oracle Corp.* 121,827
317 Red Hat, Inc.* 4,590
794 Symantec Corp.* 50,665
1,116 VERITAS Software Corp.* 24,440
---------------
943,786
---------------
PERSONNEL SERVICES (0.1%)
270 Manpower, Inc. $ 13,060
552 Robert Half International, Inc. 14,920
---------------
27,980
---------------
PHARMACEUTICALS: GENERIC
DRUGS (0.2%)
204 Barr Pharmaceuticals Inc.* 7,966
736 Mylan Laboratories, Inc. 13,366
473 Watson Pharmaceuticals, Inc.* 13,741
---------------
35,073
---------------
PHARMACEUTICALS: MAJOR (3.1%)
7,564 Johnson & Johnson 456,261
5,662 Merck & Co., Inc. 158,649
---------------
614,910
---------------
PHARMACEUTICALS: OTHER (0.4%)
330 Allergan, Inc. 24,255
937 Forest Laboratories, Inc.* 36,515
757 King Pharmaceuticals, Inc.* 9,425
203 Sepracor, Inc.* 9,035
---------------
79,230
---------------
PROPERTY - CASUALTY
INSURERS (0.9%)
268 Berkley (W.R.) Corp. 12,154
483 Chubb Corp. (The) 36,809
525 Cincinnati Financial Corp. 23,520
553 Progressive Corp. (The) 50,317
1,699 St. Paul Travelers Companies,
Inc. (The) 61,980
---------------
184,780
---------------
PUBLISHING: NEWSPAPERS (0.3%)
372 New York Times Co. (The)
(Class A) 15,252
162 Scripps (E.W.) Co. (Class A) 7,572
633 Tribune Co. 27,453
18 Washington Post Co. (The)
(Class B) 16,884
---------------
67,161
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
15
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------
PULP & PAPER (0.1%)
526 MeadWestvaco Corp. $ 17,700
---------------
RAILROADS (0.2%)
999 Norfolk Southern Corp. 34,296
---------------
REAL ESTATE INVESTMENT
TRUSTS (1.8%)
440 Archstone-Smith Trust 16,060
340 Boston Properties, Inc. 20,461
352 Catellus Development Corp. 11,053
199 Developers Diversified
Realty Corp. 8,567
492 Duke Realty Corp. 16,998
1,068 Equity Office Properties Trust 29,317
772 Equity Residential 26,024
636 General Growth Properties, Inc. 21,821
460 Health Care Property
Investors, Inc. 12,342
172 Hospitality Properties Trust 7,730
1,024 Host Marriott Corp. 16,036
423 iStar Financial Inc. 18,570
380 Kimco Realty Corp. 21,614
340 Liberty Property Trust 13,940
104 Mack-Cali Realty Corp. 4,549
300 New Plan Excel Realty Trust 7,944
629 Plum Creek Timber Co., Inc. 23,273
533 ProLogis Trust 21,442
315 Public Storage, Inc. 16,815
408 Simon Property Group, Inc. 25,329
275 Vornado Realty Trust 20,212
---------------
360,097
---------------
RECREATIONAL PRODUCTS (0.4%)
259 Brunswick Corp. 12,644
751 Electronic Arts Inc.* 36,724
1,299 Mattel, Inc. 24,616
---------------
73,984
---------------
REGIONAL BANKS (2.5%)
908 AmSouth Bancorporation 23,545
100 Bank of Hawaii Corp. 4,855
575 Banknorth Group, Inc. 20,683
113 City National Corp. $ 7,729
258 Colonial BancGroup, Inc. (The) 5,477
184 Commerce Bancorp, Inc. 11,495
427 Compass Bancshares, Inc. 19,881
1,227 Fifth Third Bancorp 61,792
382 First Horizon National Corp. 16,693
949 Hibernia Corp. (Class A) 27,445
178 M&T Bank Corp. 18,763
566 Marshall & Ilsley Corp. 23,597
1,198 North Fork Bancorporation, Inc. 34,502
557 Northern Trust Corp. 26,201
776 Synovus Financial Corp. 20,952
372 TCF Financial Corp. 11,499
4,829 U.S. Bancorp 143,083
326 Zions Bancorporation 21,679
---------------
499,871
---------------
RESTAURANTS (1.0%)
450 Darden Restaurants, Inc. 12,267
3,209 McDonald's Corp. 98,645
272 Outback Steakhouse, Inc. 11,777
1,010 Starbucks Corp.* 56,823
412 Wendy's International, Inc. 14,696
---------------
194,208
---------------
SAVINGS BANKS (0.9%)
239 Astoria Financial Corp. 9,919
308 Golden West Financial Corp. 36,726
258 Independence Community
Bank Corp. 10,960
702 New York Community
Bancorp, Inc. 13,886
872 Sovereign Bancorp, Inc. 19,053
2,219 Washington Mutual, Inc. 90,335
---------------
180,879
---------------
SEMICONDUCTORS (3.7%)
936 Advanced Micro Devices, Inc.* 19,918
4,232 Agere Systems, Inc. (Class B)* 5,756
1,111 Altera Corp.* 25,198
957 Analog Devices, Inc. 35,361
524 Broadcom Corp. (Class A)* 17,040
16,481 Intel Corp. 368,350
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
16
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------
205 International Rectifier Corp.* $ 8,680
381 Intersil Corp. (Class A) 6,134
1,164 LSI Logic Corp.* 6,158
836 Maxim Integrated Products, Inc. 34,243
528 Microchip Technology Inc. 14,879
1,648 Micron Technology, Inc.* 18,260
1,290 National Semiconductor Corp. 19,943
700 PMC - Sierra, Inc.* 7,728
4,396 Texas Instruments Inc. 106,295
909 Xilinx, Inc. 28,379
---------------
722,322
---------------
SERVICES TO THE HEALTH
INDUSTRY (0.3%)
190 Express Scripts, Inc.
(Class A)* 13,672
689 IMS Health Inc. 15,551
803 Medco Health Solutions Inc.* 30,289
259 Omnicare, Inc. 8,394
---------------
67,906
---------------
SPECIALTY INSURANCE (0.5%)
276 Ambac Financial Group, Inc. 22,447
463 Fidelity National Financial, Inc. 19,858
389 MBIA Inc. 23,325
179 MGIC Investment Corp. 12,172
245 PMI Group, Inc. (The) 10,089
224 Radian Group, Inc. 11,480
---------------
99,371
---------------
SPECIALTY STORES (0.8%)
185 AutoZone, Inc.* 15,836
758 Bed Bath & Beyond Inc.* 30,265
170 CarMax Inc.* 4,735
400 Michaels Stores, Inc. 10,932
1,005 Office Depot, Inc.* 16,482
356 PETsMART, Inc. 12,200
1,436 Staples, Inc. 45,823
326 Tiffany & Co. 9,976
655 Toys 'R' Us, Inc.* 12,668
229 Williams-Sonoma, Inc.* 8,384
---------------
167,301
---------------
SPECIALTY
TELECOMMUNICATIONS (0.3%)
673 American Tower Corp.
(Class A)* $ 12,201
368 CenturyTel, Inc. 12,115
743 Citizens Communications Co. 10,625
529 Crown Castle
International Corp.* 8,930
171 NTL, Inc.* 11,898
---------------
55,769
---------------
STEEL (0.1%)
402 Nucor Corp. 21,266
---------------
TELECOMMUNICATION
EQUIPMENT (2.1%)
807 Comverse Technology, Inc.* 17,165
3,496 Corning Inc.* 43,980
11,786 Lucent Technologies Inc.* 46,319
5,973 Motorola, Inc. 115,040
4,128 QUALCOMM Inc. 171,807
1,479 Tellabs, Inc.* 12,645
---------------
406,956
---------------
TOOLS/HARDWARE (0.1%)
206 Black & Decker Corp. 17,322
168 Stanley Works (The) 7,856
---------------
25,178
---------------
TRUCKS/CONSTRUCTION/FARM
MACHINERY (0.3%)
136 Cummins Inc. 10,828
634 Deere & Co. 45,477
---------------
56,305
---------------
WHOLESALE DISTRIBUTORS (0.2%)
500 Genuine Parts Co. 21,705
200 Grainger (W.W.), Inc. 12,372
---------------
34,077
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
17
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------
WIRELESS
TELECOMMUNICATIONS (0.4%)
2,615 Nextel Communications, Inc.
(Class A)* $ 74,423
165 Telephone & Data Systems, Inc. 12,787
---------------
87,210
---------------
TOTAL COMMON STOCKS
(COST $17,137,808) 18,035,982
---------------
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ----------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (7.9%)
REPURCHASE AGREEMENT
$ 1,553 Joint repurchase agreement
account 2.06% due 12/01/04
(dated 11/30/04; proceeds
$1,553,089) (a)
(COST $1,553,000) $ 1,553,000
---------------
TOTAL INVESTMENTS
(COST $18,690,808) (b) (c) 99.4% 19,588,982
OTHER ASSETS IN EXCESS OF
LIABILITIES 0.6 110,263
----- ---------------
NET ASSETS 100.0% $ 19,699,245
===== ===============
</Table>
- ----------
* NON-INCOME PRODUCING SECURITY.
** A PORTION OF THIS SECURITY IS PHYSICALLY SEGREGATED IN CONNECTION
WITH OPEN FUTURES CONTRACTS IN THE AMOUNT OF $153,000.
(a) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(b) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN AN AMOUNT EQUAL TO
$1,361,875 IN CONNECTION WITH OPEN FUTURES CONTRACTS.
(c) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $18,692,155.
THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $2,686,174 AND THE
AGGREGATE GROSS UNREALIZED DEPRECIATION IS $1,789,347, RESULTING IN
NET UNREALIZED APPRECIATION OF $896,827.
FUTURES CONTRACTS OPEN AT NOVEMBER 30, 2004:
<Table>
<Caption>
NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE UNREALIZED
CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE APPRECIATION
- ------------------------------------------------------------------------------------------------------------
9 Long S&P 500 Index E-Mini $ 528,345 $ 11,447
December 2004
3 Long S&P 500 Index 880,575 35,610
December 2004
5 Long Nasdaq - 100 Index E-Mini 157,300 3,939
December 2004
----------
Total unrealized appreciation $ 50,996
==========
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
18
<Page>
MORGAN STANLEY KLD SOCIAL INDEX FUND
SUMMARY OF INVESTMENTS - NOVEMBER 30, 2004
<Table>
<Caption>
PERCENT OF
SECTOR VALUE NET ASSETS
- ------------------------------------------------------
Finance $ 4,358,527 22.1%
Electric Technology 2,500,519 12.7
Technology Services 1,741,619 8.8
Health Technology 1,731,992 8.7
Repurchase Agreement 1,553,000 7.9
Consumer Non-Durables 1,381,137 7.0
Retail Trade 1,364,969 6.9
Consumer Services 1,114,570 5.7
Communications 939,787 4.8
Producer Manufacturing 612,766 3.1
Health Services 512,251 2.6
Energy Mineral 313,383 1.6
Consumer Durables 306,571 1.5
Transportation 291,139 1.5
Commercial Services 215,680 1.1
Distribution Services 213,984 1.1
Process Industries 188,468 1.0
Utilities 113,085 0.6
Industrial Services 100,738 0.5
Non-Energy Minerals 34,799 0.2
------------ ----
$ 19,588,984* 99.4%
============ ====
</Table>
- ----------
* DOES NOT INCLUDE OPEN FUTURES CONTRACTS WITH AN UNDERLYING FACE OF
$1,566,220 WITH UNREALIZED APPRECIATION OF $50,996.
SEE NOTES TO FINANCIAL STATEMENTS
19
<Page>
MORGAN STANLEY KLD SOCIAL INDEX FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 2004
<Table>
<Caption>
ASSETS:
Investments in securities, at value (cost $18,690,808) $ 19,588,982
Receivable for:
Dividends 92,832
Shares of beneficial interest sold 31,642
Prepaid expenses and other assets 8,688
Receivable from affiliate 55,354
---------------
TOTAL ASSETS 19,777,498
---------------
LIABILITIES:
Payable for:
Distribution fee 11,940
Variation margin 2,730
Accrued expenses and other payables 63,583
---------------
TOTAL LIABILITIES 78,253
---------------
NET ASSETS $ 19,699,245
===============
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 21,487,523
Net unrealized appreciation 949,170
Accumulated undistributed net investment income 186,982
Accumulated net realized loss (2,924,430)
---------------
NET ASSETS $ 19,699,245
===============
CLASS A SHARES:
Net Assets $ 2,384,122
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 244,588
NET ASSET VALUE PER SHARE $ 9.75
===============
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE) $ 10.29
===============
CLASS B SHARES:
Net Assets $ 10,798,962
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 1,116,413
NET ASSET VALUE PER SHARE $ 9.67
===============
CLASS C SHARES:
Net Assets $ 2,333,884
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 241,968
NET ASSET VALUE PER SHARE $ 9.65
===============
CLASS D SHARES:
Net Assets $ 4,182,277
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 427,620
NET ASSET VALUE PER SHARE $ 9.78
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
20
<Page>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 2004
<Table>
NET INVESTMENT INCOME:
INCOME
Dividends $ 300,684
Interest 19,939
---------------
TOTAL INCOME 320,623
---------------
EXPENSES
Professional fees 212,390
Distribution fee (Class A shares) 5,085
Distribution fee (Class B shares) 97,088
Distribution fee (Class C shares) 17,679
Shareholder reports and notices 61,180
Investment advisory fee 47,272
KLD licensing fee 45,118
Registration fees 34,480
Transfer agent fees and expenses 25,981
Custodian fees 6,667
Administration fee 1,285
Other 6,797
---------------
TOTAL EXPENSES 561,022
Less: amounts waived/reimbursed (441,170)
---------------
NET EXPENSES 119,852
---------------
NET INVESTMENT INCOME 200,771
---------------
NET REALIZED AND UNREALIZED GAIN:
NET REALIZED GAIN ON:
Investments 146,013
Futures contracts 83,683
---------------
NET REALIZED GAIN 229,696
---------------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments 1,263,145
Futures contracts 19,154
---------------
NET APPRECIATION 1,282,299
---------------
NET GAIN 1,511,995
---------------
NET INCREASE $ 1,712,766
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
21
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
NOVEMBER 30, 2004 NOVEMBER 30, 2003
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 200,771 $ 86,850
Net realized gain (loss) 229,696 (923,654)
Net change in unrealized depreciation 1,282,299 2,375,100
--------------- ---------------
NET INCREASE 1,712,766 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 3,110,855 1,726,063
--------------- ---------------
NET INCREASE 4,741,621 3,132,358
NET ASSETS:
Beginning of period 14,957,624 11,825,266
--------------- ---------------
END OF PERIOD
(Including accumulated undistributed net investment income of $186,982
and $71,237, respectively) $ 19,699,245 $ 14,957,624
=============== ===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
22
<Page>
MORGAN STANLEY KLD SOCIAL INDEX FUND
NOTES TO FINANCIAL STATEMENTS - NOVEMBER 30, 2004
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 Adviser"), determines that the latest sale price, the bid price
or the mean between the last reported bid and asked price do not reflect a
security's market value, portfolio securities are valued at their fair value as
determined in good faith under procedures established by and under the general
supervision of the Fund's Trustees. Occasionally, developments affecting the
closing prices of securities and other assets may occur between the times at
which valuations of such securities are determined (that is, close of the
foreign market on which the securities trade) and the close of business on the
NYSE. If developments occur during such periods that are expected to materially
affect the value of such securities, such valuations may be adjusted to reflect
the estimated fair value of such securities as of the close of the NYSE, as
determined in good faith by the Fund's Trustees or by the Investment Adviser
using a pricing service and/or procedures approved
23
<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 Adviser, may transfer uninvested cash
balances into one or more joint repurchase agreement accounts. These balances
are invested in one or more repurchase agreements and are collateralized by
cash, U.S. Treasury or federal agency obligations. The Fund may also invest
directly with institutions in repurchase agreements. The Fund's custodian
receives the collateral, which is marked-to-market daily to determine that the
value of the collateral does not decrease below the repurchase price plus
accrued interest.
D. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
E. 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.
24
<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 ADVISORY/ADMINISTRATION AGREEMENTS
Effective November 1, 2004, pursuant to an Investment Advisory Agreement, the
Fund pays the Investment Adviser an advisory fee, accrued daily and payable
monthly, by applying the annual rate of 0.12% to the daily net assets of the
Fund determined as of the close of each business day.
Effective November 1, 2004, pursuant to an Administration Agreement with Morgan
Stanley Services Company Inc. (the "Administrator"), an affiliate of the
Investment Adviser, the Fund pays an administration fee, accrued daily and
payable monthly, by applying the annual rate of 0.08% to the Fund's daily net
assets.
The Investment Adviser 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 April 30, 2006, whichever occurs first. Thereafter, the
Investment Adviser has agreed to assume all operating expenses (except for
distribution fees) and to waive the compensation provided for in its Investment
Advisory 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 November 30,
2004, included in the Statement of Assets and Liabilities is a receivable from
affiliate, which represents expense reimbursements due to the Fund.
Prior to November 1, 2004, the Fund had retained the Investment Adviser to
provide administrative services and to manage the investment of the Fund's
assets pursuant to an investment management agreement pursuant to which the Fund
paid the Investment Adviser a monthly 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%.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the
"Distributor"), an affiliate of the Investment Adviser and Administrator. The
Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1
under the Act. The Plan provides that the Fund will pay the Distributor a fee
which is accrued daily and paid monthly at the following annual rates: (i)
Class A -- up to 0.25% of the average daily net assets of Class A; (ii) Class B
- -- up to 1.0% of the average daily net assets of Class B; and (iii) Class C --
up to 1.0% of the average daily net assets of Class C.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future
25
<Page>
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 $1,130,833 at November 30, 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 November 30, 2004, the distribution fee was accrued for Class
A shares and Class C shares at the annual rate of 0.23% and 0.93%, respectively.
The Distributor has informed the Fund that for the year ended November 30, 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, $20,787 and
$415, respectively and received $14,997 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 November 30, 2004 aggregated
$4,713,946 and $1,587,600, respectively.
Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and
Distributor, is the Fund's transfer agent. At November 30, 2004, the Fund had
transfer agent fees and expenses payable of approximately $2,500.
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 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.
26
<Page>
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
NOVEMBER 30, 2004 NOVEMBER 30, 2003
------------------------------ ------------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- -------------
CLASS A SHARES
Sold 85,410 $ 793,258 182,321 $ 1,452,634
Reinvestment of dividends 2,172 19,479 1,546 11,206
Redeemed (79,896) (744,142) (44,830) (331,078)
------------- ------------- ------------- -------------
Net increase -- Class A 7,686 68,595 139,037 1,132,762
------------- ------------- ------------- -------------
CLASS B SHARES
Sold 289,886 2,658,349 344,034 2,744,983
Reinvestment of dividends 2,587 23,201 5,149 37,382
Redeemed (144,878) (1,337,999) (118,946) (914,768)
------------- ------------- ------------- -------------
Net increase -- Class B 147,595 1,343,551 230,237 1,867,597
------------- ------------- ------------- -------------
CLASS C SHARES
Sold 102,711 948,973 66,178 531,198
Reinvestment of dividends 462 4,129 984 7,124
Redeemed (32,227) (297,741) (24,046) (182,495)
------------- ------------- ------------- -------------
Net increase -- Class C 70,946 655,361 43,116 355,827
------------- ------------- ------------- -------------
CLASS D SHARES
Sold 194,544 1,805,479 230,463 1,880,364
Reinvestment of dividends 2,945 26,476 9,298 67,503
Redeemed (85,152) (788,607) (495,319) (3,577,990)
------------- ------------- ------------- -------------
Net increase (decrease) -- Class D 112,337 1,043,348 (255,558) (1,630,123)
------------- ------------- ------------- -------------
Net increase in Fund 338,564 $ 3,110,855 156,832 $ 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.
27
<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.
The tax character of distributions paid was as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
NOVEMBER 30, 2004 NOVEMBER 30, 2003
----------------- -----------------
Ordinary income $ 82,000 $ 132,001
========= ==========
</Table>
As of November 30, 2004, the tax-basis components of accumulated losses were as
follows:
<Table>
Undistributed ordinary income $ 186,090
Undistributed long-term gains --
-------------
Net accumulated earnings 186,090
Capital loss carryforward* (2,871,195)
Net unrealized appreciation 896,827
-------------
Total accumulated losses $ (1,788,278)
=============
</Table>
*During the year ended November 30, 2004, the Fund utilized $250,216 of its net
capital loss carryforward. As of November 30, 2004, the Fund had a net capital
loss carryforward of $2,871,195 of which $1,967,974 will expire on November 30,
2010 and $903,221 will expire on November 30, 2011 to offset future capital
gains to the extent provided by regulations.
As of November 30, 2004, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on wash sales and mark-to-market of open
futures contracts and permanent book/tax differences attributable to tax
adjustments on real estate investment trusts held by the Fund. To reflect
reclassifications arising from the permanent differences, accumulated
undistributed net investment income was charged and accumulated net realized
loss was credited $3,026.
8. LEGAL MATTERS
The Investment Adviser, certain affiliates of the Investment Adviser, certain
officers of such affiliates and certain investment companies advised by the
Investment Adviser or its affiliates, including the Fund, are named as
defendants in a number of similar class action complaints which were recently
28
<Page>
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 Adviser and certain affiliates of
the Investment Adviser allegedly offered economic incentives to brokers and
others to recommend the funds advised by the Investment Adviser or its
affiliates to investors rather than funds managed by other companies, and (ii)
that the funds advised by the Investment Adviser 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 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.
29
<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 YEAR ENDED NOVEMBER 30, JULY 13, 2001*
---------------------------------------- THROUGH
2004 2003 2002 NOVEMBER 30, 2001
---------- ---------- ---------- -----------------
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++ 0.15 0.10 0.09 0.03
Net realized and unrealized gain (loss) 0.80 1.17 (1.70) (0.64)
---------- ---------- ---------- ----------
Total income (loss) from investment operations 0.95 1.27 (1.61) (0.61)
---------- ---------- ---------- ----------
Less dividends from net investment income (0.08) (0.12) (0.05) -
---------- ---------- ---------- ----------
Net asset value, end of period $ 9.75 $ 8.88 $ 7.73 $ 9.39
========== ========== ========== ==========
TOTAL RETURN+ 10.81% 16.72% (17.25)% (6.10)%(1)
RATIOS TO AVERAGE NET ASSETS(3)(4):
Expenses 0.23% 0.20% 0.24% 0.25%(2)
Net investment income 1.61% 1.29% 1.01% 0.85%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 2,384 $ 2,103 $ 756 $ 329
Portfolio turnover rate 10% 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 ADVISER, THE ANNUALIZED EXPENSE AND NET INVESTMENT LOSS
RATIOS WOULD HAVE BEEN AS FOLLOWS:
<Table>
<Caption>
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO LOSS RATIO
----------------- ------- --------------
NOVEMBER 30, 2004 2.76% (0.92)%
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
30
<Page>
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR ENDED NOVEMBER 30, JULY 13, 2001*
---------------------------------------- THROUGH
2004 2003 2002 NOVEMBER 30, 2001
---------- ---------- ---------- -----------------
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++ 0.08 0.04 0.02 0.00
Net realized and unrealized gain (loss) 0.80 1.16 (1.69) (0.64)
---------- ---------- ---------- ----------
Total income (loss) from investment operations 0.88 1.20 (1.67) (0.64)
---------- ---------- ---------- ----------
Less dividends from net investment income (0.03) (0.06) (0.01) -
---------- ---------- ---------- ----------
Net asset value, end of period $ 9.67 $ 8.82 $ 7.68 $ 9.36
========== ========== ========== ==========
TOTAL RETURN+ 9.97% 15.75% (17.90)% (6.40)%(1)
RATIOS TO AVERAGE NET ASSETS(3)(4):
Expenses 1.00% 1.00% 1.00% 1.00%(2)
Net investment income 0.84% 0.49% 0.25% 0.10%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 10,799 $ 8,547 $ 5,670 $ 4,413
Portfolio turnover rate 10% 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 ADVISER, THE ANNUALIZED EXPENSE AND NET INVESTMENT LOSS
RATIOS WOULD HAVE BEEN AS FOLLOWS:
<Table>
<Caption>
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO LOSS RATIO
----------------- ------- --------------
NOVEMBER 30, 2004 3.53% (1.69)%
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
31
<Page>
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR ENDED NOVEMBER 30, JULY 13, 2001*
---------------------------------------- THROUGH
2004 2003 2002 NOVEMBER 30, 2001
---------- ---------- ---------- -----------------
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++ 0.09 0.04 0.02 0.00
Net realized and unrealized gain (loss) 0.80 1.16 (1.69) (0.64)
---------- ---------- ---------- ----------
Total income (loss) from investment operations 0.89 1.20 (1.67) (0.64)
---------- ---------- ---------- ----------
Less dividends from net investment income (0.03) (0.07) (0.03) -
---------- ---------- ---------- ----------
Net asset value, end of period $ 9.65 $ 8.79 $ 7.66 $ 9.36
========== ========== ========== ==========
TOTAL RETURN+ 10.12% 15.81% (17.92)% (6.40)%(1)
RATIOS TO AVERAGE NET ASSETS(3)(4):
Expenses 0.93% 1.00% 1.00% 1.00%(2)
Net investment income 0.91% 0.49% 0.25% 0.10%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 2,334 $ 1,503 $ 980 $ 544
Portfolio turnover rate 10% 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 ADVISER, THE ANNUALIZED EXPENSE AND NET INVESTMENT LOSS
RATIOS WOULD HAVE BEEN AS FOLLOWS:
<Table>
<Caption>
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO LOSS RATIO
----------------- ------- --------------
NOVEMBER 30, 2004 3.46% (1.62)%
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
32
<Page>
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR ENDED NOVEMBER 30, JULY 13, 2001*
---------------------------------------- THROUGH
2004 2003 2002 NOVEMBER 30, 2001
---------- ---------- ---------- -----------------
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++ 0.17 0.12 0.11 0.04
Net realized and unrealized gain (loss) 0.80 1.17 (1.71) (0.64)
---------- ---------- ---------- ----------
Total income (loss) from investment operations 0.97 1.29 (1.60) (0.60)
---------- ---------- ---------- ----------
Less dividends from net investment income (0.09) (0.13) (0.06) -
---------- ---------- ---------- ----------
Net asset value, end of period $ 9.78 $ 8.90 $ 7.74 $ 9.40
========== ========== ========== ==========
TOTAL RETURN+ 11.04% 17.05% (17.17)% (6.00)%(1)
RATIOS TO AVERAGE NET ASSETS(3)(4):
Expenses 0.00% 0.00% 0.00% 0.00%(2)
Net investment income 1.84% 1.49% 1.25% 1.10%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 4,182 $ 2,805 $ 4,419 $ 13,634
Portfolio turnover rate 10% 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 ADVISER, THE ANNUALIZED EXPENSE AND NET INVESTMENT LOSS
RATIOS WOULD HAVE BEEN AS FOLLOWS:
<Table>
<Caption>
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO LOSS RATIO
----------------- ------- --------------
NOVEMBER 30, 2004 2.53% (0.69)%
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
33
<Page>
MORGAN STANLEY KLD SOCIAL INDEX FUND
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of
Trustees of Morgan Stanley KLD Social Index Fund:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley KLD Social Index Fund (the "Fund"), including the portfolio of
investments, as of November 30, 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 November 30, 2004, by correspondence with the custodian
and broker. 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 KLD Social Index Fund as of November 30, 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
January 14, 2005
2004 FEDERAL TAX NOTICE (UNAUDITED)
During the fiscal year ended November 30, 2004, 100% of the income
dividends paid qualified for the dividends received deduction available to
corporations. Additionally, please note that 100% of the Fund's income
dividends paid during the fiscal year ended November 30, 2004 qualified for
the lower income tax rate available to individuals under the Jobs and
Growth Tax Relief Reconciliation Act of 2003.
34
<Page>
MORGAN STANLEY KLD SOCIAL INDEX 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 Steel
c/o Kramer Levin Naftalis April 1994 Trustee of the Retail Funds Corporation.
& Frankel LLP (since April 1994) and the
Counsel to the Independent Institutional Funds (since
Trustees July 2003); formerly Vice
919 Third Avenue Chairman of Kmart Corporation
New York, NY 10022-3902 (December 1998-October 2000),
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 (72) Trustee Since Managing Director of Summit 208 Director of Franklin Covey
c/o Summit Ventures LLC January 1993 Ventures LLC; Director or (time management systems),
1 Utah Center Trustee of the Retail Funds BMW Bank of North America,
201 S. Main Street (since January 1993) and the Inc. (industrial loan
Salt Lake City, Institutional Funds (since corporation), United Space
UT 84111-2215 July 2003); member of the Alliance (joint venture
Utah Regional Advisory Board between Lockheed Martin and
of Pacific Corp.; formerly the Boeing Company) and
United States Senator Nuskin Asia Pacific
(R-Utah) (1974-1992) and (multilevel marketing);
Chairman, Senate Banking member of the board of
Committee (1980-1986), Mayor various civic and charitable
of Salt Lake City, Utah organizations.
(1971-1974), Astronaut, Space
Shuttle Discovery (April
12-19, 1985), and Vice
Chairman, Huntsman
Corporation (chemical
company).
Wayne E. Hedien (70) Trustee Since Retired; Director or Trustee 208 Director of The PMI Group
c/o Kramer Levin Naftalis & September of the Retail Funds (since Inc. (private mortgage
Frankel LLP 1997 September 1997) and the insurance); Trustee and Vice
Counsel to the Independent Institutional Funds (since Chairman of The Field Museum
Trustees July 2003); formerly of Natural History; director
919 Third Avenue associated with the Allstate of various other business and
New York, NY 10022-3902 Companies (1966-1994), most charitable organizations.
recently as Chairman of The
Allstate Corporation (March
1993-December 1994) and
Chairman and Chief Executive
Officer of its wholly-owned
subsidiary, Allstate
Insurance Company (July
1989-December 1994).
</Table>
35
<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 (55) Trustee Since Senior Partner, Johnson Smick 208 Director of NVR, Inc. (home
c/o Johnson Smick July 1991 International, Inc., a construction);
International, Inc. consulting firm; Chairman of Director of KFX Energy;
2099 Pennsylvania the Audit Committee and Director of RBS Greenwich
Avenue, N.W. Director or Trustee of the Capital Holdings (financial
Suite 950 Retail Funds (since July 1991) holding company).
Washington, D.C. 20006 and the Institutional Funds
(since July 2003); Co-Chairman
and a founder of the Group of
Seven Council (G7C), an
international economic
commission; formerly Vice
Chairman of the Board of
Governors of the Federal
Reserve System and Assistant
Secretary of the U.S.
Treasury.
Joseph J. Kearns (62) Trustee Since President, Kearns & Associates 209 Director of Electro Rent
PMB754 July 2003 LLC (investment consulting); Corporation (equipment
23852 Pacific Coast Highway Deputy Chairman of the Audit leasing), The Ford Family
Malibu, CA 90265 Committee and Director or Foundation, and the UCLA
Trustee of the Retail Funds Foundation.
(since July 2003) and the
Institutional Funds (since
August 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 208 Director of various business
c/o Triumph Capital, L.P. July 1991 Capital, L.P., a private organizations.
445 Park Avenue investment partnership;
New York, NY 10022 Chairman of the 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 of
c/o Lumelite Plastics July 2003 Corporation; Chairman of the certain investment companies
Corporation Governance Committee and in the JPMorgan Funds complex
85 Charles Colman Blvd. Director or Trustee of the managed by J.P. Morgan
Pawling, NY 12564 Retail Funds (since July 2003) Investment Management Inc.
and the Institutional Funds
(since June 1992).
</Table>
36
<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 (71) Chairman of Since Chairman and Director or 208 None
c/o Morgan Stanley Trust the Board July 1991 Trustee of the Retail Funds
Harborside Financial Center, and Trustee (since July 1991) and the
Plaza Two, Institutional Funds (since
Jersey City, NJ 07311 July 2003); formerly Chief
Executive Officer of the
Retail Funds (until
September 2002).
James F. Higgins (56) Trustee Since Director or Trustee of the 208 Director of AXA Financial,
c/o Morgan Stanley Trust June 2000 Retail Funds (since June 2000) Inc. and The Equitable Life
Harborside Financial Center, and the Institutional Funds Assurance Society of the
Plaza Two, (since July 2003); Senior United States (financial
Jersey City, NJ 07311 Advisor of Morgan Stanley services).
(since August 2000); Director
of the Distributor and Dean
Witter Realty Inc.;
previously President and
Chief Operating Officer of
the Private Client Group of
Morgan Stanley (May 1999-
August 2000), and President
and Chief Operating Officer
of Individual Securities of
Morgan Stanley (February
1997-May 1999).
</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.).
37
<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 1999 President and Chief Operating Officer of Morgan Stanley
1221 Avenue of the Americas Investment Management Inc.; President, Director and Chief
New York, NY 10020 Executive Officer of the Investment Adviser 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.
Ronald E. Robison (65) Executive Vice Since April Principal Executive Officer-Office of the Funds (since
1221 Avenue of the Americas President and 2003 November 2003); Managing Director of Morgan Stanley & Co.
New York, NY 10020 Principal Incorporated, Managing Director of Morgan Stanley; Managing
Executive Director, Chief Administrative Officer and Director of the
Officer Investment Adviser and Morgan Stanley Services; Chief
Executive Officer and Director of the 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 (61) Vice President Since July Managing Director and Chief Investment Officer of the
1221 Avenue of the Americas 1995 Investment Adviser and Morgan Stanley Investment Management
New York, NY 10020 Inc., Director of the Transfer Agent, Chief Investment Officer
of the Van Kampen Funds; Vice President of the Institutional
Funds (since July 2003) and the Retail Funds (since July 1995).
Barry Fink (49) Vice President Since February General Counsel (since May 2000) and Managing Director (since
1221 Avenue of the Americas 1997 December 2000) of Morgan Stanley Investment Management;
New York, NY 10020 Managing Director (since December 2000), 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).
Amy R. Doberman (42) Vice President Since July Managing Director and General Counsel, U.S. Investment
1221 Avenue of the Americas 2004 Management; Managing Director of Morgan Stanley Investment
New York, NY 10020 Management Inc. and the Investment Adviser, 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).
Carsten Otto (41) Chief Since October Executive Director and U.S. Director of Compliance for Morgan
1221 Avenue of the Americas Compliance 2004 Stanley Investment Management (since October 2004); Executive
New York, NY 10020 Officer Director of the Investment Adviser and Morgan Stanley
Investment Management Inc.; formerly Assistant Secretary and
Assistant General Counsel of the Morgan Stanley Retail Funds.
</Table>
38
<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**
- ------------------------------- -------------- -------------- --------------------------------------------------------------
Stefanie V. Chang (38) Vice President Since July Executive Director of Morgan Stanley & Co. Incorporated, Morgan
1221 Avenue of the Americas 2003 Stanley Investment Management Inc., and the Investment
New York, NY 10020 Adviser; Vice President of 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).
Francis J. Smith (39) Treasurer and Treasurer Executive Director of the Investment Adviser and Morgan
c/o Morgan Stanley Trust Chief since July Stanley Services (since December 2001); previously, Vice
Harborside Financial Center, Financial 2003 and Chief President of the Retail Funds (September 2002-July 2003), and
Plaza Two, Officer Financial Vice President of the Investment Adviser and Morgan Stanley
Jersey City, NJ 07311 Officer since Services (August 2000-November 2001) and Senior Manager at
September 2002 PricewaterhouseCoopers LLP (January 1998-August 2000).
Thomas F. Caloia (58) Vice President Since July Executive Director (since December 2002) and Assistant
c/o Morgan Stanley Trust 2003 Treasurer of the Investment Adviser, the Distributor and
Harborside Financial Center, Morgan Stanley Services; previously Treasurer of the Retail
Plaza Two, Funds (April 1989 - July 2003); formerly First Vice President
Jersey City, NJ 07311 of the Investment Adviser, the Distributor and Morgan Stanley
Services.
Mary E. Mullin (37) Secretary Since July Executive Director of Morgan Stanley & Co. Incorporated, Morgan
1221 Avenue of the Americas 2003 Stanley Investment Management Inc. and the Investment Adviser;
New York, NY 10020 Secretary of the 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.
39
<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
Joseph J. McAlinden
VICE PRESIDENT
Barry Fink
VICE PRESIDENT
Amy R. Doberman
VICE PRESIDENT
Carsten Otto
CHIEF COMPLIANCE OFFICER
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 ADVISER
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
39908RPT-RA05-00031P-Y11/04
[MORGAN STANLEY LOGO]
[GRAPHIC]
MORGAN STANLEY FUNDS
MORGAN STANLEY
KLD SOCIAL
INDEX FUND
ANNUAL REPORT
NOVEMBER 30, 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) The Fund has amended its Code of Ethics during the period covered by the
shareholder report presented in Item 1 hereto to delete from the end of the
following paragraph on page 2 of the Code the phrase "to the detriment of the
Fund.":
"Each Covered Officer must not use his personal influence or personal
relationship improperly to influence investment decisions or financial reporting
by the Fund whereby the Covered Officer would benefit personally (directly or
indirectly)."
(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 $ 25,660 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 452(2) $ 3,746,495(2)
TAX FEES $ 4,889(3) $ 79,800(4)
ALL OTHER FEES $ - $ -
TOTAL NON-AUDIT FEES $ 5,341 $ 3,826,295
TOTAL $ 31,001 $ 3,826,295
</Table>
2003
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 24,150 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 684(2) $ 2,888,861(2)
TAX FEES $ 5,099(3) $ 692,753(4)
ALL OTHER FEES $ - $ -(5)
TOTAL NON-AUDIT FEES $ 5,783 $ 3,581,614
TOTAL $ 29,933 $ 3,581,614
</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:
APPENDIX A
AUDIT COMMITTEE
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS
AS ADOPTED AND AMENDED JULY 23, 2004,1
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.
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(1) This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and
Procedures (the "POLICY"), adopted as of the date above, supersedes and
replaces all prior versions that may have been adopted from time to time.
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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
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
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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.
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
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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. 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 Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Van Kampen Asset Management
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
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MORGAN STANLEY INSTITUTIONAL FUNDS
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Advisors Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
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 Covered Entities is compatible with maintaining the auditors'
independence in performing audit services.
Item 5. Audit Committee of Listed Registrants.
(a) The Fund has a separately-designated standing audit committee established
in accordance with Section 3(a)(58)(A) of the Exchange Act whose members are:
Michael Bozic, Edwin J. Garn, Wayne E. Hedien, Manual H. Johnson, Joseph J.
Kearns, Michael Nugent and Fergus Reid.
(b) Not applicable.
Item 6. Schedule of Investments
Refer to Item 1.
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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.
(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.
<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
January 20, 2005
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
January 20, 2005
/s/ Francis Smith
Francis Smith
Principal Financial Officer
January 20, 2005