<Page>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
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, 2005
Date of reporting period: May 31, 2005
Item 1 - Report to Shareholders
<Page>
WELCOME, SHAREHOLDER:
IN THIS REPORT, YOU'LL LEARN ABOUT HOW YOUR INVESTMENT IN MORGAN STANLEY KLD
SOCIAL INDEX FUND PERFORMED DURING THE SEMIANNUAL PERIOD. WE WILL PROVIDE AN
OVERVIEW OF THE MARKET CONDITIONS, AND DISCUSS SOME OF THE FACTORS THAT AFFECTED
PERFORMANCE DURING THE REPORTING PERIOD. IN ADDITION, THIS REPORT INCLUDES THE
FUND'S FINANCIAL STATEMENTS AND A LIST OF FUND INVESTMENTS.
THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS FOR THE FUND BEING
OFFERED.
MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE
IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. THE FUND IS
SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT MARKET VALUES OF
SECURITIES OWNED BY THE FUND WILL DECLINE AND, THEREFORE, THE VALUE OF THE
FUND'S SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE
MONEY INVESTING IN THIS FUND. PLEASE SEE THE PROSPECTUS FOR MORE COMPLETE
INFORMATION ON INVESTMENT RISKS.
<Page>
FUND REPORT
For the six-month period ended May 31, 2005
TOTAL RETURN FOR THE SIX MONTHS ENDED MAY 31, 2005
<Table>
<Caption>
KLD LIPPER
LARGE CAP LARGE-CAP
SOCIAL(SM) CORE FUNDS
CLASS A CLASS B CLASS C CLASS D INDEX(1) INDEX(2)
2.00% 1.64% 1.48% 2.11% 2.14% 1.74%
</Table>
THE PERFORMANCE OF THE FUND'S FOUR SHARE CLASSES VARIES BECAUSE EACH CLASS HAS
DIFFERENT EXPENSES. THE FUND'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL
DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY APPLICABLE SALES CHARGES.
SUCH COSTS WOULD LOWER PERFORMANCE. SEE PERFORMANCE SUMMARY FOR STANDARDIZED
PERFORMANCE AND BENCHMARK INFORMATION.
MARKET CONDITIONS
U.S. equity market conditions were mixed over the six months ended May 31, 2005.
Many economic indicators were positive during the period, as economic growth
continued and many companies showed improved earnings. The Federal Open Market
Committee continued to raise the federal funds target rate a number of times
during that period, but investors initially seemed to take the increases largely
in stride, and the stock market was largely unaffected.
The market rallied early in the period following the successful conclusion to
the U.S. presidential election and the temporary fall of oil prices. Stock
performance was further boosted during this time by an increase in initial
public offerings and several high-profile mergers, as well as by an increase in
consumer spending. Although the successful election in Iraq and the upward
revision of fourth-quarter gross domestic product numbers supported the market
in early 2005, equities were hurt in March as climbing oil prices, rising
interest rates and concerns over inflation weighed on market performance. In
April 2005, stocks were further hampered by weak retail sales and disappointing
earnings for a number of large companies. The period ended on a more upbeat note
due in part to declining interest rates, tame inflation data and other signs of
a stable economy.
PERFORMANCE ANALYSIS
Morgan Stanley KLD Social Index Fund underperformed the KLD Large Cap Social(SM)
Index* ("KLD Index") for the six months ended May 31, 2005, assuming no
deduction of applicable sales charges. For the same period, its Classes A and D
shares outperformed and its Classes B and C shares underperformed the Lipper
Large-Cap Core Funds Index, assuming no deduction of applicable sales charges.
Due in part to their large representation within the Index, the health care and
consumer staples sectors were a positive contributor to the Fund's return.
Health care equipment and services stocks were among the strong performers.
Additionally, a number of pharmaceutical securities recovered from significant
losses in prior months, further enhancing overall returns. Within consumer
staples, stocks from a variety of industries benefited from solid demand,
improved spending and strong earnings. In particular, homebuilder, consumer
durables and drugstore companies boosted returns. The Fund also profited from
its weightings in energy and utilities, the two top-performing sectors within
the Index. During the period, high oil prices bolstered energy stocks, while a
strengthening economy, improved balance sheets and increased demand helped
utilities stocks.
2
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Some sectors underperformed others during the six months. The industrials sector
was the worst performing for the period. Many industrials companies were hurt as
the slowdown of the auto industry rippled across related industries.
Additionally, telecom stocks also suffered due to the poor performance of the
baby bells.
* THE KLD LARGE CAP SOCIAL(SM) INDEX IS DERIVED FROM THE CONSTITUENTS OF THE
RUSSELL 1000(R) INDEX. COMPANIES ON THE KLD LARGE CAP SOCIAL(SM) INDEX ARE
COMPANIES THAT PASS KLD'S MULTIPLE PROPRIETARY ENVIRONMENTAL AND SOCIAL SCREENS.
INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR
FEES. 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 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.
TOP 10 HOLDINGS
<Table>
Microsoft Corp. 3.0%
Johnson & Johnson 2.6
Intel Corp. 2.2
Procter & Gamble Co. (The) 1.8
Cisco Systems, Inc. 1.7
American International Group, Inc. 1.6
J.P. Morgan Chase & Co. 1.6
International Business Machines Corp. 1.6
Wells Fargo & Co. 1.3
Dell, Inc. 1.3
</Table>
TOP FIVE INDUSTRIES
<Table>
Packaged Software 4.6%
Semiconductors 4.2
Major Banks 4.2
Major Telecommunications 3.8
Household/Personal Care 3.7
</Table>
DATA AS OF MAY 31, 2005. 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.
3
<Page>
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 1000 LARGEST COMPANIES IN THE UNITED
STATES AND IS CONSIDERED REPRESENTATIVE OF THE UNITED STATES LARGE
CAPITALIZATION SECURITIES MARKET. THE RUSSELL 1000 INDEX IS RECONSTITUTED
ANNUALLY ON JUNE 30.
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 (AS WELL AS THE FORM N-CSR AND N-CSRS
FILINGS) BY ACCESSING THE SEC'S WEB SITE, http://www.sec.gov. YOU MAY ALSO
REVIEW AND COPY THEM AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC.
INFORMATION ON THE OPERATION OF THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED
BY CALLING THE SEC AT (800) SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE
MATERIALS, UPON PAYMENT OF A DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S
E-MAIL ADDRESS (publicinfo@sec.gov) OR BY WRITING THE PUBLIC REFERENCE SECTION
OF THE SEC, WASHINGTON, DC 20549-0102.
PROXY VOTING 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 JUNE 30, 2004, IS AVAILABLE WITHOUT CHARGE, UPON REQUEST,
BY VISITING THE MUTUAL FUND CENTER ON OUR WEB SITE AT www.morganstanley.com.
THIS INFORMATION IS ALSO AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S
WEB SITE AT http://www.sec.gov.
HOUSEHOLDING NOTICE
TO REDUCE PRINTING AND MAILING COSTS, THE FUND ATTEMPTS TO ELIMINATE DUPLICATE
MAILINGS TO THE SAME ADDRESS. THE FUND DELIVERS A SINGLE COPY OF CERTAIN
SHAREHOLDER DOCUMENTS, INCLUDING SHAREHOLDER REPORTS, PROSPECTUSES AND PROXY
MATERIALS, TO INVESTORS WITH THE SAME LAST NAME WHO RESIDE AT THE SAME ADDRESS.
YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME
UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE
DOCUMENTS BY CALLING (800) 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.
4
<Page>
PERFORMANCE SUMMARY
AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED MAY 31, 2005
<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 6.71%(3) 5.91%(3) 5.86%(3) 7.03%(3)
1.10(4) 0.91(4) 4.86(4) --
SINCE INCEPTION 0.64(3) (0.15)(3) (0.15)(3) 0.85(3)
(0.75)(4) (0.66)(4) (0.15)(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 TABLE DOES NOT REFLECT THE DEDUCTION OF
TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF
FUND SHARES. PERFORMANCE FOR CLASS A, CLASS B, CLASS C, AND CLASS D SHARES WILL
VARY DUE TO DIFFERENCES IN SALES CHARGES AND EXPENSES.
* THE MAXIMUM FRONT-END SALES CHARGE FOR CLASS A IS 5.25%.
** THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B IS 5.0%.
THE CDSC DECLINES TO 0% AFTER SIX YEARS.
+ THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE FOR CLASS C IS 1% FOR SHARES
REDEEMED WITHIN ONE YEAR OF PURCHASE.
++ CLASS D HAS NO SALES CHARGE.
(1) THE KLD LARGE CAP SOCIAL(SM) INDEX BEGINS WITH THE RUSSELL 1000(R) INDEX.
COMPANIES ON THE KLD LARGE CAP SOCIAL(SM) INDEX ARE COMPANIES THAT PASS
KLD'S MULTIPLE PROPRIETARY ENVIRONMENTAL AND SOCIAL SCREENS. 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.
5
<Page>
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 12/01/04 - 05/31/05.
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 *
------------- ------------- ---------------
12/01/04 -
12/01/04 05/31/05 05/31/05
------------- ------------- ---------------
CLASS A
Actual (2.00% return) $ 1,000.00 $ 1,020.00 $ 0.81
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,024.13 $ 0.81
CLASS B
Actual (1.64% return) $ 1,000.00 $ 1,016.40 $ 5.03
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,019.95 $ 5.04
CLASS C
Actual (1.48% return) $ 1,000.00 $ 1,014.80 $ 5.02
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,019.95 $ 5.04
CLASS D
Actual (2.11% return) $ 1,000.00 $ 1,021.10 $ 0.00
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,024.93 $ 0.00
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.16%, 1.00%,
1.00% AND 0.00% RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER
THE PERIOD, MULTIPLIED BY 182/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). IF
THE FUND HAD BORNE ALL OF ITS EXPENSES THAT WERE WAIVED OR ASSUMED BY THE
INVESTMENT ADVISER AND ADMINISTRATOR, THE ANNUALIZED EXPENSE RATIOS WOULD
HAVE BEEN 2.56%, 3.40%, 3.40% AND 2.40%, RESPECTIVELY.
6
<Page>
INVESTMENT ADVISORY AGREEMENT APPROVAL
NATURE, EXTENT AND QUALITY OF SERVICES
The Board of Trustees of the Fund (the "Board") reviewed and considered the
nature and extent of the investment advisory services provided by the Investment
Adviser under the Advisory Agreement, including portfolio management, investment
research and equity and fixed income securities trading. The Board also reviewed
and considered the nature and extent of the non-advisory, administrative
services provided by the Fund's Administrator under the Administration
Agreement, including accounting, clerical, bookkeeping, compliance, business
management and planning, and the provision of supplies, office space and
utilities. (The Investment Adviser and the Administrator together are referred
to as the "Adviser" and the Advisory and Administration Agreements together are
referred to as the "Management Agreement.") The Board also compared the nature
of the services provided by the Adviser with similar services provided by
non-affiliated advisers as reported to the Board by Lipper Inc. ("Lipper").
The Board reviewed and considered the qualifications of the portfolio managers,
the senior administrative managers and other key personnel of the Adviser who
provide the administrative and investment advisory services to the Fund. The
Board determined that the Adviser's portfolio managers and key personnel are
well qualified by education and/or training and experience to perform the
services in an efficient and professional manner. The Board concluded that the
nature and extent of the advisory and administrative services provided were
necessary and appropriate for the conduct of the business and investment
activities of the Fund. The Board also concluded that the overall quality of the
advisory and administrative services was satisfactory.
PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the Fund's performance for the one-, three- and five-year
periods ended November 30, 2004, as shown in reports provided by Lipper (the
"Lipper Reports"), compared to the performance of comparable funds selected by
Lipper (the "performance peer group"), and noted that the Fund's performance was
lower than its performance peer group average for the one-year period, but
better for the three-and five-year periods. The Board concluded that the Fund's
overall performance was satisfactory.
FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the advisory and administrative fees (together, the
"management fee") paid by the Fund under the Management Agreement and the total
expense ratio of the Fund. The Board noted that the Fund was not paying any
management fee and did not incur expenses, other than brokerage and 12b-1 fees,
during the periods measured in the Lipper Report since the Adviser had agreed to
waive all fees and assume all expenses, excluding brokerage and 12b-1 fees,
until assets reached $50 million or until April 30, 2006, whichever comes first.
On November 30, 2004, the date used in the Lipper Report for comparison
purposes, the Fund's assets were $19.7 million. The Board concluded that the
management fee arrangement at this time was satisfactory.
7
<Page>
BREAKPOINTS AND ECONOMIES OF SCALE
The Board reviewed the structure of the Fund's management fee schedule under the
Management Agreement and noted that it does not include any breakpoints. The
Board considered that the Fund's assets were very small and its potential growth
was unpredictable. The Board concluded that it would be premature to consider
economies of scale as a factor in approving the Management Agreement.
PROFITABILITY OF ADVISER AND AFFILIATES
The Board considered and reviewed information concerning the costs incurred and
profits realized by the Adviser and its affiliates during the last two years
from their relationship with the Fund and the Morgan Stanley Fund Complex and
reviewed with the Controller of the Adviser the cost allocation methodology used
to determine the Adviser's profitability. Based on their review of the
information they received, the Board concluded that the Adviser made no profit
from its operation of the Fund.
FALL-OUT BENEFITS
The Board considered so-called "fall-out benefits" derived by the Adviser and
its affiliates from their relationship with the Fund and the Fund Complex, such
as "float" benefits derived from handling of checks for purchases and
redemptions of Fund shares through a broker-dealer affiliate of the Adviser and
"soft dollar" benefits (discussed in the next section). The Board also
considered that a broker-dealer affiliate of the Adviser receives from the Fund
12b-1 fees for distribution and shareholder services. The Board also considered
that an affiliate of the Adviser, through a joint venture, receives revenue in
connection with trading done on behalf of the Fund through an electronic trading
system network ("ECN"). The Board concluded that the float benefits and the
above-referenced ECN-related revenue were relatively small and that the 12b-1
fees were competitive with those of other broker-dealer affiliates of investment
advisers of mutual funds.
SOFT DOLLAR BENEFITS
The Board considered whether the Adviser realizes any benefits as a result of
brokerage transactions executed through "soft dollar" arrangements. Under such
arrangements, brokerage commissions paid by the Fund and/or other funds managed
by the Adviser would be used to pay for research that a securities broker
obtains from third parties, or to pay for both research and execution services
from securities brokers who effect transactions for the Fund. The Adviser
informed the Board that it does not use Fund commissions to pay for third party
research. It does use commissions to pay for research which is bundled with
execution services. The Board recognized that the receipt of such research from
brokers may reduce the Adviser's costs but concluded that the receipt of such
research strengthens the investment management resources of the Adviser, which
may ultimately benefit the Fund and other funds in the Fund Complex.
8
<Page>
ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE FUND'S NEEDS
The Board considered whether the Adviser is financially sound and has the
resources necessary to perform its obligations under the Management Agreement.
The Board noted that the Adviser's operations remain profitable, although
increased expenses in recent years have reduced the Adviser's profitability. The
Board concluded that the Adviser has the financial resources necessary to
fulfill its obligations under the Management Agreement.
HISTORICAL RELATIONSHIP BETWEEN THE FUND AND THE ADVISER
The Board also reviewed and considered the historical relationship between the
Fund and the Adviser, including the organizational structure of the Adviser, the
policies and procedures formulated and adopted by the Adviser for managing the
Fund's operations and the Board's confidence in the competence and integrity of
the senior managers and key personnel of the Adviser. The Board concluded that
it is beneficial for the Fund to continue its relationship with the Adviser.
OTHER FACTORS AND CURRENT TRENDS
The Board considered the controls and procedures adopted and implemented by the
Adviser and monitored by the Fund's Chief Compliance Officer and concluded that
the conduct of business by the Adviser indicates a good faith effort on its part
to adhere to high ethical standards in the conduct of the Fund's business.
GENERAL CONCLUSION
After considering and weighing all of the above factors, the Board concluded it
would be in the best interest of the Fund and its shareholders to approve
renewal of the Management Agreement for another year.
9
<Page>
MORGAN STANLEY KLD SOCIAL INDEX FUND
PORTFOLIO OF INVESTMENTS - MAY 31, 2005 (UNAUDITED)
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------
COMMON STOCKS (92.0%)
ADVERTISING/MARKETING
SERVICES (0.3%)
271 Lamar Advertising Co.
(Class A)* $ 11,333
494 Omnicom Group, Inc. 40,454
---------------
51,787
---------------
AIR FREIGHT/COURIERS (1.0%)
261 C.H. Robinson Worldwide, Inc. 14,921
256 Expeditors International of
Washington, Inc. 13,051
761 FedEx Corp. 68,049
1,456 United Parcel Service,
Inc. (Class B) 107,234
---------------
203,255
---------------
AIRLINES (0.2%)
2,183 Southwest Airlines Co. 31,763
---------------
APPAREL/FOOTWEAR (0.2%)
980 Coach, Inc.* 28,459
340 Liz Claiborne, Inc. 12,767
---------------
41,226
---------------
APPAREL/FOOTWEAR RETAIL (0.7%)
414 Chico's FAS, Inc.* 14,163
540 Foot Locker, Inc. 14,261
1,634 Gap, Inc. (The) 34,314
1,054 Limited Brands, Inc. 21,681
280 Nordstrom, Inc. 17,091
442 Ross Stores, Inc. 12,456
1,256 TJX Companies, Inc. (The) 28,800
---------------
142,766
---------------
AUTO PARTS: O.E.M. (0.4%)
290 Autoliv, Inc. 13,459
436 Dana Corp. 5,908
1,574 Delphi Corp. 6,847
574 Gentex Corp. 10,263
536 Johnson Controls, Inc. 30,370
200 Lear Corp. 7,540
---------------
74,387
---------------
BEVERAGES: NON-ALCOHOLIC (1.3%)
5,374 Coca-Cola Co. (The) $ 239,842
568 Coca-Cola Enterprises Inc. 12,428
412 Pepsi Bottling Group, Inc. (The) 11,688
---------------
263,958
---------------
BIOTECHNOLOGY (1.9%)
3,301 Amgen Inc.* 206,577
865 Biogen Idec Inc.* 33,822
155 Cephalon, Inc.* 6,575
577 Genzyme Corp.* 35,999
1,090 Gilead Sciences, Inc.* 44,472
158 Invitrogen Corp.* 12,534
654 MedImmune, Inc.* 17,266
913 Millennium
Pharmaceuticals, Inc.* 7,642
104 OSI Pharmaceuticals Inc.* 3,866
---------------
368,753
---------------
BROADCASTING (0.2%)
3,209 Sirius Satellite Radio Inc.* 19,382
623 Univision Communications,
Inc. (Class A)* 16,578
354 XM Satellite Radio Holdings
Inc. (Class A)* 11,367
---------------
47,327
---------------
BUILDING PRODUCTS (0.3%)
597 American Standard
Companies, Inc. 25,552
1,134 Masco Corp. 36,311
---------------
61,863
---------------
CABLE/SATELLITE TV (1.3%)
5,456 Comcast Corp. (Class A)* 175,683
6,981 Liberty Media Corp. (Class A)* 72,533
340 Liberty Media International,
Inc. (Class A)* 14,249
---------------
262,465
---------------
CHEMICALS: MAJOR
DIVERSIFIED (0.2%)
801 Engelhard Corp. 23,549
298 Rohm & Haas Co. 13,902
---------------
37,451
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
10
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------
CHEMICALS: SPECIALTY (0.5%)
579 Air Products &
Chemicals, Inc. $ 34,873
828 Praxair, Inc. 38,808
256 Sigma-Aldrich Corp. 15,337
---------------
89,018
---------------
COMMERCIAL PRINTING/
FORMS (0.1%)
619 Donnelley (R.R.) & Sons Co. 20,582
---------------
COMPUTER
COMMUNICATIONS (2.0%)
1,213 Avaya Inc.* 11,099
17,228 Cisco Systems, Inc.* 333,879
1,482 Juniper Networks, Inc.* 37,998
305 QLogic Corp.* 9,766
---------------
392,742
---------------
COMPUTER PERIPHERALS (0.8%)
6,166 EMC Corp.* 86,694
331 Lexmark International,
Inc. (Class A)* 22,654
799 Network Appliance, Inc.* 22,979
300 Storage Technology Corp.* 9,684
190 Zebra Technologies Corp.
(Class A)* 8,109
---------------
150,120
---------------
COMPUTER PROCESSING
HARDWARE (2.8%)
1,936 Apple Computer, Inc.* 76,879
6,450 Dell, Inc.* 257,291
7,775 Hewlett-Packard Co. 175,015
458 NCR Corp.* 16,777
8,482 Sun Microsystems, Inc.* 32,316
---------------
558,278
---------------
CONSTRUCTION MATERIALS (0.1%)
261 Vulcan Materials Co. 15,642
---------------
CONTAINERS/PACKAGING (0.2%)
387 Pactiv Corp.* 8,843
219 Sealed Air Corp.* 11,342
314 Temple-Inland Inc. 11,216
---------------
31,401
---------------
CONTRACT DRILLING (0.2%)
555 ENSCO International Inc. $ 18,482
620 Patterson-UTI Energy, Inc. 16,424
215 Rowan Companies, Inc.* 5,913
---------------
40,819
---------------
DATA PROCESSING SERVICES (0.8%)
1,511 Automatic Data
Processing, Inc. 66,182
591 Ceridian Corp.* 11,270
236 DST Systems, Inc.* 11,413
493 Fiserv, Inc.* 21,199
825 Paychex, Inc. 23,826
773 SunGard Data Systems Inc.* 26,831
---------------
160,721
---------------
DEPARTMENT STORES (0.5%)
764 Kohl's Corp.* 37,199
752 May Department Stores Co. 28,696
649 Penney (J.C.) Co., Inc. 32,294
---------------
98,189
---------------
DISCOUNT STORES (1.2%)
1,169 Costco Wholesale Corp. 53,096
777 Dollar General Corp. 15,237
273 Dollar Tree Stores, Inc.* 6,770
414 Family Dollar Stores, Inc. 10,627
201 Sears Holdings Corp.* 29,487
2,326 Target Corp. 124,906
---------------
240,123
---------------
DRUGSTORE CHAINS (0.9%)
1,012 CVS Corp. 55,508
2,610 Walgreen Co. 118,337
---------------
173,845
---------------
ELECTRIC UTILITIES (0.2%)
1,606 AES Corp. (The)* 23,913
133 Allete Inc. 6,384
600 Pepco Holdings, Inc. 13,524
---------------
43,821
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
11
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------
ELECTRICAL PRODUCTS (0.6%)
461 American Power
Conversion Corp. $ 11,737
1,074 Emerson Electric Co. 71,389
253 Energizer Holdings, Inc.* 15,909
116 Hubbell, Inc. (Class B) 5,271
504 Molex Inc. 13,351
---------------
117,657
---------------
ELECTRONIC COMPONENTS (0.2%)
586 Jabil Circuit, Inc.* 17,129
378 SanDisk Corp.* 9,862
2,800 Solectron Corp.* 10,220
472 Vishay Intertechnology, Inc.* 6,089
---------------
43,300
---------------
ELECTRONIC DISTRIBUTORS (0.1%)
400 Arrow Electronics, Inc.* 11,180
209 CDW Corp. 12,160
---------------
23,340
---------------
ELECTRONIC EQUIPMENT/
INSTRUMENTS (0.4%)
285 Diebold, Inc. 14,267
4,254 JDS Uniphase Corp.* 6,509
360 Scientific-Atlanta, Inc. 11,988
381 Tektronix, Inc. 8,637
460 Thermo Electron Corp.* 12,107
1,995 Xerox Corp.* 27,072
---------------
80,580
---------------
ELECTRONIC PRODUCTION
EQUIPMENT (0.7%)
4,295 Applied Materials, Inc. 70,481
770 Cadence Design
Systems, Inc.* 10,757
539 KLA-Tencor Corp. 24,476
593 Lam Research Corp.* 18,193
391 Novellus Systems, Inc.* 10,420
357 Synopsys, Inc.* 6,451
---------------
140,778
---------------
ELECTRONICS/APPLIANCE
STORES (0.3%)
674 Best Buy Co., Inc. $ 36,686
631 Circuit City Stores -
Circuit City Group 10,342
597 RadioShack Corp. 15,021
---------------
62,049
---------------
ELECTRONICS/APPLIANCES (0.1%)
170 Harman International
Industries, Inc. 14,086
219 Whirlpool Corp. 15,067
---------------
29,153
---------------
FINANCE/RENTAL/LEASING (2.7%)
325 Allied Capital Corp. 8,922
610 Capital One Financial Corp. 45,994
539 CIT Group, Inc. 22,864
1,423 Countrywide Financial Corp. 52,893
337 Doral Financial Corp.
(Puerto Rico) 3,906
2,469 Fannie Mae 146,264
1,754 Freddie Mac 114,080
2,894 MBNA Corp. 61,034
809 Providian Financial Corp.* 14,416
138 Ryder System, Inc. 5,070
1,118 SLM Corp. 53,966
---------------
529,409
---------------
FINANCIAL CONGLOMERATES (3.2%)
2,875 American Express Co. 154,819
9,079 J.P. Morgan Chase & Co. 324,574
813 Principal Financial Group, Inc. 32,431
1,364 Prudential Financial, Inc. 86,355
832 State Street Corp. 39,936
---------------
638,115
---------------
FINANCIAL PUBLISHING/
SERVICES (0.4%)
230 Dun & Bradstreet Corp.* 14,131
1,016 McGraw-Hill Companies,
Inc. (The) 44,359
668 Moody's Corp. 28,904
---------------
87,394
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
12
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------
FOOD DISTRIBUTORS (0.3%)
1,627 SYSCO Corp. $ 60,459
---------------
FOOD RETAIL (0.5%)
974 Albertson's, Inc. 20,444
1,919 Kroger Co.* 32,182
1,206 Safeway Inc.* 26,544
408 Supervalu, Inc. 13,366
129 Whole Foods Market, Inc. 15,348
---------------
107,884
---------------
FOOD: MAJOR DIVERSIFIED (1.8%)
560 Campbell Soup Co. 17,377
738 General Mills, Inc. 36,531
978 Heinz (H.J.) Co. 35,570
621 Kellogg Co. 28,249
4,349 PepsiCo, Inc. 244,849
---------------
362,576
---------------
FOOD: MEAT/FISH/DAIRY (0.1%)
391 Dean Foods Co.* 15,237
---------------
FOOD: SPECIALTY/CANDY (0.4%)
464 Hershey Foods Corp. 29,793
349 McCormick & Co., Inc.
(Non-Voting) 11,810
100 Smucker (J.M.) Co. 4,981
406 Wrigley (Wm.) Jr. Co. 27,718
---------------
74,302
---------------
GAS DISTRIBUTORS (0.4%)
397 Equitable Resources, Inc. 25,233
487 KeySpan Corp. 19,353
811 NiSource, Inc. 19,545
300 Questar Corp. 18,912
---------------
83,043
---------------
HOME BUILDING (0.6%)
342 Centex Corp. 22,394
900 D.R. Horton, Inc. 31,113
260 KB Home 17,560
298 Lennar Corp. (Class A) 17,287
271 Pulte Homes, Inc. 20,718
---------------
109,072
---------------
HOME FURNISHINGS (0.2%)
564 Leggett & Platt, Inc. $ 15,025
160 Mohawk Industries, Inc.* 13,347
704 Newell Rubbermaid, Inc. 16,044
---------------
44,416
---------------
HOME IMPROVEMENT
CHAINS (1.8%)
200 Fastenal Co. 11,624
5,712 Home Depot, Inc. (The) 224,767
2,003 Lowe's Companies, Inc. 114,592
---------------
350,983
---------------
HOSPITAL/NURSING
MANAGEMENT (0.2%)
709 Health Management
Associates, Inc. (Class A) 17,881
312 Manor Care, Inc. 12,124
192 Triad Hospitals, Inc.* 9,738
---------------
39,743
---------------
HOUSEHOLD/PERSONAL CARE (3.7%)
214 Alberto-Culver Co. (Class B) 9,487
1,202 Avon Products, Inc. 47,768
415 Clorox Co. (The) 24,240
1,355 Colgate-Palmolive Co. 67,709
310 Estee Lauder Companies,
Inc. (The) (Class A) 12,118
2,556 Gillette Co. (The) 134,803
1,277 Kimberly-Clark Corp. 82,149
6,550 Procter & Gamble Co. (The) 361,233
---------------
739,507
---------------
INDUSTRIAL CONGLOMERATES (0.8%)
1,992 3M Co. 152,687
218 SPX Corp. 9,681
---------------
162,368
---------------
INDUSTRIAL MACHINERY (0.3%)
674 Illinois Tool Works Inc. 56,906
---------------
INDUSTRIAL SPECIALTIES (0.1%)
510 Ecolab Inc. 16,488
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------
INFORMATION TECHNOLOGY
SERVICES (2.0%)
471 Citrix Systems, Inc.* $ 11,850
372 Cognizant Technology
Solutions Corp. (Class A)* 17,856
1,297 Electronic Data Systems Corp. 25,551
4,294 International Business
Machines Corp. 324,412
846 Unisys Corp.* 6,125
---------------
385,794
---------------
INSURANCE BROKERS/
SERVICES (0.2%)
189 Gallagher (Arthur J.) & Co. 5,220
1,333 Marsh & McLennan
Companies, Inc. 38,710
---------------
43,930
---------------
INTERNET RETAIL (0.3%)
788 Amazon.com, Inc.* 27,982
1,055 IAC/InterActiveCorp.* 25,848
---------------
53,830
---------------
INTERNET SOFTWARE/
SERVICES (0.7%)
900 BEA Systems, Inc.* 7,587
1,089 Siebel Systems, Inc.* 10,041
641 VeriSign, Inc.* 20,736
2,916 Yahoo!, Inc.* 108,475
---------------
146,839
---------------
INVESTMENT BANKS/
BROKERS (1.5%)
577 Ameritrade Holding Corp.* 8,574
300 Edwards (A.G.), Inc. 12,393
833 Goldman Sachs
Group, Inc. (The) 81,218
285 Legg Mason, Inc. 23,421
2,441 Merrill Lynch & Co., Inc. 132,449
2,559 Schwab (Charles) Corp. (The) 29,019
---------------
287,074
---------------
INVESTMENT MANAGERS (0.5%)
568 Eaton Vance Corp.
(Non-Voting) $ 13,836
409 Franklin Resources, Inc. 29,505
100 Investors Financial
Services Corp. 4,149
633 Janus Capital Group, Inc. 9,723
1,102 Mellon Financial Corp. 30,592
267 Price (T.) Rowe Group, Inc. 15,929
---------------
103,734
---------------
LIFE/HEALTH INSURANCE (0.5%)
1,295 AFLAC, Inc. 53,807
376 Jefferson-Pilot Corp. 18,950
484 Lincoln National Corp. 22,037
693 UnumProvident Corp. 12,723
---------------
107,517
---------------
MAJOR BANKS (4.2%)
1,430 BB&T Corp. 57,114
475 Comerica, Inc. 26,543
1,115 KeyCorp 36,527
1,514 National City Corp. 52,324
725 PNC Financial Services Group 39,621
852 Popular, Inc. 20,065
1,174 Regions Financial Corp. 39,540
835 SunTrust Banks, Inc. 61,464
281 TD Banknorth, Inc. 8,424
135 Toronto-Dominion Bank (The) 5,742
170 UnionBanCal Corp. 10,671
4,097 Wachovia Corp. 207,923
4,300 Wells Fargo & Co. 259,763
---------------
825,721
---------------
MAJOR TELECOMMUNICATIONS (3.8%)
849 ALLTEL Corp. 49,387
2,022 AT&T Corp. 37,994
4,674 BellSouth Corp. 125,076
8,438 SBC Communications, Inc. 197,280
3,634 Sprint Corp. (FON Group) 86,089
7,059 Verizon Communications Inc. 249,747
---------------
745,573
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
14
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------
MANAGED HEALTH CARE (2.4%)
776 Aetna, Inc. $ 60,536
1,296 Caremark Rx, Inc.* 57,879
360 CIGNA Corp. 35,010
190 Coventry Health Care, Inc.* 13,228
392 Health Net, Inc.* 13,418
461 Humana, Inc.* 16,762
230 PacifiCare Health
Systems, Inc.* 14,451
3,402 UnitedHealth Group, Inc. 165,269
748 WellPoint Inc.* 99,484
---------------
476,037
---------------
MEDIA CONGLOMERATES (1.7%)
5,229 Disney (Walt) Co. (The) 143,484
11,176 Time Warner, Inc.* 194,462
---------------
337,946
---------------
MEDICAL DISTRIBUTORS (0.6%)
1,103 Cardinal Health, Inc. 63,897
262 Henry Schein, Inc.* 10,556
709 McKesson Corp. 28,551
310 Patterson Companies, Inc.* 14,071
---------------
117,075
---------------
MEDICAL SPECIALTIES (3.3%)
585 Applera Corp. - Applied
Biosystems Group 12,525
370 Bard (C.R.), Inc. 25,253
168 Bausch & Lomb, Inc. 13,119
1,561 Baxter International, Inc. 57,601
176 Beckman Coulter, Inc. 12,331
665 Becton, Dickinson & Co. 38,204
668 Biomet, Inc. 25,177
1,685 Boston Scientific Corp.* 45,647
259 Cytyc Corp.* 6,063
242 DENTSPLY International, Inc. 13,806
325 Fisher Scientific
International, Inc.* 20,300
799 Guidant Corp. 59,038
182 Hillenbrand Industries, Inc. 9,184
3,088 Medtronic, Inc. 165,980
904 St. Jude Medical, Inc.* 36,268
729 Stryker Corp. $ 35,466
488 Varian Medical Systems, Inc.* 18,354
324 Waters Corp.* 12,587
621 Zimmer Holdings, Inc.* 47,556
---------------
654,459
---------------
MEDICAL/NURSING SERVICES (0.2%)
402 DaVita, Inc.* 18,516
290 Lincare Holdings, Inc.* 12,748
---------------
31,264
---------------
MISCELLANEOUS COMMERCIAL
SERVICES (0.1%)
400 Adesa Inc. 9,112
282 Iron Mountain Inc.* 8,093
600 Sabre Holdings Corp. (Class A) 12,042
---------------
29,247
---------------
MISCELLANEOUS
MANUFACTURING (0.1%)
380 Pentair, Inc. 16,914
---------------
MOTOR VEHICLES (0.2%)
757 Harley-Davidson, Inc. 37,116
---------------
MULTI-LINE INSURANCE (2.0%)
5,855 American International
Group, Inc. 325,246
744 Hartford Financial Services
Group, Inc. (The) 55,644
421 Safeco Corp. 22,654
---------------
403,544
---------------
OFFICE EQUIPMENT/
SUPPLIES (0.2%)
275 Avery Dennison Corp. 14,424
671 Pitney Bowes, Inc. 29,933
---------------
44,357
---------------
OIL & GAS PIPELINES (0.2%)
312 Kinder Morgan, Inc. 24,246
1,268 Williams Companies, Inc. (The) 23,344
---------------
47,590
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
15
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------
OIL & GAS PRODUCTION (1.5%)
664 Anadarko Petroleum Corp. $ 50,265
812 Apache Corp. 47,713
1,178 Chesapeake Energy Corp. 24,114
1,220 Devon Energy Corp. 55,998
724 EOG Resources, Inc. 36,120
380 Newfield Exploration Co.* 14,611
254 Noble Energy, Inc. 18,890
306 Pioneer Natural Resources Co. 12,280
200 Pogo Producing Co. 9,888
868 XTO Energy Inc. 27,012
---------------
296,891
---------------
OIL REFINING/MARKETING (0.4%)
227 Sunoco, Inc. 23,283
704 Valero Energy Corp. 48,308
---------------
71,591
---------------
OILFIELD SERVICES/
EQUIPMENT (0.1%)
145 National-Oilwell, Inc.* 6,525
287 Smith International, Inc. 16,864
---------------
23,389
---------------
OTHER CONSUMER SERVICES (0.7%)
390 Apollo Group, Inc. (Class A)* 30,615
284 Career Education Corp.* 9,846
2,646 eBay, Inc.* 100,574
---------------
141,035
---------------
PACKAGED SOFTWARE (4.6%)
1,216 Adobe Systems, Inc. 40,201
716 Autodesk, Inc. 28,339
664 BMC Software, Inc.* 11,301
1,069 Compuware Corp.* 7,323
465 Intuit Inc.* 20,097
247 Mercury Interactive Corp. 11,145
23,379 Microsoft Corp.** 603,178
985 Novell, Inc.* 5,762
9,623 Oracle Corp.* 123,367
317 Red Hat, Inc.* 4,007
1,588 Symantec Corp.* 35,905
1,116 VERITAS Software Corp.* 27,755
---------------
918,380
---------------
PERSONNEL SERVICES (0.1%)
270 Manpower, Inc. $ 10,754
552 Robert Half International, Inc. 13,767
---------------
24,521
---------------
PHARMACEUTICALS: GENERIC
DRUGS (0.2%)
204 Barr Pharmaceuticals Inc.* 10,367
736 Mylan Laboratories, Inc. 12,144
473 Watson Pharmaceuticals, Inc.* 14,218
---------------
36,729
---------------
PHARMACEUTICALS: MAJOR (3.5%)
7,564 Johnson & Johnson 507,544
5,662 Merck & Co., Inc. 183,675
---------------
691,219
---------------
PHARMACEUTICALS: OTHER (0.4%)
330 Allergan, Inc. 25,512
937 Forest Laboratories, Inc.* 36,149
757 King Pharmaceuticals, Inc.* 7,161
203 Sepracor, Inc.* 12,334
---------------
81,156
---------------
PROPERTY - CASUALTY
INSURERS (1.0%)
402 Berkley (W.R.) Corp. 14,255
483 Chubb Corp. (The) 40,683
551 Cincinnati Financial Corp. 21,748
553 Progressive Corp. (The) 53,127
1,699 St. Paul Travelers
Companies, Inc. (The) 64,358
---------------
194,171
---------------
PUBLISHING: NEWSPAPERS (0.3%)
372 New York Times Co. (The)
(Class A) 11,670
162 Scripps (E.W.) Co. (Class A) 8,278
633 Tribune Co. 22,902
18 Washington Post Co. (The)
(Class B) 14,940
---------------
57,790
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
16
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------
PULP & PAPER (0.1%)
526 MeadWestvaco Corp. $ 15,086
---------------
RAILROADS (0.2%)
999 Norfolk Southern Corp. 31,888
---------------
REAL ESTATE INVESTMENT
TRUSTS (1.9%)
440 Archstone-Smith Trust 16,201
340 Boston Properties, Inc. 22,709
352 Catellus Development Corp. 10,303
199 Developers Diversified
Realty Corp. 9,074
492 Duke Realty Corp. 15,188
1,068 Equity Office Properties Trust 34,699
772 Equity Residential 27,715
636 General Growth Properties, Inc. 24,759
460 Health Care Property
Investors, Inc. 12,507
172 Hospitality Properties Trust 7,554
1,024 Host Marriott Corp. 17,152
423 iStar Financial Inc. 17,724
380 Kimco Realty Corp. 21,949
340 Liberty Property Trust 14,039
104 Mack-Cali Realty Corp. 4,585
300 New Plan Excel Realty Trust 8,082
629 Plum Creek Timber Co., Inc. 22,046
533 ProLogis 21,768
315 Public Storage, Inc. 18,941
408 Simon Property Group, Inc. 28,038
275 Vornado Realty Trust 21,643
---------------
376,676
---------------
RECREATIONAL PRODUCTS (0.4%)
259 Brunswick Corp. 11,147
751 Electronic Arts, Inc.* 39,458
1,299 Mattel, Inc. 23,616
---------------
74,221
---------------
REGIONAL BANKS (2.4%)
908 AmSouth Bancorporation 24,207
100 Bank of Hawaii Corp. 4,873
113 City National Corp. 8,026
258 Colonial BancGroup, Inc. (The) 5,751
368 Commerce Bancorp, Inc. $ 10,212
427 Compass Bancshares, Inc. 19,031
1,227 Fifth Third Bancorp 52,295
382 First Horizon National Corp. 16,132
949 Hibernia Corp. (Class A) 30,510
178 M&T Bank Corp. 18,181
566 Marshall & Ilsley Corp. 24,627
1,198 North Fork Bancorporation, Inc. 32,657
557 Northern Trust Corp. 25,577
776 Synovus Financial Corp. 22,558
372 TCF Financial Corp. 9,627
4,829 U.S. Bancorp 141,635
326 Zions Bancorporation 23,094
---------------
468,993
---------------
RESTAURANTS (1.0%)
450 Darden Restaurants, Inc. 14,616
3,209 McDonald's Corp. 99,286
272 Outback Steakhouse, Inc. 12,036
1,010 Starbucks Corp.* 55,298
412 Wendy's International, Inc. 18,594
---------------
199,830
---------------
SAVINGS BANKS (0.9%)
358 Astoria Financial Corp. 9,859
616 Golden West Financial Corp. 38,574
258 Independence Community
Bank Corp. 9,670
702 New York Community
Bancorp, Inc. 12,790
872 Sovereign Bancorp, Inc. 19,463
2,219 Washington Mutual, Inc. 91,645
---------------
182,001
---------------
SEMICONDUCTORS (4.2%)
936 Advanced Micro Devices, Inc.* 15,350
423 Agere Systems, Inc. 5,756
1,111 Altera Corp.* 24,654
957 Analog Devices, Inc. 35,486
524 Broadcom Corp. (Class A)* 18,597
659 Freescale Semiconductor
Inc. (Class B)* 13,312
16,481 Intel Corp. 443,833
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
17
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------
205 International Rectifier Corp.* $ 9,795
381 Intersil Corp. (Class A) 7,148
1,164 LSI Logic Corp.* 8,567
836 Maxim Integrated Products, Inc. 32,938
528 Microchip Technology Inc. 15,650
1,648 Micron Technology, Inc.* 18,095
1,290 National Semiconductor Corp. 25,955
700 PMC - Sierra, Inc.* 6,139
4,396 Texas Instruments Inc. 121,505
909 Xilinx, Inc. 25,225
---------------
828,005
---------------
SERVICES TO THE HEALTH
INDUSTRY (0.4%)
190 Express Scripts, Inc. (Class A)* 17,554
689 IMS Health Inc. 16,915
803 Medco Health Solutions Inc.* 40,150
259 Omnicare, Inc. 9,925
---------------
84,544
---------------
SPECIALTY INSURANCE (0.5%)
276 Ambac Financial Group, Inc. 19,914
463 Fidelity National Financial, Inc. 16,663
389 MBIA Inc. 21,757
179 MGIC Investment Corp. 10,980
245 PMI Group, Inc. (The) 9,261
224 Radian Group, Inc. 10,277
---------------
88,852
---------------
SPECIALTY STORES (0.9%)
185 AutoZone, Inc.* 16,746
758 Bed Bath & Beyond Inc.* 30,813
170 CarMax Inc.* 4,340
400 Michaels Stores, Inc. 16,844
1,005 Office Depot, Inc.* 19,819
356 PETsMART, Inc. 11,310
2,154 Staples, Inc. 46,376
326 Tiffany & Co. 10,148
655 Toys 'R' Us, Inc.* 17,161
229 Williams-Sonoma, Inc.* 9,007
---------------
182,564
---------------
SPECIALTY
TELECOMMUNICATIONS (0.3%)
673 American Tower Corp.
(Class A)* $ 12,141
368 CenturyTel, Inc. 12,067
743 Citizens Communications Co. 10,135
529 Crown Castle International
Corp.* 9,406
1,500 McLeodUSA Inc. (Class A)
(Escrow) --
171 NTL, Inc.* 10,992
---------------
54,741
---------------
STEEL (0.1%)
402 Nucor Corp. 21,290
---------------
TELECOMMUNICATION
EQUIPMENT (1.9%)
807 Comverse Technology, Inc.* 18,989
3,496 Corning Inc.* 54,817
11,786 Lucent Technologies Inc.* 33,119
5,973 Motorola, Inc. 103,751
4,128 QUALCOMM, Inc. 153,809
1,479 Tellabs, Inc.* 12,157
---------------
376,642
---------------
TOOLS/HARDWARE (0.1%)
206 Black & Decker Corp. 17,988
168 Stanley Works (The) 7,494
---------------
25,482
---------------
TRUCKS/CONSTRUCTION/
FARM MACHINERY (0.3%)
136 Cummins Inc. 9,241
634 Deere & Co. 41,939
---------------
51,180
---------------
WHOLESALE DISTRIBUTORS (0.2%)
500 Genuine Parts Co. 21,480
200 Grainger (W.W.), Inc. 10,878
---------------
32,358
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
18
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------
WIRELESS
TELECOMMUNICATIONS (0.5%)
2,615 Nextel Communications, Inc.
(Class A)* $ 78,921
165 Telephone & Data Systems, Inc. 6,270
165 Telephone & Data
Systems, Inc. 6,394
---------------
91,585
---------------
TOTAL COMMON STOCKS
(COST $17,095,930) 18,195,432
---------------
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS
- ---------------
SHORT-TERM INVESTMENT (8.0%)
REPURCHASE AGREEMENT
$ 1,583 Joint repurchase agreement
account 3.04% due 06/01/05
(dated 05/31/05; proceeds
$1,583,134) (a)
(COST $1,583,000) 1,583,000
---------------
TOTAL INVESTMENTS
(COST $18,678,930) (b) (c) 100.0% 19,778,432
OTHER ASSETS IN EXCESS OF
LIABILITIES 0.0 1,730
----- ---------------
NET ASSETS 100.0% $ 19,780,162
===== ===============
</Table>
- ----------
* NON-INCOME PRODUCING SECURITY.
** A PORTION OF THIS SECURITY IS PHYSICALLY SEGREGATED IN CONNECTION WITH
OPEN FUTURES CONTRACTS IN THE AMOUNT OF $93,000.
(a) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(b) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN AN AMOUNT EQUAL TO
$1,423,585 IN CONNECTION WITH OPEN FUTURES CONTRACTS.
(c) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE
AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED
APPRECIATION IS $3,019,787 AND THE AGGREGATE GROSS UNREALIZED
DEPRECIATION IS $1,920,285, RESULTING IN NET UNREALIZED APPRECIATION OF
$1,099,502.
FUTURES CONTRACTS OPEN AT MAY 31, 2005:
<Table>
<Caption>
UNREALIZED
NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE APPRECIATION/
CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE DEPRECIATION
- -----------------------------------------------------------------------------------------------------------
1 Long Nasdaq 100 Index June 2005 $ 154,500 $ 910
5 Long Nasdaq 100 E-Mini Index June 2005 154,500 4,637
4 Long S&P 500 Index June 2005 1,192,300 (21,170)
-------------
TOTAL UNREALIZED DEPRECIATION $ (15,623)
=============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
19
<Page>
MORGAN STANLEY KLD SOCIAL INDEX FUND
SUMMARY OF INVESTMENTS - MAY 31, 2005 (UNAUDITED)
<Table>
<Caption>
PERCENT OF
SECTOR VALUE NET ASSETS
- ----------------------------------------------------------------------------------
Finance $ 4,249,737 21.5%
Electronic Technology 2,570,445 13.0
Health Technology 1,832,316 9.3
Technology Services 1,611,734 8.1
Repurchase Agreement 1,583,000 8.0
Consumer Non-Durables 1,496,806 7.6
Retail Trade 1,412,233 7.1
Consumer Services 1,046,393 5.3
Communications 891,899 4.5
Health Services 631,588 3.2
Producer Manufacturing 585,632 3.0
Energy Minerals 368,482 1.9
Consumer Durables 319,460 1.6
Transportation 266,906 1.3
Distribution Services 233,232 1.2
Commercial Services 213,531 1.1
Process Industries 189,444 0.9
Utilities 126,864 0.6
Industrial Services 111,798 0.6
Non-Energy Minerals 36,932 0.2
--------------- ---------------
$ 19,778,432* 100%
=============== ===============
</Table>
- ----------
* DOES NOT INCLUDE OPEN FUTURES CONTRACTS WITH AN UNDERLYING FACE VALUE OF
$1,501,300 WITH UNREALIZED DEPRECIATION OF $15,623.
SEE NOTES TO FINANCIAL STATEMENTS
20
<Page>
MORGAN STANLEY KLD SOCIAL INDEX FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2005 (UNAUDITED)
<Table>
ASSETS:
Investments in securities, at value (cost $18,678,930) $ 19,778,432
Receivable for:
Dividends 19,817
Shares of beneficial interest sold 2,049
Prepaid expenses and other assets 30,989
Receivable from affiliate 12,426
---------------
TOTAL ASSETS 19,843,713
---------------
LIABILITIES:
Payable for:
Distribution fee 10,906
Variation margin 9,300
Shares of beneficial interest redeemed 945
Accrued expenses and other payables 42,400
---------------
TOTAL LIABILITIES 63,551
---------------
NET ASSETS $ 19,780,162
===============
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 21,430,174
Net unrealized appreciation 1,083,879
Accumulated undistributed net investment income 79,745
Accumulated net realized loss (2,813,636)
---------------
NET ASSETS $ 19,780,162
===============
CLASS A SHARES:
Net Assets $ 3,982,624
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 405,965
NET ASSET VALUE PER SHARE $ 9.81
===============
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE) $ 10.35
===============
CLASS B SHARES:
Net Assets $ 9,080,929
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 930,690
NET ASSET VALUE PER SHARE $ 9.76
===============
CLASS C SHARES:
Net Assets $ 2,576,387
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 265,204
NET ASSET VALUE PER SHARE $ 9.71
===============
CLASS D SHARES:
Net Assets $ 4,140,222
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 421,277
NET ASSET VALUE PER SHARE $ 9.83
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
21
<Page>
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 31, 2005 (UNAUDITED)
<Table>
<Caption>
NET INVESTMENT INCOME:
INCOME
Dividends $ 136,694
Interest 22,431
---------------
TOTAL INCOME 159,125
---------------
EXPENSES
Professional fees 122,657
Distribution fee (Class A shares) 2,202
Distribution fee (Class B shares) 51,808
Distribution fee (Class C shares) 12,352
Shareholder reports and notices 27,719
Registration fees 22,272
Transfer agent fees and expenses 14,832
Investment advisory fee 11,881
Administration fee 7,921
Custodian fees 3,306
Other 26,614
---------------
TOTAL EXPENSES 303,564
Less: amounts waived/reimbursed (237,202)
---------------
NET EXPENSES 66,362
---------------
NET INVESTMENT INCOME 92,763
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
NET REALIZED GAIN ON:
Investments 32,351
Futures contracts 78,443
---------------
NET REALIZED GAIN 110,794
---------------
NET CHANGE IN UNREALIZED APPRECIATION ON:
Investments 201,328
Futures contracts (66,619)
---------------
NET APPRECIATION 134,709
---------------
NET GAIN 245,503
---------------
NET INCREASE $ 338,266
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
22
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
MAY 31, 2005 NOVEMBER 30, 2004
--------------- -----------------
(UNAUDITED)
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 92,763 $ 200,771
Net realized gain 110,794 229,696
Net change in unrealized appreciation 134,709 1,282,299
--------------- -----------------
NET INCREASE 338,266 1,712,766
--------------- -----------------
Dividends to Shareholders from Net Investment Income
Class A shares (32,594) (19,635)
Class B shares (78,004) (26,629)
Class C shares (20,851) (4,720)
Class D shares (68,551) (31,016)
--------------- -----------------
TOTAL DIVIDENDS (200,000) (82,000)
--------------- -----------------
Net increase (decrease) from transactions in shares of beneficial interest (57,349) 3,110,855
--------------- -----------------
NET INCREASE 80,917 4,741,621
NET ASSETS:
Beginning of period 19,699,245 14,957,624
--------------- -----------------
END OF PERIOD
(INCLUDING ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME OF
$79,745 AND $186,982, RESPECTIVELY) $ 19,780,162 $ 19,699,245
=============== =================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
23
<Page>
MORGAN STANLEY KLD SOCIAL INDEX FUND
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2005 (UNAUDITED)
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley KLD Social Index Fund (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a non-diversified,
open-end management investment company. The Fund's investment objective is to
provide investment results that before expenses corresponds to the total return
of the KLD Large Cap Social(SM) Index ("KLD Index"). The Fund was organized as a
Massachusetts business trust on April 6, 2001 and commenced operations on
July 13, 2001.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within eighteen
months, six years and one year, respectively. Class D shares are not subject to
a sales charge. Additionally, Class A shares, Class B shares and Class C shares
incur distribution expenses.
The 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
24
<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.
25
<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
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.
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 Manager 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 May 31, 2005,
included in the Statement of Assets and Liabilities is a receivable from
affiliate, which represents expense reimbursements due to the Fund.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the
"Distributor"), an affiliate of the Investment 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 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 $1,091,826
at May 31, 2005.
26
<Page>
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Financial Advisors or other selected
broker-dealer representatives may be reimbursed in the subsequent calendar year.
For the six months ended May 31, 2005, the distribution fee was accrued for
Class A shares and Class C shares at the annual rate of 0.16% and 1.0%,
respectively.
The Distributor has informed the Fund that for the six months ended May 31,
2005, it received contingent deferred sales charges from certain redemptions of
the Fund's Class B shares of $11,778 and received $4,456 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 proceeds from sales of portfolio securities, excluding short-term
investments, for the six months ended May 31, 2005 aggregated $45,782.
Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and
Distributor, is the Fund's transfer agent. At May 31, 2005, the Fund had
transfer agent fees and expenses payable of approximately $500.
The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan")
which allows each independent Trustee to defer payment of all, or a portion, of
the fees he 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.
27
<Page>
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
MAY 31, 2005 NOVEMBER 30, 2004
-------------------------------- --------------------------------
(UNAUDITED)
SHARES AMOUNT SHARES AMOUNT
-------------- -------------- -------------- --------------
CLASS A SHARES
Sold 212,058 $ 1,993,823 85,410 $ 793,258
Reinvestment of dividends 3,119 31,036 2,172 19,479
Redeemed (53,800) (518,281) (79,896) (744,142)
-------------- -------------- -------------- --------------
Net increase -- Class A 161,377 1,506,578 7,686 68,595
-------------- -------------- -------------- --------------
CLASS B SHARES
Sold 47,310 458,030 289,886 2,658,349
Reinvestment of dividends 6,867 68,260 2,587 23,201
Redeemed (239,900) (2,258,423) (144,878) (1,337,999)
-------------- -------------- -------------- --------------
Net increase (decrease) -- Class B (185,723) (1,732,133) 147,595 1,343,551
-------------- -------------- -------------- --------------
CLASS C SHARES
Sold 27,257 262,715 102,711 948,973
Reinvestment of dividends 1,895 18,758 462 4,129
Redeemed (5,916) (55,806) (32,227) (297,741)
-------------- -------------- -------------- --------------
Net increase -- Class C 23,236 225,667 70,946 655,361
-------------- -------------- -------------- --------------
CLASS D SHARES
Sold 73,331 709,302 194,544 1,805,479
Reinvestment of dividends 6,076 60,580 2,945 26,476
Redeemed (85,750) (827,343) (85,152) (788,607)
-------------- -------------- -------------- --------------
Net increase (decrease) -- Class D (6,343) (57,461) 112,337 1,043,348
-------------- -------------- -------------- --------------
Net increase (decrease) in Fund (7,453) $ (57,349) 338,564 $ 3,110,855
============== ============== ============== ==============
</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.
28
<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.
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.
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 consolidated class action. 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. On March 10, 2005,
Plaintiffs sought leave to supplement their complaint to assert claims on behalf
of other investors. While the Fund and Adviser believe that each 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 SIX FOR THE YEAR ENDED NOVEMBER 30, JULY 13, 2001*
MONTHS ENDED ---------------------------------------- THROUGH
MAY 31, 2005 2004 2003 2002 NOVEMBER 30, 2001
------------ ---------- ---------- ---------- ------------------
(UNAUDITED)
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.75 $ 8.88 $ 7.73 $ 9.39 $ 10.00
---------- ---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income++ 0.07 0.15 0.10 0.09 0.03
Net realized and unrealized gain
(loss) 0.13 0.80 1.17 (1.70) (0.64)
---------- ---------- ---------- ---------- ----------
Total income (loss) from investment
operations 0.20 0.95 1.27 (1.61) (0.61)
---------- ---------- ---------- ---------- ----------
Less dividends from net investment
income (0.14) (0.08) (0.12) (0.05) -
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 9.81 $ 9.75 $ 8.88 $ 7.73 $ 9.39
========== ========== ========== ========== ==========
TOTAL RETURN+ 2.00%(1) 10.81% 16.72% (17.25)% (6.10)%(1)
RATIOS TO AVERAGE NET ASSETS(3)(4):
Expenses 0.16%(2) 0.23% 0.20% 0.24% 0.25%(2)
Net investment income 1.45%(2) 1.61% 1.29% 1.01% 0.85%(2)
SUPPLEMENTAL DATA:
Net assets, end of period,
in thousands $ 3,983 $ 2,384 $ 2,103 $ 756 $ 329
Portfolio turnover rate 0%(1) 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
----------------- ------- --------------
MAY 31, 2005 2.56% (0.95)%
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 SIX FOR THE YEAR ENDED NOVEMBER 30, JULY 13, 2001*
MONTHS ENDED ---------------------------------------- THROUGH
MAY 31, 2005 2004 2003 2002 NOVEMBER 30, 2001
------------ ---------- ---------- ---------- ------------------
(UNAUDITED)
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.67 $ 8.82 $ 7.68 $ 9.36 $ 10.00
---------- ---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income++ 0.03 0.08 0.04 0.02 0.00
Net realized and unrealized gain
(loss) 0.13 0.80 1.16 (1.69) (0.64)
---------- ---------- ---------- ---------- ----------
Total income (loss) from investment
operations 0.16 0.88 1.20 (1.67) (0.64)
---------- ---------- ---------- ---------- ----------
Less dividends from net investment
income (0.07) (0.03) (0.06) (0.01) -
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 9.76 $ 9.67 $ 8.82 $ 7.68 $ 9.36
========== ========== ========== ========== ==========
TOTAL RETURN+ 1.64%(1) 9.97% 15.75% (17.90)% (6.40)%(1)
RATIOS TO AVERAGE NET ASSETS(3)(4):
Expenses 1.00%(2) 1.00% 1.00% 1.00% 1.00%(2)
Net investment income 0.61%(2) 0.84% 0.49% 0.25% 0.10%(2)
SUPPLEMENTAL DATA:
Net assets, end of period,
in thousands $ 9,081 $ 10,799 $ 8,547 $ 5,670 $ 4,413
Portfolio turnover rate 0%(1) 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
----------------- ------- --------------
MAY 31, 2005 3.40% (1.79)%
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 SIX FOR THE YEAR ENDED NOVEMBER 30, JULY 13, 2001*
MONTHS ENDED ---------------------------------------- THROUGH
MAY 31, 2005 2004 2003 2002 NOVEMBER 30, 2001
------------ ---------- ---------- ---------- ------------------
(UNAUDITED)
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.65 $ 8.79 $ 7.66 $ 9.36 $ 10.00
---------- ---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income++ 0.03 0.09 0.04 0.02 0.00
Net realized and unrealized gain
(loss) 0.11 0.80 1.16 (1.69) (0.64)
---------- ---------- ---------- ---------- ----------
Total income (loss) from investment
operations 0.14 0.89 1.20 (1.67) (0.64)
---------- ---------- ---------- ---------- ----------
Less dividends from net investment
income (0.08) (0.03) (0.07) (0.03) -
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 9.71 $ 9.65 $ 8.79 $ 7.66 $ 9.36
========== ========== ========== ========== ==========
TOTAL RETURN+ 1.48%(1) 10.12% 15.81% (17.92)% (6.40)%(1)
RATIOS TO AVERAGE NET ASSETS(3)(4):
Expenses 1.00%(2) 0.93% 1.00% 1.00% 1.00%(2)
Net investment income 0.61%(2) 0.91% 0.49% 0.25% 0.10%(2)
SUPPLEMENTAL DATA:
Net assets, end of period,
in thousands $ 2,576 $ 2,334 $ 1,503 $ 980 $ 544
Portfolio turnover rate 0%(1) 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
----------------- ------- --------------
MAY 31, 2005 3.40% (1.79)%
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 SIX FOR THE YEAR ENDED NOVEMBER 30, JULY 13, 2001*
MONTHS ENDED ---------------------------------------- THROUGH
MAY 31, 2005 2004 2003 2002 NOVEMBER 30, 2001
------------ ---------- ---------- ---------- ------------------
(UNAUDITED)
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.78 $ 8.90 $ 7.74 $ 9.40 $ 10.00
---------- ---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income++ 0.08 0.17 0.12 0.11 0.04
Net realized and unrealized gain
(loss) 0.13 0.80 1.17 (1.71) (0.64)
---------- ---------- ---------- ---------- ----------
Total income (loss) from investment
operations 0.21 0.97 1.29 (1.60) (0.60)
---------- ---------- ---------- ---------- ----------
Less dividends from net investment
income (0.16) (0.09) (0.13) (0.06) -
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 9.83 $ 9.78 $ 8.90 $ 7.74 $ 9.40
========== ========== ========== ========== ==========
TOTAL RETURN+ 2.11%(1) 11.04% 17.05% (17.17)% (6.00)%(1)
RATIOS TO AVERAGE NET ASSETS(3)(4):
Expenses 0.00%(2) 0.00% 0.00% 0.00% 0.00%(2)
Net investment income 1.61%(2) 1.84% 1.49% 1.25% 1.10%(2)
SUPPLEMENTAL DATA:
Net assets, end of period,
in thousands $ 4,140 $ 4,182 $ 2,805 $ 4,419 $ 13,634
Portfolio turnover rate 0%(1) 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
----------------- ------- --------------
MAY 31, 2005 2.40% (0.79)%
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>
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
The financial statements included herein have been taken from the records of the
Fund without examination by the independent auditors and accordingly they do not
express an opinion thereon.
This report is submitted for the general information of the shareholders of the
Fund. For more detailed information about the Fund, its fees and expenses and
other pertinent information, please read its Prospectus. The Fund's Statement of
Additional Information contains additional information about the Fund, including
its trustees. It is available, without charge, by calling (800) 869-NEWS.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective Prospectus. Read the
Prospectus carefully before investing.
Investments and services offered through Morgan Stanley DW Inc., member SIPC.
Morgan Stanley Distributors Inc., member NASD.
(C) 2005 Morgan Stanley
[MORGAN STANLEY LOGO]
39908RPT-RA05-00568P-Y05/05
[GRAPHIC]
MORGAN STANLEY FUNDS
MORGAN STANLEY
KLD SOCIAL INDEX FUND
SEMIANNUAL REPORT
MAY 31, 2005
[MORGAN STANLEY LOGO]
<Page>
Item 2. Code of Ethics.
Not applicable for semiannual reports.
Item 3. Audit Committee Financial Expert.
Not applicable for semiannual reports.
Item 4. Principal Accountant Fees and Services
Not applicable for semiannual reports.
Item 5. Audit Committee of Listed Registrants.
Not applicable for semiannual reports.
Item 6.
Refer to Item 1.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable for semiannual reports.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Applicable only to reports filed by closed-end funds.
Item 9. Closed-End Fund Repurchases
Applicable to reports filed by closed-end funds.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
<Page>
Item 11. Controls and Procedures
(a) The Fund's principal executive officer and principal financial officer have
concluded that the Fund's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Fund in this Form N-CSRS
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 12. Exhibits
(a) Code of Ethics - Not applicable for semiannual reports.
(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Morgan Stanley KLD Social Index Fund
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
July 20, 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
July 20, 2005
/s/ Francis Smith
Francis Smith
Principal Financial Officer
July 20, 2005