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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: 811-08471
Morgan Stanley Aggressive Equity 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: July 31, 2005
Date of reporting period: July 31, 2005
Item 1 - Report to Shareholders
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WELCOME, SHAREHOLDER:
IN THIS REPORT, YOU'LL LEARN ABOUT HOW YOUR INVESTMENT IN MORGAN STANLEY
AGGRESSIVE EQUITY 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. PLEASE SEE THE PROSPECTUS FOR MORE COMPLETE
INFORMATION ON INVESTMENT RISKS.
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FUND REPORT
For the year ended July 31, 2005
TOTAL RETURN FOR THE 12 MONTHS ENDED JULY 31, 2005
<Table>
<Caption>
RUSSELL LIPPER
3000(R) MULTI-CAP
GROWTH GROWTH
CLASS A CLASS B CLASS C CLASS D INDEX(1) FUNDS INDEX(2)
26.50% 25.69% 25.66% 26.86% 13.81% 18.89%
</Table>
THE PERFORMANCE OF THE FUND'S FOUR SHARE CLASSES VARIES BECAUSE EACH 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
Despite volatility, uncertainty and changing market sentiment, the domestic
stock market posted strong returns for the 12-month period ending July 31, 2005.
While this advance was broad, small and mid capitalization stocks generally
outpaced their larger counterparts.
As the fiscal year opened, investors were distracted by rising oil prices, the
pace of economic growth, inflation, and the intentions of the Federal Reserve
(the "Fed"). The prospect of terrorist disruption at the Olympics, the conflict
in Iraq and the November U.S. presidential election added to investors' unease.
As the months progressed, sentiment improved and stocks gained ground. The
Olympics and presidential election passed without major incident, the economy
appeared to be on track for moderate growth, and investors seemed to come to
terms with the Fed's "measured" rate hikes. Against this backdrop, stocks surged
in a fourth-quarter rally.
However, the market sold off sharply early in 2005 as investors sought to lock
in 2004's gains. Earlier anxieties resurfaced. As oil prices soared and
inflationary pressures loomed, investors feared for the future pace of U.S.
economic growth. Maintaining the course it set in 2004, the Federal Open Market
Committee continued to increase the federal funds target rate at each of its
meetings in 2005. While short-term interest rates increased, long-term rates
fell, and this flattening of the yield curve concerned some investors who
believed it indicated looming trouble.
In the final months of the reporting period, the market changed direction once
again. Although oil prices remained high and the prospect for additional rate
increases appeared likely, investor sentiment notably improved. Encouraging
economic data, increased consumer confidence, waning inflationary fears, and
many solid corporate earnings announcements boosted the stock market.
PERFORMANCE ANALYSIS
Morgan Stanley Aggressive Equity Fund outperformed the Russell 3000(R) Growth
Index and the Lipper Multi-Cap Growth Funds Index for the 12 months ended July
31, 2005, assuming no deduction of applicable sales charges. Broad strength in
stock selection and favorable allocations across sectors drove Fund's
performance. Financial services, consumer discretionary and technology
contributed most significantly. Within financial services, the Fund was well
served by its overall underweighting relative to the Russell benchmark, as well
as by individual stock performance. Diversified financial services, financial
information services, multi-line insurance, and investment management services
were notable buoys to performance. Also on the upside,
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our investment discipline resulted in an overweighting in consumer discretionary
stocks, with particular strength in consumer electronics, casino and gambling,
and commercial services companies. Within technology, the Fund benefited from an
overall underweighting versus the benchmark; as well as from stock selection.
Positioning in computer services software and electronics were especially
advantageous.
Superior stock selection within the energy and the materials-and-processing
sectors further propelled the Fund's advance, with robust gains in crude oil
producers and building materials, respectively.
While the Fund outperformed its benchmark by a wide margin, not all areas
contributed with equal strength. Integrated oil, multi-industry, and consumer
staples posted more muted gains. Additionally, underweights versus the benchmark
within producer durables and health care were slightly disadvantageous.
THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL
OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE FUND IN THE FUTURE.
TOP 10 HOLDINGS
<Table>
Ultra Petroleum Corp. (Canada) 6.3%
eBay Inc. 5.9
Corporate Executive Board Co. (The) 5.2
Google, Inc. (Class A) 5.2
Getty Images, Inc. 4.2
Carnival Corp. (Panama) 3.6
America Movil S.A. de C.V. (Series L) (ADR) (Mexico) 3.4
Monsanto Co. 3.2
Station Casinos, Inc. 3.1
Electronic Arts Inc. 3.0
</Table>
TOP FIVE INDUSTRIES
<Table>
Other Consumer Services 9.0%
Internet Software/Services 7.8
Casino/Gaming 7.0
Oil & Gas Production 6.7
Advertising/Marketing Services 6.2
</Table>
DATA AS OF JULY 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
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INVESTMENT STRATEGY
THE FUND NORMALLY INVESTS AT LEAST 80 PERCENT OF ITS ASSETS IN COMMON STOCKS AND
OTHER EQUITY SECURITIES OF U.S. OR FOREIGN COMPANIES THAT OFFER THE POTENTIAL
FOR SUPERIOR EARNINGS GROWTH IN THE OPINION OF THE FUND'S "INVESTMENT ADVISER,"
MORGAN STANLEY INVESTMENT ADVISORS INC. THE FUND'S OTHER EQUITY SECURITIES MAY
INCLUDE PREFERRED STOCK, DEPOSITARY RECEIPTS OR SECURITIES CONVERTIBLE INTO
COMMON STOCK.
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 POLICY AND PROCEDURES AND PROXY VOTING RECORD
YOU MAY OBTAIN A COPY OF THE FUND'S PROXY VOTING POLICY AND PROCEDURES WITHOUT
CHARGE, UPON REQUEST, BY CALLING TOLL FREE 800-869-NEWS OR BY VISITING THE
MUTUAL FUND CENTER ON OUR WEB SITE AT www.morganstanley.com. IT IS ALSO
AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT
http://www.sec.gov.
YOU MAY OBTAIN INFORMATION REGARDING HOW THE FUND VOTED PROXIES RELATING TO
PORTFOLIO SECURITIES DURING THE MOST RECENT TWELVE-MONTH PERIOD ENDED JUNE 30 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.
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(This page has been left blank intentionally.)
5
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PERFORMANCE SUMMARY
[CHART]
PERFORMANCE OF $10,000 INVESTMENT
<Table>
<Caption>
RUSSELL 3000(R)
($ IN THOUSANDS) CLASS A~~ CLASS B~~ CLASS C~~ CLASS D~~ GROWTH(1) LIPPER(2)
Feb-1999 $ 9,475 $ 10,000 $ 10,000 $ 10,000 $ 10,000 $ 10,000
Apr-1999 $ 10,138 $ 10,680 $ 10,680 $ 10,700 $ 10,424 $ 10,620
Jul-1999 $ 10,299 $ 10,840 $ 10,840 $ 10,890 $ 10,481 $ 10,892
Oct-1999 $ 11,162 $ 11,720 $ 11,720 $ 11,800 $ 11,168 $ 11,477
Jan-2000 $ 14,137 $ 14,820 $ 14,820 $ 14,960 $ 12,516 $ 14,125
Apr-2000 $ 14,241 $ 14,900 $ 14,900 $ 15,080 $ 13,328 $ 14,950
Jul-2000 $ 14,440 $ 15,080 $ 15,080 $ 15,300 $ 13,014 $ 14,844
Oct-2000 $ 14,989 $ 15,620 $ 15,620 $ 15,880 $ 12,263 $ 14,554
Jan-2001 $ 13,160 $ 13,687 $ 13,687 $ 13,950 $ 7,872 $ 12,804
Apr-2001 $ 11,288 $ 11,719 $ 11,719 $ 11,963 $ 9,096 $ 10,949
Jul-2001 $ 10,352 $ 10,718 $ 10,718 $ 10,976 $ 8,557 $ 10,119
Oct-2001 $ 9,265 $ 9,580 $ 9,580 $ 9,841 $ 7,439 $ 8,435
Jan-2002 $ 9,806 $ 10,118 $ 10,118 $ 10,412 $ 8,012 $ 9,127
Apr-2002 $ 9,666 $ 9,958 $ 9,970 $ 10,275 $ 7,342 $ 8,520
Jul-2002 $ 8,111 $ 8,348 $ 8,360 $ 8,635 $ 6,088 $ 6,797
Oct-2002 $ 7,927 $ 8,143 $ 8,143 $ 8,441 $ 5,972 $ 6,697
Jan-2003 $ 7,484 $ 7,663 $ 7,674 $ 7,974 $ 5,733 $ 6,482
Apr-2003 $ 7,722 $ 7,891 $ 7,903 $ 8,225 $ 6,240 $ 7,018
Jul-2003 $ 8,327 $ 8,497 $ 8,508 $ 8,886 $ 6,859 $ 7,858
Oct-2003 $ 9,072 $ 9,239 $ 9,250 $ 9,672 $ 7,367 $ 8,582
Jan-2004 $ 9,634 $ 9,787 $ 9,798 $ 10,275 $ 7,872 $ 9,146
Apr-2004 $ 9,342 $ 9,479 $ 9,490 $ 9,979 $ 7,671 $ 8,929
Jul-2004 $ 9,007 $ 9,113 $ 9,125 $ 9,626 $ 7,455 $ 8,676
Oct-2004 $ 9,644 $ 9,753 $ 9,764 $ 10,321 $ 7,627 $ 9,075
Jan-2005 $ 10,087 $ 10,187 $ 10,198 $ 10,799 $ 7,947 $ 9,570
Apr-2005 $ 9,688 $ 9,753 $ 9,764 $ 10,378 $ 7,694 $ 9,126
Jul-2005 $ 11,394 $ 11,454 $ 11,466 $ 12,212 $ 8,484 $ 10,315
</Table>
6
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AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED JULY 31, 2005
<Table>
<Caption>
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS D SHARES++
(SINCE 02/24/99) (SINCE 02/24/99) (SINCE 02/24/99) (SINCE 02/24/99)
SYMBOL AEQAX AEQBX AEQCX AEQDX
1 YEAR 26.50%(3) 25.69%(3) 25.66%(3) 26.86%(3)
19.86(4) 20.69(4) 24.66(4) --
5 YEARS (4.63)(3) (5.35)(3) (5.33)(3) (4.41)(3)
(5.65)(4) (5.69)(4) (5.33)(4) --
SINCE INCEPTION 2.91(3) 2.13(3) 2.15(3) 3.16(3)
2.05(4) 2.13(4) 2.15(4) --
</Table>
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFOMANCE, 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
www.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 1.0% FOR SHARES
REDEEMED WITHIN ONE YEAR OF PURCHASE.
++ CLASS D HAS NO SALES CHARGE.
(1) THE RUSSELL 3000(R) GROWTH INDEX MEASURES THE PERFORMANCE OF THOSE
COMPANIES IN THE RUSSELL 3000(R) INDEX WITH HIGHER PRICE-TO-BOOK RATIOS AND
HIGHER FORECASTED GROWTH VALUES. 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 MULTI-CAP GROWTH FUNDS INDEX IS AN EQUALLY WEIGHTED PERFORMANCE
INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN THE LIPPER
MULTI-CAP GROWTH 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 JULY 31, 2005.
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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 advisory 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 02/01/05 - 07/31/05.
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 *
------------- ------------- ---------------
02/01/05 -
02/01/05 07/31/05 07/31/05
------------- ------------- ---------------
CLASS A
Actual (12.96% return) $ 1,000.00 $ 1,129.60 $ 7.50
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,017.75 $ 7.10
CLASS B
Actual (12.44% return) $ 1,000.00 $ 1,124.40 $ 11.43
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,014.03 $ 10.84
CLASS C
Actual (12.43% return) $ 1,000.00 $ 1,124.30 $ 11.38
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,014.08 $ 10.79
CLASS D
Actual (13.08% return) $ 1,000.00 $ 1,130.80 $ 6.18
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,018.99 $ 5.86
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 1.42%, 2.17%,
2.16% AND 1.17% RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER
THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD).
8
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INVESTMENT ADVISORY AGREEMENT APPROVAL
NATURE, EXTENT AND QUALITY OF SERVICES
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 three-year period but
better for the one- and five-year periods. The Board concluded that the Fund's
overall performance was competitive with its performance peer group.
FEES RELATIVE TO OTHER FUNDS MANAGED BY THE ADVISER WITH COMPARABLE INVESTMENT
STRATEGIES
The Board reviewed the advisory and administrative fees (together, the
"management fee") paid by the Fund under the Management Agreement. The Board
noted that the rate was comparable to the management fee rates charged by the
Adviser to any other funds it manages with investment strategies comparable to
those of the Fund.
FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the management fee rate and the total expense ratio of the
Fund. The Board noted that: (i) the Fund's management fee rate was lower than
the average management fee rate for funds, selected by Lipper (the "expense peer
group"), managed by other advisers with investment strategies comparable to
those of the Fund, as
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shown in the Lipper Report for the Fund; and (ii) the Fund's total expense ratio
was also lower than the average total expense ratio of the funds included in the
Fund's expense peer group. The Board concluded that the Fund's management fee
and total expense ratio were competitive with those of the Fund's expense peer
group.
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 includes breakpoints. The Board also
reviewed the level of the Fund's management fee and noted that the fee, as a
percentage of the Fund's net assets, would decrease as net assets increase
because the management fee includes breakpoints. The Board concluded that the
Fund's management fee would reflect economies of scale as assets increase.
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 profits earned by the
Adviser and its affiliates were not excessive in light of the advisory,
administrative and other services provided to 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 Morgan Stanley 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
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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.
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.
11
<Page>
MORGAN STANLEY AGGRESSIVE EQUITY FUND
PORTFOLIO OF INVESTMENTS - JULY 31, 2005
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------
COMMON STOCKS (99.1%)
ADVERTISING/MARKETING
SERVICES (6.2%)
164,500 Getty Images, Inc.* $ 13,283,375
145,200 Lamar Advertising Co.
(Class A)* 6,390,252
---------------
19,673,627
---------------
AIR FREIGHT/COURIERS (3.7%)
95,700 C.H. Robinson Worldwide, Inc. 5,987,949
105,800 Expeditors International of
Washington, Inc. 5,824,290
---------------
11,812,239
---------------
CASINO/GAMING (7.0%)
272,300 International Game
Technology 7,450,128
134,600 Station Casinos, Inc. 9,886,370
89,160 Wynn Resorts, Ltd.* 5,019,708
---------------
22,356,206
---------------
CHEMICALS: AGRICULTURAL (3.2%)
151,320 Monsanto Co. 10,194,428
---------------
COMPUTER PROCESSING
HARDWARE (1.9%)
152,900 Dell, Inc.* 6,187,863
---------------
CONSTRUCTION MATERIALS (1.1%)
59,300 Rinker Group Ltd.
(ADR) (Australia) 3,406,192
---------------
DISCOUNT STORES (5.0%)
134,800 Costco Wholesale Corp. 6,196,756
62,200 Sears Holdings Corp.* 9,593,106
---------------
15,789,862
---------------
ELECTRONIC PRODUCTION
EQUIPMENT (2.2%)
196,000 Tessera Technologies, Inc.* 6,883,520
---------------
GAS DISTRIBUTORS (1.0%)
47,300 Questar Corp. 3,319,514
---------------
HOME BUILDING (2.2%)
7,654 NVR, Inc.* $ 7,179,452
---------------
HOTELS/RESORTS/
CRUISELINES (3.6%)
219,600 Carnival Corp. (Panama) 11,507,040
---------------
INTERNET RETAIL (1.2%)
85,300 Amazon.com, Inc.* 3,853,001
---------------
INTERNET SOFTWARE/
SERVICES (7.8%)
57,100 Google, Inc. (Class A)* 16,431,096
252,500 Yahoo!, Inc.* 8,418,350
---------------
24,849,446
---------------
INVESTMENT BANKS/
BROKERS (4.8%)
28,555 Chicago Mercantile Exchange
Holdings, Inc. 8,596,483
174,899 Greenhill & Co., Inc. 6,709,126
---------------
15,305,609
---------------
MEDICAL DISTRIBUTORS (1.4%)
101,300 Patterson Companies, Inc.* 4,517,980
---------------
MEDICAL SPECIALTIES (2.6%)
107,500 Dade Behring Holdings Inc. 8,148,500
---------------
MISCELLANEOUS COMMERCIAL
SERVICES (5.2%)
205,900 Corporate Executive
Board Co. (The) 16,612,012
---------------
OIL & GAS PRODUCTION (6.7%)
23,030 Southwestern Energy Co.* 1,269,183
527,520 Ultra Petroleum Corp.
(Canada)* 20,003,558
---------------
21,272,741
---------------
OTHER CONSUMER
SERVICES (9.0%)
78,700 Career Education Corp.* 3,052,773
450,100 eBay Inc.* 18,805,178
69,600 Strayer Education, Inc. 6,850,728
---------------
28,708,679
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
12
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------
PACKAGED SOFTWARE (3.2%)
270,700 Red Hat, Inc.* $ 4,125,468
254,500 Salesforce.com Inc.* 5,993,475
---------------
10,118,943
---------------
PERSONNEL SERVICES (2.9%)
306,600 Monster Worldwide, Inc.* 9,311,442
---------------
PROPERTY - CASUALTY
INSURERS (1.8%)
2,074 Berkshire Hathaway, Inc.
(Class B)* 5,769,868
---------------
RECREATIONAL PRODUCTS (4.0%)
167,300 Electronic Arts Inc.* 9,636,480
99,800 Shanda Interactive
Entertainment, Ltd. (ADR)
(Cayman Islands)* 3,264,448
---------------
12,900,928
---------------
RESTAURANTS (1.9%)
103,900 P.F. Chang's China
Bistro, Inc.* 5,921,261
---------------
SEMICONDUCTORS (1.6%)
117,500 Marvell Technology
Group Ltd. (Bermuda)* 5,133,575
---------------
SERVICES TO THE HEALTH
INDUSTRY (2.5%)
137,884 Stericycle, Inc.* 8,013,818
---------------
SPECIALTY
TELECOMMUNICATIONS (2.0%)
298,416 Crown Castle International
Corp.* 6,493,532
---------------
WIRELESS
TELECOMMUNICATIONS (3.4%)
490,200 America Movil S.A. de C.V.
(Series L) (ADR) (Mexico) 10,911,852
---------------
TOTAL COMMON STOCKS
(COST $268,078,179) 316,153,130
---------------
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ----------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (1.5%)
REPURCHASE AGREEMENT
$ 4,783 Joint repurchase agreement
account 3.29% due 08/01/05
(dated 07/29/05;
proceeds $4,784,311) (a)
(COST $4,783,000) $ 4,783,000
---------------
TOTAL INVESTMENTS
(COST $272,861,179) (b) 100.6% 320,936,130
LIABILITIES IN EXCESS OF
OTHER ASSETS (0.6) (1,959,519)
----- ---------------
NET ASSETS 100.0% $ 318,976,611
===== ===============
</Table>
- ----------
ADR AMERICAN DEPOSITARY RECEIPT.
* NON-INCOME PRODUCING SECURITY.
(a) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(b) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $272,861,179. THE
AGGREGATE GROSS UNREALIZED APPRECIATION IS $51,542,564 AND THE
AGGREGATE GROSS UNREALIZED DEPRECIATION IS $3,467,613, RESULTING IN NET
UNREALIZED APPRECIATION OF $48,074,951.
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
MORGAN STANLEY AGGRESSIVE EQUITY
SUMMARY OF INVESTMENTS - JULY 31, 2005
<Table>
<Caption>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- -------------------------------------------------------------------------------------
Other Consumer Services $ 28,708,679 9.0%
Internet Software/Services 24,849,446 7.8
Casino/Gaming 22,356,206 7.0
Oil & Gas Production 21,272,741 6.7
Advertising/
Marketing Services 19,673,627 6.2
Miscellaneous Commercial
Services 16,612,012 5.2
Discount Stores 15,789,862 5.0
Investment Banks/Brokers 15,305,609 4.8
Recreational Products 12,900,928 4.0
Air Freight/Couriers 11,812,239 3.7
Hotels/Resorts/Cruiselines 11,507,040 3.6
Wireless
Telecommunications 10,911,852 3.4
Chemicals: Agricultural 10,194,428 3.2
Packaged Software 10,118,943 3.2
Personnel Services 9,311,442 2.9
Medical Specialties $ 8,148,500 2.6%
Services To The
Health Industry 8,013,818 2.5
Home Building 7,179,452 2.2
Electronic Production
Equipment 6,883,520 2.2
Specialty
Telecommunications 6,493,532 2.0
Computer Processing
Hardware 6,187,863 1.9
Restaurants 5,921,261 1.9
Property - Casualty Insurers 5,769,868 1.8
Semiconductors 5,133,575 1.6
Repurchase Agreement 4,783,000 1.5
Medical Distributors 4,517,980 1.4
Internet Retail 3,853,001 1.2
Construction Materials 3,406,192 1.1
Gas Distributors 3,319,514 1.0
--------------- -------------
$ 320,936,130 100.6%
=============== =============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
14
<Page>
MORGAN STANLEY AGGRESSIVE EQUITY FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JULY 31, 2005
<Table>
ASSETS:
Investments in securities, at value (cost $272,861,179) $ 320,936,130
Receivable for:
Investments sold 738,901
Shares of beneficial interest sold 102,856
Foreign withholding taxes reclaimed 7,060
Prepaid expenses and other assets 32,275
---------------
TOTAL ASSETS 321,817,222
---------------
LIABILITIES:
Payable for:
Investments purchased 2,052,737
Shares of beneficial interest redeemed 273,061
Distribution fee 237,902
Investment advisory fee 177,747
Administration fee 21,224
Accrued expenses and other payables 77,940
---------------
TOTAL LIABILITIES 2,840,611
---------------
NET ASSETS $ 318,976,611
===============
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 666,635,891
Net unrealized appreciation 48,076,892
Accumulated net investment loss (360)
Accumulated net realized loss (395,735,812)
---------------
NET ASSETS $ 318,976,611
===============
CLASS A SHARES:
Net Assets $ 42,145,696
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 3,994,825
NET ASSET VALUE PER SHARE $ 10.55
===============
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE) $ 11.13
===============
CLASS B SHARES:
Net Assets $ 244,707,857
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 24,405,840
NET ASSET VALUE PER SHARE $ 10.03
===============
CLASS C SHARES:
Net Assets $ 30,385,884
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 3,026,897
NET ASSET VALUE PER SHARE $ 10.04
===============
CLASS D SHARES:
Net Assets $ 1,737,174
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 162,118
NET ASSET VALUE PER SHARE $ 10.72
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
15
<Page>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 2005
<Table>
NET INVESTMENT LOSS:
INCOME
Dividends (net of $22,881 foreign withholding tax) $ 2,194,511
Interest 69,162
---------------
TOTAL INCOME 2,263,673
---------------
EXPENSES
Distribution fee (Class A shares) 54,354
Distribution fee (Class B shares) 2,828,306
Distribution fee (Class C shares) 316,010
Investment advisory fee 2,338,311
Transfer agent fees and expenses 1,105,189
Administration fee 198,840
Shareholder reports and notices 103,512
Registration fees 65,276
Professional fees 63,642
Custodian fees 37,301
Trustees' fees and expenses 4,538
Other 27,142
---------------
TOTAL EXPENSES 7,142,421
---------------
NET INVESTMENT LOSS (4,878,748)
---------------
Net Realized and Unrealized Gain:
Net realized gain 47,277,366
Net change in unrealized appreciation 33,865,577
---------------
NET GAIN 81,142,943
---------------
NET INCREASE $ 76,264,195
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
16
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JULY 31, 2005 JULY 31, 2004
-------------- --------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss $ (4,878,748) $ (6,470,810)
Net realized gain 47,277,366 68,831,800
Net change in unrealized appreciation/depreciation 33,865,577 (25,961,207)
-------------- --------------
NET INCREASE 76,264,195 36,399,783
Net decrease from transactions in shares of beneficial interest (123,847,024) (118,954,439)
-------------- --------------
NET DECREASE (47,582,829) (82,554,656)
NET ASSETS:
Beginning of period 366,559,440 449,114,096
-------------- --------------
END OF PERIOD
(INCLUDING ACCUMULATED NET INVESTMENT LOSSES OF $360 AND $215, RESPECTIVELY) $ 318,976,611 $ 366,559,440
============== ==============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
17
<Page>
MORGAN STANLEY AGGRESSIVE EQUITY FUND
NOTES TO FINANCIAL STATEMENTS - JULY 31, 2005
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Aggressive Equity Fund (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Fund's investment objective is
capital growth. The Fund was organized as a Massachusetts business trust on
October 29, 1997 and commenced operations on February 24, 1999.
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.
Effective August 29, 2005, the Board of Trustees of the Fund approved the
implementation of a 2% redemption fee on Class A shares, Class B shares, Class C
shares, and Class D shares, which is paid directly to the Fund, for shares
redeemed within seven days of purchase. The redemption fee is designed to
protect the Fund and its remaining shareholders from the effects of short-term
trading.
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
18
<Page>
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 by the
Trustees of the Fund; (7) certain portfolio securities may be valued by an
outside pricing service approved by the Fund's Trustees; and (8) 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. FOREIGN CURRENCY TRANSLATION AND FORWARD FOREIGN CURRENCY CONTRACTS -- The
books and records of the Fund are maintained in U.S. dollars as follows: (1) the
foreign currency market value of investment securities, other assets and
liabilities and forward foreign currency contracts ("forward contracts") are
translated at the exchange rates prevailing at the end of the period; and (2)
purchases, sales, income and expenses are translated at the exchange rates
prevailing on the respective dates of such transactions. The resultant exchange
gains and losses are recorded as realized and unrealized gain/loss on foreign
exchange transactions. Pursuant to U.S. federal income tax regulations, certain
foreign exchange gains/losses included in realized and unrealized gain/loss are
included in or are a reduction of ordinary income for federal income tax
purposes. The Fund does not isolate that portion of the results of operations
arising as a result of changes in the foreign exchange rates from the changes in
the market prices of the securities. Forward contracts are valued daily at the
appropriate exchange rates. The resultant unrealized exchange gains and losses
are recorded as unrealized foreign currency
19
<Page>
gain or loss. The Fund records realized gains or losses on delivery of the
currency or at the time the forward contract is extinguished (compensated) by
entering into a closing transaction prior to delivery.
F. 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.
G. 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.
H. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.
I. 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 to the net assets of the Fund determined as
of the close of each business day: 0.67% to the portion of the daily net assets
not exceeding $500 million; 0.645% to the portion of the daily net assets
exceeding $500 million but not exceeding $2 billion; 0.62% to the portion of the
daily net assets exceeding $2 billion but not exceeding $3 billion; and 0.595%
to the portion of the daily net assets in excess of $3 billion.
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.
20
<Page>
Prior to November 1, 2004, the Fund 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 following annual rates to the net assets of Fund
determined as of the close of each business day: 0.75% to the portion of the
daily net assets not exceeding $2 billion; and 0.725% to the portion of the
daily net assets exceeding $2 billion.
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
$21,275,637 at July 31, 2005.
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 July 31, 2005, the distribution fee was accrued for Class A
shares and Class C shares at the annual rate of 0.25% and 0.99%, respectively.
The Distributor has informed the Fund that for the year ended July 31, 2005, it
received contingent deferred sales charges from certain redemptions of the
Fund's Class A shares, Class B shares and Class C shares of $2,000, $647,158 and
$2,199, respectively and received $14,059 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.
21
<Page>
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 July 31, 2005, aggregated
$414,359,967 and $543,449,338, respectively. Included in the aforementioned are
purchases and sales with other Morgan Stanley funds of $313,243 and $282,052,
respectively including a net realized gain of $50,928.
For the year ended July 31, 2005, the Fund incurred brokerage commissions of
$21,542 with Morgan Stanley & Co., Inc., an affiliate of the Investment Adviser,
Administrator and Distributor, for portfolio transactions executed on behalf of
the Fund.
At July 31, 2005, Morgan Stanley Fund of Funds -- Domestic Portfolio, an
affiliate of the Investment Adviser, Administrator and Distributor held 70,187
Class D shares of beneficial interest of the Fund.
Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and
Distributor, is the Fund's transfer agent. At July 31, 2005, the Fund had
transfer agent fees and expenses payable of approximately $6,300.
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.
5. FEDERAL INCOME TAX STATUS
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for tax purposes are reported as distributions of paid-in-capital.
22
<Page>
As of July 31, 2005, the tax-basis components of accumulated losses were as
follows:
<Table>
Net accumulated earnings --
Capital loss carryforward* $ (395,735,804)
Temporary differences (368)
Net unrealized appreciation 48,076,892
-----------------
Total accumulated losses $ (347,659,280)
=================
</Table>
*During the year ended July 31, 2005, the Fund utilized $46,857,586 of its net
capital loss carryforward. As of July 31, 2005, the Fund had a net capital loss
carryforward of $395,735,804 of which $274,679,081 will expire on July 31, 2010
and $121,056,723 will expire on July 31, 2011 to offset future capital gains to
the extent provided by regulations.
As of July 31, 2005, the Fund had temporary book/tax differences attributable to
nondeductible expenses and permanent book/tax differences attributable to a net
operating loss. To reflect reclassifications arising from the permanent
differences, paid-in-capital was charged and accumulated net investment loss was
credited $4,878,603.
6. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Fund may enter into forward contracts to facilitate settlement of foreign
currency denominated portfolio transactions or to manage foreign currency
exposure associated with foreign currency denominated securities.
To hedge against adverse interest rate, foreign currency and market risks, the
Fund may purchase and sell interest rate, currency and index futures ("futures
contracts").
Forward contracts and 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 foreign exchange rates
underlying the forward contracts. Risks may also rise upon entering into these
contracts from the potential inability of the counterparties to meet the terms
of their contracts.
23
<Page>
7. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JULY 31, 2005 JULY 31, 2004
-------------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- -------------- -------------- --------------
CLASS A SHARES
Sold 231,806 $ 2,009,382 220,437 $ 1,847,474
Conversion from Class B 2,971,793 26,716,883 -- --
Redeemed (1,195,775) (11,026,653) (611,642) (5,246,780)
-------------- -------------- -------------- --------------
Net increase (decrease) -- Class A 2,007,824 17,699,612 (391,205) (3,399,306)
-------------- -------------- -------------- --------------
CLASS B SHARES
Sold 607,812 5,372,272 1,388,713 11,363,567
Conversion to Class A (3,122,042) (26,716,883) -- --
Redeemed (12,433,367) (108,895,987) (14,138,172) (116,228,250)
-------------- -------------- -------------- --------------
Net decrease -- Class B (14,947,597) (130,240,598) (12,749,459) (104,864,683)
-------------- -------------- -------------- --------------
CLASS C SHARES
Sold 113,688 1,001,636 226,518 1,868,007
Redeemed (1,304,111) (11,509,513) (1,452,268) (11,955,602)
-------------- -------------- -------------- --------------
Net decrease -- Class C (1,190,423) (10,507,877) (1,225,750) (10,087,595)
-------------- -------------- -------------- --------------
CLASS D SHARES
Sold 9,562 90,754 110,174 951,405
Redeemed (94,938) (888,915) (179,248) (1,554,260)
-------------- -------------- -------------- --------------
Net decrease -- Class D (85,376) (798,161) (69,074) (602,855)
-------------- -------------- -------------- --------------
Net decrease in Fund (14,215,572) $ (123,847,024) (14,435,488) $ (118,954,439)
============== ============== ============== ==============
</Table>
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, filed in the United States District
Court Southern District of New York on April 16, 2004, 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
24
<Page>
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.
25
<Page>
MORGAN STANLEY AGGRESSIVE EQUITY FUND
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<Table>
<Caption>
FOR THE YEAR ENDED JULY 31,
------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------ ------------ ------------ ------------ ------------
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 8.34 $ 7.71 $ 7.51 $ 9.62 $ 15.24
------------ ------------ ------------ ------------ ------------
Income (loss) from investment operations:
Net investment loss++ (0.08) (0.07) (0.02) (0.03) 0.00
Net realized and unrealized gain (loss) 2.29 0.70 0.22 (2.05) (3.90)
------------ ------------ ------------ ------------ ------------
Total income (loss) from investment
operations 2.21 0.63 0.20 (2.08) (3.90)
------------ ------------ ------------ ------------ ------------
Less distributions from net realized gains - - - (0.03) (1.72)
------------ ------------ ------------ ------------ ------------
Net asset value, end of period $ 10.55 $ 8.34 $ 7.71 $ 7.51 $ 9.62
============ ============ ============ ============ ============
TOTAL RETURN+ 26.50% 8.17% 2.66% (21.65)% (28.31)%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 1.42% 1.37% 1.40% 1.29% 1.16%
Net investment loss (0.75)% (0.77)% (0.32)% (0.39)% (0.03)%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 42,146 $ 16,564 $ 18,340 $ 21,888 $ 39,662
Portfolio turnover rate 123% 219% 263% 325% 399%
</Table>
- ----------
++ 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) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
26
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED JULY 31,
------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------ ------------ ------------ ------------ ------------
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 7.98 $ 7.44 $ 7.31 $ 9.42 $ 15.08
------------ ------------ ------------ ------------ ------------
Income (loss) from investment operations:
Net investment loss++ (0.13) (0.12) (0.08) (0.10) (0.10)
Net realized and unrealized gain
(loss) 2.18 0.66 0.21 (1.98) (3.84)
------------ ------------ ------------ ------------ ------------
Total income (loss) from investment
operations 2.05 0.54 0.13 (2.08) (3.94)
------------ ------------ ------------ ------------ ------------
Less distributions from net realized
gains - - - (0.03) (1.72)
------------ ------------ ------------ ------------ ------------
Net asset value, end of period $ 10.03 $ 7.98 $ 7.44 $ 7.31 $ 9.42
============ ============ ============ ============ ============
TOTAL RETURN+ 25.69% 7.26% 1.78% (22.11)% (28.93)%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 2.17% 2.13% 2.15% 2.05% 1.94%
Net investment loss (1.50)% (1.53)% (1.07)% (1.15)% (0.81)%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 244,708 $ 314,195 $ 387,751 $ 492,959 $ 881,115
Portfolio turnover rate 123% 219% 263% 325% 399%
</Table>
- ----------
++ 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) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
27
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED JULY 31,
------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------ ------------ ------------ ------------ ------------
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 7.99 $ 7.45 $ 7.32 $ 9.42 $ 15.08
------------ ------------ ------------ ------------ ------------
Income (loss) from investment operations:
Net investment loss++ (0.13) (0.12) (0.08) (0.09) (0.10)
Net realized and unrealized gain (loss) 2.18 0.66 0.21 (1.98) (3.84)
------------ ------------ ------------ ------------ ------------
Total income (loss) from investment
operations 2.05 0.54 0.13 (2.07) (3.94)
------------ ------------ ------------ ------------ ------------
Less distributions from net realized gains - - - (0.03) (1.72)
------------ ------------ ------------ ------------ ------------
Net asset value, end of period $ 10.04 $ 7.99 $ 7.45 $ 7.32 $ 9.42
============ ============ ============ ============ ============
TOTAL RETURN+ 25.66% 7.25% 1.78% (22.00)% (28.93)%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 2.16% 2.12% 2.15% 1.93% 1.94%
Net investment loss (1.49)% (1.52)% (1.07)% (1.03)% (0.81)%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 30,386 $ 33,710 $ 40,555 $ 49,639 $ 83,603
Portfolio turnover rate 123% 219% 263% 325% 399%
</Table>
- ----------
++ 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) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
28
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED JULY 31,
------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------ ------------ ------------ ------------ ------------
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 8.45 $ 7.80 $ 7.58 $ 9.68 $ 15.30
------------ ------------ ------------ ------------ ------------
Income (loss) from investment operations:
Net investment income (loss)++ (0.05) (0.04) (0.01) (0.01) 0.02
Net realized and unrealized gain (loss) 2.32 0.69 0.23 (2.06) (3.92)
------------ ------------ ------------ ------------ ------------
Total income (loss) from investment
operations 2.27 0.65 0.22 (2.07) (3.90)
------------ ------------ ------------ ------------ ------------
Less distributions from net realized gains - - - (0.03) (1.72)
------------ ------------ ------------ ------------ ------------
Net asset value, end of period $ 10.72 $ 8.45 $ 7.80 $ 7.58 $ 9.68
============ ============ ============ ============ ============
TOTAL RETURN+ 26.86% 8.33% 2.90% (21.33)% (28.26)%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 1.17% 1.13% 1.15% 1.05% 0.94%
Net investment income (loss) (0.50)% (0.53)% (0.07)% (0.15)% 0.19%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 1,737 $ 2,091 $ 2,468 $ 2,622 $ 5,111
Portfolio turnover rate 123% 219% 263% 325% 399%
</Table>
- ----------
++ 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) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
29
<Page>
MORGAN STANLEY AGGRESSIVE EQUITY FUND
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS AND BOARD OF
TRUSTEES OF MORGAN STANLEY AGGRESSIVE EQUITY FUND:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Aggressive Equity Fund (the "Fund"), including the portfolio of
investments, as of July 31, 2005, 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 five years in
the period then ended. 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. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of July 31, 2005, by correspondence with the custodian
and brokers. 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 Aggressive Equity Fund as of July 31, 2005, 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 five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America.
Deloitte & Touche LLP
NEW YORK, NEW YORK
SEPTEMBER 16, 2005
30
<Page>
MORGAN STANLEY AGGRESSIVE EQUITY 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) DURING OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- ------------------------ ----------- ------------ ------------------------------ ------------- ------------------------------
Michael Bozic (64) Trustee Since April Private Investor; Director or 197 Director of various business
c/o Kramer Levin 1994 Trustee of the Retail Funds organizations.
Naftalis & Frankel LLP (since April 1994) and the
Counsel to the Institutional Funds (since
Independent Trustees July 2003); formerly Vice
1177 Avenue of the Chairman of Kmart Corporation
Americas (December 1998-October 2000),
New York, NY 10036 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 Consultant; Director or 197 Director of Franklin Covey
1031 N. Chartwell Court January 1993 Trustee of the Retail Funds (time management systems), BMW
Salt Lake City, UT 84103 (since January 1993) and the Bank of North America, Inc.
Institutional Funds (since (industrial loan corporation),
July 2003); member of the Utah Escrow Bank USA (industrial
Regional Advisory Board of loan corporation), United
Pacific Corp. (utility Space Alliance (joint venture
company); formerly Managing between Lockheed Martin and
Director of Summit Ventures the Boeing Company) and Nuskin
LLC (lobbying and consulting Asia Pacific (multilevel
firm) (2000-2004); United marketing); member of the
States Senator (R-Utah) board of various civic and
(1974-1992) and Chairman, charitable organizations.
Senate Banking Committee
(1980-1986), Mayor of Salt
Lake City, Utah (1971-1974),
Astronaut, Space Shuttle
Discovery (April 12-19, 1985),
and Vice Chairman, Huntsman
Corporation (chemical
company).
Wayne E. Hedien (71) Trustee Since Retired; Director or Trustee 197 Director of The PMI Group Inc.
c/o Kramer Levin September of the Retail Funds (since (private mortgage insurance);
Naftalis & Frankel LLP 1997 September 1997) and the Trustee and Vice Chairman of
Counsel to the Institutional Funds (since The Field Museum of Natural
Independent Trustees July 2003); formerly History; director of various
1177 Avenue of the associated with the Allstate other business and charitable
Americas Companies (1966-1994), most organizations.
New York, NY 10036 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>
31
<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) DURING OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- ------------------------ ----------- ------------ ------------------------------ ------------- ------------------------------
Dr. Manuel H. Johnson Trustee Since July Senior Partner, Johnson 197 Director of NVR, Inc. (home
(56) 1991 Smick International, Inc., construction); Director of
c/o Johnson Smick Group, a consulting firm; Chairman KFX Energy; Director of RBS
Inc. of the Audit Committee and Greenwich Capital Holdings
888 16th Street, NW Director or Trustee of the (financial holding
Suite 740 Retail Funds (since July company).
Washington, D.C. 20006 1991) 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 July President, Kearns & Associates 198 Director of Electro Rent
c/o Kearns & Associates 2003 LLC (investment consulting); Corporation (equipment
LLC Deputy Chairman of the Audit leasing), The Ford Family
PMB754 Committee and Director or Foundation, and the UCLA
23852 Pacific Coast Trustee of the Retail Funds Foundation.
Highway (since July 2003) and the
Malibu, CA 90265 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 (69) Trustee Since July General Partner of Triumph 197 Director of various business
c/o Triumph Capital, 1991 Capital, L.P., a private organizations.
L.P. investment partnership;
445 Park Avenue Chairman of the Insurance
New York, NY 10022 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 July Chairman of Lumelite Plastics 198 Trustee and Director of
c/o Lumelite Plastics 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>
32
<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) DURING OVERSEEN OTHER DIRECTORSHIPS
INTERESTED TRUSTEE REGISTRANT TIME SERVED* PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- ------------------------ ----------- ------------ ------------------------------ ------------- ------------------------------
Charles A. Fiumefreddo Chairman of Since July Chairman and Director or 197 None.
(72) the Board 1991 Trustee of the Retail Funds
c/o Morgan Stanley Trust and Trustee (since July 1991) and the
Harborside Financial Institutional Funds (since
Center, July 2003); formerly Chief
Plaza Two, Executive Officer of the
Jersey City, NJ 07311 Retail Funds (until September
2002).
James F. Higgins (57) Trustee Since June Director or Trustee of the 197 Director of AXA Financial,
c/o Morgan Stanley Trust 2000 Retail Funds (since June Inc. and The Equitable Life
Harborside Financial 2000) and the Institutional Assurance Society of the
Center, Funds (since July 2003); United States (financial
Plaza Two, Senior Advisor of Morgan services).
Jersey City, NJ 07311 Stanley (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 ADVISER") (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 ADVISER AND ANY FUNDS THAT
HAVE AN INVESTMENT ADVISER THAT IS AN AFFILIATED PERSON OF THE INVESTMENT
ADVISER (INCLUDING, BUT NOT LIMITED TO, MORGAN STANLEY INVESTMENT
MANAGEMENT INC.)
33
<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 the
Administrator; 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 and President (since
October 2002) of the Van Kampen Open-End Funds.
Ronald E. Robison (66) Executive Since April Principal Executive Officer of Funds in the Fund Complex (since
1221 Avenue of the Americas Vice 2003 May 2003); Managing Director of Morgan Stanley & Co.
New York, NY 10020 President and Incorporated, Morgan Stanley Investment Management Inc. and
Principal Morgan Stanley; Managing Director, Chief Administrative Officer
Executive and Director of the Investment Adviser and the Administrator;
Officer 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
Institutional Funds (March 2001-July 2003) and Chief Global
Operations Officer and Managing Director of Morgan Stanley
Investment Management Inc.
Joseph J. McAlinden (62) Vice Since July Managing Director and Chief Investment Officer of the Investment
1221 Avenue of the Americas President 1995 Adviser and Morgan Stanley Investment Management Inc.; Chief
New York, NY 10020 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 (50) Vice Since February General Counsel (since May 2000) and Managing Director (since
1221 Avenue of the Americas President 1997 December 2000) of Morgan Stanley Investment Management Inc.;
New York, NY 10020 Managing Director (since December 2000), Secretary (since
February 1997) and Director of the Investment Adviser and the
Administrator; 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 Adviser and the
Administrator (February 1997- December 2001).
Amy R. Doberman (43) Vice Since July Managing Director and General Counsel, U.S. Investment
1221 Avenue of the Americas President 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); Vice President
of the Van Kampen Funds (since August 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>
34
<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 Since July Executive Director of Morgan Stanley & Co. Incorporated, Morgan
1221 Avenue of the Americas President 2003 Stanley Investment Management Inc. and the Investment Adviser;
New York, NY 10020 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 the
c/o Morgan Stanley Trust Chief since July Administration (since December 2001); previously, Vice President
Harborside Financial Center, Financial 2003 and Chief of the Retail Funds (September 2002-July 2003); Vice President of
Plaza Two, Officer Financial the Investment Adviser and the Administrator (August
Jersey City, NJ 07311 Officer since 2000-November 2001) and Senior Manager at PricewaterhouseCoopers
September 2002 LLP (January 1998-August 2000).
Thomas F. Caloia (59) Vice Since July Executive Director (since December 2002) and Assistant Treasurer
c/o Morgan Stanley Trust President 2003 of the Investment Adviser, the Distributor and the Administrator;
Harborside Financial Center, previously Treasurer of the Retail Funds (April 1989-July 2003);
Plaza Two, formerly First Vice President of the Investment Adviser, the
Jersey City, NJ 07311 Distributor and the Administrator.
Mary E. Mullin (38) 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.
35
<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) 2005 Morgan Stanley
[MORGAN STANLEY LOGO]
36052RPT-RA05-00749P-Y07/05
[GRAPHIC]
MORGAN STANLEY FUNDS
MORGAN STANLEY
AGGRESSIVE
EQUITY FUND
ANNUAL REPORT
JULY 31, 2005
[MORGAN STANLEY LOGO]
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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.
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Item 4. Principal Accountant Fees and Services.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
<Table>
<Caption>
2005 REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 32,666 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 540(2) $ 3,215,745(2)
TAX FEES $ 5,502(3) $ 24,000(4)
ALL OTHER FEES $ - $ -
TOTAL NON-AUDIT FEES $ 6,042 $ 3,239,745
TOTAL $ 38,708 $ 3,239,745
<Caption>
2004 REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 31,230 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 452(2) $ 3,225,276(2)
TAX FEES $ 4,889(3) $ 610,053(4)
ALL OTHER FEES $ - $ -(5)
TOTAL NON-AUDIT FEES $ 5,341 $ 3,835,329
TOTAL $ 36,571 $ 3,835,329
</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.
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(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.
- ----------
(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
<Page>
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 reports filed by closed-end funds.
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 only to reports filed by closed-end funds.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
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-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 12. 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 Aggressive Equity Fund
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
September 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
September 20, 2005
/s/ Francis Smith
Francis Smith
Principal Financial Officer
September 20, 2005