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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: 811-10359
Morgan Stanley Mid-Cap Value Fund
(Exact name of registrant as specified in charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip code)
Ronald E. Robison
1221 Avenue of the Americas, New York, New York 10020
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-762-4000
Date of fiscal year end: August 31, 2005
Date of reporting period: August 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 MID-CAP
VALUE FUND PERFORMED DURING THE ANNUAL PERIOD. WE WILL PROVIDE AN OVERVIEW OF
THE MARKET CONDITIONS, AND DISCUSS SOME OF THE FACTORS THAT AFFECTED PERFORMANCE
DURING THE REPORTING PERIOD. IN ADDITION, THIS REPORT INCLUDES THE FUND'S
FINANCIAL STATEMENTS AND A LIST OF FUND INVESTMENTS.
THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS FOR THE FUND BEING
OFFERED.
MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE
IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. THE FUND IS
SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT MARKET VALUES OF
SECURITIES OWNED BY THE FUND WILL DECLINE AND, THEREFORE, THE VALUE OF THE
FUND'S SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE
MONEY INVESTING IN THIS FUND. PLEASE SEE THE PROSPECTUS FOR MORE COMPLETE
INFORMATION ON INVESTMENT RISKS.
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FUND REPORT
For the year ended August 31, 2005
TOTAL RETURN FOR THE 12 MONTHS ENDED AUGUST 31, 2005
<Table>
<Caption>
RUSSELL LIPPER LIPPER
MIDCAP(R) MID-CAP MID-CAP
VALUE VALUE FUNDS CORE FUNDS
CLASS A CLASS B CLASS C CLASS D INDEX(1) INDEX(2) INDEX(3)
23.55% 22.58% 22.66% 23.87% 28.06% 22.85% 22.62%
</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
During the 12-month period, mid-cap value stocks generated strong gains relative
to other areas of the stock market. The Russell Midcap Value Index returned 28
percent for the period, outperforming both large- and small-cap value stocks, as
well as growth-style stocks.
Although many companies across the board demonstrated sustained earnings growth
and healthier profits and consumers continued to defy expectations with robust
spending habits, the climate was unsettled and changing. As the reporting period
began, investors were concerned about the pace of economic growth, oil prices,
and the prospect of future interest rate increases. An uncertain geopolitical
landscape and the looming presidential election added to investor anxiety. The
climate improved during the final months of 2004. The presidential election
passed without major incident, and investors refocused on moderate economic
growth, and improving corporate profits. Growing optimism led to a brisk rally
in November and December.
Investor sentiment deteriorated in the opening months of 2005, as the rally gave
way to profit taking. Crude oil surged, contributing to renewed inflation fears.
As the Federal Open Market Committee ("the Fed") continued to raise the federal
funds target rate and leading auto manufacturers stumbled, the pace of economic
growth seemed more questionable. Nonetheless, the market regained its momentum
during the late spring and early summer, helped by favorable economic data,
consumer confidence, corporate earnings and tempered inflationary concerns.
However, the final weeks of the period saw another retreat. An additional Fed
tightening and rising fuel costs renewed concerns about future corporate
profitability and consumer spending. Uncertainty reached heightened levels
during the final days of the period, as Hurricane Katrina caused immeasurable
devastation to the Gulf Coast region.
PERFORMANCE ANALYSIS
Morgan Stanley Mid-Cap Value Fund underperformed the Russell Midcap(R) Value
Index for the 12 months ended August 31, 2005. For the same period, Class A and
Class D shares outperformed the Lipper Mid-Cap Value Funds Index, while Class B
and Class C shares underperformed the Lipper Mid-Cap Value Funds Index. In
addition, Class A, Class C, and Class D shares outperformed the Lipper Mid-Cap
Core Funds Index, while Class B shares underperformed this Lipper Index for this
period. (References to these Fund returns assume no deduction of applicable
sales charges).
On an absolute basis, energy holdings added the most to the Fund's overall
return. Refining companies led the
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group, driven by the wider profit margins gained from the high price of crude
oil. These companies' budgets were structured based on oil prices estimated in
the $25 to $30 per barrel range. As crude climbed considerably higher, the
refiners were able to capture significantly higher than expected operating
margins. Consumer discretionary stocks, including retailers and media stocks,
benefited from favorable consumer trends. Given the strong housing market and
low absolute interest rate environment of the past few years, homeowners have
been tapping the equity in their homes to fund additional spending.
Stock selection in the financials sector also served the Fund well. Our
investment process steered the Fund away from stocks with increased interest
rate exposure, such as banks (as the difference between long-term and short-term
rates narrows, as occurred during the period, banks' profit margins shrink).
Instead, the Fund favored insurance stocks and brokerage stocks.
The Fund underperformed the Russell Index during the period primarily due to
stock selection within the healthcare and technology sectors. Although
healthcare was a positive contributor to returns on an absolute basis, the Fund
favored pharmaceutical stocks over healthcare services. Within the benchmark
index, services outperformed pharmaceuticals, which detracted from the Fund's
relative performance. The Fund also owned hardware and equipment stocks and
software and services stocks that lagged those included in the index. Technology
stocks were also the Fund's most significant detractor, on an absolute basis.
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.
3
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TOP 10 HOLDINGS
<Table>
Watson Pharmaceuticals, Inc. 3.5%
Scholastic Corp. 3.3
Applera Corp. -- Applied Biosystems Group 3.2
Southwest Airlines Co. 3.2
PMI Group, Inc. 2.9
Tyson Foods, Inc. (Class A) 2.8
Valassis Communications, Inc. 2.7
Sovereign Bancorp, Inc. 2.7
Manpower, Inc. 2.7
Conseco Inc. 2.6
</Table>
TOP FIVE INDUSTRIES
<Table>
Pharmaceuticals: Generic Drugs 5.3%
Medical Specialties 5.1
Investment Banks/Brokers 4.9
Savings Banks 4.6
Electric Utilities 4.5
</Table>
DATA AS OF AUGUST 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.
INVESTMENT STRATEGY
THE FUND WILL NORMALLY INVEST AT LEAST 80 PERCENT OF ITS ASSETS IN COMMON STOCK
AND OTHER EQUITY SECURITIES, INCLUDING DEPOSITARY RECEIPTS AND SECURITIES
CONVERTIBLE INTO COMMON STOCK, OF COMPANIES TRADED ON A U.S. SECURITIES EXCHANGE
WITH MARKET CAPITALIZATIONS THAT FALL WITHIN THE RANGE OF COMPANIES INCLUDED IN
THE RUSSELL MIDCAP VALUE INDEX. AS OF SEPTEMBER 30, 2004, THESE MARKET
CAPITALIZATIONS RANGE BETWEEN $525 MILLION AND $15.24 BILLION. IN PURSUING ITS
INVESTMENT OBJECTIVE, THE FUND'S "INVESTMENT ADVISER," MORGAN STANLEY INVESTMENT
ADVISORS INC., SEEKS ATTRACTIVELY VALUED COMPANIES EXPERIENCING A CHANGE THAT
THE INVESTMENT ADVISER BELIEVES COULD HAVE A POSITIVE IMPACT ON A COMPANY'S
OUTLOOK, SUCH AS A CHANGE IN MANAGEMENT, INDUSTRY DYNAMICS OR OPERATIONAL
EFFICIENCY. IN DETERMINING WHETHER SECURITIES SHOULD BE SOLD, THE INVESTMENT
ADVISER CONSIDERS A NUMBER OF FACTORS, INCLUDING APPRECIATION TO FAIR VALUE,
FUNDAMENTAL CHANGE IN THE COMPANY OR CHANGES IN ECONOMIC OR MARKET TRENDS. THE
INVESTMENT ADVISER MAY PURCHASE STOCKS THAT TYPICALLY DO NOT PAY DIVIDENDS.
FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS
EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN
ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND
AND FOURTH FISCAL QUARTERS BY FILING THE SCHEDULE ELECTRONICALLY WITH THE
SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON
FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON FORM N-CSR. MORGAN STANLEY ALSO
DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO FUND SHAREHOLDERS AND MAKES THESE
REPORTS AVAILABLE ON ITS PUBLIC WEB SITE, www.morganstanley.com. EACH MORGAN
STANLEY FUND
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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.
5
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PERFORMANCE SUMMARY
[CHART]
PERFORMANCE OF $10,000 INVESTMENT
<Table>
<Caption>
LIPPER MID-CAP LIPPER MID-CAP
CLASS A~ CLASS B~ CLASS C~ CLASS D~ RUSSELL(1) VALUE(2) CORE(3)
--------- --------- --------- --------- ---------- -------------- --------------
October 29, 2001 $ 9,475 $ 10,000 $ 10,000 $ 10,000 $ 10,000 $ 10,000 $ 10,000
November 30, 2001 $ 10,006 $ 10,560 $ 10,560 $ 10,570 $ 10,568 $ 10,614 $ 10,631
February 28, 2002 $ 9,829 $ 10,343 $ 10,343 $ 10,378 $ 11,298 $ 11,095 $ 10,794
May 31, 2002 $ 9,592 $ 10,073 $ 10,072 $ 10,137 $ 11,850 $ 11,588 $ 11,102
August 31, 2002 $ 7,770 $ 8,153 $ 8,152 $ 8,224 $ 10,331 $ 9,740 $ 9,361
November 30, 2002 $ 8,017 $ 8,393 $ 8,392 $ 8,485 $ 10,187 $ 9,930 $ 9,631
February 28, 2003 $ 7,125 $ 7,442 $ 7,442 $ 7,543 $ 9,509 $ 9,037 $ 8,810
May 31, 2003 $ 8,577 $ 8,943 $ 8,942 $ 9,086 $ 11,171 $ 10,648 $ 10,296
August 31, 2003 $ 9,592 $ 9,983 $ 9,982 $ 10,167 $ 12,010 $ 11,653 $ 11,279
November 30, 2003 $ 10,038 $ 10,423 $ 10,423 $ 10,638 $ 13,162 $ 12,660 $ 12,229
February 29, 2004 $ 10,987 $ 11,394 $ 11,393 $ 11,660 $ 14,441 $ 13,935 $ 13,124
May 31, 2004 $ 10,607 $ 10,983 $ 10,983 $ 11,259 $ 14,208 $ 13,722 $ 12,879
August 31, 2004 $ 10,503 $ 10,853 $ 10,863 $ 11,159 $ 14,547 $ 13,628 $ 12,510
November 30, 2004 $ 11,651 $ 12,014 $ 12,023 $ 12,391 $ 16,351 $ 15,220 $ 13,944
February 28, 2005 $ 12,237 $ 12,589 $ 12,598 $ 13,021 $ 17,169 $ 15,849 $ 14,446
May 31, 2005 $ 12,039 $ 12,358 $ 12,378 $ 12,812 $ 17,354 $ 15,729 $ 14,407
August 31, 2005 $ 12,976 $ 13,104 $ 13,325 $ 13,823 $ 18,629 $ 16,742 $ 15,339
</Table>
6
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AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED AUGUST 31, 2005
<Table>
<Caption>
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS D SHARES++
(SINCE 10/29/01) (SINCE 10/29/01) (SINCE 10/29/01) (SINCE 10/29/01)
SYMBOL MDFAX MDFBX MDFCX MDFDX
1 YEAR 23.55%(4) 22.58%(4) 22.66%(4) 23.87%(4)
17.06(5) 17.58(5) 21.66(5) --
SINCE INCEPTION 8.54(4) 7.72(4) 7.76(4) 8.80(4)
7.02(5) 7.30(5) 7.76(5) --
</Table>
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF
FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES
SHOWN. FOR 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% FOR SHARES
REDEEMED WITHIN ONE YEAR OF PURCHASE.
++ CLASS D HAS NO SALES CHARGE.
(1) THE RUSSELL MIDCAP(R) VALUE INDEX MEASURES THE PERFORMANCE OF THOSE RUSSELL
MIDCAP(R) INDEX COMPANIES WITH LOWER PRICE-TO-BOOK RATIOS AND LOWER
FORECASTED GROWTH VALUES. THE STOCKS ARE ALSO MEMBERS OF THE RUSSELL
1000(R) VALUE INDEX. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE
ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT
POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
(2) THE LIPPER MID-CAP VALUE FUNDS INDEX IS AN EQUALLY WEIGHTED PERFORMANCE
INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN THE LIPPER
MID-CAP VALUE 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. THE FUND IS IN THE LIPPER MID-CAP VALUE FUNDS CLASSIFICATION
AS OF 8/31/2005.
(3) THE LIPPER MID-CAP CORE FUNDS INDEX IS AN EQUALLY WEIGHTED PERFORMANCE
INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN THE LIPPER
MID-CAP CORE FUNDS CLASSIFICATION. THE INDEX, WHICH IS ADJUSTED FOR CAPITAL
GAINS DISTRIBUTIONS AND INCOME DIVIDENDS, IS UNMANAGED AND SHOULD NOT BE
CONSIDERED AN INVESTMENT. THERE ARE CURRENTLY 30 FUNDS REPRESENTED IN THIS
INDEX.
(4) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT
THE DEDUCTION OF ANY SALES CHARGES.
(5) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND THE DEDUCTION OF
THE MAXIMUM APPLICABLE SALES CHARGE. SEE THE FUND'S CURRENT PROSPECTUS FOR
COMPLETE DETAILS ON FEES AND SALES CHARGES.
~ ENDING VALUE ASSUMING A COMPLETE REDEMPTION ON AUGUST 31, 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 03/01/05 - 08/31/05.
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 *
------------- ------------- ---------------
03/01/05 -
03/01/05 08/31/05 08/31/05
------------- ------------- ---------------
CLASS A
Actual (6.04% return) $ 1,000.00 $ 1,060.40 $ 7.32
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,018.10 $ 7.17
CLASS B
Actual (5.68% return) $ 1,000.00 $ 1,056.80 $ 11.25
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,014.27 $ 11.02
CLASS C
Actual (5.76% return) $ 1,000.00 $ 1,057.60 $ 10.06
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,015.43 $ 9.86
CLASS D
Actual (6.16% return) $ 1,000.00 $ 1,061.60 $ 6.08
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,019.31 $ 5.96
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 1.41%, 2.17%,
1.94% AND 1.17% FOR CLASS A, CLASS B, CLASS C AND CLASS D SHARES,
RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD,
MULTIPLIED BY 184/365 (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-year and three-year
periods ended November 30, 2004 and for the period from October 31, 2001 to
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 and the period
since October 31, 2001 but better for the one-year period. The Board considered
that performance had improved in the last year from the two prior periods and
discussed with the Adviser the reasons for the improved performance. The Board
concluded that the Fund's performance was improving and was now competitive with
that of its performance peer group.
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 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
its expense peer group.
9
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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.
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 a breakpoint. 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 a breakpoint. 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
10
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other funds managed by the Adviser would be used to pay for research that a
securities broker obtains from third parties, or to pay for both research and
execution services from securities brokers who effect transactions for the Fund.
The Adviser informed the Board that it does not use Fund commissions to pay for
third party research. It does use commissions to pay for research which is
bundled with execution services. The Board recognized that the receipt of such
research from brokers may reduce the Adviser's costs but concluded that the
receipt of such research strengthens the investment management resources of the
Adviser, which may ultimately benefit the Fund and other funds in the Fund
Complex.
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 MID-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS - AUGUST 31, 2005
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ---------------------------------------------------------------------------------
Common Stocks (94.8%)
ADVERTISING/MARKETING
SERVICES (2.7%)
231,400 Valassis Communications, Inc.* $ 9,124,102
---------------
AEROSPACE & DEFENSE (2.2%)
158,426 Goodrich Corp. 7,259,079
---------------
AIRLINES (3.2%)
811,220 Southwest Airlines Co. 10,805,450
---------------
BIOTECHNOLOGY (2.0%)
185,550 Chiron Corp.* 6,761,442
---------------
BUILDING PRODUCTS (1.6%)
95,430 York International Corp. 5,475,773
---------------
CONTAINERS/PACKAGING (2.1%)
138,210 Sealed Air Corp.* 7,014,158
---------------
DATA PROCESSING
SERVICES (1.9%)
421,296 BISYS Group, Inc. (The)* 6,289,949
---------------
DISCOUNT STORES (2.2%)
382,550 Dollar General Corp. 7,291,403
---------------
ELECTRIC UTILITIES (4.5%)
147,010 Constellation Energy Group, Inc. 8,636,837
161,990 Wisconsin Energy Corp. 6,345,148
---------------
14,981,985
---------------
ELECTRICAL PRODUCTS (1.3%)
93,490 Hubbell, Inc. (Class B) 4,225,748
---------------
ELECTRONIC DISTRIBUTORS (1.9%)
170,680 Tech Data Corp.* 6,248,595
---------------
ENGINEERING & CONSTRUCTION (2.1%)
113,840 Fluor Corp. 7,047,834
---------------
FINANCIAL CONGLOMERATES (2.6%)
417,090 Conseco Inc.* 8,708,839
---------------
FOOD: MEAT/FISH/DAIRY (2.8%)
524,160 Tyson Foods, Inc. (Class A) 9,319,565
---------------
HOME FURNISHINGS (1.9%)
275,150 Newell Rubbermaid, Inc. $ 6,446,764
---------------
HOUSEHOLD/PERSONAL CARE (2.4%)
225,650 International Flavors & Fragrances, Inc. 8,145,965
---------------
INTEGRATED OIL (2.0%)
53,710 Amerada Hess Corp. 6,826,541
---------------
INVESTMENT BANKS/BROKERS (4.9%)
140,480 Edwards (A.G.), Inc. 6,351,101
320,390 Lazard Ltd. (Bermuda) 8,144,314
145,830 Schwab (Charles) Corp. (The) 1,973,080
---------------
16,468,495
---------------
INVESTMENT TRUSTS/MUTUAL FUNDS (1.0%)
77,200 streetTRACKS Gold Trust* 3,348,936
---------------
MEDICAL SPECIALTIES (5.1%)
505,100 Applera Corp. - Applied Biosystems Group 10,859,650
82,710 Bausch & Lomb, Inc. 6,268,591
---------------
17,128,241
---------------
MOVIES/ENTERTAINMENT (2.4%)
447,600 Warner Music Group Corp.* 7,976,232
---------------
OIL REFINING/MARKETING (1.7%)
55,028 Valero Energy Corp. 5,860,482
---------------
OILFIELD SERVICES/EQUIPMENT (2.5%)
114,970 Cooper Cameron Corp.* 8,295,086
---------------
PERSONNEL SERVICES (2.7%)
198,369 Manpower, Inc. 8,938,507
---------------
PHARMACEUTICALS:
GENERIC DRUGS (5.3%)
339,240 Mylan Laboratories, Inc. 6,238,624
336,170 Watson Pharmaceuticals, Inc.* 11,591,142
---------------
17,829,766
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
12
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ---------------------------------------------------------------------------------
PROPERTY - CASUALTY
INSURERS (2.3%)
174,250 ACE Ltd. (Cayman Islands) $ 7,738,443
---------------
PUBLISHING: BOOKS/
MAGAZINES (3.3%)
305,830 Scholastic Corp.* 11,153,620
---------------
REAL ESTATE INVESTMENT
TRUSTS (2.1%)
298,100 KRR Financial Corp. 6,972,559
---------------
REGIONAL BANKS (2.4%)
160,940 Northern Trust Corp. 8,021,250
---------------
RESTAURANTS (2.4%)
190,550 Outback Steakhouse, Inc. 7,928,786
---------------
SAVINGS BANKS (4.6%)
505,310 Hudson City Bancorp, Inc. 6,316,375
386,620 Sovereign Bancorp, Inc. 9,015,978
---------------
15,332,353
---------------
SPECIALTY INSURANCE (2.9%)
241,870 PMI Group, Inc. (The) 9,786,060
---------------
SPECIALTY STORES (2.3%)
262,460 Office Depot, Inc.* 7,873,800
---------------
SPECIALTY TELECOMMUNICATIONS (2.4%)
225,470 CenturyTel, Inc. 8,094,373
---------------
TOBACCO (1.7%)
137,950 UST, Inc. 5,871,152
---------------
TOOLS/HARDWARE (1.8%)
175,590 Snap-On, Inc. 6,233,445
---------------
WIRELESS TELECOMMUNICATIONS (1.6%)
122,420 New Skies Satellites Holdings Ltd. (Bermuda) 2,744,656
111,480 Panamsat Holding Corp. 2,677,750
---------------
5,422,406
---------------
TOTAL COMMON STOCKS
(COST $280,406,790) 318,247,184
---------------
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ---------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (5.0%)
REPURCHASE AGREEMENT
$ 16,785 Joint repurchase agreement account 3.575% due
09/01/05 (dated 08/31/05; proceeds $16,786,667)(a)
(COST $16,785,000) $ 16,785,000
---------------
TOTAL INVESTMENTS
(COST $297,191,790)(b) 99.8% 335,032,184
OTHER ASSETS IN EXCESS OF
LIABILITIES 0.2 541,671
----- ---------------
NET ASSETS 100.0% $ 335,573,855
===== ===============
</Table>
- ----------
* NON-INCOME PRODUCING SECURITY.
(a) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY
OBLIGATIONS.
(b) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS
$297,451,991. THE AGGREGATE GROSS UNREALIZED
APPRECIATION IS $42,902,314 AND THE AGGREGATE GROSS
UNREALIZED DEPRECIATION IS $5,322,121, RESULTING IN
NET UNREALIZED APPRECIATION OF $37,580,193.
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
MORGAN STANLEY MID-CAP VALUE FUND
SUMMARY OF INVESTMENTS - AUGUST 31, 2005
<Table>
<Caption>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ------------------------------------------------------------------
Pharmaceuticals:
Generic Drugs $ 17,829,766 5.3%
Medical Specialties 17,128,241 5.1
Repurchase Agreement 16,785,000 5.0
Investment Banks/Brokers 16,468,495 4.9
Savings Banks 15,332,353 4.6
Electric Utilities 14,981,985 4.5
Publishing: Books/
Magazines 11,153,620 3.3
Airlines 10,805,450 3.2
Specialty Insurance 9,786,060 2.9
Food: Meat/Fish/Dairy 9,319,565 2.8
Advertising/Marketing
Services 9,124,102 2.7
Personnel Services 8,938,507 2.7
Financial Conglomerates 8,708,839 2.6
Oilfield Services/Equipment 8,295,086 2.5
Household/Personal Care 8,145,965 2.4
Specialty
Telecommunications 8,094,373 2.4
Regional Banks 8,021,250 2.4
Movies/Entertainment 7,976,232 2.4
Restaurants 7,928,786 2.4
Specialty Stores 7,873,800 2.3
Property - Casualty Insurers $ 7,738,443 2.3%
Discount Stores 7,291,403 2.2
Aerospace & Defense 7,259,079 2.2
Engineering & Construction 7,047,834 2.1
Containers/Packaging 7,014,158 2.1
Real Estate
Investment Trusts 6,972,559 2.1
Integrated Oil 6,826,541 2.0
Biotechnology 6,761,442 2.0
Home Furnishings 6,446,764 1.9
Data Processing Services 6,289,949 1.9
Electronic Distributors 6,248,595 1.9
Tools/Hardware 6,233,445 1.8
Tobacco 5,871,152 1.7
Oil Refining/Marketing 5,860,482 1.7
Building Products 5,475,773 1.6
Wireless
Telecommunications 5,422,406 1.6
Electrical Products 4,225,748 1.3
Investment Trusts/
Mutual Funds 3,348,936 1.0
--------------- ----------
$ 335,032,184 99.8%
=============== ==========
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
14
<Page>
MORGAN STANLEY MID-CAP VALUE FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 2005
<Table>
ASSETS:
Investments in securities, at value (cost $297,191,790) $ 335,032,184
Receivable for:
Investments sold 2,509,293
Dividends 298,788
Shares of beneficial interest sold 281,477
Prepaid expenses and other assets 20,493
---------------
TOTAL ASSETS 338,142,235
---------------
LIABILITIES:
Payable for:
Investments purchased 1,711,381
Shares of beneficial interest redeemed 467,053
Investment advisory fee 218,882
Distribution fee 61,326
Administration fee 24,320
Transfer agent fee 10,543
Accrued expenses and other payables 74,875
---------------
TOTAL LIABILITIES 2,568,380
---------------
NET ASSETS $ 335,573,855
===============
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 251,020,438
Net unrealized appreciation 37,840,394
Accumulated net investment loss (2,754)
Accumulated undistributed net realized gain 46,715,777
---------------
NET ASSETS $ 335,573,855
===============
CLASS A SHARES:
Net Assets $ 11,757,144
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 943,340
NET ASSET VALUE PER SHARE $ 12.46
===============
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE) $ 13.15
===============
CLASS B SHARES:
Net Assets $ 56,389,190
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 4,664,160
NET ASSET VALUE PER SHARE $ 12.09
===============
CLASS C SHARES:
Net Assets $ 8,267,529
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 682,471
NET ASSET VALUE PER SHARE $ 12.11
===============
CLASS D SHARES:
Net Assets $ 259,159,992
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 20,602,675
NET ASSET VALUE PER SHARE $ 12.58
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
15
<Page>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 2005
<Table>
NET INVESTMENT LOSS:
INCOME
Dividends (net of $10,599 foreign withholding tax) $ 3,867,862
Interest 488,576
---------------
TOTAL INCOME 4,356,438
---------------
EXPENSES
Investment advisory fee 2,414,541
Transfer agent fees and expenses 877,540
Distribution fee (Class A shares) 16,121
Distribution fee (Class B shares) 613,034
Distribution fee (Class C shares) 73,849
Administration fee 221,672
Shareholder reports and notices 95,804
Professional fees 80,782
Registration fees 71,519
Custodian fees 26,175
Trustees' fees and expenses 3,961
Other 24,155
---------------
TOTAL EXPENSES 4,519,153
---------------
NET INVESTMENT LOSS (162,715)
---------------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain 47,534,536
Net change in unrealized appreciation 21,939,073
---------------
NET GAIN 69,473,609
---------------
NET INCREASE $ 69,310,894
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
16
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
AUGUST 31, 2005 AUGUST 31, 2004
--------------- ---------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss $ (162,715) $ (418,444)
Net realized gain 47,534,536 59,481,420
Net change in unrealized appreciation 21,939,073 (31,996,129)
--------------- ---------------
NET INCREASE 69,310,894 27,066,847
--------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET REALIZED GAIN:
Class A shares (390,465) --
Class B shares (6,115,073) --
Class C shares (801,579) --
Class D shares (23,336,428) --
--------------- ---------------
TOTAL DISTRIBUTIONS (30,643,545) --
--------------- ---------------
Net increase (decrease) from transactions in shares of beneficial interest (12,116,105) 5,687,638
--------------- ---------------
NET INCREASE 26,551,244 32,754,485
NET ASSETS:
Beginning of period 309,022,611 276,268,126
--------------- ---------------
END OF PERIOD
(INCLUDING ACCUMULATED NET INVESTMENT LOSSES OF $2,754
AND $2,421, RESPECTIVELY) $ 335,573,855 $ 309,022,611
=============== ===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
17
<Page>
MORGAN STANLEY MID-CAP VALUE FUND
NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2005
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Mid-Cap Value Fund (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Fund's investment objective is
above-average total return. The Fund was organized as a Massachusetts business
trust on April 12, 2001 and commenced operations on October 29, 2001.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within 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) when market quotations are not
readily available or Morgan Stanley Investment Advisors Inc. (the "Investment
Adviser") determines that the latest sale price, the bid price or the mean
between the last reported bid and asked price do not reflect a security's market
value, portfolio securities are valued at their fair value as determined in good
faith under procedures established by and under the general supervision of the
Fund's Trustees. Occasionally, developments affecting the closing prices of
securities and other assets may occur between the times at which valuations of
such securities are determined (that is, close of the foreign market on which
the securities trade) and the close of business on the NYSE. If developments
occur during such periods that are expected to materially affect the value of
such securities, such valuations may be adjusted to reflect
18
<Page>
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;
(6) certain portfolio securities may be valued by an outside pricing service
approved by the Fund's Trustees; and (7) short-term debt securities having a
maturity date of more than sixty days at time of purchase are valued on a
mark-to-market basis until sixty days prior to maturity and thereafter at
amortized cost based on their value on the 61st day. Short-term debt securities
having a maturity date of sixty days or less at the time of purchase are valued
at amortized cost.
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. FEDERAL INCOME TAX POLICY -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Accordingly, no federal income tax provision is required.
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.
G. USE OF ESTIMATES -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
19
<Page>
2. INVESTMENT ADVISORY/ADMINISTRATION AGREEMENTS
Effective November 1, 2004, pursuant to an Investment Advisory Agreement with
the Investment Adviser, the Fund pays a advisory fee, accrued daily and payable
monthly, by applying the following annual rates to the net assets of the Fund
determined at the close of each business day: 0.72% to the portion of daily net
assets not exceeding $1 billion; and 0.65% to the portion of daily net assets
exceeding $1 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.
Prior to November 1, 2004, the Fund had retained the Investment Adviser to
provide administrative services and to manage the investment of the Fund's
assets pursuant to an investment management agreement pursuant to which the Fund
paid the Investment Adviser a monthly management fee accrued daily and payable
monthly, by applying the following annual rate of 0.80% to the net assets of the
Fund determined at the close of each business day.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the
"Distributor"), an affiliate of the Investment Adviser. The Fund has adopted a
Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan
provides that the Fund will pay the Distributor a fee which is accrued daily and
paid monthly at the following annual rates: (i) Class A -- up to 0.25% of the
average daily net assets of Class A; (ii) Class B -- up to 1.0% of the average
daily net assets of Class B; and (iii) Class C -- up to 1.0% of the average
daily net assets of Class C.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts totaled $1,323,701
at August 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
20
<Page>
expenses representing a gross sales credit to Morgan Stanley Financial Advisors
or other selected broker-dealer representatives may be reimbursed in the
subsequent calendar year. For the year ended August 31, 2005, the distribution
fee was accrued for Class A shares and Class C shares at the annual rate of
0.24% and 0.88%, respectively.
The Distributor has informed the Fund that for the year ended August 31, 2005,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class B shares and Class C shares of $164,069 and $1,166, respectively
and received $26,176 in front-end sales charges from sales of the Fund's Class A
shares. The respective shareholders pay such charges which are not an expense of
the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended August 31, 2005 aggregated
$223,582,836 and $278,828,717, respectively. Included in the aforementioned
transactions are purchases and sales of $58,310 and $94,500, respectively, with
other Morgan Stanley funds, including a realized gain of $17,476.
For the year ended August 31, 2005, the Fund incurred brokerage commissions of
$37,951 with Morgan Stanley & Co., an affiliate of the Investment Adviser,
Administrator and Distributor, for portfolio transactions executed on behalf of
the Fund.
Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and
Distributor, is the Fund's transfer agent.
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
21
<Page>
differences do not require reclassification. Dividends and distributions which
exceed net investment income and net realized capital gains for tax purposes are
reported as distributions of paid-in-capital.
The tax character of distributions paid was as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
AUGUST 31, 2005 AUGUST 31, 2004
--------------- ---------------
Ordinary income $ 23,339,357 --
Long-term capital gains 7,304,188 --
--------------- ---------------
Total distributions $ 30,643,545 --
=============== ===============
</Table>
As of August 31, 2005, the tax-basis components of accumulated earnings were as
follows:
<Table>
Undistributed ordinary income $ 13,861,651
Undistributed long-term gains 33,111,913
---------------
Net accumulated earnings 46,973,564
Temporary differences (340)
Net unrealized appreciation 37,580,193
---------------
Total accumulated earnings $ 84,553,417
===============
</Table>
As of August 31, 2005, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on wash sales and permanent book/tax
differences primarily attributable to a net operating loss. To reflect
reclassifications arising from the permanent differences, accumulated
undistributed net realized gain was charged and accumulated net investment loss
was credited $162,382.
22
<Page>
6. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
AUGUST 31, 2005 AUGUST 31, 2004
---------------------------------- ----------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------- --------------- --------------- ---------------
CLASS A SHARES
Sold 136,417 $ 1,614,623 191,872 $ 2,117,784
Conversion from Class B 634,473 7,169,678 -- --
Reinvestment of distributions 32,132 369,835 -- --
Redeemed (209,788) (2,468,177) (155,519) (1,682,332)
--------------- --------------- --------------- ---------------
Net increase -- Class A 593,234 6,685,959 36,353 435,452
--------------- --------------- --------------- ---------------
CLASS B SHARES
Sold 828,198 9,500,223 1,704,312 18,264,020
Conversion to Class A (652,534) (7,169,678) -- --
Reinvestment of distributions 490,316 5,506,245 -- --
Redeemed (1,622,191) (18,509,069) (1,775,835) (19,169,149)
--------------- --------------- --------------- ---------------
Net decrease -- Class B (956,211) (10,672,279) (71,523) (905,129)
--------------- --------------- --------------- ---------------
CLASS C SHARES
Sold 84,157 964,800 199,107 2,139,241
Reinvestment of distributions 67,479 758,458 -- --
Redeemed (216,798) (2,481,142) (176,524) (1,908,368)
--------------- --------------- --------------- ---------------
Net increase (decrease) -- Class C (65,162) (757,884) 22,583 230,873
--------------- --------------- --------------- ---------------
CLASS D SHARES
Sold 3,454,456 40,597,791 6,072,743 66,771,159
Reinvestment of distributions 1,660,516 19,261,986 -- --
Redeemed (5,690,429) (67,231,678) (5,485,609) (60,844,717)
--------------- --------------- --------------- ---------------
Net increase (decrease) -- Class D (575,457) (7,371,901) 587,134 5,926,442
--------------- --------------- --------------- ---------------
Net increase (decrease) in Fund (1,003,596) $ (12,116,105) 574,547 $ 5,687,638
=============== =============== =============== ===============
</Table>
7. 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
23
<Page>
recommend the funds advised by the Investment Adviser or its affiliates to
investors rather than funds managed by other companies, and (ii) that the funds
advised by the Investment Adviser or its affiliates, including the Fund,
allegedly paid excessive commissions to brokers in return for their efforts to
recommend these funds to investors. The complaint seeks, among other things,
unspecified compensatory damages, rescissionary damages, fees and costs. The
defendants have moved to dismiss the action and intend to otherwise vigorously
defend it. On March 9, 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.
24
<Page>
MORGAN STANLEY MID-CAP VALUE FUND
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR ENDED AUGUST 31, OCTOBER 29, 2001*
---------------------------------------- THROUGH
2005 2004 2003 AUGUST 31, 2002
---------- ---------- ---------- -----------------
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 11.08 $ 10.11 $ 8.19 $ 10.00
---------- ---------- ---------- -----------------
Income (loss) from investment operations:
Net investment loss~ (0.02) (0.02) (0.03) (0.04)
Net realized and unrealized gain (loss) 2.52 0.99 1.95 (1.76)
---------- ---------- ---------- -----------------
Total income (loss) from investment operations 2.50 0.97 1.92 (1.80)
---------- ---------- ---------- -----------------
Less dividends and distributions from:
Net investment income - - - (0.01)
Net realized gain (1.12) - - -
---------- ---------- ---------- -----------------
Total dividends and distributions (1.12) - - (0.01)
---------- ---------- ---------- -----------------
Net asset value, end of period $ 12.46 $ 11.08 $ 10.11 $ 8.19
========== ========== ========== =================
TOTAL RETURN+ 23.55% 9.50% 23.44% (17.99)%(1)
RATIOS TO AVERAGE NET ASSETS(3):
Expenses 1.40% 1.40% 1.47% 1.45%(2)(4)
Net investment loss (0.08)% (0.14)% (0.39)% (0.58)%(2)(4)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 11,757 $ 3,878 $ 3,173 $ 3,053
Portfolio turnover rate 72% 151% 165% 121%(1)
</Table>
- ----------
* COMMENCEMENT OF OPERATIONS.
~ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(4) IF THE FUND HAD BORNE ALL ITS EXPENSES THAT WERE REIMBURSED OR WAIVED BY
THE INVESTMENT ADVISER, THE ANNUALIZED EXPENSE AND NET INVESTMENT LOSS
RATIOS WOULD HAVE BEEN 1.66% AND (0.79)%, RESPECTIVELY.
SEE NOTES TO FINANCIAL STATEMENTS
25
<Page>
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR ENDED AUGUST 31, OCTOBER 29, 2001*
---------------------------------------- THROUGH
2005 2004 2003 AUGUST 31, 2002
---------- ---------- ---------- -----------------
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 10.85 $ 9.98 $ 8.15 $ 10.00
---------- ---------- ---------- -----------------
Income (loss) from investment operations:
Net investment loss~ (0.09) (0.10) (0.09) (0.10)
Net realized and unrealized gain (loss) 2.45 0.97 1.92 (1.75)
---------- ---------- ---------- -----------------
Total income (loss) from investment operations 2.36 0.87 1.83 (1.85)
---------- ---------- ---------- -----------------
Less dividends and distributions from:
Net investment income - - - 0.00++
Net realized gain (1.12) - - -
---------- ---------- ---------- -----------------
Total dividends and distributions (1.12) - - 0.00
---------- ---------- ---------- -----------------
Net asset value, end of period $ 12.09 $ 10.85 $ 9.98 $ 8.15
========== ========== ========== =================
TOTAL RETURN+ 22.58% 8.72% 22.45% (18.47)%(1)
RATIOS TO AVERAGE NET ASSETS(3):
Expenses 2.16% 2.16% 2.24% 2.20%(2)(4)
Net investment loss (0.84)% (0.90)% (1.16)% (1.33)%(2)(4)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 56,389 $ 60,987 $ 56,823 $ 53,948
Portfolio turnover rate 72% 151% 165% 121%(1)
</Table>
- ----------
* COMMENCEMENT OF OPERATIONS.
~ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
++ LESS THAN $0.005 PER SHARE.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(4) IF THE FUND HAD BORNE ALL ITS EXPENSES THAT WERE REIMBURSED OR WAIVED BY
THE INVESTMENT ADVISER, THE ANNUALIZED EXPENSE AND NET INVESTMENT LOSS
RATIOS WOULD HAVE BEEN 2.41% AND (1.54)%, RESPECTIVELY.
SEE NOTES TO FINANCIAL STATEMENTS
26
<Page>
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR ENDED AUGUST 31, OCTOBER 29, 2001*
---------------------------------------- THROUGH
2005 2004 2003 AUGUST 31, 2002
---------- ---------- ---------- -----------------
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 10.86 $ 9.98 $ 8.15 $ 10.00
---------- ---------- ---------- -----------------
Income (loss) from investment operations:
Net investment loss~ (0.08) (0.09) (0.09) (0.10)
Net realized and unrealized gain (loss) 2.45 0.97 1.92 (1.75)
---------- ---------- ---------- -----------------
Total income (loss) from investment operations 2.37 0.88 1.83 (1.85)
---------- ---------- ---------- -----------------
Less dividends and distributions from:
Net investment income - - - 0.00++
Net realized gain (1.12) - - -
---------- ---------- ---------- -----------------
Total dividends and distributions (1.12) - - 0.00
---------- ---------- ---------- -----------------
Net asset value, end of period $ 12.11 $ 10.86 $ 9.98 $ 8.15
========== ========== ========== =================
TOTAL RETURN+ 22.66% 8.82% 22.45% (18.48)%(1)
RATIOS TO AVERAGE NET ASSETS(3):
Expenses 2.04% 2.08% 2.24% 2.20%(2)(4)
Net investment loss (0.72)% (0.82)% (1.16)% (1.33)%(2)(4)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 8,268 $ 8,119 $ 7,238 $ 6,354
Portfolio turnover rate 72% 151% 165% 121%(1)
</Table>
- ----------
* COMMENCEMENT OF OPERATIONS.
~ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
++ LESS THAN $0.005 PER SHARE.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(4) IF THE FUND HAD BORNE ALL ITS EXPENSES THAT WERE REIMBURSED OR WAIVED BY
THE INVESTMENT ADVISER, THE ANNUALIZED EXPENSE AND NET INVESTMENT LOSS
RATIOS WOULD HAVE BEEN 2.41% AND (1.54)%, RESPECTIVELY.
SEE NOTES TO FINANCIAL STATEMENTS
27
<Page>
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR ENDED AUGUST 31, OCTOBER 29, 2001*
---------------------------------------- THROUGH
2005 2004 2003 AUGUST 31, 2002
---------- ---------- ---------- -----------------
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 11.15 $ 10.15 $ 8.21 $ 10.00
---------- ---------- ---------- -----------------
Income (loss) from investment operations:
Net investment income (loss)~ 0.02 0.01 (0.01) (0.04)
Net realized and unrealized gain (loss) 2.53 0.99 1.95 (1.73)
---------- ---------- ---------- -----------------
Total income (loss) from investment operations 2.55 1.00 1.94 (1.77)
---------- ---------- ---------- -----------------
Less dividends and distributions from:
Net investment income - - - (0.02)
Net realized gain (1.12) - - -
---------- ---------- ---------- -----------------
Total dividends and distributions (1.12) - - (0.02)
---------- ---------- ---------- -----------------
Net asset value, end of period $ 12.58 $ 11.15 $ 10.15 $ 8.21
========== ========== ========== =================
TOTAL RETURN+ 23.87% 9.75% 23.63% (17.76)%(1)
RATIOS TO AVERAGE NET ASSETS(3):
Expenses 1.16% 1.16% 1.24% 1.20%(2)(4)
Net investment income (loss) 0.16% 0.10% (0.16)% (0.33)%(2)(4)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 259,160 $ 236,039 $ 209,035 $ 95,150
Portfolio turnover rate 72% 151% 165% 121%(1)
</Table>
- ----------
* COMMENCEMENT OF OPERATIONS.
~ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE
MONTH.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(4) IF THE FUND HAD BORNE ALL ITS EXPENSES THAT WERE REIMBURSED OR WAIVED BY
THE INVESTMENT ADVISER, THE ANNUALIZED EXPENSE AND NET INVESTMENT LOSS
RATIOS WOULD HAVE BEEN 1.41% AND (0.54)%, RESPECTIVELY.
SEE NOTES TO FINANCIAL STATEMENTS
28
<Page>
MORGAN STANLEY MID-CAP VALUE FUND
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS AND BOARD OF
TRUSTEES OF MORGAN STANLEY MID-CAP VALUE FUND:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Mid-Cap Value Fund (the "Fund"), including the portfolio of investments,
as of August 31, 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 the periods presented. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. 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 August 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 Mid-Cap Value Fund as of August 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 the periods
presented, in conformity with accounting principles generally accepted in the
United States of America.
Deloitte & Touche LLP
NEW YORK, NEW YORK
OCTOBER 17, 2005
29
<Page>
MORGAN STANLEY MID-CAP VALUE FUND
TRUSTEE AND OFFICER INFORMATION
INDEPENDENT TRUSTEES:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- ------------------------ ----------- ------------ --------------------------------------------- ------------- --------------------
Michael Bozic (64) Trustee Since Private Investor; Director or Trustee of the 197 Director of various
c/o Kramer Levin April 1994 Retail Funds (since April 1994) and the business
Naftalis & Frankel LLP Institutional Funds (since July 2003); organizations.
Counsel to the formerly Vice Chairman of Kmart Corporation
Independent Trustees (December 1998-October 2000), Chairman and
1177 Avenue of the Chief Executive Officer of Levitz Furniture
Americas Corporation (November 1995-November 1998) and
New York, NY 10036 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 Trustee of the Retail 197 Director of Franklin
1031 N. Chartwell Court January 1993 Funds (since January 1993) and the Covey (time
Salt Lake City, UT 84103 Institutional Funds (since July 2003); member management systems),
of the Utah Regional Advisory Board of BMW Bank of North
Pacific Corp. (utility company); formerly America, Inc.
Managing Director of Summit Ventures LLC (industrial loan
(lobbying and consulting firm) (2000-2004); corporation), Escrow
United States Senator (R-Utah) (1974-1992) Bank USA (industrial
and Chairman, Senate Banking Committee loan corporation),
(1980-1986), Mayor of Salt Lake City, Utah United Space
(1971-1974), Astronaut, Space Shuttle Alliance (joint
Discovery (April 12-19, 1985), and Vice venture between
Chairman, Huntsman Corporation (chemical Lockheed Martin and
company). the Boeing Company)
and Nuskin Asia
Pacific (multilevel
marketing); member
of the board of
various civic and
charitable
organizations.
Wayne E. Hedien (71) Trustee Since Retired; Director or Trustee of the Retail 197 Director of The PMI
c/o Kramer Levin September Funds (since September 1997) and the Group Inc. (private
Naftalis & Frankel LLP 1997 Institutional Funds (since July 2003); mortgage insurance);
Counsel to the formerly associated with the Allstate Trustee and Vice
Independent Trustees Companies (1966-1994), most recently as Chairman of The
1177 Avenue of the Chairman of The Allstate Corporation (March Field Museum of
Americas 1993-December 1994) and Chairman and Chief Natural History;
New York, NY 10036 Executive Officer of its wholly-owned director of various
subsidiary, Allstate Insurance Company (July other business and
1989-December 1994). charitable
organizations.
</Table>
30
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- ------------------------ ----------- ------------ --------------------------------------------- ------------- --------------------
Dr. Manuel H. Johnson Trustee Since Senior Partner, Johnson Smick International, 197 Director of NVR,
(56) July 1991 Inc., a consulting firm; Chairman of the Inc. (home
c/o Johnson Smick Audit Committee and Director or Trustee of construction);
Group, Inc. the Retail Funds (since July 1991) and the Director of KFX
888 16th Street, NW Institutional Funds (since July 2003); Energy; Director of
Suite 740 Co-Chairman and a founder of the Group of RBS Greenwich
Washington, D.C. 20006 Seven Council (G7C), an international Capital Holdings
economic commission; formerly Vice Chairman (financial holding
of the Board of Governors of the Federal company).
Reserve System and Assistant Secretary of the
U.S. Treasury.
Joseph J. Kearns (63) Trustee Since President, Kearns & Associates LLC 198 Director of Electro
c/o Kearns & Associates July 2003 (investment consulting); Deputy Chairman of Rent Corporation
LLC the Audit Committee and Director or Trustee (equipment leasing),
PMB754 of the Retail Funds (since July 2003) and the The Ford Family
23852 Pacific Coast Institutional Funds (since August 1994); Foundation, and the
Highway previously Chairman of the Audit Committee of UCLA Foundation.
Malibu, CA 90265 the Institutional Funds (October 2001-July
2003); formerly CFO of the J. Paul Getty
Trust.
Michael E. Nugent (69) Trustee Since General Partner of Triumph Capital, L.P., a 197 Director of various
c/o Triumph Capital, July 1991 private investment partnership; Chairman of business
L.P. the Insurance Committee and Director or organizations.
445 Park Avenue Trustee of the Retail Funds (since July 1991)
New York, NY 10022 and the Institutional Funds (since July
2001); formerly Vice President, Bankers Trust
Company and BT Capital Corporation
(1984-1988).
Fergus Reid (73) Trustee Since Chairman of Lumelite Plastics Corporation; 198 Trustee and Director
c/o Lumelite Plastics July 2003 Chairman of the Governance Committee and of certain
Corporation Director or Trustee of the Retail Funds investment companies
85 Charles Colman Blvd. (since July 2003) and the Institutional Funds in the JPMorgan
Pawling, NY 12564 (since June 1992). Funds complex
managed by J.P.
Morgan Investment
Management Inc.
</Table>
31
<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 OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- ------------------------ ----------- ------------ --------------------------------------------- ------------- --------------------
Charles A. Fiumefreddo Chairman of Since Chairman and Director or Trustee of the 197 None.
(72) the Board July 1991 Retail Funds (since July 1991) and the
c/o Morgan Stanley Trust and Trustee Institutional Funds (since July 2003);
Harborside Financial formerly Chief Executive Officer of the
Center, Retail Funds (until September 2002).
Plaza Two,
Jersey City, NJ 07311
James F. Higgins (57) Trustee Since Director or Trustee of the Retail Funds 197 Director of AXA
c/o Morgan Stanley Trust June 2000 (since June 2000) and the Institutional Funds Financial, Inc. and
Harborside Financial (since July 2003); Senior Advisor of Morgan The Equitable Life
Center, Stanley (since August 2000); Director of the Assurance Society of
Plaza Two, Distributor and Dean Witter Realty Inc.; the United States
Jersey City, NJ 07311 previously President and Chief Operating (financial
Officer of the Private Client Group of Morgan services).
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.).
32
<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**
- ------------------------------ ----------------- ---------------- ------------------------------------------------------------------
Ronald E. Robison (66) President and Since May 2003 President (since September 2005) and Principal Executive Officer
1221 Avenue of the Americas Principal of funds in the Fund Complex (since May 2003); Managing Director
New York, NY 10020 Executive of Morgan Stanley & Co. Incorporated and Morgan Stanley; Managing
Officer Director and Director of Morgan Stanley Investment Management
Inc., Morgan Stanley Distribution Inc. and Morgan Stanley
Distributors Inc.; Managing Director, Chief Administrative
Officer and Director of Morgan Stanley Investment Advisors Inc.
and Morgan Stanley Services Company Inc.; Chief Executive Officer
and Director of Morgan Stanley Trust; Director of Morgan Stanley
SICAV (since May 2004); President (since September 2005) and
Principal Executive Officer (since May 2003) of the Van Kampen
Funds; previously, Executive Vice President (July 2003-September
2005) of funds in the Fund Complex and the Van Kampen Funds. He
was also previously President and Director of the Institutional
Funds (March 2001-July 2003), Chief Global Operations Officer of
Morgan Stanley Investment Management Inc. and Chief Executive
Officer and Chairman of Van Kampen Investor Services.
Joseph J. McAlinden (62) Vice President Since July 1995 Managing Director and Chief Investment Officer of the Investment
1221 Avenue of the Americas 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 President Since General Counsel (since May 2000) and Managing Director (since
1221 Avenue of the Americas February 1997 December 2000) of Morgan Stanley Investment Management; Managing
New York, NY 10020 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 President Since July 2004 Managing Director and General Counsel, U.S. Investment
1221 Avenue of the Americas 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>
33
<Page>
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- ------------------------------ ----------------- ---------------- ------------------------------------------------------------------
Stefanie V. Chang (38) Vice President Since July 2003 Executive Director of Morgan Stanley & Co. Incorporated, Morgan
1221 Avenue of the Americas 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 (40) Treasurer and Treasurer since Executive Director of the Investment Adviser and the
c/o Morgan Stanley Trust Chief Financial July 2003 and Administration (since December 2001); previously, Vice President
Harborside Financial Center, Officer Chief Financial of the Retail Funds (September 2002-July 2003); Vice President of
Plaza Two, Officer since the Investment Adviser and the Administrator (August
Jersey City, NJ 07311 September 2002 2000-November 2001) and Senior Manager at PricewaterhouseCoopers
LLP (January 1998-August 2000).
Thomas F. Caloia (59) Vice President Since July 2003 Executive Director (since December 2002) and Assistant Treasurer
c/o Morgan Stanley Trust 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 2003 Executive Director of Morgan Stanley & Co. Incorporated, Morgan
1221 Avenue of the Americas 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.
2005 FEDERAL TAX NOTICE (UNAUDITED)
During the fiscal year ended August 31, 2005, the Fund paid to its
shareholders $0.27 per share from long-term capital gains. For such
period, 15.18% of the ordinary dividends paid qualified for the
dividends received deduction available to corporations.
Additionally, please note that 15.79% of the Fund's ordinary dividends
paid during the fiscal year ended August 31, 2005 qualified for the
lower income tax rate available to individuals under the Jobs and
Growth Tax Relief Reconciliation Act of 2003.
34
<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
Ronald E. Robison
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]
39917RPT-RA05-00838P-Y08/05
[GRAPHIC]
MORGAN STANLEY FUNDS
MORGAN STANLEY
MID-CAP VALUE FUND
ANNUAL REPORT
AUGUST 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)."
Additionally, Exhibit B was amended to remove Mitchell M. Merin as a covered
officer.
(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:
2005
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 35,590 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 540 (2) $ (2)
TAX FEES $ 5,481 (3) $ (4)
ALL OTHER FEES $ - $ -
TOTAL NON-AUDIT FEES $ 6,021 $
TOTAL $ 41,611 $
</Table>
2004
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 34,615 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 452 (2) $ 5,067,400 (2)
TAX FEES $ 4,889 (3) $ 545,053 (4)
ALL OTHER FEES $ - $ - (5)
TOTAL NON-AUDIT FEES $ 5,341 $ 5,612,453
TOTAL $ 39,956 $ 5,612,453
</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
<Page>
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
<Page>
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.
<Page>
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 Mid-Cap Value Fund
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
October 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
October 20, 2005
/s/ Francis Smith
Francis Smith
Principal Financial Officer
October 20, 2005