<Page>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-10353
Morgan Stanley KLD Social Index Fund
(Exact name of registrant as specified in charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip code)
Ronald E. Robison
1221 Avenue of the Americas, New York, New York 10020
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-762-4000
Date of fiscal year end: November 30, 2005
Date of reporting period: November 30, 2005
Item 1 - Report to Shareholders
<Page>
WELCOME, SHAREHOLDER:
IN THIS REPORT, YOU'LL LEARN ABOUT HOW YOUR INVESTMENT IN MORGAN STANLEY KLD
SOCIAL INDEX FUND PERFORMED DURING THE 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.
<Page>
FUND REPORT
For the year ended November 30, 2005
TOTAL RETURN FOR THE 12 MONTHS ENDED NOVEMBER 30, 2005
<Table>
<Caption>
KLD LIPPER
LARGE CAP LARGE-CAP
SOCIAL(SM) CORE FUNDS
CLASS A CLASS B CLASS C CLASS D INDEX(1) INDEX(2)
9.59% 8.72% 8.69% 9.80% 10.46% 8.70%
</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
The annual reporting period opened on an optimistic note. Despite high oil
prices and ongoing increases to the federal funds target rate, stocks rallied
through December. The market was buoyed by a variety of factors, including the
undisputed presidential election, indications of steady economic growth, a pick
up in merger-and-acquisition activity and initial public offerings, as well as
good corporate earnings.
In contrast to the strong close of 2004, the first months of 2005 were far less
ebullient. Stocks retreated amid profit taking and deteriorating sentiment.
Investors grew increasingly apprehensive about soaring oil prices, inflationary
pressures, the Federal Open Market Committee's (the "Fed") interest rate
tightenings, and the pace of economic growth. Additionally, the misfortunes of
the auto industry called into question the strength of the U.S. economy.
Although oil prices continued to increase, the climate brightened by late
spring. Encouraging economic data, increased consumer confidence, waning
inflationary fears and many solid corporate earnings announcements boosted the
stock market.
Against the backdrop of mixed economic data and additional increases in the
federal funds rate, the markets became increasingly choppy from August through
mid-October. The Gulf Coast hurricanes sent oil prices spiking and created
anxiety about the economy, particularly given the Fed's resolve to continue
raising rates.
In mid-October, the stock market regained its equilibrium. Declining oil prices,
better-than-expected economic data, the nomination of Ben Bernanke to head the
Federal Reserve, and strengthening consumer trends provided a boost to investor
sentiment in the final portion of October. Stocks continued to advance through
November, buoyed by indications that the Fed might soon slow the pace of rate
increases, a boost in consumer confidence, continued declines in oil prices,
strong retail trends (excluding the auto industry), and acceptable housing data.
PERFORMANCE ANALYSIS
Morgan Stanley KLD Social Index Fund underperformed the KLD Large Cap Social(SM)
Index* for the 12 months ended November 30, 2005, after the deduction of the
Fund's fees and expenses and assuming no deduction of applicable sales charges.
Class A, B and D shares outperformed and Class C shares narrowly underperformed
the Lipper Large-Cap Core Funds Index for the same time period, assuming no
deduction of sales charges.
2
<Page>
The gains of the Fund and the Index were supported by positive performance
across all 10 sectors of the Index. In terms of absolute returns, the top
performing sectors were energy, healthcare and utilities. Rising commodity
prices and increased demand provided support for the energy and utilities
sector. Within healthcare, the equipment and services industry was particularly
strong, boosted by pricing power and new plan member enrollments within
healthcare services. Biotechnology and pharmaceutical stocks also contributed to
the sector's gains as favorable drug trial results were well received by the
market.
While all the sectors generated positive performance, two industry groups landed
in negative territory. The auto sector was plagued by a host of issues,
including missed earnings, credit downgrades and labor problems. In the media
industry, traditional companies came under increased pressure from Internet
competitors for advertising revenues; stock-specific setbacks also hindered the
group.
Given that the KLD Large Cap Social(SM) Index is market capitalization weighted
(and that the Fund seeks to replicate the performance attributes of the Index,
before Fund fees), the overall contribution of each sector was influenced by its
relative size within the Index and the Fund portfolio. In terms of overall
contributions to returns, the healthcare, financial and technology sectors added
most significantly to positive performance. As discussed previously, healthcare
services, biotechnology and pharmaceuticals were among the principal drivers.
Much of the contribution of the financials and technology sectors reflected
their sizable weightings within the Index. That said, diversified financial
services performed briskly, boosted by investment banking activity, such as
mergers and acquisitions. Technology included pockets of both strength and
weakness, due to company specific factors.
On an industry level, media stocks slowed the pace of the Index and the Fund
most significantly. On a sector basis, the telecommunications sector contributed
the least to overall performance. Here, performance was hindered as the market
gravitated away from companies pursuing acquisitions.
From a market capitalization perspective, small cap stocks contributed the most
to upside performance, while mega caps lagged.
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>
Microsoft Corp. 3.1%
Procter & Gamble Co. (The) 2.4
Johnson & Johnson 2.2
Intel Corp. 2.1
American International Group, Inc. 1.9
International Business Machines Corp. 1.8
JPMorgan Chase & Co. 1.6
Cisco Systems, Inc. 1.4
Wells Fargo & Co. 1.3
Amgen Inc 1.3
</Table>
TOP FIVE INDUSTRIES
<Table>
Packaged Software 4.5%
Semiconductors 4.2
Major Banks 4.0
Major Telecommunications 4.0
Household/Personal Care 3.5
</Table>
DATA AS OF NOVEMBER 30, 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.
* THE KLD LARGE CAP SOCIAL(SM) INDEX IS DERIVED FROM THE CONSTITUENTS OF THE
RUSSELL 1000(R) INDEX. COMPANIES ON THE KLD LARGE CAP SOCIAL(SM) INDEX ARE
COMPANIES THAT PASS KLD'S MULTIPLE PROPRIETARY ENVIRONMENTAL AND SOCIAL SCREENS.
INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR
FEES. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. THE KLD LARGE CAP
SOCIAL(SM) INDEX (KLD INDEX) IS A SERVICE MARK OF KLD RESEARCH & ANALYTICS, INC.
(KLD). MORGAN STANLEY KLD SOCIAL INDEX FUND IS NOT PROMOTED OR ENDORSED BY, OR
IN ANY WAY AFFILIATED WITH KLD. KLD IS NOT RESPONSIBLE FOR AND HAS NOT REVIEWED
THE FUND OR ANY ASSOCIATED LITERATURE OR PUBLICATIONS. KLD MAKES NO
REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO THEIR ACCURACY OR
COMPLETENESS, OR OTHERWISE. THE RUSSELL 1000(R) INDEX IS A TRADEMARK/SERVICE
MARK OF THE FRANK RUSSELL COMPANY (FRC). THE USE OF THE RUSSELL 1000(R) INDEX AS
THE UNIVERSE FOR THE KLD INDEX IN NO WAY SUGGESTS OR IMPLIES AN OPINION BY FRC
AS TO THE ATTRACTIVENESS OF THE KLD INDEX OR OF THE INVESTMENT IN ANY OR ALL OF
THE SECURITIES UPON WHICH THE RUSSELL 1000(R) INDEX OR KLD INDEX ARE BASED.
THE INVESTMENT PERFORMANCE OF THE KLD INDEX DOES NOT INCLUDE ANY EXPENSES, SALES
CHARGES OR FEES. INDEXES ARE UNMANAGED AND SUCH COSTS WOULD LOWER PERFORMANCE.
AS A RESULT, THE FUND'S PERFORMANCE WILL NOT EXACTLY TRACK THE PERFORMANCE OF
THE INDEX. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
INVESTMENT STRATEGY
THE FUND WILL NORMALLY INVEST AT LEAST 80 PERCENT OF ITS ASSETS IN COMMON STOCKS
OF COMPANIES INCLUDED IN THE KLD INDEX, AN INDEX COMPRISED OF STOCKS THAT MEET
CERTAIN SOCIAL AND ENVIRONMENTAL CRITERIA. THE KLD INDEX IS A COMMON STOCK INDEX
COMPRISED OF THE STOCKS OF U.S. COMPANIES WHICH ARE WEIGHTED ACCORDING TO MARKET
CAPITALIZATION. THE KLD INDEX WAS DEVELOPED BY KLD RESEARCH & ANALYTICS, INC.
("KLD") BASED ON CERTAIN SOCIAL AND ENVIRONMENTAL CRITERIA. THE KLD INDEX IS
DERIVED BY KLD FROM THE CONSTITUENTS OF THE RUSSELL 1000(R) INDEX. THE RUSSELL
1000(R) INDEX MEASURES THE PERFORMANCE OF THE 1000 LARGEST COMPANIES IN THE
UNITED STATES AND IS CONSIDERED REPRESENTATIVE OF THE U.S. LARGE CAPITALIZATION
SECURITIES MARKET. THE RUSSELL 1000(R) INDEX IS RECONSTITUTED ANNUALLY ON JUNE
30.
FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS
EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN
ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND
AND FOURTH FISCAL QUARTERS BY FILING THE SCHEDULE ELECTRONICALLY WITH THE
SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON
FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON FORM N-CSR. MORGAN STANLEY ALSO
DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO FUND SHAREHOLDERS AND MAKES THESE
REPORTS AVAILABLE ON ITS PUBLIC WEB SITE, www.morganstanley.com. EACH MORGAN
STANLEY FUND ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC
FOR THE FUND'S FIRST AND THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES
NOT DELIVER THE REPORTS FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS,
NOR ARE THE REPORTS POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY,
HOWEVER, OBTAIN THE FORM N-Q FILINGS
4
<Page>
(AS WELL AS THE FORM N-CSR AND N-CSRS FILINGS) BY ACCESSING THE SEC'S WEB SITE,
http://www.sec.gov. YOU MAY ALSO REVIEW AND COPY THEM AT THE SEC'S PUBLIC
REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE OPERATION OF THE SEC'S
PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE SEC AT (800) SEC-0330. YOU
CAN ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT OF A DUPLICATING FEE,
BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS (publicinfo@sec.gov) OR BY
WRITING THE PUBLIC REFERENCE SECTION OF THE SEC, WASHINGTON, DC 20549-0102.
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
WITHOUT CHARGE 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
<Page>
PERFORMANCE SUMMARY
[CHART]
PERFORMANCE OF $10,000 INVESTMENT
($ IN THOUSANDS)
<Table>
<Caption>
CLASS A^^ CLASS B^^ CLASS C^^ CLASS D^^ KLD INDEX(1) LIPPER LARGE-CAP CORE FUNDS INDEX(2)
Jul-2001 $ 9,475 $ 10,000 $ 10,000 $ 10,000 $ 10,000 $ 10,000
Aug-2001 $ 8,783 $ 9,260 $ 9,260 $ 9,270 $ 9,272 $ 9,403
Nov-2001 $ 8,897 $ 9,360 $ 9,360 $ 9,400 $ 9,407 $ 9,477
Feb-2002 $ 8,524 $ 8,945 $ 8,946 $ 9,004 $ 9,015 $ 9,275
May-2002 $ 8,334 $ 8,735 $ 8,736 $ 8,812 $ 8,822 $ 9,023
Aug-2002 $ 7,048 $ 7,374 $ 7,382 $ 7,464 $ 7,485 $ 7,840
Nov-2002 $ 7,362 $ 7,684 $ 7,683 $ 7,786 $ 7,848 $ 7,969
Feb-2003 $ 6,638 $ 6,908 $ 6,914 $ 7,025 $ 7,080 $ 7,254
May-2003 $ 7,635 $ 7,936 $ 7,946 $ 8,090 $ 8,203 $ 8,234
Aug-2003 $ 8,061 $ 8,360 $ 8,361 $ 8,540 $ 8,683 $ 8,610
Nov-2003 $ 8,593 $ 8,894 $ 8,898 $ 9,114 $ 9,258 $ 8,990
Feb-2004 $ 9,210 $ 9,528 $ 9,524 $ 9,778 $ 9,939 $ 9,668
May-2004 $ 9,102 $ 9,386 $ 9,392 $ 9,654 $ 9,796 $ 9,464
Aug-2004 $ 8,878 $ 9,134 $ 9,148 $ 9,427 $ 9,529 $ 9,298
Nov-2004 $ 9,522 $ 9,781 $ 9,798 $ 10,120 $ 10,250 $ 9,894
Feb-2005 $ 9,663 $ 9,911 $ 9,922 $ 10,281 $ 10,421 $ 10,158
May-2005 $ 9,713 $ 9,941 $ 9,943 $ 10,333 $ 10,469 $ 10,066
Aug-2005 $ 10,040 $ 10,247 $ 10,260 $ 10,680 $ 10,866 $ 10,363
Nov-2005 $ 10,436 $ 10,434 $ 10,649 $ 11,111 $ 11,323 $ 10,754
</Table>
6
<Page>
AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED NOVEMBER 30, 2005
<Table>
<Caption>
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS D SHARES++
(SINCE 07/13/01) (SINCE 07/13/01) (SINCE 07/13/01) (SINCE 07/13/01)
SYMBOL SIXAX SIXBX SIXCX SIXDX
1 YEAR 9.59%(3) 8.72%(3) 8.69%(3) 9.80%(3)
3.84(4) 3.72(4) 7.69(4) --
SINCE INCEPTION 2.23(3) 1.41(3) 1.45(3) 2.43(3)
0.98(4) 0.97(4) 1.45(4) --
</Table>
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF
FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES
SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT
www.morganstanley.com OR SPEAK WITH YOUR FINANCIAL ADVISOR. INVESTMENT RETURNS
AND PRINCIPAL VALUE WILL FLUCTUATE AND FUND SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. THE GRAPH AND TABLE DO NOT REFLECT THE
DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE
REDEMPTION OF FUND SHARES. PERFORMANCE FOR CLASS A, CLASS B, CLASS C, AND CLASS
D SHARES WILL VARY DUE TO DIFFERENCES IN SALES CHARGES AND EXPENSES.
* THE MAXIMUM FRONT-END SALES CHARGE FOR CLASS A IS 5.25%.
** THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B IS 5.0%.
THE CDSC DECLINES TO 0% AFTER SIX YEARS.
+ THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE FOR CLASS C IS 1.0% FOR SHARES
REDEEMED WITHIN ONE YEAR OF PURCHASE.
++ CLASS D HAS NO SALES CHARGE.
(1) THE KLD LARGE CAP SOCIAL(SM) INDEX BEGINS WITH THE RUSSELL 1000(R) INDEX.
COMPANIES ON THE KLD LARGE CAP SOCIAL(SM) INDEX ARE COMPANIES THAT PASS
KLD'S MULTIPLE PROPRIETARY ENVIRONMENTAL AND SOCIAL SCREENS. THE INDEXES
ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES.
SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY
IN AN INDEX.
(2) THE LIPPER LARGE-CAP CORE FUNDS INDEX IS AN EQUALLY WEIGHTED PERFORMANCE
INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN THE LIPPER
LARGE-CAP CORE FUNDS CLASSIFICATION. THE INDEX, WHICH IS ADJUSTED FOR
CAPITAL GAINS DISTRIBUTIONS AND INCOME DIVIDENDS, IS UNMANAGED AND SHOULD
NOT BE CONSIDERED AN INVESTMENT. THERE ARE CURRENTLY 30 FUNDS REPRESENTED
IN THIS INDEX.
(3) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT
THE DEDUCTION OF ANY SALES CHARGES.
(4) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND THE DEDUCTION OF
THE MAXIMUM APPLICABLE SALES CHARGE. SEE THE FUND'S CURRENT PROSPECTUS FOR
COMPLETE DETAILS ON FEES AND SALES CHARGES.
^^ ENDING VALUE ASSUMING A COMPLETE REDEMPTION ON NOVEMBER 30, 2005.
7
<Page>
EXPENSE EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments and redemption fees;
and (2) ongoing costs, including 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 06/01/05 - 11/30/05.
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 *
------------- ------------- ---------------
06/01/05 -
06/01/05 11/30/05 11/30/05
------------- ------------- ---------------
CLASS A
Actual (7.44% return) $ 1,000.00 $ 1,074.40 $ 1.30
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,023.82 $ 1.27
CLASS B
Actual (6.97% return) $ 1,000.00 $ 1,069.70 $ 5.19
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,020.05 $ 5.06
CLASS C
Actual (7.11% return) $ 1,000.00 $ 1,071.10 $ 5.19
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,020.05 $ 5.06
CLASS D
Actual (7.53% return) $ 1,000.00 $ 1,075.30 $ 0.00
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,025.07 $ 0.00
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.25%, 1.00%,
1.00% AND 0.00% FOR CLASS A, CLASS B, CLASS C AND CLASS D SHARES,
RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD,
MULTIPLIED BY 183/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). IF THE FUND
HAD BORNE ALL OF ITS EXPENSES THAT WERE WAIVED OR ASSUMED BY THE
INVESTMENT ADVISER AND ADMINISTRATOR, THE ANNUALIZED EXPENSE RATIOS WOULD
HAVE BEEN 2.58%, 3.33%, 3.33% AND 2.33% FOR CLASS A, CLASS B, CLASS C AND
CLASS D SHARES, RESPECTIVELY.
8
<Page>
MORGAN STANLEY KLD SOCIAL INDEX FUND
PORTFOLIO OF INVESTMENTS - NOVEMBER 30, 2005
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS (91.1%)
ADVERTISING/MARKETING SERVICES (0.3%)
271 Lamar Advertising Co. (Class A)* $ 12,561
494 Omnicom Group, Inc. 41,773
-------------
54,334
-------------
AIR FREIGHT/COURIERS (1.1%)
522 C.H. Robinson Worldwide, Inc. 21,115
256 Expeditors International of Washington, Inc. 18,179
761 FedEx Corp. 74,289
1,456 United Parcel Service, Inc. (Class B) 113,422
-------------
227,005
-------------
AIRLINES (0.2%)
2,183 Southwest Airlines Co. 36,020
-------------
APPAREL/FOOTWEAR (0.4%)
980 Coach, Inc.* 33,741
340 Liz Claiborne, Inc. 11,859
448 Nike, Inc. (Class B) 38,214
-------------
83,814
-------------
APPAREL/FOOTWEAR RETAIL (0.7%)
414 Chico's FAS, Inc.* 18,262
540 Foot Locker, Inc. 11,783
1,634 Gap, Inc. (The) 28,399
1,054 Limited Brands, Inc. 23,452
560 Nordstrom, Inc. 20,653
442 Ross Stores, Inc. 12,155
1,256 TJX Companies, Inc. (The) 28,147
-------------
142,851
-------------
AUTO PARTS: O.E.M. (0.3%)
290 Autoliv, Inc. 12,690
436 Dana Corp. 3,039
574 Gentex Corp. 10,808
536 Johnson Controls, Inc. 37,225
-------------
63,762
-------------
BEVERAGES: NON-ALCOHOLIC (1.2%)
5,374 Coca-Cola Co. (The) $ 229,416
568 Coca-Cola Enterprises Inc. 10,917
412 Pepsi Bottling Group, Inc. (The) 12,154
-------------
252,487
-------------
BIOTECHNOLOGY (2.1%)
3,301 Amgen Inc.* 267,150
865 Biogen Idec Inc.* 37,031
155 Cephalon, Inc.* 7,882
577 Genzyme Corp.* 42,894
1,090 Gilead Sciences, Inc.* 55,252
158 Invitrogen Corp.* 10,531
654 MedImmune, Inc.* 23,485
913 Millennium Pharmaceuticals, Inc.* 9,596
104 OSI Pharmaceuticals Inc.* 2,522
-------------
456,343
-------------
BROADCASTING (0.2%)
3,209 Sirius Satellite Radio Inc.* 22,944
623 Univision Communications, Inc. (Class A)* 18,833
354 XM Satellite Radio Holdings Inc. (Class A)* 10,358
-------------
52,135
-------------
BUILDING PRODUCTS (0.3%)
597 American Standard Companies, Inc. 22,735
1,134 Masco Corp. 33,759
-------------
56,494
-------------
CABLE/SATELLITE TV (1.0%)
5,456 Comcast Corp. (Class A)* 144,038
1,123 Liberty Global Inc. (Class A)* 25,054
6,981 Liberty Media Corp. (Class A)* 53,614
-------------
222,706
-------------
CHEMICALS: MAJOR DIVERSIFIED (0.2%)
801 Engelhard Corp. 23,630
298 Rohm & Haas Co. 13,052
-------------
36,682
-------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
9
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
CHEMICALS: SPECIALTY (0.4%)
579 Air Products & Chemicals, Inc. $ 34,259
828 Praxair, Inc. 43,056
256 Sigma-Aldrich Corp. 16,906
-------------
94,221
-------------
COMMERCIAL PRINTING/FORMS (0.1%)
619 Donnelley (R.R.) & Sons Co. 21,170
-------------
COMPUTER COMMUNICATIONS (1.7%)
1,213 Avaya Inc.* 14,459
17,228 Cisco Systems, Inc.* 302,179
1,482 Juniper Networks, Inc.* 33,330
305 QLogic Corp.* 10,083
-------------
360,051
-------------
COMPUTER PERIPHERALS (0.6%)
6,166 EMC Corp.* 85,892
331 Lexmark International, Inc. (Class A)* 15,762
799 Network Appliance, Inc.* 23,267
190 Zebra Technologies Corp. (Class A)* 8,575
-------------
133,496
-------------
COMPUTER PROCESSING HARDWARE (2.8%)
1,936 Apple Computer, Inc.* 131,301
6,450 Dell, Inc.* 194,532
7,775 Hewlett-Packard Co. 230,684
458 NCR Corp.* 15,549
8,482 Sun Microsystems, Inc.* 31,977
-------------
604,043
-------------
CONSTRUCTION MATERIALS (0.1%)
261 Vulcan Materials Co. 17,409
-------------
CONTAINERS/PACKAGING (0.2%)
387 Pactiv Corp.* 7,833
219 Sealed Air Corp.* 11,324
314 Temple-Inland Inc. 13,147
-------------
32,304
-------------
CONTRACT DRILLING (0.2%)
555 ENSCO International Inc. $ 26,285
215 Rowan Companies, Inc. 7,714
-------------
33,999
-------------
DATA PROCESSING SERVICES (0.7%)
1,511 Automatic Data Processing, Inc. 71,017
591 Ceridian Corp.* 14,184
236 DST Systems, Inc.* 14,035
493 Fiserv, Inc.* 22,436
825 Paychex, Inc. 34,988
-------------
156,660
-------------
DEPARTMENT STORES (0.3%)
764 Kohl's Corp.* 35,144
649 Penney (J.C.) Co., Inc. 34,053
-------------
69,197
-------------
DISCOUNT STORES (1.0%)
1,169 Costco Wholesale Corp. 58,427
777 Dollar General Corp. 14,693
273 Dollar Tree Stores, Inc.* 6,268
414 Family Dollar Stores, Inc. 9,319
2,326 Target Corp. 124,464
-------------
213,171
-------------
DRUGSTORE CHAINS (0.8%)
2,024 CVS Corp. 54,688
2,610 Walgreen Co. 119,225
-------------
173,913
-------------
ELECTRIC UTILITIES (0.2%)
1,606 AES Corp. (The)* 25,328
600 Pepco Holdings, Inc. 13,002
-------------
38,330
-------------
ELECTRICAL PRODUCTS (0.6%)
461 American Power Conversion Corp. 10,331
1,074 Emerson Electric Co. 81,205
253 Energizer Holdings, Inc.* 13,336
116 Hubbell, Inc. (Class B) 5,627
504 Molex Inc. 13,502
-------------
124,001
-------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
10
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
ELECTRONIC COMPONENTS (0.3%)
586 Jabil Circuit, Inc.* $ 19,408
378 SanDisk Corp.* 19,301
2,800 Solectron Corp.* 10,052
472 Vishay Intertechnology, Inc.* 6,056
-------------
54,817
-------------
ELECTRONIC DISTRIBUTORS (0.1%)
400 Arrow Electronics, Inc.* 12,400
209 CDW Corp. 12,258
-------------
24,658
-------------
ELECTRONIC EQUIPMENT/INSTRUMENTS (0.3%)
360 Scientific-Atlanta, Inc. 15,235
40 Symbol Technologies, Inc. 457
381 Tektronix, Inc. 9,750
460 Thermo Electron Corp.* 14,191
1,995 Xerox Corp.* 28,329
-------------
67,962
-------------
ELECTRONIC PRODUCTION EQUIPMENT (0.7%)
4,295 Applied Materials, Inc. 77,782
770 Cadence Design Systems, Inc.* 13,198
539 KLA-Tencor Corp. 27,591
593 Lam Research Corp.* 22,261
391 Novellus Systems, Inc.* 9,646
357 Synopsys, Inc.* 6,969
-------------
157,447
-------------
ELECTRONICS/APPLIANCE STORES (0.4%)
1,011 Best Buy Co., Inc. 48,771
631 Circuit City Stores - Circuit City Group 13,207
597 RadioShack Corp. 13,618
-------------
75,596
-------------
ELECTRONICS/APPLIANCES (0.2%)
170 Harman International Industries, Inc. 16,575
219 Whirlpool Corp. 17,925
-------------
34,500
-------------
FINANCE/RENTAL/LEASING (2.5%)
325 Allied Capital Corp. $ 9,831
897 Capital One Financial Corp. 74,505
539 CIT Group, Inc. 26,681
1,423 Countrywide Financial Corp. 49,535
2,469 Fannie Mae 118,635
1,754 Freddie Mac 109,537
2,894 MBNA Corp. 77,472
138 Ryder System, Inc. 5,855
1,118 SLM Corp. 58,751
-------------
530,802
-------------
FINANCIAL CONGLOMERATES (3.3%)
2,875 American Express Co. 147,834
9,079 JPMorgan Chase & Co. 347,272
813 Principal Financial Group, Inc. 41,195
1,364 Prudential Financial, Inc. 105,574
832 State Street Corp. 47,998
-------------
689,873
-------------
FINANCIAL PUBLISHING/SERVICES (0.5%)
230 Dun & Bradstreet Corp.* 14,950
1,016 McGraw-Hill Companies, Inc. (The) 53,899
668 Moody's Corp. 40,180
-------------
109,029
-------------
FOOD DISTRIBUTORS (0.2%)
1,627 SYSCO Corp. 52,585
-------------
FOOD RETAIL (0.6%)
974 Albertson's, Inc. 22,889
1,919 Kroger Co.* 37,344
1,206 Safeway Inc. 28,040
408 Supervalu, Inc. 13,350
129 Whole Foods Market, Inc. 18,999
-------------
120,622
-------------
FOOD: MAJOR DIVERSIFIED (1.8%)
560 Campbell Soup Co. 16,918
738 General Mills, Inc. 35,077
978 Heinz (H.J.) Co. 33,956
621 Kellogg Co. 27,367
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
11
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
4,349 PepsiCo, Inc. $ 257,461
78 TreeHouse Foods, Inc.* 1,538
-------------
372,317
-------------
FOOD: MEAT/FISH/DAIRY (0.1%)
391 Dean Foods Co.* 14,932
-------------
FOOD: SPECIALTY/CANDY (0.3%)
464 Hershey Foods Corp. 25,158
349 McCormick & Co., Inc. (Non-Voting) 10,896
100 Smucker (J.M.) Co. 4,535
406 Wrigley (Wm.) Jr. Co. 27,848
-------------
68,437
-------------
GAS DISTRIBUTORS (0.4%)
794 Equitable Resources, Inc. 29,688
487 KeySpan Corp. 16,344
811 NiSource, Inc. 17,461
300 Questar Corp. 22,368
-------------
85,861
-------------
HOME BUILDING (0.5%)
342 Centex Corp. 24,573
900 D.R. Horton, Inc. 31,896
260 KB Home 18,140
298 Lennar Corp. (Class A) 17,189
542 Pulte Homes, Inc. 22,563
-------------
114,361
-------------
HOME FURNISHINGS (0.2%)
564 Leggett & Platt, Inc. 13,243
160 Mohawk Industries, Inc.* 14,077
704 Newell Rubbermaid, Inc. 16,241
-------------
43,561
-------------
HOME IMPROVEMENT CHAINS (1.8%)
400 Fastenal Co. 15,880
5,712 Home Depot, Inc. (The) 238,647
2,003 Lowe's Companies, Inc. 135,162
-------------
389,689
-------------
HOSPITAL/NURSING MANAGEMENT (0.2%)
709 Health Management Associates, Inc. (Class A) $ 16,605
312 Manor Care, Inc. 12,302
192 Triad Hospitals, Inc.* 8,191
-------------
37,098
-------------
HOUSEHOLD/PERSONAL CARE (3.5%)
214 Alberto-Culver Co. 9,305
1,202 Avon Products, Inc. 32,875
415 Clorox Co. (The) 22,526
1,355 Colgate-Palmolive Co. 73,875
310 Estee Lauder Companies, Inc. (The) (Class A) 10,233
1,277 Kimberly-Clark Corp. 75,317
9,042 Procter & Gamble Co. (The) 517,112
-------------
741,243
-------------
INDUSTRIAL CONGLOMERATES (0.8%)
1,992 3M Co. 156,332
218 SPX Corp. 10,263
-------------
166,595
-------------
INDUSTRIAL MACHINERY (0.3%)
674 Illinois Tool Works Inc. 59,494
-------------
INDUSTRIAL SPECIALTIES (0.1%)
510 Ecolab Inc. 16,968
-------------
INFORMATION TECHNOLOGY SERVICES (2.1%)
471 Citrix Systems, Inc.* 12,783
372 Cognizant Technology Solutions Corp. (Class A)* 18,075
1,297 Electronic Data Systems Corp. 29,896
4,294 International Business Machines Corp. 381,737
846 Unisys Corp.* 5,203
-------------
447,694
-------------
INSURANCE BROKERS/SERVICES (0.2%)
189 Gallagher (Arthur J.) & Co. 5,755
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
12
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
1,333 Marsh & McLennan Companies, Inc. $ 41,176
-------------
46,931
-------------
INTERNET RETAIL (0.2%)
788 Amazon.com, Inc.* 38,186
527 IAC/InterActiveCorp* 14,550
-------------
52,736
-------------
INTERNET SOFTWARE/SERVICES (0.9%)
900 BEA Systems, Inc.* 7,893
393 Google, Inc. (Class A)* 159,161
1,089 Siebel Systems, Inc. 11,435
641 VeriSign, Inc.* 14,249
-------------
192,738
-------------
INVESTMENT BANKS/BROKERS (2.0%)
577 Ameritrade Holding Corp.* 13,480
81 Chicago Mercantile Exchange Holdings, Inc. 28,686
300 Edwards (A.G.), Inc. 13,221
984 Goldman Sachs Group Inc. (The) 126,897
285 Legg Mason, Inc. 34,955
2,441 Merrill Lynch & Co., Inc. 162,131
2,559 Schwab (Charles) Corp. (The) 39,025
-------------
418,395
-------------
INVESTMENT MANAGERS (0.6%)
568 Eaton Vance Corp. (Non-Voting) 15,609
409 Franklin Resources, Inc. 37,988
100 Investors Financial Services Corp. 3,775
633 Janus Capital Group, Inc. 12,135
1,102 Mellon Financial Corp. 37,071
267 Price (T.) Rowe Group, Inc. 19,211
-------------
125,789
-------------
LIFE/HEALTH INSURANCE (0.6%)
1,295 AFLAC, Inc. 62,160
376 Jefferson-Pilot Corp. 20,887
484 Lincoln National Corp. 25,158
693 UnumProvident Corp. $ 15,246
-------------
123,451
-------------
MAJOR BANKS (4.0%)
1,430 BB&T Corp. 60,847
475 Comerica, Inc. 27,393
1,115 KeyCorp. 36,973
1,514 National City Corp. 51,340
725 PNC Financial Services Group 46,233
852 Popular, Inc. 18,897
1,174 Regions Financial Corp. 39,552
835 SunTrust Banks, Inc. 60,738
281 TD Banknorth, Inc. 8,340
170 UnionBanCal Corp. 11,764
4,097 Wachovia Corp. 218,780
4,300 Wells Fargo & Co. 270,255
-------------
851,112
-------------
MAJOR TELECOMMUNICATIONS (4.0%)
849 ALLTEL Corp. 56,740
10,014 AT&T Inc. 249,448
4,674 BellSouth Corp. 127,413
6,948 Sprint Nextel Corp. 173,978
585 Telewest Global, Inc.* 13,040
7,059 Verizon Communications Inc. 225,747
-------------
846,366
-------------
MANAGED HEALTH CARE (2.7%)
776 Aetna, Inc. 71,772
1,296 Caremark Rx, Inc.* 66,601
360 CIGNA Corp. 40,507
285 Coventry Health Care, Inc.* 16,977
392 Health Net, Inc.* 20,004
461 Humana, Inc.* 21,128
230 PacifiCare Health Systems, Inc.* 19,789
3,402 UnitedHealth Group, Inc. 203,644
1,496 WellPoint Inc.* 114,938
-------------
575,360
-------------
MEDIA CONGLOMERATES (1.6%)
698 Discovery Holding Company (Class A)* 10,896
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
5,229 Disney (Walt) Co. (The) $ 130,359
11,176 Time Warner, Inc. 200,944
-------------
342,199
-------------
MEDICAL DISTRIBUTORS (0.6%)
1,103 Cardinal Health, Inc. 70,537
262 Henry Schein, Inc.* 11,174
709 McKesson Corp. 35,663
310 Patterson Companies, Inc.* 10,831
-------------
128,205
-------------
MEDICAL SPECIALTIES (3.1%)
585 Applera Corp. - Applied Biosystems Group 16,134
370 Bard (C.R.), Inc. 24,002
168 Bausch & Lomb, Inc. 13,652
1,561 Baxter International, Inc. 60,707
176 Beckman Coulter, Inc. 9,801
665 Becton, Dickinson & Co. 38,723
668 Biomet, Inc. 23,794
1,685 Boston Scientific Corp.* 44,619
259 Cytyc Corp.* 7,125
242 DENTSPLY International, Inc. 13,462
325 Fisher Scientific International, Inc.* 20,956
799 Guidant Corp. 49,282
182 Hillenbrand Industries, Inc. 8,845
3,088 Medtronic, Inc. 171,600
904 St. Jude Medical, Inc.* 43,184
729 Stryker Corp. 31,566
488 Varian Medical Systems, Inc.* 24,800
324 Waters Corp.* 12,711
621 Zimmer Holdings, Inc.* 38,918
-------------
653,881
-------------
MEDICAL/NURSING SERVICES (0.2%)
402 DaVita, Inc.* 21,101
290 Lincare Holdings, Inc.* 12,450
-------------
33,551
-------------
MISCELLANEOUS COMMERCIAL SERVICES (0.2%)
400 Adesa Inc. 9,532
282 Iron Mountain Inc.* $ 11,633
600 Sabre Holdings Corp. (Class A) 13,722
-------------
34,887
-------------
MISCELLANEOUS MANUFACTURING (0.1%)
380 Pentair, Inc. 14,516
-------------
MOTOR VEHICLES (0.2%)
757 Harley-Davidson, Inc. 40,772
-------------
MULTI-LINE INSURANCE (2.3%)
5,855 American International Group, Inc. 393,106
744 Hartford Financial Services Group, Inc. (The) 65,003
421 Safeco Corp. 23,681
-------------
481,790
-------------
OFFICE EQUIPMENT/ SUPPLIES (0.2%)
275 Avery Dennison Corp. 16,167
671 Pitney Bowes, Inc. 27,954
-------------
44,121
-------------
OIL & GAS PIPELINES (0.3%)
312 Kinder Morgan, Inc. 28,267
1,268 Williams Companies, Inc. (The) 27,262
-------------
55,529
-------------
OIL & GAS PRODUCTION (1.7%)
664 Anadarko Petroleum Corp. 60,165
812 Apache Corp. 53,007
1,178 Chesapeake Energy Corp. 34,103
1,220 Devon Energy Corp. 73,444
724 EOG Resources, Inc. 51,947
380 Newfield Exploration Co.* 17,579
508 Noble Energy, Inc. 18,984
306 Pioneer Natural Resources Co. 15,585
200 Pogo Producing Co. 9,800
868 XTO Energy Inc. 35,319
-------------
369,933
-------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
14
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
OIL REFINING/MARKETING (0.5%)
454 Sunoco, Inc. $ 35,049
704 Valero Energy Corp. 67,725
-------------
102,774
-------------
OILFIELD SERVICES/EQUIPMENT (0.2%)
410 National-Oilwell Varco, Inc.* 24,854
574 Smith International, Inc. 21,691
-------------
46,545
-------------
OTHER CONSUMER SERVICES (0.6%)
284 Career Education Corp.* 10,593
2,646 eBay, Inc.* 118,567
-------------
129,160
-------------
PACKAGED SOFTWARE (4.5%)
1,216 Adobe Systems, Inc. 39,654
716 Autodesk, Inc. 29,872
664 BMC Software, Inc.* 13,605
1,069 Compuware Corp.* 9,867
465 Intuit Inc.* 24,910
247 Mercury Interactive Corp.* 6,867
23,379 Microsoft Corp.** 647,832
985 Novell, Inc.* 7,663
9,623 Oracle Corp.* 120,961
317 Red Hat, Inc.* 7,472
2,842 Symantec Corp.* 50,218
-------------
958,921
-------------
PERSONNEL SERVICES (0.2%)
270 Manpower, Inc. 12,542
552 Robert Half International, Inc. 21,120
-------------
33,662
-------------
PHARMACEUTICALS: GENERIC DRUGS (0.2%)
204 Barr Pharmaceuticals Inc.* 11,699
736 Mylan Laboratories, Inc. 15,375
473 Watson Pharmaceuticals, Inc.* 15,779
-------------
42,853
-------------
PHARMACEUTICALS: MAJOR (3.0%)
7,564 Johnson & Johnson $ 467,077
5,662 Merck & Co., Inc. 166,463
-------------
633,540
-------------
PHARMACEUTICALS: OTHER (0.4%)
330 Allergan, Inc. 33,000
937 Forest Laboratories, Inc.* 36,609
757 King Pharmaceuticals, Inc.* 11,908
203 Sepracor, Inc.* 11,161
-------------
92,678
-------------
PROPERTY - CASUALTY INSURERS (1.1%)
402 Berkley (W.R.) Corp. 18,741
483 Chubb Corp. (The) 46,774
551 Cincinnati Financial Corp. 24,536
553 Progressive Corp. (The) 68,013
1,699 St. Paul Travelers Companies, Inc. (The) 79,054
-------------
237,118
-------------
PUBLISHING: NEWSPAPERS (0.2%)
372 New York Times Co. (The) (Class A) 10,230
162 Scripps (E.W.) Co. (Class A) 7,509
633 Tribune Co. 20,237
18 Washington Post Co. (The) (Class B) 13,266
-------------
51,242
-------------
PULP & PAPER (0.1%)
526 MeadWestvaco Corp. 14,723
-------------
RAILROADS (0.2%)
999 Norfolk Southern Corp. 44,196
-------------
REAL ESTATE INVESTMENT TRUSTS (1.7%)
440 Archstone-Smith Trust 18,396
340 Boston Properties, Inc. 25,571
199 Developers Diversified Realty Corp. 9,015
492 Duke Realty Corp. 16,728
1,068 Equity Office Properties Trust 33,300
772 Equity Residential 31,467
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
15
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
636 General Growth Properties, Inc. $ 29,014
460 Health Care Property Investors, Inc. 12,084
172 Hospitality Properties Trust 7,085
1,024 Host Marriott Corp. 18,330
423 iStar Financial Inc. 15,719
760 Kimco Realty Corp. 23,902
104 Mack-Cali Realty Corp. 4,594
300 New Plan Excel Realty Trust 7,164
742 ProLogis 33,657
315 Public Storage, Inc. 22,239
408 Simon Property Group, Inc. 31,542
275 Vornado Realty Trust 23,471
-------------
363,278
-------------
RECREATIONAL PRODUCTS (0.3%)
259 Brunswick Corp. 10,176
751 Electronic Arts, Inc.* 42,326
1,299 Mattel, Inc. 21,628
-------------
74,130
-------------
REGIONAL BANKS (2.1%)
908 AmSouth Bancorporation 24,145
100 Bank of Hawaii Corp. 5,161
113 City National Corp. 8,252
258 Colonial BancGroup, Inc. (The) 6,427
368 Commerce Bancorp, Inc. 12,398
427 Compass Bancshares, Inc. 20,692
1,227 Fifth Third Bancorp 49,411
382 First Horizon National Corp. 14,867
178 M&T Bank Corp. 19,263
566 Marshall & Ilsley Corp. 24,327
1,198 North Fork Bancorporation, Inc. 32,346
557 Northern Trust Corp. 29,348
776 Synovus Financial Corp. 21,844
372 TCF Financial Corp. 10,215
4,829 U.S. Bancorp 146,222
326 Zions Bancorporation 24,655
-------------
449,573
-------------
REIT - INDUSTRIAL/OFFICE (0.1%)
340 Liberty Property Trust 14,436
-------------
RESTAURANTS (1.0%)
450 Darden Restaurants, Inc. $ 16,101
3,209 McDonald's Corp. 108,625
272 Outback Steakhouse, Inc. 10,956
2,020 Starbucks Corp.* 61,509
412 Wendy's International, Inc. 20,921
-------------
218,112
-------------
SAVINGS BANKS (0.9%)
358 Astoria Financial Corp. 10,124
616 Golden West Financial Corp. 39,911
258 Independence Community Bank Corp. 10,227
702 New York Community Bancorp, Inc. 11,688
872 Sovereign Bancorp, Inc. 19,062
2,543 Washington Mutual, Inc. 104,746
-------------
195,758
-------------
SEMICONDUCTORS (4.2%)
936 Advanced Micro Devices, Inc.* 24,504
423 Agere Systems Inc.* 5,575
1,111 Altera Corp.* 20,287
957 Analog Devices, Inc. 36,289
524 Broadcom Corp. (Class A)* 24,387
659 Freescale Semiconductor Inc. (Class B)* 17,002
16,481 Intel Corp. 439,713
205 International Rectifier Corp.* 7,269
381 Intersil Corp. (Class A) 9,773
1,164 LSI Logic Corp.* 9,556
836 Maxim Integrated Products, Inc. 30,556
528 Microchip Technology Inc. 17,614
1,648 Micron Technology, Inc.* 23,500
1,290 National Semiconductor Corp. 33,385
405 NVIDIA Corp.* 14,649
4,396 Texas Instruments Inc. 142,782
909 Xilinx, Inc. 24,034
-------------
880,875
-------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
16
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
SERVICES TO THE HEALTH INDUSTRY (0.6%)
380 Express Scripts, Inc.* $ 32,095
689 IMS Health Inc. 16,846
321 Laboratory Corp. of America Holdings* 16,657
803 Medco Health Solutions Inc.* 43,081
259 Omnicare, Inc. 14,750
-------------
123,429
-------------
SPECIALTY INSURANCE (0.5%)
276 Ambac Financial Group, Inc. 21,166
463 Fidelity National Financial, Inc. 17,511
81 Fidelity National Title Group, Inc. 1,847
389 MBIA Inc. 24,032
179 MGIC Investment Corp. 11,653
245 PMI Group, Inc. (The) 9,947
224 Radian Group, Inc. 12,669
-------------
98,825
-------------
SPECIALTY STORES (0.8%)
185 AutoZone, Inc.* 16,476
758 Bed Bath & Beyond Inc.* 32,336
170 CarMax Inc.* 4,661
400 Michaels Stores, Inc. 14,960
1,005 Office Depot, Inc.* 29,828
356 PETsMART, Inc. 8,480
2,154 Staples, Inc. 49,757
326 Tiffany & Co. 13,268
229 Williams-Sonoma, Inc.* 9,936
-------------
179,702
-------------
SPECIALTY TELECOMMUNICATIONS (0.3%)
673 American Tower Corp. (Class A)* 18,366
368 CenturyTel, Inc. 12,181
743 Citizens Communications Co. 9,696
529 Crown Castle International Corp.* 14,495
1,500 McLeodUSA Inc. (Class A) (Escrow) (a) 0
171 NTL, Inc.* $ 9,957
-------------
64,695
-------------
STEEL (0.1%)
402 Nucor Corp. 26,966
-------------
TELECOMMUNICATION EQUIPMENT (2.2%)
807 Comverse Technology, Inc.* 21,151
3,496 Corning, Inc.* 70,794
11,786 Lucent Technologies Inc.* 32,883
5,973 Motorola, Inc. 143,890
4,128 QUALCOMM Inc. 187,700
1,479 Tellabs, Inc.* 15,175
-------------
471,593
-------------
TOOLS/HARDWARE (0.1%)
206 Black & Decker Corp. 18,089
168 Stanley Works (The) 8,064
-------------
26,153
-------------
TRUCKS/CONSTRUCTION/FARM MACHINERY (0.3%)
136 Cummins Inc. 12,104
634 Deere & Co. 43,968
-------------
56,072
-------------
WHOLESALE DISTRIBUTORS (0.2%)
500 Genuine Parts Co. 22,155
200 Grainger (W.W.), Inc. 14,046
-------------
36,201
-------------
WIRELESS TELECOMMUNICATIONS (0.1%)
165 Telephone & Data Systems, Inc. 6,031
165 Telephone & Data Systems, Inc. (special shares) 5,783
-------------
11,814
-------------
TOTAL COMMON STOCKS
(COST $17,049,315) 19,344,025
-------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
17
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (9.1%)
REPURCHASE AGREEMENT
$ 1,926 Joint repurchase agreement
account 4.01% due
12/01/05 (dated 11/30/05;
proceeds $1,926,214)(b)
(Cost $1,926,000) $ 1,926,000
-------------
TOTAL INVESTMENTS
(COST $18,975,315) (c) (d) 100.2% 21,270,025
LIABILITIES IN EXCESS OF OTHER ASSETS (0.2) (44,136)
----- -------------
NET ASSETS 100.0% $ 21,225,889
===== =============
</Table>
- ----------
* NON-INCOME PRODUCING SECURITY
** A PORTION OF THIS SECURITY IS PHYSICALLY SEGREGATED IN CONNECTION WITH
OPEN FUTURES CONTRACTS IN THE AMOUNT OF $108,000
(a) A SECURITY WITH TOTAL MARKET VALUE EQUAL TO $0 HAS BEEN VALUED AT ITS FAIR
VALUE AS DETERMINED IN GOOD FAITH UNDER PROCEDURES ESTABLISHED BY AND
UNDER THE GENERAL SUPERVISION OF THE FUND'S TRUSTEES.
(b) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(c) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN AN AMOUNT EQUAL TO
$1,613,990 IN CONNECTION WITH OPEN FUTURES CONTRACTS.
(d) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $18,975,081. THE
AGGREGATE GROSS UNREALIZED APPRECIATION IS $3,997,271 AND THE AGGREGATE
GROSS UNREALIZED DEPRECIATION IS $1,702,327, RESULTING IN NET UNREALIZED
APPRECIATION OF $2,294,944.
FUTURES CONTRACTS OPEN AT NOVEMBER 30, 2005:
<Table>
<Caption>
NUMBER OF DESCRIPTION, DELIVERY UNDERYLING FACE UNREALIZED
CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE APPRECIATION
- ------------------------------------------------------------------------------------------------------
3 Long Nasdaq-100 Index $ 502,500 $ 18,495
December 2005
4 Long S&P 500 Index
December 2005 1,251,100 12,780
-----------
Total Unrealized Appreciation $ 31,275
===========
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
18
<Page>
MORGAN STANLEY KLD SOCIAL INDEX FUND
SUMMARY OF INVESTMENTS - NOVEMBER 30, 2005
<Table>
<Caption>
PERCENTAGE OF
SECTOR VALUE NET ASSETS
- ---------------------------------------------------------------------------
Finance $ 4,627,131 21.8%
Electronic Technology 2,730,284 12.9
Repurchase Agreement 1,926,000 9.1
Health Technology 1,879,295 8.9
Technology Services 1,756,013 8.3
Consumer Non-Durables 1,533,230 7.2
Retail Trade 1,417,477 6.7
Consumer Services 1,015,554 4.8
Communications 922,875 4.3
Health Services 769,438 3.6
Producer Manufacturing 585,055 2.8
Energy Minerals 472,707 2.2
Consumer Durables 333,477 1.6
Transportation 307,221 1.4
Commercial Services 253,082 1.2
Distribution Services 241,649 1.1
Process Industries 194,898 0.9
Industrial Services 136,073 0.6
Utilities 124,191 0.6
Non-Energy Minerals 44,375 0.2
------------ -----
$ 21,270,025* 100.2%
============ =====
</Table>
- ----------
* DOES NOT INCLUDE OPEN LONG FUTURES CONTRACTS WITH AN UNDERLYING FACE
VALUE OF $1,753,600 WITH UNREALIZED APPRECIATION OF $31,275.
SEE NOTES TO FINANCIAL STATEMENTS
19
<Page>
MORGAN STANLEY KLD SOCIAL INDEX FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 2005
<Table>
ASSETS:
Investments in securities, at value (cost $18,975,315) $ 21,270,025
Receivable for:
Dividends 30,621
Shares of beneficial interest sold 13,482
Receivable from affiliate 44,585
Prepaid expenses and other assets 16,088
------------
TOTAL ASSETS 21,374,801
------------
LIABILITIES:
Payable for:
Shares of beneficial interest redeemed 68,345
Distribution fee 10,833
Variation margin 10,000
Transfer agent fee 615
Accrued expenses 59,119
------------
TOTAL LIABILITIES 148,912
------------
NET ASSETS $ 21,225,889
============
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 21,441,522
Net unrealized appreciation 2,325,985
Accumulated undistributed net investment income 197,461
Accumulated net realized loss (2,739,079)
------------
NET ASSETS $ 21,225,889
============
CLASS A SHARES:
Net Assets $ 4,250,319
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 403,302
NET ASSET VALUE PER SHARE $ 10.54
============
MAXIMUM OFFERING PRICE PER SHARE
(NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE) $ 11.12
============
CLASS B SHARES:
Net Assets $ 9,150,567
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 876,288
NET ASSET VALUE PER SHARE $ 10.44
============
CLASS C SHARES:
Net Assets $ 2,950,361
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 283,770
NET ASSET VALUE PER SHARE $ 10.40
============
CLASS D SHARES:
Net Assets $ 4,874,642
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 461,149
NET ASSET VALUE PER SHARE $ 10.57
============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
20
<Page>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 2005
<Table>
NET INVESTMENT INCOME:
INCOME
Dividends (net of $86 foreign withholding tax) $ 288,654
Interest 57,435
------------
TOTAL INCOME 346,089
------------
EXPENSES
Professional fees 224,892
Distribution fee (Class A shares) 7,348
Distribution fee (Class B shares) 97,877
Distribution fee (Class C shares) 26,551
Shareholder reports and notices 70,848
Registration fees 48,926
KLD licensing fee 45,170
Transfer agent fees and expenses 29,923
Investment advisory fee 24,295
Administration fee 16,196
Custodian fees 7,210
Other 10,407
------------
TOTAL EXPENSES 609,643
Less: amounts waived/reimbursed (477,867)
------------
NET EXPENSES 131,776
------------
NET INVESTMENT INCOME 214,313
------------
NET REALIZED AND UNREALIZED GAIN:
NET REALIZED GAIN ON:
Investments 80,313
Futures contracts 101,204
------------
NET REALIZED GAIN 181,517
------------
NET CHANGE IN UNREALIZED APPRECIATION ON:
Investments 1,396,536
Futures contracts (19,721)
------------
NET APPRECIATION 1,376,815
------------
NET GAIN 1,558,332
------------
NET INCREASE $ 1,772,645
============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
21
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
NOVEMBER 30, 2005 NOVEMBER 30, 2004
-------------------- --------------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 214,313 $ 200,771
Net realized gain 181,517 229,696
Net change in unrealized appreciation/depreciation 1,376,815 1,282,299
-------------------- --------------------
NET INCREASE 1,772,645 1,712,766
-------------------- --------------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A shares (32,594) (19,635)
Class B shares (78,004) (26,629)
Class C shares (20,851) (4,720)
Class D shares (68,551) (31,016)
-------------------- --------------------
TOTAL DIVIDENDS (200,000) (82,000)
-------------------- --------------------
Net increase (decrease) from transactions in shares of
beneficial interest (46,001) 3,110,855
-------------------- --------------------
NET INCREASE 1,526,644 4,741,621
NET ASSETS:
Beginning of period 19,699,245 14,957,624
-------------------- --------------------
END OF PERIOD
(INCLUDING ACCUMULATED UNDISTRIBUTED NET INVESTMENT
INCOME OF $197,461 AND $186,982, RESPECTIVELY) $ 21,225,889 $ 19,699,245
==================== ====================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
22
<Page>
MORGAN STANLEY KLD SOCIAL INDEX FUND
NOTES TO FINANCIAL STATEMENTS - NOVEMBER 30, 2005
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley KLD Social Index Fund (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Fund's investment objective is to
provide investment results that before expenses correspond to the total return
of the KLD Large Cap Social(SM) Index ("KLD Index"). The Fund was organized as a
Massachusetts business trust on April 6, 2001 and commenced operations on July
13, 2001.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within eighteen
months, six years and one year, respectively. Class D shares are not subject to
a sales charge. Additionally, Class A shares, Class B shares and Class C shares
incur distribution expenses.
Effective August 29, 2005, the Board of Trustees of the Fund approved the
implementation of a 2% redemption fee on Class A shares, Class B shares, Class C
shares, and Class D shares, which is paid directly to the Fund, for shares
redeemed within seven days of purchase. The redemption fee is designed to
protect the Fund and its remaining shareholders from the effects of short-term
trading.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) an equity portfolio security listed or traded
on the New York Stock Exchange ("NYSE") or American Stock Exchange or other
exchange is valued at its latest sale price prior to the time when assets are
valued; if there were no sales that day, the security is valued at the mean
between the last reported bid and asked price; (2) an equity portfolio security
listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price;
if there were no sales that day, the security is valued at the mean between the
last reported bid and asked price; (3) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the mean
between the last reported bid and asked price. In cases where a security is
traded on more than one exchange, the security is valued on the exchange
designated as the primary market; (4) for equity securities traded on foreign
exchanges, the last reported sale price or the latest bid price may be used if
there were no sales on a particular day; (5) futures are valued at the latest
price published by the commodities exchange on which they trade; (6) when market
quotations are not readily available or Morgan Stanley Investment Advisors Inc.
(the "Investment Adviser"), determines that the latest sale price, the bid price
or the mean between the last reported bid and asked price do not reflect a
security's market value, portfolio securities are valued at their fair value as
determined in good faith under procedures established by and under the general
supervision of the Fund's Trustees. Occasionally, developments affecting the
closing prices of securities and other assets may occur between the times at
which valuations of such securities are determined (that is, close of the
foreign market on which the securities trade) and the
23
<Page>
close of business on the NYSE. If developments occur during such periods that
are expected to materially affect the value of such securities, such valuations
may be adjusted to reflect the estimated fair value of such securities as of the
close of the NYSE, as determined in good faith by the Fund's Trustees or by the
Investment Adviser using a pricing service and/or procedures approved by the
Trustees of the Fund; and (7) short-term debt securities having a maturity date
of more than sixty days at time of purchase are valued on a mark-to-market basis
until sixty days prior to maturity and thereafter at amortized cost based on
their value on the 61st day. Short-term debt securities having a maturity date
of sixty days or less at the time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date.
Discounts are accreted and premiums are amortized over the life of the
respective securities. Interest income is accrued daily.
C. REPURCHASE AGREEMENTS -- Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other affiliated
entities managed by the Investment Adviser, may transfer uninvested cash
balances into one or more joint repurchase agreement accounts. These balances
are invested in one or more repurchase agreements and are collateralized by
cash, U.S. Treasury or federal agency obligations. The Fund may also invest
directly with institutions in repurchase agreements. The Fund's custodian
receives the collateral, which is marked-to-market daily to determine that the
value of the collateral does not decrease below the repurchase price plus
accrued interest.
D. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
E. FUTURES CONTRACTS -- A futures contract is an agreement between two parties
to buy and sell financial instruments or contracts based on financial indices at
a set price on a future date. Upon entering into such a contract, the Fund is
required to pledge to the broker cash, U.S. Government securities or other
liquid portfolio securities equal to the minimum initial margin requirements of
the applicable futures exchange. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in the value of the contract. Such receipts or payments known as
variation margin are recorded by the Fund as unrealized gains and losses. Upon
closing of the contract, the Fund realizes a gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed.
24
<Page>
F. FEDERAL INCOME TAX POLICY -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Accordingly, no federal income tax provision is required.
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.
H. USE OF ESTIMATES -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
2. INVESTMENT ADVISORY/ADMINISTRATION AGREEMENTS
Pursuant to an Investment Advisory Agreement, the Fund pays the Investment
Adviser an advisory fee, accrued daily and payable monthly, by applying the
annual rate of 0.12% to the daily net assets of the Fund determined as of the
close of each business day.
Pursuant to an Administration Agreement with Morgan Stanley Services Company
Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Fund
pays an administration fee, accrued daily and payable monthly, by applying the
annual rate of 0.08% to the Fund's daily net assets.
The Investment Adviser and Administrator have agreed to waive their fees and
assume all operating expenses (except for brokerage and 12b-1 fees) until such
time as the Fund has $50 million of net assets or April 30, 2006, whichever
occurs first. Thereafter, the Investment Adviser has agreed to cap the Fund's
operating expenses (except for brokerage and 12b-1 fees) by assuming the Fund's
"other expenses" and/or waiving the Fund's advisory fees, and the Administrator
has agreed to waive the Fund's administration fees, to the extent that such
operating expenses exceed 0.40% of the average daily net assets of the Fund on
an annualized basis.
At November 30, 2005, included in the Statement of Assets and Liabilities is a
receivable from affiliate, which represents expense reimbursements due to the
Fund.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the
"Distributor"), an affiliate of the Investment Adviser and Administrator. The
Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1
under the Act. The Plan provides that the Fund will pay the Distributor a fee
which is accrued daily and paid monthly at the following annual rates: (i) Class
A -- up to 0.25% of the average daily net assets of Class A; (ii) Class B -- up
to 1.0% of the average daily net assets of Class B; and (iii) Class C -- up to
1.0% of the average daily net assets of Class C.
25
<Page>
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 $1,057,057
at November 30, 2005.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Financial Advisors or other selected
broker-dealer representatives may be reimbursed in the subsequent calendar year.
For the year ended November 30, 2005, the distribution fee was accrued for Class
A shares and Class C shares at the annual rate of 0.22% and 1.0%, respectively.
The Distributor has informed the Fund that for the year ended November 30, 2005,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class B shares and Class C shares of $23,772 and $27, respectively and
received $11,107 in front-end sales charges from sales of the Fund's Class A
shares. The respective shareholders pay such charges which are not an expense of
the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended November 30, 2005, aggregated
$269,575 and $385,067, respectively.
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.
26
<Page>
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
NOVEMBER 30, 2005 NOVEMBER 30, 2004
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- -----------
CLASS A SHARES
Sold 75,160 $ 732,763 85,410 $ 793,258
Conversion from Class B 171,795 1,611,814 -- --
Reinvestment of dividends 3,119 31,036 2,172 19,479
Redeemed (91,360) (895,098) (79,896) (744,142)
----------- ----------- ----------- -----------
Net increase -- Class A 158,714 1,480,515 7,686 68,595
----------- ----------- ----------- -----------
CLASS B SHARES
Sold 82,049 804,494 289,886 2,658,349
Conversion to Class A (172,763) (1,611,814) -- --
Reinvestment of dividends 6,867 68,260 2,587 23,201
Redeemed (156,278) (1,543,677) (144,878) (1,337,999)
----------- ----------- ----------- -----------
Net increase (decrease) -- Class B (240,125) (2,282,737) 147,595 1,343,551
----------- ----------- ----------- -----------
CLASS C SHARES
Sold 69,196 680,159 102,711 948,973
Reinvestment of dividends 1,895 18,758 462 4,129
Redeemed (29,289) (291,433) (32,227) (297,741)
----------- ----------- ----------- -----------
Net increase -- Class C 41,802 407,484 70,946 655,361
----------- ----------- ----------- -----------
CLASS D SHARES
Sold 160,475 1,593,055 194,544 1,805,479
Reinvestment of dividends 6,076 60,580 2,945 26,476
Redeemed (133,022) (1,304,898) (85,152) (788,607)
----------- ----------- ----------- -----------
Net increase -- Class D 33,529 348,737 112,337 1,043,348
----------- ----------- ----------- -----------
Net increase (decrease) in Fund (6,080) $ (46,001) 338,564 $ 3,110,855
=========== =========== =========== ===========
</Table>
6. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Fund may purchase and sell stock index futures ("futures contracts") for the
following reasons: to simulate full investment in the KLD Index while retaining
a cash balance for fund management purposes; to facilitate trading; to reduce
transaction costs; or to seek higher investment returns when a futures contract
is priced more attractively than stocks comprising the KLD Index.
These futures contracts involve elements of market risk in excess of the amount
reflected in the Statement of Assets and Liabilities. The Fund bears the risk of
an unfavorable change in the value of the underlying securities. Risks may also
arise upon entering into these contracts from the potential inability of the
counter parties to meet the terms of their contracts.
27
<Page>
7. FEDERAL INCOME TAX STATUS
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for tax purposes are reported as distributions of paid-in-capital.
The tax character of distributions paid was as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
NOVEMBER 30, 2005 NOVEMBER 30, 2004
----------------- -----------------
Ordinary income $ 200,000 $ 82,000
================= =================
</Table>
As of November 30, 2005, the tax-basis components of accumulated losses were as
follows:
<Table>
Undistributed ordinary income $ 194,987
Undistributed long-term gains --
------------
Net accumulated earnings 194,987
Capital loss carryforward* (2,705,564)
Net unrealized appreciation 2,294,944
------------
Total accumulated losses $ (215,633)
============
</Table>
*During the year ended November 30, 2005, the Fund utilized $162,763 of its net
capital loss carryforward. As of November 30, 2005, the Fund had a net capital
loss carryforward of $2,705,564 of which $1,802,343 will expire on November 30,
2010 and $903,221 will expire on November 30, 2011 to offset future capital
gains to the extent provided by regulations.
As of November 30, 2005, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on wash sales and mark-to-market of open
futures contracts and permanent book/tax differences attributable to tax
adjustments on real estate investment trusts held by the Fund. To reflect
reclassifications arising from the permanent differences, accumulated
undistributed net investment income was charged and accumulated net realized
loss was credited $3,834.
8. LEGAL MATTERS
The Investment Adviser, certain affiliates of the Investment Adviser, certain
officers of such affiliates and certain investment companies advised by the
Investment Adviser or its affiliates, including the Fund, are named as
defendants in a consolidated class action. This consolidated action also names
as defendants
28
<Page>
certain individual Trustees and Directors of the Morgan Stanley funds. The
consolidated amended complaint, filed in the United States District Court
Southern District of New York on April 16, 2004, generally alleges that
defendants, including the Fund, violated their statutory disclosure obligations
and fiduciary duties by failing properly to disclose (i) that the Investment
Adviser and certain affiliates of the Investment Adviser allegedly offered
economic incentives to brokers and others to recommend the funds advised by the
Investment Adviser or its affiliates to investors rather than funds managed by
other companies, and (ii) that the funds advised by the Investment Adviser or
its affiliates, including the Fund, allegedly paid excessive commissions to
brokers in return for their efforts to recommend these funds to investors. The
complaint seeks, among other things, unspecified 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 stage of the litigation, and no provision has been made in the Fund's
financial statements for the effect, if any, of this matter.
29
<Page>
MORGAN STANLEY KLD SOCIAL INDEX FUND
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR ENDED NOVEMBER 30, JULY 13, 2001*
--------------------------------------------------- THROUGH
2005 2004 2003 2002 NOVEMBER 30, 2001
--------- --------- --------- --------- ------------------
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.75 $ 8.88 $ 7.73 $ 9.39 $ 10.00
--------- --------- --------- --------- ------------------
Income (loss) from investment operations:
Net investment income++ 0.15 0.15 0.10 0.09 0.03
Net realized and unrealized gain (loss) 0.78 0.80 1.17 (1.70) (0.64)
--------- --------- --------- --------- ------------------
Total income (loss) from investment operations 0.93 0.95 1.27 (1.61) (0.61)
--------- --------- --------- --------- ------------------
Less dividends from net investment income (0.14) (0.08) (0.12) (0.05) -
--------- --------- --------- --------- ------------------
Net asset value, end of period $ 10.54 $ 9.75 $ 8.88 $ 7.73 $ 9.39
========= ========= ========= ========= ==================
TOTAL RETURN+ 9.59% 10.81% 16.72% (17.25)% (6.10)%(1)
RATIOS TO AVERAGE NET ASSETS(3)(4):
Expenses 0.22% 0.23% 0.20% 0.24% 0.25%(2)
Net investment income 1.49% 1.61% 1.29% 1.01% 0.85%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 4,250 $ 2,384 $ 2,103 $ 756 $ 329
Portfolio turnover rate 1% 10% 24% 13% 3%(1)
</Table>
- ----------
* COMMENCEMENT OF OPERATIONS.
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(4) IF THE FUND HAD BORNE ALL ITS EXPENSES THAT WERE REIMBURSED OR WAIVED BY
THE INVESTMENT ADVISER AND ADMINISTRATOR, THE ANNUALIZED EXPENSE AND NET
INVESTMENT LOSS RATIOS WOULD HAVE BEEN AS FOLLOWS:
<Table>
<Caption>
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO LOSS RATIO
----------------- ------- --------------
NOVEMBER 30, 2005 2.58% (0.87)%
NOVEMBER 30, 2004 2.76 (0.92)
NOVEMBER 30, 2003 2.14 (0.65)
NOVEMBER 30, 2002 2.14 (0.89)
NOVEMBER 30, 2001 2.35 (1.25)
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
30
<Page>
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR ENDED NOVEMBER 30, JULY 13, 2001*
--------------------------------------------------- THROUGH
2005 2004 2003 2002 NOVEMBER 30, 2001
--------- --------- --------- --------- ------------------
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.67 $ 8.82 $ 7.68 $ 9.36 $ 10.00
--------- --------- --------- --------- ------------------
Income (loss) from investment operations:
Net investment income++ 0.07 0.08 0.04 0.02 0.00
Net realized and unrealized gain (loss) 0.77 0.80 1.16 (1.69) (0.64)
--------- --------- --------- --------- ------------------
Total income (loss) from investment operations 0.84 0.88 1.20 (1.67) (0.64)
--------- --------- --------- --------- ------------------
Less dividends from net investment income (0.07) (0.03) (0.06) (0.01) -
--------- --------- --------- --------- ------------------
Net asset value, end of period $ 10.44 $ 9.67 $ 8.82 $ 7.68 $ 9.36
========= ========= ========= ========= ==================
TOTAL RETURN+ 8.72% 9.97% 15.75% (17.90)% (6.40)%(1)
RATIOS TO AVERAGE NET ASSETS(3)(4):
Expenses 1.00% 1.00% 1.00% 1.00% 1.00%(2)
Net investment income 0.71% 0.84% 0.49% 0.25% 0.10%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 9,151 $ 10,799 $ 8,547 $ 5,670 $ 4,413
Portfolio turnover rate 1% 10% 24% 13% 3%(1)
</Table>
- ----------
* COMMENCEMENT OF OPERATIONS.
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(4) IF THE FUND HAD BORNE ALL ITS EXPENSES THAT WERE REIMBURSED OR WAIVED BY
THE INVESTMENT ADVISER AND ADMINISTRATOR, THE ANNUALIZED EXPENSE AND NET
INVESTMENT LOSS RATIOS WOULD HAVE BEEN AS FOLLOWS:
<Table>
<Caption>
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO LOSS RATIO
----------------- ------- --------------
NOVEMBER 30, 2005 3.36% (1.65)%
NOVEMBER 30, 2004 3.53 (1.69)
NOVEMBER 30, 2003 2.94 (1.45)
NOVEMBER 30, 2002 2.90 (1.65)
NOVEMBER 30, 2001 3.10 (2.00)
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
31
<Page>
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR ENDED NOVEMBER 30, JULY 13, 2001*
--------------------------------------------------- THROUGH
2005 2004 2003 2002 NOVEMBER 30, 2001
--------- --------- --------- --------- ------------------
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.65 $ 8.79 $ 7.66 $ 9.36 $ 10.00
--------- --------- --------- --------- ------------------
Income (loss) from investment operations:
Net investment income++ 0.07 0.09 0.04 0.02 0.00
Net realized and unrealized gain (loss) 0.76 0.80 1.16 (1.69) (0.64)
--------- --------- --------- --------- ------------------
Total income (loss) from investment operations 0.83 0.89 1.20 (1.67) (0.64)
--------- --------- --------- --------- ------------------
Less dividends from net investment income (0.08) (0.03) (0.07) (0.03) -
--------- --------- --------- --------- ------------------
Net asset value, end of period $ 10.40 $ 9.65 $ 8.79 $ 7.66 $ 9.36
========= ========= ========= ========= ==================
TOTAL RETURN+ 8.69% 10.12% 15.81% (17.92)% (6.40)%(1)
RATIOS TO AVERAGE NET ASSETS(3)(4):
Expenses 1.00% 0.93% 1.00% 1.00% 1.00%(2)
Net investment income 0.71% 0.91% 0.49% 0.25% 0.10%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 2,950 $ 2,334 $ 1,503 $ 980 $ 544
Portfolio turnover rate 1% 10% 24% 13% 3%(1)
</Table>
- ----------
* COMMENCEMENT OF OPERATIONS.
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(4) IF THE FUND HAD BORNE ALL ITS EXPENSES THAT WERE REIMBURSED OR WAIVED BY
THE INVESTMENT ADVISER AND ADMINISTRATOR, THE ANNUALIZED EXPENSE AND NET
INVESTMENT LOSS RATIOS WOULD HAVE BEEN AS FOLLOWS:
<Table>
<Caption>
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO LOSS RATIO
----------------- ------- --------------
NOVEMBER 30, 2005 3.36% (1.65)%
NOVEMBER 30, 2004 3.46 (1.62)
NOVEMBER 30, 2003 2.94 (1.45)
NOVEMBER 30, 2002 2.90 (1.65)
NOVEMBER 30, 2001 3.10 (2.00)
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
32
<Page>
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR ENDED NOVEMBER 30, JULY 13, 2001*
--------------------------------------------------- THROUGH
2005 2004 2003 2002 NOVEMBER 30, 2001
--------- --------- --------- --------- ------------------
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.78 $ 8.90 $ 7.74 $ 9.40 $ 10.00
--------- --------- --------- --------- ------------------
Income (loss) from investment operations:
Net investment income++ 0.17 0.17 0.12 0.11 0.04
Net realized and unrealized gain (loss) 0.78 0.80 1.17 (1.71) (0.64)
--------- --------- --------- --------- ------------------
Total income (loss) from investment operations 0.95 0.97 1.29 (1.60) (0.60)
--------- --------- --------- --------- ------------------
Less dividends from net investment income (0.16) (0.09) (0.13) (0.06) -
--------- --------- --------- --------- ------------------
Net asset value, end of period $ 10.57 $ 9.78 $ 8.90 $ 7.74 $ 9.40
========= ========= ========= ========= ==================
TOTAL RETURN+ 9.80% 11.04% 17.05% (17.17)% (6.00)%(1)
RATIOS TO AVERAGE NET ASSETS(3)(4):
Expenses 0.00% 0.00% 0.00% 0.00% 0.00%(2)
Net investment income 1.71% 1.84% 1.49% 1.25% 1.10%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 4,875 $ 4,182 $ 2,805 $ 4,419 $ 13,634
Portfolio turnover rate 1% 10% 24% 13% 3%(1)
</Table>
- ----------
* COMMENCEMENT OF OPERATIONS.
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE
PERIOD.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(4) IF THE FUND HAD BORNE ALL ITS EXPENSES THAT WERE REIMBURSED OR WAIVED BY
THE INVESTMENT ADVISER AND ADMINISTRATOR, THE ANNUALIZED EXPENSE AND NET
INVESTMENT LOSS RATIOS WOULD HAVE BEEN AS FOLLOWS:
<Table>
<Caption>
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO LOSS RATIO
----------------- ------- --------------
NOVEMBER 30, 2005 2.36% (0.65)%
NOVEMBER 30, 2004 2.53 (0.69)
NOVEMBER 30, 2003 1.94 (0.45)
NOVEMBER 30, 2002 1.90 (0.65)
NOVEMBER 30, 2001 2.10 (1.00)
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
33
<Page>
MORGAN STANLEY KLD SOCIAL INDEX FUND
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS AND BOARD OF
TRUSTEES OF MORGAN STANLEY KLD SOCIAL INDEX FUND:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley KLD Social Index Fund (the "Fund"), including the portfolio of
investments, as of November 30, 2005, and the related statements of operations
for the year then ended and changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of the 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 November 30, 2005, by correspondence with the
custodian and broker. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Morgan
Stanley KLD Social Index Fund as of November 30, 2005, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the periods presented, in conformity with accounting principles generally
accepted in the United States of America.
Deloitte & Touche LLP
NEW YORK, NEW YORK
JANUARY 20, 2006
34
<Page>
MORGAN STANLEY KLD SOCIAL INDEX FUND
TRUSTEE AND OFFICER INFORMATION
INDEPENDENT TRUSTEES:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- ---------------------------------------- ----------- ------------ ------------------------------ ------------- ---------------------
Michael Bozic (64) Trustee Since Private Investor; Director or 197 Director of various
c/o Kramer Levin Naftalis & Frankel LLP April 1994 Trustee of the Retail Funds business
Counsel to the Independent Trustees (since April 1994) and the organizations.
1177 Avenue of the Americas Institutional Funds (since
New York, NY 10036 July 2003); formerly Vice
Chairman of Kmart Corporation
(December 1998-October 2000),
Chairman and Chief Executive
Officer of Levitz Furniture
Corporation (November 1995-
November 1998) and President
and Chief Executive Officer of
Hills Department Stores (May
1991-July 1995); formerly
variously Chairman, Chief
Executive Officer, President
and Chief Operating Officer
(1987-1991) of the Sears
Merchandise Group of Sears,
Roebuck & Co.
Edwin J. Garn (73) Trustee Since Consultant; Director or 197 Director of Franklin
1031 N. Chartwell Court January 1993 Trustee of the Retail Funds Covey (time
Salt Lake City, UT 84103 (since January 1993) and the management systems),
Institutional Funds (since BMW Bank of North
July 2003); member of the Utah America, Inc.
Regional Advisory Board of (industrial loan
Pacific Corp. (utility corporation), Escrow
company); formerly Managing Bank USA (industrial
Director of Summit Ventures loan corporation),
LLC (2000-2004) (lobbying and United Space Alliance
consulting firm); United (joint venture
States Senator (R-Utah) between Lockheed
(1974-1992) and Chairman, Martin and the Boeing
Senate Banking Committee Company) and Nuskin
(1980-1986), Mayor of Salt Asia Pacific
Lake City, Utah (1971-1974), (multilevel
Astronaut, Space Shuttle marketing); member of
Discovery (April 12-19, 1985), the board of various
and Vice Chairman, Huntsman civic and charitable
Corporation (chemical organizations.
company).
Wayne E. Hedien (71) Trustee Since Retired; Director or Trustee 197 Director of The PMI
c/o Kramer Levin Naftalis & Frankel LLP September of the Retail Funds (since Group Inc. (private
Counsel to the Independent Trustees 1997 September 1997) and the mortgage insurance);
1177 Avenue of the Americas Institutional Funds (since Trustee and Vice
New York, NY 10036 July 2003); formerly Chairman of The Field
associated with the Allstate Museum of Natural
Companies (1966-1994), most History; director of
recently as Chairman of The various other
Allstate Corporation (March business and
1993-December 1994) and charitable
Chairman and Chief Executive organizations.
Officer of its wholly-owned
subsidiary, Allstate Insurance
Company (July 1989-December
1994).
</Table>
35
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- ---------------------------------------- ----------- ------------ ------------------------------ ------------- ---------------------
Dr. Manuel H. Johnson (56) Trustee Since Senior Partner, Johnson Smick 197 Director of NVR, Inc.
c/o Johnson Smick Group, Inc. July 1991 International, Inc., a (home construction);
888 16th Street, NW consulting firm; Chairman of Director of KFX
Suite 740 the Audit Committee and Energy; Director of
Washington, D.C. 20006 Director or Trustee of the RBS Greenwich Capital
Retail Funds (since July 1991) Holdings (financial
and the Institutional Funds holding company).
(since July 2003); Co-Chairman
and a founder of the Group of
Seven Council (G7C), an
international economic
commission; formerly Vice
Chairman of the Board of
Governors of the Federal
Reserve System and Assistant
Secretary of the U.S.
Treasury.
Joseph J. Kearns (63) Trustee Since President, Kearns & Associates 198 Director of Electro
c/o Kearns & Associates LLC July 2003 LLC (investment consulting); Rent Corporation
PMB754 Deputy Chairman of the Audit (equipment leasing),
23852 Pacific Coast Highway Committee and Director or The Ford Family
Malibu, CA 90265 Trustee of the Retail Funds Foundation, and the
(since July 2003) and the UCLA Foundation.
Institutional Funds (since
August 1994); previously
Chairman of the Audit
Committee of the Institutional
Funds (October 2001-July
2003); formerly CFO of the
J. Paul Getty Trust.
Michael E. Nugent (69) Trustee Since General Partner of Triumph 197
c/o Triumph Capital, L.P. July 1991 Capital, L.P., a private
445 Park Avenue investment partnership;
New York, NY 10022 Chairman of the Insurance
Committee and Director or
Trustee of the Retail Funds
(since July 1991) and the
Institutional Funds (since
July 2001); formerly Vice
President, Bankers Trust
Company and BT Capital
Corporation (1984-1988).
Fergus Reid (73) Trustee Since Chairman of Lumelite Plastics 198 Trustee and Director
c/o Lumelite Plastics Corporation July 2003 Corporation; Chairman of the of certain investment
85 Charles Colman Blvd. Governance Committee and companies in the
Pawling, NY 12564 Director or Trustee of the JPMorgan Funds
Retail Funds (since July 2003) complex managed by
and the Institutional Funds J.P. Morgan
(since June 1992). Investment Management
Inc.
</Table>
36
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS
INTERESTED TRUSTEE REGISTRANT TIME SERVED* PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- ---------------------------------------- ----------- ------------ ------------------------------ ------------- ---------------------
Charles A. Fiumefreddo (72) Chairman of Since Chairman and Director or 197 None.
c/o Morgan Stanley Trust the Board July 1991 Trustee of the Retail Funds
Harborside Financial Center, and Trustee (since July 1991) and the
Plaza Two, Institutional Funds (since
Jersey City, NJ 07311 July 2003); formerly Chief
Executive Officer of the
Retail Funds (until September
2002).
James F. Higgins (57) Trustee Since Director or Trustee of the 197 Director of AXA
c/o Morgan Stanley Trust June 2000 Retail Funds (since June 2000) Financial, Inc. and
Harborside Financial Center, and the Institutional Funds The Equitable Life
Plaza Two, (since July 2003); Senior Assurance Society of
Jersey City, NJ 07311 Advisor of Morgan Stanley the United States
(since August 2000); Director (financial services).
of the Distributor and Dean
Witter Realty Inc.; previously
President and Chief Operating
Officer of the Private Client
Group of Morgan Stanley (May
1999-August 2000), and
President and Chief Operating
Officer of Individual
Securities of Morgan Stanley
(February 1997-May 1999).
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE TRUSTEE BEGAN SERVING THE FUNDS ADVISED BY
MORGAN STANLEY INVESTMENT ADVISORS INC. (THE "INVESTMENT ADVISER") (THE
"RETAIL FUNDS").
** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICES AS
DIRECTOR/TRUSTEE FOR THE RETAIL FUNDS AND THE FUNDS ADVISED BY MORGAN
STANLEY INVESTMENT MANAGEMENT INC. AND MORGAN STANLEY AIP GP LP (THE
"INSTITUTIONAL FUNDS") REFLECT THE EARLIEST DATE THE DIRECTOR/TRUSTEE BEGAN
SERVING THE RETAIL OR INSTITUTIONAL FUNDS, AS APPLICABLE.
*** THE FUND COMPLEX INCLUDES ALL OPEN-END AND CLOSED-END FUNDS (INCLUDING ALL
OF THEIR PORTFOLIOS) ADVISED BY THE INVESTMENT ADVISER AND ANY FUNDS THAT
HAVE AN INVESTMENT ADVISER THAT IS AN AFFILIATED PERSON OF THE INVESTMENT
ADVISER (INCLUDING, BUT NOT LIMITED TO, MORGAN STANLEY INVESTMENT
MANAGEMENT INC.).
37
<Page>
OFFICERS:
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- ----------------------------- ------------- ---------------- -----------------------------------------------------------------
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 Since July 1995 Managing Director and Chief Investment Officer of the Investment
1221 Avenue of the Americas President Adviser and Morgan Stanley Investment Management Inc.; Chief
New York, NY 10020 Investment Officer of the Van Kampen Funds; Vice President of the
Institutional Funds (since July 2003) and the Retail Funds (since
July 1995).
Barry Fink (50) Vice Since General Counsel (since May 2000) and Managing Director (since
1221 Avenue of the Americas President 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 Since July 2004 Managing Director and General Counsel, U.S. Investment
1221 Avenue of the Americas President 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 (42) Vice Since October Executive Director and U.S. Director of Compliance for Morgan
1221 Avenue of the Americas President 2004 Stanley Investment Management Inc. (since October 2004);
New York, NY 10020 Executive Director of the Investment Adviser and Morgan Stanley
Investment Management Inc.; formerly Assistant Secretary and
Assistant General Counsel of the Morgan Stanley Retail Funds.
</Table>
38
<Page>
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- ----------------------------- ------------- ---------------- -----------------------------------------------------------------
Stefanie V. Chang (39) Vice Since July 2003 Executive Director of Morgan Stanley & Co. Incorporated, Morgan
1221 Avenue of the Americas President 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 July 2003 and Administration (since December 2001); previously, Vice President
Harborside Financial Center, Financial Chief Financial of the Retail Funds (September 2002-July 2003); Vice President of
Plaza Two, Officer Officer since the Investment Adviser and the Administrator (August 2000-
Jersey City, NJ 07311 September 2002 November 2001).
Thomas F. Caloia (59) Vice Since July 2003 Executive Director (since December 2002) and Assistant Treasurer
c/o Morgan Stanley Trust President 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 November 30, 2005, 100% of the ordinary
dividends paid by the Fund qualified for the dividends received
deduction available to corporations. Additionally, please note that
100% of the Fund's ordinary dividends paid during the fiscal year
ended November 30, 2005 qualified for the lower income tax rate
available to individuals under the Jobs and Growth Tax Relief
Reconciliation Act of 2003.
39
<Page>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael E. Nugent
Fergus Reid
OFFICERS
Charles A. Fiumefreddo
CHAIRMAN OF THE BOARD
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]
39908RPT-RA06-00024P-Y11/05
[GRAPHIC]
MORGAN STANLEY FUNDS
MORGAN STANLEY
KLD SOCIAL INDEX FUND
ANNUAL REPORT
NOVEMBER 30, 2005
[MORGAN STANLEY LOGO]
<Page>
Item 2. Code of Ethics.
(a) The Fund has adopted a code of ethics (the "Code of Ethics") that applies
to its principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the Fund or a third
party.
(b) No information need be disclosed pursuant to this paragraph.
(c) The Fund has amended its Code of Ethics during the period covered by the
shareholder report presented in Item 1 hereto to delete from the end of the
following paragraph on page 2 of the Code the phrase "to the detriment of the
Fund.":
"Each Covered Officer must not use his personal influence or personal
relationship improperly to influence investment decisions or financial reporting
by the Fund whereby the Covered Officer would benefit personally (directly or
indirectly)."
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.
<Page>
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 $ 26,938 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 540(2) $ (2)
TAX FEES $ 5,237(3) $ (4)
ALL OTHER FEES $ - $ -
TOTAL NON-AUDIT FEES $ 5,777 $
TOTAL $ 32,715 $
</Table>
2004
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 25,660 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 452(2) $ 3,746,495(2)
TAX FEES $ 4,889(3) $ 79,800(4)
ALL OTHER FEES $ - $ -(5)
TOTAL NON-AUDIT FEES $ 5,341 $ 3,826,295
TOTAL $ 31,001 $ 3,826,295
</Table>
N/A- Not applicable, as not required by Item 4.
(1) Covered Entities include the Adviser (excluding sub-advisors) and
any entity controlling, controlled by or under common control
with the Adviser that provides ongoing services to the
Registrant.
(2) Audit-Related Fees represent assurance and related services
provided that are reasonably related to the performance of the
audit of the financial statements of the Covered Entities' and
funds advised by the Adviser or its affiliates, specifically data
verification and agreed-upon procedures related to asset
securitizations and agreed-upon procedures engagements.
(3) Tax Fees represent tax compliance, tax planning and tax advice
services provided in connection with the preparation and review
of the Registrant's tax returns.
(4) Tax Fees represent tax compliance, tax planning and tax advice
services provided in connection with the review of Covered
Entities' tax returns.
(5) All other fees represent project management for future business
applications and improving business and operational processes.
<Page>
(e)(1) The audit committee's pre-approval policies and procedures are as
follows:
APPENDIX A
AUDIT COMMITTEE
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS
AS ADOPTED AND AMENDED JULY 23, 2004,(1)
1. STATEMENT OF PRINCIPLES
The Audit Committee of the Board is required to review and, in its sole
discretion, pre-approve all Covered Services to be provided by the Independent
Auditors to the Fund and Covered Entities in order to assure that services
performed by the Independent Auditors do not impair the auditor's independence
from the Fund.
The SEC has issued rules specifying the types of services that an independent
auditor may not provide to its audit client, as well as the audit committee's
administration of the engagement of the independent auditor. The SEC's rules
establish two different approaches to pre-approving services, which the SEC
considers to be equally valid. Proposed services either: may be pre-approved
without consideration of specific case-by-case services by the Audit Committee
("GENERAL PRE-APPROVAL"); or require the specific pre-approval of the Audit
Committee or its delegate ("SPECIFIC PRE-APPROVAL"). The Audit Committee
believes that the combination of these two approaches in this Policy will result
in an effective and efficient procedure to pre-approve services performed by the
Independent Auditors. As set forth in this Policy, unless a type of service has
received general pre-approval, it will require specific pre-approval by the
Audit Committee (or by any member of the Audit Committee to which pre-approval
authority has been delegated) if it is to be provided by the Independent
Auditors. Any proposed services exceeding pre-approved cost levels or budgeted
amounts will also require specific pre-approval by the Audit Committee.
The appendices to this Policy describe the Audit, Audit-related, Tax and All
Other services that have the general pre-approval of the Audit Committee. The
term of any general pre-approval is 12 months from the date of pre-approval,
unless the Audit Committee considers and provides a different period and states
otherwise. The Audit Committee will annually review and pre-approve the services
that may be provided by the Independent Auditors without obtaining specific
pre-approval from the Audit Committee. The Audit Committee will add to or
subtract from the list of general pre-approved services from time to time, based
on subsequent determinations.
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(1) This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and
Procedures (the "POLICY"), adopted as of the date above, supersedes and
replaces all prior versions that may have been adopted from time to time.
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The purpose of this Policy is to set forth the policy and procedures by which
the Audit Committee intends to fulfill its responsibilities. It does not
delegate the Audit Committee's responsibilities to pre-approve services
performed by the Independent Auditors to management.
The Fund's Independent Auditors have reviewed this Policy and believes that
implementation of the Policy will not adversely affect the Independent Auditors'
independence.
2. DELEGATION
As provided in the Act and the SEC's rules, the Audit Committee may delegate
either type of pre-approval authority to one or more of its members. The member
to whom such authority is delegated must report, for informational purposes
only, any pre-approval decisions to the Audit Committee at its next scheduled
meeting.
3. AUDIT SERVICES
The annual Audit services engagement terms and fees are subject to the specific
pre-approval of the Audit Committee. Audit services include the annual financial
statement audit and other procedures required to be performed by the Independent
Auditors to be able to form an opinion on the Fund's financial statements. These
other procedures include information systems and procedural reviews and testing
performed in order to understand and place reliance on the systems of internal
control, and consultations relating to the audit. The Audit Committee will
approve, if necessary, any changes in terms, conditions and fees resulting from
changes in audit scope, Fund structure or other items.
In addition to the annual Audit services engagement approved by the Audit
Committee, the Audit Committee may grant general pre-approval to other Audit
services, which are those services that only the Independent Auditors reasonably
can provide. Other Audit services may include statutory audits and services
associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4,
etc.), periodic reports and other documents filed with the SEC or other
documents issued in connection with securities offerings.
The Audit Committee has pre-approved the Audit services in Appendix B.1. All
other Audit services not listed in Appendix B.1 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
4. AUDIT-RELATED SERVICES
Audit-related services are assurance and related services that are reasonably
related to the performance of the audit or review of the Fund's financial
statements and, to the extent they are Covered Services, the Covered Entities or
that are traditionally performed by the Independent Auditors. Because the Audit
Committee believes that the provision of Audit-related services does not impair
the independence of the auditor and is consistent with the SEC's rules on
auditor independence, the Audit Committee may grant general pre-approval to
Audit-related services. Audit-related services include, among others, accounting
consultations related to accounting, financial reporting or disclosure matters
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not classified as "Audit services"; assistance with understanding and
implementing new accounting and financial reporting guidance from rulemaking
authorities; agreed-upon or expanded audit procedures related to accounting
and/or billing records required to respond to or comply with financial,
accounting or regulatory reporting matters; and assistance with internal control
reporting requirements under Forms N-SAR and/or N-CSR.
The Audit Committee has pre-approved the Audit-related services in Appendix B.2.
All other Audit-related services not listed in Appendix B.2 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
5. TAX SERVICES
The Audit Committee believes that the Independent Auditors can provide Tax
services to the Fund and, to the extent they are Covered Services, the Covered
Entities, such as tax compliance, tax planning and tax advice without impairing
the auditor's independence, and the SEC has stated that the Independent Auditors
may provide such services.
Pursuant to the preceding paragraph, the Audit Committee has pre-approved the
Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
6. ALL OTHER SERVICES
The Audit Committee believes, based on the SEC's rules prohibiting the
Independent Auditors from providing specific non-audit services, that other
types of non-audit services are permitted. Accordingly, the Audit Committee
believes it may grant general pre-approval to those permissible non-audit
services classified as All Other services that it believes are routine and
recurring services, would not impair the independence of the auditor and are
consistent with the SEC's rules on auditor independence.
The Audit Committee has pre-approved the All Other services in Appendix B.4.
Permissible All Other services not listed in Appendix B.4 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
7. PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS
Pre-approval fee levels or budgeted amounts for all services to be provided by
the Independent Auditors will be established annually by the Audit Committee.
Any proposed services exceeding these levels or amounts will require specific
pre-approval by the Audit Committee. The Audit Committee is mindful of the
overall relationship of fees for audit and non-audit services in determining
whether to pre-approve any such services.
8. PROCEDURES
All requests or applications for services to be provided by the Independent
Auditors that do not require specific approval by the Audit Committee will be
submitted to the Fund's Chief Financial Officer and must include a detailed
description of the services to be
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rendered. The Fund's Chief Financial Officer will determine whether such
services are included within the list of services that have received the general
pre-approval of the Audit Committee. The Audit Committee will be informed on a
timely basis of any such services rendered by the Independent Auditors. Requests
or applications to provide services that require specific approval by the Audit
Committee will be submitted to the Audit Committee by both the Independent
Auditors and the Fund's Chief Financial Officer, and must include a joint
statement as to whether, in their view, the request or application is consistent
with the SEC's rules on auditor independence.
The Audit Committee has designated the Fund's Chief Financial Officer to monitor
the performance of all services provided by the Independent Auditors and to
determine whether such services are in compliance with this Policy. The Fund's
Chief Financial Officer will report to the Audit Committee on a periodic basis
on the results of its monitoring. Both the Fund's Chief Financial Officer and
management will immediately report to the chairman of the Audit Committee any
breach of this Policy that comes to the attention of the Fund's Chief Financial
Officer or any member of management.
9. ADDITIONAL REQUIREMENTS
The Audit Committee has determined to take additional measures on an annual
basis to meet its responsibility to oversee the work of the Independent Auditors
and to assure the auditor's independence from the Fund, such as reviewing a
formal written statement from the Independent Auditors delineating all
relationships between the Independent Auditors and the Fund, consistent with
Independence Standards Board No. 1, and discussing with the Independent Auditors
its methods and procedures for ensuring independence.
10. COVERED ENTITIES
Covered Entities include the Fund's investment adviser(s) and any entity
controlling, controlled by or under common control with the Fund's investment
adviser(s) that provides ongoing services to the Fund(s). Beginning with
non-audit service contracts entered into on or after May 6, 2003, the Fund's
audit committee must pre-approve non-audit services provided not only to the
Fund but also to the Covered Entities if the engagements relate directly to the
operations and financial reporting of the Fund. This list of Covered Entities
would include:
MORGAN STANLEY RETAIL FUNDS
Morgan Stanley Investment Advisors Inc.
Morgan Stanley & Co. Incorporated
Morgan Stanley DW Inc.
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Van Kampen Asset Management
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
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MORGAN STANLEY INSTITUTIONAL FUNDS
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Advisors Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Morgan Stanley & Co. Incorporated
Morgan Stanley Distribution, Inc.
Morgan Stanley AIP GP LP
Morgan Stanley Alternative Investment Partners LP
(e)(2) Beginning with non-audit service contracts entered into on or after May
6, 2003, the audit committee also is required to pre-approve services to Covered
Entities to the extent that the services are determined to have a direct impact
on the operations or financial reporting of the Registrant. 100% of such
services were pre-approved by the audit committee pursuant to the Audit
Committee's pre-approval policies and procedures (attached hereto).
(f) Not applicable.
(g) See table above.
(h) The audit committee of the Board of Trustees has considered whether the
provision of services other than audit services performed by the auditors to the
Registrant and Covered Entities is compatible with maintaining the auditors'
independence in performing audit services.
Item 5. Audit Committee of Listed Registrants.
(a) The Fund has a separately-designated standing audit committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act whose members are:
Michael Bozic, Edwin J. Garn, Wayne E. Hedien, Manual H. Johnson, Joseph J.
Kearns, Michael Nugent and Fergus Reid.
(b) Not applicable.
Item 6. Schedule of Investments
Refer to Item 1.
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Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Applicable only to 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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Morgan Stanley KLD Social Index Fund
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
January 19, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
January 19, 2006
/s/ Francis Smith
Francis Smith
Principal Financial Officer
January 19, 2006