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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-08471
Morgan Stanley Aggressive Equity Fund
(Exact name of registrant as specified in charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip code)
Ronald E. Robison
1221 Avenue of the Americas, New York, New York 10020
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-762-4000
Date of fiscal year end: July 31, 2006
Date of reporting period: July 31, 2006
Item 1 - Report to Shareholders
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WELCOME, SHAREHOLDER:
IN THIS REPORT, YOU'LL LEARN ABOUT HOW YOUR INVESTMENT IN MORGAN STANLEY
AGGRESSIVE EQUITY FUND PERFORMED DURING THE ANNUAL PERIOD. WE WILL PROVIDE AN
OVERVIEW OF THE MARKET CONDITIONS, AND DISCUSS SOME OF THE FACTORS THAT AFFECTED
PERFORMANCE DURING THE REPORTING PERIOD. IN ADDITION, THIS REPORT INCLUDES THE
FUND'S FINANCIAL STATEMENTS AND A LIST OF FUND INVESTMENTS.
THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS FOR THE FUND BEING
OFFERED.
MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE
IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. THE FUND IS
SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT MARKET VALUES OF
SECURITIES OWNED BY THE FUND WILL DECLINE AND, THEREFORE, THE VALUE OF THE
FUND'S SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE
MONEY INVESTING IN THIS FUND. PLEASE SEE THE PROSPECTUS FOR MORE COMPLETE
INFORMATION ON INVESTMENT RISKS.
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FUND REPORT
FOR THE YEAR ENDED JULY 31, 2006
TOTAL RETURN FOR THE 12 MONTHS ENDED JULY 31, 2006
RUSSELL LIPPER
3000(R) MULTI-CAP
GROWTH GROWTH
CLASS A CLASS B CLASS C CLASS D INDEX(1) FUNDS INDEX(2)
- ------- ------- ------- ------- -------- --------------
9.38% 8.57% 8.57% 9.61% -0.54% 1.98%
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
Although conditions were generally favorable for stocks, pockets of volatility
were not uncommon during the 12-month period ended July 31, 2006. In the first
month of the reporting period, the 2005 Gulf Coast hurricanes caused
unprecedented devastation. The subsequent spike in oil prices and shortfall in
consumer spending data raised concerns about longer-term economic growth.
However, the economy proved more resilient than expected, and in October and
November stocks rallied on improved sentiment. December's gain was more muted as
high gold prices, the auto industry's lingering troubles and a flattening yield
curve weighed on the market. In addition, the Federal Open Market Committee (the
"Fed") continued to raise the federal funds target rate, leaving investors
uncertain about the potential effects on the economy.
However, the Fed's comments in its December meeting did spark hope that the rate
increases may not be necessary for much longer. This fuelled a market advance in
January, and higher-volatility segments of the market such as small-cap and
technology stocks were the beneficiaries of this renewed optimism. Uneven
performance characterized the months of February, March and April as investors
digested a series of mixed signals from the economic and corporate fronts.
Conditions turned volatile in May and June, as the market encountered a steep
sell-off amid the Fed's sixteenth and seventeenth consecutive rate increases
since June 2004. July was another choppy month, as oil prices skyrocketed to a
new high and signs of a slowing economy were evident in employment,
manufacturing and consumer spending data. Moreover, geopolitical tensions flared
in North Korea and the Middle East, further adding to investors' concerns. At
the same time, however, inflation data was better than expected, oil prices did
ease and corporate earnings still appeared generally healthy. Industrial
production and capacity utilization data were also strong. These positive
factors helped the equity market regain some lost ground. For the period
overall, value stocks outperformed growth stocks.
PERFORMANCE ANALYSIS
Morgan Stanley Aggressive Equity Fund outperformed the Russell 3000(R) Growth
Index and the Lipper Multi-Cap Growth Funds Index for the 12 months ended July
31, 2006, assuming no deduction of applicable sales charges. For this period,
strong stock selection added significantly to overall relative returns.
In terms of sector level contributions, the top performing sectors relative to
the Russell 3000 Growth Index ("the Index") were technology, energy and
utilities. Within the
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technology sector, a sector underweight benefited overall performance, as did
security selection in computer services, software and services, and
semiconductor companies. Stock selection, particularly in crude oil producers,
and an overweight in the other energy sector also proved advantageous to the
Fund. Within the utilities sector, stock selection in wireless companies had a
positive impact on overall relative returns.
While the Fund outperformed the Index by a substantial margin during the period,
not all sectors had a favorable influence on returns. A sizable overweight
unfortunately offset strong stock selection in the consumer discretionary
sector, a decision that weakened overall performance. A sector underweight in
consumer staples also muted gains. Lastly, in the producer durables sector,
stock selection in homebuilding and aerospace firms hindered the Fund's overall
returns.
At the close of the period, consumer discretionary was the largest weighted
sector within the Fund, followed by the energy and financial services sectors.
Relative to the Russell 3000 Growth Index, consumer discretionary also
represented the largest sector overweight. The health care sector was also
significantly overweight versus the Index. In contrast, the financial services
sector was underweight against the Index.
THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM AS
DISCUSSED HEREIN OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE FUND IN
THE FUTURE.
TOP 10 HOLDINGS
Ultra Petroleum Corp. (Canada) 8.3%
Google, Inc. (Class A) 5.4
Corporate Executive Board Co. (The) 5.1
Brookfield Asset Management Inc. (Class A) (Canada) 5.0
Monsanto Co. 4.7
eBay, Inc. 4.5
Sears Holdings Corp. 4.2
Yahoo!, Inc. 4.1
Costco Wholesale Corp. 3.4
America Movil S.A. de C.V. (Series L) (ADR) (Mexico) 3.2
TOP FIVE INDUSTRIES
Internet Software/Services 12.2%
Oil & Gas Production 8.3
Miscellaneous Commercial Services 7.9
Financial Conglomerates 7.9
Discount Stores 7.6
DATA AS OF JULY 31, 2006. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR TOP 10
HOLDINGS AND TOP FIVE INDUSTRIES ARE AS A PERCENTAGE OF NET ASSETS. THESE DATA
ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED A
RECOMMENDATION TO BUY OR SELL THE SECURITIES MENTIONED. MORGAN STANLEY IS A
FULL-SERVICE SECURITIES FIRM ENGAGED IN SECURITIES TRADING AND BROKERAGE
ACTIVITIES, INVESTMENT BANKING, RESEARCH AND ANALYSIS, FINANCING AND FINANCIAL
ADVISORY SERVICES.
3
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INVESTMENT STRATEGY
THE FUND NORMALLY INVESTS AT LEAST 80 PERCENT OF ITS ASSETS IN COMMON STOCKS AND
OTHER EQUITY SECURITIES OF U.S. OR FOREIGN COMPANIES THAT OFFER THE POTENTIAL
FOR SUPERIOR EARNINGS GROWTH IN THE OPINION OF THE FUND'S "INVESTMENT ADVISER,"
MORGAN STANLEY INVESTMENT ADVISORS INC. THE FUND'S OTHER EQUITY SECURITIES MAY
INCLUDE PREFERRED STOCK, DEPOSITARY RECEIPTS OR SECURITIES CONVERTIBLE INTO
COMMON STOCK.
FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS
EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN
ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND
AND FOURTH FISCAL QUARTERS. THE SEMIANNUAL REPORTS AND THE ANNUAL REPORTS ARE
FILED ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC) ON FORM
N-CSRS AND FORM N-CSR, RESPECTIVELY. MORGAN STANLEY ALSO DELIVERS THE SEMIANNUAL
AND ANNUAL REPORTS TO FUND SHAREHOLDERS AND MAKES THESE REPORTS AVAILABLE ON ITS
PUBLIC WEB SITE, www.morganstanley.com. EACH MORGAN STANLEY FUND ALSO FILES A
COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE FUND'S FIRST AND
THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES NOT DELIVER THE REPORTS
FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS, NOR ARE THE REPORTS
POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY, HOWEVER, OBTAIN THE FORM
N-Q FILINGS (AS WELL AS THE FORM N-CSR AND N-CSRS FILINGS) BY ACCESSING THE
SEC'S WEB SITE, http://www.sec.gov. YOU MAY ALSO REVIEW AND COPY THEM AT THE
SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE OPERATION OF
THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE SEC AT (800)
SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT OF A
DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS
(publicinfo@sec.gov) OR BY WRITING THE PUBLIC REFERENCE SECTION OF THE SEC,
WASHINGTON, DC 20549-0102.
PROXY VOTING POLICY AND PROCEDURES AND PROXY VOTING RECORD
YOU MAY OBTAIN A COPY OF THE FUND'S PROXY VOTING POLICY AND PROCEDURES WITHOUT
CHARGE, UPON REQUEST, BY CALLING TOLL FREE (800) 869-NEWS OR BY VISITING THE
MUTUAL FUND CENTER ON OUR WEB SITE AT www.morganstanley.com. IT IS ALSO
AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT
http://www.sec.gov.
YOU MAY OBTAIN INFORMATION REGARDING HOW THE FUND VOTED PROXIES RELATING TO
PORTFOLIO SECURITIES DURING THE MOST RECENT TWELVE-MONTH PERIOD ENDED JUNE 30
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.
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PERFORMANCE SUMMARY
PERFORMANCE OF $10,000 INVESTMENT
[CHART]
($ IN THOUSANDS)
<Table>
<Caption>
RUSSELL 3000(R) LIPPER MULTI-CAP
CLASS A++ CLASS B++ CLASS C++ CLASS D++ GROWTH INDEX(1) GROWTH FUNDS INDEX(2)
--------- --------- --------- --------- --------------- ---------------------
24-Feb-99 $ 9,475 $10,000 $10,000 $10,000 $10,000 $10,000
30-Apr-99 $10,138 $10,680 $10,680 $10,700 $10,424 $10,620
31-Jul-99 $10,299 $10,840 $10,840 $10,890 $10,481 $10,892
31-Oct-99 $11,162 $11,720 $11,720 $11,800 $11,168 $11,477
31-Jan-00 $14,137 $14,820 $14,820 $14,960 $12,516 $14,125
30-Apr-00 $14,241 $14,900 $14,900 $15,080 $13,328 $14,950
31-Jul-00 $14,440 $15,080 $15,080 $15,300 $13,014 $14,844
31-Oct-00 $14,989 $15,620 $15,620 $15,880 $12,263 $14,554
31-Jan-01 $13,160 $13,687 $13,687 $13,950 $ 7,872 $12,804
30-Apr-01 $11,288 $11,719 $11,719 $11,963 $ 9,096 $10,949
31-Jul-01 $10,352 $10,718 $10,718 $10,976 $ 8,557 $10,119
31-Oct-01 $ 9,265 $ 9,580 $ 9,580 $ 9,841 $ 7,439 $ 8,435
31-Jan-02 $ 9,806 $10,118 $10,118 $10,412 $ 8,012 $ 9,127
30-Apr-02 $ 9,666 $ 9,958 $ 9,970 $10,275 $ 7,342 $ 8,520
31-Jul-02 $ 8,111 $ 8,348 $ 8,360 $ 8,635 $ 6,088 $ 6,797
31-Oct-02 $ 7,927 $ 8,143 $ 8,143 $ 8,441 $ 5,972 $ 6,697
31-Jan-03 $ 7,484 $ 7,663 $ 7,674 $ 7,974 $ 5,733 $ 6,482
30-Apr-03 $ 7,722 $ 7,891 $ 7,903 $ 8,225 $ 6,240 $ 7,018
31-Jul-03 $ 8,327 $ 8,497 $ 8,508 $ 8,886 $ 6,859 $ 7,858
31-Oct-03 $ 9,072 $ 9,239 $ 9,250 $ 9,672 $ 7,367 $ 8,582
31-Jan-04 $ 9,634 $ 9,787 $ 9,798 $10,275 $ 7,872 $ 9,146
30-Apr-04 $ 9,342 $ 9,479 $ 9,490 $ 9,979 $ 7,671 $ 8,929
31-Jul-04 $ 9,007 $ 9,113 $ 9,125 $ 9,626 $ 7,455 $ 8,676
31-Oct-04 $ 9,644 $ 9,753 $ 9,764 $10,321 $ 7,627 $ 9,075
31-Jan-05 $10,087 $10,187 $10,198 $10,799 $ 7,947 $ 9,570
30-Apr-05 $ 9,688 $ 9,753 $ 9,764 $10,378 $ 7,694 $ 9,126
31-Jul-05 $11,394 $11,454 $11,466 $12,212 $ 8,484 $10,315
31-Oct-05 $11,848 $11,888 $11,900 $12,702 $ 8,313 $10,242
31-Jan-06 $13,597 $13,613 $13,624 $14,582 $ 8,867 $11,393
30-Apr-06 $13,738 $13,727 $13,738 $14,741 $ 8,994 $11,548
31-Jul-06 $12,463 $12,437 $12,448 $13,385 $ 8,438 $10,519
</Table>
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AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED JULY 31, 2006
<Table>
<Caption>
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS D SHARES@@
(SINCE 02/24/99) (SINCE 02/24/99) (SINCE 02/24/99) (SINCE 02/24/99)
SYMBOL AEQAX AEQBX AEQCX AEQDX
- --------------- ---------------- ---------------- ---------------- ----------------
1 YEAR 9.38%(3) 8.57%(3) 8.57%(3) 9.61%(3)
3.64 (4) 3.57 (4) 7.57 (4) --
5 YEARS 3.78 (3) 3.02 (3) 3.04 (3) 4.05(3)
2.67 (4) 2.66 (4) 3.04 (4) --
SINCE INCEPTION 3.76 (3) 2.98 (3) 2.99 (3) 4.00(3)
3.01 (4) 2.98 (4) 2.99 (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 RUSSELL 3000(R) GROWTH INDEX MEASURES THE PERFORMANCE OF THOSE
COMPANIES IN THE RUSSELL 3000(R) INDEX WITH HIGHER PRICE-TO-BOOK RATIOS AND
HIGHER FORECASTED GROWTH VALUES. INDEXES ARE UNMANAGED AND THEIR RETURNS DO
NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE.
IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
(2) THE LIPPER MULTI-CAP GROWTH FUNDS INDEX IS AN EQUALLY WEIGHTED PERFORMANCE
INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN THE LIPPER
MULTI-CAP GROWTH FUNDS CLASSIFICATION. THE INDEX, WHICH IS ADJUSTED FOR
CAPITAL GAINS DISTRIBUTIONS AND INCOME DIVIDENDS, IS UNMANAGED AND SHOULD
NOT BE CONSIDERED AN INVESTMENT. THERE ARE CURRENTLY 30 FUNDS REPRESENTED
IN THIS INDEX.
(3) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT
THE DEDUCTION OF ANY SALES CHARGES.
(4) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND THE DEDUCTION OF
THE MAXIMUM APPLICABLE SALES CHARGE. SEE THE FUND'S CURRENT PROSPECTUS FOR
COMPLETE DETAILS ON FEES AND SALES CHARGES.
++ ENDING VALUE ASSUMING A COMPLETE REDEMPTION ON JULY 31, 2006.
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EXPENSE EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments and redemption fees;
and (2) ongoing costs, including advisory fees; distribution and service (12b-1)
fees; and other Fund expenses. This example is intended to help you understand
your ongoing costs (in dollars) of investing in the Fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period 02/01/06 - 07/31/06.
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>
EXPENSES PAID
BEGINNING ENDING DURING PERIOD *
ACCOUNT VALUE ACCOUNT VALUE ---------------
------------- ------------- 02/01/06 -
02/01/06 07/31/06 07/31/06
------------- ------------- ---------------
CLASS A
Actual (-8.34% return) $1,000.00 $ 916.60 $ 6.42
Hypothetical (5% annual return before expenses) $1,000.00 $1,018.10 $ 6.76
CLASS B
Actual (-8.64% return) $1,000.00 $ 913.60 $10.01
Hypothetical (5% annual return before expenses) $1,000.00 $1,014.33 $10.54
CLASS C
Actual (-8.63% return) $1,000.00 $ 913.70 $10.01
Hypothetical (5% annual return before expenses) $1,000.00 $1,014.33 $10.54
CLASS D
Actual (-8.20% return) $1,000.00 $ 918.00 $ 5.28
Hypothetical (5% annual return before expenses) $1,000.00 $1,019.29 $ 5.56
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIOS OF 1.35%, 2.11%,
2.11% AND 1.11% FOR CLASS A, CLASS B, CLASS C AND CLASS D SHARES,
RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD,
MULTIPLIED BY 181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD).
8
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INVESTMENT ADVISORY AGREEMENT APPROVAL
NATURE, EXTENT AND QUALITY OF SERVICES
The Board reviewed and considered the nature and extent of the investment
advisory services provided by the Investment Adviser under the Advisory
Agreement, including portfolio management, investment research and equity and
fixed income securities trading. The Board also reviewed and considered the
nature and extent of the non-advisory, administrative services provided by the
Fund's Administrator under the Administration Agreement, including accounting,
clerical, bookkeeping, compliance, business management and planning, and the
provision of supplies, office space and utilities at the Investment Adviser's
expense. (The Investment Adviser and the Administrator together are referred to
as the "Adviser" and the Advisory and Administration Agreements together are
referred to as the "Management Agreement.") The Board also compared the nature
of the services provided by the Adviser with similar services provided by
non-affiliated advisers as reported to the Board by Lipper Inc. ("Lipper").
The Board reviewed and considered the qualifications of the portfolio managers,
the senior administrative managers and other key personnel of the Adviser who
provide the advisory and administrative services to the Fund. The Board
determined that the Adviser's portfolio managers and key personnel are well
qualified by education and/or training and experience to perform the services in
an efficient and professional manner. The Board concluded that the nature and
extent of the advisory and administrative services provided were necessary and
appropriate for the conduct of the business and investment activities of the
Fund. The Board also concluded that the overall quality of the advisory and
administrative services was satisfactory.
PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
On a regular basis, the Board reviews the performance of all funds in the Morgan
Stanley Fund Complex, including the Fund, compared to their peers, paying
specific attention to the underperforming funds. In addition, the Board
specifically reviewed the Fund's performance for the one-, three- and five-year
periods ended November 30, 2005, as shown in a report provided by Lipper (the
"Lipper Report"), compared to the performance of comparable funds selected by
Lipper (the "performance peer group"). The Board also discussed with the Adviser
the performance goals and the actual results achieved in managing the Fund. The
Board concluded that the Fund's performance was competitive with that of its
performance peer group.
FEES RELATIVE TO OTHER PROPRIETARY FUNDS MANAGED BY THE ADVISER WITH COMPARABLE
INVESTMENT STRATEGIES
The Board reviewed the advisory and administrative fee (together, the
"management fee") rate paid by the Fund under the Management Agreement. The
Board noted that the management fee rate was comparable to the management fee
rates charged by the Adviser to other proprietary funds it manages with
investment strategies comparable to those of the Fund.
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FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the management fee rate and total expense ratio of the Fund
as compared to the average management fee rate and average total expense ratio
for funds, selected by Lipper (the "expense peer group"), managed by other
advisers with investment strategies comparable to those of the Fund, as shown in
the Lipper Report. The Board concluded that the Fund's management fee rate and
total expense ratio were competitive with those of its expense peer group.
BREAKPOINTS AND ECONOMIES OF SCALE
The Board reviewed the structure of the Fund's management fee schedule under the
Management Agreement and noted that it includes breakpoints. The Board also
reviewed the level of the Fund's management fee and noted that the fee, as a
percentage of the Fund's net assets, would decrease as net assets increase
because the management fee includes breakpoints. The Board concluded that the
Fund's management fee would reflect economies of scale as assets increase.
PROFITABILITY OF THE ADVISER AND AFFILIATES
The Board considered information concerning the costs incurred and profits
realized by the Adviser and affiliates during the last year from their
relationship with the Fund and during the last two years from their relationship
with the Morgan Stanley Fund Complex and reviewed with the Adviser the cost
allocation methodology used to determine the profitability of the Adviser and
affiliates. Based on its review of the information it received, the Board
concluded that the profits earned by the Adviser and affiliates were not
excessive in light of the advisory, administrative and other services provided
to the Fund.
FALL-OUT BENEFITS
The Board considered so-called "fall-out benefits" derived by the Adviser and
affiliates from their relationship with the Fund and the Morgan Stanley Fund
Complex, such as sales charges on sales of Class A shares and "float" benefits
derived from handling of checks for purchases and sales of Fund shares, through
a broker-dealer affiliate of the Adviser and "soft dollar" benefits (discussed
in the next section). The Board also considered that a broker-dealer affiliate
of the Adviser receives from the Fund 12b-1 fees for distribution and
shareholder services. The Board also considered that an affiliate of the Adviser
sold a joint venture that owned an electronic trading system network ("ECN"),
which may be used by the Adviser for trading on behalf of the Fund. As part of
the sale of the joint venture, the affiliate receives a 10-year payout based on
the revenue stream from trading on the ECN. Although the affiliate disgorges the
portion of the payout that is comprised of commissions received from trades
executed by the Adviser on the ECN to a charitable organization, the Board
considered the fact that trades by the Adviser would increase order flow, and,
thus, result in a potential fall-out benefit to the affiliate. The Board
concluded that the float benefits were relatively small, the sales charges and
12b-1 fees were competitive with those of other broker-dealers, the affiliate
disgorged revenues in connection with the ECN-related revenue and the potential
fall-out benefit from increased order flow was relatively small.
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SOFT DOLLAR BENEFITS
The Board considered whether the Adviser realizes any benefits as a result of
brokerage transactions executed through "soft dollar" arrangements. Under such
arrangements, brokerage commissions paid by the Fund and/or other funds managed
by the Adviser would be used to pay for research that a securities broker
obtains from third parties, or to pay for both research and execution services
from securities brokers who effect transactions for the Fund. The Adviser
informed the Board that it does not use Fund commissions to pay for third party
research. It does use commissions to pay for research which is bundled with
execution services. The Board recognized that the receipt of such research from
brokers may reduce the Adviser's costs but concluded that the receipt of such
research strengthens the investment management resources of the Adviser, which
may ultimately benefit the Fund and other funds in the Morgan Stanley Fund
Complex.
ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE FUND'S NEEDS
The Board considered whether the Adviser is financially sound and has the
resources necessary to perform its obligations under the Management Agreement.
The Board noted that the Adviser's operations remain profitable, although
increased expenses in recent years have reduced the Adviser's profitability. The
Board concluded that the Adviser has the financial resources necessary to
fulfill its obligations under the Management Agreement.
HISTORICAL RELATIONSHIP BETWEEN THE FUND AND THE ADVISER
The Board also reviewed and considered the historical relationship between the
Fund and the Adviser, including the organizational structure of the Adviser, the
policies and procedures formulated and adopted by the Adviser for managing the
Fund's operations and the Board's confidence in the competence and integrity of
the senior managers and key personnel of the Adviser. The Board concluded that
it is beneficial for the Fund to continue its relationship with the Adviser.
OTHER FACTORS AND CURRENT TRENDS
The Board considered the controls and procedures adopted and implemented by the
Adviser and monitored by the Fund's Chief Compliance Officer and concluded that
the conduct of business by the Adviser indicates a good faith effort on its part
to adhere to high ethical standards in the conduct of the Fund's business.
GENERAL CONCLUSION
After considering and weighing all of the above factors, the Board concluded
that it would be in the best interest of the Fund and its shareholders to
approve renewal of the Management Agreement for another year.
11
<Page>
MORGAN STANLEY AGGRESSIVE EQUITY FUND
PORTFOLIO OF INVESTMENTS - JULY 31, 2006
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------
COMMON STOCKS (98.5%)
AIR FREIGHT/COURIERS (5.6%)
154,785 C.H. Robinson Worldwide, Inc. $ 7,086,057
176,794 Expeditors International of
Washington, Inc. 8,038,823
------------
15,124,880
------------
APPAREL/FOOTWEAR (2.6%)
246,179 Coach, Inc.* 7,067,799
------------
BROADCASTING (1.9%)
275,467 Grupo Televisa S.A.- CPO
(ADR) (Mexico) 5,101,649
------------
CHEMICALS: AGRICULTURAL (4.7%)
295,012 Monsanto Co. 12,682,566
------------
DATA PROCESSING
SERVICES (2.6%)
176,631 First Data Corp. 7,215,376
------------
DISCOUNT STORES (7.6%)
176,754 Costco Wholesale Corp. 9,325,541
82,679 Sears Holdings Corp.* 11,347,693
------------
20,673,234
------------
FINANCIAL CONGLOMERATES (7.9%)
149,481 American Express Co. 7,781,981
328,491 Brookfield Asset Management
Inc. (Class A) (Canada) 13,638,946
------------
21,420,927
------------
FINANCIAL PUBLISHING/
SERVICES (2.6%)
127,601 Moody's Corp. 7,002,743
------------
HOME BUILDING (3.4%)
121,584 Desarrolladora Homex S.A.
de C.V. (ADR) (Mexico)* 4,498,608
44,183 M.D.C. Holdings, Inc. 1,927,704
5,581 NVR, Inc.* 2,762,595
------------
9,188,907
------------
HOTELS/RESORTS/
CRUISELINES (2.4%)
183,166 Marriott International, Inc.
(Class A) 6,443,780
------------
INTERNET RETAIL (1.6%)
167,221 Amazon.com, Inc.* $4,496,573
------------
INTERNET SOFTWARE/
SERVICES (12.2%)
189,226 Akamai Technologies, Inc.* 7,499,026
38,006 Google, Inc. (Class A)* 14,693,120
408,899 Yahoo!, Inc.* 11,097,519
------------
33,289,665
------------
INVESTMENT BANKS/
BROKERS (2.7%)
127,329 Greenhill & Co., Inc. 7,379,989
------------
MEDICAL SPECIALTIES (3.1%)
206,230 Dade Behring Holdings, Inc. 8,399,748
------------
MISCELLANEOUS COMMERCIAL
SERVICES (7.9%)
148,812 Corporate Executive Board
Co. (The) 13,988,328
182,476 Iron Mountain Inc.* 7,481,516
------------
21,469,844
------------
OIL & GAS PRODUCTION (8.3%)
383,803 Ultra Petroleum Corp.
(Canada)* 22,475,504
------------
OTHER CONSUMER SERVICES (6.5%)
508,524 eBay, Inc.* 12,240,173
50,687 Strayer Education, Inc. 5,491,936
------------
17,732,109
------------
PERSONNEL SERVICES (2.0%)
134,503 Monster Worldwide, Inc.* 5,380,120
------------
PROPERTY - CASUALTY
INSURERS (2.9%)
2,560 Berkshire Hathaway, Inc.
(Class B)* 7,800,320
------------
SERVICES TO THE HEALTH
INDUSTRY (2.5%)
100,342 Stericycle, Inc.* 6,740,975
------------
SPECIALTY
TELECOMMUNICATIONS (2.6%)
202,710 Crown Castle International Corp.* 7,141,473
------------
SEE NOTES TO FINANCIAL STATEMENTS
12
<Page>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------
TOBACCO (1.7%)
83,052 Loews Corp.-Carolina Group $ 4,765,524
------------
WIRELESS
TELECOMMUNICATIONS (3.2%)
243,478 America Movil S.A. de C.V.
(Series L) (ADR) (Mexico) 8,711,643
------------
TOTAL COMMON STOCKS
(COST $228,456,601) 267,705,348
------------
PRINCIPAL
AMOUNT IN
THOUSANDS
- ---------
SHORT-TERM INVESTMENT (2.9%)
REPURCHASE AGREEMENT
$7,923 Joint repurchase agreement
account 5.27% due 08/01/06
(dated 07/31/06; proceeds
$7,924,160) (a)
(COST $7,923,000) 7,923,000
------------
TOTAL INVESTMENTS
(COST $236,379,601) (b) 101.4% 275,628,348
LIABILITIES IN EXCESS OF OTHER ASSETS (1.4) (3,911,436)
----- ------------
NET ASSETS 100.0% $271,716,912
===== ============
- ----------
ADR AMERICAN DEPOSITARY RECEIPT.
* NON-INCOME PRODUCING SECURITY.
(a) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(b) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $236,461,725. THE
AGGREGATE GROSS UNREALIZED APPRECIATION IS $56,612,054 AND THE AGGREGATE
GROSS UNREALIZED DEPRECIATION IS $17,445,431, RESULTING IN NET UNREALIZED
APPRECIATION OF $39,166,623.
SUMMARY OF INVESTMENTS
PERCENT OF
INDUSTRY VALUE NET ASSETS
- -------------------------------------------------------------
Internet Software/Services $33,289,665 12.2%
Oil & Gas Production 22,475,504 8.3
Miscellaneous Commercial Services 21,469,844 7.9
Financial Conglomerates 21,420,927 7.9
Discount Stores 20,673,234 7.6
Other Consumer Services 17,732,109 6.5
Air Freight/Couriers 15,124,880 5.6
Chemicals: Agricultural 12,682,566 4.7
Home Building 9,188,907 3.4
Wireless Telecommunications 8,711,643 3.2
Medical Specialties 8,399,748 3.1
Repurchase Agreement 7,923,000 2.9
Property - Casualty Insurers 7,800,320 2.9
Investment Banks/Brokers 7,379,989 2.7
Data Processing Services 7,215,376 2.6
Specialty Telecommunications 7,141,473 2.6
Apparel/Footwear 7,067,799 2.6
Financial Publishing/Services 7,002,743 2.6
Services to the Health Industry 6,740,975 2.5
Hotels/Resorts/Cruiselines 6,443,780 2.4
Personnel Services 5,380,120 2.0
Broadcasting 5,101,649 1.9
Tobacco 4,765,524 1.7
Internet Retail 4,496,573 1.6
------------ -----
$275,628,348 101.4%
============ =====
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
MORGAN STANLEY AGGRESSIVE EQUITY FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JULY 31, 2006
ASSETS:
Investments in securities, at value (cost $236,379,601) $ 275,628,348
Cash 817
Receivable for:
Dividends 134,195
Shares of beneficial interest sold 85,695
Interest 1,160
Prepaid expenses and other assets 20,633
-------------
TOTAL ASSETS 275,870,848
-------------
LIABILITIES:
Payable for:
Investments purchased 3,319,812
Shares of beneficial interest redeemed 374,100
Distribution fee 201,663
Investment advisory fee 157,830
Administration fee 18,845
Transfer agent fee 17,153
Accrued expenses and other payables 64,533
-------------
TOTAL LIABILITIES 4,153,936
-------------
NET ASSETS $ 271,716,912
=============
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 587,273,364
Net unrealized appreciation 39,248,747
Accumulated net investment loss (577)
Accumulated net realized loss (354,804,622)
-------------
NET ASSETS $ 271,716,912
=============
CLASS A SHARES:
Net Assets $ 46,458,278
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 4,025,111
NET ASSET VALUE PER SHARE $ 11.54
=============
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE) $ 12.18
=============
CLASS B SHARES:
Net Assets $ 193,811,154
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 17,802,873
NET ASSET VALUE PER SHARE $ 10.89
=============
CLASS C SHARES:
Net Assets $ 27,064,264
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 2,483,068
NET ASSET VALUE PER SHARE $ 10.90
=============
CLASS D SHARES:
Net Assets $ 4,383,216
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 372,974
NET ASSET VALUE PER SHARE $ 11.75
=============
SEE NOTES TO FINANCIAL STATEMENTS
14
<Page>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 2006
NET INVESTMENT LOSS:
INCOME
Dividends (net of $14,661 foreign withholding tax) $ 1,761,964
Interest 182,928
-----------
TOTAL INCOME 1,944,892
-----------
EXPENSES
Distribution fee (Class A shares) 115,103
Distribution fee (Class B shares) 2,314,697
Distribution fee (Class C shares) 298,758
Investment advisory fee 2,089,840
Transfer agent fees and expenses 877,392
Administration fee 249,533
Shareholder reports and notices 101,102
Professional fees 78,191
Registration fees 63,066
Custodian fees 26,860
Trustees' fees and expenses 3,558
Other 34,384
-----------
TOTAL EXPENSES 6,252,484
Less: expense offset (2,975)
-----------
NET EXPENSES 6,249,509
-----------
NET INVESTMENT LOSS (4,304,617)
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
NET REALIZED GAIN ON:
Investments 40,931,190
Foreign exchange transactions 1,874
-----------
NET REALIZED GAIN 40,933,064
-----------
NET CHANGE IN UNREALIZED APPRECIATION ON:
Investments (8,826,204)
Net translation of other assets and liabilities denominated in
foreign currencies (1,941)
-----------
NET DEPRECIATION (8,828,145)
-----------
NET GAIN 32,104,919
-----------
NET INCREASE $27,800,302
===========
SEE NOTES TO FINANCIAL STATEMENTS
15
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JULY 31, 2006 JULY 31, 2005
------------- -------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss $ (4,304,617) $ (4,878,748)
Net realized gain 40,933,064 47,277,366
Net change in unrealized appreciation (8,828,145) 33,865,577
------------ -------------
NET INCREASE 27,800,302 76,264,195
Net decrease from transactions in shares of
beneficial interest (75,060,001) (123,847,024)
------------ -------------
NET DECREASE (47,259,699) (47,582,829)
NET ASSETS:
Beginning of period 318,976,611 366,559,440
------------ -------------
END OF PERIOD
(INCLUDING ACCUMULATED NET INVESTMENT LOSSES OF
$577 AND $360, RESPECTIVELY) $271,716,912 $ 318,976,611
============ =============
SEE NOTES TO FINANCIAL STATEMENTS
16
<Page>
MORGAN STANLEY AGGRESSIVE EQUITY FUND
NOTES TO FINANCIAL STATEMENTS - JULY 31, 2006
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Aggressive Equity Fund (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Fund's investment objective is
capital growth. The Fund was organized as a Massachusetts business trust on
October 29, 1997 and commenced operations on February 24, 1999.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within eighteen
months, six years and one year, respectively. Class D shares are not subject to
a sales charge. Additionally, Class A shares, Class B shares and Class C shares
incur distribution expenses.
Effective August 29, 2005, the Board of Trustees of the Fund approved the
implementation of a 2% redemption fee, on Class A shares, Class B shares, Class
C shares, and Class D shares, which is paid directly to the Fund, for shares
redeemed within seven days of purchase, subject to certain exceptions. 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 including circumstances under which 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
17
<Page>
the foreign market on which the securities trade) and the close of business on
the NYSE. If developments occur during such periods that are expected to
materially affect the value of such securities, such valuations may be adjusted
to reflect the estimated fair value of such securities as of the close of the
NYSE, as determined in good faith by the Fund's Trustees or by the Investment
Adviser using a pricing service and/or procedures approved by the Trustees of
the Fund; (7) certain portfolio securities may be valued by an outside pricing
service approved by the Fund's Trustees; and (8) short-term debt securities
having a maturity date of more than sixty days at time of purchase are valued on
a mark-to-market basis until sixty days prior to maturity and thereafter at
amortized cost based on their value on the 61st day. Short-term debt securities
having a maturity date of sixty days or less at the time of purchase are valued
at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date.
Discounts are accreted and premiums are amortized over the life of the
respective securities. Interest income is accrued daily.
C. REPURCHASE AGREEMENTS -- Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other affiliated
entities managed by the Investment Adviser, may transfer uninvested cash
balances into one or more joint repurchase agreement accounts. These balances
are invested in one or more repurchase agreements and are collateralized by
cash, U.S. Treasury or federal agency obligations. The Fund may also invest
directly with institutions in repurchase agreements. The Fund's custodian
receives the collateral, which is marked-to-market daily to determine that the
value of the collateral does not decrease below the repurchase price plus
accrued interest.
D. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
E. FOREIGN CURRENCY TRANSLATION AND FORWARD FOREIGN CURRENCY CONTRACTS -- The
books and records of the Fund are maintained in U.S. dollars as follows: (1) the
foreign currency market value of investment securities, other assets and
liabilities and forward foreign currency contracts ("forward contracts") are
translated at the exchange rates prevailing at the end of the period; and (2)
purchases, sales, income and expenses are translated at the exchange rates
prevailing on the respective dates of such transactions. The resultant exchange
gains and losses are recorded as realized and unrealized gain/loss on foreign
exchange transactions. Pursuant to U.S. federal income tax regulations, certain
foreign exchange gains/losses included in realized and unrealized gain/loss are
included in or are a reduction of ordinary income for federal income tax
purposes. The Fund does not isolate that portion of the results of operations
arising as a result of changes in the foreign exchange rates from the changes
18
<Page>
in the market prices of the securities. Forward contracts are valued daily at
the appropriate exchange rates. The resultant unrealized exchange gains and
losses are recorded as unrealized foreign currency gain or loss. The Fund
records realized gains or losses on delivery of the currency or at the time the
forward contract is extinguished (compensated) by entering into a closing
transaction prior to delivery.
F. FUTURES CONTRACTS -- A futures contract is an agreement between two parties
to buy and sell financial instruments or contracts based on financial indices at
a set price on a future date. Upon entering into such a contract, the Fund is
required to pledge to the broker cash, U.S. Government securities or other
liquid portfolio securities equal to the minimum initial margin requirements of
the applicable futures exchange. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in the value of the contract. Such receipts or payments known as
variation margin are recorded by the Fund as unrealized gains and losses. Upon
closing of the contract, the Fund realizes a gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed.
G. FEDERAL INCOME TAX POLICY -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Accordingly, no federal income tax provision is required.
H. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.
I. USE OF ESTIMATES -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
2. INVESTMENT ADVISORY/ADMINISTRATION AGREEMENTS
Pursuant to an Investment Advisory Agreement, the Fund pays the Investment
Adviser an advisory fee, accrued daily and payable monthly, by applying the
annual rate to the net assets of the Fund determined as of the close of each
business day: 0.67% to the portion of the daily net assets not exceeding $500
million; 0.645% to the portion of the daily net assets exceeding $500 million
but not exceeding $2 billion; 0.62% to the portion of the daily net assets
exceeding $2 billion but not exceeding $3 billion; and 0.595% to the portion of
the daily net assets in excess of $3 billion.
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.
19
<Page>
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the
"Distributor"), an affiliate of the Investment Adviser and Administrator. The
Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1
under the Act. The Plan provides that the Fund will pay the Distributor a fee
which is accrued daily and paid monthly at the following annual rates: (i) Class
A -- up to 0.25% of the average daily net assets of Class A; (ii) Class B -- up
to 1.0% of the average daily net assets of Class B; and (iii) Class C -- up to
1.0% of the average daily net assets of Class C.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts totaled
$19,777,754 at July 31, 2006.
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 and other authorized
financial representatives at the time of sale may be reimbursed in the
subsequent calendar year. For the year ended July 31, 2006, the distribution fee
was accrued for Class A shares and Class C shares at the annual rate of 0.24%
and 1.0%, respectively.
The Distributor has informed the Fund that for the year ended July 31, 2006, it
received contingent deferred sales charges from certain redemptions of the
Fund's Class B shares and Class C shares of $290,826 and $1,985, respectively
and received $79,981 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 July 31, 2006, aggregated
$188,365,285 and $267,896,322, respectively. Included in the aforementioned are
purchases and sales with other Morgan Stanley funds of $89,080 and $4,891,047,
respectively including net realized gains of $1,312,539.
20
<Page>
For the year ended July 31, 2006, the Fund incurred brokerage commissions of
$7,500 with Morgan Stanley & Co., Inc., an affiliate of the Investment Adviser,
Administrator and Distributor, for portfolio transactions executed on behalf of
the Fund.
At July 31, 2006, Morgan Stanley Multi-Asset Class Fund, an affiliate of the
Investment Adviser, Administrator and Distributor held 61,837 Class D shares of
beneficial interest of the Fund.
Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and
Distributor, is the Fund's transfer agent.
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 they receive for serving on the Board of Trustees. Each eligible
Trustee generally may elect to have their deferred amounts credited with a
return equal to the total return on one or more of the Morgan Stanley funds that
are offered as investment options under the Compensation Plan.
Appreciation/depreciation and distributions received from these investments are
recorded with an offsetting increase/decrease in the deferred compensation
obligation and do not affect the net asset value of the Fund.
5. EXPENSE OFFSET
The expense offset represents a reduction of the transfer agent fees and
expenses for earnings on cash balances maintained by the Fund.
6. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Fund may enter into forward contracts for many purposes, including to
facilitate settlement of foreign currency denominated portfolio transactions or
to manage foreign currency exposure associated with foreign currency denominated
securities.
To hedge against adverse interest rate, foreign currency and market risks, the
Fund may purchase and sell interest rate, currency and index futures ("futures
contracts").
Forward contracts and futures contracts involve elements of market risk in
excess of the amount reflected in the Statement of Assets and Liabilities. The
Fund bears the risk of an unfavorable change in the foreign exchange rates
underlying the forward contracts. Risks may also rise upon entering into these
contracts from the potential inability of the counterparties to meet the terms
of their contracts.
21
<Page>
7. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JULY 31, 2006 JULY 31, 2005
------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ----------- -------------
CLASS A SHARES
Sold 635,469 $ 7,608,650 231,806 $ 2,009,382
Conversion from Class B 807,001 9,635,074 2,971,793 26,716,883
Redeemed (1,412,184) (16,519,048) (1,195,775) (11,026,653)
---------- ------------ ----------- -------------
Net increase -- Class A 30,286 724,676 2,007,824 17,699,612
---------- ------------ ----------- -------------
CLASS B SHARES
Sold 1,037,027 11,737,056 607,812 5,372,272
Conversion to Class A (853,018) (9,635,074) (3,122,042) (26,716,883)
Redeemed (6,786,976) (74,729,213) (12,433,367) (108,895,987)
---------- ------------ ----------- -------------
Net decrease -- Class B (6,602,967) (72,627,231) (14,947,597) (130,240,598)
---------- ------------ ----------- -------------
CLASS C SHARES
Sold 226,777 2,578,801 113,688 1,001,636
Redeemed (770,606) (8,468,608) (1,304,111) (11,509,513)
---------- ------------ ----------- -------------
Net decrease -- Class C (543,829) (5,889,807) (1,190,423) (10,507,877)
---------- ------------ ----------- -------------
CLASS D SHARES
Sold 379,947 4,765,324 9,562 90,754
Redeemed (169,091) (2,032,963) (94,938) (888,915)
---------- ------------ ----------- -------------
Net increase (decrease) -- Class D 210,856 2,732,361 (85,376) (798,161)
---------- ------------ ----------- -------------
Net decrease in Fund (6,905,654) $(75,060,001) (14,215,572) $(123,847,024)
========== ============ =========== =============
</Table>
8. FEDERAL INCOME TAX STATUS
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for tax purposes are reported as distributions of paid-in-capital.
22
<Page>
As of July 31, 2006, the tax-basis components of accumulated losses were as
follows:
Net accumulated earnings --
Capital loss carryforward* $(354,722,453)
Temporary differences (622)
Net unrealized appreciation 39,166,623
-------------
Total accumulated losses $(315,556,452)
=============
* During the year ended July 31, 2006, the Fund utilized $40,941,372 of its
net capital loss carryforward. As of July 31, 2006, the Fund had a net
capital loss carryforward of $354,722,453 of which $233,665,730 will expire
on July 31, 2010 and $121,056,723 will expire on July 31, 2011 to offset
future capital gains to the extent provided by regulations.
As of July 31, 2006, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on wash sales and permanent book/tax
differences primarily attributable to a net operating loss. To reflect
reclassifications arising from the permanent differences, paid-in-capital was
charged $4,302,526, accumulated net realized loss was charged $1,874 and
accumulated net investment loss was credited $4,304,400.
9. LEGAL MATTERS
The Investment Adviser, certain affiliates of the Investment Adviser, certain
officers of such affiliates and certain investment companies advised by the
Investment Adviser or its affiliates, including the Fund, are named as
defendants in a consolidated class action. This consolidated action also names
as defendants certain individual Trustees and Directors of the Morgan Stanley
funds. The consolidated amended complaint, filed in the United States District
Court Southern District of New York on April 16, 2004, generally alleges that
defendants, including the Fund, violated their statutory disclosure obligations
and fiduciary duties by failing properly to disclose (i) that the Investment
Adviser and certain affiliates of the Investment Adviser allegedly offered
economic incentives to brokers and others to recommend the funds advised by the
Investment Adviser or its affiliates to investors rather than funds managed by
other companies, and (ii) that the funds advised by the Investment Adviser or
its affiliates, including the Fund, allegedly paid excessive commissions to
brokers in return for their efforts to recommend these funds to investors. The
complaint seeks, among other things, unspecified compensatory damages,
rescissionary damages, fees and costs. The defendants have moved to dismiss the
action. On March 9, 2005, Plaintiffs sought leave to supplement their complaint
to assert claims on behalf of other investors, which motion defendants opposed.
On April 14, 2006, the Court granted defendants' motion to dismiss in its
entirety. Additionally, the Court denied Plaintiff's motion to supplement their
complaint. This matter is now concluded.
23
<Page>
10. NEW ACCOUNTING PRONOUNCEMENT
In July 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation 48, Accounting for Uncertainty in Income Taxes -- an
interpretation of FASB Statement 109 (FIN 48). FIN 48 clarifies the accounting
for income taxes by prescribing the minimum recognition threshold a tax position
must meet before being recognized in the financial statements. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The Fund will
adopt FIN 48 during 2007 and the impact to the Fund's financial statements, if
any, is currently being assessed.
11. FUND MERGER
On April 25, 2006, the Board of Trustees of the Fund approved a plan of
reorganization whereby the Fund would be merged into Morgan Stanley Capital
Opportunities Trust ("Capital Opportunities"). The plan of reorganization is
subject to the consent of the Fund's shareholders. On August 1, 2006, a special
meeting of shareholders of the Fund was scheduled in order to vote on the
proposed merger. The proposal failed to obtain the necessary quorum in order to
hold the meeting and, therefore, the meeting was adjourned until August 23, 2006
and later adjourned again until September 27, 2006, to permit further
solicitation of proxies. If approved, the assets of the Fund would be combined
with the assets of Capital Opportunities and shareholders of the Fund will
become shareholders of Capital Opportunities, receiving shares of the
corresponding class of Capital Opportunities equal to the value of their
holdings in the Fund.
24
<Page>
MORGAN STANLEY AGGRESSIVE EQUITY FUND
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<Table>
<Caption>
FOR THE YEAR ENDED JULY 31,
-----------------------------------------------
2006 2005 2004 2003 2002
------- ------- ------- ------- -------
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 10.55 $ 8.34 $ 7.71 $ 7.51 $ 9.62
------- ------- ------- ------- -------
Income (loss) from investment operations:
Net investment loss++ (0.09) (0.08) (0.07) (0.02) (0.03)
Net realized and unrealized gain (loss) 1.08 2.29 0.70 0.22 (2.05)
------- ------- ------- ------- -------
Total income (loss) from investment operations 0.99 2.21 0.63 0.20 (2.08)
------- ------- ------- ------- -------
Less distributions from net realized gains -- -- -- -- (0.03)
------- ------- ------- ------- -------
Net asset value, end of period $ 11.54 $ 10.55 $8.34 $ 7.71 $ 7.51
======= ======= ======= ======= =======
TOTAL RETURN+ 9.38% 26.50% 8.17% (2.66)% (21.56)%
RATIOS TO AVERAGE NET ASSETS(1):
Total expenses (before expense offset) 1.37% 1.42% 1.37% 1.40% 1.29%
Net investment loss (0.75)% (0.75)% (0.77)% (0.32)% (0.39)%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $46,458 $42,146 $16,564 $18,340 $21,888
Portfolio turnover rate 61% 123% 219% 263% 325%
</Table>
- ----------
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
25
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED JULY 31,
----------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 10.03 $ 7.98 $ 7.44 $ 7.31 $ 9.42
-------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment loss++ (0.17) (0.13) (0.12) (0.08) (0.10)
Net realized and unrealized gain (loss) 1.03 2.18 0.66 0.21 (1.98)
-------- -------- -------- -------- --------
Total income (loss) from investment operations 0.86 2.05 0.54 0.13 (2.08)
-------- -------- -------- -------- --------
Less distributions from net realized gains -- -- -- -- (0.03)
-------- -------- -------- -------- --------
Net asset value, end of period $ 10.89 $ 10.03 $ 7.98 $ 7.44 $ 7.31
======== ======== ======== ======== ========
TOTAL RETURN+ 8.57% 25.69% 7.26% 1.78% (22.11)%
RATIOS TO AVERAGE NET ASSETS(1):
Total expenses (before expense offset) 2.13% 2.17% 2.13% 2.15% 2.05%
Net investment loss (1.51)% (1.50)% (1.53)% (1.07)% (1.15)%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $193,811 $244,708 $314,195 $387,751 $492,959
Portfolio turnover rate 61% 123% 219% 263% 325%
</Table>
- ----------
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
26
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED JULY 31,
-----------------------------------------------
2006 2005 2004 2003 2002
------- ------- ------- ------- -------
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 10.04 $ 7.99 $ 7.45 $ 7.32 $ 9.42
------- ------- ------- ------- -------
Income (loss) from investment operations:
Net investment loss++ (0.17) (0.13) (0.12) (0.08) (0.09)
Net realized and unrealized gain (loss) 1.03 2.18 0.66 0.21 (1.98)
------- ------- ------- ------- -------
Total income (loss) from investment operations 0.86 2.05 0.54 0.13 (2.07)
------- ------- ------- ------- -------
Less distributions from net realized gains -- -- -- -- (0.03)
------- ------- ------- ------- -------
Net asset value, end of period $ 10.90 $ 10.04 $ 7.99 $ 7.45 $ 7.32
======= ======= ======= ======= =======
TOTAL RETURN+ 8.57% 25.66% 7.25% 1.78% (22.00)%
RATIOS TO AVERAGE NET ASSETS(1):
Total expenses (before expense offset) 2.13% 2.16% 2.12% 2.15% 1.93%
Net investment loss (1.51)% (1.49)% (1.52)% (1.07)% (1.03)%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $27,064 $30,386 $33,710 $40,555 $49,639
Portfolio turnover rate 61% 123% 219% 263% 325%
</Table>
- ----------
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
27
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED JULY 31,
-----------------------------------------------
2006 2005 2004 2003 2002
------- ------- ------- ------- -------
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 10.72 $ 8.45 $ 7.80 $ 7.58 $ 9.68
------- ------- ------- ------- -------
Income (loss) from investment operations:
Net investment loss++ (0.06) (0.05) (0.04) (0.01) (0.01)
Net realized and unrealized gain (loss) 1.09 2.32 0.69 0.23 (2.06)
------- ------- ------- ------- -------
Total income (loss) from investment operations 1.03 2.27 0.65 0.22 (2.07)
------- ------- ------- ------- -------
Less distributions from net realized gains -- -- -- -- (0.03)
------- ------- ------- ------- -------
Net asset value, end of period $ 11.75 $10.72 $ 8.45 $ 7.80 $ 7.58
======= ======= ======= ======= =======
TOTAL RETURN+ 9.61% 26.86% 8.33% 2.90% (21.33)%
RATIOS TO AVERAGE NET ASSETS(1):
Total expenses (before expense offset) 1.13% 1.17% 1.13% 1.15% 1.05%
Net investment loss (0.51)% (0.50)% (0.53)% (0.07)% (0.15)%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 4,383 $1,737 $2,091 $2,468 $2,622
Portfolio turnover rate 61% 123% 219% 263% 325%
</Table>
- ----------
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE
PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
28
<Page>
MORGAN STANLEY AGGRESSIVE EQUITY FUND
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
MORGAN STANLEY AGGRESSIVE EQUITY FUND:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Aggressive Equity Fund (the "Fund"), including the portfolio of
investments, as of July 31, 2006, and the related statements of operations for
the year then ended and changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of July 31, 2006, by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed other
auditing procedures. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Morgan
Stanley Aggressive Equity Fund as of July 31, 2006, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America.
Deloitte & Touche LLP
NEW YORK, NEW YORK
SEPTEMBER 25, 2006
29
<Page>
MORGAN STANLEY AGGRESSIVE EQUITY FUND
TRUSTEE AND OFFICER INFORMATION
INDEPENDENT TRUSTEES:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- ----------------------------------- ----------- ------------ -------------------------- ------------- ------------------------
Michael Bozic (65) Trustee Since Private Investor; Chairman 197 Director of various
c/o Kramer Levin Naftalis & April 1994 of the Insurance Committee business organizations.
Frankel LLP (since July 2006) and
Counsel to the Independent Trustees Director or Trustee of the
1177 Avenue of the Americas Retail Funds (since April
New York, NY 10036 1994) and the
Institutional Funds (since
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 Covey (time management
Salt Lake City, UT 84103 Funds (since January 1993) systems), BMW Bank of
and the Institutional North America, Inc.
Funds (since July 2003); (industrial loan
member of the Utah corporation), Escrow
Regional Advisory Board of Bank USA (industrial
Pacific Corp. (utility loan corporation),
company); formerly United Space Alliance
Managing Director of (joint venture between
Summit Ventures LLC Lockheed Martin and the
(2000-2004) (lobbying and Boeing Company) and
consulting firm); United Nuskin Asia Pacific
States Senator (R-Utah) (multilevel marketing);
(1974-1992) and Chairman, member of the board of
Senate Banking Committee various civic and
(1980-1986), Mayor of Salt charitable
Lake City, Utah organizations.
(1971-1974), Astronaut,
Space Shuttle Discovery
(April 12-19, 1985), and
Vice Chairman, Huntsman
Corporation (chemical
company).
Wayne E. Hedien (72) Trustee Since Retired; Director or 197 Director of The PMI
c/o Kramer Levin Naftalis & September Trustee of the Retail Group Inc. (private
Frankel LLP 1997 Funds (since September mortgage insurance);
Counsel to the Independent Trustees 1997) and the Trustee and Vice
1177 Avenue of the Americas Institutional Funds (since Chairman of The Field
New York, NY 10036 July 2003); formerly Museum of Natural
associated with the History; director of
Allstate Companies various other business
(1966-1994), most recently and charitable
as Chairman of The organizations.
Allstate Corporation
(March 1993-December 1994)
and Chairman and Chief
Executive Officer of its
wholly-owned subsidiary,
Allstate Insurance Company
(July 1989-December 1994).
</Table>
30
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- ----------------------------------- ----------- ------------ -------------------------- ------------- ------------------------
Dr. Manuel H. Johnson (57) Trustee Since Senior Partner, Johnson 197 Director of NVR, Inc.
c/o Johnson Smick Group, Inc. July 1991 Smick International, Inc., (home construction);
888 16th Street, a consulting firm; Director of KFX Energy;
NW Suite 740 Chairman of the Audit Director of RBS
Washington, D.C. 20006 Committee and Director or Greenwich Capital
Trustee of the Retail Holdings (financial
Funds (since July 1991) holding company).
and the Institutional
Funds (since July 2003);
Co-Chairman and a founder
of the Group of Seven
Council (G7C), an
international economic
commission; formerly Vice
Chairman of the Board of
Governors of the Federal
Reserve System and
Assistant Secretary of the
U.S. Treasury.
Joseph J. Kearns (63) Trustee Since President, Kearns & 198 Director of Electro Rent
c/o Kearns & Associates LLC July 2003 Associates LLC (investment Corporation (equipment
PMB754 consulting); Deputy leasing), The Ford
23852 Pacific Coast Highway Chairman of the Audit Family Foundation, and
Malibu, CA 90265 Committee and Director or the UCLA Foundation.
Trustee of the Retail
Funds (since July 2003)
and the Institutional
Funds (since August 1994);
previously Chairman of the
Audit Committee of the
Institutional Funds
(October 2001-July 2003);
formerly CFO of the J.
Paul Getty Trust.
Michael E. Nugent (70) Chairman of Chairman General Partner of Triumph 197 None.
c/o Triumph Capital, L.P. the Board of the Capital, L.P., a private
445 Park Avenue and Board (since investment partnership;
New York, NY 10022 Trustee July 2006) Chairman of the Board of
and Trustee the Retail Funds and
(since Institutional Funds (since
July 1991) July 2006) and Director or
Trustee of the Retail
Funds (since July 1991)
and the Institutional
Funds (since July 2001);
formerly Chairman of the
Insurance Committee (July
1991-July 2006) and Vice
President, Bankers Trust
Company and BT Capital
Corporation (1984-1988).
Fergus Reid (73) Trustee Since Chairman of Lumelite 198 Trustee and Director of
c/o Lumelite Plastics Corporation July 2003 Plastics Corporation; certain investment
85 Charles Colman Blvd. Chairman of the Governance companies in the
Pawling, NY 12564 Committee and Director or JPMorgan Funds complex
Trustee of the Retail managed by J.P. Morgan
Funds (since July 2003) Investment Management
and the Institutional Inc.
Funds (since June 1992).
</Table>
31
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- ----------------------------------- ----------- ------------ -------------------------- ------------- ------------------------
Charles A. Fiumefreddo (73) Trustee Since Director or Trustee of the 197 None.
c/o Morgan Stanley Trust July 1991 Retail Funds (since July
Harborside Financial Center 1991) and the
Plaza Two Institutional Funds (since
Jersey City, NJ 07311 July 2003); formerly
Chairman of the Retail
Funds (July 1991-July
2006) and the
Institutional Funds (July
2003-July 2006) and Chief
Executive Officer of the
Retail Funds (until
September 2002).
James F. Higgins (58) Trustee Since Director or Trustee of the 197 Director of AXA
c/o Morgan Stanley Trust June 2000 Retail Funds (since June Financial, Inc. and The
Harborside Financial Center 2000) and the Equitable Life Assurance
Plaza Two Jersey City, NJ 07311 Institutional Funds (since Society of the United
July 2003); Senior Advisor States (financial
of Morgan Stanley (since services).
August 2000).
</Table>
- ----------------
* THIS IS THE EARLIEST DATE THE TRUSTEE BEGAN SERVING THE FUNDS ADVISED BY
MORGAN STANLEY INVESTMENT ADVISORS INC. (THE "INVESTMENT ADVISER ") (THE
"RETAIL FUNDS ").
** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICES AS
DIRECTOR/TRUSTEE FOR THE RETAIL FUNDS AND THE FUNDS ADVISED BY MORGAN
STANLEY INVESTMENT MANAGEMENT INC. AND MORGAN STANLEY AIP GP LP (THE
"INSTITUTIONAL FUNDS") REFLECT THE EARLIEST DATE THE DIRECTOR/TRUSTEE BEGAN
SERVING THE RETAIL OR INSTITUTIONAL FUNDS, AS APPLICABLE.
*** THE FUND COMPLEX INCLUDES ALL OPEN-END AND CLOSED-END FUNDS (INCLUDING ALL
OF THEIR PORTFOLIOS) ADVISED BY THE INVESTMENT ADVISER AND ANY FUNDS THAT
HAVE AN INVESTMENT ADVISER THAT IS AN AFFILIATED PERSON OF THE INVESTMENT
ADVISER (INCLUDING, BUT NOT LIMITED TO, MORGAN STANLEY INVESTMENT
MANAGEMENT INC.).
32
<Page>
OFFICERS:
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- --------------------------- -------------- ---------------- -----------------------------------------------------------------
Ronald E. Robison (67) President and President (since President (since September 2005) and Principal Executive Officer
1221 Avenue of the Americas Principal September 2005) (since May 2003) of funds in the Fund Complex; President (since
New York, NY 10020 Executive and Principal September 2005) and Principal Executive Officer (since May 2003)
Officer Executive of the Van Kampen Funds; Managing Director, Director and/or
Officer Officer of the Investment Adviser and various entities affiliated
(since May 2003) with the Investment Adviser; Director of Morgan Stanley SICAV
(since May 2004). Formerly, Executive Vice President (July 2003
to September 2005) of funds in the Fund Complex and the Van
Kampen Funds; President and Director of the Institutional Funds
(March 2001 to July 2003); Chief Global Operating Officer of
Morgan Stanley Investment Management Inc.; Chief Administrative
Officer of Morgan Stanley Investment Advisors Inc.; Chief
Administrative Officer of Morgan Stanley Services Company Inc.
J. David Germany (51) Vice President Since Managing Director and (since December 2005) Chief Investment
Morgan Stanley February 2006 Officer - Global Fixed Income of Morgan Stanley Investment
Investment Management Ltd. Management; Managing Director and Director of Morgan Stanley
25 Cabot Square Investment Management Ltd.; Vice President (since February 2006)
Canary Wharf, London of the Retail and Institutional Funds.
United Kingdom E144QA
Dennis F. Shea (53) Vice President Since Managing Director and (since February 2006) Chief Investment
1221 Avenue of the Americas February 2006 Officer - Global Equity of Morgan Stanley Investment Management;
New York, NY 10020 Vice President (since February 2006) of the Retail and
Institutional Funds. Formerly, Managing Director and Director of
Global Equity Research at Morgan Stanley.
Barry Fink (51) Vice President Since Managing Director and General Counsel of Morgan Stanley
1221 Avenue of the Americas February 1997 Investment Management; Managing Director of the Investment
New York, NY 10020 Adviser and various entities affiliated with the Investment
Adviser; Vice President of the Retail Funds and (since July 2003)
the Institutional Funds. Formerly, Secretary, General Counsel
and/or Director of the Investment Adviser and various entities
affiliated with the Investment Adviser; Secretary and General
Counsel of the Retail Funds.
Amy R. Doberman (44) Vice President Since July 2004 Managing Director and General Counsel, U.S. Investment Management
1221 Avenue of the Americas of Morgan Stanley Investment Management (since July 2004); Vice
New York, NY 10020 President of the Retail Funds and the Institutional Funds (since
July 2004); Vice President of the Van Kampen Funds (since August
2004); Secretary (since February 2006) and Managing Director
(since July 2004) of the Investment Adviser and various entities
affiliated with the Investment Adviser. Formerly, Managing
Director and General Counsel - Americas, UBS Global Asset
Management (July 2000 to July 2004).
Carsten Otto (42) Chief Since October Managing Director and U.S. Director of Compliance for Morgan
1221 Avenue of the Americas Compliance 2004 Stanley Investment Management (since October 2004); Managing
New York, NY 10020 Officer Director and Chief Compliance Officer of Morgan Stanley
Investment Management. Formerly, Assistant Secretary and
Assistant General Counsel of the Retail Funds.
</Table>
33
<Page>
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- --------------------------- --------------- ---------------- -----------------------------------------------------------------
Stefanie V. Chang Yu (39) Vice President Since July 2003 Executive Director of the Investment Adviser and various entities
1221 Avenue of the Americas affiliated with the Investment Adviser; Vice President of the
New York, NY 10020 Retail Funds (since July 2002) and the Institutional Funds (since
December 1997). Formerly, Secretary of various entities
affiliated with the Investment Adviser.
Francis J. Smith (40) Treasurer and Treasurer (since Executive Director of the Investment Adviser and various entities
c/o Morgan Stanley Trust Chief Financial July 2003) and affiliated with the Investment Adviser; Treasurer and Chief
Harborside Financial Center Officer Chief Financial Financial Officer of the Retail Funds (since July 2003).
Plaza Two Officer (since Formerly, Vice President of the Retail Funds (September 2002 to
Jersey City, NJ 07311 September 2002) July 2003).
Mary E. Mullin (39) Secretary Since July 2003 Executive Director of the Investment Adviser and various entities
1221 Avenue of the Americas affiliated with the Investment Adviser; Secretary of the Retail
New York, NY 10020 Funds (since July 2003) and the Institutional Funds (since June
1999).
</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.
34
<Page>
(This page has been left blank intentionally.)
<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
Michael E. Nugent
CHAIRMAN OF THE BOARD
Ronald E. Robison
PRESIDENT AND PRINCIPAL EXECUTIVE OFFICER
J. David Germany
VICE PRESIDENT
Dennis F. Shea
VICE PRESIDENT
Barry Fink
VICE PRESIDENT
Amy R. Doberman
VICE PRESIDENT
Carsten Otto
CHIEF COMPLIANCE OFFICER
Stefanie V. Chang Yu
VICE PRESIDENT
Francis J. Smith
TREASURER AND CHIEF FINANCIAL OFFICER
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) 2006 Morgan Stanley
[Morgan Stanley LOGO]
MORGAN STANLEY FUNDS
MORGAN STANLEY
AGGRESSIVE EQUITY FUND
ANNUAL REPORT
JULY 31, 2006
[Morgan Stanley LOGO]
AEQSAR-36052RPT-RA06-00823P-Y07/06
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Item 2. Code of Ethics.
(a) The Fund has adopted a code of ethics (the "Code of Ethics") that applies to
its principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the Fund or a third
party.
(b) No information need be disclosed pursuant to this paragraph.
(c) Not applicable.
(d) Not applicable.
(e) Not applicable.
(f)
(1) The Fund's Code of Ethics is attached hereto as Exhibit 12 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.
Item 4. Principal Accountant Fees and Services.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
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2006
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $32,720 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 531 (2) $5,190,300 (2)
TAX FEES $ 5,400 (3) $2,044,491 (4)
ALL OTHER FEES $ -- $ --
TOTAL NON-AUDIT FEES $ 5,931 $7,234,791
TOTAL $38,651 $7,234,791
2005
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $32,666 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 540 (2) $3,215,745 (2)
TAX FEES $ 5,502 (3) $ 24,000 (4)
ALL OTHER FEES $ -- $ --
TOTAL NON-AUDIT FEES $ 6,042 $3,239,745
TOTAL $38,708 $3,239,745
N/A- Not applicable, as not required by Item 4.
(1) Covered Entities include the Adviser (excluding sub-advisors) and any
entity controlling, controlled by or under common control with the Adviser
that provides ongoing services to the Registrant.
(2) Audit-Related Fees represent assurance and related services provided that
are reasonably related to the performance of the audit of the financial
statements of the Covered Entities' and funds advised by the Adviser or its
affiliates, specifically data verification and agreed-upon procedures
related to asset securitizations and agreed-upon procedures engagements.
(3) Tax Fees represent tax compliance, tax planning and tax advice services
provided in connection with the preparation and review of the Registrant's
tax returns.
(4) Tax Fees represent tax compliance, tax planning and tax advice services
provided in connection with the review of Covered Entities' tax returns.
(5) All other fees represent project management for future business
applications and improving business and operational processes.
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(e)(1) The audit committee's pre-approval policies and procedures are as
follows:
APPENDIX A
AUDIT COMMITTEE
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS
AS ADOPTED AND AMENDED JULY 23, 2004,(1)
1. STATEMENT OF PRINCIPLES
The Audit Committee of the Board is required to review and, in its sole
discretion, pre-approve all Covered Services to be provided by the Independent
Auditors to the Fund and Covered Entities in order to assure that services
performed by the Independent Auditors do not impair the auditor's independence
from the Fund.
The SEC has issued rules specifying the types of services that an independent
auditor may not provide to its audit client, as well as the audit committee's
administration of the engagement of the independent auditor. The SEC's rules
establish two different approaches to pre-approving services, which the SEC
considers to be equally valid. Proposed services either: may be pre-approved
without consideration of specific case-by-case services by the Audit Committee
("GENERAL PRE-APPROVAL"); or require the specific pre-approval of the Audit
Committee or its delegate ("SPECIFIC PRE-APPROVAL"). The Audit Committee
believes that the combination of these two approaches in this Policy will result
in an effective and efficient procedure to pre-approve services performed by the
Independent Auditors. As set forth in this Policy, unless a type of service has
received general pre-approval, it will require specific pre-approval by the
Audit Committee (or by any member of the Audit Committee to which pre-approval
authority has been delegated) if it is to be provided by the Independent
Auditors. Any proposed services exceeding pre-approved cost levels or budgeted
amounts will also require specific pre-approval by the Audit Committee.
The appendices to this Policy describe the Audit, Audit-related, Tax and All
Other services that have the general pre-approval of the Audit Committee. The
term of any general pre-approval is 12 months from the date of pre-approval,
unless the Audit Committee considers and provides a different period and states
otherwise. The Audit Committee will annually review and pre-approve the services
that may be provided by the Independent Auditors without obtaining specific
pre-approval from the Audit Committee. The Audit Committee will add to or
subtract from the list of general pre-approved services from time to time, based
on subsequent determinations.
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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 second fiscal quarter of the period covered
by this 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 Aggressive Equity Fund
/s/ Ronald E. Robison
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Ronald E. Robison
Principal Executive Officer
September 21, 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
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Ronald E. Robison
Principal Executive Officer
September 21, 2006
/s/ Francis Smith
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Francis Smith
Principal Financial Officer
September 21, 2006