<Page>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-10359
Morgan Stanley Mid-Cap Value Fund
(Exact name of registrant as specified in charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip code)
Ronald E. Robison
1221 Avenue of the Americas, New York, New York 10020
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-762-4000
Date of fiscal year end: August 31, 2006
Date of reporting period: August 31, 2006
Item 1 - Report to Shareholders
<Page>
Welcome, Shareholder:
In this report, you'll learn about how your investment in Morgan Stanley Mid-Cap
Value Fund performed during the annual period. We will provide an overview of
the market conditions, and discuss some of the factors that affected performance
during the reporting period. In addition, this report includes the Fund's
financial statements and a list of Fund investments.
THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS FOR THE FUND BEING
OFFERED.
MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE
IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. THE FUND IS
SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT MARKET VALUES OF
SECURITIES OWNED BY THE FUND WILL DECLINE AND, THEREFORE, THE VALUE OF THE
FUND'S SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE
MONEY INVESTING IN THIS FUND. PLEASE SEE THE PROSPECTUS FOR MORE COMPLETE
INFORMATION ON INVESTMENT RISKS.
<Page>
FUND REPORT
FOR THE YEAR ENDED AUGUST 31, 2006
TOTAL RETURN FOR THE 12 MONTHS ENDED AUGUST 31, 2006
RUSSELL LIPPER
MIDCAP(R) MID-CAP
VALUE VALUE FUNDS
CLASS A CLASS B CLASS C CLASS D INDEX(1) INDEX(2)
11.30% 10.48% 10.56% 11.54% 12.36% 7.76%
THE PERFORMANCE OF THE FUND'S FOUR SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE FUND'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL
DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY APPLICABLE SALES CHARGES.
SUCH COSTS WOULD LOWER PERFORMANCE. SEE PERFORMANCE SUMMARY FOR STANDARDIZED
PERFORMANCE AND BENCHMARK INFORMATION.
MARKET CONDITIONS
During the 12-month period, fears intensified about a slowdown in the U.S.
economy. In the first half of the period, a favorable backdrop of moderately
strong economic growth (despite the devastation caused by the 2005 Gulf Coast
hurricanes) and generally healthy corporate profits helped to support stock
prices. With the economy still seeming to be on solid ground, the Federal Open
Market Committee (the "Fed") continued to raise the federal funds target rate in
effort to keep inflation tame.
However, a less rosy view began to emerge among investors in early 2006.
Consumer spending and housing trends showed signs of weakness, and commodity
prices remained elevated. Investors became more apprehensive about the Fed's
ongoing monetary tightening and whether it could adequately contain inflation
without dragging the economy into recession. In May, comments from the Fed that
additional rate increases could be forthcoming sent the market reeling, with
stock prices reaching a level of volatility not seen in several years. Although
the Fed increased the target funds rate in its June 29th meeting, it did leave
the rate unchanged in its August meeting. The pause was well received, and the
markets turned modestly positive in August.
In this environment, mid-capitalization value stocks (as measured by the Russell
Midcap(R) Value Index) posted a double-digit gain for the 12-month period
overall. All sectors in the index had positive returns, led by telecommunication
services, consumer staples and materials. In contrast, the consumer
discretionary, technology and health care sectors posted the smallest advances.
PERFORMANCE ANALYSIS
Morgan Stanley Mid-Cap Value Fund underperformed the Russell Midcap(R) Value
Index and outperformed the Lipper Mid-Cap Value Funds Index for the 12 months
ended August 31, 2006, assuming no deduction of applicable sales charges.
Relative to the Russell Midcap Value Index during the period, the Fund lost the
most ground in the technology sector. A relative underweight in the sector and
our stock selection in the software and services industry hampered returns. In
the consumer staples sector, our selections were outpaced by two strong
performing industries in which the Fund had minimal exposure, which were the
food and staples retailing group and the food, beverage and tobacco group.
However, the Fund's consumer staples positions did provide a positive return on
an absolute basis. Similarly, stock selection in the telecommunication services
sector contributed positively
2
<Page>
on an absolute basis, but turned out to be a relative detractor from
performance. The Fund did not own some of the Russell Midcap Value Index's
better performing telecom stocks.
Nonetheless, the Fund benefited from positive performance in other areas during
the period. Our stock selection and overweight allocation to the industrials
sector overall, and particularly in the transportation and commercial services
industries, turned out to be advantageous. Another source of relative gains was
in our selection of financial services stocks. The Fund's diversified financial
holdings were boosted by strong results within the companies' capital markets
and investment banking operations. However, performance in the financial sector
was somewhat tempered by the Fund's underweight in real estate securities. The
basic materials sector, namely select chemical companies, also contributed
positively to relative returns.
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
International Flavors & Fragrances, Inc. 4.4%
Cognos, Inc. (Canada) 3.0
ConAgra Foods Inc. 2.9
Diebold, Inc. 2.8
Applera Corp. - Applied Biosystems Group 2.8
ACE Ltd. (Cayman Islands) 2.7
KKR Financial Corp. 2.6
Hudson City Bancorp, Inc. 2.6
Sealed Air Corp. 2.5
Southwest Airlines Co. 2.4
TOP FIVE INDUSTRIES
Investment Banks/Brokers 5.9%
Household/Personal Care 5.6
Medical Specialties 5.0
Property - Casualty Insurers 5.0
Electric Utilities 4.2
DATA AS OF AUGUST 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
<Page>
INVESTMENT STRATEGY
THE FUND WILL NORMALLY INVEST AT LEAST 80 PERCENT OF ITS ASSETS IN COMMON STOCK
AND OTHER EQUITY SECURITIES, INCLUDING DEPOSITARY RECEIPTS AND SECURITIES
CONVERTIBLE INTO COMMON STOCK, OF COMPANIES TRADED ON A U.S. SECURITIES EXCHANGE
WITH MARKET CAPITALIZATIONS THAT FALL WITHIN THE RANGE OF COMPANIES INCLUDED IN
THE RUSSELL MIDCAP(R) VALUE INDEX. AS OF SEPTEMBER 30, 2005, THESE MARKET
CAPITALIZATIONS RANGE BETWEEN $809 MILLION AND $17.33 BILLION. IN PURSUING ITS
INVESTMENT OBJECTIVE, THE FUND'S "INVESTMENT ADVISER," MORGAN STANLEY INVESTMENT
ADVISORS INC., SEEKS ATTRACTIVELY VALUED COMPANIES EXPERIENCING A CHANGE THAT
THE INVESTMENT ADVISER BELIEVES COULD HAVE A POSITIVE IMPACT ON A COMPANY'S
OUTLOOK, SUCH AS A CHANGE IN MANAGEMENT, INDUSTRY DYNAMICS OR OPERATIONAL
EFFICIENCY. IN DETERMINING WHETHER SECURITIES SHOULD BE SOLD, THE INVESTMENT
ADVISER CONSIDERS A NUMBER OF FACTORS, INCLUDING APPRECIATION TO FAIR VALUE,
FUNDAMENTAL CHANGE IN THE COMPANY OR CHANGES IN ECONOMIC OR MARKET TRENDS. THE
INVESTMENT ADVISER MAY PURCHASE STOCKS THAT TYPICALLY DO NOT PAY DIVIDENDS.
FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS
EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN
ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND
AND FOURTH FISCAL QUARTERS. 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.
4
<Page>
(This page has been left blank intentionally.)
5
<Page>
PERFORMANCE SUMMARY
PERFORMANCE OF $10,000 INVESTMENT
[CHART]
<Table>
<Caption>
Russell Midcap(R) Lipper Mid-Cap Value
Class A~ Class B~ Class C~ Class D~ Value Index(1) Funds Index(2)
29-Oct-01 $ 9,475 $10,000 $10,000 $10,000 $10,000 $10,000
30-Nov-01 $10,006 $10,560 $10,560 $10,570 $10,568 $10,614
28-Feb-02 $ 9,829 $10,343 $10,343 $10,378 $11,298 $11,095
31-May-02 $ 9,592 $10,073 $10,072 $10,137 $11,850 $11,588
31-Aug-02 $ 7,770 $ 8,153 $ 8,152 $ 8,224 $10,331 $ 9,740
30-Nov-02 $ 8,017 $ 8,393 $ 8,392 $ 8,485 $10,187 $ 9,930
28-Feb-03 $ 7,125 $ 7,442 $ 7,442 $ 7,543 $ 9,509 $ 9,037
31-May-03 $ 8,577 $ 8,943 $ 8,942 $ 9,086 $11,171 $10,648
31-Aug-03 $ 9,592 $ 9,983 $ 9,982 $10,167 $12,010 $11,653
30-Nov-03 $10,038 $10,423 $10,423 $10,638 $13,162 $12,660
29-Feb-04 $10,987 $11,394 $11,393 $11,660 $14,441 $13,935
31-May-04 $10,607 $10,983 $10,983 $11,259 $14,208 $13,722
31-Aug-04 $10,503 $10,853 $10,863 $11,159 $14,547 $13,628
30-Nov-04 $11,651 $12,014 $12,023 $12,391 $16,351 $15,220
28-Feb-05 $12,237 $12,589 $12,598 $13,021 $17,169 $15,849
31-May-05 $12,039 $12,358 $12,378 $12,812 $17,354 $15,729
31-Aug-05 $12,976 $13,304 $13,325 $13,823 $18,629 $16,742
30-Nov-05 $13,361 $13,668 $13,699 $14,240 $18,949 $16,953
28-Feb-06 $14,096 $14,397 $14,430 $15,028 $20,152 $17,858
31-May-06 $14,368 $14,647 $14,666 $15,327 $20,354 $17,958
31-Aug-06 $14,442 $14,499 $14,732 $15,418 $20,931 $18,041
</Table>
6
<Page>
AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED AUGUST 31, 2006
<Table>
<Caption>
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS D SHARES++
(SINCE 10/29/01) (SINCE 10/29/01) (SINCE 10/29/01) (SINCE 10/29/01)
---------------- ---------------- ---------------- ----------------
SYMBOL MDFAX MDFBX MDFCX MDFDX
- --------------- ---------------- ---------------- ---------------- ----------------
1 YEAR 11.30%(3) 10.48%(3) 10.56%(3) 11.54%(3)
5.46 (4) 5.86 (4) 9.64 (4) --
SINCE INCEPTION 9.10 (3) 8.29 (3) 8.34 (3) 9.36 (3)
7.89 (4) 7.98 (4) 8.34 (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 MIDCAP(R) VALUE INDEX MEASURES THE PERFORMANCE OF THOSE RUSSELL
MIDCAP(R) INDEX COMPANIES WITH LOWER PRICE-TO-BOOK RATIOS AND LOWER
FORECASTED GROWTH VALUES. THE STOCKS ARE ALSO MEMBERS OF THE RUSSELL
1000(R) VALUE INDEX. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE
ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT
POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
(2) THE LIPPER MID-CAP VALUE FUNDS INDEX IS AN EQUALLY WEIGHTED PERFORMANCE
INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN THE LIPPER
MID-CAP VALUE FUNDS CLASSIFICATION. THE INDEX, WHICH IS ADJUSTED FOR
CAPITAL GAINS DISTRIBUTIONS AND INCOME DIVIDENDS, IS UNMANAGED AND SHOULD
NOT BE CONSIDERED AN INVESTMENT. THERE ARE CURRENTLY 30 FUNDS REPRESENTED
IN THIS INDEX.
(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 AUGUST 31, 2006.
7
<Page>
EXPENSE EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments and redemption fees;
and (2) ongoing costs, including advisory fees; distribution and service (12b-1)
fees; and other Fund expenses. This example is intended to help you understand
your ongoing costs (in dollars) of investing in the Fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period 03/01/06 - 08/31/06.
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.
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
03/01/06 -
03/01/06 08/31/06 08/31/06
------------- ------------- ---------------
CLASS A
Actual (2.46% return) $1,000.00 $1,024.60 $ 7.14
Hypothetical (5% annual
return before expenses) $1,000.00 $1,018.15 $ 7.12
CLASS B
Actual (2.10% return) $1,000.00 $1,021.00 $10.95
Hypothetical (5% annual
return before expenses) $1,000.00 $1,014.37 $10.92
CLASS C
Actual (2.09% return) $1,000.00 $1,020.90 $10.95
Hypothetical (5% annual
return before expenses) $1,000.00 $1,014.37 $10.92
CLASS D
Actual (2.60% return) $1,000.00 $1,026.00 $ 5.87
Hypothetical (5% annual
return before expenses) $1,000.00 $1,019.41 $ 5.85
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIOS OF 1.40%, 2.15%,
2.15% AND 1.15% FOR CLASS A, CLASS B, CLASS C AND CLASS D SHARES,
RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD,
MULTIPLIED BY 184/365 (TO REFLECT THE ONE-HALF YEAR PERIOD).
8
<Page>
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- and three-year periods
ended November 30, 2005 and for the period October 31, 2001 to 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 taking into account the
scope of the services provided.
9
<Page>
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 a breakpoint. The Board also
reviewed the level of the Fund's management fee and noted that the fee, as a
percentage of the Fund's net assets, would decrease as net assets increase
because the management fee includes a breakpoint. The Board concluded that the
Fund's management fee would reflect economies of scale as assets increase.
PROFITABILITY OF 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
10
<Page>
affiliate disgorged revenues in connection with the ECN-related revenue and the
potential fall-out benefit from increased order flow was relatively small.
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 MID-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS - AUGUST 31, 2006
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS (90.1%)
AEROSPACE & DEFENSE (1.9%)
141,656 Goodrich Corp. $ 5,517,501
-----------
AIRLINES (2.4%)
390,610 Southwest Airlines Co. 6,765,365
-----------
CHEMICALS: SPECIALTY (2.3%)
120,070 Albemarle Corp. 6,591,843
-----------
CONTAINERS/PACKAGING (2.5%)
139,030 Sealed Air Corp. 7,211,486
-----------
ELECTRIC UTILITIES (4.2%)
96,076 Constellation Energy Group, Inc. 5,773,207
141,320 Wisconsin Energy Corp. 6,076,760
-----------
11,849,967
-----------
ELECTRONIC EQUIPMENT/INSTRUMENTS (2.8%)
187,980 Diebold, Inc. 7,878,242
-----------
ENGINEERING & CONSTRUCTION (0.9%)
54,900 McDermott International, Inc. (Panama)* 2,646,180
-----------
FINANCIAL CONGLOMERATES (1.3%)
172,960 Conseco Inc.* 3,580,272
-----------
FOOD RETAIL (1.1%)
100,400 Safeway Inc. 3,105,372
-----------
FOOD: MAJOR DIVERSIFIED (2.9%)
347,370 ConAgra Foods Inc. 8,267,406
-----------
FOOD: MEAT/FISH/DAIRY (1.8%)
351,330 Tyson Foods, Inc. (Class A) 5,175,091
-----------
HOME FURNISHINGS (2.3%)
239,640 Newell Rubbermaid, Inc. 6,467,884
-----------
HOSPITAL/NURSING MANAGEMENT (1.3%)
474,920 Tenet Healthcare Corp.* 3,742,370
-----------
HOUSEHOLD/PERSONAL CARE (5.6%)
123,150 Avon Products, Inc. 3,535,636
313,570 International Flavors & Fragrances, Inc.++ $12,470,679
-----------
16,006,315
-----------
INSURANCE BROKERS/SERVICES (2.3%)
249,070 Marsh & McLennan Companies, Inc. 6,515,671
-----------
INTEGRATED OIL (2.0%)
125,500 Hess Corp. 5,745,390
-----------
INVESTMENT BANKS/BROKERS (5.9%)
106,170 Edwards (A.G.), Inc. 5,607,899
141,240 Lazard Ltd. (Class A) (Bermuda) 5,317,686
350,930 Schwab (Charles) Corp. (The) 5,723,668
-----------
16,649,253
-----------
INVESTMENT MANAGERS (2.9%)
273,720 Amvescap PLC (ADR) (United Kingdom) 5,715,274
55,490 Investors Financial Services Corp. 2,572,516
-----------
8,287,790
-----------
MEDICAL SPECIALTIES (5.0%)
255,270 Applera Corp. - Applied Biosystems Group 7,824,026
117,700 Beckman Coulter, Inc. 6,446,429
-----------
14,270,455
-----------
OILFIELD SERVICES/EQUIPMENT (1.1%)
62,680 Cameron International Corp.* 3,002,999
-----------
PACKAGED SOFTWARE (3.0%)
261,990 Cognos, Inc. (Canada)* 8,519,915
-----------
PERSONNEL SERVICES (1.8%)
87,009 Manpower, Inc. 5,143,102
-----------
SEE NOTES TO FINANCIAL STATEMENTS
12
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
PHARMACEUTICALS: GENERIC DRUGS (2.1%)
236,460 Watson Pharmaceuticals, Inc.* $ 6,062,834
------------
PHARMACEUTICALS: OTHER (1.1%)
62,200 Kos Pharmaceuticals, Inc.* 3,041,580
------------
PROPERTY - CASUALTY INSURERS (5.0%)
142,140 ACE Ltd. (Cayman Islands) 7,655,660
166,200 Allied World Assurance Holdings, Ltd. (Bermuda)* 6,407,010
------------
14,062,670
------------
REAL ESTATE INVESTMENT TRUSTS (2.6%)
308,900 KKR Financial Corp. 7,385,799
------------
REGIONAL BANKS (2.0%)
100,470 Northern Trust Corp. 5,625,315
------------
RESTAURANTS (1.0%)
92,940 OSI Restaurant Partners, Inc. 2,878,352
------------
SAVINGS BANKS (2.6%)
560,580 Hudson City Bancorp, Inc. 7,321,175
------------
SEMICONDUCTORS (2.2%)
181,410 Linear Technology Corp. 6,169,754
------------
SERVICES TO THE HEALTH INDUSTRY (1.4%)
835,300 Healthsouth Corp.* 4,059,558
------------
SPECIALTY INSURANCE (2.6%)
130,550 PMI Group, Inc. (The) 5,644,982
82,900 Security Capital Assurance (Bermuda)* 1,811,365
------------
7,456,347
------------
SPECIALTY STORES (2.0%)
154,900 Office Depot, Inc.* 5,706,516
------------
SPECIALTY TELECOMMUNICATIONS (2.4%)
168,670 CenturyTel, Inc. 6,716,439
------------
TOBACCO (2.0%)
108,420 UST, Inc. 5,731,081
------------
TOOLS/HARDWARE (2.0%)
130,670 Snap-On, Inc. $ 5,710,279
------------
WATER UTILITIES (1.8%)
282,070 Nalco Holding Co.* 5,249,323
------------
TOTAL COMMON STOCKS (COST $217,588,970) 256,116,891
------------
INVESTMENT TRUSTS/MUTUAL FUNDS (0.9%)
41,460 streetTRACKS Gold Trust* (COST $1,770,073) 2,581,300
------------
TOTAL LONG-TERM INVESTMENTS (COST 219,359,043) 258,698,191
------------
PRINCIPAL
AMOUNT IN
THOUSANDS
- ---------
SHORT-TERM INVESTMENT (7.3%)
REPURCHASE AGREEMENT
$20,719 Joint repurchase agreement account 5.27% due
09/01/06 (dated 08/31/06; proceeds
$20,722,033) (a) (COST $20,719,000) 20,719,000
------------
TOTAL INVESTMENTS
(COST $240,078,043) (b)(c) 98.3% 279,417,191
OTHER ASSETS IN EXCESS OF LIABILITIES 1.7 4,770,839
----- ------------
NET ASSETS 100.0% $284,188,030
===== ============
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
- ----------
ADR AMERICAN DEPOSITARY RECEIPT.
* NON-INCOME PRODUCING SECURITY.
++ A PORTION OF THIS SECURITY HAS BEEN PHYSICALLY SEGREGATED IN
CONNECTION WITH OPEN FUTURE CONTRACTS IN THE AMOUNT OF $108,000.
(a) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(b) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN AN AMOUNT EQUAL TO
$2,800,000 IN CONNECTION WITH OPEN FUTURES CONTRACTS.
(c) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $240,515,276.
THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $44,941,677 AND THE
AGGREGATE GROSS UNREALIZED DEPRECIATION IS $6,039,762, RESULTING IN
NET UNREALIZED APPRECIATION OF $38,901,915.
FUTURES CONTRACTS OPEN AT AUGUST 31, 2006:
DESCRIPTION, UNDERLYING
NUMBER DELIVERY FACE
OF LONG/ MONTH AMOUNT UNREALIZED
CONTRACTS SHORT AND YEAR AT VALUE APPRECIATION
- ------------------------------------------------------------
8 Long S&P Midcap
400 Index
September
2006 $3,004,000 $95,960
=======
SEE NOTES TO FINANCIAL STATEMENTS
14
<Page>
MORGAN STANLEY MID-CAP VALUE FUND
SUMMARY OF INVESTMENTS - AUGUST 31, 2006
PERCENT OF
INDUSTRY VALUE NET ASSETS
- --------------------------------------------------------------------------------
Repurchase Agreement $ 20,719,000 7.3%
Investment Banks/Brokers 16,649,253 5.9
Household/Personal Care 16,006,315 5.6
Medical Specialties 14,270,455 5.0
Property - Casualty Insurers 14,062,670 5.0
Electric Utilities 11,849,967 4.2
Packaged Software 8,519,915 3.0
Investment Managers 8,287,790 2.9
Food: Major Diversified 8,267,406 2.9
Electronic Equipment/Instruments 7,878,242 2.8
Specialty Insurance 7,456,347 2.6
Real Estate Investment Trusts 7,385,799 2.6
Savings Banks 7,321,175 2.6
Containers/Packaging 7,211,486 2.5
Airlines 6,765,365 2.4
Specialty Telecommunications 6,716,439 2.4
Chemicals: Specialty 6,591,843 2.3
Insurance Brokers/Services 6,515,671 2.3
Home Furnishings 6,467,884 2.3
Semiconductors 6,169,754 2.2
Pharmaceuticals: Generic Drugs 6,062,834 2.1
Integrated Oil 5,745,390 2.0
Tobacco 5,731,081 2.0
Tools/Hardware $ 5,710,279 2.0%
Specialty Stores 5,706,516 2.0
Regional Banks 5,625,315 2.0
Aerospace & Defense 5,517,501 1.9
Water Utilities 5,249,323 1.8
Food: Meat/Fish/Dairy 5,175,091 1.8
Personnel Services 5,143,102 1.8
Services to the Health Industry 4,059,558 1.4
Hospital/Nursing Management 3,742,370 1.3
Financial Conglomerates 3,580,272 1.3
Food Retail 3,105,372 1.1
Pharmaceuticals: Other 3,041,580 1.1
Oilfield Services/Equipment 3,002,999 1.1
Restaurants 2,878,352 1.0
Engineering & Construction 2,646,180 0.9
Investment Trusts/Mutual Funds 2,581,300 0.9
------------ ----
$279,417,191* 98.3%
============ ====
- ----------
* DOES NOT INCLUDE OPEN LONG FUTURES CONTRACTS WITH AN UNDERLYING FACE AMOUNT
OF $3,004,000 WITH UNREALIZED APPRECIATION OF $95,960.
SEE NOTES TO FINANCIAL STATEMENTS
15
<Page>
MORGAN STANLEY MID-CAP VALUE FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 2006
ASSETS:
Investments in securities, at value (cost $240,078,043) $279,417,191
Cash 690
Receivable for:
Investments sold 4,741,505
Dividends 404,294
Shares of beneficial interest sold 347,960
Variation margin 12,800
Interest 3,033
Prepaid expenses and other assets 30,969
------------
TOTAL ASSETS 284,958,442
------------
LIABILITIES:
Payable for:
Shares of beneficial interest redeemed 233,254
Investments purchased 190,146
Investment advisory fee 171,210
Distribution fee 49,516
Administration fee 19,023
Transfer agent fee 11,001
Accrued expenses and other payables 96,262
------------
TOTAL LIABILITIES 770,412
------------
NET ASSETS $284,188,030
============
COMPOSITION OF NET ASSETS:
Paid-in-capital $218,638,364
Net unrealized appreciation 39,435,108
Accumulated undistributed net investment income 864,751
Accumulated undistributed net realized gain 25,249,807
------------
NET ASSETS $284,188,030
============
CLASS A SHARES:
Net Assets $ 14,634,002
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 1,252,510
NET ASSET VALUE PER SHARE $ 11.68
============
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE) $ 12.33
============
CLASS B SHARES:
Net Assets $ 46,861,549
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 4,192,083
NET ASSET VALUE PER SHARE $ 11.18
============
CLASS C SHARES:
Net Assets $ 8,061,101
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 719,340
NET ASSET VALUE PER SHARE $ 11.21
============
CLASS D SHARES:
Net Assets $214,631,378
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 18,123,680
NET ASSET VALUE PER SHARE $ 11.84
============
SEE NOTES TO FINANCIAL STATEMENTS
16
<Page>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 2006
NET INVESTMENT INCOME:
INCOME
Dividends $ 4,504,126
Interest 655,801
-----------
TOTAL INCOME 5,159,927
-----------
EXPENSES
Investment advisory fee 2,294,164
Transfer agent fees and expenses 804,514
Distribution fee (Class A shares) 32,594
Distribution fee (Class B shares) 524,961
Distribution fee (Class C shares) 81,855
Administration fee 254,907
Shareholder reports and notices 112,918
Professional fees 67,423
Registration fees 56,641
Custodian fees 26,789
Trustees' fees and expenses 4,099
Other 33,056
-----------
TOTAL EXPENSES 4,293,921
Less: expense offset (1,814)
-----------
NET EXPENSES 4,292,107
-----------
NET INVESTMENT INCOME 867,820
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
NET REALIZED GAIN (LOSS) ON:
Investments 31,018,722
Futures contracts (494,592)
-----------
NET REALIZED GAIN 30,524,130
-----------
NET CHANGE IN UNREALIZED APPRECIATION ON:
Investments 1,498,754
Futures contracts 95,960
-----------
NET APPRECIATION 1,594,714
-----------
NET GAIN 32,118,844
-----------
NET INCREASE $32,986,664
===========
SEE NOTES TO FINANCIAL STATEMENTS
17
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
AUGUST 31, 2006 AUGUST 31, 2005
--------------- ---------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) $ 867,820 $ (162,715)
Net realized gain 30,524,130 47,534,536
Net change in unrealized appreciation 1,594,714 21,939,073
------------ ------------
NET INCREASE 32,986,664 69,310,894
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET REALIZED GAIN:
Class A shares (2,049,097) (390,465)
Class B shares (8,985,414) (6,115,073)
Class C shares (1,375,828) (801,579)
Class D shares (39,580,076) (23,336,428)
------------ ------------
TOTAL DISTRIBUTIONS (51,990,415) (30,643,545)
------------ ------------
Net decrease from transactions in shares of beneficial interest (32,382,074) (12,116,105)
------------ ------------
NET INCREASE (DECREASE) (51,385,825) 26,551,244
NET ASSETS:
Beginning of period 335,573,855 309,022,611
------------ ------------
END OF PERIOD
(INCLUDING ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME OF
$864,751 AND ACCUMULATED NET INVESTMENT LOSS OF $2,754, RESPECTIVELY) $284,188,030 $335,573,855
============ ============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
18
<Page>
MORGAN STANLEY MID-CAP VALUE FUND
NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2006
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Mid-Cap Value Fund (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Fund's investment objective is
above-average total return. The Fund was organized as a Massachusetts business
trust on April 12, 2001 and commenced operations on October 29, 2001.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within eighteen
months, six years and one year, respectively. Class D shares are not subject to
a sales charge. Additionally, Class A shares, Class B shares and Class C shares
incur distribution expenses.
The Fund will assess 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) 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 the
foreign market on which the securities trade) and the close of business on the
NYSE. If developments occur
19
<Page>
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; (6) certain portfolio
securities may be valued by an outside pricing service approved by the Fund's
Trustees; and (7) short-term debt securities having a maturity date of more than
sixty days at time of purchase are valued on a mark-to-market basis until sixty
days prior to maturity and thereafter at amortized cost based on their value on
the 61st day. Short-term debt securities having a maturity date of sixty days or
less at the time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date.
Discounts are accreted and premiums are amortized over the life of the
respective securities. Interest income is accrued daily.
C. REPURCHASE AGREEMENTS -- Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other affiliated
entities managed by the Investment Adviser, may transfer uninvested cash
balances into one or more joint repurchase agreement accounts. These balances
are invested in one or more repurchase agreements and are collateralized by
cash, U.S. Treasury or federal agency obligations. The Fund may also invest
directly with institutions in repurchase agreements. The Fund's custodian
receives the collateral, which is marked-to-market daily to determine that the
value of the collateral does not decrease below the repurchase price plus
accrued interest.
D. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
E. 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.
20
<Page>
F. FEDERAL INCOME TAX POLICY -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Accordingly, no federal income tax provision is required.
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.
H. USE OF ESTIMATES -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
2. INVESTMENT ADVISORY/ADMINISTRATION AGREEMENTS
Pursuant to an Investment Advisory Agreement with the Investment Adviser, the
Fund pays an advisory fee, accrued daily and payable monthly, by applying the
following annual rates to the net assets of the Fund determined at the close of
each business day: 0.72% to the portion of the daily net assets not exceeding $1
billion; and 0.65% to the portion of the daily net assets exceeding $1 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.
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 $845,587
at August 31, 2006.
21
<Page>
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Financial Advisors and other authorized
financial representatives at the time of sale may be reimbursed in the
subsequent calendar year. For the year ended August 31, 2006, the distribution
fee was accrued for Class A shares and Class C shares at the annual rate of
0.24% and 0.98%, respectively.
The Distributor has informed the Fund that for the year ended August 31, 2006,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class B shares and Class C shares of $138,144 and $732, respectively and
received $62,093 in front-end sales charges from sales of the Fund's Class A
shares. The respective shareholders pay such charges which are not an expense of
the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended August 31, 2006 aggregated
$158,532,971 and $250,596,109, respectively. Included in the aforementioned
transactions are sales of $487,118 with other Morgan Stanley funds, including
realized gains of $164,454.
For the year ended August 31, 2006, the Fund incurred brokerage commissions of
$32,497 with Morgan Stanley & Co., an affiliate of the Investment Adviser,
Administrator and Distributor, for portfolio transactions executed on behalf of
the Fund.
Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and
Distributor, is the Fund's transfer agent.
The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan")
which allows each independent Trustee to defer payment of all, or a portion, of
the fees 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.
22
<Page>
6. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
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").
Futures contracts involve elements of market risk in excess of the amount
reflected in the Statement of Assets and Liabilities. The Fund bears the risk of
an unfavorable change in the value of the underlying securities. Risks may also
arise upon entering into these contracts from the potential inability of the
counterparties to meet the terms of their contracts.
7. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
AUGUST 31, 2006 AUGUST 31, 2005
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
CLASS A SHARES
Sold 373,783 $ 4,415,939 136,417 $ 1,614,623
Conversion from Class B 187,930 2,175,060 634,473 7,169,678
Reinvestment of distributions 167,733 1,846,739 32,132 369,835
Redeemed (420,276) (4,876,465) (209,788) (2,468,177)
---------- ------------ ---------- ------------
Net increase -- Class A 309,170 3,561,273 593,234 6,685,959
---------- ------------ ---------- ------------
CLASS B SHARES
Sold 397,562 4,554,510 828,198 9,500,223
Conversion to Class A (195,778) (2,175,060) (652,534) (7,169,678)
Reinvestment of distributions 760,394 8,052,576 490,316 5,506,245
Redeemed (1,434,255) (16,238,696) (1,622,191) (18,509,069)
---------- ------------ ---------- ------------
Net decrease -- Class B (472,077) (5,806,670) (956,211) (10,672,279)
---------- ------------ ---------- ------------
CLASS C SHARES
Sold 93,622 1,053,107 84,157 964,800
Reinvestment of distributions 123,179 1,306,931 67,479 758,458
Redeemed (179,932) (2,016,462) (216,798) (2,481,142)
---------- ------------ ---------- ------------
Net increase (decrease) -- Class C 36,869 343,576 (65,162) (757,884)
---------- ------------ ---------- ------------
CLASS D SHARES
Sold 2,634,989 31,192,643 3,454,456 40,597,791
Reinvestment of distributions 2,982,017 33,219,666 1,660,516 19,261,986
Redeemed (8,096,001) (94,892,562) (5,690,429) (67,231,678)
---------- ------------ ---------- ------------
Net decrease -- Class D (2,478,995) (30,480,253) (575,457) (7,371,901)
---------- ------------ ---------- ------------
Net decrease in Fund (2,605,033) $(32,382,074) (1,003,596) $(12,116,105)
========== ============ ========== ============
</Table>
23
<Page>
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.
The tax character of distributions paid was as follows:
FOR THE YEAR FOR THE YEAR
ENDED ENDED
AUGUST 31, 2006 AUGUST 31, 2005
--------------- ---------------
Ordinary income $14,741,784 $23,339,357
Long-term capital gains 37,248,631 7,304,188
----------- -----------
Total distributions $51,990,415 $30,643,545
=========== ===========
As of August 31, 2006, the tax-basis components of accumulated earnings were as
follows:
Undistributed ordinary income $ 8,718,151
Undistributed long-term gains 17,930,220
-----------
Net accumulated earnings 26,648,371
Temporary differences (620)
Net unrealized appreciation 38,901,915
-----------
Total accumulated earnings $65,549,666
===========
As of August 31, 2006, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on wash sales and mark-to-market of open
futures contracts and permanent book/tax differences attributable to tax
adjustments on an investment trust sold by the Fund. To reflect
reclassifications arising from permanent differences, accumulated undistributed
net investment income was charged and accumulated undistributed net realized
gain was credited $315.
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, were named as
defendants in a consolidated class action. This consolidated action also named
as defendants certain individual Trustees and Directors of the Morgan Stanley
funds. The consolidated amended complaint, filed in the United States District
Court for the Southern District of New York on April 16, 2004, generally alleged
that defendants, including the Fund, violated their statutory disclosure
obligations and fiduciary
24
<Page>
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 alleged efforts to recommend these funds to
investors. The complaint sought, among other things, unspecified compensatory
damages, rescissionary damages, fees and costs. On July 2, 2004, defendants
moved to dismiss the action. On March 9, 2005, plaintiffs filed a Motion for
Leave to File a Supplemental Pleading that would, among other things, expand the
allegations and alleged class. On April 14, 2006, the Court granted defendants'
motion to dismiss in its entirety, with prejudice. Additionally, plaintiffs'
Motion for Leave to File a Supplemental Pleading was denied. The time for
plaintiffs to appeal the orders granting defendants' motion to dismiss and
denying plaintiffs' motion for supplemental pleading has expired. This case is
now concluded.
10. NEW ACCOUNTING PRONOUNCEMENTS
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.
In addition, in September 2006, Statement of Financial Accounting Standards No.
157, Fair Value Measurements (SFAS 157), was issued and is effective for fiscal
years beginning after November 15, 2007. SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. Management is currently evaluating the impact the
adoption of SFAS 157 will have on the Fund's financial statement disclosures.
25
<Page>
MORGAN STANLEY MID-CAP VALUE FUND
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR ENDED AUGUST 31, OCTOBER 29, 2001*
------------------------------------- THROUGH
2006 2005 2004 2003 AUGUST 31, 2002
------- ------- ------ ------ -----------------
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 12.46 $ 11.08 $10.11 $ 8.19 $ 10.00
------- ------- ------ ------ -------
Income (loss) from investment operations:
Net investment income (loss)~ 0.03 (0.02) (0.02) (0.03) (0.04)
Net realized and unrealized gain (loss) 1.25 2.52 0.99 1.95 (1.76)
------- ------- ------ ------ -------
Total income (loss) from investment operations 1.28 2.50 0.97 1.92 (1.80)
------- ------- ------ ------ -------
Less dividends and distributions from:
Net investment income -- -- -- -- (0.01)
Net realized gain (2.06) (1.12) -- -- --
------- ------- ------ ------ -------
Total dividends and distributions (2.06) (1.12) -- -- (0.01)
------- ------- ------ ------ -------
Net asset value, end of period $ 11.68 $ 12.46 $11.08 $10.11 $ 8.19
======= ======= ====== ====== =======
TOTAL RETURN+ 11.30% 23.55% 9.50% 23.44% (17.99)%(1)
RATIOS TO AVERAGE NET ASSETS(3):
Total expenses (before expense offset) 1.39% 1.40% 1.40% 1.47% 1.45%(2)(4)
Net investment income (loss) 0.23% (0.08)% (0.14)% (0.39)% (0.58)%(2)(4)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $14,634 $11,757 $3,878 $3,173 $ 3,053
Portfolio turnover rate 52% 72% 151% 165% 121%(1)
</Table>
- ----------
* COMMENCEMENT OF OPERATIONS.
~ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(4) IF THE FUND HAD BORNE ALL ITS EXPENSES THAT WERE REIMBURSED OR WAIVED BY
THE INVESTMENT ADVISER, THE ANNUALIZED EXPENSE AND NET INVESTMENT LOSS
RATIOS WOULD HAVE BEEN 1.66% AND (0.79)%, RESPECTIVELY.
SEE NOTES TO FINANCIAL STATEMENTS
26
<Page>
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR ENDED AUGUST 31, OCTOBER 29, 2001*
-------------------------------------- THROUGH
2006 2005 2004 2003 AUGUST 31, 2002
------- ------- ------- ------- -----------------
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 12.09 $ 10.85 $ 9.98 $ 8.15 $ 10.00
------- ------- ------- ------- -------
Income (loss) from investment operations:
Net investment loss~ (0.06) (0.09) (0.10) (0.09) (0.10)
Net realized and unrealized gain (loss) 1.21 2.45 0.97 1.92 (1.75)
------- ------- ------- ------- -------
Total income (loss) from investment operations 1.15 2.36 0.87 1.83 (1.85)
------- ------- ------- ------- -------
Less dividends and distributions from:
Net investment income -- -- -- -- 0.00++
Net realized gain (2.06) (1.12) -- -- --
------- ------- ------- ------- -------
Total dividends and distributions (2.06) (1.12) -- -- 0.00
------- ------- ------- ------- -------
Net asset value, end of period $ 11.18 $ 12.09 $ 10.85 $ 9.98 $ 8.15
======= ======= ======= ======= =======
TOTAL RETURN+ 10.48% 22.58% 8.72% 22.45% (18.47)%(1)
RATIOS TO AVERAGE NET ASSETS(3):
Total expenses (before expense offset) 2.15% 2.16% 2.16% 2.24% 2.20%(2)(4)
Net investment loss (0.53)% (0.84)% (0.90)% (1.16)% (1.33)%(2)(4)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $46,862 $56,389 $60,987 $56,823 $53,948
Portfolio turnover rate 52% 72% 151% 165% 121%(1)
</Table>
- ----------
* COMMENCEMENT OF OPERATIONS.
~ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
++ LESS THAN $0.005 PER SHARE.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(4) IF THE FUND HAD BORNE ALL ITS EXPENSES THAT WERE REIMBURSED OR WAIVED BY
THE INVESTMENT ADVISER, THE ANNUALIZED EXPENSE AND NET INVESTMENT LOSS
RATIOS WOULD HAVE BEEN 2.41% AND (1.54)%, RESPECTIVELY.
SEE NOTES TO FINANCIAL STATEMENTS
27
<Page>
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR ENDED AUGUST 31, OCTOBER 29, 2001*
--------------------------------- THROUGH
2006 2005 2004 2003 AUGUST 31, 2002
------ ------ ------ ------ -----------------
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $12.11 $10.86 $ 9.98 $ 8.15 $ 10.00
------ ------ ------ ------ -------
Income (loss) from investment operations:
Net investment loss~ (0.06) (0.08) (0.09) (0.09) (0.10)
Net realized and unrealized gain (loss) 1.22 2.45 0.97 1.92 (1.75)
------ ------ ------ ------ -------
Total income (loss) from investment operations 1.16 2.37 0.88 1.83 (1.85)
------ ------ ------ ------ -------
Less dividends and distributions from:
Net investment income -- -- -- -- 0.00++
Net realized gain (2.06) (1.12) -- -- --
------ ------ ------ ------ -------
Total dividends and distributions (2.06) (1.12) -- -- 0.00
------ ------ ------ ------ -------
Net asset value, end of period $11.21 $12.11 $10.86 $ 9.98 $ 8.15
====== ====== ====== ====== =======
TOTAL RETURN+ 10.56% 22.66% 8.82% 22.45% (18.48)%(1)
RATIOS TO AVERAGE NET ASSETS(3):
Total expenses (before expense offset) 2.13% 2.04% 2.08 % 2.24% 2.20%(2)(4)
Net investment loss (0.51)% (0.72)% (0.82)% (1.16)% (1.33)%(2)(4)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $8,061 $8,268 $8,119 $7,238 $ 6,354
Portfolio turnover rate 52% 72% 151% 165% 121%(1)
</Table>
- ----------
* COMMENCEMENT OF OPERATIONS.
~ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
++ LESS THAN $0.005 PER SHARE.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(4) IF THE FUND HAD BORNE ALL ITS EXPENSES THAT WERE REIMBURSED OR WAIVED BY
THE INVESTMENT ADVISER, THE ANNUALIZED EXPENSE AND NET INVESTMENT LOSS
RATIOS WOULD HAVE BEEN 2.41% AND (1.54)%, RESPECTIVELY.
SEE NOTES TO FINANCIAL STATEMENTS
28
<Page>
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR ENDED AUGUST 31, OCTOBER 29, 2001*
----------------------------------------- THROUGH
2006 2005 2004 2003 AUGUST 31, 2002
-------- -------- -------- -------- -----------------
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 12.58 $ 11.15 $ 10.15 $ 8.21 $ 10.00
-------- -------- -------- -------- -------
Income (loss) from investment operations:
Net investment income (loss)~ 0.06 0.02 0.01 (0.01) (0.04)
Net realized and unrealized gain (loss) 1.26 2.53 0.99 1.95 (1.73)
-------- -------- -------- -------- -------
Total income (loss) from investment operations 1.32 2.55 1.00 1.94 (1.77)
-------- -------- -------- -------- -------
Less dividends and distributions from:
Net investment income -- -- -- -- (0.02)
Net realized gain (2.06) (1.12) -- -- --
-------- -------- -------- -------- -------
Total dividends and distributions (2.06) (1.12) -- -- (0.02)
-------- -------- -------- -------- -------
Net asset value, end of period $ 11.84 $ 12.58 $ 11.15 $ 10.15 $ 8.21
======== ======== ======== ======== =======
TOTAL RETURN+ 11.54% 23.87% 9.75% 23.63% (17.76)%(1)
RATIOS TO AVERAGE NET ASSETS(3):
Total expenses (before expense offset) 1.15% 1.16% 1.16% 1.24% 1.20%(2)(4)
Net investment income (loss) 0.47% 0.16% 0.10% (0.16)% (0.33)%(2)(4)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $214,631 $259,160 $236,039 $209,035 $95,150
Portfolio turnover rate 52% 72% 151% 165% 121%(1)
</Table>
- ----------
* COMMENCEMENT OF OPERATIONS.
~ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE
MONTH.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(4) IF THE FUND HAD BORNE ALL ITS EXPENSES THAT WERE REIMBURSED OR WAIVED BY
THE INVESTMENT ADVISER, THE ANNUALIZED EXPENSE AND NET INVESTMENT LOSS
RATIOS WOULD HAVE BEEN 1.41% AND (0.54)%, RESPECTIVELY.
SEE NOTES TO FINANCIAL STATEMENTS
29
<Page>
MORGAN STANLEY MID-CAP VALUE FUND
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
MORGAN STANLEY MID-CAP VALUE FUND:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Mid-Cap Value Fund (the "Fund"), including the portfolio of investments,
as of August 31, 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 periods presented.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of August 31, 2006, by correspondence with the custodian
and brokers. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Morgan
Stanley Mid-Cap Value Fund as of August 31, 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 periods
presented, in conformity with accounting principles generally accepted in the
United States of America.
Deloitte & Touche LLP
NEW YORK, NEW YORK
OCTOBER 23, 2006
30
<Page>
MORGAN STANLEY MID-CAP VALUE FUND
RESULTS OF SPECIAL SHAREHOLDER MEETING
On August 1, 2006, a Special Meeting of Shareholders of the Fund was scheduled
in order to vote on the following proposals: (i) to elect Trustees; (ii) to
eliminate certain fundamental investment restrictions; (iii) to modify certain
fundamental investment restrictions; and (iv) to reclassify certain fundamental
policies as non-fundamental policies. The proposals failed to obtain the quorum
necessary in order to hold the meeting, and, therefore, the meeting was
adjourned until August 23, 2006 and later adjourned to September 27, 2006, to
permit further solicitation of proxies.
31
<Page>
MORGAN STANLEY MID-CAP VALUE FUND
TRUSTEE AND OFFICER INFORMATION
INDEPENDENT TRUSTEES:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS HELD
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS BY TRUSTEE** BY TRUSTEE
- ----------------------------------- ----------- ------------ ---------------------------- ------------ ------------------------
Frank L. Bowman (61) Trustee Since President and Chief 161 Director of the National
c/o Kramer Levin Naftalis & Frankel August 2006 Executive Officer of the Energy Foundation, the
LLP Nuclear Energy Institute U.S. Energy Association,
Counsel to the Independent Trustees (policy organization) (since the American Council for
1177 Avenue of the Americas February 2005); Director or Capital Formation and
New York, NY 10036 Trustee of various Retail the Armed Services YMCA
and Institutional Funds of the USA.
(since August 2006) formerly
variously, Admiral in the
U.S. Navy, Director of Naval
Nuclear Propulsion Program
and Deputy Administrator -
Naval Reactors in the
National Nuclear Security
Administration at the U.S.
Department of Energy
(1996-2004), Honorary Knight
Commander of the Most
Excellent Order of the
British Empire.
Michael Bozic (65) Trustee Since Private investor; 175 Director of various
c/o Kramer Levin Naftalis & Frankel April 1994 Chairperson of the business organizations.
LLP Valuation, Insurance and
Counsel to the Independent Trustees Compliance Committee (since
1177 Avenue of the Americas October 2006); Director or
New York, NY 10036 Trustee of the Retail Funds
(since April 1994) and the
Institutional Funds (since
July 2003); formerly
Chairperson of the Insurance
Committee (July
2006-September 2006); 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); variously
Chairman, Chief Executive
Officer, President and Chief
Operating Officer
(1987-1991) of the Sears
Merchandise Group of Sears,
Roebuck & Co.
Kathleen A. Dennis (53) Trustee Since President, Cedarwood 161 None.
c/o Kramer Levin Naftalis & Frankel August 2006 Associates (mutual fund
LLP consulting) (since 2006);
Counsel to the Independent Trustees Chairperson of the
1177 Avenue of the Americas Closed-End, Money Market and
New York, NY 10036 Alternatives Sub-Committee
of the Investment Committee
(since October 2006) and
Director or Trustee of
various Retail and
Institutional Funds (since
August 2006); formerly,
Senior Managing Director of
Victory Capital Management
(1993-2006).
</Table>
32
<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 HELD
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS BY TRUSTEE** BY TRUSTEE
- ----------------------------------- ----------- ------------ ---------------------------- ------------ ------------------------
Edwin J. Garn (73) Trustee Since Consultant; Director or 175 Director of Franklin
1031 N. Chartwell Court January 1993 Trustee of the Retail Funds Covey (time management
Salt Lake City, UT 84103 (since January 1993) and the systems), BMW Bank of
Institutional Funds (since North America, Inc.
July 2003); Member of the (industrial loan
Utah Regional Advisory Board corporation), Escrow
of Pacific Corp. (utility Bank USA (industrial
company); formerly Managing loan corporation);
Director of Summit Ventures United Space Alliance
LLC (2000-2004) (lobbying (joint venture between
and consulting firm); United Lockheed Martin and the
States Senator (R-Utah) Boeing Company) and
(1974-1992) and Chairman, Nuskin Asia Pacific
Senate Banking Committee (multilevel marketing);
(1980-1986), Mayor of Salt member of the board of
Lake City, Utah (1971-1974), various civic and
Astronaut, Space Shuttle charitable
Discovery (April 12-19, organizations.
1985), and Vice Chairman,
Huntsman Corporation
(chemical company).
Wayne E. Hedien (72) Trustee Since Retired; Director or Trustee 175 Director of The PMI
c/o Kramer Levin Naftalis & Frankel September of the Retail Funds; (Since Group Inc. (private
LLP 1997 September 1997) and the mortgage insurance);
Counsel to the Independent Trustees Institutional Funds (since Trustee and Vice
1177 Avenue of the Americas July 2003); formerly Chairman of The Field
New York, NY 10036 associated with the Allstate Museum of Natural
Companies (1966-1994), most History; director of
recently as Chairman of The various other business
Allstate Corporation (March and charitable
1993-December 1994) and organizations.
Chairman and Chief Executive
Officer of its wholly-owned
subsidiary, Allstate
Insurance Company (July
1989-December 1994).
Dr. Manuel H. Johnson (57) Trustee Since Senior Partner, Johnson 175 Director of NVR, Inc.
c/o Johnson Smick Group, Inc. July 1991 Smick International, Inc., a (home construction);
888 16th Street, N.W. consulting firm; Chairperson Director of KFX Energy;
Suite 740 of the Investment Committee Director of RBS
Washington, D.C. 20006 (since October 2006) and Greenwich Capital
Director or Trustee of the Holdings (financial
Retail Funds (since July holding company).
1991) and the Institutional
Funds (since July 2003);
Co-Chairman and a founder of
the Group of Seven Council
(G7C), an international
economic commission;
formerly Chairman of the
Audit Committee (July
1991-September 2006); Vice
Chairman of the Board of
Governors of the Federal
Reserve System and Assistant
Secretary of the U.S.
Treasury.
</Table>
33
<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 HELD
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS BY TRUSTEE** BY TRUSTEE
- ----------------------------------- ----------- ------------ ---------------------------- ------------ ------------------------
Joseph J. Kearns (64) Trustee Since July President, Kearns & 176 Director of Electro Rent
c/o Kearns & Associates LLC 2003 Associates LLC (investment Corporation (equipment
PMB754 consulting); Chairperson of leasing), The Ford
23852 Pacific Coast Highway the Audit Committee (since Family Foundation, and
Malibu, CA 90265 October 2006) and Director the UCLA Foundation.
or Trustee of the Retail
Funds (since July 2003) and
the Institutional Funds
(since August 1994);
previously Deputy
Chairperson of the Audit
Committee (July 2003-
September 2006) and
Chairperson of the Audit
Committee of the
Institutional Funds
(October 2001-July 2003);
formerly CFO of the J. Paul
Getty Trust.
Michael F. Klein (47) Trustee Since Chief Operating Officer and 161 Director of certain
c/o Kramer Levin August 2006 Managing Director, Aetos investment funds managed
Naftalis & Frankel LLP Capital, LLC (since March or sponsored by Aetos
Counsel to the Independent Trustees 2000); Chairman of the Capital LLC.
1177 Avenue of the Americas Fixed-Income Sub-Committee
New York, NY 10036 of the Investment Committee
(since October 2006) and
Director or Trustee (since
August 2006) of various
Retail and Institutional
Funds; formerly Managing
Director, Morgan Stanley &
Co. Inc. and Morgan Stanley
Dean Witter Investment
Management, President,
Morgan Stanley
Institutional Funds (June
1998-March 2000) and
Principal, Morgan Stanley &
Co. Inc. and Morgan Stanley
Dean Witter Investment
Management (August 1997-
December 1999).
Michael E. Nugent (70) Chairman Chairman of General Partner of Triumph 175 None.
c/o Triumph Capital, L.P. of the the Board Capital, L.P., a private
445 Park Avenue Board and since July investment partnership;
New York, NY 10022 Trustee 2006 and Chairman of the Board of
Trustee the Retail Funds and
since July Institutional Funds (since
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 (until July
2006); Vice President,
Bankers Trust Company and
BT Capital Corporation
(1984-1988).
</Table>
34
<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 HELD
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS BY TRUSTEE** BY TRUSTEE
- ----------------------------------- ----------- ------------ ---------------------------- ------------ ------------------------
W. Allen Reed (59) Trustee Since Chairperson of the Equity 161 Director of GMAC
c/o Kramer Levin Naftalis & Frankel August 2006 Sub-Commitee of the (financial services),
LLP Investment Committee (since GMAC Insurance Holdings
Counsel to the Independent Trustees October 2006) and Director and Temple-Inland
1177 Avenue of the Americas or Trustee (since August Industries (Packaging,
New York, NY 10036 2006) of various Retail and Banking and Forrest
Institutional Funds. Products); member of the
President and CEO of Board of Executives of
General Motors Asset the Morgan Stanley
Management; Chairman and Capital International
Chief Executive Officer of Editorial Board;
the GM Trust Bank and Director of Legg Mason
Corporate Vice President of and Director of various
General Motors Corporation investment fund advisory
(August 1994- December boards.
2005).
Fergus Reid (74) Trustee Since July Chairman of Lumelite 176 Trustee and Director of
c/o Lumelite Plastics Corporation 2003 Plastics Corporation; certain investment
85 Charles Colman Blvd. Chairperson of the companies in the
Pawling, NY 12564 Governance Committee and JPMorgan Funds complex
Director or Trustee of the managed by J.P. Morgan
Retail Funds (since July Investment Management
2003) and the Institutional Inc.
Funds (since June 1992).
</Table>
35
<Page>
INTERESTED TRUSTEE:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
IN FUND
TERM OF COMPLEX
POSITION(S) OFFICE AND OVERSEEN BY
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) INTERESTED OTHER DIRECTORSHIPS HELD
INTERESTED TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS TRUSTEE** BY INTERESTED TRUSTEE
- ----------------------------------- ----------- ------------ ---------------------------- ------------ ------------------------
James F. Higgins (58) Trustee Since June Director or Trustee of the 175 Director of AXA
c/o Morgan Stanley Trust 2000 Retail Funds (since June Financial, Inc. and The
Harborside Financial Center 2000) and the Institutional Equitable Life Assurance
Plaza Two Funds (since July 2003); Society of the United
Jersey City, NJ 07311 Senior Advisor of Morgan States (financial
Stanley (since August 2000). services).
</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") OR THE FUNDS ADVISED BY MORGAN STANLEY INVESTMENT
MANAGEMENT INC. AND MORGAN STANLEY AIP GP LP (THE "INSTITUTIONAL FUNDS").
** 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.) AS OF OCTOBER 2, 2006.
36
<Page>
EXECUTIVE 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 September President (since September 2005) and
1221 Avenue of the Americas Principal Executive 2005 and Principal Principal Executive Officer (since May
New York, NY 10020 Officer Executive Officer since 2003) of funds in the Fund Complex;
May 2003 President (since September 2005) and
Principal Executive Officer (since May
2003) of the Van Kampen Funds; Managing
Director, Director and/or Officer of the
Investment Adviser and various entities
affiliated 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 (52) Vice President Since February 2006 Managing Director and (since December
Morgan Stanley Investment 2005) Chief Investment Officer - Global
Management Ltd. Fixed Income of Morgan Stanley Investment
25 Cabot Square Management; Managing Director and Director
Canary Wharf, London of Morgan Stanley Investment Management
United Kingdom E144QA Limited; Vice President of the Retail and
Institutional Funds (since February 2006).
Dennis F. Shea (53) Vice President Since February 2006 Managing Director and (since February
1221 Avenue of the Americas 2006) Chief Investment Officer - Global
New York, NY 10020 Equity of Morgan Stanley Investment
Management; Vice President of the Retail
and Institutional Funds (since February
2006). Formerly, Managing Director and
Director of Global Equity Research at
Morgan Stanley.
Barry Fink (51) Vice President Since February 1997 Managing Director and General Counsel
1221 Avenue of the Americas of Morgan Stanley Investment
New York, NY 10020 Management; Managing Director of the
Investment 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.
1221 Avenue of the Americas Investment Management of Morgan Stanley
New York, NY 10020 Investment Management (since July 2004);
Vice 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 Compliance Since October 2004 Managing Director and U.S. Director of
1221 Avenue of the Americas Officer Compliance for Morgan Stanley Investment
New York, NY 10020 Management (since October 2004); Managing
Director and Chief Compliance Officer of
Morgan Stanley Investment Management.
Formerly, Assistant Secretary and
Assistant General Counsel of the Retail
Funds.
</Table>
37
<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 December1997 Executive Director of the Investment
1221 Avenue of the Americas Adviser and various entities affiliated
New York, NY 10020 with the Investment Adviser; Vice
President of the 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 (41) Treasurer and Chief Treasurer since July 2003 Executive Director of the Investment
c/o Morgan Stanley Trust Financial Officer and Chief Financial Adviser and various entities affiliated
Harborside Financial Center Officer since with the Investment Adviser; Treasurer
Plaza Two September 2002 and Chief Financial Officer of the Retail
Jersey City, NJ 07311 Funds (since July 2003). Formerly, Vice
President of the Retail Funds (September
2002 to July 2003).
Mary E. Mullin (39) Secretary Since July 1999 Executive Director of the Investment
1221 Avenue of the Americas Adviser and various entities affiliated
New York, NY 10020 with the Investment Adviser; Secretary of
the Retail Funds (since July 2003) and
the Institutional Funds (since June 1999).
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE OFFICER BEGAN SERVING THE RETAIL FUNDS OR THE
INSTITUTIONAL FUNDS.
2006 FEDERAL TAX NOTICE (UNAUDITED)
During the fiscal year ended August 31, 2006, the Fund paid to its shareholders
$1.48 per share from long-term capital gains. For such period, 23.92% of the
ordinary dividends paid qualified for the dividends received deduction available
to corporations.
Additionally, please note that 27.55% of the Fund's ordinary dividends paid
during the fiscal year ended August 31, 2006 qualified for the lower income tax
rate available to individuals under the Jobs and Growth Tax Relief
Reconciliation Act of 2003.
38
<Page>
TRUSTEES
Frank L. Bowman
Michael Bozic
Kathleen A. Dennis
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael F. Klein
Michael E. Nugent
W. Allen Reed
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
MORGAN STANLEY FUNDS
Morgan Stanley
Mid-Cap Value Fund
ANNUAL REPORT
AUGUST 31, 2006
Morgan Stanley
MDPRT-39917RPT-RA06-0093P-Y08/06
<Page>
Item 2. Code of Ethics.
(a) The Fund has adopted a code of ethics (the "Code of Ethics") that applies to
its principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the Fund or a third
party.
(b) No information need be disclosed pursuant to this paragraph.
(c) 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.
<Page>
Item 4. Principal Accountant Fees and Services.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
2006
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $35,820 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 531(2) $5,328,768(2)
TAX FEES $ 5,400(3) $1,640,675(4)
ALL OTHER FEES $ -- $ --
TOTAL NON-AUDIT FEES $ 5,931 $6,969,443
TOTAL $41,751 $6,969,443
2005
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $35,590 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 540(2) $3,215,745(2)
TAX FEES $ 5,481(3) $ 24,000(4)
ALL OTHER FEES $ -- $ --
TOTAL NON-AUDIT FEES $ 6,021 $3,239,745
TOTAL $41,611 $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.
<Page>
(e)(1) The audit committee's pre-approval policies and procedures are as
follows:
APPENDIX A
AUDIT COMMITTEE
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS
AS ADOPTED AND AMENDED JULY 23, 2004,(1)
1. STATEMENT OF PRINCIPLES
The Audit Committee of the Board is required to review and, in its sole
discretion, pre-approve all Covered Services to be provided by the Independent
Auditors to the Fund and Covered Entities in order to assure that services
performed by the Independent Auditors do not impair the auditor's independence
from the Fund.
The SEC has issued rules specifying the types of services that an independent
auditor may not provide to its audit client, as well as the audit committee's
administration of the engagement of the independent auditor. The SEC's rules
establish two different approaches to pre-approving services, which the SEC
considers to be equally valid. Proposed services either: may be pre-approved
without consideration of specific case-by-case services by the Audit Committee
("GENERAL PRE-APPROVAL"); or require the specific pre-approval of the Audit
Committee or its delegate ("SPECIFIC PRE-APPROVAL"). The Audit Committee
believes that the combination of these two approaches in this Policy will result
in an effective and efficient procedure to pre-approve services performed by the
Independent Auditors. As set forth in this Policy, unless a type of service has
received general pre-approval, it will require specific pre-approval by the
Audit Committee (or by any member of the Audit Committee to which pre-approval
authority has been delegated) if it is to be provided by the Independent
Auditors. Any proposed services exceeding pre-approved cost levels or budgeted
amounts will also require specific pre-approval by the Audit Committee.
The appendices to this Policy describe the Audit, Audit-related, Tax and All
Other services that have the general pre-approval of the Audit Committee. The
term of any general pre-approval is 12 months from the date of pre-approval,
unless the Audit Committee considers and provides a different period and states
otherwise. The Audit Committee will annually review and pre-approve the services
that may be provided by the Independent Auditors without obtaining specific
pre-approval from the Audit Committee. The Audit Committee will add to or
subtract from the list of general pre-approved services from time to time, based
on subsequent determinations.
- ----------
(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.
<Page>
The purpose of this Policy is to set forth the policy and procedures by which
the Audit Committee intends to fulfill its responsibilities. It does not
delegate the Audit Committee's responsibilities to pre-approve services
performed by the Independent Auditors to management.
The Fund's Independent Auditors have reviewed this Policy and believes that
implementation of the Policy will not adversely affect the Independent Auditors'
independence.
2. DELEGATION
As provided in the Act and the SEC's rules, the Audit Committee may delegate
either type of pre-approval authority to one or more of its members. The member
to whom such authority is delegated must report, for informational purposes
only, any pre-approval decisions to the Audit Committee at its next scheduled
meeting.
3. AUDIT SERVICES
The annual Audit services engagement terms and fees are subject to the specific
pre-approval of the Audit Committee. Audit services include the annual financial
statement audit and other procedures required to be performed by the Independent
Auditors to be able to form an opinion on the Fund's financial statements. These
other procedures include information systems and procedural reviews and testing
performed in order to understand and place reliance on the systems of internal
control, and consultations relating to the audit. The Audit Committee will
approve, if necessary, any changes in terms, conditions and fees resulting from
changes in audit scope, Fund structure or other items.
In addition to the annual Audit services engagement approved by the Audit
Committee, the Audit Committee may grant general pre-approval to other Audit
services, which are those services that only the Independent Auditors reasonably
can provide. Other Audit services may include statutory audits and services
associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4,
etc.), periodic reports and other documents filed with the SEC or other
documents issued in connection with securities offerings.
The Audit Committee has pre-approved the Audit services in Appendix B.1. All
other Audit services not listed in Appendix B.1 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
4. AUDIT-RELATED SERVICES
Audit-related services are assurance and related services that are reasonably
related to the performance of the audit or review of the Fund's financial
statements and, to the extent they are Covered Services, the Covered Entities or
that are traditionally performed by the Independent Auditors. Because the Audit
Committee believes that the provision of Audit-related services does not impair
the independence of the auditor and is consistent with the SEC's rules on
auditor independence, the Audit Committee may grant general pre-approval to
Audit-related services. Audit-related services include, among others, accounting
consultations related to accounting, financial reporting or disclosure matters
<Page>
not classified as "Audit services"; assistance with understanding and
implementing new accounting and financial reporting guidance from rulemaking
authorities; agreed-upon or expanded audit procedures related to accounting
and/or billing records required to respond to or comply with financial,
accounting or regulatory reporting matters; and assistance with internal control
reporting requirements under Forms N-SAR and/or N-CSR.
The Audit Committee has pre-approved the Audit-related services in Appendix B.2.
All other Audit-related services not listed in Appendix B.2 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
5. TAX SERVICES
The Audit Committee believes that the Independent Auditors can provide Tax
services to the Fund and, to the extent they are Covered Services, the Covered
Entities, such as tax compliance, tax planning and tax advice without impairing
the auditor's independence, and the SEC has stated that the Independent Auditors
may provide such services.
Pursuant to the preceding paragraph, the Audit Committee has pre-approved the
Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
6. ALL OTHER SERVICES
The Audit Committee believes, based on the SEC's rules prohibiting the
Independent Auditors from providing specific non-audit services, that other
types of non-audit services are permitted. Accordingly, the Audit Committee
believes it may grant general pre-approval to those permissible non-audit
services classified as All Other services that it believes are routine and
recurring services, would not impair the independence of the auditor and are
consistent with the SEC's rules on auditor independence.
The Audit Committee has pre-approved the All Other services in Appendix B.4.
Permissible All Other services not listed in Appendix B.4 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
7. PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS
Pre-approval fee levels or budgeted amounts for all services to be provided by
the Independent Auditors will be established annually by the Audit Committee.
Any proposed services exceeding these levels or amounts will require specific
pre-approval by the Audit Committee. The Audit Committee is mindful of the
overall relationship of fees for audit and non-audit services in determining
whether to pre-approve any such services.
8. PROCEDURES
All requests or applications for services to be provided by the Independent
Auditors that do not require specific approval by the Audit Committee will be
submitted to the Fund's Chief Financial Officer and must include a detailed
description of the services to be
<Page>
rendered. The Fund's Chief Financial Officer will determine whether such
services are included within the list of services that have received the general
pre-approval of the Audit Committee. The Audit Committee will be informed on a
timely basis of any such services rendered by the Independent Auditors. Requests
or applications to provide services that require specific approval by the Audit
Committee will be submitted to the Audit Committee by both the Independent
Auditors and the Fund's Chief Financial Officer, and must include a joint
statement as to whether, in their view, the request or application is consistent
with the SEC's rules on auditor independence.
The Audit Committee has designated the Fund's Chief Financial Officer to monitor
the performance of all services provided by the Independent Auditors and to
determine whether such services are in compliance with this Policy. The Fund's
Chief Financial Officer will report to the Audit Committee on a periodic basis
on the results of its monitoring. Both the Fund's Chief Financial Officer and
management will immediately report to the chairman of the Audit Committee any
breach of this Policy that comes to the attention of the Fund's Chief Financial
Officer or any member of management.
9. ADDITIONAL REQUIREMENTS
The Audit Committee has determined to take additional measures on an annual
basis to meet its responsibility to oversee the work of the Independent Auditors
and to assure the auditor's independence from the Fund, such as reviewing a
formal written statement from the Independent Auditors delineating all
relationships between the Independent Auditors and the Fund, consistent with
Independence Standards Board No. 1, and discussing with the Independent Auditors
its methods and procedures for ensuring independence.
10. COVERED ENTITIES
Covered Entities include the Fund's investment adviser(s) and any entity
controlling, controlled by or under common control with the Fund's investment
adviser(s) that provides ongoing services to the Fund(s). Beginning with
non-audit service contracts entered into on or after May 6, 2003, the Fund's
audit committee must pre-approve non-audit services provided not only to the
Fund but also to the Covered Entities if the engagements relate directly to the
operations and financial reporting of the Fund. This list of Covered Entities
would include:
MORGAN STANLEY RETAIL FUNDS
Morgan Stanley Investment Advisors Inc.
Morgan Stanley & Co. Incorporated
Morgan Stanley DW Inc.
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Van Kampen Asset Management
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
<Page>
MORGAN STANLEY INSTITUTIONAL FUNDS
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Advisors Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Morgan Stanley & Co. Incorporated
Morgan Stanley Distribution, Inc.
Morgan Stanley AIP GP LP
Morgan Stanley Alternative Investment Partners LP
(e)(2) Beginning with non-audit service contracts entered into on or after May
6, 2003, the audit committee also is required to pre-approve services to Covered
Entities to the extent that the services are determined to have a direct impact
on the operations or financial reporting of the Registrant. 100% of such
services were pre-approved by the audit committee pursuant to the Audit
Committee's pre-approval policies and procedures (attached hereto).
(f) Not applicable.
(g) See table above.
(h) The audit committee of the Board of Trustees/Directors has considered
whether the provision of services other than audit services performed by the
auditors to the Registrant and Covered Entities is compatible with maintaining
the auditors' independence in performing audit services.
Item 5. Audit Committee of Listed Registrants.
(a) The Fund has a separately-designated standing audit committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act whose members are:
Michael Bozic, Edwin J. Garn, Wayne E. Hedien, Manual H. Johnson, Joseph J.
Kearns, Michael Nugent and Fergus Reid.
(b) Not applicable.
Item 6. Schedule of Investments
Refer to Item 1.
<Page>
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Applicable only to reports filed by closed-end funds.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Applicable only to reports filed by closed-end funds.
Item 9. Closed-End Fund Repurchases
Applicable only to reports filed by closed-end funds.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures
(a) The Fund's principal executive officer and principal financial officer have
concluded that the Fund's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Fund in this Form N-CSR
was recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, based
upon such officers' evaluation of these controls and procedures as of a date
within 90 days of the filing date of the report.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the 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.
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Morgan Stanley Mid-Cap Value Fund
/s/ Ronald E. Robison
- -------------------------------------
Ronald E. Robison
Principal Executive Officer
October 19, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
/s/ Ronald E. Robison
- -------------------------------------
Ronald E. Robison
Principal Executive Officer
October 19, 2006
/s/ Francis Smith
- -------------------------------------
Francis Smith
Principal Financial Officer
October 19, 2006