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: 811-07683

Morgan Stanley Special 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: July 31, 2006

Date of reporting period: July 31, 2006


Item 1 - Report to Shareholders

Welcome, Shareholder:

In this report, you'll learn about how your investment in Morgan Stanley Special 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.

	Fund Report
	For the year ended July 31, 2006

Total Return for the 12 Months Ended July 31, 2006

Class   A						ClassB						ClassC						ClassD						Russell 2000® Value Index1						Lipper Small-Cap Value Funds Index2
8.50%							7.68	%					7.72	%					8.76	%					6.93	%					5.16	%

The performance of the Fund’s four share classes varies because each has different expenses. The Fund’s total returns assume the reinvestment of all distributions but do not reflect the deduction of any applicable sales charges. Such costs would lower performance. See Performance Summary for standardized performance and benchmark information.

Market Conditions

Although the stock market posted a modest gain for the 12-month period ended July 31, 2006, investors contended with a number of significant challenges. Natural disasters and geopolitical tensions, rising interest rates and commodity prices, inflation concerns, and the Federal Open Market Committee’s (the ‘‘Fed’s’’) actions and language all contributed to market volatility during the period.

As the period began, the 2005 hurricane season brought unprecedented devastation to the U.S. Gulf Coast and caused oil and natural gas prices to spike above already elevated levels. In addition, consumer confidence fell and inflation concerns became more evident, all of which led to market weakness from August through October. Markets rallied in November, though, helped by a drop in oil prices and improvement in a number of measures of economic activity. Stocks were more subdued in December, but investors’ enthusiasm returned with vigor in January. Minutes from the Fed’s December 13 meeting bolstered hopes that the Fed might be nearing the end of its current rate tightening cycle. Investors also responded positively to encouraging labor market data, improved consumer confidence, and the continuation of robust merger-and-acquisition and corporate restructuring activities. A pronounced ‘‘January Effect’’ emerged as the higher growth, higher risk segments of the market (such as small-cap and technology stocks) drove gains.

The rally tapered off in February, amid a number of corporate earnings disappointments, lackluster outlooks from company managements and declining consumer confidence. Moreover, fourth quarter gross domestic product (GDP) growth, which is reported in the first quarter, was below expectations. Nonetheless, other positive economic data and well-received Congressional testimony from the new Federal Reserve Board Chairman Ben Bernanke helped keep stock prices from falling further. In March and April, tame inflation data and expectations for a recovery in GDP growth bolstered investors’ confidence, as did favorable employment, durable goods orders and consumer confidence data.

However, against a backdrop of sharply rising commodity prices and an uptick in long-term interest rates, inflation concerns intensified in May. In addition, the April and May Consumer Price Index reports did little to soothe these anxieties. As the Fed moved the target rate up for the sixteenth consecutive time and left the door open for additional increases, the market soured. Sentiment continued to decline in June,

2

although stocks rallied significantly in the final days of the month. The Fed raised rates again on June 29, but its language suggested that additional rate hikes might become unnecessary. Although investors became more convinced that the Fed would pause its monetary tightening (and it did in August, after the close of the reporting period), negative influences affected the market in July. The price of oil soared to a new high, geopolitical conflicts escalated and second quarter GDP growth came in lower than expected. Additionally, a number of bellwether technology companies announced earnings disappointments, and retail sales and housing market data declined.

For the 12 months overall, cyclical sectors — those sectors whose performance is strongly tied to economic cycles — led the market. Energy stocks continued to benefit from the high oil prices commanded in an environment of ongoing geopolitical strife and tight supply-demand dynamics. Basic materials also made strong gains on the back of high commodity prices for raw materials and robust global demand. Heavy industry/transportation, especially within the most cyclical segments such as industrials, machinery and shipping and freight, did well. Consumer-related sectors, namely durables, staples and services, were the market’s most lagging groups. With energy and borrowing costs increasing, an expected slowdown in consumer spending overshadowed consumer stocks across the board.

Performance Analysis

Morgan Stanley Special Value Fund outperformed the Russell 2000^® Value Index and the Lipper Small-Cap Value Funds Index for the 12 months ended July 31, 2006, assuming no deduction of applicable sales charges.

Although the consumer-related sectors struggled in the broad market during the period, much of the Fund’s outperformance relative to the Russell 2000 Value Index was driven by stock selection in these areas. In consumer staples, the Fund’s exposure to the food products industry was especially additive to performance. The Fund was well positioned within the consumer durables sector, with minimal exposure to the lagging auto, recreation and toys, and home building stocks. In addition, the resulting relative underweight in consumer durables further bolstered the Fund’s performance. Within consumer services, a number of media and lodging holdings had a positive impact on performance.

Another notable theme in the Fund’s performance during the period came from industry consolidation. As we discussed in the market conditions, merger-and-acquisition activity continued at a strong pace in 2005 and 2006. Several of the Fund’s holdings received offers to be acquired at a premium during the reporting period, which produced good gains.

However, other areas within the Fund did not fare so well during the period. Our stock selection in health care detracted from relative results. An underperforming position in the health services industry and a lack of exposure to pharmaceuticals — the sector’s strongest performing industry — detracted from gains. The retail sector was another area of weakness due to select restaurant and specialty retail

3

holdings. In basic resources, the Fund did not own any steel or non-ferrous metal stocks, which were the two strongest performing areas in the sector.

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
Belden CDT Inc.					2.6	%
Geo Group Inc. (The)					2.5
ACCO Brands Corp.					2.2
MAXIMUS, Inc.					2.1
Apria Healthcare Group, Inc.					2.1
DRS Technologies, Inc.					2.0
Intrawest Corp. (Canada)					1.9
Pacer International, Inc.					1.9
Laidlaw International Inc.					1.9
Electronics for Imaging, Inc.					1.8

TOP FIVE INDUSTRIES
Miscellaneous Commercial Services					7.8	%
Electrical Products					4.3
Aerospace & Defense					3.6
Regional Banks					3.6
Real Estate Investment Trusts					3.3

Data as of July 31, 2006. Subject to change daily. All percentages for top 10 holdings and top five industries are as a percentage of net assets. These data are provided for informational purposes only and should not be deemed a recommendation to buy or sell the securities mentioned. Morgan Stanley is a full-service securities firm engaged in securities trading and brokerage activities, investment banking, research and analysis, financing and financial advisory services.

Investment Strategy

The Fund will normally invest at least 65 percent of its assets in common stocks of small companies that the Fund’s ‘‘Investment Adviser,’’ Morgan Stanley Investment Advisors Inc., believes are undervalued relative to the marketplace or similar companies. Companies within a capitalization range of $100 million to $1.5 billion are considered small companies. The Fund may invest in foreign securities (including depositary receipts) that are listed in the United States on a national securities exchange. In deciding which securities to buy, hold or sell, the Investment Adviser pursues a value oriented approach that seeks to identify securities whose market value is less than their intrinsic value. The Investment Adviser focuses on securities with market-to-book ratios and price-earnings ratios that are lower than those of the general market averages or similar companies. The Investment Adviser also may consider a company’s dividend yield, growth in sales, balance sheet, management capabilities, earnings and cash flow, as well as other factors. The Investment Adviser generally considers selling a portfolio holding when it determines that the holding no longer satisfies its investment criteria.

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

4

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.

5

	Performance Summary

Performance of $10,000 Investment — Class B

6

Average Annual Total Returns — Period Ended July 31, 2006

						Class A Shares* (since 07/28/97)						Class B Shares** (since 10/29/96)						Class C Shares† (since 07/28/97)						Class D Shares†† (since 07/28/97)
Symbol						SVFAX						SVFBX						SVFCX						SVFDX
1 Year							8.50	% 3					7.68	% 3					7.72	% 3					8.76	% 3
							2.81	4					3.09	4					6.80	4					—
5 Years							10.15	3					9.31	3					9.34	3					10.40	3
							8.97	4					9.03	4					9.34	4					—
Since Inception							10.91	3					11.45	3					10.10	3					11.16	3
							10.25	4					11.45	4					10.10	4					—

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 2000^® Value Index measures the performance of those companies in the Russell 2000^® Index with lower price-to-book ratios and lower forecasted growth values. Indexes are unmanaged and their returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(2) The Lipper Small-Cap Value Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Small-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 July 31, 2006.

7

	Expense Example

As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments and redemption fees; and (2) ongoing costs, including advisory fees; distribution and service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.

The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period 02/01/06 – 07/31/06.

Actual Expenses

The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled ‘‘Expenses Paid During Period’’ to estimate the expenses you paid on your account during this period.

Hypothetical Example for Comparison Purposes

The second line of the table below provides information about hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing cost of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs, and will not help you determine the relative total cost of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

				Beginning Account Value				Ending Account Value				Expenses Paid During Period*
				02/01/06				07/31/06				02/01/06 – 07/31/06
Class A
Actual (1.96% return)				$	1,000.00			$	1,019.60			$	6.11
Hypothetical (5% annual return before expenses)				$	1,000.00			$	1,018.74			$	6.11
Class B
Actual (1.53% return)				$	1,000.00			$	1,015.30			$	9.94
Hypothetical (5% annual return before expenses)				$	1,000.00			$	1,014.93			$	9.94
Class C
Actual (1.58% return)				$	1,000.00			$	1,015.80			$	9.75
Hypothetical (5% annual return before expenses)				$	1,000.00			$	1,015.12			$	9.74
Class D
Actual (2.06% return)				$	1,000.00			$	1,020.60			$	4.96
Hypothetical (5% annual return before expenses)				$	1,000.00			$	1,019.89			$	4.96

* Expenses are equal to the Fund's annualized expense ratios of 1.22%, 1.99%, 1.95% and 0.99% for Class A, Class B, Class C and Class D shares, respectively, multiplied by the average account value over the period, multiplied by 181/365 (to reflect the one-half year period).

8

Investment Advisory Agreement Approval 

Nature, Extent and Quality of Services

The Board reviewed and considered the nature and extent of the investment advisory services provided by the Investment Adviser under the Advisory Agreement, including portfolio management, investment research and equity and fixed income securities trading. The Board also reviewed and considered the nature and extent of the non-advisory, administrative services provided by the Fund's Administrator under the Administration Agreement, including accounting, clerical, bookkeeping, compliance, business management and planning, and the provision of supplies, office space and utilities at the Investment Adviser's expense. (The Investment Adviser and the Administrator together are referred to as the ‘‘Adviser’’ and the Advisory and Administration Agreements together are referred to as the ‘‘Management Agreement.’’) The Board also compared the nature of the services provided by the Adviser with similar services provided by non-affiliated advisers as reported to the Board by Lipper Inc. (‘‘Lipper’’).

The Board reviewed and considered the qualifications of the portfolio managers, the senior administrative managers and other key personnel of the Adviser who provide the advisory and administrative services to the Fund. The Board determined that the Adviser's portfolio managers and key personnel are well qualified by education and/or training and experience to perform the services in an efficient and professional manner. The Board concluded that the nature and extent of the advisory and administrative services provided were necessary and appropriate for the conduct of the business and investment activities of the Fund. The Board also concluded that the overall quality of the advisory and administrative services was satisfactory.

Performance Relative to Comparable Funds Managed by Other Advisers

On a regular basis, the Board reviews the performance of all funds in the Morgan Stanley Fund Complex, including the Fund, compared to their peers, paying specific attention to the underperforming funds. In addition, the Board specifically reviewed the Fund's performance for the one-, three- and five-year periods ended November 30, 2005, as shown in a report provided by Lipper (the ‘‘Lipper Report’’), compared to the performance of comparable funds selected by Lipper (the ‘‘performance peer group’’). The Board also discussed with the Adviser the performance goals and the actual results achieved in managing the Fund. The Board concluded that the Fund's performance was competitive with that of its performance peer group.

Fees Relative to Other Proprietary Funds Managed by the Adviser with Comparable
Investment Strategies

The Board reviewed the advisory and administrative fee (together, the ‘‘management fee’’) rate paid by the Fund under the Management Agreement. The Board noted that the management fee rate was comparable to the management fee rates charged by the Adviser to other proprietary funds it manages with investment strategies comparable to those of the Fund taking into account the scope of the services provided.

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.

9

Breakpoints and Economies of Scale

The Board reviewed the structure of the Fund's management fee schedule under the Management Agreement and noted that it includes breakpoints. The Board also reviewed the level of the Fund's management fee and noted that the fee, as a percentage of the Fund's net assets, would decrease as net assets increase because the management fee includes breakpoints. The Board concluded that the Fund's management fee would reflect economies of scale as assets increase.

Profitability of the Adviser and Affiliates

The Board considered information concerning the costs incurred and profits realized by the Adviser and affiliates during the last year from their relationship with the Fund and during the last two years from their relationship with the Morgan Stanley Fund Complex and reviewed with the Adviser the cost allocation methodology used to determine the profitability of the Adviser and affiliates. Based on its review of the information it received, the Board concluded that the profits earned by the Adviser and affiliates were not excessive in light of the advisory, administrative and other services provided to the Fund.

Fall-Out Benefits

The Board considered so-called ‘‘fall-out benefits’’ derived by the Adviser and affiliates from their relationship with the Fund and the Morgan Stanley Fund Complex, such as sales charges on sales of Class A shares and ‘‘float’’ benefits derived from handling of checks for purchases and sales of Fund shares, through a broker-dealer affiliate of the Adviser and ‘‘soft dollar’’ benefits (discussed in the next section). The Board also considered that a broker-dealer affiliate of the Adviser receives from the Fund 12b-1 fees for distribution and shareholder services. The Board also considered that an affiliate of the Adviser sold a joint venture that owned an electronic trading system network (‘‘ECN’’), which may be used by the Adviser for trading on behalf of the Fund. As part of the sale of the joint venture, the affiliate receives a 10-year payout based on the revenue stream from trading on the ECN. Although the affiliate disgorges the portion of the payout that is comprised of commissions received from trades executed by the Adviser on the ECN to a charitable organization, the Board considered the fact that trades by the Adviser would increase order flow, and, thus, result in a potential fall-out benefit to the affiliate. The Board concluded that the float benefits were relatively small, the sales charges and 12b-1 fees were competitive with those of other broker-dealers, the affiliate disgorged revenues in connection with the ECN-related revenue and the potential fall-out benefit from increased order flow was relatively small.

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.

10

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

Morgan Stanley Special Value Fund

Portfolio of Investments July 31, 2006

NUMBER OF SHARES								VALUE
				Common Stocks (96.7%)
				Advertising/Marketing     Services (1.5%)
	259,900			ADVO, Inc.				$	9,410,979
				Aerospace & Defense (3.6%)
	101,200			AAR Corp.*					2,396,416
	264,100			DRS Technologies, Inc.					12,225,189
	236,400			Moog Inc. (Class A)*					8,200,716
									22,822,321
				Agricultural Commodities/     Milling (2.9%)
	326,000			Corn Products International, Inc.					10,842,760
	223,200			Delta & Pine Land Co.					7,635,672
									18,478,432
				Air Freight/Couriers (1.9%)
	394,200			Pacer International, Inc.					11,766,870
				Apparel/Footwear (1.1%)
	508,035			Maidenform Brands, Inc.*					6,802,589
				Apparel/Footwear Retail (1.2%)
	245,400			Stage Stores, Inc.					7,278,564
				Broadcasting (1.4%)
	91,600			Live Nation Inc.*					1,919,936
	803,500			Sinclair Broadcast Group, Inc. (Class A)					6,765,470
									8,685,406
				Chemicals: Major Diversified (1.3%)
	598,613			Hercules Inc.*					8,320,721
				Chemicals: Specialty (1.4%)
	167,600			Cytec Industries, Inc.					8,951,516
				Coal (0.8%)
	756,300			International Coal Group, Inc.*					5,082,336
				Commercial Printing/Forms (1.6%)
	506,500			Cenveo Inc.*					9,689,345
				Computer Peripherals (1.8%)
	560,600			Electronics for Imaging, Inc.*					11,312,908
				Consumer Sundries (0.5%)
	73,600			Central Garden & Pet Co.*					2,910,144
				Containers/Packaging (1.5%)
	537,642			Rock-Tenn Co. (Class A)				$	9,242,066
				Electric Utilities (2.0%)
	244,700			Avista Corp.					6,112,606
	236,150			PNM Resources Inc.					6,331,181
									12,443,787
				Electrical Products (4.3%)
	246,300			Acuity Brands, Inc.					10,770,699
	500,300			Belden CDT Inc.					16,234,735
									27,005,434
				Electronic Components (0.4%)
	293,456			Methode Electronics, Inc.					2,347,648
				Finance/Rental/Leasing (0.9%)
	224,100			TAL International Group, Inc.					5,441,148
				Financial Conglomerates (1.6%)
	447,500			Conseco Inc.*					10,203,000
				Food: Specialty/Candy (1.6%)
	343,800			NBTY, Inc.*					10,152,414
				Gas Distributors (2.2%)
	207,400			AGL Resources, Inc.					8,092,748
	224,600			UGI Corp.					5,581,310
									13,674,058
				Home Furnishings (1.0%)
	214,700			Jarden Corp.*					6,224,153
				Hotels/Resorts/Cruiselines (1.9%)
	430,763			Intrawest Corp. (Canada)					12,013,980
				Household/Personal Care (0.9%)
	339,800			Elizabeth Arden, Inc.*					5,735,824
				Industrial Machinery (2.5%)
	280,365			CIRCOR International, Inc.					7,808,165
	266,300			Watts Water Technologies, Inc. (Class A)					7,757,319
									15,565,484
				Information Technology     Services (2.4%)
	247,100			Intergraph Corp.*					8,779,463
	429,700			Keane, Inc.*					6,196,274
									14,975,737

See Notes to Financial Statements

12

Morgan Stanley Special Value Fund

Portfolio of Investments July 31, 2006 continued

NUMBER OF SHARES								VALUE
				Managed Health Care (0.5%)
	61,100			Magellan Health Services, Inc.*				$	2,937,077
				Marine Shipping (1.1%)
	119,300			American Commercial Lines Inc.*					6,555,535
				Medical Specialties (2.5%)
	148,540			Bio-Rad Laboratories, Inc. (Class A)*					9,787,301
	149,300			West Pharmaceutical Services, Inc.					5,792,840
									15,580,141
				Medical/Nursing Services (2.1%)
	741,800			Apria Healthcare Group, Inc.*					12,996,336
				Metal Fabrications (0.6%)
	114,030			General Cable Corp.*					4,070,871
				Miscellaneous Commercial Services (7.8%)
	423,300			Gartner, Inc.*					6,027,792
	378,539			Geo Group Inc. (The)*					15,603,377
	486,800			MAXIMUS, Inc.					13,211,752
	437,650			ProQuest Co.*					5,181,776
	161,700			The Brink's Co.					8,908,053
									48,932,750
				Multi-Line Insurance (1.3%)
	370,100			Max Re Capital Ltd. (Bermuda)					8,327,250
				Office Equipment/Supplies (2.2%)
	710,000			ACCO Brands Corp.*					13,937,300
				Oil & Gas Production (3.0%)
	270,000			Denbury Resources Inc.*					9,360,900
	224,080			St. Mary Land & Exploration Co.					9,635,440
									18,996,340
				Oilfield Services/Equipment (2.8%)
	219,070			Superior Energy Services, Inc.*					7,503,147
	157,590			Universal Compression Holdings, Inc.*					10,038,483
									17,541,630
				Other Consumer Services (0.8%)
	151,120			Jackson Hewitt Tax Service Inc.				$	5,157,726
				Other Transportation (1.9%)
	439,300			Laidlaw International Inc.					11,641,450
				Packaged Software (2.7%)
	212,650			Hummingbird Ltd. (Canada)*					6,035,007
	669,188			MSC. Software Corp.*					10,707,008
									16,742,015
				Personnel Services (1.9%)
	355,622			Gevity HR, Inc.					7,898,365
	387,800			Hudson Highland Group Inc.*					3,839,220
									11,737,585
				Property – Casualty Insurers (2.8%)
	251,500			Platinum Underwriters Holdings Ltd. (ADR) (Bermuda)					7,114,935
	509,886			United America Indemnity, Ltd. (Class A) (Cayman Islands)*					10,575,036
									17,689,971
				Real Estate Investment Trusts (3.3%)
	759,400			Anthracite Capital, Inc.					9,317,838
	123,500			LaSalle Hotel Properties					5,101,785
	133,700			Parkway Properties, Inc.					6,079,339
									20,498,962
				Regional Banks (3.6%)
	50,000			Alabama National BanCorporation					3,387,500
	98,400			Central Pacific Financial Corp.					3,444,000
	139,300			Greater Bay Bancorp					3,989,552
	175,572			Integra Bank Corp.					4,268,155
	100,800			Provident Bankshares Corp.					3,706,416
	289,730			Provident New York Bancorp.					3,908,458
									22,704,081
				Restaurants (2.2%)
	643,400			AFC Enterprises, Inc.*					8,274,124
	2,007,600			Denny's Corp.*					5,601,204
									13,875,328

See Notes to Financial Statements

13

Morgan Stanley Special Value Fund

Portfolio of Investments July 31, 2006 continued

NUMBER OF SHARES								VALUE
				Savings Banks (1.8%)
	444,746			First Niagara Financial Group, Inc.				$	6,506,634
	140,104			MB Financial, Inc.					4,982,098
									11,488,732
				Specialty Insurance (3.1%)
	133,000			NYMAGIC, Inc.					4,173,540
	127,286			Proassurance Corp.*					6,327,387
	184,200			Triad Guaranty, Inc.*					9,187,896
									19,688,823
				Specialty Stores (1.5%)
	57,400			Guitar Center, Inc.*					2,440,648
	239,900			Lithia Motors Inc. (Class A)					6,760,382
									9,201,030
				Specialty     Telecommunications (0.7%)
	328,286			Syniverse Holdings Inc.*					4,589,438
				Telecommunication     Equipment (1.0%)
	634,300			Tekelec*					6,526,947
				Textiles (1.3%)
	228,200			Albany International Corp. (Class A)					8,199,226
				Total Common Stocks
				(Cost $455,935,526)					606,153,408

PRINCIPAL AMOUNT IN THOUSANDS								VALUE
				Short-Term Investment (2.8%)
				Repurchase agreement
$	17,324			Joint repurchase agreement account 5.27% due 08/01/06 (dated 07/31/06; proceeds $17,326,536) (a) (Cost $17,324,000)				$	17,324,000

Total Investments (Cost $473,259,526) (b)					99.5	%			623,477,408
Other Assets in Excess of Liabilities					0.5				3,013,970
Net Assets					100.0	%		$	626,491,378

ADR American Depositary Receipt.

* Non-income producing security.

(a) Collateralized by federal agency and U.S. Treasury obligations.

(b) The aggregate cost for federal income tax purposes is $475,452,008. The aggregate gross unrealized appreciation is $179,334,852 and the aggregate gross unrealized depreciation is $31,309,452, resulting in net unrealized appreciation of $148,025,400.

See Notes to Financial Statements

14

Morgan Stanley Special Value Fund

Summary of Investments July 31, 2006

	INDUSTRY				VALUE				PERCENT OF NET ASSETS
	Miscellaneous Commercial Services				$	48,932,750				7.8	%
	Electrical Products					27,005,434				4.3
	Aerospace & Defense					22,822,321				3.6
	Regional Banks					22,704,081				3.6
	Real Estate Investment Trusts					20,498,962				3.3
	Specialty Insurance					19,688,823				3.1
	Oil & Gas Production					18,996,340				3.0
	Agricultural Commodities/Milling					18,478,432				2.9
	Property – Casualty Insurers					17,689,971				2.8
	Oilfield Services/Equipment					17,541,630				2.8
	Repurchase Agreement					17,324,000				2.8
	Packaged Software					16,742,015				2.7
	Medical Specialties					15,580,141				2.5
	Industrial Machinery					15,565,484				2.5
	Information Technology Services					14,975,737				2.4
	Office Equipment/Supplies					13,937,300				2.2
	Restaurants					13,875,328				2.2
	Gas Distributors					13,674,058				2.2
	Medical/Nursing Services					12,996,336				2.1
	Electric Utilities					12,443,787				2.0
	Hotels/Resorts/Cruiselines					12,013,980				1.9
	Air Freight/Couriers					11,766,870				1.9
	Personnel Services					11,737,585				1.9
	Other Transportation					11,641,450				1.9
	Savings Banks					11,488,732				1.8
	Computer Peripherals				$	11,312,908				1.8	%
	Financial Conglomerates					10,203,000				1.6
	Food: Specialty/Candy					10,152,414				1.6
	Commercial Printing/Forms					9,689,345				1.6
	Advertising/Marketing Services					9,410,979				1.5
	Containers/Packaging					9,242,066				1.5
	Specialty Stores					9,201,030				1.5
	Chemicals: Specialty					8,951,516				1.4
	Broadcasting					8,685,406				1.4
	Multi-Line Insurance					8,327,250				1.3
	Chemicals: Major Diversified					8,320,721				1.3
	Textiles					8,199,226				1.3
	Apparel/Footwear Retail					7,278,564				1.2
	Apparel/Footwear					6,802,589				1.1
	Marine Shipping					6,555,535				1.1
	Telecommunication Equipment					6,526,947				1.0
	Home Furnishings					6,224,153				1.0
	Household/Personal Care					5,735,824				0.9
	Finance/Rental/Leasing					5,441,148				0.9
	Other Consumer Services					5,157,726				0.8
	Coal					5,082,336				0.8
	Specialty Telecommunications					4,589,438				0.7
	Metal Fabrications					4,070,871				0.6
	Managed Health Care					2,937,077				0.5
	Consumer Sundries					2,910,144				0.5
	Electronic Components					2,347,648				0.4
					$	623,477,408				99.5	%

See Notes to Financial Statements

15

Morgan Stanley Special Value Fund

Financial Statements

Statement of Assets and Liabilities

July 31, 2006

Assets:
Investments in securities, at value (cost $473,259,526)				$	623,477,408
Cash					525
Receivable for:
Investments sold					4,984,182
Shares of beneficial interest sold					425,969
Dividends					226,121
Interest					2,536
Prepaid expenses and other assets					73,877
Total Assets					629,190,618
Liabilities:
Payable for:
Shares of beneficial interest redeemed					1,013,550
Investments purchased					857,215
Investment advisory fee					352,301
Distribution fee					304,770
Administration fee					42,380
Transfer agent fee					25,172
Accrued expenses and other payables					103,852
Total Liabilities					2,699,240
Net Assets				$	626,491,378
Composition of Net Assets:
Paid-in-capital				$	317,083,685
Net unrealized appreciation					150,217,882
Accumulated undistributed net investment income					54,783
Accumulated undistributed net realized gain					159,135,028
Net Assets				$	626,491,378
Class A Shares:
Net Assets				$	283,280,626
Shares Outstanding (unlimited authorized, $.01 par value)					13,593,335
Net Asset Value Per Share				$	20.84
Maximum Offering Price Per Share, (net asset value plus 5.54% of net asset value)				$	21.99
Class B Shares:
Net Assets				$	251,969,597
Shares Outstanding (unlimited authorized, $.01 par value)					13,090,511
Net Asset Value Per Share				$	19.25
Class C Shares:
Net Assets				$	36,310,857
Shares Outstanding (unlimited authorized, $.01 par value)					1,884,541
Net Asset Value Per Share				$	19.27
Class D Shares:
Net Assets				$	54,930,298
Shares Outstanding (unlimited authorized, $.01 par value)					2,573,647
Net Asset Value Per Share				$	21.34

See Notes to Financial Statements

16

Morgan Stanley Special Value Fund

Financial Statements continued

Statement of Operations

For the year ended July 31, 2006

Net Investment Loss:
Income
Dividends (net of $17,056 foreign withholding tax)				$	7,284,462
Interest					801,495
Total Income					8,085,957
Expenses
Investment advisory fee					5,056,943
Distribution fee (Class A shares)					662,778
Distribution fee (Class B shares)					2,967,621
Distribution fee (Class C shares)					378,606
Transfer agent fees and expenses					1,753,779
Administration fee					611,914
Shareholder reports and notices					203,971
Professional fees					89,200
Registration fees					84,337
Custodian fees					50,591
Trustees' fees and expenses					10,391
Other					48,270
Total Expenses					11,918,401
Less: expense offset					(5,441	)
Net Expenses					11,912,960
Net Investment Loss					(3,827,003	)
Net Realized and Unrealized Gain (Loss):
Net realized gain					188,915,674
Net change in unrealized appreciation					(141,722,410	)
Net Gain					47,193,264
Net Increase				$	43,366,261

See Notes to Financial Statements

17

Morgan Stanley Special Value Fund

Financial Statements continued

Statements of Changes in Net Assets

				FOR THE YEAR ENDED JULY 31, 2006				FOR THE YEAR ENDED JULY 31, 2005
Increase (Decrease) in Net Assets:
Operations:
Net investment loss				$	(3,827,003	)		$	(1,578,109	)
Net realized gain					188,915,674				98,543,959
Net change in unrealized appreciation/depreciation					(141,722,410	)			133,447,170
Net Increase					43,366,261				230,413,020
Distributions to Shareholders from Net Realized Gain:
Class A shares					(36,131,854	)			(3,448,862	)
Class B shares					(46,359,388	)			(14,818,651	)
Class C shares					(5,685,404	)			(1,242,247	)
Class D shares					(8,323,369	)			(9,690,267	)
Total Distributions					(96,500,015	)			(29,200,027	)
Net decrease from transactions in shares of beneficial interest					(393,210,673	)			(110,823,224	)
Net Increase (Decrease)					(446,344,427	)			90,389,769
Net Assets:
Beginning of period					1,072,835,805				982,446,036
End of Period (Including accumulated undistributed investment income of $54,783 and $23,496, respectively)				$	626,491,378			$	1,072,835,805

See Notes to Financial Statements

18

Morgan Stanley Special Value Fund

Notes to Financial Statements July 31, 2006

1.   Organization and Accounting Policies

Morgan Stanley Special 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 to seek long-term capital appreciation. The Fund was organized as a Massachusetts business trust on June 21, 1996 and commenced operations on October 29, 1996. On July 28, 1997, the Fund converted to a multiple class share structure.

The Fund offers Class A shares, Class B shares, Class C shares and Class D shares. The four classes are substantially the same except that most Class A shares are subject to a sales charge imposed at the time of purchase and some Class A shares, and most Class B shares and Class C shares are subject to a contingent deferred sales charge imposed on shares redeemed within eighteen months, six years and one year, respectively. Class D shares are not subject to a sales charge. Additionally, Class A shares, Class B shares and Class C shares incur distribution expenses.

Effective August 29, 2005, the Board of Trustees of the Fund approved the implementation of a 2% redemption fee, on Class A shares, Class B shares, Class C shares, and Class D shares, which is paid directly to the Fund, for shares redeemed within seven days of purchase, subject to certain exceptions. The redemption fee is designed to protect the Fund and its remaining shareholders from the effects of short-term trading.

The following is a summary of significant accounting policies:

A.   Valuation of Investments — (1) an equity portfolio security listed or traded on the New York Stock Exchange (‘‘NYSE’’) or American Stock Exchange or other exchange is valued at its latest sale price prior to the time when assets are valued; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (2) an equity portfolio security listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (3) all other portfolio securities for which over-the-counter market quotations are readily available are valued at the mean between the last reported bid and asked price. In cases where a security is traded on more than one exchange, the security is valued on the exchange designated as the primary market; (4) for equity securities traded on foreign exchanges, the last reported sale price or the latest bid price may be used if there were no sales on a particular day; (5) 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

19

Morgan Stanley Special Value Fund

Notes to Financial Statements July 31, 2006 continued

foreign market on which the securities trade) and the close of business on the NYSE. If developments occur during such periods that are expected to materially affect the value of such securities, such valuations may be adjusted to reflect the estimated fair value of such securities as of the close of the NYSE, as determined in good faith by the Fund’s Trustees or by the Investment Adviser using a pricing service and/or procedures approved by the Trustees of the Fund; (6) certain portfolio securities may be valued by an outside pricing service approved by the Fund’s Trustees; and (7) short-term debt securities having a maturity date of more than sixty days at time of purchase are valued on a mark-to-market basis until sixty days prior to maturity and thereafter at amortized cost based on their value on the 61st day. Short-term debt securities having a maturity date of sixty days or less at the time of purchase are valued at amortized cost.

B.   Accounting for Investments — Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on security transactions are determined by the identified cost method. Dividend income and other distributions are recorded on the ex-dividend date. Discounts are accreted and premiums are amortized over the life of the respective securities. Interest income is accrued daily.

C.   Repurchase Agreements — Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund, along with other affiliated entities managed by the Investment Adviser, may transfer uninvested cash balances into one or more joint repurchase agreement accounts. These balances are invested in one or more repurchase agreements and are collateralized by cash, U.S. Treasury or federal agency obligations. The Fund may also invest directly with institutions in repurchase agreements. The Fund’s custodian receives the collateral, which is marked-to-market daily to determine that the value of the collateral does not decrease below the repurchase price plus accrued interest.

D.   Multiple Class Allocations — Investment income, expenses (other than distribution fees), and realized and unrealized gains and losses are allocated to each class of shares based upon the relative net asset value on the date such items are recognized. Distribution fees are charged directly to the respective class.

E.   Federal Income Tax Policy — It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Accordingly, no federal income tax provision is required.

F.   Dividends and Distributions to Shareholders — Dividends and distributions to shareholders are recorded on the ex-dividend date.

G.   Use of Estimates — The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates.

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

20

Morgan Stanley Special Value Fund

Notes to Financial Statements July 31, 2006 continued

determined as of the close of each business day: 0.67% to the portion of the daily net assets not exceeding $500 million; 0.645% to the portion of the daily net assets exceeding $500 million but not exceeding $1 billion; and 0.62% 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.

Effective November 18, 2005, the Investment Adviser has agreed to cap the Fund’s operating expenses (except for brokerage and 12b-1 fees) for one year by assuming the Fund’s ‘‘other expenses’’ and/or waiving the Fund’s advisory fees, and the Administrator has agreed to waive the Fund’s administrative fees, to the extent such operating expenses on an annualized basis exceed 1.06% of the average net assets of the Fund.

3.   Plan of Distribution

Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the ‘‘Distributor’’), an affiliate of the Investment Adviser and Administrator. The Fund has adopted a Plan of Distribution (the ‘‘Plan’’) pursuant to Rule 12b-1 under the Act. The Plan provides that the Fund will pay the Distributor a fee which is accrued daily and paid monthly at the following annual rates: (i) Class A – up to 0.25% of the average daily net assets of Class A; (ii) Class B – up to 1.0% of the average daily net assets of Class B; and (iii) Class C – up to 1.0% of the average daily net assets of Class C.

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 $7,014,972 at July 31, 2006.

In the case of Class A shares and Class C shares, expenses incurred pursuant to the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily net assets of Class A or Class C, respectively, will not be reimbursed by the Fund through payments in any subsequent year, except that expenses representing a gross sales credit to Morgan Stanley Financial Advisors and other authorized financial representatives at the time of sale may be reimbursed in the subsequent calendar year. For the year ended July 31, 2006, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.25% and 0.99%, respectively.

21

Morgan Stanley Special Value Fund

Notes to Financial Statements July 31, 2006 continued

The Distributor has informed the Fund that for the year ended July 31, 2006, it received contingent deferred sales charges from certain redemptions of the Fund's Class A shares, Class B shares and Class C shares of $104, $605,433 and $1,483, respectively and received $129,850 in front-end sales charges from sales of the Fund's Class A shares. The respective shareholders pay such charges which are not an expense of the Fund.

4.   Security Transactions and Transactions with Affiliates

The cost of purchases and proceeds from sales of portfolio securities, excluding short-term investments, for the year ended July 31, 2006 aggregated $215,004,781 and $714,829,024, respectively. Included in the aforementioned are sales with other Morgan Stanley funds of $307,667,437, including net realized gains of $59,027,825.

For the year ended July 31, 2006, the Fund incurred brokerage commissions of $3,430 with Morgan Stanley & Co., Inc., 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

Morgan Stanley Special Value Fund

Notes to Financial Statements July 31, 2006 continued

6.   Shares of Beneficial Interest^†

Transactions in shares of beneficial interest were as follows:

				FOR THE YEAR ENDED JULY 31, 2006								FOR THE YEAR ENDED JULY 31, 2005
				SHARES				AMOUNT				SHARES				AMOUNT
CLASS A SHARES
Sold					1,308,267			$	27,474,516				1,569,943			$	31,233,037
Conversion from Class B					2,016,470				41,055,466				6,628,612				129,867,637
Reinvestment of distributions					1,786,668				34,661,351				169,373				3,419,637
Redeemed					(3,820,940	)			(79,846,994	)			(2,351,419	)			(47,094,946	)
Net increase – Class A					1,290,465				23,344,339				6,016,509				117,425,365
CLASS B SHARES
Sold					568,832				11,024,347				731,597				13,682,503
Conversion to Class A					(2,172,414	)			(41,055,466	)			(7,032,763	)			(129,867,637	)
Reinvestment of distributions					2,327,594				41,896,689				706,762				13,492,092
Redeemed					(4,444,991	)			(86,763,860	)			(7,541,843	)			(140,777,469	)
Net decrease – Class B					(3,720,979	)			(74,898,290	)			(13,136,247	)			(243,470,511	)
CLASS C SHARES
Sold					114,039				2,227,793				65,184				1,210,773
Reinvestment of distributions					287,869				5,187,393				60,296				1,150,443
Redeemed					(537,230	)			(10,512,921	)			(570,927	)			(10,728,903	)
Net decrease – Class C					(135,322	)			(3,097,735	)			(445,447	)			(8,367,687	)
CLASS D SHARES
Sold					437,214				9,359,161				5,247,123				104,506,381
Reinvestment of distributions					348,458				6,913,399				413,513				8,493,555
Redeemed					(16,025,095	)			(354,831,547	)			(4,407,113	)			(89,410,327	)
Net increase (decrease) – Class D					(15,239,423	)			(338,558,987	)			1,253,523				23,589,609
Net decrease in Fund					(17,805,259	)		$	(393,210,673	)			(6,311,662	)		$	(110,823,224	)

† On March 12, 2004, the Fund suspended the offering of its shares to new investors. On February 6, 2006, the Board was notified that management intends to reopen the Fund to new investors as soon as practicable.

7.   Federal Income Tax Status

The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations which may differ from generally accepted accounting principles. These ‘‘book/tax’’ differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment; temporary differences do not require reclassification.

23

Morgan Stanley Special Value Fund

Notes to Financial Statements July 31, 2006 continued

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 ENDED JULY 31, 2006				FOR THE YEAR ENDED JULY 31, 2005
Long-term capital gains				$	96,500,015			$	29,200,027

As of July 31, 2006, the tax-basis components of accumulated earnings were as follows:

Undistributed ordinary income				$	10,910,234
Undistributed long-term gains					150,473,750
Net accumulated earnings					161,383,984
Temporary differences					(1,691	)
Net unrealized appreciation					148,025,400
Total accumulated earnings				$	309,407,693

As of July 31, 2006, the Fund had temporary book/tax differences primarily attributable to capital loss deferrals on wash sales and permanent book/tax differences primarily attributable to a net operating loss and equalization debits. To reflect reclassifications arising from the permanent differences, accumulated undistributed net realized gain was charged $28,582,995, paid-in-capital was credited $24,724,705 and accumulated undistributed net investment income was credited $3,858,290.

8.   Legal Matters

The Investment Adviser, certain affiliates of the Investment Adviser, certain officers of such affiliates and certain investment companies advised by the Investment Adviser or its affiliates, including the Fund, are named as defendants in a consolidated class action. This consolidated action also names as defendants certain individual Trustees and Directors of the Morgan Stanley funds. The consolidated amended complaint, filed in the United States District Court Southern District of New York on April 16, 2004, generally alleges that defendants, including the Fund, violated their statutory disclosure obligations and fiduciary duties by failing properly to disclose (i) that the Investment Adviser and certain affiliates of the Investment Adviser allegedly offered economic incentives to brokers and others to recommend the funds advised by the Investment Adviser or its affiliates to investors rather than funds managed by other companies, and (ii) that the funds advised by the Investment Adviser or its affiliates, including the Fund, allegedly paid excessive commissions to brokers in return for their efforts to recommend these funds to investors. The complaint seeks, among other things, unspecified compensatory damages, rescissionary damages, fees and costs. The defendants have

24

Morgan Stanley Special Value Fund

Notes to Financial Statements July 31, 2006 continued

moved to dismiss the action. On March 9, 2005, Plaintiffs sought leave to supplement their complaint to assert claims on behalf of other investors, which motion defendants opposed. On April 14, 2006, the Court granted defendants’ motion to dismiss in its entirety. Additionally, the Court denied Plaintiff’s motion to supplement their complaint. This matter is now concluded.

9.   New Accounting Pronouncement

In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109 (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position must meet before being recognized in the financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Fund will adopt FIN 48 during 2007 and the impact to the Fund's financial statements, if any, is currently being assessed.

25

Morgan Stanley Special Value Fund

Financial Highlights

Selected ratios and per share data for a share of beneficial interest outstanding throughout each period:

				FOR THE YEAR ENDED JULY 31,
				2006				2005				2004				2003				2002
Class A Shares
Selected Per Share Data:
Net asset value, beginning of period				$	22.28			$	18.24			$	15.51			$	13.56			$	15.67
Income (loss) from investment operations:
Net investment income (loss)‡					(0.04	)			0.04				(0.04	)			(0.02	)			0.01
Net realized and unrealized gain (loss)					1.70				4.55				2.77				1.97				(1.76	)
Total income (loss) from investment operations					1.66				4.59				2.73				1.95				(1.75	)
Less dividends and distributions from:
Net investment income					—				—				—				—				(0.06	)
Net realized gain					(3.10	)			(0.55	)			—				—				(0.30	)
Total dividends and distributions					(3.10	)			(0.55	)			—				—				(0.36	)
Net asset value, end of period				$	20.84			$	22.28			$	18.24			$	15.51			$	13.56
Total Return†					8.50	%			25.45	%			17.60	%			14.38	%			(11.43	)%
Ratios to Average Net Assets(1):
Total expenses (before expense offset)					1.28	%			1.27	%			1.23	%			1.25	%			1.19	%
Net investment income (loss)					(0.22	)%			0.14	%			(0.23	)%			(0.11	)%			0.12	%
Supplemental Data:
Net assets, end of period, in thousands					$283,281				$274,050				$114,636				$71,088				$56,064
Portfolio turnover rate					28	%			41	%			44	%			47	%			72	%

‡ The per share amounts were computed using an average number of shares outstanding during the period.

† Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period.

(1) Reflects overall Fund ratios for investment income and non-class specific expenses.

See Notes to Financial Statements

26

Morgan Stanley Special Value Fund

Financial Highlights continued

				FOR THE YEAR ENDED JULY 31,
				2006				2005				2004				2003				2002
Class B Shares
Selected Per Share Data:
Net asset value, beginning of period				$	20.95			$	17.31			$	14.84			$	13.08			$	15.18
Income (loss) from investment operations:
Net investment loss‡					(0.19	)			(0.11	)			(0.17	)			(0.11	)			(0.09	)
Net realized and unrealized gain (loss)					1.59				4.30				2.64				1.87				(1.71	)
Total income (loss) from investment operations					1.40				4.19				2.47				1.76				(1.80	)
Less distributions from net realized gain					(3.10	)			(0.55	)			—				—				(0.30	)
Net asset value, end of period				$	19.25			$	20.95			$	17.31			$	14.84			$	13.08
Total Return†					7.68	%			24.55	%			16.64	%			13.46	%			(12.08	)%
Ratios to Average Net Assets(1):
Total expenses (before expense offset)					2.03	%			2.04	%			2.00	%			2.04	%			1.95	%
Net investment loss					(0.97	)%			(0.63	)%			(1.00	)%			(0.90	)%			(0.64	)%
Supplemental Data:
Net assets, end of period, in thousands					$251,970				$352,265				$518,426				$500,124				$587,241
Portfolio turnover rate					28	%			41	%			44	%			47	%			72	%

‡ The per share amounts were computed using an average number of shares outstanding during the period.

† Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period.

(1) Reflects overall Fund ratios for investment income and non-class specific expenses.

See Notes to Financial Statements

27

Morgan Stanley Special Value Fund

Financial Highlights continued

				FOR THE YEAR ENDED JULY 31,
				2006				2005				2004				2003				2002
Class C Shares
Selected Per Share Data:
Net asset value, beginning of period				$	20.97			$	17.30			$	14.84			$	13.08			$	15.20
Income (loss) from investment operations:
Net investment loss‡					(0.19	)			(0.10	)			(0.17	)			(0.12	)			(0.10	)
Net realized and unrealized gain (loss)					1.59				4.32				2.63				1.88				(1.69	)
Total income (loss) from investment operations					1.40				4.22				2.46				1.76				(1.79	)
Less dividends and distributions from:
Net investment income					—				—				—				—				(0.03	)
Net realized gain					(3.10	)			(0.55	)			—				—				(0.30	)
Total dividends and distributions					(3.10	)			(0.55	)			—				—				(0.33	)
Net asset value, end of period				$	19.27			$	20.97			$	17.30			$	14.84			$	13.08
Total Return†					7.72	%			24.61	%			16.64	%			13.46	%			(12.03	)%
Ratios to Average Net Assets(1):
Total expenses (before expense offset)					2.02	%			1.93	%			2.00	%			2.04	%			1.95	%
Net investment loss					(0.96	)%			(0.52	)%			(1.00	)%			(0.90	)%			(0.64	)%
Supplemental Data:
Net assets, end of period, in thousands					$36,311				$42,352				$42,662				$37,454				$41,147
Portfolio turnover rate					28	%			41	%			44	%			47	%			72	%

‡ The per share amounts were computed using an average number of shares outstanding during the period.

† Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period.

(1) Reflects overall Fund ratios for investment income and non-class specific expenses.

See Notes to Financial Statements

28

Morgan Stanley Special Value Fund

Financial Highlights continued

				FOR THE YEAR ENDED JULY 31,
				2006				2005				2004				2003				2002
Class D Shares
Selected Per Share Data:
Net asset value, beginning of period				$	22.69			$	18.52			$	15.72			$	13.72			$	15.81
Income (loss) from investment operations:
Net investment income‡					0.00				0.08				0.00				0.01				0.05
Net realized and unrealized gain (loss)					1.75				4.64				2.80				1.99				(1.77	)
Total income (loss) from investment operations					1.75				4.72				2.80				2.00				(1.72	)
Less dividends and distributions from:
Net investment income					—				—				—				—				(0.07	)
Net realized gain					(3.10	)			(0.55	)			—				—				(0.30	)
Total dividends and distributions					(3.10	)			(0.55	)			—				—				(0.37	)
Net asset value, end of period				$	21.34			$	22.69			$	18.52			$	15.72			$	13.72
Total Return†					8.76	%			25.77	%			17.81	%			14.58	%			(11.20	)%
Ratios to Average Net Assets(1):
Total expenses (before expense offset)					1.03	%			1.04	%			1.00	%			1.04	%			0.95	%
Net investment income					0.03	%			0.37	%			0.00	%			0.10	%			0.36	%
Supplemental Data:
Net assets, end of period, in thousands					$54,930				$404,168				$306,722				$130,693				$103,561
Portfolio turnover rate					28	%			41	%			44	%			47	%			72	%

‡ The per share amounts were computed using an average number of shares outstanding during the period.

† Calculated based on the net asset value as of the last business day of the period.

(1) Reflects overall Fund ratios for investment income and non-class specific expenses.

See Notes to Financial Statements

29

Morgan Stanley Special Value Fund

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Trustees of
Morgan Stanley Special Value Fund:

We have audited the accompanying statement of assets and liabilities of Morgan Stanley Special Value Fund (the ‘‘Fund’’), including the portfolio of investments, as of July 31, 2006, and the related statements of operations for the year then ended and changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of July 31, 2006, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Morgan Stanley Special Value Fund as of July 31, 2006, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.

Deloitte & Touche LLP
New York, New York
September 25, 2006

30

Morgan Stanley Special Value Fund

Trustee and Officer Information

Independent Trustees:

Name, Age and Address of Independent Trustee

Position(s) Held with Registrant

Term of Office and Length of Time Served*

Principal Occupation(s) During Past 5 Years

Number of Portfolios in Fund Complex Overseen by Trustee**

Other Directorships Held by Trustee

Frank L. Bowman (61) c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Trustees 1177 Avenue of the Americas New York, NY 10036

Trustee

Since August 2006

President and Chief Executive Officer of the Nuclear Energy Institute (policy organization) (since February 2005); 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.

108

Director of the National Energy Foundation, the U.S. Energy Association, the American Council for Capital Formation and the Armed Services YMCA of the USA.

Michael Bozic (65) c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Trustees 1177 Avenue of the Americas New York, NY 10036

Trustee

Since April 1994

Private Investor; Chairman of the Insurance Committee (since July 2006) and Director or Trustee of the Retail Funds (since April 1994) and the Institutional Funds (since July 2003); formerly Vice Chairman of Kmart Corporation (December 1998-October 2000), Chairman and Chief Executive Officer of Levitz Furniture Corporation (November 1995-November 1998) and President and Chief Executive Officer of Hills Department Stores (May 1991-July 1995); variously Chairman, Chief Executive Officer, President and Chief Operating Officer (1987-1991) of the Sears Merchandise Group of Sears, Roebuck & Co.

175

Director of various business organizations.

Kathleen A. Dennis (53) c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Trustees 1177 Avenue of the Americas New York, NY 10036

Trustee

Since August 2006

President, Cedarwood Associates (mutual fund consulting) (since 2006); formerly, Senior Managing Director of Victory Capital Management (1993-2006).

108

None.

31

Morgan Stanley Special Value Fund

Trustee and Officer Information continued

Name, Age and Address of Independent Trustee

Position(s) Held with Registrant

Term of Office and Length of Time Served*

Principal Occupation(s) During Past 5 Years

Number of Portfolios in Fund Complex Overseen by Trustee**

Other Directorships Held by Trustee

Edwin J. Garn (73) 1031 N. Chartwell Court Salt Lake City, UT 84103

Trustee

Since January 1993

Consultant; Director or Trustee of the Retail Funds (since January 1993) and the Institutional Funds (since July 2003); Member of the Utah Regional Advisory Board of Pacific Corp. (utility company); formerly Managing Director of Summit Ventures LLC (2000-2004) (lobbying and consulting firm); United States Senator (R-Utah) (1974-1992) and Chairman, Senate Banking Committee (1980-1986), Mayor of Salt Lake City, Utah (1971-1974), Astronaut, Space Shuttle Discovery (April 12-19, 1985), and Vice Chairman, Huntsman Corporation (chemical company).

175

Director of Franklin Covey (time management systems), BMW Bank of North America, Inc. (industrial loan corporation), Escrow Bank USA (industrial loan corporation); United Space Alliance (joint venture between Lockheed Martin and the Boeing Company) and Nuskin Asia Pacific (multilevel marketing); member of the board of various civic and charitable organizations.

Wayne E. Hedien (72) c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Trustees 1177 Avenue of the Americas New York, NY 10036

Trustee

Since September 1997

Retired; Director or Trustee of the Retail Funds; (Since September 1997) and the Institutional Funds (since July 2003); formerly associated with the Allstate Companies (1966-1994), most recently as Chairman of The Allstate Corporation (March 1993-December 1994) and Chairman and Chief Executive Officer of its wholly-owned subsidiary, Allstate Insurance Company (July 1989-December 1994).

175

Director of The PMI Group Inc. (private mortgage insurance); Trustee and Vice Chairman of The Field Museum of Natural History; director of various other business and charitable organizations.

Dr. Manuel H. Johnson (57) c/o Johnson Smick Group, Inc. 888 16th Street, N.W. Suite 740 Washington, D.C. 20006

Trustee

Since July 1991

Senior Partner, Johnson Smick International, Inc., a consulting firm; Chairman of the Audit Committee and Director or Trustee of the Retail Funds (since July 1991) and the Institutional Funds (since July 2003); Co-Chairman and a founder of the Group of Seven Council (G7C), an international economic commission; formerly Vice Chairman of the Board of Governors of the Federal Reserve System and Assistant Secretary of the U.S. Treasury.

175

Director of NVR, Inc. (home construction); Director of KFX Energy; Director of RBS Greenwich Capital Holdings (financial holding company).

32

Morgan Stanley Special Value Fund

Trustee and Officer Information continued

Name, Age and Address of Independent Trustee

Position(s) Held with Registrant

Term of Office and Length of Time Served*

Principal Occupation(s) During Past 5 Years

Number of Portfolios in Fund Complex Overseen by Trustee**

Other Directorships Held by Trustee

Joseph J. Kearns (63) c/o Kearns & Associates LLC PMB754 23852 Pacific Coast Highway Malibu, CA 90265

Trustee

Since July 2003

President, Kearns & Associates LLC (investment consulting); Deputy Chairman of the Audit Committee and Director or Trustee of the Retail Funds (since July 2003) and the Institutional Funds (since August 1994); previously Chairman of the Audit Committee of the Institutional Funds (October 2001-July 2003); formerly CFO of the J. Paul Getty Trust.

176

Director of Electro Rent Corporation (equipment leasing), The Ford Family Foundation, and the UCLA Foundation.

Michael F. Klein (47) c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Trustees 1177 Avenue of the Americas New York, NY 10036

Trustee

Since August 2006

Chief Operating Officer and Managing Director, Aetos Capital, LLC (since March 2000); formerly Managing Director, Morgan Stanley & Co. Inc. and Morgan Stanley Dean Witter Investment Management, and President, Morgan Stanley Institutional Funds (June 1998-March 2000); Principal, Morgan Stanley & Co. Inc. and Morgan Stanley Dean Witter Investment Management (August 1997-December 1999).

108

Director of certain investment funds managed or sponsored by Aetos Capital LLC.

Michael E. Nugent (70) c/o Triumph Capital, L.P. 445 Park Avenue New York, NY 10022

Chairman of the Board and Trustee

Chairman of the Board (since July 2006) and Trustee (since July 1991)

General Partner of Triumph Capital, L.P., a private investment partnership; Chairman of the Board of the Retail Funds and Institutional Funds (since 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).

175

None.

33

Morgan Stanley Special Value Fund

Trustee and Officer Information continued

Name, Age and Address of Independent Trustee

Position(s) Held with Registrant

Term of Office and Length of Time Served*

Principal Occupation(s) During Past 5 Years

Number of Portfolios in Fund Complex Overseen by Trustee**

Other Directorships Held by Trustee

W. Allen Reed (59) c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Trustees 1177 Avenue of the Americas New York, NY 10036

Trustee

Since August 2006

President and CEO of General Motors Asset Management; Chairman and Chief Executive Officer of the GM Trust Bank and Corporate Vice President of General Motors Corporation (August 1994-December 2005).

108

Director of GMAC (financial services), GMAC Insurance Holdings, iShares, Inc. (exchange traded funds), and Temple-Inland Industries (Packaging, Banking and Forrest Products); member of the Board of Executives of the New York Stock Exchange, the Investment Advisory Committee for the New York State Retirement System and the Morgan Stanley Capital International Editorial Board; Director of various investment fund advisory boards.

Fergus Reid (73) c/o Lumelite Plastics Corporation 85 Charles Colman Blvd. Pawling, NY 12564

Trustee

Since July 2003

Chairman of Lumelite Plastics Corporation; Chairman of the Governance Committee and Director or Trustee of the Retail Funds (since July 2003) and the Institutional Funds (since June 1992).

176

Trustee and Director of certain investment companies in the JPMorgan Funds complex managed by J.P. Morgan Investment Management Inc.

34

Morgan Stanley Special Value Fund

Trustee and Officer Information continued

Interested Trustees:

Name, Age and Address of Interested Trustee

Position(s) Held with Registrant

Term of Office and Length of Time Served*

Principal Occupation(s) During Past 5 Years

Number of Portfolios in Fund Complex Overseen by Trustee**

Other Directorships Held by Trustee

Charles A. Fiumefreddo (73) c/o Morgan Stanley Trust Harborside Financial Center Plaza Two Jersey City, NJ 07311

Trustee

Since July 1991

Director or Trustee of the Retail Funds (since July 1991) and the Institutional Funds (since July 2003); formerly Chairman of the Retail Funds (July 1991-July 2006) and the Institutional Funds (July 2003-July 2006) and Chief Executive Officer of the Retail Funds (until September 2002).

175

None.

James F. Higgins (58) c/o Morgan Stanley Trust Harborside Financial Center Plaza Two Jersey City, NJ 07311

Trustee

Since June 2000

Director or Trustee of the Retail Funds (since June 2000) and the Institutional Funds (since July 2003); Senior Advisor of Morgan Stanley (since August 2000).

175

Director of AXA Financial, Inc. and The Equitable Life Assurance Society of the United States (financial services).

    * 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 August 23, 2006.

35

Morgan Stanley Special Value Fund

Trustee and Officer Information continued

Officers:

Name, Age and Address of Executive Officer

Position(s) Held with Registrant

Term of Office and Length of Time Served*

Principal Occupation(s) During Past 5 Years

Ronald E. Robison (67) 1221 Avenue of the Americas New York, NY 10020

President and Principal Executive Officer

President (since September 2005) and Principal Executive Officer (since May 2003)

President (since September 2005) and Principal Executive Officer (since May 2003) of funds in the Fund Complex; 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 (51) Morgan Stanley Investment Management Ltd. 25 Cabot Square Canary Wharf, London United Kingdom E144QA

Vice President

Since February 2006

Managing Director and (since December 2005) Chief Investment Officer – Global Fixed Income of Morgan Stanley Investment Management; Managing Director and Director of Morgan Stanley Investment Management Limited; Vice President of the Retail and Institutional Funds (since February 2006).

Dennis F. Shea (53) 1221 Avenue of the Americas New York, NY 10020

Vice President

Since February 2006

Managing Director and (since February 2006) Chief Investment Officer – Global 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) 1221 Avenue of the Americas New York, NY 10020

Vice President

Since February 1997

Managing Director and General Counsel of Morgan Stanley Investment 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) 1221 Avenue of the Americas New York, NY 10020

Vice President

Since July 2004

Managing Director and General Counsel, U.S. Investment Management of Morgan Stanley 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) 1221 Avenue of the Americas New York, NY 10020

Chief Compliance Officer

Since October 2004

Managing Director and U.S. Director of Compliance for Morgan Stanley Investment 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.

Stefanie V. Chang Yu (39) 1221 Avenue of the Americas New York, NY 10020

Vice President

Since December 1997

Executive Director of the Investment Adviser and various entities affiliated 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.

36

Morgan Stanley Special Value Fund

Trustee and Officer Information continued

Name, Age and Address of Executive Officer

Position(s) Held with Registrant

Term of Office and Length of Time Served*

Principal Occupation(s) During Past 5 Years

Francis J. Smith (40) c/o Morgan Stanley Trust Harborside Financial Center Plaza Two Jersey City, NJ 07311

Treasurer and Chief Financial Officer

Treasurer (since July 2003) and Chief Financial Officer (since September 2002)

Executive Director of the Investment Adviser and various entities affiliated with the Investment Adviser; Treasurer and Chief Financial Officer of the Retail Funds (since July 2003). Formerly, Vice President of the Retail Funds (September 2002 to July 2003).

Mary E. Mullin (39) 1221 Avenue of the Americas New York, NY 10020

Secretary

Since July 1999

Executive Director of the Investment Adviser and various entities affiliated with the Investment Adviser; Secretary of the Retail Funds (since July 2003) and the Institutional Funds (since June 1999).

    * 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 July 31, 2006, the Fund paid to its shareholders $3.10 per share from long-term capital gains.

37

(This page has been left blank intentionally.)

(This page has been left blank intentionally.)

Trustees Frank L. Bowman Michael Bozic Kathleen A. Dennis Charles A. Fiumefreddo 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. © 2006 Morgan Stanley SVFRPT-38424RPT-RA06-00846P-Y07/06		MORGAN STANLEY FUNDS
		Morgan Stanley Special Value Fund Annual Report July 31, 2006

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.


                                       2


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....................... $ 33,920        N/A

          NON-AUDIT FEES
                    AUDIT-RELATED FEES..... $    531 (2)    $5,190,300 (2)
                    TAX FEES............... $  5,100 (3)    $2,044,491 (4)
                    ALL OTHER FEES......... $   -           $    -
          TOTAL NON-AUDIT FEES............. $  5,631        $7,234,791

          TOTAL............................ $ 39,551        $7,234,791


       2005
                                            REGISTRANT      COVERED ENTITIES (1)
          AUDIT FEES....................... $ 33,836        N/A

          NON-AUDIT FEES
                    AUDIT-RELATED FEES..... $    540 (2)    $ 3,215,745 (2)
                    TAX FEES............... $  5,285 (3)    $    24,000 (4)
                    ALL OTHER FEES......... $   -           $    -
          TOTAL NON-AUDIT FEES............. $  5,825        $ 3,239,745

          TOTAL............................ $ 39,661        $ 3,239,745

          N/A- Not applicable, as not required by Item 4.

          (1)   Covered Entities include the Adviser (excluding
                sub-advisors) and any entity controlling, controlled by or
                under common control with the Adviser that provides ongoing
                services to the Registrant.
          (2)   Audit-Related Fees represent assurance and related services
                provided that are reasonably related to the performance of
                the audit of the financial statements of the Covered
                Entities' and funds advised by the Adviser or its
                affiliates, specifically data verification and agreed-upon
                procedures related to asset securitizations and agreed-upon
                procedures engagements.
          (3)   Tax Fees represent tax compliance, tax planning and tax
                advice services provided in connection with the preparation
                and review of the Registrant's tax returns.
          (4)   Tax Fees represent tax compliance, tax planning and tax
                advice services provided in connection with the review of
                Covered Entities' tax returns.
          (5)   All other fees represent project management for future
                business applications and improving business and operational
                processes.


                                       3


(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.


                                       4


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


                                       5


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


                                       6


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


                                       7


         Morgan Stanley Institutional Funds
         ----------------------------------
         Morgan Stanley Investment Management Inc.
         Morgan Stanley Investment Advisors Inc.
         Morgan Stanley Investment Management Limited
         Morgan Stanley Investment Management Private Limited
         Morgan Stanley Asset & Investment Trust Management Co., Limited
         Morgan Stanley Investment Management Company
         Morgan Stanley & Co. Incorporated
         Morgan Stanley Distribution, Inc.
         Morgan Stanley AIP GP LP
         Morgan Stanley Alternative Investment Partners LP


(e)(2) Beginning with non-audit service contracts entered into on or after May
6, 2003, the audit committee also is required to pre-approve services to Covered
Entities to the extent that the services are determined to have a direct impact
on the operations or financial reporting of the Registrant. 100% of such
services were pre-approved by the audit committee pursuant to the Audit
Committee's pre-approval policies and procedures (attached hereto).

(f) Not applicable.

(g) See table above.

(h) The audit committee of the Board of Trustees has considered whether the
provision of services other than audit services performed by the auditors to the
Registrant and Covered Entities is compatible with maintaining the auditors'
independence in performing audit services.


Item 5. Audit Committee of Listed Registrants.

(a) The Fund has a separately-designated standing audit committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act whose members are:
Michael Bozic, Edwin J. Garn, Wayne E. Hedien, Manual H. Johnson, Joseph J.
Kearns, Michael Nugent and Fergus Reid.

(b) Not applicable.


Item 6. Schedule of Investments

Refer to Item 1.


                                       8


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.


                                       9


                                   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 Special Value Fund

/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
September 21, 2006

     Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.

/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
September 21, 2006

/s/ Francis Smith
Francis Smith
Principal Financial Officer
September 21, 2006


                                       10


                                                                    EXHIBIT 12 A


      CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS
      --------------------------------------------------------------------
            ADOPTED SEPTEMBER 28, 2004, AS AMENDED SEPTEMBER 20, 2005
            ---------------------------------------------------------


I.   This Code of Ethics (the "Code") for the investment companies within the
     Morgan Stanley complex identified in Exhibit A (collectively, "Funds" and
     each, a "Fund") applies to each Fund's Principal Executive Officer,
     President, Principal Financial Officer and Treasurer (or persons performing
     similar functions) ("Covered Officers" each of whom are set forth in
     Exhibit B) for the purpose of promoting:

     o    honest and ethical conduct, including the ethical handling of actual
          or apparent conflicts of interest between personal and professional
          relationships.

     o    full, fair, accurate, timely and understandable disclosure in reports
          and documents that a company files with, or submits to, the Securities
          and Exchange Commission ("SEC") and in other public communications
          made by the Fund;

     o    compliance with applicable laws and governmental rules and
          regulations;

     o    prompt internal reporting of violations of the Code to an appropriate
          person or persons identified in the Code; and

     o    accountability for adherence to the Code.

     Each Covered Officer should adhere to a high standard of business ethics
and should be sensitive to situations that may give rise to actual as well as
apparent conflicts of interest. Any question about the application of the Code
should be referred to the General Counsel or his/her designee (who is set forth
in Exhibit C).

II.  COVERED OFFICERS SHOULD HANDLE ETHICALLY ACTUAL AND APPARENT CONFLICTS OF
     INTEREST

     OVERVIEW. A "conflict of interest" occurs when a Covered Officer's private
interest interferes, or appears to interfere, with the interests of, or his
service to, the Fund. For example, a conflict of interest would arise if a
Covered Officer, or a member of his family, receives improper personal benefits
as a result of his position with the Fund.

     Certain conflicts of interest arise out of the relationships between
Covered Officers and the Fund and already are subject to conflict of interest
provisions in the


                                       11


Investment Company Act of 1940 ("Investment Company Act") and the Investment
Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers
may not individually engage in certain transactions (such as the purchase or
sale of securities or other property) with the Fund because of their status as
"affiliated persons" (as defined in the Investment Company Act) of the Fund. The
Fund's and its investment adviser's compliance programs and procedures are
designed to prevent, or identify and correct, violations of these provisions.
This Code does not, and is not intended to, repeat or replace these programs and
procedures, and such conflicts fall outside the parameters of this Code, unless
or until the General Counsel determines that any violation of such programs and
procedures is also a violation of this Code.

     Although typically not presenting an opportunity for improper personal
benefit, conflicts may arise from, or as a result of, the contractual
relationship between the Fund and its investment adviser of which the Covered
Officers are also officers or employees. As a result, this Code recognizes that
the Covered Officers will, in the normal course of their duties (whether
formally for the Fund or for the investment adviser, or for both), be involved
in establishing policies and implementing decisions that will have different
effects on the Fund and its investment adviser. The participation of the Covered
Officers in such activities is inherent in the contractual relationship between
the Fund and the investment adviser and is consistent with the performance by
the Covered Officers of their duties as officers of the Fund. Thus, if performed
in conformity with the provisions of the Investment Company Act and the
Investment Advisers Act, such activities will be deemed to have been handled
ethically. In addition, it is recognized by the Funds' Boards of
Directors/Trustees ("Boards") that the Covered Officers may also be officers or
employees of one or more other investment companies covered by this or other
codes.

     Other conflicts of interest are covered by the Code, even if such conflicts
of interest are not subject to provisions in the Investment Company Act and the
Investment Advisers Act. The following list provides examples of conflicts of
interest under the Code, but Covered Officers should keep in mind that these
examples are not exhaustive. The overarching principle is that the personal
interest of a Covered Officer should not be placed improperly before the
interest of the Fund.

     Each Covered Officer must not:

     o    use his personal influence or personal relationships improperly to
          influence investment decisions or financial reporting by the Fund
          whereby the Covered Officer would benefit personally (directly or
          indirectly);

     o    cause the Fund to take action, or fail to take action, for the
          individual personal benefit of the Covered Officer rather than the
          benefit of the Fund; or

     o    use material non-public knowledge of portfolio transactions made or
          contemplated for, or actions proposed to be taken by, the Fund to
          trade personally or cause others to trade personally in contemplation
          of the market effect of such transactions.


                                       12


     Each Covered Officer must, at the time of signing this Code, report to the
General Counsel all affiliations or significant business relationships outside
the Morgan Stanley complex and must update the report annually.

     Conflict of interest situations should always be approved by the General
Counsel and communicated to the relevant Fund or Fund's Board. Any activity or
relationship that would present such a conflict for a Covered Officer would
likely also present a conflict for the Covered Officer if an immediate member of
the Covered Officer's family living in the same household engages in such an
activity or has such a relationship. Examples of these include:

     o    service or significant business relationships as a director on the
          board of any public or private company;

     o    accepting directly or indirectly, anything of value, including gifts
          and gratuities in excess of $100 per year from any person or entity
          with which the Fund has current or prospective business dealings, not
          including occasional meals or tickets for theatre or sporting events
          or other similar entertainment; provided it is business-related,
          reasonable in cost, appropriate as to time and place, and not so
          frequent as to raise any question of impropriety;

     o    any ownership interest in, or any consulting or employment
          relationship with, any of the Fund's service providers, other than its
          investment adviser, principal underwriter, or any affiliated person
          thereof; and

     o    a direct or indirect financial interest in commissions, transaction
          charges or spreads paid by the Fund for effecting portfolio
          transactions or for selling or redeeming shares other than an interest
          arising from the Covered Officer's employment, such as compensation or
          equity ownership.

III. DISCLOSURE AND COMPLIANCE

     o    Each Covered Officer should familiarize himself/herself with the
          disclosure and compliance requirements generally applicable to the
          Funds;

     o    each Covered Officer must not knowingly misrepresent, or cause others
          to misrepresent, facts about the Fund to others, whether within or
          outside the Fund, including to the Fund's Directors/Trustees and
          auditors, or to governmental regulators and self-regulatory
          organizations;

     o    each Covered Officer should, to the extent appropriate within his area
          of responsibility, consult with other officers and employees of the
          Funds and their investment advisers with the goal of promoting full,
          fair, accurate, timely and understandable disclosure in the reports
          and documents the Funds file with, or submit to, the SEC and in other
          public communications made by the Funds; and


                                       13


     o    it is the responsibility of each Covered Officer to promote compliance
          with the standards and restrictions imposed by applicable laws, rules
          and regulations.

IV.  REPORTING AND ACCOUNTABILITY

     Each Covered Officer must:

     o    upon adoption of the Code (thereafter as applicable, upon becoming a
          Covered Officer), affirm in writing to the Boards that he has
          received, read and understands the Code;

     o    annually thereafter affirm to the Boards that he has complied with the
          requirements of the Code;

     o    not retaliate against any other Covered Officer, other officer or any
          employee of the Funds or their affiliated persons for reports of
          potential violations that are made in good faith; and

     o    notify the General Counsel promptly if he/she knows or suspects of any
          violation of this Code. Failure to do so is itself a violation of this
          Code.

     The General Counsel is responsible for applying this Code to specific
situations in which questions are presented under it and has the authority to
interpret this Code in any particular situation. However, any waivers(2) sought
by a Covered Officer must be considered by the Board of the relevant Fund or
Funds.

     The Funds will follow these procedures in investigating and enforcing this
Code:

     o    the General Counsel will take all appropriate action to investigate
          any potential violations reported to him;

     o    if, after such investigation, the General Counsel believes that no
          violation has occurred, the General Counsel is not required to take
          any further action;

     o    any matter that the General Counsel believes is a violation will be
          reported to the relevant Fund's Audit Committee;

     o    if the directors/trustees/managing general partners who are not
          "interested persons" as defined by the Investment Company Act (the
          "Independent Directors/Trustees/Managing General Partners") of the
          relevant Fund concur that a violation has occurred, they will consider
          appropriate action, which may include review of, and appropriate
          modifications to, applicable

----------
(2)  Item 2 of Form N-CSR defines "waiver" as "the approval by the registrant of
     a material departure from a provision of the code of ethics."


                                       14


          policies and procedures; notification to appropriate personnel of the
          investment adviser or its board; or a recommendation to dismiss the
          Covered Officer or other appropriate disciplinary actions;

     o    the Independent Directors/Trustees/Managing General Partners of the
          relevant Fund will be responsible for granting waivers of this Code,
          as appropriate; and

     o    any changes to or waivers of this Code will, to the extent required,
          be disclosed as provided by SEC rules.

V.   OTHER POLICIES AND PROCEDURES

     This Code shall be the sole code of ethics adopted by the Funds for
purposes of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules and
forms applicable to registered investment companies thereunder. Insofar as other
policies or procedures of the Funds, the Funds' investment advisers, principal
underwriters, or other service providers govern or purport to govern the
behavior or activities of the Covered Officers who are subject to this Code,
they are superseded by this Code to the extent that they overlap or conflict
with the provisions of this Code unless any provision of this Code conflicts
with any applicable federal or state law, in which case the requirements of such
law will govern. The Funds' and their investment advisers' and principal
underwriters' codes of ethics under Rule 17j-1 under the Investment Company Act
and Morgan Stanley's Code of Ethics are separate requirements applying to the
Covered Officers and others, and are not part of this Code.

VI.  AMENDMENTS

     Any amendments to this Code, other than amendments to Exhibits A, B or C,
must be approved or ratified by a majority vote of the Board of each Fund,
including a majority of Independent Directors/Trustees/Managing General
Partners.

VII. CONFIDENTIALITY

     All reports and records prepared or maintained pursuant to this Code will
be considered confidential and shall be maintained and protected accordingly.
Except as otherwise required by law or this Code, such matters shall not be
disclosed to anyone other than the Independent Directors/Trustees/Managing
General Partners of the relevant Fund or Funds and their counsel, the relevant
Fund or Funds and their counsel and the relevant investment adviser and its
counsel.


                                       15


VIII. INTERNAL USE

     The Code is intended solely for the internal use by the Funds and does not
constitute an admission, by or on behalf of any Fund, as to any fact,
circumstance, or legal conclusion



I have read and understand the terms of the above Code. I recognize the
responsibilities and obligations incurred by me as a result of my being subject
to the Code. I hereby agree to abide by the above Code.



-------------------------

Date:
     --------------------


                                       16


                                    EXHIBIT A
                                    ---------


                                    FUND LIST

                                       AT
                                  JULY 31, 2006


RETAIL FUNDS
------------

OPEN-END RETAIL FUNDS

     TAXABLE MONEY MARKET FUNDS
     --------------------------

1.   Active Assets Government Securities Trust ("AA Government")
2.   Active Assets Institutional Government Securities Trust ("AA Institutional
     Government")
3.   Active Assets Institutional Money Trust ("AA Institutional Money")
4.   Active Assets Money Trust ("AA Money")
5.   Morgan Stanley Liquid Asset Fund Inc. ("Liquid Asset")
6.   Morgan Stanley U.S. Government Money Market Trust ("Government Money")

     TAX-EXEMPT MONEY MARKET FUNDS
     -----------------------------

7.   Active Assets California Tax-Free Trust ("AA California")
8.   Active Assets Tax-Free Trust ("AA Tax-Free")
9.   Morgan Stanley California Tax-Free Daily Income Trust ("California Tax-Free
     Daily")
10.  Morgan Stanley New York Municipal Money Market Trust ("New York Money")
11.  Morgan Stanley Tax-Free Daily Income Trust ("Tax-Free Daily")

     EQUITY FUNDS
     ------------

12.  Morgan Stanley Aggressive Equity Fund ("Aggressive Equity")+
13.  Morgan Stanley Allocator Fund ("Allocator Fund")+
14.  Morgan Stanley Capital Opportunities Trust ("Capital Opportunities")+
15.  Morgan Stanley Developing Growth Securities Trust ("Developing Growth")+
16.  Morgan Stanley Dividend Growth Securities Inc. ("Dividend Growth")+
17.  Morgan Stanley Equally-Weighted S&P 500 Fund ("Equally-Weighted S&P 500")+
18.  Morgan Stanley European Equity Fund Inc. ("European Equity")+
19.  Morgan Stanley Financial Services Trust ("Financial Services")+
20.  Morgan Stanley Focus Growth Fund ("Focus Growth")+
21.  Morgan Stanley Fundamental Value Fund ("Fundamental Value")+
22.  Morgan Stanley Global Advantage Fund ("Global Advantage")+
23.  Morgan Stanley Global Dividend Growth Securities ("Global Dividend
     Growth")+
24.  Morgan Stanley Global Utilities Fund ("Global Utilities")+


                                       17


25.  Morgan Stanley Growth Fund ("Growth Fund")+
26.  Morgan Stanley Health Sciences Trust ("Health Sciences")+
27.  Morgan Stanley Income Builder Fund ("Income Builder")+
28.  Morgan Stanley Institutional Strategies Fund ("Institutional Strategies")+
29.  Morgan Stanley International Fund ("International Fund")+
30.  Morgan Stanley International SmallCap Fund ("International SmallCap")+
31.  Morgan Stanley International Value Equity Fund ("International Value")+
32.  Morgan Stanley Japan Fund ("Japan Fund")+
33.  Morgan Stanley Mid-Cap Value Fund (Mid-Cap Value")+
34.  Morgan Stanley Multi-Asset Class Fund ("Multi-Asset Class")+
35.  Morgan Stanley Nasdaq-100 Index Fund ("Nasdaq-100")+
36.  Morgan Stanley Natural Resource Development Securities Inc. ("Natural
     Resource")+
37.  Morgan Stanley Pacific Growth Fund Inc. ("Pacific Growth")+
38.  Morgan Stanley Real Estate Fund ("Real Estate")+
39.  Morgan Stanley Small-Mid Special Value Fund (Small-Mid Special Value")+
40.  Morgan Stanley S&P 500 Index Fund ("S&P500 Index")+
41.  Morgan Stanley Special Growth Fund ("Special Growth")+
42.  Morgan Stanley Special Value Fund ("Special Value")+
43.  Morgan Stanley Technology Fund ("Technology")+
44.  Morgan Stanley Total Market Index Fund ("Total Market Index")+
45.  Morgan Stanley Total Return Trust ("Total Return")+
46.  Morgan Stanley Utilities Fund ("Utilities Fund")+
47.  Morgan Stanley Value Fund ("Value Fund")+

     BALANCED FUNDS
     --------------

48.  Morgan Stanley Balanced Growth Fund ("Balanced Growth")+
49.  Morgan Stanley Balanced Income Fund ("Balanced Income")+

     ASSET ALLOCATION FUND
     ---------------------

50.  Morgan Stanley Strategist Fund ("Strategist Fund")+

     TAXABLE FIXED-INCOME FUNDS
     --------------------------

51. Morgan Stanley Convertible Securities Trust ("Convertible Securities")+
52.  Morgan Stanley Flexible Income Trust ("Flexible Income")+
53.  Morgan Stanley Income Trust ("Income Trust")+
54.  Morgan Stanley High Yield Securities Inc. ("High Yield Securities")+
55.  Morgan Stanley Limited Duration Fund ("Limited Duration Fund")
56.  Morgan Stanley Limited Duration U.S. Treasury Trust ("Limited Duration
     Treasury")
57.  Morgan Stanley Mortgage Securities Trust ("Mortgage Securities")+
58.  Morgan Stanley Total Return Income Securities Fund ("Total Return Income")+
59.  Morgan Stanley U.S. Government Securities Trust ("Government Securities")+


                                       18


     TAX-EXEMPT FIXED-INCOME FUNDS
     -----------------------------

60.  Morgan Stanley California Tax-Free Income Fund ("California Tax-Free")+
61.  Morgan Stanley Limited Term Municipal Trust ("Limited Term Municipal")
62.  Morgan Stanley New York Tax-Free Income Fund ("New York Tax-Free")+
63.  Morgan Stanley Tax-Exempt Securities Trust ("Tax-Exempt Securities")+

     SPECIAL PURPOSE FUNDS
     ---------------------

64.  Morgan Stanley Select Dimensions Investment Series ("Select Dimensions")
        o  Balanced Growth Portfolio
        o  Capital Opportunities Portfolio
        o  Developing Growth Portfolio
        o  Dividend Growth Portfolio
        o  Equally-Weighted S&P 500 Portfolio
        o  Flexible Income Portfolio
        o  Focus Growth Portfolio
        o  Global Equity Portfolio
        o  Growth Portfolio
        o  Money Market Portfolio
        o  Utilities Portfolio

65.  Morgan Stanley Variable Investment Series ("Variable Investment")
        o  Aggressive Equity Portfolio
        o  Dividend Growth Portfolio
        o  Equity Portfolio
        o  European Equity Portfolio
        o  Global Advantage Portfolio
        o  Global Dividend Growth Portfolio
        o  High Yield Portfolio
        o  Income Builder Portfolio
        o  Limited Duration Portfolio
        o  Money Market Portfolio
        o  Income Plus Portfolio
        o  S&P 500 Index Portfolio
        o  Strategist Portfolio
        o  Utilities Portfolio


CLOSED-END RETAIL FUNDS

     TAXABLE FIXED-INCOME CLOSED-END FUNDS
     -------------------------------------

66.  Morgan Stanley Government Income Trust ("Government Income")
67.  Morgan Stanley Income Securities Inc. ("Income Securities")


                                       19


68.  Morgan Stanley Prime Income Trust ("Prime Income")

     TAX-EXEMPT FIXED-INCOME CLOSED-END FUNDS
     ----------------------------------------

69.  Morgan Stanley California Insured Municipal Income Trust ("California
     Insured Municipal")
70.  Morgan Stanley California Quality Municipal Securities ("California Quality
     Municipal")
71.  Morgan Stanley Insured California Municipal Securities ("Insured California
     Securities")
72.  Morgan Stanley Insured Municipal Bond Trust ("Insured Municipal Bond")
73.  Morgan Stanley Insured Municipal Income Trust ("Insured Municipal Income")
74.  Morgan Stanley Insured Municipal Securities ("Insured Municipal
     Securities")
75.  Morgan Stanley Insured Municipal Trust ("Insured Municipal Trust")
76.  Morgan Stanley Municipal Income Opportunities Trust ("Municipal
     Opportunities")
77.  Morgan Stanley Municipal Income Opportunities Trust II ("Municipal
     Opportunities II")
78.  Morgan Stanley Municipal Income Opportunities Trust III ("Municipal
     Opportunities III")
79.  Morgan Stanley Municipal Premium Income Trust ("Municipal Premium")
80.  Morgan Stanley New York Quality Municipal Securities ("New York Quality
     Municipal")
81.  Morgan Stanley Quality Municipal Income Trust ("Quality Municipal Income")
82.  Morgan Stanley Quality Municipal Investment Trust ("Quality Municipal
     Investment")
83.  Morgan Stanley Quality Municipal Securities ("Quality Municipal
     Securities")

+- Denotes Retail Multi-Class Fund

                               INSTITUTIONAL FUNDS
                               -------------------

OPEN-END INSTITUTIONAL FUNDS

1. Morgan Stanley Institutional Fund, Inc. ("Institutional Fund Inc.")

   Active Portfolios:
        o  Active International Allocation Portfolio
        o  Emerging Markets Portfolio
        o  Emerging Markets Debt Portfolio
        o  Focus Equity Portfolio
        o  Global Franchise Portfolio
        o  Global Real Estate Portfolio
        o  Global Value Equity Portfolio
        o  International Equity Portfolio
        o  International Growth Equity Portfolio
        o  International Magnum Portfolio


                                       20


        o  International Real Estate Portfolio
        o  International Small Cap Portfolio
        o  Large Cap Relative Value Portfolio
        o  Money Market Portfolio
        o  Municipal Money Market Portfolio
        o  Small Company Growth Portfolio
        o  Systematic Active large Cap Core Portfolio
        o  Systematic Active Small Cap Core Portfolio
        o  Systematic Active Small Cap Growth Portfolio
        o  Systematic Active Small Cap Value Portfolio
        o  U.S. Large Cap Growth Portfolio
        o  U.S. Real Estate Portfolio

   Inactive Portfolios*:

        o  China Growth Portfolio
        o  Gold Portfolio
        o  Large Cap Relative Value Portfolio
        o  MicroCap Portfolio
        o  Mortgage-Backed Securities Portfolio
        o  Municipal Bond Portfolio
        o  U.S. Equity Plus Portfolio

2. Morgan Stanley Institutional Fund Trust ("Institutional Fund Trust")

   Active Portfolios:

        o  Advisory Portfolio
        o  Advisory Foreign Fixed Income II Portfolio
        o  Advisory Foreign Fixed Income Portfolio
        o  Balanced Portfolio
        o  Core Fixed Income Portfolio
        o  Core Plus Fixed Income Portfolio
        o  Equity Portfolio
        o  Equity Plus Portfolio
        o  High Yield Portfolio
        o  Intermediate Duration Portfolio
        o  International Fixed Income Portfolio
        o  Investment Grade Fixed Income Portfolio
        o  Limited Duration Portfolio
        o  Long Duration Fixed Income Portfolio

----------
*    Have not commenced or have ceased operations


                                       21


        o  Mid-Cap Growth Portfolio
        o  Municipal Portfolio
        o  U.S. Mid-Cap Value Portfolio
        o  U.S. Small-Cap Value Portfolio
        o  Value Portfolio

   Inactive Portfolios*:

        o  Balanced Plus Portfolio
        o  Growth Portfolio
        o  Investment Grade Credit Advisory Portfolio
        o  Mortgage Advisory Portfolio
        o  New York Municipal Portfolio
        o  Targeted Duration Portfolio
        o  Value II Portfolio

3. The Universal Institutional Funds, Inc. ("Universal Funds")

   Active Portfolios:

        o  Core Plus Fixed Income Portfolio
        o  Emerging Markets Debt Portfolio
        o  Emerging Markets Equity Portfolio
        o  Equity and Income Portfolio
        o  Equity Growth Portfolio
        o  Global Franchise Portfolio
        o  Global Real Estate Portfolio
        o  Global Value Equity Portfolio
        o  High Yield Portfolio
        o  International Growth Equity Portfolio
        o  International Magnum Portfolio
        o  Mid-Cap Growth Portfolio
        o  Small Company Growth Portfolio
        o  U.S. Mid-Cap Value Portfolio
        o  U.S. Real Estate Portfolio
        o  Value Portfolio

     Inactive Portfolios*:

        o  Balanced Portfolio
        o  Capital Preservation Portfolio
        o  Core Equity Portfolio
        o  International Fixed Income Portfolio
        o  Investment Grade Fixed Income Portfolio


                                       22


        o  Latin American Portfolio
        o  Multi-Asset Class Portfolio
        o  Targeted Duration Portfolio

4. Morgan Stanley Institutional Liquidity Funds ("Liquidity Funds")

   Active Portfolios:

        o  Government Portfolio
        o  Money Market Portfolio
        o  Prime Portfolio
        o  Tax-Exempt Portfolio
        o  Treasury Portfolio


   Inactive Portfolios*:

        o  Government Securities Portfolio
        o  Treasury Securities Portfolio


CLOSED-END INSTITUTIONAL FUNDS

5.   Morgan Stanley Asia-Pacific Fund, Inc. ("Asia-Pacific Fund")
6.   Morgan Stanley Eastern Europe Fund, Inc. ("Eastern Europe")
7.   Morgan Stanley Emerging Markets Debt Fund, Inc. ("Emerging Markets Debt")
8.   Morgan Stanley Emerging Markets Fund, Inc. ("Emerging Markets Fund")
9.   Morgan Stanley Global Opportunity Bond Fund, Inc. ("Global Opportunity")
10.  Morgan Stanley High Yield Fund, Inc. ("High Yield Fund")
11.  The Latin American Discovery Fund, Inc. ("Latin American Discovery")
12   The Malaysia Fund, Inc. ("Malaysia Fund")
13.  The Thai Fund, Inc. ("Thai Fund")
14.  The Turkish Investment Fund, Inc. ("Turkish Investment")
15.  India Investment Fund

CLOSED-END FUND OF HEDGE FUNDS

16.  Morgan Stanley Institutional Fund of Hedge Funds ("Fund of Hedge Funds")



                                 IN REGISTRATION
MORGAN STANLEY RETAIL FUNDS
1. Morgan Stanley American Franchise Fund

----------

* Have not commenced or have ceased operations


                                       23


FUNDS OF HEDGE FUNDS
1.   Morgan Stanley Absolute Return Fund
2.   Morgan Stanley Institutional Fund of Hedge Funds II


                                       24






                                    EXHIBIT B
                                    ---------

                               INSTITUTIONAL FUNDS
                                COVERED OFFICERS
                                ----------------

          Ronald E. Robison -President and Principal Executive Officer
            James W. Garrett - Chief Financial Officer and Treasurer

                                  RETAIL FUNDS
                                COVERED OFFICERS
                                ----------------

          Ronald E. Robison -President and Principal Executive Officer
              Francis Smith - Chief Financial Officer and Treasurer

                   MORGAN STANLEY INDIA INVESTMENT FUND, INC.
                                COVERED OFFICERS
                                ----------------

          Ronald E. Robison - President and Principal Executive Officer
            James W. Garrett - Chief Financial Officer and Treasurer


                                       25






                                    EXHIBIT C
                                    ---------

                                 GENERAL COUNSEL
                                 ---------------

                                   Barry Fink


                                       26



                                                                   EXHIBIT 12 B1

                  CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

                                 CERTIFICATIONS
                                 --------------

I, Ronald E. Robison, certify that:

1.   I have reviewed this report on Form N-CSR of Morgan Stanley Special Value
     Fund;

2.   Based on my knowledge, this report does not contain any untrue statement of
     a material fact or omit to state a material fact necessary to make the
     statements made, in light of the circumstances under which such statements
     were made, not misleading with respect to the period covered by this
     report;

3.   Based on my knowledge, the financial statements and other financial
     information included in this report, fairly present in all material
     respects the financial condition, results of operations, changes in net
     assets, and cash flows (if the financial statements are required to include
     a statement of cash flows) of the registrant as of, and for, the periods
     presented in this report;

4.   The registrant's other certifying officers and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Rule 30a-3(c) under the Investment Company Act of 1940) and internal
     control over financial reporting (as defined in Rule 30a-3(d) under the
     Investment Company Act of 1940) for the registrant and have:

     a)   designed such disclosure controls and procedures, or caused such
          disclosure controls and procedures to be designed under our
          supervision, to ensure that material information relating to the
          registrant, including its consolidated subsidiaries, is made known to
          us by others within those entities, particularly during the period in
          which this report is being prepared;

     b)   designed such internal control over financial reporting, or caused
          such internal control over financial reporting to be designed under
          our supervision, to provide reasonable assurance regarding the
          reliability of financial reporting and the preparation of financial
          statements for external purposes in accordance with generally accepted
          accounting principles;

     c)   evaluated the effectiveness of the registrant's disclosure controls
          and procedures and presented in this report our conclusions about the
          effectiveness of the disclosure controls and procedures, as of a date
          within 90 days prior to the filing date of this report based on such
          evaluation; and

     d)   disclosed in this report any change 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; and

5.   The registrant's other certifying officer(s) and I have disclosed to the
     registrant's auditors and the audit committee of the registrant's board of
     directors (or persons performing the equivalent functions):


                                       27


     a)   all significant deficiencies and material weaknesses in the design or
          operation of internal control over financial reporting which are
          reasonably likely to adversely affect the registrant's ability to
          record, process, summarize, and report financial information; and

     b)   any fraud, whether or not material, that involves management or other
          employees who have a significant role in the registrant's internal
          controls over financial reporting.

Date: September 21, 2006
                                                     /s/ Ronald E. Robison
                                                     Ronald E. Robison
                                                     Principal Executive Officer


                                       28


                                                                   EXHIBIT 12 B2

                  CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

                                 CERTIFICATIONS
                                 --------------

I, Francis Smith, certify that:

1.   I have reviewed this report on Form N-CSR of Morgan Stanley Special Value
     Fund;

2.   Based on my knowledge, this report does not contain any untrue statement of
     a material fact or omit to state a material fact necessary to make the
     statements made, in light of the circumstances under which such statements
     were made, not misleading with respect to the period covered by this
     report;

3.   Based on my knowledge, the financial statements and other financial
     information included in this report, fairly present in all material
     respects the financial condition, results of operations, changes in net
     assets, and cash flows (if the financial statements are required to include
     a statement of cash flows) of the registrant as of, and for, the periods
     presented in this report;

4.   The registrant's other certifying officers and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Rule 30a-3(c) under the Investment Company Act of 1940) and internal
     control over financial reporting (as defined in Rule 30a-3(d) under the
     Investment Company Act of 1940) for the registrant and have:

     a)   designed such disclosure controls and procedures, or caused such
          disclosure controls and procedures to be designed under our
          supervision, to ensure that material information relating to the
          registrant, including its consolidated subsidiaries, is made known to
          us by others within those entities, particularly during the period in
          which this report is being prepared;

     b)   designed such internal control over financial reporting, or caused
          such internal control over financial reporting to be designed under
          our supervision, to provide reasonable assurance regarding the
          reliability of financial reporting and the preparation of financial
          statements for external purposes in accordance with generally accepted
          accounting principles;

     c)   evaluated the effectiveness of the registrant's disclosure controls
          and procedures and presented in this report our conclusions about the
          effectiveness of the disclosure controls and procedures, as of a date
          within 90 days prior to the filing date of this report based on such
          evaluation; and

     d)   disclosed in this report any change 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; and

5.   The registrant's other certifying officer(s) and I have disclosed to the
     registrant's auditors and the audit committee of the registrant's board of
     directors (or persons performing the equivalent functions):


                                       29


     a)   all significant deficiencies and material weaknesses in the design or
          operation of internal control over financial reporting which are
          reasonably likely to adversely affect the registrant's ability to
          record, process, summarize, and report financial information; and

     b)   any fraud, whether or not material, that involves management or other
          employees who have a significant role in the registrant's internal
          controls over financial reporting.

Date: September 21, 2006
                                                    /s/ Francis Smith
                                                    Francis Smith
                                                    Principal Financial  Officer


                                       30


                            SECTION 906 CERTIFICATION

                Certification Pursuant to 18 U.S.C. Section 1350,
                             As Adopted Pursuant to
                  Section 906 of the Sarbanes-Oxley Act of 2002

Morgan Stanley Special Value Fund

     In connection with the Report on Form N-CSR (the "Report") of the
above-named issuer for the period ended July 31, 2006, 2006 that is accompanied
by this certification, the undersigned hereby certifies that:

1.   The Report fully complies with the requirements of Section 13(a) or 15(d)
     of the Securities Exchange Act of 1934; and

2.   The information contained in the Report fairly presents, in all material
     respects, the financial condition and results of operations of the Issuer.



Date: September 21, 2006                          /s/ Ronald E. Robison
                                                  ---------------------------
                                                  Ronald E. Robison
                                                  Principal Executive Officer


A signed original of this written statement required by Section 906 has been
provided to Morgan Stanley Special Value Fund and will be retained by Morgan
Stanley Special Value Fund and furnished to the Securities and Exchange
Commission or its staff upon request.


                                       31


                            SECTION 906 CERTIFICATION

                Certification Pursuant to 18 U.S.C. Section 1350,
                             As Adopted Pursuant to
                  Section 906 of the Sarbanes-Oxley Act of 2002

Morgan Stanley Special Value Fund

     In connection with the Report on Form N-CSR (the "Report") of the
above-named issuer for the period ended July 31, 2006 that is accompanied by
this certification, the undersigned hereby certifies that:

1.   The Report fully complies with the requirements of Section 13(a) or 15(d)
     of the Securities Exchange Act of 1934; and

2.   The information contained in the Report fairly presents, in all material
     respects, the financial condition and results of operations of the Issuer.



Date: September 21, 2006                       /s/ Francis Smith
                                               ----------------------
                                               Francis Smith
                                               Principal Financial Officer


A signed original of this written statement required by Section 906 has been
provided to Morgan Stanley Special Value Fund and will be retained by Morgan
Stanley Special Value Fund and furnished to the Securities and Exchange
Commission or its staff upon request.