N-CSRS 1 a12-17004_1ncsrs.htm N-CSRS

 

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

811-03692

 

Morgan Stanley Variable Investment Series

(Exact name of registrant as specified in charter)

 

522 Fifth Avenue, New York, New York

 

10036

(Address of principal executive offices)

 

(Zip code)

 

Arthur Lev

522 Fifth Avenue, New York, New York 10036

(Name and address of agent for service)

 

Registrant’s telephone number, including area code:

201-830-8894

 

 

Date of fiscal year end:

December 31, 2012

 

 

Date of reporting period:

June 30, 2012

 

 


 

Item 1 - Report to Shareholders

 


MORGAN STANLEY
VARIABLE INVESTMENT SERIES

Semi-Annual Report

JUNE 30, 2012

The Portfolios are intended to be the funding vehicle for variable annuity contracts and variable life insurance policies offered by the separate accounts of certain life insurance companies.


Morgan Stanley Variable Investment Series

Table of Contents

Letter to the Shareholders   1  
Fund Performance   15  
Expense Examples   17  
Investment Advisory Agreement Approval   21  
Portfolio of Investments:  
Money Market   25  
Limited Duration   28  
Income Plus   35  
Global Infrastructure   46  
European Equity   49  
Multi Cap Growth   52  
Aggressive Equity   55  
Strategist   58  
Financial Statements:  
Statements of Assets and Liabilities   68  
Statements of Operations   70  
Statements of Changes in Net Assets   72  
Notes to Financial Statements   80  
Financial Highlights   110  


Morgan Stanley Variable Investment Series

Letter to the Shareholders n June 30, 2012 (unaudited)

Dear Shareholder:

After starting the year on a relatively optimistic note, financial markets endured some disappointments but ultimately finished the six-month period ended June 30, 2012 mostly higher. While sluggish economic growth across Europe was expected given the ongoing debt crisis and the resulting austerity measures, indications of slowing in the U.S. and China further tempered investors' outlooks on the global economy. Some progress was made on containing Europe's debt woes, including the European Central Bank's (ECB) two long-term refinancing operations (or LTROs, in December 2011 and February 2012), which provided three-year loans to European banks, and coordinated monetary policy responses from central banks around the world, which boosted liquidity in the system. However, Greece's embattled legislative election in the spring and a bank bailout in Spain were a reminder that many fundamental issues have yet to be resolved. In the final days of the reporting period, the latest European summit yielded some positive developments, including a willingness to enable bank supervision at a federal, rather than national level and an easing of restrictions on access to rescue funds.

Domestic Equity Overview

In the first few months of 2012, improving data from the labor market, housing market, and consumer confidence and spending bolstered investor confidence about the U.S. economy's prospects. However, part of the improvement in jobs and consumer data was due to the unseasonably warm spring, and the positive momentum in these metrics did not last beyond April. The economy began to appear more sluggish in the second quarter of 2012. Concerns about the effects of the ongoing European debt crisis on economies in Europe and China also contributed to volatility in stock prices. Despite the challenging backdrop, corporate earnings generally remained within or above expectations during the period, although signs emerged after the close of the period (as second quarter earnings reports were being released) that earnings expectations would need to be lowered going forward. While U.S. stock market performance was weaker in the second quarter of 2012 than in the first quarter, the S&P 500 Index closed the six-month period up 9.49%.

Fixed Income Overview

In 2011, the Federal Open Market Committee announced that it expected to keep interest rates on hold until at least mid-2013. Yields on the short end of the yield curve remained anchored by the Fed's near-zero interest rate policy, keeping money market yields low. Given the weaker-than-expected economic conditions, the Federal Reserve (the Fed) extended its timeline to late-2014 at the beginning of this year. Since October 2011, the Fed has been buying longer-maturity Treasuries and selling short-term Treasuries


Morgan Stanley Variable Investment Series

Letter to the Shareholders n June 30, 2012 (unaudited) continued

to put downward pressure on longer-term interest rates. This program was scheduled to end in June 2012, but has been extended to December 2012.

Treasury yields rose in the first quarter but then declined in the second quarter, reflecting weaker growth as well as a flight to quality due to the European debt crisis. The 10-year Treasury yield reached an all time low of 1.47% at the beginning of June.

Agency mortgage-backed securities performed well over the period. The sector offers an attractive yield advantage in the current low yield environment. Despite historically low mortgage rates, refinancing activity has been slower than it has been in the past under similar rate incentives. Many borrowers are unable to refinance due to tighter underwriting standards. The U.S. housing market appears to be trying to find a bottom. The headline home price index was still showing a negative year-over-year trend at the end of the review period, but the momentum of the decline had meaningfully slowed.

The corporate segment outperformed Treasuries, aided by strong corporate balance sheets and low borrowing costs. The high yield corporate sector saw increased volatility in the second quarter of 2012 amid worries about the European debt crisis. For the period overall, the financial sector was the best-performing corporate sector.

International Equity Overview

Despite the concerns about the European debt crisis and the slackening pace of China's economy, many international equity markets posted gains for the six-month period ended June 30, 2012. The outcome of the European summit on June 28 and 29 surprised the markets, leading to a rally in the final days of the reporting period. However, the proposals' implementation details have yet to be worked out and the larger issue of developing a more sustainable framework for economic growth in the region remains. Meanwhile, European economies continued to show signs of deterioration, even within the so-called "core" countries. China's economy also cooled during the period, as export demand from the U.S. and Europe declined and credit remained restricted. The country's central bank unexpectedly cut interest rates in June (and again in July, just after the end of the reporting period) in attempt to keep economic growth from sliding further.

Money Market Portfolio

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money market funds seek to preserve the value of an investment at $1.00 per share, it is possible to lose money by investing in such funds.


2


Morgan Stanley Variable Investment Series

Letter to the Shareholders n June 30, 2012 (unaudited) continued

As of June 30, 2012, Variable Investment Series – Money Market Portfolio had net assets of approximately $97 million with an average portfolio maturity of 19 days. For the seven-day period ended June 30, 2012, the Portfolio's Class X shares provided an effective annualized yield of 0.01% (subsidized) and – 0.33% (non-subsidized) and a current yield of 0.01% (subsidized) and – 0.33% (non-subsidized), while its 30-day moving average yield for June was 0.01% (subsidized) and – 0.32% (non-subsidized). Yield quotations more closely reflect the current earnings of the Portfolio. The non-subsidized yield reflects what the yield would have been had a fee and/or expense waiver not been in place during the period shown. For the six-month period ended June 30, 2012, the Portfolio's Class X shares returned 0.00%. Past performance is no guarantee of future results.

For the seven-day period ended June 30, 2012, the Portfolio's Class Y shares provided an effective annualized yield of 0.01% (subsidized) and – 0.58% (non-subsidized) and a current yield of 0.01% (subsidized) and – 0.58% (non-subsidized), while its 30-day moving average yield for June was 0.01% (subsidized) and – 0.57% (non-subsidized). Yield quotations more closely reflect the current earnings of the Portfolio. The non-subsidized yield reflects what the yield would have been had a fee and/or expense waiver not been in place during the period shown. For the six-month period ended June 30, 2012, the Portfolio's Class Y shares returned 0.00%. Past performance is no guarantee of future results.

The performance of the Portfolio's two share classes varies because each has different expenses. The Portfolio's total returns assume the reinvestment of all distributions but do not reflect the deduction of any charges by your insurance company. Such costs would lower performance.

We continued to remain cautious in our investment approach, focusing on high liquidity and short durations. We believe our investment process and focus on credit research and risk management have placed the Portfolio in a favorable position to respond to market uncertainty. Most of our investment activity has been focused on rolling significant amounts of overnight and short-dated maturities, with occasional selective purchases of one-month, three-month, and six-month fixed rate maturities, as well as selective purchases of nine-month and one-year floating rate paper.

There is no guarantee that any sectors mentioned will continue to perform as discussed above or that securities in such sectors will be held by the Portfolio in the future.

Limited Duration Portfolio

For the six-month period ended June 30, 2012, Variable Investment Series – Limited Duration Portfolio Class X shares produced a total return of 1.86%, outperforming the Barclays Capital U.S. Government/Credit


3


Morgan Stanley Variable Investment Series

Letter to the Shareholders n June 30, 2012 (unaudited) continued

Index (1-5 Year) (the "Index"),1 which returned 1.13%. For the same period, the Portfolio's Class Y shares returned 1.71%. Past performance is no guarantee of future results.

The performance of the Portfolio's two share classes varies because each has different expenses. The Portfolio's total returns assume the reinvestment of all distributions but do not reflect the deduction of any charges by your insurance company. Such costs would lower performance.

The Portfolio's overweight to the credit sector was the main driver of performance as spread (or non-government) sectors outperformed Treasuries during the period. Short maturity corporate spreads retraced most of their widening from the second half of last year, and overall corporate spreads ended the period 60 basis points tighter. The financial sector was the best performing corporate sector, with short-maturity financial spreads tightening by about 100 basis points during the period. The Portfolio's allocation to short-maturity, high-quality asset-backed securities also helped performance.

Conversely, the Portfolio was underweight in the agency sector, which detracted slightly from relative performance as spreads tightened over the period. Interest-rate positioning did not have an impact on performance as the Portfolio had been positioned to be neutral relative to the Index.

There is no guarantee that any sectors mentioned will continue to perform as discussed above or that securities in such sectors will be held by the Portfolio in the future.

Income Plus Portfolio

For the six-month period ended June 30, 2012, Variable Investment Series – Income Plus Portfolio Class X shares produced a total return of 6.56%, outperforming the Barclays Capital U.S. Corporate Index (the "Index"),2 which returned 4.65%. For the same period, the Portfolio's Class Y shares returned 6.38%. Past performance is no guarantee of future results.

The performance of the Portfolio's two share classes varies because each has different expenses. The Portfolio's total returns assume the reinvestment of all distributions but do not reflect the deduction of any charges by your insurance company. Such costs would lower performance.

1  The Barclays Capital U.S. Government/Credit Index (1-5 Year) tracks the performance of U.S. government and corporate obligations, including U.S. government agency and Treasury securities, and corporate and Yankee bonds with maturities of one to five years. The Index is unmanaged and its 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 Barclays Capital U.S. Corporate Index covers U.S. dollar-denominated, investment-grade, fixed rate, taxable securities sold by industrial, utility and financial issuers. It includes publicly issued U.S. corporate and foreign debentures and secured notes that meet specified maturity, liquidity and quality requirements. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.


4


Morgan Stanley Variable Investment Series

Letter to the Shareholders n June 30, 2012 (unaudited) continued

Following a period of historic volatility in risk assets during the latter half of 2011, the Portfolio entered 2012 overweight investment grade corporate bonds and with exposure to high yield corporate bonds and convertible bonds as well. These positions were designed to attempt to benefit from a normalization of credit spreads, which we believed would be driven by supportive global monetary policy and a continued modest U.S. economic recovery.

Although fears of a European financial collapse dominated headlines late in 2011, sentiment dramatically reversed early in 2012, in large part due to supportive actions by the European Central Bank (ECB). In particular, the ECB's long-term refinancing operations, or LTROs, had a substantial positive impact on the market by reducing liquidity pressures on European banks. These actions helped lower yields across many asset classes, most notably those securities with direct exposure to Europe.

Financial sector corporate bonds, which remain one of the Portfolio's largest overweights, responded strongly to the improved sentiment surrounding Europe and these exposures generated the majority of the Portfolio's outperformance of the period. High yield bonds held in the Portfolio also performed well during this period. We responded to this strong relative performance by modestly decreasing risk in those sectors which outperformed the most, particularly financials, and rotating into less volatile segments of the market. Underweights to select non-financial corporate sectors, such as health care and pharmaceuticals, detracted from relative performance during the period.

Over the last few months of the period, the market once again became concerned about the European fiscal crisis. In addition, a slowing U.S. economy pressured risk assets. While the future of Europe is certain to remain volatile, we believe that absent a significant downward spiral in Europe, the U.S. economy will continue to follow a path of slow growth. This slow growth environment is expected to remain supportive of credit fundamentals, in our opinion, ultimately leading to tighter credit spreads and potentially benefiting the Portfolio's current positioning.

There is no guarantee that any sectors mentioned will continue to perform as discussed above or that securities in such sectors will be held by the Portfolio in the future.

Global Infrastructure Portfolio

For the six-month period ended June 30, 2012, Variable Investment Series – Global Infrastructure Portfolio Class X shares produced a total return of 7.06%, outperforming the Dow Jones Brookfield Global


5


Morgan Stanley Variable Investment Series

Letter to the Shareholders n June 30, 2012 (unaudited) continued

Infrastructure IndexSM (the "Index"),3 which returned 6.44%, and the S&P Global BMI Index,4 which returned 6.09%. For the same period, the Portfolio's Class Y shares returned 6.93%. Past performance is no guarantee of future results.

The performance of the Portfolio's two share classes varies because each has different expenses. The Portfolio's total returns assume the reinvestment of all distributions but do not reflect the deduction of any charges by your insurance company. Such costs would lower performance.

Infrastructure shares appreciated 6.44% during the first half of 2012, as measured by the Index. Among the major infrastructure sectors, the communications, European regulated utilities, and gas distribution utilities sectors exhibited relative outperformance over the Index, while the gas midstream, toll roads, pipeline companies, and transmission and distribution sectors underperformed the Index. In addition, all of the smaller sectors exhibited relative outperformance, with the water sector realizing the strongest gains.

Despite indications of slowing economic growth globally, the first half of 2012 ended on a high note for the broader equity markets as investors cheered the prospect of a common European banking regulator and the potential for direct bank bailouts within the European Union (EU) that will bypass sovereign governments (thus breaking the circular, co-dependent relationship between governments and banks that plagues the current crisis). While many would welcome these potential measures, we are cautious given the continued lack of specifics and the seemingly different interpretations of EU summit promises as expressed by members of the German and Spanish governments. Certain northern European countries have also threatened to block such initiatives unless current austerity drives are implemented in full.

If certain announcements in Europe are cause for optimism, such optimism may be in short supply as economic statistics elsewhere indicate a global economy struggling to escape from the global financial crisis. Job growth in the United States remains lackluster at best, and business optimism has started to deteriorate again, after improving earlier in the year. In Asia, the Chinese government has announced policy measures to stimulate growth and has lowered borrowing rates, but recent disclosure of various economic statistics indicate a broad slowing of growth in that country.

3  The Dow Jones Brookfield Global Infrastructure IndexSM is a float-adjusted market capitalization weighted index that measures the stock performance of companies that exhibit strong infrastructure characteristics. The Index intends to measure all sectors of the infrastructure market. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

4  The Standard & Poor's Global BMI Index (S&P Global BMI Index) is a broad market index designed to capture exposure to equities in all countries in the world that meet minimum size and liquidity requirements. As of the date of this Report, there are approximately 11,000 index members representing 26 developed and 20 emerging market countries. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.


6


Morgan Stanley Variable Investment Series

Letter to the Shareholders n June 30, 2012 (unaudited) continued

Within infrastructure, the strength of operating fundamentals exhibited in the first half of the year varies by sector and region. One of the strongest areas from a fundamental perspective remains the communications sector, where U.S.-based wireless tower operators in particular are enjoying robust growth, driven by upgrades to telecommunications companies' wireless networks. Utility assets globally that focus on transmission, distribution, and storage initiatives are also witnessing very stable, steady growth. Within energy infrastructure in North America, there has been some softening in fundamentals off the very robust growth achieved over the last couple of years as lower natural gas, crude oil, and natural gas liquids (NGL) prices have curtailed exploration and production company drilling plans somewhat, lessening the utilization of existing infrastructure in certain parts of the value chain (in particular, gathering and processing). We view this softening as temporary, however, as the long-term need for takeaway capacity and processing is significant and the geographical location of both resource and demand centers continues to evolve. We would also note that recent merger and acquisition activity in the exploration and production space for North American commodity resources by Asian buyers underscores the medium- to long-term demand for natural gas, crude oil, and commodity byproducts that will require infrastructure investment for some time to come. It is important to note the distinction between energy infrastructure company share prices, some of which were weak in the first half of 2012 — in particular within gas midstream — and the magnitude of their capital programs, which remain very robust.

As a final note, while the operating fundamentals (i.e., traffic) of European toll road companies have for the most part been weak for the first half of the year, current valuation levels are difficult to ignore. Current share prices imply a long-term cost of capital and/or indefinite weakness in traffic, which is difficult to justify despite the current financial and economic crises surrounding the countries in which these concessionaires are domiciled.

For the first half of 2012, the Portfolio realized favorable performance from both bottom-up stock selection and top-down allocation. From a bottom-up perspective, the Portfolio benefited from stock selection in the gas distribution utilities, communications, European regulated utilities, and gas midstream sectors, but relative gains were partially offset by adverse selection in the pipeline companies sector. From a top-down perspective, the Portfolio benefited from an underweight to the gas midstream sector and overweights to the communications and gas distribution utilities sectors. This outperformance was partially offset by overweights to the toll roads and pipeline companies sectors.

We remain committed to our core investment philosophy as an infrastructure value investor. As value-oriented, bottom-up driven investors, our investment perspective is that over the medium and long term, the key factor in determining the performance of infrastructure securities will be underlying infrastructure asset values.


7


Morgan Stanley Variable Investment Series

Letter to the Shareholders n June 30, 2012 (unaudited) continued

Given the large and growing private infrastructure market, we believe that there are limits as to the level of premium or discount at which the public sector should trade relative to its underlying private infrastructure value. These limits can be viewed as the point at which the arbitrage opportunity between owning infrastructure in the private versus public markets becomes compelling. In aiming to achieve core infrastructure exposure in a cost effective manner, we invest in equity securities of publicly listed infrastructure companies we believe offer the best value relative to their underlying infrastructure value and Net Asset Value growth prospects.

Our research currently leads us to an overweighting in the Portfolio (amongst the largest sectors) to a group of companies in the gas distribution utilities, communications, toll road, and pipeline companies sectors, and an underweighting to companies in the gas midstream and transmission and distribution sectors. Since our year-end commentary dated December 31, 2011, the only change from a sector perspective is that we now hold close to a market-weight position in the European regulated utilities sector.

Looking forward, we continue to believe the toll road sector presents an attractive opportunity from a valuation perspective, and we also like the secular growth stories within the communications sector and energy infrastructure sector — in particular, gas distribution utilities within Asia and pipeline companies within North America. For more processing and fractionation-focused midstream companies, we remain underweight but believe they have become more attractively valued given the absolute declines observed in the first half of the year.

There is no guarantee that any sectors mentioned will continue to perform as discussed above or that securities in such sectors will be held by the Portfolio in the future.

European Equity Portfolio

For the six-month period ended June 30, 2012, Variable Investment Series – European Equity Portfolio Class X shares produced a total return of 3.04%, outperforming the MSCI Europe Index (the "Index"),5 which returned 2.40%. For the same period, the Portfolio's Class Y shares returned 2.90%. Past performance is no guarantee of future results.

5  The Morgan Stanley Capital International (MSCI) Europe Index is a free float-adjusted market capitalization index that is designed to measure developed market equity performance in Europe. The term "free float" represents the portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors. The performance of the Index is listed in U.S. dollars and assumes reinvestment of net dividends. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.


8


Morgan Stanley Variable Investment Series

Letter to the Shareholders n June 30, 2012 (unaudited) continued

The performance of the Portfolio's two share classes varies because each has different expenses. The Portfolio's total returns assume the reinvestment of all distributions but do not reflect the deduction of any charges by your insurance company. Such costs would lower performance.

On a sector basis, the Portfolio's outperformance was driven by stock selection in capital goods, insurance, software and services, and banks. The largest contributor to relative performance was a holding in a Spanish IT company that is the world's largest provider of reservations management software and systems for the travel industry. Other major contributors included holdings in a French hotel chain that recently sold off its underperforming U.S. business operation, a German truck maker that was recently acquired, a U.K. insurance provider, and a U.K. aerospace equipment company. Strong stock selection and an underweight in the telecommunications sector also aided relative results.

However, stock selection in the materials, retail, and utilities sectors diminished relative gains. Relative weakness came from holdings in a Spanish bank that saw its credit rating lowered by Moody's Investor Service in June although the bank's financials have remained relatively healthy, a French utility company that we believed had an uncertain outlook, a U.K. mining company that has underperformed since its merger, and a U.K. supermarket chain that has been losing market share in the sluggish economic environment.

On a country level, positive contributors included stock selection in Germany, Finland, and Switzerland. Both stock selection and an underweight in Spain were beneficial as well. The only detractor on a country basis during the period was stock selection in the U.K.

In the first half of the period, the financials and other cyclical (or economically sensitive) sectors rallied strongly. However, from mid-March through the end of the period, the outperformance of these sectors faded amid rising concerns about the global economy (including emerging markets) and disappointing news from the development of the European debt crisis. At the same time, valuations of some of the more defensive (or less economically sensitive) stocks were quite expensive, as investors largely preferred to position defensively.

In this environment, we have sought to maintain what we believe is a balanced and diversified stance in the Portfolio. In fact, the Portfolio is overweight in energy and industrials, which are more cyclical sectors, counterbalanced by an overweight in consumer staples and health care, which are more defensive. On the contrary, we are underweight in defensive utilities and telecommunications sectors, but also underweight in cyclical materials, consumer discretionary (with no exposure to luxury goods due to expensive valuations), and financials (with an overweight in banks) sectors.


9


Morgan Stanley Variable Investment Series

Letter to the Shareholders n June 30, 2012 (unaudited) continued

Central banks around the world have shifted their tone, as the markets expected a possible third quantitative easing program (dubbed QE3) from the U.S. Federal Reserve in second half of 2012. In addition, we saw recently action from the Bank of England, which pumped £50 billion into the system, the European Central Bank (ECB) cutting interest rates by 25 basis points, Brazil cutting by 50 basis points, and South Korea by 25 basis points. These coordinated easing actions have been in the past a positive catalyst for the equity markets. We also look with favor toward the recent trend in oil prices, which potentially point to further falls in inflation over the coming months. This trend should help those central banks wishing to add further monetary stimulus, but also lowers input costs for the corporate sector — thereby improving margin trends — and may provide support for consumers' disposable income.

Although concerns remain on sovereign debt for some European "peripheral" countries, we believe that the current scenario has provided opportunities in the market. In Europe we still see large economic imbalances (between north and south, "core" and "periphery") and a lack of fiscal integration. While it is possible to overcome these deficiencies, it will take some years.

Over the long term, we expect that the European economy should be a major beneficiary of a global recovery, with its high exposure to emerging markets. We see recent market weakness as an opportunity to selectively add quality stocks to the portfolio, as we believe European valuations are cheap compared to historical levels. Current equity valuations have priced a low-growth environment for Europe, which we believe seems to be the most likely scenario for the next few years. Economic growth in core European countries versus poor results from peripheral Europe, emerging markets exposure, asset allocation shift out of fixed income into developed equities and cheap valuations provide strong back up to our favorable thesis on the asset class. Our investment approach remains the same. We continue to seek high quality companies that we believe have high earnings visibility and predictability, stable and strong cash flow and low levels of debt trading at attractive valuations.

There is no guarantee that any sectors mentioned will continue to perform as discussed above or that securities in such sectors will be held by the Portfolio in the future.

Multi Cap Growth Portfolio

For the six-month period ended June 30, 2012, Variable Investment Series – Multi Cap Growth Portfolio Class X shares produced a total return of 9.85%, underperforming the Russell 3000® Growth Index (the


10


Morgan Stanley Variable Investment Series

Letter to the Shareholders n June 30, 2012 (unaudited) continued

"Index"),6 which returned 9.98%. For the same period, the Portfolio's Class Y shares returned 9.72%. Past performance is no guarantee of future results.

The performance of the Portfolio's two share classes varies because each has different expenses. The Portfolio's total returns assume the reinvestment of all distributions but do not reflect the deduction of any charges by your insurance company. Such costs would lower performance.

Stock selection in the technology sector was by far the largest detractor from performance. Several holdings in the computer services, software and systems industry were among the weakest performers in the portfolio during the period. Stock selection in materials and processing dampened relative performance, due to positions in two companies specializing in rare earth minerals production. Stock selection in financial services also hurt relative returns. The Portfolio's position in an auto insurance provider and a lack of exposure to real estate investment trusts (REITs), a group that performed well in the Index, were the main reasons for the Portfolio's underperformance within the sector.

Conversely, stock selection in health care was additive to relative performance. The Portfolio held several stocks that performed well, including a provider of billing services to medical group practices and companies making medical and dental instrument and supplies. Stock selection in consumer discretionary was another positive contributor, mostly due to strong gains from a position in an online retailer. Stock selection in producer durables further benefited relative returns. Within the sector, the Portfolio was helped by exposure to companies involved in back office support, human resources, and consulting, as well as holdings in commercial services providers.

There is no guarantee that any sectors mentioned will continue to perform as discussed above or that securities in such sectors will be held by the Portfolio in the future.

Aggressive Equity Portfolio

For the six-month period ended June 30, 2012, Variable Investment Series – Aggressive Equity Portfolio Class X shares produced a total return of 9.80%, underperforming the Russell 3000® Growth Index (the "Index"),6 which returned 9.98%. For the same period, the Portfolio's Class Y shares returned 9.70%. Past performance is no guarantee of future results.

6  The Russell 3000® Growth Index measures the performance of the broad growth segment of the U.S. equity universe. It includes those Russell 3000® Index companies with higher price-to-book ratios and higher forecasted growth values. The Russell 3000® Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.


11


Morgan Stanley Variable Investment Series

Letter to the Shareholders n June 30, 2012 (unaudited) continued

The performance of the Portfolio's two share classes varies because each has different expenses. The Portfolio's total returns assume the reinvestment of all distributions but do not reflect the deduction of any charges by your insurance company. Such costs would lower performance.

Stock selection in the technology sector was by far the largest detractor from performance. Several holdings in the computer services, software and systems industry were among the weakest performers in the portfolio during the period. Stock selection in materials and processing dampened relative performance, due to positions in two companies specializing in rare earth minerals production. Stock selection in financial services also hurt relative returns. The Portfolio's position in an auto insurance provider and a lack of exposure to real estate investment trusts (REITs), a group that performed well in the Index, were the main reasons for the Portfolio's underperformance within the sector.

Conversely, stock selection in health care was additive to relative performance. The Portfolio held several stocks that performed well, including a provider of billing services to medical group practices and companies making medical and dental instrument and supplies. Stock selection in consumer discretionary was another positive contributor, mostly due to strong gains from a position in an online retailer. Stock selection in producer durables further benefited relative returns. Within the sector, the Portfolio was helped by exposure to companies involved in back office support, human resources, and consulting, as well as holdings in commercial services providers.

There is no guarantee that any sectors mentioned will continue to perform as discussed above or that securities in such sectors will be held by the Portfolio in the future.

Strategist Portfolio

For the six-month period ended June 30, 2012, Variable Investment Series – Strategist Portfolio Class X shares produced a total return of 4.41%, underperforming the S&P 500® Index (the "Index"),7 which returned 9.49%, and outperforming the Barclays Capital U.S. Government/Credit Index,8 which returned 2.65%. For the same period, the Portfolio's Class Y shares returned 4.28%. In addition, the Portfolio's Class X and Y shares outperformed their peers within the Lipper Variable Annuity Flexible Portfolio Underlying Funds category by 70 and 57 basis points, respectively, for the period under review, according to Lipper Analytics. Past performance is no guarantee of future results.

7  The Standard & Poor's 500® Index (S&P 500®) measures the performance of the large cap segment of the U.S. equities market, covering approximately 75% of the U.S. equities market. The Index includes 500 leading companies in leading industries of the U.S. economy. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

8  The Barclays Capital U.S. Government/Credit Index tracks the performance of government and corporate obligations, including U.S. government agency and Treasury securities and corporate and Yankee bonds. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.


12


Morgan Stanley Variable Investment Series

Letter to the Shareholders n June 30, 2012 (unaudited) continued

The performance of the Portfolio's two share classes varies because each has different expenses. The Portfolio's total returns assume the reinvestment of all distributions but do not reflect the deduction of any charges by your insurance company. Such costs would lower performance.

Strategist Portfolio's flexible investment approach allows investment across stocks, bonds, cash and other investment classes. To determine the specific allocation among asset classes throughout the period, we rigorously evaluate a comprehensive array of quantitative and qualitative factors. The quantitative analysis comprises an extensive "top-down" asset class review of many macroeconomic variables, with primary focus on three core factors: monetary policy and its impact on liquidity, inflation trends and corporate profitability. A second, more qualitative process then broadens the analysis to determine which sectors and industries would offer the best opportunities, in our view, given the macroeconomic climate. Individual holdings are then selected in an effort to provide desired exposure to asset classes and sectors.

During the first half of 2012, there were no material changes to the Portfolio's asset allocation. At period-end, the Portfolio's asset allocation (as a percentage of total Portfolio assets) stood at approximately 61% equities, 24% fixed income and 15% cash equivalents. The Portfolio's equity exposure continued to be focused in large capitalization, high free-cash flow generating companies featuring dividend yields in excess of the average equity security. These stocks have tended to underperform the general market in periods of strong rallies and outperformed during market corrections. The equity portfolio's largest sector exposures include consumer discretionary, industrials and information technology holdings; these three sectors make up approximately half of the Portfolio's total equity exposure.

The fixed income portfolio is diversified among a number of sectors as well, with U.S. government-issued exposures totaling 61% of the fixed income portfolio and corporate credit exposures totaling 32%. The balance of the Portfolio's fixed income holdings is spread among asset-backed instruments, municipal bonds and cash equivalents.

There is no guarantee that any sectors mentioned will continue to perform as discussed above or that securities in such sectors will be held by the Portfolio in the future.

We appreciate your ongoing support of Morgan Stanley Variable Investment Series and look forward to continuing to serve your investment needs.

Very truly yours,

Arthur Lev
President and Principal Executive Officer


13


Morgan Stanley Variable Investment Series

Letter to the Shareholders n June 30, 2012 (unaudited) continued

For More Information About Portfolio Holdings

Each Morgan Stanley fund provides a complete schedule of portfolio holdings in its semiannual and annual reports within 60 days of the end of the fund's second and fourth fiscal quarters. The semiannual reports and the annual reports are filed electronically with the Securities and Exchange Commission (SEC) on Form N-CSRS and Form N-CSR, respectively. Morgan Stanley also delivers the semiannual and annual reports to fund shareholders and makes these reports available on its public web site, www.morganstanley.com. Each Morgan Stanley fund also files a complete schedule of portfolio holdings with the SEC for the fund's first and third fiscal quarters on Form N-Q and monthly holdings for each money market fund on Form N-MFP. Morgan Stanley does not deliver these reports to shareholders, nor are the first and third fiscal quarter reports posted to the Morgan Stanley public web site. However, the holdings for each money market fund are posted to the Morgan Stanley public web site. You may obtain the Form N-Q filings (as well as the Form N-CSR, N-CSRS and N-MFP 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 20549-1520.

Proxy Voting Policy and Procedures and Proxy Voting Record

You may obtain a copy of the Portfolio'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 SEC's web site at http://www.sec.gov.

You may obtain information regarding how the Portfolios 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 SEC's web site at http://www.sec.gov.


14



Morgan Stanley Variable Investment Series

Fund Performance n June 30, 2012 (unaudited)

Average Annual Total Returns—Period Ended June 30, 2012(1)   
Class X   1 Year   5 Years   10 Years   Since
Inception		   Gross Expense
Ratio		   Date of
Inception		  
Aggressive Equity     -2.82 %     3.96 %     8.13 %     5.39 %     1.06 %   5/4/1999  
European Equity     -14.04       -5.61       3.81       8.06       1.17     3/1/1991  
Global Infrastructure     10.88       2.52       8.71       7.87       0.86     3/1/1990  
Income Plus     8.02       7.57       6.59       7.38       0.59     3/1/1987  
Limited Duration     2.66       -0.61       1.13       2.04       0.60     5/4/1999  
Money Market     0.01       0.98       1.68       4.27       0.60     3/9/1984  
Multi Cap Growth     -2.49       5.07       7.37       10.89       0.56     3/9/1984  
Strategist     -4.91       -0.92       5.20       7.49       0.61     3/1/1987  

 

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 contact the issuing insurance company or speak with your Financial Advisor. Investment return and principal value will fluctuate. When you sell Portfolio shares, they may be worth less than their original cost. Total returns do not reflect the deduction of taxes that a shareholder would pay on Portfolio distributions or the redemption of Portfolio shares. Performance for Class Y shares will vary from the performance of Class X shares due to differences in expenses.

(1)  Figure assumes reinvestment of all distributions for the underlying fund based on net asset value (NAV). It does not reflect the deduction of insurance expenses, an annual contract maintenance fee, or surrender charges. If performance information included the effect of these additional charges, the total returns would be lower.

 


15


Morgan Stanley Variable Investment Series

Fund Performance n June 30, 2012 (unaudited) continued

Average Annual Total Returns—Period Ended June 30, 2012(1)   
Class Y   1 Year   5 Years   10 Years   Since
Inception		   Gross Expense
Ratio		   Date of
Inception		  
Aggressive Equity     -3.03 %     3.71 %     7.86 %     2.31 %     1.31 %   6/5/2000  
European Equity     -14.27       -5.84       3.55       0.11       1.42     6/5/2000  
Global Infrastructure     10.62       2.27       8.44       2.89       1.11     6/5/2000  
Income Plus     7.64       7.30       6.32       6.72       0.84     6/5/2000  
Limited Duration     2.38       -0.83       0.88       1.70       0.85     6/5/2000  
Money Market     0.01       0.90       1.52       1.89       0.85     6/5/2000  
Multi Cap Growth     -2.72       4.80       7.10       1.98       0.81     6/5/2000  
Strategist     -5.15       -1.16       4.93       2.74       0.86     6/5/2000  

 

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 contact the issuing insurance company or speak with your Financial Advisor. Investment return and principal value will fluctuate. When you sell Portfolio shares, they may be worth less than their original cost. Total returns do not reflect the deduction of taxes that a shareholder would pay on Portfolio distributions or the redemption of Portfolio shares. Performance for Class Y shares will vary from the performance of Class X shares due to differences in expenses.

(1)  Figure assumes reinvestment of all distributions for the underlying fund based on net asset value (NAV). It does not reflect the deduction of insurance expenses, an annual contract maintenance fee, or surrender charges. If performance information included the effect of these additional charges, the total returns would be lower.

 


16


Morgan Stanley Variable Investment Series

Expense Examples n June 30, 2012 (unaudited)

As a shareholder of the Portfolio, you incur two types of costs: (1) insurance company charges; and (2) ongoing costs, including advisory fees; distribution and service (12b-1) fees; and other Portfolio expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds.

These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period 01/01/12 – 06/30/12.

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 Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio'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 Portfolio 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 insurance company charges. 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 insurance company charges were included, your costs would have been higher.


17


Morgan Stanley Variable Investment Series

Expense Examples n June 30, 2012 (unaudited) continued

Money Market

    Beginning
Account Value		   Ending
Account Value		   Expenses Paid
During Period@		  
    01/01/12   06/30/12   01/01/12 –
06/30/12		  
Class X  
Actual (0.00% return)   $ 1,000.00     $ 1,000.00     $ 1.29    
Hypothetical (5% annual return before expenses)   $ 1,000.00     $ 1,023.57     $ 1.31    
Class Y  
Actual (0.00% return)   $ 1,000.00     $ 1,000.00     $ 1.29    
Hypothetical (5% annual return before expenses)   $ 1,000.00     $ 1,023.57     $ 1.31    

 

  @  Expenses are equal to the Portfolio's annualized expense ratios of 0.26% and 0.26% for Class X and Class Y shares, respectively, multiplied by the average account value over the period, multiplied by 182/366 (to reflect the one-half year period). If the Portfolio had borne all of its expenses, the annualized expense ratios would have been 0.63% and 0.88% for Class X and Class Y shares, respectively.

Limited Duration

    Beginning
Account Value		   Ending
Account Value		   Expenses Paid
During Period@		  
    01/01/12   06/30/12   01/01/12 –
06/30/12		  
Class X  
Actual (1.86% return)   $ 1,000.00     $ 1,018.60     $ 2.91    
Hypothetical (5% annual return before expenses)   $ 1,000.00     $ 1,021.98     $ 2.92    
Class Y  
Actual (1.71% return)   $ 1,000.00     $ 1,017.10     $ 4.16    
Hypothetical (5% annual return before expenses)   $ 1,000.00     $ 1,020.74     $ 4.17    

 

  @  Expenses are equal to the Portfolio's annualized expense ratios of 0.58% and 0.83% for Class X and Class Y shares, respectively, multiplied by the average account value over the period, multiplied by 182/366 (to reflect the one-half year period).

Income Plus

    Beginning
Account Value		   Ending
Account Value		   Expenses Paid
During Period@		  
    01/01/12   06/30/12   01/01/12 –
06/30/12		  
Class X  
Actual (6.56% return)   $ 1,000.00     $ 1,065.60     $ 2.98    
Hypothetical (5% annual return before expenses)   $ 1,000.00     $ 1,021.98     $ 2.92    
Class Y  
Actual (6.38% return)   $ 1,000.00     $ 1,063.80     $ 4.26    
Hypothetical (5% annual return before expenses)   $ 1,000.00     $ 1,020.74     $ 4.17    

 

  @  Expenses are equal to the Portfolio's annualized expense ratios of 0.58% and 0.83% for Class X and Class Y shares, respectively, multiplied by the average account value over the period, multiplied by 182/366 (to reflect the one-half year period).


18


Morgan Stanley Variable Investment Series

Expense Examples n June 30, 2012 (unaudited) continued

Global Infrastructure

    Beginning
Account Value		   Ending
Account Value		   Expenses Paid
During Period@		  
    01/01/12   06/30/12   01/01/12 –
06/30/12		  
Class X  
Actual (7.06% return)   $ 1,000.00     $ 1,070.60     $ 4.27    
Hypothetical (5% annual return before expenses)   $ 1,000.00     $ 1,020.74     $ 4.17    
Class Y  
Actual (6.93% return)   $ 1,000.00     $ 1,069.30     $ 5.56    
Hypothetical (5% annual return before expenses)   $ 1,000.00     $ 1,019.49     $ 5.42    

 

  @  Expenses are equal to the Portfolio's annualized expense ratios of 0.83% and 1.08% for Class X and Class Y shares, respectively, multiplied by the average account value over the period, multiplied by 182/366 (to reflect the one-half year period).

European Equity

    Beginning
Account Value		   Ending
Account Value		   Expenses Paid
During Period@		  
    01/01/12   06/30/12   01/01/12 –
06/30/12		  
Class X  
Actual (3.04% return)   $ 1,000.00     $ 1,030.40     $ 5.05    
Hypothetical (5% annual return before expenses)   $ 1,000.00     $ 1,019.89     $ 5.02    
Class Y  
Actual (2.90% return)   $ 1,000.00     $ 1,029.00     $ 6.31    
Hypothetical (5% annual return before expenses)   $ 1,000.00     $ 1,018.65     $ 6.27    

 

  @  Expenses are equal to the Portfolio's annualized expense ratios of 1.00% and 1.25% for Class X and Class Y shares, respectively, multiplied by the average account value over the period, multiplied by 182/366 (to reflect the one-half year period). If the Portfolio had borne all of its expenses, the annualized expense ratios would have been 1.20% and 1.45% for Class X and Class Y shares, respectively.

Multi Cap Growth

    Beginning
Account Value		   Ending
Account Value		   Expenses Paid
During Period@		  
    01/01/12   06/30/12   01/01/12 –
06/30/12		  
Class X  
Actual (9.85% return)   $ 1,000.00     $ 1,098.50     $ 2.97    
Hypothetical (5% annual return before expenses)   $ 1,000.00     $ 1,022.03     $ 2.87    
Class Y  
Actual (9.72% return)   $ 1,000.00     $ 1,097.20     $ 4.28    
Hypothetical (5% annual return before expenses)   $ 1,000.00     $ 1,020.79     $ 4.12    

 

  @  Expenses are equal to the Portfolio's annualized expense ratios of 0.57% and 0.82% for Class X and Class Y shares, respectively, multiplied by the average account value over the period, multiplied by 182/366 (to reflect the one-half year period).


19


Morgan Stanley Variable Investment Series

Expense Examples n June 30, 2012 (unaudited) continued

Aggressive Equity

    Beginning
Account Value		   Ending
Account Value		   Expenses Paid
During Period@		  
    01/01/12   06/30/12   01/01/12 –
06/30/12		  
Class X  
Actual (9.80% return)   $ 1,000.00     $ 1,098.00     $ 5.63    
Hypothetical (5% annual return before expenses)   $ 1,000.00     $ 1,019.49     $ 5.42    
Class Y  
Actual (9.70% return)   $ 1,000.00     $ 1,097.00     $ 6.93    
Hypothetical (5% annual return before expenses)   $ 1,000.00     $ 1,018.25     $ 6.67    

 

  @  Expenses are equal to the Portfolio's annualized expense ratios of 1.08% and 1.33% for Class X and Class Y shares, respectively, multiplied by the average account value over the period, multiplied by 182/366 (to reflect the one-half year period). If the Portfolio had borne all of its expenses, the annualized expense ratios would have been 1.09% and 1.34% for Class X and Class Y shares, respectively.

Strategist

    Beginning
Account Value		   Ending
Account Value		   Expenses Paid
During Period@		  
    01/01/12   06/30/12   01/01/12 –
06/30/12		  
Class X  
Actual (4.41% return)   $ 1,000.00     $ 1,044.10     $ 3.05    
Hypothetical (5% annual return before expenses)   $ 1,000.00     $ 1,021.88     $ 3.02    
Class Y  
Actual (4.28% return)   $ 1,000.00     $ 1,042.80     $ 4.32    
Hypothetical (5% annual return before expenses)   $ 1,000.00     $ 1,020.64     $ 4.27    

 

  @  Expenses are equal to the Portfolio's annualized expense ratios of 0.60% and 0.85% for Class X and Class Y shares, respectively, multiplied by the average account value over the period, multiplied by 182/366 (to reflect the one-half year period). If the Portfolio had borne all of its expenses, the annualized expense ratios would have been 0.63% and 0.88% for Class X and Class Y shares, respectively.


20


Morgan Stanley Variable Investment Series

Investment Advisory Agreement Approval n June 30, 2012 (unaudited)

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 (as defined herein) under the advisory agreement, including portfolio management, investment research and equity and fixed income securities trading. The Board reviewed similar information and factors regarding the Sub-Advisers (as defined herein), to the extent applicable. The Board also reviewed and considered the nature and extent of the non-advisory, administrative services provided by the Administrator (as defined herein) 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, Sub-Advisers and Administrator together are referred to as the "Adviser" and the advisory, sub-advisory and administration agreements together are referred to as the "Management Agreement.") The Board also compared the nature of the services provided by the Adviser with similar services provided by non-affiliated advisers as reported to the Board by Lipper, Inc. ("Lipper").

The Board reviewed and considered the qualifications of the portfolio managers, the senior administrative managers and other key personnel of the Adviser who provide the administrative and advisory services to the Portfolios. 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 Portfolios and supported its decision to approve the Management Agreement.

Performance, Fees and Expenses of the Portfolios

The Board reviewed the performance, fees and expenses of the Portfolios compared to their peers, as determined by Lipper, and to appropriate benchmarks where applicable. The Board discussed with the Adviser the performance goals and the actual results achieved in managing the Portfolios. When considering a fund's performance, the Board and the Adviser place emphasis on trends and longer-term returns (focusing on one-year, three-year and five-year performance, as of December 31, 2011, or since inception, as applicable). When a fund underperforms its benchmark and/or its peer group average, they discuss the causes of such underperformance and, where necessary, they discuss specific changes to investment strategy or investment personnel.

Performance

The Board noted that the performance of the Strategist Portfolio was below its peer group averages for the one-, three- and five-year periods.


21


Morgan Stanley Variable Investment Series

Investment Advisory Agreement Approval n June 30, 2012 (unaudited) continued

The Board noted that the performance of the Money Market and Limited Duration Portfolios was better than the peer group averages for the one-year period but below the peer group averages for the three- and five-year periods.

The Board noted that the performance of the Income Plus, Multi Cap Growth and Aggressive Equity Portfolios was better than the peer group averages for the three- and five-year periods but below the peer group averages for the one-year period.

The Board noted that the performance of the Global Infrastructure and European Equity Portfolios was better than the peer group averages for the one- and five-year periods but below the peer group averages for the three-year period.

Performance Conclusions

With respect to the Money Market, Limited Duration and Strategist Portfolios, after discussion, the Board concluded that performance was acceptable.

With respect to the Income Plus, Multi Cap Growth, Global Infrastructure, Aggressive Equity and European Equity Portfolios, after discussion, the Board concluded that performance was competitive with the peer group averages.

Fees and Expenses

The Board members discussed with the Adviser the level of the advisory and administration fees (together, the "management fee") for the Portfolios relative to comparable funds and/or other accounts advised by the Adviser and/or compared to their peers as determined by Lipper. In addition to the management fee, the Board also reviewed the Portfolios' total expense ratios. When a fund's management fee and/or its expense ratio are higher than comparable funds or peers, the Board and the Adviser discuss the reasons for this and, where appropriate, they discuss possible waivers and/or caps.

The Board noted that the management fees and total expense ratios for the Money Market, Limited Duration, Income Plus, Multi Cap Growth, Global Infrastructure, European Equity and Strategist Portfolios were lower than the peer group averages.

The Board noted for the Aggressive Equity Portfolio that the management fee and the total expense ratio was higher but close to its peer group average.

Fee and Expense Conclusions

With respect to the Money Market, Limited Duration, Income Plus, Multi Cap Growth, Global Infrastructure, Aggressive Equity, European Equity and Strategist Portfolios, after discussion, the Board concluded that the management fees and total expense ratios were competitive with the peer group averages.


22


Morgan Stanley Variable Investment Series

Investment Advisory Agreement Approval n June 30, 2012 (unaudited) continued

Economies of Scale

The Board considered the size and growth prospects of the Portfolios and how that relates to the Portfolios' total expense ratios and particularly the Portfolios' management fee rates (which, for all the Portfolios except Limited Duration, include one or more breakpoints). In conjunction with its review of the Adviser's profitability, the Board discussed with the Adviser how a change in assets can affect the efficiency or effectiveness of managing the Portfolios and whether the management fee level is appropriate relative to current and projected asset levels and/or whether the management fee structure reflects economies of scale as asset levels change. The Board has determined that its review of the actual and potential economies of scale of each Portfolio supports its decision to approve the Management Agreement.

Profitability of the Adviser and Affiliates

The Board considered information concerning the costs incurred and profits realized by the Adviser and its affiliates during the last year from their relationship with the Portfolios 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. The Board has determined that its review of the analysis of the Adviser's expenses and profitability supports its decision to approve the Management Agreement.

Other Benefits of the Relationship

The Board considered other benefits to the Adviser and its affiliates derived from their relationship with the Portfolios and other funds advised by the Adviser. These benefits may include, among other things, "float" benefits derived from handling of checks for purchases and sales, research received by the Adviser generated from commission dollars spent on funds' portfolio trading and fees for distribution and/or shareholder servicing. The Board reviewed with the Adviser each of these arrangements and the reasonableness of the Adviser's costs relative to the services performed. The Board has determined that its review of the other benefits received by the Adviser or its affiliates supports its decision to approve the Management Agreement.

Resources of the Adviser and Historical Relationship Between the Portfolios and the Adviser

The Board considered whether the Adviser is financially sound and has the resources necessary to perform its obligations under the Management Agreement. The Board also reviewed and considered the historical relationship between the Portfolios and the Adviser, including the organizational structure of the Adviser, the policies and procedures formulated and adopted by the Adviser for managing the Portfolios' 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 the Adviser has the financial resources necessary to fulfill its obligations under the Management Agreement and that it is beneficial for the Portfolios to continue their relationship with the Adviser.


23


Morgan Stanley Variable Investment Series

Investment Advisory Agreement Approval n June 30, 2012 (unaudited) continued

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 each Portfolio and its shareholders to approve renewal of the Management Agreement for another year. In reaching this conclusion the Board did not give particular weight to any single factor referenced above. The Board considered these factors over the course of numerous meetings, some of which were in executive session with only the independent Board members and their counsel present. It is possible that individual Board members may have weighed these factors differently in reaching their individual decisions to approve the Management Agreement.


24



Morgan Stanley Variable Investment Series - Money Market

Portfolio of Investments n June 30, 2012 (unaudited)

PRINCIPAL
AMOUNT
(000)		  


  ANNUALIZED
YIELD
ON DATE OF
PURCHASE		   MATURITY
DATE		   VALUE  
    Repurchase Agreements (54.7%)  
$ 5,000     ABN Amro Securities (USA) LLC,
(dated 06/29/12; proceeds $5,000,067;
fully collateralized by a U.S. Government
Obligation; U.S. Treasury Note 2.63%
due 12/31/14; valued at $5,100,040)		     0.16 %   07/02/12   $ 5,000,000    
  2,000     Bank of Montreal, (dated 06/19/12; proceeds
$2,000,198; fully collateralized by U.S.
Government Agencies; Federal National
Mortgage Association 4.00% due 08/01/22 -
12/01/40; valued at $2,067,723)		     0.17     07/10/12     2,000,000    
  10,000     Bank of Nova Scotia, (dated 06/29/12;
proceeds $10,000,125; fully collateralized
by a U.S. Government Obligation;
U.S. Treasury Note 0.63% due 07/15/14;
valued at $10,228,820)		     0.15     07/02/12     10,000,000    
  11,208     BNP Paribas Securities Corp., (dated 06/29/12;
proceeds $11,208,177; fully collateralized by
a U.S. Government Agency; Federal National
Mortgage Association 3.40% due 11/01/41;
valued at $11,528,888)		     0.19     07/02/12     11,208,000    
  20,000     Credit Agricole CIB, (dated 06/29/12; proceeds
$20,000,250; fully collateralized by a U.S.
Government Obligation; U.S. Treasury Strip
Zero Coupon due 04/04/13; valued
at $20,400,000)		     0.15     07/02/12     20,000,000    
  5,000     TD Securities (USA) LLC, (dated 06/28/12;
proceeds $5,000,136; fully collateralized
by a U.S. Government Obligation;
U.S. Treasury Bond 4.50% due 05/15/38;
valued at $5,100,011)		     0.14     07/05/12     5,000,000    
    Total Repurchase Agreements
(Cost $53,208,000)		     53,208,000    
    Commercial Paper (16.9%)  
    International Banks  
  1,000     BNZ International Funding Ltd. (a)     0.55     08/16/12     999,295    
  1,000     ING US Funding LLC     0.42     07/06/12     999,931    
  3,000     National Australia Funding Corp. (a)     0.13     07/05/12     2,999,946    
  2,000     NRW Bank (a)     0.25     07/02/12     1,999,972    
  500     Oversea Chinese Banking     0.48     01/02/13     498,786    

 

See Notes to Financial Statements
25


Morgan Stanley Variable Investment Series - Money Market

Portfolio of Investments n June 30, 2012 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  


  ANNUALIZED
YIELD
ON DATE OF
PURCHASE		   MATURITY
DATE		   VALUE  
$ 4,500     Rabobank USA Financial Corp.     0.54 - 0.67 %   07/30/12 - 10/02/12   $ 4,496,676    
  1,000     Sumitomo Mitsui Banking Corp. (a)     0.39     07/06/12     999,937    
  1,000     Toyota Motor Credit Corp.     0.13     07/10/12     999,964    
  2,500     Westpac Banking Corp. (a)     0.48     09/14/12     2,497,467    
    Total Commercial Paper
(Cost $16,491,974)		     16,491,974    
    Certificates of Deposit (13.4%)  
    International Banks  
  3,000     Bank of Montreal     0.16     07/06/12     3,000,000    
  1,000     Deutsche Bank AG     0.52     10/18/12     1,000,000    
  3,000     Skandin Ens Banken     0.44 - 0.49     08/15/12 - 09/07/12     2,999,990    
  3,000     Sumitomo Mitsui Banking Corp.     0.36 - 0.38     07/06/12 - 08/01/12     3,000,000    
  1,000     Svenska Handelsbanken AB     0.60     08/02/12     1,000,000    
  2,000     Toronto Dominion Bank     0.17     07/19/12 - 07/20/12     2,000,000    
    Total Certificates of Deposit
(Cost $12,999,990)		     12,999,990    

 
 

  COUPON
RATE(b)		   DEMAND
DATE(c)		  

 

 
    Floating Rate Notes (12.9%)  
    International Banks  
  3,000     Bank of Nova Scotia     0.47 - 0.51 %   07/26/12 - 10/02/12   04/26/13 - 07/02/13     2,999,836    
  4,000     Barclays Bank PLC     0.92     08/06/12   11/05/12     4,000,000    
  1,600     Commonwealth Bank of
Australia (a)		     0.63     08/23/12   11/16/12     1,600,883    
  3,000     Deutsche Bank AG     0.67     09/17/12   03/15/13     3,000,000    
  1,000     Westpac Banking Corp.     0.48     07/05/12   07/05/12     1,000,000    
        Total Floating Rate Notes
(Cost $12,600,719)		                 12,600,719    

 

See Notes to Financial Statements
26


Morgan Stanley Variable Investment Series - Money Market

Portfolio of Investments n June 30, 2012 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

  COUPON
RATE(b)		   DEMAND
DATE(c)		   MATURITY
DATE		  

VALUE		  
    Tax-Exempt Instruments (3.1%)  
    Weekly Variable Rate Bonds  
$ 3,000     Miami-Dade County, FL,
Professional Sports
Franchise Facilities
Tax Ser 2009 E
(Cost $3,000,000)		     0.18 %   07/06/12   10/01/48   $ 3,000,000    

 

      Total Investments
(Cost $98,300,683)		     101.0 %     98,300,683    
      Liabilities in Excess of Other Assets         (1.0 )     (1,004,857 )  
    Net Assets         100.0 %   $ 97,295,826    

 

  (a)  144A security — Certain conditions for public sale may exist. Unless otherwise noted, these securities are deemed to be liquid.

  (b)  Rate shown is the rate in effect at June 30, 2012.

  (c)  Date of next interest rate reset.

MATURITY SCHEDULE†

1 - 30 Days     75 %  
31 - 60 Days     14    
61 - 90 Days     7    
91 - 120 Days     3    
121 + Days     1    
      100 %  

 

†  As a percentage of total investments.

 

See Notes to Financial Statements
27


Morgan Stanley Variable Investment Series - Limited Duration

Portfolio of Investments n June 30, 2012 (unaudited)

PRINCIPAL
AMOUNT
(000)		  

  COUPON
RATE		   MATURITY
DATE		   VALUE  
    Corporate Bonds (54.9%)  
    Basic Materials (2.9%)  
$ 350     Anglo American Capital PLC (United Kingdom) (a)     9.375 %   04/08/14   $ 393,767    
  190     ArcelorMittal (Luxembourg)     9.00     02/15/15     213,657    
  230     Barrick Gold Corp. (Canada)     1.75     05/30/14     232,933    
  115     Ecolab, Inc.     3.00     12/08/16     121,366    
  260     Kinross Gold Corp. (Canada)     3.625     09/01/16     262,281    
  350     Potash Corp. of Saskatchewan, Inc. (Canada)     5.25     05/15/14     376,353    
          1,600,357    
    Communications (5.3%)  
  375     AT&T, Inc.     2.50     08/15/15     390,672    
  300     Comcast Corp.     6.50     01/15/15     338,595    
  215     COX Communications, Inc.     4.625     06/01/13     222,595    
  220     DirecTV Holdings LLC/DirecTV Financing Co., Inc.     4.75     10/01/14     236,280    
  290     NBC Universal Media LLC     2.10     04/01/14     295,277    
  145     News America, Inc.     5.30     12/15/14     159,016    
  200     Time Warner Cable, Inc.     8.25     02/14/14     222,762    
  250     Verizon Communications, Inc.     1.25     11/03/14     253,221    
  350     Viacom, Inc.     4.375     09/15/14     374,851    
  340     Vodafone Group PLC (United Kingdom)     5.00     12/16/13     360,551    
          2,853,820    
    Consumer, Cyclical (2.6%)  
  305     Best Buy Co., Inc.     3.75     03/15/16     298,029    
  280     Daimler Finance North America LLC (a)     1.875     09/15/14     281,645    
  220     Home Depot, Inc.     5.40     03/01/16     253,835    
  430     Volkswagen International Finance N.V.
(Germany) (a)		     1.625     03/22/15     431,775    
  135     Wesfarmers Ltd. (Australia) (a)     2.983     05/18/16     139,101    
          1,404,385    
    Consumer, Non-Cyclical (8.1%)  
  250     Altria Group, Inc.     4.125     09/11/15     271,549    
  165     Anheuser-Busch InBev Worldwide, Inc. (Belgium)     4.125     01/15/15     177,929    
  205     Anheuser-Busch InBev Worldwide, Inc. (Belgium)     5.375     11/15/14     226,123    
  265     Bacardi Ltd. (Bermuda) (a)     7.45     04/01/14     292,680    
  260     Bunge Ltd. Finance Corp.     5.35     04/15/14     274,469    
  430     Coca-Cola Co. (The)     0.75     03/13/15     431,155    
  330     Delhaize Group SA (Belgium)     5.875     02/01/14     347,630    
  275     Diageo Capital PLC (United Kingdom)     1.50     05/11/17     276,335    
  15     Express Scripts Holding Co. (a)     2.65     02/15/17     15,277    
  200     Express Scripts Holding Co. (a)     2.75     11/21/14     204,396    

 

See Notes to Financial Statements
28


Morgan Stanley Variable Investment Series - Limited Duration

Portfolio of Investments n June 30, 2012 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

  COUPON
RATE		   MATURITY
DATE		   VALUE  
$ 350     Gilead Sciences, Inc.     3.05 %   12/01/16   $ 369,879    
  120     GlaxoSmithKline Capital PLC (United Kingdom)     0.75     05/08/15     120,071    
  300     Kraft Foods, Inc.     6.75     02/19/14     328,755    
  225     Kroger Co. (The)     7.50     01/15/14     246,752    
  370     McKesson Corp.     3.25     03/01/16     397,513    
  175     PepsiCo, Inc.     0.75     03/05/15     174,636    
  250     Stryker Corp.     2.00     09/30/16     256,396    
          4,411,545    
    Energy (3.1%)  
  225     Enterprise Products Operating LLC, Series O     9.75     01/31/14     253,942    
  380     Marathon Petroleum Corp.     3.50     03/01/16     398,673    
  275     Phillips 66 (a)     1.95     03/05/15     277,149    
  320     Plains All American Pipeline L.P./PAA Finance Corp.     4.25     09/01/12     321,471    
  305     Spectra Energy Capital LLC     5.90     09/15/13     320,517    
  100     TransCanada PipeLines Ltd. (Canada)     0.875     03/02/15     99,885    
          1,671,637    
    Finance (25.0%)  
  265     ABB Treasury Center USA, Inc. (Switzerland) (a)     2.50     06/15/16     274,329    
  255     Abbey National Treasury Services PLC
(United Kingdom)		     2.875     04/25/14     248,782    
  110     Aflac, Inc.     3.45     08/15/15     117,156    
  475     American Express Co.     7.25     05/20/14     526,976    
  260     American International Group, Inc.     3.65     01/15/14     265,699    
  620     Bank of America Corp., Series 1     3.75     07/12/16     625,622    
  300     Barclays Bank PLC (United Kingdom)     5.20     07/10/14     316,229    
  330     BBVA Bancomer SA (Mexico) (a)     4.50     03/10/16     333,300    
  320     BNP Paribas SA (France)     3.60     02/23/16     323,954    
  205     BP Capital Markets PLC (United Kingdom)     3.875     03/10/15     219,820    
  390     Canadian Imperial Bank of Commerce (Canada)     1.45     09/13/13     393,962    
  300     Capital One Financial Corp.     7.375     05/23/14     329,702    
  405     Citigroup, Inc. (See Note 6)     4.45     01/10/17     424,972    
  250     Commonwealth Bank of Australia (Australia)     1.95     03/16/15     251,777    
  115     Cooperatieve Centrale Raiffeisen-Boerenleenbank
BA (Netherlands)		     3.375     01/19/17     118,481    
  340     Credit Suisse (Switzerland)     5.50     05/01/14     360,607    
  355     Deutsche Bank AG (Germany)     2.375     01/11/13     357,185    
  205     DNB Bank ASA (Norway) (a)     3.20     04/03/17     207,568    
  975     General Electric Capital Corp.     2.95     05/09/16     1,007,046    
  300     Genworth Life Institutional Funding Trust (a)     5.875     05/03/13     305,110    
  425     Goldman Sachs Group, Inc. (The)     3.625     02/07/16     425,402    
  250     Harley-Davidson Funding Corp. (a)     5.25     12/15/12     254,144    

 

See Notes to Financial Statements
29


Morgan Stanley Variable Investment Series - Limited Duration

Portfolio of Investments n June 30, 2012 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

  COUPON
RATE		   MATURITY
DATE		   VALUE  
$ 200     HCP, Inc.     2.70 %   02/01/14   $ 203,273    
  350     HSBC Finance Corp.     5.25     04/15/15     374,793    
  200     ING Bank (Netherlands) (a)     3.75     03/07/17     199,273    
  425     JPMorgan Chase & Co.     1.875     03/20/15     424,951    
  135     JPMorgan Chase & Co.     3.15     07/05/16     138,965    
  200     LVMH Moet Hennessy Louis Vuitton SA (France) (a)     1.625     06/29/17     200,181    
  230     Macquarie Group Ltd. (Australia) (a)     7.30     08/01/14     244,983    
  200     Metropolitan Life Global Funding I (See Note 6) (a)     1.70     06/29/15     200,296    
  325     Metropolitan Life Global Funding I (See Note 6) (a)     2.00     01/10/14     328,443    
  350     Monumental Global Funding III (a)     5.25     01/15/14     371,443    
  250     National Australia Bank (Australia)     2.00     03/09/15     250,797    
  270     Nationwide Building Society (United Kingdom) (a)     4.65     02/25/15     279,706    
  30     Nissan Motor Acceptance Corp. (Japan) (a)     3.25     01/30/13     30,294    
  200     Nordea Bank AB (Sweden) (a)     2.25     03/20/15     200,853    
  270     Principal Financial Group, Inc.     7.875     05/15/14     300,826    
  320     Prudential Financial, Inc., MTN     4.75     09/17/15     344,773    
  300     Standard Chartered PLC (United Kingdom) (a)     3.85     04/27/15     314,026    
  250     Svenska Handelsbanken AB (Sweden)     2.875     04/04/17     253,713    
  365     UBS AG (Switzerland)     3.875     01/15/15     377,408    
  330     US Bancorp     2.20     11/15/16     340,695    
  470     Wells Fargo & Co.     3.676     06/15/16     500,728    
          13,568,243    
    Industrials (3.7%)  
  385     Agilent Technologies, Inc.     4.45     09/14/12     387,650    
  200     BAA Funding Ltd. (United Kingdom) (a)     2.50     06/25/15     201,263    
  200     BAT International Finance PLC (United Kingdom) (a)     1.40     06/05/15     200,119    
  125     Cardinal Health, Inc.     1.90     06/15/17     126,084    
  100     Covidien International Finance SA     1.35     05/29/15     100,201    
  90     Danaher Corp.     1.30     06/23/14     90,980    
  210     Experian Finance PLC (United Kingdom) (a)(b)     2.375     06/15/17     210,479    
  75     Kellogg Co.     1.125     05/15/15     75,414    
  150     Kraft Foods Group, Inc. (a)     1.625     06/04/15     151,695    
  75     McDonald's Corp.     0.75     05/29/15     75,045    
  60     Tyco Electronics Group SA (Luxembourg)     1.60     02/03/15     60,289    
  45     United Technologies Corp.     1.20     06/01/15     45,556    
  250     Waste Management, Inc.     2.60     09/01/16     256,796    
          1,981,571    

 

See Notes to Financial Statements
30


Morgan Stanley Variable Investment Series - Limited Duration

Portfolio of Investments n June 30, 2012 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

  COUPON
RATE		   MATURITY
DATE		   VALUE  
    Technology (1.5%)      
$ 160     Applied Materials, Inc.     2.65    %   06/15/16   $ 167,673    
  285     Hewlett-Packard Co.     3.30     12/09/16     298,204    
  330     Texas Instruments, Inc.     1.375     05/15/14     333,798    
          799,675    
    Utilities (2.7%)      
  300     Commonwealth Edison Co.     1.625     01/15/14     304,159    
  350     Enel Finance International N.V. (Italy) (a)     3.875     10/07/14     344,292    
  215     FirstEnergy Solutions Corp.     4.80     02/15/15     228,378    
  265     NextEra Energy Capital Holdings, Inc.     5.35     06/15/13     276,071    
  320     Sempra Energy     2.00     03/15/14     325,139    
          1,478,039    
        Total Corporate Bonds
(Cost $29,649,561)		             29,769,272    
    U.S. Treasury Securities (17.0%)      
    U.S. Treasury Notes      
  1,650             0.75     06/15/14     1,663,923    
  730             0.875     12/31/16     736,673    
  3,253             1.25     10/31/15     3,334,579    
  3,275             2.25     03/31/16     3,483,270    
        Total U.S. Treasury Securities
(Cost $9,217,033)		             9,218,445    
    Asset-Backed Securities (16.1%)      
    Ally Master Owner Trust      
  100     (a)     1.992 (c)   01/15/15     100,816    
  200             2.15     01/15/16     203,703    
  225     (a)     2.88     04/15/15     228,047    
  800     American Express Credit Account Master Trust     1.492 (c)   03/15/17     820,391    
  37     ARI Fleet Lease Trust (a)     1.692 (c)   08/15/18     37,236    
  807     Capital One Multi-Asset Execution Trust     0.322 (c)   09/15/15     806,834    
  225     CarMax Auto Owner Trust     1.29     09/15/15     226,314    
  37     Chesapeake Funding LLC (a)     2.242 (c)   12/15/20     37,376    
  600     Citibank Credit Card Issuance Trust (See Note 6)     2.25     12/23/14     605,406    
    CNH Equipment Trust      
  421             1.17     05/15/15     422,575    
  40             1.54     07/15/14     40,187    
    Ford Credit Floorplan Master Owner Trust      
  775             1.792 (c)   09/15/14     777,537    
  375     (a)     4.20     02/15/17     405,063    

 

See Notes to Financial Statements
31


Morgan Stanley Variable Investment Series - Limited Duration

Portfolio of Investments n June 30, 2012 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

  COUPON
RATE		   MATURITY
DATE		   VALUE  
$ 330     GE Dealer Floorplan Master Note Trust     0.844 (c)%   07/20/16   $ 331,520    
  214     GE Equipment Midticket LLC (a)     0.94     07/14/14     214,533    
  555     Harley-Davidson Motorcycle Trust     1.16     02/15/15     556,110    
  310     Hyundai Auto Lease Securitization Trust 2011-A (a)     1.02     08/15/14     311,072    
  326     Hyundai Auto Receivables Trust     1.50     10/15/14     327,182    
  294     Macquarie Equipment Funding Trust (a)     1.21     09/20/13     294,422    
  118     MMAF Equipment Finance LLC (a)     2.37     11/15/13     118,123    
    MMCA Automobile Trust      
  225     (a)     1.22     01/15/15     225,786    
  148     (a)     1.39     01/15/14     148,002    
  531     Nissan Auto Lease Trust     1.12     12/15/13     532,265    
  200     Nissan Master Owner Trust Receivables (a)     1.392 (c)   01/15/15     201,149    
    North Carolina State Education Assistance Authority      
  216         0.916 (c)   01/25/21     216,133    
  225         1.266 (c)   07/25/25     224,435    
  100     Panhandle-Plains Higher Education Authority, Inc.     1.411 (c)   07/01/24     100,356    
  125     Toyota Auto Receivables Owner Trust     1.27     12/16/13     125,228    
  32     Wheels SPV LLC (a)     1.792 (c)   03/15/18     31,995    
  60     World Omni Automobile Lease Securitization Trust     0.93     11/16/15     60,087    
        Total Asset-Backed Securities
(Cost $8,637,600)		             8,729,883    
    Non-U.S. Government - Guaranteed (4.5%)      
  900     Commonwealth Bank of Australia (Australia) (a)     2.50     12/10/12     907,594    
  1,545     Swedbank AB (Sweden) (a)     2.90     01/14/13     1,564,535    
        Total Non-U.S. Government - Guaranteed
(Cost $1,880,889)		             2,472,129    
    Agency Adjustable Rate Mortgages (3.6%)      
  77     Federal Home Loan Mortgage Corporation,
Conventional Pool		     5.433     01/01/38     83,212    
    Federal National Mortgage Association,
Conventional Pools:		      
  386         2.306     02/01/36     409,762    
  250         2.332     05/01/35     265,660    
  644         2.587     09/01/37     687,779    
  465         3.137     04/01/38     498,635    
        Total Agency Adjustable Rate Mortgages
(Cost $1,936,597)		             1,945,048    

 

See Notes to Financial Statements
32


Morgan Stanley Variable Investment Series - Limited Duration

Portfolio of Investments n June 30, 2012 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

  COUPON
RATE		   MATURITY
DATE		   VALUE  
    Agency Fixed Rate Mortgages (0.7%)  
    Federal National Mortgage Association,
Conventional Pools:		  
$ 191             6.50    %   01/01/32 - 11/01/33   $ 219,530    
  115             7.00     08/01/29 - 06/01/32     136,674    
    Total Agency Fixed Rate Mortgages
(Cost $320,393)		             356,204    
    Collateralized Mortgage Obligation - Agency Collateral Series (0.6%)  
  282     Federal Home Loan Mortgage Corporation, REMIC
(Cost $301,340)		     7.50     09/15/29     332,012    
    Municipal Bond (0.5%)  
  300     New Jersey Economic Development Authority
(Cost $300,000)		     1.468 (c)   06/15/13     301,158    
    Sovereign (0.4%)  
  200     Qatar Government International Bond (Qatar)
(Cost $211,500) (a)		     4.00     01/20/15     211,200    
    Short-Term Investments (1.1%)  
    U.S. Treasury Security (0.7%)  
  385     U.S. Treasury Bill
(Cost $384,914) (d)(e)		     0.136     08/30/12     384,970    
NUMBER OF
SHARES (000)  
 
 
 
 
 
    Investment Company (0.4%)  
  231     Morgan Stanley Institutional Liquidity Funds - Money
Market Portfolio - Institutional Class (See Note 6)
(Cost $231,019) 		    231,019    
    Total Short-Term Investments
(Cost $615,933)		             615,989    
    Total Investments
(Cost $53,070,846) (f)		         99.4 %     53,951,340    
    Other Assets in Excess of Liabilities         0.6       312,584    
    Net Assets         100.0 %   $ 54,263,924    

 

See Notes to Financial Statements
33


Morgan Stanley Variable Investment Series - Limited Duration

Portfolio of Investments n June 30, 2012 (unaudited) continued

  MTN  Medium Term Note.

  REMIC  Real Estate Mortgage Investment Conduit.

  (a)  144A security — Certain conditions for public sale may exist. Unless otherwise noted, these securities are deemed to be liquid.

  (b)  When-issued security.

  (c)  Variable/Floating Rate Security — Interest rate changes on these instruments are based on changes in a designated base rate. The rates shown are those in effect on June 30, 2012.

  (d)  Rate shown is the yield to maturity at June 30, 2012.

  (e)  A portion of this security has been physically segregated in connection with open futures contracts.

  (f)  Securities are available for collateral in connection with purchase of when-issued securities and futures contracts.

FUTURES CONTRACTS OPEN AT JUNE 30, 2012:

NUMBER OF
CONTRACTS		   LONG/SHORT   DESCRIPTION, DELIVERY
MONTH AND YEAR		   UNDERLYING FACE
AMOUNT AT VALUE		   UNREALIZED
APPRECIATION
(DEPRECIATION)		  
  23     Long   U.S. Treasury 2 yr. Note,
Sep-12		   $ 5,064,313     $ (2,139 )  
  40     Long   U.S. Treasury 5 yr. Note,
Sep-12		     4,958,750       7,844    
Net Unrealized Appreciation   $ 5,705    

 

LONG TERM CREDIT ANALYSIS++  
AAA     21.6 %  
AA     33.1    
A     28.5    
BBB     16.5    
Not Rated     0.3    
      100.0 %+  

 

  +  Does not include open long futures contracts with an underlying face amount of $10,023,063 with net unrealized appreciation of $5,705.

  ++  The ratings shown are based on the Portfolio's security ratings as determined by Standard & Poor's, Moody's or Fitch, each a Nationally Recognized Statistical Ratings Organization ("NRSRO").

See Notes to Financial Statements
34


Morgan Stanley Variable Investment Series - Income Plus

Portfolio of Investments n June 30, 2012 (unaudited)

PRINCIPAL
AMOUNT
(000)		  

  COUPON
RATE		   MATURITY
DATE		   VALUE  
    Corporate Bonds (96.3%)  
    Basic Materials (6.0%)  
$ 820     ArcelorMittal (Luxembourg)     9.85 %   06/01/19   $ 977,094    
EUR 811     ArcelorMittal, Series MT (Luxembourg)     7.25     04/01/14     225,208    
$ 540     Barrick Gold Corp. (Canada)     3.85     04/01/22     560,210    
  1,570     CF Industries, Inc.     6.875     05/01/18     1,866,338    
  575     Eastman Chemical Co.     3.60     08/15/22     587,674    
  540     FMG Resources August 2006 Pty Ltd.
(Australia) (a)		     6.375     02/01/16     549,450    
  205     FMG Resources August 2006 Pty Ltd.
(Australia) (a)		     6.875     02/01/18     207,819    
  595     Georgia-Pacific LLC     8.875     05/15/31     841,060    
  203     Goldcorp, Inc. (Canada)     2.00     08/01/14     229,644    
  535     Incitec Pivot Ltd. (Australia) (a)     4.00     12/07/15     550,878    
  600     Inversiones CMPC SA (Chile) (a)     4.50     04/25/22     596,871    
  580     Kinross Gold Corp. (Canada)     5.125     09/01/21     587,855    
  545     Lubrizol Corp.     8.875     02/01/19     745,027    
  675     LyondellBasell Industries N.V. (a)     5.00     04/15/19     711,281    
  1,000     MeadWestvaco Corp.     7.375     09/01/19     1,192,016    
  290     Syngenta Finance N.V. (Switzerland)     4.375     03/28/42     313,460    
  280     Teck Resources Ltd. (Canada)     6.25     07/15/41     314,593    
  195     Vale Overseas Ltd. (Brazil)     6.875     11/21/36     227,166    
  210     Vale Overseas Ltd. (Brazil)     6.875     11/10/39     246,409    
          11,530,053    
    Communications (11.4%)  
  1,700     AT&T, Inc.     5.35     09/01/40     1,958,557    
  875     AT&T, Inc.     6.30     01/15/38     1,093,707    
  310     Cablevision Systems Corp.     7.75     04/15/18     331,700    
  470     CenturyLink, Inc.     5.80     03/15/22     468,746    
  655     CenturyLink, Inc.     6.45     06/15/21     682,734    
  325     CenturyLink, Inc., Series Q     6.15     09/15/19     335,725    
  920     Comcast Corp.     6.40     05/15/38     1,125,374    
  625     Corning, Inc.     4.75     03/15/42     657,588    
  195     CSC Holdings LLC (a)     6.75     11/15/21     208,650    
  315     Deutsche Telekom International Finance BV
(Germany)		     6.75     08/20/18     379,731    
  300     Deutsche Telekom International Finance BV
(Germany)		     8.75     06/15/30     417,491    
  1,425     DirecTV Holdings LLC/DirecTV
Financing Co., Inc.		     3.80     03/15/22     1,444,001    
  510     DISH DBS Corp.     7.125     02/01/16     562,275    

 

See Notes to Financial Statements
35


Morgan Stanley Variable Investment Series - Income Plus

Portfolio of Investments n June 30, 2012 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

  COUPON
RATE		   MATURITY
DATE		   VALUE  
$ 381     Liberty Interactive LLC     3.125 %   03/30/23   $ 467,201    
  600     Motorola Solutions, Inc.     3.75     05/15/22     592,911    
  1,045     NBC Universal Media LLC     4.375     04/01/21     1,151,738    
  200     News America, Inc.     6.40     12/15/35     231,337    
  575     Omnicom Group, Inc.     3.625     05/01/22     585,461    
  263     Priceline.com, Inc. (a)     1.00     03/15/18     278,451    
  260     Qwest Corp.     6.875     09/15/33     260,000    
  213     Sable International Finance Ltd.
(United Kingdom) (a)		     7.75     02/15/17     221,520    
  351     SBA Communications Corp.     1.875     05/01/13     487,890    
  198     SBA Telecommunications, Inc.     8.25     08/15/19     217,800    
  350     Symantec Corp., Series B     1.00     06/15/13     360,063    
  655     Telecom Italia Capital SA (Italy)     7.175     06/18/19     655,000    
  375     Telefonaktiebolaget LM Ericsson (Sweden)     4.125     05/15/22     376,794    
  580     Telefonica Europe BV (Spain)     8.25     09/15/30     562,307    
  1,200     Time Warner Cable, Inc.     6.75     07/01/18     1,463,671    
  610     Time Warner, Inc.     6.50     11/15/36     724,282    
  1,295     Time Warner, Inc.     7.70     05/01/32     1,695,863    
  150     Verizon Communications, Inc.     6.40     02/15/38     195,475    
  715     Verizon Communications, Inc.     8.95     03/01/39     1,181,617    
  335     Vivendi SA (France) (a)     6.625     04/04/18     370,741    
          21,746,401    
    Consumer, Cyclical (4.9%)  
  1,105     Chrysler Group LLC/CG Co-Issuer, Inc.     8.00     06/15/19     1,140,913    
  395     Daimler Finance North America LLC
(Germany)		     8.50     01/18/31     605,996    
  925     Gap, Inc. (The)     5.95     04/12/21     960,404    
  105     Ingram Micro, Inc.     5.25     09/01/17     112,692    
  208     International Game Technology     3.25     05/01/14     230,620    
  285     Levi Strauss & Co.     7.625     05/15/20     304,238    
  350     Macy's Retail Holdings, Inc.     3.875     01/15/22     368,699    
  1,450     McDonald's Corp.     2.625     01/15/22     1,479,497    
  620     QVC, Inc. (a)     7.125     04/15/17     658,748    
  565     Volkswagen International Finance N.V.
(Germany) (a)		     2.375     03/22/17     574,580    
  780     Wyndham Worldwide Corp.     4.25     03/01/22     786,927    
  500     Wynn Las Vegas LLC/Wynn Las Vegas
Capital Corp. (a)		     5.375     03/15/22     503,750    
  265     Wynn Las Vegas LLC/Wynn Las Vegas
Capital Corp.		     7.75     08/15/20     294,813    
  1,040     Yum! Brands, Inc.     6.875     11/15/37     1,382,073    
          9,403,950    

 

See Notes to Financial Statements
36


Morgan Stanley Variable Investment Series - Income Plus

Portfolio of Investments n June 30, 2012 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

  COUPON
RATE		   MATURITY
DATE		   VALUE  
    Consumer, Non-Cyclical (8.6%)  
$ 245     Amgen, Inc.     3.875 %   11/15/21   $ 259,194    
  950     BAT International Finance PLC
(United Kingdom) (a)		     2.125     06/07/17     949,853    
  795     Boston Scientific Corp.     6.00     01/15/20     949,609    
  720     Cigna Corp.     5.375     02/15/42     768,973    
  220     Covidien International Finance SA     3.20     06/15/22     227,296    
  1,185     Delhaize Group SA (Belgium)     5.70     10/01/40     998,602    
  475     Diageo Investment Corp. (United Kingdom)     2.875     05/11/22     488,990    
  690     Express Scripts Holding Co. (a)     2.65     02/15/17     702,744    
  370     Express Scripts Holding Co. (a)     3.90     02/15/22     384,278    
  420     Gilead Sciences, Inc.     1.00     05/01/14     523,950    
  320     Gilead Sciences, Inc.     5.65     12/01/41     374,437    
  490     Grupo Bimbo SAB de CV (Mexico) (a)     4.875     06/30/20     545,074    
  700     Kraft Foods, Inc.     6.875     02/01/38     918,596    
  400     Kraft Foods, Inc.     6.875     01/26/39     521,518    
  415     Life Technologies Corp.     6.00     03/01/20     487,628    
  835     Lorillard Tobacco Co.     8.125     06/23/19     1,037,726    
  875     PepsiCo, Inc.     2.75     03/05/22     885,015    
  600     Philip Morris International, Inc.     4.50     03/20/42     640,758    
  550     SABMiller Holdings, Inc. (a)     3.75     01/15/22     586,075    
  305     SABMiller Holdings, Inc. (a)     4.95     01/15/42     338,959    
  800     Sigma Alimentos SA de CV (Mexico) (a)     5.625     04/14/18     866,000    
  260     Smithfield Foods, Inc.     4.00     06/30/13     290,550    
  665     Teva Pharmaceutical Finance IV BV (Israel)     3.65     11/10/21     700,820    
  520     TreeHouse Foods, Inc.     7.75     03/01/18     564,850    
  630     Verisk Analytics, Inc.     5.80     05/01/21     704,371    
  280     Vertex Pharmaceuticals, Inc.     3.35     10/01/15     367,150    
  235     Viropharma, Inc.     2.00     03/15/17     334,288    
          16,417,304    
    Energy (8.3%)  
  356     Alpha Natural Resources, Inc.     2.375     04/15/15     303,045    
  85     Alpha Natural Resources, Inc.     6.00     06/01/19     72,888    
  370     Alpha Natural Resources, Inc.     6.25     06/01/21     314,500    
  1,075     BP Capital Markets PLC (United Kingdom)     3.245     05/06/22     1,115,387    
  450     Canadian Natural Resources Ltd. (Canada)     6.25     03/15/38     553,228    
  225     Canadian Oil Sands Ltd. (Canada) (a)     6.00     04/01/42     239,569    
  550     Canadian Oil Sands Ltd. (Canada) (a)     7.75     05/15/19     675,056    
  394     Chesapeake Energy Corp.     2.75     11/15/35     361,987    
  300     Chesapeake Energy Corp.     6.775     03/15/19     292,875    
  150     Concho Resources, Inc.     7.00     01/15/21     161,250    

 

See Notes to Financial Statements
37


Morgan Stanley Variable Investment Series - Income Plus

Portfolio of Investments n June 30, 2012 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

  COUPON
RATE		   MATURITY
DATE		   VALUE  
$ 745     Continental Resources, Inc.     7.125 %   04/01/21   $ 834,400    
  275     Enterprise Products Operating LLC     5.25     01/31/20     315,512    
  850     Enterprise Products Operating LLC     5.95     02/01/41     964,731    
  490     EQT Corp.     4.875     11/15/21     501,440    
  500     Halliburton Co.     4.50     11/15/41     526,482    
  325     Marathon Petroleum Corp.     5.125     03/01/21     364,516    
  775     Marathon Petroleum Corp.     6.50     03/01/41     883,790    
  325     MarkWest Energy Partners LP/MarkWest
Energy Finance Corp.		     6.25     06/15/22     336,375    
  820     Murphy Oil Corp.     4.00     06/01/22     836,798    
  925     Phillips 66 (a)     4.30     04/01/22     975,010    
  1,095     Plains All American Pipeline LP/PAA
Finance Corp.		     6.70     05/15/36     1,284,260    
  675     Plains All American Pipeline LP/PAA
Finance Corp.		     8.75     05/01/19     891,489    
  355     Sinopec Group Overseas Development 2012
Ltd. (China) (a)(b)		     2.75     05/17/17     361,901    
  225     Spectra Energy Capital LLC     8.00     10/01/19     288,652    
  900     Total Capital International SA (France)     2.875     02/17/22     914,393    
  700     Valero Energy Corp.     6.125     02/01/20     809,439    
  550     Weatherford International Ltd.     4.50     04/15/22     564,786    
          15,743,759    
    Finance (38.8%)  
EUR 200     Aabar Investments PJSC (United Arab Emirates)     4.00     05/27/16     241,331    
$ 630     ABN Amro Bank N.V. (Netherlands) (a)     4.25     02/02/17     643,009    
  1,125     Aegon N.V. (Netherlands)     4.625     12/01/15     1,201,455    
  264     Affiliated Managers Group, Inc.     3.95     08/15/38     286,110    
  475     Alexandria Real Estate Equities, Inc.     4.60     04/01/22     487,283    
  1,285     American Financial Group, Inc.     9.875     06/15/19     1,615,911    
  1,000     American Honda Finance Corp. (a)     2.125     02/28/17     1,012,807    
  720     American International Group, Inc.     6.40     12/15/20     816,015    
  1,415     Amgen, Inc.     2.125     05/15/17     1,433,261    
  432     Ares Capital Corp. (a)     5.75     02/01/16     441,720    
  1,150     Banco de Credito del Peru (Peru) (a)     4.75     03/16/16     1,187,375    
  990     Banco Votorantim SA (Brazil) (a)     5.25     02/11/16     1,017,225    
  780     Barclays Bank PLC (United Kingdom) (a)     6.05     12/04/17     791,757    
  1,135     BBVA Bancomer SA (Mexico) (a)     4.50     03/10/16     1,146,350    
  610     Bear Stearns Cos. LLC (The)     5.55     01/22/17     659,047    
  300     Billion Express Investments Ltd. (China) (b)     0.75     10/18/15     297,375    
  540     BNP Paribas SA (France)     5.00     01/15/21     555,279    
  490     Brookfield Asset Management, Inc. (Canada)     5.80     04/25/17     533,857    

 

See Notes to Financial Statements
38


Morgan Stanley Variable Investment Series - Income Plus

Portfolio of Investments n June 30, 2012 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

  COUPON
RATE		   MATURITY
DATE		   VALUE  
$ 780     Capital One Bank, USA NA     8.80     %   07/15/19   $ 983,638    
  800     Capital One Capital VI     8.875     05/15/40     817,000    
  970     CIT Group, Inc.     5.00     05/15/17     999,706    
  1,735     Citigroup, Inc. (See Note 6)     5.875     05/29/37     1,896,870    
  1,230     Citigroup, Inc. (See Note 6)     8.50     05/22/19     1,521,142    
  700     CNA Financial Corp.     7.35     11/15/19     829,321    
  680     Cooperatieve Centrale Raiffeisen-Boerenleenbank
BA (Netherlands)		     3.875     02/08/22     693,099    
  260     Cooperatieve Centrale Raiffeisen-Boerenleenbank
BA (Netherlands) (a)		     11.00 (c)   06/30/19(d)     328,783    
  600     Credit Agricole SA (France) (a)     8.375 (c)   10/13/19(d)     499,500    
  765     Credit Suisse (Switzerland)     5.40     01/14/20     796,880    
  280     Credit Suisse (Switzerland)     6.00     02/15/18     299,948    
  800     Dexus Diversified Trust/Dexus Office Trust
(Australia) (a)		     5.60     03/15/21     830,304    
  425     Discover Bank     7.00     04/15/20     495,404    
  715     Discover Bank     8.70     11/18/19     889,574    
  990     DNB Bank ASA (Norway) (a)     3.20     04/03/17     1,002,401    
  270     ERP Operating LP     4.625     12/15/21     293,820    
  750     Farmers Insurance Exchange (a)     8.625     05/01/24     975,820    
  1,060     Ford Motor Credit Co., LLC (a)     4.207     04/15/16     1,101,641    
  600     Ford Motor Credit Co., LLC     5.00     05/15/18     638,629    
  400     Ford Motor Credit Co., LLC     5.875     08/02/21     445,797    
  545     General Electric Capital Corp.     5.30     02/11/21     612,769    
  1,550     General Electric Capital Corp., MTN     5.875     01/14/38     1,785,642    
  1,650     General Electric Capital Corp., Series G     6.00     08/07/19     1,933,472    
  1,195     Genworth Financial, Inc.     7.70     06/15/20     1,182,388    
  565     Goldman Sachs Group, Inc. (The)     5.75     01/24/22     597,515    
  815     Goldman Sachs Group, Inc. (The)     6.15     04/01/18     884,598    
  1,565     Goldman Sachs Group, Inc. (The)     6.75     10/01/37     1,538,364    
  950     Goodman Funding Pty Ltd. (Australia) (a)     6.375     04/15/21     991,372    
  550     Harley-Davidson Funding Corp. (a)     6.80     06/15/18     656,528    
  600     Hartford Financial Services Group, Inc.     5.50     03/30/20     627,419    
  1,675     HBOS PLC, Series G (United Kingdom) (a)     6.75     05/21/18     1,582,156    
  185     HCP, Inc.     5.625     05/01/17     204,490    
  300     Health Care REIT, Inc.     4.75     07/15/27     353,250    
  485     HSBC Finance Corp.     6.676     01/15/21     525,976    
  1,890     HSBC Holdings PLC (United Kingdom)     4.00     03/30/22     1,966,528    
  705     HSBC Holdings PLC (United Kingdom)     6.50     05/02/36     779,709    
  595     Huntington Bancshares, Inc.     7.00     12/15/20     697,840    
  575     ING Bank (Netherlands) (a)     3.75     03/07/17     572,911    

 

See Notes to Financial Statements
39


Morgan Stanley Variable Investment Series - Income Plus

Portfolio of Investments n June 30, 2012 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

  COUPON
RATE		   MATURITY
DATE		   VALUE  
$ 945     International Lease Finance Corp.     6.25   %   05/15/19   $ 962,955    
  1,325     JPMorgan Chase & Co.     4.50     01/24/22     1,430,103    
  660     JPMorgan Chase Capital XXVII     7.00     11/01/39     661,650    
  260     Lloyds TSB Bank PLC (United Kingdom)     6.375     01/21/21     295,147    
  500     Mack-Cali Realty LP     4.50     04/18/22     514,033    
  710     Macquarie Bank Ltd. (Australia) (a)     6.625     04/07/21     713,071    
  705     Macquarie Group Ltd. (Australia) (a)     6.00     01/14/20     702,402    
  930     Merrill Lynch & Co., Inc.     7.75     05/14/38     1,063,989    
  3,625     Merrill Lynch & Co., Inc., MTN     6.875     04/25/18     4,061,051    
  600     Metlife Capital Trust IV (See Note 6) (a)     7.875     12/15/37     669,000    
  840     Mizuho Corporate Bank Ltd. (Japan) (a)     2.55     03/17/17     853,196    
  1,315     Nationwide Building Society
(United Kingdom) (a)		     6.25     02/25/20     1,420,698    
  525     Nationwide Financial Services (a)     5.375     03/25/21     543,995    
  1,100     Nordea Bank AB (Sweden) (a)     4.875     05/13/21     1,073,673    
  370     Platinum Underwriters Finance, Inc., Series B     7.50     06/01/17     405,635    
  1,025     Principal Financial Group, Inc.     8.875     05/15/19     1,330,382    
  925     Protective Life Corp.     7.375     10/15/19     1,070,684    
  635     Prudential Financial, Inc., MTN     6.625     12/01/37     720,546    
  775     QBE Capital Funding III Ltd. (Australia) (a)     7.25 (c)   05/24/41     700,479    
  785     Royal Bank of Scotland PLC (The)
(United Kingdom)		     4.875     03/16/15     812,789    
  360     Santander Holdings USA, Inc. (Spain)     4.625     04/19/16     348,185    
  700     Santander US Debt SAU (Spain) (a)     3.724     01/20/15     651,466    
  1,060     SLM Corp., MTN     6.25     01/25/16     1,118,300    
  495     SLM Corp., MTN     8.00     03/25/20     544,500    
  885     Standard Chartered Bank (United Kingdom) (a)     6.40     09/26/17     987,625    
  900     Svenska Handelsbanken AB (Sweden)     2.875     04/04/17     913,366    
  250     Wachovia Bank NA     6.60     01/15/38     316,594    
  900     Wells Operating Partnership II LP     5.875     04/01/18     936,877    
          74,021,762    
    Industrials (10.7%)  
  415     ABB Finance USA, Inc. (Switzerland)     2.875     05/08/22     420,692    
  522     Anixter, Inc.     5.625     05/01/19     541,575    
  1,060     BAA Funding Ltd. (United Kingdom) (a)     4.875     07/15/21     1,120,633    
  540     Ball Corp.     7.375     09/01/19     599,400    
  500     Bemis Co., Inc.     4.50     10/15/21     540,624    
  255     Bombardier, Inc. (Canada) (a)     7.50     03/15/18     280,819    
  505     Bombardier, Inc. (Canada) (a)     7.75     03/15/20     564,338    
  675     Boston Properties LP     3.85     02/01/23     682,784    
  1,000     Burlington Northern Santa Fe LLC     3.05     03/15/22     1,011,064    

 

See Notes to Financial Statements
40


Morgan Stanley Variable Investment Series - Income Plus

Portfolio of Investments n June 30, 2012 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

  COUPON
RATE		   MATURITY
DATE		   VALUE  
$ 885     Cardinal Health, Inc.     1.90 %   06/15/17   $ 892,676    
  300     Comcast Corp. (e)     4.65     07/15/42     301,349    
  820     CRH America, Inc.     6.00     09/30/16     898,452    
  480     CRH America, Inc.     8.125     07/15/18     572,471    
  585     Crown Americas LLC/Crown Americas
Capital Corp. III		     6.25     02/01/21     642,037    
  630     Deere & Co.     3.90     06/09/42     628,658    
  450     Discovery Communications LLC     3.30     05/15/22     455,101    
  645     Experian Finance PLC (United Kingdom) (a)(e)     2.375     06/15/17     646,472    
  248     General Cable Corp.     4.50     11/15/29     242,730    
  545     Holcim US Finance Sarl & Cie SCS
(Switzerland) (a)		     6.00     12/30/19     572,264    
  975     International Business Machines Corp.     1.875     05/15/19     986,947    
  950     Koninklijke Philips Electronics N.V.
(Netherlands)		     3.75     03/15/22     987,988    
  915     L-3 Communications Corp.     4.95     02/15/21     991,278    
  670     Lafarge SA (France) (a)     6.20     07/09/15     717,282    
  750     Odebrecht Finance Ltd. (Brazil) (a)     6.00     04/05/23     793,725    
  374     Owens-Brockway Glass Container, Inc. (a)     3.00     06/01/15     359,040    
  675     Pioneer Natural Resources Co.     3.95     07/15/22     677,996    
  950     Republic Services, Inc.     3.55     06/01/22     962,264    
  135     Sonoco Products Co.     4.375     11/01/21     142,660    
  470     Sonoco Products Co.     5.75     11/01/40     534,574    
  525     United Technologies Corp.     4.50     06/01/42     579,122    
  975     URS Corp. (a)     3.85     04/01/17     963,873    
          20,310,888    
    Technology (1.8%)  
  703     Fidelity National Information Services, Inc. (a)     5.00     03/15/22     718,817    
  235     Hewlett-Packard Co.     2.60     09/15/17     236,179    
  845     Hewlett-Packard Co.     4.65     12/09/21     887,424    
  234     Intel Corp.     2.95     12/15/35     265,883    
  255     Lam Research Corp.     1.25     05/15/18     252,769    
  434     Microsoft Corp. (a)     0.00     06/15/13     462,752    
  284     Rovi Corp.     2.625     02/15/40     274,770    
  276     SanDisk Corp.     1.50     08/15/17     285,315    
          3,383,909    
    Utilities (5.8%)  
  1,110     AES Corp. (The)     8.00     06/01/20     1,279,275    
  775     Boston Gas Co. (a)     4.487     02/15/42     821,720    
  495     CMS Energy Corp.     5.05     03/15/22     515,908    
  280     CMS Energy Corp.     6.25     02/01/20     312,348    

 

See Notes to Financial Statements
41


Morgan Stanley Variable Investment Series - Income Plus

Portfolio of Investments n June 30, 2012 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

  COUPON
RATE		   MATURITY
DATE		   VALUE  
$ 750     EDP Finance BV (Portugal) (a)     4.90 %   10/01/19   $ 604,888    
  675     Enel Finance International N.V. (Italy) (a)     5.125     10/07/19     645,762    
  2,100     Exelon Generation Co., LLC     4.00     10/01/20     2,116,788    
  975     FirstEnergy Solutions Corp.     6.05     08/15/21     1,072,724    
  975     FirstEnergy Solutions Corp.     6.80     08/15/39     1,027,140    
  575     Iberdrola Finance Ireland Ltd. (Spain) (a)     5.00     09/11/19     531,819    
  900     PPL WEM Holdings PLC (a)     3.90     05/01/16     944,091    
  1,150     Puget Energy, Inc.     6.50     12/15/20     1,254,805    
          11,127,268    
    Total Corporate Bonds
(Cost $171,443,789)		     183,685,294    
    Asset-Backed Securities (0.9%)  
    CVS Pass-Through Trust  
  1,435             6.036     12/10/28     1,622,978    
  114     (a)     8.353     07/10/31     149,080    
    Total Asset-Backed Securities
(Cost $1,554,468)		     1,772,058    
    Municipal Bond (0.4%)  
  600     State of California, General Obligation Bonds
(Cost $603,036)		     5.95     04/01/16     685,080    
    Sovereign (0.2%)  
  395     Korea Development Bank (The)
(Korea, Republic of)
(Cost $393,218)		     3.875     05/04/17     420,935    
    Agency Fixed Rate Mortgage (0.0%)  
  1     Federal Home Loan Mortgage Corporation,
Gold Pool
(Cost $1,417)		     6.50     12/01/28     1,561    
NUMBER OF
SHARES		    
 
 
 
    Convertible Preferred Stocks (0.3%)  
    Diversified Financial Services (0.2%)  
  350     Bank of America Corp., Series L     341,250    
    Electric Utilities (0.1%)  
  4,430     PPL Corp.     234,347    
    Total Convertible Preferred Stocks
(Cost $585,890)		     575,597    

 

See Notes to Financial Statements
42


Morgan Stanley Variable Investment Series - Income Plus

Portfolio of Investments n June 30, 2012 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

  COUPON
RATE		   MATURITY
DATE		   VALUE  
    Short-Term Investments (1.4%)  
    U.S. Treasury Securities (0.1%)  
    U.S. Treasury Bills  
$ 25     (f)(g)     0.101 %   08/30/12   $ 24,997    
  175     (f)(g)     0.136     08/30/12     174,987    
    Total U.S. Treasury Securities
(Cost $199,957)		     199,984    
NUMBER OF
SHARES (000) 
 
 
 
 
 
    Investment Company (1.3%)  
  2,384     Morgan Stanley Institutional Liquidity Funds - Money
Market Portfolio - Institutional Class (See Note 6)
(Cost $2,384,162) 		    2,384,162    
    Total Short-Term Investments
(Cost $2,584,119)		     2,584,146    
    Total Investments
(Cost $177,165,937) (h)		         99.5 %     189,724,671    
    Other Assets in Excess of Liabilities         0.5       996,664    
    Net Assets         100.0 %   $ 190,721,335    

 

  MTN  Medium Term Note.

  REIT  Real Estate Investment Trust.

  (a)  144A security — Certain conditions for public sale may exist. Unless otherwise noted, these securities are deemed to be liquid.

  (b)  Security trades on the Hong Kong exchange.

  (c)  Variable/Floating Rate Security — Interest rate changes on these instruments are based on changes in a designated base rate. The rates shown are those in effect on June 30, 2012.

  (d)  Perpetual — Security does not have a predetermined maturity date. Rate for this security is fixed for a period of time then reverts to a floating rate. The interest shown is the rate in effect at June 30, 2012.

  (e)  When-issued security.

  (f)  Rate shown is the yield to maturity at June 30, 2012.

  (g)  A portion of this security has been physically segregated in connection with open futures contracts.

  (h)  Securities are available for collateral in connection with purchase of when-issued securities, open foreign currency exchange contracts, futures contracts and swap agreements.

 

See Notes to Financial Statements
43


Morgan Stanley Variable Investment Series - Income Plus

Portfolio of Investments n June 30, 2012 (unaudited) continued

FOREIGN CURRENCY EXCHANGE CONTRACTS OPEN AT JUNE 30, 2012:

COUNTERPARTY   CONTRACTS
TO DELIVER		   IN EXCHANGE
FOR		   DELIVERY
DATE		   UNREALIZED
DEPRECIATION		  
Goldman Sachs International   EUR 396,597     $ 491,290     07/13/12   $ (10,642 )  

 

FUTURES CONTRACTS OPEN AT JUNE 30, 2012:

NUMBER OF
CONTRACTS		   LONG/SHORT   DESCRIPTION, DELIVERY
MONTH AND YEAR		   UNDERLYING FACE
AMOUNT AT VALUE		   UNREALIZED
APPRECIATION
(DEPRECIATION)		  
  135     Long   U.S. Treasury 2 yr. Note,
Sep-12		   $ 29,725,312     $ (12,553 )  
  48     Long   U.S. Treasury Ultra Long Bond,
Sep-12		     8,008,500       14,815    
  37     Long   U.S. Treasury 5 yr. Note,
Sep-12		     4,586,844       8,094    
  19     Short   U.S. Treasury 30 yr. Bond,
Sep-12		     (2,811,406 )     (94 )  
  284     Short   U.S. Treasury 10 yr. Note,
Sep-12		     (37,878,500 )     (93,657 )  
Net Unrealized Depreciation   $ (83,395 )  

 

INTEREST RATE SWAP AGREEMENTS OPEN AT JUNE 30, 2012:

SWAP COUNTERPARTY   NOTIONAL
AMOUNT
(000)		   FLOATING
RATE INDEX		   PAY/RECEIVE
FLOATING RATE		   FIXED RATE   TERMINATION
DATE		   UNREALIZED
DEPRECIATION		  
Goldman Sachs
International		   $ 2,200     3 Month LIBOR   Receive     2.42 %   03/22/22   $ (149,688 )  
JPMorgan Chase Bank     1,069     3 Month LIBOR   Receive     2.43     03/22/22     (74,176 )  
Total Unrealized Depreciation       $(223,864)  

 

LIBOR  London Interbank Offered Rate.

Currency Abbreviations:

EUR  Euro.

See Notes to Financial Statements
44


Morgan Stanley Variable Investment Series - Income Plus

Summary of Investments n June 30, 2012 (unaudited) continued

LONG TERM CREDIT ANALYSIS++  
AA     6.5 %  
A     30.9    
BBB     49.5    
BB     9.4    
B or Below     1.3    
Not Rated     2.4    
      100.0 %+  

 

  +  Does not include open foreign currency exchange contracts with total unrealized depreciation of $10,642. Does not include open long/short futures contracts with an underlying face amount of $83,010,562 with net unrealized depreciation of $83,395. Also does not include open swap agreements with total unrealized depreciation of $223,864.

  ++  The ratings shown are based on the Portfolio's security ratings as determined by Standard & Poor's, Moody's or Fitch, each a Nationally Recognized Statistical Ratings Organization ("NRSRO").

 

See Notes to Financial Statements
45



Morgan Stanley Variable Investment Series - Global Infrastructure

Portfolio of Investments n June 30, 2012 (unaudited)

NUMBER OF
SHARES		  

  VALUE  
    Common Stocks (97.5%)  
    Australia (5.3%)  
    Airports  
  39,313     Australian Infrastructure Fund
(Stapled Securities) (a)(b)		   $ 97,050    
  266,364     Sydney Airport (Stapled
Securities) (a)		     793,618    
      890,668    
    Diversified  
  271,480     DUET Group (Stapled
Securities) (a)(b)		     512,343    
    Oil & Gas Storage &
Transportation		  
  122,600     APA Group (Stapled
Securities) (a)(b)		     628,243    
    Toll Roads  
  75,579     Macquarie Atlas Roads Group
(Stapled Securities) (a)(c)		     116,676    
  235,415     Transurban Group (Stapled
Securities) (a)		     1,372,614    
      1,489,290    
    Transmission & Distribution  
  224,049     Spark Infrastructure Group     350,276    
        Total Australia     3,870,820    
    Brazil (0.8%)  
    Water  
  7,800     Cia de Saneamento Basico do
Estado de Sao Paulo ADR		     591,708    
    Canada (11.3%)  
    Oil & Gas Storage &
Transportation		  
  81,240     Enbridge, Inc.     3,244,493    
  4,398     Keyera Corp.     183,074    
  113,500     TransCanada Corp.     4,756,944    
        Total Canada     8,184,511    

 

NUMBER OF
SHARES		  

  VALUE  
    China (14.7%)  
    Oil & Gas Storage &
Transportation		  
  755,000     Beijing Enterprises
Holdings Ltd. (d)		   $ 4,557,072    
  5,936,000     China Gas Holdings Ltd. (d)     2,966,181    
  246,000     ENN Energy Holdings Ltd. (d)     865,013    
  1,610,000     Sichuan Expressway Co., Ltd.,
H Shares (d)		     546,119    
      8,934,385    
    Ports  
  223,529     China Merchants Holdings
International Co., Ltd. (d)		     683,686    
    Toll Roads  
  1,078,000     Jiangsu Expressway Co., Ltd.,
H Shares (d)		     1,011,401    
        Total China     10,629,472    
    France (3.8%)  
    Communications  
  20,991     Eutelsat Communications SA     645,406    
  89,415     SES SA     2,114,426    
        Total France     2,759,832    
    Germany (0.4%)  
    Airports  
  4,775     Fraport AG Frankfurt Airport
Services Worldwide		     257,093    
    Italy (5.2%)  
    Oil & Gas Storage &
Transportation		  
  232,796     Snam SpA     1,037,805    
    Toll Roads  
  53,044     Atlantia SpA     677,487    
  179,235     Societa Iniziative Autostradali
e Servizi SpA		     1,264,469    
      1,941,956    

 

See Notes to Financial Statements
46


Morgan Stanley Variable Investment Series - Global Infrastructure

Portfolio of Investments n June 30, 2012 (unaudited) continued

NUMBER OF
SHARES		  

  VALUE  
    Transmission & Distribution  
  214,100     Terna Rete Elettrica
Nazionale SpA		   $ 771,425    
        Total Italy     3,751,186    
    Japan (1.1%)  
    Oil & Gas Storage &
Transportation		  
  152,000     Tokyo Gas Co., Ltd.     776,274    
    Netherlands (0.8%)  
    Oil & Gas Storage &
Transportation		  
  9,106     Koninklijke Vopak N.V.     583,935    
    Spain (1.4%)  
    Diversified  
  31,263     Ferrovial SA     352,494    
    Oil & Gas Storage &
Transportation		  
  15,256     Enagas SA     278,393    
    Toll Roads  
  29,223     Abertis Infraestructuras SA     395,676    
        Total Spain     1,026,563    
    Switzerland (1.2%)  
    Airports  
  2,517     Flughafen Zuerich AG
(Registered)		     883,875    
    United Kingdom (11.0%)  
    Transmission & Distribution  
  571,500     National Grid PLC     6,049,115    
    Water  
  31,700     Severn Trent PLC     821,037    
  102,700     United Utilities Group PLC     1,086,625    
      1,907,662    
      Total United Kingdom     7,956,777    

 

NUMBER OF
SHARES		  

  VALUE  
    United States (40.5%)  
    Communications  
  49,490     American Tower Corp.,
Class A		   $ 3,459,846    
  35,610     Crown Castle International
Corp. (c)		     2,088,883    
  44,600     SBA Communications Corp.,
Class A (c)		     2,544,430    
      8,093,159    
    Diversified  
  48,770     CenterPoint Energy, Inc.     1,008,076    
    Oil & Gas Storage &
Transportation		  
  9,660     AGL Resources, Inc.     374,325    
  5,070     Atmos Energy Corp.     177,805    
  56,413     Enbridge Energy
Management LLC (c)		     1,803,524    
  10,037     Kinder Morgan
Management LLC (c)		     736,917    
  13,170     Kinder Morgan, Inc.     424,337    
  13,900     New Jersey Resources Corp.     606,179    
  39,390     NiSource, Inc.     974,902    
  26,940     Oneok, Inc.     1,139,831    
  41,120     PG&E Corp.     1,861,502    
  38,790     Sempra Energy     2,671,855    
  91,546     Spectra Energy Corp.     2,660,327    
  8,480     WGL Holdings, Inc.     337,080    
  53,140     Williams Cos., Inc. (The)     1,531,495    
      15,300,079    
    Transmission & Distribution  
  21,290     ITC Holdings Corp.     1,467,094    
  67,178     Northeast Utilities     2,607,178    
  12,860     Pepco Holdings, Inc.     251,670    
      4,325,942    
    Water  
  15,810     American Water
Works Co., Inc.		     541,967    
      Total United States     29,269,223    
      Total Common Stocks
(Cost $57,439,296)		     70,541,269    

 

See Notes to Financial Statements
47


Morgan Stanley Variable Investment Series - Global Infrastructure

Portfolio of Investments n June 30, 2012 (unaudited) continued

NUMBER OF
SHARES (000)		  

  VALUE  
    Short-Term Investment (1.5%)      
    Investment Company      
  1,093     Morgan Stanley Institutional
Liquidity Fund - Treasury
Portfolio - Institutional Class
(See Note 6)
(Cost $1,092,962)		   $ 1,092,962    
Total Investments
(Cost $58,532,258) (e)  		    99.0 %     71,634,231    
Other Assets in Excess of
Liabilities  		    1.0       709,555    
Net Assets      100.0 %   $ 72,343,786    

 

ADR  American Depositary Receipt.

  (a)  Comprised of securities in separate entities that are traded as a single stapled security.

  (b)  Consists of one or more classes of securities traded together as a unit; stocks with attached warrants.

  (c)  Non-income producing security.

  (d)  Security trades on the Hong Kong exchange.

  (e)  The fair value and percentage of net assets, $32,495,827 and 44.9%, respectively, represent the securities that have been fair valued under the fair valuation policy for international investments as described in Note 1A within the Notes to the Financial Statements.

 

SUMMARY OF INVESTMENTS
INDUSTRY		   VALUE   PERCENT OF
TOTAL
INVESTMENTS		  
Oil & Gas Storage &
Transportation		   $ 35,723,625       49.9 %  
Transmission &
Distribution		     11,496,758       16.0    
Communications     10,852,991       15.2    
Toll Roads     4,838,323       6.8    
Water     3,041,337       4.2    
Airports     2,031,636       2.8    
Diversified     1,872,913       2.6    
Investment Company     1,092,962       1.5    
Ports     683,686       1.0    
    $ 71,634,231       100.0 %  

 

See Notes to Financial Statements
48


Morgan Stanley Variable Investment Series - European Equity

Portfolio of Investments n June 30, 2012 (unaudited)

NUMBER OF
SHARES		  

  VALUE  
    Common Stocks (97.2%)  
    Belgium (1.7%)  
    Chemicals  
  18,541     Umicore SA   $ 857,106    
    Finland (1.8%)  
    Machinery  
  14,617     Kone Oyj, Class B     885,138    
    France (8.1%)  
    Commercial Banks  
  24,034     BNP Paribas SA     927,803    
  29,204     Societe Generale SA (a)     688,546    
      1,616,349    
    Electrical Equipment  
  16,608     Schneider Electric SA     925,376    
    Hotels, Restaurants & Leisure  
  21,699     Accor SA     683,187    
    Media  
  32,319     SES SA     764,258    
        Total France     3,989,170    
    Germany (12.9%)  
    Automobiles  
  23,494     Daimler AG (Registered)     1,056,617    
    Health Care Providers &
Services		  
  11,062     Fresenius SE & Co., KGaA     1,147,076    
    Industrial Conglomerates  
  15,742     Siemens AG (Registered)     1,323,236    
    Insurance  
  6,529     Muenchener
Rueckversicherungs AG
(Registered)		     921,175    
    Machinery  
  6,654     MAN SE     680,051    
    Pharmaceuticals  
  17,083     Bayer AG (Registered)     1,231,832    
        Total Germany     6,359,987    

 

NUMBER OF
SHARES		  

  VALUE  
    Netherlands (3.2%)  
    Media  
  81,718     Reed Elsevier N.V.   $ 934,798    
    Metals & Mining  
  42,802     ArcelorMittal     661,208    
        Total Netherlands     1,596,006    
    Portugal (1.3%)  
    Oil, Gas & Consumable Fuels  
  48,284     Galp Energia SGPS SA,
Class B		     612,405    
    Spain (4.0%)  
    Commercial Banks  
  133,152     Banco Bilbao Vizcaya
Argentaria SA		     959,673    
    Information Technology
Services		  
  48,175     Amadeus IT Holding SA,
Class A		     1,020,207    
        Total Spain     1,979,880    
    Sweden (1.4%)  
    Wireless Telecommunication
Services		  
  7,177     Millicom International
Cellular SA SDR		     677,134    
    Switzerland (14.6%)  
    Food Products  
  44,160     Nestle SA (Registered)     2,634,207    
    Insurance  
  4,822     Zurich Insurance
Group AG (a)		     1,087,938    
    Pharmaceuticals  
  32,909     Novartis AG (Registered)     1,835,662    
  9,732     Roche Holding AG
(Genusschein)		     1,680,010    
      3,515,672    
      Total Switzerland     7,237,817    

 

See Notes to Financial Statements
49


Morgan Stanley Variable Investment Series - European Equity

Portfolio of Investments n June 30, 2012 (unaudited) continued

NUMBER OF
SHARES		  

  VALUE  
    United Kingdom (48.2%)  
    Aerospace & Defense  
  105,505     Rolls-Royce Holdings PLC (a)   $ 1,423,358    
    Commercial Banks  
  307,796     Barclays PLC     787,894    
  247,419     HSBC Holdings PLC     2,181,604    
      2,969,498    
    Food & Staples Retailing  
  185,635     WM Morrison
Supermarkets PLC		     774,749    
    Household Products  
  22,307     Reckitt Benckiser Group PLC     1,176,510    
    Insurance  
  99,602     Prudential PLC     1,154,027    
    Metals & Mining  
  32,607     Anglo American PLC     1,069,836    
  66,097     Xstrata PLC     834,278    
      1,904,114    
    Oil, Gas & Consumable Fuels  
  79,325     BG Group PLC     1,623,611    
  264,535     BP PLC     1,772,428    
  61,421     Royal Dutch Shell PLC,
Class A		     2,069,044    
  40,852     Tullow Oil PLC     943,038    
      6,408,121    
    Pharmaceuticals  
  76,342     GlaxoSmithKline PLC     1,731,120    
    Professional Services  
  68,476     Experian PLC     967,304    
    Tobacco  
  36,516     British American
Tobacco PLC		     1,858,603    
  36,173     Imperial Tobacco
Group PLC		     1,391,831    
      3,250,434    

 

NUMBER OF
SHARES		  

  VALUE  
    Wireless Telecommunication
Services		      
  735,393     Vodafone Group PLC   $ 2,066,187    
    Total United Kingdom     23,825,422    
    Total Common Stocks
(Cost $42,865,159)		     48,020,065    
NUMBER OF
SHARES (000)		      
    Short-Term Investment (2.3%)      
    Investment Company      
  1,158     Morgan Stanley Institutional
Liquidity Funds - Money Market
Portfolio - Institutional Class
(See Note 6)
(Cost $1,158,271)		     1,158,271    
Total Investments
(Cost $44,023,430) (b)(c)		     99.5 %     49,178,336    
Other Assets in Excess of
Liabilities		     0.5       266,921    
Net Assets     100.0 %   $ 49,445,257    

 

SDR  Swedish Depositary Receipt.

  (a)  Non-income producing security.

  (b)  Securities are available for collateral in connection with open foreign currency exchange contracts.

  (c)  The fair value and percentage of net assets, $48,020,065 and 97.1%, respectively, represent the securities that have been fair valued under the fair valuation policy for international investments as described in Note 1A within the Notes to the Financial Statements.

 

See Notes to Financial Statements
50


Morgan Stanley Variable Investment Series - European Equity

Portfolio of Investments n June 30, 2012 (unaudited) continued

FOREIGN CURRENCY EXCHANGE CONTRACTS OPEN AT JUNE 30, 2012:

COUNTERPARTY   CONTRACTS
TO DELIVER		   IN EXCHANGE
FOR		   DELIVERY
DATE		   UNREALIZED
DEPRECIATION		  
State Street Bank London   GBP 3,055,000     EUR 3,773,646     07/13/2012   $ (8,551 )  

 

Currency Abbreviations:

EUR  Euro.

GBP  British Pound.

SUMMARY OF INVESTMENTS
INDUSTRY		   VALUE   PERCENT OF
TOTAL
INVESTMENTS		  
Oil, Gas &
Consumable Fuels		   $ 7,020,526       14.3 %  
Pharmaceuticals     6,478,624       13.2    
Commercial Banks     5,545,520       11.3    
Tobacco     3,250,434       6.6    
Insurance     3,163,140       6.4    
Wireless Telecommunication
Services		     2,743,321       5.6    
Food Products     2,634,207       5.4    
Metals & Mining     2,565,322       5.2    
Media     1,699,056       3.4    
Machinery     1,565,189       3.2    
Aerospace & Defense     1,423,358       2.9    
Industrial Conglomerates     1,323,236       2.7    
Household Products     1,176,510       2.4    
Investment Company     1,158,271       2.3    

 

INDUSTRY   VALUE   PERCENT OF
TOTAL
INVESTMENTS		  
Health Care Providers &
Services		   $ 1,147,076       2.3 %  
Automobiles     1,056,617       2.1    
Information Technology
Services		     1,020,207       2.1    
Professional Services     967,304       2.0    
Electrical Equipment     925,376       1.9    
Chemicals     857,106       1.7    
Food & Staples Retailing     774,749       1.6    
Hotels, Restaurants &
Leisure		     683,187       1.4    
    $ 49,178,336 +     100.0 %  

 

+  Does not include open foreign currency exchange contracts with total unrealized depreciation of $8,551.

 

See Notes to Financial Statements
51


Morgan Stanley Variable Investment Series - Multi Cap Growth

Portfolio of Investments n June 30, 2012 (unaudited)

NUMBER OF SHARES  

  VALUE  
    Common Stocks (95.8%)  
    Air Transport (1.6%)  
  92,758     Expeditors International of
Washington, Inc.		   $ 3,594,373    
    Alternative Energy (3.6%)  
  77,286     Range Resources Corp.     4,781,685    
  138,458     Ultra Petroleum Corp. (a)     3,194,226    
      7,975,911    
    Beverage: Brewers &
Distillers (1.3%)		  
  260,410     DE Master Blenders 1753 N.V.
(Netherlands) (a)		     2,936,279    
    Biotechnology (2.3%)  
  128,513     Illumina, Inc. (a)     5,190,640    
    Chemicals: Diversified (3.0%)  
  81,976     Monsanto Co.     6,785,973    
    Commercial Finance &
Mortgage Companies (1.5%)		  
  630,526     BM&F Bovespa SA (Brazil)     3,217,770    
    Commercial Services (4.5%)  
  133,491     Intertek Group PLC
(United Kingdom)		     5,610,298    
  87,537     Weight Watchers
International, Inc. (a)		     4,513,408    
      10,123,706    
    Communications
Technology (3.4%)		  
  156,909     Motorola Solutions, Inc.     7,548,892    
    Computer Services,
Software & Systems (19.8%)		  
  61,290     Baidu, Inc. ADR (China) (a)     7,047,124    
  167,392     Facebook, Inc. (a)     5,209,239    
  327,898     Facebook, Inc.,
Class B (a)(b)(c)		     9,354,930    
  16,821     Google, Inc., Class A (a)     9,757,358    
  53,696     LinkedIn Corp., Class A (a)     5,706,274    
  39,990     Salesforce.com, Inc. (a)     5,529,017    
  287,079     Zynga, Inc., Class A (a)     1,561,710    
      44,165,652    

 

NUMBER OF SHARES  

  VALUE  
    Computer Technology (10.8%)  
  34,242     Apple, Inc. (a)   $ 19,997,328    
  215,324     Yandex N.V., Class A
(Russia) (a)		     4,101,922    
      24,099,250    
    Consumer Lending (3.0%)  
  7,810     Mastercard, Inc., Class A     3,359,159    
  27,387     Visa, Inc., Class A     3,385,855    
      6,745,014    
    Diversified Retail (14.7%)  
  87,805     Amazon.com, Inc. (a)     20,050,272    
  491,036     Groupon, Inc. (a)     5,219,712    
  11,336     Priceline.com, Inc. (a)     7,532,999    
      32,802,983    
    Financial Data &
Systems (5.3%)		  
  159,792     MSCI, Inc., Class A (a)     5,436,124    
  128,781     Verisk Analytics, Inc.,
Class A (a)		     6,343,752    
      11,779,876    
    Foods (0.7%)  
  52,082     Hillshire Brands Co.     1,509,857    
    Health Care Services (4.3%)  
  121,773     athenahealth, Inc. (a)     9,640,768    
    Insurance:
Property-Casualty (1.8%)		  
  197,260     Progressive Corp. (The)     4,108,926    
    Medical Equipment (3.5%)  
  13,934     Intuitive Surgical, Inc. (a)     7,716,510    
    Metals & Minerals:
Diversified (1.9%)		  
  2,494,075     Lynas Corp., Ltd.
(Australia) (a)		     2,205,188    
  94,351     Molycorp, Inc. (a)     2,033,264    
      4,238,452    

 

See Notes to Financial Statements
52


Morgan Stanley Variable Investment Series - Multi Cap Growth

Portfolio of Investments n June 30, 2012 (unaudited) continued

NUMBER OF SHARES  

  VALUE  
    Real Estate Investment
Trusts (REIT) (3.6%)		      
  244,421     Brookfield Asset Management,
Inc., Class A (Canada)		   $ 8,090,335    
    Recreational Vehicles &
Boats (3.4%)		      
  262,869     Edenred (France)     7,459,093    
    Wholesale & International
Trade (1.8%)		      
  2,044,000     Li & Fung Ltd. (d)     3,966,277    
    Total Common Stocks
(Cost $164,869,334)		     213,696,537    
    Convertible Preferred
Stocks (1.0%)		      
    Alternative Energy (0.9%)      
  586,326     Better Place, Inc. (a)(b)(c)     1,940,739    
    Computer Services,
Software & Systems (0.1%)		      
  28,236     Workday, Inc. (a)(b)(c)     374,409    
    Total Convertible
Preferred Stocks
(Cost $1,840,224)		     2,315,148    
NUMBER OF
SHARES (000)		      
    Short-Term Investment (3.0%)      
    Investment Company      
  6,674     Morgan Stanley Institutional
Liquidity Funds - Money
Market Portfolio - Institutional
Class (See Note 6)
(Cost $6,673,526)		     6,673,526    
Total Investments
(Cost $173,383,084) (e)		     99.8 %     222,685,211    
Other Assets in Excess of
Liabilities		     0.2       469,019    
Net Assets     100.0 %   $ 223,154,230    

 

  ADR  American Depositary Receipt.

  (a)  Non-income producing security.

  (b)  Illiquid security. Resale is restricted to qualified institutional investors.

  (c)  At June 30, 2012, the Portfolio held fair valued securities valued at $11,670,078, representing 5.2% of net assets. These securities have been fair valued as determined in good faith under procedures established by and under the general supervision of the Fund's Trustees.

  (d)  Security trades on the Hong Kong exchange.

  (e)  The fair value and percentage of net assets, $19,240,856 and 8.6%, respectively, represent the securities that have been fair valued under the fair valuation policy for international investments as described in Note 1A within the Notes to the Financial Statements.

See Notes to Financial Statements
53


Morgan Stanley Variable Investment Series - Multi Cap Growth

Summary of Investments n June 30, 2012 (unaudited)

INDUSTRY   VALUE   PERCENT OF
TOTAL
INVESTMENTS		  
Computer Services,
Software & Systems		   $ 44,540,061       20.0 %  
Diversified Retail     32,802,983       14.7    
Computer Technology     24,099,250       10.8    
Financial Data & Systems     11,779,876       5.3    
Commercial Services     10,123,706       4.6    
Alternative Energy     9,916,650       4.5    
Health Care Services     9,640,768       4.3    
Real Estate Investment
Trusts (REIT)		     8,090,335       3.6    
Medical Equipment     7,716,510       3.5    
Communications
Technology		     7,548,892       3.4    
Recreational Vehicles &
Boats		     7,459,093       3.4    
Chemicals: Diversified     6,785,973       3.1    
Consumer Lending     6,745,014       3.0    

 

INDUSTRY   VALUE   PERCENT OF
TOTAL
INVESTMENTS		  
Investment Companies   $ 6,673,526       3.0 %  
Biotechnology     5,190,640       2.3    
Metals & Minerals:
Diversified		     4,238,452       1.9    
Insurance:
Property-Casualty		     4,108,926       1.8    
Wholesale & International
Trade		     3,966,277       1.8    
Air Transport     3,594,373       1.6    
Commercial Finance &
Mortgage Companies		     3,217,770       1.4    
Beverage: Brewers &
Distillers		     2,936,279       1.3    
Foods     1,509,857       0.7    
    $ 222,685,211       100.0 %  

 

See Notes to Financial Statements
54


Morgan Stanley Variable Investment Series - Aggressive Equity

Portfolio of Investments n June 30, 2012 (unaudited)

NUMBER OF
SHARES		  

  VALUE  
    Common Stocks (95.6%)  
    Air Transport (1.6%)  
  11,735     Expeditors International of
Washington, Inc.		   $ 454,731    
    Alternative Energy (3.6%)  
  9,777     Range Resources Corp.     604,903    
  17,516     Ultra Petroleum Corp. (a)     404,094    
      1,008,997    
    Beverage: Brewers &
Distillers (1.3%)		  
  32,945     DE Master Blenders 1753 N.V.
(Netherlands) (a)		     371,475    
    Biotechnology (2.3%)  
  16,258     Illumina, Inc. (a)     656,661    
    Chemicals: Diversified (3.0%)  
  10,371     Monsanto Co.     858,511    
    Commercial Finance &
Mortgage Companies (1.4%)		  
  79,769     BM&F Bovespa SA (Brazil)     407,086    
    Commercial Services (4.5%)  
  16,882     Intertek Group PLC
(United Kingdom)		     709,509    
  11,074     Weight Watchers
International, Inc. (a)		     570,975    
      1,280,484    
    Communications
Technology (3.4%)		  
  19,851     Motorola Solutions, Inc.     955,032    
    Computer Services,
Software & Systems (19.8%)		  
  7,754     Baidu, Inc. ADR (China) (a)     891,555    
  23,370     Facebook, Inc. (a)     727,275    
  39,222     Facebook, Inc.,
Class B (a)(b)(c)		     1,119,004    
  2,126     Google, Inc., Class A (a)     1,233,229    
  6,793     LinkedIn Corp., Class A (a)     721,892    
  5,059     Salesforce.com, Inc. (a)     699,457    
  36,319     Zynga, Inc., Class A (a)     197,575    
      5,589,987    

 

NUMBER OF
SHARES		  

  VALUE  
    Computer Technology (10.8%)  
  4,328     Apple, Inc. (a)   $ 2,527,552    
  27,241     Yandex N.V., Class A
(Russia) (a)		     518,941    
      3,046,493    
    Consumer Lending (3.0%)  
  988     Mastercard, Inc., Class A     424,949    
  3,465     Visa, Inc., Class A     428,378    
      853,327    
    Diversified Retail (14.7%)  
  11,108     Amazon.com, Inc. (a)     2,536,512    
  62,071     Groupon, Inc. (a)     659,815    
  1,434     Priceline.com, Inc. (a)     952,921    
      4,149,248    
    Financial Data &
Systems (5.3%)		  
  20,215     MSCI, Inc., Class A (a)     687,714    
  16,292     Verisk Analytics, Inc.,
Class A (a)		     802,544    
      1,490,258    
    Foods (0.7%)  
  6,589     Hillshire Brands Co.     191,015    
    Health Care Services (4.3%)  
  15,406     athenahealth, Inc. (a)     1,219,693    
    Insurance:
Property-Casualty (1.8%)		  
  24,866     Progressive Corp. (The)     517,959    
    Medical Equipment (3.5%)  
  1,763     Intuitive Surgical, Inc. (a)     976,332    
    Metals & Minerals:
Diversified (1.9%)		  
  315,528     Lynas Corp., Ltd.
(Australia) (a)		     278,980    
  11,936     Molycorp, Inc. (a)     257,221    
      536,201    

 

See Notes to Financial Statements
55


Morgan Stanley Variable Investment Series - Aggressive Equity

Portfolio of Investments n June 30, 2012 (unaudited) continued

NUMBER OF
SHARES		  

  VALUE  
    Real Estate Investment Trusts
(REIT) (3.6%)		      
  30,922     Brookfield Asset Management,
Inc., Class A (Canada)		   $ 1,023,518    
    Recreational Vehicles &
Boats (3.3%)		      
  33,256     Edenred (France)     943,662    
    Wholesale & International
Trade (1.8%)		      
  258,000     Li & Fung Ltd. (d)     500,636    
        Total Common Stocks
(Cost $21,343,236)		     27,031,306    
    Convertible Preferred
Stocks (1.0%)		      
    Alternative Energy (0.8%)      
  70,908     Better Place, Inc. (a)(b)(c)     234,705    
    Computer Services,
Software & Systems (0.2%)		      
  3,313     Workday, Inc. (a)(b)(c)     43,930    
        Total Convertible
Preferred Stocks
(Cost $221,200)		     278,635    
NUMBER OF
SHARES (000)		      
    Short-Term Investment (3.7%)      
    Investment Company      
  1,038     Morgan Stanley Institutional
Liquidity Funds - Money
Market Portfolio - Institutional
Class (See Note 6)
(Cost $1,038,390)		     1,038,390    
Total Investments
(Cost $22,602,826) (e)		     100.3 %     28,348,331    
Liabilities in Excess of
Other Assets		     (0.3 )     (82,065 )  
Net Assets     100.0 %   $ 28,266,266    

 

  ADR  American Depositary Receipt.

  (a)  Non-income producing security.

  (b)  At June 30, 2012, the Portfolio held fair valued securities valued at $1,397,639, representing 4.9% of net assets. These securities have been fair valued as determined in good faith under procedures established by and under the general supervision of the Fund's Trustees.

  (c)  Illiquid security. Resale is restricted to qualified institutional investors.

  (d)  Security trades on the Hong Kong exchange.

  (e)  The fair value and percentage of net assets, $2,432,787 and 8.6%, respectively, represent the securities that have been fair valued under the fair valuation policy for international investments as described in Note 1A within the Notes to the Financial Statements.

See Notes to Financial Statements
56


Morgan Stanley Variable Investment Series - Aggressive Equity

Summary of Investments n June 30, 2012 (unaudited)

INDUSTRY   VALUE   PERCENT OF
TOTAL
INVESTMENTS		  
Computer Services,
Software & Systems		   $ 5,633,917       19.9 %  
Diversified Retail     4,149,248       14.6    
Computer Technology     3,046,493       10.8    
Financial Data & Systems     1,490,258       5.3    
Commercial Services     1,280,484       4.5    
Alternative Energy     1,243,702       4.4    
Health Care Services     1,219,693       4.3    
Investment Company     1,038,390       3.7    
Real Estate Investment
Trusts (REIT)		     1,023,518       3.6    
Medical Equipment     976,332       3.4    
Communications
Technology		     955,032       3.4    
Recreational Vehicles &
Boats		     943,662       3.3    
Chemicals: Diversified     858,511       3.0    

 

INDUSTRY   VALUE   PERCENT OF
TOTAL
INVESTMENTS		  
Consumer Lending   $ 853,327       3.0 %  
Biotechnology     656,661       2.3    
Metals & Minerals:
Diversified		     536,201       1.9    
Insurance:
Property-Casualty		     517,959       1.8    
Wholesale & International
Trade		     500,636       1.8    
Air Transport     454,731       1.6    
Commercial Finance &
Mortgage Companies		     407,086       1.4    
Beverage: Brewers &
Distillers		     371,475       1.3    
Foods     191,015       0.7    
    $ 28,348,331       100.0 %  

 

See Notes to Financial Statements
57



Morgan Stanley Variable Investment Series - Strategist

Portfolio of Investments n June 30, 2012 (unaudited)

NUMBER OF
SHARES		  
  VALUE  
    Common Stocks (61.5%)  
    Aerospace & Defense (2.3%)  
  52,230     Raytheon Co.   $ 2,955,696    
    Auto Components (1.0%)  
  45,180     Johnson Controls, Inc.     1,251,938    
    Chemicals (1.9%)  
  47,270     EI du Pont de Nemours & Co.     2,390,444    
    Commercial Services & Supplies (0.1%)  
  15,724     ACCO Brands Corp. (a)     162,586    
    Computers & Peripherals (0.6%)  
  40,115     Hewlett-Packard Co.     806,713    
    Diversified Financial Services (2.0%)  
  71,445     JPMorgan Chase & Co.     2,552,730    
    Diversified Telecommunication Services (3.6%)  
  38,980     CenturyLink, Inc.     1,539,320    
  69,870     Verizon Communications, Inc.     3,105,023    
      4,644,343    
    Food & Staples Retailing (1.1%)  
  77,350     Safeway, Inc.     1,403,902    
    Food Products (1.9%)  
  94,270     ConAgra Foods, Inc.     2,444,421    
    Hotels, Restaurants & Leisure (5.1%)  
  29,050     McDonald's Corp.     2,571,796    
  63,080     Yum! Brands, Inc.     4,063,614    
      6,635,410    
    Industrial Conglomerates (4.5%)  
  134,870     General Electric Co.     2,810,691    
  57,090     Tyco International Ltd.     3,017,206    
      5,827,897    
    Information Technology Services (2.0%)  
  13,300     International Business Machines Corp.     2,601,214    
    Insurance (2.5%)  
  45,050     Chubb Corp. (The)     3,280,541    
    Machinery (1.8%)  
  42,525     Illinois Tool Works, Inc.     2,249,147    
    Media (2.2%)  
  74,380     Time Warner, Inc.     2,863,630    

 

See Notes to Financial Statements
58


Morgan Stanley Variable Investment Series - Strategist

Portfolio of Investments n June 30, 2012 (unaudited) continued

NUMBER OF
SHARES		  
  VALUE  
    Multi-Utilities (1.9%)  
  43,680     Integrys Energy Group, Inc.   $ 2,484,082    
    Oil, Gas & Consumable Fuels (6.4%)  
  26,550     Chevron Corp.     2,801,025    
  39,035     ConocoPhillips     2,181,276    
  30,900     Exxon Mobil Corp.     2,644,113    
  19,517     Phillips 66 (a)     648,745    
      8,275,159    
    Paper & Forest Products (1.1%)  
  47,670     MeadWestvaco Corp.     1,370,513    
    Pharmaceuticals (5.9%)  
  55,675     Abbott Laboratories     3,589,367    
  113,640     Bristol-Myers Squibb Co.     4,085,358    
      7,674,725    
    Road & Rail (1.8%)  
  32,410     Norfolk Southern Corp.     2,326,066    
    Semiconductors & Semiconductor Equipment (1.7%)  
  83,805     Intel Corp.     2,233,403    
    Software (2.4%)  
  99,060     Microsoft Corp.     3,030,245    
    Specialty Retail (2.9%)  
  71,305     Home Depot, Inc.     3,778,452    
    Textiles, Apparel & Luxury Goods (1.7%)  
  16,710     VF Corp.     2,229,949    
    Tobacco (3.1%)  
  28,700     Philip Morris International, Inc.     2,504,362    
  34,280     Reynolds American, Inc.     1,538,144    
      4,042,506    
        Total Common Stocks
(Cost $73,384,491)		     79,515,712    

 

PRINCIPAL
AMOUNT
(000)		  

 
COUPON
RATE		  
MATURITY
DATE		  

 
    Corporate Bonds (7.4%)  
    Basic Materials (0.5%)  
$ 105     Air Products & Chemicals, Inc     2.00 %   08/02/16     108,348    
  15     ArcelorMittal (Luxembourg)     7.00     10/15/39     14,603    
  50     ArcelorMittal (Luxembourg)     9.85     06/01/19     59,579    

 

See Notes to Financial Statements
59


Morgan Stanley Variable Investment Series - Strategist

Portfolio of Investments n June 30, 2012 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

 
COUPON
RATE		  
MATURITY
DATE		  

VALUE 		 
$ 60     Barrick Gold Corp. (Canada)     3.85 %   04/01/22   $ 62,245    
  55     Barrick North America Finance LLC     4.40     05/30/21     59,390    
  50     Eastman Chemical Co.     3.60     08/15/22     51,102    
  50     Georgia-Pacific LLC     8.875     05/15/31     70,677    
  75     Kinross Gold Corp. (Canada)     5.125     09/01/21     76,016    
  75     Syngenta Finance (Switzerland)     3.125     03/28/22     76,276    
  60     Vale Overseas Ltd. (Brazil)     5.625     09/15/19     66,814    
      645,050    
    Communications (0.7%)  
  25     AT&T, Inc.     5.35     09/01/40     28,802    
  85     AT&T, Inc.     6.30     01/15/38     106,246    
  45     CenturyLink, Inc.     6.45     06/15/21     46,905    
  50     Comcast Corp.     5.15     03/01/20     58,138    
  45     Comcast Corp.     5.70     05/15/18     53,137    
  25     Comcast Corp.     6.40     05/15/38     30,581    
  45     Deutsche Telekom International Finance BV (Germany)     8.75     06/15/30     62,624    
  50     Motorola Solutions, Inc.     3.75     05/15/22     49,409    
  40     NBC Universal Media LLC     4.375     04/01/21     44,086    
  25     NBC Universal Media LLC     5.95     04/01/41     29,622    
  55     Omnicom Group, Inc.     3.625     05/01/22     56,001    
  40     Qwest Corp.     6.875     09/15/33     40,000    
  25     Time Warner, Inc.     7.70     05/01/32     32,739    
  35     Verizon Communications, Inc.     4.60     04/01/21     40,189    
  55     Verizon Communications, Inc.     8.95     03/01/39     90,893    
  45     Vivendi SA (France) (b)     6.625     04/04/18     49,801    
  100     WPP Finance UK (United Kingdom)     8.00     09/15/14     112,835    
      932,008    
    Consumer, Cyclical (0.4%)  
  90     Best Buy Co., Inc.     3.75     03/15/16     87,943    
  65     Gap, Inc. (The)     5.95     04/12/21     67,488    
  20     Ingram Micro, Inc.     5.25     09/01/17     21,465    
  30     Macy's Retail Holdings, Inc.     3.875     01/15/22     31,603    
  70     VF Corp.     3.50     09/01/21     74,778    
  100     Volkswagen International Finance N.V. (Germany) (b)     2.375     03/22/17     101,696    
  40     Wal-Mart Stores, Inc.     5.25     09/01/35     48,584    
  45     Wesfarmers Ltd. (Australia) (b)     2.983     05/18/16     46,367    
  5     Yum! Brands, Inc.     6.875     11/15/37     6,644    
      486,568    
    Consumer, Non-Cyclical (1.0%)  
  50     Altria Group, Inc.     4.125     09/11/15     54,310    
  60     Altria Group, Inc.     9.25     08/06/19     83,473    

 

See Notes to Financial Statements
60


Morgan Stanley Variable Investment Series - Strategist

Portfolio of Investments n June 30, 2012 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

 
COUPON
RATE		  
MATURITY
DATE		  

VALUE 		 
$ 60     Boston Scientific Corp.     6.00 %   01/15/20   $ 71,669    
  90     Cigna Corp.     2.75     11/15/16     92,820    
  65     Coventry Health Care, Inc.     5.45     06/15/21     73,198    
  25     Covidien International Finance SA     3.20     06/15/22     25,829    
  96     Delhaize Group SA (Belgium)     5.70     10/01/40     80,899    
  65     Gilead Sciences, Inc.     4.50     04/01/21     72,364    
  5     Gilead Sciences, Inc.     5.65     12/01/41     5,851    
  100     Grupo Bimbo SAB de CV (Mexico) (b)     4.875     06/30/20     111,240    
  50     Kraft Foods, Inc.     6.50     02/09/40     64,462    
  70     Life Technologies Corp.     6.00     03/01/20     82,250    
  75     Sanofi (France)     4.00     03/29/21     83,806    
  120     Teva Pharmaceutical Finance IV BV (Israel)     3.65     11/10/21     126,464    
  65     UnitedHealth Group, Inc.     6.625     11/15/37     87,306    
  55     Verisk Analytics, Inc.     5.80     05/01/21     61,493    
  65     Woolworths Ltd. (Australia) (b)     4.00     09/22/20     69,528    
      1,246,962    
    Energy (0.6%)  
  75     BP Capital Markets PLC (United Kingdom)     3.245     05/06/22     77,818    
  35     Enterprise Products Operating LLC     5.25     01/31/20     40,156    
  90     Enterprise Products Operating LLC, Series N     6.50     01/31/19     108,624    
  40     EQT Corp.     4.875     11/15/21     40,934    
  50     Kinder Morgan Energy Partners LP     5.95     02/15/18     58,051    
  35     Marathon Petroleum Corp.     5.125     03/01/21     39,256    
  50     Murphy Oil Corp.     4.00     06/01/22     51,024    
  50     Phillips 66 (b)     4.30     04/01/22     52,703    
  60     Plains All American Pipeline LP/PAA Finance Corp.     6.70     05/15/36     70,370    
  60     Plains All American Pipeline LP/PAA Finance Corp.     8.75     05/01/19     79,243    
  50     Spectra Energy Capital LLC     7.50     09/15/38     66,328    
  55     Texas Eastern Transmission LP     7.00     07/15/32     71,452    
      755,959    
    Finance (3.0%)  
  100     ABB Treasury Center USA, Inc. (Switzerland) (b)     2.50     06/15/16     103,521    
  100     Abbey National Treasury Services PLC
(United Kingdom) (b)		     3.875     11/10/14     98,572    
  75     Aegon N.V. (Netherlands)     4.625     12/01/15     80,097    
  100     Australia & New Zealand Banking Group Ltd.
(Australia) (b)		     4.875     01/12/21     109,810    
  130     Berkshire Hathaway, Inc.     3.75     08/15/21     138,950    
  75     BNP Paribas SA (France)     5.00     01/15/21     77,122    
  45     Brookfield Asset Management, Inc. (Canada)     5.80     04/25/17     49,028    
  35     Citigroup, Inc. (See Note 6)     5.875     05/29/37     38,265    

 

See Notes to Financial Statements
61


Morgan Stanley Variable Investment Series - Strategist

Portfolio of Investments n June 30, 2012 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

 
COUPON
RATE		  
MATURITY
DATE		  

VALUE 		 
$ 70     Citigroup, Inc. (See Note 6)     6.125 %   05/15/18   $ 78,257    
  95     CNA Financial Corp.     5.75     08/15/21     104,574    
  50     Cooperatieve Centrale Raiffeisen-Boerenleenbank BA
(Netherlands)		     3.875     02/08/22     50,963    
  240     Credit Suisse (Switzerland)     5.40     01/14/20     250,002    
  25     Credit Suisse (Switzerland)     6.00     02/15/18     26,781    
  60     Dexus Diversified Trust/Dexus Office Trust
(Australia) (b)		     5.60     03/15/21     62,273    
  25     ERP Operating LP     4.625     12/15/21     27,206    
  140     Farmers Exchange Capital (b)     7.05     07/15/28     161,090    
  200     Ford Motor Credit Co., LLC (b)     4.207     04/15/16     207,857    
  60     General Electric Capital Corp.     5.30     02/11/21     67,461    
  145     General Electric Capital Corp., Series G     6.00     08/07/19     169,911    
  75     Genworth Financial, Inc.     7.20     02/15/21     71,549    
  45     Harley-Davidson Funding Corp. (b)     6.80     06/15/18     53,716    
  60     Hartford Financial Services Group, Inc.     5.50     03/30/20     62,742    
  70     HSBC Holdings PLC (United Kingdom)     4.00     03/30/22     72,834    
  60     JPMorgan Chase & Co.     4.25     10/15/20     63,141    
  140     JPMorgan Chase & Co.     4.625     05/10/21     150,071    
  70     Lloyds TSB Bank PLC (United Kingdom)     6.375     01/21/21     79,463    
  50     Macquarie Bank Ltd. (Australia) (b)     6.625     04/07/21     50,216    
  55     Macquarie Group Ltd. (Australia) (b)     6.00     01/14/20     54,797    
  225     Merrill Lynch & Co., Inc., MTN     6.875     04/25/18     252,065    
  35     MetLife, Inc. (See Note 6)     7.717     02/15/19     44,387    
  170     Nationwide Building Society (United Kingdom) (b)     6.25     02/25/20     183,664    
  50     Nationwide Financial Services (b)     5.375     03/25/21     51,809    
  75     Pacific LifeCorp (b)     6.00     02/10/20     81,991    
  60     Platinum Underwriters Finance, Inc., Series B     7.50     06/01/17     65,779    
  50     Principal Financial Group, Inc.     8.875     05/15/19     64,897    
  40     Prudential Financial, Inc., MTN     6.625     12/01/37     45,389    
  25     Santander Holdings USA, Inc. (Spain)     4.625     04/19/16     24,180    
  70     SLM Corp., MTN     6.25     01/25/16     73,850    
  100     Standard Chartered Bank (United Kingdom) (b)     6.40     09/26/17     111,596    
  60     Wachovia Corp.     5.625     10/15/16     67,700    
  95     Wells Fargo & Co.     5.625     12/11/17     111,066    
  80     Wells Operating Partnership II LP     5.875     04/01/18     83,278    
      3,821,920    
    Industrials (0.8%)  
  50     ABB Finance USA, Inc. (Switzerland)     2.875     05/08/22     50,686    
  100     BAA Funding Ltd. (United Kingdom) (b)     4.875     07/15/21     105,720    
  65     Bemis Co., Inc.     4.50     10/15/21     70,281    

 

See Notes to Financial Statements
62


Morgan Stanley Variable Investment Series - Strategist

Portfolio of Investments n June 30, 2012 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

 
COUPON
RATE		  
MATURITY
DATE		  

VALUE 		 
$ 75     Boston Properties LP     3.85 %   02/01/23   $ 75,865    
  90     Cooper US, Inc.     5.25     11/15/12     91,493    
  75     CRH America, Inc.     6.00     09/30/16     82,176    
  30     Holcim US Finance Sarl & Cie SCS (Switzerland) (b)     6.00     12/30/19     31,501    
  75     L-3 Communications Corp.     4.95     02/15/21     81,252    
  75     LVMH Moet Hennessy Louis Vuitton SA (France) (b)     1.625     06/29/17     75,068    
  10     Norfolk Southern Corp.     4.837     10/01/41     11,081    
  50     Norfolk Southern Corp.     7.25     02/15/31     69,458    
  75     Republic Services, Inc.     3.55     06/01/22     75,968    
  70     Sonoco Products Co.     5.75     11/01/40     79,617    
  40     Union Pacific Corp.     6.125     02/15/20     49,476    
  45     United Technologies Corp.     4.50     06/01/42     49,639    
  80     Waste Management, Inc.     6.125     11/30/39     99,296    
      1,098,577    
    Technology (0.2%)  
  50     Fiserv, Inc.     3.125     06/15/16     51,592    
  125     Hewlett-Packard Co.     4.65     12/09/21     131,276    
  100     International Business Machines Corp.     7.625     10/15/18     133,403    
      316,271    
    Utilities (0.2%)  
  75     Ohio Power Co., Series M     5.375     10/01/21     88,712    
  80     Oncor Electric Delivery Co., LLC     6.80     09/01/18     95,744    
  75     PPL WEM Holdings PLC (b)     3.90     05/01/16     78,674    
      263,130    
        Total Corporate Bonds
(Cost $8,643,655)		             9,566,445    
    Sovereign (0.4%)  
  100     Banco Nacional de Desenvolvimento, Economico e
Social (Brazil) (b)		     5.50     07/12/20     114,125    
  150     Brazilian Government International Bond (Brazil)     4.875     01/22/21     174,225    
  80     Mexico Government International Bond (Mexico)     3.625     03/15/22     85,120    
  150     Petroleos Mexicanos (Mexico) (b)     4.875     01/24/22     162,375    
        Total Sovereign
(Cost $528,980)		             535,845    
    Municipal Bonds (0.5%)  
  75     Chicago, IL, Transit Authority     6.20     12/01/40     82,846    
  30     City of Chicago, IL, O'Hare International Airport
Revenue		     6.395     01/01/40     38,579    
  70     City of New York, NY, Series G-1     5.968     03/01/36     87,314    

 

See Notes to Financial Statements
63


Morgan Stanley Variable Investment Series - Strategist

Portfolio of Investments n June 30, 2012 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

 
COUPON
RATE		  
MATURITY
DATE		  

VALUE 		 
$ 85     Illinois State Toll Highway Authority, Highway
Revenue, Build America Bonds		     6.184   %   01/01/34   $ 105,538    
  95     Municipal Electric Authority of Georgia     6.655     04/01/57     109,966    
  65     New York City, NY, Transitional Finance Authority
Future Tax Secured Revenue		     5.267     05/01/27     75,095    
    State of California,
General Obligation Bonds		      
  45             5.95     04/01/16     51,381    
  30             6.65     03/01/22     36,947    
        Total Municipal Bonds
(Cost $496,205)		             587,666    
    Agency Fixed Rate Mortgages (0.0%)      
  2     Federal Home Loan Mortgage Corporation,
Gold Pools		     6.50     05/01/29 - 12/01/31     2,772    
  1     Federal National Mortgage Association,
Conventional Pool		     6.50     11/01/29     641    
        Total Agency Fixed Rate Mortgages
(Cost $3,102)		             3,413    
    Asset-Backed Securities (0.8%)      
  100     Ally Master Owner Trust     1.112 (c)   01/15/16     100,692    
  29     Brazos Student Finance Corp.     1.368 (c)   06/25/35     29,402    
  141     CVS Pass-Through Trust     6.036     12/10/28     159,876    
  100     GE Dealer Floorplan Master Note Trust (b)     1.792 (c)   10/20/14     100,464    
  175     Louisiana Public Facilities Authority     1.366 (c)   04/26/27     175,616    
  150     Nissan Auto Receivables Owner Trust     1.18     02/16/15     151,017    
  180     PFS Financing Corp. (b)     1.742 (c)   10/17/16     181,530    
  125     World Omni Automobile Lease Securitization Trust     1.49     10/15/14     125,776    
        Total Asset-Backed Securities
(Cost $998,649)		             1,024,373    
    U.S. Treasury Securities (13.8%)      
        U.S. Treasury Bonds                    
  1,620             3.50     02/15/39     1,874,897    
  610             3.875     08/15/40     751,063    
  200             5.25     11/15/28     281,500    
  255             5.375     02/15/31     371,623    
        U.S. Treasury Notes                    
  210             0.50     10/15/13     210,607    
  1,710             1.00     09/30/16     1,736,852    
  452             1.25     10/31/15     463,335    

 

See Notes to Financial Statements
64


Morgan Stanley Variable Investment Series - Strategist

Portfolio of Investments n June 30, 2012 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

 
COUPON
RATE		  
MATURITY
DATE		  

VALUE 		 
$ 3,180           1.75 %   01/31/14 - 07/31/15   $ 3,275,588    
      1,000       1.875     09/30/17     1,055,078    
      2,145       2.25     01/31/15 - 03/31/16     2,260,393    
      5,300       2.375     08/31/14 - 06/30/18     5,592,462    
    Total U.S. Treasury Securities
(Cost $17,372,100)		             17,873,398    
    U.S. Agency Securities (1.6%)      
    Federal Home Loan Mortgage Corporation      
      150       3.75     03/27/19     173,516    
      45       6.75     03/15/31     69,264    
    Federal National Mortgage Association      
      500       1.25     09/28/16     509,256    
      700       4.375     10/15/15     786,307    
      450       5.375     06/12/17     545,820    
    Total U.S. Agency Securities
(Cost $1,993,375)		             2,084,163    
    Short-Term Investments (13.8%)      
    U.S. Treasury Security (0.1%)      
  100     U.S. Treasury Bill
(Cost $99,978) (d)		     0.136     08/30/12     99,992    
NUMBER OF
SHARES (000)		  
 
 
 
 
    Investment Company (13.7%)      
    17,767Morgan Stanley Institutional Liquidity Funds - Money
Market Portfolio - Institutional Class (See Note 6)
(Cost $17,766,564)		     17,766,564    
    Total Short-Term Investments
(Cost $17,866,542)		             17,866,556    
    Total Investments
(Cost $121,287,099) (e)		         99.8 %     129,057,571    
    Other Assets in Excess of Liabilities         0.2       245,328    
    Net Assets         100.0 %   $ 129,302,899    

 

See Notes to Financial Statements
65


Morgan Stanley Variable Investment Series - Strategist

Portfolio of Investments n June 30, 2012 (unaudited) continued

  MTN  Medium Term Note.

  (a)  Non-income producing security.

  (b)  144A security — Certain conditions for public sale may exist. Unless otherwise noted, these securities are deemed to be liquid.

  (c)  Variable/Floating Rate Security — Interest rate changes on these instruments are based on changes in a designated base rate. The rates shown are those in effect on June 30, 2012.

  (d)  Rate shown is the yield to maturity at June 30, 2012.

  (e)  Securities are available for collateral in connection with open futures contracts and swap agreements.

FUTURES CONTRACTS OPEN AT JUNE 30, 2012:

NUMBER OF
CONTRACTS		   LONG/SHORT   DESCRIPTION, DELIVERY
MONTH AND YEAR		   UNDERLYING FACE
AMOUNT AT VALUE		   UNREALIZED
DEPRECIATION		  
  1     Long   U.S. Treasury 5 yr. Note,
Sep-12		   $ 123,969     $ (8 )  
  10     Short   U.S. Treasury 10 yr. Note,
Sep-12		     (1,333,750 )     (2,522 )  
Total Unrealized Depreciation   $ (2,530 )  

 

INTEREST RATE SWAP AGREEMENTS OPEN AT JUNE 30, 2012:

SWAP
COUNTERPARTY		   NOTIONAL
AMOUNT
(000)		   FLOATING
RATE INDEX		   PAY/RECEIVE
FLOATING RATE		   FIXED RATE   TERMINATION
DATE		   UNREALIZED
APPRECIATION
(DEPRECIATION)		  
Bank of America   EUR 1,720     6 Month EURIBOR   Pay     4.26 %   08/18/26   $ 111,313    
Bank of America   $ 2,305     3 Month LIBOR   Receive     4.35     08/18/26     (104,732 )  
Bank of America     2,860     3 Month LIBOR   Pay     4.15     08/18/31     102,319    
Bank of America   EUR 2,175     6 Month EURIBOR   Receive     3.61     08/18/31     (116,564 )  
Net Unrealized Depreciation   $ (7,664 )  

 

  EURIBOR  Euro Interbank Offered Rate.

  LIBOR    London Interbank Offered Rate.

Currency Abbreviation:

EUR  Euro.

See Notes to Financial Statements
66


Morgan Stanley Variable Investment Series - Strategist

Summary of Investments n June 30, 2012 (unaudited)

PORTFOLIO COMPOSITION   VALUE   PERCENT OF
TOTAL
INVESTMENTS		  
Common Stocks   $ 79,515,712       61.6 %  
U.S. Treasury Securities     17,973,390       13.9    
Investment Company     17,766,564       13.8    
Corporate Bonds     9,566,445       7.4    
U.S. Agency Securities     2,084,163       1.6    
Asset-Backed Securities     1,024,373       0.8    
Municipal Bonds     587,666       0.5    
Sovereign     535,845       0.4    
Agency Fixed Rate Mortgages     3,413       0.0 +  
    $ 129,057,571 ++     100.0 %  

 

  +  Amount is less than 0.05%.

  ++  Does not include open long/short futures contracts with an underlying face amount of $1,457,719 with total unrealized depreciation of $2,530 and open swap agreements with net unrealized depreciation of $7,664.

 

See Notes to Financial Statements
67



Morgan Stanley Variable Investment Series

Financial Statements

Statements of Assets and Liabilities
June 30, 2012 (unaudited)

    Money
Market		   Limited
Duration		   Income
Plus		   Global
Infrastructure		  
Assets:  
Investments in securities, at value*   $ 98,300,683 (1)    $ 52,161,204     $ 183,253,497     $ 70,541,269    
Investment in affiliates, at value**     —       1,790,136       6,471,174       1,092,962    
Total investments in securities, at value     98,300,683       53,951,340       189,724,671       71,634,231    
Unrealized appreciation on open swap agreements     —       —       —       —    
Cash     9,269       —       5,063 (2)      147,960 (2)   
Receivable for:  
Interest     18,051       354,748       2,240,158       —    
Dividends     —       —       11,604       652,243    
Investments sold     —       324,229       192,533       254,559    
Foreign withholding taxes reclaimed     —       148       6,107       32,201    
Variation margin     —       —       43,916       —    
Shares of beneficial interest sold     54,929       —       —       —    
Interest and dividends from affiliates     —       11,973       22,075       47    
Prepaid expenses and other assets     4,830       2,302       6,561       4,083    
Total Assets     98,387,762       54,644,740       192,252,688       72,725,324    
Liabilities:  
Unrealized depreciation on open swap agreements     —       —       223,864       —    
Unrealized depreciation on open foreign currency exchange contracts     —       —       10,642       —    
Payable for:  
Investments purchased     1,000,000       209,057       941,858       197,506    
Shares of beneficial interest redeemed     25,642       93,456       193,303       97,013    
Advisory fee     9,540       13,389       65,571       32,647    
Distribution fee (Class Y)     —       8,799       20,996       2,900    
Administration fee     3,897       3,593       12,532       4,590    
Variation margin     —       8,352       —       —    
Transfer agent fee     251       217       257       258    
Accrued expenses and other payables     52,606       43,953       62,330       46,624    
Total Liabilities     1,091,936       380,816       1,531,353       381,538    
Net Assets   $ 97,295,826     $ 54,263,924     $ 190,721,335     $ 72,343,786    
Composition of Net Assets:  
Paid-in-capital   $ 97,297,773     $ 88,256,023     $ 190,595,982     $ 55,826,367    
Net unrealized appreciation (depreciation)     —       886,199       12,240,951       13,106,001    
Accumulated undistributed net investment income (net investment loss)     61       406,163       4,193,887       1,039,819    
Accumulated net realized gain (loss)     (2,008 )     (35,284,461 )     (16,309,485 )     2,371,599    
Net Assets   $ 97,295,826     $ 54,263,924     $ 190,721,335     $ 72,343,786    
* Cost   $ 98,300,683     $ 51,286,079     $ 171,209,949     $ 57,439,296    
** Affiliated Cost   $ —     $ 1,784,767     $ 5,955,988     $ 1,092,962    
Class X Shares:  
Net Assets   $ 46,494,505     $ 11,593,169     $ 88,523,257     $ 57,680,075    
Shares Outstanding (unlimited shares authorized, $0.01 par value)     46,495,365       1,525,556       7,920,029       6,956,170    
Net Asset Value Per Share   $ 1.00     $ 7.60     $ 11.18     $ 8.29    
Class Y Shares:  
Net Assets   $ 50,801,321     $ 42,670,755     $ 102,198,078     $ 14,663,711    
Shares Outstanding (unlimited shares authorized, $0.01 par value)     50,802,414       5,624,114       9,164,757       1,772,720    
Net Asset Value Per Share   $ 1.00     $ 7.59     $ 11.15     $ 8.27    

 

(1)  Including repurchase agreements of $53,208,000.

(2)  Including foreign currency valued at $5,063, $147,960, and $111,874, respectively with a cost of $4,955, $147,505, and $111,183, respectively.

 

See Notes to Financial Statements
68


    European
Equity		   Multi Cap
Growth		   Aggressive
Equity		   Strategist  
Assets:  
Investments in securities, at value*   $ 48,020,065     $ 216,011,685     $ 27,309,941     $ 111,130,098    
Investment in affiliates, at value**     1,158,271       6,673,526       1,038,390       17,927,473    
Total investments in securities, at value     49,178,336       222,685,211       28,348,331       129,057,571    
Unrealized appreciation on open swap agreements     —       —       —       213,632    
Cash     111,874 (2)      781,230       —       —    
Receivable for:  
Interest     —       —       —       281,990    
Dividends     132,802       90,429       11,237       125,995    
Investments sold     17,783       —       —       —    
Foreign withholding taxes reclaimed     116,521       —       —       140    
Variation margin     —       —       —       23,075    
Shares of beneficial interest sold     —       —       —       —    
Interest and dividends from affiliates     126       1,533       206       4,497    
Prepaid expenses and other assets     5,423       10,146       3,982       5,889    
Total Assets     49,562,865       223,568,549       28,363,756       129,712,789    
Liabilities:  
Unrealized depreciation on open swap agreements     —       —       —       221,296    
Unrealized depreciation on open foreign currency exchange contracts     8,551       —       —       —    
Payable for:  
Investments purchased     —       209,392       26,621       —    
Shares of beneficial interest redeemed     22,642       40,558       18,841       72,502    
Advisory fee     26,091       74,070       15,026       41,945    
Distribution fee (Class Y)     2,210       9,704       3,205       7,473    
Administration fee     3,132       14,318       1,812       8,377    
Variation margin     —       —       —       —    
Transfer agent fee     260       297       216       260    
Accrued expenses and other payables     54,722       65,980       31,769       58,037    
Total Liabilities     117,608       414,319       97,490       409,890    
Net Assets   $ 49,445,257     $ 223,154,230     $ 28,266,266     $ 129,302,899    
Composition of Net Assets:  
Paid-in-capital   $ 58,452,257     $ 164,611,612     $ 21,186,003     $ 125,565,408    
Net unrealized appreciation (depreciation)     5,139,400       49,301,897       5,745,475       7,760,278    
Accumulated undistributed net investment income (net investment loss)     1,738,381       599,171       (15,096 )     1,240,192    
Accumulated net realized gain (loss)     (15,884,781 )     8,641,550       1,349,884       (5,262,979 )  
Net Assets   $ 49,445,257     $ 223,154,230     $ 28,266,266     $ 129,302,899    
* Cost   $ 42,865,159     $ 166,709,558     $ 21,564,436     $ 103,377,763    
** Affiliated Cost   $ 1,158,271     $ 6,673,526     $ 1,038,390     $ 17,909,336    
Class X Shares:  
Net Assets   $ 38,275,654     $ 174,814,313     $ 12,254,377     $ 92,405,250    
Shares Outstanding (unlimited shares authorized, $0.01 par value)     2,697,665       4,360,608       673,229       8,818,445    
Net Asset Value Per Share   $ 14.19     $ 40.09     $ 18.20     $ 10.48    
Class Y Shares:  
Net Assets   $ 11,169,603     $ 48,339,917     $ 16,011,889     $ 36,897,649    
Shares Outstanding (unlimited shares authorized, $0.01 par value)     788,971       1,217,711       904,280       3,528,209    
Net Asset Value Per Share   $ 14.16     $ 39.70     $ 17.71     $ 10.46    

 


69


Morgan Stanley Variable Investment Series

Financial Statements continued

Statements of Operations
For the six months ended June 30, 2012 (unaudited)

    Money
Market		   Limited
Duration		   Income
Plus		   Global
Infrastructure		  
Net Investment Income:  
Income  
Dividends†     —       —     $ 34,749     $ 1,419,426    
Interest†   $ 135,514     $ 605,879       4,723,447       28    
Interest and dividends from affiliates (Note 6)     —       20,296       135,213       636    
Income from securities loaned - net     —       —       —       —    
Total Income     135,514       626,175       4,893,409       1,420,090    
†Net of foreign withholding taxes     —       295       —       78,878    
Expenses  
Advisory fee (Note 4)     229,892       83,425       406,022       206,207    
Distribution fee (Class Y shares) (Note 5)     67,140       54,369       128,994       18,053    
Professional fees     26,189       25,500       29,379       28,614    
Administration fee (Note 4)     25,544       22,247       77,338       28,941    
Shareholder reports and notices     15,951       9,451       18,986       8,459    
Custodian fees     11,076       6,284       10,558       17,443    
Trustees' fees and expenses     3,188       1,441       3,614       1,697    
Transfer agent fees and expenses     1,508       1,259       1,507       1,508    
Other     4,557       12,930       21,415       8,396    
Total Expenses     385,045       216,906       697,813       319,318    
Less: amounts waived (Note 5)     (254,657 )     —       —       —    
Less: rebate from Morgan Stanley affiliated cash sweep (Note 6)     —       (783 )     (3,823 )     (639 )  
Net Expenses     130,388       216,123       693,990       318,679    
Net Investment Income     5,126       410,052       4,199,419       1,101,411    
Realized and Unrealized Gain (Loss):  
Realized Gain (Loss) on:  
Investments     3       116,834       3,855,068       2,630,126    
Investments in affiliates (Note 6)     —       13,129       333,108       —    
Futures contracts     —       66,926       (490,301 )     —    
Swap agreements     —       (279,311 )     (90,725 )     —    
Foreign currency exchange contracts     —       —       41,819       —    
Foreign currency translation     —       —       610       8,065    
Net Realized Gain (Loss)     3       (82,422 )     3,649,579       2,638,191    
Change in Unrealized Appreciation/Depreciation on:  
Investments     —       359,706       4,423,208       1,203,538    
Investments in affiliates (Note 6)     —       8,570       (47,785 )     —    
Futures contracts     —       (21,893 )     125,403       —    
Swap agreements     —       270,993       (212,964 )     —    
Foreign currency exchange contracts     —       —       (10,642 )     —    
Foreign currency translation     —       —       118       5,120    
Net Change in Unrealized Appreciation/Depreciation     —       617,376       4,277,338       1,208,658    
Net Gain     3       534,954       7,926,917       3,846,849    
Net Increase   $ 5,129     $ 945,006     $ 12,126,336     $ 4,948,260    

 

See Notes to Financial Statements
70


    European
Equity		   Multi Cap
Growth		   Aggressive
Equity		   Strategist  
Net Investment Income:  
Income  
Dividends†   $ 1,827,134     $ 1,570,002     $ 197,829     $ 1,205,449    
Interest†     —       —       —       465,442    
Interest and dividends from affiliates (Note 6)     424       5,044       716       27,943    
Income from securities loaned - net     45,411       —       —       —    
Total Income     1,872,969       1,575,046       198,545       1,698,834    
†Net of foreign withholding taxes     135,341       45,414       5,769       —    
Expenses  
Advisory fee (Note 4)     229,449       495,788       99,047       279,816    
Distribution fee (Class Y shares) (Note 5)     14,783       65,218       20,888       48,159    
Professional fees     33,462       31,696       27,614       32,717    
Administration fee (Note 4)     21,099       94,436       11,827       53,298    
Shareholder reports and notices     11,811       28,819       7,023       19,420    
Custodian fees     9,389       9,226       4,309       11,951    
Trustees' fees and expenses     1,447       4,255       1,244       2,717    
Transfer agent fees and expenses     1,510       1,755       1,257       1,510    
Other     8,529       9,364       8,202       20,985    
Total Expenses     331,479       740,557       181,411       470,573    
Less: amounts waived (Note 5)     (52,961 )     —       —       —    
Less: rebate from Morgan Stanley affiliated cash sweep (Note 6)     (405 )     (5,174 )     (798 )     (18,042 )  
Net Expenses     278,113       735,383       180,613       452,531    
Net Investment Income     1,594,856       839,663       17,932       1,246,303    
Realized and Unrealized Gain (Loss):  
Realized Gain (Loss) on:  
Investments     (979,612 )     9,305,031       1,350,122       (3,702,220 )  
Investments in affiliates (Note 6)     —       —       —       (907,033 )  
Futures contracts     —       —       —       33,536    
Swap agreements     —       —       —       (100,127 )  
Foreign currency exchange contracts     (63,191 )     —       —       4,044    
Foreign currency translation     (261,530 )     (1,145 )     (104 )     (594 )  
Net Realized Gain (Loss)     (1,304,333 )     9,303,886       1,350,018       (4,672,394 )  
Change in Unrealized Appreciation/Depreciation on:  
Investments     1,336,740       12,333,203       1,381,489       8,143,446    
Investments in affiliates (Note 6)     —       —       —       998,890    
Futures contracts     —       —       —       493    
Swap agreements     —       —       —       41,792    
Foreign currency exchange contracts     138,593       —       —       4,074    
Foreign currency translation     (647 )     3,220       244       3,175    
Net Change in Unrealized Appreciation/Depreciation     1,474,686       12,336,423       1,381,733       9,191,870    
Net Gain     170,353       21,640,309       2,731,751       4,519,476    
Net Increase   $ 1,765,209     $ 22,479,972     $ 2,749,683     $ 5,765,779    

 


71


Morgan Stanley Variable Investment Series

Financial Statements continued

Statements of Changes in Net Assets

    Money Market   Limited Duration   Income Plus  
    For The Six
Months Ended
June 30, 2012		   For The Year
Ended
December 31, 2011		   For The Six
Months Ended
June 30, 2012		   For The Year
Ended
December 31, 2011		   For The Six
Months Ended
June 30, 2012		   For The Year
Ended
December 31, 2011		  
    (unaudited)     (unaudited)     (unaudited)    
Increase (Decrease) in Net Assets:  
Operations:  
Net investment income   $ 5,126     $ 12,040     $ 410,052     $ 1,217,838     $ 4,199,419     $ 10,385,354    
Net realized gain (loss)     3       (2,034 )     (82,422 )     340,336       3,649,579       5,672,980    
Net change in unrealized appreciation/depreciation     —       —       617,376       74,923       4,277,338       (5,677,427 )  
Net Increase (Decrease)     5,129       10,006       945,006       1,633,097       12,126,336       10,380,907    
Dividends and Distributions to Shareholders from:  
Net investment income  
Class X Shares     (2,430 )     (5,521 )     (347,237 )     (456,806 )     (5,085,206 )     (5,809,741 )  
Class Y Shares     (2,693 )     (6,188 )     (1,155,973 )     (1,462,462 )     (5,615,046 )     (6,427,424 )  
Net realized gain  
Class X Shares     —       —       —       —       —       —    
Class Y Shares     —       —       —       —       —       —    
Total Dividends and Distributions     (5,123 )     (11,709 )     (1,503,210 )     (1,919,268 )     (10,700,252 )     (12,237,165 )  
Net increase (decrease) from transactions in shares of
beneficial interest		     (9,984,288 )     (19,788,308 )     (1,955,320 )     (11,618,059 )     (4,528,699 )     (35,004,480 )  
Net Decrease     (9,984,282 )     (19,790,011 )     (2,513,524 )     (11,904,230 )     (3,102,615 )     (36,860,738 )  
Net Assets:  
Beginning of period     107,280,108       127,070,119       56,777,448       68,681,678       193,823,950       230,684,688    
End of Period   $ 97,295,826     $ 107,280,108     $ 54,263,924     $ 56,777,448     $ 190,721,335     $ 193,823,950    
Accumulated Undistributed Net Investment
Income		   $ 61     $ 58     $ 406,163     $ 1,499,321     $ 4,193,887     $ 10,694,720    

 

See Notes to Financial Statements
72


    Global Infrastructure   European Equity  
    For The Six
Months Ended
June 30, 2012		   For The Year
Ended
December 31, 2011		   For The Six
Months Ended
June 30, 2012		   For The Year
Ended
December 31, 2011		  
    (unaudited)     (unaudited)    
Increase (Decrease) in Net Assets:  
Operations:  
Net investment income   $ 1,101,411     $ 1,821,472     $ 1,594,856     $ 1,640,380    
Net realized gain (loss)     2,638,191       6,272,022       (1,304,333 )     1,393,180    
Net change in unrealized appreciation/depreciation     1,208,658       3,163,169       1,474,686       (8,877,969 )  
Net Increase (Decrease)     4,948,260       11,256,663       1,765,209       (5,844,409 )  
Dividends and Distributions to Shareholders from:  
Net investment income  
Class X Shares     (1,393,488 )     (1,548,002 )     (1,129,845 )     (1,159,573 )  
Class Y Shares     (317,994 )     (341,922 )     (291,780 )     (329,209 )  
Net realized gain  
Class X Shares     (5,078,266 )     (3,167,474 )     —       —    
Class Y Shares     (1,294,994 )     (781,261 )     —       —    
Total Dividends and Distributions     (8,084,742 )     (5,838,659 )     (1,421,625 )     (1,488,782 )  
Net increase (decrease) from transactions in shares of
beneficial interest		     2,009,444       (9,143,834 )     (3,747,985 )     (12,462,693 )  
Net Decrease     (1,127,038 )     (3,725,830 )     (3,404,401 )     (19,795,884 )  
Net Assets:  
Beginning of period     73,470,824       77,196,654       52,849,658       72,645,542    
End of Period   $ 72,343,786     $ 73,470,824     $ 49,445,257     $ 52,849,658    
Accumulated Undistributed Net Investment
Income		   $ 1,039,819     $ 1,649,890     $ 1,738,381     $ 1,565,150    

 


73


Morgan Stanley Variable Investment Series

Financial Statements continued

Statements of Changes in Net Assets continued

    Multi Cap Growth   Aggressive Equity  
    For The Six
Months Ended
June 30, 2012		   For The Year
Ended
December 31, 2011		   For The Six
Months Ended
June 30, 2012		   For The Year
Ended
December 31, 2011		  
    (unaudited)       (unaudited)      
Increase (Decrease) in Net Assets:  
Operations:  
Net investment income (loss)   $ 839,663     $ (64,872 )   $ 17,932     $ (188,722 )  
Net realized gain (loss)     9,303,886       32,645,551       1,350,018       4,222,056    
Net change in unrealized appreciation/depreciation     12,336,423       (48,028,545 )     1,381,733       (6,086,619 )  
Net Increase (Decrease)     22,479,972       (15,447,866 )     2,749,683       (2,053,285 )  
Dividends and Distributions to Shareholders from:  
Net investment income  
Class X Shares     —       (327,521 )     —       —    
Class Y Shares     —       —       —       —    
Net realized gain  
Class X Shares     (3,819,990 )     —       (939,227 )     —    
Class Y Shares     (1,066,481 )     —       (1,257,234 )     —    
Total Dividends and Distributions     (4,886,471 )     (327,521 )     (2,196,461 )     —    
Net decrease from transactions in shares of beneficial interest     (17,401,532 )     (49,118,412 )     (185,334 )     (4,238,872 )  
Net Increase (Decrease)     191,969       (64,893,799 )     367,888       (6,292,157 )  
Net Assets:  
Beginning of period     222,962,261       287,856,060       27,898,378       34,190,535    
End of Period   $ 223,154,230     $ 222,962,261     $ 28,266,266     $ 27,898,378    
Accumulated Undistributed Net Investment Income (Loss)   $ 599,171     $ (240,492 )   $ (15,096 )   $ (33,028 )  

 

See Notes to Financial Statements
74


    Strategist  
    For The Six
Months Ended
June 30, 2012		   For The Year
Ended
December 31, 2011		  
    (unaudited)      
Increase (Decrease) in Net Assets:  
Operations:  
Net investment income (loss)   $ 1,246,303     $ 2,351,102    
Net realized gain (loss)     (4,672,394 )     1,769,803    
Net change in unrealized appreciation/depreciation     9,191,870       (16,475,705 )  
Net Increase (Decrease)     5,765,779       (12,354,800 )  
Dividends and Distributions to Shareholders from:  
Net investment income  
Class X Shares     (1,835,044 )     (2,406,851 )  
Class Y Shares     (615,244 )     (860,346 )  
Net realized gain  
Class X Shares     (1,393,988 )     (12,604,023 )  
Class Y Shares     (559,117 )     (5,258,076 )  
Total Dividends and Distributions     (4,403,393 )     (21,129,296 )  
Net decrease from transactions in shares of beneficial interest     (9,071,816 )     (14,118,840 )  
Net Increase (Decrease)     (7,709,430 )     (47,602,936 )  
Net Assets:  
Beginning of period     137,012,329       184,615,265    
End of Period   $ 129,302,899     $ 137,012,329    
Accumulated Undistributed Net Investment Income (Loss)   $ 1,240,192     $ 2,444,177    

 


75


Morgan Stanley Variable Investment Series

Financial Statements continued

Statements of Changes in Net Assets continued
Summary of Transactions in Shares of Beneficial Interest

    Money Market   Limited Duration   Income Plus  
    For The Six
Months Ended
June 30, 2012		   For The Year
Ended
December 31, 2011		   For The Six
Months Ended
June 30, 2012		   For The Year
Ended
December 31, 2011		   For The Six
Months Ended
June 30, 2012		   For The Year
Ended
December 31, 2011		  
    (unaudited)       (unaudited)       (unaudited)      
Class X Shares  
Shares  
Sold     4,456,358       9,528,528       22,478       37,891       64,655       120,523    
Reinvestment of dividends and distributions     2,430       5,521       45,689       59,870       454,849       529,120    
Redeemed     (9,395,451 )     (18,033,730 )     (192,120 )     (375,310 )     (761,033 )     (1,931,499 )  
Net Increase (Decrease) - Class X     (4,936,663 )     (8,499,681 )     (123,953 )     (277,549 )     (241,529 )     (1,281,856 )  
Amount  
Sold   $ 4,456,358     $ 9,528,528     $ 175,465     $ 292,242     $ 741,686     $ 1,351,724    
Reinvestment of dividends and distributions     2,430       5,521       347,237       456,806       5,085,206       5,809,741    
Redeemed     (9,395,451 )     (18,033,730 )     (1,495,343 )     (2,907,547 )     (8,823,934 )     (21,828,131 )  
Net Increase (Decrease) - Class X   $ (4,936,663 )   $ (8,499,681 )   $ (972,641 )   $ (2,158,499 )   $ (2,997,042 )   $ (14,666,666 )  
Class Y Shares  
Shares  
Sold     3,821,547       14,834,425       123,068       159,097       157,677       238,653    
Reinvestment of dividends and distributions     2,693       6,188       152,302       191,924       503,592       586,444    
Redeemed     (8,871,865 )     (26,129,240 )     (398,590 )     (1,571,630 )     (776,545 )     (2,627,052 )  
Net Increase (Decrease) - Class Y     (5,047,625 )     (11,288,627 )     (123,220 )     (1,220,609 )     (115,276 )     (1,801,955 )  
Amount  
Sold   $ 3,821,547     $ 14,834,425     $ 955,368     $ 1,222,848     $ 1,823,289     $ 2,668,015    
Reinvestment of dividends and distributions     2,693       6,188       1,155,973       1,462,462       5,615,046       6,427,424    
Redeemed     (8,871,865 )     (26,129,240 )     (3,094,020 )     (12,144,870 )     (8,969,992 )     (29,433,253 )  
Net Increase (Decrease) - Class Y   $ (5,047,625 )   $ (11,288,627 )   $ (982,679 )   $ (9,459,560 )   $ (1,531,657 )   $ (20,337,814 )  

 

See Notes to Financial Statements
76


    Global Infrastructure   European Equity  
    For The Six
Months Ended
June 30, 2012		   For The Year
Ended
December 31, 2011		   For The Six
Months Ended
June 30, 2012		   For The Year
Ended
December 31, 2011		  
    (unaudited)       (unaudited)      
Class X Shares  
Shares  
Sold     11,124       41,008       4,912       10,124    
Reinvestment of dividends and distributions     780,670       560,033       79,623       68,170    
Redeemed     (598,153 )     (1,394,386 )     (289,814 )     (590,445 )  
Net Increase (Decrease) - Class X     193,641       (793,345 )     (205,279 )     (512,151 )  
Amount  
Sold   $ 100,023     $ 350,997     $ 72,607     $ 152,977    
Reinvestment of dividends and distributions     6,471,754       4,715,476       1,129,845       1,159,573    
Redeemed     (5,395,256 )     (11,775,763 )     (4,371,015 )     (9,410,517 )  
Net Increase (Decrease) - Class X   $ 1,176,521     $ (6,709,290 )   $ (3,168,563 )   $ (8,097,967 )  
Class Y Shares  
Shares  
Sold     31,775       37,827       1,179       4,450    
Reinvestment of dividends and distributions     195,041       133,712       20,606       19,411    
Redeemed     (118,680 )     (456,268 )     (59,000 )     (312,722 )  
Net Increase (Decrease) - Class Y     108,136       (284,729 )     (37,215 )     (288,861 )  
Amount  
Sold   $ 283,079     $ 315,142     $ 17,254     $ 67,572    
Reinvestment of dividends and distributions     1,612,988       1,123,183       291,780       329,209    
Redeemed     (1,063,144 )     (3,872,869 )     (888,456 )     (4,761,507 )  
Net Increase (Decrease) - Class Y   $ 832,923     $ (2,434,544 )   $ (579,422 )   $ (4,364,726 )  

 


77


Morgan Stanley Variable Investment Series

Financial Statements continued

Statements of Changes in Net Assets continued
Summary of Transactions in Shares of Beneficial Interest

    Multi Cap Growth   Aggressive Equity  
    For The Six
Months Ended
June 30, 2012		   For The Year
Ended
December 31, 2011		   For The Six
Months Ended
June 30, 2012		   For The Year
Ended
December 31, 2011		  
    (unaudited)     (unaudited)    
Class X Shares  
Shares  
Sold     10,168       23,630       4,494       22,589    
Reinvestment of dividends and distributions     95,285       7,793       51,606       —    
Redeemed     (389,233 )     (891,278 )     (55,568 )     (145,437 )  
Net Increase (Decrease) - Class X     (283,780 )     (859,855 )     532       (122,848 )  
Amount  
Sold   $ 420,331     $ 952,101     $ 87,778     $ 434,357    
Reinvestment of dividends and distributions     3,819,990       327,521       939,227       —    
Redeemed     (16,364,688 )     (36,256,926 )     (1,108,749 )     (2,852,868 )  
Net Decrease - Class X   $ (12,124,367 )   $ (34,977,304 )   $ (81,744 )   $ (2,418,511 )  
Class Y Shares  
Shares  
Sold     7,496       44,490       3,750       154,196    
Reinvestment of dividends and distributions     26,864       —       70,990       —    
Redeemed     (159,331 )     (394,005 )     (73,256 )     (241,830 )  
Net Increase (Decrease) - Class Y     (124,971 )     (349,515 )     1,484       (87,634 )  
Amount  
Sold   $ 291,021     $ 1,698,262     $ 73,607     $ 2,809,245    
Reinvestment of dividends and distributions     1,066,481       —       1,257,234       —    
Redeemed     (6,634,667 )     (15,839,370 )     (1,434,431 )     (4,629,606 )  
Net Decrease - Class Y   $ (5,277,165 )   $ (14,141,108 )   $ (103,590 )   $ (1,820,361 )  

 

See Notes to Financial Statements
78


    Strategist  
    For The Six
Months Ended
June 30, 2012		   For The Year
Ended
December 31, 2011		  
    (unaudited)    
Class X Shares  
Shares  
Sold     38,329       33,714    
Reinvestment of dividends and distributions     308,114       1,314,437    
Redeemed     (869,160 )     (1,905,781 )  
Net Increase (Decrease) - Class X     (522,717 )     (557,630 )  
Amount  
Sold   $ 409,253     $ 381,164    
Reinvestment of dividends and distributions     3,229,032       15,010,874    
Redeemed     (9,297,974 )     (22,742,640 )  
Net Decrease - Class X   $ (5,659,689 )   $ (7,350,602 )  
Class Y Shares  
Shares  
Sold     22,295       11,243    
Reinvestment of dividends and distributions     112,272       537,175    
Redeemed     (451,758 )     (1,070,631 )  
Net Increase (Decrease) - Class Y     (317,191 )     (522,213 )  
Amount  
Sold   $ 237,038     $ 130,345    
Reinvestment of dividends and distributions     1,174,361       6,118,422    
Redeemed     (4,823,526 )     (13,017,005 )  
Net Decrease - Class Y   $ (3,412,127 )   $ (6,768,238 )  

 


79



Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2012 (unaudited)

1. Organization and Accounting Policies

Morgan Stanley Variable Investment Series (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 is offered exclusively to life insurance companies in connection with particular life insurance and/or annuity contracts they offer.

The Fund, organized on February 25, 1983 as a Massachusetts business trust, consists of eight Portfolios
("Portfolios") which commenced operations as follows:

PORTFOLIO   COMMENCEMENT OF
OPERATIONS		   PORTFOLIO   COMMENCEMENT OF
OPERATIONS		  
Money Market   March 9, 1984   European Equity   March 1, 1991  
Limited Duration   May 4, 1999   Multi Cap Growth   March 9, 1984  
Income Plus   March 1, 1987   Aggressive Equity   May 4, 1999  
Global Infrastructure   March 1, 1990   Strategist   March 1, 1987  

 

On June 5, 2000, the Fund commenced offering one additional class of shares (Class Y shares). The two classes are identical except that Class Y shares incur distribution expenses. Class X shares are generally available to holders of contracts offered before May 1, 2000. Class Y shares are available to holders of contracts offered on or after June 5, 2000.

The investment objectives of each Portfolio are as follows:

Money Market   Seeks high current income, preservation of capital and liquidity.  
Limited Duration   Seeks to provide a high level of current income, consistent with the preservation of capital.  
Income Plus   Seeks, as its primary objective, to provide a high level of current income and, as a secondary objective, capital appreciation, but only when consistent with its primary objective.  
Global Infrastructure   Seeks both capital appreciation and current income.  
European Equity   Seeks to maximize the capital appreciation of its investments.  
Multi Cap Growth   Seeks, as its primary objective, growth of capital and, as a secondary objective, income, but only when consistent with its primary objective.  
Aggressive Equity   Seeks long-term capital growth.  
Strategist   Seeks high total investment return.  


80


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2012 (unaudited) continued

The following is a summary of significant policies:

A. Valuation of Investments — Money Market: Portfolio securities are valued at amortized cost, which approximates fair value, in accordance with Rule 2a-7 under the Act. All remaining Portfolios: (1) an equity portfolio security listed or traded on the New York Stock Exchange ("NYSE") or American Stock Exchange or other domestic exchange is valued at its latest sales price (or at the exchange official closing price if such exchange reports an official closing 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 domestic securities for which over-the-counter market quotations are readily available are valued at the mean between the last reported bid and asked prices. In cases where a security is traded on more than one domestic exchange, the security is valued on the exchange designated as the primary market; (4) swaps are marked-to-market daily based upon quotations from market makers; (5) for equity securities traded on foreign exchanges, the latest reported sales price (or at the exchange official closing price if such exchange reports an official closing price) or the mean between the last reported bid and asked prices may be used if there were no sales on a particular day or the latest bid price may be used if only bid prices are available; (6) futures are valued at the latest price published by the commodities exchange on which they trade; (7) when market quotations are not readily available, including circumstances under which Morgan Stanley Investment Management Inc. (the "Adviser") or Morgan Stanley Investment Management Limited or Morgan Stanley Investment Management Company (each, a "Sub-Adviser"), each a wholly owned subsidiary of Morgan Stanley, determines that the latest sale price, the bid price or the mean between the last reported bid and ask price do not reflect a security's fair 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 Board of Trustees (the "Trustees"). Occasionally, developments affecting the closing prices of securities and other assets may occur between the times at which valuations of such securities are determined (that is, close of the foreign market on which the securities trade) and the close of business on the NYSE. If developments occur during such periods that are expected to materially affect the value of such securities, such valuations may be adjusted to reflect the estimated fair value of such securities as of the close of the NYSE, as determined in good faith by the Trustees or by the Adviser using a pricing service and/or procedures approved by the Trustees; (8) certain portfolio securities may be valued by an outside pricing service approved by the Trustees. The prices provided by a pricing service take into account broker-dealer market price quotations for trading in similar groups of securities, security quality, maturity, coupon and


81


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2012 (unaudited) continued

other security characteristics as well as any developments related to the specific securities; (9) investments in mutual funds, including the Morgan Stanley Institutional Liquidity Funds, are valued at the net asset value as of the close of each business day; and (10) 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, which approximates fair value.

Under procedures approved by the Trustees, the Fund's Adviser has formed a Valuation Committee. The Valuation Committee provides administration and oversight of the Fund's valuation policies and procedures, which are reviewed at least annually by the Trustees. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.

The Fund has procedures to determine the fair value of securities and other financial instruments for which market prices are not readily available. Under these procedures, the Valuation Committee convenes on a regular and adhoc basis to review such securities and considers a number of factors, including valuation methodologies and significant unobservable valuation inputs, when arriving at fair value. The Valuation Committee may employ a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The Valuation Committee employs various methods for calibrating these valuation approaches including a regular review of valuation methodologies, key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.

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 except for certain dividends on foreign securities which are recorded as soon as the Fund is informed after the ex-dividend date. Interest income is accrued daily as earned except where collection is not expected.


82


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2012 (unaudited) continued

Discounts are accreted and premiums are amortized over the life of the respective securities and are included in interest income.

C. Repurchase Agreements — The Fund invests 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 as earned. If such a decrease occurs, additional collateral will be requested and, when received, will be added to the account to maintain full collateralization.

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

E. Foreign Currency Translation — The books and records of the Fund are maintained in U.S. dollars as follows: (1) the foreign currency market value of investment securities, other assets and liabilities and foreign currency exchange contracts are translated at the exchange rates prevailing at the end of the period; and (2) purchases, sales, income and expenses are translated at the exchange rates prevailing on the respective dates of such transactions. The resultant exchange gains and losses are recorded as realized and unrealized gains/losses on foreign currency exchange contracts and foreign currency translations. Pursuant to U.S. federal income tax regulations, certain foreign exchange gains/losses included in realized and unrealized gains/losses are included in or are a reduction of ordinary income for federal income tax purposes. The Fund does not isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the changes in the market prices of the securities held.

F. Dividends and Distributions to Shareholders — The Fund records dividends and distributions to its shareholders on the ex-dividend date.

G. Expenses — Direct expenses are charged to the respective Portfolio and general Fund expenses are allocated on the basis of relative net assets or equally among the Portfolios.

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


83


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2012 (unaudited) continued

I. Indemnifications — The Fund enters into contracts that contain a variety of indemnifications. The Fund's maximum exposure under these arrangements is unknown. However, the Fund has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.

2. Fair Valuation Measurements

Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 820, Fair Value Measurements and Disclosures ("ASC 820"), defines fair value as the value that the Fund would receive to sell an investment or pay to transfer a liability in a timely transaction with an independent buyer in the principal market, or in the absence of a principal market the most advantageous market for the investment or liability. ASC 820 establishes a three-tier hierarchy to distinguish between (1) inputs that reflect the assumptions market participants would use in valuing an asset or liability developed based on market data obtained from sources independent of the reporting entity (observable inputs); and (2) inputs that reflect the reporting entity's own assumptions about the assumptions market participants would use in valuing an asset or liability developed based on the best information available in the circumstances (unobservable inputs) and to establish classification of fair value measurements for disclosure purposes. Various inputs are used in determining the value of the Fund's investments. The inputs are summarized in the three broad levels listed below.

•  Level 1 — unadjusted quoted prices in active markets for identical investments

•  Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)

•  Level 3 — significant unobservable inputs including the Fund's own assumptions in determining the fair value of investments. Factors considered in making this determination may include, but are not limited to, information obtained by contacting the issuer, analysts, or the appropriate stock exchange (for exchange-traded securities), analysis of the issuer's financial statements or other available documents and, if necessary, available information concerning other securities in similar circumstances

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities and the determination of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each security.


84


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2012 (unaudited) continued

The following is a summary of the inputs used to value each Portfolio's investments as of June 30, 2012.

Investment Type   Level 1
Unadjusted
Quoted Prices		   Level 2
Other
Significant
Observable
Inputs		   Level 3
Significant
Unobservable
Inputs		   Total  
Money Market  
Assets:  
Repurchase Agreements   $ —     $ 53,208,000     $ —     $ 53,208,000    
Commercial Paper     —       16,491,974       —       16,491,974    
Certificates of Deposit     —       12,999,990       —       12,999,990    
Floating Rate Notes     —       12,600,719       —       12,600,719    
Tax-Exempt Instruments     —       3,000,000       —       3,000,000    
Total Assets   $ —     $ 98,300,683     $ —     $ 98,300,683    
Limited Duration  
Assets:  
Fixed Income Securities  
Corporate Bonds   $ —     $ 29,769,272     $ —     $ 29,769,272    
U.S. Treasury Securities     —       9,218,445       —       9,218,445    
Asset-Backed Securities     —       8,729,883       —       8,729,883    
Non-U.S. Government — Guaranteed     —       2,472,129       —       2,472,129    
Agency Adjustable Rate Mortgages     —       1,945,048       —       1,945,048    
Agency Fixed Rate Mortgages     —       356,204       —       356,204    
Collateralized Mortgage Obligation — Agency
Collateral Series		     —       332,012       —       332,012    
Municipal Bond     —       301,158       —       301,158    
Sovereign     —       211,200       —       211,200    
Total Fixed Income Securities     —       53,335,351       —       53,335,351    
Short-Term Investments  
U.S. Treasury Security     —       384,970       —       384,970    
Investment Company     231,019       —       —       231,019    
Total Short-Term Investments     231,019       384,970       —       615,989    
Futures Contracts     7,844       —       —       7,844    
Total Assets   $ 238,863     $ 53,720,321     $ —     $ 53,959,184    


85


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2012 (unaudited) continued

Investment Type   Level 1
Unadjusted
Quoted Prices		   Level 2
Other
Significant
Observable
Inputs		   Level 3
Significant
Unobservable
Inputs		   Total  
Liabilities:  
Futures Contracts   $ (2,139 )   $ —     $ —     $ (2,139 )  
Total   $ 236,724     $ 53,720,321     $ —     $ 53,957,045    
Income Plus  
Assets:  
Corporate Bonds   $ —     $ 183,685,294     $ —     $ 183,685,294    
Asset-Backed Securities     —       1,772,058       —       1,772,058    
Municipal Bond     —       685,080       —       685,080    
Sovereign     —       420,935       —       420,935    
Agency Fixed Rate Mortgage     —       1,561       —       1,561    
Total Fixed Income Securities     —       186,564,928       —       186,564,928    
Convertible Preferred Stocks     575,597       —       —       575,597    
Short-Term Investments  
U.S. Treasury Securities     —       199,984       —       199,984    
Investment Company     2,384,162       —       —       2,384,162    
Total Short-Term Investments     2,384,162       199,984       —       2,584,146    
Futures     22,909       —       —       22,909    
Total Assets     2,982,668       186,764,912       —       189,747,580    
Liabilities:  
Foreign Currency Exchange Contracts     —       (10,642 )     —       (10,642 )  
Futures     (106,304 )     —       —       (106,304 )  
Interest Rate Swap Agreements     —       (223,864 )     —       (223,864 )  
Total Liabilities     (106,304 )     (234,506 )     —       (340,810 )  
Total   $ 2,876,364     $ 186,530,406     $ —     $ 189,406,770    
Global Infrastructure  
Assets:  
Common Stocks  
Airports   $ —     $ 2,031,636     $ —     $ 2,031,636    
Communications     8,093,159       2,759,832       —       10,852,991    
Diversified     1,008,076       864,837       —       1,872,913    
Oil & Gas Storage & Transportation     23,484,590       12,239,035       —       35,723,625    
Ports     —       683,686       —       683,686    
Toll Roads     —       4,838,323       —       4,838,323    
Transmission & Distribution     4,325,942       7,170,816       —       11,496,758    

 


86


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2012 (unaudited) continued

Investment Type   Level 1
Unadjusted
Quoted Prices		   Level 2
Other
Significant
Observable
Inputs		   Level 3
Significant
Unobservable
Inputs		   Total  
Water   $ 1,133,675     $ 1,907,662     $ —     $ 3,041,337    
Total Common Stocks     38,045,442       32,495,827       —       70,541,269    
Short-Term Investment — Investment Company     1,092,962       —       —       1,092,962    
Total Assets   $ 39,138,404     $ 32,495,827     $ —     $ 71,634,231    
European Equity  
Assets:  
Common Stocks  
Aerospace & Defense   $ —     $ 1,423,358     $ —     $ 1,423,358    
Automobiles     —       1,056,617       —       1,056,617    
Chemicals     —       857,106       —       857,106    
Commercial Banks     —       5,545,520       —       5,545,520    
Electrical Equipment     —       925,376       —       925,376    
Food & Staples Retailing     —       774,749       —       774,749    
Food Products     —       2,634,207       —       2,634,207    
Health Care Providers & Services     —       1,147,076       —       1,147,076    
Hotels, Restaurants & Leisure     —       683,187       —       683,187    
Household Products     —       1,176,510       —       1,176,510    
Industrial Conglomerates     —       1,323,236       —       1,323,236    
Information Technology Services     —       1,020,207       —       1,020,207    
Insurance     —       3,163,140       —       3,163,140    
Machinery     —       1,565,189       —       1,565,189    
Media     —       1,699,056       —       1,699,056    
Metals & Mining     —       2,565,322       —       2,565,322    
Oil, Gas & Consumable Fuels     —       7,020,526       —       7,020,526    
Pharmaceuticals     —       6,478,624       —       6,478,624    
Professional Services     —       967,304       —       967,304    
Tobacco     —       3,250,434       —       3,250,434    
Wireless Telecommunication Services     —       2,743,321       —       2,743,321    
Total Common Stocks     —       48,020,065       —       48,020,065    
Short-Term Investment — Investment Company     1,158,271       —       —       1,158,271    
Total Assets     1,158,271       48,020,065       —       49,178,336    
Liabilities:  
Foreign Currency Exchange Contracts     —       (8,551 )     —       (8,551 )  
Total   $ 1,158,271     $ 48,011,514     $ —     $ 49,169,785    

 


87


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2012 (unaudited) continued

Investment Type   Level 1
Unadjusted
Quoted Prices		   Level 2
Other
Significant
Observable
Inputs		   Level 3
Significant
Unobservable
Inputs		   Total  
Multi Cap Growth  
Assets:  
Common Stocks  
Air Transport   $ 3,594,373     $ —     $ —     $ 3,594,373    
Alternative Energy     7,975,911       —       —       7,975,911    
Beverage: Brewers & Distillers     2,936,279       —       —       2,936,279    
Biotechnology     5,190,640       —       —       5,190,640    
Chemicals: Diversified     6,785,973       —       —       6,785,973    
Commercial Finance & Mortgage Companies     3,217,770       —       —       3,217,770    
Commercial Services     4,513,408       5,610,298       —       10,123,706    
Communications Technology     7,548,892       —       —       7,548,892    
Computer Services, Software & Systems     34,810,722       —       9,354,930       44,165,652    
Computer Technology     24,099,250       —       —       24,099,250    
Consumer Lending     6,745,014       —       —       6,745,014    
Diversified Retail     32,802,983       —       —       32,802,983    
Financial Data & Systems     11,779,876       —       —       11,779,876    
Foods     1,509,857       —       —       1,509,857    
Health Care Services     9,640,768       —       —       9,640,768    
Insurance: Property-Casualty     4,108,926       —       —       4,108,926    
Medical Equipment     7,716,510       —       —       7,716,510    
Metals & Minerals: Diversified     2,033,264       2,205,188       —       4,238,452    
Real Estate Investment Trusts (REIT)     8,090,335       —       —       8,090,335    
Recreational Vehicles & Boats     —       7,459,093       —       7,459,093    
Wholesale & International Trade     —       3,966,277       —       3,966,277    
Total Common Stocks     185,100,751       19,240,856       9,354,930       213,696,537    
Convertible Preferred Stocks     —       —       2,315,148       2,315,148    
Short-Term Investment — Investment Company     6,673,526       —       —       6,673,526    
Total Assets   $ 191,774,277     $ 19,240,856     $ 11,670,078     $ 222,685,211    

 


88


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2012 (unaudited) continued

Multi Cap Growth

The following table presents additional information about valuation techniques and inputs used for investments that are measured at fair value and categorized within Level 3 as of June 30, 2012.

    Fair Value at
June 30, 2012		   Valuation Technique(s)   Unobservable Input   Range   Weighted
Average		   Impact
to
Valuation
from an
Increase
in Input		  
Common Stocks  
Computer Services,
Software & Systems		   $ 9,354,930     Adjusted Stock Price   Discount for
Illiquidity		     8.3 %     8.3 %     8.3 %   Decrease  
Convertible Preferred
Stocks		  
Alternative Energy   $ 1,940,739     Market Transaction   Purchase Price of              
 
            Preferred     —       —       —       —    
        Discounted cash flow   Weighted average
cost of capital		     22.5 %     27.5 %     24.2 %   Decrease  
            Perpetual growth
rate		     2.5 %     3.5 %     3.0 %   Increase  
        Market Comparable
Companies		   Enterprise Value /
Revenue		     2.6 x     3.4 x     3.1 x   Increase  
            Discount for lack
of marketability		     15 %     15 %     15 %   Decrease  
Computer Services,
 
Software & Systems   $ 374,409     Market Transaction   Purchase Price of              
 
            Preferred     —       —       —       —    
        Discounted cash flow   Weighted average
cost of capital		     13 %     18 %     15 %   Decrease  
            Perpetual growth
rate		     2.0 %     3.0 %     2.5 %  
Increase		  
        Market Comparable
Companies		   Enterprise Value /
Revenue		     6.7 x     15.7 x     9.6 x   Increase  
            Discount for lack
of marketability		     N/A       N/A       N/A     Decrease  
        Merger & Acquisition
Transactions		   Enterprise Value /
Revenue		     8.7 x     10.8 x     9.4 x   Increase  
            Discount for lack
of control		     25 %     25 %     25 %   Decrease  


89


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2012 (unaudited) continued

Investment Type   Level 1
Unadjusted
Quoted Prices		   Level 2
Other
Significant
Observable
Inputs		   Level 3
Significant
Unobservable
Inputs		   Total  
Aggressive Equity  
Assets:  
Common Stocks  
Air Transport   $ 454,731     $ —     $ —     $ 454,731    
Alternative Energy     1,008,997       —       —       1,008,997    
Beverage: Brewers & Distillers     371,475       —       —       371,475    
Biotechnology     656,661       —       —       656,661    
Chemicals: Diversified     858,511       —       —       858,511    
Commercial Finance & Mortgage Companies     407,086       —       —       407,086    
Commercial Services     570,975       709,509       —       1,280,484    
Communications Technology     955,032       —       —       955,032    
Computer Services, Software & Systems     4,470,983       —       1,119,004       5,589,987    
Computer Technology     3,046,493       —       —       3,046,493    
Consumer Lending     853,327       —       —       853,327    
Diversified Retail     4,149,248       —       —       4,149,248    
Financial Data & Systems     1,490,258       —       —       1,490,258    
Foods     191,015       —       —       191,015    
Health Care Services     1,219,693       —       —       1,219,693    
Insurance: Property-Casualty     517,959       —       —       517,959    
Medical Equipment     976,332       —       —       976,332    
Metals & Minerals: Diversified     257,221       278,980       —       536,201    
Real Estate Investment Trusts (REIT)     1,023,518       —       —       1,023,518    
Recreational Vehicles & Boats     —       943,662       —       943,662    
Wholesale & International Trade     —       500,636       —       500,636    
Total Common Stocks     23,479,515       2,432,787       1,119,004       27,031,306    
Convertible Preferred Stocks     —       —       278,635       278,635    
Short-Term Investment — Investment Company     1,038,390       —       —       1,038,390    
Total Assets   $ 24,517,905     $ 2,432,787     $ 1,397,639     $ 28,348,331    

 


90


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2012 (unaudited) continued

Aggressive Equity

The following table presents additional information about valuation techniques and inputs used for investments that are measured at fair value and categorized within Level 3 as of June 30, 2012.

    Fair Value at
June 30, 2012		   Valuation Technique(s)   Unobservable Input   Range   Weighted
Average		   Impact
to
Valuation
from an
Increase
in Input		  
Common Stocks  
Computer Services,
Software & Systems		   $ 1,119,004     Adjusted Stock Price   Discount for
Illiquidity		     8.3 %     8.3 %     8.3 %   Decrease  
Convertible Preferred
Stocks		  
Alternative Energy   $ 234,705     Market Transaction   Purchase Price of              
 
            Preferred     —       —       —       —    
        Discounted cash flow   Weighted average
cost of capital		     22.5 %     27.5 %     24.2 %   Decrease  
            Perpetual growth
rate		     2.5 %     3.5 %     3.0 %   Increase  
        Market Comparable
Companies		   Enterprise Value /
Revenue		     2.6 x     3.4 x     3.1 x   Increase  
            Discount for lack
of marketability		     15 %     15 %     15 %   Decrease  
Computer Services,
 
Software & Systems   $ 43,930     Market Transaction   Purchase Price of              
 
            Preferred     —       —       —       —    
        Discounted cash flow   Weighted average
cost of capital		     13 %     18 %     15 %   Decrease  
            Perpetual growth
rate		     2.0 %     3.0 %     2.5 %   Increase  
        Market Comparable
Companies		   Enterprise Value/
Revenue		     6.7 x     15.7 x     9.6 x   Increase  
            Discount for lack
of marketability		     N/A       N/A       N/A     Decrease  
        Merger & Acquisition
Transactions		   Enterprise Value/
Revenue		     8.7 x     10.8 x     9.4 x   Increase  
            Discount for lack
of control		     25 %     25 %     25 %   Decrease  


91


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2012 (unaudited) continued

Investment Type   Level 1
Unadjusted
Quoted Prices		   Level 2
Other
Significant
Observable
Inputs		   Level 3
Significant
Unobservable
Inputs		   Total  
Strategist  
Assets:  
Common Stocks  
Aerospace & Defense   $ 2,955,696     $ —     $ —     $ 2,955,696    
Auto Components     1,251,938       —       —       1,251,938    
Chemicals     2,390,444       —       —       2,390,444    
Commercial Services & Supplies     162,586       —       —       162,586    
Computers & Peripherals     806,713       —       —       806,713    
Diversified Financial Services     2,552,730       —       —       2,552,730    
Diversified Telecommunication Services     4,644,343       —       —       4,644,343    
Food & Staples Retailing     1,403,902       —       —       1,403,902    
Food Products     2,444,421       —       —       2,444,421    
Hotels, Restaurants & Leisure     6,635,410       —       —       6,635,410    
Industrial Conglomerates     5,827,897       —       —       5,827,897    
Information Technology Services     2,601,214       —       —       2,601,214    
Insurance     3,280,541       —       —       3,280,541    
Machinery     2,249,147       —       —       2,249,147    
Media     2,863,630       —       —       2,863,630    
Multi-Utilities     2,484,082       —       —       2,484,082    
Oil, Gas & Consumable Fuels     8,275,159       —       —       8,275,159    
Paper & Forest Products     1,370,513       —       —       1,370,513    
Pharmaceuticals     7,674,725       —       —       7,674,725    
Road & Rail     2,326,066       —       —       2,326,066    
Semiconductors & Semiconductor Equipment     2,233,403       —       —       2,233,403    
Software     3,030,245       —       —       3,030,245    
Specialty Retail     3,778,452       —       —       3,778,452    
Textiles, Apparel & Luxury Goods     2,229,949       —       —       2,229,949    
Tobacco     4,042,506       —       —       4,042,506    
Total Common Stocks     79,515,712       —       —       79,515,712    
Fixed Income Securities  
Corporate Bonds     —       9,566,445       —       9,566,445    
Sovereign     —       535,845       —       535,845    
Municipal Bonds     —       587,666       —       587,666    
Agency Fixed Rate Mortgages     —       3,413       —       3,413    
Asset-Backed Securities     —       1,024,373       —       1,024,373    
U.S. Treasury Securities     —       17,873,398       —       17,873,398    
U.S. Agency Securities     —       2,084,163       —       2,084,163    
Total Fixed Income Securities   $   —   $ 31,675,303     $ —     $ 31,675,303    

 


92


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2012 (unaudited) continued

Investment Type   Level 1
Unadjusted
Quoted Prices		   Level 2
Other
Significant
Observable
Inputs		   Level 3
Significant
Unobservable
Inputs		   Total  
Short-Term Investments  
U.S. Treasury Security   $ —     $ 99,992     $ —     $ 99,992    
Investment Company     17,766,564       —       —       17,766,564    
Total Short-Term Investments     17,766,564       99,992       —       17,866,556    
Interest Rate Swap Agreements     —       213,632       —       213,632    
Total Assets     97,282,276       31,988,927       —       129,271,203    
Liabilities:  
Futures     (2,530 )     —       —       (2,530 )  
Interest Rate Swap Agreements     —       (221,296 )     —       (221,296 )  
Total Liabilities     (2,530 )     (221,296 )     —       (223,826 )  
Total   $ 97,279,746     $ 31,767,631     $ —     $ 129,047,377    

 

Transfers between investment levels may occur as the markets fluctuate and/or the availability of data used in an investment's valuation changes. The Fund recognizes transfers between the levels as of the end of the period. As of June 30, 2012, the fair market value of certain securities were adjusted due to developments which occurred between the time of the close of the foreign markets on which they trade and the close of business on the NYSE which resulted in their Level 2 classification. The values of the transfers were as follows:

GLOBAL
INFRASTRUCTURE		   EUROPEAN
EQUITY		   MULTI CAP
GROWTH		   AGGRESSIVE
EQUITY		  
$ 32,495,827     $ 47,342,931     $ 13,630,558     $ 1,723,278    

 


93


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2012 (unaudited) continued

Following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining fair value:

    Multi Cap Growth   Aggressive Equity  
    Common
Stock		   Convertible
Preferred Stocks		   Common
Stock		   Convertible
Preferred Stocks		  
Beginning Balance   $ 8,853,246     $ 3,036,329     $ 1,058,994     $ 365,853    
Purchases     —       —       —       —    
Sales     —       —       —       —    
Amortization of discount     —       —       —       —    
Transfers in     —       —       —       —    
Transfers out     —       —       —       —    
Change in unrealized appreciation
(depreciation)		     501,684       (721,181 )     60,010       (87,218 )  
Realized gains (losses)     —       —       —       —    
Ending Balance   $ 9,354,930     $ 2,315,148     $ 1,119,004     $ 278,635    
Net change in unrealized appreciation/
depreciation from investments still held
as of June 30, 2012.		   $ 501,684     $ (721,181 )   $ 60,010     $ (87,218 )  

 

3. Derivatives

Certain Portfolios may, but are not required to, use derivative instruments for a variety of purposes, including hedging, risk management, portfolio management or to earn income. Derivatives are financial instruments whose value is based on the value of an underlying asset, interest rate, index or financial instrument. A derivative instrument often has risks similar to its underlying asset and may have additional risks, including imperfect correlation between the value of the derivative and the underlying asset, risks of default by the counterparty to certain transactions, magnification of losses incurred due to changes in the market value of the securities, instruments, indices or interest rates to which they relate, and risks that the transactions may not be liquid. The use of derivatives involves risks that are different from, and possibly greater than, the risks associated with other portfolio investments. Derivatives may involve the use of highly specialized instruments that require investment techniques and risk analyses different from those associated with other portfolio investments. All of a Portfolio's holdings, including derivative instruments, are marked-to-market each day with the change in value reflected in unrealized appreciation (depreciation). Upon disposition, a realized gain or loss is recognized.

Certain derivative transactions may give rise to a form of leverage. Leverage magnifies the potential for gain and risk of loss. Leverage associated with derivative transactions may cause the Portfolios to liquidate


94


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2012 (unaudited) continued

portfolio positions when it may not be advantageous to do so to satisfy its obligations or to meet earmarking or segregation requirements, pursuant to applicable Securities and Exchange Commission rules and regulations, or may cause the Portfolios to be more volatile than if the Portfolios had not been leveraged. Although the Adviser and/or Sub-Advisers seek to use derivatives to further the Portfolio's investment objectives, there is no assurance that the use of derivatives will achieve this result.

Following is a description of the derivative instruments and techniques that the Portfolios used during the period and their associated risks:

Foreign Currency Exchange Contracts In connection with its investments in foreign securities, certain Portfolios entered into contracts with banks, brokers or dealers to purchase or sell foreign currencies at a future date. A foreign currency exchange contract ("currency contracts") is a negotiated agreement between two parties to exchange specified amounts of two or more currencies at a specified future time at a specified rate. The rate specified by the currency contract can be higher or lower than the spot rate between the currencies that are the subject of the currency contract. Currency contracts may be used to protect against uncertainty in the level of future foreign currency exchange rates or to gain or modify exposure to a particular currency. In addition, certain Portfolios may use cross currency hedging or proxy hedging with respect to currencies in which a Portfolio has or expects to have portfolio or currency exposure. Cross currency hedges involve the sale of one currency against the positive exposure to a different currency and may be used for hedging purposes or to establish an active exposure to the exchange rate between any two currencies. Hedging a Portfolio's currency risks involves the risk of mismatching a Portfolio's objectives under a currency contract with the value of securities denominated in a particular currency. Furthermore, such transactions reduce or preclude the opportunity for gain if the value of the currency should move in the direction opposite to the position taken. There is an additional risk to the effect that currency contracts create exposure to currencies in which a Portfolio's securities are not denominated. Unanticipated changes in currency prices may result in poorer overall performance for a Portfolio than if it had not entered into such currency contracts. The use of currency contracts involves the risk of loss from the insolvency or bankruptcy of the counterparty to the contract or the failure of the counterparty to make payments or otherwise comply with the term of the contract. A currency contract is marked-to-market daily and the change in market value is recorded by a Portfolio as unrealized gain or (loss). A Portfolio records realized gains (losses) when the currency contract is closed equal to the difference between the value of the currency contract at the time it was opened and the value at the time it was closed.

Futures A futures contract is a standardized agreement between two parties to buy or sell a specific quantity of an underlying instrument at a specific price at a specific future time. The value of a futures contract tends to increase and decrease in tandem with the value of the underlying instrument. Depending


95


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2012 (unaudited) continued

on the terms of the particular contract, futures contracts are settled through either physical delivery of the underlying instrument on the settlement date or by payment of a cash settlement amount on the settlement date. During the period the futures contract is open, payments are received from or made to the broker based upon changes in the value of the contract (the variation margin). A decision as to whether, when and how to use futures involves the exercise of skill and judgment and even a well-conceived futures transaction may be unsuccessful because of market behavior or unexpected events. In addition to the derivatives risks discussed above, the prices of futures can be highly volatile, using futures can lower total return, and the potential loss from futures can exceed a Portfolio's initial investment in such contracts.

Swaps An over-the-counter ("OTC") swap agreement is an agreement between two parties pursuant to which the parties exchange payments at specified dates on the basis of a specified notional amount, with the payments calculated by reference to specified securities, indexes, reference rates, currencies or other instruments. A small percentage of swap agreements are cleared through a central clearing house. Most swap agreements provide that when the period payment dates for both parties are the same, the payments are made on a net basis (i.e., the two payment streams are netted out, with only the net amount paid by one party to the other). A Portfolio's obligations or rights under a swap agreement entered into on a net basis will generally be equal only to the net amount to be paid or received under the agreement, based on the relative values of the positions held by each counterparty. Most swap agreements are not entered into or traded on exchanges and there is no central clearing or guaranty function for swaps. These OTC swaps are often subject to credit risk or the risk of default or non-performance by the counterparty. Swaps could result in losses if interest rate or foreign currency exchange rates or credit quality changes are not correctly anticipated by a Portfolio or if the reference index, security or investments do not perform as expected.

A Portfolio's use of swaps during the period included those based on the credit of an underlying security and commonly referred to as credit default swaps. Where a Portfolio is the buyer of a credit default swap agreement, it would be entitled to receive the par (or other agreed-upon) value of a referenced debt obligation from the counterparty to the agreement only in the event of a default by a third party on the debt obligation. If no default occurs, a Portfolio would have paid to the counterparty a periodic stream of payments over the term of the agreement and received no benefit from the agreement. When a Portfolio is the seller of a credit default swap agreement, it receives the stream of payments but is obligated to pay an amount equal to the par (or other agreed upon) value of a referenced debt obligation upon default of the referenced debt obligation. Alternatively, for credit default swaps on an index of credits, the quoted market prices and current values serve as an indicator of the current status of the payment/performance risk of the credit derivative. Generally, lower credit ratings and increasing market values, in absolute terms, represent a deterioration of the credit and a greater likelihood of an adverse credit event of the issuer.


96


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2012 (unaudited) continued

When a Portfolio has an unrealized loss on a swap agreement, the Portfolio has instructed the custodian to pledge cash or liquid securities as collateral with a value approximately equal to the amount of the unrealized loss. Collateral pledges are monitored and subsequently adjusted if and when the swap valuations fluctuate. If applicable, cash collateral is included with "Due from (to) Broker" in the Statements of Assets and Liabilities.

FASB ASC 815, Derivatives and Hedging: Overall ("ASC 815"), is intended to improve financial reporting about derivative instruments by requiring enhanced disclosures to enable investors to better understand how and why a Portfolio uses derivative instruments, how these derivative instruments are accounted for and their effects on a Portfolio's financial position and results of operations.

The following table sets forth the fair value of each Portfolio's derivative contracts by primary risk exposure as of June 30, 2012.

PORTFOLIO  

PRIMARY RISK
EXPOSURE		   ASSET DERIVATIVES
STATEMENTS OF
ASSETS AND
LIABILITIES LOCATION		  


FAIR VALUE		   LIABILITIES DERIVATIVES
STATEMENTS OF
ASSETS AND
LIABILITIES LOCATION		  


FAIR VALUE		  
Limited Duration   Interest Rate
Risk		  
Variation margin		   $ 7,844 †  
Variation margin		   $ (2,139 )†  
Income Plus   Interest Rate
Risk		  
Variation margin		   $ 22,909 †  
Variation margin		   $ (106,304 )†  
          Unrealized appreciation
on open swap agreements		     —     Unrealized depreciation
on open swap agreements		     (223,864 )  
    Currency Risk   Unrealized appreciation
on open foreign currency
exchange contracts		     —     Unrealized depreciation
on open foreign currency
exchange contracts		     (10,642 )  
        Total   $ 22,909     Total   $ (340,810 )  
European Equity   Currency Risk   Unrealized appreciation
on open foreign currency
exchange contracts		   $ —     Unrealized depreciation
on open foreign currency
exchange contracts		   $ (8,551 )  
Strategist   Interest Rate
Risk		  
Variation margin		   $ — †  
Variation margin		   $ (2,530 )†  
        Unrealized appreciation
on open swap agreements		     213,632     Unrealized depreciation
on open swap agreements		     (221,296 )  
        Total   $ 213,632     Total   $ (223,826 )  

 

†  Includes cumulative appreciation/depreciation of futures contracts as reported in the Portfolio of Investments. Only current day's net variation margin is reported within the Statements of Assets and Liabilities.


97


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2012 (unaudited) continued

The following tables set forth by primary risk exposure each Portfolio's realized gains (losses) and change in unrealized appreciation (depreciation) by type of derivative contract for the six months ended June 30, 2012 in accordance with ASC 815.

AMOUNT OF REALIZED GAIN (LOSS) ON DERIVATIVE CONTRACTS

PORTFOLIO   PRIMARY RISK
EXPOSURE		   FUTURES   SWAPS   FOREIGN
CURRENCY
EXCHANGE		  
Limited Duration   Interest Rate Risk   $ 66,926     $ (279,311 )   $ —    
Income Plus   Interest Rate Risk   $ (490,301 )   $ (90,725 )   $ —    
    Currency Risk     —       —       41,819    
    Total   $ (490,301 )   $ (90,725 )   $ 41,819    
European Equity   Currency Risk   $ —     $ —     $ (63,191 )  
Strategist   Interest Rate Risk   $ 33,536     $ (100,127 )   $ —    
    Currency Risk     —       —       4,044    
    Total   $ 33,536     $ (100,127 )   $ 4,044    

 

CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVE CONTRACTS

PORTFOLIO   PRIMARY RISK
EXPOSURE		   FUTURES   SWAPS   FOREIGN
CURRENCY
EXCHANGE		  
Limited Duration   Interest Rate Risk   $ (21,893 )   $ 270,993     $ —    
Income Plus   Interest Rate Risk   $ 125,403     $ (212,964 )   $ —    
    Currency Risk     —       —       (10,642 )  
    Total   $ 125,403     $ (212,964 )   $ (10,642 )  
European Equity   Currency Risk   $ —     $ —     $ 138,593    
Strategist   Interest Rate Risk   $ 493     $ 41,792     $ —    
    Currency Risk     —       —       4,074    
    Total   $ 493     $ 41,792     $ 4,074    

 

For the six months ended June 30, 2012, Limited Duration Portfolios' average monthly original value of futures contracts was $12,818,513 and average monthly notional amount of swap agreements was $4,289,002. Income Plus and Strategist Portfolio's average monthly principal amount of foreign currency exchange contracts was $717,451 and $202,941, the average monthly original value of futures contracts was $68,444,542 and $1,910,121 and the average monthly notional amount of swap agreements was $2,886,167 and $20,916,446, respectively. European Equity Portfolio's average monthly principal amount of foreign currency exchange contracts was $5,377,388.


98


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2012 (unaudited) continued

4. Advisory/Administration and Sub-Advisory Agreements

Pursuant to an Investment Advisory Agreement with the Adviser and Sub-Advisers, the Fund pays an advisory fee, accrued daily and payable monthly, by applying the annual rates listed below to each Portfolio's net assets determined at the close of each business day.

Money Market — 0.45% to the portion of the daily net assets not exceeding $250 million; 0.375% to the portion of the daily net assets exceeding $250 million but not exceeding $750 million; 0.325% to the portion of the daily net assets exceeding $750 million but not exceeding $1.25 billion; 0.30% to the portion of the daily net assets exceeding $1.25 billion but not exceeding $1.5 billion; and 0.275% to the portion of the daily net assets in excess of $1.5 billion.

Limited Duration — 0.30%.

Income Plus — 0.42% to the portion of the daily net assets not exceeding $500 million; 0.35% to the portion of the daily net assets exceeding $500 million but not exceeding $1.25 billion; and 0.22% to the portion of the daily net assets in excess of $1.25 billion.

Global Infrastructure — 0.57% to the portion of the daily net assets not exceeding $500 million; 0.47% to the portion of the daily net assets exceeding $500 million but not exceeding $1 billion; 0.445% to the portion of the daily net assets exceeding $1 billion but not exceeding $1.5 billion; 0.42% to the portion of the daily net assets exceeding $1.5 billion but not exceeding $2.5 billion; 0.395% to the portion of the daily net assets exceeding $2.5 billion but not exceeding $3.5 billion; 0.37% to the portion of the daily net assets exceeding $3.5 billion but not exceeding $5 billion; and 0.345% to the portion of the daily net assets in excess of $5 billion.

European Equity — 0.87% to the portion of the daily net assets not exceeding $500 million; 0.82% to the portion of the daily net assets exceeding $500 million but not exceeding $2 billion; 0.77% to the portion of the daily net assets exceeding $2 billion but not exceeding $3 billion; and 0.745% to the portion of the daily net assets in excess of $3 billion.

Multi Cap Growth — 0.42% to the portion of the daily net assets not exceeding $1 billion; 0.395% to the portion of the daily net assets exceeding $1 billion but not exceeding $2 billion; and 0.37% to the portion of the daily net assets in excess of $2 billion.

Aggressive Equity — 0.67% to the portion of the daily net assets not exceeding $500 million; 0.645% to the portion of the daily net assets exceeding $500 million but not exceeding $2 billion; 0.62% to the portion of


99


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2012 (unaudited) continued

the daily net assets exceeding $2 billion but not exceeding $3 billion; and 0.595% to the portion of the daily net assets in excess of $3 billion.

Strategist — 0.42% to the portion of the daily net assets not exceeding $1.5 billion; and 0.395% to the portion of the daily net assets in excess of $1.5 billion.

Under the Sub-Advisory Agreement between the Adviser and the Sub-Advisers, the Sub-Advisers provide Global Infrastructure Portfolio, European Equity Portfolio and Money Market Portfolio (effective June 25th, 2012) with advisory services subject to the overall supervision of the Adviser and the Fund's Officers and Trustees. The Adviser pays the Sub-Advisers on a monthly basis a portion of the net advisory fees the Adviser receives from each Portfolio.

The Adviser has agreed to cap European Equity's operating expenses (except for brokerage and 12b-1 fees) by assuming the Portfolio's "other expenses" and/or waiving the Portfolio's advisory fees, and Morgan Stanley Services Company Inc. (the "Administrator") has agreed to waive the Portfolio's administrative fees, to the extent such operating expenses exceed 1.00% of the average daily net assets of the Portfolio on an annualized basis. These fee waivers and/or expense reimbursements will continue for at least one year or until such time as the Fund's Board of Trustees acts to discontinue such waivers and/or reimbursements when it deems that such action is appropriate.

Pursuant to an Administration Agreement with the Administrator, an affiliate of the Adviser and Sub-Advisers, each Portfolio pays an administration fee, accrued daily and payable monthly, by applying the annual rate of 0.08% (Money Market 0.05%) to the Portfolio's daily net assets.

Under a Sub-Administration agreement between the Administrator and State Street Bank and Trust Company ("State Street"), State Street provides certain administrative services to the Fund. For such services, the Administrator pays State Street a portion of the fee the Administrator receives from the Fund.

5. Plan of Distribution

Shares of the Fund are distributed by Morgan Stanley Distribution, Inc. (the "Distributor"), an affiliate of the Adviser, Administrator and Sub-Advisers. The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. Under the Plan, Class Y shares of each Portfolio bear a distribution fee which is accrued daily and paid monthly at the annual rate of 0.25% of the average daily net assets of the class.

The Distributor, Adviser and Administrator have agreed to waive and/or reimburse all or a portion of the Money Market Portfolio's distribution fee, advisory fee and administration fee, respectively, to the extent


100


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2012 (unaudited) continued

that total expenses exceed total income of the Money Market Portfolio on a daily basis. For the six months ended June 30, 2012, the Distributor waived $67,140 and the Adviser waived $187,517. These fee waivers and/or expense reimbursements will continue for at least one year or until such time that the Trustees acts to discontinue such waivers and/or expense reimbursements when it deems such action is appropriate.

6. Security Transactions and Transactions with Affiliates

For the six months ended June 30, 2012, purchases and sales of investment securities, excluding short-term investments, were as follows:

    U.S. GOVERNMENT SECURITIES   OTHER  
PORTFOLIO   PURCHASES   SALES   PURCHASES   SALES  
Limited Duration   $ 11,190,589     $ 5,326,888     $ 6,421,572     $ 10,983,498    
Income Plus     —       22       64,557,336       74,824,392    
Global Infrastructure     —       —       11,332,125       15,855,755    
European Equity     —       —       1,600,934       6,055,304    
Multi Cap Growth     —       —       66,549,684       82,913,687    
Aggressive Equity     —       —       8,460,034       10,039,934    
Strategist     9,522,315       5,271,460       27,812,277       35,232,770    

 

Each Portfolio (except Money Market) invests in the Institutional Class of the Morgan Stanley Institutional Liquidity Funds (the "Liquidity Funds"), an open-end management investment company managed by the Adviser, both directly, and as a portion of the securities held as collateral on loaned securities. Advisory fees paid by the Portfolios are reduced by an amount equal to its pro-rata share of advisory and administrative fees paid by the Portfolios due to its investment in the Liquidity Funds.

A summary of the Portfolio's transactions in shares of the Liquidity Funds during the six months ended June 30, 2012 is as follows:

PORTFOLIO   VALUE
DECEMBER 31, 2011		   PURCHASES
AT COST		   SALES   DIVIDEND
INCOME		   VALUE
JUNE 30, 2012		  
Limited Duration   $ 110,511     $ 15,544,261     $ 15,423,753     $ 1,005     $ 231,019    
Income Plus     208,270       40,760,825       38,584,933       5,153       2,384,162    
Global Infrastructure     1,993,348       8,088,166       8,988,552       636       1,092,962    
European Equity     718,547       5,438,706       4,998,982       424       1,158,271    
Multi Cap Growth     12,216,664       39,716,828       45,259,966       5,044       6,673,526    
Aggressive Equity     1,790,916       4,843,174       5,595,700       716       1,038,390    
Strategist     26,626,452       17,676,355       26,536,243       19,524       17,766,564    


101


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2012 (unaudited) continued

In addition, the table also identifies the income distributions earned, if any, by each Portfolio for that Portfolio's investment in the Liquidity Funds.

Income distributions are included in "interest and dividends from affiliates" in the Statements of Operations.

PORTFOLIO   ADVISORY FEE
REDUCTION		  
Limited Duration   $ 783    
Income Plus     3,823    
Global Infrastructure     639    
European Equity     405    
Multi Cap Growth     5,174    
Aggressive Equity     798    
Strategist     18,042    

 

The following Portfolios had transactions with the following affiliates of the Fund:

PORTFOLIO   ISSUER   VALUE
DECEMBER 31,
2011		   PURCHASES
AT COST		   SALES   NET
REALIZED
GAIN		   INTEREST
INCOME		   VALUE
JUNE 30,
2012		  
Limited
Duration		   MetLife Global   $ 327,079     $ 199,842     $ —     $ —     $ 3,241     $ 528,739    
Income Plus   MetLife Capital Trust IV     —       633,000       —       —       21,262       669,000    
    MetLife, Inc.     1,276,994       —       1,297,925       333,108       4,899       —    
Strategist   MetLife, Inc.     43,951       —       —       —       1,343       44,387    

 

The following Portfolios had transactions with Citigroup, Inc., and its affiliated broker-dealers, which may be deemed to be affiliates of the Adviser, Sub-Advisers, Administrator and Distributor under Section 17 of the Act, for the six months ended June 30, 2012:

PORTFOLIO   VALUE
DECEMBER 31,
2011		   PURCHASES
AT COST		   SALES   NET
REALIZED
GAIN (LOSS)		   INTEREST
INCOME		   VALUE
JUNE 30,
2012		  
Limited Duration   $ 1,087,480     $ 427,870     $ 504,854     $ 13,129     $ 16,050     $ 1,030,378    
Income Plus     3,188,387       —       —       —       103,899       3,418,012    
Strategist     2,483,400       —       2,458,471       (907,033 )     7,076       116,522    


102


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2012 (unaudited) continued

For the six months ended June 30, 2012, the following Portfolios incurred brokerage commissions with Morgan Stanley & Co., LLC, an affiliate of the Adviser, Sub-Advisers, Administrator and Distributor, for portfolio transactions executed on behalf of each Portfolio:

STRATEGIST   EUROPEAN
EQUITY		  
$ 20,142     $ 153    

 

For the six months ended June 30, 2012, the following Portfolios incurred brokerage commissions with Citigroup, Inc., and its affiliated broker-dealers, which may be deemed affiliates of the Adviser, Sub-Advisers, Administrator and Distributor under Section 17 of the Act, for portfolio transactions executed on behalf of each Portfolio:

GLOBAL
INFRASTRUCTURE		   EUROPEAN
EQUITY		   MULTI CAP
GROWTH		   AGGRESSIVE
EQUITY		  
$ 1,109     $ 941     $ 300     $ 38    

 

Morgan Stanley Services Company Inc., an affiliate of the Adviser, Sub-Advisers and Distributor, is the Fund's transfer agent.

The Fund has an unfunded noncontributory defined benefit pension plan covering certain independent Trustees of the Fund who will have served as independent Trustees for at least five years at the time of retirement. Benefits under this plan are based on factors which include years of service and compensation. The Trustees voted to close the plan to new participants and eliminate the future benefits growth due to increases to compensation after July 31, 2003.

Aggregate pension costs for the six months ended June 30, 2012, included in "trustees' fees and expenses" in the Statements of Operations and the accrued pension liability included in "accrued expenses and other payables" in the Statements of Assets and Liabilities are as follows:

AGGREGATE PENSION COSTS

MONEY
MARKET		   LIMITED
DURATION		   INCOME
PLUS		   GLOBAL
INFRASTRUCTURE		   EUROPEAN
EQUITY		   MULTI CAP
GROWTH		   AGGRESSIVE
EQUITY		   STRATEGIST  
$ 162     $ 89     $ 304     $ 122     $ 100     $ 382     $ 46     $ 251    

 

AGGREGATE PENSION LIABILITY

MONEY
MARKET		   LIMITED
DURATION		   INCOME
PLUS		   GLOBAL
INFRASTRUCTURE		   EUROPEAN
EQUITY		   MULTI CAP
GROWTH		   AGGRESSIVE
EQUITY		   STRATEGIST  
$ 5,288     $ 2,752     $ 9,128     $ 2,801     $ 2,523     $ 9,589     $ 1,137     $ 7,262    


103


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2012 (unaudited) continued

The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan"), which allows each independent Trustee to defer payment of all, or a portion, of the fees he or she receives for serving on the Board of Trustees. Each eligible Trustee generally may elect to have the deferred amounts credited with a return equal to the total return on one or more of the Morgan Stanley funds that are offered as investment options under the Compensation Plan. Appreciation/depreciation and distributions received from these investments are recorded with an offsetting increase/decrease in the deferred compensation obligation and do not affect the net asset value of the Fund.

7. Federal Income Tax Status

It is the Portfolios' intention to continue to qualify as a regulated investment company and distribute all of its taxable and tax-exempt income. Accordingly, no provision for Federal income taxes is required in the financial statements.

Dividend income and distributions to shareholders are recorded on the ex-dividend date. Interest income is recognized on an accrual basis. Dividends from net investment income, if any, are declared and paid annually. Net realized capital gains, if any, are distributed at least annually.

A Portfolio may be subject to taxes imposed by countries in which it invests. Such taxes are generally based on income and/or capital gains earned or repatriated. Taxes are accrued based on net investment income, net realized gains and net unrealized appreciation as such income and/or gains are earned. Taxes may also be based on transactions in foreign currency and are accrued based on the value of investments denominated in such currency.

FASB ASC 740-10, Income Taxes — Overall, sets forth a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken in a tax return. Management has concluded there are no significant uncertain tax positions that would require recognition in the financial statements. If applicable, the Portfolios recognize interest accrued related to unrecognized tax benefits in "interest expense" and penalties in "other expenses" in the Statements of Operations. The Portfolios file tax returns with the U.S. Internal Revenue Service, New York and various states. Each of the tax years in the four-year period ended December 31, 2011, remains subject to examination by taxing authorities.


104


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2012 (unaudited) continued

The tax character of distributions paid may differ from the character of distributions shown in the Statements of Changes in Net Assets due to short-term capital gains being treated as ordinary income for tax purposes. The tax character of distributions paid during fiscal 2011 and 2010 was as follows:

    2011 DISTRIBUTIONS PAID FROM:   2010 DISTRIBUTIONS PAID FROM:  
PORTFOLIO   ORDINARY
INCOME		   LONG-TERM
CAPTIAL GAIN		   ORDINARY
INCOME		   LONG-TERM
CAPTIAL GAIN		  
Money Market   $ 11,709     $ —     $ 14,474     $ 202    
Limited Duration     1,919,268       —       2,459,575       —    
Income Plus     12,237,165       —       14,616,596       —    
Global Infrastructure     1,889,924       3,948,735       5,523,941       3,205,294    
European Equity     1,488,782       —       1,837,269       —    
Multi Cap Growth     327,516       5       333,905       —    
Strategist     5,463,608       15,665,688       2,865,187       1,010,412    

 

The amount and character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from GAAP. These book/tax differences are either considered temporary or permanent in nature.

Temporary differences are primarily due to differing book and tax treatments in the timing of the recognition of gains (losses) on certain investment transactions and the timing of the deductibility of certain expenses.

Permanent differences, primarily due to differing treatments of gains (losses) related to foreign currency transactions, swap transactions, paydown adjustments, expiring capital losses, net operating losses, REIT adjustments, partnership basis adjustments, distribution redesignations, nondeductible expenses and certain equity securities designated as issued by passive foreign investment companies, resulted in the following reclassifications among the Portfolio's components of net assets at December 31, 2011:

PORTFOLIO   ACCUMULATED UNDISTRIBUTED
(DISTRIBUTIONS IN EXCESS OF)
NET INVESTMENT INCOME		   ACCUMULATED
NET REALIZED GAIN (LOSS)		   PAID-IN-CAPITAL  
Money Market   $ (107 )   $ 107     $ —    
Limited Duration     700,245       603,087       (1,303,332 )  
Income Plus     761,229       (761,229 )     —    
Global Infrastructure     (118,528 )     118,543       (15 )  
European Equity     34,870       (34,877 )     7    
Multi Cap Growth     118,008       (40,804 )     (77,204 )  
Aggressive Equity     189,189       (2,163 )     (187,026 )  
Strategist     214,896       (214,894 )     (2 )  


105


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2012 (unaudited) continued

At December 31, 2011, the components of distributable earnings on a tax basis were as follows:

PORTFOLIO   UNDISTRIBUTED
ORDINARY
INCOME		   UNDISTRIBUTED
LONG-TERM
CAPITAL GAIN		  
Money Market   $ 7,605     $ —    
Limited Duration     1,503,207       —    
Income Plus     10,700,252       —    
Global Infrastructure     2,854,240       5,230,378    
European Equity     1,421,623       —    
Multi Cap Growth     —       4,886,438    
Aggressive Equity     —       2,196,459    
Strategist     2,450,279       1,953,002    

 

At June 30, 2012, the aggregate cost for federal income tax purposes approximates the aggregate cost for book purposes. The aggregate gross unrealized appreciation/(depreciation) and net unrealized appreciation/(depreciation) of the investments of each of the Portfolios were as follows:

PORTFOLIO   APPRECIATION   DEPRECIATION   NET APPRECIATION
(DEPRECIATION)		  
Money Market   $ —     $ —     $ —    
Limited Duration     1,194,652       (314,158 )     880,494    
Income Plus     13,794,169       (1,235,435 )     12,558,734    
Global Infrastructure     14,237,935       (1,135,962 )     13,101,973    
European Equity     9,327,396       (4,172,490 )     5,154,906    
Multi Cap Growth     70,232,396       (20,930,269 )     49,302,127    
Aggressive Equity     8,452,517       (2,707,012 )     5,745,505    
Strategist     9,792,691       (2,022,219 )     7,770,472    

 

On December 22, 2010, the Regulated Investment Company Modernization Act of 2010 (the "Modernization Act") was signed into law. The Modernization Act modernizes several tax provisions related to Regulated Investment Companies ("RICs") and their shareholders. One key change made by the Modernization Act is that capital losses will generally retain their character as short-term or long-term and may be carried forward indefinitely to offset future gains. These losses are utilized before other capital loss carryforwards that expire. Generally, the Modernization Act is effective for taxable years beginning after December 22, 2010.

At December 31, 2011, the following Portfolio had available for Federal income tax purposes unused short-term capital losses that will not expire:

PORTFOLIO   SHORT-TERM LOSSES
(NO EXPIRATION)		  
Money Market   $ 2,011    


106


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2012 (unaudited) continued

In addition, at December 31, 2011, the following Portfolios had available capital loss carryforwards to offset future net capital gains, to the extent provided by regulations, on the indicated dates:

    AMOUNTS IN THOUSANDS AVAILABLE THROUGH DECEMBER 31,  
PORTFOLIO   2012   2013   2014   2015   2016   2017   2018   TOTAL  
Limited Duration   $ 4,026     $ 1,267     $ 2,233     $ 1,063     $ 17,119     $ 8,980     $ —     $ 34,688    
Income Plus     —       —       —       344       19,232       —       —       19,576    
European Equity     —       —       —       —       —       10,552       3,315       13,867    

 

During the year ended December 31, 2011, the following Portfolio expired capital loss carryforwards for U.S. Federal income tax purposes of:

PORTFOLIO   EXPIRED CAPITAL LOSS
CARRYFORWARDS		  
Limited Duration   $ 1,303,332    

 

To the extent that capital loss carryforwards are used to offset any future capital gains realized during the carryover period as provided by U.S. Federal income tax regulations, no capital gains tax liability will be incurred by a Portfolio for gains realized and not distributed. To the extent that capital gains are offset, such gains will not be distributed to the shareholders. During the year ended December 31, 2011, the following Portfolios utilized capital loss carryforwards for U.S. Federal income tax purposes of:

PORTFOLIO   UTILIZED CAPITAL LOSS
CARRYFORWARDS		  
Limited Duration   $ 88,554    
Income Plus     4,828,845    
European Equity     1,331,481    
Multi Cap Growth     27,708,593    
Aggressive Equity     1,987,158    

 

8. Purposes of and Risks Relating to Certain Financial Instruments

Certain Portfolios may lend securities to qualified financial institutions, such as broker-dealers, to earn additional income. Risks in securities lending transactions are that a borrower may not provide additional collateral when required or return the securities when due, and that the value of the short-term investments will be less than the amount of cash collateral plus any rebate that is required to be returned to the borrower.

Certain Portfolios may invest in mortgage securities, including securities issued by Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC"). These are fixed income securities that derive their value from or represent interests in a pool of mortgages or mortgage


107


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2012 (unaudited) continued

securities. An unexpectedly high rate of defaults on the mortgages held by a mortgage pool may adversely affect the value of a mortgage backed security and could result in losses to the Portfolio. The risk of such defaults is generally higher in the case of mortgage pools that include sub-prime mortgages. Sub-prime mortgages refer to loans made to borrowers with weakened credit histories or with a lower capacity to make timely payments on their mortgages. The securities issued by FNMA and FHLMC that are held by the Portfolios are not backed by sub-prime mortgages.

Additionally, securities issued by FNMA and FHLMC are not backed by or entitled to the full faith and credit of the United States; rather, they are supported by the right of the issuer to borrow from the U.S. Department of the Treasury.

The Federal Housing Finance Agency ("FHFA") serves as conservator of FNMA and FHLMC and the U.S. Department of the Treasury has agreed to provide capital as needed to ensure FNMA and FHLMC continue to provide liquidity to the housing and mortgage markets.

Certain Portfolios may enter into repurchase agreements under which a Portfolio lends excess cash and takes possession of securities with an agreement that the counterparty will repurchase such securities. In the event of default on the obligation to repurchase, the Portfolio has the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. In the event of default or bankruptcy by the counterparty to the agreement, realization of the collateral proceeds may be subject to certain costs and delays.

At June 30, 2012, European Equity Portfolio's investments in securities of issuers in the United Kingdom, Switzerland, Germany, and France represented 48.2%, 14.6%, 12.9% and 8.1%, respectively of the Portfolio's net assets. These investments, as well as other non-U.S. investments, which involve risks and considerations not present with respect to U.S. securities, may be affected by economic or political developments in these countries.

9. Expense Offset

The Fund has entered into an arrangement with State Street (the "Custodian"), whereby credits realized on uninvested cash balances were used to offset a portion of the Fund's expenses. If applicable, these custodian credits are shown as "expense offset" in the Statements of Operations.


108


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2012 (unaudited) continued

10. Accounting Pronouncement

In December 2011, FASB issued Accounting Standards Update ("ASU") 2011-11, Balance Sheet: Disclosures about Offsetting Assets and Liabilities. The pronouncement improves disclosures for recognized financial and derivative instruments that are either offset on the balance sheet in accordance with the offsetting guidance in ASC 210-20-45 or ASC 815-10-45 or are subject to an enforceable master netting agreements or similar. The Fund will be required to disclose information about rights to offset and related arrangements (such as collateral agreements) in order to enable financial statement users to understand the effect of those rights and arrangements on its financial position as well as disclose the following (1) gross amounts; (2) amounts offset in the statement of financial position; (3) any other amounts that can be offset in the event of bankruptcy, insolvency or default of any of the parties (including cash and noncash financial collateral); and (4) the Fund's net exposure. The requirements are effective for annual reporting periods beginning on or after January 1, 2013, and must be applied retrospectively. At this time, the Fund's management is evaluating the implications of ASU 2011-11 and its impact, if any, on the financial statements.


109



Morgan Stanley Variable Investment Series

Financial Highlights

                               
FOR THE YEAR
ENDED
DECEMBER 31		   NET ASSET
VALUE
BEGINNING
OF PERIOD		   NET
INVESTMENT
INCOME(a)		   NET REALIZED
AND
UNREALIZED
GAIN (LOSS)		   TOTAL FROM
INVESTMENT
OPERATIONS		   DIVIDENDS
TO
SHAREHOLDERS		   DISTRIBUTIONS
TO
SHAREHOLDERS		   TOTAL
DIVIDENDS
AND
DISTRIBUTIONS		  
MONEY MARKET
CLASS X SHARES		      
2007^   $ 1.00     $ 0.050       —     $ 0.050     $ (0.050 )     —     $ (0.050 )  
2008^     1.00       0.020       —       0.020       (0.020 )     —       (0.020 )  
2009^     1.00       0.000 (e)     —       0.000 (e)     (0.000 )(e)     —       (0.000 )(e)  
2010^     1.00       0.000 (e)     —       0.000 (e)     (0.000 )(e)     —       (0.000 )(e)  
2011     1.00       0.000 (e)     (0.000 )(e)     0.000 (e)     (0.000 )(e)     —       (0.000 )(e)  
2012^^     1.00       0.000 (e)     0.000 (e)     0.000 (e)     (0.000 )(e)     —       (0.000 )(e)  
CLASS Y SHARES      
2007^     1.00       0.050       —       0.050       (0.050 )     —       (0.050 )  
2008^     1.00       0.020       —       0.020       (0.020 )     —       (0.020 )  
2009^     1.00       0.000 (e)     —       0.000 (e)     (0.000 )(e)     —       (0.000 )(e)  
2010^     1.00       0.000 (e)     —       0.000 (e)     (0.000 )(e)     —       (0.000 )(e)  
2011     1.00       0.000 (e)     (0.000 )(e)     0.000 (e)     (0.000 )(e)     —       (0.000 )(e)  
2012^^     1.00       0.000 (e)     0.000 (e)     0.000 (e)     (0.000 )(e)     —       (0.000 )(e)  
LIMITED DURATION
CLASS X SHARES		      
2007^     9.49       0.47     $ (0.19 )     0.28       (0.50 )     —       (0.50 )  
2008^     9.27       0.36       (1.72 )     (1.36 )     (0.15 )     —       (0.15 )  
2009^     7.76       0.20       0.24       0.44       (0.36 )     —       (0.36 )  
2010^     7.84       0.18       0.00       0.18       (0.28 )     —       (0.28 )  
2011     7.74       0.17       0.04       0.21       (0.26 )     —       (0.26 )  
2012^^     7.69       0.06       0.08       0.14       (0.23 )     —       (0.23 )  
CLASS Y SHARES      
2007^     9.48       0.44       (0.19 )     0.25       (0.47 )     —       (0.47 )  
2008^     9.26       0.34       (1.73 )     (1.39 )     (0.14 )     —       (0.14 )  
2009^     7.73       0.18       0.24       0.42       (0.34 )     —       (0.34 )  
2010^     7.81       0.16       0.01       0.17       (0.26 )     —       (0.26 )  
2011     7.72       0.15       0.04       0.19       (0.24 )     —       (0.24 )  
2012^^     7.67       0.05       0.08       0.13       (0.21 )     —       (0.21 )  

 

See Notes to Financial Statements
110


                RATIO TO AVERAGE
NET ASSETS(c)		          
FOR THE YEAR
ENDED
DECEMBER 31		   NET ASSET
VALUE
END OF
PERIOD		   TOTAL
RETURN(b)		   NET ASSETS
END OF
PERIOD
(000'S)		   EXPENSES   NET
INVESTMENT
INCOME		   REBATE FROM
MORGAN STANLEY
AFFILIATE		   PORTFOLIO
TURNOVER
RATE		  
MONEY MARKET
CLASS X SHARES		  
2007^   $ 1.00       4.93 %(d)   $ 111,478       0.55 %     4.79 %     —       N/A    
2008^     1.00       2.45       115,415       0.57       2.40       —       N/A    
2009^     1.00       0.03       84,486       0.40 (f)(g)     0.03 (f)(g)     —       N/A    
2010^     1.00       0.01       59,932       0.29 (g)     0.00 (g)(h)     —       N/A    
2011     1.00       0.01       51,431       0.22 (g)     0.01 (g)     —       N/A    
2012^^     1.00       0.00 (h)(l)     46,495       0.26 (g)(m)     0.01 (g)(m)     —       N/A    
CLASS Y SHARES  
2007^     1.00       4.67 (d)     101,524       0.80       4.54       —       N/A    
2008^     1.00       2.19       112,113       0.82       2.15       —       N/A    
2009^     1.00       0.01       81,145       0.41 (f)(g)     0.01 (f)(g)     —       N/A    
2010^     1.00       0.01       67,139       0.29 (g)     0.00 (g)(h)     —       N/A    
2011     1.00       0.01       55,849       0.22 (g)     0.01 (g)     —       N/A    
2012^^     1.00       0.00 (h)(l)     50,801       0.26 (g)(m)     0.01 (g)(m)     —       N/A    
LIMITED DURATION
CLASS X SHARES		  
2007^     9.27       2.95       26,214       0.47       4.95       —       49 %  
2008^     7.76       (14.91 )     16,405       0.48 (i)     4.27 (i)     0.01 %     54    
2009^     7.84       5.76       16,889       0.49 (i)     2.61 (i)     0.00 (h)     105    
2010^     7.74       2.35       14,921       0.55 (i)     2.25 (i)     0.00 (h)     88    
2011     7.69       2.75       12,693       0.60 (i)     2.15 (i)     0.00 (h)     45    
2012^^     7.60       1.86 (l)     11,593       0.58 (i)(m)     1.67 (i)(m)     0.00 (h)(m)     30 (l)  
CLASS Y SHARES  
2007^     9.26       2.80       101,066       0.72       4.70       —       49    
2008^     7.73       (15.22 )     63,223       0.73 (i)     4.02 (i)     0.01       54    
2009^     7.81       5.56       60,753       0.74 (i)     2.36 (i)     0.00 (h)     105    
2010^     7.72       2.22       53,760       0.80 (i)     2.00 (i)     0.00 (h)     88    
2011     7.67       2.45       44,085       0.85 (i)     1.90 (i)     0.00 (h)     45    
2012^^     7.59       1.71 (l)     42,671       0.83 (i)(m)     1.42 (i)(m)     0.00 (h)(m)     30 (l)  

 


111


Morgan Stanley Variable Investment Series

Financial Highlights continued

                               
FOR THE YEAR
ENDED
DECEMBER 31		   NET ASSET
VALUE
BEGINNING
OF PERIOD		   NET
INVESTMENT
INCOME(a)		   NET REALIZED
AND
UNREALIZED
GAIN (LOSS)		   TOTAL FROM
INVESTMENT
OPERATIONS		   DIVIDENDS
TO
SHAREHOLDERS		   DISTRIBUTIONS
TO
SHAREHOLDERS		   TOTAL
DIVIDENDS
AND
DISTRIBUTIONS		  
INCOME PLUS
CLASS X SHARES		      
2007^   $ 10.51     $ 0.53     $ 0.08     $ 0.61     $ (0.56 )     —     $ (0.56 )  
2008^     10.56       0.53       (1.46 )     (0.93 )     (0.18 )     —       (0.18 )  
2009^     9.45       0.57       1.50       2.07       (0.53 )     —       (0.53 )  
2010^     10.99       0.58       0.39       0.97       (0.70 )     —       (0.70 )  
2011     11.26       0.57       (0.02 )     0.55       (0.68 )     —       (0.68 )  
2012^^     11.13       0.26       0.47       0.73       (0.68 )     —       (0.68 )  
CLASS Y SHARES      
2007^     10.49       0.50       0.08       0.58       (0.53 )     —       (0.53 )  
2008^     10.54       0.51       (1.45 )     (0.94 )     (0.18 )     —       (0.18 )  
2009^     9.42       0.55       1.49       2.04       (0.51 )     —       (0.51 )  
2010^     10.95       0.55       0.39       0.94       (0.67 )     —       (0.67 )  
2011     11.22       0.54       (0.02 )     0.52       (0.65 )     —       (0.65 )  
2012^^     11.09       0.24       0.47       0.71       (0.65 )     —       (0.65 )  
GLOBAL INFRASTRUCTURE
CLASS X SHARES		      
2007^     19.44       0.39       3.38       3.77       (0.39 )   $ (2.16 )     (2.55 )  
2008^     20.66       0.40       (6.21 )     (5.81 )     (0.11 )     (3.44 )     (3.55 )  
2009^     11.30       0.31       1.16       1.47       (0.38 )     (3.71 )     (4.09 )  
2010^     8.68       0.21       0.18       0.39       (0.25 )     (0.69 )     (0.94 )  
2011     8.13       0.21       1.07       1.28       (0.23 )     (0.46 )     (0.69 )  
2012^^     8.72       0.14       0.48       0.62       (0.23 )     (0.82 )     (1.05 )  
CLASS Y SHARES      
2007^     19.43       0.34       3.38       3.72       (0.34 )     (2.16 )     (2.50 )  
2008^     20.65       0.35       (6.20 )     (5.85 )     (0.09 )     (3.44 )     (3.53 )  
2009^     11.27       0.28       1.15       1.43       (0.35 )     (3.71 )     (4.06 )  
2010^     8.64       0.19       0.19       0.38       (0.23 )     (0.69 )     (0.92 )  
2011     8.10       0.19       1.06       1.25       (0.20 )     (0.46 )     (0.66 )  
2012^^     8.69       0.13       0.47       0.60       (0.20 )     (0.82 )     (1.02 )  

 

See Notes to Financial Statements
112


                RATIO TO AVERAGE
NET ASSETS(c)		          
FOR THE YEAR
ENDED
DECEMBER 31		   NET ASSET
VALUE
END OF
PERIOD		   TOTAL
RETURN(b)		   NET ASSETS
END OF
PERIOD
(000'S)		   EXPENSES   NET
INVESTMENT
INCOME		   REBATE FROM
MORGAN STANLEY
AFFILIATE		   PORTFOLIO
TURNOVER
RATE		  
INCOME PLUS
CLASS X SHARES		  
2007^   $ 10.56       5.99 %   $ 155,879       0.55 %     5.02 %     —       125 %  
2008^     9.45       (8.92 )     109,833       0.55 (i)     5.34 (i)     0.00 %(h)     55    
2009^     10.99       22.57       114,488       0.56 (i)     5.64 (i)     0.00 (h)     75    
2010^     11.26       9.28       106,363       0.59 (i)     5.23 (i)     0.00 (h)     53    
2011     11.13       5.01       90,876       0.59 (i)     5.01 (i)     0.00 (h)     43    
2012^^     11.18       6.56 (l)     88,523       0.58 (i)(m)     4.48 (i)(m)     0.00 (h)(m)     35 (l)  
CLASS Y SHARES  
2007^     10.54       5.73       196,774       0.80       4.77       —       125    
2008^     9.42       (9.11 )     135,850       0.80 (i)     5.09 (i)     0.00 (h)     55    
2009^     10.95       22.29       148,108       0.81 (i)     5.39 (i)     0.00 (h)     75    
2010^     11.22       9.01       124,322       0.84 (i)     4.98 (i)     0.00 (h)     53    
2011     11.09       4.71       102,948       0.84 (i)     4.76 (i)     0.00 (h)     43    
2012^^     11.15       6.38 (l)     102,198       0.83 (i)(m)     4.23 (i)(m)     0.00 (h)(m)     35 (l)  
GLOBAL INFRASTRUCTURE
CLASS X SHARES		  
2007^     20.66       20.34       133,507       0.70       1.90       —       8    
2008^     11.30       (33.27 )     70,951       0.74 (i)     2.46 (i)     0.00 (h)     76    
2009^     8.68       19.26       68,748       0.96 (i)     3.37 (i)     0.00 (h)     280    
2010^     8.13       6.93       61,408       0.87 (i)     2.71 (i)     0.00 (h)     148    
2011     8.72       16.07       58,998       0.86 (i)     2.48 (i)     0.00 (h)     36    
2012^^     8.29       7.06 (l)     57,680       0.83 (i)(m)     3.09 (i)(m)     0.00 (h)(m)     16 (l)  
CLASS Y SHARES  
2007^     20.65       20.04       31,780       0.95       1.65       —       8    
2008^     11.27       (33.45 )     16,545       0.99 (i)     2.21 (i)     0.00 (h)     76    
2009^     8.64       18.83       17,818       1.21 (i)     3.12 (i)     0.00 (h)     280    
2010^     8.10       6.74       15,789       1.12 (i)     2.46 (i)     0.00 (h)     148    
2011     8.69       15.82       14,472       1.11 (i)     2.23 (i)     0.00 (h)     36    
2012^^     8.27       6.93 (l)     14,664       1.08 (i)(m)     2.84 (i)(m)     0.00 (h)(m)     16 (l)  

 


113


Morgan Stanley Variable Investment Series

Financial Highlights continued

                               
FOR THE YEAR
ENDED
DECEMBER 31		   NET ASSET
VALUE
BEGINNING
OF PERIOD		   NET
INVESTMENT
INCOME
(LOSS)(a)		   NET REALIZED
AND
UNREALIZED
GAIN (LOSS)		   TOTAL FROM
INVESTMENT
OPERATIONS		   DIVIDENDS
TO
SHAREHOLDERS		   DISTRIBUTIONS
TO
SHAREHOLDERS		   TOTAL
DIVIDENDS
AND
DISTRIBUTIONS		  
EUROPEAN EQUITY
CLASS X SHARES		      
2007^   $ 25.34     $ 0.47     $ 3.48     $ 3.95     $ (0.46 )     —     $ (0.46 )  
2008^     28.83       0.63       (11.31 )     (10.68 )     (0.61 )   $ (4.22 )     (4.83 )  
2009^     13.32       0.36       3.01       3.37       (0.56 )     (0.71 )     (1.27 )  
2010^     15.42       0.26       0.76       1.02       (0.39 )     —       (0.39 )  
2011     16.05       0.41       (1.90 )     (1.49 )     (0.37 )     —       (0.37 )  
2012^^     14.19       0.45       (0.02 )     0.43       (0.43 )     —       (0.43 )  
CLASS Y SHARES      
2007^     25.19       0.40       3.46       3.86       (0.40 )     —       (0.40 )  
2008^     28.65       0.58       (11.25 )     (10.67 )     (0.52 )     (4.22 )     (4.74 )  
2009^     13.24       0.32       3.00       3.32       (0.50 )     (0.71 )     (1.21 )  
2010^     15.35       0.22       0.76       0.98       (0.35 )     —       (0.35 )  
2011     15.98       0.37       (1.90 )     (1.53 )     (0.33 )     —       (0.33 )  
2012^^     14.12       0.43       (0.01 )     0.42       (0.38 )     —       (0.38 )  
MULTI CAP GROWTH
CLASS X SHARES		      
2007^     29.63       0.21       5.57       5.78       (0.18 )     —       (0.18 )  
2008^     35.23       0.03       (16.78 )     (16.75 )     (0.07 )     —       (0.07 )  
2009^     18.41       0.11       12.99       13.10       (0.09 )     —       (0.09 )  
2010^     31.42       0.06       8.65       8.71       (0.06 )     —       (0.06 )  
2011     40.07       0.01       (2.70 )     (2.69 )     (0.07 )     —       (0.07 )  
2012^^     37.31       0.16       3.52       3.68       —       (0.90 )     (0.90 )  
CLASS Y SHARES      
2007^     29.43       0.13       5.54       5.67       (0.04 )     —       (0.04 )  
2008^     35.06       (0.05 )     (16.67 )     (16.72 )     (0.05 )     —       (0.05 )  
2009^     18.29       0.05       12.90       12.95       (0.03 )     —       (0.03 )  
2010^     31.21       (0.02 )     8.58       8.56       —       —       —    
2011     39.77       (0.09 )     (2.68 )     (2.77 )     —       —       —    
2012^^     37.00       0.11       3.49       3.60       —       (0.90 )     (0.90 )  

 

See Notes to Financial Statements
114


                RATIO TO AVERAGE
NET ASSETS(c)		          
FOR THE YEAR
ENDED
DECEMBER 31		   NET ASSET
VALUE
END OF
PERIOD		   TOTAL
RETURN(b)		   NET ASSETS
END OF
PERIOD
(000'S)		   EXPENSES   NET
INVESTMENT
INCOME (LOSS)		   REBATE FROM
MORGAN STANLEY
AFFILIATE		   PORTFOLIO
TURNOVER
RATE		  
EUROPEAN EQUITY
CLASS X SHARES		  
2007^   $ 28.83       15.59 %   $ 127,071       1.00 %(j)     1.73 %(j)     —       41 %  
2008^     13.32       (42.70 )     57,734       1.00 (i)(j)     3.01 (i)(j)     0.00 %(h)     15    
2009^     15.42       27.73       61,197       1.00 (i)(j)     2.67 (i)(j)     0.00 (h)     26    
2010^     16.05       7.23 (k)     54,824       1.00 (i)(j)     1.81 (i)(j)     0.00 (h)     22    
2011     14.19       (9.64 )     41,181       1.00 (i)(j)     2.56 (i)(j)     0.00 (h)     11    
2012^^     14.19       3.04 (l)     38,276       1.00 (i)(j)(m)     6.10 (i)(j)(m)     0.00 (h)(m)     3 (l)  
CLASS Y SHARES  
2007^     28.65       15.34       40,721       1.25 (j)     1.48 (j)     —       41    
2008^     13.24       (42.84 )     17,845       1.25 (i)(j)     2.76 (i)(j)     0.00 (h)     15    
2009^     15.35       27.41       19,323       1.25 (i)(j)     2.42 (i)(j)     0.00 (h)     26    
2010^     15.98       6.96 (k)     17,821       1.25 (i)(j)     1.56 (i)(j)     0.00 (h)     22    
2011     14.12       (9.85 )     11,668       1.25 (i)(j)     2.31 (i)(j)     0.00 (h)     11    
2012^^     14.16       2.90 (l)     11,170       1.25 (i)(j)(m)     5.85 (i)(j)(m)     0.00 (h)(m)     3 (l)  
MULTI CAP GROWTH
CLASS X SHARES		  
2007^     35.23       19.54       331,243       0.54       0.66       —       55    
2008^     18.41       (47.62 )     140,041       0.55 (i)     0.08 (i)     0.01       33    
2009^     31.42       71.32       202,279       0.55 (i)     0.44 (i)     0.00 (h)     23    
2010^     40.07       27.76       220,553       0.58 (i)     0.19 (i)     0.00 (h)     29    
2011     37.31       (6.74 )     173,284       0.56 (i)     0.03 (i)     0.00 (h)     24    
2012^^     40.09       9.85 (l)     174,814       0.57 (i)(m)     0.76 (i)(m)     0.00 (h)(m)     29 (l)  
CLASS Y SHARES  
2007^     35.06       19.24       107,710       0.79       0.41       —       55    
2008^     18.29       (47.75 )     45,671       0.80 (i)     (0.17 )(i)     0.01       33    
2009^     31.21       70.85       64,122       0.80 (i)     0.19 (i)     0.00 (h)     23    
2010^     39.77       27.43       67,303       0.83 (i)     (0.06 )(i)     0.00 (h)     29    
2011     37.00       (6.97 )     49,678       0.81 (i)     (0.22 )(i)     0.00 (h)     24    
2012^^     39.70       9.72 (l)     48,340       0.82 (i)(m)     0.51 (i)(m)     0.00 (h)(m)     29 (l)  

 


115


Morgan Stanley Variable Investment Series

Financial Highlights continued

                               
FOR THE YEAR
ENDED
DECEMBER 31		   NET ASSET
VALUE
BEGINNING
OF PERIOD		   NET
INVESTMENT
INCOME
(LOSS)(a)		   NET REALIZED
AND
UNREALIZED
GAIN (LOSS)		   TOTAL FROM
INVESTMENT
OPERATIONS		   DIVIDENDS
TO
SHAREHOLDERS		   DISTRIBUTIONS
TO
SHAREHOLDERS		   TOTAL
DIVIDENDS
AND
DISTRIBUTIONS		  
AGGRESSIVE EQUITY
CLASS X SHARES		      
2007^   $ 14.85     $ 0.06     $ 2.86     $ 2.92       —       —       —    
2008^     17.77       (0.04 )     (8.63 )     (8.67 )   $ (0.03 )     —     $ (0.03 )  
2009^     9.07       0.00       6.30       6.30       —       —       —    
2010^     15.37       (0.05 )     4.05       4.00       —       —       —    
2011     19.37       (0.09 )     (1.33 )     (1.42 )     —       —       —    
2012^^     17.95       0.03       1.73       1.76       —     $ (1.51 )     (1.51 )  
CLASS Y SHARES      
2007^     14.65       0.02       2.82       2.84       —       —       —    
2008^     17.49       (0.08 )     (8.49 )     (8.57 )     —       —       —    
2009^     8.92       (0.03 )     6.19       6.16       —       —       —    
2010^     15.08       (0.09 )     3.97       3.88       —       —       —    
2011     18.96       (0.14 )     (1.30 )     (1.44 )     —       —       —    
2012^^     17.52       0.00 (e)     1.70       1.70       —       (1.51 )     (1.51 )  
STRATEGIST
CLASS X SHARES		      
2007^     16.53       0.46       0.92       1.38       (0.46 )     (1.90 )     (2.36 )  
2008^     15.55       0.30       (3.76 )     (3.46 )     (0.10 )     (1.39 )     (1.49 )  
2009^     10.60       0.16       1.90       2.06       (0.26 )     —       (0.26 )  
2010^     12.40       0.24       0.59       0.83       (0.20 )     (0.07 )     (0.27 )  
2011     12.96       0.18       (1.06 )     (0.88 )     (0.27 )     (1.41 )     (1.68 )  
2012^^     10.40       0.10       0.36       0.46       (0.22 )     (0.16 )     (0.38 )  
CLASS Y SHARES      
2007^     16.51       0.42       0.92       1.34       (0.42 )     (1.90 )     (2.32 )  
2008^     15.53       0.27       (3.76 )     (3.49 )     (0.09 )     (1.39 )     (1.48 )  
2009^     10.56       0.13       1.89       2.02       (0.23 )     —       (0.23 )  
2010^     12.35       0.21       0.58       0.79       (0.17 )     (0.07 )     (0.24 )  
2011     12.90       0.15       (1.05 )     (0.90 )     (0.23 )     (1.41 )     (1.64 )  
2012^^     10.36       0.09       0.35       0.44       (0.18 )     (0.16 )     (0.34 )  

 

See Notes to Financial Statements
116


                RATIO TO AVERAGE
NET ASSETS(c)		          
FOR THE YEAR
ENDED
DECEMBER 31		   NET ASSET
VALUE
END OF
PERIOD		   TOTAL
RETURN(b)		   NET ASSETS
END OF
PERIOD
(000'S)		   EXPENSES   NET
INVESTMENT
INCOME (LOSS)		   REBATE FROM
MORGAN STANLEY
AFFILIATE		   PORTFOLIO
TURNOVER
RATE		  
AGGRESSIVE EQUITY
CLASS X SHARES		  
2007^   $ 17.77       19.66 %   $ 26,035       0.87 %     0.34 %     —       56 %  
2008^     9.07       (48.86 )     10,289       0.90 (i)     (0.29 )(i)     0.00 %(h)     33    
2009^     15.37       69.46       14,898       1.01 (i)     (0.02 )(i)     0.01       23    
2010^     19.37       26.02       15,413       1.09 (i)     (0.32 )(i)     0.00 (h)     27    
2011     17.95       (7.33 )     12,078       1.06 (i)     (0.47 )(i)     0.00 (h)     28    
2012^^     18.20       9.80 (l)     12,254       1.08 (i)(m)     0.26 (i)(m)     0.01 (m)     30 (l)  
CLASS Y SHARES  
2007^     17.49       19.39       29,837       1.12       0.09       —       56    
2008^     8.92       (49.00 )     12,272       1.15 (i)     (0.54 )(i)     0.00 (h)     33    
2009^     15.08       69.06       17,541       1.26 (i)     (0.27 )(i)     0.01       23    
2010^     18.96       25.73       18,777       1.34 (i)     (0.57 )(i)     0.00 (h)     27    
2011     17.52       (7.59 )     15,821       1.31 (i)     (0.72 )(i)     0.00 (h)     28    
2012^^     17.71       9.70 (l)     16,012       1.33 (i)(m)     0.01 (i)(m)     0.01 (m)     30 (l)  
STRATEGIST
CLASS X SHARES		  
2007^     15.55       8.63       217,265       0.54       2.84       —       34    
2008^     10.60       (23.98 )     134,668       0.54 (i)     2.28 (i)     0.02       52    
2009^     12.40       19.74       137,731       0.55 (i)     1.41 (i)     0.03       96    
2010^     12.96       6.81       128,254       0.59 (i)     1.89 (i)     0.02       119    
2011     10.40       (7.96 )     97,169       0.59 (i)     1.52 (i)     0.02       121    
2012^^     10.48       4.41 (l)     92,405       0.60 (i)(m)     1.95 (i)(m)     0.03 (m)     33 (l)  
CLASS Y SHARES  
2007^     15.53       8.37       88,651       0.79       2.59       —       34    
2008^     10.56       (24.20 )     53,046       0.79 (i)     2.03 (i)     0.02       52    
2009^     12.35       19.44       59,737       0.80 (i)     1.16 (i)     0.03       96    
2010^     12.90       6.50       56,361       0.84 (i)     1.64 (i)     0.02       119    
2011     10.36       (8.13 )     39,844       0.84 (i)     1.27 (i)     0.02       121    
2012^^     10.46       4.28 (l)     36,898       0.85 (i)(m)     1.70 (i)(m)     0.03 (m)     33 (l)  

 


117


Morgan Stanley Variable Investment Series

Financial Highlights continued

^^  For the six months ended June 30, 2012 (unaudited).

^  Beginning with the year ended December 31, 2011, the Fund was audited by Ernst & Young LLP. The previous years were audited by another independent registered public accounting firm.

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

(b)  Calculated based on the net asset value as of the last business day of the period. Performance shown does not reflect fees and expenses imposed by your insurance company. If performance information included the effect of these additional charges, the total returns would be lower.

(c)  Reflects overall Portfolio ratios for investment income and non-class specific expenses.

(d)  The Adviser fully reimbursed the Portfolio for losses incurred resulting from the disposal of an investment. Without this reimbursement, the total return was 4.79% and 4.52% for Class X and Y, respectively.

(e)  Amount is less than $0.001.

(f)  Reflects fees paid in connection with the U.S. Treasury Guarantee Program for Money Market Funds. This fee had an effect of 0.04% for the year ended 2009.

(g)  If the Portfolio had borne all of its expenses that were reimbursed or waived by the Distributor, Adviser, and Administrator, the annualized expense and net investment loss ratios, would have been as follows:

PERIOD ENDED   EXPENSE
RATIO		   NET INVESTMENT LOSS
RATIO		  
June 30, 2012              
Class X     0.63 %     (0.36 )%  
Class Y     0.88       (0.61 )  
December 31, 2011              
Class X     0.60       (0.37 )  
Class Y     0.85       (0.62 )  
December 31, 2010              
Class X     0.62       (0.33 )  
Class Y     0.87       (0.58 )  
December 31, 2009              
Class X     0.59       (0.16 )  
Class Y     0.84       (0.42 )  

 

(h)  Amount is less than 0.005%.

(i)  The ratios reflect the rebate of certain Portfolio expenses in connection with investments in a Morgan Stanley affiliate during the period. The effect of the rebate on the ratios is disclosed in the above table as "Rebate from Morgan Stanley affiliate."

See Notes to Financial Statements
118


(j)  If the Portfolio had borne all of its expenses that were reimbursed or waived by the Adviser and Administrator, the annualized expense and net investment income ratios, would have been as follows:

PERIOD ENDED   EXPENSE
RATIO		   NET INVESTMENT INCOME
RATIO		  
June 30, 2012              
Class X     1.20 %     5.90 %  
Class Y     1.45       5.65    
December 31, 2011              
Class X     1.17       2.39    
Class Y     1.42       2.14    
December 31, 2010              
Class X     1.16       1.65    
Class Y     1.41       1.40    
December 31, 2009              
Class X     1.12       2.55    
Class Y     1.37       2.30    
December 31, 2008              
Class X     1.08       2.93    
Class Y     1.33       2.68    
December 31, 2007              
Class X     1.04       1.69    
Class Y     1.29       1.44    

 

(k)  During the year ended December 31, 2010, the Portfolio received a regulatory settlement from an unaffiliated third party which had an impact of approximately 0.14% and 0.14% for Class X and Y, respectively, on the total return. This was a one-time settlement, and as a result, the impact on the NAV and consequently the performance will not likely be repeated in the future. Had this settlement not occurred, the total return for Class X and Y shares would have been approximately 7.09% and 6.82%, respectively.

(l)  Not annualized.

(m)  Annualized.


119


(This page has been intentionally left blank.)



Trustees  
Frank L. Bowman   Joseph J. Kearns  
Michael Bozic   Michael F. Klein  
Kathleen A. Dennis   Michael E. Nugent  
James F. Higgins   W. Allen Reed  
Dr. Manuel H. Johnson   Fergus Reid  
Officers  
Michael E. Nugent
Chairperson of the Board		  
Arthur Lev
President and Principal Executive Officer		  
Mary Ann Picciotto
Chief Compliance Officer		  
Stefanie V. Chang Yu
Vice President		  
Francis J. Smith
Treasurer and Principal Financial Officer		  
Mary E. Mullin
Secretary		  
Transfer Agent   Custodian  
Morgan Stanley Services Company Inc.
P.O. Box 219886
Kansas City, Missouri 64121		   State Street Bank and Trust Company
One Lincoln Street
Boston, Massachusetts 02111		  
Independent Registered Public Accounting Firm   Legal Counsel  
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116		   Dechert LLP
1095 Avenue of the Americas
New York, New York 10036		  
Counsel to the Independent Trustees   Adviser  
Kramer Levin Naftalis & Frankel LLP
1177 Avenue of the Americas
New York, New York 10036		   Morgan Stanley Investment Management Inc.
522 Fifth Avenue
New York, New York 10036		  
Sub-Advisers  
Morgan Stanley Investment Management Limited
25 Cabot Square, Canary Wharf
London, E14 4QA, England		  
Morgan Stanley Investment Management Company
23 Church Street
16-01 Capital Square 049481 Singapore		  

 

This report is submitted for the general information of 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.

Morgan Stanley Distribution, Inc., member FINRA.


#40113A

VARINSAN
IU12-01691P-Y06/12



 

Item 2.  Code of Ethics.

 

Not applicable for semiannual reports.

 

Item 3.  Audit Committee Financial Expert.

 

Not applicable for semiannual reports.

 

Item 4. Principal Accountant Fees and Services

 

Not applicable for semiannual reports.

 

Item 5. Audit Committee of Listed Registrants.

 

Not applicable for semiannual reports.

 

Item 6.

 

(a) Refer to Item 1.

 

(b) Not applicable.

 

Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.

 

Not applicable for semiannual reports.

 

Item 8. Portfolio Managers of Closed-End Management Investment Companies

 

Applicable only to annual reports filed by closed-end funds.

 

Item 9. Closed-End Fund Repurchases

 

Applicable 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) Code of Ethics — Not applicable for semiannual reports.

 

(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.

 


 

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 Variable Investment Series

 

/s/ Arthur Lev

 

Arthur Lev

 

Principal Executive Officer

 

August 15, 2012

 

 

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/ Arthur Lev

 

Arthur Lev

 

Principal Executive Officer

 

August 15, 2012

 

 

 

/s/ Francis Smith

 

Francis Smith

 

Principal Financial Officer

 

August 15, 2012