N-CSR 1 file1.htm FORM N-CSR



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: 811-08916


Morgan Stanley Technology Fund

(Exact name of registrant as specified in charter)


522 Fifth Avenue, New York, New York

10036

(Address of principal executive offices)

(Zip code)


Ronald E. Robison

522 Fifth Avenue, New York, New York 10036

(Name and address of agent for service)


Registrant's telephone number, including area code: 212-296-6990


Date of fiscal year end: March 31, 2008


Date of reporting period: March 31, 2008




Item 1 - Report to Shareholders

Welcome, Shareholder:

In this report, you’ll learn about how your investment in Morgan Stanley Technology Fund performed during the annual period. We will provide an overview of the market conditions, and discuss some of the factors that affected performance during the reporting period. In addition, this report includes the Fund’s financial statements and a list of Fund investments.

This material must be preceded or accompanied by a prospectus for the fund being offered.
Market forecasts provided in this report may not necessarily come to pass. There is no assurance that the Fund will achieve its investment objective. The Fund is subject to market risk, which is the possibility that market values of securities owned by the Fund will decline and, therefore, the value of the Fund’s shares may be less than what you paid for them. Accordingly, you can lose money investing in this Fund. Please see the prospectus for more complete information on investment risks.




Fund Report
For the year ended March 31, 2008

Total Return for the 12 Months Ended March 31, 2008


Class A Class B Class C Class I+ NYSE
Arca
Tech
100
Index®1
S&P
500®2
Lipper
Science &
Technology
Funds Index3
  −0.96   −1.66   −1.67   −0.66   −4.80   −5.08   −2.93
+ Formerly Class D shares. Renamed Class I shares effective March 31, 2008.
The performance of the Fund’s four share classes varies because each has different expenses. The Fund’s total returns assume the reinvestment of all distributions but do not reflect the deduction of any applicable sales charges. Such costs would lower performance. See Performance Summary for standardized performance and benchmark information.

Market Conditions

The U.S. economy experienced a number of headwinds in the 12-month period ended March 31, 2008, contributing to a volatile stock market. Rising home foreclosures fed into the deterioration of the domestic housing sector. In turn, the collapse of the subprime mortgage market led to mortgage lender bankruptcies and the subsequent demise of several hedge funds invested in subprime-related securities. Major Wall Street financial institutions declared asset losses totaling billions of dollars, due to their exposure to mortgage securities. Credit tightened across the board, eliminating a source of available capital that had been fueling a boom in mergers and acquisitions (M&A), robust stock gains and vigorous consumer spending for the past several years. Food and fuel prices continued to rise to unprecedented levels, while wages remained stagnant and unemployment figures began to creep upward. For the fourth quarter 2007, gross domestic product (GDP) growth dropped to 0.6 percent, a marked deceleration from previous quarters.

In response, the Federal Open Market Committee (the ‘‘Fed’’) strove to bolster liquidity in the markets and help stimulate economic growth through a series of rate cuts, which lowered the target federal funds rate to 2.25 percent and the discount window rate (at which the Fed makes loans to eligible institutions) to 2.5 percent as of the end of the period. The Fed also offered an instant source of liquidity through short-term loans via the Term Auction Facility, a newly-created structure where banks could borrow funds at rates below the discount rate. Additionally, in January the federal government adopted an economic stimulus plan designed to bolster consumer spending.

Although the markets briefly rallied following each of these announced actions, investors were still very concerned about the state of the economy, and their fears intensified following the emergency sale of Bear Stearns, once the fifth-largest investment bank in the U.S., to JP Morgan Chase for a fraction of its recent share price. This event had a significant impact on the equity markets, and the broad market (as measured by the S&P 500®) ended the period in negative territory.

The evident slowdown in consumer spending hit the technology sector especially hard during the period. Sales declined in home computers and personal technology items, which had driven gains over the past several years. Even though gaming equipment and

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entertainment software (i.e., video games) retained significant market share, it was expected to decrease as the economy worsens. Furthermore, investors’ disinclination for ‘‘non-defensive’’ securities greatly impacted the traditional blue-chip technology leaders and several industry stalwarts. Companies such as Google, Intel and VMware recently reported disappointing earnings expectations, sending their stock prices tumbling. Moreover, executives at Cisco Systems recently spoke about the weakening in U.S. enterprise demand, which further fueled worries about industry and the overall economy. The stagnating overall economy, diminished consumer spending and the upcoming national election (which is expected to give investors pause as they wait to see the formation of the new administration) will likely hamper gains in the technology sector over the next several quarters.

Performance Analysis

All share classes of Morgan Stanley Technology Fund outperformed the NYSE Arca Tech 100 Index®, the S&P 500®, and the Lipper Science & Technology Funds Index for the 12 months ended March 31, 2008, assuming no deduction of applicable sales charges.

Security selection drove outperformance for the period. Although performance at the sector level is discussed in this analysis, the sector allocations were strictly the result of the portfolio manager’s bottom-up stock picking. Among the areas of strength for the Fund was the communications equipment sector. This particular sector benefited over the year from increased demand from consumers and enterprises for high-speed interactive web access and greater broadband capabilities for actions such as faster video downloads and videoconferencing. As such, the Fund’s exposure to several major networking and communications device companies that provide the infrastructure necessary for the next stages of development in advanced internet services greatly added to relative returns during the period. Additionally, the Fund’s investment in a mobile communications provider which has expanded its presence from the institutional marketplace into the direct consumer market boosted performance. In the data processing and outsourcing services segment, the avoidance of certain names held by the NYSE Arca Tech 100 Index, along with a substantial underweight allocation, was highly advantageous to performance. Stock selection in the computer hardware segment also helped relative returns as sales of personal computers gained traction in emerging markets and domestic sales of portable communications and music devices remained strong during the period.

However, other positions did not fare so well. Within the biotechnology segment, the Fund’s lack of exposure to a strongly performing stock represented in the NYSE Arca Tech 100 Index detracted from relative performance. Another biotechnology holding in the Fund declined shortly after we initiated a position. Investors became concerned when the company announced it was not for sale. The applications software group was another source of weakness, with poor performance across a number of holdings. In the system software segment, the Fund’s investments in a virtualization solutions provider and an elite application software firm greatly diminished relative returns and overshadowed the benefit offered by a slight sector overweight.

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In recent months we have attempted to reduce volatility by further diversifying the Fund with investments in health care and life sciences tools subsectors and also in large capitalization stocks. Furthermore, we have actively increased our cash position. We continue to seek out companies with solid fundamental business structures and strong long-term growth prospects.

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


TOP 10 HOLDINGS  
Apple Inc.   5.2
Yahoo! Inc.   5.1  
QUALCOMM, Inc.   4.3  
International Business Machines Corp.   4.2  
Research In Motion Ltd. (Canada)   3.6  
Cisco Systems, Inc.   3.4  
Lockheed Martin Corp.   3.4  
Google Inc. (Class A)   3.2  
Hewlett-Packard Co.   2.8  
Visa Inc.– Class A Shares   2.8  

TOP FIVE INDUSTRIES  
Telecommunications Equipment   12.1
Packaged Software   10.6  
Internet Software/Services   10.2  
Biotechnology   8.9  
Semiconductors   8.4  
Data as of March 31, 2008. Subject to change daily. All percentages for top 10 holdings and top five industries are as a percentage of net assets. These data are provided for informational purposes only and should not be deemed a recommendation to buy or sell the securities mentioned. Morgan Stanley is a full-service securities firm engaged in securities trading and brokerage activities, investment banking, research and analysis, financing and financial advisory services.

Investment Strategy

The Fund will normally invest at least 80 percent of its assets in common stocks and other equity securities of companies located throughout the world considered by the Fund’s ‘‘Investment Adviser,’’ Morgan Stanley Investment Advisors Inc., to rely extensively on technology, science and communications in their product development or operations at the time of investment. This policy may be changed without shareholder approval; however, you would be notified in writing of any changes. The companies in which the Fund may invest may be from any industry, as long as they produce or deploy innovative technology. The Investment Adviser focuses on those companies that it believes have the best potential for earnings growth. The Fund normally holds common stocks and other equity securities of companies located in at least three countries, one of which is the United States. The Fund may invest up to 50 percent of its net assets in the securities (including depositary receipts) of foreign companies; however, it will not invest more than 25 percent of its net assets in any one foreign country. Up to 15 percent of the Fund’s net assets may be invested in emerging market securities (held either directly or in the form of depositary receipts), but of which no more than 10 percent may be invested in local shares (shares traded in the issuer’s local or regional market). In addition, the Fund will not invest more than 10 percent of its net assets in convertible securities. In deciding which securities to buy, hold or sell, the Investment Adviser considers business, economic and political conditions. The Investment Adviser generally considers selling a portfolio holding when it determines that the holding no longer satisfies its investment criteria.

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For More Information About Portfolio Holdings

Each Morgan Stanley fund provides a complete schedule of portfolio holdings in its semiannual and annual reports within 60 days of the end of the fund’s second and fourth fiscal quarters. The semiannual reports and the annual reports are filed electronically with the Securities and Exchange Commission (SEC) on Form N-CSRS and Form N-CSR, respectively. Morgan Stanley also delivers the semiannual and annual reports to fund shareholders and makes these reports available on its public web site, www.morganstanley.com. Each Morgan Stanley fund also files a complete schedule of portfolio holdings with the SEC for the fund’s first and third fiscal quarters on Form N-Q. Morgan Stanley does not deliver the reports for the first and third fiscal quarters to shareholders, nor are the reports posted to the Morgan Stanley public web site. You may, however, obtain the Form N-Q filings (as well as the Form N-CSR and N-CSRS filings) by accessing the SEC’s web site, http://www.sec.gov. You may also review and copy them at the SEC’s public reference room in Washington, DC. Information on the operation of the SEC’s public reference room may be obtained by calling the SEC at (800) SEC-0330. You can also request copies of these materials, upon payment of a duplicating fee, by electronic request at the SEC’s e-mail address (publicinfo@sec.gov) or by writing the public reference section of the SEC, Washington, DC 20549-0102.

Proxy Voting Policy and Procedures and Proxy Voting Record

You may obtain a copy of the Fund’s Proxy Voting Policy and Procedures without charge, upon request, by calling toll free (800) 869-NEWS or by visiting the Mutual Fund Center on our Web site at www.morganstanley.com. It is also available on the Securities and Exchange Commission’s Web site at http://www.sec.gov.

You may obtain information regarding how the Fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 without charge by visiting the Mutual Fund Center on our Web site at www.morganstanley.com. This information is also available on the Securities and Exchange Commission’s Web site at http://www.sec.gov.

Householding Notice

To reduce printing and mailing costs, the Fund attempts to eliminate duplicate mailings to the same address. The Fund delivers a single copy of certain shareholder documents, including shareholder reports, prospectuses and proxy materials, to investors with the same last name who reside at the same address. Your participation in this program will continue for an unlimited period of time unless you instruct us otherwise. You can request multiple copies of these documents by calling (800) 869-NEWS, 8:00 a.m. to 8:00 p.m., ET. Once our Customer Service Center has received your instructions, we will begin sending individual copies for each account within 30 days.

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Performance Summary

Performance of $10,000 Investment — Class B**
Over 10 Years

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Average Annual Total Returns — Period Ended March 31, 2008


  Class A Shares*
(since 07/28/97)
Class B Shares**
(since 11/28/95)
Class C Shares
(since 07/28/97)
Class I Shares††
(since 07/28/97)
Symbol  IFOAX  IFOBX  IFOCX  IFODX
1 Year   (0.96)% 4    (1.66)% 4    (1.67)% 4    (0.66)% 4 
    (6.16) 5    (6.58) 5    (2.65) 5    —         
5 Years   9.09 4    8.24 4    8.22 4    9.35 4 
    7.92 5    7.95 5    8.22 5    —         
10 Years   1.37 4    0.75 4    0.61 4    1.60 4 
    0.82 5    0.75 5    0.61 5    —         
Since Inception   3.24 4    3.43 4    2.46 4    3.47 4 
    2.72 5    3.43 5    2.46 5    —         

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 the most recent month-end performance figures, please visit www.morganstanley.com/msim or speak with your Financial Advisor. Investment returns and principal value will fluctuate and fund shares, when redeemed, may be worth more or less than their original cost. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Performance for Class A, Class B, Class C, and Class I shares will vary due to differences in sales charges and expenses.

* The maximum front-end sales charge for Class A is 5.25%.
** The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%. The CDSC declines to 0% after six years. Effective April 2005, Class B shares will generally convert to Class A shares approximately eight years after the end of the calendar month in which the shares were purchased. Performance for periods greater than eight years reflects this conversion (beginning April 2005).
The maximum contingent deferred sales charge for Class C is 1.0% for shares redeemed within one year of purchase.
†† Class I has no sales charge.
(1) The NYSE Arca Tech 100 Index® is a price-weighted index comprised of common stocks and ADRs of technology-related companies listed on US exchanges. 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 Standard & Poor’s 500® Index (S&P 500®) is a broad-based index, the performance of which is based on the performance of 500 widely-held common stocks chosen for market size, liquidity and industry group representation. 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.
(3) The Lipper Science & Technology Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Science & Technology Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 30 funds represented in this Index. The Fund is in the Lipper Science & Technology Funds classification as of the date of this report.
(4) Figure shown assumes reinvestment of all distributions and does not reflect the deduction of any sales charges.
(5) Figure shown assumes reinvestment of all distributions and the deduction of the maximum applicable sales charge. See the Fund’s current prospectus for complete details on fees and sales charges.
Ending value assuming a complete redemption on March 31, 2008.

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Expense Example

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

The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period 10/01/07 – 03/31/08.

Actual Expenses

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

Hypothetical Example for Comparison Purposes

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

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


  Beginning
Account Value
Ending
Account Value
Expenses Paid
During Period@
  10/01/07 03/31/08 10/01/07 –
03/31/08
Class A            
Actual (−16.30% return) $ 1,000.00   $ 837.00   $ 7.90  
Hypothetical (5% annual return before expenses) $ 1,000.00   $ 1,016.40   $ 8.67  
Class B            
Actual (−16.59% return) $ 1,000.00   $ 834.10   $ 11.37  
Hypothetical (5% annual return before expenses) $ 1,000.00   $ 1,012.60   $ 12.48  
Class C            
Actual (−16.61% return) $ 1,000.00   $ 833.90   $ 11.37  
Hypothetical (5% annual return before expenses) $ 1,000.00   $ 1,012.60   $ 12.48  
Class I@@            
Actual (−16.14% return) $ 1,000.00   $ 838.60   $ 6.80  
Hypothetical (5% annual return before expenses) $ 1,000.00   $ 1,017.60   $ 7.47  
@ Expenses are equal to the Fund’s annualized expense ratios of 1.72%, 2.48%, 2.48%, 1.48% for Class A, Class B, Class C and Class I shares, respectively, multiplied by the average account value over the period, multiplied by 183/366 (to reflect the one-half year period).
@@ Formerly Class D shares. Renamed Class I shares effective March 31, 2008.

    

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Morgan Stanley Technology Fund

Portfolio of Investments March 31, 2008


    
NUMBER OF
SHARES
  VALUE
    Common Stocks (99.5%)    
    Aerospace & Defense (7.5%)
  65,000   Goodrich Corp. $     3,738,150  
  65,000   Lockheed Martin Corp.   6,454,500  
  65,000   Raytheon Co. (a)   4,199,650  
        14,392,300  
    Biotechnology (8.9%)
  65,000   Biogen Idec Inc.*   4,009,850  
  65,000   Genentech, Inc.*   5,276,700  
  60,000   Genzyme Corp.*   4,472,400  
  65,000   Gilead Sciences, Inc.*   3,349,450  
        17,108,400  
    Chemicals: Agricultural (1.7%)
  30,000   Monsanto Co.   3,345,000  
    Computer Communications (5.4%)
  275,000   Cisco Systems, Inc.*   6,624,750  
  155,000   Juniper Networks, Inc.*   3,875,000  
        10,499,750  
    Computer Peripherals (1.7%)
  1,000   Data Domain, Inc. (a)   23,800  
  125,000   EMC Corp.*   1,792,500  
  70,000   Netapp, Inc   1,403,500  
  192,300   Seagate Technology Inc. (c)*   0  
        3,219,800  
    Computer Processing
    Hardware (8.0%)
  70,000   Apple Inc.*   10,045,000  
  120,000   Hewlett-Packard Co.   5,479,200  
        15,524,200  
    Electronic Components (1.1%)
  30,000   MEMC Electronic Materials, Inc.*   2,127,000  
    Electronic Production
    Equipment (4.8%)
  100,000   Applied Materials, Inc.   1,951,000  
  80,000   KLA-Tencor Corp.   2,968,000  
  70,000   Lam Research Corp.*   2,675,400  
  75,000   Synopsys, Inc.*   1,703,250  
        9,297,650  
    Finance/Rental/Leasing (2.8%)
  85,600   Visa Inc. (Class A) $     5,338,016  
    Information Technology Services (6.3%)  
  70,000   Amdocs Ltd. (Guernsey) (a)*   1,985,200  
  70,000   Citrix Systems, Inc.*   2,053,100  
  70,000   International Business Machines Corp.   8,059,800  
        12,098,100  
    Internet Retail (1.5%)
  40,000   Amazon.com, Inc.*   2,852,000  
    Internet Software/Services (10.2%)
  60,000   Check Point Software Technologies Ltd. (Israel)*   1,344,000  
  13,800   Google Inc. (Class A)*   6,078,486  
  70,000   VeriSign, Inc.*   2,326,800  
  340,000   Yahoo! Inc.*   9,836,200  
        19,585,486  
    Medical Specialties (2.1%)
  70,000   Thermo Fisher Scientific, Inc.*   3,978,800  
    Miscellaneous Commercial Services (2.2%)  
  65,000   IHS Inc. (Class A) (a)*   4,180,150  
    Packaged Software (10.6%)
  70,000   Adobe Systems, Inc.*   2,491,300  
  155,000   BMC Software, Inc.*   5,040,600  
  140,000   McAfee Inc. (a)*   4,632,600  
  75,000   Microsoft Corp.   2,128,500  
  150,000   Oracle Corp.*   2,934,000  
  30,000   Salesforce.com Inc.*   1,736,100  
  85,000   Symantec Corp.*   1,412,700  
        20,375,800  
    Pharmaceuticals: Major (1.9%)
  65,000   Abbott Laboratories   3,584,750  
    Recreational Products (1.0%)
  75,000   Activision, Inc.*   2,048,250  

See Notes to Financial Statements

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Morgan Stanley Technology Fund

Portfolio of Investments March 31, 2008 continued


    
NUMBER OF
SHARES
  VALUE
    Semiconductors (8.4%)
  65,000   Analog Devices, Inc. $     1,918,800  
  80,000   Broadcom Corp. (Class A)*   1,541,600  
  75,000   Cypress Semiconductor Corp. (a)*   1,770,750  
  140,000   Intel Corp.   2,965,200  
  175,000   Marvell Technology Group, Ltd. (Bermuda)*   1,904,000  
  65,000   Microchip Technology Inc. (a)   2,127,450  
  100,000   National Semiconductor Corp.   1,832,000  
  75,000   Texas Instruments Inc.   2,120,250  
        16,180,050  
    Telecommunication
    Equipment (12.1%)
  70,000   Ciena Corp. (a)*   2,158,100  
  115,000   Corning Inc.   2,764,600  
  100,000   Nokia Corp. (ADR) (Finland)   3,183,000  
  200,000   Qualcomm, Inc.   8,200,000  
  62,500   Research In Motion Ltd. (Canada)*   7,014,375  
        23,320,075  
    Wireless
    Telecommunications (1.3%)
  40,000   America Movil SAB de C.V. (Series L) (ADR) (Mexico) (a)   2,547,600  
    Total Common Stocks
(Cost $188,713,241)
  191,603,177  

PRINCIPAL
AMOUNT IN
THOUSANDS
  VALUE
    Short-Term Investment (9.6%)
    Short-Term Debt Securities
    held as Collateral on Loaned
    Securities (9.4%)
$ 446   Alliance & Leister Plc., 3.08%, 09/02/08 (b) $       446,323  
  223   Bancaja, 4.04%,
11/12/08 (b)
  223,162  
  223   Bank of New York Co., Inc., 3.07%, 08/08/08 (b)   223,162  
  223   BASF AG, 3.89%,
08/19/08 (b)
  223,151  
  893   Cam US Finance SA Unipersonal, 4.71%, 07/25/08 (b)   892,646  
  446   Canadian Imperial Bank NY, 2.42%, 07/28/08 (b)   446,323  
  803   CIT Group Holdings 3.97%, 05/19/08 (b)   803,382  
  3,101   Citigroup Global Markets Inc., 3.01%, 04/01/08   3,101,454  
    First Tennessee Bank
  223   2.84%, 08/15/08 (b)   223,162  
  893   2.85%, 08/15/08 (b)   892,630  
  223   Goldman Sachs Group, Inc., 2.89%, 09/12/08   223,162  
  223   HSBC Finance Corp., 3.10%, 08/05/08 (b)       223,162  
  893   IBM Corp., 3.09%,
09/08/08 (b)
  892,646  
  446   Macquarie Group Ltd., 2.62%, 08/20/08 (b)   446,323  
  669   Metropolitan Life Global Funding, 2.59%,
08/21/08 (b)
  669,485  
  5,026   Morgan Stanley Institutional Liquidity Fund, 3.38%, 04/01/08   5,025,597  
  893   National Rural Utilities Coop., Fin., 3.13% 09/02/08 (b)   892,646  
  518   Nationwide Building Society, 2.75%, 07/28/08 (b)   517,735  

See Notes to Financial Statements

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Morgan Stanley Technology Fund

Portfolio of Investments March 31, 2008 continued


PRINCIPAL
AMOUNT IN
THOUSANDS
  VALUE
$ 893   National Bank of Canada, 3.11%, 04/02/08 (b) $       892,628  
    Unicredito Italiano Bank (IRE) PLC
  491       2.84%, 08/14/08 (b)   490,955  
  312       3.09%, 08/08/08 (b)         312,426  
    Total Short-Term Debt Securities held as Collateral on Loaned Securities
(Cost $18,062,159)  
  18,062,159  

NUMBER OF
SHARES (000)
   
    Investment Company (d) (0.2%) 
  505   Morgan Stanley Institutional Liquidity Money Market Portfolio – Institutional Class (Cost $504,567)   504,567  
    Total Short-Term Investments
(Cost $18,566,726)  
    18,566,726  

Total Investments
(Cost $207,279,967) (e)
  109.1     210,169,903  
Liabilities in Excess of Other Assets   (9.1   (17,503,829
Net Assets   100.0   $ 192,666,074  

    

ADR American Depositary Receipt
* Non-income producing security.
(a) All or a portion of this security was on loan at March 31, 2008.
(b) 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 March 31, 2008.
(c) A security with total market value equal to $0 has been valued at its fair value as determined in good faith under procedures established by and under the general supervision of the Fund’s Trustees.
(d) See note 4 to the financial statements regarding investments in Morgan Stanley Institutional Liquidity Money Market Portfolio – Institutional Class.
(e) The aggregate cost for federal income tax purposes is $209,936,300. The aggregate gross unrealized appreciation is $14,841,373 and the aggregate gross unrealized depreciation is $14,607,770, resulting in net unrealized appreciation of $233,603.

Summary of Investments


INDUSTRY  VALUE  PERCENT OF
TOTAL
INVESTMENTS
 
Telecommunication Equipment $ 23,320,075     12.2
Packaged Software   20,375,800     10.6  
Internet Software/Services   19,585,486     10.2  
Biotechnology   17,108,400     8.9  
Semiconductors   16,180,050     8.4  
Computer Processing Hardware   15,524,200     8.1  
Aerospace & Defense   14,392,300     7.5  
Information Technology Services   12,098,100     6.3  
Computer Communications   10,499,750     5.5  
Electronic Production Equipment   9,297,650     4.9  
Finance/Rental/Leasing   5,338,016     2.8  
Miscellaneous Commercial Services   4,180,150     2.2  
Medical Specialties   3,978,800     2.1  
Pharmaceuticals: Major   3,584,750     1.9  
Chemicals: Agricultural   3,345,000     1.7  
Computer Peripherals   3,219,800     1.7  
Internet Retail   2,852,000     1.5  
Wireless Telecommunications   2,547,600     1.3  
Electronic Components   2,127,000     1.1  
Recreational Products   2,048,250     1.1  
  $ 191,603,177     100.0

See Notes to Financial Statements

11





Morgan Stanley Technology Fund

Financial Statements

Statement of Assets and Liabilities

March 31, 2008


Assets:
Investments in securities, at value
(cost $206,775,400) (including $14,081,212 of securities loaned)
$209,665,336
Investment in affiliate, at value (cost $504,567) 504,567
Cash (including $118 in foreign currency) 72,947
Receivable for:  
Investments sold 4,672,706
Shares of beneficial interest sold 42,801
Dividends 58,050
Dividends from affiliate 6,134
Prepaid expenses and other assets 25,141
Total Assets  215,047,682
Liabilities:  
Collateral on securities loaned at value 18,062,159
Payable for:  
Investments purchased 3,585,050
Shares of beneficial interest redeemed 299,018
Investment advisory fee 108,529
Distribution fee 104,497
Transfer agent fee 98,144
Administration fee 13,062
Accrued expenses and other payables 111,149
Total Liabilities  22,381,608
Net Assets  $192,666,074
Composition of Net Assets:  
Paid-in-capital $2,323,363,821
Net unrealized appreciation 2,889,936
Accumulated net investment loss (2,431)
Accumulated net realized loss (2,133,585,252)
Net Assets  $192,666,074
Class A Shares:  
Net Assets $94,361,048
Shares Outstanding (unlimited authorized, $.01 par value) 9,139,780
Net Asset Value Per Share  $10.32
    Maximum Offering Price Per Share,
(net asset value plus 5.54% of net asset value)
$10.89
Class B Shares:  
Net Assets $81,609,164
Shares Outstanding (unlimited authorized, $.01 par value) 8,635,317
Net Asset Value Per Share  $9.45
Class C Shares:  
Net Assets $15,835,395
Shares Outstanding (unlimited authorized, $.01 par value) 1,676,621
Net Asset Value Per Share  $9.44
Class I Shares@@:  
Net Assets $860,468
Shares Outstanding (unlimited authorized, $.01 par value) 81,176
Net Asset Value Per Share  $10.60
@@ Formerly Class D shares. Renamed Class I shares effective March 31, 2008.

See Notes to Financial Statements

12





Morgan Stanley Technology Fund

Financial Statements continued

Statement of Operations

For the year ended March 31, 2008


Net Investment Loss:
Income
Dividends (net of $7,617 foreign withholding tax) $ 1,048,965  
Income from securities loaned – net   148,774  
Dividends from affiliates   88,548  
Interest   943  
Total Income    1,287,230  
Expenses    
Investment advisory fee   1,602,551  
Transfer agent fees and expenses   1,361,855  
Distribution fee (Class A shares)   231,975  
Distribution fee (Class B shares)   1,241,751  
Distribution fee (Class C shares)   192,256  
Administration fee   191,349  
Shareholder reports and notices   181,320  
Professional fees   82,303  
Registration fees   41,264  
Custodian fees   32,348  
Trustees’ fees and expenses   4,154  
Other   32,218  
Total Expenses    5,195,344  
Less: rebate from Morgan Stanley affiliated cash sweep (Note 4)   (2,141
Less: expense offset   (9,204
Net Expenses    5,183,999  
Net Investment Loss    (3,896,769
Realized and Unrealized Gain (Loss):    
Realized Gain on:    
Investments   9,961,896  
Foreign exchange transactions   322  
Net Realized Gain    9,962,218  
Net Change in Unrealized Appreciation/Depreciation    (3,902,933
Net Gain    6,059,285  
Net Increase $ 2,162,516  

See Notes to Financial Statements

13





Morgan Stanley Technology Fund

Financial Statements continued

Statements of Changes in Net Assets


  FOR THE YEAR
ENDED
MARCH 31, 2008
FOR THE YEAR
ENDED
MARCH 31, 2007
Increase (Decrease) in Net Assets:        
Operations:        
Net investment loss $ (3,896,769 $ (5,421,324
Net realized gain (loss)   9,962,218     (16,917,363
Net change in unrealized appreciation/depreciation   (3,902,933   7,539,976  
Net Increase (Decrease)    2,162,516     (14,798,711
Net decrease from transactions in shares of beneficial interest   (62,024,564   (123,327,475
Net Decrease    (59,862,048   (138,126,186
Net Assets:        
Beginning of period   252,528,122     390,654,308  
End of Period        
(Including accumulated net investment losses of $2,431 and $1,495, respectively)   $ 192,666,074   $ 252,528,122  

See Notes to Financial Statements

14





Morgan Stanley Technology Fund

Notes to Financial Statements March 31, 2008

1.   Organization and Accounting Policies

Morgan Stanley Technology Fund (the ‘‘Fund’’) is registered under the Investment Company Act of 1940, as amended (the ‘‘Act’’), as a diversified, open-end management investment company. The Fund’s investment objective is long-term capital appreciation. The Fund was organized as a Massachusetts business trust on December 8, 1994 and commenced operations on November 28, 1995. On July 28, 1997, the Fund converted to a multiple class share structure.

The Fund offers Class A shares, Class B shares, Class C shares and Class I shares. The four classes are substantially the same except that most Class A shares are subject to a sales charge imposed at the time of purchase and some Class A shares, and most Class B shares and Class C shares are subject to a contingent deferred sales charge imposed on shares redeemed within eighteen months, six years and one year, respectively. Class I shares are not subject to a sales charge. Additionally, Class A shares, Class B shares and Class C shares incur distribution expenses. Effective March 31, 2008, Class D shares were renamed Class I shares.

The Fund will assess a 2% redemption fee, on Class A shares, Class B shares, Class C shares, and Class I shares, which is paid directly to the Fund, for shares redeemed or exchanged within thirty days of purchase, subject to certain exceptions. The redemption fee is designed to protect the Fund and its remaining shareholders from the effects of short-term trading.

The following is a summary of significant accounting policies:

A.   Valuation of Investments — (1) an equity portfolio security listed or traded on the New York Stock Exchange (‘‘NYSE’’) or American Stock Exchange or other exchange is valued at its latest sale price prior to the time when assets are valued; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (2) an equity portfolio security listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (3) all other portfolio securities for which over-the-counter market quotations are readily available are valued at the mean between the last reported bid and asked price. In cases where a security is traded on more than one exchange, the security is valued on the exchange designated as the primary market; (4) for equity securities traded on foreign exchanges, the last reported sale price or the latest bid price may be used if there were no sales on a particular day; (5) when market quotations are not readily available including circumstances under which Morgan Stanley Investment Advisors Inc. (the ‘‘Investment Adviser’’) determines that the latest sale price, the bid price or the mean between the last reported bid and asked price do not reflect a security’s market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Fund’s Trustees. Occasionally, developments affecting the closing prices of securities and other assets may occur between the times at which valuations of such securities are determined (that is, close of the

15





Morgan Stanley Technology Fund

Notes to Financial Statements March 31, 2008 continued

foreign market on which the securities trade) and the close of business on the NYSE. If developments occur during such periods that are expected to materially affect the value of such securities, such valuations may be adjusted to reflect the estimated fair value of such securities as of the close of the NYSE, as determined in good faith by the Fund’s Trustees or by the Investment Adviser using a pricing service and/or procedures approved by the Trustees of the Fund; (6) certain portfolio securities may be valued by an outside pricing service approved by the Fund’s Trustees; (7) investments in open-end 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 (8) short-term debt securities having a maturity date of more than sixty days at time of purchase are valued on a mark-to-market basis until sixty days prior to maturity and thereafter at amortized cost based on their value on the 61st day. Short-term debt securities having a maturity date of sixty days or less at the time of purchase are valued at amortized cost.

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

C.   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.

D.   Foreign Currency Translation and Forward Foreign Currency Contracts — The books and records of the Fund are maintained in U.S. dollars as follows: (1) the foreign currency market value of investment securities, other assets and liabilities and forward foreign currency contracts (‘‘forward contracts’’) are translated at the exchange rates prevailing at the end of the period; and (2) purchases, sales, income and expenses are translated at the exchange rates prevailing on the respective dates of such transactions. The resultant exchange gains and losses are recorded as realized and unrealized gain/loss on foreign exchange transactions. Pursuant to U.S. federal income tax regulations, certain foreign exchange gains/losses included in realized and unrealized gain/loss are included in or are a reduction of ordinary income for federal income tax purposes. The Fund does not isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the changes in the market prices of the securities. Forward contracts are valued daily at the appropriate exchange rates. The resultant unrealized exchange gains and losses are recorded as unrealized foreign currency gain or loss. The Fund records realized gains or losses on delivery of the currency or at the time the forward contract is extinguished (compensated) by entering into a closing transaction prior to delivery.

E.   Futures Contracts — A futures contract is an agreement between two parties to buy and sell financial instruments or contracts based on financial indices at a set price on a future date. Upon entering into such a

16





Morgan Stanley Technology Fund

Notes to Financial Statements March 31, 2008 continued

contract, the Fund is required to pledge to the broker cash, U.S. Government securities or other liquid portfolio securities equal to the minimum initial margin requirements of the applicable futures exchange. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments known as variation margin are recorded by the Fund as unrealized gains and losses. Upon closing of the contract, the Fund realizes a gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.

F.   Securities Lending — Fund may lend securities to qualified financial institutions, such as broker-dealers, to earn additional income. Any increase or decrease in the fair value of the securities loaned that might occur and any interest earned or dividends declared on those securities during the term of the loan would remain in the Fund. The Fund receives cash or securities as collateral in an amount equal to or exceeding 100% of the current fair value of the loaned securities. The collateral is marked-to-market daily, by the securities lending agent, to ensure that a minimum of 100% collateral coverage is maintained.

Based on pre-established guidelines, the securities lending agent invests any cash collateral that is received in high-quality short-term investments. Securities lending income is generated from the earnings on the invested collateral and borrowing fees, less any rebates owed to the borrowers and compensation to the lending agent.

The value of loaned securities and related collateral outstanding at March 31, 2008 were $14,081,212 and $18,062,159, respectively. The Fund has the right under the lending agreement to recover the securities from the borrower on demand.

G.   Federal Income Tax Policy — It is the Fund’s policy to comply with the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable and non taxable income to its shareholders. Therefore, no provisions for federal income taxes is required. The Fund files tax returns with the U.S. Internal Revenue Service, New York State and New York City. The Fund adopted the provisions of the Financial Accounting Standards Board (‘‘FASB’’) Interpretation No. 48 (‘‘FIN 48’’) Accounting for Uncertainty in Income Taxes, on September 28, 2007. FIN 48 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. The implementation of FIN 48 did not result in any unrecognized tax benefits in the accompanying financial statements. If applicable, the Fund recognizes the interest accrued related to unrecognized tax benefits in interest expense and penalties in other expenses in the Statement of Operations. Each of the tax years in the four year period ended March 31, 2008, remains subject to examination by taxing authorities.

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

17





Morgan Stanley Technology Fund

Notes to Financial Statements March 31, 2008 continued

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

2.   Investment Advisory/Administration Agreements

Pursuant to an Investment Advisory Agreement with the Investment Adviser, the Fund pays an advisory fee, accrued daily and payable monthly, by applying the following annual rates to the net assets of the Fund determined at the close of each business day: 0.67% 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 $3 billion and 0.62% to the portion of the daily net assets in excess of $3 billion.

Pursuant to an Administration Agreement with Morgan Stanley Services Company Inc. (the ‘‘Administrator’’), an affiliate of the Investment Adviser, the Fund pays an administration fee, accrued daily and payable monthly, by applying the annual rate of 0.08% to the Fund’s daily net assets.

Under an 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.

3.   Plan of Distribution

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

In the case of Class B shares, provided that the Plan continues in effect, any cumulative expenses incurred by the Distributor but not yet recovered may be recovered through the payment of future distribution fees from the Fund pursuant to the Plan and contingent deferred sales charges paid by investors upon redemption of Class B shares. Although there is no legal obligation for the Fund to pay expenses incurred in excess of payments made to the Distributor under the Plan and the proceeds of contingent deferred sales charges paid by investors upon redemption of shares, if for any reason the Plan is terminated, the Trustees will consider at that time the manner in which to treat such expenses. The Distributor has advised the Fund that such excess amounts totaled $105,791,051 at March 31, 2008.

In the case of Class A shares and Class C shares, expenses incurred pursuant to the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily net assets of Class A or Class C, respectively, will not be

18





Morgan Stanley Technology Fund

Notes to Financial Statements March 31, 2008 continued

reimbursed by the Fund through payments in any subsequent year, except that expenses representing a gross sales credit to Morgan Stanley Financial Advisors and other authorized financial representatives at the time of sale may be reimbursed in the subsequent calendar year. For the year ended March 31, 2008, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.25% and 1.0%, respectively.

The Distributor has informed the Fund that for the year ended March 31, 2008, it received contingent deferred sales charges from certain redemptions of the Fund’s Class A shares, Class B shares and Class C shares of $28, $112,050 and $747, respectively and received $17,536 in front-end sales charges from sales of the Fund’s Class A shares. The respective shareholders pay such charges which are not an expense of the Fund.

4.   Security Transactions and Transactions with Affiliates

The Fund invests in Morgan Stanley Institutional Liquidity Money Market Portfolio – Institutional Class, an open-end management investment company managed by the Investment Adviser. Investment advisory fees paid by the Fund are reduced by an amount equal to the advisory and administrative service fees paid by Morgan Stanley Institutional Liquidity Money Market Portfolio – Institutional Class with respect to assets invested by the Fund in Morgan Stanley Institutional Liquidity Money Market Portfolio – Institutional Class. For the year ended March 31, 2008, advisory fees paid were reduced by $2,141 relating to the Fund’s investment in Morgan Stanley Institutional Liquidity Money Market Portfolio – Institutional Class. Income distributions earned by the Fund are recorded as dividends from affiliate in the Statement of Operations and totaled $88,548 for the year ended March 31, 2008. During the year ended March 31, 2008, cost of purchases and sales of investments in Morgan Stanley Institutional Liquidity Money Market Portfolio – Institutional Class aggregated $68,417,257 and $67,912,690, respectively.

The cost of purchases and proceeds from sales of portfolio securities, excluding short-term investments, for the year ended March 31, 2008 aggregated $289,983,513 and $354,636,753, respectively. Included in the aforementioned transactions are purchases and sales of $7,083,580 and $3,684,456, respectively with other Morgan Stanley funds, including realized gains of $565,203.

For the year ended March 31, 2008, the Fund incurred brokerage commissions of $22,683 with Morgan Stanley & Co., Inc., an affiliate of the Investment Adviser, Administrator and Distributor, for portfolio transactions executed on behalf of the Fund.

Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and Distributor, is the Fund’s transfer agent.

The Fund has an unfunded Deferred Compensation Plan (the ‘‘Compensation Plan’’) which allows each independent Trustee to defer payment of all, or a portion, of the fees he or she receives for serving on the

19





Morgan Stanley Technology Fund

Notes to Financial Statements March 31, 2008 continued

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.

5.   Shares of Beneficial Interest

Transactions in shares of beneficial interest were as follows:


  FOR THE YEAR
ENDED
MARCH 31, 2008
FOR THE YEAR
ENDED
MARCH 31, 2007
  SHARES AMOUNT SHARES AMOUNT
CLASS A SHARES                  
Sold   795,995   $ 11,001,064     352,938   $ 3,571,269  
Conversion from Class B   2,434,604     25,942,311     1,517,139     15,428,283  
Redeemed   (2,374,688   (26,918,634   (3,966,620   (40,123,184
Net increase (decrease) – Class A   855,911     10,024,741     (2,096,543   (21,123,632
CLASS B SHARES                  
Sold   163,551     1,749,668     310,388     2,870,210  
Conversion to Class A   (2,236,583   (25,942,311   (1,639,919   (15,428,283
Redeemed   (4,342,753   (42,737,672   (8,053,074   (75,245,316
Net decrease – Class B   (6,415,785   (66,930,315   (9,382,605   (87,803,389
CLASS C SHARES                  
Sold   53,616     582,815     52,573     493,009  
Redeemed   (441,509   (4,588,133   (1,100,810   (10,295,693
Net decrease – Class C   (387,893   (4,005,318   (1,048,237   (9,802,684
CLASS I SHARES@@                  
Sold   31,046     357,985     90,193     897,784  
Redeemed   (119,447   (1,471,657   (519,907   (5,495,554
Net decrease – Class I   (88,401   (1,113,672   (429,714   (4,597,770
Net decrease in Fund   (6,036,168 $ (62,024,564   (12,957,099 $ (123,327,475
@@ Formerly Class D shares. Renamed Class I shares effective March 31, 2008.

6.   Federal Income Tax Status

The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations which may differ from generally accepted accounting principles. These ‘‘book/tax’’ differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital

20





Morgan Stanley Technology Fund

Notes to Financial Statements March 31, 2008 continued

accounts based on their federal tax-basis treatment; temporary differences do not require reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for tax purposes are reported as distributions of paid-in-capital.

As of March 31, 2008, the tax-basis components of accumulated losses were as follows:


Net accumulated earnings    
Capital loss carryforward* $ (2,130,928,580
Temporary differences   (2,770
Net unrealized appreciation   233,603  
Total accumulated losses $ (2,130,697,747

* During the year ended March 31, 2008, the Fund utilized $11,961,696 of its net capital loss carryforward. As of March 31, 2008, the Fund had a net capital loss carryforward of $2,130,928,580, to offset future capital gains to the extent provided by regulations, which will expire according to the following schedule.


AMOUNT EXPIRATION
$ 140,094,974   March 31, 2009
  1,275,591,838   March 31, 2010
  670,621,776   March 31, 2011
  25,113,400   March 31, 2012
  19,506,592   March 31, 2015

As of March 31, 2008, the Fund had temporary book/tax differences primarily attributable to capital loss deferrals on wash sales.

Permanent differences, due to foreign currency gains and a net operating loss, resulted in the following reclassifications among the Fund’s components of net asset at March 31, 2008:


ACCUMULATED
NET INVESTMENT
LOSS
ACCUMULATED
NET REALIZED
LOSS
PAID-IN-CAPITAL
$ 3,895,833   $ (322 $ (3,895,511

7.   Expense Offset

The expense offset represents a reduction of the fees and expenses for interest earned on cash balances maintained by the Fund with the transfer agent.

21





Morgan Stanley Technology Fund

Notes to Financial Statements March 31, 2008 continued

8.   Purposes of and Risks Relating to Certain Financial Instruments

The Fund may enter into forward contracts for many purposes, including to facilitate settlement of foreign currency denominated portfolio transactions or to manage foreign currency exposure associated with foreign currency denominated securities.

To hedge against adverse interest rate and market risks, the Fund may enter into interest rate futures contracts (‘‘futures contracts’’).

Forward contracts and futures contracts involve elements of market risk in excess of the amounts reflected in the Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the foreign exchange rates underlying the forward contracts or in the value of the underlying securities. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts.

The Fund 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.

9.   Legal Matters

Beginning October 25, 2002, purported class action complaints were filed in the United States District Court for the Southern District of New York against Morgan Stanley, the Fund (under its former name Morgan Stanley Information Fund), Morgan Stanley Investment Advisors Inc., and certain subsidiaries of Morgan Stanley alleging violations of certain federal securities laws in connection with the underwriting and management of the Fund. These actions were consolidated into one action in which plaintiffs allege, among other things, that the prospectus and registration statements for the Fund improperly failed to disclose that research analysts employed by Morgan Stanley DW Inc. were issuing overly optimistic stock recommendations to help Morgan Stanley obtain investment banking business, and that certain of these reports concerned companies in which the Fund was investing. A similar consolidated complaint was filed with respect to the Fund formerly called Morgan Stanley Technology Fund, which merged with the Fund on October 6, 2003. Both consolidated complaints were stayed on pending a decision by the United States Court of Appeals for the Second Circuit on the appeal from the dismissal of a very similar complaint filed by plaintiffs against another mutual funds complex. The case involving the other mutual funds complex recently settled. Plaintiffs filed a Second Amended Consolidated Complaint against the Fund, Morgan Stanley Investment Advisors Inc. and certain subsidiaries of Morgan Stanley, and also filed a Second Amended Consolidated Complaint against the Fund formerly called the Morgan Stanley Technology Fund, Morgan Stanley Investment Advisors Inc. and certain subsidiaries of Morgan Stanley. The defendants have moved to dismiss both Complaints. A decision on the motions to dismiss is pending.

22





Morgan Stanley Technology Fund

Notes to Financial Statements March 31, 2008 continued

The Fund and Morgan Stanley believe these lawsuits have no merit. However, the ultimate outcome of these matters is not presently determinable and no provision has been made in the Fund’s financial statements for the effect, if any, of such matters. The Investment Manager has agreed to indemnify the Fund against any losses and claims associated with complaint filed against the Fund formerly called the Morgan Stanley Technology Fund.

10.   Accounting Pronouncements

On March 19, 2008, Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (FAS 161). FAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. The application of FAS 161 is required for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. At this time, management is evaluating the implications of FAS 161 and its impact on the financial statements has not yet been determined.

In September 2006, Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157), was issued and is effective for fiscal years beginning after November 15, 2007. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Management is currently evaluating the impact the adoption of SFAS 157 will have on the Fund’s financial statement disclosures.

23





Morgan Stanley Technology Fund

Financial Highlights

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


  FOR THE YEAR ENDED MARCH 31,
  2008 2007 2006 2005 2004
                     
Class A Shares                    
Selected Per Share Data:                
Net asset value, beginning of period $ 10.42   $ 10.68   $   9.47   $ 10.14   $   6.68  
Income (loss) from investment operations:            
Net investment loss‡   (0.13   (0.13   (0.12   (0.05   (0.11
Net realized and unrealized gain (loss)   0.03     (0.13   1.33     (0.62   3.57  
Total income (loss) from investment operations   (0.10   (0.26   1.21     (0.67   3.46  
Net asset value, end of period $ 10.32   $ 10.42   $ 10.68   $   9.47   $ 10.14  
Total Return†   (0.96 )%    (2.43 )%    12.78  %    (6.61 )%    51.80  % 
Ratios to Average Net Assets(1):                    
Total expenses (before expense offset)   1.72  %(2)    1.80  %    1.67  %    1.49  %    1.46  % 
Net investment loss   (1.18 )%(2)    (1.27 )%    (1.19 )%    (0.58 )%    (1.19 )% 
Supplemental Data:                    
Net assets, end of period, in thousands   $94,361  $86,308  $110,847  $38,891  $53,534 
Portfolio turnover rate   122  %    100  %    177  %    106  %    108  % 
The per share amounts were computed using an average number of shares outstanding during the period.
Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period.
(1) Reflects overall Fund ratios for investment income and non-class specific expenses.
(2) Reflects rebate of certain Fund expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio – Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets had an effect of less than 0.005%.

See Notes to Financial Statements

24





Morgan Stanley Technology Fund

Financial Highlights continued

    


  FOR THE YEAR ENDED MARCH 31,
  2008 2007 2006 2005 2004
                     
Class B Shares                    
Selected Per Share Data:                
Net asset value, beginning of period $ 9.61   $ 9.92   $ 8.87   $ 9.58   $  6.36  
Income (loss) from investment operations:            
Net investment loss‡   (0.20   (0.19   (0.19   (0.13   (0.18
Net realized and unrealized gain (loss)   0.04     (0.12   1.24     (0.58   3.40  
Total income (loss) from investment operations   (0.16   (0.31   1.05     (0.71   3.22  
Net asset value, end of period $ 9.45   $ 9.61   $ 9.92   $ 8.87   $  9.58  
Total Return†   (1.66 )%    (3.13 )%    11.84  %    (7.41 )%    50.63  % 
Ratios to Average Net Assets(1):                    
Total expenses (before expense offset)   2.47  %(2)    2.55  %    2.45  %    2.35  %    2.30  % 
Net investment loss   (1.93 )%(2)    (2.02 )%    (1.97 )%    (1.44 )%    (2.03 )% 
Supplemental Data:                    
Net assets, end of period, in thousands $81,609  $144,588    $242,405    $421,973    $657,944 
Portfolio turnover rate   122  %    100  %    177  %    106  %    108  % 
The per share amounts were computed using an average number of shares outstanding during the period.
Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period.
(1) Reflects overall Fund ratios for investment income and non-class specific expenses.
(2) Reflects rebate of certain Fund expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio – Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets had an effect of less than 0.005%.

See Notes to Financial Statements

25





Morgan Stanley Technology Fund

Financial Highlights continued

    


  FOR THE YEAR ENDED MARCH 31,
  2008 2007 2006 2005 2004
                     
Class C Shares                    
Selected Per Share Data:                
Net asset value, beginning of period $ 9.60   $ 9.92   $  8.86   $ 9.57   $  6.36  
Income (loss) from investment operations:            
Net investment loss‡   (0.20   (0.19   (0.19   (0.13   (0.18
Net realized and unrealized gain (loss)   0.04     (0.13   1.25     (0.58   3.39  
Total income (loss) from investment operations   (0.16   (0.32   1.06     (0.71   3.21  
Net asset value, end of period $ 9.44   $ 9.60   $  9.92   $ 8.86   $  9.57  
Total Return†   (1.67 )%    (3.23 )%    11.96  %    (7.42 )%    50.47  % 
Ratios to Average Net Assets(1):                    
Total expenses (before expense offset)   2.47  %(2)    2.55  %    2.45  %    2.34  %    2.29  % 
Net investment loss   (1.93 )%(2)    (2.02 )%    (1.97 )%    (1.43 )%    (2.02 )% 
Supplemental Data:                    
Net assets, end of period, in thousands $15,835  $19,823    $30,866  $39,754  $60,555 
Portfolio turnover rate   122  %    100  %    177  %    106  %    108  % 
The per share amounts were computed using an average number of shares outstanding during the period.
Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period.
(1) Reflects overall Fund ratios for investment income and non-class specific expenses.
(2) Reflects rebate of certain Fund expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio – Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets had an effect of less than 0.005%.

See Notes to Financial Statements

26





Morgan Stanley Technology Fund

Financial Highlights continued

    


  FOR THE YEAR ENDED MARCH 31,
  2008 2007 2006 2005 2004
                     
Class I Shares@@                    
Selected Per Share Data:                
Net asset value, beginning of period $ 10.67   $ 10.91   $   9.65   $ 10.32   $   6.78  
Income (loss) from investment operations:            
Net investment loss‡   (0.11   (0.10   (0.10   (0.04   (0.09
Net realized and unrealized gain (loss)   0.04     (0.14   1.36     (0.63   3.63  
Total income (loss) from investment operations   (0.07   (0.24   1.26     (0.67   3.54  
Net asset value, end of period $ 10.60   $ 10.67   $ 10.91   $   9.65   $ 10.32  
Total Return†   (0.66 )%    (2.20 )%    13.06  %    (6.49 )%    52.21  % 
Ratios to Average Net Assets(1):                    
Total expenses (before expense offset)   1.47  %(2)    1.55  %    1.45  %    1.35  %