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: 811-07117
Morgan Stanley Limited Duration 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: April 30, 2008
Date of reporting period: October 31, 2007
Item 1 - Report to Shareholders
Welcome, Shareholder:
In this report, you'll learn about how your investment in Morgan Stanley Limited
Duration Fund performed during the semiannual 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 six months ended October 31, 2007
TOTAL RETURN FOR THE 6 MONTHS ENDED OCTOBER 31, 2007
<Table>
<Caption>
MORGAN STANLEY LEHMAN BROTHERS LIPPER SHORT
LIMITED DURATION U.S. CREDIT INVESTMENT GRADE
FUND INDEX (1-5 YEAR)(1) BOND FUNDS INDEX(2)
1.54% 2.49% 1.94%
</Table>
The Fund's total return assumes the reinvestment of all distributions. See
Performance Summary for standardized performance and benchmark information.
MARKET CONDITIONS
The second and third quarter of 2007 marked a negative turn for the markets.
Confronted with increasing delinquency rates on subprime loans, high-profile
hedge fund collapses, and a series of subprime mortgage related credit
downgrades, markets responded severely. The impact was exacerbated by an influx
of forced sellers looking to liquidate assets to help meet margin calls and
capital withdrawals, and a flight to quality ensued. As the period progressed,
concerns about the impact on the financial markets, the financial system, and
the broader economy intensified.
In an effort to help ease the credit and liquidity crunch, the Federal Open
Market Committee (the "Fed") elected to cut the target federal funds rate by 50
basis points in September and another 25 basis points in October, bringing the
benchmark overnight rate to 4.50 percent as of October 31, 2007. At each of
these meetings, the Fed acknowledged that while some upward pressure on
inflation remained, the housing correction had the potential to intensify and
restrain economic growth. However, at their October meeting they also noted that
the upside risk to inflation roughly balanced the downside risk to growth,
setting expectations for no further cuts in the target rate.
Aided by the flight to quality that occurred during the third calendar quarter,
Treasury and agency securities outperformed all other sectors of the fixed
income market. Within the investment-grade corporate sector, lower-rated (Baa)
and higher-rated (AAA) issues outpaced middle investment-grade issues.
Industrials outpaced utilities and financials, which were hit hardest by the
liquidity and credit crisis. Overall, intermediate-term issues outperformed
longer dated issues. Despite a general widening of credit spreads during the
reporting period, however, spreads still remained narrow by historical
standards.
The mortgage market was highly impacted by subprime credit and liquidity
concerns, with non-agency mortgage securities suffering the bulk of the damage.
As the amount of non-agency mortgage originations has grown, so too has the
secondary market for non-agency mortgage-backed bonds. Many non-agency issues
were held on a highly levered basis by hedge funds. As these securities' prices
fell -- in some cases, very sharply -- these levered investors became forced
sellers to meet margin calls. This phenomenon was at the core of the liquidity
crisis. What is interesting to note is the indiscriminate way the market
re-priced risk; essentially all non-agency mortgage-backed securities suffered
price markdowns regardless of whether or not they were in any way tied to
subprime lending. The performance of fixed-rate agency mortgages also suffered
during the period.
2
PERFORMANCE ANALYSIS
Morgan Stanley Limited Duration Fund underperformed the Lehman Brothers U.S.
Credit Index (1-5 Year) and the Lipper Short Investment Grade Bond Funds Index
for the six months ended October 31, 2007.
Various factors contributed to the Fund's underperformance versus the benchmark
Lehman Brothers U.S. Credit Index (1-5 Year). The greatest contributors,
however, were its interest rate duration* positioning and emphasis on
non-Treasury securities. The Fund maintained a duration lower than that of the
benchmark index. Interest rates declined meaningfully during the period and the
Fund's defensive positioning detracted from returns as it kept the Fund from
more fully benefiting from the corresponding increase in prices.
As credit concerns in the subprime mortgage market spread into the broader
credit markets, all non-Treasury assets underperformed Treasuries during the
period. The portfolio had a greater relative emphasis on non-Treasury securities
and given the broad-based underperformance of these securities, this positioning
also hindered returns. Additionally, the portfolio had significant holdings in
financial services bonds, a sector that suffered as financial institutions began
to record mortgage asset writedowns.
Our mortgage strategy of investing in non-agency mortgage collateral also
dampened performance. The portfolio holds only high quality, AAA-rated mortgage
securities but default experience in the subprime market pushed all mortgage
product spreads wider and market liquidity for mortgage products was severely
diminished.
The Fund's holdings in credit card and automobile receivable asset-backed
securities were a bright spot, however, as these securities did not suffer
meaningful price declines. Additionally, our relatively low credit spread
duration (a measure of the portfolio's sensitivity to credit spread widening),
aided performance. We kept the spread duration low by focusing on higher-rated
credits, which was beneficial given the broad-based credit deterioration that
took place during the reporting period.
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.
* A measure of the sensitivity of a bond's price to changes in interest rates,
expressed in years. Each year of duration represents an expected 1 percent
change in the price of a bond for every 1 percent change in interest rates. The
longer a bond's duration, the greater the effect of interest-rate movements on
its price. Typically, funds with shorter durations perform better in
rising-interest-rate environments, while funds with longer durations perform
better when rates decline.
3
<Table>
<Caption>
PORTFOLIO COMPOSITION**
Corporate Bonds 37.6%
Collateralized Mortgage Obligations 34.4
Mortgage-Back Securities 15.4
Asset-Backed Securities 9.5
Commercial Mortgage-Backed Securities 0.9
Short-Term Investments 2.2
</Table>
<Table>
<Caption>
LONG-TERM CREDIT ANALYSIS
Aaa/AAA 66.7%
Aa/AA 11.4
A/A 10.8
Baa/BBB 11.1
</Table>
** Does not include open long futures contracts with an underlying face amount
of $12,995,672 with unrealized appreciation of $131,263 and open short futures
contracts with an underlying face amount of $30,923,361 with unrealized
depreciation of $74,794. Also does not include open swap contracts with
unrealized appreciation of $149,265.
Data as of October 31, 2007. Subject to change daily. All percentages for
portfolio composition are as a percentage of total investments and all
percentages for long-term credit analysis are as a percentage of total long-term
investments. These data are provided for informational purposes only and should
not be deemed a recommendation to buy or sell the securities mentioned. Morgan
Stanley is a full-service securities firm engaged in securities trading and
brokerage activities, investment banking, research and analysis, financing and
financial advisory services.
INVESTMENT STRATEGY
THE FUND WILL NORMALLY INVEST AT LEAST 65 PERCENT OF ITS ASSETS IN SECURITIES
ISSUED OR GUARANTEED AS TO PRINCIPAL AND INTEREST BY THE U.S. GOVERNMENT, ITS
AGENCIES OR INSTRUMENTALITIES (INCLUDING ZERO COUPON SECURITIES), INVESTMENT
GRADE MORTGAGE-BACKED SECURITIES, INCLUDING COLLATERALIZED MORTGAGE OBLIGATIONS,
AND INVESTMENT GRADE CORPORATE AND OTHER TYPES OF BONDS. IN SELECTING PORTFOLIO
INVESTMENTS TO PURCHASE OR SELL, THE "INVESTMENT ADVISER," MORGAN STANLEY
INVESTMENT ADVISORS INC., CONSIDERS BOTH DOMESTIC AND INTERNATIONAL ECONOMIC
DEVELOPMENTS, INTEREST RATE LEVELS, THE STEEPNESS OF THE YIELD CURVE AND OTHER
FACTORS, AND SEEKS TO MAINTAIN AN OVERALL AVERAGE DURATION FOR THE FUND'S
PORTFOLIO OF THREE YEARS OR LESS.
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
4
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.
5
PERFORMANCE SUMMARY
AVERAGE ANNUAL TOTAL RETURNS -- PERIOD ENDED OCTOBER 31, 2007
<Table>
<Caption>
SYMBOL MSLDX
1 YEAR 4.01%(3)
5 YEARS 2.42(3)
10 YEARS 4.10(3)
SINCE INCEPTION
(01/10/94) 4.41(3)
</Table>
Performance data quoted represents past performance, which is no guarantee of
future results and current performance may be lower or higher than the figures
shown. For most recent month-end performance figures, please visit
www.morganstanley.com/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 table does not reflect the
deduction of taxes that a shareholder would pay on fund distributions or the
redemption of fund shares.
(1) The Lehman Brothers U.S. Credit Index (1-5 Year) includes U.S. corporate
and specified foreign debentures and secured notes 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 Lipper Short Investment Grade Bond Funds Index is an equally weighted
performance index of the largest qualifying funds (based on net assets) in
the Lipper Short Investment Grade Bond 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 Short
Investment Grade Bond Funds classification as of the date of this report.
(3) Figure shown assumes reinvestment of all distributions. There are no sales
charges.
6
EXPENSE EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees; and (2) ongoing costs, including advisory 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 05/01/07 - 10/31/07.
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. 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 that have transactional costs, such as sales charges
(loads), redemption fees or exchange fees.
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
05/01/07 -
05/01/07 10/31/07 10/31/07
------------- ------------- ---------------
Actual (1.54% return)....................................... $1,000.00 $1,015.40 $4.61
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,020.56 $4.62
</Table>
- ------------------
* Expenses are equal to the Fund's annualized expense ratio of 0.91%
multiplied by the average account value over the period, multiplied by
184/366 (to reflect the one-half year period).
7
Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 2007 (UNAUDITED)
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
Corporate Bonds (37.5%)
Aerospace & Defense (0.3%)
$ 325 Bae Systems Holdings Inc. - 144A*................ 4.75% 08/15/10 $ 323,058
------------
Air Freight/Couriers (0.3%)
245 FedEx Corp. ..................................... 5.50 08/15/09 247,062
------------
Beverages: Alcoholic (0.3%)
330 Miller Brewing Co. - 144A*....................... 4.25 08/15/08 327,742
------------
Cable/Satellite TV (0.8%)
410 Comcast Cable Communications, Inc. .............. 6.875 06/15/09 420,580
427 Cox Communications Inc. ......................... 6.253+ 12/14/07 427,371
------------
847,951
------------
Chemicals: Major Diversified (0.3%)
275 ICI Wilmington Inc. ............................. 4.375 12/01/08 273,948
------------
Containers/Packaging (0.2%)
145 Sealed Air Corp. - 144A*......................... 6.95 05/15/09 149,581
------------
Department Stores (0.5%)
160 Federated Department Stores, Inc. ............... 6.30 04/01/09 161,416
340 JC Penney Corp., Inc. ........................... 7.375 08/15/08 345,422
------------
506,838
------------
Drugstore Chains (0.4%)
355 CVS Corp. ....................................... 4.00 09/15/09 348,733
100 CVS Corp. ....................................... 3.875 11/01/07 100,000
------------
448,733
------------
Electric Utilities (5.2%)
475 Baltimore Gas & Electric Co. .................... 6.625 03/15/08 476,722
315 Columbus Southern Power Co. ..................... 4.40 12/01/10 308,494
315 Consumers Energy Co. (Series H).................. 4.80 02/17/09 314,590
285 Detroit Edison Co. (The)......................... 6.125 10/01/10 294,457
350 Dominion Resources Inc. ......................... 5.687 05/15/08 350,425
335 Duke Energy Corp. ............................... 3.75 03/05/08 333,593
185 Entergy Gulf States, Inc. ....................... 3.60 06/01/08 182,802
295 Entergy Gulf States, Inc. ....................... 5.98+ 12/01/09 292,832
605 FPL Group Capital Inc. .......................... 5.551 02/16/08 605,312
</Table>
See Notes to Financial Statements
8
Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 2007 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
$ 285 Pacific Gas & Electric Co. ...................... 3.60% 03/01/09 $ 280,119
595 Peco Energy Co. ................................. 3.50 05/01/08 590,735
450 Southwestern Public Service Co. (Series A)....... 6.20 03/01/09 456,787
375 Texas-New Mexico Power Co. ...................... 6.25 01/15/09 378,941
345 Wisconsin Electric Power Co. .................... 3.50 12/01/07 344,559
------------
5,210,368
------------
Finance/Rental/Leasing (2.3%)
220 American Honda Finance Corp. - 144A*............. 3.85 11/06/08 217,240
300 Capmark Financial Group Inc. - 144A*............. 5.875 05/10/12 269,588
695 CIT Group Inc. (Series MTN)...................... 4.75 08/15/08 689,417
510 Countrywide Home Loans, Inc. (Series L).......... 3.25 05/21/08 484,782
130 Residential Capital Corp. ....................... 7.00 02/22/11 94,964
600 SLM Corp. ....................................... 4.00 01/15/10 562,945
------------
2,318,936
------------
Financial Conglomerates (1.3%)
145 Chase Manhattan Corp. ........................... 7.00 11/15/09 150,349
85 Chase Manhattan Corp. ........................... 6.00 02/15/09 85,821
165 Citigroup Inc. .................................. 4.625 08/03/10 164,124
345 Citigroup Inc. .................................. 3.625 02/09/09 339,963
140 JPMorgan Chase & Co. ............................ 6.75 02/01/11 146,671
425 Pricoa Global Funding I - 144A*.................. 3.90 12/15/08 418,767
------------
1,305,695
------------
Food Retail (0.6%)
290 Fred Meyer, Inc. ................................ 7.45 03/01/08 292,028
290 Safeway Inc. .................................... 7.50 09/15/09 301,908
------------
593,936
------------
Food: Major Diversified (1.4%)
565 General Mills Inc. .............................. 3.875 11/30/07 564,533
485 Kraft Foods Inc. ................................ 4.125 11/12/09 477,623
405 Sara Lee Corp. .................................. 2.75 06/15/08 399,105
------------
1,441,261
------------
Gas Distributors (0.8%)
170 Keyspan Corp. ................................... 4.90 05/16/08 169,778
320 NiSource Finance Corp. .......................... 6.064+ 11/23/09 318,910
345 Sempra Energy.................................... 4.75 05/15/09 343,241
------------
831,929
------------
Home Improvement Chains (0.3%)
330 Home Depot Inc. ................................. 5.819+ 12/16/09 326,089
------------
</Table>
See Notes to Financial Statements
9
Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 2007 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
Household/Personal Care (0.5%)
$ 510 Clorox Co. (The)................................. 5.828+% 12/14/07 $ 510,408
------------
Industrial Conglomerates (0.4%)
400 Textron Financial Corp. ......................... 4.125 03/03/08 399,025
------------
Investment Banks/Brokers (1.8%)
355 Goldman Sachs Group Inc. (The)................... 6.875 01/15/11 371,928
1,055 Goldman Sachs Group Inc. (The)................... 4.125 01/15/08 1,052,715
165 Lehman Brothers Holdings......................... 5.42+ 12/23/10 161,962
215 Lehman Brothers Holdings......................... 5.26+ 12/23/08 213,173
------------
1,799,778
------------
Life/Health Insurance (1.4%)
585 John Hancock Financial Services, Inc. ........... 5.625 12/01/08 590,005
410 Met Life Global - 144A*.......................... 4.625 08/19/10 409,256
65 Monumental Global Funding II - 144A*............. 3.85 03/03/08 64,709
350 Monumental Global Funding II - 144A*............. 4.375 07/30/09 346,581
------------
1,410,551
------------
Major Banks (4.4%)
200 Bank of America Corp. ........................... 3.375 02/17/09 195,435
155 Credit Suisse USA Inc. .......................... 6.125 11/15/11 160,415
510 HBOS Treasury Services PLC - 144A* (United 5.625 07/20/09 514,799
Kingdom).......................................
850 HSBC Finance Corp. .............................. 6.75 05/15/11 887,649
355 MBNA Corp. (Series F)............................ 5.79+ 05/05/08 355,897
315 Popular North America, Inc. (Series F)........... 5.65 04/15/09 316,968
585 Suntrust Bank Atlanta............................ 4.55 05/25/09 581,345
400 Unicredit Luxembourg Finance S.A. - 144A* 5.143+ 10/24/08 399,155
(Luxembourg)...................................
700 Wachovia Corp. .................................. 5.35 03/15/11 705,149
365 Well Fargo & Co. ................................ 3.12 08/15/08 358,808
------------
4,475,620
------------
Major Telecommunications (1.4%)
390 AT&T Inc. ....................................... 5.46+ 02/05/10 387,766
325 Deutsche Telekom International Finance BV 8.00 06/15/10 348,695
(Netherlands)..................................
280 Sprint Nextel Corp. ............................. 5.598+ 06/28/10 279,329
425 Telecom Italia Capital SA (Luxembourg)........... 4.875 10/01/10 422,609
------------
1,438,399
------------
</Table>
See Notes to Financial Statements
10
Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 2007 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
Managed Health Care (0.5%)
$ 480 UnitedHealth Group Inc. ......................... 4.125% 08/15/09 $ 473,515
------------
Media Conglomerates (0.9%)
400 Time Warner, Inc. ............................... 5.73+ 11/13/09 397,858
155 Viacom Inc. ..................................... 6.044+ 06/16/09 154,533
300 Viacom Inc. ..................................... 5.75 04/30/11 303,132
------------
855,523
------------
Medical Specialties (0.9%)
605 Baxter International, Inc. ...................... 5.196 02/16/08 605,249
310 Hospira, Inc. ................................... 5.678+ 03/30/10 307,805
------------
913,054
------------
Motor Vehicles (0.6%)
345 DaimlerChrysler North American Holdings Co....... 6.133+ 03/13/09 345,098
295 DaimlerChrysler North American Holdings Co. ..... 4.05 06/04/08 292,658
------------
637,756
------------
Multi-Line Insurance (1.3%)
540 American General Finance Corp. (Series H)........ 4.625 09/01/10 529,226
125 Equitable Co. ................................... 6.50 04/01/08 125,662
490 Hartford Financial Services Group, Inc. (The).... 5.55 08/16/08 491,842
140 International Lease Finance Corp. (Series Q)..... 4.625 06/02/08 139,487
------------
1,286,217
------------
Oil & Gas Pipelines (0.5%)
555 Enbridge Energy Parners, LP...................... 4.00 01/15/09 546,657
------------
Oil Refining/Marketing (0.5%)
495 Valero Energy Corp. ............................. 3.50 04/01/09 485,003
------------
Other Metals/Minerals (0.4%)
370 Brascan Corp. (Canada)........................... 8.125 12/15/08 382,640
------------
Property - Casualty Insurers (1.4%)
815 Mantis Reef Ltd. - 144A* (Australia)............. 4.692 11/14/08 811,708
255 Platinum Underwriters Holdings, Ltd. (Series B) 6.371 11/16/07 254,976
(Bermuda)......................................
300 XLLIAC Global Funding - 144A*.................... 4.80 08/10/10 296,719
------------
1,363,403
------------
</Table>
See Notes to Financial Statements
11
Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 2007 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
Railroads (1.5%)
$ 425 Burlington North Santa Fe Railway Co. ........... 6.125% 03/15/09 $ 430,114
1,120 Union Pacific Corp. (Series E)................... 6.79 11/09/07 1,120,211
------------
1,550,325
------------
Real Estate Development (0.7%)
317 World Financial Properties - 144A*............... 6.95 09/01/13 328,370
359 World Financial Properties - 144A*............... 6.91 09/01/13 371,553
------------
699,923
------------
Real Estate Investment Trusts (0.7%)
355 iStar Financial Inc. ............................ 6.074+ 03/09/10 335,593
330 Simon Property Group LP.......................... 6.375 11/15/07 330,068
------------
665,661
------------
Regional Banks (0.5%)
510 Banco Santander Central Hispano Issuances Ltd. 7.625 11/03/09 536,025
(Cayman Islands)...............................
------------
Restaurants (0.5%)
500 Tricon Global Restaurant, Inc. .................. 7.65 05/15/08 506,621
------------
Savings Banks (1.1%)
475 Sovereign Bancorp, Inc. ......................... 5.44+ 03/23/10 471,226
150 Sovereign Bank (Series CD)....................... 4.00 02/01/08 149,499
310 Washington Mutual Inc. .......................... 8.25 04/01/10 325,700
155 Washington Mutual Inc. .......................... 4.00 01/15/09 151,898
------------
1,098,323
------------
Wireless Telecommunications (0.6%)
580 Vodafone Group PLC (United Kingdom).............. 5.288+ 12/28/07 580,139
------------
Total Corporate Bonds (Cost $38,005,301).........
37,767,693
------------
Collateralized Mortgage Obligations (34.3%)
U.S. Government Agencies - Collateralized
Mortgage Obligations (2.8%)
1,712 Federal Home Loan Mortgage Corp. 2182 ZC......... 7.50 09/15/29 1,219,467
818 Federal National Mortgage Assoc. 2005-27 NA 5.50 01/25/24 818,297
(PAC)..........................................
785 Federal National Mortgage Assoc. 2005-52 PA 6.50 06/25/35 810,636
(PAC)..........................................
------------
Total U.S. Government Agencies - Collateralized
Mortgage Obligations...........................
2,848,400
------------
</Table>
See Notes to Financial Statements
12
Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 2007 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
Private Issues - Collateralized Mortgage
Obligations (31.5%)
$ 341 American Home Mortgage Assets 2007-5 A3.......... 5.173+% 06/25/47 $ 319,715
742 Bank of America Funding Corp. - 2006-H 3A1....... 6.202 09/20/46 748,836
522 Bear Stearns Alt -A Trust 2003-3 3A.............. 5.223+ 10/25/33 524,703
Bear Stearns Mortgage Funding Trust
766 2006-AR1 1A2................................... 5.123+ 07/25/36 732,216
899 2006-AR3 1A1................................... 5.053+ 10/25/36 883,232
Countrywide Alternative Loan Trust
836 2005-58 A2..................................... 5.389+ 12/20/35 806,723
599 2006-0A1 1A2................................... 5.298+ 03/20/46 581,375
3,169 2005-81 X1 (IO)................................ 2,302+ 02/25/37 164,386
Countrywide Alternative Loan Trust NIM
13 2006-0A6 N1-144A*.............................. 5.25 07/25/46 12,710
573 2006-0A14 2A1.................................. 5.063+ 11/25/46 564,032
616 2006-0A22 A2................................... 5.083+ 02/25/47 600,217
217 2005-J2 1A12................................... 5.273+ 04/25/35 204,880
231 2005-J1 5A1.................................... 5.273+ 02/25/35 217,516
946 2006-0A16 A3................................... 5.123+ 10/25/46 922,289
418 2005-76 2A2.................................... 6.633+ 02/25/36 418,989
3,718 2006-0A1 2X (IO)............................... 2.757+ 03/20/46 158,744
3,437 Countrywide Home Loans 2004-25 1X (IO)........... 2.203+ 02/25/35 76,789
800 DSLA Mortgage Loan Trust 2006-AR2 2A1A........... 5.221+ 11/19/37 785,312
680 First Horizon Alternative Mortgage Sec. 2006-FA8 6.00 02/25/37 673,665
1A7............................................
Greenpoint Mortgage Funding Trust
678 2006-AR2 4A1................................... 6.933+ 03/25/36 692,364
1,542 2005-AR3 X1 (IO)............................... 2.372+ 08/25/45 46,017
2,726 2005-AR4 X4 (IO)............................... 2.277+ 10/25/45 81,346
GS Mortgage Securities Corp.
147 2007-NIM1 N1 - 144A*........................... 6.25 08/25/46 143,031
23 2006-NIM3 N1 - 144A*........................... 6.414+ 06/25/46 22,572
Harborview Mortgage Loan Trust
932 2006-10 2A1B................................... 5.26+ 11/19/36 909,247
612 2006-7 2A1B.................................... 5.27+ 10/19/37 593,378
747 2006-8 2A1B.................................... 5.247+ 08/21/36 728,549
646 2006-1 2A1A.................................... 5.26+ 03/19/37 635,226
# 2006-5 PO2 (PO)................................ 0.00 07/19/47 10
2,859 2006-5 X2 (IO)................................. 2.279+ 07/19/47 107,202
3,034 2005-2 X (IO).................................. 1.815+ 05/19/35 70,150
2,047 2005-16 X1 (IO)................................ 2.475+ 01/19/36 65,253
4,929 2005-16 X3 (IO)................................ 2.217+ 01/19/36 135,545
2,608 2005-3 X2 (IO)................................. 0.769+ 06/19/35 60,305
220 2005-9 B1...................................... 5.597+ 06/20/35 200,624
</Table>
See Notes to Financial Statements
13
Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 2007 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
$ 2 2006-1 PO1 (PO)................................ 0.00% 03/19/37 $ 1,617
1,096 2006-12 2A2B................................... 5.271+ 01/19/38 1,066,984
1,520 2005-16 4A1A................................... 6.933+ 01/19/36 1,540,229
3,763 2006-1 X1 (IO)................................. 2.293+ 03/19/37 164,623
Harborview NIM Corp.
177 2006-14 N1 - 144A*............................. 6.409 03/19/38 176,106
64 2006-9A N1..................................... 6.409 11/19/36 64,051
119 2007-1A N1 - 144A*............................. 6.409 03/19/37 118,835
180 2006-12 N1 - 144A*............................. 6.409 12/19/36 179,567
170 Indymac Index Mortgage Loan Trust 2004 - AR3 5.373+ 07/25/34 160,820
B1.............................................
9 Indymac Index NIM Corp. 2006-AR6 N1 - 144A*...... 6.654 06/25/46 9,246
17 Lehman XS Net Interest Margin Notes 2006-GP1 A1 - 6.250 05/28/46 16,735
144A*..........................................
Luminent Mortgage Trust
701 2006-6 A1...................................... 5.073+ 10/25/46 687,968
554 2006-1 A1...................................... 5.113+ 04/25/36 544,861
558 2006-2 A1B..................................... 5.153+ 02/25/46 544,445
350 Master Adjustable Rate Mortgages Trust 2007-3 5.973+ 05/25/47 243,156
1M2............................................
18 Rali NIM Corp. 2006-Q04 N1 - 144A*............... 6.048 04/25/46 17,750
Residential Accredit Loans Inc.
267 2006-Q01 2A1................................... 5.143+ 02/25/46 263,311
421 2006-Q01 2A2................................... 5.203+ 02/25/46 412,554
254 2006-Q01 1A1................................... 5.133+ 02/25/46 250,598
748 2006-QH1 A1.................................... 5.063+ 12/25/36 731,882
904 2006-Q06 A2.................................... 5.103+ 06/25/46 884,431
872 2006-QO10 A2................................... 5.073+ 01/25/37 834,035
1,038 2007-QH1 A2.................................... 5.063+ 02/25/37 1,004,033
485 2007-Q04 A2.................................... 5.133+ 05/25/47 472,807
291 2007-Q04 A23................................... 5.173+ 05/25/47 276,226
Structured Asset Mortgage Investments Inc.
707 2006-AR2 A2.................................... 5.183+ 02/25/36 689,634
458 2006-AR1 2A2................................... 5.183+ 02/25/36 450,810
868 2006-AR8 A1A................................... 5.073+ 10/25/36 855,197
780 2007-AR2 1A2................................... 5.063+ 02/25/37 759,832
Washington Mutual Mortgage Pass-Through
Certificates
808 2005-AR13 A1B3................................. 5.233+ 10/25/45 789,715
854 2005-AR15 A1B3................................. 5.213+ 11/25/45 835,338
312 2005-AR8 2AB3.................................. 5.233+ 07/25/45 307,470
637 2006-AR6 2A.................................... 5.893+ 08/25/46 627,725
1,054 2006-AR9 1A.................................... 5.933+ 08/25/46 1,036,090
2,673 2004-AR10 X (IO)............................... 1.615+ 07/25/44 45,109
3,608 2004-AR12 X (IO)............................... 1.485+ 10/25/44 63,141
</Table>
See Notes to Financial Statements
14
Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 2007 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
$ 1,397 2004-AR8 X (IO)................................ 1.665+% 06/25/44 $ 24,448
Washington Mutual Mortgage Pass-Through
703 2006-AR2 A1A................................... 5.873+ 04/25/46 693,839
------------
Total Private Issues - Collateralized Mortgage Obligations...................
31,732,366
------------
Total Collateralized Mortgage Obligations (Cost $36,218,739).................
34,580,766
------------
Commercial Mortgage-Backed Securities (0.9%)
248 Citigroup Commercial Mortgage Trust 2007-C6 A1... 5.622 12/10/49 250,109
626 JP Morgan Chase CMBS 2007-LD11 A1................ 5.651 06/15/49 631,934
------------
Total Commercial Mortgage-Backed Securities (Cost $876,140)..................
882,043
------------
U.S. Government Agencies - Mortgage-Backed Securities
(15.3%)
982 Federal Home Loan Mortgage Corp. ................ 7.50 10/01/26-08/01/32 1,037,088
718 Federal Home Loan Mortgage Corp. ARM............. 6.092 08/01/34 726,718
5 Federal Home Loan Mortgage Corp. PC Gold......... 6.50 07/01/29-09/01/29 5,636
1,366 Federal Home Loan Mortgage Corp. PC Gold......... 7.50 01/01/30-07/01/32 1,440,416
792 Federal National Mortgage Assoc.................. 6.50 01/01/29-07/01/32 815,965
1,213 Federal National Mortgage Assoc.................. 7.00 02/01/26-04/01/33 1,269,969
503 Federal National Mortgage Assoc.................. 7.50 09/01/29-09/01/32 532,773
201 Federal National Mortgage Assoc. ARM............. 5.599 06/01/34 202,363
409 Federal National Mortgage Assoc. ARM............. 6.151 09/01/34 412,265
841 Federal National Mortgage Assoc. ARM............. 4.325 05/01/35 858,652
1,083 Federal National Mortgage Assoc. ARM............. 4.282 04/01/35 1,091,248
1,027 Federal National Mortgage Assoc. ARM............. 4.216 05/01/35 1,052,183
439 Federal National Mortgage Assoc. ARM............. 4.553 04/01/35 441,222
1,400 Federal National Mortgage Assoc. ARM............. 4.717 09/01/35 1,393,367
1,203 Federal National Mortgage Assoc. ARM............. 4.784 07/01/35 1,200,450
455 Federal National Mortgage Assoc. ARM............. 5.496 07/01/34 458,698
388 Federal National Mortgage Assoc. ARM............. 6.889 07/01/33 396,717
990 Government National Mortgage Assoc. II........... 6.375+ 06/20/22-05/20/23 1,001,150
869 Government National Mortgage Assoc. II........... 5.50+ 08/20/29-09/20/29 877,983
234 Government National Mortgage Assoc. II........... 6.125+ 10/20/24-12/20/24 237,483
------------
Total U.S. Government Agencies - Mortgage-Backed Securities (Cost
$15,428,866)...............................................................
15,452,346
------------
Asset-Backed Securities (9.6%)
275 Aegis Asset Backed Securities Trust 2004-2 B1.... 6.873+ 06/25/34 181,504
350 Ameriquest Mortgage Securities Inc. 2004-R7 M5... 6.023+ 08/25/34 305,278
1,150 Bank of America CDT CD Trust - 2007-A13.......... 5.33+ 04/16/12 1,150,902
1,125 Capital Auto Receivables Asset Trust 2007-SN1 5.38 07/15/10 1,133,999
A3A............................................
931 Chase Manhattan Auto Owner Trust 2004-A A4....... 2.83 09/15/10 924,369
925 Chase Issuance Trust 2007-A15 A.................. 4.96 09/17/12 927,210
950 Ford Credit Auto Owner Trust 2007-A A3A.......... 5.40 08/15/11 961,295
</Table>
See Notes to Financial Statements
15
Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 2007 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
$ 1,198 Harley-Davidson Motorcycle Trust 2003-3 A2....... 2.76% 05/15/11 $ 1,194,077
725 Hertz Vehicle Financing LLC 2005-2A A2 - 144A*... 4.93 02/25/10 725,575
150 Home Equity Asset Trust 2004-3 B1................ 6.973+ 08/25/34 126,023
750 Hyundai Auto Receivables Trust 2007-A A3A........ 5.04 01/17/12 750,583
650 Nissan Auto Receivables Owner Trust 2007-B A3.... 5.03 05/16/11 653,815
425 Park Place Securities Inc. 2004-MCW1 M7.......... 6.723+ 10/25/34 341,917
236 Soundview Home Equity Loan Trust 2006-OPT3 2A1... 4.933+ 06/25/36 235,762
------------
Total Asset-Backed Securities (Cost $9,853,016)..............................
9,612,309
------------
Short-Term Investments (2.2%)
U.S. Government Obligation (a) (0.2%)
200 U.S. Treasury Bill ** (Cost $198,115)............ 198,116
------------
</Table>
<Table>
<Caption>
NUMBER OF
- --------------
Investment Company (b) (2.0%)
Morgan Stanley Institutional Liquidity Money Market Portfolio - Institutional
1,981 Class
(Cost $1,981,064)..........................................................
$ 1,981,064
------------
Total Short-Term Investments (Cost $2,179,179)............................... 2,179,180
------------
Total Investments (Cost $102,561,241) (c)(d)...................... 99.8% 100,474,337
Other Assets in Excess of Liabilities............................. 0.2 211,632
------- ------------
Net Assets........................................................ 100.0% $100,685,969
======= ============
</Table>
See Notes to Financial Statements
16
Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 2007 (UNAUDITED) continued
- ---------------------
<Table>
ARM Adjustable Rate Mortgage.
IO Interest Only Security.
MTN Medium Term Note.
PC Participation Certificate.
PO Principal Only Security.
# Amount less than one thousand.
* Resale is restricted to qualified institutional investors.
** A portion of this security has been physically segregated in
connection with open futures contracts in the amount of
$47,290.
+ Floating rate security. Rate shown is the rate in effect at
October 31, 2007.
(a) Purchased on a discount basis. The interest rate shown has
been adjusted to reflect a money market equivalent yield.
(b) See Note 3 to the financial statements regarding investments
in Morgan Stanley Institutional Liquidity Money Market
Portfolio - Institutional Class.
(c) Securities have been designated as collateral in an amount
equal to $43,816,392 in connection with open futures and
swap contracts.
(d) The aggregate cost for federal income tax purposes
approximates the aggregate cost for book purposes. The
aggregate gross unrealized appreciation is $189,287 and the
aggregate gross unrealized depreciation is $2,276,191,
resulting in net unrealized depreciation of $2,086,904.
</Table>
FUTURES CONTRACTS OPEN AT OCTOBER 31, 2007:
<Table>
<Caption>
UNREALIZED
NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE APPRECIATION
CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE (DEPRECIATION)
- ----------------------------------------------------------------------------------------
83 Long U.S. Treasury Note 10 Year,
December 2007 $ 9,131,297 $117,878
36 Long U.S. Treasury Note 5 Year,
December 2007 3,864,375 13,385
30 Short U.S. Treasury Bond 20 Year,
December 2007 (3,377,813) (31,215)
133 Short U.S. Treasury Note 2 Year,
December 2007 (27,545,548) (43,579)
--------
Net Unrealized Appreciation................................ $ 56,469
========
</Table>
See Notes to Financial Statements
17
Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 2007 (UNAUDITED) continued
CREDIT DEFAULT SWAP CONTRACTS OPEN AT OCTOBER 31, 2007:
<Table>
<Caption>
NOTIONAL UNREALIZED
SWAP COUNTERPARTY & BUY/SELL AMOUNT PAY/RECEIVE TERMINATION APPRECIATION
REFERENCE OBLIGATION PROTECTION (000'S) FIXED RATE DATE (DEPRECIATION)
- --------------------------------------------------------------------------------------------------
Goldman Sachs Buy $300 0.22% March 20, 2012 $(265)
International
Dell Inc.
Citibank, N.A., New York Buy 113 0.43 March 20, 2012 (614)
Covidien Ltd.
Citibank, N.A., New York Buy 50 0.43 March 20, 2012 (271)
Covidien Ltd.
Citibank, N.A., New York Buy 113 0.43 March 20, 2012 (168)
Tyco Electronics Ltd.
Citibank, N.A., New York Buy 50 0.43 March 20, 2012 (74)
Tyco Electronics Ltd.
Citibank, N.A., New York Buy 113 0.43 March 20, 2012 (168)
Tyco International Ltd.
Citibank, N.A., New York Buy 50 0.43 March 20, 2012 (74)
Tyco International Ltd.
Goldman Sachs Sell 800 0.35 June 20, 2012 973
International Dow Jones
CDX.NA.IG.HVOL.8
-----
Net Unrealized Depreciation...................... $(661)
=====
</Table>
See Notes to Financial Statements
18
Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 2007 (UNAUDITED) continued
INTEREST RATE SWAP CONTRACTS OPEN AT OCTOBER 31, 2007:
<Table>
<Caption>
NOTIONAL PAYMENTS UNREALIZED
AMOUNT RECEIVED BY PAYMENTS TERMINATION APPRECIATION
COUNTERPARTY (000'S) FUND MADE BY FUND++ DATE (DEPRECIATION)
- ------------------------------------------------------------------------------------------------------------------------
JPMorgan Chase N.A.
New York $ 2,250 Fixed Rate 5.391% Floating Rate 5.36% June 6, 2009 $ 27,609
JPMorgan Chase N.A.
New York 2,260 Fixed Rate 5.486 Floating Rate 5.36 June 14, 2009 31,052
JPMorgan Chase N.A.
New York 2,300 Fixed Rate 5.364 Floating Rate 5.36 June 28, 2009 29,302
JPMorgan Chase N.A.
New York 2,225 Fixed Rate 5.357 Floating Rate 5.36 July 13, 2009 28,391
JPMorgan Chase N.A.
New York 2,200 Fixed Rate 5.078 Floating Rate 5.356 August 1, 2009 20,350
Goldman Sachs International 2,100 Fixed Rate 4.642 Floating Rate 5.725 September 11, 2009 2,184
JPMorgan Chase N.A.
New York 2,100 Fixed Rate 4.793 Floating Rate 5.587 September 20, 2009 7,980
JPMorgan Chase N.A.
New York 2,100 Fixed Rate 4.782 Floating Rate 5.208 October 18, 2009 8,778
Deutsche Bank 2,000 Fixed Rate 4.55 Floating Rate 5.151 October 23, 2009 (80)
JPMorgan Chase N.A.
New York 2,000 Fixed Rate 4.384 Floating Rate 5.01 October 29, 2009 (5,640)
--------
Net Unrealized Appreciation.............................................. $149,926
========
</Table>
- ---------------------
++ Floating rate represents USD-3 months LIBOR.
See Notes to Financial Statements
19
Morgan Stanley Limited Duration Fund
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
October 31, 2007 (unaudited)
<Table>
Assets:
Investments in securities, at value (cost $100,580,177)..... $ 98,493,273
Investment in affiliate, at value (cost $1,981,064)......... 1,981,064
Unrealized appreciation on open swap contracts.............. 156,619
Receivable for:
Interest................................................ 750,639
Periodic interest on swap contracts..................... 235,244
Principal paydowns...................................... 60,211
Shares of beneficial interest sold...................... 19,993
Variation margin........................................ 19,657
Dividends from affiliate................................ 5,727
Prepaid expenses and other assets........................... 12,522
------------
Total Assets............................................ 101,734,949
------------
Liabilities:
Unrealized depreciation on open swap contracts.............. 7,354
Payable for:
Investments purchased................................... 423,051
Swap contracts collateral due to brokers................ 260,000
Periodic interest payment on swap contract.............. 121,288
Shares of beneficial interest redeemed.................. 85,232
Investment advisory fee................................. 47,534
Dividends to shareholders............................... 27,454
Premium received from swap contracts.................... 11,363
Administration fee...................................... 7,354
Transfer agent fee...................................... 4,770
Accrued expenses and other payables......................... 53,580
------------
Total Liabilities....................................... 1,048,980
------------
Net Assets.............................................. $100,685,969
============
Composition of Net Assets:
Paid-in-capital............................................. $132,495,773
Net unrealized depreciation................................. (1,881,170)
Dividends in excess of net investment income................ (779,837)
Accumulated net realized loss............................... (29,148,797)
------------
Net Assets.............................................. $100,685,969
============
Net Asset Value Per Share,
11,289,564 shares outstanding (unlimited shares authorized
of $.01 par value).......................................... $8.92
============
</Table>
See Notes to Financial Statements
20
Morgan Stanley Limited Duration Fund
FINANCIAL STATEMENTS continued
Statement of Operations
For the six months ended October 31, 2007 (unaudited)
<Table>
Net Investment Income:
Income
Income...................................................... $3,018,681
Dividends from affiliate.................................... 23,788
----------
Total Income............................................ 3,042,469
----------
Expenses
Investment advisory fee..................................... 282,644
Transfer agent fees and expenses............................ 49,881
Administration fee.......................................... 43,484
Professional fees........................................... 37,059
Shareholder reports and notices............................. 28,879
Custodian fees.............................................. 21,895
Registration fees........................................... 11,977
Trustees' fees and expenses................................. 1,163
Other....................................................... 16,091
----------
Total Expenses.......................................... 493,073
Less: amounts waived/reimbursed............................. (497)
Less: expense offset........................................ (419)
----------
Net Expenses............................................ 492,157
----------
Net Investment Income................................... 2,550,312
----------
Net Realized and Unrealized Gain (Loss):
Net Realized Loss on:
Investments................................................. (227,752)
Futures contracts........................................... (92,025)
Swap contracts.............................................. (8,548)
----------
Net Realized Loss....................................... (328,325)
----------
Net Change in Unrealized Appreciation/Depreciation
Investments................................................. (865,390)
Futures contracts........................................... 63,692
Swap contracts.............................................. 144,278
----------
Net Change in Unrealized Appreciation/Depreciation...... (657,420)
----------
Net Loss................................................ (985,745)
----------
Net Increase................................................ $1,564,567
==========
</Table>
See Notes to Financial Statements
21
Morgan Stanley Limited Duration Fund
FINANCIAL STATEMENTS continued
Statements of Changes in Net Assets
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
OCTOBER 31, 2007 APRIL 30, 2007
---------------- --------------
(unaudited)
Increase (Decrease) in Net Assets:
Operations:
Net investment income....................................... $ 2,550,312 $ 5,814,322
Net realized loss........................................... (328,325) (715,417)
Net change in unrealized appreciation/depreciation.......... (657,420) 1,305,630
------------ ------------
Net Increase............................................ 1,564,567 6,404,535
Dividends to shareholders from net investment income........ (2,718,873) (6,600,628)
Net decrease from transactions in shares of beneficial
interest.................................................. (14,273,265) (43,890,687)
------------ ------------
Net Decrease............................................ (15,427,571) (44,086,780)
Net Assets:
Beginning of period......................................... 116,113,540 160,200,320
------------ ------------
End of Period
(Including dividends in excess of net investment income of
$779,837 and $611,276, respectively)........................ $100,685,969 $116,113,540
============ ============
</Table>
See Notes to Financial Statements
22
Morgan Stanley Limited Duration Fund
NOTES TO FINANCIAL STATEMENTS - OCTOBER 31, 2007 (UNAUDITED)
1. Organization and Accounting Policies
Morgan Stanley Limited Duration Fund (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The Fund's investment objective is to provide a
high level of current income consistent with the preservation of capital. The
Fund was organized as a Massachusetts business trust on October 22, 1993 and
commenced operations on January 10, 1994.
The Fund will assess a 2% redemption fee, which is paid directly to the Fund,
for shares redeemed or exchanged within seven days of purchase, subject to
certain exceptions. The redemption fee is designed to protect the Fund and its
remaining shareholders from the effects of short-term trading.
The following is a summary of significant accounting policies:
A. Valuation of Investments -- (1) certain portfolio securities may be valued by
an outside pricing service approved by the Fund's Trustees; (2) 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; (3)
futures are valued at the latest price published by the commodities exchange on
which they trade; (4) interest rate/credit default swaps are marked-to-market
daily based upon quotations from market makers and the change, if any, is
recorded as unrealized appreciation or depreciation in the Statement of
Operations; (5) listed options are valued at the latest sale price on the
exchange on which they are listed unless no sales of such options have taken
place that day, in which case they are valued at the mean between their latest
bid and asked price; (6) when market quotations are not readily available
including circumstances under which Morgan Stanley Investment Advisors Inc. (the
"Investment Adviser") determines that the market quotations are not reflective
of 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; (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.
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.
23
Morgan Stanley Limited Duration Fund
NOTES TO FINANCIAL STATEMENTS - OCTOBER 31, 2007 (UNAUDITED) continued
C. Futures Contracts -- A futures contract is an agreement between two parties
to buy and sell financial instruments or contracts based on financial indices at
a set price on a future date. Upon entering into such a contract, the Fund is
required to pledge to the broker cash, U.S. Government securities or other
liquid portfolio securities equal to the minimum initial margin requirements of
the applicable futures exchange. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in the value of the contract. Such receipts or payments known as
variation margin are recorded by the Fund as unrealized gains and losses. Upon
closing of the contract, the Fund realizes a gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed.
D. Interest Rate Swaps -- Interest rate swaps involve the exchange of
commitments to pay and receive interest based on a notional principal amount.
Net periodic interest payments to be received or paid are accrued daily and are
recorded as realized gains or losses in the Statement of Operations.
E. Credit Default Swaps -- A credit default swap is an agreement between two
parties to exchange the credit risk of an issuer. The Fund may purchase credit
protection on the referenced obligation of the credit default swap ("Buy
Contract"), or provide credit protection on the referenced obligation of the
credit default swap ("Sale Contract"). A buyer of a credit default swap is said
to buy protection by paying periodic fees in return for a contingent payment
from the seller if the issuer has a credit event such as bankruptcy, failure to
pay outstanding obligations or deteriorating credit while the swap is
outstanding. A seller of a credit default swap is said to sell protection and
thus collects the periodic fees and profits if the credit of the issuer remains
stable or improves while the swap is outstanding. If a credit event occurs, the
seller pays to the buyer the maximum payout amount limited to the notional
amount of the swap contract as disclosed in the table following the Portfolio of
Investments. During the term of the swap agreement, the Fund receives or pays
periodic fixed payments from or to the respective counterparty calculated at the
agreed upon interest rate applied to the notional amount. These periodic
payments are accrued daily and recorded as realized gains or losses in the
Statement of Operations. In addition, upon termination of the swap contract,
gains and losses are also realized. Any upfront payment received or paid by the
Fund is recorded as assets/liabilities on the Fund's books.
F. Options -- When the Fund writes a call or put option, an amount equal to the
premium received is included in the Fund's Statement of Assets and Liabilities a
liability which is subsequently marked-to-market to reflect the current market
value of the option written. If a written option either expires or the Fund
enters into a closing purchase transaction, the Fund realizes a gain or loss
without regard to any unrealized gain or loss on the underlying security or
currency and the liability related to such
24
Morgan Stanley Limited Duration Fund
NOTES TO FINANCIAL STATEMENTS - OCTOBER 31, 2007 (UNAUDITED) continued
option is extinguished. If a written call option is exercised, the Fund realizes
a gain or loss from the sale of the underlying security and the proceeds from
such sale are increased by the premium originally received. If a written put
option is exercised, the amount of the premium originally received reduces the
cost of the security, which the Fund purchases upon exercise of the option.
When the Fund purchases a call or put option, the premium paid is recorded as an
investment which and is subsequently marked-to-market to reflect the current
market value. If a purchased option expires, the Fund will realize a loss to the
extent of the premium paid. If the Fund enters into a closing sale transaction,
a gain or loss is realized for the difference between the proceeds from the sale
and the cost of the option. If a put option is exercised, the cost of the
security or currency sold upon exercise will be increased by the premium
originally paid. If a call option is exercised, the cost of the security
purchased upon exercise will be increased by the premium originally paid.
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 income to its shareholders. Therefore, no provision for federal income
tax is required. The Fund files tax returns with the U.S. Internal Revenue
Service and various states. Generally, the tax authorities can examine all tax
returns filed for the last three years. If applicable, the Fund recognizes
interest accrued related to unrecognized tax benefits in interest expense and
penalties in other expenses in the Statement of Operations. The Fund adopted the
provisions of the Financial Accounting Standards Board's (FASB) Interpretation
number 48 Accounting for Uncertainty in Income Taxes, on June 30, 2007. As of
October 31, 2007, this did not result in an impact to the Fund's financial
statements.
H. Dividends and Distributions to Shareholders -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.
I. Use of Estimates -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
2. Investment Advisory/Administration Agreements
Pursuant to an Investment Advisory Agreement with Morgan Stanley 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 as
of the close of each business day: 0.52% of the portion of the daily net assets
not exceeding $1 billion; 0.47% to the portion of the daily net assets exceeding
$1 billion but not exceeding $2 billion and 0.42% of the portion of the daily
net assets in excess of $2 billion.
25
Morgan Stanley Limited Duration Fund
NOTES TO FINANCIAL STATEMENTS - OCTOBER 31, 2007 (UNAUDITED) continued
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. 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 services 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 six months ended October 31, 2007, advisory fees paid were reduced by
$497 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 $23,788 for the six months ended October 31, 2007. During the six
months ended October 31, 2007, cost of purchases and sales of investments in
Morgan Stanley Institutional Liquidity Money Market Portfolio -- Institutional
Class aggregated $18,188,699 and $16,207,634, respectively.
The cost of purchases and proceeds from sales/prepayments/maturities of
portfolio securities, excluding short-term investments, for six months ended
October 31, 2007 were $10,965,638, and $29,343,512, respectively. Included in
the aforementioned are sales/prepayments of U.S. Government securities of
$4,654,977.
Morgan Stanley Trust, an affiliate of the Investment Adviser and Administrator,
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 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.
26
Morgan Stanley Limited Duration Fund
NOTES TO FINANCIAL STATEMENTS - OCTOBER 31, 2007 (UNAUDITED) continued
4. Shares of Beneficial Interest
Transactions in shares of beneficial interest were as follows:
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
OCTOBER 31, 2007 APRIL 30, 2007
------------------------- -------------------------
(unaudited)
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
Sold.............................................. 265,924 $ 2,380,035 1,269,539 $ 11,424,932
Reinvestment of dividends......................... 229,448 2,052,906 526,268 4,737,400
---------- ------------ ---------- ------------
495,372 4,432,941 1,795,807 16,162,332
Redeemed.......................................... (2,090,042) (18,706,206) (6,670,835) (60,053,019)
---------- ------------ ---------- ------------
Net decrease...................................... (1,594,670) $(14,273,265) (4,875,028) $(43,890,687)
========== ============ ========== ============
</Table>
5. Federal Income Tax Status
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for tax purposes are reported as distributions of paid-in-capital.
As of April 30, 2007, the Fund had a net capital loss carryforward of
$27,648,478 of which $51,242 will expire on April 30, 2008, $2,035,052 will
expire on April 30, 2009, $1,582,163 will expire on April 30, 2011, $2,183,130
will expire on April 30, 2012, $11,744,997 will expire on April 30, 2013,
$4,214,200 will expire on April 30, 2014 and $5,837,694 will expire on April 30,
2015 to offset future capital gains to the extent provided by regulations.
As of April 30, 2007, the Fund had temporary book/tax differences primarily
attributable to post-October losses (capital losses incurred after October 31
within the taxable year which are deemed to arise on the first business day of
the Fund's next taxable year), capital loss deferrals on wash sales, book
amortization of premiums on debt securities, mark-to-market of open futures
contracts and dividend payable.
6. Purposes of and Risks Relating to Certain Financial Instruments
To hedge against adverse interest rate and market risks on portfolio positions
or anticipated positions in U.S. Government securities, the Fund may enter into
interest rate futures contracts ("futures contracts").
27
Morgan Stanley Limited Duration Fund
NOTES TO FINANCIAL STATEMENTS - OCTOBER 31, 2007 (UNAUDITED) continued
For hedging and investment purposes, the Fund may also engage in transactions in
listed and over-the-counter options.
These futures contracts involve elements of market risk in excess of the amount
reflected in the Statement and Assets and Liabilities. The Fund bears the risk
of an unfavorable change in the value of the underlying securities. Risk may
also arise upon entering into contracts from the potential inability of
counterparts to meet the terms of their contracts.
The Fund may enter into interest rate swaps and may purchase or sell interest
rate caps, floors and collars. The Fund expects to enter into these transactions
primarily to manage interest rate risk, hedge portfolio positions and preserve a
return or spread on a particular investment or portion of its portfolio. The
Fund may also enter into these transactions to protect against any increase in
the price of securities the Fund anticipates purchasing at a later date.
Interest rate swap transactions are subject to market risk, risk of default by
the other party to the transaction, risk of imperfect correlation and manager
risk. Such risks may exceed the related amounts shown in the Statement of Assets
and Liabilities.
The Fund may enter into credit default swaps for hedging purposes to add
leverage to its portfolio or to gain exposure to a credit in which the Fund may
otherwise invest. Credit default swaps may involve greater risks than if a fund
had invested in the issuer directly. Credit default swaps are subject to general
market risk, counterparty risk and credit risk. If the Fund is a buyer and no
credit event occurs, it will lose its investment. In addition, if the Fund is a
seller and a credit event occurs, the value of the referenced obligation
received by the Fund coupled with the periodic payments previously received may
be less than the maximum payout amount it pays to the buyer, resulting in a loss
to the Fund.
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.
8. Accounting Pronouncement
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.
28
Morgan Stanley Limited Duration Fund
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED APRIL 30,
MONTHS ENDED ---------------------------------------------------------
OCTOBER 31, 2007 2007 2006 2005 2004 2003
----------------- --------- --------- --------- --------- ---------
(unaudited)
Selected Per Share Data:
Net asset value, beginning of period... $9.01 $9.02 $9.17 $9.41 $9.68 $9.59
----- ----- ----- ----- ----- -----
Income (loss) from investment
operations:
Net investment income.............. 0.20 0.33 0.16 0.19 0.17 0.24
Net realized and unrealized gain
(loss)............................. (0.06) 0.09 0.05 (0.08) (0.07) 0.13
----- ----- ----- ----- ----- -----
Total income from investment
operations............................ 0.14 0.42 0.21 0.11 0.10 0.37
----- ----- ----- ----- ----- -----
Less dividends from net investment
income:............................... (0.23) (0.43) (0.36) (0.35) (0.37) (0.28)
----- ----- ----- ----- ----- -----
Net asset value, end of period......... $8.92 $9.01 $9.02 $9.17 $9.41 $9.68
===== ===== ===== ===== ===== =====
Total Return+.......................... 1.54%(1) 4.77% 2.29% 1.20% 0.99% 3.93%
Ratios To Average Net Assets:
Total expenses (before expense
offset)............................... 0.91%(2)(4) 0.85%(5) 0.80%(5) 0.76%(3) 0.85%(3) 0.84%(5)
Net investment income.................. 4.69%(2)(4) 4.23%(5) 2.95%(5) 2.63% 1.75% 1.90%(5)
Supplemental Data:
Net assets, end of period, in
thousands............................. $100,686 $116,114 $160,200 $356,124 $488,409 $429,409
Portfolio turnover rate................ 10%(1) 63% 54% 82% 240% 217%
</Table>
- ---------------------
<Table>
+ Calculated based on the net asset value as of the last
business day of the period.
(1) Not Annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.01%.
(4) Reflects waivers 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 waivers the expenses as a
percentage of its net assets had an effect of less than
0.005%.
(5) If the Fund had borne all expenses that were assumed or
waived by the Investment Adviser, the annualized expense and
net investment income ratios would have been as follows:
</Table>
<Table>
<Caption>
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO INCOME RATIO
------------ ------- --------------
April 30, 2007 0.89% 4.19%
April 30, 2006 0.83 2.93
April 30, 2003 0.87 1.86
</Table>
See Notes to Financial Statements
29
(This Page Intentionally Left Blank)
(This Page Intentionally Left Blank)
TRUSTEES
Frank L. Bowman
Michael Bozic
Kathleen A. Dennis
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael F. Klein
Michael E. Nugent
W. Allen Reed
Fergus Reid
OFFICERS
Michael E. Nugent
Chairperson of the Board
Ronald E. Robison
President and Principal Executive Officer
J. David Germany
Vice President
Dennis F. Shea
Vice President
Amy R. Doberman
Vice President
Carsten Otto
Chief Compliance Officer
Stefanie V. Chang Yu
Vice President
Francis J. Smith
Treasurer and Chief Financial Officer
Mary E. Mullin
Secretary
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
LEGAL COUNSEL
Clifford Chance US LLP
31 West 52nd Street
New York, New York 10019
COUNSEL TO THE INDEPENDENT TRUSTEES
Kramer Levin Naftalis & Frankel LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT ADVISER
Morgan Stanley Investment Advisors Inc.
522 Fifth Avenue
New York, New York 10036
The financial statements included herein have been taken from the records of the
Fund without examination by the independent auditors and accordingly they do not
express an opinion thereon.
This report is submitted for the general information of the shareholders of the
Fund. For more detailed information about the Fund, its fees and expenses and
other pertinent information, please read its Prospectus. The Fund's Statement of
Additional Information contains additional information about the Fund, including
its trustees. It is available, without charge, by calling (800) 869-NEWS.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective Prospectus. Read the
Prospectus carefully before investing.
Morgan Stanley Distributors Inc., member FINRA.
(c) 2007 Morgan Stanley
[MORGAN STANLEY LOGO]
MORGAN STANLEY FUNDS
Morgan Stanley
Limited Duration Fund
Semiannual Report
October 31, 2007
[MORGAN STANLEY LOGO]
MSLSAN
1U07-05330P-Y10/07
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.
Refer to Item 1.
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 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.
2
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 Limited Duration Fund
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
December 20, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
December 20, 2007
/s/ Francis Smith
Francis Smith
Principal Financial Officer
December 20, 2007
3