<Page>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-07117
Morgan Stanley Limited Duration Fund
(Exact name of registrant as specified in charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip code)
Ronald E. Robison
1221 Avenue of the Americas, New York, New York 10020
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-762-4000
Date of fiscal year end: April 30, 2003
Date of reporting period: April 30, 2003
<Page>
ITEM 1. Report to Stockholders.
Morgan Stanley Limited Duration Fund
LETTER TO THE SHAREHOLDERS / / APRIL 30, 2003
Dear Shareholder:
This annual report to shareholders of Morgan Stanley Limited Duration Fund
covers the 12-month period ended April 30, 2003. The period included a
continuation of the persistent concerns that have resulted in investment-grade
securities yields falling to 45-year lows. These included concerns about
corporate accounting and governance, the conflict in the Mideast, potential
terrorist events and SARS.
By the beginning of the period, the cumulative effects of corporate-governance
and accounting scandals had shaken investor confidence, with adverse effects on
the economy and the non-government security markets. The deterioration in
confidence was especially pronounced following the first announcement in late
June of accounting fraud at WorldCom. The resulting flight to quality and
subsequent additional easing of monetary policy created a fresh impetus toward
lower Treasury yields.
Thereafter, there were several periods in which market participants began to
believe that the economy was improving and security yields rose. Each of these
was followed by renewed concerns about the geopolitical situation and, toward
the end of the period, about SARS. Interest rates fell relatively sharply during
the first half of the review period, then posted more-moderate changes during
the latter half. For example, during the first half the two-year Treasury yield
fell from 3.22 percent to 1.67 percent. During the latter half it fell an
additional 18 basis points to 1.49 percent.
In our view, these low yields were inconsistent with an eventual return to
normal economic activity. Our analysis suggests that, by the end of the period,
Treasury yields were consistent with slow economic growth for about the next
five years and below full employment growth for some ten years. We viewed the
market's implied outlook as being excessively pessimistic. Accordingly, we
reduced the Fund's interest-rate sensitivity to lessen the effect if interest
rates rose. Although this decision hampered the Fund's performance somewhat, it
left the Fund with some insulation from potentially rising rates during the
period ahead.
Performance
For the 12-month period ended April 30, 2003, the Fund produced a total return
of 3.93 percent versus 10.45 percent for the Lehman Brothers U.S. Credit Index
(1-5 Year) and 4.79 percent for the Lipper Short Investment Grade Bond Funds
Index. THE TOTAL RETURN FIGURES ASSUME THE REINVESTMENT OF ALL DISTRIBUTIONS.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
The Fund's performance relative to its benchmark was handicapped by its
relatively limited duration. Throughout the period, the Fund maintained a
duration that was well below that of the Lehman Index, because of the manager's
view that interest rates reflected an overly pessimistic outlook for the
economy. The Fund's effective duration averaged approximately one year
throughout the review period and stood at 0.88 years on April 30, 2003, compared
to 2.75 years for the Lehman Index.
<Page>
Morgan Stanley Limited Duration Fund
LETTER TO THE SHAREHOLDERS / / APRIL 30, 2003 CONTINUED
In addition, a relatively large portion of the Fund was invested in
higher-coupon mortgage-backed securities. This sector lagged others during the
period because of concerns that falling interest rates would result in a
sustained period of high mortgage prepayment speeds.
We appreciate your ongoing support of Morgan Stanley Limited Duration Fund and
look forward to continuing to serve your investment needs.
Very truly yours,
[/S/ CHARLES A. FIUMEFREDDO] [/S/ MITCHELL M. MERIN]
Charles A. Fiumefreddo Mitchell M. Merin
CHAIRMAN OF THE BOARD PRESIDENT
Annual 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 and reside at the same address.
Your participation in this program will continue for an unlimited period of time
unless you instruct us otherwise. You can request multiple copies of these
documents by calling (800) 350-6414, 8:00 a.m. to 8:00 p.m., ET. Once our
Customer Service Center has received your instructions, we will begin sending
individual copies for each account within 30 days.
2
<Page>
Morgan Stanley Limited Duration Fund
FUND PERFORMANCE / / APRIL 30, 2003
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
GROWTH OF $10,000
($ in Thousands)
<Table>
<Caption>
FUND LEHMAN(3)(5) LIPPER(4)(5)
Jan-1994 $10,000 $10,000 $10,000
Jan-1994 $10,034 $10,000 $10,000
Apr-1994 $9,799 $9,727 $9,830
Jul-1994 $9,914 $9,899 $9,906
Oct-1994 $9,977 $9,899 $9,961
Jan-1995 $9,947 $10,027 $10,021
Apr-1995 $10,266 $10,413 $10,283
Jul-1995 $10,571 $10,779 $10,570
Oct-1995 $10,806 $11,050 $10,792
Jan-1996 $11,081 $11,406 $11,057
Apr-1996 $11,018 $11,269 $10,976
Jul-1996 $11,151 $11,428 $11,122
Oct-1996 $11,401 $11,776 $11,389
Jan-1997 $11,554 $11,926 $11,548
Apr-1997 $11,666 $12,027 $11,667
Jul-1997 $11,959 $12,442 $11,962
Oct-1997 $12,140 $12,622 $12,139
Jan-1998 $12,337 $12,881 $12,348
Apr-1998 $12,484 $13,010 $12,473
Jul-1998 $12,696 $13,219 $12,652
Oct-1998 $12,998 $13,581 $12,855
Jan-1999 $13,127 $13,791 $13,010
Apr-1999 $13,233 $13,864 $13,115
Jul-1999 $13,253 $13,797 $13,137
Oct-1999 $13,349 $13,999 $13,279
Jan-2000 $13,431 $14,000 $13,357
Apr-2000 $13,545 $14,155 $13,516
Jul-2000 $13,899 $14,529 $13,799
Oct-2000 $14,138 $14,851 $14,059
Jan-2001 $14,604 $15,495 $14,541
Apr-2001 $14,740 $15,808 $14,783
Jul-2001 $15,079 $16,294 $15,120
Oct-2001 $15,565 $16,841 $15,479
Jan-2002 $15,583 $16,775 $15,432
Apr-2002 $15,698 $16,913 $15,530
Jul-2002 $15,946 $17,314 $15,681
Oct-2002 $16,099 $17,726 $15,892
Jan-2003 $16,201 $18,241 $16,082
Apr-2003 $16,315(2) $18,681 $16,274
</Table>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH
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.
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURNS
-----------------------------------------------------------
PERIOD ENDED 4/30/2003
----------------------
1 Year 3.93%(1)
5 Years 5.50%(1)
Since Inception (1/10/94) 5.40%(1)
</Table>
- ---------------------
(1) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS. THERE IS NO SALES
CHARGE.
(2) CLOSING VALUE ASSUMING A COMPLETE REDEMPTION ON APRIL 30, 2003.
(3) 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 DOES NOT INCLUDE ANY EXPENSES, FEES OR CHARGES.
THE INDEX IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT.
(4) THE LIPPER SHORT INVESTMENT GRADE BOND FUND 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.
(5) PERIOD BEGINS 1/31/1994.
3
<Page>
Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS / / APRIL 30, 2003
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------
Corporate Bonds (14.0%)
AEROSPACE & DEFENSE (0.3%)
$ 475 Lockheed Martin Corp.............................. 7.25 % 05/15/06 $ 537,806
270 McDonnell Douglas Corp............................ 6.875 11/01/06 294,432
165 Raytheon Co....................................... 8.20 03/01/06 189,441
180 Raytheon Co....................................... 6.75 08/15/07 200,231
------------
1,221,910
------------
AIRLINES (0.1%)
230 Southwest Airlines Co............................. 5.496 11/01/06 246,654
------------
AUTO PARTS: O.E.M. (0.2%)
640 Delphi Automotive Systems Corp.................... 6.125 05/01/04 656,874
385 Johnson Controls, Inc............................. 5.00 11/15/06 409,238
------------
1,066,112
------------
BROADCASTING (0.4%)
1,850 Clear Channel Communications, Inc................. 7.25 09/15/03 1,882,758
------------
BUILDING PRODUCTS (0.1%)
275 Masco Corp........................................ 4.625 08/15/07 282,893
------------
CABLE/SATELLITE TV (0.3%)
705 Comcast Corp...................................... 5.85 01/15/10 750,176
350 Cox Communications Inc............................ 7.75 08/15/06 398,335
300 TCI Communications, Inc........................... 8.00 08/01/05 327,018
------------
1,475,529
------------
DEPARTMENT STORES (0.3%)
840 Federated Department Stores, Inc.................. 6.625 09/01/08 933,699
130 May Department Stores Co.......................... 6.875 11/01/05 142,683
------------
1,076,382
------------
DISCOUNT STORES (0.1%)
310 Target Corp....................................... 7.50 02/15/05 340,354
------------
DRUGSTORE CHAINS (0.2%)
725 CVS Corp.......................................... 5.625 03/15/06 789,099
135 CVS Corp.......................................... 3.875 11/01/07 137,254
------------
926,353
------------
ELECTRIC UTILITIES (0.2%)
815 Appalachian Power Corp............................ 3.60 05/15/08 814,658
190 Duke Energy Corp.................................. 4.50 04/01/10 194,377
------------
1,009,035
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
4
<Page>
Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS / / APRIL 30, 2003 CONTINUED
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------
ELECTRICAL PRODUCTS (0.1%)
$ 270 Cooper Industries Inc............................. 5.25% 07/01/07 $ 289,518
------------
ENVIRONMENTAL SERVICES (0.1%)
510 WMX Technologies, Inc............................. 7.00 10/15/06 566,494
------------
FINANCE/RENTAL/LEASING (1.0%)
740 American General Finance Corp..................... 5.875 07/14/06 806,031
1,500 Ford Motor Credit Co.............................. 6.875 02/01/06 1,551,755
1,250 Ford Motor Credit Co.............................. 6.50 01/25/07 1,277,741
210 Hertz Corp........................................ 7.00 07/01/04 215,192
160 Household Finance Corp............................ 6.75 05/15/11 180,283
215 Household Finance Corp............................ 6.375 10/15/11 235,479
220 Prime Property Funding II - 144A*................. 7.00 08/15/04 233,163
------------
4,499,644
------------
FINANCIAL CONGLOMERATES (1.1%)
715 Boeing Capital Corp............................... 5.75 02/15/07 758,112
1,810 General Electric Capital Corp..................... 5.375 03/15/07 1,969,012
640 General Motors Acceptance Corp.................... 7.50 07/15/05 684,898
1,170 General Motors Acceptance Corp.................... 6.125 08/28/07 1,214,946
365 John Hancock Financial Services, Inc.............. 5.625 12/01/08 391,938
------------
5,018,906
------------
FOOD RETAIL (0.5%)
735 Kroger Co......................................... 7.375 03/01/05 794,465
550 Kroger Co......................................... 7.625 09/15/06 622,657
625 Safeway Inc....................................... 6.15 03/01/06 677,983
------------
2,095,105
------------
FOOD: MAJOR DIVERSIFIED (0.1%)
365 Kraft Foods Inc................................... 5.25 06/01/07 384,220
------------
FOOD: MEAT/FISH/DAIRY (0.2%)
630 Conagra Foods, Inc................................ 6.00 09/15/06 688,954
------------
FOREIGN GOVERNMENT OBLIGATIONS (0.5%)
935 Quebec Province (Canada).......................... 5.50 04/11/06 1,017,968
945 United Mexican States (Mexico).................... 8.625 03/12/08 1,130,220
------------
2,148,188
------------
FOREST PRODUCTS (0.4%)
1,660 Weyerhaeuser Co................................... 5.50 03/15/05 1,743,986
------------
GAS DISTRIBUTORS (0.4%)
1,315 Consolidated Natural Gas Co....................... 5.375 11/01/06 1,416,948
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
5
<Page>
Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS / / APRIL 30, 2003 CONTINUED
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------
$ 309 Ras Laffan Liquefied Natural Gas Co. Ltd. - 144A*
(Qatar).......................................... 7.628% 09/15/06 $ 326,016
------------
1,742,964
------------
HOME BUILDING (0.1%)
240 Centex Corp....................................... 9.75 06/15/05 272,075
------------
HOME FURNISHINGS (0.1%)
195 Mohawk Industries, Inc. (Series C)................ 6.50 04/15/07 215,525
------------
HOME IMPROVEMENT CHAINS (0.1%)
565 Lowe's Companies Inc.............................. 7.50 12/15/05 640,887
------------
HOTELS/RESORTS/CRUISELINES (0.3%)
465 Hyatt Equities LLC - 144A*........................ 6.875 06/15/07 469,993
485 Marriott International Inc. (Ser D)............... 8.125 04/01/05 530,613
295 Starwood Hotels Resorts........................... 7.375 05/01/07 308,275
------------
1,308,881
------------
INDUSTRIAL CONGLOMERATES (0.4%)
1,480 Honeywell International, Inc...................... 5.125 11/01/06 1,599,930
------------
INSURANCE BROKERS/SERVICES (0.2%)
1,015 Marsh & McLennan Companies Inc.................... 5.375 03/15/07 1,094,569
------------
INTEGRATED OIL (0.3%)
250 Conoco Funding Co. (Canada)....................... 5.45 10/15/06 272,776
585 Conoco Inc........................................ 5.90 04/15/04 607,999
360 ConocoPhillips.................................... 8.50 05/25/05 406,548
------------
1,287,323
------------
INVESTMENT BANKS/BROKERS (0.7%)
1,570 Goldman Sachs Group, Inc.......................... 4.125 01/15/08 1,620,326
1,050 Lehman Brothers Holdings, Inc..................... 8.25 06/15/07 1,247,337
------------
2,867,663
------------
INVESTMENT MANAGERS (0.3%)
1,045 TIAA Global Markets - 144A*....................... 5.00 03/01/07 1,113,229
------------
LIFE/HEALTH INSURANCE (0.8%)
250 Equitable Life Assurance - 144A*.................. 6.95 12/01/05 278,292
585 John Hancock Global Funding - 144A*............... 5.625 06/27/06 636,344
460 John Hancock Global Funding II - 144A*............ 7.90 07/02/10 547,455
625 Metropolitan Life Insurance Co. - 144A*........... 6.30 11/01/03 640,138
630 Monumental Global Funding II - 144A*.............. 6.05 01/19/06 691,673
745 Prudential Insurance Co. - 144A*.................. 6.375 07/23/06 815,961
------------
3,609,863
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
6
<Page>
Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS / / APRIL 30, 2003 CONTINUED
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------
MAJOR TELECOMMUNICATIONS (0.8%)
$ 455 AT&T Corp......................................... 7.00% 11/15/06 $ 487,915
450 British Telecommunications PLC (Great Britain).... 8.375 12/15/10 553,851
415 Deutsche Telekom International Finance Corp.
(Netherlands).................................... 8.50 06/15/10 500,220
1,615 Verizon Communications, Inc....................... 6.36 04/15/06 1,783,850
------------
3,325,836
------------
MANAGED HEALTH CARE (0.5%)
575 Aetna, Inc........................................ 7.375 03/01/06 638,789
610 Anthem, Inc....................................... 4.875 08/01/05 640,541
275 UnitedHealth Group Inc............................ 7.50 11/15/05 309,588
410 Wellpoint Health Network, Inc..................... 6.375 06/15/06 452,895
------------
2,041,813
------------
MEDIA CONGLOMERATES (0.3%)
480 AOL Time Warner Inc............................... 6.15 05/01/07 517,369
945 News America Inc. - 144A*......................... 4.75 03/15/10 958,335
------------
1,475,704
------------
MOTOR VEHICLES (0.3%)
1,045 DaimlerChrysler North American Holdings Co........ 6.40 05/15/06 1,141,754
------------
MULTI-LINE INSURANCE (0.7%)
465 AIG SunAmerica Global Finance - 144A*............. 5.20 05/10/04 482,619
500 Farmers Insurance Exchange - 144A*................ 8.50 08/01/04 508,361
1,080 Hartford Financial Service Group, Inc. (The)...... 7.75 06/15/05 1,193,564
650 Nationwide Mutual Insurance - 144A*............... 6.50 02/15/04 671,332
------------
2,855,876
------------
OIL & GAS PRODUCTION (0.2%)
305 Kerr-McGee Corp................................... 5.875 09/15/06 329,797
300 Pemex Project Funding Master Trust................ 7.875 02/01/09 341,250
------------
671,047
------------
OIL REFINING/MARKETING (0.1%)
400 Ashland Inc....................................... 7.83 08/15/05 429,297
------------
OTHER CONSUMER SERVICES (0.2%)
520 Cendant Corp...................................... 6.25 01/15/08 555,407
335 Cendant Corp...................................... 6.25 03/15/10 354,837
------------
910,244
------------
PULP & PAPER (0.2%)
650 International Paper Co. - 144A*................... 3.80 04/01/08 653,152
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
7
<Page>
Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS / / APRIL 30, 2003 CONTINUED
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------
RAILROADS (0.3%)
$ 555 Norfolk Southern Corp............................. 7.875% 02/15/04 $ 581,435
200 Union Pacific Corp................................ 6.34 11/25/03 204,698
615 Union Pacific Corp................................ 5.84 05/25/04 638,936
------------
1,425,069
------------
REAL ESTATE INVESTMENT TRUSTS (0.5%)
415 EOP Operating LP.................................. 8.375 03/15/06 472,392
160 EOP Operating LP.................................. 6.763 06/15/07 177,629
1,170 Simon Property Group LP........................... 6.375 11/15/07 1,280,661
345 Vornado Realty Trust.............................. 5.625 06/15/07 355,224
------------
2,285,906
------------
Total Corporate Bonds
(COST $57,270,432)................................................................... 59,931,602
------------
U.S. Government & Agencies Obligations (56.2%)
Mortgage Pass-Through Securities (16.9%)
15,500 Federal Home Loan Mortgage Corp................... 6.00 *** 16,187,813
275 Federal Home Loan Mortgage Corp. PC Gold.......... 6.00 05/01/03 - 09/01/03 285,517
6,075 Federal Home Loan Mortgage Corp................... 7.50 *** 6,475,570
7,639 Federal Home Loan Mortgage Corp. PC Gold.......... 7.50 01/01/30 - 04/01/32 8,150,004
5,100 Federal Home Loan Mortgage Corp................... 7.50 10/01/26 - 08/01/32 5,440,557
7,000 Federal National Mortgage Corp.................... 6.50 *** 7,310,625
7,000 Federal National Mortgage Corp.................... 7.00 *** 7,398,125
9,610 Federal National Mortgage Corp.................... 7.50 09/01/29 - 09/01/32 10,240,293
4,032 Government National Mortgage Assoc................ 4.50 08/20/29 4,125,818
1,721 Government National Mortgage Assoc................ 5.00 09/20/29 1,770,550
4,155 Government National Mortgage Assoc................ 5.375 06/20/22 - 05/20/23 4,256,550
1,019 Government National Mortgage Assoc................ 5.625 10/20/24 - 12/20/24 1,042,499
------------
72,683,921
------------
U.S. Government & Agency Obligations (39.3%)
5,000 Federal National Mortgage Assoc................... 4.75 11/14/03 5,095,635
160,000 U.S. Treasury Notes............................... 3.00 - 7.25 11/30/03 - 08/15/04 163,638,591
------------
168,734,226
------------
Total U.S. Government & Agencies Obligations
(COST $240,095,655).................................................................. 241,418,147
------------
Asset Backed Securities (12.1%)
FINANCE/RENTAL/LEASING
2,000 Bank One Issuance Trust 2002-A4................... 2.94 06/16/08 2,044,114
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
8
<Page>
Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS / / APRIL 30, 2003 CONTINUED
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------
$ 1,150 BMW Vehicle Owner Trust 2002-2A4.................. 4.46% 05/25/07 $ 1,213,588
1,500 Capital Auto Receivables Asset Trust 2002-3A...... 3.58 10/16/06 1,555,815
1,200 Capital Auto Receivables Asset Trust 2002-2A...... 4.50 10/15/07 1,261,232
1,855 Chase Credit Card Master Trust 2001-4A............ 5.50 11/17/08 2,024,884
1,100 Chase Manhattan Auto Owner Trust 2002A............ 4.24 09/15/08 1,155,009
1,400 Chase Manhattan Auto Owner Trust 2002A............ 4.21 01/15/09 1,472,160
6 CIT Marine Trust 1999-A A2........................ 5.80 04/15/10 6,163
2,275 Citibank Credit Card Issuance Trust 2002A3........ 4.40 05/15/07 2,395,065
1,700 Citibank Credit Card Issuance Trust 2003-A2....... 2.70 01/15/08 1,723,604
2,200 Citibank Credit Issuance Trust 2000-A1............ 6.90 10/15/07 2,453,724
500 Connecticut RRB Special Purpose Trust CL&P-1
2001-1 A2........................................ 5.36 03/30/07 519,552
173 Daimler Chrysler Auto Trust 2000-C A3............. 6.82 09/06/04 174,006
1,200 Daimler Chrysler Auto Trust 2002-A A4............. 4.49 10/06/08 1,262,808
1,750 Daimler Chrysler Auto Trust 2002-C A4............. 3.09 01/08/08 1,792,114
2,300 Fleet Credit Card Master Trust II 2002-C.......... 2.75 04/15/08 2,340,260
146 Ford Credit Auto Owner Trust 2002-B............... 6.74 06/15/04 147,662
600 Ford Credit Auto Owner Trust 2002-B A3A........... 4.14 12/15/05 615,391
375 Ford Credit Auto Owner Trust 2002-B A4............ 4.75 08/15/06 396,995
1,900 Ford Credit Auto Owner Trust 2002-C A4............ 3.79 09/15/06 1,978,119
2,000 Ford Credit Auto Owner Trust 2002-D A4A........... 3.13 11/15/06 2,053,601
1,400 Harley-Davidson Motorcycle Trust 2002-1........... 3.09 06/15/10 1,436,298
1,600 Harley-Davidson Motorcycle Trust 2002-1 A2........ 4.50 01/15/10 1,681,332
1,400 Harley-Davidson Motorcycle Trust 2003-1........... 2.63 11/15/10 1,417,348
82 Honda Auto Receivables Owner Trust 2000-1......... 6.62 07/15/04 82,109
1,300 Honda Auto Receivables Owner Trust
2002-2 A4........................................ 4.49 09/17/07 1,370,446
650 Honda Auto Receivables Owner Trust 2002-1......... 3.50 10/17/05 659,392
1,500 Honda Auto Receivables Owner Trust 2002-4......... 2.70 03/17/08 1,518,648
2,000 Honda Auto Receivables Owner Trust 2003-1......... 2.48 07/18/08 2,015,135
1,198 Household Automotive Trust 2001-3 A3.............. 3.68 04/17/06 1,213,665
1,000 MBNA Credit Card Master 2002-A6-JA................ 3.90 11/15/07 1,042,970
1,200 MBNA Master Credit Card Trust 1997-JA............. 1.43 02/15/07 1,200,992
1,100 National City Auto Trust 2002-A................... 4.04 07/15/06 1,126,830
151 Nissan Auto Receivables Owner Trust 2000-C........ 6.72 08/16/04 152,364
500 Nissan Auto Receivables Owner Trust 2001-C........ 4.80 02/15/07 523,184
600 Nissan Auto Receivables Owner Trust
2002-A A3........................................ 3.58 09/15/05 609,376
900 Nissan Auto Receivables Owner Trust 2002 B........ 4.60 09/17/07 949,360
650 Nordstrom Private Label Credit Card Master
Trust - 144A* 2001-1A A.......................... 4.82 04/15/10 691,260
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
9
<Page>
Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS / / APRIL 30, 2003 CONTINUED
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------
$ 23 Premier Auto Trust 1999-2 A4...................... 5.59% 02/09/04 $ 22,645
2,500 Volkswagen Auto Lease Trust 2002-A................ 2.36 12/20/05 2,526,450
3,000 William Street Funding Corp. - 144A* 2003-1 A..... 1.59 04/23/06 3,000,000
------------
Total Asset Backed Securities
(COST $50,544,504)................................................................... 51,825,670
------------
Collateralized Mortgage Obligations (0.1%)
U.S. Government Agency
79 Federal Home Loan Mortgage Corp................... 6.50 03/15/29 79,381
182 Federal Home Loan Mortgage Corp................... 6.60 03/15/29 183,050
------------
Total Collateralized Mortgage Obligations
(COST $300,636)...................................................................... 262,431
------------
Short-Term Investments (24.1%)
Commercial Paper (a) (2.6%)
FINANCIAL CONGLOMERATES (2.3%)
10,000 General Electric Capital Corp..................... 1.24 05/09/03 9,997,244
------------
FOOD: MAJOR DIVERSIFIED (0.3%)
1,300 Kraft Inc......................................... 1.60 06/05/03 1,297,978
------------
Total Commercial Paper
(COST $11,295,222)................................................................... 11,295,222
------------
U.S. Government Agencies & Obligations (a) (5.9%)
15,000 Federal Home Loan Mortgage Corp................... 1.22 05/15/03 14,992,883
10,000 Federal National Mortgage Assoc................... 1.18 06/04/03 9,988,856
550 U.S. Treasury Bill**.............................. 1.15 09/25/03 547,417
------------
Total U.S. Government Agencies & Obligations
(COST $25,529,156)................................................................... 25,529,156
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
10
<Page>
Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS / / APRIL 30, 2003 CONTINUED
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------
Repurchase Agreement (15.6%)
$66,890 Joint repurchase agreement account (dated
04/30/03; proceeds $66,892,490) (b)
(COST $66,890,000)................................ 1.34 % 05/01/03 $ 66,890,000
------------
Total Short-Term Investments
(COST $103,714,378).................................................................. 103,714,378
------------
</Table>
<Table>
Total Investments
(COST $451,925,605) (c) (d)...................... 106.5% 457,152,228
Liabilities in Excess of Other Assets............. (6.5) (27,743,048)
----- ------------
Net Assets........................................ 100.0% $429,409,180
===== ============
</Table>
- ---------------------
PC PARTICIPATION CERTIFICATE.
* RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS.
** ALL OR A PORTION OF THESE SECURITIES HAVE BEEN PHYSICALLY SEGREGATED IN
CONNECTION WITH OPEN FUTURES CONTRACTS.
*** SECURITY PURCHASED ON A FORWARD COMMITMENT WITH AN APPROXIMATE PRINCIPAL
AMOUNT AND NO DEFINITE MATURITY DATE; THE ACTUAL PRINCIPAL AMOUNT AND
MATURITY DATE WILL BE DETERMINED UPON SETTLEMENT.
(A) PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATES SHOWN HAVE BEEN
ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD.
(B) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(C) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN AN AMOUNT EQUAL TO
$136,566,780 IN CONNECTION WITH SECURITIES PURCHASE ON A FORWARD
COMMITMENT BASIS AND OPEN FUTURES CONTRACTS.
(D) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $453,682,767. THE
AGGREGATE GROSS UNREALIZED APPRECIATION IS $5,284,967 AND THE AGGREGATE
GROSS UNREALIZED DEPRECIATION IS $1,815,506, RESULTING IN NET UNREALIZED
APPRECIATION OF $3,469,461.
Futures Contracts Open at April 30, 2003:
<Table>
<Caption>
UNDERLYING UNREALIZED
NUMBER OF DESCRIPTION, DELIVERY FACE AMOUNT APPRECIATION/
CONTRACTS LONG/SHORT MONTH, AND YEAR AT VALUE DEPRECIATION
- -------------------------------------------------------------------------------------------------------------
210 Long U.S. Treasury Notes 2 Year, June $ 45,340,314 $ 128,164
2003
373 Short U.S. Treasury Notes 5 Year, June (42,428,750) (157,413)
2003
104 Short U.S. Treasury Notes 10 Year, June (11,973,000) (68,197)
2003
---------
Net unrealized depreciation........................ $ (97,446)
=========
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
11
<Page>
Morgan Stanley Limited Duration Fund
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
APRIL 30, 2003
<Table>
Assets:
Investments in securities, at value (including
repurchase agreements of $66,890,000)
(cost $451,925,605).............................. $ 457,152,228
Receivable for:
Shares of beneficial interest sold.............. 9,185,956
Interest........................................ 2,766,000
Prepaid expenses and other assets................. 41,772
---------------
Total Assets.................................. 469,145,956
---------------
Liabilities:
Payable for:
Investments purchased........................... 38,189,791
Shares of beneficial interest redeemed.......... 1,002,684
Investment management fee....................... 238,959
Variation margin................................ 141,436
Dividends to shareholders....................... 69,009
Accrued expenses and other payables............... 94,897
---------------
Total Liabilities............................. 39,736,776
---------------
Net Assets.................................... $ 429,409,180
===============
Composition of Net Assets:
Paid-in-capital................................... $ 433,428,827
Net unrealized appreciation....................... 5,129,177
Dividends in excess of net investment income...... (1,194,723)
Accumulated net realized loss..................... (7,954,101)
---------------
Net Assets.................................... $ 429,409,180
===============
Net Asset Value Per Share,
44,382,107 SHARES OUTSTANDING (UNLIMITED
SHARES AUTHORIZED OF $.01 PAR VALUE)....... $ 9.68
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
12
<Page>
Morgan Stanley Limited Duration Fund
FINANCIAL STATEMENTS CONTINUED
Statement of Operations
FOR THE YEAR ENDED APRIL 30, 2003
<Table>
Net Investment Income:
Interest Income................................... $ 8,029,592
---------------
Expenses
Investment management fee......................... 2,054,536
Transfer agent fees and expenses.................. 250,157
Shareholder reports and notices................... 84,908
Registration fees................................. 68,306
Professional fees................................. 58,165
Custodian fees.................................... 19,783
Trustees' fees and expenses....................... 14,943
Other............................................. 11,871
---------------
Total Expenses................................ 2,562,669
Less: amounts waived/reimbursed................... (97,727)
---------------
Net Expenses.................................. 2,464,942
---------------
Net Investment Income......................... 5,564,650
---------------
Net Realized and Unrealized Gain (Loss):
Net Realized Gain/Loss on:
Investments..................................... 2,189,560
Futures contracts............................... (1,921,560)
---------------
Net Realized Gain............................. 268,000
---------------
Net Change in Unrealized Appreciation/Depreciation
on:
Investments..................................... 4,184,779
Futures contracts............................... (32,063)
---------------
Net Appreciation.............................. 4,152,716
---------------
Net Gain...................................... 4,420,716
---------------
Net Increase...................................... $ 9,985,366
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
Morgan Stanley Limited Duration Fund
FINANCIAL STATEMENTS CONTINUED
Statement of Changes in Net Assets
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
APRIL 30, 2003 APRIL 30, 2002
-------------- --------------
Increase (Decrease) in Net Assets:
Operations:
Net investment income................... $ 5,564,650 $ 5,322,647
Net realized gain....................... 268,000 3,573,849
Net change in unrealized
appreciation/depreciation.............. 4,152,716 (918,030)
------------ ------------
Net Increase........................ 9,985,366 7,978,466
Dividends to shareholders from net
investment income...................... (8,187,421) (6,198,203)
Net increase from transactions in shares
of beneficial interest................. 260,980,399 54,933,218
------------ ------------
Net Increase........................ 262,778,344 56,713,481
Net Assets:
Beginning of period..................... 166,630,836 109,917,355
------------ ------------
End of Period
(INCLUDING DIVIDENDS IN EXCESS OF NET
INVESTMENT INCOME OF $1,194,723 AND
$572,326, RESPECTIVELY)................ $429,409,180 $166,630,836
============ ============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
14
<Page>
Morgan Stanley Limited Duration Fund
NOTES TO FINANCIAL STATEMENTS / / APRIL 30, 2003
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 seeks to achieve its objective by investing in a diversified portfolio of
short-term fixed income securities. The Fund was organized as a Massachusetts
business trust on October 22, 1993 and commenced operations on January 10, 1994.
The following is a summary of significant accounting practices:
A. Valuation of Investments -- (1) 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; (2) futures are valued at the
latest price published by the commodities exchange on which they trade;
(3) when market quotations are not readily available or Morgan Stanley
Investment Advisors Inc. (the "Investment Manager") 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;
(4) certain portfolio securities may be valued by an outside pricing service
approved by the Fund's Trustees; and (5) 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. Interest income is accrued daily.
C. Repurchase Agreements -- Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other affiliated
entities managed by the Investment Manager, may transfer uninvested cash
balances into one or more joint repurchase agreement accounts. These balances
are invested in one or more repurchase agreements and are collateralized by
cash, U.S. Treasury or federal agency obligations. The Fund may also invest
directly with institutions in repurchase agreements. The Fund's custodian
receives the collateral, which is marked-to-market daily to determine that the
value of the collateral does not decrease below the repurchase price plus
accrued interest.
15
<Page>
Morgan Stanley Limited Duration Fund
NOTES TO FINANCIAL STATEMENTS / / APRIL 30, 2003 CONTINUED
D. 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.
E. Federal Income Tax Policy -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Accordingly, no federal income tax provision is required.
F. Dividends and Distributions to Shareholders -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.
G. Use of Estimates -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
2. Investment Management Agreement
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, accrued daily and payable monthly, by applying the
annual rate of 0.70% to the net assets of the Fund determined as of the close of
each business day.
For the period May 1, 2002 through December 31, 2002, the Investment Manager
waived its fee and reimbursed expenses to the extent they exceeded 0.80% of the
daily net assets of the Fund.
3. Security Transactions and Transactions with Affiliates
The cost of purchases and proceeds from sales/prepayments of portfolio
securities, excluding short-term investments, for the year ended April 30, 2003
were $695,123,814, and $542,744,348, respectively. Included in the
aforementioned are purchases and sales/prepayments of U.S. Government securities
of $624,655,282 and $516,102,538, respectively.
16
<Page>
Morgan Stanley Limited Duration Fund
NOTES TO FINANCIAL STATEMENTS / / APRIL 30, 2003 CONTINUED
Morgan Stanley Trust, an affiliate of the Investment Manager, is the Fund's
transfer agent. At April 30, 2003, the Fund had transfer agent fees and expenses
payable of approximately $2,600.
4. Shares of Beneficial Interest
Transactions in shares of beneficial interest were as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
APRIL 30, 2003 APRIL 30, 2002
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- -------------
Sold.......................... 42,201,034 $ 407,738,435 35,638,246 $ 340,437,108
Shares issued in connection
with the acquisition of
Morgan Stanley North American
Government Income Trust...... 7,879,235 76,281,762 -- --
Reinvestment of dividends..... 631,058 6,098,602 458,331 4,385,816
----------- ------------- ----------- -------------
50,711,327 490,118,799 36,096,577 344,822,924
Redeemed...................... (23,709,068) (229,138,400) (30,358,372) (289,889,706)
----------- ------------- ----------- -------------
Net increase.................. 27,002,259 $ 260,980,399 5,738,205 $ 54,933,218
=========== ============= =========== =============
</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.
The tax character of distributions paid was as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
APRIL 30, 2003 APRIL 30, 2002
-------------- --------------
Ordinary Income......................... $8,187,421 $6,198,203
</Table>
17
<Page>
Morgan Stanley Limited Duration Fund
NOTES TO FINANCIAL STATEMENTS / / APRIL 30, 2003 CONTINUED
As of April 30, 2003, the tax-basis components of accumulated losses were as
follows:
<Table>
Undistributed ordinary income..................... $ 631,448
Undistributed long-term gains..................... --
----------
Net accumulated earnings.......................... 631,448
Capital loss carryforward*........................ (7,537,611)
Post-October losses............................... (511,221)
Temporary differences............................. (71,724)
Net unrealized appreciation....................... 3,469,461
----------
Total accumulated losses.......................... $(4,019,647)
==========
</Table>
* As of April 30, 2003, the Fund had a net capital loss carryforward of
$7,537,611 of which $2,013,271 will expire on April 30, 2004, $151,743 will
expire on April 30, 2005, $1,656,930 will expire on April 30, 2006, $20,504 will
expire on April 30, 2007, $51,242 will expire on April 30, 2008, $2,043,383 will
expire on April 30, 2009 and $1,600,538 will expire on April 30, 2011 to offset
future capital gains to the extent provided by regulations.
As part of the Fund's acquisition of the assets of Morgan Stanley North American
Government Income Trust ("North American"), the Fund obtained a net capital loss
carryforward of approximately $18,769,000 from North American. Utilization of
this carryforward is subject to limitations imposed by the Internal Revenue Code
and Treasury Regulations, reducing the total carryforward available.
As of April 30, 2003, 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), and book amortization of premiums on debt
securities and permanent book/tax differences attributable to losses on
paydowns, tax adjustments on debt securities sold by the Fund and an expired
capital loss carryforward. To reflect reclassifications arising from the
permanent differences, paid-in-capital was charged $14,716,492, dividends in
excess of net investment income was credited $2,000,374 and accumulated net
realized loss was credited $12,716,118.
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").
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.
At April 30, 2003, the Fund had outstanding interest rate future contracts.
18
<Page>
Morgan Stanley Limited Duration Fund
NOTES TO FINANCIAL STATEMENTS / / APRIL 30, 2003 CONTINUED
7. Acquisition of Morgan Stanley North American Government Income Trust
On November 4, 2002, the Fund acquired all the net assets of the Morgan Stanley
North American Government Income Trust ("North American") based on the
respective valuations as of the close of business on November 1, 2002, pursuant
to a plan of reorganization approved by the shareholders of North American on
October 23, 2002. The acquisition was accomplished by a tax-free exchange of
7,879,235 shares of the Fund at a net asset value of $9.68 per share for
8,837,891 shares of North American. The net assets of the Fund and North
American immediately before the acquisition were $273,925,042 and $76,281,762,
respectively, including unrealized appreciation of $982,393 for North American.
Immediately after the acquisition, the combined net assets of the Fund amounted
to $350,206,804.
19
<Page>
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 YEAR ENDED APRIL 30,
---------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
Selected Per Share Data:
Net asset value,
beginning of period..... $ 9.59 $ 9.44 $ 9.20 $ 9.49 $ 9.49
------ ------ ------ ------ ------
Income (loss) from
investment operations:
Net investment
income................ 0.24 0.41 0.55 0.51 0.56
Net realized and
unrealized gain
(loss)................ 0.13 0.19 0.24 (0.29) -
------ ------ ------ ------ ------
Total income from
investment operations... 0.37 0.60 0.79 0.22 0.56
------ ------ ------ ------ ------
Less dividends from net
investment income....... (0.28) (0.45) (0.55) (0.51) (0.56)
------ ------ ------ ------ ------
Net asset value, end of
period.................. $ 9.68 $ 9.59 $ 9.44 $ 9.20 $ 9.49
====== ====== ====== ====== ======
Total Return+............ 3.93% 6.50% 8.82% 2.36% 6.00%
Ratios to Average Net
Assets(1):
Expenses................. 0.84% 0.80% 0.80% 0.80% 0.31%
Net investment income.... 1.90% 3.94% 5.87% 5.43% 5.68%
Supplemental Data:
Net assets, end of
period, in thousands.... $429,409 $166,631 $109,917 $118,694 $186,442
Portfolio turnover
rate.................... 217% 327% 133% 71% 58%
</Table>
- ---------------------
+ CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF
THE PERIOD.
(1) IF THE FUND HAD BORNE ALL EXPENSES THAT WERE ASSUMED OR WAIVED BY THE
INVESTMENT MANAGER, THE ANNUALIZED EXPENSE AND NET INVESTMENT INCOME
RATIOS WOULD HAVE BEEN AS FOLLOWS:
<Table>
<Caption>
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO INCOME RATIO
- ------------ --------- ----------------
APRIL 30, 2003 0.87% 1.86%
APRIL 30, 2002 0.92% 3.82%
APRIL 30, 2001 0.92% 5.75%
APRIL 30, 2000 0.90% 5.33%
APRIL 30, 1999 0.88% 5.11%
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
20
<Page>
Morgan Stanley Limited Duration Fund
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Trustees of
Morgan Stanley Limited Duration Fund:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Limited Duration Fund (the "Fund"), including the portfolio of
investments, as of April 30, 2003, and the related statements of operations for
the year then ended and changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of April 30, 2003, by correspondence with the custodian and
brokers; where replies were not received from brokers, we performed other
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Morgan
Stanley Limited Duration Fund as of April 30, 2003, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America.
Deloitte & Touche LLP
NEW YORK, NEW YORK
JUNE 9, 2003
2003 FEDERAL TAX NOTICE (UNAUDITED)
Of the Fund's ordinary income dividends paid during the fiscal
year ended April 30, 2003, 35.95% was attributable to qualifying
Federal obligations. Please consult your tax advisor to determine
if any portion of the dividends you received is exempt from state
income tax.
21
<Page>
Morgan Stanley Limited Duration Fund
TRUSTEE AND OFFICER INFORMATION
Independent Trustees:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF OVERSEEN
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS BY TRUSTEE**
- ------------------------- ----------- --------------- ------------------------------------------- --------------------
Michael Bozic (62) Trustee Since April Retired; Director or Trustee of the Morgan 123
c/o Mayer, Brown, Rowe & 1994 Stanley Funds and TCW/DW Term Trust 2003;
Maw formerly Vice Chairman of Kmart Corporation
Counsel to the (December 1998-October 2000), Chairman and
Independent Trustees Chief Executive Officer of Levitz Furniture
1675 Broadway Corporation (November 1995-November 1998)
New York, NY and President and Chief Executive Officer
of Hills Department Stores (May 1991-July
1995); formerly variously Chairman, Chief
Executive Officer, President and Chief
Operating Officer (1987-1991) of the Sears
Merchandise Group of Sears, Roebuck & Co.
Edwin J. Garn (70) Trustee Since January Director or Trustee of the Morgan Stanley 123
c/o Summit Ventures LLC 1993 Funds and TCW/DW Term Trust 2003; formerly
1 Utah Center United States Senator (R-Utah) (1974-1992)
201 S. Main Street and Chairman, Senate Banking Committee
Salt Lake City, UT (1980-1986); formerly Mayor of Salt Lake
City, Utah (1971-1974), Astronaut, Space
Shuttle Discovery (April 12-19, 1985) and
Vice Chairman, Huntsman Corporation
(chemical company); member of the Utah
Regional Advisory Board of Pacific Corp.
Wayne E. Hedien (68) Trustee Since September Retired; Director or Trustee of the Morgan 123
c/o Mayer, Brown, Rowe & 1997 Stanley Funds and TCW/DW Term Trust 2003;
Maw formerly associated with the Allstate
Counsel to the Companies (1966-1994), most recently as
Independent Trustees Chairman of The Allstate Corporation (March
1675 Broadway 1993-December 1994) and Chairman and Chief
New York, NY Executive Officer of its wholly-owned
subsidiary, Allstate Insurance Company
(July 1989-December 1994).
<Caption>
NAME, AGE AND ADDRESS OF
INDEPENDENT TRUSTEE OTHER DIRECTORSHIPS HELD BY TRUSTEE
- ------------------------- -----------------------------------
Michael Bozic (62) Director of Weirton Steel
c/o Mayer, Brown, Rowe & Corporation.
Maw
Counsel to the
Independent Trustees
1675 Broadway
New York, NY
Edwin J. Garn (70) Director of Franklin Covey (time
c/o Summit Ventures LLC management systems), BMW Bank of
1 Utah Center North America, Inc. (industrial
201 S. Main Street loan corporation), United Space
Salt Lake City, UT Alliance (joint venture between
Lockheed Martin and the Boeing
Company) and Nuskin Asia Pacific
(multilevel marketing); member of
the board of various civic and
charitable organizations.
Wayne E. Hedien (68) Director of The PMI Group Inc.
c/o Mayer, Brown, Rowe & (private mortgage insurance);
Maw Trustee and Vice Chairman of The
Counsel to the Field Museum of Natural History;
Independent Trustees director of various other business
1675 Broadway and charitable organizations.
New York, NY
</Table>
22
<Page>
Morgan Stanley Limited Duration Fund
TRUSTEE AND OFFICER INFORMATION CONTINUED
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF OVERSEEN
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS BY TRUSTEE**
- ------------------------- ----------- -------------- ------------------------------------------- --------------------
Dr. Manuel H. Johnson Trustee Since July Chairman of the Audit Committee and 123
(53) 1991 Director or Trustee of the Morgan Stanley
c/o Johnson Smick Funds and TCW/DW Term Trust 2003; Senior
International, Inc. Partner, Johnson Smick International, Inc.,
2099 Pennsylvania Avenue, a consulting firm; Co-Chairman and a
N.W. founder of the Group of Seven Council
Suite 950 (G7C), an international economic
Washington, D.C. commission; formerly Vice Chairman of the
Board of Governors of the Federal Reserve
System and Assistant Secretary of the U.S.
Treasury.
Michael E. Nugent (66) Trustee Since July Chairman of the Insurance Committee and 214
c/o Triumph Capital, L.P. 1991 Director or Trustee of the Morgan Stanley
445 Park Avenue Funds and TCW/DW Term Trust 2003;
New York, NY director/trustee of various investment
companies managed by Morgan Stanley
Investment Management Inc. and Morgan
Stanley Investments LP (since July 2001);
General Partner, Triumph Capital, L.P., a
private investment partnership; formerly
Vice President, Bankers Trust Company and
BT Capital Corporation (1984-1988).
<Caption>
NAME, AGE AND ADDRESS OF
INDEPENDENT TRUSTEE OTHER DIRECTORSHIPS HELD BY TRUSTEE
- ------------------------- -----------------------------------
Dr. Manuel H. Johnson Director of NVR, Inc. (home
(53) construction); Chairman and Trustee
c/o Johnson Smick of the Financial Accounting
International, Inc. Foundation (oversight organization
2099 Pennsylvania Avenue, of the Financial Accounting
N.W. Standards Board); Director of RBS
Suite 950 Greenwich Capital Holdings
Washington, D.C. (financial holding company).
Michael E. Nugent (66) Director of various business
c/o Triumph Capital, L.P. organizations.
445 Park Avenue
New York, NY
</Table>
23
<Page>
Morgan Stanley Limited Duration Fund
TRUSTEE AND OFFICER INFORMATION CONTINUED
Interested Trustees:
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
INTERESTED TRUSTEE REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
- ------------------------- ------------------- --------------- -------------------------------------------
Charles A. Fiumefreddo Chairman of the Since July 1991 Chairman and Director or Trustee of the
(69) Board and Trustee Morgan Stanley Funds and TCW/DW Term Trust
c/o Morgan Stanley Trust 2003; formerly Chairman, Chief Executive
Harborside Financial Officer and Director of the Investment
Center, Manager, the Distributor and Morgan Stanley
Plaza Two, Services, Executive Vice President and
Jersey City, NJ Director of Morgan Stanley DW, Chairman and
Director of the Transfer Agent, and
Director and/or officer of various Morgan
Stanley subsidiaries (until June 1998) and
Chief Executive Officer of the Morgan
Stanley Funds and the TCW/DW Term Trusts
(until September 2002).
James F. Higgins (54) Trustee Since June 2000 Director or Trustee of the Morgan Stanley
c/o Morgan Stanley Trust Funds and TCW/DW Term Trust 2003 (since
Harborside Financial June 2000); Senior Advisor of Morgan
Center, Stanley (since August 2000); Director of
Plaza Two, the Distributor and Dean Witter Realty
Jersey City, NJ Inc.; Director of AXA Financial, Inc. and
The Equitable Life Assurance Society of the
United States (financial services);
previously President and Chief Operating
Officer of the Private Client Group of
Morgan Stanley (May 1999-
August 2000), President and Chief Operating
Officer of Individual Securities of Morgan
Stanley (February 1997-
May 1999).
Philip J. Purcell (59) Trustee Since April Director or Trustee of the Morgan Stanley
1585 Broadway 1994 Funds and TCW/DW Term Trust 2003; Chairman
New York, NY of the Board of Directors and Chief
Executive Officer of Morgan Stanley and
Morgan Stanley DW; Director of the
Distributor; Chairman of the Board of
Directors and Chief Executive Officer of
Novus Credit Services Inc.; Director and/or
officer of various Morgan Stanley
subsidiaries.
<Caption>
NUMBER OF
PORTFOLIOS
IN FUND
COMPLEX
NAME, AGE AND ADDRESS OF OVERSEEN
INTERESTED TRUSTEE BY TRUSTEE** OTHER DIRECTORSHIPS HELD BY TRUSTEE
- ------------------------- -------------------- -----------------------------------
Charles A. Fiumefreddo 123 None
(69)
c/o Morgan Stanley Trust
Harborside Financial
Center,
Plaza Two,
Jersey City, NJ
James F. Higgins (54) 123 None
c/o Morgan Stanley Trust
Harborside Financial
Center,
Plaza Two,
Jersey City, NJ
Philip J. Purcell (59) 123 Director of American Airlines, Inc.
1585 Broadway and its parent company, AMR
New York, NY Corporation.
</Table>
- ----------------------------
* EACH TRUSTEE SERVES AN INDEFINITE TERM, UNTIL HIS OR HER SUCCESSOR IS
ELECTED.
** THE FUND COMPLEX INCLUDES ALL OPEN AND CLOSED-END FUNDS (INCLUDING ALL
OF THEIR PORTFOLIOS) ADVISED BY MORGAN STANLEY INVESTMENT ADVISORS INC.
AND ANY FUNDS THAT HAVE AN INVESTMENT ADVISOR THAT IS AN AFFILIATED
PERSON OF MORGAN STANLEY INVESTMENT ADVISORS INC. (INCLUDING BUT NOT
LIMITED TO, MORGAN STANLEY INVESTMENT MANAGEMENT INC., MORGAN STANLEY
INVESTMENTS LP AND VAN KAMPEN ASSET MANAGEMENT INC.).
24
<Page>
Morgan Stanley Limited Duration Fund
TRUSTEE AND OFFICER INFORMATION CONTINUED
Officers:
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED*
- ----------------------------------- ----------------------------------- -----------------------------------
Mitchell M. Merin (49) President Since May 1999
1221 Avenue of the Americas
New York, NY
Ronald E. Robison (64) Executive Vice President and Since April 2003
1221 Avenue of the Americas Principal Executive Officer
New York, NY
Barry Fink (48) Vice President, Secretary and Since February 1997
1221 Avenue of the Americas General Counsel
New York, NY
Joseph J. McAlinden (60) Vice President Since July 1995
1221 Avenue of the Americas
New York, NY
Francis Smith (37) Vice President and Chief Financial Since September 2002
c/o Morgan Stanley Trust Officer
Harborside Financial Center,
Plaza Two,
Jersey City, NJ
Thomas F. Caloia (57) Treasurer Since April 1989
c/o Morgan Stanley Trust
Harborside Financial Center,
Plaza Two,
Jersey City, NJ
<Caption>
NAME, AGE AND ADDRESS OF
EXECUTIVE OFFICER PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
- ----------------------------------- -------------------------------------------
Mitchell M. Merin (49) President and Chief Operating Officer of
1221 Avenue of the Americas Morgan Stanley Investment Management (since
New York, NY December 1998); President, Director (since
April 1997) and Chief Executive Officer
(since June 1998) of the Investment Manager
and Morgan Stanley Services; Chairman,
Chief Executive Officer and Director of the
Distributor (since June 1998); Chairman
(since June 1998) and Director (since
January 1998) of the Transfer Agent;
Director of various Morgan Stanley
subsidiaries; President (since May 1999) of
the Morgan Stanley Funds and TCW/DW Term
Trust 2003; Trustee (since December 1999)
and President and Chief Executive Officer
(since October 2002) of the Van Kampen
Open-End Funds and President and Chief
Executive Officer (since December 2002) of
the Van Kampen Closed-End Funds; previously
Chief Strategic Officer of the Investment
Manager and Morgan Stanley Services and
Executive Vice President of the Distributor
(April 1997-June 1998), Chief Executive
Officer (September 2002-April 2003) and
Vice President (May 1997-April 1999) of the
Morgan Stanley Funds and the TCW/DW Term
Trusts, and Executive Vice President of
Morgan Stanley.
Ronald E. Robison (64) Managing Director, Chief Administrative
1221 Avenue of the Americas Officer and Director (since February 1999)
New York, NY of the Investment Manager and Morgan
Stanley Services, Chief Executive Officer
and Director of the Transfer Agent and
Executive Vice President and Principal
Executive Officer of the Morgan Stanley
Funds and TCW/DW Term Trust 2003 (since
April 2003); previously Managing Director
of the TCW Group Inc.
Barry Fink (48) General Counsel (since May 2000) and
1221 Avenue of the Americas Managing Director (since December 2000) of
New York, NY Morgan Stanley Investment Management;
Managing Director (since December 2000),
and Director (since July 1998) of the
Investment Manager and Morgan Stanley
Services; Assistant Secretary of Morgan
Stanley DW; Vice President, Secretary and
General Counsel of the Morgan Stanley Funds
and TCW/DW Term Trust 2003 (since February
1997); Managing Director, Director and
Secretary of the Distributor; previously,
Vice President and Assistant General
Counsel of the Investment Manager and
Morgan Stanley Services (February
1997-December 2001).
Joseph J. McAlinden (60) Managing Director and Chief Investment
1221 Avenue of the Americas Officer of the Investment Manager, Morgan
New York, NY Stanley Investment Management Inc. and
Morgan Stanley Investments LP; Director of
the Transfer Agent, Chief Investment
Officer of the Van Kampen Funds.
Francis Smith (37) Vice President and Chief Financial Officer
c/o Morgan Stanley Trust of the Morgan Stanley Funds and TCW/DW Term
Harborside Financial Center, Trust 2003 (since September 2002);
Plaza Two, Executive Director of the Investment
Jersey City, NJ Manager and Morgan Stanley Services (since
December 2001); previously Vice President
of the Investment Manager and Morgan
Stanley Services (August 2000-November
2001) and Senior Manager at
PricewaterhouseCoopers LLP (January
1998-August 2000).
Thomas F. Caloia (57) Executive Director (since December 2002)
c/o Morgan Stanley Trust and Assistant Treasurer of the Investment
Harborside Financial Center, Manager, the Distributor and Morgan Stanley
Plaza Two, Services; previously First Vice President
Jersey City, NJ of the Investment Manager, the Distributor
and Morgan Stanley Services; Treasurer of
the Morgan Stanley Funds.
</Table>
- ----------------------------
* EACH OFFICER SERVES AN INDEFINITE TERM, UNTIL HIS OR HER SUCCESSOR IS
ELECTED.
25
<Page>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
OFFICERS
Charles A. Fiumefreddo
Chairman of the Board
Mitchell M. Merin
President
Ronald E. Robison
Executive Vice President and Principal Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
Joseph J. McAlinden
Vice President
Francis Smith
Vice President and Chief Financial Officer
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT MANAGER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
This report is submitted for the general information of the shareholders of
the Fund. For more detailed information about the Fund, its fees and expenses
and other pertinent information, please read its Prospectus. The Fund's
Statement of Additional Information contains additional information about the
Fund, including its trustees. It is available, without charge, by calling
(800) 869-NEWS.
This report is not authorized for distribution to prospective investors in
the Fund unless preceded or accompanied by an effective Prospectus. Read the
Prospectus carefully before investing.
Investments and services offered through Morgan Stanley DW Inc., member SIPC.
Morgan Stanley Funds are distributed by Morgan Stanley Distributors Inc.
Morgan Stanley Distributors Inc., member NASD.
[MORGAN STANLEY LOGO]
37880RPT-11155E03-AP-5/03
[MORGAN STANLEY LOGO]
[PHOTO]
Morgan Stanley
Limited Duration Fund
ANNUAL REPORT
APRIL 30, 2003
<Page>
Item 9 - Controls and Procedures
The Trust's principal executive officer and principal financial officer
have concluded that the Trust's disclosure controls and procedures are
sufficient to ensure that information required to be disclosed by the Trust 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.
There were no significant changes or corrective actions with regard to
siginficant deficiencies or material weaknesses in the Trust's internal
controls or in other factors that could significantly affect the Trust's
internal controls subsequent to the date of their evaluation.
<Page>
Item 10b Exhibits
A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.
Items 2-8 and Item 10a are not applicable
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant are attached herto as part
of EX-99.CERT.
Morgan Stanley Limited Duration Fund
Ronald E. Robison
Principal Executive Officer
June 20, 2003
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.
Ronald E. Robison
Principal Executive Officer
June 20, 2003
Francis Smith
Principal Financial Officer
June 20, 2003