<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, 2005
Date of reporting period: April 30, 2005
Item 1 - Report to Shareholders
<Page>
WELCOME, SHAREHOLDER:
IN THIS REPORT, YOU'LL LEARN ABOUT HOW YOUR INVESTMENT IN MORGAN STANLEY LIMITED
DURATION FUND PERFORMED DURING THE ANNUAL PERIOD. WE WILL PROVIDE AN OVERVIEW OF
THE MARKET CONDITIONS, AND DISCUSS SOME OF THE FACTORS THAT AFFECTED PERFORMANCE
DURING THE REPORTING PERIOD. IN ADDITION, THIS REPORT INCLUDES THE FUND'S
FINANCIAL STATEMENTS AND A LIST OF FUND INVESTMENTS.
THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS FOR THE FUND BEING
OFFERED.
MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE
IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. THE FUND IS
SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT MARKET VALUES OF
SECURITIES OWNED BY THE FUND WILL DECLINE AND, THEREFORE, THE VALUE OF THE
FUND'S SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE
MONEY INVESTING IN THIS FUND. PLEASE SEE THE PROSPECTUS FOR MORE COMPLETE
INFORMATION ON INVESTMENT RISKS.
<Page>
FUND REPORT
For the year ended April 30, 2005
TOTAL RETURN FOR THE 12 MONTHS ENDED APRIL 30, 2005
<Table>
<Caption>
MORGAN LEHMAN BROTHERS LIPPER
STANLEY 1-5 YEAR SHORT INVESTMENT
LIMITED U.S. CREDIT GRADE DEBT
DURATION FUND INDEX(1) FUNDS INDEX(2)
------------- --------------- ----------------
1.20% 2.08% 1.69%
</Table>
THE FUND'S TOTAL RETURN FIGURE ASSUMES THE REINVESTMENT OF ALL DISTRIBUTIONS BUT
DO NOT REFLECT THE DEDUCTION OF ANY APPLICABLE SALES CHARGES. SUCH COSTS WOULD
LOWER PERFORMANCE. SEE PERFORMANCE SUMMARY FOR STANDARDIZED PERFORMANCE AND
BENCHMARK INFORMATION.
MARKET CONDITIONS
The reporting period opened on a positive note following a string of strong
economic data. Investor sentiment reflected anticipation that the Federal Open
Market Committee (the Fed) would raise interest rates. This indeed proved to be
the case. Beginning in June, the Fed began a series of increases to the federal
funds rate, which brought the rate to 2.75 percent at the close of the reporting
period.
Continued softness in the economy pushed yields on intermediate and
longer-maturity securities lower in the third and into the fourth quarter of
2004. The market's concerns were fueled by continued weakness in employment
growth, anxiety about the U.S trade deficit and budget deficit, steady rises in
oil prices and uncertainty over the outcome of the U.S. presidential election.
The climate changed in November, however, when a surprisingly strong increase in
non-farm payrolls and in producer and consumer price indices pushed rates
higher. This improved sentiment continued well into the first quarter of 2005 as
rates continued to rise.
Against this backdrop, the yield curve flattened overall. Short- and
intermediate-term yields rose across the U.S. Treasury curve, while longer term
(10 years and longer) yields declined.
Performance among U.S. government and mortgage sectors varied during the period.
Treasuries and agencies posted the least impressive performance among the major
fixed-income sectors, due to their relative lack of yield and greater
sensitivity to changes in interest rates. Higher coupon mortgage-backed
securities, which tend to be less sensitive to rising interest rates,
outperformed their lower-coupon peers during the period.
Generally, corporate issues performed well due to investors' desire for
higher-yielding securities. Nevertheless, corporate yield spreads widened during
the first four months of 2005, most notably within the auto sector. General
Motors' (GM) lowered earnings guidance for the balance of 2005 took a toll on
its bonds, and also cast a shadow across the auto and auto-related industry.
2
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PERFORMANCE ANALYSIS
Morgan Stanley Limited Duration Fund underperformed both the Lehman Brothers 1-5
Year U.S. Credit Index and the Lipper Short Investment Grade Debt Funds Index
for the 12 months ended April 30, 2005.
Within the government sector, performance was varied. The Fund's emphasis on
higher-coupon, slow-prepaying mortgage issues benefited the Fund as rates rose
during the bulk of the period. Because of this focus, the Fund was less
susceptible to market volatility. However, an underweight to the agency sector
detracted slightly from relative performance as spreads tightened. Additionally,
the Fund's U.S. Treasuries generated more muted performance due to their
relative lack of yield.
Within the corporate debt sector, the Fund gained from its emphasis on insurance
companies, which outperformed for the period. Strong security selection in the
energy sector further enhanced returns. Additionally, a benchmark-neutral
weighting in the auto sector benefited relative performance in 2005. On the
upside, the portfolio's exposure to medium-quality issues benefited relative
performance during the majority of the period.
Overall, paper, gaming and lodging, and energy credits remain the emphasis of
the portfolio's medium-quality corporate holdings. Within the high-quality
segment, our sole overweight relative to the benchmark is in the insurance area.
Throughout the reporting period, we managed the Fund's overall duration*, or
interest-rate sensitivity, to be in line with ("neutral") or below that of its
benchmark. The defensive, below-benchmark duration was beneficial as interest
rates rose across the short and intermediate-portions of the curve. The neutral
position benefited relative performance during periods when rates declined.
* 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.
THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL
OR BE HELD BY THE FUND IN THE FUTURE.
3
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PORTFOLIO COMPOSITION**
<Table>
Corporate Bonds 49.7%
Asset-Backed Securities 19.8
U.S. Government Agencies -- Bonds 12.7
Mortgage-Backed Securities 8.5
U.S. Treasury Notes 5.0
Foreign Government Obligations 1.7
U.S. Government Agencies -- CMOs 1.5
Short-Term Investments 1.1
</Table>
LONG-TERM CREDIT ANALYSIS
<Table>
Aaa/AAA 50.5%
Aa/AA 13.8
A/A 20.5
Baa/BBB 15.1
Ba/BB 0.1
</Table>
DATA AS OF APRIL 30, 2005. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR
PORTFOLIO COMPOSITION ARE AS A PERCENTAGE OF TOTAL INVESTMENTS. 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.
** DOES NOT INCLUDE OUTSTANDING OPEN LONG FUTURES CONTRACTS WITH AN UNDERLYING
FACE AMOUNT OF $25,962,890 AND UNREALIZED APPRECIATION OF $117,311 AND OPEN
SHORT FUTURES CONTRACTS WITH AN UNDERLYING FACE AMOUNT OF $44,068,799 AND
UNREALIZED DEPRECIATION OF $176,645.
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 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 BY FILING THE SCHEDULE ELECTRONICALLY WITH THE
SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON
FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON FORM N-CSR. 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
4
<Page>
ACCESSING THE SEC'S WEB SITE, http://www.sec.gov. YOU MAY ALSO REVIEW AND COPY
THEM AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE
OPERATION OF THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE SEC
AT (800) SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT
OF A DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS
(publicinfo@sec.gov) OR BY WRITING THE PUBLIC REFERENCE SECTION OF THE SEC,
WASHINGTON, DC 20549-0102.
PROXY VOTING POLICIES AND PROCEDURES
A DESCRIPTION OF (1) THE FUND'S POLICIES AND PROCEDURES WITH RESPECT TO THE
VOTING OF PROXIES RELATING TO THE FUND'S PORTFOLIO SECURITIES AND (2) HOW THE
FUND VOTED PROXIES RELATING TO PORTFOLIO SECURITIES DURING THE MOST RECENT
12-MONTH PERIOD ENDED JUNE 30, 2004, IS AVAILABLE WITHOUT CHARGE, BY VISITING
THE MUTUAL FUND CENTER ON OUR WEB SITE AT www.morganstanley.com. THIS
INFORMATION IS ALSO AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB
SITE AT http://www.sec.gov.
HOUSEHOLDING NOTICE
TO REDUCE PRINTING AND MAILING COSTS, THE FUND ATTEMPTS TO ELIMINATE DUPLICATE
MAILINGS TO THE SAME ADDRESS. THE FUND DELIVERS A SINGLE COPY OF CERTAIN
SHAREHOLDER DOCUMENTS, INCLUDING SHAREHOLDER REPORTS, PROSPECTUSES AND PROXY
MATERIALS, TO INVESTORS WITH THE SAME LAST NAME WHO RESIDE AT THE SAME ADDRESS.
YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME
UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE
DOCUMENTS BY CALLING (800) 350-6414, 8:00 A.M. TO 8:00 P.M., ET. ONCE OUR
CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING
INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS.
5
<Page>
PERFORMANCE SUMMARY
[CHART]
PERFORMANCE OF A $10,000 INVESTMENT
<Table>
<Caption>
($ IN THOUSANDS) FUND++ LEHMAN(1) LIPPER(2)
Apr-1995 $ 10,000 $ 10,000 $ 10,000
Apr-1996 $ 10,733 $ 10,822 $ 10,674
Apr-1997 $ 11,364 $ 11,549 $ 11,346
Apr-1998 $ 12,161 $ 12,494 $ 12,130
Apr-1999 $ 12,891 $ 13,314 $ 12,754
Apr-2000 $ 13,195 $ 13,594 $ 13,143
Apr-2001 $ 14,358 $ 15,181 $ 14,376
Apr-2002 $ 15,291 $ 16,242 $ 15,102
Apr-2003 $ 15,893 $ 17,939 $ 15,825
Apr-2004 $ 16,050 $ 18,450 $ 16,064
Apr-2005 $ 16,244 $ 18,834 $ 16,335
</Table>
6
<Page>
AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED APRIL 30, 2005
<Table>
<Caption>
(SINCE 01/10/94)
SYMBOL MSLDX
1 YEAR 1.20%(3)
5 YEARS 4.24(3)
10 YEARS 4.97(3)
SINCE INCEPTION 4.63(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
morganstanley.com OR SPEAK WITH YOUR FINANCIAL ADVISOR. INVESTMENT RETURNS AND
PRINCIPAL VALUE WILL FLUCTUATE AND FUND SHARES, WHEN REDEEMED, MAY BE WORTH MORE
OR LESS THAN THEIR ORIGINAL COST. THE GRAPH AND TABLE DO NOT REFLECT THE
DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE
REDEMPTION OF FUND SHARES.
(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. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY
SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT
POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
(2) THE LIPPER SHORT INVESTMENT GRADE DEBT FUNDS INDEX IS AN EQUALLY WEIGHTED
PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN
THE LIPPER SHORT INVESTMENT GRADE DEBT FUNDS CLASSIFICATION. THE INDEX,
WHICH IS ADJUSTED FOR CAPITAL GAINS DISTRIBUTIONS AND INCOME DIVIDENDS, IS
UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT. THERE ARE CURRENTLY
30 FUNDS REPRESENTED IN THIS INDEX.
(3) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS. THERE ARE NO SALES
CHARGES.
++ ENDING VALUE ASSUMING A COMPLETE REDEMPTION ON APRIL 30, 2005.
7
<Page>
EXPENSE EXAMPLE
As a shareholder of the Fund, you incur ongoing costs, including management
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 11/01/04 - 04/30/05.
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), and redemption fees, or exchange fees.
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
11/01/04 -
11/01/04 04/30/05 04/30/05
------------- ------------- ---------------
Actual (0.35% return) $ 1,000.00 $ 1,003.50 $ 3.83
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,020.98 $ 3.86
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.77%
MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY
181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD).
8
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INVESTMENT ADVISORY AGREEMENT APPROVAL
NATURE, EXTENT AND QUALITY OF SERVICES
The Board reviewed and considered the nature and extent of the investment
advisory services provided by the Investment Adviser under the Advisory
Agreement, including portfolio management, investment research and fixed income
securities trading. The Board also reviewed and considered the nature and extent
of the non-advisory, administrative services provided by the Fund's
Administrator under the Administration Agreement, including accounting,
clerical, bookkeeping, compliance, business management and planning, and the
provision of supplies, office space and utilities at the Adviser's expense. (The
Investment Adviser and the Administrator together are referred to as the
"Adviser" and the Advisory and Administration Agreements together are referred
to as the "Management Agreement.") The Board also compared the nature of the
services provided by the Adviser with similar services provided by
non-affiliated advisers as reported to the Board by Lipper Inc. ("Lipper").
The Board reviewed and considered the qualifications of the portfolio managers,
the senior administrative managers and other key personnel of the Adviser who
provide the administrative and investment advisory services to the Fund. The
Board determined that the Adviser's portfolio managers and key personnel are
well qualified by education and/or training and experience to perform the
services in an efficient and professional manner. The Board concluded that the
nature and extent of the advisory and administrative services provided were
necessary and appropriate for the conduct of the business and investment
activities of the Fund. The Board also concluded that the overall quality of the
advisory and administrative services was satisfactory.
PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the Fund's performance for one-, three- and five-year periods
ended November 30, 2004, as shown in reports provided by Lipper (the "Lipper
Reports"), compared to the performance of comparable funds selected by Lipper
(the "performance peer group"), and noted that the Fund's performance was lower
than its performance peer group average for all three periods. The Adviser
informed the Board that the Fund's relative performance was hindered during a
period of declining interest rates due to the defensive positioning of the
Fund's portfolio. The Board discussed with the Adviser possible steps to improve
performance. The Board concluded that the relative underperformance was
understandable in view of the defensive positioning and corresponding lower risk
of the Fund's investments.
FEES RELATIVE TO OTHER FUNDS MANAGED BY THE ADVISER WITH COMPARABLE INVESTMENT
STRATEGIES
The Board reviewed the advisory and administrative fees (together, the
"management fee") paid by the Fund under the Management Agreement. The Board
noted that the management fee rate was higher than the management fee rates
charged by the Adviser to any other funds it manages with investment strategies
comparable to those of the Fund. The Board also noted, as discussed below, that
the rate was competitive with contractual rates charged by other advisers for
comparable funds.
9
<Page>
FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the management fee rate and total expense ratio of the Fund.
The Board noted that: (i) the Fund's management fee rate was higher than the
average management fee rate for funds, selected by Lipper (the "expense peer
group"), managed by other advisers with investment strategies comparable to
those of the Fund, as shown in the Lipper Report for the Fund; and (ii) the
Fund's total expense ratio was slightly higher than the average total expense
ratio of the mutual funds included in the Fund's expense peer group. The Board
also noted that most of the other funds in the expense peer group were waiving
part of their fees. The Board noted that the fee waivers by those funds were not
contractual obligations and could be terminated without shareholder consent and,
therefore, that the average fee excluding these waivers was a more valid
comparison. The Board concluded that the Fund's contractual management fee and
total expense ratio were competitive with those of the Fund's expense peer
group.
BREAKPOINTS AND ECONOMIES OF SCALE
The Board reviewed the structure of the Fund's management fee schedule under the
Management Agreement and noted that it includes breakpoints. The Board also
reviewed the level of the Fund's management fee and noted that the fee, as a
percentage of the Fund's net assets, would decrease as net assets increase
because the management fee includes breakpoints. The Board concluded that the
Fund's management fee would reflect economies of scale as assets increase.
PROFITABILITY OF ADVISER AND AFFILIATES
The Board considered and reviewed information concerning the costs incurred and
profits realized by the Adviser and its affiliates during the last two years
from their relationship with the Fund and the Morgan Stanley Fund Complex and
reviewed with the Controller of the Adviser the cost allocation methodology used
to determine the Adviser's profitability. Based on their review of the
information they received, the Board concluded that the profits earned by the
Adviser and its affiliates were not excessive in light of the advisory,
administrative and other services provided to the Fund.
FALL-OUT BENEFITS
The Board considered so-called "fall-out benefits" derived by the Adviser and
its affiliates from their relationship with the Fund and the Fund Complex, such
as "float" benefits derived from handling of checks for purchases and
redemptions of Fund shares through a broker-dealer affiliate of the Adviser. The
Board considered the float benefits and concluded that they were relatively
small.
10
<Page>
SOFT DOLLAR BENEFITS
The Board considered whether the Adviser realizes any benefits from commissions
paid to brokers who execute securities transactions for the Fund ("soft
dollars"). The Board noted that the Fund invests only in fixed income
securities, which do not generate soft dollars.
ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE FUND'S NEEDS
The Board considered whether the Adviser is financially sound and has the
resources necessary to perform its obligations under the Management Agreement.
The Board noted that the Adviser's operations remain profitable, although
increased expenses in recent years have reduced the Adviser's profitability. The
Board concluded that the Adviser has the financial resources necessary to
fulfill its obligations under the Management Agreement.
HISTORICAL RELATIONSHIP BETWEEN THE FUND AND THE ADVISER
The Board also reviewed and considered the historical relationship between the
Fund and the Adviser, including the organizational structure of the Adviser, the
policies and procedures formulated and adopted by the Adviser for managing the
Fund's operations and the Board's confidence in the competence and integrity of
the senior managers and key personnel of the Adviser. The Board concluded that
it is beneficial for the Fund to continue its relationship with the Adviser.
OTHER FACTORS AND CURRENT TRENDS
The Board considered the controls and procedures adopted and implemented by the
Adviser and monitored by the Fund's Chief Compliance Officer and concluded that
the conduct of business by the Adviser indicates a good faith effort on its part
to adhere to high ethical standards in the conduct of the Fund's business.
GENERAL CONCLUSION
After considering and weighing all of the above factors, the Board concluded it
would be in the best interest of the Fund and its shareholders to approve
renewal of the Management Agreement for another year.
11
<Page>
MORGAN STANLEY LIMITED DURATION FUND
PORTFOLIO OF INVESTMENTS - APRIL 30, 2005
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
CORPORATE BONDS (49.7%)
AEROSPACE & DEFENSE (0.4%)
$ 615 McDonnell Douglas Corp. 6.875% 11/01/06 $ 638,839
465 Northrop Grumman Corp. 4.079 11/16/06 464,998
105 Raytheon Co. 6.75 08/15/07 110,460
385 Raytheon Co. 8.30 03/01/10 445,099
---------------
1,659,396
---------------
AIR FREIGHT/COURIERS (0.1%)
540 Fedex Corp. 2.65 04/01/07 525,051
---------------
AIRLINES (0.1%)
615 Southwest Airlines Co. (Series 01-1) 5.496 11/01/06 628,442
---------------
AUTO PARTS: O.E.M. (0.2%)
745 Johnson Controls, Inc. 5.00 11/15/06 753,535
---------------
BEVERAGES: ALCOHOLIC (0.2%)
880 Miller Brewing Co. - 144A* 4.25 08/15/08 871,932
---------------
BUILDING PRODUCTS (0.3%)
275 Masco Corp. 4.625 08/15/07 276,991
795 Masco Corp. 6.75 03/15/06 814,181
---------------
1,091,172
---------------
CABLE/SATELLITE TV (0.9%)
1,120 Comcast Cable Communications, Inc. 6.875 06/15/09 1,217,019
705 Comcast Corp. 5.85 01/15/10 741,763
602 Cox Communications Inc. 3.55+ 12/14/07 605,975
350 Cox Communications Inc. 7.75 08/15/06 364,878
300 TCI Communications, Inc. 8.00 08/01/05 303,258
---------------
3,232,893
---------------
CHEMICALS: MAJOR DIVERSIFIED (0.1%)
390 ICI Wilmington Inc. 4.375 12/01/08 385,921
---------------
CONTAINERS/PACKAGING (0.1%)
205 Sealed Air Corp. - 144A* 6.95 05/15/09 219,618
---------------
DEPARTMENT STORES (0.8%)
160 Federated Department Stores, Inc. 6.30 04/01/09 169,338
1,320 Federated Department Stores, Inc. 6.625 09/01/08 1,402,518
1,155 May Department Stores Co., Inc. 3.95 07/15/07 1,144,458
430 May Department Stores Co., Inc. 6.875 11/01/05 436,528
---------------
3,152,842
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
12
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
DISCOUNT STORES (0.7%)
$ 2,605 Target Corp. 5.95% 05/15/06 $ 2,658,910
---------------
DRUGSTORE CHAINS (0.4%)
135 CVS Corp. 3.875 11/01/07 133,643
1,455 CVS Corp. 5.625 03/15/06 1,476,717
---------------
1,610,360
---------------
ELECTRIC UTILITIES (5.9%)
815 Appalachian Power Co. (Series G) 3.60 05/15/08 795,890
1,655 Carolina Power & Light Company Inc. 6.80 08/15/07 1,742,242
595 CC Funding Trust I 6.90 02/16/07 621,487
1,000 Columbus Southern Power Co. 4.40 12/01/10 986,800
2,985 Consolidated Natural Gas Co. (Series B) 5.375 11/01/06 3,040,686
590 Consumers Energy Co. 4.80 02/17/09 594,814
1,485 DTE Energy Co. 6.45 06/01/06 1,522,805
475 Duke Energy Corp. 3.75 03/05/08 468,883
415 Entergy Gulf States, Inc. 3.31+ 12/01/09 416,308
485 Entergy Gulf States, Inc. 3.60 06/01/08 474,641
690 Exelon Corp. 6.75 05/01/11 758,287
1,820 FPL Group Capital Inc. 3.25 04/11/06 1,811,790
1,530 Pacific Gas & Electric Co. 3.60 03/01/09 1,489,319
235 Panhandle Eastern Pipe Line Co. (Series B) 2.75 03/15/07 228,441
835 Peco Energy Co. 3.50 05/01/08 819,070
1,920 Pinnacle West Capital Corp. 6.40 04/01/06 1,950,507
2,725 Public Service Electric & Gas Co. 3.178+ 06/23/06 2,724,699
485 Wisconsin Electric Power Co. 3.50 12/01/07 477,097
---------------
20,923,766
---------------
ELECTRICAL PRODUCTS (0.2%)
680 Cooper Industries Inc. 5.25 07/01/07 694,380
---------------
ENVIRONMENTAL SERVICES (0.1%)
510 WMX Technologies, Inc. 7.00 10/15/06 530,065
---------------
FINANCE/RENTAL/LEASING (3.6%)
1,185 American Honda Finance Corp. - 144A* 3.85 11/06/08 1,164,638
545 CIT Group Inc. 2.875 09/29/06 536,472
1,300 CIT Group Inc. 2.98+ 11/04/05 1,301,661
1,035 CIT Group Inc. 7.375 04/02/07 1,094,895
1,000 Countrywide Home Loans, Inc. (Series MTN) 3.25 05/21/08 966,352
1,845 Ford Motor Credit Co. 6.875 02/01/06 1,866,583
305 MBNA America Bank NA 7.75 09/15/05 309,432
495 MBNA Corp. - (WI) 3.59+ 05/05/08 495,128
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
$ 1,535 MBNA Corp. 6.125% 03/01/13 $ 1,627,794
1,910 Nationwide Buildings Society - 144A*
(United Kingdom) 2.625 01/30/07 1,867,434
1,760 SLM Corp. 4.00 01/15/10 1,727,720
---------------
12,958,109
---------------
FINANCIAL CONGLOMERATES (5.2%)
1,300 Bank One NA Illinois 2.87+ 05/05/06 1,302,139
1,390 Bank One NA Illinois 5.50 03/26/07 1,427,716
410 Chase Manhattan Corp. 6.00 02/15/09 432,572
145 Chase Manhattan Corp. 7.00 11/15/09 159,052
585 Citicorp 6.75 08/15/05 590,592
2,505 Citigroup Global Markets Inc. 3.11+ 12/12/06 2,508,615
835 Citigroup Inc. 5.50 08/09/06 851,156
1,205 Citigroup Inc. 5.75 05/10/06 1,228,922
1,190 General Electric Capital Corp. 4.25 12/01/10 1,179,751
2,550 General Electric Capital Corp. 5.375 03/15/07 2,610,854
1,375 General Motors Acceptance Corp. 4.50 07/15/06 1,345,194
1,150 ING Security Life Institutional - 144A* 2.70 02/15/07 1,120,476
1,475 Pricoa Global Funding I - 144A* 3.90 12/15/08 1,450,856
1,470 Prudential Funding LLC (Series MTN) - 144A* 6.60 05/15/08 1,566,407
860 Prudential Insurance Co. - 144A* 6.375 07/23/06 887,036
---------------
18,661,338
---------------
FOOD RETAIL (1.4%)
2,510 Kroger Co. 7.625 09/15/06 2,620,033
2,318 Safeway Inc. 6.15 03/01/06 2,352,258
---------------
4,972,291
---------------
FOOD: MAJOR DIVERSIFIED (1.0%)
1,300 Conagra Foods, Inc. 6.00 09/15/06 1,332,088
325 General Mills Inc. 3.875 11/30/07 322,196
1,790 Kraft Foods Inc. 5.25 06/01/07 1,825,184
---------------
3,479,468
---------------
FOREST PRODUCTS (0.1%)
202 Weyerhaeuser Co. 6.125 03/15/07 208,925
---------------
GAS DISTRIBUTORS (0.6%)
450 Nisource Finance Corp. 3.43+ 11/23/09 453,144
132 Ras Laffan Liquid Natural Gas Co. Ltd. - 144A*
(Qatar) 7.628 09/15/06 136,487
1,440 Sempra Energy 4.75 05/15/09 1,444,113
---------------
2,033,744
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
14
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
HOME BUILDING (0.1%)
$ 240 Centex Corp. 9.75% 06/15/05 $ 241,429
---------------
HOME FURNISHINGS (0.2%)
630 Mohawk Industries, Inc. (Class C) 6.50 04/15/07 657,716
---------------
HOME IMPROVEMENT CHAINS (0.2%)
565 Lowe's Companies, Inc. 7.50 12/15/05 578,380
---------------
HOTELS/RESORTS/CRUISELINES (0.4%)
795 Hyatt Equities LLC - 144A* 6.875 06/15/07 823,041
130 Marriott International, Inc. (Series E) 7.00 01/15/08 138,577
295 Starwood Hotels & Resorts Worldwide, Inc. 7.375 05/01/07 306,800
---------------
1,268,418
---------------
HOUSEHOLD/PERSONAL CARE (0.4%)
1,305 Clorox Co. (The) - 144A* 3.125+ 12/14/07 1,307,506
---------------
INDUSTRIAL CONGLOMERATES (0.9%)
2,035 Honeywell International, Inc. 5.125 11/01/06 2,069,672
715 Honeywell International, Inc. 6.875 10/03/05 724,469
380 Textron Financial Corp. 4.125 03/03/08 379,725
---------------
3,173,866
---------------
INSURANCE BROKERS/SERVICES (0.5%)
1,785 Marsh & McLennan Companies Inc. 5.375 03/15/07 1,816,994
---------------
INTEGRATED OIL (0.5%)
1,728 Conoco Funding Co. (Canada) 5.45 10/15/06 1,766,324
---------------
INVESTMENT BANKS/BROKERS (1.5%)
2,370 Goldman Sachs Group Inc. (The) 4.125 01/15/08 2,366,042
2,652 Lehman Brothers Holdings, Inc. 8.25 06/15/07 2,875,277
---------------
5,241,319
---------------
INVESTMENT MANAGERS (1.4%)
4,250 TIAA Global Markets - 144A* 3.875 01/22/08 4,222,749
750 TIAA Global Markets - 144A* 5.00 03/01/07 762,471
---------------
4,985,220
---------------
LIFE/HEALTH INSURANCE (2.7%)
3,895 Genworth Financial, Inc. 3.16+ 06/15/07 3,905,809
2,025 John Hancock Financial Services, Inc. 5.625 12/01/08 2,114,740
635 John Hancock Global Funding - 144A* 5.625 06/27/06 646,902
135 John Hancock Global Funding II - 144A* 7.90 07/02/10 156,167
495 Monumental Global Funding II - 144A* 3.85 03/03/08 492,819
2,125 Monumental Global Funding II - 144A* 6.05 01/19/06 2,159,899
---------------
9,476,336
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
15
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
MAJOR BANKS (5.1%)
$ 1,815 ABN Amro Bank (Netherlands) 2.834%+ 05/11/07 $ 1,817,599
2,100 Bank of America Corp. 3.375 02/17/09 2,035,475
515 Bank of America Corp. 3.875 01/15/08 511,684
465 Bank of America Corp. 4.75 10/15/06 470,733
80 Bank of America Corp. 5.25 02/01/07 81,715
400 Bank of New York Co., Inc. (The) 5.20 07/01/07 408,236
3,405 Branch Banking & Trust Corp. 3.00+ 06/04/07 3,412,048
1,050 FleetBoston Financial Corp. 7.25 09/15/05 1,064,789
280 HSBC Finance Corp. 6.75 05/15/11 310,224
500 Huntington National Bank 2.75 10/16/06 492,082
1,260 Key Bank NA 7.125 08/15/06 1,308,868
2,000 Suntrust Bank Atlanta 7.25 09/15/06 2,083,360
250 Wachovia Corp. 3.625 02/17/09 244,506
1,240 Wachovia Corp. 4.95 11/01/06 1,257,308
1,500 Wachovia Corp. 6.875 09/15/05 1,518,318
1,165 Wells Fargo Co. 3.03+ 03/03/06 1,166,447
---------------
18,183,392
---------------
MAJOR TELECOMMUNICATIONS (2.2%)
1,360 Deutsche Telekom International Finance Corp.
(Netherlands) 8.50 06/15/10 1,578,927
1,925 GTE Corp. 6.36 04/15/06 1,967,429
140 Telecom Italia Capital SpA - 144A* (Luxembourg) 4.00 01/15/10 135,383
535 Telecom Italia Capital SpA (Luxembourg) 4.00 11/15/08 524,113
1,040 Verizon Global Funding Corp. 6.125 06/15/07 1,081,254
2,000 Verizon Global Funding Corp. 7.25 12/01/10 2,248,422
---------------
7,535,528
---------------
MANAGED HEALTH CARE (1.8%)
870 Aetna, Inc. 7.375 03/01/06 893,968
765 Aetna, Inc. 7.875 03/01/11 883,069
1,245 Anthem, Inc. 4.875 08/01/05 1,247,907
680 UnitedHealth Group Inc. 4.125 08/15/09 672,086
1,590 UnitedHealth Group Inc. 7.50 11/15/05 1,618,445
965 WellPoint Health Networks Inc. 6.375 06/15/06 989,339
---------------
6,304,814
---------------
MEDIA CONGLOMERATES (0.7%)
1,990 Time Warner, Inc. 6.125 04/15/06 2,031,048
480 Time Warner, Inc. 6.15 05/01/07 497,583
---------------
2,528,631
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
16
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
MOTOR VEHICLES (0.5%)
$ 415 DaimlerChrysler North American Holdings Co. 4.05% 06/04/08 $ 400,054
1,215 DaimlerChrysler North American Holdings Co. 6.40 05/15/06 1,235,514
---------------
1,635,568
---------------
MULTI-LINE INSURANCE (1.3%)
1,780 American General Finance Corp. (Series MTNF) 5.875 07/14/06 1,820,258
250 Equitable Life Assurance Society - 144A* 6.95 12/01/05 254,555
480 Hartford Financial Services Group, Inc. (The) 2.375 06/01/06 470,567
1,420 Hartford Financial Services Group, Inc. (The) 7.75 06/15/05 1,426,837
500 International Lease Finance Corp. 3.75 08/01/07 494,862
---------------
4,467,079
---------------
OIL REFINING/MARKETING (0.2%)
660 Ashland Inc. (Series MTNJ) 7.83 08/15/05 667,702
---------------
OTHER CONSUMER SERVICES (0.3%)
950 Cendant Corp. 6.25 01/15/08 990,813
---------------
PROPERTY - CASUALTY INSURERS (0.7%)
1,195 Allstate Finance Global Funding II - 144A* 2.625 10/22/06 1,172,297
1,145 Mantis Reef Ltd. - 144A* (Australia) 4.692 11/14/08 1,143,181
---------------
2,315,478
---------------
PULP & PAPER (0.6%)
615 International Paper Co. 3.80 04/01/08 603,891
805 MeadWestvaco Corp. 2.75 12/01/05 800,779
530 Sappi Papier Holding AG - 144A* (Austria) 6.75 06/15/12 576,716
---------------
1,981,386
---------------
RAILROADS (0.8%)
300 CSX Corp. 2.75 02/15/06 297,194
180 CSX Corp. 9.00 08/15/06 190,585
315 Norfolk Southern Corp. 7.35 05/15/07 334,192
400 Union Pacific Corp. 3.625 06/01/10 381,431
1,575 Union Pacific Corp. (Series MTNE) 6.79 11/09/07 1,674,329
---------------
2,877,731
---------------
REAL ESTATE DEVELOPMENT (0.7%)
1,897 World Financial Properties - 144A* 6.91 09/01/13 2,048,512
417 World Financial Properties - 144A* 6.95 09/01/13 450,238
---------------
2,498,750
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
17
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS (0.7%)
$ 1,800 EOP Operating LP 6.763% 06/15/07 $ 1,885,723
415 EOP Operating LP 8.375 03/15/06 430,843
---------------
2,316,566
---------------
REGIONAL BANKS (0.5%)
1,190 US Bancorp 5.10 07/15/07 1,215,011
740 US Bank NA 2.85 11/15/06 728,578
---------------
1,943,589
---------------
SAVINGS BANKS (1.1%)
420 Household Finance Corp. 4.125 12/15/08 415,506
225 Household Finance Corp. 5.875 02/01/09 235,920
215 Household Finance Corp. 6.375 10/15/11 234,436
1,360 Household Finance Corp. 6.40 06/17/08 1,440,663
150 Sovereign Bank (Series CD) 4.00 02/01/08 148,295
355 Washington Mutual Inc. 7.50 08/15/06 369,629
1,000 Washington Mutual Inc. 8.25 04/01/10 1,146,735
---------------
3,991,184
---------------
TOBACCO (0.3%)
530 Altria Group Inc. 5.625 11/04/08 549,586
450 Altria Group Inc. 7.65 07/01/08 492,412
---------------
1,041,998
---------------
TRUCKS/CONSTRUCTION/FARM MACHINERY (1.0%)
1,535 Caterpillar Financial Services Corp. (Series MTNF) 3.625 11/15/07 1,517,805
890 John Deere Capital Corp. 3.375 10/01/07 872,733
1,225 John Deere Capital Corp. 4.50 08/22/07 1,233,505
---------------
3,624,043
---------------
Total Corporate Bonds
(COST $178,029,926) 176,669,918
---------------
Asset-Backed Securities (19.7%)
FINANCE/RENTAL/LEASING
2,600 American Express Credit Account Master Trust
2003-4 A 1.69 01/15/09 2,542,705
2,000 Americredit Automoblie Receivables Trust
2004-BM A3 2.07 08/06/08 1,967,173
3,800 BMW Vehicle Owner Trust 2002-2A4 4.04 02/25/09 3,808,681
1,600 Capital One Master - (WI) 4.05 02/15/11 1,600,000
2,700 Chase Credit Card Master Trust 2001-4 A 5.50 11/17/08 2,757,133
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
18
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
$ 705 Chase Manhattan Auto Owner Trust 2002A 4.24% 09/15/08 $ 707,813
1,107 Chase Manhattan Auto Owner Trust 2002-B A4 4.21 01/15/09 1,111,824
3,600 Chase Manhattan Auto Owner Trust 2004-A A4 2.83 09/15/10 3,506,679
4,000 Chase Manhattan Auto Owner Trust 2003-C A4 2.94 06/15/10 3,925,986
1,450 CNH Equipment Trust 2005-A A3 4.02 04/15/09 1,449,775
901 Daimler Chrysler Auto Trust 2002-A A4 4.49 10/06/08 905,498
2,600 Daimler Chrysler Auto Trust 2003-B A4 2.86 03/09/09 2,554,561
3,700 Daimler Chrysler Auto Trust 2004-A A4 2.58 04/08/09 3,605,409
1,425 Ford Credit Auto Owner Trust 2002-B A3A 4.17 01/15/09 1,428,191
270 Ford Credit Auto Owner Trust 2002-B A4 4.75 08/15/06 271,101
1,274 Harley-Davidson Motorcycle Trust 2002-1 4.50 01/15/10 1,282,864
1,152 Harley-Davidson Motorcycle Trust 2002-2 3.09 06/15/10 1,145,941
1,500 Harley-Davidson Motorcycle Trust 2003-1 2.63 11/15/10 1,478,409
3,300 Harley-Davidson Motorcycle Trust 2003-3 A2 2.76 05/15/11 3,255,286
1,500 Honda Auto Receivables Owner Trust 2002-4 2.70 03/17/08 1,487,556
2,000 Honda Auto Receivables Owner Trust 2003-1 2.48 07/18/08 1,978,542
3,800 Honda Auto Receivables Owner Trust 2003-3 A4 2.77 11/21/08 3,724,513
1,100 Hyundai Auto Receivables Trust 2003-A A3 2.33 11/15/07 1,091,047
3,500 MBNA Credit Card Master Trust 2004-A4 A4 2.70 09/15/09 3,420,149
507 Nissan Auto Receivables Owner Trust 2002B 4.60 09/17/07 509,052
3,500 Nissan Auto Receivables Owner Trust 2003-A A4 2.61 07/15/08 3,452,511
2,900 Nissan Auto Receivables Owner Trust 2004-A A4 2.76 07/15/09 2,822,187
650 Nordstrom Private Label Credit Card Master Trust
2001-1A A - 144A* 4.82 04/15/10 658,486
3,700 USAA Auto Owner Trust 2004-1 A4 2.67 10/15/10 3,607,267
2,500 USAA Auto Owner Trust 2004-3 A3 3.16 02/17/09 2,472,934
1,775 USAA Auto Owner Trust 2005-1 A3 3.90 07/15/09 1,772,697
4,000 Whole Auto Loan Trust 2003-1 A4 2.58 03/15/10 3,925,986
---------------
TOTAL ASSET-BACKED SECURITIES
(COST $71,393,058) 70,227,956
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
19
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCIES -- BONDS (12.7%)
$ 7,800 Federal Home Loan Bank 3.25% 12/17/07 $ 7,664,678
9,760 Federal Home Loan Mortgage Corp. 2.75 08/15/06 9,642,158
28,350 Federal Home Loan Mortgage Corp. 2.875 05/15/07 27,818,296
---------------
TOTAL U.S. GOVERNMENT AGENCIES -- BONDS
(COST $45,521,739) 45,125,132
---------------
U.S. GOVERNMENT AGENCIES -- MORTGAGE-BACKED
SECURITIES (8.5%)
165 Federal Home Loan Mortgage Corp. PC Gold 6.50 03/01/29 - 09/01/29 172,013
2,175 Federal Home Loan Mortgage Corp. 7.50 10/01/26 - 08/01/32 2,335,665
4,127 Federal Home Loan Mortgage Corp. PC Gold 7.50 01/01/30 - 07/01/32 4,429,705
1,368 Federal Home Loan Mortgage Corp. ARM 3.608 07/01/34 1,353,566
2,202 Federal Home Loan Mortgage Corp. ARM 4.184 08/01/34 2,213,280
2,332 Federal National Mortgage Assoc. 6.50 02/01/28 - 10/01/32 2,431,581
3,420 Federal National Mortgage Assoc. 7.00 02/01/26 - 05/01/33 3,615,089
250 Federal National Mortgage Assoc. 7.50 *** 267,578
2,607 Federal National Mortgage Assoc. 7.50 09/01/29 - 09/01/32 2,794,164
1,452 Federal National Mortgage Assoc. ARM 3.699 07/01/34 1,446,941
814 Federal National Mortgage Assoc. ARM 3.793 06/01/34 813,584
1,650 Federal National Mortgage Assoc. ARM 4.487 04/01/35 1,667,995
1,969 Federal National Mortgage Assoc. ARM 4.121 09/01/34 1,966,886
1,876 Government National Mortgage Assoc. II 3.375+ 06/20/22 - 05/20/23 1,901,164
2,370 Government National Mortgage Assoc. II 3.50+ 08/20/29 - 09/20/29 2,398,493
435 Government National Mortgage Assoc. II 4.125+ 10/20/24 - 12/20/24 443,251
---------------
TOTAL U.S. GOVERNMENT AGENCIES -- MORTGAGE-BACKED
SECURITIES (COST $30,112,808) 30,250,955
---------------
U.S. GOVERNMENT OBLIGATION (5.0%)
18,000 U.S. Treasury Note
(COST $17,798,231) 1.875 01/31/06 17,820,018
---------------
U.S. GOVERNMENT AGENCIES -- COLLATERALIZED
MORTGAGE OBLIGATIONS (1.5%)
1,402 Federal Home Loan Mortgage Corp. 5.50 02/15/12 1,411,612
2,514 Federal National Mortgage Assoc. 5.50 01/25/24 2,557,383
1,250 Federal National Mortgage Assoc. - (WI) 6.50 04/25/35 1,330,322
---------------
TOTAL U.S. GOVERNMENT AGENCIES -- COLLATERALIZED
MORTGAGE OBLIGATIONS (COST $5,668,926) 5,299,317
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
20
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT OBLIGATIONS (1.7%)
$ 935 Quebec Province (Canada) 5.50% 04/11/06 $ 952,744
915 Quebec Province (Canada) 6.125 01/22/11 992,450
2,640 United Mexican States (Mexico) 8.375 01/14/11 3,028,080
945 United Mexican States (Mexico) 8.625 03/12/08 1,045,170
---------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(COST $6,031,220) 6,018,444
---------------
SHORT-TERM INVESTMENTS (1.0%)
U.S. GOVERNMENT OBLIGATION (a) (0.1%)
500 U.S. Treasury Bill**
(COST $497,103) 2.819 07/14/05 497,182
---------------
REPURCHASE AGREEMENT (0.9%)
3,339 Joint repurchase agreement account
(dated 04/29/05; proceeds $3,339,819) (b)
(COST $3,339,000) 2.945 05/02/05 3,339,000
---------------
TOTAL SHORT-TERM INVESTMENTS
(COST $3,836,103) 3,836,182
---------------
TOTAL INVESTMENTS
(COST $358,392,011) (c) (d) 99.8% 355,247,922
OTHER ASSETS IN EXCESS OF LIABILITIES 0.2 876,451
-------- ---------------
NET ASSETS 100.0% $ 356,124,373
======== ===============
</Table>
- ----------
PC PARTICIPATION CERTIFICATE.
ARM ADJUSTABLE RATE MORTGAGE. INTEREST RATE IN EFFECT AS OF APRIL 30, 2005.
WI SECURITY PURCHASED ON A WHEN-ISSUED BASIS.
* 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 $201,050.
*** SECURITY WAS PURCHASED ON A FORWARD COMMITMENT BASIS WITH AN APPROXIMATE
PRINCIPAL AMOUNT AND NO DEFINITE MATURITY DATE; THE ACTUAL PRINCIPAL
AMOUNT AND MATURITY DATE WILL BE DETERMINED UPON SETTLEMENT.
+ FLOATING RATE SECURITY; RATE SHOWN IS THE RATE IN EFFECT AT APRIL 30,
2005.
(a) PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS 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
$73,235,324 IN CONNECTION WITH SECURITIES PURCHASED ON A FORWARD
COMMITMENT BASIS AND OPEN FUTURES CONTRACTS.
(d) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $361,924,773. THE
AGGREGATE GROSS UNREALIZED APPRECIATION IS $452,281 AND THE AGGREGATE
GROSS UNREALIZED DEPRECIATION IS $7,129,132, RESULTING IN NET UNREALIZED
DEPRECIATION OF $6,676,851.
SEE NOTES TO FINANCIAL STATEMENTS
21
<Page>
FUTURES CONTRACTS OPEN AT APRIL 30, 2005:
<Table>
<Caption>
UNREALIZED
NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE APPRECIATION
CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE (DEPRECIATION)
- ----------------------------------------------------------------------------------------
125 Long U.S. Treasury Notes 2 year,
June 2005 $ 25,962,890 $ 117,311
281 Short U.S. Treasury Notes 5 year,
June 2005 (30,475,330) (77,465)
122 Short U.S. Treasury Notes 10 year,
June 2005 (13,593,469) (99,180)
--------------
Net unrealized depreciation $ (59,334)
==============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
22
<Page>
MORGAN STANLEY LIMITED DURATION FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2005
<Table>
ASSETS:
Investments in securities, at value (cost $358,392,011) $ 355,247,922
Cash 14,144
Receivable for:
Interest 3,396,157
Investments sold 1,387,101
Shares of beneficial interest sold 238,742
Principal paydowns 89,727
Variation margin 69,500
Prepaid expenses and other assets 10,563
--------------
TOTAL ASSETS 360,453,856
--------------
LIABILITIES:
Payable for:
Investments purchased 3,697,877
Shares of beneficial interest redeemed 291,159
Investment advisory fee 155,398
Dividends to shareholders 69,901
Administration fee 23,908
Accrued expenses and other payables 91,240
--------------
TOTAL LIABILITIES 4,329,483
--------------
NET ASSETS $ 356,124,373
==============
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 383,784,309
Net unrealized depreciation (3,203,423)
Dividends in excess of net investment income (3,499,479)
Accumulated net realized loss (20,957,034)
--------------
NET ASSETS $ 356,124,373
==============
NET ASSET VALUE PER SHARE,
38,835,359 shares outstanding (unlimited shares authorized of $.01 par value) $ 9.17
==============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
23
<Page>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 2005
<Table>
NET INVESTMENT INCOME:
INTEREST INCOME $ 14,753,594
--------------
EXPENSES
Investment advisory fee 2,455,867
Transfer agent fees and expenses 408,500
Administration fee 164,517
Shareholder reports and notices 83,066
Professional fees 63,996
Custodian fees 62,582
Registration fees 48,133
Trustees' fees and expenses 5,781
Other 45,901
--------------
TOTAL EXPENSES 3,338,343
Less: expense offset (49,706)
--------------
NET EXPENSES 3,288,637
--------------
NET INVESTMENT INCOME 11,464,957
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
NET REALIZED LOSS ON:
Investments (1,023,108)
Futures contracts (288,999)
--------------
NET REALIZED LOSS (1,312,107)
--------------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments (3,077,347)
Futures contracts (2,014,043)
--------------
NET DEPRECIATION (5,091,390)
--------------
NET LOSS (6,403,497)
--------------
NET INCREASE $ 5,061,460
==============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
24
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
APRIL 30, 2005 APRIL 30, 2004
--------------- ---------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 11,464,957 $ 9,161,533
Net realized loss (1,312,107) (590,555)
Net change in unrealized appreciation/depreciation (5,091,390) (3,241,210)
--------------- ---------------
NET INCREASE 5,061,460 5,329,768
Dividends to shareholders from net investment income (16,474,040) (19,730,822)
Net increase (decrease) from transactions in shares of beneficial interest (120,871,693) 73,400,520
--------------- ---------------
NET INCREASE (DECREASE) (132,284,273) 58,999,466
NET ASSETS:
Beginning of period 488,408,646 429,409,180
--------------- ---------------
END OF PERIOD
(Including dividends in excess of net investment income of $3,499,479 and
$4,536,830, respectively) $ 356,124,373 $ 488,408,646
=============== ===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
25
<Page>
MORGAN STANLEY LIMITED DURATION FUND
NOTES TO FINANCIAL STATEMENTS - APRIL 30, 2005
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 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) when market quotations are not readily available or 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; 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 Adviser, may transfer uninvested cash
balances into one or more joint repurchase agreement accounts. These balances
are invested in one or more repurchase agreements and are collateralized by
cash, U.S. Treasury or federal agency obligations. The Fund may also invest
directly with institutions in repurchase agreements. The Fund's custodian
receives the collateral, which is marked-to-market daily to determine that the
value of the collateral does not decrease below the repurchase price plus
accrued interest.
D. 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
26
<Page>
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 ADVISORY/ADMINISTRATION AGREEMENTS
Effective November 1, 2004, pursuant to an Investment Advisory Agreement with
the Investment Adviser, the Fund pays an advisory fee, accrued daily and payable
monthly, by applying the following annual rates to the net assets of the Fund
determined 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 daily net
assets exceeding $1 billion but not exceeding $2 billion and 0.42% of the
portion of daily net assets exceeding $2 billion.
Effective November 1, 2004, 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.
Prior to November 1, 2004, the Fund had retained the Investment Adviser to
provide administrative services and to manage the investment of the Fund's
assets pursuant to an investment agreement pursuant to which the Fund paid the
Investment Adviser a monthly management 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: 0.60% of the portion of the daily net
assets not exceeding $1 billion; 0.55% to the portion of daily net assets
exceeding $1 billion but not exceeding $2 billion and 0.50% of the portion of
daily net assets exceeding $2 billion.
27
<Page>
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, 2005
were $353,175,544, and $521,245,740, respectively. Included in the
aforementioned are purchases and sales/prepayments of U.S. Government securities
of $273,470,195 and $423,312,043, respectively.
Morgan Stanley Trust, an affiliate of the Investment Adviser and Administrator,
is the Fund's transfer agent. At April 30, 2005, the Fund had transfer agent
fees and expenses payable of approximately $5,200.
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 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.
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, 2005 APRIL 30, 2004
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- --------------
Sold 13,944,535 $ 129,742,246 48,705,797 $ 466,638,947
Reinvestment of dividends 1,321,375 12,255,388 1,560,045 14,878,957
----------- -------------- ----------- --------------
15,265,910 141,997,634 50,265,842 481,517,904
Redeemed (28,350,418) (262,869,327) (42,728,082) (408,117,384)
----------- -------------- ----------- --------------
Net increase (decrease) (13,084,508) $ (120,871,693) 7,537,760 $ 73,400,520
=========== ============== =========== ==============
</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
28
<Page>
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, 2005 APRIL 30, 2004
-------------- --------------
Ordinary income $ 16,513,968 $ 19,690,002
============== ==============
</Table>
As of April 30, 2005, the tax-basis components of accumulated losses were as
follows:
<Table>
Undistributed ordinary income $ 103,552
Undistributed long-term gains --
--------------
Net accumulated earnings 103,552
Capital loss carryforward* (19,274,017)
Post-October losses (1,742,346)
Temporary differences (70,274)
Net unrealized depreciation (6,676,851)
--------------
Total accumulated losses $ (27,659,936)
==============
</Table>
*As of April 30, 2005, the Fund had a net capital loss carryforward of
$19,274,017 of which $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, $2,035,052 will
expire on April 30, 2009, $1,582,163 will expire on April 30, 2011, $2,183,130
will expire on April 30, 2012 and $11,744,996 will expire on April 30, 2013 to
offset future capital gains to the extent provided by regulations.
As of April 30, 2005, 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 $151,743, accumulated net
realized loss was charged $5,894,691 and dividends in excess of net investment
income was credited $6,046,434.
29
<Page>
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 of 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 contacts.
7. EXPENSE OFFSET
The expense offset represents a reduction of the custodian fees for earnings on
cash balances maintained by the Fund.
8. LEGAL MATTERS
The Investment Adviser, certain affiliates of the Investment Adviser, certain
officers of such affiliates and certain investment companies advised by the
Investment Adviser or its affiliates, including the Fund, are named as
defendants in a consolidated class action. This consolidated action also names
as defendants certain individual Trustees and Directors of the Morgan Stanley
funds. The consolidated amended complaint generally alleges that defendants,
including the Fund, violated their statutory disclosure obligations and
fiduciary duties by failing properly to disclose (i) that the Investment Adviser
and certain affiliates of the Investment Adviser allegedly offered economic
incentives to brokers and others to recommend the funds advised by the
Investment Adviser or its affiliates to investors rather than funds managed by
other companies, and (ii) that the funds advised by the Investment Adviser or
its affiliates, including the Fund, allegedly paid excessive commissions to
brokers in return for their efforts to recommend these funds to investors. The
complaint seeks, among other things, unspecified compensatory damages,
rescissionary damages, fees and costs. The defendants have moved to dismiss the
action and intend to otherwise vigorously defend it. On March 10, 2005,
Plaintiffs sought leave to supplement their complaint to assert claims on behalf
of other investors. While the Fund and Adviser believe that each has meritorious
defenses, the ultimate outcome of this matter is not presently determinable at
this early stage of the litigation, and no provision has been made in the Fund's
financial statements for the effect, if any, of this matter.
30
<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,
--------------------------------------------------------------------------
2005 2004 2003 2002 2001
---------- ---------- ---------- ---------- ----------
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.41 $ 9.68 $ 9.59 $ 9.44 $ 9.20
---------- ---------- ---------- ---------- ----------
Income (loss) from investment
operations:
Net investment income 0.19 0.17 0.24 0.41 0.55
Net realized and unrealized gain
(loss) (0.08) (0.07) 0.13 0.19 0.24
---------- ---------- ---------- ---------- ----------
Total income from investment
operations 0.11 0.10 0.37 0.60 0.79
---------- ---------- ---------- ---------- ----------
Less dividends from net investment
income (0.35) (0.37) (0.28) (0.45) (0.55)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 9.17 $ 9.41 $ 9.68 $ 9.59 $ 9.44
========== ========== ========== ========== ==========
TOTAL RETURN+ 1.20% 0.99% 3.93% 6.50% 8.82%
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.76%(1) 0.85%(1) 0.84%(2) 0.80%(2) 0.80%(2)
Net investment income 2.63% 1.75% 1.90% 3.94% 5.87%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 356,124 $ 488,409 $ 429,409 $ 166,631 $ 109,917
Portfolio turnover rate 82% 240% 217% 327% 133%
</Table>
- ----------
+ CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE
PERIOD.
(1) DOES NOT REFLECT THE EFFECT OF EXPENSE OFFSET OF 0.01%.
(2) 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>
<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%
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
31
<Page>
MORGAN STANLEY LIMITED DURATION FUND
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2005, and the related statements of operations for
the year then ended and changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of April 30, 2005, by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed other
auditing procedures. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Morgan
Stanley Limited Duration Fund as of April 30, 2005, 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 17, 2005
32
<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 PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- ---------------------------------------- ------------ ------------ ------------------------- ------------- --------------------
Michael Bozic (64) Trustee Since Private Investor; 197 Director of various
c/o Kramer Levin Naftalis & Frankel LLP April 1994 Director or Trustee of business
Counsel to the Independent Trustees the Retail Funds (since organizations.
1177 Avenue of the Americas April 1994) and the
New York, NY 10036 Institutional Funds
(since July 2003);
formerly Vice Chairman of
Kmart Corporation
(December 1998-October
2000), Chairman and Chief
Executive Officer of
Levitz Furniture
Corporation (November
1995-November 1998) and
President and Chief
Executive Officer of
Hills Department Stores
(May 1991-July 1995);
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 (72) Trustee Since Consultant; Director or 197 Director of Franklin
1031 N. Chartwell Court January 1993 Trustee of the Retail Covey (time
Salt Lake City, UT 84103 Funds (since January management systems),
1993) and the BMW Bank of North
Institutional Funds America, Inc.
(since July 2003); member (industrial loan
of the Utah Regional corporation), Escrow
Advisory Board of Pacific Bank USA (industrial
Corp.; formerly Managing loan corporation),
Director of Summit United Space
Ventures LLC (2000-2004); Alliance (joint
United States Senator venture between
(R-Utah) (1974-1992) and Lockheed Martin and
Chairman, Senate Banking the Boeing Company)
Committee (1980-1986), and Nuskin Asia
Mayor of Salt Lake City, Pacific (multilevel
Utah (1971-1974), marketing); member
Astronaut, Space Shuttle of the board of
Discovery (April 12-19, various civic and
1985), and Vice Chairman, charitable
Huntsman Corporation organizations.
(chemical company).
Wayne E. Hedien (71) Trustee Since Retired; Director or 197 Director of The PMI
c/o Kramer Levin Naftalis & Frankel LLP September Trustee of the Retail Group Inc. (private
Counsel to the Independent Trustees 1997 Funds (since September mortgage insurance);
1177 Avenue of the Americas 1997) and the Trustee and Vice
New York, NY 10036 Institutional Funds Chairman of The
(since July 2003); Field Museum of
formerly associated with Natural History;
the Allstate Companies director of various
(1966-1994), most other business and
recently as Chairman of charitable
The Allstate Corporation organizations.
(March 1993-December
1994) and Chairman and
Chief Executive Officer
of its wholly-owned
subsidiary, Allstate
Insurance Company (July
1989-December 1994).
</Table>
33
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- ---------------------------------------- ------------ ------------ ------------------------- ------------- --------------------
Dr. Manuel H. Johnson (56) Trustee Since Senior Partner, Johnson 197 Director of NVR,
c/o Johnson Smick Group, Inc. July 1991 Smick International, Inc. (home
888 16th Street, NW Inc., a consulting firm; construction);
Suite 740 Chairman of the Audit Director of KFX
Washington, D.C. 20006 Committee and Director or Energy; Director of
Trustee of the Retail RBS Greenwich
Funds (since July 1991) Capital Holdings
and the Institutional (financial holding
Funds (since July 2003); company).
Co-Chairman and a founder
of the Group of Seven
Council (G7C), an
international economic
commission; formerly Vice
Chairman of the Board of
Governors of the Federal
Reserve System and
Assistant Secretary of
the U.S. Treasury.
Joseph J. Kearns (62) Trustee Since President, Kearns & 198 Director of Electro
c/o Kearns & Associates LLC July 2003 Associates LLC Rent Corporation
PMB754 (investment consulting); (equipment leasing),
23852 Pacific Coast Highway Deputy Chairman of the The Ford Family
Malibu, CA 90265 Audit Committee and Foundation, and the
Director or Trustee of UCLA Foundation.
the Retail Funds (since
July 2003) and the
Institutional Funds
(since August 1994);
previously Chairman of
the Audit Committee of
the Institutional Funds
(October 2001-July
2003); formerly CFO of
the J. Paul Getty Trust.
Michael E. Nugent (68) Trustee Since General Partner of 197 Director of various
c/o Triumph Capital, L.P. July 1991 Triumph Capital, L.P., a business
445 Park Avenue private investment organizations.
New York, NY 10022 partnership; Chairman of
the Insurance Committee
and Director or Trustee
of the Retail Funds
(since July 1991) and the
Institutional Funds
(since July 2001);
formerly Vice President,
Bankers Trust Company and
BT Capital Corporation
(1984-1988).
Fergus Reid (72) Trustee Since Chairman of Lumelite 198 Trustee and Director
c/o Lumelite Plastics Corporation July 2003 Plastics Corporation; of certain
85 Charles Colman Blvd. Chairman of the investment companies
Pawling, NY 12564 Governance Committee and in the JPMorgan
Director or Trustee of Funds complex
the Retail Funds (since managed by J.P.
July 2003) and the Morgan Investment
Institutional Funds Management Inc.
(since June 1992).
</Table>
34
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- ---------------------------------------- ------------ ------------ ------------------------- ------------- --------------------
Charles A. Fiumefreddo (71) Chairman of Since Chairman and Director or 197 None.
c/o Morgan Stanley Trust the Board July 1991 Trustee of the Retail
Harborside Financial Center, and Trustee Funds (since July 1991)
Plaza Two, and the Institutional
Jersey City, NJ 07311 Funds (since July 2003);
formerly Chief Executive
Officer of the Retail
Funds (until September
2002).
James F. Higgins (57) Trustee Since Director or Trustee of 197 Director of AXA
c/o Morgan Stanley Trust June 2000 the Retail Funds (since Financial, Inc. and
Harborside Financial Center, June 2000) and the The Equitable Life
Plaza Two, Institutional Funds Assurance Society of
Jersey City, NJ 07311 (since July 2003); Senior the United States
Advisor of Morgan Stanley (financial
(since August 2000); services).
Director of the
Distributor and Dean
Witter Realty Inc.;
previously President and
Chief Operating Officer
of the Private Client
Group of Morgan Stanley
(May 1999-August 2000),
and President and Chief
Operating Officer of
Individual Securities of
Morgan Stanley (February
1997-May 1999).
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE TRUSTEE BEGAN SERVING THE FUNDS ADVISED BY
MORGAN STANLEY INVESTMENT ADVISORS INC. (THE "INVESTMENT ADVISER") (THE
"RETAIL FUNDS").
** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICES AS
DIRECTOR/TRUSTEE FOR THE RETAIL FUNDS AND THE FUNDS ADVISED BY MORGAN
STANLEY INVESTMENT MANAGEMENT INC. AND MORGAN STANLEY AIP GP LP (THE
"INSTITUTIONAL FUNDS") REFLECT THE EARLIEST DATE THE DIRECTOR/TRUSTEE BEGAN
SERVING THE RETAIL OR INSTITUTIONAL FUNDS, AS APPLICABLE.
*** THE FUND COMPLEX INCLUDES ALL OPEN-END AND CLOSED-END FUNDS (INCLUDING ALL
OF THEIR PORTFOLIOS) ADVISED BY THE INVESTMENT ADVISER AND ANY FUNDS THAT
HAVE AN INVESTMENT ADVISER THAT IS AN AFFILIATED PERSON OF THE INVESTMENT
ADVISER (INCLUDING, BUT NOT LIMITED TO, MORGAN STANLEY INVESTMENT MANAGEMENT
INC.).
35
<Page>
OFFICERS:
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- ------------------------------ --------------- --------------- ------------------------------------------------------
Mitchell M. Merin (51) President Since May 1999 President and Chief Operating Officer of Morgan
1221 Avenue of the Americas Stanley Investment Management Inc.; President,
New York, NY 10020 Director and Chief Executive Officer of the Investment
Adviser and the Administrator; Chairman and Director
of the Distributor; Chairman and Director of the
Transfer Agent; Director of various Morgan Stanley
subsidiaries; President of the Institutional Funds
(since July 2003) and President of the Retail Funds
(since May 1999); Trustee (since July 2003) and
President (since December 2002) of the Van Kampen
Closed-End Funds; Trustee (since May 1999) and
President (since October 2002) of the Van Kampen
Open-End Funds.
Ronald E. Robison (66) Executive Vice Since Principal Executive Officer of Funds in the Fund
1221 Avenue of the Americas President and April 2003 Complex (since May 2003); Managing Director of Morgan
New York, NY 10020 Principal Stanley & Co. Incorporated, Morgan Stanley Investment
Executive Management Inc. and Morgan Stanley; Managing Director,
Officer Chief Administrative Officer and Director of the
Investment Adviser and the Administrator; Director of
the Transfer Agent; Managing Director and Director of
the Distributor; Executive Vice President and
Principal Executive Officer of the Institutional Funds
(since July 2003) and the Retail Funds (since April
2003); Director of Morgan Stanley SICAV (since May
2004); previously, President and Director of the
Institutional Funds (March 2001-July 2003) and Chief
Global Operations Officer and Managing Director of
Morgan Stanley Investment Management Inc.
Joseph J. McAlinden (62) Vice President Since July 1995 Managing Director and Chief Investment Officer of the
1221 Avenue of the Americas Investment Adviser and Morgan Stanley Investment
New York, NY 10020 Management Inc.; Chief Investment Officer of the Van
Kampen Funds; Vice President of the Institutional
Funds (since July 2003) and the Retail Funds (since
July 1995).
Barry Fink (50) Vice President Since General Counsel (since May 2000) and Managing Director
1221 Avenue of the Americas February 1997 (since December 2000) of Morgan Stanley Investment
New York, NY 10020 Management; Managing Director (since December 2000),
Secretary (since February 1997) and Director (since
July 1998) of the Investment Adviser and the
Administrator; Vice President of the Retail Funds;
Assistant Secretary of Morgan Stanley DW; Vice
President of the Institutional Funds (since July
2003); Managing Director, Secretary and Director of
the Distributor; previously Secretary (February
1997-July 2003) and General Counsel (February
1997-April 2004) of the Retail Funds; Vice President
and Assistant General Counsel of the Investment
Adviser and the Administrator (February 1997-December
2001).
Amy R. Doberman (43) Vice President Since July 2004 Managing Director and General Counsel, U.S. Investment
1221 Avenue of the Americas Management; Managing Director of Morgan Stanley
New York, NY 10020 Investment Management Inc. and the Investment Adviser,
Vice President of the Institutional and Retail Funds
(since July 2004); Vice President of the Van Kampen
Funds (since August 2004); previously, Managing
Director and General Counsel - Americas, UBS Global
Asset Management (July 2000 - July 2004) and General
Counsel, Aeltus Investment Management, Inc. (January
1997 - July 2000).
Carsten Otto (41) Chief Since October Executive Director and U.S. Director of Compliance for
1221 Avenue of the Americas Compliance 2004 Morgan Stanley Investment Management (since October
New York, NY 10020 Officer 2004); Executive Director of the Investment Adviser
and Morgan Stanley Investment Management Inc.;
formerly Assistant Secretary and Assistant General
Counsel of the Morgan Stanley Retail Funds.
</Table>
36
<Page>
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- ------------------------------ --------------- --------------- ------------------------------------------------------
Stefanie V. Chang (38) Vice President Since July 2003 Executive Director of Morgan Stanley & Co.
1221 Avenue of the Americas Incorporated, Morgan Stanley Investment Management
New York, NY 10020 Inc. and the Investment Adviser; Vice President of the
Institutional Funds (since December 1997) and the
Retail Funds (since July 2003); formerly practiced law
with the New York law firm of Rogers & Wells (now
Clifford Chance US LLP).
Francis J. Smith (39) Treasurer and Treasurer since Executive Director of the Investment Adviser and the
c/o Morgan Stanley Trust Chief Financial July 2003 and Administration (since December 2001); previously, Vice
Harborside Financial Center, Officer Chief Financial President of the Retail Funds (September 2002-July
Plaza Two, Officer since 2003); Vice President of the Investment Adviser and
Jersey City, NJ 07311 September 2002 the Administrator (August 2000-November 2001) and
Senior Manager at PricewaterhouseCoopers LLP (January
1998-August 2000).
Thomas F. Caloia (59) Vice President Since July 2003 Executive Director (since December 2002) and Assistant
c/o Morgan Stanley Trust Treasurer of the Investment Adviser, the Distributor
Harborside Financial Center, and the Administrator; previously Treasurer of the
Plaza Two, Retail Funds (April 1989-July 2003); formerly First
Jersey City, NJ 07311 Vice President of the Investment Adviser, the
Distributor and the Administrator.
Mary E. Mullin (38) Secretary Since July 2003 Executive Director of Morgan Stanley & Co.
1221 Avenue of the Americas Incorporated, Morgan Stanley Investment Management
New York, NY 10020 Inc. and the Investment Adviser; Secretary of the
Institutional Funds (since June 1999) and the Retail
Funds (since July 2003); formerly practiced law with
the New York law firms of McDermott, Will & Emery and
Skadden, Arps, Slate, Meagher & Flom LLP.
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE OFFICER BEGAN SERVING THE RETAIL FUNDS. EACH
OFFICER SERVES AN INDEFINITE TERM, UNTIL HIS OR HER SUCCESSOR IS ELECTED.
** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICE AS AN OFFICER
FOR THE RETAIL AND INSTITUTIONAL FUNDS REFLECT THE EARLIEST DATE THE OFFICER
BEGAN SERVING THE RETAIL OR INSTITUTIONAL FUNDS, AS APPLICABLE.
2005 FEDERAL TAX NOTICE (UNAUDITED)
Of the Fund's ordinary dividends paid during the fiscal year ended April 30,
2005, 3.60% 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.
37
<Page>
(This page has been left blank intentionally.)
<Page>
(This page has been left blank intentionally.)
<Page>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael E. Nugent
Fergus Reid
OFFICERS
Charles A. Fiumefreddo
CHAIRMAN OF THE BOARD
Mitchell M. Merin
PRESIDENT
Ronald E. Robison
EXECUTIVE VICE PRESIDENT and PRINCIPAL EXECUTIVE OFFICER
Joseph J. McAlinden
VICE PRESIDENT
Barry Fink
VICE PRESIDENT
Amy R. Doberman
VICE PRESIDENT
Carsten Otto
CHIEF COMPLIANCE OFFICER
Stefanie V. Chang
VICE PRESIDENT
Francis J. Smith
TREASURER and CHIEF FINANCIAL OFFICER
Thomas F. Caloia
VICE PRESIDENT
Mary E. Mullin
SECRETARY
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT ADVISER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
This report is submitted for the general information of the shareholders of the
Fund. For more detailed information about the Fund, its fees and expenses and
other pertinent information, please read its Prospectus. The Fund's Statement of
Additional Information contains additional information about the Fund, including
its trustees. It is available, without charge, by calling (800) 869-NEWS.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective Prospectus. Read the
Prospectus carefully before investing.
Investments and services offered through Morgan Stanley DW Inc., member SIPC.
Morgan Stanley Distributors Inc., member NASD.
(C) 2005 Morgan Stanley
[MORGAN STANLEY LOGO]
37880RPT RA05-00451P-Y04/05
[GRAPHIC]
MORGAN STANLEY FUNDS
MORGAN STANLEY
LIMITED DURATION FUND
ANNUAL REPORT
APRIL 30, 2005
[MORGAN STANLEY LOGO]
<Page>
Item 2. Code of Ethics.
(a) The Fund has adopted a code of ethics (the "Code of Ethics") that
applies to its principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by the Fund or a
third party.
(b) No information need be disclosed pursuant to this paragraph.
(c) The Fund has amended its Code of Ethics during the period covered by the
shareholder report presented in Item 1 hereto to delete from the end of the
following paragraph on page 2 of the Code the phrase "to the detriment of the
Fund.":
"Each Covered Officer must not use his personal influence or personal
relationship improperly to influence investment decisions or financial reporting
by the Fund whereby the Covered Officer would benefit personally (directly or
indirectly)."
(d) Not applicable.
(e) Not applicable.
(f)
(1) The Fund's Code of Ethics is attached hereto as Exhibit A.
(2) Not applicable.
(3) Not applicable.
Item 3. Audit Committee Financial Expert.
The Fund's Board of Trustees has determined that it has two "audit committee
financial experts" serving on its audit committee, each of whom are
"independent" Trustees: Dr. Manuel H. Johnson and Joseph J. Kearns. Under
applicable securities laws, a person who is determined to be an audit committee
financial expert will not be deemed an "expert" for any purpose, including
without limitation for the purposes of Section 11 of the Securities Act of 1933,
as a result of being designated or identified as an audit committee financial
expert. The designation or identification of a person as an audit committee
financial expert does not impose on such person any duties, obligations, or
liabilities that are greater than the duties, obligations, and liabilities
imposed on such person as a member of the audit committee and Board of Trustees
in the absence of such designation or identification.
<Page>
Item 4. Principal Accountant Fees and Services.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
2005
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 33,458 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 452 (2) $ 3,215,745 (2)
TAX FEES $ 7,495 (3) $ 24,000 (4)
ALL OTHER FEES $ - $ -
TOTAL NON-AUDIT FEES $ 7,947 $ 3,239,745
TOTAL $ 41,405 $ 3,239,745
</Table>
2004
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 32,170 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 684 (2) $ 3,364,576 (2)
TAX FEES $ 5,888 (3) $ 652,431 (4)
ALL OTHER FEES $ - $ - (5)
TOTAL NON-AUDIT FEES $ 6,572 $ 4,017,007
TOTAL $ 38,742 $ 4,017,007
</Table>
N/A- Not applicable, as not required by Item 4.
(1) Covered Entities include the Adviser (excluding sub-advisors) and
any entity controlling, controlled by or under common control with
the Adviser that provides ongoing services to the Registrant.
(2) Audit-Related Fees represent assurance and related services
provided that are reasonably related to the performance of the
audit of the financial statements of the Covered Entities' and
funds advised by the Adviser or its affiliates, specifically data
verification and agreed-upon procedures related to asset
securitizations and agreed-upon procedures engagements.
(3) Tax Fees represent tax compliance, tax planning and tax advice
services provided in connection with the preparation and review of
the Registrant's tax returns.
(4) Tax Fees represent tax compliance, tax planning and tax advice
services provided in connection with the review of Covered
Entities' tax returns.
(5) All other fees represent project management for future business
applications and improving business and operational processes.
<Page>
(e)(1) The audit committee's pre-approval policies and procedures are as
follows:
APPENDIX A
AUDIT COMMITTEE
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS
AS ADOPTED AND AMENDED JULY 23, 2004,(1)
1. STATEMENT OF PRINCIPLES
The Audit Committee of the Board is required to review and, in its sole
discretion, pre-approve all Covered Services to be provided by the Independent
Auditors to the Fund and Covered Entities in order to assure that services
performed by the Independent Auditors do not impair the auditor's independence
from the Fund.
The SEC has issued rules specifying the types of services that an independent
auditor may not provide to its audit client, as well as the audit committee's
administration of the engagement of the independent auditor. The SEC's rules
establish two different approaches to pre-approving services, which the SEC
considers to be equally valid. Proposed services either: may be pre-approved
without consideration of specific case-by-case services by the Audit Committee
("GENERAL PRE-APPROVAL"); or require the specific pre-approval of the Audit
Committee or its delegate ("SPECIFIC PRE-APPROVAL"). The Audit Committee
believes that the combination of these two approaches in this Policy will result
in an effective and efficient procedure to pre-approve services performed by the
Independent Auditors. As set forth in this Policy, unless a type of service has
received general pre-approval, it will require specific pre-approval by the
Audit Committee (or by any member of the Audit Committee to which pre-approval
authority has been delegated) if it is to be provided by the Independent
Auditors. Any proposed services exceeding pre-approved cost levels or budgeted
amounts will also require specific pre-approval by the Audit Committee.
The appendices to this Policy describe the Audit, Audit-related, Tax and All
Other services that have the general pre-approval of the Audit Committee. The
term of any general pre-approval is 12 months from the date of pre-approval,
unless the Audit Committee considers and provides a different period and states
otherwise. The Audit Committee will annually review and pre-approve the services
that may be provided by the Independent Auditors without obtaining specific
pre-approval from the Audit Committee. The Audit Committee will add to or
subtract from the list of general pre-approved services from time to time, based
on subsequent determinations.
- ----------
(1) This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and
Procedures (the "POLICY"), adopted as of the date above, supersedes and
replaces all prior versions that may have been adopted from time to time.
<Page>
The purpose of this Policy is to set forth the policy and procedures by which
the Audit Committee intends to fulfill its responsibilities. It does not
delegate the Audit Committee's responsibilities to pre-approve services
performed by the Independent Auditors to management.
The Fund's Independent Auditors have reviewed this Policy and believes that
implementation of the Policy will not adversely affect the Independent Auditors'
independence.
2. DELEGATION
As provided in the Act and the SEC's rules, the Audit Committee may delegate
either type of pre-approval authority to one or more of its members. The member
to whom such authority is delegated must report, for informational purposes
only, any pre-approval decisions to the Audit Committee at its next scheduled
meeting.
3. AUDIT SERVICES
The annual Audit services engagement terms and fees are subject to the specific
pre-approval of the Audit Committee. Audit services include the annual financial
statement audit and other procedures required to be performed by the Independent
Auditors to be able to form an opinion on the Fund's financial statements. These
other procedures include information systems and procedural reviews and testing
performed in order to understand and place reliance on the systems of internal
control, and consultations relating to the audit. The Audit Committee will
approve, if necessary, any changes in terms, conditions and fees resulting from
changes in audit scope, Fund structure or other items.
In addition to the annual Audit services engagement approved by the Audit
Committee, the Audit Committee may grant general pre-approval to other Audit
services, which are those services that only the Independent Auditors reasonably
can provide. Other Audit services may include statutory audits and services
associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4,
etc.), periodic reports and other documents filed with the SEC or other
documents issued in connection with securities offerings.
The Audit Committee has pre-approved the Audit services in Appendix B.1. All
other Audit services not listed in Appendix B.1 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
4. AUDIT-RELATED SERVICES
Audit-related services are assurance and related services that are reasonably
related to the performance of the audit or review of the Fund's financial
statements and, to the extent they are Covered Services, the Covered Entities or
that are traditionally performed by the Independent Auditors. Because the Audit
Committee believes that the provision of Audit-related services does not impair
the independence of the auditor and is consistent with the SEC's rules on
auditor independence, the Audit Committee may grant general pre-approval to
Audit-related services. Audit-related services include, among others, accounting
consultations related to accounting, financial reporting or disclosure matters
<Page>
not classified as "Audit services"; assistance with understanding and
implementing new accounting and financial reporting guidance from rulemaking
authorities; agreed-upon or expanded audit procedures related to accounting
and/or billing records required to respond to or comply with financial,
accounting or regulatory reporting matters; and assistance with internal control
reporting requirements under Forms N-SAR and/or N-CSR.
The Audit Committee has pre-approved the Audit-related services in Appendix B.2.
All other Audit-related services not listed in Appendix B.2 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
5. TAX SERVICES
The Audit Committee believes that the Independent Auditors can provide Tax
services to the Fund and, to the extent they are Covered Services, the Covered
Entities, such as tax compliance, tax planning and tax advice without impairing
the auditor's independence, and the SEC has stated that the Independent Auditors
may provide such services.
Pursuant to the preceding paragraph, the Audit Committee has pre-approved the
Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
6. ALL OTHER SERVICES
The Audit Committee believes, based on the SEC's rules prohibiting the
Independent Auditors from providing specific non-audit services, that other
types of non-audit services are permitted. Accordingly, the Audit Committee
believes it may grant general pre-approval to those permissible non-audit
services classified as All Other services that it believes are routine and
recurring services, would not impair the independence of the auditor and are
consistent with the SEC's rules on auditor independence.
The Audit Committee has pre-approved the All Other services in Appendix B.4.
Permissible All Other services not listed in Appendix B.4 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
7. PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS
Pre-approval fee levels or budgeted amounts for all services to be provided by
the Independent Auditors will be established annually by the Audit Committee.
Any proposed services exceeding these levels or amounts will require specific
pre-approval by the Audit Committee. The Audit Committee is mindful of the
overall relationship of fees for audit and non-audit services in determining
whether to pre-approve any such services.
8. PROCEDURES
All requests or applications for services to be provided by the Independent
Auditors that do not require specific approval by the Audit Committee will be
submitted to the Fund's Chief Financial Officer and must include a detailed
description of the services to be
<Page>
rendered. The Fund's Chief Financial Officer will determine whether such
services are included within the list of services that have received the general
pre-approval of the Audit Committee. The Audit Committee will be informed on a
timely basis of any such services rendered by the Independent Auditors. Requests
or applications to provide services that require specific approval by the Audit
Committee will be submitted to the Audit Committee by both the Independent
Auditors and the Fund's Chief Financial Officer, and must include a joint
statement as to whether, in their view, the request or application is consistent
with the SEC's rules on auditor independence.
The Audit Committee has designated the Fund's Chief Financial Officer to monitor
the performance of all services provided by the Independent Auditors and to
determine whether such services are in compliance with this Policy. The Fund's
Chief Financial Officer will report to the Audit Committee on a periodic basis
on the results of its monitoring. Both the Fund's Chief Financial Officer and
management will immediately report to the chairman of the Audit Committee any
breach of this Policy that comes to the attention of the Fund's Chief Financial
Officer or any member of management.
9. ADDITIONAL REQUIREMENTS
The Audit Committee has determined to take additional measures on an annual
basis to meet its responsibility to oversee the work of the Independent Auditors
and to assure the auditor's independence from the Fund, such as reviewing a
formal written statement from the Independent Auditors delineating all
relationships between the Independent Auditors and the Fund, consistent with
Independence Standards Board No. 1, and discussing with the Independent Auditors
its methods and procedures for ensuring independence.
10. COVERED ENTITIES
Covered Entities include the Fund's investment adviser(s) and any entity
controlling, controlled by or under common control with the Fund's investment
adviser(s) that provides ongoing services to the Fund(s). Beginning with
non-audit service contracts entered into on or after May 6, 2003, the Fund's
audit committee must pre-approve non-audit services provided not only to the
Fund but also to the Covered Entities if the engagements relate directly to the
operations and financial reporting of the Fund. This list of Covered Entities
would include:
MORGAN STANLEY RETAIL FUNDS
Morgan Stanley Investment Advisors Inc.
Morgan Stanley & Co. Incorporated
Morgan Stanley DW Inc.
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Van Kampen Asset Management
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
<Page>
MORGAN STANLEY INSTITUTIONAL FUNDS
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Advisors Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Morgan Stanley & Co. Incorporated
Morgan Stanley Distribution, Inc.
Morgan Stanley AIP GP LP
Morgan Stanley Alternative Investment Partners LP
(e)(2) Beginning with non-audit service contracts entered into on or after May
6, 2003, the audit committee also is required to pre-approve services to Covered
Entities to the extent that the services are determined to have a direct impact
on the operations or financial reporting of the Registrant. 100% of such
services were pre-approved by the audit committee pursuant to the Audit
Committee's pre-approval policies and procedures (attached hereto).
(f) Not applicable.
(g) See table above.
(h) The audit committee of the Board of Trustees has considered whether the
provision of services other than audit services performed by the auditors to the
Registrant and Covered Entities is compatible with maintaining the auditors'
independence in performing audit services.
Item 5. Audit Committee of Listed Registrants.
(a) The Fund has a separately-designated standing audit committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act whose members are:
Michael Bozic, Edwin J. Garn, Wayne E. Hedien, Manual H. Johnson, Joseph J.
Kearns, Michael Nugent and Fergus Reid.
(b) Not applicable.
Item 6. Schedule of Investments
Refer to Item 1.
<Page>
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Applicable only to reports filed by closed-end funds.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Applicable only to reports filed by closed-end funds.
Item 9. Closed-End Fund Repurchases
Applicable only to reports filed by closed-end funds.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures
(a) The Fund's principal executive officer and principal financial officer have
concluded that the Fund's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Fund in this Form N-CSR
was recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, based
upon such officers' evaluation of these controls and procedures as of a date
within 90 days of the filing date of the report.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 12. Exhibits
(a) The Code of Ethics for Principal Executive and Senior Financial Officers is
attached hereto.
(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.
<Page>
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
June 16, 2005
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
June 16, 2005
/s/ Francis Smith
Francis Smith
Principal Financial Officer
June 16, 2005