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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, 2006
Date of reporting period: April 30, 2006
Item 1 - Report to Shareholders
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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.
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Fund Report
For the year ended April 30, 2006
TOTAL RETURN FOR THE 12 MONTHS ENDED APRIL 30, 2006
LIPPER SHORT
MORGAN LEHMAN BROTHERS INVESTMENT
STANLEY LIMITED U.S. CREDIT INDEX GRADE BOND
DURATION FUND (1-5 YEAR)(1) FUNDS INDEX(2)
2.29% 1.89% 2.34%
THE FUND'S TOTAL RETURN ASSUMES THE REINVESTMENT OF ALL DISTRIBUTIONS. SEE
PERFORMANCE SUMMARY FOR STANDARDIZED PERFORMANCE AND BENCHMARK INFORMATION.
MARKET CONDITIONS
During the 12-month review period, fixed-income markets were influenced by a
number of factors. Throughout the period, the specter of sharply higher energy
prices stoked inflationary fears and prompted concerns about the pace and
sustainability of economic growth. The misfortunes of the auto industry also
loomed large. Early in 2005, two icons of American industry, General Motors and
Ford, were downgraded from investment-grade to below-investment grade credit
status. The moves had a significant effect on both the investment-grade and
high-yield bond markets, leading to a sharp rise in volatility versus U.S.
Treasuries.
In late summer, the Gulf Coast hurricanes resulted in unprecedented devastation.
While some observers initially believed that the U.S. economy would suffer
lingering aftereffects, the economic impact was less severe and far reaching
than many had originally anticipated. Positive economic momentum continued,
although waning somewhat in the final months of 2005 before ramping up
significantly in the first quarter of 2006. In fact, the Federal Open Market
Committee (the "Fed") has revised its growth and inflation projections upward
for all of 2006.
As many had expected, the Fed raised the federal funds target rate in 25 basis
point increments at each of its meetings, bringing the rate to 4.75 percent at
the close of the reporting period. Although most measures of core inflation were
at or above the high end of the Fed's acceptable inflation range, the Fed's view
was that the U.S. economy remains on solid footing with relatively low core
inflation. Investors continued to speculate about the central bank's future
course of action and if the current tightening cycle might be nearer an end.
Overall, U.S. Treasury yields increased across the maturity spectrum. During the
majority of the period, the yield curve was relatively flat, as short-and
intermediate-term bonds were more responsive to the Fed's actions and
stronger-than-expected economic data. (The yield curve tracks the difference
between the yields of short-term and long-term bonds.) Long-term yields rates
also rose; however, and toward the end of the period, the yield curve steepened.
Within the mortgage sector, higher-coupon, longer-dated mortgage-backed issues
outperformed lower-coupons issues for much of the period. As is typical during
periods of rises in interest rates, prepayment speeds on mortgages slowed,
resulting in the attractiveness of the higher yield offered by these issues.
Meanwhile, U.S. investment-grade corporate bonds underperformed other major bond
market sectors. Within the investment-grade universe, returns were unevenly
distributed, with a few key names driving performance within each sector.
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Aaa- and Baa-rated issues posted the highest returns, while A-rated issues
lagged. Among the corporate sectors, financials posted the best return. The
industrials sector lagged most significantly, mostly due to poor performance by
the automotive manufacturers and parts producers sub-sectors.
PERFORMANCE ANALYSIS
Morgan Stanley Limited Duration Fund outperformed the Lehman Brothers U.S.
Credit Index (1-5 Year) and underperformed the Lipper Short Investment Grade
Bond Funds Index for the 12 months ended April 30, 2006.
Throughout the reporting period, we kept the Fund's overall interest-rate
exposure well below that of its benchmark, the Lehman Brothers U.S. Credit Index
(1-5 Year). This posture served the Fund well as interest rates rose across the
yield curve, especially in the short-term and intermediate-term portions of the
curve.
A focus on high-coupon, slow prepaying mortgage-backed securities benefited
performance as these issues outperformed their lower-coupon counterparts. As is
typical during periods of rising interest rates, prepayment speeds on mortgages
slowed, which enhanced the appeal of these higher-yielding issues. This
positioning was most favorable during the early portion of the reporting period.
In the latter months, however, higher-coupon mortgage-backed issues slowed their
pace. Against this backdrop, the yield advantage provided by the Fund's
higher-coupon holdings offset the underperformance of its underweight in lower-
and current-coupon issues, resulting in an overall neutral impact on
performance.
A defensive, underweighted approach toward corporate credit proved helpful as
most credit spreads widened. Additionally, within the corporate credit area,
favorable sector and security selection decisions further benefited relative
performance. The Fund maintained a modest focus on certain medium-quality
credits, such as those in the paper and forest products area. Selected life
insurance and asset-backed issues remained the focus of the Fund's
higher-quality activities.
THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM AS
DISCUSSED HEREIN OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE FUND IN
THE FUTURE.
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PORTFOLIO COMPOSITION*
Corporate Bonds 50.8%
Mortgage-Backed Securities 19.0
Asset-Backed Securities 11.9
Private Issues -- CMOs 10.9
Short-Term Investments 4.4
U.S. Government Agencies -- CMOs 3.0
LONG-TERM CREDIT ANALYSIS
Aaa/AAA 50.8%
Aa/AA 14.9
A/A 19.7
Baa/BBB 14.5
Ba/BB 0.1
* DOES NOT INCLUDE OUTSTANDING LONG FUTURES CONTRACTS WITH AN UNDERLYING FACE
AMOUNT OF $29,948,954 WITH UNREALIZED DEPRECIATION OF $62,680.
DATA AS OF APRIL 30, 2006. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR
PORTFOLIO COMPOSITION ARE AS A PERCENTAGE OF TOTAL INVESTMENTS AND ALL
PERCENTAGES FOR LONG-TERM CREDIT ANALYSIS ARE AS A PERCENTAGE OF TOTAL LONG-TERM
INVESTMENTS. THESE DATA ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD
NOT BE DEEMED A RECOMMENDATION TO BUY OR SELL THE SECURITIES MENTIONED. MORGAN
STANLEY IS A FULL-SERVICE SECURITIES FIRM ENGAGED IN SECURITIES TRADING AND
BROKERAGE ACTIVITIES, INVESTMENT BANKING, RESEARCH AND ANALYSIS, FINANCING AND
FINANCIAL ADVISORY SERVICES.
INVESTMENT STRATEGY
THE FUND WILL NORMALLY INVEST AT LEAST 65 PERCENT OF ITS ASSETS IN SECURITIES
ISSUED OR GUARANTEED AS TO PRINCIPAL AND INTEREST BY THE U.S. GOVERNMENT, ITS
AGENCIES OR INSTRUMENTALITIES (INCLUDING ZERO COUPON SECURITIES), INVESTMENT
GRADE MORTGAGE-BACKED SECURITIES, INCLUDING COLLATERALIZED MORTGAGE OBLIGATIONS,
AND INVESTMENT GRADE CORPORATE AND OTHER TYPES OF BONDS. IN SELECTING PORTFOLIO
INVESTMENTS TO PURCHASE OR SELL, THE "INVESTMENT ADVISER," MORGAN STANLEY
INVESTMENT ADVISORS INC., CONSIDERS BOTH DOMESTIC AND INTERNATIONAL ECONOMIC
DEVELOPMENTS, INTEREST RATE LEVELS, THE STEEPNESS OF THE YIELD CURVE AND OTHER
FACTORS, AND SEEKS TO MAINTAIN AN OVERALL AVERAGE DURATION FOR THE FUND'S
PORTFOLIO OF THREE YEARS OR LESS.
FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS
EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN
ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND
AND FOURTH FISCAL QUARTERS. THE SEMIANNUAL REPORTS AND THE ANNUAL REPORTS ARE
FILED ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC) ON FORM
N-CSRS AND FORM N-CSR, RESPECTIVELY. MORGAN STANLEY ALSO DELIVERS THE SEMIANNUAL
AND ANNUAL REPORTS TO FUND SHAREHOLDERS AND MAKES THESE REPORTS AVAILABLE ON ITS
PUBLIC WEB SITE, WWW.MORGANSTANLEY.COM. EACH MORGAN STANLEY FUND ALSO FILES A
COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE FUND'S FIRST AND
THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES NOT DELIVER THE REPORTS
FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS, NOR ARE THE REPORTS
POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY, HOWEVER, OBTAIN THE FORM
N-Q FILINGS (AS WELL AS THE FORM N-CSR
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AND N-CSRS FILINGS) BY ACCESSING THE SEC'S WEB SITE, HTTP://WWW.SEC.GOV. YOU MAY
ALSO REVIEW AND COPY THEM AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC.
INFORMATION ON THE OPERATION OF THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED
BY CALLING THE SEC AT (800) SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE
MATERIALS, UPON PAYMENT OF A DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S
E-MAIL ADDRESS (PUBLICINFO@SEC.GOV) OR BY WRITING THE PUBLIC REFERENCE SECTION
OF THE SEC, WASHINGTON, DC 20549-0102.
PROXY VOTING POLICY AND PROCEDURES AND PROXY VOTING RECORD
YOU MAY OBTAIN A COPY OF THE FUND'S PROXY VOTING POLICY AND PROCEDURES WITHOUT
CHARGE, UPON REQUEST, BY CALLING TOLL FREE (800) 869-NEWS OR BY VISITING THE
MUTUAL FUND CENTER ON OUR WEB SITE AT WWW.MORGANSTANLEY.COM. IT IS ALSO
AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT
HTTP://WWW.SEC.GOV.
YOU MAY OBTAIN INFORMATION REGARDING HOW THE FUND VOTED PROXIES RELATING TO
PORTFOLIO SECURITIES DURING THE MOST RECENT TWELVE-MONTH PERIOD ENDED JUNE 30
WITHOUT CHARGE BY VISITING THE MUTUAL FUND CENTER ON OUR WEB SITE AT
WWW.MORGANSTANLEY.COM. THIS INFORMATION IS ALSO AVAILABLE ON THE SECURITIES AND
EXCHANGE COMMISSION'S WEB SITE AT HTTP://WWW.SEC.GOV.
HOUSEHOLDING NOTICE
TO REDUCE PRINTING AND MAILING COSTS, THE FUND ATTEMPTS TO ELIMINATE DUPLICATE
MAILINGS TO THE SAME ADDRESS. THE FUND DELIVERS A SINGLE COPY OF CERTAIN
SHAREHOLDER DOCUMENTS, INCLUDING SHAREHOLDER REPORTS, PROSPECTUSES AND PROXY
MATERIALS, TO INVESTORS WITH THE SAME LAST NAME WHO RESIDE AT THE SAME ADDRESS.
YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME
UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE
DOCUMENTS BY CALLING (800) 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.
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Performance Summary
PERFORMANCE OF $10,000 INVESTMENT
[CHART]
April 1996
April 1997
April 1998
April 1999
April 2000
April 2001
April 2002
April 2003
April 2004
April 2005
April 2006
ENDING VALUE
- ------------
Lehman Brothers U.S. Lipper Short Investment
Fund++ Credit Index (1-5 year)(1) Grade Bond Funds Index(2)
- ------ -------------------------- -------------------------
$15,482 $17,732 $15,662
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ANNUAL AVERAGE TOTAL RETURNS--PERIOD ENDED APRIL 30, 2006
(SINCE 01/10/94)
SYMBOL MSLDX
1 YEAR 2.29%(3)
5 YEARS 2.96(3)
10 YEARS 4.47(3)
SINCE INCEPTION 4.44(3)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF
FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES
SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT
WWW.MORGANSTANLEY.COM 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 BOND FUNDS INDEX IS AN EQUALLY WEIGHTED
PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN
THE LIPPER SHORT INVESTMENT GRADE BOND FUNDS CLASSIFICATION. THE INDEX,
WHICH IS ADJUSTED FOR CAPITAL GAINS DISTRIBUTIONS AND INCOME DIVIDENDS, IS
UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT. THERE ARE CURRENTLY
30 FUNDS REPRESENTED IN THIS INDEX.
(3) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS. THERE ARE NO SALES
CHARGES.
++ ENDING VALUE ASSUMING A COMPLETE REDEMPTION ON APRIL 30, 2006.
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Expense Example
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees; and (2) ongoing costs, including advisory fees
and other Fund expenses. This example is intended to help you understand your
ongoing costs (in dollars) of investing in the Fund and to compare these costs
with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period 11/01/05 - 04/30/06.
ACTUAL EXPENSES
The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table below provides information about hypothetical
expenses based on the Fund's actual expense ratio and an assumed rate of return
of 5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use this
information to compare the ongoing cost of investing in the Fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only. Therefore, the second line of the table is useful in
comparing ongoing costs, and will not help you determine the relative total cost
of owning different funds that have transactional costs, such as sales charges
(loads), redemption fees or exchange fees.
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
11/01/05 -
11/01/05 04/30/06 04/30/06
------------- ------------- ---------------
Actual (1.62% return) $1,000.00 $1,016.20 $4.00
Hypothetical (5% annual return before expenses) $1,000.00 $1,020.83 $4.01
</Table>
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* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.80%
MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY
181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). IF THE FUND HAD BORNE ALL OF
ITS EXPENSES THAT WERE WAIVED BY THE INVESTMENT ADVISER AND ADMINISTRATOR,
THE ANNUALIZED EXPENSES RATIOS FOR THE ONE HALF YEAR PERIOD WOULD HAVE BEEN
0.88%
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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 Investment 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 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
On a regular basis, the Board reviews the performance of all funds in the Morgan
Stanley Fund Complex, including the Fund, compared to their peers, paying
specific attention to the underperforming funds. In addition, the Board
specifically reviewed the Fund's performance for the one-, three- and five-year
periods ended November 30, 2005, as shown in a report provided by Lipper (the
"Lipper Report"), compared to the performance of comparable funds selected by
Lipper (the "performance peer group"). The Board also discussed with the Adviser
the performance goals and the actual results achieved in managing the Fund. When
a fund underperforms its performance peer group, the Board discusses with the
Adviser the causes of the underperformance and, where necessary, specific
changes to the fund's investment strategy or investment personnel. The Board
concluded that the Fund can reasonably be expected to be competitive with that
of its performance peer group based on recent action taken or proposed to be
taken by the Adviser with respect to the Fund's investment strategy and/or
investment personnel.
FEES RELATIVE TO OTHER PROPRIETARY FUNDS MANAGED BY THE ADVISER WITH COMPARABLE
INVESTMENT STRATEGIES
The Board reviewed the advisory and administrative fees (together, the
"management fee") rate 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 other proprietary funds it manages with
investment strategies
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comparable to those of the Fund. The Board also noted that in November 2004, the
Fund reduced the management fee rate and that the Fund had not had the benefit
of a full year under the reduced fee. The Board determined that it would
reevaluate the management fee rate once the Fund had had the benefit of the
reduced management fee rate for a full year.
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
as compared to the average management fee rate and average total expense ratio
for the 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. The Board concluded that the Fund's management fee rate and
total expense ratio were competitive with those of its 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 information concerning the costs incurred and profits
realized by the Adviser and affiliates during the last year from their
relationship with the Fund and during the last two years from their relationship
with the Morgan Stanley Fund Complex and reviewed with the Adviser the cost
allocation methodology used to determine the profitability of the Adviser and
affiliates. Based on its review of the information it received, the Board
concluded that the profits earned by the Adviser and 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
affiliates from their relationship with the Fund and the Morgan Stanley Fund
Complex, such as "float" benefits derived from handling of checks for purchases
and sales of Fund shares, through a broker-dealer affiliate of the Adviser. The
Board concluded that the float benefits were relatively small.
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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
that it would be in the best interest of the Fund and its shareholders to
approve renewal of the Management Agreement for another year.
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Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS -- APRIL 30, 2006
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------
Corporate Bonds (50.6%)
AEROSPACE & DEFENSE (0.5%)
$435 McDonnell Douglas Corp. 6.875% 11/01/06 $ 437,942
330 Northrop Grumman Corp. 4.079 11/16/06 327,903
65 Raytheon Co. 6.15 11/01/08 66,170
55 Raytheon Co. 6.75 08/15/07 55,738
----------
887,753
----------
AIR FREIGHT/COURIERS (0.2%)
385 Fedex Corp. 2.65 04/01/07 375,079
----------
AIRLINES (0.3%)
435 Southwest Airlines Co. (Series 01-1) 5.496 11/01/06 435,852
----------
AUTO PARTS: O.E.M. (0.3%)
530 Johnson Controls, Inc. 5.00 11/15/06 528,321
----------
BEVERAGES: ALCOHOLIC (0.3%)
460 Miller Brewing Co. - 144A* 4.25 08/15/08 448,467
----------
BUILDING PRODUCTS (0.1%)
200 Masco Corp. 4.625 08/15/07 197,477
----------
CABLE/SATELLITE TV (0.9%)
710 Comcast Cable Communications, Inc. 6.875 06/15/09 736,179
427 Cox Communications Inc. 5.45+ 12/14/07 429,431
250 Cox Communications Inc. 7.75 08/15/06 251,382
----------
1,416,992
----------
CASINO/GAMING (0.3%)
455 Harrahs Operating Co. Inc. 7.125 06/01/07 462,221
----------
CHEMICALS: MAJOR DIVERSIFIED (0.2%)
275 ICI Wilmington Inc. 4.375 12/01/08 264,945
----------
CONTAINERS/PACKAGING (0.1%)
145 Sealed Air Corp. - 144A* 6.95 05/15/09 150,422
----------
DEPARTMENT STORES (0.6%)
160 Federated Department Stores, Inc. 6.30 04/01/09 163,288
820 May Department Stores Co., Inc. 3.95 07/15/07 803,112
----------
966,400
----------
DRUGSTORE CHAINS (0.1%)
100 CVS Corp. 3.875 11/01/07 97,832
----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
12
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<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES (8.3%)
$ 415 Ameren Corp. 4.263% 05/15/07 $ 409,853
385 Appalachian Power Co. (Series G) 3.60 05/15/08 371,423
475 Baltimore Gas & Electric Co. 6.625 03/15/08 485,118
1,175 Carolina Power & Light Company Inc. 6.80 08/15/07 1,194,203
480 CC Funding Trust I 6.90 02/16/07 484,925
710 Columbus Southern Power Co. 4.40 12/01/10 674,416
2,120 Consolidated Natural Gas Co. (Series B) 5.375 11/01/06 2,119,678
270 Consumers Energy Co. 4.80 02/17/09 264,581
350 Dominion Resources Inc. 5.687 05/15/08 350,879
1,055 DTE Energy Co. 6.45 06/01/06 1,055,860
335 Duke Energy Corp. 3.75 03/05/08 325,798
185 Entergy Gulf States, Inc. 3.60 06/01/08 177,246
295 Entergy Gulf States, Inc. 5.22+ 12/01/09 291,990
605 FPL Group Capital Inc. 5.551 02/16/08 605,921
1,090 Pacific Gas & Electric Co. 3.60 03/01/09 1,038,188
165 Panhandle Eastern Pipe Line Co. (Series B) 2.75 03/15/07 161,198
595 Peco Energy Co. 3.50 05/01/08 573,838
1,935 Public Service Electric & Gas Co. 5.065+ 06/23/06 1,934,687
450 Southwestern Public Service Co. (Series A) 6.20 03/01/09 458,056
345 Wisconsin Electric Power Co. 3.50 12/01/07 335,480
-----------
13,313,338
-----------
ELECTRICAL PRODUCTS (0.3%)
480 Cooper Industries Inc. 5.25 07/01/07 477,645
-----------
ENVIRONMENTAL SERVICES (0.2%)
360 WMX Technologies, Inc. 7.00 10/15/06 362,609
-----------
FINANCE/RENTAL/LEASING (3.4%)
840 American Honda Finance Corp. - 144A* 3.85 11/06/08 810,807
545 CIT Group, Inc. 2.875 09/29/06 540,027
695 CIT Group, Inc. 4.75 08/15/08 685,758
710 Countrywide Home Loans, Inc. (Series MTN) 3.25 05/21/08 680,886
355 MBNA Corp. 5.14+ 05/05/08 358,013
1,360 Nationwide Buildings Society - 144A* (United Kingdom) 2.625 01/30/07 1,333,918
500 Residential Capital Corp. 6.125 11/21/08 498,136
600 SLM Corp. 4.00 01/15/10 569,179
-----------
5,476,724
-----------
FINANCIAL CONGLOMERATES (4.4%)
920 Bank One NA Illinois 4.81+ 05/05/06 919,986
145 Chase Manhattan Corp. 7.00 11/15/09 151,842
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------
$1,780 Citigroup Global Markets Inc. 5.00+% 12/12/06 $1,781,426
595 Citigroup Inc. 5.50 08/09/06 595,666
715 General Electric Capital Corp. 4.25 12/01/10 680,689
535 General Electric Capital Corp. 5.375 03/15/07 535,721
815 ING Security Life Institutional - 144A* 2.70 02/15/07 796,139
1,045 Pricoa Global Funding I - 144A* 3.90 12/15/08 1,006,559
610 Prudential Insurance Co. - 144A* 6.375 07/23/06 611,502
----------
7,079,530
FOOD RETAIL (1.3%) ----------
1,780 Kroger Co. 7.625 09/15/06 1,792,957
290 Safeway Inc. 7.50 09/15/09 306,576
----------
2,099,533
----------
FOOD: MAJOR DIVERSIFIED (1.3%)
565 General Mills Inc. 3.875 11/30/07 551,809
190 Heinz (H.J.) Co. - 144A* 6.428 12/01/08 193,189
1,270 Kraft Foods Inc. 5.25 06/01/07 1,266,516
----------
2,011,514
----------
FOREST PRODUCTS (0.0%)
57 Weyerhaeuser Co. 6.125 03/15/07 57,226
----------
GAS DISTRIBUTORS (0.9%)
320 Nisource Finance Corp. 5.344+ 11/23/09 321,380
44 Ras Laffan Liquid Natural Gas Co. Ltd. - 144A*(Qatar) 7.628 09/15/06 44,441
1,025 Sempra Energy 4.75 05/15/09 1,003,657
----------
1,369,478
----------
HOME FURNISHINGS (0.3%)
450 Mohawk Industries, Inc. (Class C) 6.50 04/15/07 454,149
----------
HOTELS/RESORTS/CRUISELINES (0.5%)
545 Hyatt Equities LLC - 144A* 6.875 06/15/07 551,608
210 Starwood Hotels & Resorts Worldwide, Inc. 7.375+ 05/01/07 214,725
----------
766,333
----------
HOUSEHOLD/PERSONAL CARE (0.3%)
510 Clorox Co. (The) 5.025+ 12/14/07 510,721
----------
INDUSTRIAL CONGLOMERATES (0.2%)
270 Textron Financial Corp. 4.125 03/03/08 264,146
----------
INSURANCE BROKERS/SERVICES (0.8%)
1,265 Marsh & McLennan Companies Inc. 5.375 03/15/07 1,261,415
----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
14
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------
INTEGRATED OIL (0.8%)
$1,228 Conoco Funding Co. (Canada) 5.45% 10/15/06 $1,228,501
----------
INVESTMENT BANKS/BROKERS (1.2%)
1,055 Goldman Sachs Group Inc. (The) 4.125 01/15/08 1,035,282
917 Lehman Brothers Holdings, Inc. 8.25 06/15/07 946,085
----------
1,981,367
----------
INVESTMENT MANAGERS (1.2%)
1,240 TIAA Global Markets - 144A* 3.875 01/22/08 1,209,538
750 TIAA Global Markets - 144A* 5.00 03/01/07 747,087
----------
1,956,625
----------
LIFE/HEALTH INSURANCE (2.8%)
1,540 Genworth Financial, Inc. 5.06+ 06/15/07 1,543,095
585 John Hancock Financial Services, Inc. 5.625 12/01/08 589,892
450 John Hancock Global Funding II - 144A* 5.625 06/27/06 450,227
1,255 Met Life Global Funding I - 144A* 3.375 10/05/07 1,218,244
355 Monumental Global Funding II - 144A* 3.85 03/03/08 345,466
350 Monumental Global Funding II - 144A* 4.375 07/30/09 339,282
----------
4,486,206
----------
MAJOR BANKS (4.9%)
1,290 ABN Amro Bank (Netherlands) 4.80+ 05/11/07 1,291,491
800 Bank of America Corp. 3.375 02/17/09 760,813
265 Bank of America Corp. 4.75 10/15/06 264,381
80 Bank of America Corp. 5.25 02/01/07 80,011
285 Bank of New York Co., Inc. (The) 5.20 07/01/07 284,380
955 Branch Banking & Trust Corp. 4.90+ 06/04/07 956,154
500 Huntington National Bank 2.75 10/16/06 494,362
895 Key Bank NA 7.125 08/15/06 899,232
315 Popular North America Inc. (Series MTN) 5.65 04/15/09 314,400
1,420 Suntrust Bank Atlanta 7.25 09/15/06 1,429,423
180 Wachovia Corp. 3.625 02/17/09 172,155
880 Wachovia Corp. 4.95 11/01/06 878,349
----------
7,825,151
----------
MAJOR TELECOMMUNICATIONS (0.9%)
325 Deutsche Telekom International Finance Corp.
(Netherlands) 8.00+ 06/15/10 353,580
385 Telecom Italia Capital SpA (Luxembourg) 4.00 11/15/08 371,474
740 Verizon Global Funding Corp. 6.125 06/15/07 745,884
----------
1,470,938
----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
15
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------
MANAGED HEALTH CARE (0.7%)
$ 480 UnitedHealth Group Inc. 4.125% 08/15/09 $ 461,403
685 WellPoint Health Networks Inc. 6.375 06/15/06 685,964
----------
1,147,367
----------
MEDIA CONGLOMERATES (0.4%)
340 Time Warner, Inc. 6.15 05/01/07 342,485
300 Viacom Inc. - 144A* 5.75 04/30/11 298,236
----------
640,721
----------
MEDICAL SPECIALTIES (0.4%)
605 Baxter International Inc. 5.196 02/16/08 602,530
----------
MOTOR VEHICLES (0.9%)
295 DaimlerChrysler North American Holdings Co. 4.05 06/04/08 286,480
345 DaimlerChrysler North American Holdings Co. 5.33+ 03/13/09 345,375
860 DaimlerChrysler North American Holdings Co. 6.40 05/15/06 860,271
----------
1,492,126
----------
MULTI-LINE INSURANCE (1.6%)
1,265 American General Finance Corp. (Series MTNF) 5.875 07/14/06 1,266,948
125 AXA Financial, Inc. 6.50 04/01/08 127,459
340 Hartford Financial Services Group, Inc. (The) 2.375 06/01/06 339,258
500 International Lease Finance Corp. 3.75 08/01/07 489,466
310 International Lease Finance Corp. 4.625 06/02/08 305,318
----------
2,528,449
----------
OIL & GAS PIPELINES (0.3%)
555 Enbridge Energy Partners, LP 4.00 01/15/09 530,630
----------
OTHER CONSUMER SERVICES (0.4%)
565 Cendant Corp. 6.25 01/15/08 571,621
----------
OTHER METALS/MINERALS (0.2%)
245 Brascan Corp. (Canada) 8.125 12/15/08 259,859
----------
PROPERTY - CASUALTY INSURERS (1.7%)
845 Allstate Finance Global Funding II - 144A* 2.625 10/22/06 834,295
815 Mantis Reef Ltd. - 144A* (Australia) 4.692 11/14/08 792,022
255 Platinum Underwriters Holdings, Ltd.
(Series B) (Bermuda) 6.371 11/16/07 253,950
405 St. Paul Travelers Companies, Inc. (The) 5.01 08/16/07 402,795
500 XLLIAC Global Funding - 144A* 4.80 08/10/10 483,339
----------
2,766,401
----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
16
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------
PULP & PAPER (0.4%)
$ 365 International Paper Co. 3.80% 04/01/08 $ 353,878
375 Sappi Papier Holding AG - 144A* (Austria) 6.75 06/15/12 357,066
----------
710,944
----------
RAILROADS (1.3%)
385 Burlington North Santa Fe Railway Co. 6.125 03/15/09 392,605
270 Norfolk Southern Corp. 7.35 05/15/07 275,842
285 Union Pacific Corp. 3.625 06/01/10 264,601
1,120 Union Pacific Corp. (Series MTNE) 6.79 11/09/07 1,143,664
----------
2,076,712
----------
REAL ESTATE DEVELOPMENT (0.5%)
430 World Financial Properties - 144A* 6.91 09/01/13 450,439
379 World Financial Properties - 144A* 6.95 09/01/13 398,059
----------
848,498
----------
REAL ESTATE INVESTMENT TRUSTS (0.5%)
440 EOP Operating LP 6.763 06/15/07 445,952
330 Simon Property Group LP 6.375 11/15/07 334,520
----------
780,472
----------
REGIONAL BANKS (0.8%)
845 US Bancorp (Series MTNN) 5.10 07/15/07 840,914
525 US Bank NA (Series BKNT) 2.85 11/15/06 518,513
----------
1,359,427
----------
SAVINGS BANKS (1.4%)
420 Household Finance Corp. 4.125 12/15/08 407,877
1,010 Household Finance Corp. 6.40 06/17/08 1,030,852
150 Sovereign Bank (Series CD) 4.00 02/01/08 146,744
255 Washington Mutual Inc. 7.50 08/15/06 256,634
310 Washington Mutual Inc. 8.25 04/01/10 336,110
----------
2,178,217
----------
TRUCKS/CONSTRUCTION/FARM MACHINERY (0.8%)
500 Caterpillar Financial Services Corp. (Series MTNF) 3.625 11/15/07 487,707
525 John Deere Capital Corp. 3.375 10/01/07 510,932
360 John Deere Capital Corp. 4.50 08/22/07 356,210
----------
1,354,849
----------
WIRELESS TELECOMMUNICATIONS (0.4%)
580 Vodafone Group PLC (United Kingdom) 5.05+ 12/28/07 580,401
----------
Total Corporate Bonds (COST $82,581,707) 81,114,134
----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
17
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------------
U.S. Government Agencies -- Mortgage-Backed Securities (18.9%)
$1,309 Federal Home Loan Mortgage Corp. 7.50% 10/01/26 - 08/01/32 $ 1,365,915
950 Federal Home Loan Mortgage Corp. ARM 3.536 07/01/34 929,009
1,517 Federal Home Loan Mortgage Corp. ARM 4.158 08/01/34 1,502,593
18 Federal Home Loan Mortgage Corp. PC Gold 6.50 07/01/29 - 09/01/29 18,214
2,013 Federal Home Loan Mortgage Corp. PC Gold 7.50 01/01/30 - 07/01/32 2,100,178
985 Federal National Mortgage Assoc. 6.50 01/01/29 - 07/01/32 1,005,561
5,872 Federal National Mortgage Assoc. 7.00 02/01/26 - 12/01/35 6,045,395
400 Federal National Mortgage Assoc. 7.00 *** 411,250
758 Federal National Mortgage Assoc. 7.50 09/01/29 - 09/01/32 789,898
998 Federal National Mortgage Assoc. ARM. 3.566 07/01/34 985,647
517 Federal National Mortgage Assoc. ARM. 3.765 06/01/34 515,365
1,347 Federal National Mortgage Assoc. ARM. 4.112 09/01/34 1,333,677
1,568 Federal National Mortgage Assoc. ARM. 4.189 05/01/35 1,552,985
1,342 Federal National Mortgage Assoc. ARM. 4.324 04/01/35 1,323,324
1,292 Federal National Mortgage Assoc. ARM. 4.355 05/01/35 1,273,167
1,170 Federal National Mortgage Assoc. ARM. 4.506 04/01/35 1,155,214
1,305 Federal National Mortgage Assoc. ARM. 4.724 07/01/33 1,305,300
1,405 Federal National Mortgage Assoc. ARM. 4.767 07/01/35 1,373,621
1,947 Federal National Mortgage Assoc. ARM 4.777 09/01/35 1,908,183
1,444 Government National Mortgage Assoc. II 4.375+ 06/20/22 - 05/20/23 1,443,395
1,634 Government National Mortgage Assoc. II 4.50+ 08/20/29 - 09/20/29 1,636,355
337 Government National Mortgage Assoc. II 5.125+ 10/20/24 - 12/20/24 339,491
------------
Total U.S. Government Agencies -- Mortgage-Backed Securities
(COST $30,777,427) 30,313,737
============
Asset-Backed Securities (11.8%)
FINANCE/RENTAL/LEASING
1,800 Capital Auto Receivables Asset Trust 2006-1 A3 5.03 10/15/09 1,792,784
600 Capital One Multi-Asset Execution Trust 2005-A2 A2 4.05 02/15/11 587,799
1,675 Capital One Prime Auto Receivables Trust 2006-1 A3 4.99 09/15/10 1,668,811
1,800 Chase Manhattan Auto Owner Trust 2004-A A4 2.83 09/15/10 1,746,363
1,450 CNH Equipment Trust 2005-A A3 4.02 04/15/09 1,431,676
1,600 Daimler Chrysler Auto Trust 2005-B A3 4.04 09/08/09 1,580,832
656 Harley-Davidson Motorcycle Trust 2002-2 A2 3.09 06/15/10 648,503
2,801 Harley-Davidson Motorcycle Trust 2003-3 A2 2.76 05/15/11 2,758,782
725 Hertz Vehicle Financing LLC 2005-2A A2 4.93 02/25/10 717,198
1,500 Nissan Auto Receivables Owner Trust 2004-A A4 2.76 07/15/09 1,455,278
1,500 Nissan Auto Receivables Owner Trust 2005-B A3 3.99 07/15/09 1,480,360
2,150 USAA Auto Owner Trust 2005-3 A3 4.55 02/16/10 2,130,717
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
18
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------------
$ 1,000 Wachovia Auto Owner Trust 2005-B A3 4.79% 04/20/10 $ 993,527
------------
Total Asset-Backed Securities
(COST $19,273,815) 18,992,630
------------
Private Issues -- Collateralized Mortgage Obligations (10.9%)
696 Bear Stearns Series 2003-3 3A 5.309+ 10/25/33 697,610
4,060 CountryWide Alt Ln Tst - 2005-81 X1 IO 1.368+ 02/25/37 227,110
5,488 CountryWide Alt Ln Tst - 2006-0A1 2X IO 1.055+ 03/20/46 283,812
7,237 CountryWide Home Loans - 2004-25 1X IO 1.562+ 02/25/35 176,400
989 CountryWide Alt Ln Tst - 2006-0A1 1A2 5.223+ 03/20/46 989,565
138 DSLA Nim Corp. - 2006-1 N1 5.926+ 04/20/46 137,926
3,048 Greenpoint Mortgage Funding Trust - 2005-AR3 X1 IO 1.627+ 08/25/45 100,477
900 Greenpoint Mortgage Funding Trust - 2006-AR2 4A1 6.959+ 03/25/36 923,624
5,034 Greenpoint Mortgage Funding Trust - 2005-AR4 X4 IO 1.532+ 10/25/45 162,822
2 Harborview Mortgage Loan Trust - 2006-1 PO1 PO 0.00 03/19/37 1,610
10,439 Harborview Mortgage Loan Trust - 2005-16 X3 IO 1.38+ 01/19/36 368,618
5,270 Harborview Mortgage Loan Trust - 2005-3 X2 IO 0.798+ 06/19/35 138,346
5,322 Harborview Mortgage Loan Trust - 2006-1 X1 IO 1.424+ 03/19/37 276,103
3,825 Harborview Mortgage Loan Trust - 2005-16 X1 IO 1.712+ 01/19/36 136,151
6,470 Harborview Mortgage Loan Trust - 2005-2 X IO 1.102+ 05/19/35 169,829
970 Harborview Mortgage Loan - 2006-1 2A1A 5.15+ 03/19/37 970,225
1,968 Harborview Mortgage Loan Trust - 2005-16 4A1A 5.888+ 01/19/36 2,010,712
111 Harborview Nim Corp. 2006-BU1 N1 5.926+ 02/20/46 111,288
918 Luminent Mortgage Trust - 2006-1 A1 5.199+ 04/25/36 919,108
891 Luminent Mortgage Trust - 2006-2 A1B 5.239+ 02/25/46 891,885
555 Residential Accredit Loans Inc. - 2006-Q01 1A1 5.219+ 02/25/46 554,678
473 Residential Accredit Loans Inc. - 2006-Q01 2A1 5.229+ 02/25/46 475,416
903 Structured Asset Mortgage Investment Inc. -
2006-AR1 2A2 5.269+ 02/25/36 905,734
1,127 Structured Asset Mortgage Investment Inc. -
2006-AR2 A2 5.269+ 02/25/36 1,129,746
6,431 Washington Mutual Mortgage Pass-Through Certificates
2004-AR10 X IO 0.576+ 07/25/44 120,576
3,697 Washington Mutual Mortgage Pass-Through Certificates
2004-AR8 X IO 0.584+ 06/25/44 69,315
9,137 Washington Mutual Mortgage Pass-Through Certificates
2004-AR12 X IO 0.601+ 10/25/44 159,892
1,657 Washington Mutual Mortgage Pass-Through Certificates
2005-AR15 A1B3 5.299+ 11/25/45 1,667,777
754 Washington Mutual Mortgage Pass-Through Certificates
2005-AR8 2AB3 5.319+ 07/25/45 758,540
1,866 Washington Mutual Mortgage Pass-Through Certificates
2005-AR13 A1B3 5.319+ 10/25/45 1,875,939
------------
Total Private Issues -- Collateralized Mortgage
Obligations
(COST $17,501,138) 17,410,834
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
19
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------------
U.S. Government Agencies -- Collateralized Mortgage Obligations (3.0%)
$1,597 Federal Home Loan Mortgage Corp. 2182 ZC 7.50% 09/15/29 $ 1,672,455
1,946 Federal National Mortgage Assoc. 2005 - 27 NA (PAC) 5.50 01/25/24 1,945,207
1,100 Federal National Mortgage Assoc. 2005 - 27 NA (PAC) 6.50 06/25/35 1,136,192
------------
Total U.S. Government Agencies -- Collateralized
Mortgage Obligations (COST $4,917,802) 4,753,854
------------
Short-Term Investments (4.4%)
U.S. Government Obligation (a) (0.1%)
200 U.S. Treasury Bill** (COST $198,272) 4.26 07/13/06 198,272
------------
Repurchase Agreement (4.3%)
6,838 Joint repurchase agreement account (dated 04/28/06;
proceeds $6,840,721) (b) (COST $6,838,000) 4.775 05/01/06 6,838,000
------------
Total Short-Term Investments
(COST $7,036,272) 7,036,272
------------
Total Investments
(COST $162,088,161)(C)(D) 99.6% 159,621,461
Other Assets in Excess of Liabilities 0.4 578,859
------------
Net Assets 100.0% $160,200,320
============
</Table>
- ----------
ARM ADJUSTABLE RATE MORTGAGE. INTEREST RATE IN EFFECT AS OF APRIL 30, 2006.
IO INTEREST ONLY SECURITY.
PAC PLANNED AMORTIZATION CLASS.
PC PARTICIPATION CERTIFICATE.
PO PRINCIPAL ONLY SECURITY.
* 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 $55,125.
*** 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, 2006.
(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
$30,368,133 IN CONNECTION WITH SECURITIES PURCHASED ON A FORWARD COMMITMENT
BASIS AND OPEN FUTURES CONTRACTS.
(D) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $164,069,246. THE
AGGREGATE GROSS UNREALIZED APPRECIATION IS $104,713 AND THE AGGREGATE GROSS
UNREALIZED DEPRECIATION IS $4,552,498, RESULTING IN NET UNREALIZED
DEPRECIATION OF $4,447,785.
SEE NOTES TO FINANCIAL STATEMENTS
20
<Page>
FUTURES CONTRACTS OPEN AT APRIL 30, 2006:
NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE UNREALIZED
CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE DEPRECIATION
- -------------------------------------------------------------------------------
147 Long U.S. Treasury Note 2
year, June 2006 $29,948,954 $(62,680)
========
SEE NOTES TO FINANCIAL STATEMENTS
21
<Page>
Morgan Stanley Limited Duration Fund
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
APRIL 30, 2006
Assets:
Investments in securities, at value (cost $162,088,161) $159,621,461
Receivable for:
Interest 1,403,680
Investments sold 303,795
Principal paydowns 100,023
Shares of beneficial interest sold 40,702
Variation margin 22,969
Prepaid expenses and other assets 20,252
------------
Total Assets 161,512,882
------------
Liabilities:
Payable for:
Investments purchased 741,944
Shares of beneficial interest redeemed 355,577
Investment advisory fee 69,132
Dividends to shareholders 35,350
Administration fee 10,781
Transfer agent fee 10,245
Accrued expenses and other payables 89,533
------------
Total Liabilities 1,312,562
------------
Net Assets $160,200,320
------------
Composition of Net Assets:
Paid-in-capital $190,680,229
Net unrealized depreciation (2,529,380)
Dividends in excess of net investment income (1,878,696)
Accumulated net realized loss (26,071,833)
------------
Net Assets $160,200,320
============
Net Asset Value Per Share, 17,759,262 shares outstanding
(UNLIMITED SHARES AUTHORIZED OF $.01 PAR VALUE) $ 9.02
============
Statement of Operations
FOR THE YEAR ENDED APRIL 30, 2006
Net Investment Income:
Interest Income $ 9,785,672
-----------
Expenses
Investment advisory fee 1,355,785
Transfer agent fees and expenses 307,050
Administration fee 208,582
Professional fees 94,375
Shareholder reports and notices 66,084
Custodian fees 46,245
Registration fees 34,842
Trustees' fees and expenses 3,575
Other 42,051
-----------
Total Expenses 2,158,589
Less: amounts waived/reimbursed (72,490)
Less: expense offset (276)
-----------
Net Expenses 2,085,823
-----------
Net Investment Income 7,699,849
-----------
Net Realized and Unrealized Gain (Loss):
Net Realized Gain (Loss) on:
Investments (3,042,686)
Futures contracts 76,166
-----------
Net Realized Loss (2,966,520)
-----------
Net Change in Unrealized Appreciation/ Depreciation on:
Investments 677,389
Futures contracts (3,346)
-----------
Net Appreciation 674,043
-----------
Net Loss (2,292,477)
-----------
Net Increase $ 5,407,372
===========
SEE NOTES TO FINANCIAL STATEMENTS
22
<Page>
Statements of Changes in Net Assets
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
APRIL 30, 2006 APRIL 30, 2005
-------------- --------------
Increase (Decrease) in Net Assets:
Operations:
Net investment income $ 7,699,849 $ 11,464,957
Net realized loss (2,966,520) (1,312,107)
Net change in unrealized appreciation/depreciation 674,043 (5,091,390)
------------- -------------
Net Increase 5,407,372 5,061,460
Dividends to Shareholders from Net Investment
Income (10,065,548) (16,474,040)
Net decrease from transactions in shares of
beneficial interest (191,265,877) (120,871,693)
------------- -------------
Net Decrease (195,924,053) (132,284,273)
Net Assets:
Beginning of period 356,124,373 488,408,646
------------- -------------
End of Period
(INCLUDING DIVIDENDS IN EXCESS OF NET INVESTMENT
INCOME OF $1,878,696 AND $3,499,479, RESPECTIVELY) $ 160,200,320 $ 356,124,373
============= =============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
23
<Page>
Morgan Stanley Limited Duration Fund
NOTES TO FINANCIAL STATEMENTS - APRIL 30, 2006
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.
Effective August 29, 2005, the Board of Trustees of the Fund approved the
implementation of a 2% redemption fee, which is paid directly to the Fund, for
shares redeemed within seven days of purchase, subject to certain exceptions.
The redemption fee is designed to protect the Fund and its remaining
shareholders from the effects of short-term trading.
The following is a summary of significant accounting policies:
A. Valuation of Investments -- (1) certain portfolio securities may be valued by
an outside pricing service approved by the Fund's Trustees; (2) portfolio
securities for which over-the-counter market quotations are readily available
are valued at the mean between the last reported bid and asked price; (3)
futures are valued at the latest price published by the commodities exchange on
which they trade; (4) 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.
24
<Page>
D. Futures Contracts -- A futures contract is an agreement between two parties
to buy and sell financial instruments or contracts based on financial indices at
a set price on a future date. Upon entering into such a contract, the Fund is
required to pledge to the broker cash, U.S. Government securities or other
liquid portfolio securities equal to the minimum initial margin requirements of
the applicable futures exchange. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in the value of the contract. Such receipts or payments known as
variation margin are recorded by the Fund as unrealized gains and losses. Upon
closing of the contract, the Fund realizes a gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed.
E. Federal Income Tax Policy -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Accordingly, no federal income tax provision is required.
F. Dividends and Distributions to Shareholders -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.
G. Use of Estimates -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
2. Investment Advisory/Administration Agreements
Pursuant to an Investment Advisory Agreement with the Investment Adviser, the
Fund pays an advisory fee, accrued daily and payable monthly, by applying the
following annual rates to the net assets of the Fund determined as of the close
of each business day: 0.52% of the portion of the daily net assets not exceeding
$1 billion; 0.47% to the portion of the daily net assets exceeding $1 billion
but not exceeding $2 billion and 0.42% of the portion of the daily net assets in
excess of $2 billion.
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.
Effective November 18, 2005, the Investment Adviser has agreed to cap the Fund's
operating expenses for one year by assuming the Fund's "other expenses" and/or
waiving the Fund's advisory fees, and the Administrator has agreed to waive the
Fund's administrative fees, to the extent such operating expenses on an
annualized basis exceed 0.80% of the average daily net assets of the Fund.
25
<Page>
3. Security Transactions and Transactions with Affiliates
The cost of purchases and proceeds from sales/maturities/prepayments of
portfolio securities, excluding short-term investments, for the year ended April
30, 2006 were $135,828,528 and $311,733,340, respectively. Included in the
aforementioned are purchases and sales/prepayments of U.S. Government securities
of $83,568,905 and $128,306,201, respectively. Also, included in the
aforementioned transactions were sales of $78,788,048 with MSIF Trust Limited
Duration Fund, including net realized losses of $1,829,534.
Morgan Stanley Trust, an affiliate of the Investment Adviser and Administrator,
is the Fund's transfer agent.
The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan")
which allows each independent Trustee to defer payment of all, or a portion, of
the fees he 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, 2006 APRIL 30, 2005
--------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ------------ -------------
Sold 3,479,165 $ 31,694,608 13,944,535 $ 129,742,246
Reinvestment of dividends 795,079 7,229,149 1,321,375 12,255,388
----------- ------------- ----------- -------------
4,274,244 38,923,757 15,265,910 141,997,634
Redeemed (25,350,341) (230,189,634) (28,350,418) (262,869,327)
----------- ------------- ----------- -------------
Net decrease (21,076,097) $(191,265,877) (13,084,508) $(120,871,693)
=========== ============= =========== =============
</Table>
5. Expense Offset
The expense offset represents a reduction of the custodian and transfer agent
fees and expenses for earnings on cash balances maintained by the Fund.
26
<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 and Assets and Liabilities. The Fund bears the risk
of an unfavorable change in the value of the underlying securities. Risk may
also arise upon entering into contracts from the potential inability of
counterparties to meet the terms of their contacts.
7. Federal Income Tax Status
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for tax purposes are reported as distributions of paid-in-capital.
The tax character of distributions paid was as follows:
FOR THE YEAR FOR THE YEAR
ENDED ENDED
APRIL 30, 2006 APRIL 30, 2005
-------------- --------------
Ordinary income $ 10,100,099 $ 16,513,968
As of April 30, 2006, the tax-basis components of accumulated losses were as
follows:
Undistributed ordinary income $ 136,388
Undistributed long-term gains --
Net accumulated earnings 136,388
Capital loss carryforward* (21,831,288)
Post-October losses (4,301,244)
Temporary differences (35,980)
Net unrealized depreciation (4,447,785)
------------
Total accumulated losses $(30,479,909)
============
*As of April 30, 2006, the Fund had a net capital loss carryforward of
$21,831,288 of which $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,
27
<Page>
$11,744,997 will expire on April 30, 2013 and $4,214,200 will expire on April
30, 2014 to offset future capital gains to the extent provided by regulations.
As of April 30, 2006, 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 primarily 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 $1,838,203, accumulated net
realized loss was charged $2,148,279 and dividends in excess of net investment
income was credited $3,986,482.
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, filed in the United States District
Court Southern District of New York on April 16, 2004, 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. On March 9, 2005, Plaintiffs sought leave to supplement their complaint
to assert claims on behalf of other investors, which motion defendants opposed.
On April 14, 2006, the Court granted defendants' motion to dismiss in its
entirety. Additionally, the Court denied Plaintiff's motion to supplement their
complaint. This matter is now concluded.
28
<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,
----------------------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
Selected Per Share Data:
Net asset value, beginning of period $ 9.17 $ 9.41 $ 9.68 $ 9.59 $ 9.44
-------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income 0.16 0.19 0.17 0.24 0.41
Net realized and unrealized gain (loss) 0.05 (0.08) (0.07) 0.13 0.19
-------- -------- -------- -------- --------
Total income from investment operations 0.21 0.11 0.10 0.37 0.60
-------- -------- -------- -------- --------
Less dividends from net investment income: (0.36) (0.35) (0.37) (0.28) (0.45)
-------- -------- -------- -------- --------
Net asset value, end of period $ 9.02 $ 9.17 $ 9.41 $ 9.68 $ 9.59
======== ======== ======== ======== ========
Total Return+ 2.29% 1.20% 0.99% 3.93% 6.50%
Ratios to Average Net Assets:
Expenses(before expense offset) 0.80%(2) 0.76%(1) 0.85%(1) 0.84%(2) 0.80%(2)
Net investment income 2.95% 2.63% 1.75% 1.90% 3.94%
Supplemental Data:
Net assets, end of period, in thousands $160,200 $356,124 $488,409 $429,409 $166,631
Portfolio turnover rate 54% 82% 240% 217% 327%
</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 AND ADMINISTRATOR, THE ANNUALIZED EXPENSE AND NET
INVESTMENT INCOME RATIOS WOULD HAVE BEEN AS FOLLOWS:
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO INCOME RATIO
- -------------- ------- --------------
APRIL 30, 2006 0.83% 2.93%
APRIL 30, 2003 0.87 1.86
APRIL 30, 2002 0.92 3.82
SEE NOTES TO FINANCIAL STATEMENTS
29
<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, 2006, 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, 2006 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, 2006, 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 20, 2006
30
<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 HELD BY
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** TRUSTEE
- ------------------------ ----------- ------------ ----------------------------- ------------- ----------------------------
Michael Bozic (65) Trustee Since Private Investor; Director or 197 Director of various business
c/o Kramer Levin April 1994 Trustee of the Retail Funds organizations.
Naftalis & Frankel LLP (since April 1994) and the
Counsel to the Institutional Funds (since
Independent Trustees July 2003); formerly Vice
1177 Avenue of the Chairman of Kmart Corporation
Americas New York, NY (December 1998-October 2000),
10036 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 (73) Trustee Since Consultant; Director or 197 Director of Franklin Covey
1031 N. Chartwell Court January 1993 Trustee of the Retail Funds (time management systems),
Salt Lake City, UT 84103 (since January 1993) and the BMW Bank of North America,
Institutional Funds (since Inc. (industrial loan
July 2003); member of the corporation), Escrow Bank
Utah Regional Advisory Board USA (industrial loan
of Pacific Corp. (utility corporation), United Space
company); formerly Managing Alliance (joint venture
Director of Summit Ventures between Lockheed Martin and
LLC (2000-2004) (lobbying and the Boeing Company) and
consulting firm); United Nuskin Asia Pacific
States Senator (R-Utah) (multilevel marketing);
(1974-1992) and Chairman, member of the board of
Senate Banking Committee various civic and charitable
(1980-1986), Mayor of Salt organizations.
Lake City, Utah (1971-1974),
Astronaut, Space Shuttle
Discovery (April 12-19,
1985), and Vice Chairman,
Huntsman Corporation
(chemical company).
Wayne E. Hedien (72) Trustee Since Retired; Director or Trustee 197 Director of The PMI Group
c/o Kramer Levin September of the Retail Funds (since Inc. (private mortgage
Naftalis & Frankel LLP 1997 September 1997) and the insurance); Trustee and Vice
Counsel to the Institutional Funds (since Chairman of The Field Museum
Independent Trustees July 2003); formerly of Natural History; director
1177 Avenue of the associated with the Allstate of various other business
Americas New York, NY Companies (1966-1994), most and charitable
10036 recently as Chairman of The organizations.
Allstate Corporation (March
1993-December 1994) and
Chairman and Chief Executive
Officer of its wholly-owned
subsidiary, Allstate
Insurance Company (July
1989-December 1994).
</Table>
31
<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 HELD BY
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** TRUSTEE
- ------------------------ ----------- ------------ ----------------------------- ------------- ----------------------------
Dr.Manuel H. Johnson Trustee Since Senior Partner, Johnson Smick 197 Director of NVR, Inc. (home
(57) July 1991 International, Inc., a construction); Director of
c/o Johnson Smick Group, consulting firm; Chairman of KFX Energy; Director of RBS
Inc. 888 16th Street, NW the Audit Committee and Greenwich Capital Holdings
Suite 740 Washington, Director or Trustee of the (financial holding company).
D.C. 20006 Retail Funds (since July
1991) and the Institutional
Funds (since July 2003);
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 (63) Trustee Since President, Kearns & 198 Director of Electro Rent
c/o Kearns & Associates July 2003 Associates LLC (investment Corporation (equipment
LLC PMB754 23852 Pacific consulting); Deputy Chairman leasing), The Ford Family
Coast Highway Malibu, CA of the Audit Committee and Foundation, and the UCLA
90265 Director or Trustee of the Foundation.
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 (69) Trustee Since General Partner of Triumph 197 None.
c/o Triumph Capital, July 1991 Capital, L.P., a private
L.P. 445 Park Avenue New investment partnership;
York, NY 10022 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 (73) Trustee Since Chairman of Lumelite Plastics 198 Trustee and Director of
c/o Lumelite Plastics July 2003 Corporation; Chairman of the certain investment companies
Corporation 85 Charles Governance Committee and in the JPMorgan Funds
Colman Blvd. Pawling, NY Director or Trustee of the complex managed by J.P.
12564 Retail Funds (since July Morgan Investment Management
2003) and the Institutional Inc.
Funds (since June 1992).
</Table>
32
<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 HELD BY
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** TRUSTEE
- ------------------------ ----------- ------------ ----------------------------- ------------- ----------------------------
Charles A. Fiumefreddo Chairman of Since Chairman and Director or 197 None.
(72) the Board July 1991 Trustee of the Retail Funds
c/o Morgan Stanley Trust and Trustee (since July 1991) and the
Harborside Financial Institutional Funds (since
Center, Plaza Two, July 2003); formerly Chief
Jersey City, NJ 07311 Executive Officer of the
Retail Funds (until September
2002).
James F. Higgins (58) Trustee Since Director or Trustee of the 197 Director of AXA Financial,
c/o Morgan Stanley Trust June 2000 Retail Funds (since June Inc. and The Equitable Life
Harborside Financial 2000) and the Institutional Assurance Society of the
Center, Plaza Two, Funds (since July 2003); United States (financial
Jersey City, NJ 07311 Senior Advisor of Morgan services).
Stanley; Director of Dean
Witter Realty Inc.
</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.).
33
<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**
- --------------------------- ----------------- ------------------ --------------------------------------------
Ronald E. Robison (67) President and Since May 2003 President (since September 2005) and
1221 Avenue of the Americas Principal Principal Executive Officer (since
New York, NY 10020 Executive Officer May 2003) of funds in the Fund Complex;
President (since September 2005) and
Principal Executive Officer (since
May 2003) of the Van Kampen Funds; Managing
Director, Director and/or Officer of the
Investment Adviser and various entities
affiliated with the Investment Adviser;
Director of Morgan Stanley SICAV (since
May 2004). Formerly, Executive Vice
President (July 2003 to September 2005) of
funds in the Fund Complex and the Van
Kampen Funds; President and Director of
the Institutional Funds (March 2001 to
July 2003); Chief Global Operating Officer
of Morgan Stanley Investment Management
Inc.; Chief Administrative Officer of
Morgan Stanley Investment Advisors Inc.;
Chief Administrative Officer of Morgan
Stanley Services Company Inc.
J. David Germany (51) Vice President Since Managing Director and (since December 2005)
25 Cabot Square February 2006 Chief Investment Officer - Global Fixed
Canary Wharf, London Income of Morgan Stanley Investment
United Kingdom E144QA Management; Managing Director and Director
of Morgan Stanley Investment Management
Ltd.; Vice President (since February 2006)
of the Retail and Institutional Funds.
Dennis F. Shea (52) Vice President Since Managing Director and (since February 2006)
1221 Avenue of the Americas February 2006 Chief Investment Officer - Global Equity
New York, NY 10020 of Morgan Stanley Investment Management;
Vice President (since February 2006) of the
Retail and Institutional Funds. Formerly,
Managing Director and Director of Global
Equity Research at Morgan Stanley.
Barry Fink (51) Vice President Since Managing Director and General Counsel of
1221 Avenue of the Americas February 1997 Morgan Stanley Investment Management;
New York, NY 10020 Managing Director of the Investment
Adviser and various entities affiliated
with the Investment Adviser; Vice
President of the Retail Funds and (since
July 2003) the Institutional Funds.
Formerly, Secretary, General Counsel
and/or Director of the Investment Adviser
and various entities affiliated with the
Investment Adviser; Secretary and General
Counsel of the Retail Funds.
Amy R. Doberman (44) Vice President Since July 2004 Managing Director and General Counsel,
1221 Avenue of the Americas U.S. Investment Management of Morgan
New York, NY 10020 Stanley Investment Management (since
July 2004); Vice President of the Retail
Funds and the Institutional Funds (since
July 2004); Vice President of the Van
Kampen Funds (since August 2004); Secretary
(since February 2006) and Managing Director
(since July 2004) of the Investment Adviser
and various entities affiliated with the
Investment Adviser. Formerly, Managing
Director and General Counsel - Americas,
UBS Global Asset Management (July 2000 to
July 2004).
Carsten Otto (42) Chief Compliance Since October 2004 Managing Director and U.S. Director of
1221 Avenue of the Americas Officer Compliance for Morgan Stanley Investment
New York, NY 10020 Management (since October 2004); Managing
Director and Chief Compliance Officer of
Morgan Stanley Investment Management.
Formerly, Assistant Secretary and
Assistant General Counsel of the Retail
Funds.
Stefanie V. Chang Yu (39) Vice President Since July 2003 Executive Director of the Investment
1221 Avenue of the Americas Adviser and various entities affiliated
New York, NY 10020 with the Investment Adviser; Vice
President of the Retail Funds (since
July 2002) and the Institutional Funds
(since December 1997). Formerly, Secretary
of various entities affiliated with the
Investment Adviser.
</Table>
34
<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**
- --------------------------- ----------------- ------------------ --------------------------------------------
Francis J. Smith (40) Treasurer and Treasurer (since Executive Director of the Investment
c/o Morgan Stanley Trust Chief Financial July 2003) and Adviser and various entities affiliated
Harborside Financial Center, Officer Chief Financial with the Investment Adviser; Treasurer and
Plaza Two, Officer (since Chief Financial Officer of the Retail Funds
Jersey City, NJ 07311 September 2002) (since July 2003). Formerly, Vice President
of the Retail Funds (September 2002 to
July 2003).
Mary E. Mullin (39) Secretary Since July 2003 Executive Director of the Investment
1221 Avenue of the Americas Adviser and various entities affiliated
New York, NY 10020 with the Investment Adviser; Secretary of
the Retail Funds (since July 2003) and the
Institutional Funds (since June 1999).
</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.
2006 FEDERAL TAX NOTICE (UNAUDITED)
Of the Fund's ordinary dividends paid during the fiscal year ended April 30,
2006, 2.40% 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.
35
<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
Ronald E. Robison
PRESIDENT AND PRINCIPAL EXECUTIVE OFFICER
J. David Germany
VICE PRESIDENT
Dennis F. Shea
VICE PRESIDENT
Barry Fink
VICE PRESIDENT
Amy R. Doberman
VICE PRESIDENT
Carsten Otto
CHIEF COMPLIANCE OFFICER
Stefanie V. Chang Yu
VICE PRESIDENT
Francis J. Smith
TREASURER AND CHIEF FINANCIAL OFFICER
Mary E. Mullin
SECRETARY
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
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) 2006 Morgan Stanley
[MORGAN STANLEY LOGO]
MORGAN STANLEY FUNDS
Morgan Stanley
Limited Duration Fund
Annual Report
April 30, 2006
[MORGAN STANLEY LOGO]
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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 not amended its Code of Ethics during the period covered by
the shareholder report presented in Item 1.
(d) Not applicable.
(e) Not applicable.
(f)
(1) The Fund's Code of Ethics is attached hereto as Exhibit 12 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.
Item 4. Principal Accountant Fees and Services.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
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2006
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $35,125 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 540(2) $ 5,190,300(2)
TAX FEES $ 5,475(3) $ 2,044,491(4)
ALL OTHER FEES $ -- $ --
TOTAL NON-AUDIT FEES $ 6,015 $ 7,234,791
TOTAL $41,140 $ 7,234,791
2005
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
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.
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(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.
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(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.
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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
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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
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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
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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.
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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 second fiscal quarter of the period covered
by this report that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting.
Item 12. Exhibits
(a) 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.
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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
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Ronald E. Robison
Principal Executive Officer
June 20, 2006
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
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Ronald E. Robison
Principal Executive Officer
June 20, 2006
/s/ Francis Smith
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Francis Smith
Principal Financial Officer
June 20, 2006