MORGAN STANLEY SPECTRUM STRATEGIC LP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2005 or

[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to__________________

Commission File Number 0-26280

MORGAN STANLEY SPECTRUM STRATEGIC L.P.

(Exact name of registrant as specified in its charter)

Delaware 13-3782225
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

Demeter Management Corporation
330 Madison Avenue, 8th Floor
New York, NY 10017
(Address of principal executive offices) (Zip Code)

Registrant?s telephone number, including area code (212) 905-2700

(Former name, former address, and former fiscal year, if changed
since last report)

Indicate by check-mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes X No___________

Indicate by check-mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).

Yes No X

MORGAN STANLEY SPECTRUM STRATEGIC L.P.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

March 31, 2005

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MORGAN STANLEY SPECTRUM STRATEGIC L.P.
STATEMENTS OF FINANCIAL CONDITION

MORGAN STANLEY SPECTRUM STRATEGIC L.P.
STATEMENTS OF OPERATIONS
(Unaudited)

MORGAN STANLEY SPECTRUM STRATEGIC L.P.
STATEMENTS OF CHANGES IN PARTNERS? CAPITAL
For the Quarters Ended March 31, 2005 and 2004
(Unaudited)

MORGAN STANLEY SPECTRUM STRATEGIC L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)

MORGAN STANLEY SPECTRUM STRATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS

March 31, 2005

(Unaudited)

The unaudited financial statements contained herein include, in
the opinion of management, all adjustments necessary for a fair
presentation of the results of operations and financial condition
of Morgan Stanley Spectrum Strategic L.P. (the ?Partnership?).
The financial statements and condensed notes herein should be read
in conjunction with the Partnership?s December 31, 2004 Annual
Report on Form 10-K. Certain reclassifications have been made to
the prior year?s financial statements to conform to the current
year presentation. Such reclassifications have no impact on the
Partnership?s reported net income (loss).

1. Organization
Morgan Stanley Spectrum Strategic L.P. is a Delaware limited
partnership organized in 1994 to engage primarily in the
speculative trading of futures contracts, options on futures and
forward contracts, and forward contracts on physical commodities
and other commodity interests, including, but not limited to,
foreign currencies, financial instruments, metals, energy, and
agricultural products. The Partnership is one of the Morgan
Stanley Spectrum Series of funds, comprised of the Partnership,
Morgan Stanley Spectrum Currency L.P., Morgan Stanley Spectrum

MORGAN STANLEY SPECTRUM STATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Global Balanced L.P., Morgan Stanley Spectrum Select L.P., and
Morgan Stanley Spectrum Technical L.P.

The Partnership?s general partner is Demeter Management
Corporation (?Demeter?). The non-clearing commodity broker is
Morgan Stanley DW Inc. (?Morgan Stanley DW?). The clearing
commodity brokers are Morgan Stanley & Co. Incorporated (?MS &
Co.?), Morgan Stanley & Co. International Limited (?MSIL?), and
Morgan Stanley Capital Group Inc. (?MSCG?). MSCG acts as the
counterparty on all of the options on foreign currency forward
trades for the Partnership. Demeter, Morgan Stanley DW, MS & Co.,
MSIL, and MSCG are wholly-owned subsidiaries of Morgan Stanley.
The trading advisors to the Partnership are Blenheim Capital
Management, L.L.C., Eclipse Capital Management, Inc., and FX
Concepts (Trading Advisor) Inc. (individually, a ?Trading
Advisor?, or collectively, the ?Trading Advisors?).

2. Related Party Transactions
The Partnership?s cash is on deposit with Morgan Stanley DW, MS &
Co., MSIL, and MSCG in futures, forwards, and options trading
accounts to meet margin requirements as needed. Monthly, Morgan
Stanley DW pays the Partnership interest income equal to 80% of
the month?s average daily Net Assets at a rate equal to a

MORGAN STANLEY SPECTRUM STATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

prevailing rate on U.S. Treasury bills. The Partnership pays
brokerage fees to Morgan Stanley DW.

3. Financial Instruments
The Partnership trades futures contracts, options on futures and
forward contracts, and forward contracts on physical commodities
and other commodity interests, including, but not limited to,
foreign currencies, financial instruments, metals, energy, and
agricultural products. Futures and forwards represent contracts
for delayed delivery of an instrument at a specified date and
price. Risk arises from changes in the value of these contracts
and the potential inability of counterparties to perform under the
terms of the contracts. There are numerous factors which may
significantly influence the market value of these contracts,
including interest rate volatility.

The market value of exchange-traded contracts is based on the
settlement price quoted by the exchange on the day with respect
to which market value is being determined. If an exchange-traded
contract could not have been liquidated on such day due to the
operation of daily limits or other rules of the exchange, the
settlement price shall be the settlement price on the first
subsequent day on which the contract could be liquidated. The

MORGAN STANLEY SPECTRUM STATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

market value of off-exchange-traded contracts is based on the
fair market value quoted by the counterparty.

The Partnership?s contracts are accounted for on a trade-date
basis and marked to market on a daily basis. The Partnership
accounts for its derivative investments in accordance with the
provisions of Statement of Financial Accounting Standards No.
133, ?Accounting for Derivative Instruments and Hedging
Activities? (?SFAS No. 133?). SFAS No. 133 defines a derivative
as a financial instrument or other contract that has all three of
the following characteristics:

1) One or more underlying notional amounts or payment
provisions;
2) Requires no initial net investment or a smaller initial net
investment than would be required relative to changes in
market factors;
3) Terms require or permit net settlement.

Generally, derivatives include futures, forward, swaps or options
contracts, and other financial instruments with similar
characteristics such as caps, floors, and collars.

MORGAN STANLEY SPECTRUM STATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

The net unrealized gains (losses) on open contracts, reported as a
component of ?Equity in futures interests trading accounts? on the
Statements of Financial Condition, and their longest contract
maturities were as follows:

Net Unrealized Gains/(Losses)
on Open Contracts Longest Maturities

Exchange- Off-Exchange- Exchange- Off-Exchange-
Date Traded Traded Total Traded Traded
$ $ $

Mar. 31, 2005 2,032,101 (3,164,105) (1,132,004) Jun. 2010 Jun. 2005
Dec. 31, 2004 3,084,000 (424,631) 2,659,369 Mar. 2006 Mar. 2005

The Partnership has credit risk associated with counterparty non-
performance. The credit risk associated with the instruments in
which the Partnership trades is limited to the amounts reflected
in the Partnership?s Statements of Financial Condition.

The Partnership also has credit risk because Morgan Stanley DW, MS
& Co., MSIL, and MSCG act as the futures commission merchants or
the counterparties, with respect to most of the Partnership?s
assets. Exchange-traded futures, forward, options on forward, and
futures-styled options contracts are marked to market on a daily
basis, with variations in value settled on a daily basis. Morgan
Stanley DW, MS & Co., MSIL, and MSCG each as a futures commission
merchant for the Partnership?s exchange-traded futures, forward,

MORGAN STANLEY SPECTRUM STATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

and futures-styled options contracts, are required, pursuant to
regulations of the Commodity Futures Trading Commission (?CFTC?),
to segregate from their own assets, and for the sole benefit of
their commodity customers, all funds held by them with respect to
exchange-traded futures, forward, options on forward, and futures-
styled options contracts, including an amount equal to the net
unrealized gains (losses) on all open futures, forward, options of
forward, and futures-styled options contracts, which funds, in the
aggregate, totaled $179,780,662 and $181,484,461 at March 31, 2005
and December 31, 2004, respectively. With respect to the
Partnership?s off-exchange-traded forward currency contracts,
there are no daily exchange-required settlements of variation in
value, nor is there any requirement that an amount equal to the
net unrealized gains (losses) on open forward contracts be
segregated. However, the Partnership is required to meet margin
requirements equal to the net unrealized loss on open contracts
in the Partnership accounts with the counterparty, which is
accomplished by daily maintenance of the cash balance in a
custody account held at Morgan Stanley DW for the benefit of MS &
Co. With respect to those off-exchange-traded forward currency
contracts, the Partnership is at risk to the ability of MS & Co.,
the sole counterparty on all such contracts, to perform. The
Partnership has a netting agreement with MS & Co. This agreement,
which seeks to reduce both the Partnership?s and MS & Co.?s
exposure on off-exchange-traded forward currency contracts, should
MORGAN STANLEY SPECTRUM STATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

materially decrease the Partnership?s credit risk in the event of
MS & Co.?s bankruptcy or insolvency.

Item 2. MANAGEMENT?S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Liquidity. The Partnership deposits its assets with Morgan
Stanley DW as non-clearing broker, and MS & Co., MSIL, and MSCG
as clearing brokers in separate futures, forwards, and options
trading accounts established for each Trading Advisor. Such
assets are used as margin to engage in trading and may be used as
margin solely for the Partnership?s trading. The assets are held
in either non-interest bearing bank accounts or in securities and
instruments permitted by the CFTC for investment of customer
segregated or secured funds. Since the Partnership?s sole purpose
is to trade in futures, forwards, and options, it is expected that
the Partnership will continue to own such liquid assets for margin
purposes.

The Partnership?s investment in futures, forwards, and options
may, from time to time, be illiquid. Most U.S. futures exchanges
limit fluctuations in prices during a single day by regulations
referred to as ?daily price fluctuations limits? or ?daily
limits?. Trades may not be executed at prices beyond the daily
limit. If the price for a particular futures or options contract
has increased or decreased by an amount equal to the daily limit,
positions in that futures or options contract can neither be taken
nor liquidated unless traders are willing to effect trades at or
within the limit. Futures prices have occasionally moved the daily
limit for several consecutive days with little or no trading.
These market conditions could prevent the Partnership from
promptly liquidating its futures or options contracts and result
in restrictions on redemptions.

There is no limitation on daily price moves in trading forward
contracts on foreign currencies. The markets for some world
currencies have low trading volume and are illiquid, which may
prevent the Partnership from trading in potentially profitable
markets or prevent the Partnership from promptly liquidating
unfavorable positions in such markets, subjecting it to
substantial losses. Either of these market conditions could
result in restrictions on redemptions. For the periods covered by
this report, illiquidity has not materially affected the
Partnership?s assets.

There are no known material trends, demands, commitments, events,
or uncertainties at the present time that are reasonably likely to
result in the Partnership?s liquidity increasing or decreasing in
any material way.

Capital Resources. The Partnership does not have, nor expects to
have, any capital assets. Redemptions, exchanges, and sales of
units of limited partnership interest (?Unit(s)?) in the future
will affect the amount of funds available for investments in
futures, forwards, and options in subsequent periods. It is not
possible to estimate the amount, and therefore the impact,
of future inflows and outflows of Units.

There are no known material trends, favorable or unfavorable, that
would affect, nor any expected material changes to, the
Partnership?s capital resource arrangements at the present time.

Off-Balance Sheet Arrangements and Contractual Obligations. The
Partnership does not have any off-balance sheet arrangements, nor
does it have contractual obligations or commercial commitments to
make future payments that would affect its liquidity or capital
resources.

Results of Operations
General. The Partnership?s results depend on the Trading Advisors
and the ability of each Trading Advisor?s trading program to take
advantage of price movements in the futures, forwards, and options
markets. The following presents a summary of the Partnership?s
operations for the three month periods ended March 31, 2005 and
2004, and a general discussion of its trading activities during
each period. It is important to note, however, that the Trading
Advisors trade in various markets at different times and that
prior activity in a particular market does not mean that such
market will be actively traded by the Trading Advisors or will be
profitable in the future. Consequently, the results of operations
of the Partnership are difficult to discuss other than in the
context of the Trading Advisors? trading activities on
behalf of the Partnership during the period in question. Past
performance is no guarantee of future results.

The Partnership?s results of operations set forth in the financial
statements on pages 2 through 12 of this report are prepared in
accordance with accounting principles generally accepted in the
United States of America, which require the use of certain
accounting policies that affect the amounts reported in these
financial statements, including the following: The contracts the
Partnership trades are accounted for on a trade-date basis and
marked to market on a daily basis. The difference between their
cost and market value is recorded on the Statements of Operations
as ?Net change in unrealized trading profit (loss)? for open
(unrealized) contracts, and recorded as ?Realized trading profit
(loss)? when open positions are closed out. The sum of these
amounts constitutes the Partnership?s trading results. The market
value of a futures contract is the settlement price on the
exchange on which that futures contract is traded on a particular
day. The value of foreign currency forward contracts is based on
the spot rate as of the close of business. Interest income, as
well as management fees, incentive fees, and brokerage fees
expenses of the Partnership are recorded on an accrual basis.

Demeter believes that, based on the nature of the operations of
the Partnership, no assumptions relating to the application of
critical accounting policies other than those presently
used could reasonably affect reported amounts.

For the Quarter Ended March 31, 2005
The Partnership recorded total trading results including interest
income totaling $(7,718,402) and expenses totaling $4,925,168,
resulting in a net loss of $12,643,570 for the quarter ended
March 31, 2005. The Partnership?s net asset value per Unit
decreased from $14.56 at December 31, 2004 to $13.57 at March 31,
2005.

The most significant trading losses of approximately 5.2% were
recorded in the currency sector throughout the quarter from a
variety of foreign currencies versus the U.S. dollar. During
January, long positions in the Australian dollar and Japanese yen
versus the U.S. dollar incurred losses after the U.S. dollar?s
value reversed sharply higher amid conflicting economic data,
improvements in U.S. trade deficit numbers, and speculation for
higher U.S. interest rates. The U.S. dollar?s value advanced
further due to expectations that the Chinese government would
announce postponement of Chinese yuan-revaluation for the
foreseeable future. Short positions in the Swiss franc and
Japanese yen against the U.S. dollar experienced losses during
February as the value of the U.S. dollar weakened in response to
concern for the considerable U.S. current account deficit
expressed by Federal Reserve Chairman Alan Greenspan. The value
of the U.S. dollar weakened further in response to a
larger-than-expected drop in January leading economic indicators
and news that South Korea?s Central Bank planned to reduce its
U.S. dollar currency reserves. During March, long positions in
most European currencies, as well as the Australian dollar,
Canadian dollar, and Japanese yen, versus the U.S. dollar
experienced losses after the value of the U.S. dollar reversed
sharply higher, benefiting from increases in U.S. interest rates
and consumer prices. Additional losses of approximately 1.3%
were recorded in the global stock index markets, primarily during
January and March, from long positions in U.S. and Pacific Rim
stock index futures. During January, long U.S. stock index
futures positions experienced losses after prices declined amid
weak consumer confidence data, concerns about higher U.S.
interest rates, and the potential for slower growth in corporate
profits. During March, long positions in U.S. and Pacific Rim
stock index futures incurred losses after equity prices moved
lower in response to concerns for the growing U.S. trade deficit,
weakness in the U.S. dollar early in the month, inflation fears,
and a surge in crude oil prices. Prices continued to weaken
throughout the month on higher U.S. interest rates and fears that
consistently rising energy prices would negatively impact
economic growth. Further losses of approximately 1.0% were
experienced in the global interest rate sector, primarily during
February, from long positions in Australian, U.S., and Japanese
interest rate futures as prices reversed lower after positive
economic data and expectations for higher interest rates
reduced investor demand for fixed-income investments. Smaller
Partnership losses of approximately 0.1% recorded in the metals
markets occurred during January and March from long futures
positions in precious and base metals. During January, long
futures positions in gold recorded losses as prices declined due
to strength in the U.S. while long futures positions in base
metals also incurred losses from U.S. dollar strength and a drop
in Chinese demand. Losses in March resulted from long futures
positions in precious metals after prices declined amid renewed
strength in the U.S. dollar. A portion of the Partnership?s
overall losses for the quarter was offset by gains of
approximately 0.6% achieved in the agricultural markets during
January and February from long futures positions in coffee and
cocoa. Long coffee futures positions benefited during January as
prices increased due to technically-based and speculative buying.
During February, long futures positions in cocoa profited as
prices moved higher on news of political instability in the Ivory
Coast, the world?s top cocoa producer. Smaller Partnership gains
of approximately 0.3% were recorded in the energy sector during
January from long futures positions in unleaded gas as prices
moved higher in response to colder weather in the Northeastern
U.S. and speculation that OPEC would move to cut oil production.

For the Quarter Ended March 31, 2004
The Partnership recorded total trading results including interest
income totaling $19,386,598 and expenses totaling $5,330,275,
resulting in net income of $14,056,323 for the quarter ended
March 31, 2004. The Partnership?s net asset value per Unit
increased from $14.31 at December 31, 2003 to $15.87 at March 31,
2004.

The most significant trading gains of approximately 7.1% were
recorded in the agricultural markets, primarily during February,
from long futures positions in soybeans, soybean-related
products, and corn. During the quarter, prices for both
commodities finished higher due to increased exports abroad and
greater demand from Asia. In the metals markets, gains of
approximately 5.9% were recorded, primarily during February, from
long futures positions in base metals. Copper, zinc, lead, and
aluminum prices trended higher as a declining U.S. dollar
prompted an increase in industrial metal demand from Asia and
global central banks. Additional gains of approximately 2.7% were
recorded in the global interest rate markets, primarily during
February and March. Long positions in European and U.S. interest
rate futures profited as global bond prices rallied after central
banks, such as the European Central Bank and U.S. Federal
Reserve, reported no need to raise interest rates due to a lack
of inflation. Prices trended higher during March due to
uncertainty in the global equity markets, disappointing U.S.
economic data, and safe-haven buying following the
terrorist attack in Madrid. Smaller gains of approximately 0.5%
were established in the energy markets during February from long
futures positions in crude oil and its related products. Low
market supply, falling inventory levels, and a production cut
announcement from OPEC caused prices to rally throughout
February. A portion of the Partnership's overall gains for the
quarter was offset by losses of approximately 1.2% in the
currency markets. Long positions in the Australian dollar against
the U.S. dollar incurred losses as the U.S. dollar reversed
higher during March. Against the Australian dollar, the U.S.
dollar benefited from the belief that the Australian Central Bank
would not increase interest rates in the short term, as had been
expected. Additional currency sector losses stemmed from long
positions in the euro versus the U.S. dollar during March as the
euro?s value moved lower in response to expectations that the
European Central Bank would move to cut interest rates in order
to spur economic growth in the euro zone. Long positions in the
Swiss franc and Canadian dollar versus the U.S. dollar also
resulted in losses as the U.S. dollar advanced during January
amid a brief corrective recovery encouraged by the release of
positive U.S. economic data. Smaller losses of approximately 0.6%
resulted in the global stock index markets from long positions in
European stock index futures as prices declined during February
and early March in response to a drop in German and U.S. consumer
confidence figures, as well as growing geopolitical
uncertainty stemming from the terrorist attacks in Spain.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK

Introduction
The Partnership is a commodity pool engaged primarily in the
speculative trading of futures, forwards, and options. The
market-sensitive instruments held by the Partnership are acquired
for speculative trading purposes only and, as a result, all or
substantially all of the Partnership?s assets are at risk of
trading loss. Unlike an operating company, the risk of market-
sensitive instruments is inherent to the primary business activity
of the Partnership.

The futures, forwards, and options traded by the Partnership
involve varying degrees of related market risk. Market risk is
often dependent upon changes in the level or volatility of
interest rates, exchange rates, and prices of financial
instruments and commodities, factors that result in frequent
changes in the fair value of the Partnership?s open positions,
and consequently in its earnings, whether realized or unrealized,
and cash flow. Gains and losses on open positions of exchange-
traded futures, forwards, and options are settled daily through
variation margin. Gains and losses on off-exchange-traded
forward currency contracts are settled upon termination of the
contract, however, the Partnership is required to meet margin
requirements equal to the net unrealized loss on open contracts
in the Partnership accounts with the counterparty, which is
accomplished by daily maintenance of the cash balance in a
custody account held at Morgan Stanley DW for the benefit of MS &
Co.

The Partnership?s total market risk may increase or decrease as
it is influenced by a wide variety of factors, including, but not
limited to, the diversification among the Partnership?s open
positions, the volatility present within the markets, and the
liquidity of the markets.

The face value of the market sector instruments held by the
Partnership is typically many times the applicable margin
requirements. Margin requirements generally range between 2% and
15% of contract face value. Additionally, the use of leverage
causes the face value of the market sector instruments held by
the Partnership to typically be many times the total
capitalization of the Partnership.

The Partnership?s past performance is no guarantee of its future
results. Any attempt to numerically quantify the Partnership?s
market risk is limited by the uncertainty of its speculative
trading. The Partnership?s speculative trading and use of
leverage may cause future losses and volatility (i.e., ?risk of
ruin?) that far exceed the Partnership?s experience to date under
the ?Partnership?s Value at Risk in Different Market Sectors?
section and significantly exceed the Value at Risk (?VaR?)
tables disclosed.
Limited partners will not be liable for losses exceeding the
current net asset value of their investment.

Quantifying the Partnership?s Trading Value at Risk
The following quantitative disclosures regarding the Partnership?s
market risk exposures contain ?forward-looking statements? within
the meaning of the safe harbor from civil liability provided for
such statements by the Private Securities Litigation Reform Act of
1995 (set forth in Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934). All
quantitative disclosures in this section are deemed to be forward-
looking statements for purposes of the safe harbor, except for
statements of historical fact.

The Partnership accounts for open positions on the basis of mark
to market accounting principles. Any loss in the market value of
the Partnership?s open positions is directly reflected in the
Partnership?s earnings and cash flow.

The Partnership?s risk exposure in the market sectors traded by
the Trading Advisors is estimated below in terms of VaR. The
Partnership estimates VaR using a model based upon historical
simulation (with a confidence level of 99%) which involves
constructing a distribution of hypothetical daily changes in the
value of a trading portfolio. The VaR model takes into
account linear exposures to risk including equity and commodity
prices, interest rates, foreign exchange rates, and correlation
among these variables. The hypothetical changes in portfolio
value are based on daily percentage changes observed in key
market indices or other market factors (?market risk factors?) to
which the portfolio is sensitive. The one-day 99% confidence
level of the Partnership?s VaR corresponds to the negative change
in portfolio value that, based on observed market risk factors,
would have been exceeded once in 100 trading days, or one day in
100. VaR typically does not represent the worst case outcome.
Demeter uses approximately four years of daily market data (1,000
observations) and revalues its portfolio (using delta-gamma
approximations) for each of the historical market moves that
occurred over this time period. This generates a probability
distribution of daily ?simulated profit and loss? outcomes. The
VaR is the appropriate percentile of this distribution. For
example, the 99% one-day VaR would represent the 10th worst
outcome from Demeter?s simulated profit and loss series.

The Partnership?s VaR computations are based on the risk
representation of the underlying benchmark for each instrument or
contract and do not distinguish between exchange and non-exchange
dealer-based instruments. They are also not based on exchange
and/or dealer-based maintenance margin requirements.

VaR models, including the Partnership?s, are continually
evolving as trading portfolios become more diverse and modeling
techniques and systems capabilities improve. Please note that
the VaR model is used to numerically quantify market risk for
historic reporting purposes only and is not utilized by either
Demeter or the Trading Advisors in their daily risk management
activities. Please further note that VaR as described above may
not be comparable to similarly titled measures used by other
entities.

The Partnership?s Value at Risk in Different Market Sectors
The following table indicates the VaR associated with the
Partnership?s open positions as a percentage of total net assets
by primary market risk category at March 31, 2005 and 2004. At
March 31, 2005 and 2004, the Partnership?s total capitalization
was approximately $176 million and $158 million, respectively.

Primary Market March 31, 2005 March 31, 2004
Risk Category Value at Risk Value at Risk

Currency (3.76)% (0.08)%

Interest Rate (0.29) (1.73)

Equity (0.25) (0.41)

Commodity (0.99) (1.00)

Aggregate Value at Risk (3.78)% (1.96)%

The VaR for a market category represents the one-day downside
risk for the aggregate exposures associated with this market
category. The Aggregate Value at Risk listed above represents
the VaR of the Partnership?s open positions across all the
market categories, and is less than the sum of the VaRs for all
such market categories due to the diversification benefit across
asset classes.

Because the business of the Partnership is the speculative
trading of futures, forwards, and options, the composition of its
trading portfolio can change significantly over any given time
period, or even within a single trading day, which could
positively or negatively materially impact market risk as
measured by VaR.

The table below supplements the quarter-end VaR set forth above
by presenting the Partnership?s high, low, and average VaR, as a
percentage of total net assets for the four quarter-end reporting
periods from April 1, 2004 through March 31, 2005.

Primary Market Risk Category High Low Average
Currency (5.47)% (0.12)% (2.51)%
Interest Rate (1.40) (0.21) (0.59)
Equity (1.21) - (0.64)
Commodity (1.31) (0.52) (0.96)
Aggregate Value at Risk (6.00)% (1.44)% (3.40)%

Limitations on Value at Risk as an Assessment of Market Risk
VaR models permit estimation of a portfolio?s aggregate market
risk exposure, incorporating a range of varied market risks;
reflect risk reduction due to portfolio diversification or
hedging activities; and can cover a wide range of portfolio
assets. However, VaR risk measures should be viewed in light of
the methodology?s limitations, which include, but may not be
limited to the following:
* past changes in market risk factors will not always result in
accurate predictions of the distributions and correlations of
future market movements;
* changes in portfolio value caused by market movements may
differ from those of the VaR model;
* VaR results reflect past market fluctuations applied to current
trading positions while future risk depends on future
positions;
* VaR using a one-day time horizon does not fully capture the
market risk of positions that cannot be liquidated or hedged
within one day; and
* the historical market risk factor data used for VaR estimation
may provide only limited insight into losses that could be
incurred under certain unusual market movements.

In addition, the VaR tables above, as well as the past performance
of the Partnership, give no indication of the Partnership?s
potential ?risk of ruin?.

The VaR tables provided present the results of the Partnership?s
VaR for each of the Partnership?s market risk exposures and on an
aggregate basis at March 31, 2005, and for the four
quarter-end reporting periods from April 1, 2004 through March 31,
2005. VaR is not necessarily representative of the Partnership?s
historic risk, nor should it be used to predict the Partnership?s
future financial performance or its ability to manage or monitor
risk. There can be no assurance that the Partnership?s actual
losses on a particular day will not exceed the VaR amounts
indicated above or that such losses will not occur more than once
in 100 trading days.

Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash
balances. These balances and any market risk they may represent
are immaterial.

The Partnership also maintains a substantial portion
(approximately 100% as of March 31, 2005) of its available assets
in cash at Morgan Stanley DW. A decline in short-term interest
rates would result in a decline in the Partnership?s cash
management income. This cash flow risk is not considered to be
material.

Materiality, as used throughout this section, is based on an
assessment of reasonably possible market movements and any
associated potential losses, taking into account the leverage,
optionality, and multiplier features of the Partnership?s market-
sensitive instruments, in relation to the Partnership?s
net assets.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership?s
market risk exposures ? except for (A) those disclosures that are
statements of historical fact and (B) the descriptions of how the
Partnership manages its primary market risk exposures ?
constitute forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act. The Partnership?s primary market risk
exposures, as well as the strategies used and to be used by
Demeter and the Trading Advisors for managing such exposures, are
subject to numerous uncertainties, contingencies and risks, any
one of which could cause the actual results of the Partnership?s
risk controls to differ materially from the objectives of such
strategies. Government interventions, defaults and expro-
priations, illiquid markets, the emergence of dominant
fundamental factors, political upheavals, changes in historical
price relationships, an influx of new market participants,
increased regulation, and many other factors could result in
material losses, as well as in material changes to the risk
exposures and the risk management strategies of the Partnership.
Investors must be prepared to lose all or substantially all of
their investment in the Partnership.

The following were the primary trading risk exposures of
the Partnership at March 31, 2005 by market sector. It may be
anticipated, however, that these market exposures will vary
materially over time.

Currency. The primary market exposure of the Partnership at
March 31, 2005 was to the currency sector. The Partnership?s
currency exposure is to exchange rate fluctuations, primarily
fluctuations which disrupt the historical pricing relationships
between different currencies and currency pairs. Interest rate
changes, as well as political and general economic conditions
influence these fluctuations. The Partnership trades a large
number of currencies, including cross-rates ? i.e., position
between two currencies other than the U.S. dollar. At March 31,
2005, the Partnership?s major exposure was to the euro, Japanese
yen, Australian dollar, and British pound currency crosses, as
well as to outright U.S. dollar positions. Outright positions
consists of the U.S. dollar vs. other currencies. These other
currencies include major and minor currencies. Demeter does not
anticipate that the risk associated with the Partnership?s
currency trades will change significantly in the future.

Interest Rate. At March 31, 2005, the Partnership had market
exposure to the global interest rate sector. Exposure was
primarily spread across the G-7 countries interest rates. The G-
7 countries consist of France, the U.S., Britain, Germany, Japan,
Italy, and Canada. As of March 31, 2005, exposure was
concentrated in the Japanese, U.S., and European interest rate
sectors. Interest rate movements directly affect the price of
the sovereign bond futures positions held by the Partnership and
indirectly affect the value of its stock index and currency
positions. Interest rate movements in one country, as well as
relative interest rate movements between countries, materially
impact the Partnership?s profitability. The Partnership?s
interest rate exposure is generally to interest rate fluctuations
in the U.S. and the other G-7 countries. Demeter anticipates that
the G-7 countries and Australian interest rates will remain the
primary interest rate exposure of the Partnership for the
foreseeable future. The speculative futures positions held by
the Partnership may range from short to long-term instruments.
Consequently, changes in short, medium, or long-term interest
rates may have an effect on the Partnership.

Equity. At March 31, 2005, the Partnership had market exposure
to the stock index futures sector. The stock index futures
traded by the Partnership are by law limited to futures on
broadly-based indices. At March 31, 2005, the Partnership?s
primary exposures were to the NIKKEI (Japan), DAX (Germany), S&P
500 (U.S.), and HANG SENG (China) stock indices. The Partnership
is exposed to the risk of adverse price trends or static markets
in the U.S., European, and Japanese stock indices. Static
markets would not cause major market changes, but would make it
difficult for the Partnership to avoid trendless price
movements, resulting in numerous small losses.
Commodity.
Energy. The second largest market exposure of the
Partnership at March 31, 2005 was to the energy sector. The
Partnership?s energy exposure was primarily to futures
contracts in crude oil and its related products, and natural
gas. Price movements in these markets result from
geopolitical developments, particularly in the Middle East,
as well as weather patterns, and other economic
fundamentals. Significant profits and losses, which have
been experienced in the past, are expected to continue to be
experienced in the future. Natural gas has exhibited
volatility in prices resulting from weather patterns and
supply and demand factors and will likely continue in this
choppy pattern.

Metals. At March 31, 2005, the Partnership had market
exposure in the metals sector. The Partnership?s metals
exposure was to fluctuations in the price of base metals,
such as copper, aluminum, zinc, and lead, and precious
metals, such as gold and silver. Economic forces, supply
and demand inequalities, geopolitical factors, and market
expectations influence price movements in these markets.
The Trading Advisors utilize the trading system(s) to take
positions when market opportunities develop, and
Demeter anticipates that the Partnership will continue to do
so.

Soft Commodities and Agriculturals. At March 31, 2005, the
Partnership had market exposure to the markets that comprise
these sectors. Most of the exposure was to the cocoa and
sugar markets. Supply and demand inequalities, severe
weather disruptions, and market expectations affect price
movements in these markets.

Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following was the only non-trading risk exposure of the
Partnership at March 31, 2005:

Foreign Currency Balances. The Partnership?s primary
foreign currency balances at March 31, 2005 were in British
pounds, Japanese yen, and euros. The Partnership controls
the non-trading risk of foreign currency balances by
regularly converting them back into U.S. dollars upon
liquidation of their respective positions.

Qualitative Disclosures Regarding Means of Managing Risk Exposure
The Partnership and the Trading Advisors, separately, attempt to
manage the risk of the Partnership?s open positions in
essentially the same manner in all market categories traded.
Demeter attempts to manage market exposure by diversifying the
Partnership?s assets among different Trading Advisors in a
multi-advisor Partnership, each of whose strategies focus on
different market sectors and trading approaches, and by
monitoring the performance of the Trading Advisors daily. In
addition, the Trading Advisors establish diversification
guidelines, often set in terms of the maximum margin to be
committed to positions in any one market sector or market-
sensitive instrument.

Demeter monitors and controls the risk of the Partnership?s non-
trading instrument, cash. Cash is the only Partnership
investment directed by Demeter, rather than the Trading Advisors.

Item 4. CONTROLS AND PROCEDURES

(a) As of the end of the period covered by this quarterly
report, the President and Chief Financial Officer of
Demeter, the general partner of the Partnership, have
evaluated the effectiveness of the Partnership?s
disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Exchange Act), and have
judged such controls and procedures to be effective.

(b) There have been no material changes during the period
covered by this quarterly report in the Partnership?s
internal controls or in other factors that could
significantly affect these controls subsequent to the
date of their evaluation.

PART II. OTHER INFORMATION

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
SEC
1175: Registration Statement on Form S-1 Units Registered Effective Date
File Number

Initial Registration 4,000,000.000 September 15, 1994 33-80146
Additional Registration 6,000,000.000 January 31, 1996 333-00494
Additional Registration 2,500,000.000 April 30, 1996 333-03222
Additional Registration 6,500,000.000 February 28, 2000 333-90487
Additional Registration 6,500,000.000 April 28, 2003 333-104003
Additional Registration 12,000,000.000 April 28, 2004 333-113396
Total Units Registered 37,500,000.000

Units sold through 3/31/05 21,922,262.834
Units unsold through 3/31/05 15,577,737.166

The managing underwriter for the Partnership is Morgan Stanley
DW.

Units are continuously sold at monthly closings at a purchase
price equal to 100% of the net asset value per Unit as of the
close of business on the last day of each month.

The aggregate price of the Units sold through March 31, 2005 was
$268,754,706.

Since no expenses are chargeable against proceeds, 100% of the
proceeds of the offering have been applied to the working capital
of the Partnership for use in accordance with the ?Use of
Proceeds? section of the prospectus included as part of
the above referenced Registration Statements.

Item 5. OTHER INFORMATION
Departure of Directors or Principal Officers; Election of
Directors; Appointment of Principal Officers.

At a meeting of the Board of Directors of Demeter held on March
30, 2005, the following Directors of Demeter resigned, and the
Board of Directors accepted such resignations effective May 1,
2005: Ms. Louise M. Wasso-Jonikas and Messrs. Raymond A. Harris,
Todd Taylor, and William D. Seugling.

At that March 30, 2005 meeting of the Board of Directors of
Demeter, the Board of Directors elected two new Directors
effective May 1, 2005, subject to approval by and registration
with the National Futures Association: Ms. Shelley Hanan and Mr.
Harry Handler.

Item 6. EXHIBITS

3.01 Form of Amended and Restated Limited Partnership
Agreement of the Partnership, is incorporated by
reference to Exhibit A of the Partnership?s Prospectus,
dated April 25, 2005, filed with the Securities and
Exchange Commission pursuant to Rule 424(b)(3) under the
Securities Act of 1933 on April 29, 2005.
3.02 Certificate of Limited Partnership, dated April 18, 1994,
is incorporated by reference to Exhibit 3.02 of the
Partnership?s Registration Statement on Form S-1 (File
No. 33-80146) filed with the Securities and Exchange
Commission on June 10, 1994.

3.04 Certificate of Amendment of Certificate of Limited
Partnership of the Partnership, dated April 6, 1999,
(changing its name from Dean Witter Spectrum Strategic
L.P.), is incorporated by reference to Exhibit 3.04 of
the Partnership?s Registration Statement (File No. 333-
3222) filed with the Securities and Exchange Commission
on April 12, 1999.
3.05 Certificate of Amendment of Certificate of Limited
Partnership, dated November 1, 2001 (changing its name
from Morgan Stanley Dean Witter Spectrum Strategic L.P.),
is incorporated by reference to Exhibit 3.01 of the
Partnership?s Form 8-K (File No. 0-26280) filed with the
Securities and Exchange Commission on November 1, 2001.
10.02 Management Agreement, dated as of November 1, 1994, among
the Partnership, Demeter, and Blenheim Investments, Inc.,
is incorporated by reference to Exhibit 10.01 of the
Partnership?s Form 10-K (File No. 0-26280) for fiscal
year ended December 31, 1998 filed with the Securities
and Exchange Commission on June 30, 1999.
10.02(a) Amendment to the Management Agreement, among the
Partnership, Demeter, and Blenheim Investments, Inc., is
incorporated by reference to Exhibit 10.01 of the
Partnership?s From 8-K (File No. 0-26280), filed with the
Securities and Exchange Commission on April 25, 2001.
10.03 Management Agreement, dated as of June 1, 2000, among the
Partnership, Demeter, and Eclipse Capital Management,
Inc., is incorporated by reference to Exhibit 10.09 of
the Partnership?s Form 10-Q (File No. 0-26280) for the
quarterly period ended September 30, 2000 and filed with
the Securities and Exchange Commission on November 14,
2000.
10.04 Management Agreement, dated as of October 7, 2004, among
the Partnership, Demeter, and FX Concepts (Trading
Advisor), Inc., is incorporated by reference to Exhibit
10.04 of the Partnership?s Form 10-Q (File No. 0-26280)
for the quarterly period ended September 30, 2004 and
filed with the Securities and Exchange Commission on
November 15, 2004.
10.11 Form of Subscription and Exchange Agreement and Power of
Attorney to be executed by each purchaser of Units is
incorporated by reference to Exhibit B of the
Partnership?s Prospectus, dated April 25, 2005, as filed
with the Securities and Exchange Commission pursuant to
Rule 424(b)(3) under the Securities Act of 1933 on
April 29, 2005.
10.13 Amended and Restated Escrow Agreement, dated as of March
10, 2000, among the Partnership, Morgan Stanley Spectrum
Select L.P., Morgan Stanley Spectrum Technical L.P.,
Morgan Stanley Spectrum Global Balanced L.P., Morgan
Stanley Spectrum Currency L.P., Morgan Stanley Spectrum
Commodity L.P., Morgan Stanley DW, and The Chase
Manhattan Bank, the escrow agent, is incorporated by
reference to Exhibit 10.13 of the Partnership?s
Registration Statement on Form S-1 (File No. 333-90487)
filed with the Securities and Exchange Commission on
November 2, 2001.
10.14 Form of Subscription Agreement Update Form to be executed
by purchasers of Units is incorporated by reference to
Exhibit C of the Partnership?s Prospectus, dated April
25, 2005, as filed with the Securities and Exchange
Commission pursuant to Rule 424(b)(3) under the
Securities Act of 1933 on April 29, 2005.
10.15 Amended and Restated Customer Agreement between the
Partnership and Morgan Stanley DW, dated as of October
16, 2000, is incorporated by reference to Exhibit 10.01
of the Partnership?s Form 8-K (File No. 0-26280) filed
with the Securities and Exchange Commission on November
1, 2001.
10.16 Commodity Futures Customer Agreement between MS & Co. and
the Partnership, and acknowledged and agreed to by Morgan
Stanley DW, dated as of June 6, 2000, is incorporated by
reference to Exhibit 10.02 of the Partnership?s Form 8-K
(File No. 0-26280) filed with the Securities and Exchange
Commission on November 1, 2001.
10.17 Customer Agreement between the Partnership and MSIL,
dated as of May 1, 2000, is incorporated by reference to
Exhibit 10.04 of the Partnership?s Form 8-K (File No. 0-
26280) filed with the Securities and Exchange Commission
on November 1, 2001.
10.18 Foreign Exchange and Options Master Agreement between MS
& Co. and the Partnership, dated as of April 30, 2000, is
incorporated by reference to Exhibit 10.05 of the
Partnership?s Form 8-K (File No. 0-26280) filed with the
Securities and Exchange Commission on November 1, 2001.
10.19 Securities Account Control Agreement among the
Partnership, MS & Co., and Morgan Stanley DW, dated as of
May 1, 2000, is incorporated by reference to Exhibit
10.03 of the Partnership?s Form 8-K (File No. 0-26280)
filed with the Securities and Exchange Commission
on November 1, 2001.
10.20 Foreign Exchange and Options Master Agreement between
Morgan Stanley Capital Group Inc. and the Partnership,
dated as of September 27, 2004, is incorporated by
reference to Exhibit 10.20 of the Partnership?s Form 10-Q
(File No. 0-26280) for the quarterly period ended
September 30, 2004 and filed with the Security and
Exchange Commission on November 15, 2004.
31.01 Certification of President of Demeter Management
Corporation, the general partner of the Partnership
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.02 Certification of Chief Financial Officer of Demeter
Management Corporation, the general partner of the
Partnership pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.01 Certification of President of Demeter Management
Corporation, the general partner of the Partnership,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.02 Certification of Chief Financial Officer of Demeter
Management Corporation, the general partner of the
Partnership, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.

Morgan Stanley Spectrum
Strategic L.P. (Registrant)

By: Demeter Management Corporation
(General Partner)

May 16, 2005 By: /s/Kevin Perry
Kevin Perry
Chief Financial Officer

The General Partner which signed the above is the only party
authorized to act for the Registrant. The Registrant has no
principal executive officer, principal financial officer,
controller, or principal accounting officer and has no Board of
Directors.

MORGAN STANLEY SPECTRUM STRATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)