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: 811-02349
Morgan Stanley Income Securities Inc.
(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: September 30, 2007
Date of reporting period: March 31, 2007
Item 1 - Report to Shareholders
Welcome, Shareholder:
In this report, you'll learn about how your investment in Morgan Stanley Income
Securities Inc. performed during the semiannual period. We will provide an
overview of the market conditions, and discuss some of the factors that affected
performance during the reporting period. In addition, this report includes the
Fund's financial statements and a list of Fund investments.
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.
FUND REPORT
For the six months ended March 31, 2007
MARKET CONDITIONS
Housing sector concerns, equity market behavior, and a slight deceleration in
real economic growth rates all affected bond market performance during the
period. The troubled residential housing situation was further complicated as
investors focused on the fallout within the sub-prime lending area. Broadly
speaking, sub-prime loans are those made to borrowers with credit impairments
that limit or preclude access to more traditional credit sources. In recent
months, increasing delinquency and default rates within the sub-prime area led
to concerns about the spillover effects on consumer confidence and the economy
in general. At the same time, equity markets came under pressures from the same
set of domestic economic concerns, as well as a sharp sell-off in some overseas
equity markets -- most notably within China. As a result, the equity market
tumbled in late February, and a flight to quality ensued that propelled Treasury
prices. In March, however, the equity markets quickly snapped back, recovering
much of their late-February losses.
Against this backdrop, the Federal Open Market Committee (the "Fed") not only
opted to leave the target federal funds rate unchanged, but also shifted to a
symmetric policy bias (i.e., one that was as much inclined to cut short-term
rates as to raise them) at its March policymaking session. The change in the
Fed's bias, coupled with increased equity market volatility and mixed economic
data, caused a steepening in the yield curve during the period.
As has been the case for several months, the low interest-rate environment sent
many investors on a quest for yield. The strong demand for riskier, higher-
yielding securities led this segment of the market to outperform higher-quality
bonds for the overall reporting period. Within the investment-grade corporate
sector, lower-rated issues (BBB and A rated) outpaced higher-rated issues (AA
rated and above). In terms of sector performance, industrials posted the highest
returns, followed by utilities and financials. Overall, spreads on corporate
issues narrowed during the period, although there was some widening in the
latter months. Most fixed-rate agency and mortgage-backed securities
underperformed equal-duration Treasuries, with lower-coupon issues posting the
lowest relative returns for the period.
PERFORMANCE ANALYSIS
For the six-month period ended March 31, 2007, the net asset value (NAV) of
Morgan Stanley Income Securities Inc. (ICB) increased from $17.14 to $17.18 per
share. Based on this change plus reinvestment of dividends totaling $0.46635 per
share, the Fund's total NAV return was 3.17 percent. ICB's value on the New York
Stock Exchange (NYSE) moved from $16.07 to $16.19 per share during the same
period. Based on this change plus reinvestment of dividends, the Fund's total
market return was 3.70 percent. ICB's NYSE market price was at a 5.76 percent
discount to its NAV. Past performance is no guarantee of future results.
Monthly dividends for the second quarter of 2007, declared in March, were
unchanged at $0.077725 per share. The dividend reflects the current level of the
Fund's net investment income. ICB's procedure for reinvesting all dividends and
distributions in common shares is through purchases in the open market. This
method helps support the market value of the Fund's shares. In addition, we
would like to remind you that
2
the directors have approved a procedure whereby the Fund may, when appropriate,
purchase shares in the open market or in privately negotiated transactions at a
price not above market value or net asset value, whichever is lower at the time
of the purchase.
During the period, we kept the Fund's duration* conservatively positioned.
Overall, this conservative interest-rate posture was additive to the Fund's
performance. However, during periods of sharp declines in yields, this
positioning detracted somewhat from returns. In addition, at the end of the
period, we reduced the portfolio's holdings in the 10-year portion of the yield
curve while seeking to keep the level of relative interest-rate risk unchanged.
In our opinion, with inflation not expected to moderate below the Fed's stated
comfort zone and with growth relatively stable, we view the longer-end of the
curve as vulnerable to an eventual rise in yields and a steeper yield curve.
The Fund was also positioned defensively in terms of its credit quality profile.
Given the fact that the lower-rated, riskier segments of the market generally
outperformed, the portfolio's greater relative emphasis on higher-quality
securities tempered its performance. It's important to note, however, that good
security selection within the investment-grade market sector, as well as an
opportunistic allocation to foreign issues, were beneficial to performance and
helped to offset the negative effect of the Fund's underweight in credit risk.
- --------------------------------------------------------------------------------
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. INVESTMENT RETURN, NET ASSET VALUE AND COMMON SHARE MARKET PRICE WILL
FLUCTUATE AND FUND SHARES, WHEN SOLD, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST.
There is no guarantee that any sectors mentioned will continue to perform as
discussed herein or that securities in such sectors will be held by the Fund in
the future.
* A measure of the sensitivity of a bond's price to changes in interest rates,
expressed in years. Each year of duration represents an expected 1 percent
change in the price of a bond for every 1 percent change in interest rates. The
longer a bond's duration, the greater the effect of interest-rate movements on
its price. Typically, funds with shorter durations perform better in
rising-interest-rate environments, while funds with longer durations perform
better when rates decline.
3
<Table>
<Caption>
PORTFOLIO COMPOSITION**
Corporate Bonds 58.6%
U.S. Government Obligations 20.5
Short-Term Investments 18.2
Asset-Backed Securities 2.2
Foreign Government Obligation 0.5
</Table>
<Table>
<Caption>
LONG-TERM CREDIT ANALYSIS
AAA 41.3%
AA 1.3
A 13.8
BBB 39.7
BB 2.3
B or Below 1.6
</Table>
** Does not include open long futures contracts with an underlying face amount
of $29,343,812 with unrealized depreciation of $107,429, open short futures
contracts with an underlying face amount of $4,108,750 with unrealized
appreciation of $12,927 and open swap contracts with an underlying face
amount of $24,170,000 with net unrealized appreciation of $20,263.
Data as of March 31, 2007. Subject to change daily. All percentages for
portfolio composition are as a percentage of total investments and all
percentages for long-term credit analysis are as a percentage of total
long-term investments. These data are provided for informational purposes
only and should not be deemed a recommendation to buy or sell the securities
mentioned. Morgan Stanley is a full-service securities firm engaged in
securities trading and brokerage activities, investment banking, research and
analysis, financing and financial advisory services.
FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS
Each Morgan Stanley fund provides a complete schedule of portfolio holdings in
its semiannual and annual reports within 60 days of the end of the fund's second
and fourth fiscal quarters. The semiannual reports and the annual reports are
filed electronically with the Securities and Exchange Commission (SEC) on Form
N-CSRS and Form N-CSR, respectively. Morgan Stanley also delivers the semiannual
and annual reports to fund shareholders and makes these reports available on its
public Web site, www.morganstanley.com. Each Morgan Stanley fund also files a
complete schedule of portfolio holdings with the SEC for the fund's first and
third fiscal quarters on Form N-Q. Morgan Stanley does not deliver the reports
for the first and third fiscal quarters to shareholders, nor are the reports
posted to the Morgan Stanley public Web site. You may, however, obtain the Form
N-Q filings (as well as the Form N-CSR and N-CSRS filings) by accessing the
SEC's Web site, http://www.sec.gov. You may also review and copy them at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the SEC's 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.
In addition to filing a complete schedule of portfolio holdings with the SEC
each fiscal quarter, the fund makes portfolio holdings information available by
periodically providing the information on its public web
4
site, www.morganstanley.com/im. The fund provides a complete schedule of
portfolio holdings on the public web site on a calendar-quarter basis
approximately 30 calendar days after the close of the calendar quarter. The Fund
also provides Top 10 holdings information on the public web site approximately
31 calendar days following the end of each month.
You may obtain more information about web site postings, by calling
1-800-869-6397.
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.
5
Morgan Stanley Income Securities Inc.
PORTFOLIO OF INVESTMENTS - MARCH 31, 2007 (UNAUDITED)
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------
Corporate Bonds (58.0%)
Advertising/Marketing Services (0.1%)
$ 175 Interpublic Group of Companies, Inc. (The)............ 6.25% 11/15/14 $ 165,375
------------
Aerospace & Defense (0.6%)
328 Raytheon Co. ......................................... 4.50 11/15/07 326,313
557 Systems 2001 Asset Trust - 144A* (Cayman Islands)..... 6.664 09/15/13 587,818
------------
914,131
------------
Air Freight/Couriers (1.3%)
2,000 FedEx Corp. .......................................... 7.25 02/15/11 2,137,162
------------
Airlines (0.2%)
377 America West Airlines, Inc. (Series 01-1)............. 7.10 04/02/21 400,655
------------
Auto Parts: O.E.M. (0.3%)
460 ArvinMeritor, Inc. ................................... 8.75 03/01/12 477,250
------------
Beverages: Alcoholic (0.6%)
1,100 FBG Finance Ltd. - 144A* (Australia).................. 5.125 06/15/15 1,057,201
------------
Cable/Satellite TV (3.0%)
1,355 Comcast Cable Communications, Inc. ................... 6.75 01/30/11 1,428,072
750 Comcast Cable Communications, Inc. ................... 8.375 05/01/07 751,709
1,740 Comcast Cable Communications, Inc. ................... 7.125 06/15/13 1,888,024
780 EchoStar DBS Corp. ................................... 6.375 10/01/11 786,825
110 EchoStar DBS Corp. ................................... 6.625 10/01/14 110,963
------------
4,965,593
------------
Computer Processing Hardware (0.6%)
1,000 Hewlett-Packard Co. .................................. 5.485+ 05/22/09 1,001,439
------------
Department Stores (2.7%)
2,800 Federated Department Stores, Inc. .................... 6.625 09/01/08 2,844,229
610 May Department Stores Co. ............................ 5.95 11/01/08 616,390
1,005 May Department Stores Co. ............................ 6.70 07/15/34 994,311
------------
4,454,930
------------
</Table>
See Notes to Financial Statements
6
Morgan Stanley Income Securities Inc.
PORTFOLIO OF INVESTMENTS - MARCH 31, 2007 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------
Drugstore Chains (1.3%)
$ 495 CVS Corp. ............................................ 5.75% 08/15/11 $ 504,602
1,642 CVS Corp. - 144A*..................................... 6.036 12/10/28 1,665,389
------------
2,169,991
------------
Electric Utilities (10.2%)
1,100 Ameren Corp. ......................................... 4.263 05/15/07 1,097,679
3,130 Arizona Public Service Co. ........................... 5.80 06/30/14 3,161,892
2,105 Carolina Power & Light Co. ........................... 5.125 09/15/13 2,082,211
285 CenterPoint Energy Resource........................... 6.25 02/01/37 283,975
1,705 Consumers Energy Co. (Series F)....................... 4.00 05/15/10 1,646,370
240 Consumers Energy Co. (Series H)....................... 4.80 02/17/09 237,906
680 Detroit Edison Co. (The).............................. 6.125 10/01/10 701,289
690 Duquesne Light Co. (Series Q)......................... 5.70 05/15/14 701,844
835 Duquesne Light Co. (Series O)......................... 6.70 04/15/12 891,167
915 Entergy Gulf States, Inc. ............................ 3.60 06/01/08 897,053
930 Entergy Gulf States, Inc. ............................ 5.76+ 12/01/09 929,499
820 Entergy Gulf States, Inc. - 144A*..................... 6.09+ 12/08/08 822,425
215 Indianapolis Power & Light Co. - 144A*................ 6.30 07/01/13 224,480
1,310 Ohio Power Company - IBC (Series K)................... 6.00 06/01/16 1,360,816
228 PSEG Energy Holdings Inc. ............................ 8.625 02/15/08 233,415
185 Public Service Electric & Gas Co. (Series B).......... 5.00 01/01/13 181,954
570 Texas Eastern Transmission, L.P. ..................... 7.00 07/15/32 637,600
650 TXU Energy Co. ....................................... 7.00 03/15/13 676,324
------------
16,767,899
------------
Electrical Products (0.6%)
920 Cooper Industries, Inc. .............................. 5.25 11/15/12 919,281
------------
Electronics/Appliances (0.4%)
705 LG Electronics Inc. - 144A* (South Korea)............. 5.00 06/17/10 695,571
------------
Environmental Services (0.9%)
1,370 Waste Management, Inc. ............................... 6.875 05/15/09 1,413,482
------------
Finance/Rental/Leasing (2.2%)
1,680 Ford Motor Credit Co. ................................ 7.25 10/25/11 1,634,349
1,985 Residential Capital Corp. ............................ 6.375 06/30/10 1,985,899
------------
3,620,248
------------
Financial Conglomerates (1.2%)
1,945 General Motors Acceptance Corp. ...................... 6.875 09/15/11 1,948,725
------------
</Table>
See Notes to Financial Statements
7
Morgan Stanley Income Securities Inc.
PORTFOLIO OF INVESTMENTS - MARCH 31, 2007 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------
Food Retail (0.8%)
$ 380 Delhaize America, Inc. ............................... 9.00% 04/15/31 $ 458,478
830 Fred Meyer, Inc. ..................................... 7.45 03/01/08 845,981
------------
1,304,459
------------
Food: Major Diversified (1.6%)
800 ConAgra Foods, Inc. .................................. 7.00 10/01/28 854,167
670 ConAgra Foods, Inc. .................................. 8.25 09/15/30 818,007
1,085 Sara Lee Corp. ....................................... 6.125 11/01/32 1,005,960
------------
2,678,134
------------
Food: Meat/Fish/Dairy (0.3%)
355 Pilgrim's Pride Corp. ................................ 7.625 05/01/15 355,888
125 Pilgrim's Pride Corp. ................................ 9.625 09/15/11 130,625
------------
486,513
------------
Gas Distributors (0.7%)
745 NiSource Finance Corp. ............................... 5.93+ 11/23/09 746,287
450 Sempra Energy......................................... 4.621 05/17/07 449,517
------------
1,195,804
------------
Home Furnishings (0.6%)
950 Mohawk Industries, Inc. (Series D).................... 7.20 04/15/12 1,007,502
------------
Home Improvement Chains (0.3%)
470 Home Depot, Inc. ..................................... 5.475+ 12/16/09 470,873
------------
Hotels/Resorts/Cruiselines (0.1%)
145 Starwood Hotels & Resorts Worldwide, Inc. ............ 7.375 05/01/07 145,114
------------
Insurance Brokers/Services (2.4%)
1,170 Catlin Insurance Co., Ltd. - 144A* (Bermuda).......... 7.249+ 12/31/49++ 1,163,709
1,210 Farmers Exchange Capital - 144A*...................... 7.05 07/15/28 1,243,996
1,330 Farmers Insurance Exchange - 144A*.................... 8.625 05/01/24 1,585,550
------------
3,993,255
------------
Major Banks (3.1%)
2,070 Unicredit Luxembourg Finance S.A. - 144A*
(Luxembourg)........................................ 5.41+ 10/24/08 2,071,252
840 USB Capital IX........................................ 6.189+ 04/15/49+++ 862,053
2,185 Wachovia Capital Trust III............................ 5.80+ 08/29/49+++ 2,212,990
------------
5,146,295
------------
</Table>
See Notes to Financial Statements
8
Morgan Stanley Income Securities Inc.
PORTFOLIO OF INVESTMENTS - MARCH 31, 2007 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------
Major Telecommunications (5.7%)
$ 1,410 AT&T Corp. ........................................... 8.00+% 11/15/31 $ 1,747,696
1,355 France Telecom S.A. (France).......................... 8.50+ 03/01/31 1,766,215
1,525 SBC Communications, Inc. ............................. 6.15 09/15/34 1,505,826
785 Sprint Capital Corp. ................................. 8.75 03/15/32 928,503
1,405 Telecom Italia Capital SpA (Luxembourg)............... 4.00 01/15/10 1,358,294
1,415 Telefonica Europe BV (Netherlands).................... 8.25 09/15/30 1,699,968
405 Verizon New England Inc. ............................. 6.50 09/15/11 422,649
------------
9,429,151
------------
Media Conglomerates (2.1%)
2,005 Time Warner, Inc. .................................... 5.59+ 11/13/09 2,009,573
1,350 Viacom, Inc. ......................................... 6.875 04/30/36 1,365,066
------------
3,374,639
------------
Medical Specialties (0.8%)
1,330 Hospira, Inc. ........................................ 5.83+ 03/30/10 1,333,990
------------
Motor Vehicles (1.2%)
795 DaimlerChrysler North American Holdings Co. .......... 7.30 01/15/12 859,021
260 DaimlerChrysler North American Holdings Co. .......... 8.00 06/15/10 280,872
675 DaimlerChrysler North American Holdings Co. .......... 8.50 01/18/31 845,428
------------
1,985,321
------------
Multi-Line Insurance (0.5%)
750 Two-Rock Pass Through - 144A* (Bermuda)............... 6.30+ 12/31/49++ 738,825
------------
Oil & Gas Pipelines (2.9%)
2,685 Enterprise Products Operating L.P. (Series B)......... 5.60 10/15/14 2,682,938
1,095 Kinder Morgan Finance Co. (Canada).................... 5.70 01/05/16 1,028,406
1,010 Plains All American Pipelines, L.P. / PAA Finance
Corp. .............................................. 6.70 05/15/36 1,036,825
------------
4,748,169
------------
Oil & Gas Production (0.2%)
395 Kerr-McGee Corp. ..................................... 6.625 10/15/07 397,705
------------
Oil Refining/Marketing (0.3%)
515 Valero Energy Corp. .................................. 3.50 04/01/09 499,714
------------
Other Metals/Minerals (0.7%)
1,030 Brascan Corp. (Canada)................................ 7.125 06/15/12 1,103,985
------------
</Table>
See Notes to Financial Statements
9
Morgan Stanley Income Securities Inc.
PORTFOLIO OF INVESTMENTS - MARCH 31, 2007 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------
Property - Casualty Insurers (1.2%)
$ 1,400 Mantis Reef Ltd. - 144A* (Australia).................. 4.692% 11/14/08 $ 1,387,093
500 Platinum Underwriters Finance Inc. (Series B)......... 7.50 06/01/17 530,014
------------
1,917,107
------------
Railroads (2.1%)
830 Burlington North Santa Fe Railway Co. ................ 6.125 03/15/09 842,209
850 Norfolk Southern Corp. ............................... 7.35 05/15/07 851,792
1,140 Union Pacific Corp. .................................. 6.625 02/01/08 1,151,902
625 Union Pacific Corp. (Series E)........................ 6.79 11/09/07 629,328
------------
3,475,231
------------
Real Estate Development (0.6%)
764 World Financial Properties - 144A*.................... 6.91 09/01/13 802,231
171 World Financial Properties - 144A*.................... 6.95 09/01/13 179,909
------------
982,140
------------
Real Estate Investment Trusts (0.9%)
1,485 iStar Financial Inc. ................................. 5.69+ 03/09/10 1,486,811
------------
Restaurants (0.4%)
570 Tricon Global Restaurants, Inc. ...................... 8.875 04/15/11 640,543
------------
Savings Banks (2.3%)
1,975 Sovereign BanCorp Inc. ............................... 5.58+ 03/23/10 1,975,622
1,455 Washington Mutual Inc. ............................... 8.25 04/01/10 1,572,932
300 Washington Mutual Preferred Funding II................ 6.665+ 12/31/49++ 294,942
------------
3,843,496
------------
Total Corporate Bonds (Cost $94,108,028)......................................... 95,493,709
------------
U.S. Government Obligations (20.3%)
5,215 U.S. Treasury Bond.................................... 6.125 08/15/29 6,066,923
5,400 U.S. Treasury Bond.................................... 6.375 08/15/27 6,397,315
14,600 U.S. Treasury Bond.................................... 11.25 02/15/15 20,907,667
------------
Total U.S. Government Obligations (Cost $33,987,663)............................. 33,371,905
------------
Asset-Backed Securities (2.2%)
Finance/Rental/Leasing
180 CIT Equipment Collateral 2004-EF1 A3.................. 3.50 09/20/08 178,804
445 CNH Equipment Trust 2005-A A3......................... 4.02 04/15/09 442,659
</Table>
See Notes to Financial Statements
10
Morgan Stanley Income Securities Inc.
PORTFOLIO OF INVESTMENTS - MARCH 31, 2007 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------
$ 350 Ford Credit Auto Owner Trust 2005-B A3................ 4.17% 01/15/09 $ 348,308
739 Harley-Davidson Motorcycle Trust 2004-2 A2............ 3.56 02/15/12 726,457
328 Honda Auto Receivables Owner Trust 2005-2 A3.......... 3.93 01/15/09 326,755
950 TXU Electric Delivery Transition Bond Co. LLC 2004-1
A2.................................................. 4.81 11/17/14 946,256
432 USAA Auto Owner Trust 2005-1 A3....................... 3.90 07/15/09 430,138
260 Volkswagen Auto Lease Trust 2005-A A3................. 3.82 05/20/08 258,907
------------
Total Asset-Backed Securities (Cost $3,682,440).................................. 3,658,284
------------
Foreign Government Obligation (0.5%)
MXN 7,735 Mexican Fixed Rate Bonds (Series MI10) (Mexico) (Cost
$785,791)........................................... 9.50 12/18/14 780,118
------------
Short-Term Investments (18.1%)
U.S. Government Obligation (a) (0.2%)
$ 300 U.S. Treasury Bill** (Cost $295,822).................. 4.915 07/12/07 295,863
------------
Repurchase Agreement (17.9%)
29,405 Joint repurchase agreement account (dated 03/30/07;
proceeds $29,418,061) (b) (Cost $29,405,000)........ 5.33 04/02/07 29,405,000
------------
Total Short-Term Investments (Cost $29,700,822).................................. 29,700,863
------------
</Table>
<Table>
Total Investments (Cost $162,264,744) (c) (d)...................... 99.1% 163,004,879
Other Assets in Excess of Liabilities.............................. 0.9 1,484,901
----- ------------
Net Assets......................................................... 100.0% $164,489,780
===== ============
</Table>
See Notes to Financial Statements
11
Morgan Stanley Income Securities Inc.
PORTFOLIO OF INVESTMENTS - MARCH 31, 2007 (UNAUDITED) continued
- ---------------------
<Table>
MXN Mexican New Peso.
* 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
$245,250.
+ Floating rate security, rate shown is the rate in effect at
March 31, 2007.
++ Security with perpetual maturity.
+++ Securities represent beneficial interest in trusts. The
corresponding assets of the trusts are junior subordinated
notes due 2042 and a stock purchase contract to purchase
preferred stock on or about March 15, 2011 for Wachovia
Capital Trust III on or about April 15, 2011 for USB Capital
IX. Securities have a perpetual maturity and the trusts will
redeem them only to the extent the preferred stock is
redeemed.
(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 amount
equal to $33,347,324 in connection with open futures
contracts and open swap contracts.
(d) The aggregate cost for federal income tax purposes
approximates the aggregate cost for book purposes. The
aggregate gross unrealized appreciation is $1,714,445 and
the aggregate gross unrealized depreciation is $2,454,580,
resulting in net unrealized depreciation of $740,135.
</Table>
FUTURES CONTRACTS OPEN AT MARCH 31, 2007:
<Table>
<Caption>
UNREALIZED
NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE APPRECIATION
CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE (DEPRECIATION)
- ---------------------------------------------------------------------------------------
229 Long U.S. Treasury Bond 20 year,
June 2007 $25,476,250 $(98,919)
23 Long U.S. Treasury Note 5 year,
June 2007 2,433,328 (5,749)
7 Long U.S. Treasury Note 2 year,
June 2007 1,434,234 (2,761)
38 Short U.S. Treasury Note 10 year,
June 2007 (4,108,750) 12,927
--------
Net Unrealized Depreciation............................... $(94,502)
========
</Table>
See Notes to Financial Statements
12
Morgan Stanley Income Securities Inc.
PORTFOLIO OF INVESTMENTS - MARCH 31, 2007 (UNAUDITED) continued
CREDIT DEFAULT SWAP CONTRACTS OPEN AT MARCH 31, 2007:
<Table>
<Caption>
NOTIONAL UNREALIZED
SWAP COUNTERPARTY & BUY/SELL AMOUNT PAY/RECEIVE TERMINATION APPRECIATION
REFERENCE OBLIGATION PROTECTION (000'S) FIXED RATE DATE (DEPRECIATION)
- --------------------------------------------------------------------------------------------------------------------
Goldman Sachs Capital Markets, L.P.
Dow Jones CDX.NA.IG.HVOL.6 Index Buy $6,700 0.75 % June 20, 2011 $ 8,502
Goldman Sachs International
The Hartford Financial Services Group Inc. Buy 1,700 0.12 December 20, 2011 43
Goldman Sachs International
Southwest Airlines Co. Buy 1,700 0.22 December 20, 2011 5,979
Goldman Sachs International
Motorola, Inc. Buy 540 0.15 December 20, 2011 6,084
Goldman Sachs International
Motorola, Inc. Buy 1,100 0.157 December 20, 2011 12,069
Goldman Sachs International
Union Pacific Corporation Buy 850 0.20 December 20, 2011 10,547
Goldman Sachs International
Dow Jones CDX.NA.HVOL Buy 3,300 0.75 December 20, 2011 13,215
Goldman Sachs International
Chubb Corp. Buy 1,640 0.10 March 20, 2012 1,689
Goldman Sachs International
Dell Inc. Buy 830 0.22 March 20, 2012 200
Citigroup Global
Tyco International Ltd. Buy 500 0.43 March 20, 2012 484
Citigroup Global
Tyco International Ltd. Buy 970 0.43 March 20, 2012 939
Goldman Sachs International
Gap Inc. Buy 1,000 1.19 March 20, 2012 (8,256)
Goldman Sachs International
Countrywide Home Loan Sell 830 0.60 March 20, 2012 (3,374)
Goldman Sachs International
Countrywide Home Loan Sell 850 0.66 March 20, 2012 (1,235)
Goldman Sachs International
Residential Capital LL Sell 1,660 2.00 March 20, 2017 (26,623)
--------
Net Unrealized Appreciation............................ $ 20,263
========
</Table>
See Notes to Financial Statements
13
Morgan Stanley Income Securities Inc.
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
March 31, 2007 (unaudited)
<Table>
Assets:
Investments in securities, at value
(cost $162,264,744, including repurchase agreement of
$29,405,000).............................................. $163,004,879
Unrealized appreciation on open swap contracts.............. 59,751
Receivable for:
Interest................................................ 1,715,208
Investments sold........................................ 54,952
Periodic income on swap contracts....................... 3,460
Prepaid expenses and other assets........................... 19,610
Premium received from swap contracts........................ 382
------------
Total Assets............................................ 164,858,242
------------
Liabilities:
Payable for:
Investment advisory fee................................. 68,734
Variation margin........................................ 68,578
Capital stock repurchased............................... 59,824
Transfer agent fee...................................... 14,776
Administration fee...................................... 13,092
Periodic payment on swap contracts...................... 3,557
Unrealized depreciation on open swap contracts.............. 39,488
Accrued expenses and other payables......................... 100,413
------------
Total Liabilities....................................... 368,462
------------
Net Assets.............................................. $164,489,780
============
Composition of Net Assets:
Paid-in-capital............................................. $180,190,464
Net unrealized appreciation................................. 665,876
Dividend in excess of net investment income................. (1,200,177)
Accumulated net realized loss............................... (15,166,383)
------------
Net Assets.............................................. $164,489,780
============
Net Asset Value Per Share
9,573,913 shares outstanding (15,000,000 shares authorized
of $.01 par value).......................................... $17.18
============
</Table>
See Notes to Financial Statements
14
Morgan Stanley Income Securities Inc.
FINANCIAL STATEMENTS continued
Statement of Operations
For the six months ended March 31, 2007 (unaudited)
<Table>
Net Investment Income:
Interest Income............................................. $4,837,179
----------
Expenses
Investment advisory fee..................................... 347,286
Administration fee.......................................... 66,150
Transfer agent fees and expenses............................ 46,311
Shareholder reports and notices............................. 36,919
Professional fees........................................... 28,586
Custodian fees.............................................. 16,545
Listing fees................................................ 10,230
Directors' fees and expenses................................ 2,830
Other....................................................... 14,698
----------
Total Expenses.......................................... 569,555
Less: expense offset........................................ (210)
----------
Net Expenses............................................ 569,345
----------
Net Investment Income................................... 4,267,834
----------
Net Realized and Unrealized Gain:
Net Realized Gain (Loss) on:
Investments................................................. 6,094
Futures contracts........................................... 248,760
Swap contracts.............................................. (9,330)
Foreign exchange transactions............................... 10,064
----------
Net Realized Gain....................................... 255,588
----------
Net Change in Unrealized Appreciation/Depreciation on:
Investments................................................. 535,261
Futures contracts........................................... (409,274)
Swap contracts.............................................. 20,243
Net translation of other assets and liabilities denominated
in foreign currencies..................................... 55
----------
Net Appreciation........................................ 146,285
----------
Net Gain................................................ 401,873
----------
Net Increase................................................ $4,669,707
==========
</Table>
See Notes to Financial Statements
15
Morgan Stanley Income Securities Inc.
FINANCIAL STATEMENTS continued
Statements of Changes in Net Assets
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
MARCH 31, 2007 SEPTEMBER 30, 2006
-------------- ------------------
(unaudited)
Increase (Decrease) in Net Assets:
Operations:
Net investment income....................................... $ 4,267,834 $ 8,282,283
Net realized gain........................................... 255,588 931,181
Net change in unrealized appreciation/depreciation.......... 146,285 (2,594,529)
------------ ------------
Net Increase............................................ 4,669,707 6,618,935
------------ ------------
Dividends to shareholders from net investment income........ (4,498,933) (9,554,680)
Decrease from capital stock transactions.................... (2,543,487) (7,543,095)
------------ ------------
Net Decrease............................................ (2,372,713) (10,478,840)
Net Assets:
Beginning of period......................................... 166,862,493 177,341,333
------------ ------------
End of Period
(Including dividends in excess of net investment income of
$1,200,177 and $969,078, respectively)...................... $164,489,780 $166,862,493
============ ============
</Table>
See Notes to Financial Statements
16
Morgan Stanley Income Securities Inc.
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007 (UNAUDITED)
1. Organization and Accounting Policies
Morgan Stanley Income Securities Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, closed-end
management investment company. The Fund's primary investment objective is to
provide as high a level of current income for distribution to shareholders as is
consistent with prudent investment risk and, as a secondary objective, capital
appreciation. The Fund commenced operations on April 6, 1973.
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 Directors; (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) credit default swaps are marked-to-market daily based upon
quotations from market markers and the change, if any, is recorded as unrealized
appreciation or depreciation in the Statement of Operations; (5) when market
quotations are not readily available including circumstances under which Morgan
Stanley Investment Advisors Inc. (the "Investment Adviser") determines that the
market quotations are not reflective of a security's market value, portfolio
securities are valued at their fair value as determined in good faith under
procedures established by and under the general supervision of the Fund's
Directors; and (6) 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-
17
Morgan Stanley Income Securities Inc.
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007 (UNAUDITED) continued
to-market daily to determine that the value of the collateral does not decrease
below the repurchase price plus accrued interest.
D. Futures Contracts -- A futures contract is an agreement between two parties
to buy and sell financial instruments or contracts based on financial indices at
a set price on a future date. Upon entering into such a contract, the Fund is
required to pledge to the broker cash, U.S. Government securities or other
liquid portfolio securities equal to the minimum initial margin requirements of
the 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. Credit Default Swaps -- A credit default swap is an agreement between two
parties to exchange the credit risk of an issuer. The Fund may purchase credit
protection on the referenced obligation of the credit default swap ("Buy
Contract"), or provide credit protection on the referenced obligation of the
credit default swap ("Sale Contract"). A buyer of a credit default swap is said
to buy protection by paying periodic fees in return for a contingent payment
from the seller if the issuer has a credit event such as bankruptcy or a failure
to pay outstanding obligations while the swap is outstanding. A seller of a
credit default swap is said to sell protection and thus collects the periodic
fees and profits if the credit of the issuer remains stable or improves while
the swap is outstanding. If a credit event occurs, the seller pays to the buyer
an agreed upon amount which approximates the notional amount of the swap
contract as disclosed in the table following the Portfolio of Investments.
During the term of the swap agreement, the Fund receives or pays periodic fixed
payments from or to the respective counterparty calculated at the agreed upon
interest rate applied to the Notional Amount. These periodic payments are
accrued daily and recorded as realized gains or losses in the Statement of
Operations. In addition, upon termination of the swap contract, gains and losses
are also realized. Any upfront payment received or paid by the Fund is recorded
as assets/liabilities on the Fund's books.
F. 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.
G. Dividends and Distributions to Shareholders -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.
18
Morgan Stanley Income Securities Inc.
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007 (UNAUDITED) continued
H. 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 weekly and payable monthly, by applying the
following annual rates to the net assets of the Fund determined at the close of
each business week: 0.42% to the portion of the weekly net assets not exceeding
$500 million and 0.35% to the portion of the weekly net assets in excess of $500
million.
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 weekly and payable monthly, by applying the
annual rate of 0.08% to the Fund's weekly net assets.
3. Security Transactions and Transactions with Affiliates
The cost of purchases and proceeds from sales/prepayments/maturities of
portfolio securities, excluding short-term investments, for the six months ended
March 31, 2007 aggregated $21,523,007 and $23,950,605, respectively. Included in
the aforementioned are purchases of U.S. Government security of $644,359.
Morgan Stanley Trust, an affiliate of the Investment Adviser and Administrator,
is the Fund's transfer agent.
The Fund has an unfunded noncontributory defined benefit pension plan covering
certain independent Directors of the Fund who will have served as independent
Directors for at least five years at the time of retirement. Benefits under this
plan are based on factors which include years of service and compensation. The
Directors voted to close the plan to new participants and eliminate the future
benefits growth due to increases to compensation after July 31, 2003. Aggregate
pension costs for the six months ended March 31, 2007 included in Directors'
fees and expenses in the Statement of Operations amounted to $1,053. At March
31, 2007, the Fund had an accrued pension liability of $61,652 which is included
in accrued expenses in the Statement of Assets and Liabilities.
The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan")
which allows each independent Director to defer payment of all, or a portion, of
the fees he or she receives for serving on the Board of Directors. Each eligible
Director 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
19
Morgan Stanley Income Securities Inc.
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007 (UNAUDITED) continued
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. Dividends
On March 26, 2007, the Fund declared the following dividends from net investment
income:
<Table>
<Caption>
AMOUNT RECORD PAYABLE
PER SHARE DATE DATE
- --------- ------------ -------------
April 5, April 20,
$0.077725 2007 2007
$0.077725 May 4, 2007 May 18, 2007
$0.077725 June 8, 2007 June 22, 2007
</Table>
5. Capital Stock
Transactions in capital stock were as follows:
<Table>
<Caption>
CAPITAL
PAID IN
PAR VALUE EXCESS OF
SHARES OF SHARES PAR VALUE
---------- --------- ------------
Balance, September 30, 2005................................. 10,221,413 $102,212 $190,174,834
Treasury shares purchased and retired (weighted average
discount 8.81%)*.......................................... (488,700) (4,887) (7,538,208)
---------- -------- ------------
Balance, September 30, 2006................................. 9,732,713 97,325 182,636,626
Treasury shares purchased and retired (weighted average
discount 6.56%)*.......................................... (158,800) (1,588) (2,541,899)
---------- -------- ------------
Balance, March 31, 2007..................................... 9,573,913 $ 95,737 $180,094,727
========== ======== ============
</Table>
- ---------------------
* The Directors have voted to retire the shares purchased.
6. Expense Offset
The expense offset represents a reduction of the fees and expenses for interest
earned on cash balances maintained by the Fund with the transfer agent.
7. Purposes of and Risks Relating to Certain Financial Instruments
To hedge against adverse interest rate and market risks, the Fund may enter into
interest rate futures contracts ("future contracts").
These futures contracts involve element of market risk in excess of the amount
reflected in the Statement of Assets and Liabilities. The Fund bears the risk of
an unfavorable change in the value of underlying securities. Risks may also
arise upon entering into these contracts from the potential inability of the
counterparties to meet the terms of their contracts.
20
Morgan Stanley Income Securities Inc.
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007 (UNAUDITED) continued
The Fund may enter into credit default swaps for hedging purposes to add
leverage to its portfolio or to gain exposure to a credit in which the Fund may
otherwise invest. Credit default swaps may involve greater risks than if a fund
had invested in the issuer directly. Credit default swaps are subject to general
market risk, counterparty risk and credit risk. If the Fund is a buyer and no
credit event occurs, it will lose its investment. In addition, if the Fund is a
seller and a credit event occurs, the value of the referenced obligation
received by the Fund coupled with the periodic payments previously received may
be less than the maximum payout amount it pays to the buyer, resulting in a loss
to the Fund.
8. Federal Income Tax Status
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for tax purposes are reported as distributions of paid-in-capital.
As of September 30, 2006, the Fund had a net capital loss carryforward of
$15,107,176 of which $5,565,824 will expire on September 30, 2010 and $9,541,352
will expire on September 30, 2011 to offset future capital gains to the extent
provided by regulations.
As of September 30, 2006, the Fund had temporary book/tax difference primarily
attributable to book amortization of premiums on debt securities and
mark-to-market of open futures contracts.
9. Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation 48, Accounting for Uncertainty in Income Taxes -- an
interpretation of FASB Statement 109 (FIN 48). FIN 48 clarifies the accounting
for income taxes by prescribing the minimum recognition threshold a tax position
must meet before being recognized in the financial statements. FIN 48 is
effective for fiscal years beginning after December 15, 2006 and is to be
applied to all open tax years as of the effective date. The impact to the Fund's
financial statements, if any is currently being assessed.
In addition, in September 2006, Statement of Financial Accounting Standards No.
157, Fair Value Measurements (SFAS 157), was issued and is effective for fiscal
years beginning after November 15, 2007. SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. Management is currently evaluating the impact the
adoption of SFAS 157 will have on the Fund's financial statement disclosures.
21
Morgan Stanley Income Securities Inc.
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of capital stock outstanding
throughout each period:
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED SEPTEMBER 30,
MONTHS ENDED ------------------------------------------------------------
MARCH 31, 2007 2006 2005 2004 2003 2002
-------------- --------- --------- --------- --------- ---------
(unaudited)
Selected Per Share Data:
Net asset value, beginning of period.... $ 17.14 $ 17.35 $ 17.59 $ 17.42 $ 16.13 $17.10
------- ------- ------- ------- ------- ------
Income (loss) from investment
operations:
Net investment income*.............. 0.44 0.83 0.87 0.95 0.97 1.05
Net realized and unrealized gain
(loss).............................. 0.05 (0.16) (0.18) 0.13 1.21 (0.89)
------- ------- ------- ------- ------- ------
Total income from investment
operations............................. 0.49 0.67 0.69 1.08 2.18 0.16
------- ------- ------- ------- ------- ------
Less dividends and distributions from:
Net investment income............... (0.47) (0.95) (0.98) (0.96) (0.93) (1.12)
Paid-in-capital..................... -- -- -- -- -- (0.02)
------- ------- ------- ------- ------- ------
Total dividends and distributions....... (0.47) (0.95) (0.98) (0.96) (0.93) (1.14)
------- ------- ------- ------- ------- ------
Anti-dilutive effect of acquiring
treasury shares*....................... 0.02 0.07 0.05 0.05 0.04 0.01
------- ------- ------- ------- ------- ------
Net asset value, end of period.......... $ 17.18 $ 17.14 $ 17.35 $ 17.59 $ 17.42 $16.13
======= ======= ======= ======= ======= ======
Market value, end of period............. $ 16.19 $ 16.07 $ 15.84 $ 16.04 $ 15.87 $15.23
======= ======= ======= ======= ======= ======
Total Return+........................... 3.70%(1) 7.88% 4.92% 7.27% 10.61% (3.89)%
Ratios to Average Net Assets:
Total expenses (before expense
offset)................................ 0.69%(2) 0.68% 0.68% 0.66% 0.67% 0.66%
Net investment income................... 5.16%(2) 4.88% 4.96% 5.43% 5.81% 6.28%
Supplemental Data:
Net assets, end of period, in
thousands.............................. $164,490 $166,862 $177,341 $185,953 $190,302 $182,461
Portfolio turnover rate................. 16%(1) 59% 58% 40% 56% 62%
</Table>
- ---------------------
<Table>
* The per share amounts were computed using an average number
of shares outstanding during the period.
+ Total return is based upon the current market value on the
last day of each period reported. Dividends and
distributions are assumed to be reinvested at the prices
obtained under the Fund's dividend reinvestment plan. Total
return does not reflect brokerage commissions.
(1) Not annualized.
(2) Annualized.
</Table>
See Notes to Financial Statements
22
(This Page Intentionally Left Blank)
DIRECTORS
Frank L. Bowman
Michael Bozic
Kathleen A. Dennis
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael F. Klein
Michael E. Nugent
W. Allen Reed
Fergus Reid
OFFICERS
Michael E. Nugent
Chairperson of the Board
Ronald E. Robison
President and Principal Executive Officer
J. David Germany
Vice President
Dennis F. Shea
Vice President
Amy R. Doberman
Vice President
Carsten Otto
Chief Compliance Officer
Stefanie V. Chang Yu
Vice President
Francis J. Smith
Treasurer and Chief Financial Officer
Mary E. Mullin
Secretary
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
LEGAL COUNSEL
Clifford Chance US LLP
31 West 52nd Street
New York, New York 10019
COUNSEL TO THE INDEPENDENT DIRECTORS
Kramer Levin Naftalis & Frankel LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT ADVISER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
The financial statements included herein have been taken from the records of the
Fund without examination by the independent auditors and accordingly they do not
express an opinion thereon.
(c) 2007 Morgan Stanley
[MORGAN STANLEY LOGO]
MORGAN STANLEY FUNDS
LOGO
Morgan Stanley
Income Securities
Semiannual Report
March 31, 2007
[MORGAN STANLEY LOGO]
ICBSAR IU07-01085P-Y03/07
Item 2. Code of Ethics.
Not applicable for semiannual reports.
Item 3. Audit Committee Financial Expert.
Not applicable for semiannual reports.
Item 4. Principal Accountant Fees and Services
Not applicable for semiannual reports.
Item 5. Audit Committee of Listed Registrants.
Not applicable for semiannual reports.
Item 6.
Refer to Item 1.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable for semiannual reports.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Applicable only to reports covering periods ending on or after December 31,
2005.
Item 9. Closed-End Fund Repurchases
REGISTRANT PURCHASE OF EQUITY SECURITIES
<Table>
<Caption>
Period (a) Total (b) Average (c) Total (d) Maximum
Number of Price Paid per Number of Number (or
Shares (or Share (or Unit) Shares (or Approximate
Units) Units) Dollar Value)
Purchased Purchased as of Shares (or
Part of Units) that May
Publicly Yet Be
Announced Purchased Under
Plans or the Plans or
Programs Programs
- ----------------------------------------------------------------------------------------
October 1, 2006
- -October 31, 2006 57,700.00 15.8677 N/A N/A
- ----------------------------------------------------------------------------------------
November 1, 2006
- -November 30, 2006 22,400.00 15.9781 N/A N/A
- ----------------------------------------------------------------------------------------
December 1, 2006
- -December 31, 2006 22,700.00 16.1150 N/A N/A
- ----------------------------------------------------------------------------------------
January 1, 2007
- -January 31, 2007 15,900.00 15.9785 N/A N/A
- ----------------------------------------------------------------------------------------
February 1, 2007
- -February 28, 2007 18,000.00 16.1234 N/A N/A
- ----------------------------------------------------------------------------------------
March 1, 2007 -March
31, 2007 22,100.00 16.2539 N/A N/A
- ----------------------------------------------------------------------------------------
Total 158,800.00 16.0528 N/A N/A
- ----------------------------------------------------------------------------------------
</Table>
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
2
and Exchange Commission's rules and forms, based upon such officers' evaluation
of these controls and procedures as of a date within 90 days of the filing date
of the report.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the second fiscal quarter of the period covered
by this report that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting.
Item 12. Exhibits
(a) Code of Ethics -- Not applicable for semiannual reports.
(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.
3
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 Income Securities Inc.
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
May 22, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
May 22, 2007
/s/ Francis Smith
Francis Smith
Principal Financial Officer
May 22, 2007
4