<Page>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-03870
Morgan Stanley U.S. Government Securities Trust
(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: December 31, 2003
Date of reporting period: December 31, 2003
Item 1 - Report to Shareholders
<Page>
Welcome, Shareholder:
In this report, you'll learn about how your investment in Morgan Stanley U.S.
Government Securities Trust performed during the annual period. We will provide
an overview of the market conditions, and discuss some of the factors that
affected performance during the reporting period. In addition, this report
includes the Fund's financial statements and a list of Fund investments.
This material must be preceded or accompanied by a prospectus for the fund being
offered. Market forecasts provided in this report may not necessarily come to
pass. There is no assurance that the Fund will achieve its investment objective.
The Fund is subject to market risk, which is the possibility that market values
of securities owned by the Fund will decline and, therefore, the value of the
Fund's shares may be less than what you paid for them. Accordingly, you can lose
money investing in this Fund.
<Page>
FUND REPORT
FOR THE YEAR ENDED DECEMBER 31, 2003
TOTAL RETURN FOR THE 12 MONTHS ENDED DECEMBER 31, 2003
<Table>
<Caption>
LEHMAN LIPPER
BROTHERS GENERAL
U.S. GOV'T U.S. GOV'T
CLASS A CLASS B CLASS C CLASS D BOND INDEX(1) FUNDS INDEX(2)
1.48% 1.49% 0.93% 1.67% 2.36% 1.73%
</Table>
THE PERFORMANCE OF THE FUND'S FOUR SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE FUND'S TOTAL RETURN FIGURES ASSUME THE REINVESTMENT OF
ALL DISTRIBUTIONS, BUT DO NOT REFLECT THE DEDUCTION OF ANY APPLICABLE SALES
CHARGES. SUCH COSTS WOULD LOWER PERFORMANCE. PAST PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS. SEE PERFORMANCE SUMMARY FOR STANDARDIZED PERFORMANCE
INFORMATION.
MARKET CONDITIONS
In 2003 the bond markets were dominated by perceptions of the Federal Reserve
Bank's concerns about deflation as well as by mounting evidence that the U.S.
economy was moving into a solid recovery. Interest rates rose briefly in January
on expectations of an imminent recovery, only to consolidate through the spring
in the absence of any decisive economic developments. The market moved out of
this pattern in May, when Federal Reserve minutes acknowledged its heightened
concern about deflation as a possibility, "however remote." These comments sent
yields plummeting to multidecade lows as investors sought the safety of Treasury
bonds.
Interest rates reversed course once more in June, when the Federal Reserve Open
Market Committee cut rates by 25 basis points. Half of what the market had
expected, this signaled to many investors that the Fed was less concerned about
deflation than had previously been thought. The economy also began showing more
convincing signs of strength in the third quarter. By September both consumer
and corporate spending were showing strength and the GDP growth rate topped 8
percent. Interest rates moved sharply higher through the end of August in one of
their strongest upward moves in years. Continuing strength in the economy
balanced ongoing deflationary worries to keep interest rates largely unchanged
through the end of the year.
In spite of this volatility during the year, interest rates ended the period
only slightly changed. Across the bulk of the yield curve, yields moved up in
parallel, increasing by roughly 50 basis points. The very short part of the
yield curve, in contrast, fell by 25 basis points in response to the June
interest-rate cut. These changes had the effect of steepening the yield curve
slightly to a configuration consistent with expectations for an improving
economy. However, the implied period over which the economy would recover was,
in our view, unduly pessimistic.
Mortgage-backed securities (MBSs) had a strong year, in which they went from
attractively priced to expensive relative to historical levels. At the beginning
of the year, uncertainty over the state of the economy and prepayment speeds led
investors to demand a fairly large risk premium as compensation. By early
summer, the market had priced in prepayment speeds well in excess of historical
levels. Once rates stabilized later in the year, yield spreads over Treasuries
began to decline as investors developed greater confidence in the clarity of
economic data.
PERFORMANCE ANALYSIS
For the 12-month period ended December 31, 2003, Morgan Stanley U.S. Government
Securities Trust underperformed both the Lehman Brothers U.S. Government Bond
Index and the Lipper General
2
<Page>
U.S. Government Funds Index. While the Fund benefited from our overall
interest-rate strategy, our implementation proved less helpful. Our strategy was
to maintain a reduced level of interest-rate sensitivity relative to the Fund's
benchmark. We established this position based on our assessment at the beginning
of the period that prevailing interest rates did not adequately reflect the
prospect of improving economic conditions. The strategy proved to be successful,
especially when interest rates rose sharply in the second half of the period.
We chose to deemphasize the five-year portion of the yield curve in the belief
that it offered little value relative to other segments of the curve. This
strategy resulted in the Fund being underweighted in five-year securities
relative to the Lehman Brothers U.S. Government Bond Index. Unfortunately, this
proved to be the best-performing segment of the yield curve, so this strategy
hampered the Fund's return relative to the Index.
<Table>
PORTFOLIO COMPOSITION
U.S. Government Obligations 42.0%
Short Term Investments 31.1%
Mortgage-Backed Securities 21.6%
U.S. Government Agencies 5.3%
</Table>
SUBJECT TO CHANGE DAILY. ALL PERCENTAGES ARE AS A PERCENTAGE OF TOTAL
INVESTMENTS. PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED A
RECOMMENDATION TO BUY OR SELL THE SECURITIES MENTIONED. MORGAN STANLEY IS A
FULL-SERVICE SECURITIES FIRM ENGAGED IN SECURITIES TRADING AND BROKERAGE
ACTIVITIES, INVESTMENT BANKING, RESEARCH AND ANALYSIS, FINANCING AND FINANCIAL
ADVISORY SERVICES.
INVESTMENT STRATEGY
1. THE FUND INVESTS ALL OF ITS ASSETS IN U.S. GOVERNMENT SECURITIES. IN MAKING
INVESTMENT DECISIONS, THE FUND'S INVESTMENT MANAGER, MORGAN STANLEY
INVESTMENT ADVISORS INC., CONSIDERS ECONOMIC DEVELOPMENTS, INTEREST RATE
TRENDS AND OTHER FACTORS. THE FUND IS NOT LIMITED AS TO THE MATURITIES OF THE
U.S. GOVERNMENT SECURITIES IN WHICH IT MAY INVEST.
2. THE U.S. GOVERNMENT SECURITIES (INCLUDING ZERO COUPON SECURITIES) THAT THE
FUND MAY PURCHASE ARE LIMITED TO:
a. U.S. TREASURY BILLS, NOTES AND BONDS, ALL OF WHICH ARE DIRECT OBLIGATIONS
OF THE U.S. GOVERNMENT.
b. SECURITIES (INCLUDING MORTGAGE-BACKED SECURITIES) ISSUED BY AGENCIES AND
INSTRUMENTALITIES OF THE U.S. GOVERNMENT, WHICH ARE BACKED BY THE FULL
FAITH, AND CREDIT OF THE UNITED STATES. AMONG THE AGENCIES AND
INSTRUMENTALITIES ISSUING THESE OBLIGATIONS ARE THE GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION, THE FEDERAL HOUSING ADMINISTRATION, AND THE
RESOLUTION FUNDING CORPORATION.
3. MOST U.S. GOVERNMENT SECURITIES PAY EITHER FIXED OR ADJUSTABLE RATES OF
INTEREST AT REGULAR INTERVALS UNTIL THEY MATURE, AT WHICH POINT INVESTORS GET
THEIR PRINCIPAL BACK. THE FUND'S INVESTMENTS MAY INCLUDE ZERO COUPON
SECURITIES, WHICH ARE PURCHASED AT A DISCOUNT AND GENERALLY ACCRUE INTEREST,
BUT MAKE NO PAYMENT UNTIL MATURITY.
ANNUAL HOUSEHOLDING NOTICE
TO REDUCE PRINTING AND MAILING COSTS, THE FUND ATTEMPTS TO ELIMINATE DUPLICATE
MAILINGS TO THE SAME ADDRESS. THE FUND DELIVERS A SINGLE COPY OF CERTAIN
SHAREHOLDER DOCUMENTS, INCLUDING SHAREHOLDER REPORTS, PROSPECTUSES AND PROXY
MATERIALS, TO INVESTORS WITH THE SAME LAST NAME WHO RESIDE AT THE SAME ADDRESS.
YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME
UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE
DOCUMENTS BY CALLING (800) 350-6414, 8:00 A.M. TO 8:00 P.M. ET. ONCE OUR
CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING
INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS.
3
<Page>
PERFORMANCE SUMMARY
[CHART]
PERFORMANCE OF A $10,000 INVESTMENT--CLASS B
($ IN THOUSANDS)
<Table>
<Caption>
CLASS B^^ LEHMAN(1) LIPPER(2)
Dec-1993 $ 10,000 $ 10,000 $ 10,000
Dec-1994 $ 9,649 $ 9,662 $ 9,526
Dec-1995 $ 11,264 $ 11,435 $ 11,140
Dec-1996 $ 11,620 $ 11,751 $ 11,380
Dec-1997 $ 12,614 $ 12,878 $ 12,418
Dec-1998 $ 13,531 $ 14,147 $ 13,392
Dec-1999 $ 13,443 $ 13,831 $ 13,035
Dec-2000 $ 14,953 $ 15,663 $ 14,585
Dec-2001 $ 15,893 $ 16,795 $ 15,559
Dec-2002 $ 17,468 $ 18,726 $ 17,110
Dec-2003 $ 17,729 $ 19,167 $ 17,406
ENDING VALUE
</Table>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH
LESS THAN THEIR ORIGINAL COST. THE GRAPH AND TABLE DO NOT REFLECT THE DEDUCTION
OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF
FUND SHARES. PERFORMANCE FOR CLASS A, CLASS B, CLASS C, AND CLASS D SHARES WILL
VARY DUE TO DIFFERENCES IN SALES CHARGES AND EXPENSES.
4
<Page>
AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED DECEMBER 31, 2003
<Table>
<Caption>
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS D SHARES++
(SINCE 07/28/97) (SINCE 06/29/84) (SINCE 07/28/97) (SINCE 07/28/97)
SYMBOL USGAX USGBX USGCX USGDX
1 YEAR 1.48%(3) 1.49%(3) 0.93%(3) 1.67%(3)
(2.83)(4) (3.40)(4) (0.05)(4) --
5 YEARS 5.73(3) 5.55(3) 5.14(3) 5.95(3)
4.81(4) 5.23(4) 5.14(4) --
10 YEARS -- 5.89(3) -- --
-- 5.89(4) -- --
SINCE INCEPTION 6.21(3) 7.49(3) 5.76(3) 6.45(3)
5.49(4) 7.49(4) 5.76(4) --
</Table>
- ----------
Notes on Performance
(1) THE LEHMAN BROTHERS U.S. GOVERNMENT INDEX IS A BROAD-BASED MEASURE OF ALL
U.S. GOVERNMENT AND TREASURY SECURITIES. INDEXES ARE UNMANAGED AND THEIR
RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER
PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
(2) THE LIPPER GENERAL U.S. GOVERNMENT FUNDS INDEX IS AN EQUALLY WEIGHTED
PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN
THE LIPPER GENERAL U.S. GOVERNMENT FUNDS CLASSIFICATION. THE INDEX, WHICH
IS ADJUSTED FOR CAPITAL GAINS DISTRIBUTIONS AND INCOME DIVIDENDS, IS
UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT. THERE ARE CURRENTLY
30 FUNDS REPRESENTED IN THIS INDEX.
(3) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT
THE DEDUCTION OF ANY SALES CHARGES.
(4) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND THE DEDUCTION OF
THE MAXIMUM APPLICABLE SALES CHARGE. SEE THE FUND'S CURRENT PROSPECTUS FOR
COMPLETE DETAILS ON FEES AND SALES CHARGES.
* THE MAXIMUM FRONT-END SALES CHARGE FOR CLASS A IS 4.25%.
** THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B IS 5.0%.
THE CDSC DECLINES TO 0% AFTER SIX YEARS.
+ THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE FOR CLASS C IS 1% FOR SHARES
REDEEMED WITHIN ONE YEAR OF PURCHASE.
++ CLASS D HAS NO SALES CHARGE.
^^ CLOSING VALUE ASSUMING A COMPLETE REDEMPTION ON DECEMBER 31, 2003.
5
<Page>
MORGAN STANLEY U.S. GOVERNMENT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2003
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON
THOUSANDS DESCRIPTION AND MATURITY DATE RATE VALUE
- --------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES (23.7%)
Government National Mortgage Assoc. I (23.3%)
$ 110,000 * 5.50% $ 111,856,250
100,000 * 6.00 103,937,500
46,861 02/15/28 - 03/15/29 6.00 48,759,279
238,216 10/15/22 - 07/15/31 6.50 251,229,069
198,738 04/15/17 - 03/15/27 7.00 211,854,560
79,277 01/15/06 - 10/15/31 7.50 85,088,422
26,843 10/15/16 - 09/15/31 8.00 29,208,496
37,051 01/15/06 - 11/15/24 8.50 40,325,881
27,904 10/15/08 - 08/15/21 9.00 31,215,355
18,091 10/15/09 - 12/15/20 9.50 20,260,548
22,720 11/15/09 - 11/15/20 10.00 25,562,324
88 05/15/10 - 06/15/15 12.50 102,122
---------------
959,399,806
---------------
Government National Mortgage Assoc. II (0.4%)
6,981 01/20/24 - 02/20/24 6.50 7,347,889
8,294 03/20/26 - 07/20/29 7.00 8,815,933
---------------
16,163,822
---------------
Government National Mortgage Assoc. GPM I (0.0%)
1,046 08/15/13 - 07/15/15 12.25 1,201,902
---------------
TOTAL MORTGAGE-BACKED SECURITIES
(COST $925,867,833) 976,765,530
---------------
U.S. GOVERNMENT OBLIGATIONS (46.0%)
U.S. Treasury Bonds (17.5%)
111,500 08/15/27 6.375 129,531,668
174,500 02/15/27 6.625 208,479,862
210,000 02/15/25 7.625 277,405,170
73,225 08/15/20 8.75 104,734,669
---------------
720,151,369
---------------
U.S. Treasury Notes (26.9%)
300,000 11/15/06 3.50 310,183,800
180,000 02/15/13 3.875 176,259,420
35,000 11/15/05 5.75 37,589,475
50,000 05/15/05 6.75 53,617,200
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
6
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON
THOUSANDS DESCRIPTION AND MATURITY DATE RATE VALUE
- --------------------------------------------------------------------------------------------------
$ 206,350 02/15/05 7.50% $ 220,657,484
285,000 11/15/04 7.875 301,398,900
4,750 02/15/15 11.25 7,604,085
---------------
1,107,310,364
---------------
U.S. Treasury Strips (1.6%)
40,000 08/15/10 0.00 31,032,880
45,000 02/15/11 0.00 33,845,040
---------------
64,877,920
---------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $1,883,408,588) 1,892,339,653
---------------
U.S. GOVERNMENT AGENCIES (5.8%)
Housing Urban Development Ser 99-A (0.9%)
18,800 08/01/10 6.06 20,212,876
15,290 08/01/11 6.16 16,457,514
---------------
36,670,390
---------------
Resolution Funding Corp. Zero Coupon Strips (4.9%)
74,000 10/15/08 0.00 62,978,292
138,134 01/15/12 0.00 97,196,608
61,607 04/15/12 0.00 42,616,889
---------------
202,791,789
---------------
TOTAL U.S. GOVERNMENT AGENCIES
(COST $225,991,671) 239,462,179
---------------
SHORT-TERM INVESTMENTS (a)(34.1%)
U.S. TREASURY BILLS
198,730 01/15/04 - 03/04/04 0.90 198,594,685
200,000 01/15/04 0.91 199,934,278
92,100 01/02/04 0.92 92,097,646
11,000 02/05/04 0.923 10,990,134
100,000 02/19/04 0.93 99,873,417
51,600 01/15/04 0.935 51,581,238
30,400 06/10/04 0.965 30,269,618
291,270 01/15/04 - 04/01/04+ 0.97 290,564,694
92,000 01/02/04 0.975 91,997,508
100,400 01/02/04 - 01/15/04+ 0.98 100,397,125
107,400 04/15/04 - 06/10/04 0.99 106,977,336
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
7
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON
THOUSANDS DESCRIPTION AND MATURITY DATE RATE VALUE
- --------------------------------------------------------------------------------------------------
$ 50,000 03/25/04 1.00% $ 49,884,722
80,000 02/19/04 1.015 79,889,478
---------------
TOTAL SHORT-TERM INVESTMENTS
(COST $1,403,037,517) 1,403,051,879
---------------
TOTAL INVESTMENTS
(COST $4,438,305,609)(b)(c) 109.6% 4,511,619,241
LIABILITIES IN EXCESS OF OTHER ASSETS (9.6) (393,666,948)
----- ---------------
NET ASSETS 100.0% $ 4,117,952,293
===== ===============
</Table>
- ----------
GPM GRADUATED PAYMENT MORTGAGE.
* SECURITIES PURCHASED ON A FORWARD COMMITMENT BASIS WITH AN APPROXIMATE
PRINCIPAL AMOUNT AND NO DEFINITE MATURITY DATE; THE ACTUAL PRINCIPAL
AMOUNT AND MATURITY DATE WILL BE DETERMINED UPON SETTLEMENT.
+ ALL OR A PORTION OF THIS SECURITY HAS BEEN PHYSICALLY SEGREGATED IN
CONNECTION WITH OPEN FUTURES CONTRACTS.
(a) PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED
TO REFLECT A MONEY MARKET EQUIVALENT YIELD.
(b) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN AN AMOUNT EQUAL TO
$226,349,307 IN CONNECTION WITH SECURITIES PURCHASED ON A FORWARD
COMMITMENT BASIS.
(c) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $4,479,558,901. THE
AGGREGATE GROSS UNREALIZED APPRECIATION IS $45,968,667 AND THE AGGREGATE
GROSS UNREALIZED DEPRECIATION IS $13,908,327, RESULTING IN NET UNREALIZED
APPRECIATION OF $32,060,340.
FUTURES CONTRACTS OPEN AT DECEMBER 31, 2003:
<Table>
<Caption>
NUMBER OF DESCRIPTION/DELIVERY UNDERLYING FACE UNREALIZED
CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE DEPRECIATION
- ------------------------------------------------------------------------------
100 Short U.S. Treasury Notes
5 Year March 2004 $ (11,162,500) $ (80,788)
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
8
<Page>
MORGAN STANLEY U.S. GOVERNMENT SECURITIES TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
<Table>
ASSETS:
Investments in securities, at value (cost $4,438,305,609) $ 4,511,619,241
Cash 97,790
Receivable for:
Interest 34,979,883
Shares of beneficial interest sold 1,782,458
Prepaid expenses and other assets 2,020,119
----------------
TOTAL ASSETS 4,550,499,491
----------------
LIABILITIES:
Payable for:
Investments purchased 416,101,257
Shares of beneficial interest redeemed 6,051,630
Dividends and distributions to shareholders 5,767,700
Distribution fee 2,495,539
Investment management fee 1,659,830
Variation margin 12,500
Accrued expenses and other payables 458,742
----------------
TOTAL LIABILITIES 432,547,198
----------------
NET ASSETS $ 4,117,952,293
================
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 4,149,162,244
Net unrealized appreciation 73,232,844
Dividends in excess of net investment income (41,054,419)
Accumulated net realized loss (63,388,376)
----------------
NET ASSETS $ 4,117,952,293
================
CLASS A SHARES:
Net Assets $ 242,335,279
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 26,308,709
NET ASSET VALUE PER SHARE $ 9.21
================
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 4.44% OF NET ASSET VALUE) $ 9.62
================
CLASS B SHARES:
Net Assets $ 3,461,241,088
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 375,133,898
NET ASSET VALUE PER SHARE $ 9.23
================
CLASS C SHARES:
Net Assets $ 105,392,304
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 11,344,868
NET ASSET VALUE PER SHARE $ 9.29
================
CLASS D SHARES:
Net Assets $ 308,983,622
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 33,527,681
NET ASSET VALUE PER SHARE $ 9.22
================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
9
<Page>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
<Table>
NET INVESTMENT INCOME:
INTEREST INCOME $ 175,124,817
----------------
EXPENSES
Distribution fee (Class A shares) 477,010
Distribution fee (Class B shares) 30,283,995
Distribution fee (Class C shares) 926,025
Investment management fee 20,667,437
Transfer agent fees and expenses 4,573,735
Custodian fees 717,868
Shareholder reports and notices 216,385
Registration fees 120,193
Professional fees 65,875
Trustees' fees and expenses 38,792
Other 398,603
----------------
TOTAL EXPENSES 58,485,918
Less: distribution fee rebate (Class B shares) (22,730,676)
----------------
NET EXPENSES 35,755,242
----------------
NET INVESTMENT INCOME 139,369,575
----------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
NET REALIZED GAIN/LOSS ON:
Investments 39,512,622
Futures contracts (2,564,837)
----------------
NET REALIZED GAIN 36,947,785
----------------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments (108,996,436)
Futures contracts (80,788)
----------------
NET DEPRECIATION (109,077,224)
----------------
NET LOSS (72,129,439)
----------------
NET INCREASE $ 67,240,136
================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
10
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
------------------ ------------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 139,369,575 $ 201,556,647
Net realized gain 36,947,785 112,542,103
Net change in unrealized appreciation (109,077,224) 126,519,788
------------------ ------------------
NET INCREASE 67,240,136 440,618,538
------------------ ------------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A shares (9,110,250) (8,662,841)
Class B shares (146,837,400) (200,811,470)
Class C shares (3,781,279) (4,001,567)
Class D shares (12,038,733) (10,153,806)
------------------ ------------------
TOTAL DIVIDENDS (171,767,662) (223,629,684)
------------------ ------------------
Net increase (decrease) from transactions in shares
of beneficial interest (892,911,901) 547,928,025
------------------ ------------------
NET INCREASE (DECREASE) (997,439,427) 764,916,879
NET ASSETS:
Beginning of period 5,115,391,720 4,350,474,841
------------------ ------------------
END OF PERIOD
(Including dividends in excess of net investment income
of $41,054,419 and $10,469,569, respectively) $ 4,117,952,293 $ 5,115,391,720
================== ==================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
11
<Page>
MORGAN STANLEY U.S. GOVERNMENT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2003
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley U.S. Government Securities Trust (the "Fund") is registered under
the Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Fund's investment objective is high
current income consistent with safety of principal. The Fund seeks to achieve
its objective by investing in obligations issued or guaranteed by the U.S.
Government or its instrumentalities. The Fund was organized as a Massachusetts
business trust on September 29, 1983 and commenced operations on June 29, 1984.
On July 28, 1997, the Fund converted to a multiple class share structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) certain portfolio securities may be valued by
an outside pricing service approved by the Fund's Trustees; (2) portfolio
securities for which over-the-counter market quotations are readily available
are valued at the mean between the last reported bid and asked price; (3) when
market quotations are not readily available or Morgan Stanley Investment
Advisors Inc. (the "Investment Manager") determines that the market quotations
are not reflective of a security's market value, portfolio securities are valued
at their fair value as determined in good faith under procedures established by
and under the general supervision of the Fund's Trustees; and (4) 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. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
12
<Page>
D. FUTURES CONTRACTS -- A futures contract is an agreement between two parties
to buy and sell financial instruments or contracts based on financial indices at
a set price on a future date. Upon entering into such a contract, the Fund is
required to pledge to the broker cash, U.S. Government securities or other
liquid portfolio securities equal to the minimum initial margin requirements of
the applicable futures exchange. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in the value of the contract. Such receipts or payments known as
variation margin are recorded by the Fund as unrealized gains and losses. Upon
closing of the contract, the Fund realizes a gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed.
E. FEDERAL INCOME TAX POLICY -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Accordingly, no federal income tax provision is required.
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.
G. USE OF ESTIMATES -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, accrued daily and payable monthly, by applying the
following annual rates to the Fund's net assets determined at the close of each
business day: 0.50% to the portion of daily net assets not exceeding $1 billion;
0.475% to the portion of daily net assets exceeding $1 billion but not exceeding
$1.5 billion; 0.45% to the portion of daily net assets exceeding $1.5 billion
but not exceeding $2 billion; 0.425% to the portion of daily net assets
exceeding $2 billion but not exceeding $2.5 billion; 0.40% to the portion of
daily net assets exceeding $2.5 billion but not exceeding $5 billion; 0.375% to
the portion of daily net assets exceeding $5 billion but not exceeding $7.5
billion; 0.35% to the portion of daily net assets exceeding $7.5 billion but not
exceeding $10 billion; 0.325% to the portion of daily net assets exceeding $10
billion but not exceeding $12.5 billion; and 0.30% to the portion of daily net
assets exceeding $12.5 billion.
13
<Page>
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the
"Distributor"), an affiliate of the Investment Manager. The Fund has adopted a
Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan
provides that the Fund will pay the Distributor a fee which is accrued daily and
paid monthly at the following annual rates: (i) Class A -- up to 0.25% of the
average daily net assets of Class A; (ii) Class B -- 0.75% (0.65% on amounts
over $10 billion) of the lesser of: (a) the average daily aggregate gross sales
of the Class B shares since the inception of the Fund (not including
reinvestment of dividend or capital gain distributions) less the average daily
aggregate net asset value of the Class B shares redeemed since the Fund's
inception upon which a contingent deferred sales charge has been imposed or
waived; or (b) the average daily net assets of Class B; and (iii) Class C -- up
to 0.75% of the average daily net assets of Class C.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that there were no excess expenses as of
December 31, 2003.
For the year ended December 31, 2003, the Distributor rebated a portion of the
distribution fees paid by the Fund on Class B shares in the amount of
$22,730,676.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 0.75% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Financial Advisors or other selected
broker-dealer representatives may be reimbursed in the subsequent calendar year.
For the year ended December 31, 2003, the distribution fee was accrued for Class
A shares and Class C shares at the annual rate of 0.19% and 0.75%, respectively.
The Distributor has informed the Fund that for the year ended December 31, 2003,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class A shares, Class B shares and Class C shares of $167,298, $4,766,767
and $102,952, respectively and received $392,802 in front-end sales charges from
sales of the Fund's Class A shares. The respective shareholders pay such charges
which are not an expense of the Fund.
14
<Page>
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The costs of purchases and proceeds from sales/prepayments of portfolio
securities, excluding short-term investments, for the year ended December 31,
2003 were $5,333,125,122 and $6,139,302,587, respectively.
Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is
the Fund's transfer agent. At December 31, 2003, the Fund had transfer agent
fees and expenses payable of approximately $76,800.
The Fund has an unfunded noncontributory defined benefit pension plan covering
certain independent Trustees of the Fund who will have served as independent
Trustees 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.
Aggregate pension costs for the year ended December 31, 2003 included in
Trustees' fees and expenses in the Statement of Operations amounted to $7,338.
At December 31, 2003, the Fund had an accrued pension liability of $61,580 which
is included in accrued expenses in the Statement of Assets and Liabilities.
On December 2, 2003, the Trustees voted to close the plan to new participants,
eliminate the future benefits growth due to increases to compensation after July
31, 2003 and effective April 1, 2004, establish an unfunded deferred
compensation plan which allows each independent Trustee to defer payment of all
or a portion of the fees he receives for serving on the Board of Trustees
throughout the year.
5. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
To hedge against adverse interest rate risk, the Fund may purchase and sell
interest rate futures contracts ("futures contracts").
Futures contracts involve elements of market risk in excess of the amounts
reflected in the Statement of Assets and Liabilities. The Fund bears the risk of
an unfavorable change in the value of the 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.
15
<Page>
6. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
------------------------------------ ------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------- ---------------- ---------------- ----------------
CLASS A SHARES
Sold 31,910,340 $ 298,309,612 37,278,528 $ 343,201,691
Reinvestment of dividends 782,521 7,283,221 728,176 6,688,504
Redeemed (31,445,337) (293,410,503) (26,612,726) (245,296,636)
---------------- ---------------- ---------------- ----------------
Net increase -- Class A 1,247,524 12,182,330 11,393,978 104,593,559
---------------- ---------------- ---------------- ----------------
CLASS B SHARES
Sold 34,512,843 324,031,042 115,853,848 1,066,594,060
Reinvestment of dividends 9,261,878 86,401,971 12,580,271 115,384,334
Redeemed (139,688,353) (1,301,149,848) (104,445,896) (960,901,268)
---------------- ---------------- ---------------- ----------------
Net increase (decrease) -- Class B (95,913,632) (890,716,835) 23,988,223 221,077,126
---------------- ---------------- ---------------- ----------------
CLASS C SHARES
Sold 4,640,484 43,762,890 14,187,046 131,278,119
Reinvestment of dividends 272,422 2,559,820 292,665 2,712,560
Redeemed (7,212,567) (67,610,716) (7,854,069) (72,484,472)
---------------- ---------------- ---------------- ----------------
Net increase (decrease) -- Class C (2,299,661) (21,288,006) 6,625,642 61,506,207
---------------- ---------------- ---------------- ----------------
CLASS D SHARES
Sold 17,605,741 164,783,346 30,513,611 281,767,152
Reinvestment of dividends 820,139 7,637,771 715,931 6,585,942
Redeemed (17,726,181) (165,510,507) (13,818,790) (127,601,961)
---------------- ---------------- ---------------- ----------------
Net increase -- Class D 699,699 6,910,610 17,410,752 160,751,133
---------------- ---------------- ---------------- ----------------
Net increase (decrease) in Fund (96,266,070) $ (892,911,901) 59,418,595 $ 547,928,025
================ ================ ================ ================
</Table>
7. LEGAL MATTERS
The Investment Manager, certain affiliates of the Investment Manager and certain
investment companies advised by the Investment Manager or its affiliates,
including the Fund, are named as defendants in a number of recently filed,
similar class action complaints. These complaints generally allege that
defendants, including the Fund, violated their statutory disclosure obligations
and fiduciary duties by failing properly to disclose (i) that the Investment
Manager and certain affiliates of the Investment Manager allegedly offered
economic incentives to brokers and others to steer investors to the funds
advised by the Investment Manager or its affiliates rather than funds managed by
other companies, and (ii) that the funds advised by the Investment Manager or
its affiliates, including the Fund, allegedly paid excessive commissions to
brokers in return for their alleged efforts to steer investors to these funds.
The complaints seek, among other things, unspecified compensatory damages,
rescissionary damages, fees and costs. The defendants intend to move to dismiss
these actions and otherwise vigorously to
16
<Page>
defend them. While the Fund believes that it has meritorious defenses, the
ultimate outcome of these matters is not presently determinable at this early
stage of the litigation, and no provision has been made in the Fund's financial
statements for the effect, if any, of these matters.
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.
The tax character of distributions paid was as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
---------------- ----------------
Ordinary Income $ 171,767,662 $ 223,629,684
</Table>
As of December 31, 2003, the tax-basis components of accumulated losses were as
follows:
<Table>
Undistributed ordinary income $ 260,452
Undistributed long-term gains --
----------------
Net accumulated earnings 260,452
Capital loss carryforward* (61,458,629)
Post-October losses (2,010,534)
Temporary differences (61,580)
Net unrealized appreciation 32,060,340
----------------
Total accumulated losses $ (31,209,951)
================
</Table>
* During the year ended December 31, 2003, the Fund utilized $37,064,294 of its
net capital loss carryforward. As of December 31, 2003, the Fund had a net
capital loss carryforward of $61,458,629 of which $49,152,459 will expire on
December 31, 2004, $3,006,443 will expire on December 31, 2005, $2,711,317 will
expire on December 31, 2006 and $6,588,410 will expire on December 31, 2007 to
offset future capital gains to the extent provided by regulations.
As of December 31, 2003, the Fund had temporary book/tax differences primarily
attributable to post-October losses (capital losses incurred after October 31
within the taxable year which are deemed to arise on the first business day of
the Fund's next taxable year) and book amortization of premiums on debt
securities and permanent book/tax differences primarily attributable to tax
adjustments on debt securities sold by the Fund and an expired capital loss
carryforward. To reflect reclassifications arising from the permanent
differences, paid-in-capital was charged $26,602,236, accumulated net realized
loss was credited $24,788,999 and dividends in excess of net investment income
was credited $1,813,237.
17
<Page>
MORGAN STANLEY U.S. GOVERNMENT SECURITIES TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.41 $ 8.99 $ 8.94 $ 8.58 $ 9.18
------------ ------------ ------------ ------------ ------------
Income (loss) from investment operations:
Net investment income 0.26 0.43 0.51 0.56 0.58
Net realized and unrealized gain (loss) (0.12) 0.45 0.07 0.36 (0.60)
------------ ------------ ------------ ------------ ------------
Total income (loss) from investment
operations 0.14 0.88 0.58 0.92 (0.02)
------------ ------------ ------------ ------------ ------------
Less dividends from net investment income (0.34) (0.46) (0.53) (0.56) (0.58)
------------ ------------ ------------ ------------ ------------
Net asset value, end of period $ 9.21 $ 9.41 $ 8.99 $ 8.94 $ 8.58
============ ============ ============ ============ ============
TOTAL RETURN+ 1.48% 10.07% 6.66% 11.18% (0.26)%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 0.76% 0.75% 0.73% 0.77% 0.70%
Net investment income 2.94% 4.50% 5.65% 5.81% 6.50%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 242,335 $ 235,787 $ 122,863 $ 99,750 $ 70,881
Portfolio turnover rate 153% 85% 73% 19% 11%
</Table>
- ----------
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
18
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.43 $ 9.00 $ 8.95 $ 8.59 $ 9.20
------------ ------------ ------------ ------------ ------------
Income (loss) from investment operations:
Net investment income 0.26 0.40 0.48 0.57 0.55
Net realized and unrealized gain (loss) (0.12) 0.46 0.07 0.36 (0.61)
------------ ------------ ------------ ------------ ------------
Total income (loss) from investment
operations 0.14 0.86 0.55 0.93 (0.06)
------------ ------------ ------------ ------------ ------------
Less dividends from net investment income (0.34) (0.43) (0.50) (0.57) (0.55)
------------ ------------ ------------ ------------ ------------
Net asset value, end of period $ 9.23 $ 9.43 $ 9.00 $ 8.95 $ 8.59
============ ============ ============ ============ ============
TOTAL RETURN+ 1.49% 9.91% 6.29% 11.23% (0.65)%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 0.76%(2) 1.00%(2) 1.07%(2) 0.72%(2) 1.02%(2)
Net investment income 2.95%(2) 4.25%(2) 5.30%(2) 5.86%(2) 6.18%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in millions $ 3,461 $ 4,441 $ 4,025 $ 3,745 $ 4,145
Portfolio turnover rate 153% 85% 73% 19% 11%
</Table>
- ----------
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(2) IF THE DISTRIBUTOR HAD NOT REBATED A PORTION OF ITS FEES TO THE FUND, THE
EXPENSE AND NET INVESTMENT INCOME RATIOS WOULD HAVE BEEN AS FOLLOWS:
<Table>
<Caption>
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO INCOME RATIO
- ------------ ------- --------------
DECEMBER 31, 2003 1.32% 2.38%
DECEMBER 31, 2002 1.29 3.96
DECEMBER 31, 2001 1.29 5.08
DECEMBER 31, 2000 1.29 5.29
DECEMBER 31, 1999 1.29 5.91
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
19
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.49 $ 9.07 $ 9.02 $ 8.65 $ 9.26
------------ ------------ ------------ ------------ ------------
Income (loss) from investment operations:
Net investment income 0.21 0.38 0.46 0.52 0.53
Net realized and unrealized gain (loss) (0.12) 0.45 0.07 0.37 (0.61)
------------ ------------ ------------ ------------ ------------
Total income (loss) from investment
operations 0.09 0.83 0.53 0.89 (0.08)
------------ ------------ ------------ ------------ ------------
Less dividends from net investment income (0.29) (0.41) (0.48) (0.52) (0.53)
------------ ------------ ------------ ------------ ------------
Net asset value, end of period $ 9.29 $ 9.49 $ 9.07 $ 9.02 $ 8.65
============ ============ ============ ============ ============
TOTAL RETURN+ 0.93% 9.42% 6.03% 10.70% (0.90)%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 1.32% 1.29% 1.29% 1.29% 1.29%
Net investment income 2.38% 3.96% 5.08% 5.29% 5.91%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 105,392 $ 129,515 $ 63,646 $ 27,445 $ 22,004
Portfolio turnover rate 153% 85% 73% 19% 11%
</Table>
- ----------
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
20
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.42 $ 8.99 $ 8.95 $ 8.58 $ 9.18
------------ ------------ ------------ ------------ ------------
Income (loss) from investment operations:
Net investment income 0.28 0.45 0.53 0.58 0.59
Net realized and unrealized gain (loss) (0.12) 0.46 0.06 0.37 (0.60)
------------ ------------ ------------ ------------ ------------
Total income (loss) from investment
operations 0.16 0.91 0.59 0.95 (0.01)
------------ ------------ ------------ ------------ ------------
Less dividends from net investment income (0.36) (0.48) (0.55) (0.58) (0.59)
------------ ------------ ------------ ------------ ------------
Net asset value, end of period $ 9.22 $ 9.42 $ 8.99 $ 8.95 $ 8.58
============ ============ ============ ============ ============
TOTAL RETURN+ 1.67% 10.41% 6.85% 11.43% (0.10)%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 0.57% 0.54% 0.54% 0.54% 0.54%
Net investment income 3.13% 4.71% 5.83% 6.04% 6.66%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 308,984 $ 309,109 $ 138,669 $ 93,446 $ 30,315
Portfolio turnover rate 153% 85% 73% 19% 11%
</Table>
- ----------
+ CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE
PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
21
<Page>
MORGAN STANLEY U.S. GOVERNMENT SECURITIES TRUST
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of
Trustees of Morgan Stanley U.S. Government Securities Trust:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley U.S. Government Securities Trust (the "Fund"), including the portfolio
of investments, as of December 31, 2003, and the related statements of
operations for the year then ended and changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 2003, by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed other
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Morgan
Stanley U.S. Government Securities Trust as of December 31, 2003, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended, and the financial highlights for each
of the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America.
Deloitte & Touche LLP
NEW YORK, NEW YORK
FEBRUARY 13, 2004
2003 FEDERAL TAX NOTICE (UNAUDITED)
Of the Fund's ordinary income dividends paid during the fiscal year ended
December 31, 2003, 62.76% was attributable to qualifying Federal
obligations. Please consult your tax advisor to determine if any portion of
the dividends you received is exempt from state income tax.
22
<Page>
MORGAN STANLEY U.S. GOVERNMENT SECURITIES TRUST
TRUSTEE AND OFFICER INFORMATION
INDEPENDENT TRUSTEES:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- ------------------------------------- ----------- ------------- -------------------------- ------------- ---------------------
Michael Bozic (62) Trustee Since Retired; Director or 216 Director of Weirton
c/o Mayer, Brown, Rowe & Maw LLP April 1994 Trustee of the Retail Steel Corporation.
Counsel to the Independent Directors Funds (since April 1994)
1675 Broadway and the Institutional
New York, NY Funds (since July 2003);
formerly Vice Chairman of
Kmart Corporation
(December 1998-October
2000), Chairman and Chief
Executive Officer of
Levitz Furniture
Corporation (November
1995-November 1998) and
President and Chief
Executive Officer of
Hills Department Stores
(May 1991-July 1995);
formerly variously
Chairman, Chief Executive
Officer, President and
Chief Operating Officer
(1987-1991) of the Sears
Merchandise Group of
Sears, Roebuck & Co.
Edwin J. Garn (71) Trustee Since Director or Trustee of 216 Director of Franklin
c/o Summit Ventures LLC January 1993 the Retail Funds (since Covey (time
1 Utah Center January 1993) and the management systems),
201 S. Main Street Institutional Funds BMW Bank of North
Salt Lake City, UT (since July 2003); member America, Inc.
of the Utah Regional (industrial loan
Advisory Board of Pacific corporation), United
Corp.; formerly United Space Alliance
States Senator (R-Utah) (joint venture
(1974-1992) and Chairman, between Lockheed
Senate Banking Committee Martin and the
(1980-1986), Mayor of Boeing Company) and
Salt Lake City, Utah Nuskin Asia Pacific
(1971-1974), Astronaut, (multilevel
Space Shuttle Discovery marketing); member
(April 12-19, 1985), and of the board of
Vice Chairman, Huntsman various civic and
Corporation (chemical charitable
company). organizations.
Wayne E. Hedien (69) Trustee Since Retired; Director or 216 Director of The PMI
c/o Mayer, Brown, Rowe & Maw LLP September Trustee of the Retail Group Inc. (private
Counsel to the Independent Directors 1997 Funds (since September mortgage insurance);
1675 Broadway 1997) and the Trustee and Vice
New York, NY Institutional Funds Chairman of The
(since July 2003); Field Museum of
formerly associated with Natural History;
the Allstate Companies director of various
(1966-1994), most other business and
recently as Chairman of charitable
The Allstate Corporation organizations.
(March 1993-December
1994) and Chairman and
Chief Executive Officer
of its wholly-owned
subsidiary, Allstate
Insurance Company (July
1989-December 1994).
</Table>
23
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- ------------------------------------- ----------- ------------- -------------------------- ------------- ---------------------
Dr. Manuel H. Johnson (54) Trustee Since Chairman of the Audit 216 Director of NVR,
c/o Johnson Smick International, Inc. July 1991 Committee and Director or Inc. (home
2099 Pennsylvania Avenue, N.W. Trustee of the Retail construction);
Suite 950 Funds (since July 1991) Chairman and Trustee
Washington, D.C. and the Institutional of the Financial
Funds (since July 2003); Accounting
Senior Partner, Johnson Foundation
Smick International, (oversight
Inc., a consulting firm; organization of the
Co-Chairman and a founder Financial Accounting
of the Group of Seven Standards Board);
Council (G7C), an Director of RBS
international economic Greenwich Capital
commission; formerly Vice Holdings (financial
Chairman of the Board of holding company).
Governors of the Federal
Reserve System and
Assistant Secretary of
the U.S. Treasury.
Joseph J. Kearns (61) Trustee Since Deputy Chairman of the 217 Director of Electro
PMB754 July 2003 Audit Committee and Rent Corporation
23852 Pacific Coast Highway Director or Trustee of (equipment leasing),
Malibu, CA the Retail Funds (since The Ford Family
July 2003) and the Foundation, and the
Institutional Funds UCLA Foundation.
(since August 1994);
previously Chairman of
the Audit Committee of
the Institutional Funds
(October 2001-July 2003);
President, Kearns &
Associates LLC
(investment consulting);
formerly CFO of the J.
Paul Getty Trust.
Michael E. Nugent (67) Trustee Since Chairman of the Insurance 216 Director of various
c/o Triumph Capital, L.P. July 1991 Committee and Director or business
445 Park Avenue Trustee of the Retail organizations.
New York, NY Funds (since July 1991)
and the Institutional
Funds (since July 2001);
General Partner of
Triumph Capital, L.P., a
private investment
partnership; formerly
Vice President, Bankers
Trust Company and BT
Capital Corporation
(1984-1988).
Fergus Reid (71) Trustee Since Chairman of the 217 Trustee and Director
85 Charles Colman Blvd. July 2003 Governance Committee and of certain
Pawling, NY Director or Trustee of investment companies
the Retail Funds (since in the JPMorgan
July 2003) and the Funds complex
Institutional Funds managed by JPMorgan
(since June 1992); Investment
Chairman of Lumelite Management Inc.
Plastics Corporation.
</Table>
24
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
INTERESTED TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- ------------------------------------- ----------- ------------- -------------------------- ------------- ---------------------
Charles A. Fiumefreddo (70) Chairman of Since Chairman and Director or 216 None
c/o Morgan Stanley Trust the Board July 1991 Trustee of the Retail
Harborside Financial Center, and Trustee Funds (since July 1991)
Plaza Two, and the Institutional
Jersey City, NJ Funds (since July 2003);
formerly Chief Executive
Officer of the Retail
Funds (until September
2002).
James F. Higgins (55) Trustee Since Director or Trustee of 216 Director of AXA
c/o Morgan Stanley Trust June 2000 the Retail Funds (since Financial, Inc. and
Harborside Financial Center, June 2000) and the The Equitable Life
Plaza Two, Institutional Funds Assurance Society of
Jersey City, NJ (since July 2003); Senior the United States
Advisor of Morgan Stanley (financial services).
(since August 2000);
Director of the
Distributor and Dean
Witter Realty Inc.;
previously President and
Chief Operating Officer
of the Private Client
Group of Morgan Stanley
(May 1999 - August 2000),
and President and Chief
Operating Officer of
Individual Securities of
Morgan Stanley (February
1997-May 1999).
Philip J. Purcell (60) Trustee Since Director or Trustee of 216 Director of American
1585 Broadway April 1994 the Retail Funds (since Airlines, Inc. and
New York, NY April 1994) and the its parent company,
Institutional Funds AMR Corporation.
(since July 2003);
Chairman of the Board of
Directors and Chief
Executive Officer of
Morgan Stanley and Morgan
Stanley DW Inc.; Director
of the Distributor;
Chairman of the Board of
Directors and Chief
Executive Officer of
Novus Credit Services
Inc.; Director and/or
officer of various Morgan
Stanley subsidiaries.
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE TRUSTEE BEGAN SERVING THE FUNDS ADVISED BY
MORGAN STANLEY INVESTMENT ADVISORS INC. (THE "INVESTMENT MANAGER ") (THE
"RETAIL FUNDS ").
** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICES AS
DIRECTOR/TRUSTEE FOR THE RETAIL FUNDS AND THE FUNDS ADVISED BY MORGAN
STANLEY INVESTMENT MANAGEMENT INC., MORGAN STANLEY INVESTMENTS LP AND
MORGAN STANLEY AIP GP LP (THE "INSTITUTIONAL FUNDS") REFLECT THE EARLIEST
DATE THE DIRECTOR/TRUSTEE BEGAN SERVING THE RETAIL OR INSTITUTIONAL FUNDS
AS APPLICABLE.
*** THE FUND COMPLEX INCLUDES ALL OPEN-END AND CLOSED-END FUNDS (INCLUDING ALL
OF THEIR PORTFOLIOS) ADVISED BY THE INVESTMENT MANAGER AND ANY FUNDS THAT
HAVE AN INVESTMENT ADVISOR THAT IS AN AFFILIATED PERSON OF THE INVESTMENT
MANAGER (INCLUDING BUT NOT LIMITED TO MORGAN STANLEY INVESTMENT MANAGEMENT
INC. AND MORGAN STANLEY INVESTMENTS LP).
25
<Page>
OFFICERS:
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S)
EXECUTIVE OFFICER REGISTRANT TIME SERVED* DURING PAST 5 YEARS**
- ------------------------------------- --------------- ------------- ---------------------------------
Mitchell M. Merin (50) President Since President and Chief Operating
1221 Avenue of the Americas May 1999 Officer of Morgan Stanley
New York, NY Investment Management Inc.;
President, Director and Chief
Executive Officer of the
Investment Manager and Morgan
Stanley Services; Chairman,
Chief Executive Officer and
Director of the Distributor;
Chairman and Director of the
Transfer Agent; Director of
various Morgan Stanley
subsidiaries; President Morgan
Stanley Investments LP (since
February 2003); President of
the Institutional Funds (since
July 2003) and President of
the Retail Funds (since May
1999); Trustee (since July
2003) and President (since
December 2002) of the Van
Kampen Closed-End Funds;
Trustee (since May 1999) and
President (since October 2002)
of the Van Kampen Open-End
Funds.
Ronald E. Robison (64) Executive Vice Since Chief Global Operations
1221 Avenue of the Americas President and April 2003 Officer and Managing Director
New York, NY Principal of Morgan Stanley Investment
Executive Management Inc.; Managing
Officer DIrector of Morgan Stanley &
Co. Incorporated; Managing
DIrector of Morgan Stanley;
Managing Director, Chief
Administrative Officer and
Director of the Investment
Manager and Morgan Stanley
Services; Chief Executive
Officer and Director of
the Transfer Agent; Managing
Director and Director of the
Distributor; Executive Vice
President and Principal
Executive Officer of the
Institutional Funds (since
July 2003); previously
President of the Institutional
Funds (March 2001-July 2003)
and Director of the
Institutional Funds (March
2001-July 2003).
Barry Fink (48) Vice Since General Counsel (since May
1221 Avenue of the Americas President February 1997 2000) and Managing Director
New York, NY and General (since December 2000) of
Counsel Morgan Stanley Investment
Management; Managing Director
(since December 2000),
Secretary (since February
1997) and Director (since July
1998) of the Investment
Manager and Morgan Stanley
Services; Assistant Secretary
of Morgan Stanley DW; Chief
Legal Officer of Morgan
Stanley Investments LP (since
July 2002); Vice President of
the Institutional Funds (since
July 2003); Vice President and
Secretary of the Distributor;
previously Secretary of the
Retail Funds (February
1997-July 2003); previously
Vice President and Assistant
General Counsel of the
Investment Manager and Morgan
Stanley Services (February
1997-December 2001).
Joseph J. McAlinden (60) Vice President Since Managing Director and Chief
1221 Avenue of the Americas July 1995 Investment Officer of the
New York, NY Investment Manager, Morgan
Stanley Investment Management
Inc. and Morgan Stanley
Investments LP; Director of
the Transfer Agent, Chief
Investment Officer of the Van
Kampen Funds; Vice President
of the Institutional Funds
(since July 2003) and the
Retail Funds (since July
1995).
Stefanie V. Chang (37) Vice President Since Executive Director of Morgan
1221 Avenue of the Americas July 2003 Stanley & Co. and Morgan
New York, NY Stanley Investment Management
Inc. and Vice President of the
Institutional Funds (since
December 1997) and the Retail
Funds (since July 2003);
formerly practiced law with
the New York law firm of
Rogers & Wells (now Clifford
Chance LLP).
</Table>
26
<Page>
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S)
EXECUTIVE OFFICER REGISTRANT TIME SERVED* DURING PAST 5 YEARS**
- ------------------------------------- --------------- ------------- ----------------------------------
Francis J. Smith (38) Treasurer and Treasurer Executive Director of the
c/o Morgan Stanley Trust Chief Financial since Investment Manager and Morgan
Harborside Financial Center, Officer July 2003 and Stanley Services (since
Plaza Two, Chief Financial December 2001); previously
Jersey City, NJ Officer since Vice President of the Retail
September 2002 Funds (September 2002-July
2003); previously Vice
President of the Investment
Manager and Morgan Stanley
Services (August 2000-November
2001) and Senior Manager at
PricewaterhouseCoopers LLP
(January 1998-August 2000).
Thomas F. Caloia (57) Vice President Since Executive Director (since
c/o Morgan Stanley Trust July 2003 December 2002) and Assistant
Harborside Financial Center, Treasurer of the Investment
Plaza Two, Manager, the Distributor and
Jersey City, NJ Morgan Stanley Services;
previously Treasurer of the
Retail Funds (April 1989-July
2003); formerly First Vice
President of the Investment
Manager, the Distributor and
Morgan Stanley Services.
Mary E. Mullin (36) Secretary Since Vice President of Morgan
1221 Avenue of the Americas July 2003 Stanley & Co. Incorporated and
New York, NY Morgan Stanley Investment
Management Inc.; Secretary of
the Institutional Funds (since
June 1999) and the Retail
Funds (since July 2003);
formerly practiced law with
the New York law firms of
McDermott, Will & Emery and
Skadden, Arps, Slate, Meagher &
Flom LLP.
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE OFFICER BEGAN SERVING THE RETAIL FUNDS. EACH
OFFICER SERVES AN INDEFINITE TERM, UNTIL HIS OR HER SUCCESSOR IS ELECTED.
** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICE AS AN OFFICER
FOR THE RETAIL AND INSTITUTIONAL FUNDS REFLECT THE EARLIEST DATE THE
OFFICER BEGAN SERVING THE RETAIL OR INSTITUTIONAL FUNDS AS APPLICABLE.
27
<Page>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael E. Nugent
Philip J. Purcell
Fergus Reid
OFFICERS
Charles A. Fiumefreddo
CHAIRMAN OF THE BOARD
Mitchell M. Merin
PRESIDENT
Ronald E. Robison
EXECUTIVE VICE PRESIDENT and PRINCIPAL EXECUTIVE OFFICER
Barry Fink
VICE PRESIDENT and GENERAL COUNSEL
Joseph J. McAlinden
VICE PRESIDENT
Stephanie V. Chang
VICE PRESIDENT
Francis J. Smith
TREASURER and CHIEF FINANCIAL OFFICER
Thomas F. Caloia
VICE PRESIDENT
Mary E. Mullin
SECRETARY
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT MANAGER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
This report is submitted for the general information of the shareholders of the
Fund. For more detailed information about the Fund, its fees and expenses and
other pertinent information, please read its Prospectus. The Fund's Statement of
Additional Information contains additional information about the Fund, including
its trustees. It is available, without charge, by calling (800) 869-NEWS.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective Prospectus. Read the
prospectus carefully before investing.
Investments and services offered through Morgan Stanley DW Inc., member SIPC.
Morgan Stanley Distributors Inc., member NASD.
(C) 2003 Morgan Stanley
[MORGAN STANLEY LOGO]
37965RPT-00-13559B04-AP-1/04
[GRAPHIC]
MORGAN STANLEY FUNDS
MORGAN STANLEY
U.S. GOVERNMENT
SECURITIES TRUST
ANNUAL REPORT
DECEMBER 31, 2003
[MORGAN STANLEY LOGO]
<Page>
Item 2. Code of Ethics.
(a) The Fund has adopted a code of ethics (the "Code of Ethics") that
applies to its principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by the Fund or a
third party.
(b) No information need be disclosed pursuant to this paragraph.
(c) Not applicable.
(d) Not applicable.
(e) Not applicable.
(f)
(1) The Fund's Code of Ethics is attached hereto as Exhibit A.
(2) Not applicable.
(3) Not applicable.
Item 3. Audit Committee Financial Expert.
The Fund's Board of Trustees has determined that it has two "audit committee
financial experts" serving on its audit committee, each of whom are
"independent" Trustees: Dr. Manuel H. Johnson and Joseph J. Kearns. Under
applicable securities laws, a person who is determined to be an audit committee
financial expert will not be deemed an "expert" for any purpose, including
without limitation for the purposes of Section 11 of the Securities Act of 1933,
as a result of being designated or identified as an audit committee financial
expert. The designation or identification of a person as an audit committee
financial expert does not impose on such person any duties, obligations, or
liabilities that are greater than the duties, obligations, and liabilities
imposed on such person as a member of the audit committee and Board of Trustees
in the absence of such designation or identification.
<Page>
Item 4. Principal Accountant Fees and Services.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
2003
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 40,650 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 684(2) $ 2,847,161(2)
TAX FEES $ 4,240(3) $ 736,810(4)
ALL OTHER FEES $ 0 $ 0
TOTAL NON-AUDIT FEES $ 4,924 $ 3,583,971
TOTAL $ 45,574 $ 3,583,971
</Table>
2002
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 37,600 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 5,657(2) $ 2,818,115(2)
TAX FEES $ 4,629(3) $ 365,427(4)
ALL OTHER FEES $ 0 $ 501,166(5)
TOTAL NON-AUDIT FEES $ 10,286 $ 3,684,708
TOTAL $ 47,886 $ 3,684,708
</Table>
N/A- Not applicable, as not required by Item 4.
(1) Covered Entities include the Adviser (excluding sub-advisors)
and any entity controlling, controlled by or under common
control with the Adviser that provides ongoing services to the
Registrant.
(2) Audit-Related Fees represent assurance and related services
provided that are reasonably related to the performance of
the audit of the financial statements of the Covered
Entities' and funds advised by the Adviser or its
affiliates, specifically data verification and agreed-upon
procedures related to asset securitizations and agreed-upon
procedures engagements.
(3) Tax Fees represent tax compliance, tax planning and tax
advice services provided in connection with the preparation
and review of the Registrant's tax returns.
(4) Tax Fees represent tax compliance, tax planning and tax
advice services provided in connection with the review of
Covered Entities' tax returns.
(5) All other fees represent project management for future
business applications and improving business and operational
processes.
<Page>
(e)(1) The audit committee's pre-approval policies and procedures are as
follows:
AUDIT COMMITTEE
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS
AS ADOPTED JULY 31, 2003(1)
1. STATEMENT OF PRINCIPLES
The Audit Committee of the Board is required to review and, in its sole
discretion, pre-approve all Covered Services to be provided by the Independent
Auditors to the Fund and Covered Entities in order to assure that services
performed by the Independent Auditors do not impair the auditor's independence
from the Fund.
The SEC has issued rules specifying the types of services that an
independent auditor may not provide to its audit client, as well as the audit
committee's administration of the engagement of the independent auditor. The
SEC's rules establish two different approaches to pre-approving services, which
the SEC considers to be equally valid. Proposed services either: may be
pre-approved without consideration of specific case-by-case services by the
Audit Committee ("GENERAL PRE-APPROVAL"); or require the specific pre-approval
of the Audit Committee or its delegate ("SPECIFIC PRE-APPROVAL"). The Audit
Committee believes that the combination of these two approaches in this Policy
will result in an effective and efficient procedure to pre-approve services
performed by the Independent Auditors. As set forth in this Policy, unless a
type of service has received general pre-approval, it will require specific
pre-approval by the Audit Committee (or by any member of the Audit Committee to
which pre-approval authority has been delegated) if it is to be provided by the
Independent Auditors. Any proposed services exceeding pre-approved cost levels
or budgeted amounts will also require specific pre-approval by the Audit
Committee.
The appendices to this Policy describe the Audit, Audit-related, Tax and
All Other services that have the general pre-approval of the Audit Committee.
The term of any general pre-approval is 12 months from the date of pre-approval,
unless the Audit Committee considers and provides a different period and states
otherwise. The Audit Committee will annually review and pre-approve the services
that may be provided by the Independent Auditors without obtaining specific
pre-approval from the Audit Committee. The Audit Committee will add to or
subtract from the list of general pre-approved services from time to time, based
on subsequent determinations.
- ----------
(1) This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and
Procedures (the "POLICY"), adopted as of the date above, supercedes and
replaces all prior versions that may have been adopted from time to time.
<Page>
The purpose of this Policy is to set forth the policy and procedures by
which the Audit Committee intends to fulfill its responsibilities. It does not
delegate the Audit Committee's responsibilities to pre-approve services
performed by the Independent Auditors to management.
The Fund's Independent Auditors have reviewed this Policy and believes that
implementation of the Policy will not adversely affect the Independent Auditors'
independence.
2. DELEGATION
As provided in the Act and the SEC's rules, the Audit Committee may
delegate either type of pre-approval authority to one or more of its members.
The member to whom such authority is delegated must report, for informational
purposes only, any pre-approval decisions to the Audit Committee at its next
scheduled meeting.
3. AUDIT SERVICES
The annual Audit services engagement terms and fees are subject to the
specific pre-approval of the Audit Committee. Audit services include the annual
financial statement audit and other procedures required to be performed by the
Independent Auditors to be able to form an opinion on the Fund's financial
statements. These other procedures include information systems and procedural
reviews and testing performed in order to understand and place reliance on the
systems of internal control, and consultations relating to the audit. The Audit
Committee will approve, if necessary, any changes in terms, conditions and fees
resulting from changes in audit scope, Fund structure or other items.
In addition to the annual Audit services engagement approved by the Audit
Committee, the Audit Committee may grant general pre-approval to other Audit
services, which are those services that only the Independent Auditors reasonably
can provide. Other Audit services may include statutory audits and services
associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4,
etc.), periodic reports and other documents filed with the SEC or other
documents issued in connection with securities offerings.
The Audit Committee has pre-approved the Audit services in Appendix B.1.
All other Audit services not listed in Appendix B.1 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
4. AUDIT-RELATED SERVICES
<Page>
Audit-related services are assurance and related services that are
reasonably related to the performance of the audit or review of the Fund's
financial statements and, to the extent they are Covered Services, the Covered
Entities or that are traditionally performed by the Independent Auditors.
Because the Audit Committee believes that the provision of Audit-related
services does not impair the independence of the auditor and is consistent with
the SEC's rules on auditor independence, the Audit Committee may grant general
pre-approval to Audit-related services. Audit-related services include, among
others, accounting consultations related to accounting, financial reporting or
disclosure matters not classified as "Audit services"; assistance with
understanding and implementing new accounting and financial reporting guidance
from rulemaking authorities; agreed-upon or expanded audit procedures related to
accounting and/or billing records required to respond to or comply with
financial, accounting or regulatory reporting matters; and assistance with
internal control reporting requirements under Forms N-SAR and/or N-CSR.
The Audit Committee has pre-approved the Audit-related services in Appendix
B.2. All other Audit-related services not listed in Appendix B.2 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
5. TAX SERVICES
The Audit Committee believes that the Independent Auditors can provide Tax
services to the Fund and, to the extent they are Covered Services, the Covered
Entities, such as tax compliance, tax planning and tax advice without impairing
the auditor's independence, and the SEC has stated that the Independent Auditors
may provide such services.
Pursuant to the preceding paragraph, the Audit Committee has pre-approved
the Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
6. ALL OTHER SERVICES
The Audit Committee believes, based on the SEC's rules prohibiting the
Independent Auditors from providing specific non-audit services, that other
types of non-audit services are permitted. Accordingly, the Audit Committee
believes it may grant general pre-approval to those permissible non-audit
services classified as All Other services that it believes are routine and
recurring services, would not impair the independence of the auditor and are
consistent with the SEC's rules on auditor independence.
<Page>
The Audit Committee has pre-approved the All Other services in Appendix
B.4. Permissible All Other services not listed in Appendix B.4 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
7. PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS
Pre-approval fee levels or budgeted amounts for all services to be provided
by the Independent Auditors will be established annually by the Audit Committee.
Any proposed services exceeding these levels or amounts will require specific
pre-approval by the Audit Committee. The Audit Committee is mindful of the
overall relationship of fees for audit and non-audit services in determining
whether to pre-approve any such services.
8. PROCEDURES
All requests or applications for services to be provided by the Independent
Auditors that do not require specific approval by the Audit Committee will be
submitted to the Fund's Chief Financial Officer and must include a detailed
description of the services to be rendered. The Fund's Chief Financial Officer
will determine whether such services are included within the list of services
that have received the general pre-approval of the Audit Committee. The Audit
Committee will be informed on a timely basis of any such services rendered by
the Independent Auditors. Requests or applications to provide services that
require specific approval by the Audit Committee will be submitted to the Audit
Committee by both the Independent Auditors and the Fund's Chief Financial
Officer, and must include a joint statement as to whether, in their view, the
request or application is consistent with the SEC's rules on auditor
independence.
The Audit Committee has designated the Fund's Chief Financial Officer to
monitor the performance of all services provided by the Independent Auditors and
to determine whether such services are in compliance with this Policy. The
Fund's Chief Financial Officer will report to the Audit Committee on a periodic
basis on the results of its monitoring. Both the Fund's Chief Financial Officer
and management will immediately report to the chairman of the Audit Committee
any breach of this Policy that comes to the attention of the Fund's Chief
Financial Officer or any member of management.
9. ADDITIONAL REQUIREMENTS
The Audit Committee has determined to take additional measures on an annual
basis to meet its responsibility to oversee the work of the Independent Auditors
and to assure the auditor's independence from the Fund, such as reviewing a
formal written statement from the Independent Auditors delineating all
relationships between the Independent Auditors and the Fund, consistent with
Independence Standards Board No.
<Page>
1, and discussing with the Independent Auditors its methods and procedures for
ensuring independence.
10. COVERED ENTITIES
Covered Entities include the Fund's investment adviser(s) and any entity
controlling, controlled by or under common control with the Fund's investment
adviser(s) that provides ongoing services to the Fund(s). Beginning with
non-audit service contracts entered into on or after May 6, 2003, the Fund's
audit committee must pre-approve non-audit services provided not only to the
Fund but also to the Covered Entities if the engagements relate directly to the
operations and financial reporting of the Fund. This list of Covered Entities
would include:
MORGAN STANLEY RETAIL FUNDS
Morgan Stanley Investment Advisors Inc.
Morgan Stanley & Co. Incorporated
Morgan Stanley DW Inc.
Morgan Stanley Investment Management
Morgan Stanley Investments LP
Van Kampen Asset Management Inc.
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
MORGAN STANLEY INSTITUTIONAL FUNDS
Morgan Stanley Investment Management Inc.
Morgan Stanley Investments LP
Morgan Stanley & Co. Incorporated
Morgan Stanley Distribution, Inc.
Morgan Stanley AIP GP LP
Morgan Stanley Alternative Investment Partners LP
(e)(2) Beginning with non-audit service contracts entered into on or after
May 6, 2003, the audit committee also is required to pre-approve services to
Covered Entities to the extent that the services are determined to have a
direct impact on the operations or financial reporting of the Registrant. 100%
of such services were pre-approved by the audit committee pursuant to the
Audit Committee's pre-approval policies and procedures (attached hereto).
(f) Not applicable.
(g) See table above.
(h) The audit committee of the Board of Trustees has considered whether the
provision of services other than audit services performed by the auditors to the
Registrant and Covered Entities is compatible with maintaining the auditors'
independence in performing audit services.
<Page>
Item 5. Audit Committee of Listed Registrants.
Applicable only for reports covering periods ending on or after the earlier of
(i) the first annual shareholder meeting after January 15, 2004 or (ii) October
31, 2004.
Item 6. [Reserved.]
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Applicable only to annual reports filed by closed-end funds.
Item 8. [Reserved.]
Item 9 - Controls and Procedures
(a) The Fund's principal executive officer and principal financial officer have
concluded that the Fund's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Fund in this Form N-CSR
was recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, based
upon such officers' evaluation of these controls and procedures as of a date
within 90 days of the filing date of the report.
There were no significant changes or corrective actions with regard to
significant deficiencies or material weaknesses in the Fund's internal controls
or in other factors that could significantly affect the Fund's internal controls
subsequent to the date of their evaluation.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 10 Exhibits
(a) The Code of Ethics for Principal Executive and Senior Financial Officers is
attached hereto.
<Page>
(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.
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 U.S. Government Securities Trust
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
February 18, 2004
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
February 18, 2004
/s/ Francis Smith
Francis Smith
Principal Financial Officer
February 18, 2004