<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: 811-04917
Morgan Stanley Federal 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: October 31, 2004
Date of reporting period: April 30, 2004
Item 1 - Report to Shareholders
<Page>
WELCOME, SHAREHOLDER:
IN THIS REPORT, YOU'LL LEARN ABOUT HOW YOUR INVESTMENT IN MORGAN STANLEY FEDERAL
SECURITIES TRUST 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.
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 SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE
MONEY INVESTING IN THIS FUND.
<Page>
Fund Report
For the six month period ended April 30, 2004
TOTAL RETURN FOR THE SIX MONTHS ENDED APRIL 30, 2004.
<Table>
<Caption>
LEHMAN
BROTHERS LIPPER
U.S. GENERAL U.S.
GOVERNMENT GOVERNMENT
CLASS A CLASS B CLASS C CLASS D INDEX(1) FUNDS INDEX(2)
1.51% 1.09% 1.09% 1.52% 0.84% 0.79%
</Table>
THE PERFORMANCE OF THE FUND'S FOUR SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE FUND'S TOTAL RETURN FIGURE ASSUMES THE REINVESTMENT OF
ALL DISTRIBUTIONS BUT DOES 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
Yields of intermediate treasury debt securities declined by almost 50 basis
points (0.50%) for the first five months of the period before rising sharply
during the month of April. For the bulk of the period, mounting signals of
improvement in the economy were offset by continued weakness in the job market
as well as low inflationary pressures and ongoing concerns about deflation. In
this environment, the Federal Open Market Committee (the "Fed") opted to keep
rates at multidecade lows.
This pattern shifted in late March, when indicators showing more rapid growth
and increasing price pressures began to surface. In early April, the Bureau of
Labor Statistics produced an employment report indicating that employment growth
had exceeded the market's expectations. These shifts accelerated the market's
expected date for the Fed to move to a tightening mode and had a substantial
effect on yields as investors began to discount future Fed increases in advance.
Against this backdrop, the mortgage-backed securities (MBS) sector had a
somewhat mixed performance. During the first part of the period, MBSs tended to
provide somewhat lower returns than equivalent-duration Treasury securities as
declining interest rates created expectations for more rapid prepayment. MBSs
went on to outperform in April as prepayment expectations slowed, especially for
higher-coupon mortgages, and because MBSs tended to have less interest-rate
sensitivity. This late outperformance was enough to lift MBS returns slightly
above those of Treasuries for the period.
PERFORMANCE ANALYSIS
Morgan Stanley Federal Securities Trust slightly outperformed its benchmark, the
Lehman Brothers U.S. Government Index, as well as its peer group, the Lipper
General U.S. Government Funds Index, for the six months ended April 30, 2004.
With the economy poised for recovery, our primary strategy in managing the Fund
was to reduce its vulnerability to a potentially damaging rise in interest
rates. We implemented this strategy primarily by reducing the portfolio's
duration.* This approach initially hindered the Fund's performance, as interest
rates fell early in the period, but ultimately proved beneficial, when interest
rates spiked in the period's final weeks.
- ----------
* 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.
2
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We also chose to emphasize higher-coupon MBSs during the period. These
securities are generally better cushioned against rising rates than are
lower-coupon MBSs, because of their additional income stream as well as the
decreasing likelihood of prepayments in their underlying mortgages as interest
rates rise (rapid prepayment hurts the value of high-coupon MBSs). Our models
also suggested that many of these securities were undervalued, thanks to
investors pricing in unrealistically high prepayment expectations. As with our
approach to duration, the emphasis on higher-coupon MBSs did not yield positive
results until later in the period, but ultimately contributed strongly to the
Fund's outperformance.
PORTFOLIO COMPOSITION
<Table>
Mortgage Backed - FNMA 41.7%
Short Term 26.8
Mortgage Backed - FHLMC 20.4
U.S. Treasuries 5.7
Mortgage Backed - GNMA 5.4
</Table>
LONG-TERM CREDIT ANALYSIS
<Table>
Aaa/AAA 100%
</Table>
DATA AS OF APRIL 30, 2004. SUBJECT TO CHANGE DAILY. PORTFOLIO COMPOSITION IS A
PERCENTAGE OF TOTAL INVESTMENTS AND LONG-TERM CREDIT ANALYSIS IS A PERCENTAGE OF
LONG-TERM INVESTMENTS. PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT
BE DEEMED AS A RECOMMENDATION TO BUY OR SELL THE SECURITIES MENTIONED. MORGAN
STANLEY IS A FULL-SERVICE SECURITIES FIRM ENGAGED IN SECURITIES TRADING AND
BROKERAGE ACTIVITIES, INVESTMENT BANKING, RESEARCH AND ANALYSIS, FINANCING AND
FINANCIAL ADVISORY SERVICES.
INVESTMENT STRATEGY
THE FUND WILL NORMALLY INVEST AT LEAST 80% 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 LEVELS AND OTHER FACTORS. THE FUND IS NOT LIMITED AS TO THE
MATURITIES OR TYPES OF THE U.S. GOVERNMENT SECURITIES IN WHICH IT MAY INVEST.
THE FUND'S INVESTMENTS IN MORTGAGE-BACKED SECURITIES ISSUED OR GUARANTEED BY
AGENCIES OR INSTRUMENTALITIES OF THE U.S. GOVERNMENT MAY, AT ANY TIME, BE
SUBSTANTIAL.
3
<Page>
Performance Summary
AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED APRIL 30, 2004
<Table>
<Caption>
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS D SHARES++
(SINCE 07/28/97) (SINCE 03/31/87) (SINCE 07/28/97) (SINCE 07/28/97)
SYMBOL FDLAX FDLBX FDLCX FDLDX
1 YEAR 1.38%(3) 0.50%(3) 0.53%(3) 1.46%(3)
(2.92)(4) (4.32)(4) (0.44)(4) --
5 YEARS 5.51(3) 4.59(3) 4.61(3) 5.50(3)
4.60(4) 4.26(4) 4.61(4) --
10 YEARS -- 5.77(3) -- --
-- 5.77(4) -- --
SINCE INCEPTION 6.05(3) 6.40(3) 5.19(3) 5.93(3)
5.37(4) 6.40(4) 5.19(4) --
</Table>
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS AND CURRENT PERFORMANCE MAY
BE LOWER OR HIGHER THAN THE FIGURES SHOWN. FOR MORE UP-TO-DATE INFORMATION,
INCLUDING MONTH-END PERFORMANCE FIGURES, PLEASE VISIT morganstanley.com OR SPEAK
WITH YOUR FINANCIAL ADVISOR. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL
FLUCTUATE AND FUND SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. THE TABLE DOES 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.
- ----------
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 1.0% FOR SHARES
REDEEMED WITHIN ONE YEAR OF PURCHASE.
++ CLASS D HAS NO SALES CHARGE.
4
<Page>
MORGAN STANLEY FEDERAL SECURITIES TRUST
PORTFOLIO OF INVESTMENTS - APRIL 30, 2004 (UNAUDITED)
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON
THOUSANDS DESCRIPTION AND MATURITY DATES RATE VALUE
- ----------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES (107.3%)
FEDERAL HOME LOAN MORTGAGE CORP. (10.7%)
$ 5,000 * 5.00% $ 5,034,375
24,850 * 6.00 25,952,719
4,785 12/01/28 - 05/01/32 7.50 5,141,078
4,022 10/01/10 - 02/01/20 9.50 4,502,890
884 06/01/16 - 10/01/19 10.00 993,921
105 02/01/16 - 12/01/17 10.50 118,772
-------------
41,743,755
-------------
FEDERAL HOME LOAN MORTGAGE CORP. PC GOLD (21.7%)
28,200 * 6.00 28,746,375
36,026 07/01/28 - 11/01/33 6.50 37,532,572
13,330 01/01/30 - 08/01/32 7.50 14,322,924
3,705 02/01/23 - 07/01/31 8.00 4,001,509
-------------
84,603,380
-------------
FEDERAL NATIONAL MORTGAGE ASSOC. (66.3%)
20,600 * 4.50 20,278,125
5,000 * 5.00 5,029,688
84,700 * 5.50 85,286,797
20,347 05/01/34 6.00 20,830,100
30,113 01/01/27 - 01/01/33 6.50 31,356,583
29,300 * 6.50 30,499,469
45,970 07/01/23 - 01/01/33 7.00 48,612,916
1,050 05/01/34 7.00 1,110,375
10,553 09/01/29 - 06/01/32 7.50 11,291,515
2,997 06/01/25 - 02/01/32 8.00 3,236,537
368 02/01/22 8.50 397,716
220 09/01/19 - 05/01/20 9.50 247,884
60 03/01/16 - 02/01/18 9.75 67,881
-------------
258,245,586
-------------
GOVERNMENT NATIONAL MORTGAGE ASSOC. (8.4%)
10,200 * 5.50 10,203,188
15,000 * 6.00 15,379,687
2,239 08/15/25 - 05/15/29 6.50 2,339,540
53 01/15/29 - 08/15/29 7.50 57,081
1,219 10/15/19 - 10/15/24 8.50 1,335,629
2,810 11/15/17 - 06/15/20 9.50 3,169,228
101 05/15/16 - 11/15/20 10.00 113,665
-------------
32,598,018
-------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
5
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON
THOUSANDS DESCRIPTION AND MATURITY DATES RATE VALUE
- ----------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOC. II (0.2%)
$ 789 05/20/30 8.00% $ 857,702
-------------
TOTAL MORTGAGE-BACKED SECURITIES
(COST $418,910,277) 418,048,441
-------------
U.S. GOVERNMENT OBLIGATIONS (9.1%)
U.S. TREASURY NOTES
5,500 02/15/13 3.875 5,291,605
29,400 11/15/04 5.875 30,129,267
-------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $35,610,964) 35,420,872
-------------
SHORT-TERM INVESTMENTS (42.6%)
U.S. GOVERNMENT AGENCIES & OBLIGATIONS (a) (25.2%)
40,000 Federal Home Loan Bank 06/04/04 - 06/23/04 0.995 - 1.00% 39,951,814
18,000 Federal National Mortgage Assoc. 07/21/04 1.03 17,957,770
1,600 U.S. Treasury Bill+ 07/15/04 0.945 1,596,934
38,000 U.S. Treasury Notes 11/15/04 - 08/15/04 5.25 - 6.00 38,523,653
-------------
TOTAL U.S. GOVERNMENT AGENCIES & OBLIGATIONS
(COST $98,031,923) 98,030,171
-------------
REPURCHASE AGREEMENT (17.4%)
67,632 Joint repurchase agreement account due 05/03/04
(dated 04/30/04 proceeds $67,637,777) (b)
(COST $67,632,000) 1.025 67,632,000
-------------
TOTAL SHORT-TERM INVESTMENTS
(COST $165,669,700) 165,662,171
-------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
6
<Page>
<Table>
<Caption>
VALUE
- ----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST $620,190,941) (c) (d) 159.0% $ 619,131,484
LIABILITIES IN EXCESS OF OTHER ASSETS (59.0) (229,783,796)
----- -------------
NET ASSETS 100.0% $ 389,347,688
===== =============
</Table>
- ----------
PC PARTICIPATION CERTIFICATE.
+ THIS SECURITY HAS BEEN PHYSICALLY SEGREGATED IN CONNECTION WITH OPEN
FUTURES CONTRACTS IN AN AMOUNT EQUAL TO $771,950.
* SECURITY 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.
(a) PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED
TO REFLECT A MONEY MARKET EQUIVALENT YIELD.
(b) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(c) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN AN AMOUNT EQUAL TO
$341,728,572 IN CONNECTION WITH SECURITIES PURCHASED ON A FORWARD
COMMITMENT BASIS AND OPEN FUTURES CONTRACTS.
(d) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE
AGGREGATE COST FOR BOOK PURPOSES, THE AGGREGATE GROSS UNREALIZED
APPRECIATION IS $1,029,764 AND THE AGGREGATE GROSS UNREALIZED
DEPRECIATION IS $2,089,221, RESULTING IN NET UNREALIZED DEPRECIATION OF
$1,059,457.
FUTURES CONTRACTS OPEN AT APRIL 30, 2004:
<Table>
<Caption>
UNDERLYING UNREALIZED
NUMBER OF DESCRIPTION, DELIVERY FACE AMOUNT APPRECIATION
CONTRACTS LONG/SHORT MONTH AND YEAR AT VALUE (DEPRECIATION)
- -------------------------------------------------------------------------------------------------------------
266 Short U.S. Treasury Notes $ (29,243,375) $ 501,361
5 Year June 2004
270 Short U.S. Treasury Notes (57,387,658) 393,843
2 Year June 2004
103 Long U.S. Treasury Notes 11,381,500 (221,613)
10 Year June 2004
115 Long U.S. Treasury Bonds 12,315,781 (487,053)
30 Year June 2004
-----------------
Net unrealized appreciation $ 186,538
=================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
7
<Page>
MORGAN STANLEY FEDERAL SECURITIES TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2004 (UNAUDITED)
<Table>
ASSETS:
Investments in securities, at value
(including a repurchase agreement of
$67,632,000) (cost $620,190,941) $ 619,131,484
Receivable for:
Interest 3,260,147
Principal paydowns 81,296
Shares of beneficial interest sold 46,944
Prepaid expenses and other assets 75,470
---------------
TOTAL ASSETS 622,595,341
---------------
LIABILITIES:
Payable for:
Investments purchased 231,056,111
Shares of beneficial interest redeemed 1,543,139
Distribution fee 260,281
Investment management fee 179,837
Dividends to shareholders 65,364
Accrued expenses and other payables 142,921
---------------
TOTAL LIABILITIES 233,247,653
---------------
NET ASSETS $ 389,347,688
---------------
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 402,065,843
Net unrealized depreciation (872,919)
Dividends in excess of net investment income (10,665,114)
Accumulated net realized loss (1,180,122)
---------------
NET ASSETS $ 389,347,688
===============
CLASS A SHARES:
Net Assets $ 12,404,749
Shares Outstanding (UNLIMITED AUTHORIZED,
$.01 PAR VALUE) 1,339,373
NET ASSET VALUE PER SHARE $ 9.26
===============
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 4.44% OF
NET ASSET VALUE) $ 9.67
===============
CLASS B SHARES:
NET ASSETS $ 345,190,073
Shares Outstanding (UNLIMITED AUTHORIZED,
$.01 PAR VALUE) 38,007,642
NET ASSET VALUE PER SHARE $ 9.08
===============
CLASS C SHARES:
NET ASSETS $ 15,717,724
Shares Outstanding (UNLIMITED AUTHORIZED,
$.01 PAR VALUE) 1,715,274
NET ASSET VALUE PER SHARE $ 9.16
===============
CLASS D SHARES:
NET ASSETS $ 16,035,142
Shares Outstanding (UNLIMITED AUTHORIZED,
$.01 PAR VALUE) 1,768,923
NET ASSET VALUE PER SHARE $ 9.06
===============
</Table>
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2004 (UNAUDITED)
<Table>
NET INVESTMENT INCOME:
INTEREST INCOME $ 5,339,882
---------------
EXPENSES
Distribution fee (Class A shares) 7,899
Distribution fee (Class B shares) 1,578,360
Distribution fee (Class C shares) 71,857
Investment management fee 1,159,206
Transfer agent fees and expenses 223,002
Custodian fees 48,969
Professional fees 43,053
Registration fees 33,806
Shareholder reports and notices 32,342
Trustees' fees and expenses 6,649
Other 18,067
---------------
TOTAL EXPENSES 3,223,210
---------------
NET INVESTMENT INCOME 2,116,672
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
NET REALIZED GAIN/LOSS ON:
Investments 7,182,387
Futures contracts (1,519,819)
---------------
NET REALIZED GAIN 5,662,568
---------------
NET CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION ON:
Investments (3,377,943)
Futures contracts 866,558
---------------
NET DEPRECIATION (2,511,385)
---------------
NET GAIN 3,151,183
---------------
NET INCREASE $ 5,267,855
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
8
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
APRIL 30, 2004 OCTOBER 31, 2003
-------------- ----------------
(UNAUDITED)
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 2,116,672 $ 5,577,597
Net realized gain 5,662,568 18,304,927
Net change in unrealized depreciation (2,511,385) (18,922,147)
-------------- ----------------
NET INCREASE 5,267,855 4,960,377
-------------- ----------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A shares (276,396) (882,181)
Class B shares (5,660,365) (17,967,709)
Class C shares (256,026) (756,668)
Class D shares (348,928) (1,074,018)
-------------- ----------------
TOTAL DIVIDENDS (6,541,715) (20,680,576)
-------------- ----------------
Net decrease from transactions in shares of beneficial interest (58,666,849) (65,140,797)
-------------- ----------------
NET DECREASE (59,940,709) (80,860,996)
NET ASSETS:
Beginning of period 449,288,397 530,149,393
-------------- ----------------
END OF PERIOD
(INCLUDING DIVIDENDS IN EXCESS OF NET INVESTMENT INCOME OF $10,665,114 AND
$6,240,071, RESPECTIVELY) $ 389,347,688 $ 449,288,397
============== ================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
9
<Page>
MORGAN STANLEY FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS - APRIL 30, 2004 (UNAUDITED)
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Federal 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 to
earn a high level of current income. The Fund commenced operations on March 31,
1987. 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) listed
options are valued at the latest sale price on the exchange on which they are
listed unless no sales of such options have taken place that day, in which case
they are valued at the mean between their latest bid and asked price; (4)
futures are valued at the latest price published by the commodities exchange on
which they trade; (5) 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 (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 Manager, 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.
10
<Page>
Treasury or federal agency obligations. The Fund may also invest directly with
institutions in repurchase agreements. The Fund's custodian receives the
collateral, which is marked-to-market daily to determine that the value of the
collateral does not decrease below the repurchase price plus accrued interest.
D. 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.
E. 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.
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.
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 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: 0.55% to the portion of daily net assets not exceeding $1 billion;
0.525% to the portion of daily net assets exceeding $1 billion but not exceeding
$1.5 billion; 0.50% to the portion of daily net assets exceeding $1.5 billion
but not exceeding $2 billion; 0.475% to the portion of daily net assets
exceeding $2 billion but not exceeding $2.5 billion; 0.45% to the portion of
daily net assets exceeding $2.5 billion but not exceeding $5 billion; 0.425% to
the portion of daily net assets exceeding $5 billion but not exceeding $7.5
billion;
11
<Page>
0.40% to the portion of daily net assets exceeding $7.5 billion but not
exceeding $10 billion; 0.375% to the portion of daily net assets exceeding $10
billion but not exceeding $12.5 billion; and 0.35% to the portion of daily net
assets exceeding $12.5 billion.
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 -- 0.85% 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 0.85% 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 such excess amounts totaled
$13,110,034 at April 30, 2004.
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 0.85% 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 six months ended April 30, 2004, the distribution fee was accrued for
Class A shares and Class C shares at the annual rate of 0.10% and 0.85%,
respectively.
The Distributor has informed the Fund that for the six months ended April 30,
2004, it received contingent deferred sales charges from certain redemptions of
the Fund's Class B and Class C shares of $210,599 and $3,126, respectively and
received $45,131 in front-end sales charges from sales of
12
<Page>
the Fund's Class A shares. The respective shareholders pay such charges which
are not an expense of the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales/prepayments of portfolio
securities, excluding short-term investments, for the six months ended April 30,
2004 were $1,631,173,509 and $1,737,171,365, respectively.
Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is
the Fund's transfer agent. At April 30, 2004, the Fund had transfer agent fees
and expenses payable of approximately $14,100.
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 six ended April 30, 2004 included in Trustees'
fees and expenses in the Statement of Operations amounted to $3,672. At April
30, 2004, the Fund had an accrued pension liability of $60,362 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 and eliminate the
future benefits growth due to increases to compensation after July 31, 2003.
Effective April 1, 2004, the Fund began an unfunded Deferred Compensation Plan
(the "Compensation Plan"), which allows each independent Trustee to defer
payment of all, or a portion, of the fees he receives for serving on the Board
of Trustees. Each eligible Trustee generally may elect to have the deferred
amounts credited with a return equal to the total return on one or more of the
Morgan Stanley funds that are offered as investment options under the
Compensation Plan. Appreciation/depreciation and distributions received from
these investments are recorded with an offsetting increase/decrease in the
deferred compensation obligation and do not affect the net asset value of the
Fund.
5. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
To hedge against adverse interest rate and market risks on portfolio positions
or anticipated positions in U.S. Government securities, the Fund may enter into
interest rate futures contracts ("futures contracts").
These futures contracts involve elements of market risk in excess of the amount
reflected in the Statement of Assets and Liabilities. The Fund bears the risk of
an unfavorable change in the value of the underlying securities. Risks may also
arise upon entering into these contracts from the potential inability of the
counterparties to meet the terms of their contracts.
13
<Page>
6. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
APRIL 30, 2004 OCTOBER 31, 2003
---------------------------------- ----------------------------------
(UNAUDITED)
SHARES AMOUNT SHARES AMOUNT
--------------- --------------- --------------- ---------------
CLASS A SHARES
Sold 328,253 $ 3,077,341 12,080,315 $ 115,068,690
Reinvestment of dividends 11,155 104,257 33,582 317,262
Redeemed (981,254) (9,209,360) (12,504,404) (119,103,199)
--------------- --------------- --------------- ---------------
Net decrease -- Class A (641,846) (6,027,762) (390,507) (3,717,247)
--------------- --------------- --------------- ---------------
CLASS B SHARES
Sold 731,924 6,724,728 7,519,978 70,233,933
Reinvestment of dividends 375,231 3,443,619 1,178,747 10,944,394
Redeemed (6,338,852) (58,187,712) (16,018,721) (149,116,736)
--------------- --------------- --------------- ---------------
Net decrease -- Class B (5,231,697) (48,019,365) (7,319,996) (67,938,409)
--------------- --------------- --------------- ---------------
CLASS C SHARES
Sold 341,951 3,166,135 2,622,184 24,769,208
Reinvestment of dividends 17,928 165,997 49,570 464,326
Redeemed (470,606) (4,348,920) (2,858,868) (26,941,553)
--------------- --------------- --------------- ---------------
Net decrease -- Class C (110,727) (1,016,788) (187,114) (1,708,019)
--------------- --------------- --------------- ---------------
CLASS D SHARES
Sold 305,301 2,795,700 4,907,298 45,931,401
Reinvestment of dividends 26,091 238,956 70,736 653,850
Redeemed (723,847) (6,637,590) (4,126,214) (38,362,373)
--------------- --------------- --------------- ---------------
Net increase (decrease) -- Class D (392,455) (3,602,934) 851,820 8,222,878
--------------- --------------- --------------- ---------------
Net decrease in Fund (6,376,725) $ (58,666,849) (7,045,797) $ (65,140,797)
=============== =============== =============== ===============
</Table>
7. FEDERAL INCOME TAX STATUS
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for tax purposes are reported as distributions of paid-in-capital.
As of October 31, 2003, the Fund had a net capital loss carryforward of
$6,782,848 of which $690,086 will expire on October 31, 2004, $2,381,171 will
expire on October 31, 2007 and
14
<Page>
$3,711,591 will expire October 31, 2011 to offset future capital gains to the
extent provided by regulations.
As of October 31, 2003, the Fund had temporary book/tax differences primarily
attributable to book amortization of premiums on debt securities.
8. LEGAL MATTERS
The Investment Manager, certain affiliates of the Investment Manager, certain
officers of such affiliates and certain investment companies advised by the
Investment Manager or its affiliates, including the Fund, are named as
defendants in a number of similar class action complaints which were recently
consolidated. This consolidated action also names as defendants certain
individual Trustees and Directors of the Morgan Stanley funds. The consolidated
amended complaint generally alleges that defendants, including the Fund,
violated their statutory disclosure obligations and fiduciary duties by failing
properly to disclose (i) that the Investment Manager and certain affiliates of
the Investment Manager allegedly offered economic incentives to brokers and
others to recommend the funds advised by the Investment Manager or its
affiliates to investors 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
efforts to recommend these funds to investors. The complaint seeks, among other
things, unspecified compensatory damages, recessionary damages, fees and costs.
The defendants intend to move to dismiss the action and otherwise vigorously to
defend it. While the Fund believes that it has meritorious defenses, the
ultimate outcome of this matter is not presently determinable at this early
stage of the litigation, and no provision has been made in the Fund's financial
statements for the effect, if any, of this matter.
15
<Page>
MORGAN STANLEY FEDERAL SECURITIES TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED OCTOBER 31,
MONTHS ENDED ------------------------------------------------------------------
APRIL 30, 2004 2003 2002 2001 2000 1999
--------------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.29 $ 9.58 $ 9.51 $ 8.98 $ 9.01 $ 9.79
--------------- ---------- ---------- ---------- ---------- ----------
Income (loss) from investment
operations:
Net investment income 0.05 0.12 0.43 0.54 0.63 0.62
Net realized and unrealized gain
(loss) 0.09 0.04 0.12 0.53 (0.03) (0.78)
--------------- ---------- ---------- ---------- ---------- ----------
Total income (loss) from investment
operations 0.14 0.16 0.55 1.07 0.60 (0.16)
--------------- ---------- ---------- ---------- ---------- ----------
Less dividends from net investment
income (0.17) (0.45) (0.48) (0.54) (0.63) (0.62)
--------------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 9.26 $ 9.29 $ 9.58 $ 9.51 $ 8.98 $ 9.01
=============== ========== ========== ========== ========== ==========
TOTAL RETURN+ 1.51%(2) 1.70% 6.14% 12.28% 6.97% (1.66)%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 0.84%(3) 0.92% 0.90% 0.91% 0.82% 0.91%
Net investment income 1.69%(3) 1.69% 4.51% 5.90% 7.05% 6.65%
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands $ 12,405 $ 18,409 $ 22,713 $ 8,593 $ 4,821 $ 4,272
Portfolio turnover rate 319%(2) 654% 25% 157% 64% 17%
</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) NOT ANNUALIZED.
(3) ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS
16
<Page>
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED OCTOBER 31,
MONTHS ENDED ------------------------------------------------------------------
APRIL 30, 2004 2003 2002 2001 2000 1999
--------------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.12 $ 9.42 $ 9.35 $ 8.85 $ 8.87 $ 9.72
--------------- ---------- ---------- ---------- ---------- ----------
Income (loss) from investment
operations:
Net investment income 0.02 0.05 0.36 0.47 0.55 0.55
Net realized and unrealized gain
(loss) 0.08 0.03 0.12 0.50 (0.02) (0.85)
--------------- ---------- ---------- ---------- ---------- ----------
Total income (loss) from investment
operations 0.10 0.08 0.48 0.97 0.53 (0.30)
--------------- ---------- ---------- ---------- ---------- ----------
Less dividends from net investment
income (0.14) (0.38) (0.41) (0.47) (0.55) (0.55)
--------------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 9.08 $ 9.12 $ 9.42 $ 9.35 $ 8.85 $ 8.87
=============== ========== ========== ========== ========== ==========
TOTAL RETURN+ 1.09%(2) 0.89% 5.36% 11.38% 6.26% (3.09)%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 1.59%(3) 1.56% 1.55% 1.56% 1.57% 1.55%
Net investment income 0.94%(3) 1.05% 3.86% 5.25% 6.30% 6.01%
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands $ 345,190 $ 394,399 $ 476,023 $ 490,351 $ 456,418 $ 540,916
Portfolio turnover rate 319%(2) 654% 25% 157% 64% 17%
</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) NOT ANNUALIZED.
(3) ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS
17
<Page>
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED OCTOBER 31,
MONTHS ENDED ------------------------------------------------------------------
APRIL 30, 2004 2003 2002 2001 2000 1999
--------------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.20 $ 9.50 $ 9.43 $ 8.93 $ 8.95 $ 9.80
--------------- ---------- ---------- ---------- ---------- ----------
Income (loss) from investment
operations:
Net investment income 0.02 0.06 0.36 0.48 0.56 0.56
Net realized and unrealized gain
(loss) 0.08 0.03 0.12 0.50 (0.02) (0.85)
--------------- ---------- ---------- ---------- ---------- ----------
Total income (loss) from investment
operations 0.10 0.09 0.48 0.98 0.54 (0.29)
--------------- ---------- ---------- ---------- ---------- ----------
Less dividends from net investment
income (0.14) (0.39) (0.41) (0.48) (0.56) (0.56)
--------------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 9.16 $ 9.20 $ 9.50 $ 9.43 $ 8.93 $ 8.95
=============== ========== ========== ========== ========== ==========
TOTAL RETURN+ 1.09%(2) 0.91% 5.35% 11.33% 6.26% (3.03)%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 1.59%(3) 1.56% 1.55% 1.56% 1.57% 1.55%
Net investment income 0.94%(3) 1.05% 3.86% 5.25% 6.30% 6.01%
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands $ 15,718 $ 16,803 $ 19,116 $ 15,248 $ 10,191 $ 10,995
Portfolio turnover rate 319%(2) 654% 25% 157% 64% 17%
</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) NOT ANNUALIZED.
(3) ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS
18
<Page>
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED OCTOBER 31,
MONTHS ENDED ------------------------------------------------------------------
APRIL 30, 2004 2003 2002 2001 2000 1999
--------------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.10 $ 9.39 $ 9.33 $ 8.84 $ 8.86 $ 9.69
--------------- ---------- ---------- ---------- ---------- ----------
Income (loss) from investment
operations:
Net investment income 0.06 0.13 0.43 0.55 0.63 0.63
Net realized and unrealized gain
(loss) 0.08 0.04 0.12 0.49 (0.02) (0.83)
--------------- ---------- ---------- ---------- ---------- ----------
Total income (loss) from investment
operations 0.14 0.17 0.55 1.04 0.61 (0.20)
--------------- ---------- ---------- ---------- ---------- ----------
Less dividends from net investment
income (0.18) (0.46) (0.49) (0.55) (0.63) (0.63)
--------------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 9.06 $ 9.10 $ 9.39 $ 9.33 $ 8.84 $ 8.86
=============== ========== ========== ========== ========== ==========
TOTAL RETURN+ 1.52%(2) 1.85% 6.14% 12.23% 7.17% (2.08)%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 0.74%(3) 0.71% 0.70% 0.71% 0.72% 0.70%
Net investment income 1.79%(3) 1.90% 4.71% 6.10% 7.15% 6.86%
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands $ 16,035 $ 19,677 $ 12,297 $ 6,206 $ 4,378 $ 5,590
Portfolio turnover rate 319%(2) 654% 25% 157% 64% 17%
</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.
(2) NOT ANNUALIZED.
(3) ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS
19
<Page>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael E. Nugent
Fergus Reid
OFFICERS
Charles A. Fiumefreddo
CHAIRMAN OF THE BOARD
Mitchell M. Merin
PRESIDENT
Ronald E. Robison
EXECUTIVE VICE PRESIDENT and PRINCIPAL EXECUTIVE OFFICER
Barry Fink
VICE PRESIDENT
Joseph J. McAlinden
VICE PRESIDENT
Stefanie V. Chang
VICE PRESIDENT
Francis J. Smith
TREASURER and CHIEF FINANCIAL OFFICER
Thomas F. Caloia
VICE PRESIDENT
Mary E. Mullin
SECRETARY
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT 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
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.
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) 2004 Morgan Stanley
[MORGAN STANLEY LOGO]
[GRAPHIC]
MORGAN STANLEY FUNDS
MORGAN STANLEY FEDERAL SECURITIES TRUST
SEMIANNUAL REPORT
APRIL 30, 2004
[MORGAN STANLEY LOGO]
37895PRT-RA04-00264P-Y04/04
<Page>
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. [Reserved.]
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable for semiannual reports.
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.
<Page>
(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) 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.
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Morgan Stanley Federal Securities Trust
/s/ Ronald E. Robison
- ---------------------
Ronald E. Robison
Principal Executive Officer
June 22, 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
June 22, 2004
/s/ Francis Smith
- -----------------
Francis Smith
Principal Financial Officer
June 22, 2004