<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, 2004
Date of reporting period: December 31, 2004
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, 2004
TOTAL RETURN FOR THE 12 MONTHS ENDED DECEMBER 31, 2004
<Table>
<Caption>
LEHMAN
BROTHERS U.S. LIPPER GENERAL
GOVERNMENT U.S. GOVERNMENT
CLASS A CLASS B CLASS C CLASS D INDEX(1) FUNDS INDEX(2)
- --------------------------------------------------------------------------------------
3.41% 3.52% 2.86% 3.63% 3.48% 3.35%
</Table>
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF
FUTURE RESULTS, AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES
SHOWN. FOR THE MOST RECENT 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 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. SEE PERFORMANCE SUMMARY FOR
STANDARDIZED PERFORMANCE INFORMATION.
MARKET CONDITIONS
The 12-month review period began with interest rates generally falling and still
near their historical lows. Continued low employment numbers and deflationary
pressures caused rates to follow this downward path throughout the first quarter
of 2004. The market then reversed course in April, after the release of March
employment numbers. The surprisingly strong employment data, coupled with
increasing oil prices, led investors to the conclusion that the Federal Reserve
Open Market Committee (the "Fed") would move to raise interest rates. At its
June meeting, the Fed initiated a series of 25 basis point rate increases that
continued through the end of the year.
Despite these rate increases, continued softness in the economy pushed yields on
intermediate and longer maturity government securities lower during the third
quarter of 2004 and into the beginning of the fourth. Investors became
increasingly concerned by increasing oil prices and uneven employment gains.
While the bond market gained slightly following the conclusion of the election,
gains were largely limited to intermediate and longer-maturity securities.
Perceptions of the economy were varied during the period. The year began with
concern over economic sluggishness and ended with concern over too much growth.
Overall, rates were mixed, with shorter-term rates rising and longer-term rate
declining from the start of the period.
Against this mixed backdrop, performance varied over the major segments of the
fixed income market. U.S. Treasury securities lagged other parts of the market,
due in most part to their high sensitivity to fluctuating interest rates and
their relatively low yields. Mortgage-backed securities (MBS) had good
performance, especially in those securities with longer durations. Higher-coupon
mortgage-backed securities outperformed their Treasury counterparts as declining
rates resulted in increased prepayment expectations.
PERFORMANCE ANALYSIS
Morgan Stanley U.S. Government Securities Trust Class B and D shares
outperformed the Lehman Brothers U.S. Government Index, and its Class A, B and D
shares also outperformed the Lipper General U.S. Government Funds Index for the
12 months ended December 31, 2004, assuming no deduction of applicable sales
charges. Class A shares underperformed the Lehman index, while
2
<Page>
Class C shares underperformed both the Lehman and Lipper Index. The fund's
returns were driven in large part by two key strategies. The first of these
involved limiting its duration* to a level below that of the Lehman Brothers
U.S. Government Index. This approach was based on our anticipation of rising
interest rates in 2004. While these expectations were validated by the rising
federal funds target rate, economic softness and foreign purchases resulted in a
general decline in longer-term yields.
The portfolio's positioning in the MBS sector was more advantageous. Our
strategy during the year was to emphasize higher-coupon MBS in the portfolio.
These securities did not benefit as much as lower-coupon issues due to the
market's concerns that lower-coupon securities would continue to suffer from a
decline in prepayments triggered by low interest rates. By the end of the fourth
quarter, we began taking profits in these positions in order to redeploy the
proceeds into securities with more compelling total return potential.
As is mandated by the investment objective, the Fund is restricted to only
investing in those securities backed by "the full faith and credit of the U.S.
Government." This strategy resulted in the Fund having an underweight to agency
issues relative to the benchmark and Lipper peer group and detracted slightly
from relative performance.
* 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.
THERE IS NO GUARANTEE THAT ANY SECURITIES MENTIONED WILL CONTINUE TO PERFORM
WELL OR BE HELD BY THE FUND IN THE FUTURE.
<Table>
<Caption>
PORTFOLIO COMPOSITION**
------------------------------------------------
U.S. Government Obligations 44.0
Mortgage-Backed Securities 30.8
Short-Term Investments 18.7
U.S. Government Agencies 6.5
</Table>
** DOES NOT INCLUDE OPEN SHORT FUTURES CONTRACTS WITH AN UNDERLYING FACE
AMOUNT OF $601,160,469 AND NET UNREALIZED DEPRECIATION OF $1,841,516 AND
OPEN LONG FUTURES CONTRACTS WITH AN UNDERLYING FACE AMOUNT OF $192,110,721
AND UNREALIZED DEPRECIATION OF $509,452.
DATA AS OF DECEMBER 31, 2004. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR
PORTFOLIO COMPOSITION ARE AS A PERCENTAGE OF TOTAL INVESTMENTS. THESE DATA ARE
PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED A
RECOMMENDATION TO BUY OR SELL THE SECURITIES MENTIONED. MORGAN STANLEY IS A
FULL-SERVICE SECURITIES FIRM ENGAGED IN SECURITIES TRADING AND BROKERAGE
ACTIVITIES, INVESTMENT BANKING, RESEARCH AND ANALYSIS, FINANCING AND FINANCIAL
ADVISORY SERVICES.
3
<Page>
INVESTMENT STRATEGY
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.
FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS
Each Morgan Stanley fund provides a complete schedule of portfolio holdings in
its semiannual and annual reports within 60 days of the end of the fund's second
and fourth fiscal quarters by filing the schedule electronically with the
Securities and Exchange Commission (SEC). The semiannual reports are filed on
Form N-CSRS and the annual reports are filed on Form N-CSR. Morgan Stanley also
delivers the semiannual and annual reports to fund shareholders and makes these
reports available on its public Web site, www.morganstanley.com. Each Morgan
Stanley fund also files a complete schedule of portfolio holdings with the SEC
for the fund's first and third fiscal quarters on Form N-Q. Morgan Stanley does
not deliver the reports for the first and third fiscal quarters to shareholders,
nor are the reports posted to the Morgan Stanley public Web site. You may,
however, obtain the Form N-Q filings (as well as the Form N-CSR and N-CSRS
filings) by accessing the SEC's Web site, http://www.sec.gov. You may also
review and copy them at the SEC's Public Reference Room in Washington, DC.
Information on the operation of the SEC's Public Reference Room may be obtained
by calling the SEC at (800) SEC-0330. You can also request copies of these
materials, upon payment of a duplicating fee, by electronic request at the SEC's
e-mail address (publicinfo@sec.gov) or by writing the Public Reference section
of the SEC, Washington, DC 20549-0102. You may obtain copies of a fund's fiscal
quarter filings by contacting Morgan Stanley Client Relations at (800) 869-NEWS.
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.
4
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(This page has been left blank intentionally.)
5
<Page>
PERFORMANCE SUMMARY
PERFORMANCE OF A $10,000 INVESTMENT--CLASS B
[CHART]
<Table>
<Caption>
CLASS B++ LEHMAN(1) LIPPER(2)
December 31, 1994 $ 10,000 $ 10,000 $ 10,000
December 31, 1995 $ 11,674 $ 11,834 $ 11,694
December 31, 1996 $ 12,043 $ 12,162 $ 11,947
December 31, 1997 $ 13,073 $ 13,328 $ 13,036
December 31, 1998 $ 14,024 $ 14,641 $ 14,058
December 31, 1999 $ 13,932 $ 14,314 $ 13,684
December 31, 2000 $ 15,497 $ 16,210 $ 15,311
December 31, 2001 $ 16,471 $ 17,382 $ 16,333
December 31, 2002 $ 18,104 $ 19,380 $ 17,962
December 31, 2003 $ 18,374 $ 19,837 $ 18,273
December 31, 2004 $ 19,020 $ 20,526 $ 18,886
</Table>
6
<Page>
AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED DECEMBER 31, 2004
<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 3.41%(3) 3.52%(3) 2.86%(3) 3.63%(3)
(0.99)(4) (1.45)(4) 1.87(4) --
5 YEARS 6.49(3) 6.42(3) 5.92(3) 6.73(3)
5.57(4) 6.11(4) 5.92(4) --
10 YEARS -- 6.64(3) -- --
-- 6.64(4) -- --
SINCE INCEPTION 5.83(3) 7.30(3) 5.36(3) 6.06(3)
5.21(4) 7.30(4) 5.36(4) --
</Table>
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF
FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES
SHOWN. FOR THE MOST RECENT 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 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.
- ----------
* 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.
(1) THE LEHMAN BROTHERS U.S. GOVERNMENT INDEX IS A BROAD-BASED MEASURE OF 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.
++ ENDING VALUE ASSUMING A COMPLETE REDEMPTION ON DECEMBER 31, 2004.
7
<Page>
EXPENSE EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments and redemption fees;
and (2) ongoing costs, including management fees; distribution and service
(12b-1) fees; and other Fund expenses. This example is intended to help you
understand your ongoing costs (in dollars) of investing in the Fund and to
compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period 07/01/04 - 12/31/04.
ACTUAL EXPENSES
The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table below provides information about hypothetical
expenses based on the Fund's actual expense ratio and an assumed rate of return
of 5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use this
information to compare the ongoing cost of investing in the Fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) and redemption fees. Therefore, the second line of the table is
useful in comparing ongoing costs, and will not help you determine the relative
total cost of owning different funds. In addition, if these transactional costs
were included, your costs would have been higher.
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
--------------- --------------- ---------------
07/01/04 -
07/01/04 12/31/04 12/31/04
--------------- --------------- ---------------
CLASS A
Actual (3.28% return) $ 1,000.00 $ 1,032.80 $ 4.29
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,020.91 $ 4.27
CLASS B
Actual (3.33% return) $ 1,000.00 $ 1,033.30 $ 3.73
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,021.47 $ 3.71
CLASS C
Actual (3.01% return) $ 1,000.00 $ 1,030.10 $ 6.84
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,018.40 $ 6.80
CLASS D
Actual (3.41% return) $ 1,000.00 $ 1,034.10 $ 3.02
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,022.17 $ 3.00
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.84%, 0.73%,
1.34% AND 0.59% RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER
THE PERIOD, MULTIPLIED BY 184/366 (TO REFLECT THE ONE-HALF YEAR PERIOD).
8
<Page>
MORGAN STANLEY U.S. GOVERNMENT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2004
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON
THOUSANDS DESCRIPTION AND MATURITY DATE RATE VALUE
- ----------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES (35.1%)
GOVERNMENT NATIONAL MORTGAGE ASSOC. I (30.3%)
$ 209,200 * 5.00% $ 209,200,000
6,913 08/20/34 5.25 7,052,629
2,949 08/20/34 5.50 3,024,432
174,895 02/15/28 - 09/20/34 6.00 181,440,694
245,250 * 6.50 258,048,984
56,971 03/15/14 - 07/15/31 6.50 60,443,119
129,206 04/15/17 - 03/15/27 7.00 138,014,609
49,231 01/15/06 - 10/15/31 7.50 53,216,206
15,898 10/15/16 - 09/15/31 8.00 17,367,782
25,414 05/15/16 - 11/15/24 8.50 27,999,129
19,145 10/15/08 - 08/15/21 9.00 21,469,308
12,270 10/15/09 - 12/15/20 9.50 13,830,410
15,829 11/15/09 - 11/15/20 10.00 17,667,181
64 05/15/10 - 06/15/15 12.50 73,717
---------------
1,008,848,200
---------------
GOVERNMENT NATIONAL MORTGAGE ASSOC. II (3.4%)
103,073 04/20/34 5.50 105,260,581
4,223 01/20/24 - 02/20/24 6.50 4,460,333
4,282 03/20/26 - 07/20/29 7.00 4,542,723
---------------
114,263,637
---------------
GOVERNMENT NATIONAL MORTGAGE ASSOC. GPM I (1.4%)
773 08/15/13 - 07/15/15 12.25 878,273
48,009 05/20/34 3.75 47,362,744
---------------
48,241,017
---------------
TOTAL MORTGAGE-BACKED SECURITIES
(COST $1,142,575,720) 1,171,352,854
---------------
U.S. GOVERNMENT OBLIGATIONS (50.2%)
U.S. TREASURY BONDS (24.1%)
76,000 08/15/29 6.125 89,252,576
99,000 08/15/27 6.375 118,908,306
153,000 02/15/27 6.625 188,638,290
159,000 02/15/25 7.625 215,389,191
66,225 08/15/20 8.75 95,746,913
81,550 02/15/06 9.375 87,436,931
4,750 02/15/15 11.25 7,468,078
---------------
802,840,285
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
9
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON
THOUSANDS DESCRIPTION AND MATURITY DATE RATE VALUE
- ----------------------------------------------------------------------------------------------------------
U.S. TREASURY NOTES (22.4%)
$ 315,000 11/15/06 3.50% $ 317,756,565
322,000 02/15/13 3.875 317,799,188
25,000 11/15/08 4.75 26,192,400
35,000 11/15/05 5.75 35,907,830
50,000 05/15/05 6.75 50,789,100
---------------
748,445,083
---------------
U.S. TREASURY STRIPS (3.7%)
40,000 08/15/10 0.00 32,412,720
45,000 02/15/11 0.00 35,445,960
150,000 02/15/25 0.00 53,932,950
---------------
121,791,630
---------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $1,646,878,520) 1,673,076,998
---------------
U.S. Government Agencies (7.5%)
HOUSING URBAN DEVELOPMENT SER 99-A (1.1%)
18,800 08/01/10 6.06 20,083,702
15,290 08/01/11 6.16 16,296,740
---------------
36,380,442
---------------
RESOLUTION FUNDING CORP. ZERO COUPON STRIPS (6.4%)
74,000 10/15/08 0.00 64,804,464
138,134 01/15/12 0.00 102,954,585
61,607 04/15/12 0.00 45,299,134
---------------
213,058,183
---------------
TOTAL U.S. GOVERNMENT AGENCIES
(COST $235,862,424) 249,438,625
---------------
SHORT-TERM INVESTMENTS (a) (21.3%)
U.S. TREASURY BILLS (5.8%)
39,700 01/27/05 1.58 39,654,698
900 01/13/05+ 1.645 899,506
2,800 03/24/05+ 1.895 2,788,209
2,000 03/24/05+ 1.979 1,991,207
150,000 02/10/05 2.035 149,660,833
---------------
194,994,453
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
10
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON
THOUSANDS DESCRIPTION AND MATURITY DATE RATE VALUE
- ----------------------------------------------------------------------------------------------------------
U.S. TREASURY NOTES (15.5%)
$ 195,000 05/15/05 6.50% $ 197,909,790
142,850 08/15/05 6.50 146,371,110
168,000 05/15/05 6.75 170,651,376
---------------
514,932,276
---------------
TOTAL SHORT-TERM INVESTMENTS
(COST $710,166,117) 709,926,729
---------------
TOTAL INVESTMENTS
(COST $3,735,482,781) (b) (c) 114.1% 3,803,795,206
LIABILITIES IN EXCESS OF OTHER ASSETS (14.1) (470,489,615)
-------- ---------------
NET ASSETS 100.0% $ 3,333,305,591
======== ===============
</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 IN AN AMOUNT EQUAL TO $4,776,440.
(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
$1,282,019,351 IN CONNECTION WITH SECURITIES PURCHASED ON A FORWARD
COMMITMENT BASIS AND OPEN FUTURES CONTRACTS.
(c) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $3,761,798,249. THE
AGGREGATE GROSS UNREALIZED APPRECIATION IS $63,697,264 AND THE AGGREGATE
GROSS UNREALIZED DEPRECIATION IS $21,700,307, RESULTING IN NET UNREALIZED
APPRECIATION OF $41,996,957.
FUTURES CONTRACTS OPEN AT DECEMBER 31, 2004:
<Table>
<Caption>
UNREALIZED
NUMBER OF DESCRIPTION/DELIVERY UNDERLYING FACE APPRECIATION
CONTRACTS LONG/SHORT MONTH, AND YEAR AMOUNT AT VALUE (DEPRECIATION)
- -------------------------------------------------------------------------------------------
2,287 Short U.S. Treasury Notes 5 year $ (250,497,969) $ 766,982
March 2005
3117 Short U.S. Treasury Bonds 20 year (350,662,500) (2,608,498)
March 2005
249 Long U.S. Treasury Notes 2 year 52,188,846 (63,200)
March 2005
1250 Long U.S. Treasury Notes 10 year 139,921,875 (446,252)
March 2005
----------------
Net unrealized depreciation $ (2,350,968)
================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
11
<Page>
MORGAN STANLEY U.S. GOVERNMENT SECURITIES TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2004
<Table>
<Caption>
ASSETS:
Investments in securities, at value (cost $3,735,482,781) $ 3,803,795,206
Cash 48,312
Receivable for:
Interest 36,660,953
Shares of beneficial interest sold 778,171
Receivable from affiliate 1,500,000
Prepaid expenses and other assets 118,393
------------------
TOTAL ASSETS 3,842,901,035
------------------
LIABILITIES:
Payable for:
Investments purchased 494,845,924
Dividends and distributions to shareholders 5,329,245
Shares of beneficial interest redeemed 3,410,207
Variation margin 2,292,304
Distribution fee 1,884,723
Investment advisory fee 1,057,381
Administration fee 227,289
Accrued expenses and other payables 548,371
------------------
TOTAL LIABILITIES 509,595,444
------------------
NET ASSETS $ 3,333,305,591
==================
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 3,354,956,503
Net unrealized appreciation 65,961,457
Dividends in excess of net investment income (22,925,801)
Accumulated net realized loss (64,686,568)
------------------
NET ASSETS $ 3,333,305,591
==================
CLASS A SHARES:
Net Assets $ 240,835,289
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 26,306,501
NET ASSET VALUE PER SHARE $ 9.15
==================
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 4.44% OF NET ASSET VALUE) $ 9.56
==================
CLASS B SHARES:
Net Assets $ 2,787,959,426
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 304,016,620
NET ASSET VALUE PER SHARE $ 9.17
==================
CLASS C SHARES:
Net Assets $ 80,341,781
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 8,701,102
NET ASSET VALUE PER SHARE $ 9.23
==================
CLASS D SHARES:
Net Assets $ 224,169,095
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 24,475,138
NET ASSET VALUE PER SHARE $ 9.16
==================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
12
<Page>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004
<Table>
<Caption>
NET INVESTMENT INCOME:
INTEREST INCOME $ 137,091,657
------------------
EXPENSES
Investment advisory fee 15,902,859
Distribution fee (Class A shares) 519,674
Distribution fee (Class B shares) 10,466,622
Distribution fee (Class C shares) 673,262
Transfer agent fees and expenses 3,821,161
Custodian fees 619,546
Administration fee 450,882
Shareholder reports and notices 199,957
Professional fees 87,884
Registration fees 79,207
Trustees' fees and expenses 58,954
Other 372,445
------------------
TOTAL EXPENSES 33,252,453
Less: distribution fee rebate (Class B shares) (7,150,549)
------------------
NET EXPENSES 26,101,904
------------------
NET INVESTMENT INCOME 110,989,753
------------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net Realized Gain/Loss on:
Investments 32,576,989
Futures contracts (12,688,166)
------------------
NET REALIZED GAIN 19,888,823
------------------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments (5,001,207)
Futures contracts (2,270,180)
------------------
NET DEPRECIATION (7,271,387)
------------------
NET GAIN 12,617,436
------------------
NET INCREASE $ 123,607,189
==================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 2004 DECEMBER 31, 2003
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 110,989,753 $ 139,369,575
Net realized gain 19,888,823 36,947,785
Net change in unrealized appreciation/depreciation (7,271,387) (109,077,224)
----------------- -----------------
NET INCREASE 123,607,189 67,240,136
----------------- -----------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A shares (9,671,007) (9,110,250)
Class B shares (125,791,123) (146,837,400)
Class C shares (3,088,726) (3,781,279)
Class D shares (10,316,791) (12,038,733)
----------------- -----------------
TOTAL DIVIDENDS (148,867,647) (171,767,662)
----------------- -----------------
Net decrease from transactions in shares of beneficial interest (759,386,244) (892,911,901)
----------------- -----------------
NET DECREASE (784,646,702) (997,439,427)
NET ASSETS:
Beginning of period 4,117,952,293 5,115,391,720
----------------- -----------------
END OF PERIOD
(Including dividends in excess of net investment income of
$22,925,801 and $41,054,419, respectively) $ 3,333,305,591 $ 4,117,952,293
================= =================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
14
<Page>
MORGAN STANLEY U.S. GOVERNMENT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2004
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
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 Adviser") determines that the market quotations
are not reflective of a security's market value, portfolio securities are valued
at their fair value as determined in good faith under procedures established by
and under the general supervision of the Fund's Trustees; and (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.
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
15
<Page>
securities or other liquid portfolio securities equal to the minimum initial
margin requirements of the applicable futures exchange. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount of cash
equal to the daily fluctuation in the value of the contract. Such receipts or
payments known as variation margin are recorded by the Fund as unrealized gains
and losses. Upon closing of the contract, the Fund realizes a gain or loss equal
to the difference between the value of the contract at the time it was opened
and the value at the time it was closed.
E. FEDERAL INCOME TAX POLICY -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Accordingly, no federal income tax provision is required.
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and
distributions to shareholders are recorded on the ex-dividend date.
G. USE OF ESTIMATES -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
2. INVESTMENT ADVISORY/ADMINISTRATION AGREEMENTS
Effective November 1, 2004, pursuant to an Investment Advisory Agreement with
the Investment Adviser, the Fund pays a advisory 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: 0.42% to the portion of daily net
assets not exceeding $1 billion; 0.395% to the portion of daily net assets
exceeding $1 billion but not exceeding $1.5 billion; 0.37% to the portion of
daily net assets exceeding $1.5 billion but not exceeding $2 billion; 0.345% to
the portion of daily net assets exceeding $2 billion but not exceeding $2.5
billion; 0.32% to the portion of daily net assets exceeding $2.5 billion but not
exceeding $5 billion; 0.295% to the portion of daily net assets exceeding $5
billion but not exceeding $7.5 billion; 0.27% to the portion of daily net assets
exceeding $7.5 billion but not exceeding $10 billion; 0.245% to the portion of
daily net assets exceeding $10 billion but not exceeding $12.5 billion; and
0.22% to the portion of daily net assets exceeding $12.5 billion.
Effective November 1, 2004, pursuant to an Administration Agreement with Morgan
Stanley Services Company Inc. (the "Administrator"), an affiliate of the
Investment Adviser, the Fund pays an administration fee, accrued daily and
payable monthly, by applying the annual rate of 0.08% to the fund's daily net
assets.
Prior to November 1, 2004, the Fund had retained the Investment Adviser to
provide administrative services and to manage the investment of the Fund's
assets pursuant to an investment management agreement pursuant to which the Fund
paid the Investment Adviser a monthly management fee, accrued
16
<Page>
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.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the
"Distributor"), an affiliate of the Investment Adviser and Administrator. 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 -- up
to 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 at
December 31, 2004.
For the period January 1, 2004 through April 30, 2004, the Distributor rebated a
portion of the distribution fees paid by the Fund on Class B shares in the
amount of $7,150,549. For the year ended December 31, 2004, the net distribution
fee was accrued for Class B at the annual rate of 0.11%. At December 31, 2004,
included in the Statement of Assets and Liabilities, is a receivable from
affiliate of $1,500,000 which represents payments by the Distributor.
17
<Page>
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, 2004, the distribution fee was accrued for Class
A shares and Class C shares at the annual rate of 0.22% and 0.75%, respectively.
The Distributor has informed the Fund that for the year ended December 31, 2004,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class A shares, Class B shares and Class C shares of $24,219, $2,968,828
and $26,737, respectively and received $111,407 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.
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,
2004 were $7,118,436,414 and $7,070,039,874, respectively.
Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and
Distributor, is the Fund's transfer agent. At December 31, 2004, the Fund had
transfer agent fees and expenses payable of approximately $124,500.
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, 2004 included in
Trustees' fees and expenses in the Statement of Operations amounted to $7,495.
At December 31, 2004, the Fund had an accrued pension liability of $63,011 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
18
<Page>
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 risk, the Fund may purchase and sell
interest rate futures contracts ("futures contracts").
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.
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, 2004 DECEMBER 31, 2003
---------------------------------- ----------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------- --------------- --------------- ---------------
CLASS A SHARES
Sold 8,705,976 $ 79,928,293 31,910,340 $ 298,309,612
Reinvestment of dividends 891,975 8,162,666 782,521 7,283,221
Redeemed (9,600,159) (87,972,860) (31,445,337) (293,410,503)
--------------- --------------- --------------- ---------------
Net increase (decrease) -- Class A (2,208) 118,099 1,247,524 12,182,330
--------------- --------------- --------------- ---------------
CLASS B SHARES
Sold 10,036,507 92,228,433 34,512,843 324,031,042
Reinvestment of dividends 8,086,291 74,145,148 9,261,878 86,401,971
Redeemed (89,240,076) (818,127,811) (139,688,353) (1,301,149,848)
--------------- --------------- --------------- ---------------
Net decrease -- Class B (71,117,278) (651,754,230) (95,913,632) (890,716,835)
--------------- --------------- --------------- ---------------
CLASS C SHARES
Sold 1,276,507 11,833,867 4,640,484 43,762,890
Reinvestment of dividends 231,030 2,133,042 272,422 2,559,820
Redeemed (4,151,303) (38,337,464) (7,212,567) (67,610,716)
--------------- --------------- --------------- ---------------
Net decrease -- Class C (2,643,766) (24,370,555) (2,299,661) (21,288,006)
--------------- --------------- --------------- ---------------
CLASS D SHARES
Sold 3,931,072 36,089,803 17,605,741 164,783,346
Reinvestment of dividends 843,674 7,723,414 820,139 7,637,771
Redeemed (13,827,289) (127,192,775) (17,726,181) (165,510,507)
--------------- --------------- --------------- ---------------
Net increase (decrease) -- Class D (9,052,543) (83,379,558) 699,699 6,910,610
--------------- --------------- --------------- ---------------
Net decrease in Fund (82,815,795) $ (759,386,244) (96,266,070) $ (892,911,901)
=============== =============== =============== ===============
</Table>
19
<Page>
7. FEDERAL INCOME TAX STATUS
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for tax purposes are reported as distributions of paid-in-capital.
The tax character of distributions paid was as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 2004 DECEMBER 31, 2003
----------------- -----------------
Ordinary income $ 148,867,647 $ 171,767,662
================= =================
</Table>
As of December 31, 2004, the tax-basis components of accumulated losses were as
follows:
<Table>
Undistributed ordinary income $ 723,734
Undistributed long-term gains --
-------------
Net accumulated earnings 723,734
Capital loss carryforward* (12,306,170)
Post-October losses (52,000,364)
Temporary differences (65,069)
Net unrealized appreciation 41,996,957
-------------
Total accumulated losses $ (21,650,912)
=============
</Table>
*During the year ended December 31, 2004, the Fund utilized $12,647,276 of its
net capital loss carryforward. As of December 31, 2004, the Fund had a net
capital loss carryforward of $12,306,170 of which $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, 2004, 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), mark-to-market of open futures contracts, capital
loss deferrals on straddles 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
20
<Page>
permanent differences, paid-in-capital was charged $34,819,497, accumulated net
realized loss was charged $21,187,015 and dividends in excess of net investment
income was credited $56,006,512.
8. LEGAL MATTERS
The Investment Adviser, certain affiliates of the Investment Adviser, certain
officers of such affiliates and certain investment companies advised by the
Investment Adviser or its affiliates, including the Fund, are named as
defendants in a 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 Adviser and certain affiliates of
the Investment Adviser allegedly offered economic incentives to brokers and
others to recommend the funds advised by the Investment Adviser or its
affiliates to investors rather than funds managed by other companies, and (ii)
that the funds advised by the Investment Adviser or its affiliates, including
the Fund, allegedly paid excessive commissions to brokers in return for their
efforts to recommend these funds to investors. The complaint seeks, among other
things, unspecified compensatory damages, rescissionary damages, fees and costs.
The defendants have moved to dismiss the action and intend to otherwise
vigorously 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.
21
<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,
--------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.21 $ 9.41 $ 8.99 $ 8.94 $ 8.58
------------ ------------ ------------ ------------ ------------
Income (loss) from investment operations:
Net investment income 0.24 0.26 0.43 0.51 0.56
Net realized and unrealized gain (loss) 0.07 (0.12) 0.45 0.07 0.36
------------ ------------ ------------ ------------ ------------
Total income from investment operations 0.31 0.14 0.88 0.58 0.92
------------ ------------ ------------ ------------ ------------
Less dividends from net investment income (0.37) (0.34) (0.46) (0.53) (0.56)
------------ ------------ ------------ ------------ ------------
Net asset value, end of period $ 9.15 $ 9.21 $ 9.41 $ 8.99 $ 8.94
============ ============ ============ ============ ============
TOTAL RETURN+ 3.41% 1.48% 10.07% 6.66% 11.18%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 0.81% 0.76% 0.75% 0.73% 0.77%
Net investment income 2.94% 2.94% 4.50% 5.65% 5.81%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 240,835 $ 242,335 $ 235,787 $ 122,863 $ 99,750
Portfolio turnover rate 212% 153% 85% 73% 19%
</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
22
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.23 $ 9.43 $ 9.00 $ 8.95 $ 8.59
------------ ------------ ------------ ------------ ------------
Income (loss) from investment operations:
Net investment income 0.25 0.26 0.40 0.48 0.57
Net realized and unrealized gain (loss) 0.07 (0.12) 0.46 0.07 0.36
------------ ------------ ------------ ------------ ------------
Total income from investment operations 0.32 0.14 0.86 0.55 0.93
------------ ------------ ------------ ------------ ------------
Less dividends from net investment income (0.38) (0.34) (0.43) (0.50) (0.57)
------------ ------------ ------------ ------------ ------------
Net asset value, end of period $ 9.17 $ 9.23 $ 9.43 $ 9.00 $ 8.95
============ ============ ============ ============ ============
TOTAL RETURN+ 3.52% 1.49% 9.91% 6.29% 11.23%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 0.70%(2) 0.76%(2) 1.00%(2) 1.07%(2) 0.72%(2)
Net investment income 3.05%(2) 2.95%(2) 4.25%(2) 5.30%(2) 5.86%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in millions $ 2,788 $ 3,461 $ 4,441 $ 4,025 $ 3,745
Portfolio turnover rate 212% 153% 85% 73% 19%
</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, 2004 0.93% 2.82%
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%
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
23
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
CLASS C SHARES
Selected Per Share Data:
Net asset value, beginning of period $ 9.29 $ 9.49 $ 9.07 $ 9.02 $ 8.65
------------ ------------ ------------ ------------ ------------
Income (loss) from investment operations:
Net investment income 0.20 0.21 0.38 0.46 0.52
Net realized and unrealized gain (loss) 0.06 (0.12) 0.45 0.07 0.37
------------ ------------ ------------ ------------ ------------
Total income from investment operations 0.26 0.09 0.83 0.53 0.89
------------ ------------ ------------ ------------ ------------
Less dividends from net investment income (0.32) (0.29) (0.41) (0.48) (0.52)
------------ ------------ ------------ ------------ ------------
Net asset value, end of period $ 9.23 $ 9.29 $ 9.49 $ 9.07 $ 9.02
============ ============ ============ ============ ============
TOTAL RETURN+ 2.86% 0.93% 9.42% 6.03% 10.70%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 1.34% 1.32% 1.29% 1.29% 1.29%
Net investment income 2.41% 2.38% 3.96% 5.08% 5.29%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 80,342 $ 105,392 $ 129,515 $ 63,646 $ 27,445
Portfolio turnover rate 212% 153% 85% 73% 19%
</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
24
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.22 $ 9.42 $ 8.99 $ 8.95 $ 8.58
------------ ------------ ------------ ------------ ------------
Income (loss) from investment operations:
Net investment income 0.26 0.28 0.45 0.53 0.58
Net realized and unrealized gain (loss) 0.07 (0.12) 0.46 0.06 0.37
------------ ------------ ------------ ------------ ------------
Total income from investment operations 0.33 0.16 0.91 0.59 0.95
------------ ------------ ------------ ------------ ------------
Less dividends from net investment income (0.39) (0.36) (0.48) (0.55) (0.58)
------------ ------------ ------------ ------------ ------------
Net asset value, end of period $ 9.16 $ 9.22 $ 9.42 $ 8.99 $ 8.95
============ ============ ============ ============ ============
TOTAL RETURN+ 3.63% 1.67% 10.41% 6.85% 11.43%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 0.59% 0.57% 0.54% 0.54% 0.54%
Net investment income 3.16% 3.13% 4.71% 5.83% 6.04%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 224,169 $ 308,984 $ 309,109 $ 138,669 $ 93,446
Portfolio turnover rate 212% 153% 85% 73% 19%
</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
25
<Page>
MORGAN STANLEY U.S. GOVERNMENT SECURITIES TRUST
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004, and the related statements of
operations for the year then ended and changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Fund's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. Our procedures
included confirmation of securities owned as of December 31, 2005, by
correspondence with the custodian and brokers; where replies were not received
from brokers, we performed other auditing procedures. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Morgan
Stanley U.S. Government Securities Trust as of December 31, 2004, 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 16, 2005
26
<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 (63) Trustee Since Private Investor; 208 None.
c/o Kramer Levin Naftalis & Frankel LLP April 1994 Director or Trustee of
Counsel to the Independent Trustees the Retail Funds (since
919 Third Avenue April 1994) and the
New York, NY 10022-3902 Institutional 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 (72) Trustee Since Consultant; Managing 208 Director of Franklin
1031 N. Chartwell Court January 1993 Director of Summit Covey (time management
Salt Lake City, UT 84103 Ventures LLC; Director or systems), BMW Bank of
Trustee of the Retail North America, Inc.
Funds (since January (industrial loan
1993) and the corporation), United
Institutional Funds Space Alliance (joint
(since July 2003); member venture between
of the Utah Regional Lockheed Martin and
Advisory Board of Pacific the Boeing Company)
Corp.; formerly Managing and Nuskin Asia
Director of Summit Pacific (multilevel
Ventures LLC (2000-2004); marketing); member of
United States Senator the board of various
(R-Utah) (1974-1992) and civic and charitable
Chairman, Senate Banking organizations.
Committee (1980-1986),
Mayor of Salt Lake City,
Utah (1971-1974),
Astronaut, Space Shuttle
Discovery (April 12-19,
1985), and Vice Chairman,
Huntsman Corporation
(chemical company).
Wayne E. Hedien (70) Trustee Since Retired; Director or 208 Director of The PMI
c/o Kramer Levin Naftalis & Frankel LLP September Trustee of the Retail Group Inc. (private
Counsel to the Independent Trustees 1997 Funds (since September mortgage insurance);
919 Third Avenue 1997) and the Trustee and Vice
New York, NY 10022-3902 Institutional Funds Chairman of The Field
(since July 2003); Museum of Natural
formerly associated with History; director of
the Allstate Companies various other business
(1966-1994), most and charitable
recently as Chairman of organizations.
The Allstate Corporation
(March 1993-December
1994) and Chairman and
Chief Executive Officer
of its wholly-owned
subsidiary, Allstate
Insurance Company (July
1989-December 1994).
</Table>
27
<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 (55) Trustee Since Senior Partner, Johnson 208 Director of NVR, Inc.
c/o Johnson Smick International, Inc. July 1991 Smick International, (home construction);
2099 Pennsylvania Avenue, N.W. Inc., a consulting firm; Director of KFX
Suite 950 Chairman of the Audit Energy; Director of
Washington, D.C. 20006 Committee and Director or RBS Greenwich Capital
Trustee of the Retail Holdings (financial
Funds (since July 1991) holding company).
and the Institutional
Funds (since July 2003);
Co-Chairman and a founder
of the Group of Seven
Council (G7C), an
international economic
commission; formerly Vice
Chairman of the Board of
Governors of the Federal
Reserve System and
Assistant Secretary of
the U.S. Treasury.
Joseph J. Kearns (62) Trustee Since President, Kearns & 209 Director of Electro
c/o Kearns & Associates LLC July 2003 Associates LLC Rent Corporation
PMB754 (investment consulting); (equipment leasing),
23852 Pacific Coast Highway Deputy Chairman of the The Ford Family
Malibu, CA 90265 Audit Committee and Foundation, and the
Director or Trustee of UCLA Foundation.
the Retail Funds (since
July 2003) and the
Institutional Funds
(since August 1994);
previously Chairman of
the Audit Committee of
the Institutional Funds
(October 2001-July 2003);
formerly CFO of the J.
Paul Getty Trust.
Michael E. Nugent (68) Trustee Since General Partner of 208 Director of various
c/o Triumph Capital, L.P. July 1991 Triumph Capital, L.P., a business
445 Park Avenue private investment organizations.
New York, NY 10022 partnership; Chairman of
the Insurance Committee
and Director or Trustee
of the Retail Funds
(since July 1991) and the
Institutional Funds
(since July 2001);
formerly Vice President,
Bankers Trust Company and
BT Capital Corporation
(1984-1988).
Fergus Reid (72) Trustee Since Chairman of Lumelite 209 Trustee and Director
c/o Lumelite Plastics Corporation July 2003 Plastics Corporation; of certain investment
85 Charles Colman Blvd. Chairman of the companies in the
Pawling, NY 12564 Governance Committee and JPMorgan Funds complex
Director or Trustee of managed by J.P. Morgan
the Retail Funds (since Investment Management
July 2003) and the Inc.
Institutional Funds
(since June 1992).
</Table>
28
<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
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- --------------------------------------- ----------- ------------ ------------------------- ------------- ----------------------
Charles A. Fiumefreddo (71) Chairman of Since Chairman and Director or 208 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 07311 Funds (since July 2003);
formerly Chief Executive
Officer of the Retail
Funds (until September
2002).
James F. Higgins (56) Trustee Since Director or Trustee of 208 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 07311 (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).
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE TRUSTEE BEGAN SERVING THE FUNDS ADVISED BY
MORGAN STANLEY INVESTMENT ADVISORS INC. (THE "INVESTMENT ADVISER ") (THE
"RETAIL FUNDS ").
** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICES AS
DIRECTOR/TRUSTEE FOR THE RETAIL FUNDS AND THE FUNDS ADVISED BY MORGAN
STANLEY INVESTMENT MANAGEMENT INC. AND MORGAN STANLEY AIP GP LP (THE
"INSTITUTIONAL FUNDS ") REFLECT THE EARLIEST DATE THE DIRECTOR/TRUSTEE
BEGAN SERVING THE RETAIL OR INSTITUTIONAL FUNDS AS APPLICABLE.
*** THE FUND COMPLEX INCLUDES ALL OPEN-END AND CLOSED-END FUNDS (INCLUDING ALL
OF THEIR PORTFOLIOS) ADVISED BY THE INVESTMENT ADVISER AND ANY FUNDS THAT
HAVE AN INVESTMENT ADVISER THAT IS AN AFFILIATED PERSON OF THE INVESTMENT
ADVISER (INCLUDING, BUT NOT LIMITED TO, MORGAN STANLEY INVESTMENT
MANAGEMENT INC.).
29
<Page>
OFFICERS:
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- ----------------------------- -------------- ----------------- ---------------------------------------------------------------
Mitchell M. Merin (51) President Since May 1999 President and Chief Operating Officer of Morgan Stanley
1221 Avenue of the Americas Investment Management Inc.; President, Director and Chief
New York, NY 10020 Executive Officer of the Investment Adviser and the
Administrator; Chairman and Director of the Distributor;
Chairman and Director of the Transfer Agent; Director of
various Morgan Stanley subsidiaries; President of the
Institutional Funds (since July 2003) and President of the
Retail Funds; Trustee (since July 2003) and President (since
December 2002) of the Van Kampen Closed-End Funds; Trustee
and President (since October 2002) of the Van Kampen Open-End
Funds.
Ronald E. Robison (65) Executive Since April Principal Executive Officer of Funds in the Fund Complex
1221 Avenue of the Americas Vice 2003 (since May 2003); Managing Director of Morgan Stanley & Co.
New York, NY 10020 President Incorporated, Morgan Stanley Investment Management Inc. and
and Morgan Stanley; Managing Director, Chief Administrative
Principal Officer and Director of the Investment Adviser and the
Executive Administrator; Director of the Transfer Agent; Managing
Officer Director and Director of the Distributor; Executive Vice
President and Principal Executive Officer of the
Institutional Funds (since July 2003) and the Retail Funds
(since April 2003); Director of Morgan Stanley SICAV (since
May 2004); previously President and Director of the Retail
Funds (March 2001-July 2003) and Chief Global Operations
Officer and Managing Director of Morgan Stanley Investment
Management Inc.
Joseph J. McAlinden (61) Vice Since July 1995 Managing Director and Chief Investment Officer of the
1221 Avenue of the Americas President Investment Adviser and Morgan Stanley Investment Management
New York, NY 10020 Inc., 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).
Barry Fink (49) Vice Since February General Counsel (since May 2000) and Managing Director (since
1221 Avenue of the Americas President 1997 December 2000) of Morgan Stanley Investment Management;
New York, NY 10020 Managing Director (since December 2000), Secretary (since
February 1997) and Director of the Investment Adviser and the
Administrator; Vice President of the Retail Funds; Assistant
Secretary of Morgan Stanley DW; Vice President of the
Institutional Funds (since July 2003); Managing Director,
Secretary and Director of the Distributor; previously
Secretary (February 1997-July 2003) and General Counsel
(February 1997-April 2004) of the Retail Funds; Vice
President and Assistant General Counsel of the Investment
Adviser and the Administrator (February 1997-December 2001).
Amy R. Doberman (42) Vice Since July 2004 Managing Director and General Counsel, U.S. Investment
1221 Avenue of the Americas President Management; Managing Director of Morgan Stanley Investment
New York, NY 10020 Management Inc. and the Investment Adviser, Vice President of
the Institutional and Retail Funds (since July 2004); Vice
President of the Van Kampen Funds (since August 2004);
previously, Managing Director and General Counsel - Americas,
UBS Global Asset Management (July 2000 - July 2004) and
General Counsel, Aeltus Investment Management, Inc. (January
1997 - July 2000).
Carsten Otto (41) Chief Since October Executive Director and U.S. Director of Compliance for Morgan
1221 Avenue of the Americas Compliance 2004 Stanley Investment Management (since October 2004); Executive
New York, NY 10020 Officer Director of the Investment Adviser and Morgan Stanley
Investment Management Inc.; formerly Assistant Secretary and
Assistant General Counsel of the Morgan Stanley Retail Funds.
</Table>
30
<Page>
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- ----------------------------- -------------- ----------------- ---------------------------------------------------------------
Stefanie V. Chang (38) Vice Since July 2003 Executive Director of Morgan Stanley & Co. Incorporated,
1221 Avenue of the Americas President Morgan Stanley Investment Management Inc., and the Investment
New York, NY 10020 Adviser; Vice President of the Institutional Funds and the
Retail Funds (since July 2003); formerly practiced law with
the New York law firm of Rogers & Wells (now Clifford Chance
US LLP).
Francis J. Smith (39) Treasurer Treasurer since Executive Director of the Investment Adviser and Morgan
c/o Morgan Stanley Trust and Chief July 2003 and Stanley Services (since December 2001); previously, Vice
Harborside Financial Financial Chief Financial President of the Retail Funds (September 2002-July 2003), and
Center, Officer Officer since Vice President of the Investment Adviser and the
Plaza Two, September 2002 Administrator (August 2000-November 2001) and Senior Manager
Jersey City, NJ 07311 at PricewaterhouseCoopers LLP (January 1998-August 2000).
Thomas F. Caloia (58) Vice Since July 2003 Executive Director (since December 2002) and Assistant
c/o Morgan Stanley Trust President Treasurer of the Investment Adviser, the Distributor and the
Harborside Financial Administrator; previously Treasurer of the Retail Funds
Center, (April 1989-July 2003); formerly First Vice President of the
Plaza Two, Investment Adviser, the Distributor and the Administrator.
Jersey City, NJ 07311
Mary E. Mullin (37) Secretary Since July 2003 Executive Director of Morgan Stanley & Co. Incorporated,
1221 Avenue of the Americas Morgan Stanley Investment Management Inc. and the Investment
New York, NY 10020 Adviser; Secretary of the Institutional Funds 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.
2004 FEDERAL TAX NOTICE (UNAUDITED)
Of the Fund's ordinary income dividends paid during the fiscal year
ended December 31, 2004, 67.81% 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.
31
<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
Joseph J. McAlinden
VICE PRESIDENT
Barry Fink
VICE PRESIDENT
Amy R. Doberman
VICE PRESIDENT
Carsten Otto
CHIEF COMPLIANCE OFFICER
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 REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT ADVISER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
This report is submitted for the general information of the shareholders of the
Fund. For more detailed information about the Fund, its fees and expenses and
other pertinent information, please read its Prospectus. The Fund's Statement of
Additional Information contains additional information about the Fund, including
its trustees. It is available, without charge, by calling (800) 869-NEWS.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective Prospectus. Read the
Prospectus carefully before investing.
Investments and services offered through Morgan Stanley DW Inc.,
member SIPC. Morgan Stanley Distributors Inc., member NASD.
(C) 2004 Morgan Stanley
[MORGAN STANLEY LOGO]
37965RPT-RA05-00100-P-Y12/04
[GRAPHIC]
MORGAN STANLEY FUNDS
MORGAN STANLEY
U.S. GOVERNMENT
SECURITIES TRUST
ANNUAL REPORT
DECEMBER 31, 2004
[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) The Fund has amended its Code of Ethics during the period covered by the
shareholder report presented in Item 1 hereto to delete from the end of the
following paragraph on page 2 of the Code the phrase "to the detriment of the
Fund.":
"Each Covered Officer must not use his personal influence or personal
relationship improperly to influence investment decisions or financial reporting
by the Fund whereby the Covered Officer would benefit personally (directly or
indirectly)."
(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:
2004
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 42,370 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 452(2) $ 3,746,495(2)
TAX FEES $ 4,694(3) $ 79,800(4)
ALL OTHER FEES $ - $ -
TOTAL NON-AUDIT FEES $ 5,146 $ 3,826,295
TOTAL $ 47,516 $ 3,826,295
</Table>
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 $ - $ -(5)
TOTAL NON-AUDIT FEES $ 4,924 $ 3,583,971
TOTAL $ 45,574 $ 3,583,971
</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:
APPENDIX A
AUDIT COMMITTEE
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS
AS ADOPTED AND AMENDED JULY 23, 2004,(1)
1. STATEMENT OF PRINCIPLES
The Audit Committee of the Board is required to review and, in its sole
discretion, pre-approve all Covered Services to be provided by the Independent
Auditors to the Fund and Covered Entities in order to assure that services
performed by the Independent Auditors do not impair the auditor's independence
from the Fund.
The SEC has issued rules specifying the types of services that an independent
auditor may not provide to its audit client, as well as the audit committee's
administration of the engagement of the independent auditor. The SEC's rules
establish two different approaches to pre-approving services, which the SEC
considers to be equally valid. Proposed services either: may be pre-approved
without consideration of specific case-by-case services by the Audit Committee
("GENERAL PRE-APPROVAL"); or require the specific pre-approval of the Audit
Committee or its delegate ("SPECIFIC PRE-APPROVAL"). The Audit Committee
believes that the combination of these two approaches in this Policy will result
in an effective and efficient procedure to pre-approve services performed by the
Independent Auditors. As set forth in this Policy, unless a type of service has
received general pre-approval, it will require specific pre-approval by the
Audit Committee (or by any member of the Audit Committee to which pre-approval
authority has been delegated) if it is to be provided by the Independent
Auditors. Any proposed services exceeding pre-approved cost levels or budgeted
amounts will also require specific pre-approval by the Audit Committee.
The appendices to this Policy describe the Audit, Audit-related, Tax and All
Other services that have the general pre-approval of the Audit Committee. The
term of any general pre-approval is 12 months from the date of pre-approval,
unless the Audit Committee considers and provides a different period and states
otherwise. The Audit Committee will annually review and pre-approve the services
that may be provided by the Independent Auditors without obtaining specific
pre-approval from the Audit Committee. The Audit Committee will add to or
subtract from the list of general pre-approved services from time to time, based
on subsequent determinations.
- ----------
(1) This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and
Procedures (the "POLICY"), adopted as of the date above, supersedes and
replaces all prior versions that may have been adopted from time to time.
<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
Audit-related services are assurance and related services that are reasonably
related to the performance of the audit or review of the Fund's financial
statements and, to the extent they are Covered Services, the Covered Entities or
that are traditionally performed by the Independent Auditors. Because the Audit
Committee believes that the provision of Audit-related services does not impair
the independence of the auditor and is consistent with the SEC's rules on
auditor independence, the Audit Committee may grant general pre-approval to
Audit-related services. Audit-related services include, among others, accounting
consultations related to accounting, financial reporting or disclosure matters
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not classified as "Audit services"; assistance with understanding and
implementing new accounting and financial reporting guidance from rulemaking
authorities; agreed-upon or expanded audit procedures related to accounting
and/or billing records required to respond to or comply with financial,
accounting or regulatory reporting matters; and assistance with internal control
reporting requirements under Forms N-SAR and/or N-CSR.
The Audit Committee has pre-approved the Audit-related services in Appendix B.2.
All other Audit-related services not listed in Appendix B.2 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
5. TAX SERVICES
The Audit Committee believes that the Independent Auditors can provide Tax
services to the Fund and, to the extent they are Covered Services, the Covered
Entities, such as tax compliance, tax planning and tax advice without impairing
the auditor's independence, and the SEC has stated that the Independent Auditors
may provide such services.
Pursuant to the preceding paragraph, the Audit Committee has pre-approved the
Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
6. ALL OTHER SERVICES
The Audit Committee believes, based on the SEC's rules prohibiting the
Independent Auditors from providing specific non-audit services, that other
types of non-audit services are permitted. Accordingly, the Audit Committee
believes it may grant general pre-approval to those permissible non-audit
services classified as All Other services that it believes are routine and
recurring services, would not impair the independence of the auditor and are
consistent with the SEC's rules on auditor independence.
The Audit Committee has pre-approved the All Other services in Appendix B.4.
Permissible All Other services not listed in Appendix B.4 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
7. PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS
Pre-approval fee levels or budgeted amounts for all services to be provided by
the Independent Auditors will be established annually by the Audit Committee.
Any proposed services exceeding these levels or amounts will require specific
pre-approval by the Audit Committee. The Audit Committee is mindful of the
overall relationship of fees for audit and non-audit services in determining
whether to pre-approve any such services.
8. PROCEDURES
All requests or applications for services to be provided by the Independent
Auditors that do not require specific approval by the Audit Committee will be
submitted to the Fund's Chief Financial Officer and must include a detailed
description of the services to be
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rendered. The Fund's Chief Financial Officer will determine whether such
services are included within the list of services that have received the general
pre-approval of the Audit Committee. The Audit Committee will be informed on a
timely basis of any such services rendered by the Independent Auditors. Requests
or applications to provide services that require specific approval by the Audit
Committee will be submitted to the Audit Committee by both the Independent
Auditors and the Fund's Chief Financial Officer, and must include a joint
statement as to whether, in their view, the request or application is consistent
with the SEC's rules on auditor independence.
The Audit Committee has designated the Fund's Chief Financial Officer to monitor
the performance of all services provided by the Independent Auditors and to
determine whether such services are in compliance with this Policy. The Fund's
Chief Financial Officer will report to the Audit Committee on a periodic basis
on the results of its monitoring. Both the Fund's Chief Financial Officer and
management will immediately report to the chairman of the Audit Committee any
breach of this Policy that comes to the attention of the Fund's Chief Financial
Officer or any member of management.
9. ADDITIONAL REQUIREMENTS
The Audit Committee has determined to take additional measures on an annual
basis to meet its responsibility to oversee the work of the Independent Auditors
and to assure the auditor's independence from the Fund, such as reviewing a
formal written statement from the Independent Auditors delineating all
relationships between the Independent Auditors and the Fund, consistent with
Independence Standards Board No. 1, and discussing with the Independent Auditors
its methods and procedures for ensuring independence.
10. COVERED ENTITIES
Covered Entities include the Fund's investment adviser(s) and any entity
controlling, controlled by or under common control with the Fund's investment
adviser(s) that provides ongoing services to the Fund(s). Beginning with
non-audit service contracts entered into on or after May 6, 2003, the Fund's
audit committee must pre-approve non-audit services provided not only to the
Fund but also to the Covered Entities if the engagements relate directly to the
operations and financial reporting of the Fund. This list of Covered Entities
would include:
MORGAN STANLEY RETAIL FUNDS
Morgan Stanley Investment Advisors Inc.
Morgan Stanley & Co. Incorporated
Morgan Stanley DW Inc.
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Van Kampen Asset Management
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
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MORGAN STANLEY INSTITUTIONAL FUNDS
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Advisors Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Morgan Stanley & Co. Incorporated
Morgan Stanley Distribution, Inc.
Morgan Stanley AIP GP LP
Morgan Stanley Alternative Investment Partners LP
(e)(2) Beginning with non-audit service contracts entered into on or after May
6, 2003, the audit committee also is required to pre-approve services to Covered
Entities to the extent that the services are determined to have a direct impact
on the operations or financial reporting of the Registrant. 100% of such
services were pre-approved by the audit committee pursuant to the Audit
Committee's pre-approval policies and procedures (attached hereto).
(f) Not applicable.
(g) See table above.
(h) The audit committee of the Board of Trustees has considered whether the
provision of services other than audit services performed by the auditors to the
Registrant and Covered Entities is compatible with maintaining the auditors'
independence in performing audit services.
Item 5. Audit Committee of Listed Registrants.
(a) The Fund has a separately-designated standing audit committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act whose members are:
Michael Bozic, Edwin J. Garn, Wayne E. Hedien, Manual H. Johnson, Joseph J.
Kearns, Michael Nugent and Fergus Reid.
(b) Not applicable.
Item 6. Schedule of Investments
Refer to Item 1.
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Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Applicable only to annual reports filed by closed-end funds.
Item 8. Closed-End Fund Repurchases
Applicable to reports filed by closed-end funds.
Item 9. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 10 - Controls and Procedures
(a) The Fund's principal executive officer and principal financial officer have
concluded that the Fund's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Fund in this Form N-CSR
was recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, based
upon such officers' evaluation of these controls and procedures as of a date
within 90 days of the filing date of the report.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the 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 11 Exhibits
(a) The Code of Ethics for Principal Executive and Senior Financial Officers is
attached hereto.
(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Morgan Stanley U.S. Government Securities Trust
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
February 17, 2005
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 17, 2005
/s/ Francis Smith
Francis Smith
Principal Financial Officer
February 17, 2005