<Page>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-04917
Morgan Stanley Mortgage Securities Trust
(Exact name of registrant as specified in charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip code)
Ronald E. Robison
1221 Avenue of the Americas, New York, New York 10020
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-762-4000
Date of fiscal year end: October 31, 2005
Date of reporting period: April 30, 2005
Item 1 - Report to Shareholders
<Page>
WELCOME, SHAREHOLDER:
IN THIS REPORT, YOU'LL LEARN ABOUT HOW YOUR INVESTMENT IN MORGAN STANLEY
MORTGAGE SECURITIES TRUST (FORMERLY MORGAN STANLEY FEDERAL SECURITIES TRUST)*
PERFORMED DURING THE SEMIANNUAL PERIOD. WE WILL PROVIDE AN OVERVIEW OF THE
MARKET CONDITIONS, AND DISCUSS SOME OF THE FACTORS THAT AFFECTED PERFORMANCE
DURING THE REPORTING PERIOD. IN ADDITION, THIS REPORT INCLUDES THE FUND'S
FINANCIAL STATEMENTS AND A LIST OF FUND INVESTMENTS.
THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS FOR THE FUND BEING
OFFERED.
MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE
IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. THE FUND IS
SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT MARKET VALUES OF
SECURITIES OWNED BY THE FUND WILL DECLINE AND, THEREFORE, THE VALUE OF THE
FUND'S SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE
MONEY INVESTING IN THIS FUND. PLEASE SEE THE PROSPECTUS FOR MORE COMPLETE
INFORMATION ON INVESTMENT RISKS.
* THE FUND'S NAME CHANGED EFFECTIVE JUNE 22, 2005.
<Page>
FUND REPORT
For the six months ended April 30, 2005
TOTAL RETURN FOR THE 6 MONTHS ENDED APRIL 30, 2005
<Table>
<Caption>
LEHMAN LIPPER
BROTHERS U.S. GENERAL U.S.
GOVERNMENT GOVERNMENT
CLASS A CLASS B CLASS C CLASS D INDEX(1) FUNDS INDEX(2)
1.21% 0.83% 1.04% 1.37% 0.87% 1.17%
</Table>
THE PERFORMANCE OF THE FUND'S FOUR SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE FUND'S TOTAL RETURNS 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 AND BENCHMARK INFORMATION.
EFFECTIVE JUNE 22, 2005, THE FUND CHANGED ITS NAME FROM "MORGAN STANLEY FEDERAL
SECURITIES TRUST" TO "MORGAN STANLEY MORTGAGE SECURITIES TRUST." IN CONNECTION
WITH THE NAME CHANGE, THE FUND ALSO CHANGED ITS INVESTMENT STRATEGY. AS OF JUNE
22, 2005, THE FUND INVESTS AT LEAST 80% OF ITS ASSETS IN MORTGAGE-RELATED
SECURITIES. PRIOR TO JUNE 22, 2005, WHICH INCLUDES THE PERIOD COVERED BY THIS
REPORT, THE FUND INVESTED AT LEAST 80% OF ITS ASSETS IN U.S. GOVERNMENT
SECURITIES.
MARKET CONDITIONS
As the reporting period began, investor anxiety about economic softness was
abating. In November, an increase in the federal funds rate (the fourth of 2004)
and a surprisingly strong gain in non-farm payrolls combined with unexpectedly
robust increases in producer and consumer price indices to push rates higher.
Throughout the period, the Federal Open Market Committee (the Fed) continued to
raise the federal funds rate, to 2.75 percent at the end of the reporting
period. As the Fed indicated that the prevailing rate was still well below its
equilibrium level, the market anticipated additional increases.
Against this backdrop, the yield curve continued to flatten, with much of the
change occurring in the first three months of 2005. Short- and intermediate-term
yields rose across the U.S. Treasury curve, while longer-term yields declined.
Performance among U.S. government and mortgage sectors varied during the period.
Treasuries and agencies posted the least impressive performance among the major
fixed-income sectors, due to their relative lack of yield and greater
sensitivity to changes in interest rates. Higher coupon mortgage-backed
securities, which tend to be less sensitive to rising interest rates,
outperformed their lower-coupon peers during the period.
PERFORMANCE ANALYSIS
Morgan Stanley Mortgage Securities Trust -- Class A and D shares outperformed
the Lehman Brothers U.S. Government Index and the Lipper U.S. General Government
Funds Index for the six months ended April 30, 2005, assuming no deduction of
applicable sales charges. Class C shares outperformed the Lehman Brothers U.S.
Government Index and underperformed the Lipper U.S. General Government Funds
Index while Class B shares underperformed both of these indices for the
reporting period assuming no deduction of applicable sales charges.
The Fund's mortgage position had a positive impact on performance relative to
the benchmark. The Fund's emphasis on higher-coupon, slow-prepaying mortgage
issues benefited the Fund as rates rose during the bulk of the period. Due in
part to this focus, the Fund was less susceptible to market volatility caused by
a rise in interest rates. In contrast, the Fund's Treasuries generated more
muted performance, due to their relative lack of yield.
2
<Page>
During the period, we kept the Fund's overall interest-rate exposure well below
that of its benchmark, the Lehman Brothers U.S. Government Index. This
positioning was beneficial as interest rates rose across the short- and
intermediate-portions of the curve. However, we note that during period of rate
declines, this strategy may hinder relative performance.
THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL
OR BE HELD BY THE FUND IN THE FUTURE.
PORTFOLIO COMPOSITION*
<Table>
Short-Term Investments 39.6%
Mortgaged-Backed -- FNMA 31.8
Mortgaged-Backed -- FHLMC 12.0
U.S. Treasuries 11.7
Mortgaged-Backed -- GNMA 3.5
Collateralized Mortgage Obligations 1.4
</Table>
LONG-TERM CREDIT ANALYSIS
<Table>
AAA 100%
</Table>
DATA AS OF APRIL 30, 2005. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR
PORTFOLIO COMPOSITION ARE AS A PERCENTAGE OF TOTAL INVESTMENTS. ALL PERCENTAGES
FOR LONG-TERM CREDIT ANALYSIS ARE FOR TOTAL LONG-TERM INVESTMENTS. THESE DATA
ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED A
RECOMMENDATION TO BUY OR SELL THE SECURITIES MENTIONED. MORGAN STANLEY IS A
FULL-SERVICE SECURITIES FIRM ENGAGED IN SECURITIES TRADING AND BROKERAGE
ACTIVITIES, INVESTMENT BANKING, RESEARCH AND ANALYSIS, FINANCING AND FINANCIAL
ADVISORY SERVICES.
* DOES NOT INCLUDE OUTSTANDING LONG FUTURES CONTRACTS WITH AN UNDERLYING FACE
AMOUNT OF $5,742,188 WITH NET UNREALIZED APPRECIATION OF $76,868 AND SHORT
FUTURES CONTRACTS WITH AN UNDERLYING FACE AMOUNT OF $64,597,109 WITH NET
UNREALIZED DEPRECIATION OF $107,627.
INVESTMENT STRATEGY
THE FUND WILL NORMALLY INVEST AT LEAST 80 PERCENT OF ITS ASSETS IN U.S.
MORTGAGE-RELATED SECURITIES. (PRIOR TO JUNE 22, 2005 THE FUND INVESTED AT LEAST
80% OF ITS ASSETS IN U.S. GOVERNMENT SECURITIES). IN MAKING INVESTMENT
DECISIONS, THE FUND'S "INVESTMENT ADVISER," MORGAN STANLEY INVESTMENT ADVISORS
INC., CONSIDERS ECONOMIC DEVELOPMENTS, INTEREST RATE LEVELS AND OTHER FACTORS.
THE FUND IS NOT LIMITED AS TO THE MATURITIES OR TYPES OF THE U.S. GOVERNMENT
SECURITIES IN WHICH IT MAY INVEST. THE FUND'S INVESTMENTS IN MORTGAGE-BACKED
SECURITIES ISSUED OR GUARANTEED BY AGENCIES OR INSTRUMENTALITIES OF THE U.S.
GOVERNMENT MAY, AT ANY TIME, BE SUBSTANTIAL.
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
3
<Page>
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.
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
<Page>
PERFORMANCE SUMMARY
AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED APRIL 30, 2005
<Table>
<Caption>
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS D SHARES++
(SINCE 07/28/97) (SINCE 03/31/87) (SINCE 07/28/97) (SINCE 07/28/97)
SYMBOL FDLAX FDLBX FDLCX FDLDX
1 YEAR 4.43%(3) 3.78%(3) 3.98%(3) 4.78%(3)
(0.01)(4) (1.22)(4) 2.98(4) --
5 YEARS 6.34(3) 5.56(3) 5.59(3) 6.49(3)
5.42(4) 5.24(4) 5.59(4) --
10 YEARS -- 5.54(3) -- --
-- 5.54(4) -- --
SINCE INCEPTION 5.84(3) 6.25(3) 5.04(3) 5.78(3)
5.25(4) 6.25(4) 5.04(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 TABLE DOES NOT REFLECT THE DEDUCTION OF
TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF
FUND SHARES. PERFORMANCE FOR CLASS A, CLASS B, CLASS C, AND CLASS D SHARES WILL
VARY DUE TO DIFFERENCES IN SALES CHARGES AND EXPENSES.
* 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 ALL
U.S. GOVERNMENT AND TREASURY SECURITIES. INDEXES ARE UNMANAGED AND THEIR
RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER
PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
(2) THE LIPPER GENERAL U.S. GOVERNMENT FUNDS INDEX IS AN EQUALLY WEIGHTED
PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN
THE LIPPER GENERAL U.S. GOVERNMENT FUNDS CLASSIFICATION. THE INDEX, WHICH
IS ADJUSTED FOR CAPITAL GAINS DISTRIBUTIONS AND INCOME DIVIDENDS, IS
UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT. THERE ARE CURRENTLY
30 FUNDS REPRESENTED IN THIS INDEX.
(3) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT
THE DEDUCTION OF ANY SALES CHARGES.
(4) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND THE DEDUCTION OF
THE MAXIMUM APPLICABLE SALES CHARGE. SEE THE FUND'S CURRENT PROSPECTUS FOR
COMPLETE DETAILS ON FEES AND SALES CHARGES.
5
<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 11/01/04 - 04/30/05.
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 *
---------------- ---------------- ----------------
11/01/04 -
11/01/04 04/30/05 04/30/05
---------------- ---------------- ----------------
CLASS A
Actual (1.21% return) $ 1,000.00 $ 1,012.10 $ 4.89
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,019.93 $ 4.91
CLASS B
Actual (0.83% return) $ 1,000.00 $ 1,008.30 $ 8.12
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,016.71 $ 8.15
CLASS C
Actual (1.04% return) $ 1,000.00 $ 1,010.40 $ 7.33
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,017.50 $ 7.35
CLASS D
Actual (1.37% return) $ 1,000.00 $ 1,013.70 $ 3.89
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,020.93 $ 3.91
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.98%,
1.63%, 1.47% AND 0.78% RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT
VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE ONE-HALF
YEAR PERIOD).
6
<Page>
INVESTMENT ADVISORY AGREEMENT APPROVAL
NATURE, EXTENT AND QUALITY OF SERVICES
The Board reviewed and considered the nature and extent of the investment
advisory services provided by the Investment Adviser under the Advisory
Agreement, including portfolio management, investment research and fixed income
securities trading. The Board also reviewed and considered the nature and extent
of the non-advisory, administrative services provided by the Fund's
Administrator under the Administration Agreement, including accounting,
clerical, bookkeeping, compliance, business management and planning, and the
provision of supplies, office space and utilities at the Adviser's expense. (The
Investment Adviser and the Administrator together are referred to as the
"Adviser" and the Advisory and Administration Agreements together are referred
to as the "Management Agreement.") The Board also compared the nature of the
services provided by the Adviser with similar services provided by
non-affiliated advisers as reported to the Board by Lipper Inc. ("Lipper").
The Board reviewed and considered the qualifications of the portfolio managers,
the senior administrative managers and other key personnel of the Adviser who
provide the administrative and investment advisory services to the Fund. The
Board determined that the Adviser's portfolio managers and key personnel are
well qualified by education and/or training and experience to perform the
services in an efficient and professional manner. The Board concluded that the
nature and extent of the advisory and administrative services provided were
necessary and appropriate for the conduct of the business and investment
activities of the Fund. The Board also concluded that the overall quality of the
advisory and administrative services was satisfactory.
PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the Fund's performance for one-, three- and five-year periods
ended November 30, 2004, as shown in reports provided by Lipper (the "Lipper
Reports"), compared to the performance of comparable funds selected by Lipper
(the "performance peer group"), and noted that the Fund's performance was lower
than its performance peer group average for the five-year period, but better
than average for the one- and three-year periods. The Board concluded that the
Fund's overall performance was satisfactory.
FEES RELATIVE TO OTHER FUNDS MANAGED BY THE ADVISER WITH COMPARABLE INVESTMENT
STRATEGIES
The Board reviewed the advisory and administrative fees (together, the
"management fee") paid by the Fund under the Management Agreement. The Board
noted that the rate was comparable to the management fee rates charged by the
Adviser to any other funds it manages with investment strategies comparable to
those of the Fund.
FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the management fee rate and total expense ratio of the Fund.
The Board noted that: (i) the Fund's management fee rate was higher than the
average management fee rate for funds, selected by Lipper (the "expense peer
group"), managed by other advisers with investment strategies comparable to
those of the Fund, as
7
<Page>
shown in the Lipper Report for the Fund; but (ii) the Fund's total expense ratio
was lower than the average total expense ratio of the funds included in the
Fund's expense peer group. The Board concluded that the management fee was
competitive with the management fees charged by other investment advisers
considering that the Adviser's overall management of the Fund resulted in lower
total expenses compared to its expense peer group average.
BREAKPOINTS AND ECONOMIES OF SCALE
The Board reviewed the structure of the Fund's management fee schedule under the
Management Agreement and noted that it includes breakpoints. The Board also
reviewed the level of the Fund's management fee and noted that the fee, as a
percentage of the Fund's net assets, would decrease as net assets increase
because the management fee includes breakpoints. The Board concluded that the
Fund's management fee would reflect economies of scale as assets increase.
PROFITABILITY OF ADVISER AND AFFILIATES
The Board considered and reviewed information concerning the costs incurred and
profits realized by the Adviser and its affiliates during the last two years
from their relationship with the Fund and the Morgan Stanley Fund Complex and
reviewed with the Controller of the Adviser the cost allocation methodology used
to determine the Adviser's profitability. Based on their review of the
information they received, the Board concluded that the profits earned by the
Adviser and its affiliates were not excessive in light of the advisory,
administrative and other services provided to the Fund.
FALL-OUT BENEFITS
The Board considered so-called "fall-out benefits" derived by the Adviser and
its affiliates from their relationship with the Fund and the Fund Complex, such
as "float" benefits derived from handling of checks for purchases and
redemptions of Fund shares through a broker-dealer affiliate of the Adviser and
"soft dollar" benefits (discussed in the next section). The Board also
considered that a broker-dealer affiliate of the Adviser receives from the Fund
12b-1 fees for distribution and shareholder services. The Board also considered
that an affiliate of the Adviser, through a joint venture, receives revenue in
connection with trading done on behalf of the Fund through an electronic trading
system network ("ECN"). The Board concluded that the float benefits and the
above-referenced ECN-related revenue were relatively small and that the 12b-1
fees were competitive with those of other broker-dealer affiliates of investment
advisers of mutual funds.
8
<Page>
SOFT DOLLAR BENEFITS
The Board considered whether the Adviser realizes any benefits from commissions
paid to brokers who execute securities transactions for the Fund ("soft
dollars"). The Board noted that the Fund invests only in fixed income
securities, which do not generate soft dollars.
ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE FUND'S NEEDS
The Board considered whether the Adviser is financially sound and has the
resources necessary to perform its obligations under the Management Agreement.
The Board noted that the Adviser's operations remain profitable, although
increased expenses in recent years have reduced the Adviser's profitability. The
Board concluded that the Adviser has the financial resources necessary to
fulfill its obligations under the Management Agreement.
HISTORICAL RELATIONSHIP BETWEEN THE FUND AND THE ADVISER
The Board also reviewed and considered the historical relationship between the
Fund and the Adviser, including the organizational structure of the Adviser, the
policies and procedures formulated and adopted by the Adviser for managing the
Fund's operations and the Board's confidence in the competence and integrity of
the senior managers and key personnel of the Adviser. The Board concluded that
it is beneficial for the Fund to continue its relationship with the Adviser.
OTHER FACTORS AND CURRENT TRENDS
The Board considered the controls and procedures adopted and implemented by the
Adviser and monitored by the Fund's Chief Compliance Officer and concluded that
the conduct of business by the Adviser indicates a good faith effort on its part
to adhere to high ethical standards in the conduct of the Fund's business.
GENERAL CONCLUSION
After considering and weighing all of the above factors, the Board concluded it
would be in the best interest of the Fund and its shareholders to approve
renewal of the Management Agreement for another year.
9
<Page>
MORGAN STANLEY MORTGAGE SECURITIES TRUST
PORTFOLIO OF INVESTMENTS - APRIL 30, 2005 (UNAUDITED)
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON
THOUSANDS DESCRIPTION AND MATURITY DATE RATE VALUE
- ---------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCIES - MORTGAGE-BACKED SECURITIES (71.7%)
FEDERAL HOME LOAN MORTGAGE CORP. (14.9%)
$ 5,000 * 5.00% $ 5,037,500
32,500 * 5.50 33,282,031
2,354 04/01/20 - 05/01/32 7.50 2,527,303
3,020 10/01/10 - 02/01/20 9.50 3,331,700
745 06/01/16 - 10/01/19 10.00 837,698
59 02/01/16 - 12/01/17 10.50 66,538
----------------
45,082,770
----------------
FEDERAL HOME LOAN MORTGAGE CORP. PC GOLD (3.3%)
985 12/01/28 - 09/01/33 6.50 1,024,830
6,278 01/01/30 - 08/01/32 7.50 6,736,215
2,060 02/01/23 - 07/01/31 8.00 2,254,257
----------------
10,015,302
----------------
FEDERAL NATIONAL MORTGAGE ASSOC. (48.2%)
28,500 * 4.50 27,970,937
28,300 * 5.00 28,503,406
37,300 * 5.50 37,661,344
16,700 * 6.00 17,145,625
21,294 01/01/27 - 09/01/34 6.50 22,180,961
2,781 07/01/23 - 01/01/33 7.00 2,941,921
5,820 09/01/29 - 06/01/32 7.50 6,239,602
350 * 7.50 374,609
1,852 05/01/24 - 02/01/32 8.00 2,019,907
196 01/01/22 - 04/01/25 8.50 214,924
142 09/01/16 - 05/01/20 9.50 158,209
58 03/01/16 - 02/01/18 9.75 65,160
----------------
145,476,605
----------------
GOVERNMENT NATIONAL MORTGAGE ASSOC. (5.1%)
10,200 * 5.50 10,375,313
1,437 08/15/25 - 05/15/29 6.50 1,506,735
14 06/15/29 - 08/15/29 7.50 15,175
935 10/15/19 - 10/15/24 8.50 1,032,780
2,056 11/15/17 - 06/15/20 9.50 2,285,311
69 05/15/16 - 11/15/20 10.00 77,867
----------------
15,293,181
----------------
GOVERNMENT NATIONAL MORTGAGE ASSOC. II (0.2%)
619 05/20/30 8.00 668,532
----------------
TOTAL U.S. GOVERNMENT AGENCIES - MORTGAGE-BACKED SECURITIES
(COST $214,530,315) 216,536,390
----------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
10
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON
THOUSANDS DESCRIPTION AND MATURITY DATE RATE VALUE
- ---------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS (17.8%)
U.S. TREASURY BONDS
$ 1,300 08/15/29 6.13% $ 1,586,915
1,400 08/15/27 6.38 1,740,704
26,000 02/15/06 9.38 27,250,236
U.S. TREASURY NOTES
8,800 02/15/13 3.88 8,685,195
11,000 08/15/13 4.25 11,091,960
U.S. TREASURY STRIPS
4,560 02/15/25 0.00 1,797,753
4,560 02/15/27 0.00 1,643,301
----------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $53,497,531) 53,796,064
----------------
U.S. GOVERNMENT AGENCIES - COLLATERALIZED MORTGAGE OBLIGATIONS (2.2%)
FEDERAL HOME LOAN MORTGAGE CORP. (0.8%)
2,503 2547 HA
08/15/12 5.00 2,511,773
----------------
FEDERAL NATIONAL MORTGAGE ASSOC. (1.4%)
1,820 2004 - TS A13
05/28/35 3.22++ 1,821,629
2,294 2005 - W2 A1
05/25/35 3.22++ 2,294,937
----------------
4,116,566
----------------
TOTAL U.S. GOVERNMENT AGENCIES - COLLATERALIZED MORTGAGE OBLIGATIONS
(COST $6,638,495) 6,628,339
----------------
SHORT-TERM INVESTMENTS (60.0%)
U.S. GOVERNMENT AGENCIES & OBLIGATIONS (36.3%)
35,000 Federal National Mortgage Assoc. (a)
05/02/05 - 05/18/05 2.64 - 2.73 34,976,233
200 U.S. Treasury Bills + (a)
07/14/05 2.58 - 2.81 198,929
19,700 U.S. Treasury Bonds
08/15/05 10.75 20,143,270
U.S. Treasury Notes
35,000 05/15/05 - 08/15/05 6.50 35,202,714
19,000 05/15/05 6.75 19,029,697
----------------
TOTAL U.S. GOVERNMENT AGENCIES & OBLIGATIONS
(COST $109,609,225) 109,550,843
----------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
11
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON
THOUSANDS DESCRIPTION AND MATURITY DATE RATE VALUE
- ---------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT (23.7%)
$ 71,673 Joint repurchase agreement account due 05/02/05
(dated 04/29/05 proceeds $71,690,590) (b)
(COST $71,673,000) 2.945% $ 71,673,000
----------------
TOTAL SHORT-TERM INVESTMENTS
(COST $181,282,225) 181,223,843
----------------
TOTAL INVESTMENTS
(COST $455,948,566) (c) (d) 151.7% 458,184,636
LIABILITIES IN EXCESS OF OTHER ASSETS (51.7) (156,223,157)
----------- ----------------
NET ASSETS 100.0% $ 301,961,479
=========== ================
</Table>
- ----------
PC PARTICIPATION CERTIFICATE.
+ ALL OR A PORTION OF THIS SECURITY HAS BEEN PHYSICALLY SEGREGATED IN
CONNECTION WITH OPEN FUTURES CONTRACTS IN AN AMOUNT EQUAL TO $161,150.
++ FLOATING RATE SECURITY, RATE SHOWN IS THE RATE IN EFFECT AT APRIL 30,
2005.
* SECURITY PURCHASED ON A FORWARD COMMITMENT BASIS WITH AN APPROXIMATE
PRINCIPAL AMOUNT AND NO DEFINITE MATURITY DATE; THE ACTUAL PRINCIPAL
AMOUNT AND MATURITY DATE WILL BE DETERMINED UPON SETTLEMENT.
(a) PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN
ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD.
(b) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(c) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN AN AMOUNT EQUAL TO
$227,203,551 IN CONNECTION WITH SECURITIES PURCHASED ON A FORWARD
COMMITMENT BASIS AND OPEN FUTURES CONTRACTS.
(d) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE
AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED
APPRECIATION IS $2,530,097 AND THE AGGREGATE GROSS UNREALIZED
DEPRECIATION IS $294,027, RESULTING IN NET UNREALIZED APPRECIATION OF
$2,236,070.
FUTURES CONTRACTS OPEN AT APRIL 30, 2005:
<Table>
<Caption>
UNREALIZED
NUMBER OF DESCRIPTION/DELIVERY UNDERLYING FACE APPRECIATION
CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE (DEPRECIATION)
- ---------------------------------------------------------------------------------------------
50 Long U.S. Treasury Bonds $ 5,742,188 $ 76,868
20 Year June 2005
193 Short U.S. Treasury Notes (40,086,702) 68,589
2 Year June 2005
226 Short U.S. Treasury Notes (24,510,407) (176,216)
5 Year June 2005
--------------
Net unrealized depreciation $ (30,759)
==============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
12
<Page>
MORGAN STANLEY MORTGAGE SECURITIES TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2005 (UNAUDITED)
<Table>
ASSETS:
Investments in securities, at value (including a repurchase agreement of
71,673,000) (cost $455,948,566) $ 458,184,636
Cash 155,054
Receivable for:
Investments sold 22,110,969
Interest 3,209,361
Shares of beneficial interest sold 114,562
Variation margin 89,816
Principal paydowns 62,441
Prepaid expenses and other assets 91,257
---------------
TOTAL ASSETS 484,018,096
---------------
LIABILITIES:
Payable for:
Investments purchased 181,374,185
Distribution fee 175,720
Shares of beneficial interest redeemed 174,047
Investment advisory fee 117,110
Dividends and distributions to shareholders 66,762
Administration fee 19,934
Accrued expenses and other payables 128,859
---------------
TOTAL LIABILITIES 182,056,617
---------------
NET ASSETS $ 301,961,479
===============
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 311,096,694
Net unrealized appreciation 2,205,311
Dividends in excess of net investment income (5,103,990)
Accumulated net realized loss (6,236,536)
---------------
NET ASSETS $ 301,961,479
===============
CLASS A SHARES:
Net Assets $ 185,555,202
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 19,899,390
NET ASSET VALUE PER SHARE $ 9.32
===============
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 4.44% OF NET ASSET VALUE) $ 9.73
===============
CLASS B SHARES:
Net Assets $ 92,527,127
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 10,107,985
NET ASSET VALUE PER SHARE $ 9.15
===============
CLASS C SHARES:
Net Assets $ 11,430,891
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 1,237,619
NET ASSET VALUE PER SHARE $ 9.24
===============
CLASS D SHARES:
Net Assets $ 12,448,259
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 1,362,390
NET ASSET VALUE PER SHARE $ 9.14
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2005 (UNAUDITED)
<Table>
NET INVESTMENT INCOME:
INTEREST INCOME $ 4,871,418
---------------
EXPENSES
Distribution fee (Class A shares) 16,315
Distribution fee (Class B shares) 1,171,449
Distribution fee (Class C shares) 41,309
Investment advisory fee 745,832
Transfer agent fees and expenses 187,643
Administration fee 126,950
Custodian fees 47,941
Professional fees 42,452
Shareholder reports and notices 34,224
Registration fees 27,772
Trustees' fees and expenses 5,774
Other 26,961
---------------
TOTAL EXPENSES 2,474,622
---------------
NET INVESTMENT INCOME 2,396,796
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
NET REALIZED GAIN ON:
Investments 523,788
Futures contracts 997,422
---------------
NET REALIZED GAIN 1,521,210
---------------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments (829,631)
Futures contracts (166,615)
---------------
NET DEPRECIATION (996,246)
---------------
NET GAIN 524,964
---------------
NET INCREASE $ 2,921,760
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
14
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
APRIL 30, 2005 OCTOBER 31, 2004
-------------- ----------------
(UNAUDITED)
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 2,396,796 $ 3,564,078
Net realized gain 1,521,210 10,297,425
Net change in unrealized appreciation/depreciation (996,246) 1,563,091
-------------- ----------------
NET INCREASE 2,921,760 15,424,594
-------------- ----------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A shares (339,074) (465,680)
Class B shares (4,737,855) (9,669,856)
Class C shares (218,174) (430,048)
Class D shares (269,457) (597,216)
-------------- ----------------
TOTAL DIVIDENDS (5,564,560) (11,162,800)
-------------- ----------------
Net decrease from transactions in shares of beneficial interest (36,730,758) (112,215,154)
-------------- ----------------
NET DECREASE (39,373,558) (107,953,360)
NET ASSETS:
Beginning of period 341,335,037 449,288,397
-------------- ----------------
END OF PERIOD
(INCLUDING DIVIDENDS IN EXCESS OF NET INVESTMENT INCOME OF
$5,103,990 AND $1,936,226, RESPECTIVELY) $ 301,961,479 $ 341,335,037
============== ================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
15
<Page>
MORGAN STANLEY MORTGAGE SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS - APRIL 30, 2005 (UNAUDITED)
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Mortgage Securities Trust (the "Fund"), formerly Morgan Stanley
Federal Securities Trust (the Fund's name changed effective June 22, 2005), is
registered under the Investment Company Act of 1940, as amended (the "Act"), as
a diversified, open-end management investment company. The Fund's investment
objective is to earn a high level of current income. The Fund commenced
operations on March 31, 1987. On July 28, 1997, the Fund converted to a multiple
class share structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) certain portfolio securities may be valued by
an outside pricing service approved by the Fund's Trustees (2) portfolio
securities for which over-the-counter market quotations are readily available
are valued at the mean between the last reported bid and asked price; (3)
futures are valued at the latest price published by the commodities exchange on
which they trade; (4) 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 (5) short-term debt securities having a maturity date of more than
sixty days at time of purchase are valued on a mark-to-market basis until sixty
days prior to maturity and thereafter at amortized cost based on their value on
the 61st day. Short-term debt securities having a maturity date of sixty days or
less at the time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Discounts are accreted and premiums are amortized over the life of the
respective securities. Interest income is accrued daily.
C. REPURCHASE AGREEMENTS -- Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other affiliated
entities managed by the Investment Adviser, may transfer uninvested cash
balances into one or more joint repurchase agreement accounts. These balances
are invested in one or more repurchase agreements and are collateralized by
cash, U.S. Treasury or federal agency obligations. The Fund may also invest
directly with institutions in
16
<Page>
repurchase agreements. The Fund's custodian receives the collateral, which is
marked-to-market daily to determine that the value of the collateral does not
decrease below the repurchase price plus accrued interest.
D. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
E. FUTURES CONTRACTS -- A futures contract is an agreement between two parties
to buy and sell financial instruments or contracts based on financial indices at
a set price on a future date. Upon entering into such a contract, the Fund is
required to pledge to the broker cash, U.S. Government securities or other
liquid portfolio securities equal to the minimum initial margin requirements of
the applicable futures exchange. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in the value of the contract. Such receipts or payments known as
variation margin are recorded by the Fund as unrealized gains and losses. Upon
closing of the contract, the Fund realizes a gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed.
F. FEDERAL INCOME TAX POLICY -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Accordingly, no federal income tax provision is required.
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.
H. USE OF ESTIMATES -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
2. INVESTMENT ADVISORY/ADMINISTRATION AGREEMENTS
Pursuant to an Investment Advisory Agreement, the Fund pays the Investment
Adviser an advisory fee, accrued daily and payable monthly, by applying the
following annual rates to the net assets of the Fund determined as of the close
of each business day: 0.47% to the portion of daily net assets not exceeding $1
billion; 0.445% to the portion of daily net assets exceeding $1 billion but not
exceeding $1.5 billion; 0.42% to the portion of daily net assets exceeding $1.5
billion but not exceeding $2 billion; 0.395% to the portion of daily net assets
exceeding $2 billion but not exceeding $2.5 billion; 0.37% to the portion of
daily net assets exceeding $2.5 billion but not exceeding $5 billion; 0.345% to
the portion of daily net assets exceeding $5 billion but not exceeding $7.5
billion; 0.32% to the portion of
17
<Page>
daily net assets exceeding $7.5 billion but not exceeding $10 billion; 0.295% to
the portion of daily net assets exceeding $10 billion but not exceeding $12.5
billion; and 0.27% to the portion of daily net assets exceeding $12.5 billion
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.
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 0.85% of the lesser of: (a) the average daily aggregate gross sales of the
Class B shares since the inception of the Fund (not including reinvestment of
dividend or capital gain distributions) less the average daily aggregate net
asset value of the Class B shares redeemed since the Fund's inception upon which
a contingent deferred sales charge has been imposed or waived; or (b) the
average daily net assets of Class B; and (iii) Class C -- up to 0.85% of the
average daily net assets of Class C.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts totaled
$10,815,503 at April 30, 2005.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 0.85% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Financial Advisors or other selected
broker-dealer representatives may be reimbursed in the subsequent calendar year.
For the six months ended April 30, 2005, the distribution fee was accrued for
Class A shares and Class C shares at the annual rate of 0.20% and 0.69%,
respectively.
18
<Page>
The Distributor has informed the Fund that for the six months ended April 30,
2005, it received contingent deferred sales charges from certain redemptions of
the Fund's Class A shares, Class B shares and Class C shares of $47, $149,130
and $1,595, respectively and received $4,782 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 cost of purchases and proceeds from sales/prepayments of portfolio
securities, excluding short-term investments, for the six months ended April 30,
2005 were $1,188,577,183 and $1,286,280,822, respectively.
Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and
Distributor, is the Fund's transfer agent. At April 30, 2005, the Fund had
transfer agent fees and expenses payable of approximately $2,600.
The Fund has an unfunded noncontributory defined benefit pension plan covering
certain independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on factors which include years of service and compensation.
Aggregate pension costs for the six months ended April 30, 2005 included in
Trustees' fees and expenses in the Statement of Operations amounted to $3,658.
At April 30, 2005, the Fund had an accrued pension liability of $61,807 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.
The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan")
which allows each independent Trustee to defer payment of all, or a portion, of
the fees he receives for serving on the Board of Trustees. Each eligible Trustee
generally may elect to have the deferred amounts credited with a return equal to
the total return on one or more of the Morgan Stanley funds that are offered as
investment options under the Compensation Plan. Appreciation/depreciation and
distributions received from these investments are recorded with an offsetting
increase/decrease in the deferred compensation obligation and do not affect the
net asset value of the Fund.
5. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
To hedge against adverse interest rate and market risks on portfolio positions
or anticipated positions in U.S. Government securities, the Fund may enter into
interest rate futures contracts ("futures contracts").
19
<Page>
These futures contracts involve elements of market risk in excess of the amount
reflected in the Statement of Assets and Liabilities. The Fund bears the risk of
an unfavorable change in the value of the underlying securities. Risks may also
arise upon entering into theses contracts from 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 SIX FOR THE YEAR
MONTHS ENDED ENDED
APRIL 30, 2005 OCTOBER 31, 2004
---------------------------------- ----------------------------------
(UNAUDITED)
SHARES AMOUNT SHARES AMOUNT
--------------- --------------- --------------- ---------------
CLASS A SHARES
Sold 83,463 $ 780,171 513,280 $ 4,804,882
Conversion from Class B 19,077,553 177,802,790 -- --
Reinvestment of dividends 20,014 186,753 22,990 214,078
Redeemed (415,706) (3,884,333) (1,383,423) (12,946,742)
--------------- --------------- --------------- ---------------
Net increase (decrease) -- Class A 18,765,324 174,885,381 (847,153) (7,927,782)
--------------- --------------- --------------- ---------------
CLASS B SHARES
Sold 397,114 3,641,003 1,517,976 13,883,792
Conversion to Class A (19,431,999) (177,802,790) -- --
Reinvestment of dividends 295,933 2,710,672 645,707 5,907,269
Redeemed (4,210,731) (38,642,367) (12,345,354) (112,864,951)
--------------- --------------- --------------- ---------------
Net decrease -- Class B (22,949,683) (210,093,482) (10,181,671) (93,073,890)
--------------- --------------- --------------- ---------------
CLASS C SHARES
Sold 75,826 703,403 410,963 3,799,461
Reinvestment of dividends 16,220 149,895 30,647 282,875
Redeemed (236,085) (2,184,852) (885,953) (8,161,101)
--------------- --------------- --------------- ---------------
Net decrease -- Class C (144,039) (1,331,554) (444,343) (4,078,765)
--------------- --------------- --------------- ---------------
CLASS D SHARES
Sold 186,005 1,703,687 453,643 4,145,381
Reinvestment of dividends 21,030 192,343 45,843 418,438
Redeemed (228,023) (2,087,133) (1,277,486) (11,698,536)
--------------- --------------- --------------- ---------------
Net decrease -- Class D (20,988) (191,103) (778,000) (7,134,717)
--------------- --------------- --------------- ---------------
Net decrease in Fund (4,349,386) $ (36,730,758) (12,251,167) $ (112,215,154)
=============== =============== =============== ===============
</Table>
7. FEDERAL INCOME TAX STATUS
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally
20
<Page>
accepted accounting principles. These "book/tax" differences are either
considered temporary or permanent in nature. To the extent these differences are
permanent in nature, such amounts are reclassified within the capital accounts
based on their federal tax-basis treatment; temporary differences do not require
reclassification. Dividends and distributions which exceed net investment income
and net realized capital gains for tax purposes are reported as distributions of
paid-in-capital.
As of October 31, 2004, the Fund had a net capital loss carryforward of
$7,355,496 of which $2,381,171 will expire on October 31, 2007, $3,711,589 will
expire on October 31, 2011 and $1,262,736 will expire on October 31, 2012 to
offset future capital gains to the extent provided by regulations.
As of October 31, 2004, the Fund had temporary book/tax differences primarily
attributable to book amortization of premiums on debt securities and
mark-to-market of open futures contracts.
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 consolidated class action. 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. On March 10, 2005,
Plaintiffs sought leave to supplement their complaint to assert claims on behalf
of other investors. While the Fund and Adviser believe that each 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 MORTGAGE SECURITIES TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED OCTOBER 31,
MONTHS ENDED --------------------------------------------------------------
APRIL 30, 2005 2004 2003 2002 2001 2000
---------------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.40 $ 9.29 $ 9.58 $ 9.51 $ 8.98 $ 9.01
---------------- ---------- ---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income 0.09 0.07 0.12 0.43 0.54 0.63
Net realized and unrealized gain (loss) 0.02 0.36 0.04 0.12 0.53 (0.03)
---------------- ---------- ---------- ---------- ---------- ----------
Total income from investment operations 0.11 0.43 0.16 0.55 1.07 0.60
---------------- ---------- ---------- ---------- ---------- ----------
Less dividends from net investment income (0.19) (0.32) (0.45) (0.48) (0.54) (0.63)
---------------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 9.32 $ 9.40 $ 9.29 $ 9.58 $ 9.51 $ 8.98
================ ========== ========== ========== ========== ==========
TOTAL RETURN+ 1.21%(2) 4.74% 1.70% 6.14% 12.28% 6.97%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 0.98%(3) 0.91% 0.92% 0.90% 0.91% 0.82%
Net investment income 2.09%(3) 1.52% 1.69% 4.51% 5.90% 7.05%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 185,555 $ 10,663 $ 18,409 $ 22,713 $ 8,593 $ 4,821
Portfolio turnover rate 379%(2) 666% 654% 25% 157% 64%
</Table>
- ----------
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(2) NOT ANNUALIZED.
(3) ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS
22
<Page>
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED OCTOBER 31,
MONTHS ENDED --------------------------------------------------------------
APRIL 30, 2005 2004 2003 2002 2001 2000
---------------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.23 $ 9.12 $ 9.42 $ 9.35 $ 8.85 $ 8.87
---------------- ---------- ---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income 0.05 0.00 0.05 0.36 0.47 0.55
Net realized and unrealized gain (loss) 0.03 0.36 0.03 0.12 0.50 (0.02)
---------------- ---------- ---------- ---------- ---------- ----------
Total income from investment operations 0.08 0.36 0.08 0.48 0.97 0.53
---------------- ---------- ---------- ---------- ---------- ----------
Less dividends from net investment income (0.16) (0.25) (0.38) (0.41) (0.47) (0.55)
---------------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 9.15 $ 9.23 $ 9.12 $ 9.42 $ 9.35 $ 8.85
================ ========== ========== ========== ========== ==========
TOTAL RETURN+ 0.83%(2) 4.05% 0.89% 5.36% 11.38% 6.26%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 1.63%(3) 1.59% 1.56% 1.55% 1.56% 1.57%
Net investment income 1.44%(3) 0.84% 1.05% 3.86% 5.25% 6.30%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 92,527 $ 305,066 $ 394,399 $ 476,023 $ 490,351 $ 456,418
Portfolio turnover rate 379%(2) 666% 654% 25% 157% 64%
</Table>
- ----------
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(2) NOT ANNUALIZED.
(3) ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS
23
<Page>
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED OCTOBER 31,
MONTHS ENDED --------------------------------------------------------------
APRIL 30, 2005 2004 2003 2002 2001 2000
---------------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.31 $ 9.20 $ 9.50 $ 9.43 $ 8.93 $ 8.95
---------------- ---------- ---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income 0.06 0.01 0.06 0.36 0.48 0.56
Net realized and unrealized gain (loss) 0.04 0.35 0.03 0.12 0.50 (0.02)
---------------- ---------- ---------- ---------- ---------- ----------
Total income from investment operations 0.10 0.36 0.09 0.48 0.98 0.54
---------------- ---------- ---------- ---------- ---------- ----------
Less dividends from net investment income (0.17) (0.25) (0.39) (0.41) (0.48) (0.56)
---------------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 9.24 $ 9.31 $ 9.20 $ 9.50 $ 9.43 $ 8.93
================ ========== ========== ========== ========== ==========
TOTAL RETURN+ 1.04%(2) 4.03% 0.91% 5.35% 11.33% 6.26%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 1.47%(3) 1.59% 1.56% 1.55% 1.56% 1.57%
Net investment income 1.60%(3) 0.84% 1.05% 3.86% 5.25% 6.30%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 11,431 $ 12,864 $ 16,803 $ 19,116 $ 15,248 $ 10,191
Portfolio turnover rate 379%(2) 666% 654% 25% 157% 64%
</Table>
- ----------
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(2) NOT ANNUALIZED.
(3) ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS
24
<Page>
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED OCTOBER 31,
MONTHS ENDED --------------------------------------------------------------
APRIL 30, 2005 2004 2003 2002 2001 2000
---------------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.21 $ 9.10 $ 9.39 $ 9.33 $ 8.84 $ 8.86
---------------- ---------- ---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income 0.09 0.08 0.13 0.43 0.55 0.63
Net realized and unrealized gain (loss) 0.04 0.36 0.04 0.12 0.49 (0.02)
---------------- ---------- ---------- ---------- ---------- ----------
Total income from investment operations 0.13 0.44 0.17 0.55 1.04 0.61
---------------- ---------- ---------- ---------- ---------- ----------
Less dividends from net investment income (0.20) (0.33) (0.46) (0.49) (0.55) (0.63)
---------------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 9.14 $ 9.21 $ 9.10 $ 9.39 $ 9.33 $ 8.84
================ ========== ========== ========== ========== ==========
TOTAL RETURN+ 1.37%(2) 4.93% 1.85% 6.14% 12.23% 7.17%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 0.78%(3) 0.74% 0.71% 0.70% 0.71% 0.72%
Net investment income 2.29%(3) 1.69% 1.90% 4.71% 6.10% 7.15%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 12,448 $ 12,742 $ 19,677 $ 12,297 $ 6,206 $ 4,378
Portfolio turnover rate 379%(2) 666% 654% 25% 157% 64%
</Table>
- ----------
+ CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE
PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(2) NOT ANNUALIZED.
(3) ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS
25
<Page>
(This page has been left blank intentionally.)
<Page>
(This page has been left blank intentionally.)
<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
The financial statements included herein have been taken from the records of the
Fund without examination by the independent auditors and accordingly they do not
express an opinion thereon.
This report is submitted for the general information of the shareholders of the
Fund. For more detailed information about the Fund, its fees and expenses and
other pertinent information, please read its Prospectus. The Fund's Statement of
Additional Information contains additional information about the Fund, including
its trustees. It is available, without charge, by calling (800) 869-NEWS.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective Prospectus. Read the
Prospectus carefully before investing.
Investments and services offered through Morgan Stanley DW Inc., member SIPC.
Morgan Stanley Distributors Inc., member NASD.
(C) 2005 Morgan Stanley
[MORGAN STANLEY LOGO]
37895RPT RA05-00444P-Y04/05
[GRAPHIC]
MORGAN STANLEY FUNDS
MORGAN STANLEY
MORTGAGE SECURITIES
TRUST
SEMIANNUAL REPORT
APRIL 30, 2005
[MORGAN STANLEY LOGO]
<Page>
Item 2. Code of Ethics.
Not applicable for semiannual reports.
Item 3. Audit Committee Financial Expert.
Not applicable for semiannual reports.
Item 4. Principal Accountant Fees and Services
Not applicable for semiannual reports.
Item 5. Audit Committee of Listed Registrants.
Not applicable for semiannual reports.
Item 6.
Refer to Item 1.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable for semiannual reports.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Applicable only to reports filed by closed-end funds.
Item 9. Closed-End Fund Repurchases
Applicable to reports filed by closed-end funds.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
<Page>
Item 11. Controls and Procedures
(a) The Fund's principal executive officer and principal financial officer have
concluded that the Fund's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Fund in this Form N-CSR
was recorded, processed, summarized and reported within the time periods
specified in the Securities 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 12. Exhibits
(a) Code of Ethics - Not applicable for semiannual reports.
(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Morgan Stanley Mortgage Securities Trust
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
June 16, 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
June 16, 2005
/s/ Francis Smith
Francis Smith
Principal Financial Officer
June 16, 2005