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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: 811-03326
Morgan Stanley U.S. Government Money Market 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: January 31, 2006
Date of reporting period: January 31, 2006
Item 1 - Report to Shareholders
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WELCOME, SHAREHOLDER:
IN THIS REPORT, YOU'LL LEARN ABOUT HOW YOUR INVESTMENT IN MORGAN STANLEY U.S.
GOVERNMENT MONEY MARKET 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 A MUTUAL FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. AN
INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND
SEEKS TO PRESERVE THE VALUE OF AN INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE
TO LOSE MONEY BY INVESTING IN THE FUND. PLEASE SEE THE PROSPECTUS FOR MORE
COMPLETE INFORMATION ON INVESTMENT RISKS.
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FUND REPORT
For the year ended January 31, 2006
MARKET CONDITIONS
During the 12-month period ended January 31, 2006, the Federal Open Market
Committee (the "Fed") continued its pattern of raising short-term rates which
began in June of 2004. Through 14 steps of 25 basis points each -- including
nine during the 12 months covered by this report -- the Fed increased its target
rate for federal funds from 1.00 percent to 4.50 percent.
Short-term rates rose alongside the federal funds rate, providing increased
return opportunities for investors in money market funds.
PERFORMANCE ANALYSIS
As of January 31, 2006, Morgan Stanley U.S. Government Money Market Trust had
net assets in excess of $937 million and an average portfolio maturity of 36
days. For the 12-month period ended January 31, 2006, the Fund returned 2.71
percent. For the seven-day period ended January 31, 2006, the Fund provided an
effective annualized yield of 3.70 percent and a current annualized yield of
3.63 percent, while its 30-day moving average annualized yield for January was
3.62 percent. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
Our strategy in managing the Fund remained consistent with our long-term focus
on preservation of capital and liquidity. We adhered to a conservative approach
in managing the Fund, emphasizing high-quality money market obligations. We
avoided the use of derivatives or structured notes that might fluctuate
excessively with changing interest rates. We also took advantage of the rising
yields available on the money market securities. As short-term interest rates
climbed, we reinvested the proceeds of maturing short-term holdings into
higher-yielding securities.
PORTFOLIO COMPOSITION
<Table>
U.S. Government Agencies 81.3%
Repurchase Agreements 18.1
U.S. Treasury Bill 0.6
</Table>
MATURITY SCHEDULE
<Table>
1 - 30 Days 66.6%
31 - 60 Days 13.8
61 - 90 Days 8.7
91 - 120 Days 0.9
121 + Days 10.0
</Table>
DATA AS OF JANUARY 31, 2006. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR
PORTFOLIO COMPOSITION AND MATURITY SCHEDULE ARE AS A PERCENTAGE OF TOTAL
INVESTMENTS.
2
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INVESTMENT STRATEGY
THE FUND WILL INVEST IN HIGH QUALITY, SHORT-TERM U.S. GOVERNMENT SECURITIES. THE
FUND'S "INVESTMENT ADVISER," MORGAN STANLEY INVESTMENT ADVISORS INC., SEEKS TO
MAINTAIN THE FUND'S SHARE PRICE AT $1.00. THE SHARE PRICE REMAINING STABLE AT
$1.00 MEANS THAT THE FUND WOULD PRESERVE THE PRINCIPAL VALUE OF YOUR INVESTMENT.
AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN THE FUND.
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.
HOUSEHOLDING NOTICE
TO REDUCE PRINTING AND MAILING COSTS, THE FUND ATTEMPTS TO ELIMINATE DUPLICATE
MAILINGS TO THE SAME ADDRESS. THE FUND DELIVERS A SINGLE COPY OF CERTAIN
SHAREHOLDER DOCUMENTS, INCLUDING SHAREHOLDER REPORTS, PROSPECTUSES AND PROXY
MATERIALS, TO INVESTORS WITH THE SAME LAST NAME WHO RESIDE AT THE SAME ADDRESS.
YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME
UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE
DOCUMENTS BY CALLING (800) 350-6414, 8:00 A.M. TO 8:00 P.M., ET. ONCE OUR
CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING
INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS.
3
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EXPENSE EXAMPLE
As a shareholder of the Fund, you incur ongoing costs, including advisory 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 08/01/05 - 01/31/06.
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. 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 that have transactional costs, such as sales charges
(loads), and redemption fees, or exchange fees.
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
08/01/05 -
08/01/05 01/31/06 01/31/06
------------- ------------- ---------------
Actual (1.62% return) $ 1,000.00 $ 1,016.20 $ 3.85
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,021.66 $ 3.86
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.75%
MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY
186/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). IF THE FUND HAD BORNE ALL OF
ITS EXPENSES THAT WERE REIMBURSED OR WAIVED BY THE INVESTMENT ADVISER AND
ADMINISTRATOR, THE ANNUALIZED EXPENSE RATIO WOULD HAVE BEEN 0.77%.
4
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MORGAN STANLEY U.S. GOVERNMENT MONEY MARKET TRUST
PORTFOLIO OF INVESTMENTS - JANUARY 31, 2006
<Table>
<Caption>
ANNUALIZED
PRINCIPAL YIELD
AMOUNT IN ON DATE OF MATURITY
THOUSANDS DESCRIPTION PURCHASE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY - DISCOUNT NOTES (64.9%)
$ 25,000 Federal Farm Credit Banks 4.19% 02/08/06 $ 24,979,729
397,573 Federal Home Loan Banks 4.23 - 4.52 02/03/06 - 06/07/06 395,631,939
91,913 Federal Home Loan Mortgage Corp. 4.37 - 4.61 03/27/06 - 07/18/06 90,716,177
97,574 Federal National Mortgage Assoc. 4.12 - 4.65 02/01/06 - 07/26/06 96,925,008
--------------
TOTAL U.S. GOVERNMENT AGENCY - DISCOUNT NOTES
(COST $608,252,853) 608,252,853
--------------
U.S. GOVERNMENT AGENCY - FLOATING RATE NOTES (17.4%)
48,900 Federal Farm Credit Banks 4.29 - 4.42 02/21/06 - 08/01/06 48,897,983
114,000 Federal Home Loan Banks 4.14 - 4.39 05/10/06 - 08/21/06 113,991,261
--------------
TOTAL U.S. GOVERNMENT AGENCY - FLOATING RATE NOTES
(COST $162,889,244) 162,889,244
--------------
REPURCHASE AGREEMENTS (18.2%)
35,000 Banc of America Securities, LLC (dated
01/31/06; proceeds $35,004,307) (a) 4.43 02/01/06 35,000,000
75,000 Deutsche Bank Securities, Inc. (dated
01/31/06; proceeds $75,009,292) (b) 4.46 02/01/06 75,000,000
30,000 Goldman Sachs Group, Inc. (The) (dated
1/26/06; proceeds $30,025,783) (c) 4.42 02/02/06 30,000,000
30,000 Goldman Sachs Group, Inc. (The) (dated
1/23/06; proceeds $30,050,750) (d) 4.35 02/06/06 30,000,000
1,078 The Bank of New York (dated
01/31/06; proceeds $1,077,941) (e) 4.313 02/01/06 1,077,812
--------------
TOTAL REPURCHASE AGREEMENTS
(COST $171,077,812) 171,077,812
--------------
U.S. GOVERNMENT OBLIGATION (0.6%)
6,000 U.S. Treasury Bill (COST $5,994,773) 3.93 02/09/06 5,994,773
--------------
TOTAL INVESTMENTS (COST $948,214,682) (f) 101.1% 948,214,682
LIABILITIES IN EXCESS OF OTHER ASSETS (1.1) (10,389,424)
----- --------------
NET ASSETS 100.0% $ 937,825,258
===== ==============
</Table>
- ----------
(a) COLLATERALIZED BY FEDERAL NATIONAL MORTGAGE ASSOC. 5.00 - 5.50% DUE
01/01/19 - 03/01/20 VALUED AT $35,700,001.
(b) COLLATERALIZED BY FEDERAL NATIONAL MORTGAGE ASSOC. 6.50% DUE 05/01/23
VALUED AT $27,732,967 AND FEDERAL MORTGAGE ACCEPTANCE CORP. 4.00 - 5.50%
DUE 08/01/20 - 05/01/25 VALUED AT $48,767,033.
(c) COLLATERALIZED BY U.S. TREASURY TINTS 0.00% DUE 05/15/21 VALUED AT
$30,600,000.
(d) COLLATERALIZED BY U.S. TREASURY TINTS 0.00% DUE 11/15/17 - 05/15/21
VALUED AT $30,600,000.
(e) COLLATERALIZED BY FEDERAL NATIONAL MORTGAGE ASSOC. 5.50% DUE 08/01/35
VALUED AT $1,099,368.
(f) COST IS THE SAME FOR FEDERAL INCOME TAX PURPOSES.
SEE NOTES TO FINANCIAL STATEMENTS
5
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MORGAN STANLEY U.S. GOVERNMENT MONEY MARKET TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JANUARY 31, 2006
<Table>
ASSETS:
Investments in securities, at value (cost $948,214,682)
(including repurchase agreements of $171,077,812) $ 948,214,682
Cash 90,000
Receivable for:
Interest 901,566
Shares of beneficial interest sold 6,852
Prepaid expenses and other assets 40,273
--------------
TOTAL ASSETS 949,253,373
--------------
LIABILITIES:
Payable for:
Shares of beneficial interest redeemed 10,791,906
Investment advisory fee 317,316
Distribution fee 63,109
Transfer agent fee 48,315
Administration fee 41,748
Accrued expenses and other payables 165,721
--------------
TOTAL LIABILITIES 11,428,115
--------------
NET ASSETS $ 937,825,258
==============
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 937,738,851
Accumulated undistributed net investment income 86,407
--------------
NET ASSETS $ 937,825,258
==============
NET ASSET VALUE PER SHARE
937,803,763 shares outstanding (UNLIMITED SHARES AUTHORIZED OF $.01 PAR VALUE) $ 1.00
==============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
6
<Page>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 2006
<Table>
NET INVESTMENT INCOME:
INTEREST INCOME $ 34,228,165
--------------
EXPENSES
Investment advisory fee 4,045,523
Transfer agent fees and expenses 1,799,172
Distribution fee 995,958
Administration fee 508,173
Shareholder reports and notices 164,497
Professional fees 65,142
Registration fees 60,443
Custodian fees 52,107
Trustees' fees and expenses 21,236
Other 56,315
--------------
TOTAL EXPENSES 7,768,566
Less: amounts waived/reimbursed (168,052)
--------------
NET EXPENSES 7,600,514
--------------
NET INVESTMENT INCOME $ 26,627,651
==============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
7
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JANUARY 31, 2006 JANUARY 31, 2005
---------------- ----------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 26,627,651 $ 8,941,329
Dividends to shareholders from net investment income (26,626,357) (8,966,340)
Net decrease from transactions in shares of beneficial interest (184,921,785) (146,513,383)
---------------- ----------------
NET DECREASE (184,920,491) (146,538,394)
NET ASSETS:
Beginning of period 1,122,745,749 1,269,284,143
---------------- ----------------
END OF PERIOD
(INCLUDING ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME OF
$86,407 AND $85,113, RESPECTIVELY) $ 937,825,258 $ 1,122,745,749
================ ================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
8
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MORGAN STANLEY U.S. GOVERNMENT MONEY MARKET TRUST
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2006
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley U.S. Government Money Market 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
objectives are security of principal, high current income and liquidity. The
Fund was organized as a Massachusetts business trust on November 18, 1981 and
commenced operations on February 17, 1982.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- Portfolio securities are valued at amortized
cost, which approximates market value, in accordance with Rule 2a-7 of the
Investment Company Act of 1940.
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 -- The Fund may invest directly with institutions in
repurchase agreements. The Fund's custodian receives the collateral, which is
marked-to-market daily to determine that the value of the collateral does not
decrease below the repurchase price plus accrued interest.
D. 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.
E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends and
distributions to shareholders as of the close of each business day.
F. USE OF ESTIMATES -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
2. INVESTMENT ADVISORY/ADMINISTRATION AGREEMENTS
Pursuant to an Investment Advisory Agreement with Morgan Stanley Investment
Advisors Inc. (the "Investment Adviser"), 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: 0.45% to the portion of the daily net assets not exceeding $500
million; 0.375% to the portion of the daily net assets exceeding $500 million
but not exceeding $750 million; 0.325% to the portion of the daily net assets
exceeding $750 million but not exceeding $1 billion; 0.30% to the portion of the
daily net assets exceeding $1 billion but not exceeding $1.5 billion; 0.275% to
the
9
<Page>
portion of the daily net assets exceeding $1.5 billion but not exceeding $2
billion; 0.25% to the portion of the daily net assets exceeding $2 billion but
not exceeding $2.5 billion; 0.225% to the portion of the daily net assets
exceeding $2.5 billion but not exceeding $3 billion; and 0.20% to the portion of
the daily net assets exceeding $3 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 0.05% to the Fund's daily net assets.
For the year ended January 31, 2006 and through April 30, 2006, the Investment
Adviser agreed to waive its fee and reimburse expenses to the extent they exceed
0.75% of the daily net assets of the Fund.
3. PLAN OF DISTRIBUTION
Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the
Investment Adviser and Administrator, is the distributor of the Fund's shares
and in accordance with a Plan of Distribution (the "Plan") pursuant to Rule
12b-1 under the Act, finances certain expenses in connection with the promotion
of sales of Fund shares.
Reimbursements for these expenses are made in monthly payments by the Fund to
the Distributor, which will in no event exceed an amount equal to a payment at
the annual rate of 0.15% of the Fund's average daily net assets during the
month. Expenses incurred by the Distributor pursuant to the Plan in any fiscal
year will not be reimbursed by the Fund through payments accrued in any
subsequent fiscal year. For the year ended January 31, 2006, the distribution
fee was accrued at the annual rate of 0.10%.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales/maturities of portfolio securities
for the year ended January 31, 2006 aggregated $32,457,850,572 and
$32,664,221,565, respectively.
Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and
Distributor, is the Fund's transfer agent.
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. 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. Aggregate
pension costs for the year ended January 31, 2006 included in Trustees' fees and
expenses in the Statement of Operations amounted to $7,373. At January 31, 2006,
the Fund had an accrued pension liability of $62,456 which is included in
accrued expenses in the Statement of Assets and Liabilities.
10
<Page>
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. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest, at $1.00 per share, were as
follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JANUARY 31, 2006 JANUARY 31, 2005
---------------- ----------------
Shares sold 2,112,793,188 2,729,300,423
Shares issued in reinvestment of dividends 26,500,899 8,935,675
---------------- ----------------
2,139,294,087 2,738,236,098
Shares redeemed (2,324,215,872) (2,884,749,481)
---------------- ----------------
Net decrease (184,921,785) (146,513,383)
================ ================
</Table>
6. 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, filed in the United States District
Court Southern District of New York on April 16, 2004, 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 9, 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 stage of the litigation, and no provision has been made in the Fund's
financial statements for the effect, if any, of this matter.
11
<Page>
MORGAN STANLEY U.S. GOVERNMENT MONEY MARKET 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 JANUARY 31,
--------------------------------------------------------------------------
2006 2005 2004 2003 2002
--------- --------- --------- --------- ---------
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- ---------
Net investment income from investment operations 0.027 0.008 0.004 0.011 0.032
Less dividends from net investment income (0.027) (0.008) (0.004) (0.011) (0.032)
--------- --------- --------- --------- ---------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= =========
TOTAL RETURN 2.71% 0.78% 0.45% 1.06% 3.25%
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.75%(1) 0.73% 0.71%(1) 0.74%(1) 0.74%(1)
Net investment income 2.62%(1) 0.74% 0.43%(1) 1.03%(1) 3.14%(1)
SUPPLEMENTAL DATA:
Net assets, end of period, in millions $ 938 $ 1,123 $ 1,269 $ 1,340 $ 1,257
</Table>
- ----------
(1) IF THE FUND HAD BORNE ALL ITS EXPENSES THAT WERE REIMBURSED OR WAIVED BY
THE INVESTMENT ADVISER AND ADMINISTRATOR, THE ANNUALIZED EXPENSE AND NET
INVESTMENT INCOME RATIOS WOULD HAVE BEEN AS FOLLOWS:
<Table>
<Caption>
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO INCOME RATIO
---------------- ------- --------------
JANUARY 31, 2006 0.76% 2.60%
JANUARY 31, 2004 0.71 0.43
JANUARY 31, 2003 0.76 1.01
JANUARY 31, 2002 0.81 3.07
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
12
<Page>
MORGAN STANLEY U.S. GOVERNMENT MONEY MARKET TRUST
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
MORGAN STANLEY U.S. GOVERNMENT MONEY MARKET TRUST:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley U.S. Government Money Market Trust (the "Fund"), including the portfolio
of investments, as of January 31, 2006, 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. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included 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 January 31, 2006, 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 Money Market Trust as of January 31, 2006, 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
MARCH 23, 2006
13
<Page>
MORGAN STANLEY U.S. GOVERNMENT MONEY MARKET 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) DURING OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- --------------------------------------- ----------- ------------ ------------------------------ ------------- --------------------
Michael Bozic (65) Trustee Since Private Investor; Director or 197 Director of various
c/o Kramer Levin Naftalis & Frankel LLP April 1994 Trustee of the Retail Funds business
Counsel to the Independent Trustees (since April 1994) and the organizations.
1177 Avenue of the Americas Institutional Funds (since
New York, NY 10036 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 (73) Trustee Since Consultant; Director or 197 Director of Franklin
1031 N. Chartwell Court January 1993 Trustee of the Retail Funds Covey (time
Salt Lake City, UT 84103 (since January 1993) and the management systems),
Institutional Funds (since BMW Bank of North
July 2003); member of the Utah America, Inc.
Regional Advisory Board of (industrial loan
Pacific Corp. (utility corporation), Escrow
company); formerly Managing Bank USA (industrial
Director of Summit Ventures loan corporation),
LLC (2000-2004) (lobbying and United Space
consulting firm); United Alliance (joint
States Senator (R-Utah) venture between
(1974-1992) and Chairman, Lockheed Martin and
Senate Banking Committee the Boeing Company)
(1980-1986), Mayor of Salt and Nuskin Asia
Lake City, Utah (1971-1974), Pacific (multilevel
Astronaut, Space Shuttle marketing); member
Discovery (April 12-19, 1985), of the board of
and Vice Chairman, Huntsman various civic and
Corporation (chemical charitable
company). organizations.
Wayne E. Hedien (71) Trustee Since Retired; Director or Trustee 197 Director of The PMI
c/o Kramer Levin Naftalis & Frankel LLP September of the Retail Funds (since Group Inc. (private
Counsel to the Independent Trustees 1997 September 1997) and the mortgage insurance);
1177 Avenue of the Americas Institutional Funds (since Trustee and Vice
New York, NY 10036 July 2003); formerly Chairman of The
associated with the Allstate Field Museum of
Companies (1966-1994), most Natural History;
recently as Chairman of The director of various
Allstate Corporation (March other business and
1993-December 1994) and charitable
Chairman and Chief Executive organizations.
Officer of its wholly-owned
subsidiary, Allstate Insurance
Company (July 1989-December
1994).
</Table>
14
<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) DURING OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- --------------------------------------- ----------- ------------ ------------------------------ ------------- --------------------
Dr. Manuel H. Johnson (56) Trustee Since Senior Partner, Johnson 197 Director of NVR,
c/o Johnson Smick Group, Inc. July 1991 Smick International, Inc., a Inc. (home
888 16th Street, NW consulting firm; Chairman of construction);
Suite 740 the Audit Committee and Director of KFX
Washington, D.C. 20006 Director or Trustee of the Energy; Director of
Retail Funds (since July RBS Greenwich
1991) and the Institutional Capital Holdings
Funds (since July 2003); (financial holding
Co-Chairman and a founder of company).
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 (63) Trustee Since President, Kearns & 198 Director of Electro
c/o Kearns & Associates LLC July 2003 Associates LLC (investment Rent Corporation
PMB754 consulting); Deputy Chairman (equipment leasing),
23852 Pacific Coast Highway of the Audit Committee and The Ford Family
Malibu, CA 90265 Director or Trustee of the Foundation, and the
Retail Funds (since July UCLA Foundation.
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 (69) Trustee Since General Partner of Triumph 197 None.
c/o Triumph Capital, L.P. July 1991 Capital, L.P., a private
445 Park Avenue investment partnership;
New York, NY 10022 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 (73) Trustee Since Chairman of Lumelite 198 Trustee and Director
c/o Lumelite Plastics Corporation July 2003 Plastics Corporation; of certain
85 Charles Colman Blvd. Chairman of the Governance investment companies
Pawling, NY 12564 Committee and Director or in the JPMorgan
Trustee of the Retail Funds Funds complex
(since July 2003) and the managed by J.P.
Institutional Funds (since Morgan Investment
June 1992). Management Inc.
</Table>
15
<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) DURING OVERSEEN OTHER DIRECTORSHIPS
INTERESTED TRUSTEE REGISTRANT TIME SERVED* PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- --------------------------------------- ----------- ------------ ------------------------------ ------------- --------------------
Charles A. Fiumefreddo (72) Chairman of Since Chairman and Director or 197 None.
c/o Morgan Stanley Trust the Board July 1991 Trustee of the Retail Funds
Harborside Financial Center, and Trustee (since July 1991) and the
Plaza Two, Institutional Funds (since
Jersey City, NJ 07311 July 2003); formerly Chief
Executive Officer of the
Retail Funds (until
September 2002).
James F. Higgins (57) Trustee Since Director or Trustee of the 197 Director of AXA
c/o Morgan Stanley Trust June 2000 Retail Funds (since June Financial, Inc. and
Harborside Financial Center, 2000) and the Institutional The Equitable Life
Plaza Two, Funds (since July 2003); Assurance Society of
Jersey City, NJ 07311 Senior Advisor of Morgan the United States
Stanley (since August 2000); (financial
Director of Dean Witter services).
Realty Inc.
</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.).
16
<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**
- ------------------------------ -------------- ---------------- -----------------------------------------------------------------
Ronald E. Robison (67) President and Since May 2003 President (since September 2005) and Principal Executive Officer
1221 Avenue of the Americas Principal (since May 2003) of funds in the Fund Complex; President (since
New York, NY 10020 Executive September 2005) and Principal Executive Officer (since May 2003)
Officer of the Van Kampen Funds; Managing Director of Morgan Stanley,
Morgan Stanley Investment Management and Morgan Stanley & Co.
Incorporated; Managing Director and Director of Morgan Stanley
Investment Advisors Inc.; Managing Director and (since May 2002)
Director , Morgan Stanley Investment Management Inc., Managing
Director and (since January 2005) Director of Van Kampen Asset
Management and Van Kampen Investments Inc. Director, President
(since February 2006) and Chief Executive Officer (since February
2006) of Morgan Stanley Services Company Inc., Director of Morgan
Stanley Distributors Inc., Morgan Stanley Distribution, Inc. and
Morgan Stanley Trust; Director of Morgan Stanley SICAV (since May
2004). Formerly, Executive Vice President (July 2003 to September
2005) of funds in the Fund Complex and the Van Kampen Funds;
President and Director of the Institutional Funds (March
2001-July 2003), Chief Global Operating Officer of Morgan Stanley
Investment Management Inc., Chief Administrative Officer of
Morgan Stanley Investment Advisors Inc.; Chief Administrative
Officer of Morgan Stanley Services Company Inc. (November 2003 to
February 2006).
J. David Germany (51) Vice President Since Managing Director and (since December 2005) Chief Investment
25 Cabot Square, Canary Wharf, February 2006 Officer - Global Fixed Income of Morgan Stanley Investment
London, United Kingdom Advisors Inc., Morgan Stanley Investment Management Inc., Van
E144QA Kampen Asset Management and Van Kampen Advisors Inc. Managing
Director and Director of Morgan Stanley Investment Management
Ltd. Vice President (since February 2006) of the Retail and
Institutional Funds.
Dennis F. Shea (52) Vice President Since Managing Director and (since February 2006) Chief Investment
1221 Avenue of the Americas February 2006 Officer - Global Equity of Morgan Stanley Investment Advisors
New York, NY 10020 Inc., Morgan Stanley Investment Management Inc., Van Kampen Asset
Management and Van Kampen Advisors Inc. Vice President (since
February 2006) of the Retail and Institutional Funds. Formerly,
Managing Director and Director of Global Equity Research at
Morgan Stanley.
Barry Fink (51) Vice President Since Managing Director of Morgan Stanley Investment Management, Morgan
1221 Avenue of the Americas February 1997 Stanley Investment Advisors Inc. and Morgan Stanley Investment
New York, NY 10020 Management Inc.; Vice President of the Retail Funds and (since
July 2003) the Institutional Funds; Formerly, General Counsel
(May 2000-February 2006) of Morgan Stanley Investment Management;
Secretary (October 2003 to February 2006), General Counsel (May
2004 to February 2006) and Director (July 1998 to January 2005)
of Morgan Stanley Investment Advisors Inc. and Morgan Stanley
Services Company Inc.; Secretary and General Counsel of Morgan
Stanley Investment Management Inc. (November 2002 to February
2006); Secretary and Director of Morgan Stanley Distributors
Inc.; Secretary (February 1997 to July 2003) and General Counsel
(February 1997 to April 2004) of the Morgan Stanley Retail Funds;
Vice President and Assistant General Counsel of Morgan Stanley
Investment Advisors Inc. and Morgan Stanley Distributors Inc.
(February 1997 to December 2001).
</Table>
17
<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**
- ------------------------------ -------------- ---------------- -----------------------------------------------------------------
Amy R. Doberman (43) Vice President Since July 2004 Managing Director and General Counsel, U.S. Investment Management
1221 Avenue of the Americas (since July 2004); Vice President of the Retail Funds and the
New York, NY 10020 Institutional Funds (since July 2004); Vice President of the Van
Kampen Funds (since August 2004); Secretary (since February 2006)
and Managing Director (since July 2004) of Morgan Stanley
Investment Advisors Inc., Morgan Stanley Services Company Inc.,
Morgan Stanley Investment Management Inc., Van Kampen Asset
Management, Van Kampen Advisors Inc. and Van Kampen Investments
Inc.; Secretary (since February 2006) of Morgan Stanley
Distributors Inc. and Morgan Stanley Distribution, Inc. Formerly,
Managing Director and General Counsel - Americas, UBS Global
Asset Management (July 2000 to July 2004).
Carsten Otto (42) Chief Since Managing Director and U.S. Director of Compliance for Morgan
1221 Avenue of the Americas Compliance October 2004 Stanley Investment Management (since October 2004); Managing
New York, NY 10020 Officer Director and Chief Compliance Officer (since February 2005) of
Morgan Stanley Investment Advisors Inc. and Morgan Stanley
Investment Management Inc. and (since June 2004) of Van Kampen
Asset Management, Van Kampen Advisors Inc. and Van Kampen
Investments Inc. Formerly, Assistant Secretary and Assistant
General Counsel of the Retail Funds.
Stefanie V. Chang (39) Vice President Since July 2003 Executive Director of Morgan Stanley & Co. Incorporated, Morgan
1221 Avenue of the Americas Stanley Investment Advisors Inc., Morgan Stanley Investment
New York, NY 10020 Management Inc., Van Kampen Asset Management, Van Kampen Advisors
Inc. and Van Kampen Investments Inc. Vice President of the Retail
Funds (since July 2002) and the Institutional Funds (since
December 1997). Formerly, Secretary of Van Kampen Asset
Management Inc., Van Kampen Advisors Inc. and Van Kampen
Investments Inc. (December 2002 to February 2006); Secretary of
Morgan Stanley Distribution, Inc. (October 2005 to February
2006).
Francis J. Smith (40) Treasurer and Treasurer since Executive Director of Morgan Stanley Investment Advisors Inc. and
c/o Morgan Stanley Trust Chief July 2003 and Morgan Stanley Services Company Inc.; Treasurer and Chief
Harborside Financial Center, Financial Chief Financial Financial Officer of the Morgan Stanley Retail Funds (since July
Plaza Two, Officer Officer since 2003). Formerly Vice President of the Retail Funds (September
Jersey City, NJ 07311 September 2002 2002-July 2003).
Thomas F. Caloia (59) Vice President Since July 2003 Executive Director of Morgan Stanley Investment Advisors Inc. and
c/o Morgan Stanley Trust Morgan Stanley Services Company Inc.; Assistant Treasurer of
Harborside Financial Center, Morgan Stanley Investment Advisors Inc., Morgan Stanley Services
Plaza Two, Company Inc. and Morgan Stanley Distributors Inc.; Vice President
Jersey City, NJ 07311 of the Retail Funds. Formerly, Treasurer of the Retail Funds
(April 1989-July 2003).
</Table>
18
<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**
- ------------------------------ -------------- ---------------- -----------------------------------------------------------------
Mary E. Mullin (38) Secretary Since July 2003 Executive Director of Morgan Stanley & Co. Incorporated, Morgan
1221 Avenue of the Americas Stanley Investment Advisors Inc. and Morgan Stanley Investment
New York, NY 10020 Management Inc. Secretary of the Retail Funds (since July 2003)
and the Institutional Funds (since June 1999).
</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.
2006 FEDERAL TAX NOTICE (UNAUDITED)
Of the Fund's ordinary dividends paid during the fiscal
year ended January 31, 2006, 50.91% 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.
19
<Page>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael E. Nugent
Fergus Reid
OFFICERS
Charles A. Fiumefreddo
CHAIRMAN OF THE BOARD
Ronald E. Robison
PRESIDENT and PRINCIPAL EXECUTIVE OFFICER
J. David Germany
VICE PRESIDENT
Dennis F. Shea
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) 2006 Morgan Stanley
[MORGAN STANLEY LOGO]
37960RPT-RA06-00215P-Y01/06
[GRAPHIC]
MORGAN STANLEY FUNDS
MORGAN STANLEY
U.S. GOVERNMENT
MONEY MARKET TRUST
ANNUAL REPORT
JANUARY 31, 2006
[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)."
Additionally, Exhibit B was amended to remove Mitchell M. Merin as a covered
officer.
(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>
MORGAN STANLEY U.S GOVT MONEY MARKET
Item 4. Principal Accountant Fees and Services.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
2006
<Table>
Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 25,768 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 540 (2) $ 5,190,300 (2)
TAX FEES $ 4,335 (3) $ 2,044,491 (4)
ALL OTHER FEES $ - $ -
TOTAL NON-AUDIT FEES $ 4,875 $ 7,234,791
TOTAL $ 30,643 $ 7,234,791
</Table>
2005
<Table>
Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 23,689 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 684 (2) $ 3,746,495 (2)
TAX FEES $ 4,757 (3) $ 79,800 (4)
ALL OTHER FEES $ - $ - (5)
TOTAL NON-AUDIT FEES $ 5,441 $ 3,826,295
TOTAL $ 29,130 $ 3,826,295
</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
<Page>
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 reports filed by closed-end funds.
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 only to reports filed by closed-end funds.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures
(a) The Fund's principal executive officer and principal financial officer have
concluded that the Fund's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Fund in this Form N-CSR
was recorded, processed, summarized and reported within the time periods
specified in the Securities 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) 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 Money Market Trust
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
March 23, 2006
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
March 23, 2006
/s/ Francis Smith
Francis Smith
Principal Financial Officer
March 23, 2006