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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: 811-02932
Morgan Stanley High Yield Securities Inc.
(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: August 31, 2006
Date of reporting period: August 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 High
Yield Securities Inc. performed during the annual period. We will provide an
overview of the market conditions, and discuss some of the factors that affected
performance during the reporting period. In addition, this report includes the
Fund's financial statements and a list of Fund investments.
THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS FOR THE FUND BEING
OFFERED.
MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE
IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. THE FUND IS
SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT MARKET VALUES OF
SECURITIES OWNED BY THE FUND WILL DECLINE AND, THEREFORE, THE VALUE OF THE
FUND'S SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE
MONEY INVESTING IN THIS FUND. PLEASE SEE THE PROSPECTUS FOR MORE COMPLETE
INFORMATION ON INVESTMENT RISKS.
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FUND REPORT
FOR THE YEAR ENDED AUGUST 31, 2006
TOTAL RETURN FOR THE 12 MONTHS ENDED AUGUST 31, 2006
LEHMAN
BROTHERS U.S.
CORPORATE LIPPER HIGH
HIGH CURRENT
YIELD-2% CSFB YIELD BOND
ISSUER CAP HIGH YIELD FUNDS
CLASS A CLASS B CLASS C CLASS D INDEX(1) INDEX(2) INDEX(3)
3.84% 3.34% 3.25% 4.11% 4.83% 5.44% 4.89%
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.
MARKET CONDITIONS
In the early months of the reporting period, the economy continued to show
resilience, inflation remained in check and the equity market improved.
Together, these factors provided support for the high yield market, helping to
keep returns in positive territory despite a declining appetite for corporate
credit risk and rising interest rates.
In the first quarter of 2006, the high yield market benefited from a rekindled
investor interest in adding risk, which was fueled by continued solid economic
growth and a briskly rising equity market. The healthy gains in the high yield
market came despite declining Treasury prices, tight credit spreads, moderate
new issuance and outflows from mutual funds. Against this backdrop, the riskiest
segment of the bond market -- securities rated CCC and below -- had the best
showing, outperforming higher-quality issues.
Although returns dipped in the second quarter, the high yield market still fared
better than most other asset classes, including equities. The low positive
returns of the high yield market came despite robust new issuance, increased
market volatility and lower Treasury prices. Lower-rated bonds continued to
outperform their higher-rated counterparts, with CCC-rated securities turning in
the best returns.
In the last months of the reporting period, high yield prices rebounded nicely
as investors appeared confident that good economic growth and loose credit
conditions would continue to be positive for high yield credits. High yield
bonds again outpaced equities. However, because of their high correlation to
Treasuries, which rallied in July, higher-quality fixed-income securities posted
better overall returns than lower-rated, high yield bonds. Of note, the Federal
Open Market Committee (the "Fed") finally paused in its two-year long series of
interest-rate increases, electing not to raise the target federal funds rate at
its August meeting.
Industry returns varied considerably across individual sectors, many of which
were significantly influenced by individual companies. For example, the
aerospace sector benefited from a rebound in airline issues, while poor
performance of auto-related companies hindered the transportation sector. In the
second half of the period, however, transportation and manufacturing were the
best performing sectors due to strong gains by the auto industry. In July, the
health care sector was hurt by
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the announcement that HCA, one of the larger issuers in high yield, had agreed
to be bought out in a highly leveraged transaction.
PERFORMANCE ANALYSIS
Morgan Stanley High Yield Securities Inc. underperformed the Lehman Brothers
U.S. Corporate High Yield-2% Issuer Cap Index (the "Index"), the CSFB High Yield
Index and the Lipper High Current Yield Bond Funds Index for the 12 months ended
August 31, 2006, assuming no deduction of applicable sales charges.
In general, the Fund was overweighted versus the Index in the chemicals and
food/tobacco sectors, and underweighted in utilities throughout the reporting
year which detracted from performance. Early in the period, the Fund was also
underweight versus the Index in the transportation sector, which was beneficial
to performance given the struggles in the auto industry. From January through
August, the Fund had an overweight in transportation companies relative to the
Index, which helped performance as the sector rebounded. Strong security
selection in the sector, as well as in the utilities sector, also added to
performance. On a less positive note, security selection in forest products
detracted from performance.
Regarding credit risk, the Fund's overall average credit quality was in line
with the Index early in the period but its yield-to-maturity was comparatively
lower, signifying less relative credit risk. We began reducing the risk in the
portfolio in order to take advantage of our belief that high yield prices may
move lower and that spreads, which were tighter than historical averages, may
widen. We continued this defensive strategy throughout the duration of the
reporting period, which tempered the Fund's returns from February through May,
but was additive to performance over the last three months of the period when
higher-rated bonds outperformed lower-quality issues.
THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM AS
DISCUSSED HEREIN OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE FUND IN
THE FUTURE.
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TOP FIVE INDUSTRIES
Electric Utilities 6.9%
Chemicals: Specialty 5.5
Oil & Gas Production 5.0
Casino/Gaming 4.5
Cable/Satellite TV 3.9
LONG-TERM CREDIT ANALYSIS
A/A 2.1%
Baa/BBB+ 2.3
Ba/BB- 26.0
B/B 51.2
Caa/CCC 16.6
NR/NA 1.8
DATA AS OF AUGUST 31, 2006. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR TOP
FIVE INDUSTRIES ARE AS A PERCENTAGE OF NET ASSETS AND ALL PERCENTAGES FOR
LONG-TERM CREDIT ANALYSIS ARE AS A PERCENTAGE OF 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.
INVESTMENT STRATEGY
THE FUND WILL NORMALLY INVEST AT LEAST 80 PERCENT OF ITS ASSETS IN FIXED-INCOME
SECURITIES (INCLUDING ZERO COUPON SECURITIES) RATED BELOW BAA BY MOODY'S
INVESTORS SERVICE ("MOODY'S") OR BELOW BBB BY STANDARD & POOR'S RATING GROUP, A
DIVISION OF THE MCGRAW-HILL COMPANIES, INC. ("S&P"), OR IN NON-RATED SECURITIES
CONSIDERED BY THE FUND'S INVESTMENT ADVISER TO BE APPROPRIATE INVESTMENTS FOR
THE FUND. SUCH SECURITIES MAY ALSO INCLUDE "RULE 144A" SECURITIES, WHICH ARE
SUBJECT TO RESALE RESTRICTIONS. SHAREHOLDERS OF THE FUND WILL RECEIVE AT LEAST
60 DAYS' PRIOR NOTICE OF ANY CHANGES IN THIS POLICY. SECURITIES RATED BELOW BAA
OR BBB ARE COMMONLY KNOWN AS "JUNK BONDS." THERE ARE NO MINIMUM QUALITY RATINGS
FOR INVESTMENTS, AND AS SUCH THE FUND MAY INVEST IN SECURITIES WHICH NO LONGER
MAKE PAYMENTS OF INTEREST OR PRINCIPAL.
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. THE SEMIANNUAL REPORTS AND THE ANNUAL REPORTS ARE
FILED ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC) ON FORM
N-CSRS AND FORM N-CSR, RESPECTIVELY. 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,
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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.
PROXY VOTING POLICY AND PROCEDURES AND PROXY VOTING RECORD
YOU MAY OBTAIN A COPY OF THE FUND'S PROXY VOTING POLICY AND PROCEDURES WITHOUT
CHARGE, UPON REQUEST, BY CALLING TOLL FREE (800) 869-NEWS OR BY VISITING THE
MUTUAL FUND CENTER ON OUR WEB SITE AT www.morganstanley.com. IT IS ALSO
AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT
http://www.sec.gov.
YOU MAY OBTAIN INFORMATION REGARDING HOW THE FUND VOTED PROXIES RELATING TO
PORTFOLIO SECURITIES DURING THE MOST RECENT TWELVE-MONTH PERIOD ENDED JUNE 30
WITHOUT CHARGE BY VISITING THE MUTUAL FUND CENTER ON OUR WEB SITE AT
www.morganstanley.com. THIS INFORMATION IS ALSO AVAILABLE ON THE SECURITIES AND
EXCHANGE COMMISSION'S WEB SITE AT http://www.sec.gov.
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.
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PERFORMANCE SUMMARY
PERFORMANCE OF $10,000 INVESTMENT-CLASS A AND CLASS D
[CHART]
($ IN THOUSANDS)
ENDING VALUE
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<Caption>
Lehman Brothers U.S.
Corporate Lipper High
High Yield-2% Issuer CSFB High Current Yield
CLASS A++ CLASS D++ Cap Index(1) Yield Index(2) Bond Funds Index(3)
31-Aug-96 $ 9,575 $10,000 $10,000 $10,000 $10,000
31-Aug-97 $10,986 $11,501 $11,496 $11,543 $11,556
31-Aug-98 $11,030 $11,574 $11,874 $11,711 $11,710
31-Aug-99 $11,192 $11,767 $12,361 $12,266 $12,347
31-Aug-00 $10,198 $10,744 $12,501 $12,521 $12,427
31-Aug-01 $ 6,420 $ 6,774 $12,560 $12,588 $11,491
31-Aug-02 $ 5,027 $ 5,321 $11,768 $12,282 $10,484
31-Aug-03 $ 6,026 $ 6,429 $14,640 $15,119 $12,768
31-Aug-04 $ 6,954 $ 7,388 $16,682 $17,337 $14,397
31-Aug-05 $ 7,430 $ 7,908 $18,200 $18,895 $15,699
31-Aug-06 $ 7,715 $ 8,233 $19,079 $19,922 $16,468
</Table>
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AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED AUGUST 31, 2006
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<Caption>
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS D SHARES++
(SINCE 09/26/79) (SINCE 07/28/97) (SINCE 07/28/97) (SINCE 09/26/79)
SYMBOL HYLAX HYLBX HYLCX HYLDX
1 YEAR 3.84%(4) 3.34%(4) 3.25%(4) 4.11%(4)
(0.58)(5) (1.49)(5) 2.29(5) --
5 YEARS 3.74(4) 3.01(4) 3.01(4) 3.98(4)
2.85(5) 2.75(5) 3.01(5) --
10 YEARS (2.14)(4) -- -- (1.93)(4)
(2.56)(5) -- -- --
SINCE INCEPTION 4.99(4) (4.34)(4) (4.39)(4) 5.24(4)
4.82(5) (4.34)(5) (4.39)(5) --
</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 MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT
www.morganstanley.com OR SPEAK WITH YOUR FINANCIAL ADVISOR. INVESTMENT RETURNS
AND PRINCIPAL VALUE WILL FLUCTUATE AND FUND SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. THE GRAPH AND TABLE DO NOT REFLECT THE
DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE
REDEMPTION OF FUND SHARES. PERFORMANCE FOR CLASS A, CLASS B, CLASS C, AND CLASS
D SHARES WILL VARY DUE TO DIFFERENCES IN SALES CHARGES AND EXPENSES.
PRIOR TO JULY 28, 1997 THE FUND OFFERED ONLY ONE CLASS OF SHARES. BECAUSE THE
DISTRIBUTION ARRANGEMENT FOR CLASS A MOST CLOSELY RESEMBLED THE DISTRIBUTION
ARRANGEMENT APPLICABLE PRIOR TO THE IMPLEMENTATION OF MULTIPLE CLASSES (I.E.,
CLASS A IS SOLD WITH A FRONT-END SALES CHARGE), HISTORICAL PERFORMANCE
INFORMATION HAS BEEN RESTATED TO REFLECT THE ACTUAL MAXIMUM SALES CHARGE
APPLICABLE TO CLASS A (I.E., 4.25%) AS COMPARED TO THE 5.50% SALES CHARGE IN
EFFECT PRIOR TO JULY 28, 1997. IN ADDITION, CLASS A SHARES ARE NOW SUBJECT TO AN
ONGOING 12B-1 FEE WHICH IS REFLECTED IN THE RESTATED PERFORMANCE FOR THAT CLASS.
BECAUSE ALL SHARES OF THE FUND HELD PRIOR TO JULY 28, 1997 WERE DESIGNATED CLASS
D SHARES, THE FUND'S HISTORICAL PERFORMANCE HAS BEEN RESTATED TO REFLECT THE
ABSENCE OF ANY SALES CHARGE.
* THE MAXIMUM FRONT-END SALES CHARGE FOR CLASS A IS 4.25%.
** THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B IS 5.0%.
THE CDSC DECLINES TO 0% AFTER SIX YEARS.
+ THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE FOR CLASS C IS 1.0% FOR SHARES
REDEEMED WITHIN ONE YEAR OF PURCHASE.
++ CLASS D HAS NO SALES CHARGE.
(1) THE LEHMAN BROTHERS U.S. CORPORATE HIGH YIELD - 2% ISSUER CAP INDEX IS THE
2% ISSUER CAP COMPONENT OF THE LEHMAN BROTHERS U.S. CORPORATE HIGH YIELD
INDEX WHICH COVERS THE U.S. DOLLAR-DENOMINATED, NON-INVESTMENT GRADE,
FIXED-RATE, TAXABLE CORPORATE BOND MARKET. SECURITIES ARE CLASSIFIED AS
HIGH-YIELD IF THE MIDDLE RATING OF MOODY'S, FITCH, AND S&P IS BA1/BB+/BB+
OR BELOW. THE INDEX EXCLUDES EMERGING MARKETS DEBT. 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.
THE FUND'S BENCHMARK WAS CHANGED FROM THE CSFB HIGH YIELD INDEX TO THE
LEHMAN BROTHERS U.S. CORPORATE HIGH YIELD - 2% ISSUER CAP INDEX TO MORE
ACCURATELY REFLECT THE FUND'S INVESTIBLE UNIVERSE.
(2) THE CSFB HIGH YIELD INDEX IS DESIGNED TO MIRROR THE INVESTIBLE UNIVERSE OF
THE U.S. DOLLAR--DENOMINATED HIGH YIELD DEBT MARKET. 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.
(3) THE LIPPER HIGH CURRENT YIELD BOND FUNDS INDEX IS AN EQUALLY WEIGHTED
PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN
THE LIPPER HIGH CURRENT YIELD BOND 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.
(4) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT
THE DEDUCTION OF ANY SALES CHARGES.
(5) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND THE DEDUCTION OF
THE MAXIMUM APPLICABLE SALES CHARGE. SEE THE FUND'S CURRENT PROSPECTUS FOR
COMPLETE DETAILS ON FEES AND SALES CHARGES.
~ ENDING VALUE ASSUMING A COMPLETE REDEMPTION ON AUGUST 31, 2006.
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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 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 03/01/06 - 08/31/06.
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 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 *
------------- ------------- ---------------
03/01/06 -
03/01/06 08/31/06 08/31/06
------------- ------------- ---------------
CLASS A
Actual (2.75% return) $1,000.00 $1,027.50 $6.49
Hypothetical (5% annual return before expenses) $1,000.00 $1,018.80 $6.46
CLASS B
Actual (1.91% return) $1,000.00 $1,019.10 $9.01
Hypothetical (5% annual return before expenses) $1,000.00 $1,016.28 $9.00
CLASS C
Actual (1.86% return) $1,000.00 $1,018.60 $9.51
Hypothetical (5% annual return before expenses) $1,000.00 $1,015.78 $9.50
CLASS D
Actual (2.88% return) $1,000.00 $1,028.80 $5.22
Hypothetical (5% annual return before expenses) $1,000.00 $1,020.06 $5.19
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 1.27%, 1.77%,
1.87% AND 1.02% FOR CLASS A, CLASS B, CLASS C AND CLASS D SHARES,
RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD,
MULTIPLIED BY 184/365 (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 RATIOS WOULD
HAVE BEEN 1.36%, 1.86%, 1.96% AND 1.11% FOR CLASS A, CLASS B, CLASS C AND
CLASS D SHARES, RESPECTIVELY.
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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 Investment 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 advisory and administrative 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
On a regular basis, the Board reviews the performance of all funds in the Morgan
Stanley Fund Complex, including the Fund, compared to their peers, paying
specific attention to the underperforming funds. In addition, the Board
specifically reviewed the Fund's performance for the one-, three- and five-year
periods ended November 30, 2005, as shown in a report provided by Lipper (the
"Lipper Report"), compared to the performance of comparable funds selected by
Lipper (the "performance peer group"). The Board also discussed with the Adviser
the performance goals and the actual results achieved in managing the Fund. When
a fund underperforms its performance peer group, the Board discusses with the
Adviser the causes of the underperformance and, where necessary, specific
changes to the fund's investment strategy or investment personnel. The Board
concluded that the Fund can reasonably be expected to be competitive with that
of its performance peer group based on recent action taken or proposed to be
taken by the Adviser with respect to the Fund's investment strategy and/or
investment personnel.
FEES RELATIVE TO OTHER PROPRIETARY FUNDS MANAGED BY THE ADVISER WITH COMPARABLE
INVESTMENT STRATEGIES
The Board reviewed the advisory and administrative fee (together, the
"management fee") rate paid by the Fund under the Management Agreement. The
Board noted that the management fee rate was comparable to the management fee
rates charged by the Adviser to other proprietary funds it manages with
investment strategies comparable to those of the Fund taking into account the
scope of the services provided.
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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
as compared to the average management fee rate and average total expense ratio
for funds, selected by Lipper (the "expense peer group"), managed by other
advisers with investment strategies comparable to those of the Fund, as shown in
the Lipper Report. The Board concluded that the Fund's management fee rate and
total expense ratio were competitive with those of its expense peer group.
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 THE ADVISER AND AFFILIATES
The Board considered information concerning the costs incurred and profits
realized by the Adviser and affiliates during the last year from their
relationship with the Fund and during the last two years from their relationship
with the Morgan Stanley Fund Complex and reviewed with the Adviser the cost
allocation methodology used to determine the profitability of the Adviser and
affiliates. Based on its review of the information it received, the Board
concluded that the profits earned by the Adviser and 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
affiliates from their relationship with the Fund and the Morgan Stanley Fund
Complex, such as sales charges on sales of Class A shares and "float" benefits
derived from handling of checks for purchases and sales of Fund shares, through
a broker-dealer affiliate of the Adviser. 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 concluded that the float
benefits were relatively small and the sales charges and 12b-1 fees were
competitive with those of other broker-dealers.
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 primarily in fixed income
securities, which do not generate soft dollars.
10
<Page>
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
that it would be in the best interest of the Fund and its shareholders to
approve renewal of the Management Agreement for another year.
11
<Page>
MORGAN STANLEY HIGH YIELD SECURITIES INC.
PORTFOLIO OF INVESTMENTS - AUGUST 31, 2006
<Table>
<Caption>
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------
Corporate Bonds (94.9%)
ADVERTISING/MARKETING SERVICES (0.3%)
$ 825 Advanstar Communications, Inc. 10.75% 08/15/10 $ 895,125
-----------
AEROSPACE & DEFENSE (1.1%)
2,995 K&F Acquisition Inc. 7.75 11/15/14 2,995,000
-----------
ALUMINUM (1.1%)
3,310 Novelis, Inc. - 144A* (Canada) 8.25** 02/15/15 3,161,050
-----------
APPAREL/FOOTWEAR (1.6%)
2,825 Levi Strauss & Co. 10.258** 04/01/12 2,930,938
1,525 Oxford Industries, Inc. 8.875 06/01/11 1,547,875
-----------
4,478,813
-----------
APPAREL/FOOTWEAR RETAIL (0.6%)
1,620 Brown Shoe Co., Inc. 8.75 05/01/12 1,676,700
-----------
AUTO PARTS: O.E.M. (1.4%)
1,610 ArvinMeritor, Inc. 8.75 03/01/12 1,577,800
2,275 TRW Automotive, Inc. 9.375 02/15/13 2,439,937
-----------
4,017,737
-----------
BROADCASTING (0.8%)
1,630 LIN Television Corp. 6.50 05/15/13 1,511,825
950 LIN Television Corp. (Series B) 6.50 05/15/13 881,125
-----------
2,392,950
-----------
BUILDING PRODUCTS (2.1%)
865 Interface Inc. 7.30 04/01/08 870,406
2,750 Interface Inc. 9.50 02/01/14 2,839,375
2,450 Nortek Inc. 8.50 09/01/14 2,290,750
-----------
6,000,531
-----------
CABLE/SATELLITE TV (3.9%)
3,165 Cablevision Systems Corp. (Series B) 9.62** 04/01/09 3,390,506
893 CCH I LLC /CCH /CAPCO 11.00 10/01/15 797,002
1,940 Echostar DBS Corp. 6.375 10/01/11 1,893,925
285 Intelsat Sub Holdings Co Ltd. (Bermuda) 8.25 01/15/13 285,712
2,555 Intelsat Sub Holdings Co Ltd. (Bermuda) 8.625 01/15/15 2,593,325
1,910 Intelsat Sub Holdings Co Ltd. (Bermuda) 10.484** 01/15/12 1,948,200
165 NTL Cable PLC (United Kingdom) 9.125 08/15/16 171,600
-----------
11,080,270
-----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
12
<Page>
<Table>
<Caption>
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------
CASINO/GAMING (4.5%)
$27,175 Aladdin Gaming Holdings/
Capital Corp. LLC (Series B) (a) (b) (g) 13.50**% 03/01/10 $ 0
3,185 Isle of Capri Casinos 7.00 03/01/14 3,041,675
2,000 Las Vegas Sands Corp. 6.375 02/15/15 1,870,000
4,470 MGM Mirage Inc. 6.00 10/01/09 4,391,775
27,634 Resort At Summerlin LP/
Ras Co. (Series B) (a) (b) (g) 13.00+ 12/15/07 0
2,980 Station Casinos, Inc. 6.00 04/01/12 2,864,525
265 Station Casinos, Inc. 6.875 03/01/16 246,781
495 Station Casinos, Inc. 7.75 08/15/16 512,944
-----------
12,927,700
-----------
CHEMICALS: MAJOR DIVERSIFIED (0.5%)
1,445 Westlake Chemical Corp. 6.625 01/15/16 1,379,975
-----------
CHEMICALS: SPECIALTY (5.5%)
2,775 Equistar Chemical Funding 10.125 09/01/08 2,941,500
1,845 Innophos, Inc. 8.875** 08/15/14 1,854,225
1,716 Innophos Investments 13.405**+ 02/15/15 1,784,977
1,045 Koppers Holdings, Inc. 9.875++ 11/15/14 775,913
915 Koppers Industry Inc. 9.875 10/15/13 995,063
1,190 Millennium America, Inc. 9.25 06/15/08 1,222,725
1,320 Nalco Co. 7.75 11/15/11 1,349,700
1,920 Nalco Co. 8.875 11/15/13 1,987,200
2,616 Rockwood Specialties, Group. 10.625 05/15/11 2,818,740
-----------
15,730,043
-----------
COAL (1.3%)
860 Foundation PA Coal Co. 7.25 08/01/14 840,650
3,225 Massey Energy Co. 6.875 12/15/13 3,007,313
-----------
3,847,963
-----------
COMMERCIAL PRINTING/FORMS (0.7%)
2,090 Quebecor World Capital Corp. - 144A* (Canada) 8.75 03/15/16 1,975,050
-----------
CONTAINERS/PACKAGING (3.4%)
2,020 Graham Packaging Company Inc. 8.50 10/15/12 1,964,450
1,500 Graham Packaging Company Inc. 9.875 10/15/14 1,451,250
2,625 Graphic Packaging International Corp. 9.50 08/15/13 2,651,250
850 Owens-Brockway Glass Containers Corp. 8.75 11/15/12 907,375
1,765 Owens-Illinois, Inc. 7.35 05/15/08 1,773,825
950 Owens-Illinois, Inc. 7.50 05/15/10 945,250
-----------
9,693,400
-----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
<Table>
<Caption>
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------
DATA PROCESSING SERVICES (0.8%)
$ 171 Sungard Data Systems, Inc. 9.973**% 08/15/13 $ 179,550
1,965 Sungard Data Systems, Inc. 9.125 08/15/13 2,038,688
-----------
2,218,238
-----------
ELECTRIC UTILITIES (6.9%)
415 AES Corp. (The) 7.75 03/01/14 429,525
347 AES Corp. (The) 8.875 02/15/11 373,025
497 AES Corp. (The) 9.375 09/15/10 539,245
1,100 AES Corp. (The) - 144A* 9.00 05/15/15 1,192,125
2,420 CMS Energy Corp. 7.50 01/15/09 2,498,650
910 IPALCO Enterprises, Inc. 8.375** 11/14/08 944,125
965 IPALCO Enterprises, Inc. 8.625** 11/14/11 1,039,787
2,925 Monongahela Power Co. 5.00 10/01/06 2,923,184
1,450 MSW Energy Holdings/Finance II (Series B) 7.375 09/01/10 1,464,500
695 MSW Energy Holdings/Finance (Series B) 8.50 09/01/10 719,325
1,940 Nevada Power Co. (Series A) 8.25 06/01/11 2,134,834
1,889 Nevada Power Co. 9.00 08/15/13 2,068,602
3,320 PSEG Energy Holdings Inc. 8.625 02/15/08 3,436,200
-----------
19,763,127
-----------
ELECTRICAL PRODUCTS (1.2%)
3,409 Ormat Funding Corp. 8.25 12/30/20 3,451,864
-----------
ENVIRONMENTAL SERVICES (1.4%)
840 Allied Waste North America, Inc. 6.375 04/15/11 819,000
1,515 Allied Waste North America, Inc. 6.50 11/15/10 1,496,062
1,546 Allied Waste North America, Inc. (Series B) 9.25 09/01/12 1,661,950
-----------
3,977,012
-----------
FINANCE/RENTAL/LEASING (1.2%)
1,780 Ford Motor Credit Corp. 5.80 01/12/09 1,706,075
1,810 Residential Capital Corp. 6.375 06/30/10 1,827,231
-----------
3,533,306
-----------
FINANCIAL CONGLOMERATES (1.8%)
2,345 General Motors Acceptance Corp. (Series MTN) 4.375 12/10/07 2,281,312
2,780 General Motors Acceptance Corp. 6.875 09/15/11 2,740,824
-----------
5,022,136
-----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
14
<Page>
<Table>
<Caption>
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------
FOOD RETAIL (1.4%)
$1,205 Albertson's, Inc. 7.25% 05/01/13 $1,176,285
1,265 Kroger Co. - 144A* 8.50 07/15/17 1,366,430
1,400 Delhaize America, Inc. 8.125 04/15/11 1,507,276
----------
4,049,991
----------
FOOD: MEAT/FISH/DAIRY (3.5%)
1,845 Michael Foods Inc. 8.00 11/15/13 1,891,125
2,525 Pilgrim's Pride Corp. 9.625 09/15/11 2,657,563
2,300 Pilgrim's Pride Corp. 9.25 11/15/13 2,323,000
3,100 Smithfield Foods Inc. 7.00 08/01/11 3,127,125
----------
9,998,813
----------
FOREST PRODUCTS (1.1%)
1,865 Covalence Specialty Material - 144A* 10.25 03/01/16 1,799,725
1,520 Crown Americas, Inc. 7.625 11/15/13 1,535,200
----------
3,334,925
----------
GAS DISTRIBUTORS (0.2%)
675 Northwest Pipeline Corp. 8.125 03/01/10 705,375
----------
HOME BUILDING (0.6%)
865 Tech Olympic USA, Inc. 10.375 07/01/12 778,500
865 Tech Olympic USA, Inc. 9.00 07/01/10 839,050
----------
1,617,550
----------
HOME FURNISHINGS (0.5%)
1,420 Tempur-Pedic Inc. 10.25 08/15/10 1,494,550
----------
HOSPITAL/NURSING MANAGEMENT (3.3%)
2,775 Community Health System Inc. 6.50 12/15/12 2,608,500
1,200 HCA, Inc. 5.75 03/15/14 936,000
540 HCA, Inc. 6.30 10/01/12 453,600
2,280 HCA, Inc. 6.50 02/15/16 1,806,900
80 HCA, Inc. 8.75 09/01/10 80,800
2,285 Medcath Holdings Corp. 9.875 07/15/12 2,433,525
740 Tenet Healthcare Corp. 7.375 02/01/13 662,300
430 Tenet Healthcare Corp. 9.875 07/01/14 421,400
----------
9,403,025
----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
15
<Page>
<Table>
<Caption>
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------
HOTELS/RESORTS/CRUISELINES (0.4%)
$ 980 Starwood Hotels & Resorts Worldwide, Inc. 7.875**% 05/01/12 $1,065,750
----------
INDUSTRIAL MACHINERY (0.2%)
587 Goodman Global Holding Company, Inc. (Series B) 8.329** 06/15/12 588,467
----------
INDUSTRIAL SPECIALTIES (2.1%)
3,710 Johnsondiversy, Inc. (Series B) 9.625 05/15/12 3,672,900
2,255 Graftech Finance, Inc. 10.25 02/15/12 2,379,025
----------
6,051,925
----------
MEDIA CONGLOMERATES (1.0%)
3,061 Canwest Media Inc. (Canada) 8.00 09/15/12 2,976,343
----------
MEDICAL SPECIALTIES (0.8%)
2,370 Fisher Scientific International, Inc. 6.125 07/01/15 2,355,187
----------
MEDICAL/NURSING SERVICES (1.8%)
1,370 DaVita Inc. 6.625 03/15/13 1,342,600
3,700 Fresenius Medical Care Capital Trust 7.875 06/15/11 3,792,500
----------
5,135,100
----------
METAL FABRICATIONS (1.3%)
1,555 General Cable Corp. 9.50 11/15/10 1,671,625
2,240 Hexcell Corp. 6.75 02/01/15 2,122,400
----------
3,794,025
----------
MISCELLANEOUS COMMERCIAL SERVICES (1.3%)
920 Iron Mountain Inc. 7.75 01/15/15 915,400
2,590 Iron Mountain Inc. 8.625 04/01/13 2,657,988
----------
3,573,388
----------
MISCELLANEOUS MANUFACTURING (0.4%)
1,165 Propex Fabrics Inc. 10.00 12/01/12 1,057,238
----------
MOTOR VEHICLES (1.5%)
2,330 Ford Motor Co. 7.45 07/16/31 1,840,700
860 General Motors Corp. 7.125 07/15/13 737,450
1,920 General Motors Corp. 8.375 07/15/33 1,617,600
----------
4,195,750
----------
MOVIES/ENTERTAINMENT (0.6%)
1,650 AMC Entertainment Inc. 9.655** 08/15/10 1,707,750
----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
16
<Page>
<Table>
<Caption>
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------
OIL & GAS PIPELINES (3.9%)
$1,520 Colorado Interstate Gas Co. 6.80% 11/15/15 $ 1,514,020
2,625 El Paso Production Holdings 7.75 06/01/13 2,677,500
2,335 Pacific Energy Partners/Finance 7.125 06/15/14 2,370,025
1,330 Southern Natural Gas 8.875 03/15/10 1,401,883
3,100 Williams Companies, Inc. (The) 7.875 09/01/21 3,169,750
-----------
11,133,178
-----------
OIL & GAS PRODUCTION (5.0%)
2,625 Chaparral Energy, Inc. 8.50 12/01/15 2,657,812
400 Chesapeake Energy Corp. 6.375 06/15/15 382,000
2,400 Chesapeake Energy Corp. 7.50 09/15/13 2,436,000
465 Chesapeake Energy Corp. 7.625 07/15/13 476,625
1,700 Hilcorp Energy/Finance - 144A* 7.75 11/01/15 1,678,750
1,671 Hilcorp Energy/Finance - 144A* 10.50 09/01/10 1,821,390
2,775 Husky Oil Ltd. 8.90 08/15/28 2,948,923
1,950 Pogo Producing Co. 6.875 10/01/17 1,867,125
-----------
14,268,625
-----------
OILFIELD SERVICES/EQUIPMENT (1.6%)
965 Compagnie Generale de Geophysique S.A. 7.50 05/15/15 965,000
580 Hanover Compressor Co. 8.625 12/15/10 606,100
530 Hanover Compressor Co. 9.00 06/01/14 564,450
591 Hanover Equipment Trust 2001 A (Series A) 8.50** 09/01/08 604,297
1,655 Hanover Equipment Trust 2001 B (Series B) 8.75** 09/01/11 1,729,475
-----------
4,469,322
-----------
OIL REFINING/MARKETING (0.5%)
1,295 Magnum Hunter Resources, Inc. 9.60 03/15/12 1,375,938
-----------
OTHER METALS/MINERALS (0.0%)
3,750 Murrin Holdings Property Ltd. (Australia) (b) (g) 9.375 08/31/07 0
-----------
OTHER TRANSPORTATION (1.2%)
3,700 CHC Helicopter Corp. (Canada) 7.375 05/01/14 3,496,500
-----------
PHARMACEUTICALS: MAJOR (1.4%)
1,730 VWR International Inc. 6.875 04/15/12 1,695,400
2,335 Warner Chilcott Corp. 8.75 02/01/15 2,346,675
-----------
4,042,075
-----------
PUBLISHING: BOOKS/MAGAZINES (2.0%)
1,255 Dex Media East/Finance 12.125 11/15/12 1,405,600
1,536 Dex Media West/Finance 9.875 08/15/13 1,656,960
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
17
<Page>
<Table>
<Caption>
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------
$ 1,670 Houghton Mifflin Co. 8.25% 02/01/11 $1,695,050
990 Houghton Mifflin Co. 9.875 02/01/13 1,029,600
----------
5,787,210
----------
PULP & PAPER (0.2%)
525 P.H. Glatfelter - 144A* 7.125 05/01/16 520,164
----------
REAL ESTATE INVESTMENT TRUSTS (0.7%)
2,200 Host Marriott LP 6.375 03/15/15 2,123,000
SERVICES TO THE HEALTH INDUSTRY (1.0%)
1,285 National Mentor Holdings Inc. - 144A* 11.25 07/01/14 1,329,975
1,720 Omnicare Inc. 6.75 12/15/13 1,659,800
----------
2,989,775
----------
SPECIALTY STORES (2.8%)
2,435 Linens' n Things, Inc. - 144A* 11.132** 01/15/14 2,282,813
2,425 Petro Stopping Centers LP/Petro Financial Corp. 9.00 02/15/12 2,449,250
3,250 Sonic Automotive, Inc. 8.625 08/15/13 3,241,875
----------
7,973,938
----------
SPECIALTY TELECOMMUNICATIONS (2.7%)
1,920 American Tower Corp. 7.125 10/15/12 1,953,600
1,920 American Tower Corp. 7.50 05/01/12 1,963,200
432 Panamsat Corp. 9.00 08/15/14 441,720
3,005 Qwest Communications International 8.905** 02/15/09 3,065,100
28,549 Rhythms Netconnections, Inc. (a) (b) (g) 12.75 04/15/09 0
4,309 Rhythms Netconnections, Inc. (Series B) (a) (b) (g) 14.00 02/15/10 0
13,439 Rhythms Netconnections, Inc. (Series B) (a) (b) (g) 13.50 05/15/08 0
370 U.S. West Communications Corp. 5.625 11/15/08 367,225
----------
7,790,845
----------
STEEL (1.4%)
3,595 Amsted Industries Inc. - 144A* 10.25 10/15/11 3,900,575
----------
TELECOMMUNICATIONS (1.4%)
2,044 Axtel SA (Mexico) 11.00 12/15/13 2,309,720
6,416 Exodus Communications, Inc. (a) (b) (g) 11.625 07/15/10 0
640 Nordic Tel Company - 144A* (Denmark) 8.875 05/01/16 668,800
315 NTL Cable PLC (United Kingdom) 8.75 04/15/14 328,388
EUR530 TDC AS (Denmark) 6.50 04/19/12 692,248
----------
3,999,156
----------
TOBACCO (0.8%)
$ 2,160 Reynolds American Inc. - 144A* 6.50 07/15/10 2,188,255
----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
18
<Page>
<Table>
<Caption>
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------
TRUCKS/CONSTRUCTION/FARM MACHINERY (1.1%)
$ 2,939 Manitowoc Inc. (The) 10.50% 08/01/12 $3,174,120
-----------
WHOLESALE DISTRIBUTORS (1.3%)
920 Buhrmann US, Inc. 7.875 03/01/15 897,000
545 Buhrmann US, Inc. 8.25 07/01/14 547,725
765 Nebraska Book Company, Inc. 8.625 03/15/12 701,888
1,670 RBS Global & Rexnold Corp. - 144A* 9.50 08/01/14 1,686,700
-----------
3,833,313
-----------
WIRELESS TELECOMMUNICATIONS (1.8%)
2,505 Ubiquitel Operating Co. 9.875 03/01/11 2,736,712
2,175 Wind Acquisition Finance SA - 144A* (Italy) 10.75 12/01/15 2,373,469
-----------
5,110,181
-----------
Total Corporate Bonds
(COST $371,837,652) 271,499,312
-----------
Convertible Bond (0.6%)
TELECOMMUNICATIONS EQUIPMENT
1,840 Nortel Networks Corp. (Canada) (COST $1,794,174) 4.25 09/01/08 1,750,300
-----------
Foreign Government Obligation (0.6%)
MXN15,775 Mexican Fixed Rate Bonds (Series M2O) (Mexico)
(COST $1,562,445) 10.00 12/05/24 1,655,759
-----------
NUMBER OF
SHARES
- ---------
Common Stocks (0.1%)
CASINO/GAMING (D) (0.0%)
212,312 Fitzgeralds Gaming Corp. + (g) 0
-----------
ELECTRIC UTILITIES (0.0%)
197 PNM Resources Inc. 5,648
1 SW Acquisition LP (0.06% Ownership interest acquired 09/25/05) (d) (g)
(h) 0
-----------
5,648
-----------
FOOD: SPECIALTY/CANDY (D) (0.0%)
2,447 SFFB Holdings Inc. (c) (g) 0
13,317 SFAC New Holdings Inc. ++ (c) (g) 0
1,069,725 Specialty Foods Acquisition Corp. - 144A* (g) 0
-----------
0
-----------
RESTAURANTS (0.0%)
10,125 American Restaurant Group Holdings, Inc. (c) (d) (g) (Note 4) 81,000
64,807 American Restaurant Group Holdings, Inc. - 144A* (d) (g) (Note 4) 0
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
19
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------
111,558 American Restaurant Group Holdings, Inc. (c) (d) (g) (Note 4) $ 0
13,107 American Restaurant Group Holdings, Inc. (c) (d) (g) (Note 4) 0
787,160 Catalina Restaurant Group (escrow) (c) (g) (Note 4) 0
--------
81,000
--------
SPECIALTY TELECOMMUNICATIONS (D) (0.0%)
34,159 Birch Telecom Inc. +++ (c) (g) 342
1,448,200 PFB Telecom NV (Series B) (c) (g) 0
8,510 XO Holdings, Inc. (c) 39,316
--------
39,658
--------
TELECOMMUNICATIONS (D) (0.0%)
49,597 Viatel Holdings Bermuda Ltd. (c) 248
--------
TEXTILES (D) (0.0%)
2,389,334 U.S. Leather, Inc. (c) (g) 0
--------
WIRELESS TELECOMMUNICATIONS (0.1%)
5,199 USA Mobility, Inc. (c) 118,797
315,021 Vast Solutions, Inc. (Class B1) (c) (d) (g) 0
315,021 Vast Solutions, Inc. (Class B2) (c) (d) (g) 0
315,021 Vast Solutions, Inc. (Class B3) (c) (d) (g) 0
--------
118,797
--------
Total Common Stocks
(COST $219,096,381) 245,351
--------
NUMBER OF EXPIRATION
WARRANTS DATE
- --------- ----------
Warrants (d) (0.0%)
CASINO/GAMING (0.0%)
319,500 Aladdin Gaming Enterprises, Inc. - 144A* (g) 03/01/10 0
23,000 Resort At Summerlin LP - 144A* (g) 12/15/07 0
--------
0
--------
RESTAURANTS (0.0%)
4,500 American Restaurant Group Holdings, Inc. - 144A* (g) 08/15/08 0
--------
SPECIALTY TELECOMMUNICATIONS (0.0%)
17,020 XO Holdings, Inc. (Series A) (c) 01/16/10 13,616
12,768 XO Holdings, Inc. (Series B) (c) 01/16/10 7,022
12,768 XO Holdings, Inc. (Series C) (c) 01/16/10 4,341
--------
24,979
--------
Total Warrants
(COST $15,485) 24,979
--------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
20
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------
Short-Term Investments (2.1%)
Repurchase Agreements
$6,008 Joint repurchase agreement account
(dated 08/31/06; proceeds $6,008,880) (e)
(COST $6,008,000) 5.27% 09/01/06 $ 6,008,000
160 The Bank of New York (dated 08/31/06;
proceeds $160,018) (f) (COST $159,995) 5.125 09/01/06 159,995
------------
Total Short-Term Investments
(COST $6,167,995) 6,167,995
------------
Total Investments
(COST $600,474,132) (i) 98.3% 281,343,696
Other Assets in Excess of Liabilities 1.7 4,707,253
-------- ------------
Net Assets 100.0% $286,050,949
======== ============
</Table>
- ----------
* RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS.
** FLOATING RATE SECURITY. RATE SHOWN IS THE RATE IN EFFECT AT AUGUST 31,
2006.
+ RESALE IS RESTRICTED, ACQUIRED (12/22/98) AT A COST BASIS OF $957,527.
++ RESALE IS RESTRICTED, ACQUIRED (06/10/99) AT A COST BASIS OF $133.
+++ RESALE IS RESTRICTED, ACQUIRED (BETWEEN 06/18/98 AND 05/11/99) AT A COST
BASIS OF $17,257,340.
+ PAYMENT-IN-KIND SECURITY.
++ CURRENTLY A ZERO COUPON BOND AND IS SCHEDULED TO PAY INTEREST AT THE RATE
SHOWN AT A FUTURE SPECIFIED DATE.
(a) ISSUER IN BANKRUPTCY.
(b) NON-INCOME PRODUCING SECURITY; BOND IN DEFAULT.
(c) ACQUIRED THROUGH EXCHANGE OFFER.
(d) NON-INCOME PRODUCING SECURITIES.
(e) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(f) COLLATERALIZED BY FEDERAL NATIONAL MORTGAGE ASSOC. 5.50% DUE 08/01/36
VALUED AT $163,195.
(g) SECURITIES WITH TOTAL MARKET VALUE EQUAL TO $81,342 HAVE BEEN VALUED AT
THEIR FAIR VALUE AS DETERMINED IN GOOD FAITH UNDER PROCEDURES ESTABLISHED
BY AND UNDER THE GENERAL SUPERVISION OF THE FUND'S DIRECTORS.
(h) RESALE IS RESTRICTED. NO TRANSACTION ACTIVITY DURING THE YEAR.
(i) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $598,586,262. THE
AGGREGATE GROSS UNREALIZED APPRECIATION IS $5,454,827 AND THE AGGREGATE
GROSS UNREALIZED DEPRECIATION IS $322,697,393, RESULTING IN NET UNREALIZED
DEPRECIATION OF $317,242,566.
SEE NOTES TO FINANCIAL STATEMENTS
21
<Page>
FORWARD FOREIGN CURRENCY CONTRACT OPEN AT AUGUST 31, 2006:
CONTRACT IN EXCHANGE DELIVERY UNREALIZED
TO DELIVER FOR DATE DEPRECIATION
- --------------------------------------------------
EUR543,000 $684,082 09/27/06 $(12,348)
========
CURRENCY ABBREVIATIONS:
- -----------------------
EUR EURO.
MXN MEXICAN NEW PESO.
SEE NOTES TO FINANCIAL STATEMENTS
22
<Page>
MORGAN STANLEY HIGH YIELD SECURITIES INC.
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
AUGUST 31, 2006
Assets:
Investments in securities, at value (cost $588,464,055) $ 281,262,696
Investments in affiliates, at value (cost $12,010,077) 81,000
Receivable for:
Interest 5,769,362
Capital stock sold 19,734
Prepaid expenses and other assets 80,775
---------------
Total Assets 287,213,567
---------------
Liabilities:
Unrealized depreciation on open forward foreign currency
contract Payable for: 12,348
Capital stock redeemed 593,690
Distribution fee 108,110
Investment advisory fee 61,899
Transfer agent fee 37,348
Administration fee 19,640
Accrued expenses and other payables 329,583
---------------
Total Liabilities 1,162,618
---------------
Net Assets $ 286,050,949
===============
Composition of Net Assets:
Paid-in-capital $ 2,616,226,164
Net unrealized depreciation (319,142,608)
Accumulated undistributed net investment income 2,307,661
Accumulated net realized loss (2,013,340,268)
---------------
Net Assets $ 286,050,949
===============
Class A Shares:
Net Assets $ 75,098,993
Shares Outstanding (2,000,000,000 AUTHORIZED, $.01 PAR VALUE) 43,397,554
Net Asset Value Per Share $ 1.73
===============
Maximum Offering Price Per Share,
(NET ASSET VALUE PLUS 4.44% OF NET ASSET VALUE) $ 1.81
===============
Class B Shares:
Net Assets $ 119,287,785
Shares Outstanding (2,000,000,000 AUTHORIZED, $.01 PAR VALUE) 69,543,996
Net Asset Value Per Share $ 1.72
===============
Class C Shares:
Net Assets $ 19,752,646
Shares Outstanding (2,000,000,000 AUTHORIZED, $.01 PAR VALUE) 11,475,845
Net Asset Value Per Share $ 1.72
===============
Class D Shares:
Net Assets $ 71,911,525
Shares Outstanding (2,000,000,000 AUTHORIZED, $.01 PAR VALUE) 41,645,475
Net Asset Value Per Share $ 1.73
===============
SEE NOTES TO FINANCIAL STATEMENTS
23
<Page>
Statement of Operations
FOR THE YEAR ENDED AUGUST 31, 2006
Net Investment Income:
Income
Interest $ 27,003,761
Dividends from affiliates 673,821
Dividends 23,521
------------
Total Income 27,701,103
------------
Expenses
Investment advisory fee 1,445,648
Distribution fee (Class A shares) 185,919
Distribution fee (Class B shares) 1,192,474
Distribution fee (Class C shares) 191,627
Transfer agent fees and expenses 848,198
Professional fees 810,770
Administration fee 275,362
Shareholder reports and notices 116,277
Registration fees 56,580
Directors' fees and expenses 22,143
Custodian fees 20,913
Other 39,546
------------
Total Expenses 5,205,457
Less: amounts waived (139,010)
Less: expense offset (2,634)
------------
Net Expenses 5,063,813
------------
Net Investment Income 22,637,290
------------
Net Realized and Unrealized Gain (Loss):
Net Realized Gain (Loss) on:
Investments (30,148,855)
Investments in affiliates 1,724,136
Foreign exchange transactions 5,229
------------
Net Realized Loss (28,419,490)
------------
Net Change in Unrealized Appreciation (Depreciation) on:
Investments 15,914,708
Investments in affiliates 81,000
Translation of forward foreign currency
contracts, other assets and liabilities denominated
in foreign currencies (12,172)
------------
Net Appreciation 15,983,536
------------
Net Loss (12,435,954)
------------
Net Increase $ 10,201,336
============
SEE NOTES TO FINANCIAL STATEMENTS
24
<Page>
Statements of Changes in Net Assets
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
AUGUST 31, 2006 AUGUST 31, 2005
--------------- ---------------
Increase (Decrease) in Net Assets:
Operations:
Net investment income $ 22,637,290 $ 35,751,826
Net realized loss (28,419,490) (42,347,309)
Net change in unrealized appreciation/depreciation 15,983,536 37,567,982
------------- -------------
Net Increase 10,201,336 30,972,499
------------- -------------
Dividends to Shareholders from Net Investment Income:
Class A shares (5,289,164) (2,711,458)
Class B shares (10,742,499) (20,033,058)
Class C shares (1,528,289) (2,208,231)
Class D shares (6,342,863) (10,309,554)
------------- -------------
Total Dividends (23,902,815) (35,262,301)
------------- -------------
Net decrease from capital stock transactions (135,781,836) (134,830,856)
------------- -------------
Net Decrease (149,483,315) (139,120,658)
Net Assets:
Beginning of period 435,534,264 574,654,922
------------- -------------
End of Period
(INCLUDING ACCUMULATED UNDISTRIBUTED NET INVESTMENT
INCOME OF $2,307,661 AND $3,469,714, RESPECTIVELY) $ 286,050,949 $ 435,534,264
============= =============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
25
<Page>
MORGAN STANLEY HIGH YIELD SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2006
1. Organization and Accounting Policies
Morgan Stanley High Yield Securities Inc. (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 seeks as a primary objective to
earn a high level of current income. As a secondary objective, the Fund seeks
capital appreciation but only to the extent consistent with its primary
objective. The Fund was incorporated in Maryland on June 14, 1979 and commenced
operations on September 26, 1979. 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 eighteen
months, 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 Fund will assess a 2% redemption fee on Class A shares, Class B shares,
Class C shares, and Class D shares, which is paid directly to the Fund, for
shares redeemed within thirty days of purchase. The redemption fee is designed
to protect the Fund and its remaining shareholders from the effects of
short-term trading.
The following is a summary of significant accounting policies:
A. Valuation of Investments -- (1) an equity portfolio security listed or traded
on the New York Stock Exchange ("NYSE") or American Stock Exchange or other
exchange is valued at its latest sale price prior to the time when assets are
valued; if there were no sales that day, the security is valued at the mean
between the last reported bid and asked price; (2) an equity portfolio security
listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price;
if there were no sales that day, the security is valued at the mean between the
last reported bid and asked price; (3) all other 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. In cases where a security is
traded on more than one exchange, the security is valued on the exchange
designated as the primary market; (4) for equity securities traded on foreign
exchanges, the last reported sale price or the latest bid price may be used if
there were no sales on a particular day; (5) when market quotations are not
readily available including circumstances under which Morgan Stanley Investment
Advisors Inc. (the "Investment Adviser") determines that the latest sale price,
the bid price or the mean between the last reported bid and asked price do not
reflect 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 Directors. Occasionally, developments
affecting the closing prices of securities and other assets may occur between
the times at which valuations of such securities are determined (that is, close
of the foreign
26
<Page>
market on which the securities trade) and the close of business on the NYSE. If
developments occur during such periods that are expected to materially affect
the value of such securities, such valuations may be adjusted to reflect the
estimated fair value of such securities as of the close of the NYSE, as
determined in good faith by the Fund's Directors or by the Investment Adviser
using a pricing service and/or procedures approved by the Directors of the Fund;
(6) certain portfolio securities may be valued by an outside pricing service
approved by the Fund's Directors; and (7) 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.
Dividend income and other distributions are recorded on the ex-dividend date.
Discounts are accreted and premiums are amortized over the life of the
respective securities. Interest income is accrued daily except where collection
is not expected.
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 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. Foreign Currency Translation and Forward Foreign Currency Contracts -- The
books and records of the Fund are maintained in U.S. dollars as follows: (1) the
foreign currency market value of investment securities, other assets and
liabilities and forward foreign currency contracts ("forward contracts") are
translated at the exchange rates prevailing at the end of the period; and (2)
purchases, sales, income and expenses are translated at the exchange rates
prevailing on the respective dates of such transactions. The resultant exchange
gains and losses are recorded as realized and unrealized gain/loss on foreign
exchange transactions. Pursuant to U.S. federal income tax regulations, certain
foreign exchange gains/losses included in realized and unrealized gain/loss are
included in or are a
27
<Page>
reduction of ordinary income for federal income tax purposes. The Fund does not
isolate that portion of the results of operations arising as a result of changes
in the foreign exchange rates from the changes in the market prices of the
securities. Forward contracts are valued daily at the appropriate exchange
rates. The resultant unrealized exchange gains and losses are recorded as
unrealized foreign currency gain or loss. The Fund records realized gains or
losses on delivery of the currency or at the time the forward contract is
extinguished (compensated) by entering into a closing transaction prior to
delivery.
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 at the close of
each business day: 0.42% to the portion of the daily net assets not exceeding
$500 million; 0.345% to the portion of the daily net assets exceeding $500
million but not exceeding $750 million; 0.295% to the portion of the daily net
assets exceeding $750 million but not exceeding $1 billion; 0.27% to the portion
of the daily net assets exceeding $1 billion but not exceeding $2 billion;
0.245% to the portion of the daily net assets exceeding $2 billion but not
exceeding $3 billion; and 0.22% 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 0.08% to the Fund's daily net assets.
Effective November 18, 2005, the Investment Adviser has agreed to cap the Fund's
operating expenses (except for brokerage and 12b-1 fees) for one year by
assuming the Fund's "other expenses" and/or waiving the Fund's advisory fees,
and the Administrator has agreed to waive the Fund's administrative fees, to the
extent such operating expenses on an annualized basis exceed 1.02% of the
average daily net assets of the Fund.
28
<Page>
3. Plan of Distribution
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the
"Distributor"), an affiliate of the Investment Adviser and Administrator. The
Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1
under the Act. The Plan provides that the Fund will pay the Distributor a fee
which is accrued daily and paid monthly at the following annual rates: (i) Class
A -- up to 0.25% of the average daily net assets of Class A; (ii) Class B -- up
to 0.75% of 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
Directors will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts totaled
$59,613,113 at August 31, 2006.
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 and other authorized
financial representatives at the time of sale may be reimbursed in the
subsequent calendar year. For the year ended August 31, 2006, the distribution
fee was accrued for Class A shares and Class C shares at the annual rate of
0.25% and 0.83%, respectively.
The Distributor has informed the Fund that for the year ended August 31, 2006,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class A shares, Class B shares and Class C shares of $390, $437,127 and
$2,249, respectively and received $23,079 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 of portfolio securities, excluding
short-term investments, for the year ended August 31, 2006, aggregated
$87,641,860 and $220,145,465, respectively. Included in the aforementioned
transactions are sales of $25,026,228 with other Morgan Stanley funds, including
realized gains of $178,943.
29
<Page>
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 Directors of the Fund who will have served as independent
Directors 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
Directors 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 included in Directors' fees and expenses in the
Statement of Operations amounted to $16,458. At August 31, 2006, the Fund had an
accrued pension liability of $129,232 which is included in accrued expenses in
the Statement of Assets and Liabilities.
The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan")
which allows each independent Director to defer payment of all, or a portion, of
the fees they receive for serving on the Board of Directors. Each eligible
Director generally may elect to have their 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.
An affiliated company is a company in which the Fund has ownership of at least
5% of the voting securities at any point during the fiscal year. Transactions
with such companies during the year ended August 31, 2006 were as follows:
<Table>
<Caption>
REALIZED
ISSUER PURCHASES SALES GAIN INCOME VALUE
- ------ --------- ---------- ---------- -------- -------
Catalina Restaurant Group (Common Stock) -- $4,232,639 $1,083,999 -- --
Catalina Restaurant Group (Preferred Stock) (units) -- 2,283,061 20,349 $673,821 --
Catalina Restaurant Group (Warrants) -- 460,296 460,296 -- --
Catalina Restaurant Group (escrow) -- -- 159,492(1) -- $ 0
American Restaurant Group Holding, Inc. (Common Stocks) -- -- -- -- 81,000
American Restaurant Group Holding, Inc. (Restricted Stocks) -- -- -- -- 0
American Restaurant Group Holding, Inc. (Warrants) -- -- -- -- 0
</Table>
- ----------
(1) DISTRIBUTION PAYMENT.
5. Purposes of and Risks Relating to Certain Financial Instruments
The Fund may enter into forward contracts for many purposes, including to
facilitate settlement of foreign currency denominated portfolio transactions or
to manage foreign currency exposure associated with foreign currency denominated
securities.
Forward 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 foreign exchange rates underlying the forward
contracts. Risks may also arise upon entering into these contracts from the
potential inability of the counterparties to meet the terms of their contracts.
30
<Page>
6. Capital Stock
Transactions in capital stock were as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
AUGUST 31, 2006 AUGUST 31, 2005
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- -------------
CLASS A SHARES
Sold 2,659,394 $ 4,616,598 2,420,086 $ 4,384,430
Conversion from Class B 15,880,535 27,512,854 39,485,771 69,553,274
Reinvestment of dividends 1,264,607 2,186,027 650,643 1,160,278
Redeemed (19,954,807) (34,657,064) (10,998,888) (19,613,632)
----------- ------------- ----------- -------------
Net increase (decrease) -- Class A (150,271) (341,585) 31,557,612 55,484,350
----------- ------------- ----------- -------------
CLASS B SHARES
Sold 2,491,515 4,309,706 12,758,363 23,071,062
Conversion to Class A (16,017,129) (27,512,854) (39,731,082) (69,553,274)
Reinvestment of dividends 2,499,833 4,291,182 4,583,006 8,219,932
Redeemed (35,440,135) (61,039,508) (62,941,319) (112,821,636)
----------- ------------- ----------- -------------
Net decrease -- Class B (46,465,916) (79,951,474) (85,331,032) (151,083,916)
----------- ------------- ----------- -------------
CLASS C SHARES
Sold 387,062 670,383 1,927,189 3,489,545
Reinvestment of dividends 383,731 660,309 553,599 993,637
Redeemed (4,684,368) (8,094,071) (8,208,423) (14,684,654)
----------- ------------- ----------- -------------
Net decrease -- Class C (3,913,575) (6,763,379) (5,727,635) (10,201,472)
----------- ------------- ----------- -------------
CLASS D SHARES
Sold 506,067 880,161 1,933,695 3,515,756
Reinvestment of dividends 2,067,866 3,574,901 3,348,157 6,024,152
Redeemed (30,687,485) (53,180,460) (21,377,185) (38,569,726)
----------- ------------- ----------- -------------
Net decrease -- Class D (28,113,552) (48,725,398) (16,095,333) (29,029,818)
----------- ------------- ----------- -------------
Net decrease in Fund (78,643,314) $(135,781,836) (75,596,388) $(134,830,856)
=========== ============= =========== =============
</Table>
7. Expense Offset
The expense offset represents a reduction of the transfer agent fees and
expenses for earnings on cash balances maintained by the Fund.
8. Federal Income Tax Status
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for tax purposes are reported as distributions of paid-in-capital.
31
<Page>
The tax character of distributions paid was as follows:
FOR THE YEAR FOR THE YEAR
ENDED ENDED
AUGUST 31, 2006 AUGUST 31, 2005
--------------- ---------------
Ordinary Income $23,902,815 $35,262,301
=========== ===========
As of August 31, 2006, the tax-basis components of accumulated losses were as
follows:
Undistributed ordinary income $ 1,668,546
Undistributed long-term gains --
---------------
Net accumulated earnings 1,668,546
Capital loss carryforward* (1,987,313,218)
Post-October losses (26,120,036)
Temporary differences (1,168,118)
Net unrealized depreciation (317,242,389)
---------------
Total accumulated losses $(2,330,175,215)
===============
*As of August 31, 2006, the Fund had a net capital loss carryforward of
$1,987,313,218 of which $24,919,181 will expire on August 31, 2007, $69,856,779
will expire on August 31, 2008, $89,299,249 will expire on August 31, 2009,
$245,944,739 will expire on August 31, 2010, $568,502,378 will expire on August
31, 2011, $758,434,573 will expire on August 31, 2012, $183,559,922 will expire
on August 31, 2013 and $46,796,397 will expire on August 31, 2014 to offset
future capital gains to the extent provided by regulations.
As of August 31, 2006, the Fund had temporary book/tax differences primarily
attributable to post-October losses (capital losses incurred after October 31
within the taxable year which are deemed to arise on the first business day of
the Fund's next taxable year), interest on bonds in default and book
amortization of discounts on debt securities and permanent book/tax differences
primarily attributable to tax adjustments on debt securities sold by the Fund
and an expired capital loss carryforward. To reflect reclassifications arising
from the permanent differences, paid-in-capital was charged $12,603,314,
accumulated undistributed net investment income was credited $103,472 and
accumulated net realized loss was credited $12,499,842.
9. 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, were named as
defendants in a consolidated class action. This consolidated action also named
as defendants certain individual Trustees and Directors of the Morgan Stanley
funds. The consolidated amended complaint, filed in the United States District
Court for the Southern District of New York on April 16, 2004, generally alleged
that defendants, including the Fund, violated their statutory disclosure
32
<Page>
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 alleged efforts to recommend these
funds to investors. The complaint sought, among other things, unspecified
compensatory damages, rescissionary damages, fees and costs. On July 2, 2004
defendants moved to dismiss the action. On March 9, 2005, plaintiffs filed a
Motion for Leave to File a Supplemental Pleading that would, among other things,
expand the allegations and alleged class. On April 14, 2006, the Court granted
defendants' motion to dismiss in its entirety, with prejudice. Additionally,
plaintiffs' Motion for Leave to File a Supplemental Pleading was denied. The
time for plaintiffs to appeal the orders granting defendants' motion to dismiss
and denying plaintiffs' motion for supplemental pleading has expired. This case
is now concluded.
10. New Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation 48, Accounting for Uncertainty in Income Taxes -- an
interpretation of FASB Statement 109 (FIN 48). FIN 48 clarifies the accounting
for income taxes by prescribing the minimum recognition threshold a tax position
must meet before being recognized in the financial statements. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The Fund will
adopt FIN 48 during 2007 and the impact to the Fund's financial statements, if
any, is currently being assessed.
In addition, in September 2006, Statement of Financial Accounting Standards No.
157, Fair Value Measurements (SFAS 157), was issued and is effective for fiscal
years beginning after November 15, 2007. SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. Management is currently evaluating the impact the
adoption of SFAS 157 will have on the Fund's financial statement disclosures.
33
<Page>
MORGAN STANLEY HIGH YIELD SECURITIES INC.
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of capital stock outstanding
throughout each period:
<Table>
<Caption>
FOR THE YEAR ENDED AUGUST 31,
-------------------------------------------------
2006 2005 2004 2003 2002
------- ------- ------- ------- -------
Class A Shares
Selected Per Share Data:
Net asset value, beginning of period $ 1.79 $ 1.80 $ 1.67 $ 1.55 $ 2.32
------- ------- ------- ------- -------
Income (loss) from investment operations:
Net investment income~ 0.12 0.13 0.16 0.19 0.26
Net realized and unrealized gain (loss) (0.06) (0.01) 0.09 0.10 (0.73)
------- ------- ------- ------- -------
Total income (loss) from investment operations 0.06 0.12 0.25 0.29 (0.47)
------- ------- ------- ------- -------
Less dividends and distributions from:
Net investment income (0.12) (0.13) (0.12) (0.17) (0.27)
Paid-in-capital -- -- -- -- (0.03)
------- ------- ------- ------- -------
Total dividends and distributions (0.12) (0.13) (0.12) (0.17) (0.30)
------- ------- ------- ------- -------
Net asset value, end of period $ 1.73 $ 1.79 $ 1.80 $ 1.67 $ 1.55
======= ======= ======= ======= =======
Total Return+ 3.84% 6.84% 15.40% 19.88% (21.70)%
Ratios to Average Net Assets(1):
Total expenses (before expense offset) 1.26%(2) 1.12% 1.03% 1.06% 0.99%
Net investment income 6.79%(2) 7.24% 8.98% 11.96% 13.76%
Supplemental Data:
Net assets, end of period, in thousands $75,099 $77,861 $21,595 $38,072 $23,879
Portfolio turnover rate 26% 43% 51% 66% 39%
</Table>
- ----------
~ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(2) IF THE 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:
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO INCOME RATIO
--------------- ------- --------------
AUGUST 31, 2006 1.30% 6.75%
SEE NOTES TO FINANCIAL STATEMENTS
34
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED AUGUST 31,
------------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
Class B Shares
Selected Per Share Data:
Net asset value, beginning of period $ 1.77 $ 1.79 $ 1.67 $ 1.55 $ 2.32
-------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income~ 0.11 0.12 0.15 0.18 0.25
Net realized and unrealized gain (loss) (0.04) (0.02) 0.08 0.10 (0.73)
-------- -------- -------- -------- --------
Total income (loss) from investment operations 0.07 0.10 0.23 0.28 (0.48)
-------- -------- -------- -------- --------
Less dividends and distributions from:
Net investment income (0.12) (0.12) (0.11) (0.16) (0.26)
Paid-in-capital -- -- -- -- (0.03)
-------- -------- -------- -------- --------
Total dividends and distributions (0.12) (0.12) (0.11) (0.16) (0.29)
-------- -------- -------- -------- --------
Net asset value, end of period $ 1.72 $ 1.77 $ 1.79 $ 1.67 $ 1.55
======== ======== ======== ======== ========
Total Return+ 3.34% 5.68% 14.15% 19.27% (22.00)%
Ratios to Average Net Assets(1):
Total expenses (before expense offset) 1.77%(2) 1.66% 1.60% 1.61% 1.56%
Net investment income 6.28%(2) 6.70% 8.41% 11.41% 13.19%
Supplemental Data:
Net assets, end of period, in thousands $119,288 $205,739 $360,513 $422,468 $371,399
Portfolio turnover rate 26% 43% 51% 66% 39%
</Table>
- ----------
~ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(2) IF THE 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:
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO INCOME RATIO
--------------- ------- --------------
AUGUST 31, 2006 1.81% 6.24%
SEE NOTES TO FINANCIAL STATEMENTS
35
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED AUGUST 31,
--------------------------------------------------
2006 2005 2004 2003 2002
------- ------- ------- ------- -------
Class C Shares
Selected Per Share Data:
Net asset value, beginning of period $ 1.78 $ 1.80 $ 1.67 $ 1.55 $ 2.32
------- ------- ------- ------- -------
Income (loss) from investment
operations:
Net investment income~ 0.11 0.12 0.15 0.18 0.25
Net realized and unrealized gain
(loss) (0.06) (0.02) 0.09 0.10 (0.73)
------- ------- ------- ------- -------
Total income (loss) from investment
operations 0.05 0.10 0.24 0.28 (0.48)
------- ------- ------- ------- -------
Less dividends and distributions from:
Net investment income (0.11) (0.12) (0.11) (0.16) (0.26)
Paid-in-capital -- -- -- -- (0.03)
------- ------- ------- ------- -------
Total dividends and distributions (0.11) (0.12) (0.11) (0.16) (0.29)
------- ------- ------- ------- -------
Net asset value, end of period $ 1.72 $ 1.78 $ 1.80 $ 1.67 $ 1.55
======= ======= ======= ======= =======
Total Return+ 3.25% 5.58% 14.65% 19.14% (22.11)%
Ratios to Average Net Assets(1):
Total expenses (before expense offset) 1.84%(2) 1.74% 1.70% 1.71% 1.66%
Net investment income 6.21%(2) 6.62% 8.31% 11.31% 13.09%
Supplemental Data:
Net assets, end of period, in thousands $19,753 $27,378 $37,907 $45,114 $33,978
Portfolio turnover rate 26% 43% 51% 66% 39%
</Table>
- ----------
~ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(2) IF THE 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:
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO INCOME RATIO
--------------- ------- --------------
AUGUST 31, 2006 1.88% 6.17%
SEE NOTES TO FINANCIAL STATEMENTS
36
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED AUGUST 31,
-----------------------------------------------------
2006 2005 2004 2003 2002
------- -------- -------- -------- -------
Class D Shares
Selected Per Share Data:
Net asset value, beginning of period $ 1.79 $ 1.80 $ 1.68 $ 1.55 $ 2.32
------- -------- -------- -------- -------
Income (loss) from investment
operations:
Net investment income~ 0.12 0.13 0.16 0.19 0.26
Net realized and unrealized gain
(loss) (0.05) (0.01) 0.08 0.11 (0.73)
------- -------- -------- -------- -------
Total income (loss) from investment
operations 0.07 0.12 0.24 0.30 (0.47)
------- -------- -------- -------- -------
Less dividends and distributions from:
Net investment income (0.13) (0.13) (0.12) (0.17) (0.27)
Paid-in-capital -- -- -- -- (0.03)
------- -------- -------- -------- -------
Total dividends and distributions (0.13) (0.13) (0.12) (0.17) (0.30)
------- -------- -------- -------- -------
Net asset value, end of period $ 1.73 $ 1.79 $ 1.80 $ 1.68 $ 1.55
======= ======== ======== ======== =======
Total Return+ 4.11% 7.04% 14.93% 20.82% (21.45)%
Ratios to Average Net Assets(1):
Total expenses (before expense offset) 1.01%(2) 0.91% 0.85% 0.86% 0.81%
Net investment income 7.04%(2) 7.45% 9.16% 12.16% 13.94%
Supplemental Data:
Net assets, end of period, in thousands $71,911 $124,556 $154,639 $175,471 $86,436
Portfolio turnover rate 26% 43% 51% 66% 39%
</Table>
- ----------
~ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE
PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(2) IF THE 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:
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO INCOME RATIO
--------------- ------- --------------
AUGUST 31, 2006 1.05% 7.00%
SEE NOTES TO FINANCIAL STATEMENTS
37
<Page>
MORGAN STANLEY HIGH YIELD SECURITIES INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Morgan Stanley High Yield Securities Inc.:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley High Yield Securities Inc. (the "Fund"), including the portfolio of
investments, as of August 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 August 31, 2006, by correspondence with the custodian.
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 High Yield Securities Inc. as of August 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
OCTOBER 23, 2006
38
<Page>
MORGAN STANLEY HIGH YIELD SECURITIES INC.
RESULTS OF SPECIAL SHAREHOLDER MEETING
On August 1, 2006, a Special Meeting of Shareholders of the Fund was scheduled
in order to vote on the proposals set forth below. The proposals failed to
obtain the quorum necessary in order to hold the meeting, and, therefore, the
meeting was adjourned until August 23, 2006, to permit further solicitation of
proxies. The meeting was held on August 23, 2006 and the voting results with
respect to these proposals were as follows:
(1) Election of Directors:
FOR WITHHOLD ABSTAIN
----------- --------- -------
Frank L. Bowman 104,412,477 4,967,296 0
Kathleen A. Dennis 104,496,427 4,883,346 0
James F. Higgins 104,425,516 4,954,257 0
Joseph J. Kearns 104,374,890 5,004,883 0
Michael F. Klein 104,424,882 4,954,891 0
W. Allen Reed 104,328,631 5,051,142 0
Fergus Reid 104,190,283 5,189,490 0
(2) Elimination of certain fundamental investment restrictions:
<Table>
<Caption>
FOR AGAINST ABSTAIN
---------- --------- ---------
Elimination of the fundamental policy restricting the Fund's
ability to pledge assets 86,225,027 4,795,331 4,391,075
Elimination of the fundamental policy restricting purchases
of securities on margin 86,083,894 4,991,870 4,335,669
Elimination of the fundamental policy prohibiting investments
in oil, gas, and other types of minerals or mineral leases 86,578,592 4,513,238 4,319,603
Elimination of the fundamental policy prohibiting or
restricting the purchase of securities of issuers in which
Directors or Officers have an interest 86,614,209 4,821,387 3,975,837
Elimination of the fundamental policy prohibiting investments
for purposes of exercising control 87,061,688 4,410,266 3,939,479
Elimination of the fundamental policy prohibiting the purchase
of common stocks and other instruments 87,502,778 4,064,224 3,844,431
Elimination of the fundamental policy regarding investments in
unseasoned companies 86,442,999 4,948,151 4,020,283
</Table>
(3) Modify certain fundamental investment restrictions for:
<Table>
<Caption>
FOR AGAINST ABSTAIN
---------- --------- ---------
Modify fundamental policy regarding diversification 87,153,805 4,296,251 3,961,377
Modify fundamental policy regarding borrowing money 86,406,804 5,094,594 3,910,035
Modify fundamental policy regarding loans 86,429,658 5,068,109 3,913,666
Modify fundamental policy regarding investment in commodities,
commodity contracts and futures contracts 86,755,379 4,757,493 3,898,561
Modify fundamental policy regarding issuance of senior
securities 86,971,799 4,452,670 3,986,964
</Table>
39
<Page>
(4) Reclassify certain fundamental policies as non-fundamental policies:
<Table>
<Caption>
FOR AGAINST ABSTAIN
---------- --------- ---------
Reclassification as non-fundamental the fundamental policy
regarding the short sale of securities 86,390,383 4,984,182 4,036,868
Reclassification as non-fundamental the fundamental policy
prohibiting investments in other investment companies 87,083,623 4,399,134 3,928,676
Reclassification as non-fundamental the fundamental policy on
the purchase or sale of puts, calls, and combinations
thereof 86,574,182 4,696,444 4,140,807
</Table>
40
<Page>
MORGAN STANLEY HIGH YIELD SECURITIES INC.
DIRECTOR AND OFFICER INFORMATION
Independent Directors:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND OTHER
POSITION(S) OFFICE AND COMPLES DIRECTORSHIPS
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN HELD BY
INDEPENDENT DIRECTOR REGISTRANT TIME SERVED* DURING PAST 5 YEARS BY DIRECTOR** DIRECTOR
- --------------------------------------- ----------- ------------ ----------------------- ------------- ------------------------
Frank L. Bowman (61) Director Since President and Chief 161 Director of the National
c/o Kramer Levin Naftalis & Frankel LLP August 2006 Executive Officer of Energy Foundation, the
Counsel to the Independent Directors the Nuclear Energy U.S. Energy Association,
1177 Avenue of the Americas Institute (policy the American Council for
New York, NY 10036 organization) (since Capital Formation and
February 2005); the Armed Services YMCA
Director or Trustee of of the USA.
various Retail and
Institutional Funds
(since August 2006)
formerly variously,
Admiral in the U.S.
Navy, Director of Naval
Nuclear Propulsion
Program and Deputy
Administrator - Naval
Reactors in the
National Nuclear
Security Administration
at the U.S. Department
of Energy (1996-2004),
Honorary Knight
Commander of the Most
Excellent Order of the
British Empire.
Michael Bozic (65) Director Since Private investor; 175 Director of various
c/o Kramer Levin Naftalis & Frankel LLP April 1994 Chairperson of the business organizations.
Counsel to the Independent Directors Valuation, Insurance
1177 Avenue of the Americas and Compliance
New York, NY 10036 Committee (since
October 2006); Director
or Trustee of the
Retail Funds (since
April 1994) and the
Institutional Funds
(since July 2003);
formerly Chairperson of
the Insurance Committee
(July 2006-September
2006); 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);
variously Chairman,
Chief Executive
Officer, President and
Chief Operating Officer
(1987-1991) of the
Sears Merchandise Group
of Sears, Roebuck & Co.
Kathleen A. Dennis (53) Director Since President, Cedarwood 161 None.
c/o Kramer Levin Naftalis & Frankel LLP August 2006 Associates (mutual fund
Counsel to the Independent Directors consulting) (since
1177 Avenue of the Americas 2006); Chairperson of
New York, NY 10036 the Closed-End, Money
Market and Alternatives
Sub-Committee of the
Investment Committee
(since October 2006)
and Director or Trustee
of various Retail and
Institutional Funds
(since August 2006);
formerly, Senior
Managing Director of
Victory Capital
Management (1993-2006).
</Table>
41
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND OTHER
POSITION(S) OFFICE AND COMPLES DIRECTORSHIPS
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN HELD BY
INDEPENDENT DIRECTOR REGISTRANT TIME SERVED* DURING PAST 5 YEARS BY DIRECTOR** DIRECTOR
- --------------------------------------- ----------- ------------ ----------------------- ------------- ------------------------
Edwin J. Garn (73) Director Since Consultant; Director or 175 Director of Franklin
1031 N. Chartwell Court January 1993 Trustee of the Retail Covey (time management
Salt Lake City, UT 84103 Funds (since January systems), BMW Bank of
1993) and the North America, Inc.
Institutional Funds (industrial loan
(since July 2003); corporation), Escrow
Member of the Utah Bank USA (industrial
Regional Advisory Board loan corporation);
of Pacific Corp. United Space Alliance
(utility company); (joint venture between
formerly Managing Lockheed Martin and the
Director of Summit Boeing Company) and
Ventures LLC Nuskin Asia Pacific
(2000-2004) (lobbying (multilevel marketing);
and consulting firm); member of the board of
United States Senator various civic and
(R-Utah) (1974-1992) charitable
and Chairman, Senate organizations.
Banking Committee
(1980-1986), Mayor of
Salt Lake City, Utah
(1971-1974), Astronaut,
Space Shuttle Discovery
(April 12-19, 1985),
and Vice Chairman,
Huntsman Corporation
(chemical company).
Wayne E. Hedien (72) Director Since Retired; Director or 175 Director of The PMI
c/o Kramer Levin Naftalis & Frankel LLP September Trustee of the Retail Group Inc. (private
Counsel to the Independent Directors 1997 Funds; (Since September mortgage insurance);
1177 Avenue of the Americas 1997) and the Trustee and Vice
New York, NY 10036 Institutional Funds Chairman of The Field
(since July 2003); Museum of Natural
formerly associated History; director of
with the Allstate various other business
Companies (1966-1994), and charitable
most recently as organizations.
Chairman of The
Allstate Corporation
(March 1993- December
1994) and Chairman and
Chief Executive Officer
of its wholly-owned
subsidiary, Allstate
Insurance Company (July
1989-December 1994).
Dr. Manuel H. Johnson (57) Director Since Senior Partner, Johnson 175 Director of NVR, Inc.
c/o Johnson Smick Group, Inc. July 1991 Smick International, (home construction);
888 16th Street, N.W. Inc., a consulting Director of KFX Energy;
Suite 740 firm; Chairperson of Director of RBS
Washington, D.C. 20006 the Investment Greenwich Capital
Committee (since Holdings (financial
October 2006) and holding company).
Director or Trustee of
the Retail Funds (since
July 1991) and the
Institutional Funds
(since July 2003);
Co-Chairman and a
founder of the Group of
Seven Council (G7C), an
international economic
commission; formerly
Chairman of the Audit
Committee (July
1991-September 2006);
Vice Chairman of the
Board of Governors of
the Federal Reserve
System and Assistant
Secretary of the U.S.
Treasury.
</Table>
42
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND OTHER
POSITION(S) OFFICE AND COMPLES DIRECTORSHIPS
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN HELD BY
INDEPENDENT DIRECTOR REGISTRANT TIME SERVED* DURING PAST 5 YEARS BY DIRECTOR** DIRECTOR
- --------------------------------------- ----------- ------------ ----------------------- ------------- ------------------------
Joseph J. Kearns (64) Director Since President, Kearns & 176 Director of Electro Rent
c/o Kearns & Associates LLC July 2003 Associates LLC Corporation (equipment
PMB754 (investment leasing), The Ford
23852 Pacific Coast Highway consulting); Family Foundation, and
Malibu, CA 90265 Chairperson of the the UCLA Foundation.
Audit Committee (since
October 2006) and
Director or Trustee of
the Retail Funds (since
July 2003) and the
Institutional Funds
(since August 1994);
previously Deputy
Chairperson of the
Audit Committee (July
2003- September 2006)
and Chairperson of the
Audit Committee of the
Institutional Funds
(October 2001-July
2003); formerly CFO of
the J. Paul Getty
Trust.
Michael F. Klein (47) Director Since Chief Operating Officer 161 Director of certain
c/o Kramer Levin Naftalis & Frankel LLP August 2006 and Managing Director, investment funds managed
Counsel to the Independent Directors Aetos Capital, LLC or sponsored by Aetos
1177 Avenue of the Americas (since March 2000); Capital LLC.
New York, NY 10036 Chairman of the Fixed-
Income Sub-Committee of
the Investment
Committee (since
October 2006) and
Director or Trustee
(since August 2006) of
various Retail and
Institutional Funds;
formerly Managing
Director, Morgan
Stanley & Co. Inc. and
Morgan Stanley Dean
Witter Investment
Management, President,
Morgan Stanley
Institutional Funds
(June 1998-March 2000)
and Principal, Morgan
Stanley & Co. Inc. and
Morgan Stanley Dean
Witter Investment
Management (August
1997- December 1999).
Michael E. Nugent (70) Chairman of Chairman of General Partner of 175 None.
c/o Triumph Capital, L.P. the Board the Board Triumph Capital, L.P.,
445 Park Avenue and since July a private investment
New York, NY 10022 Director 2006 and partnership; Chairman
Director of the Board of the
since July Retail Funds and
1991 Institutional Funds
(since July 2006) and
Director or Trustee of
the Retail Funds (since
July 1991) and the
Institutional Funds
(since July 2001);
formerly Chairman of
the Insurance Committee
(until July 2006); Vice
President, Bankers
Trust Company and BT
Capital Corporation
(1984-1988).
</Table>
43
<Page>
<Table>
<Caption>
TERM OF OTHER
POSITION(S) OFFICE AND DIRECTORSHIPS
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) HELD BY
INDEPENDENT DIRECTOR REGISTRANT TIME SERVED* DURING PAST 5 YEARS DIRECTOR
- --------------------------------------- ----------- ------------ ----------------------- ------------- ------------------------
W. Allen Reed (59) Director Since Chairperson of the 161 Director of GMAC
c/o Kramer Levin Naftalis & Frankel LLP August 2006 Equity Sub-Commitee of (financial services),
Counsel to the Independent Directors the Investment GMAC Insurance Holdings
1177 Avenue of the Americas Committee (since and Temple-Inland
New York, NY 10036 October 2006) and Industries (Packaging,
Director or Trustee Banking and Forrest
(since August 2006) of Products); member of the
various Retail and Board of Executives of
Institutional Funds. the Morgan Stanley
President and CEO of Capital International
General Motors Asset Editorial Board;
Management; Chairman Director of Legg Mason
and Chief Executive and Director of various
Officer of the GM Trust investment fund advisory
Bank and Corporate Vice boards.
President of General
Motors Corporation
(August 1994-December
2005).
Fergus Reid (74) Director Since Chairman of Lumelite 176 Trustee and Director of
c/o Lumelite Plastics Corporation July 2003 Plastics Corporation; certain investment
85 Charles Colman Blvd. Chairperson of the companies in the
Pawling, NY 12564 Governance Committee JPMorgan Funds complex
and Director or Trustee managed by J.P. Morgan
of the Retail Funds Investment Management
(since July 2003) and Inc.
the Institutional Funds
(since June 1992).
</Table>
44
<Page>
INTERESTED DIRECTOR:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
IN FUND
TERM OF COMPLES OTHER
POSITION(S) OFFICE AND OVERSEEN DIRECTORSHIPS
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) INTERESTED HELD BY
INTERESTED DIRECTOR REGISTRANT TIME SERVED* DURING PAST 5 YEARS BY DIRECTOR** DIRECTOR
- --------------------------------------- ----------- ------------ ----------------------- ------------- ------------------------
James F. Higgins (58) Director Since Director or Trustee of 175 Director of AXA
c/o Morgan Stanley Trust June 2000 the Retail Funds (since Financial, Inc. and The
Harborside Financial Center June 2000) and the Equitable Life Assurance
Plaza Two Institutional Funds Society of the United
Jersey City, NJ 07311 (since July 2003); States (financial
Senior Advisor of services).
Morgan Stanley (since
August 2000).
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE DIRECTOR BEGAN SERVING THE FUNDS ADVISED BY
MORGAN STANLEY INVESTMENT ADVISORS INC. (THE "INVESTMENT ADVISER") (THE
"RETAIL FUNDS") OR THE FUNDS ADVISED BY MORGAN STANLEY INVESTMENT
MANAGEMENT INC. AND MORGAN STANLEY AIP GP LP (THE "INSTITUTIONAL FUNDS").
** 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.) AS OF OCTOBER 2, 2006.
45
<Page>
Executive 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 President since President (since September 2005) and Principal Executive Officer
1221 Avenue of the Americas Principal September (since May 2003) of funds in the Fund Complex; President (since
New York, NY 10020 Executive 2005 and September 2005) and Principal Executive Officer (since May 2003) of
Officer Principal the Van Kampen Funds; Managing Director, Director and/or Officer of
Executive the Investment Adviser and various entities affiliated with the
Officer since Investment Adviser; Director of Morgan Stanley SICAV (since May
May 2003 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 to
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.
J. David Germany (52) Vice President Since February Managing Director and (since December 2005) Chief Investment Officer
Morgan Stanley Investment 2006 - Global Fixed Income of Morgan Stanley Investment Management;
Management Ltd. Managing Director and Director of Morgan Stanley Investment
25 Cabot Square Management Limited; Vice President of the Retail and Institutional
Canary Wharf, London Funds (since February 2006).
United Kingdom E144QA
Dennis F. Shea (53) Vice President Since February Managing Director and (since February 2006) Chief Investment Officer
1221 Avenue of the Americas 2006 - Global Equity of Morgan Stanley Investment Management; Vice
New York, NY 10020 President of the Retail and Institutional Funds (since February
2006). Formerly, Managing Director and Director of Global Equity
Research at Morgan Stanley.
Barry Fink (51) Vice President Since Managing Director and General Counsel of Morgan Stanley Investment
1221 Avenue of the Americas February 1997 Management; Managing Director of the Investment Adviser and various
New York, NY 10020 entities affiliated with the Investment Adviser; Vice President of
the Retail Funds and (since July 2003) the Institutional Funds.
Formerly, Secretary, General Counsel and/or Director of the
Investment Adviser and various entities affiliated with the
Investment Adviser; Secretary and General Counsel of the Retail
Funds.
Amy R. Doberman (44) Vice President Since July 2004 Managing Director and General Counsel, U.S. Investment Management of
1221 Avenue of the Americas Morgan Stanley Investment Management (since July 2004); Vice
New York, NY 10020 President of the Retail Funds and the 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 the Investment Adviser and various entities affiliated
with the Investment Adviser. Formerly, Managing Director and General
Counsel - Americas, UBS Global Asset Management (July 2000 to July
2004).
Carsten Otto (42) Chief Since October Managing Director and U.S. Director of Compliance for Morgan Stanley
1221 Avenue of the Americas Compliance 2004 Investment Management (since October 2004); Managing Director and
New York, NY 10020 Officer Chief Compliance Officer of Morgan Stanley Investment Management.
Formerly, Assistant Secretary and Assistant General Counsel of the
Retail Funds.
</Table>
46
<Page>
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
- --------------------------- ------------- --------------- --------------------------------------------------------------------
Stefanie V. Chang Yu (39) Vice President Since Executive Director of the Investment Adviser and various entities
1221 Avenue of the Americas December1997 affiliated with the Investment Adviser; Vice President of the Retail
New York, NY 10020 Funds (since July 2002) and the Institutional Funds (since December
1997). Formerly, Secretary of various entities affiliated with the
Investment Adviser.
Francis J. Smith (41) Treasurer and Treasurer since Executive Director of the Investment Adviser and various entities
c/o Morgan Stanley Trust Chief Financial July 2003 and affiliated with the Investment Adviser; Treasurer and Chief
Harborside Financial Center Officer Chief Financial Financial Officer of the Retail Funds (since July 2003). Formerly,
Plaza Two Officer since Vice President of the Retail Funds (September 2002 to July 2003).
Jersey City, NJ 07311 September 2002
Mary E. Mullin (39) Secretary Since July 1999 Executive Director of the Investment Adviser and various entities
1221 Avenue of the Americas affiliated with the Investment Adviser; Secretary of the Retail
New York, NY 10020 Funds (since July 2003) and the Institutional Funds (since June
1999).
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE OFFICER BEGAN SERVING THE RETAIL FUNDS OR THE
INSTITUTIONAL FUNDS.
2006 FEDERAL TAX NOTICE (UNAUDITED)
During the fiscal year ended August 31, 2006, 1.08% of the ordinary dividends
paid by the Fund qualified for the dividends received deduction available to
corporations. Additionally, please note that 0.80% of the Fund's ordinary
dividends paid during the fiscal year ended August 31, 2006 qualified for the
lower income tax rate available to individuals under the Jobs and Growth Tax
Relief Reconciliation Act of 2003.
47
<Page>
DIRECTORS
Frank L. Bowman
Michael Bozic
Kathleen A. Dennis
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael F. Klein
Michael E. Nugent
W. Allen Reed
Fergus Reid
OFFICERS
Michael E. Nugent
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 Yu
VICE PRESIDENT
Francis J. Smith
TREASURER AND CHIEF FINANCIAL OFFICER
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 directors. 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
MORGAN STANLEY FUNDS
Morgan Stanley
High Yield Securities
Annual Report
August 31, 2006
MORGAN STANLEY
HYLRPT-37915RPT-RA06-00933P-Y09/06
<Page>
Item 2. Code of Ethics.
(a) The Fund has adopted a code of ethics (the "Code of Ethics") that applies to
its principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the Fund or a third
party.
(b) No information need be disclosed pursuant to this paragraph.
(c) Not applicable.
(d) Not applicable.
(e) Not applicable.
(f)
(1) The Fund's Code of Ethics is attached hereto as Exhibit 12 A.
(2) Not applicable.
(3) Not applicable.
Item 3. Audit Committee Financial Expert.
The Fund's Board of Directors has determined that it has two "audit committee
financial experts" serving on its audit committee, each of whom are
"independent" Directors: 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 Directors
in the absence of such designation or identification.
<Page>
Item 4. Principal Accountant Fees and Services.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
2006
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $46,620 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 531(2) $5,328,768(2)
TAX FEES $ 5,200(3) $1,640,675(4)
ALL OTHER FEES $ -- $ (5)
TOTAL NON-AUDIT FEES $ 5,731 $6,969,443
TOTAL $52,351 $6,696,443
2005
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $46,106 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 540(2) $3,215,745(2)
TAX FEES $ 5,368(3) $ 24,000(4)
ALL OTHER FEES $ -- $ --
TOTAL NON-AUDIT FEES $ 5,908 $ 3,239,745
TOTAL $52,014 $ 3,239,745
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
<Page>
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
<Page>
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 Directors 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.
<Page>
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 second fiscal quarter of the period covered
by this 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.
<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 High Yield Securities Inc.
/s/ Ronald E. Robison
- --------------------------------------
Ronald E. Robison
Principal Executive Officer
October 19, 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
October 19, 2006
/s/ Francis Smith
- --------------------------------------
Francis Smith
Principal Financial Officer
October 19, 2006