Trustees

Frank L. Bowman

Kathleen A. Dennis

Nancy C. Everett

Jakki L. Haussler

Dr. Manuel H. Johnson

Joseph J. Kearns

Michael F. Klein

Patricia Maleski

Michael E. Nugent, Chair of the Board

W. Allen Reed

Fergus Reid

Officers

John H. Gernon
President and Principal Executive Officer

Timothy J. Knierim
Chief Compliance Officer

Francis J. Smith
Treasurer and Principal Financial Officer

Mary E. Mullin
Secretary

Michael J. Key
Vice President

Transfer Agent

Boston Financial Data Services, Inc.
2000 Crown Colony Drive
Quincy, Massachusetts 02169

Custodian

State Street Bank and Trust Company
One Lincoln Street
Boston, Massachusetts 02111

Independent Registered Public Accounting Firm

Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116

Legal Counsel

Dechert LLP
1095 Avenue of the Americas
New York, New York 10036

Counsel to the Independent Trustees

Perkins Coie LLP
30 Rockefeller Plaza
New York, New York 10112

Adviser and Administrator

Morgan Stanley Investment Management Inc.
522 Fifth Avenue
New York, New York 10036

Total Return for the 6 Months Ended June 30, 2017
Class A			Class B			Class L			Class I			Class C			Barclays U.S. Government/ Mortgage Index¹			Bloomberg Lipper General U.S. Government Funds Index²
	1.85	%		1.85	%		1.59	%		1.90	%		1.45	%		1.64	%		1.46	%

The performance of the Fund's five 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.

Because Class B shares incurred lower expenses under the 12b-1 fee plan than did Class A shares for the six months ended June 30, 2017, the total operating expense ratio for Class B shares was lower and, as a result, the performance of Class B shares was equal to that of the Class A shares. There can be no assurance that this will continue to occur in the future as the maximum fees payable by Class B shares under the 12b-1 Plan are higher than those payable by Class A shares.

The Fund's Distributor has agreed to reduce the 12b-1 fee on Class B shares of the Fund to the extent it exceeds 0.24% of the average daily net assets of such shares on an annualized basis. This waiver will continue for at least one year or until such time that the Fund's Board of Trustees acts to discontinue all or a portion of such waiver when it deems that such action is appropriate.

PORTFOLIO COMPOSITION⁺ as of 06/30/17
Agency Fixed Rate Mortgages	35.9	%
Collateralized Mortgage Obligations — Agency Collateral Series	13.5
U.S. Agency Securities	9.9
Municipal Bonds	9.5
Asset-Backed Securities	7.2
Mortgages — Other	5.8
U.S. Treasury Securities	4.8
Agency Bonds — Sovereign (U.S. Government Guaranteed)	4.1
Commercial Mortgage-Backed Securities	3.1
Short-Term Investments	3.1
Agency Bonds — Consumer Discretionary (U.S. Government Guaranteed)	1.4
Agency Adjustable Rate Mortgages	1.4
Agency Bond — Finance (U.S. Government Guaranteed)	0.3

+ Does not include open long/short futures contracts with an underlying face amount of $62,845,891 with net unrealized appreciation of $292,490. Does not include open swap agreements with net unrealized depreciation of $30,385.

Subject to change daily. Provided for informational purposes only and should not be deemed as a recommendation to buy or sell the types of securities mentioned above. Portfolio composition data are stated as a percentage of total investments.

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.

Average Annual Total Returns—Period Ended June 30, 2017

Symbol

Class A Shares*
(since 07/28/97)
USGAX

Class B Shares**
(since 06/29/84)
USGBX

Class L Shares***
(since 07/28/97)
USGCX

Class I Shares^†(since 07/28/97)
USGDX

Class C Shares^††(since 04/30/15)
MSGVX

1 Year

–0.12
–4.38⁴

%³

–0.10
–4.96⁴

%³

–0.48

%³

0.23
—

%³

–0.88
–1.85⁴

%³

5 Years

1.83³0.95⁴

1.85³1.48⁴

1.46³

2.10³—

10 Years

2.81³2.37⁴

2.83³2.83⁴

2.38³

3.08³—

—

Since Inception

3.94³3.72⁴

5.60³5.60⁴

3.49³

4.20³—

0.90³0.90⁴

Gross Expense Ratio

1.19

0.95

1.21

0.69

2.15

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/im or speak with your Financial Advisor. Investment returns and principal value will fluctuate and fund shares, when redeemed, may be worth more or less than their original cost. The table does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Performance for Class A, Class B, Class L, Class I and Class C shares will vary due to differences in sales charges and expenses. See the Fund's current prospectus for complete details on fees and sales charges. Expenses are as of each Fund's fiscal year end as outlined in the Fund's current prospectus.

* 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. For periods greater than eight years, returns do not reflect conversion to Class A shares eight years after the end of the calendar month in which shares were purchased. The conversion feature is currently suspended because the total annual operating expense ratio of Class B is currently lower than that of Class A. See "Conversion Feature" for Class B shares in "Share Class Arrangements" of the Prospectus for more information. Class B shares are closed for new investments.

*** Class L has no sales charge. Class L shares are closed for new investments.

† Class I has no sales charge.

†† The maximum contingent deferred sales charge for Class C is 1.0% for shares redeemed within one year of purchase.

(1) The Bloomberg Barclays U.S. Government/Mortgage Index includes Treasuries, Government-related issues, and agency mortgage-backed pass-through securities issued by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(2) The Lipper General U.S. Government Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper General U.S. Government Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 10 funds represented in this Index. The Fund was in the Lipper General U.S. Government Funds classification as of the date of this report.

(3) Figure shown assumes reinvestment of all distributions and does not reflect the deduction of any sales charges.

(4) Figure shown assumes reinvestment of all distributions and the deduction of the maximum applicable sales charge. See the Fund's current prospectus for complete details on fees and sales charges.

As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments; and (2) ongoing costs, which may include advisory fees, administration fees, distribution and shareholder services (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.

This example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period 01/01/17 – 06/30/17.

Actual Expenses

The first line of the table on the following page 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 on the following page 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). 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.

	Beginning Account Value		Ending Account Value		Expenses Paid During Period⁽¹⁾
	01/01/17		06/30/17		01/01/17 – 06/30/17
Class A
Actual (1.85% return)	$	1,000.00	$	1,018.50	$	4.30
Hypothetical (5% annual return before expenses)	$	1,000.00	$	1,020.53	$	4.31
Class B
Actual (1.85% return)	$	1,000.00	$	1,018.50	$	4.25
Hypothetical (5% annual return before expenses)	$	1,000.00	$	1,020.58	$	4.26
Class L
Actual (1.59% return)	$	1,000.00	$	1,015.90	$	5.55
Hypothetical (5% annual return before expenses)	$	1,000.00	$	1,019.29	$	5.56
Class I
Actual (1.90% return)	$	1,000.00	$	1,019.00	$	2.55
Hypothetical (5% annual return before expenses)	$	1,000.00	$	1,022.27	$	2.56
Class C
Actual (1.45% return)	$	1,000.00	$	1,014.50	$	8.04
Hypothetical (5% annual return before expenses)	$	1,000.00	$	1,016.81	$	8.05

(1) Expenses are equal to the Fund's annualized expense ratios of 0.86%, 0.85%, 1.11%, 0.51% and 1.61% for Class A, Class B, Class L, Class I and Class C shares, respectively, multiplied by the average account value over the period, multiplied by 181/365 (to reflect the one-half year period). If the Fund had borne all of its expenses, the annualized expense ratios would have been 1.05%, 0.95%, 1.23%, 0.71% and 1.90% for Class A, Class B, Class L, Class I and Class C shares, respectively.

Because Class B shares incurred lower expenses under the 12b-1 fee Plan than did Class A shares for the year ended June 30, 2017, the total operating expense ratio for Class B shares was lower and, as a result, the performance of Class B shares was equal to that of the Class A shares. There can be no assurance that this will continue to occur in the future as the maximum fees payable by Class B shares under the 12b-1 Plan are higher than those payable by Class A shares.

PRINCIPAL AMOUNT (000)				COUPON RATE			MATURITY DATE	VALUE
		Agency Adjustable Rate Mortgages (1.5%)
		Federal Home Loan Mortgage Corporation, Conventional Pools:
$	376				3.111	%	11/01/36	$	396,556
	3,789				3.329		10/01/36 - 06/01/43		3,994,344
		Federal National Mortgage Association, Conventional Pools:
	1,367				2.201		05/01/44		1,389,255
	1,154				5.098		03/01/38		1,243,313
		Total Agency Adjustable Rate Mortgages (Cost $5,782,313)							7,023,468
		Agency Bonds - Consumer Discretionary (U.S. Government Guaranteed) (1.5%)
	4,320	Amal Ltd. (Cayman Islands)			3.465		08/21/21		4,444,946
	2,748	Safina Ltd. (Cayman Islands)			2.00		12/30/23		2,726,934
		Total Agency Bonds - Consumer Discretionary (U.S. Government Guaranteed) (Cost $7,068,013)							7,171,880
		Agency Bond - Finance (U.S. Government Guaranteed) (0.4%)
	1,734	Washington Aircraft 1 Co., DAC (Ireland) (Cost $1,733,812)			2.637		09/15/26		1,751,565
		Agency Bonds - Sovereign (U.S. Government Guaranteed) (4.3%)
	14,175	Israel Government AID Bond (Israel)			5.50		09/18/23		16,889,740
	3,889	Petroleos Mexicanos (Mexico)			2.46		12/15/25		3,903,072
		Total Agency Bonds - Sovereign (U.S. Government Guaranteed) (Cost $19,465,658)							20,792,812
		Agency Fixed Rate Mortgages (37.7%)
		Federal Home Loan Mortgage Corporation, Gold Pools:
	4,961				3.00		03/01/47		4,954,587
	11,251				3.50		08/01/42 - 06/01/45		11,615,464
	7,474				4.00		12/01/41 - 10/01/45		7,876,660
	1,178				5.00		01/01/40		1,299,289
	1,234				5.50		11/01/39		1,378,954
	178				6.50		03/01/29 - 09/01/32		196,457
	363				7.50		05/01/35		426,004
	234				8.00		08/01/32		276,675
	245				8.50		08/01/31		294,443
		July TBA:
	2,320		(a)		4.00		07/01/47		2,440,105

PRINCIPAL AMOUNT (000)			COUPON RATE			MATURITY DATE	VALUE
		Federal National Mortgage Association, Conventional Pools:
$	16,001			3.00	%	05/01/30 - 06/01/47	$	16,055,438
	26,483			3.50		12/01/42 - 03/01/47		27,320,167
	33,722			4.00		11/01/41 - 01/01/46		35,595,414
	13,611			4.50		01/01/25 - 11/01/44		14,757,982
	4,075			5.00		05/01/35 - 02/01/41		4,495,671
	3,921			5.50		03/01/35 - 10/01/35		4,390,771
	70			6.50		06/01/29 - 02/01/33		78,110
	2			7.00		05/01/31		1,794
	613			7.50		08/01/37		743,091
	490			8.00		04/01/33		594,674
	453			8.50		10/01/32		561,242
		July TBA:
	4,870	(a)		3.00		07/01/32		4,998,598
	12,350	(a)		3.50		07/01/47		12,685,283
	1,920	(a)		4.00		07/01/47		2,018,475
	1,170	(a)		4.50		07/01/47		1,255,236
		Government National Mortgage Association,
		July TBA:
	2,380	(a)		3.50		07/20/47		2,465,345
		Various Pools:
	9,048			3.50		08/20/45 - 07/20/46		9,388,992
	5,140			4.00		11/20/42 - 07/15/44		5,431,300
	827			5.00		01/20/40		892,234
	94			5.125		11/20/37		101,577
	858			5.25		04/20/36 - 09/20/39		943,680
	1,376			5.375		02/20/36 - 08/20/40		1,510,427
	2,176			6.00		03/15/26 - 09/20/34		2,475,874
	115			6.50		04/15/19		117,587
	141			7.00		03/20/26 - 07/20/29		166,570
	1,039			8.00		11/15/19 - 08/15/31		1,078,851
	1,097			8.50		07/15/30		1,238,830
	239			9.00		10/15/17 - 02/15/25		252,830
	189			9.50		07/15/17 - 12/15/20		195,940
	199			10.00		08/15/17 - 11/15/20		208,620
		Total Agency Fixed Rate Mortgages (Cost $182,495,894)						182,779,241

PRINCIPAL AMOUNT (000)			COUPON RATE			MATURITY DATE	VALUE
		Asset-Backed Securities (7.6%)
		American Homes 4 Rent
$	3,008	(b)		3.678	%	12/17/36	$	3,138,904
	2,764	(b)		3.732		10/17/45		2,906,909
	2,560	Colony American Homes (b)		2.359	(c)	05/17/31		2,575,807
	6,665	Ford Credit Auto Owner Trust (b)		2.26		11/15/25		6,728,677
	2,000	Green Tree Agency Advance Funding Trust I (b)		2.38		10/15/48		1,994,218
		Invitation Homes Trust
	4,112	(b)		2.509	(c)	08/17/32		4,133,529
	2,140	(b)		2.559	(c)	06/17/32		2,161,616
		North Carolina State Education Assistance Authority
	1,406			1.956	(c)	07/25/25		1,409,752
	631			2.056	(c)	01/26/26		631,634
	298	Panhandle-Plains Higher Education Authority, Inc.		2.098	(c)	07/01/24		298,263
	2,470	SBA Small Business Investment Cos.		2.245		09/10/22		2,465,254
		United States Small Business Administration
	2,355			2.42		06/01/32		2,353,156
	5,798			2.67		04/01/32		5,888,077
		Total Asset-Backed Securities (Cost $36,148,610)						36,685,796
		Collateralized Mortgage Obligations — Agency Collateral Series (14.2%)
		Federal Home Loan Mortgage Corporation
	4,019			1.883		05/25/19		4,034,805
	2,665			2.086		03/25/19		2,683,208
	3,265			2.355		07/25/22		3,287,237
	10,125			2.373		05/25/22		10,217,249
	4,700			2.682		10/25/22		4,792,250
	5,439			2.699		05/25/18		5,482,729
	5,595			2.789		01/25/22		5,747,376
	3,392			3.154		02/25/18		3,416,151
	4,000			3.32	(c)	02/25/23		4,205,084
	3,429			3.527	(c)	10/25/23		3,642,286
	5,125			3.871		04/25/21		5,451,922
		IO REMIC
	5,905			4.841	(c)	11/15/43		804,909
	5,144			4.891	(c)	04/15/39		460,171

PRINCIPAL AMOUNT (000)			COUPON RATE			MATURITY DATE	VALUE
		Federal National Mortgage Association
$	4,516			2.171	(c)%	09/25/19	$	4,555,452
	1,689			3.763		06/25/21		1,774,954
		IO
	12,126			5.174	(c)	09/25/20		1,351,565
		IO REMIC
	17,034			3.50		02/25/39		2,015,696
	9,668			5.334	(c)	08/25/41		1,388,782
		Government National Mortgage Association,
		IO
	7,091			3.50		05/20/43		1,493,292
	7,215			4.878	(c)	11/16/40		1,338,219
	7,891			4.928	(c)	07/16/33		454,552
	915			5.00		02/16/41		202,875
		Total Collateralized Mortgage Obligations - Agency Collateral Series (Cost $63,710,063)						68,800,764
		Commercial Mortgage-Backed Securities (3.3%)
		Citigroup Commercial Mortgage Trust,
		IO
	5,812			0.898	(c)	11/10/48		297,943
	29,081			1.121	(c)	09/10/58		1,752,066
	12,805			1.593	(c)	11/10/46		585,357
	12,022	COMM Mortgage Trust, IO		1.50	(c)	08/10/46		532,839
	32,235	Commercial Mortgage Pass-Through Certificates, IO		0.967	(c)	02/10/47		983,571
		GS Mortgage Securities Trust,
		IO
	22,097			1.17	(c)	04/10/47		1,162,157
	20,483			1.405	(c)	10/10/49		1,771,230
	15,907			1.519	(c)	10/10/48		1,335,168
	13,640			1.588	(c)	11/10/46		643,761
	9,500	JP Morgan Chase Commercial Mortgage Securities Trust, IO		0.959	(c)	12/15/49		457,421
		JPMBB Commercial Mortgage Securities Trust,
		IO
	33,269			1.101	(c)	01/15/47		1,407,060
	8,332			1.467	(c)	11/15/45		378,043

PRINCIPAL AMOUNT (000)			COUPON RATE			MATURITY DATE	VALUE
		Wells Fargo Commercial Mortgage Trust,
		IO
$	13,925			1.19	(c)%	12/15/49	$	832,325
	17,352			1.802	(c)	11/15/49		1,791,509
		WF-RBS Commercial Mortgage Trust,
		IO
	16,568			0.66	(c)	08/15/46		374,267
	17,461			1.225	(c)	03/15/46		607,263
	20,789			1.668	(c)	12/15/46		1,080,440
		Total Commercial Mortgage-Backed Securities (Cost $15,616,676)						15,992,420
		Mortgages - Other (6.1%)
		Fannie Mae Connecticut Avenue Securities
	2,572			2.516	(c)	04/25/29		2,603,389
	1,143			3.416	(c)	10/25/28		1,159,545
		Freddie Mac Structured Agency Credit Risk Debt Notes
	793			2.416	(c)	10/25/29		804,600
	1,550			3.066	(c)	10/25/27		1,590,215
	750			3.216	(c)	12/25/28		768,933
	750			3.416	(c)	10/25/28		765,618
	1,500			3.966	(c)	09/25/28		1,556,866
	730			4.016	(c)	05/25/28		755,850
	1,200			4.116	(c)	07/25/28		1,249,586
		Freddie Mac Whole Loan Securities Trust
	4,180			3.00		09/25/45 - 10/25/46		4,109,281
	7,067			3.50		05/25/45 - 12/25/46		7,152,645
	331			4.00		05/25/45		338,813
		New Residential Mortgage Loan Trust
	4,018	(b)		3.75	(c)	11/26/35 - 08/25/55		4,160,272
	2,303	(b)		4.00	(c)	02/25/57		2,408,341
		Total Mortgages - Other (Cost $29,125,656)						29,423,954
		Municipal Bonds (9.9%)
	3,615	Bay Area Toll Authority		6.263		04/01/49		5,180,729
	3,875	City of New York, NY, Series G-1		5.968		03/01/36		5,033,509
	3,060	City of San Francisco, CA, Public Utilities Commission Water Revenue		6.00		11/01/40		3,865,821
	5,980	Los Angeles Unified School District		5.75		07/01/34		7,576,899
	1,450	Metropolitan Transportation Authority		6.668		11/15/39		1,985,833

PRINCIPAL AMOUNT (000)			COUPON RATE			MATURITY DATE	VALUE
$	6,245	Missouri Highway & Transportation Commission		5.445	%	05/01/33	$	7,493,313
	1,760	Municipal Electric Authority of Georgia		6.637		04/01/57		2,166,718
	1,360	New Jersey Transportation Trust Fund Authority		6.561		12/15/40		1,586,658
	3,625	New York City, NY, Transitional Finance Authority Future Tax Secured Revenue		5.267		05/01/27		4,232,876
	3,000	New York State Dormitory Authority		5.628		03/15/39		3,724,110
	2,575	State of Oregon Department of Transportation		5.834		11/15/34		3,324,711
	1,580	State of Washington		5.481		08/01/39		1,977,212
		Total Municipal Bonds (Cost $38,976,359)						48,148,389
		U.S. Agency Securities (10.4%)
		Federal Home Loan Bank
	5,550			0.875		10/01/18		5,517,138
	5,525			1.00		09/26/19		5,470,684
	5,520	Federal Home Loan Mortgage Corporation		0.875		10/12/18		5,487,040
		Private Export Funding Corp.
	5,300			1.45		08/15/19		5,287,105
	6,960			4.30		12/15/21		7,631,800
		Tennessee Valley Authority
	6,935			5.25		09/15/39		9,104,962
	8,085			7.125		05/01/30		11,728,998
		Total U.S. Agency Securities (Cost $46,216,547)						50,227,727
		U.S. Treasury Securities (5.0%)
		U.S. Treasury Notes
	5,263			0.375		01/15/27		5,172,745
	14,600			0.75		03/31/18		14,546,958
	4,800			1.50		08/15/26		4,490,626
		Total U.S. Treasury Securities (Cost $24,199,913)						24,210,329
		Short-Term Investments (3.2%)
		U.S. Treasury Security (0.4%)
	2,234	U.S. Treasury Bill (d)(e) (Cost $2,212,421)		1.191		04/26/18		2,212,670

NUMBER OF SHARES (000)				VALUE
	Investment Company (2.8%)
13,715	Morgan Stanley Institutional Liquidity Funds - Government Portfolio - Institutional Class (See Note 9) (Cost $13,715,489)			$	13,715,489
	Total Short-Term Investments (Cost $15,927,910)				15,928,159
	Total Investments (Cost $486,467,424) (f)(g)	105.1	%		508,936,504
	Liabilities in Excess of Other Assets	(5.1	)		(24,495,501	)
	Net Assets	100.0	%	$	484,441,003

AID Agency for International Development.

IO Interest Only.

REMIC Real Estate Mortgage Investment Conduit.

TBA To Be Announced.

(a) Security is subject to delayed delivery.

(b) 144A security - Certain conditions for public sale may exist. Unless otherwise noted, these securities are deemed to be liquid.

(c) Variable/Floating Rate Security - Interest rate changes on these instruments are based on changes in a designated base rate. The rates shown are those in effect on June 30, 2017.

(d) Rate shown is the yield to maturity at June 30, 2017.

(e) All or a portion of the security was pledged to cover margin requirements for futures contracts and swap agreements.

(f) Securities are available for collateral in connection with securities purchased on a forward commitment basis, open futures contracts and swap agreements.

(g) At June 30, 2017, the aggregate cost for federal income tax purposes approximates the aggregate cost for book purposes. The aggregate gross unrealized appreciation is $24,757,241 and the aggregate gross unrealized depreciation is $2,288,161, resulting in net unrealized appreciation of $22,469,080.

Futures Contracts Open at June 30, 2017:

NUMBER OF CONTRACTS		LONG/SHORT	DESCRIPTION, DELIVERY MONTH AND YEAR	UNREALIZED UNDERLYING FACE AMOUNT AT VALUE		APPRECIATION (DEPRECIATION)
	169	Long	U.S. Treasury 2 yr. Note, Sep-17		$36,522,485		$(53,765)
	113	Long	U.S. Treasury Ultra Bond, Sep-17		18,743,875		358,657
	30	Long	U.S. Treasury 10 yr. Ultra Long Bond, Sep-17		4,044,375		(14,438)
	12	Long	U.S. Treasury 5 yr. Note, Sep-17		1,414,031		(2,250)
	4	Long	U.S. Treasury 30 yr. Bond, Sep-17		614,750		3,270
	12	Short	U.S. Treasury 10 yr. Note, Sep-17		(1,506,375)		1,016
			Net Unrealized Appreciation			$	292,490

Interest Rate Swap Agreements Open at June 30, 2017:

SWAP COUNTERPARTY	NOTIONAL AMOUNT (000)		FLOATING RATE INDEX	PAY/RECEIVE FLOATING RATE	FIXED RATE			TERMINATION DATE	UNREALIZED APPRECIATION (DEPRECIATION)
Morgan Stanley & Co., LLC*	$	7,141	3 Month LIBOR	Receive		2.26	%	12/07/26	$	(91	)
Morgan Stanley & Co., LLC*		7,186	3 Month LIBOR	Receive		2.48		12/21/26		(135,224	)
Morgan Stanley & Co., LLC*		5,858	3 Month LIBOR	Receive		2.48		05/23/47		104,930
Net Unrealized Depreciation									$	(30,385	)

* Cleared swap agreement, the broker is Morgan Stanley & Co., LLC.

LIBOR London Interbank Offered Rate.

Statement of Assets and Liabilities June 30, 2017 (unaudited)

Assets:
Investments in securities, at value (cost $472,751,935)	$	495,221,015
Investment in affiliate, at value (cost $13,715,489)		13,715,489
Total investments in securities, at value (cost $486,467,424)		508,936,504
Cash		98,466
Receivable from Distributor		294,043
Receivable for:
Interest and paydown		2,679,113
Variation margin on open swap agreements		71,641
Shares of beneficial interest sold		38,241
Investments sold		12,415
Dividends from affiliate		7,929
Prepaid expenses and other assets		127,584
Total Assets		512,265,936
Liabilities:
Due to broker		20,000
Payable for:
Investments purchased		25,965,410
Shares of beneficial interest redeemed		754,665
Distribution fee		249,798
Transfer and sub transfer agent fees		214,224
Dividends to shareholders		148,121
Advisory fee		125,854
Variation margin on open futures contracts		105,715
Trustees' fees		70,837
Administration fee		34,238
Accrued expenses and other payables		136,071
Total Liabilities		27,824,933
Net Assets	$	484,441,003
Composition of Net Assets:
Paid-in-capital	$	483,783,940
Net unrealized appreciation		22,731,185
Accumulated undistributed net investment income		1,548,347
Accumulated net realized loss		(23,622,469	)
Net Assets	$	484,441,003
Class A Shares:
Net Assets	$	40,539,285
Shares Outstanding (unlimited shares authorized, $0.01 par value)		4,651,204
Net Asset Value Per Share	$	8.72
Maximum Offering Price Per Share, (net asset value plus 4.44% of net asset value)	$	9.11
Class B Shares:
Net Assets	$	355,155,631
Shares Outstanding (unlimited shares authorized, $0.01 par value)		40,754,620
Net Asset Value Per Share	$	8.71
Class L Shares:
Net Assets	$	10,619,323
Shares Outstanding (unlimited shares authorized, $0.01 par value)		1,209,094
Net Asset Value Per Share	$	8.78
Class I Shares:
Net Assets	$	77,312,383
Shares Outstanding (unlimited shares authorized, $0.01 par value)		8,867,621
Net Asset Value Per Share	$	8.72
Class C Shares:
Net Assets	$	814,381
Shares Outstanding (unlimited shares authorized, $0.01 par value)		92,681
Net Asset Value Per Share	$	8.79

Statement of Operations For the six months ended June 30, 2017 (unaudited)

Net Investment Income: Income
Interest	$	8,963,456
Dividends from affiliate (Note 9)		114,944
Total Income		9,078,400
Expenses
Advisory fee (Note 4)		1,048,222
Distribution fee (Class A shares) (Note 5)		52,054
Distribution fee (Class B shares) (Note 5)		435,869
Distribution fee (Class L shares) (Note 5)		28,515
Distribution fee (Class C shares) (Note 5)		3,994
Sub transfer agent fees and expenses (Class A shares)		37,414
Sub transfer agent fees and expenses (Class B shares)		150,725
Sub transfer agent fees and expenses (Class L shares)		6,147
Sub transfer agent fees and expenses (Class I shares)		34,675
Sub transfer agent fees and expenses (Class C shares)		288
Administration fee (Note 4)		199,661
Transfer agent fees and expenses (Class A shares) (Note 8)		8,105
Transfer agent fees and expenses (Class B shares) (Note 8)		102,164
Transfer agent fees and expenses (Class L shares) (Note 8)		2,376
Transfer agent fees and expenses (Class I shares) (Note 8)		15,501
Transfer agent fees and expenses (Class C shares) (Note 8)		997
Professional fees		64,272
Shareholder reports and notices		33,697
Custodian fees (Note 7)		29,854
Registration fees		24,565
Trustees' fees and expenses		10,410
Other		33,994
Total Expenses		2,323,499
Less: waiver of Advisory fees (Note 4)		(146,883	)
Less: reimbursement of class specific expenses (Class A shares) (Note 4)		(24,683	)
Less: reimbursement of class specific expenses (Class B shares) (Note 4)		(66,251	)
Less: reimbursement of class specific expenses (Class L shares) (Note 4)		(2,624	)
Less: reimbursement of class specific expenses (Class I shares) (Note 4)		(50,092	)
Less: reimbursement of class specific expenses (Class C shares) (Note 4)		(864	)
Less: rebate from Morgan Stanley affiliated cash sweep (Note 9)		(33,548	)
Net Expenses		1,998,554
Net Investment Income		7,079,846
Realized and Unrealized Gain (Loss):
Realized Gain (Loss) on:
Investments		(361,539	)
Futures contracts		844,894
Swap agreements		(348,684	)
Net Realized Gain		134,671
Change in Unrealized Appreciation (Depreciation) on:
Investments		1,565,710
Futures contracts		188,550
Swap agreements		7,679
Net Change in Unrealized Appreciation (Depreciation)		1,761,939
Net Gain		1,896,610
Net Increase	$	8,976,456

Statements of Changes in Net Assets

	FOR THE SIX MONTHS ENDED JUNE 30, 2017			FOR THE YEAR ENDED DECEMBER 31, 2016
	(unaudited)
Increase (Decrease) in Net Assets: Operations:
Net investment income	$	7,079,846		$	15,104,061
Net realized gain		134,671			2,066,164
Net change in unrealized appreciation (depreciation)		1,761,939			(2,045,506	)
Net Increase		8,976,456			15,124,719
Dividends to Shareholders from Net Investment Income:
Class A shares		(580,334	)		(1,266,332	)
Class B shares		(5,126,217	)		(11,244,505	)
Class L shares		(143,330	)		(320,642	)
Class I shares		(1,237,467	)		(2,631,183	)
Class C shares		(7,944	)		(8,574	)
Total Dividends		(7,095,292	)		(15,471,236	)
Net decrease from transactions in shares of beneficial interest		(29,944,397	)		(62,058,632	)
Net Decrease		(28,063,233	)		(62,405,149	)
Net Assets:
Beginning of period		512,504,236			574,909,385
End of Period (Including accumulated undistributed net investment income of $1,548,347 and $1,563,793)	$	484,441,003		$	512,504,236

1. Organization and Accounting Policies

Morgan Stanley U.S. Government Securities Trust (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "Act"), as a diversified, open-end management investment company. The Fund applies investment company accounting and reporting guidance. The Fund's investment objective is to seek a high level of current income consistent with safety of principal. The Fund was organized as a Massachusetts business trust on September 29, 1983 and commenced operations on June 29, 1984. On July 28, 1997, the Fund converted to a multiple class share structure.

The Fund offers Class A shares, Class B shares, Class L shares, Class I shares and Class C shares. The five 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, most Class B shares, and most 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 L shares and Class I shares are not subject to a sales charge. Additionally, Class A shares, Class B shares, Class L shares and Class C shares incur distribution expenses.

The Fund suspended offering Class B and Class L shares to all investors (February 25, 2013 and April 30, 2015, respectively). Class B and Class L shareholders of the Fund do not have the option of purchasing additional Class B or Class L shares. However, the existing Class B and Class L shareholders may invest through reinvestment of dividends and distributions.

The following is a summary of significant accounting policies:

A. Valuation of Investments — (1) Certain portfolio securities may be valued by an outside pricing service/vendor approved by the Fund's Board of Trustees (the "Trustees"). The pricing service/vendor may employ a pricing model that takes into account, among other things, bids, yield spreads, and/or other market data and specific security characteristics. Alternatively, if a valuation is not available from an outside pricing service/vendor, and the security trades on an exchange, the security may be valued at its latest reported sale price (or at the exchange official closing price if such exchange reports an official closing price), prior to the time when assets are valued. If there are no sales on a given day and if there is no official exchange closing price for that day, the security is valued at the mean between the last reported bid and asked prices if such bid and asked prices are available in the relevant exchanges; (2) portfolio securities for which over-the-counter ("OTC") market quotations are readily available are valued at its latest reported sales price (or at the market official closing price if such market reports an official closing price), and if there was no trading in the security on a given day and if there is no official closing price from relevant markets for that day, the security is valued at the mean between the last

reported bid and asked prices if such bid and asked prices are available on the relevant markets; (3) when market quotations are not readily available, including circumstances under which Morgan Stanley Investment Management Inc. (the "Adviser"), a wholly-owned subsidiary of Morgan Stanley, determines that the market quotations are not reflective of a security's market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Trustees; (4) futures are valued at the settlement price on the exchange on which they trade or, if a settlement price is unavailable, at the last sale price on the exchange; (5) listed swaps are valued at the last reported sales price on the exchange on which they are listed (or at the exchange official closing price if such exchange reports an official closing price). If an official closing price or last reported sale price is unavailable, the listed swaps should be fair valued at the mean between its latest bid and ask prices. Unlisted swaps are valued at the mean between their latest bid and ask prices from a broker/dealer or valued by a pricing service/vendor; and (6) investments in mutual funds, including the Morgan Stanley Institutional Liquidity Funds, are valued at the net asset value ("NAV") as of the close of each business day.

The Trustees have responsibility for determining in good faith the fair value of the investments, and the Trustees may appoint others, such as the Fund's Adviser or a valuation committee, to assist the Trustees in determining fair value and to make the actual calculations pursuant to the fair valuation methodologies previously approved by the Trustees. Under procedures approved by the Trustees, the Fund's Adviser has formed a Valuation Committee whose members are approved by the Trustees. The Valuation Committee provides administration and oversight of the Fund's valuation policies and procedures, which are reviewed at least annually by the Trustees. These procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.

The Fund has procedures to determine the fair value of securities and other financial instruments for which market prices are not readily available. Under these procedures, the Valuation Committee convenes on a regular and ad hoc basis to review such securities and considers a number of factors, including valuation methodologies and significant unobservable valuation inputs, when arriving at fair value. The Valuation Committee may employ a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market

existed. The Valuation Committee employs various methods for calibrating these valuation approaches including a regular review of valuation methodologies, key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.

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 and are included in interest income. Interest income is accrued daily as earned.

C. Multiple Class Allocations — Investment income, realized and unrealized gain (loss), and non-class specific expenses are allocated daily based upon the proportion of net assets of each class. Class specific expenses are borne by the respective share classes and include Distribution, Transfer Agent and Sub Transfer Agent fees.

D. Dividends and Distributions to Shareholders — Dividends and distributions to shareholders are recorded on the ex-dividend date. Dividends from net investment income, if any, are declared daily and paid monthly. Net realized capital gains, if any, are distributed at least annually.

E. When-Issued/Delayed Delivery Securities — The Fund may purchase or sell when-issued and delayed delivery securities. Securities purchased on a when-issued or delayed delivery basis are purchased for delivery beyond the normal settlement date at a stated price, and no income accrues to the Fund on such securities prior to delivery date. Payment and delivery for when-issued and delayed delivery securities can take place a month or more after the date of the transaction. When the Fund enters into a purchase transaction on a when-issued or delayed delivery basis, securities are available for collateral in an amount at least equal in value to the Fund's commitments to purchase such securities. Purchasing securities on a when-issued or delayed delivery basis may involve a risk that the market price at the time of delivery may be lower than the agreed upon purchase price, in which case there could be an unrealized loss at the time of delivery. Purchasing investments on a when-issued or delayed delivery basis may be considered a form of leverage which may increase the impact that gains (losses) may have on the Fund.

F. Use of Estimates — The preparation of financial statements in accordance with generally accepted accounting principles in the United States ("GAAP") requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates.

G. Indemnifications — The Fund enters into contracts that contain a variety of indemnifications. The Fund's maximum exposure under these arrangements is unknown. However, the Fund has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.

2. Fair Valuation Measurements

Financial Accounting Standards Board ("FASB") Accounting Standards Codification^TM ("ASC") 820, "Fair Value Measurement" ("ASC 820"), defines fair value as the value that the Fund would receive to sell an investment or pay to transfer a liability in a timely transaction with an independent buyer in the principal market, or in the absence of a principal market, the most advantageous market for the investment or liability. ASC 820 establishes a three-tier hierarchy to distinguish between (1) inputs that reflect the assumptions market participants would use in valuing an asset or liability developed based on market data obtained from sources independent of the reporting entity (observable inputs); and (2) inputs that reflect the reporting entity's own assumptions about the assumptions market participants would use in valuing an asset or liability developed based on the best information available in the circumstances (unobservable inputs) and to establish classification of fair value measurements for disclosure purposes. Various inputs are used in determining the value of the Fund's investments. The inputs are summarized in the three broad levels listed below.

• Level 1 — unadjusted quoted prices in active markets for identical investments

• Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)

• Level 3 — significant unobservable inputs including the Fund's own assumptions in determining the fair value of investments. Factors considered in making this determination may include, but are not limited to, information obtained by contacting the issuer, analysts, or the appropriate stock exchange (for exchange-traded securities), analysis of the issuer's financial statements or other available documents and, if necessary, available information concerning other securities in similar circumstances

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities and the determination of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each security.

The following is a summary of the inputs used to value the Fund's investments as of June 30, 2017.

INVESTMENT TYPE	LEVEL 1 UNADJUSTED QUOTED PRICES			LEVEL 2 OTHER SIGNIFICANT OBSERVABLE INPUTS			LEVEL 3 SIGNIFICANT UNOBSERVABLE INPUTS		TOTAL
Assets:
Fixed Income Securities
Agency Adjustable Rate Mortgages	$	—		$	7,023,468		$	—	$	7,023,468
Agency Bonds — Consumer Discretionary (U.S. Government Guaranteed)		—			7,171,880			—		7,171,880
Agency Bond — Finance (U.S. Government Guaranteed)		—			1,751,565			—		1,751,565
Agency Bonds — Sovereign (U.S. Government Guaranteed)		—			20,792,812			—		20,792,812
Agency Fixed Rate Mortgages		—			182,779,241			—		182,779,241
Asset-Backed Securities		—			36,685,796			—		36,685,796
Collateralized Mortgage Obligations — Agency Collateral Series		—			68,800,764			—		68,800,764
Commercial Mortgage-Backed Securities		—			15,992,420			—		15,992,420
Mortgages — Other		—			29,423,954			—		29,423,954
Municipal Bonds		—			48,148,389			—		48,148,389
U.S. Agency Securities		—			50,227,727			—		50,227,727
U.S. Treasury Securities		—			24,210,329			—		24,210,329
Total Fixed Income Securities		—			493,008,345			—		493,008,345
Short-Term Investments
U.S. Treasury Security		—			2,212,670			—		2,212,670
Investment Company		13,715,489			—			—		13,715,489
Total Short-Term Investments		13,715,489			2,212,670			—		15,928,159
Futures Contracts		362,943			—			—		362,943
Interest Rate Swap Agreement		—			104,930			—		104,930
Total Assets		14,078,432			495,325,945			—		509,404,377
Liabilities:
Futures Contracts		(70,453	)		—			—		(70,453	)
Interest Rate Swap Agreements		—			(135,315	)		—		(135,315	)
Total Liabilities		(70,453	)		(135,315	)		—		(205,768	)
Total	$	14,007,979		$	495,190,630		$	—	$	509,198,609

Transfers between investment levels may occur as the markets fluctuate and/or the availability of data used in an investment's valuation changes. The Fund recognizes transfers between the levels as of the

end of the period. As of June 30, 2017, the Fund did not have any investments transfer between investment levels.

3. Derivatives

The Fund may, but it is not required to, use derivative instruments for a variety of purposes, including hedging, risk management, portfolio management or to earn income. Derivatives are financial instruments whose value is based, in part, on the value of an underlying asset, interest rate, index or financial instrument. Prevailing interest rates and volatility levels, among other things, also affect the value of derivative instruments. A derivative instrument often has risks similar to its underlying asset and may have additional risks, including imperfect correlation between the value of the derivative and the underlying asset, risks of default by the counterparty to certain transactions, magnification of losses incurred due to changes in the market value of the securities, instruments, indices or interest rates to which the derivative instrument relates, risks that the transactions may not be liquid and risks arising from margin requirements. The use of derivatives involves risks that are different from, and possibly greater than, the risks associated with other portfolio investments. Derivatives may involve the use of highly specialized instruments that require investment techniques and risk analyses different from those associated with other portfolio investments. All of the Fund's holdings, including derivative instruments, are marked-to-market each day with the change in value reflected in unrealized appreciation (depreciation). Upon disposition, a realized gain or loss is recognized.

Certain derivative transactions may give rise to a form of leverage. Leverage magnifies the potential for gain and risk of loss. Leverage associated with derivative transactions may cause the Fund to liquidate portfolio positions when it may not be advantageous to do so to satisfy its obligations or to meet earmarking or segregation requirements, pursuant to applicable Securities and Exchange Commission ("SEC") rules and regulations, or may cause the Fund to be more volatile than if the Fund had not been leveraged. Although the Adviser seeks to use derivatives to further the Fund's investment objectives, there is no assurance that the use of derivatives will achieve this result.

Following is a description of the derivative instruments and techniques that the Fund used during the period and their associated risks:

Futures — A futures contract is a standardized, exchange-traded agreement to buy or sell a specific quantity of an underlying asset, reference rate or index at a specific price at a specific future time. The value of a futures contract tends to increase and decrease in tandem with the value of the underlying instrument. Depending on the terms of the particular contract, futures contracts are settled through either physical delivery of the underlying instrument on the settlement date or by payment of a cash settlement amount on the settlement date. During the period the futures contract is open, payments

are received from or made to the broker based upon changes in the value of the contract (the variation margin). A decision as to whether, when and how to use futures contracts involves the exercise of skill and judgment and even a well-conceived futures transaction may be unsuccessful because of market behavior or unexpected events. In addition to the derivatives risks discussed above, the prices of futures contracts can be highly volatile, using futures contracts can lower total return, and the potential loss from futures contracts can exceed the Fund's initial investment in such contracts. No assurance can be given that a liquid market will exist for any particular futures contract at any particular time. There is also the risk of loss by the Fund of margin deposits in the event of bankruptcy of a broker with which the Fund has open positions in the futures contract.

Swaps — The Fund may enter into OTC swap contracts or cleared swap transactions. An OTC swap contract is an agreement between two parties pursuant to which the parties exchange payments at specified dates on the basis of a specified notional amount, with the payments calculated by reference to specified securities, indices, reference rates, currencies or other instruments. Typically swap agreements provide that when the period payment dates for both parties are the same, the payments are made on a net basis (i.e., the two payment streams are netted out, with only the net amount paid by one party to the other). The Fund's obligations or rights under a swap contract entered into on a net basis will generally be equal only to the net amount to be paid or received under the agreement, based on the relative values of the positions held by each party. Cleared swap transactions may help reduce counterparty credit risk. In a cleared swap, the Fund's ultimate counterparty is a clearinghouse rather than a swap dealer, bank or other financial institution. OTC swap agreements are not entered into or traded on exchanges and often there is no central clearing or guaranty function for OTC swaps. These OTC swaps are often subject to credit risk or the risk of default or non-performance by the counterparty. Both OTC and cleared swaps could result in losses if interest rates, foreign currency exchange rates or other factors are not correctly anticipated by the Fund or if the reference index, security or investments do not perform as expected. During the period swap agreements are open, payments are received from or made to the clearinghouse or counterparty based upon changes in the value of the contract (variation margin). The Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulatory developments require the clearing and exchange-trading of certain standardized swap transactions. Mandatory exchange-trading and clearing is occurring on a phased-in basis.

When the Fund has an unrealized loss on a swap agreement, the Fund has instructed the custodian to pledge cash or liquid securities as collateral with a value approximately equal to the amount of the unrealized loss. Collateral pledges are monitored and subsequently adjusted if and when the swap valuations fluctuate. If applicable, cash collateral is included with "Due from (to) broker" in the Statement of Assets and Liabilities.

FASB ASC 815, "Derivatives and Hedging" ("ASC 815"), is intended to improve financial reporting about derivative instruments by requiring enhanced disclosures to enable investors to better understand how and why the Fund uses derivative instruments, how these derivative instruments are accounted for and their effects on the Fund's financial position and results of operations.

The following table sets forth the fair value of the Fund's derivative contracts by primary risk exposure as of June 30, 2017.

PRIMARY RISK EXPOSURE	ASSET DERIVATIVES STATEMENT OF ASSETS AND LIABILITIES LOCATION	FAIR VALUE			LIABILITY DERIVATIVES STATEMENT OF ASSETS AND LIABILITIES LOCATION	FAIR VALUE
Interest Rate Risk	Variation margin on open futures contracts	$	362,943	(a)	Variation margin on open futures contracts	$	(70,453	)(a)
Interest Rate Risk	Variation margin on open swap agreement		104,930	(a)	Variation margin on open swap agreements		(135,315	)(a)
		$	467,873			$	(205,768	)

(a) Includes cumulative appreciation (depreciation) as reported in the Portfolio of Investments. Only current day's net variation margin is reported within the Statement of Assets and Liabilities.

The following tables set forth by primary risk exposure the Fund's realized gains (losses) and change in unrealized appreciation (depreciation) by type of derivative contract for the six months ended June 30, 2017 in accordance with ASC 815.

AMOUNT OF REALIZED GAIN (LOSS) ON DERIVATIVES

PRIMARY RISK EXPOSURE				FUTURES CONTRACTS				SWAP AGREEMENTS
Interest Rate Risk				$	844,894			$	(348,684	)

CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVES

PRIMARY RISK EXPOSURE				FUTURES CONTRACTS				SWAP AGREEMENTS
Interest Rate Risk				$	188,550			$	7,679

For the six months ended June 30, 2017, the average monthly amount outstanding for each derivative type is as follows:

Futures Contracts:
Average monthly original value	$	59,895,698
Swap Agreements:
Average monthly notional amount	$	34,286,333

4. Advisory/Administration Agreements

Pursuant to an Investment Advisory Agreement with the Adviser, the Fund pays an advisory fee, accrued daily and paid monthly, by applying the following annual rates to the net assets of the Fund determined as of the close of each business day: 0.42% to the portion of the daily net assets not exceeding $1 billion; 0.395% to the portion of the daily net assets exceeding $1 billion but not exceeding $1.5 billion; 0.37% to the portion of the daily net assets exceeding $1.5 billion but not exceeding $2 billion; 0.345% to the portion of the daily net assets exceeding $2 billion but not exceeding $2.5 billion; 0.32% to the portion of the daily net assets exceeding $2.5 billion but not exceeding $5 billion; 0.295% to the portion of the daily net assets exceeding $5 billion but not exceeding $7.5 billion; 0.27% to the portion of the daily net assets exceeding $7.5 billion but not exceeding $10 billion; 0.245% to the portion of the daily net assets exceeding $10 billion but not exceeding $12.5 billion; and 0.22% to the portion of the daily net assets exceeding $12.5 billion. For the six months ended June 30, 2017, the advisory fee rate (net of waivers/rebate) was equivalent to an annual effective rate of 0.35% of the Fund's average daily net assets.

The Adviser also serves as the Administrator to the Fund and provides administrative services pursuant to an Administration Agreement for an annual fee, accrued daily and paid monthly, of 0.08% of the Fund's average daily net assets.

Under a Sub-Administration Agreement between the Administrator and State Street Bank and Trust Company ("State Street"), State Street provides certain administrative services to the Fund. For such services, the Administrator pays State Street a portion of the fee the Administrator receives from the Fund.

The Adviser/Administrator has agreed to reduce its advisory fee, its administration fee and/or reimburse the Fund so that total annual operating expenses, excluding certain investment related expenses, taxes, interest and other extraordinary expenses (including litigation), will not exceed 0.87% for Class A, 0.86% for Class B, 1.12% for Class L, 0.52% for Class I and 1.62% for Class C shares. The fee waivers and/or expense reimbursements will continue for at least one year from the date of the Fund's prospectus or until such time that the Trustees act to discontinue all or a portion of such waivers and/or expense reimbursements when they deem such action is appropriate. For the six months ended June 30, 2017, $146,883 of advisory fees were waived and $144,514 of other expenses were reimbursed by the Adviser pursuant to this arrangement.

5. Plan of Distribution

Shares of the Fund are distributed by Morgan Stanley Distribution, Inc. (the "Distributor"), an affiliate of the Adviser/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 shares; (ii) Class B — up to 0.75% (0.65% on amounts over $10 billion) of the average daily net assets of Class B shares; (iii) Class L — up to 0.50% of the average daily net assets of Class L shares; and (iv) Class C — up to 1.00% of the average daily net assets of Class C shares.

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 or may not be recovered through the payment of future distribution fees from the Fund pursuant to the Plan and contingent deferred sales charges paid by investors upon redemption of Class B shares. Although there is no legal obligation for the Fund to pay expenses incurred in excess of payments made to the Distributor under the Plan and the proceeds of contingent deferred sales charges paid by investors upon redemption of shares, if for any reason the Plan is terminated, the Trustees will consider at that time the manner in which to treat such expenses. The Distributor has advised the Fund that such excess amounts totaled $1,627,113 at June 30, 2017.

The Fund's Distributor has agreed to reduce the 12b-1 fee on Class B shares of the Fund to the extent it exceeds 0.24% of the average daily net assets of such shares on an annualized basis. This waiver will continue for at least one year from the date of the Fund's prospectus or until such time that the Trustees act to discontinue all or a portion of such waiver when they deem that such action is appropriate. For the six months ended June 30, 2017, the distribution fee was accrued for Class B at an annual rate of 0.24%.

At June 30, 2017, included in the Statement of Assets and Liabilities is a receivable from the Fund's Distributor which represents payments due to be reimbursed to the Fund under the Plan. Because the Plan is what is referred to as a "reimbursement plan", the Distributor reimburses to the Fund any 12b-1 fees collected in excess of the actual distribution expenses incurred. This receivable represents this excess amount as of June 30, 2017.

In the case of Class A shares, Class L shares and Class C shares, expenses incurred pursuant to the Plan in any calendar year in excess of 0.25%, 0.50% and 1.00% of the average daily net assets of Class A shares, Class L shares and Class C shares, respectively, will not be reimbursed by the Fund through payments in any subsequent year, except that expenses representing a gross sales commission credited to Financial Intermediaries at the time of sale may be reimbursed in the subsequent calendar year. For the six months ended June 30, 2017, the distribution fee was accrued for Class A shares, Class L shares and Class C shares at the annual rate of 0.25%, 0.50% and 1.00%, respectively.

The Distributor has informed the Fund that for the six months ended June 30, 2017, it received contingent deferred sales charges from certain redemptions of the Fund's Class B shares of $3,627

and received $5,479 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.

6. Shares of Beneficial Interest

Transactions in shares of beneficial interest were as follows:

	FOR THE SIX MONTHS ENDED JUNE 30, 2017						FOR THE YEAR ENDED DECEMBER 31, 2016
	(unaudited)
	SHARES			AMOUNT			SHARES			AMOUNT
CLASS A SHARES
Sold		284,242		$	2,470,937			1,007,416		$	8,933,925
Reinvestment of dividends		63,936			556,535			140,278			1,243,455
Redeemed		(577,586	)		(5,023,449	)		(1,978,136	)		(17,531,532	)
Net decrease — Class A		(229,408	)		(1,995,977	)		(830,442	)		(7,354,152	)
CLASS B SHARES
Sold		38,530			334,008			39,306			349,932
Reinvestment of dividends		548,267			4,770,492			1,205,696			10,687,135
Redeemed		(3,211,126	)		(27,900,765	)		(6,525,659	)		(57,758,474	)
Net decrease — Class B		(2,624,329	)		(22,796,265	)		(5,280,657	)		(46,721,407	)
CLASS L SHARES
Sold		1,552			13,556			17,341			154,750
Reinvestment of dividends		15,652			137,256			35,035			312,980
Redeemed		(180,096	)		(1,578,164	)		(237,279	)		(2,120,483	)
Net decrease — Class L		(162,892	)		(1,427,352	)		(184,903	)		(1,652,753	)
CLASS I SHARES
Sold		137,416			1,194,792			567,901			5,036,173
Reinvestment of dividends		134,327			1,169,284			285,297			2,530,286
Redeemed		(714,502	)		(6,209,307	)		(1,628,235	)		(14,451,615	)
Net decrease — Class I		(442,759	)		(3,845,231	)		(775,037	)		(6,885,156	)
CLASS C SHARES
Sold		24,773			217,407			100,934			904,714
Reinvestment of dividends		817			7,168			821			7,340
Redeemed		(11,867	)		(104,147	)		(40,110	)		(357,218	)
Net increase — Class C		13,723			120,428			61,645			554,836
Net decrease in Fund		(3,445,665	)	$	(29,944,397	)		(7,009,394	)	$	(62,058,632	)

7. Custodian Fees

State Street (the "Custodian") serves as Custodian for the Fund in accordance with a Custodian Agreement. The Custodian holds cash, securities, and other assets of the Fund as required by the Act. Custody fees are payable monthly based on assets held in custody, investment purchases and sales activity and account maintenance fees, plus reimbursement for certain out-of-pocket expenses.

8. Dividend Disbursing and Transfer Agent

The Fund's dividend disbursing and transfer agent is Boston Financial Data Services, Inc. ("BFDS"). Pursuant to a Transfer Agency Agreement, the Fund pays BFDS a fee based on the number of classes, accounts and transactions relating to the Fund.

9. Security Transactions and Transactions with Affiliates

The cost of purchases and proceeds from sales of investment securities, excluding short-term investments, for the six months ended June 30, 2017, aggregated $536,730,021 and $565,527,082, respectively. Included in the aforementioned are purchases and sales of U.S. Government securities of $534,148,598 and $555,761,567, respectively.

The Fund invests in the Institutional Class of the Morgan Stanley Institutional Liquidity Funds – Government Portfolio (the "Liquidity Funds"), an open-end management investment company managed by the Adviser. Advisory fees paid by the Fund are reduced by an amount equal to its pro-rata share of the advisory and administration fees paid by the Fund due to its investment in the Liquidity Funds. For the six months ended June 30, 2017, advisory fees paid were reduced by $33,548 relating to the Fund's investment in the Liquidity Funds.

A summary of the Fund's transactions in shares of the Liquidity Funds during the six months ended June 30, 2017 is as follows:

VALUE DECEMBER 31, 2016				PURCHASES AT COST				SALES				DIVIDEND INCOME				VALUE JUNE 30, 2017
$	39,867,551			$	40,290,609			$	66,442,671			$	114,944			$	13,715,489

The Fund has an unfunded noncontributory defined benefit pension plan covering certain independent Trustees of the Fund who will have served as independent Trustees for at least five years at the time of retirement. Benefits under this plan are based on factors which include years of service and compensation. The Trustees voted to close the plan to new participants and eliminate the future benefits growth due to increases to compensation after July 31, 2003. Aggregate pension costs for the six months ended June 30, 2017, included in "Trustees' fees and expenses" in the Statement of

Operations amounted to $2,552. At June 30, 2017, the Fund had an accrued pension liability of $70,837, which is reflected as "Trustees' fees" in the Statement of Assets and Liabilities.

The Fund is permitted to purchase and sell securities ("cross-trade") from and to other Morgan Stanley Funds as well as other funds and client accounts for which the Adviser or an affiliate of the Adviser serves as investment adviser, pursuant to procedures approved by the Trustees in compliance with Rule 17a-7 under the Act (the "Rule"). Each cross-trade is executed at the current market price in compliance with provisions of the Rule. For the six months ended June 30, 2017, the Fund did not engage in any cross-trade transactions.

The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan"), which allows each independent Trustee to defer payment of all, or a portion, of the fees he or she receives for serving on the Board of Trustees. Each eligible Trustee generally may elect to have the deferred amounts credited with a return equal to the total return on one or more of the Morgan Stanley funds that are offered as investment options under the Compensation Plan. Appreciation/depreciation and distributions received from these investments are recorded with an offsetting increase/decrease in the deferred compensation obligation and do not affect the NAV of the Fund.

10. Federal Income Tax Status

It is the Fund's intention to continue to qualify as a regulated investment company and distribute all of its taxable and tax-exempt income. Accordingly, no provision for federal income taxes is required in the financial statements.

The Fund may be subject to taxes imposed by countries in which it invests. Such taxes are generally based on income and/or capital gains earned or repatriated. Taxes are accrued based on net investment income, net realized gains and net unrealized appreciation as such income and/or gains are earned. Taxes may also be based on transactions in foreign currency and are accrued based on the value of investments denominated in such currency.

FASB ASC 740-10, "Income Taxes — Overall", sets forth a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken in a tax return. Management has concluded that there are no significant uncertain tax positions that would require recognition in the financial statements. If applicable, the Fund recognizes interest accrued related to unrecognized tax benefits in "Interest Expense" and penalties in "Other Expenses" in the Statement of Operations. The Fund files tax returns with the U.S. Internal Revenue Service, New York and various states. Generally, each of the tax years in the four-year period ended December 31, 2016, remains subject to examination by taxing authorities.

The tax character of distributions paid may differ from the character of distributions shown in the Statements of Changes in Net Assets due to short-term capital gains being treated as ordinary income for tax purposes. The tax character of distributions paid during fiscal years 2016 and 2015 was as follows:

2016 DISTRIBUTIONS PAID FROM:				2015 DISTRIBUTIONS PAID FROM:
ORDINARY INCOME		LONG-TERM CAPITAL GAIN		ORDINARY INCOME		LONG-TERM CAPITAL GAIN
$	15,471,236	$	—	$	14,347,563	$	—

The amount and character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from GAAP. These book/tax differences are either considered temporary or permanent in nature.

Temporary differences are attributable to differing book and tax treatments for the timing of the recognition of gains (losses) on certain investment transactions and the timing of the deductibility of certain expenses.

Permanent differences, primarily attributable to gains on paydowns, tax adjustments on swaps and an expired capital loss carryforward, resulted in the following reclassifications among the Fund's components of net assets at December 31, 2016:

ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME				ACCUMULATED NET REALIZED LOSS				PAID-IN-CAPITAL
$	341,299			$	125,714,634			$	(126,055,933	)

At December 31, 2016, the components of distributable earnings for the Fund on a tax basis were as follows:

UNDISTRIBUTED ORDINARY INCOME				UNDISTRIBUTED LONG-TERM CAPITAL GAIN
$	1,677,181			$	—

At December 31, 2016, the Fund had available for federal income tax purposes capital loss carryforwards which will expire on the indicated dates:

AMOUNT				EXPIRATION
$	19,682,287			December 31, 2017

To the extent that capital loss carryforwards are used to offset any future capital gains realized during the carryover period as provided by U.S. federal income tax regulations, no capital gains tax liability will be incurred by the Fund for gains realized and not distributed. To the extent that capital gains are offset, such gains will not be distributed to the shareholders.

During the year ended December 31, 2016, capital loss carryforwards of $126,055,933 expired for federal income tax purposes.

Qualified late year losses are capital losses and specified ordinary losses, including currency losses, incurred after October 31 but within the taxable year that, if elected, are deemed to arise on the first day of the Fund's next taxable year. For the year ended December 31, 2016, the Fund deferred to January 1, 2017 for U.S. federal income tax purposes the following losses:

QUALIFIED LATE YEAR ORDINARY LOSSES				POST-OCTOBER CAPITAL LOSSES
$	—			$	2,666,243

11. Purposes of and Risks Relating to Certain Financial Instruments

The Fund may invest in mortgage securities, including securities issued by the Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC"). These are fixed income securities that derive their value from or represent interests in a pool of mortgages or mortgage securities. An unexpectedly high rate of defaults on the mortgages held by a mortgage pool may adversely affect the value of a mortgage-backed security and could result in losses to the Fund. The risk of such defaults is generally higher in the case of mortgage pools that include sub-prime mortgages. Sub-prime mortgages refer to loans made to borrowers with weakened credit histories or with a lower capacity to make timely payments on their mortgages. The securities held by the Fund are not backed by sub-prime mortgages.

Additionally, securities issued by FNMA and FHLMC are not backed by or entitled to the full faith and credit of the United States; rather, they are supported by the right of the issuer to borrow from the U.S. Department of the Treasury.

The Federal Housing Finance Agency ("FHFA") serves as conservator of FNMA and FHLMC and the U.S. Department of the Treasury has agreed to provide capital as needed to ensure FNMA and FHLMC continue to provide liquidity to the housing and mortgage markets.

	FOR THE SIX			FOR THE YEAR ENDED DECEMBER 31,
	MONTHS ENDED
	JUNE 30, 2017			2016⁽¹⁾			2015			2014			2013			2012
	(unaudited)
Class A Shares
Selected Per Share Data:
Net asset value, beginning of period	$	8.68		$	8.71		$	8.90		$	8.63		$	9.03		$	8.91
Income (loss) from investment operations:
Net investment income		0.12			0.25			0.22			0.17			0.15			0.13
Net realized and unrealized gain (loss)		0.04			(0.04	)		(0.21	)		0.31			(0.34	)		0.21
Total income (loss) from investment operations		0.16			0.21			0.01			0.48			(0.19	)		0.34
Less dividends from net investment income		(0.12	)		(0.24	)		(0.20	)		(0.21	)		(0.21	)		(0.22	)
Net asset value, end of period	$	8.72		$	8.68		$	8.71		$	8.90		$	8.63		$	9.03
Total Return⁽²⁾		1.85	%⁽⁸⁾		2.40	%⁽³⁾		0.10	%		5.60	%		(2.10	)%		3.86	%
Ratios to Average Net Assets:
Net expenses		0.86	%^(4)(5)(9)		0.87	%⁽⁴⁾⁽⁶⁾		0.87	%⁽⁴⁾⁽⁵⁾		0.86	%⁽⁴⁾⁽⁵⁾		0.89	%⁽⁴⁾		0.90	%⁽⁴⁾
Net investment income		2.86	%^(4)(5)(9)		2.66	%⁽⁴⁾⁽⁶⁾		2.41	%⁽⁴⁾⁽⁵⁾		1.90	%⁽⁴⁾⁽⁵⁾		1.76	%⁽⁴⁾		1.64	%⁽⁴⁾
Rebate from Morgan Stanley affiliate		0.01	%⁽⁹⁾		0.00	%⁽⁷⁾		0.00	%⁽⁷⁾		0.01	%		0.01	%		0.01	%
Supplemental Data:
Net assets, end of period, in thousands	$	40,539		$	42,375		$	49,715		$	56,270		$	68,635		$	77,789
Portfolio turnover rate		109	%⁽⁸⁾		279	%		464	%		317	%		264	%		257	%

(1) Reflects prior period custodian out-of-pocket expenses that were reimbursed in September 2016. The amount of the reimbursement was immaterial on a per share basis and did not impact the total return of Class A shares.

(2) Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period.

(3) Performance was positively impacted by approximately 0.68% for Class A shares due to the receipt of proceeds from the settlements of class action suits involving the Fund's past holdings. These were one time settlements, and as a result, the impact on the NAV and consequently the performance will not likely be repeated in the future. Had these settlements not occurred, the total return for Class A shares would have been approximately 1.72%.

(4) The ratios reflect the rebate of certain Fund expenses in connection with investments in a Morgan Stanley affiliate during the period. The effect of the rebate on the ratios is disclosed in the above table as "Rebate from Morgan Stanley affiliate."

(5) If the Fund had borne all of its expenses that were waived by the Adviser/Administrator, the annualized expense and net investment income ratios, would have been as follows:

PERIOD ENDED	EXPENSE RATIO			NET INVESTMENT INCOME RATIO
June 30, 2017		1.05	%		2.67	%
December 31, 2015		0.94			2.34
December 31, 2014		0.99			1.77

(6) If the Fund had not received the reimbursement from the custodian and had borne all of its expenses that were waived by the Adviser/Administrator, the annualized expense and net investment income ratios would have been as follows:

PERIOD ENDED				EXPENSE RATIO				NET INVESTMENT INCOME RATIO
December 31, 2016					1.19	%			2.34	%

(7) Amount is less than 0.005%.

(8) Not Annualized.

(9) Annualized.

	FOR THE SIX			FOR THE YEAR ENDED DECEMBER 31,
	MONTHS ENDED
	JUNE 30, 2017			2016⁽¹⁾			2015			2014			2013			2012
	(unaudited)
Class B Shares
Selected Per Share Data:
Net asset value, beginning of period	$	8.68		$	8.70		$	8.90		$	8.62		$	9.03		$	8.91
Income (loss) from investment operations:
Net investment income		0.12			0.25			0.22			0.17			0.16			0.14
Net realized and unrealized gain (loss)		0.03			(0.03	)		(0.22	)		0.32			(0.36	)		0.21
Total income (loss) from investment operations		0.15			0.22			0.00	⁽²⁾		0.49			(0.20	)		0.35
Less dividends from net investment income		(0.12	)		(0.24	)		(0.20	)		(0.21	)		(0.21	)		(0.23	)
Net asset value, end of period	$	8.71		$	8.68		$	8.70		$	8.90		$	8.62		$	9.03
Total Return⁽³⁾		1.85	%⁽¹⁰⁾		2.54	%⁽⁴⁾		0.00	%⁽⁵⁾		5.73	%		(2.20	)%		3.96	%
Ratios to Average Net Assets:
Net expenses		0.85	%^(6)(7)(11)		0.86	%⁽⁶⁾⁽⁸⁾		0.83	%⁽⁶⁾⁽⁷⁾		0.85	%⁽⁶⁾⁽⁷⁾		0.88	%⁽⁶⁾⁽⁷⁾		0.89	%⁽⁶⁾⁽⁹⁾
Net investment income		2.87	%^(6)(7)(11)		2.66	%⁽⁶⁾⁽⁸⁾		2.46	%⁽⁶⁾⁽⁷⁾		1.91	%⁽⁶⁾⁽⁷⁾		1.78	%⁽⁶⁾⁽⁷⁾		1.65	%⁽⁶⁾⁽⁹⁾
Rebate from Morgan Stanley affiliate		0.01	%⁽¹¹⁾		0.00	%⁽⁵⁾		0.00	%⁽⁵⁾		0.01	%		0.01	%		0.01	%
Supplemental Data:
Net assets, end of period, in thousands	$	355,156		$	376,574		$	423,561		$	498,350		$	551,744		$	721,596
Portfolio turnover rate		109	%⁽¹⁰⁾		279	%		464	%		317	%		264	%		257	%

(2) Amount is less than $0.005 per share.

(3) Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period.

(4) Performance was positively impacted by approximately 0.69% for Class B shares due to the receipt of proceeds from the settlements of class action suits involving the Fund's past holdings. These were one time settlements, and as a result, the impact on the NAV and consequently the performance will not likely be repeated in the future. Had these settlements not occurred, the total return for Class B shares would have been approximately 1.85%.

(5) Amount is less than 0.005%.

(6) The ratios reflect the rebate of certain Fund expenses in connection with investments in a Morgan Stanley affiliate during the period. The effect of the rebate on the ratios is disclosed in the above table as "Rebate from Morgan Stanley affiliate."

(7) If the Fund had borne all of its expenses that were waived by the Adviser/Administrator, the annualized expense and net investment income ratios, would have been as follows:

PERIOD ENDED	EXPENSE RATIO			NET INVESTMENT INCOME RATIO
June 30, 2017		0.95	%		2.77	%
December 31, 2015		0.90			2.39
December 31, 2014		0.96			1.80
December 31, 2013		1.42			1.24

(8) If the Fund had not received the reimbursement from the custodian and had borne all of its expenses that were waived by the Adviser/Administrator, the annualized expense and net investment income ratios would have been as follows:

PERIOD ENDED				EXPENSE RATIO				NET INVESTMENT INCOME RATIO
December 31, 2016					0.95	%			2.57	%

(9) If the Distributor had not rebated a portion of its fee to the Fund, the expense and net investment income ratios would have been as follows:

PERIOD ENDED				EXPENSE RATIO				NET INVESTMENT INCOME RATIO
December 31, 2012					0.97	%			1.57	%

(10) Not Annualized.

(11) Annualized.

	FOR THE SIX			FOR THE YEAR ENDED DECEMBER 31,
	MONTHS ENDED
	JUNE 30, 2017			2016⁽¹⁾			2015			2014			2013			2012
	(unaudited)
Class L Shares
Selected Per Share Data:
Net asset value, beginning of period	$	8.75		$	8.77		$	8.97		$	8.69		$	9.10		$	8.98
Income (loss) from investment operations:
Net investment income		0.11			0.23			0.20			0.14			0.13			0.09
Net realized and unrealized gain (loss)		0.03			(0.03	)		(0.22	)		0.32			(0.36	)		0.21
Total income (loss) from investment operations		0.14			0.20			(0.02	)		0.46			(0.23	)		0.30
Less dividends from net investment income		(0.11	)		(0.22	)		(0.18	)		(0.18	)		(0.18	)		(0.18	)
Net asset value, end of period	$	8.78		$	8.75		$	8.77		$	8.97		$	8.69		$	9.10
Total Return⁽²⁾		1.59	%⁽⁸⁾		2.24	%⁽³⁾		(0.27	)%		5.30	%		(2.50	)%		3.39	%
Ratios to Average Net Assets:
Net expenses		1.11	%^(4)(5)(9)		1.12	%⁽⁴⁾⁽⁶⁾		1.14	%⁽⁴⁾⁽⁵⁾		1.21	%⁽⁴⁾		1.20	%⁽⁴⁾		1.40	%⁽⁴⁾
Net investment income		2.58	%^(4)(5)(9)		2.41	%⁽⁴⁾⁽⁶⁾		2.12	%⁽⁴⁾⁽⁵⁾		1.55	%⁽⁴⁾		1.45	%⁽⁴⁾		1.14	%⁽⁴⁾
Rebate from Morgan Stanley affiliate		0.01	%⁽⁹⁾		0.00	%⁽⁷⁾		0.00	%⁽⁷⁾		0.01	%		0.01	%		0.01	%
Supplemental Data:
Net assets, end of period, in thousands	$	10,619		$	12,004		$	13,658		$	16,334		$	17,920		$	26,838
Portfolio turnover rate		109	%⁽⁸⁾		279	%		464	%		317	%		264	%		257	%

(2) Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. Class L shares held for less than one year were subject to a 1.0% contingent deferred sales charge. The contingent deferred sales charge on Class L shares was eliminated effective February 25, 2013.

(3) Performance was positively impacted by approximately 0.67% for Class L shares due to the receipt of proceeds from the settlements of class action suits involving the Fund's past holdings. These were one time settlements, and as a result, the impact on the NAV and consequently the performance will not likely be repeated in the future. Had these settlements not occurred, the total return for Class L shares would have been approximately 1.57%.

(5) If the Fund had borne all of its expenses that were waived by the Adviser/Administrator, the annualized expense and net investment income ratios, would have been as follows:

PERIOD ENDED	EXPENSE RATIO			NET INVESTMENT INCOME RATIO
June 30, 2017		1.23	%		2.46	%
December 31, 2015		1.22			2.04

PERIOD ENDED				EXPENSE RATIO				NET INVESTMENT INCOME RATIO
December 31, 2016					1.21	%			2.32	%

(7) Amount is less than 0.005%.

(8) Not Annualized.

(9) Annualized.

	FOR THE SIX			FOR THE YEAR ENDED DECEMBER 31,
	MONTHS ENDED
	JUNE 30, 2017			2016⁽¹⁾			2015			2014			2013			2012
	(unaudited)
Class I Shares
Selected Per Share Data:
Net asset value, beginning of period	$	8.68		$	8.71		$	8.90		$	8.63		$	9.04		$	8.92
Income (loss) from investment operations:
Net investment income		0.13			0.28			0.25			0.19			0.18			0.16
Net realized and unrealized gain (loss)		0.04			(0.04	)		(0.21	)		0.31			(0.36	)		0.21
Total income (loss) from investment operations		0.17			0.24			0.04			0.50			(0.18	)		0.37
Less dividends from net investment income		(0.13	)		(0.27	)		(0.23	)		(0.23	)		(0.23	)		(0.25	)
Net asset value, end of period	$	8.72		$	8.68		$	8.71		$	8.90		$	8.63		$	9.04
Total Return⁽²⁾		1.90	%⁽⁸⁾		2.88	%⁽³⁾		0.44	%		5.83	%		(1.98	)%		4.21	%
Ratios to Average Net Assets:
Net expenses		0.51	%^(4)(5)(9)		0.52	%⁽⁴⁾⁽⁶⁾		0.54	%⁽⁴⁾⁽⁵⁾		0.64	%⁽⁴⁾⁽⁵⁾		0.65	%⁽⁴⁾		0.65	%⁽⁴⁾
Net investment income		3.21	%^(4)(5)(9)		3.00	%⁽⁴⁾⁽⁶⁾		2.74	%⁽⁴⁾⁽⁵⁾		2.12	%⁽⁴⁾⁽⁵⁾		2.00	%⁽⁴⁾		1.89	%⁽⁴⁾
Rebate from Morgan Stanley affiliate		0.01	%⁽⁹⁾		0.00	%⁽⁷⁾		0.00	%⁽⁷⁾		0.01	%		0.01	%		0.01	%
Supplemental Data:
Net assets, end of period, in thousands	$	77,312		$	80,861		$	87,824		$	98,543		$	91,558		$	114,630
Portfolio turnover rate		109	%⁽⁸⁾		279	%		464	%		317	%		264	%		257	%

(2) Calculated based on the net asset value as of the last business day of the period.

(3) Performance was positively impacted by approximately 0.69% for Class I shares due to the receipt of proceeds from the settlements of class action suits involving the Fund's past holdings. These were one time settlements, and as a result, the impact on the NAV and consequently the performance will not likely be repeated in the future. Had these settlements not occurred, the total return for Class I shares would have been approximately 2.19%.

(5) If the Fund had borne all of its expenses that were waived by the Adviser/Administrator, the annualized expense and net investment income ratios, would have been as follows:

PERIOD ENDED	EXPENSE RATIO			NET INVESTMENT INCOME RATIO
June 30, 2017		0.71	%		3.01	%
December 31, 2015		0.71			2.57
December 31, 2014		0.77			1.99

PERIOD ENDED				EXPENSE RATIO				NET INVESTMENT INCOME RATIO
December 31, 2016					0.69	%			2.83	%

(7) Amount is less than 0.005%.

(8) Not Annualized.

(9) Annualized.

	FOR THE SIX MONTHS ENDED JUNE 30, 2017			FOR THE YEAR ENDED, DECEMBER 31,2016⁽¹⁾			PERIOD FROM APRIL 30, 2015⁽²⁾ TO DECEMBER 31, 2015
	(unaudited)
Class C Shares
Selected Per Share Data:
Net asset value, beginning of period	$	8.75		$	8.77		$	8.97
Income (loss) from investment operations:
Net investment income		0.09			0.17			0.11
Net realized and unrealized gain (loss)		0.04			(0.02	)		(0.22	)
Total income (loss) from investment operations		0.13			0.15			(0.11	)
Less dividends from net investment income		(0.09	)		(0.17	)		(0.09	)
Net asset value, end of period	$	8.79		$	8.75		$	8.77
Total Return⁽³⁾		1.45	%⁽⁹⁾		1.60	%⁽⁴⁾		(1.08	)%⁽⁹⁾
Ratios to Average Net Assets:
Net expenses		1.61	%^(5)(6)(10)		1.62	%⁽⁵⁾⁽⁷⁾		1.62	%^(5)(6)(10)
Net investment income		2.06	%^(5)(6)(10)		1.90	%⁽⁵⁾⁽⁷⁾		1.53	%^(5)(6)(10)
Rebate from Morgan Stanley affiliate		0.01	%⁽¹⁰⁾		0.00	%⁽⁸⁾		0.00	%^(8)(10)
Supplemental Data:
Net assets, end of period, in thousands	$	814		$	691		$	152
Portfolio turnover rate		109	%⁽⁹⁾		279	%		464	%

(2) Commencement of Offering.

(3) Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period.

(4) Performance was positively impacted by approximately 0.56% for Class C shares due to the receipt of proceeds from the settlements of class action suits involving the Fund's past holdings. These were one time settlements, and as a result, the impact on the NAV and consequently the performance will not likely be repeated in the future. Had these settlements not occurred, the total return for Class C shares would have been approximately 1.04%.

(5) The ratios reflect the rebate of certain Fund expenses in connection with investments in a Morgan Stanley affiliate during the period. The effect of the rebate on the ratios is disclosed in the above table as "Rebate from Morgan Stanley affiliate."

(6) If the Fund had borne all of its expenses that were waived by the Adviser/Administrator, the annualized expense and net investment income (loss) ratios, would have been as follows:

PERIOD ENDED	EXPENSE RATIO			NET INVESTMENT INCOME (LOSS) RATIO
June 30, 2017		1.90	%		1.77	%
December 31, 2015		4.26			(1.11	)

(7) If the Fund had not received the reimbursement from the custodian and had borne all of its expenses that were waived by the Adviser/Administrator, the annualized expense and net investment income ratios would have been as follows:

PERIOD ENDED				EXPENSE RATIO				NET INVESTMENT INCOME RATIO
December 31, 2016					2.15	%			1.37	%

(8) Amount is less than 0.005%.

(9) Not Annualized.

(10) Annualized.

Nature, Extent and Quality of Services

The Board reviewed and considered the nature and extent of the investment advisory services provided by the Adviser (as defined herein) under the advisory agreement, including portfolio management, investment research and equity 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 Adviser under the administration agreement, including accounting, operations, clerical, bookkeeping, compliance, business management and planning, legal services and the provision of supplies, office space and utilities at the Adviser's expense. The Board also considered the Adviser's investment in personnel and infrastructure that benefits the Fund. (The advisory and administration agreements together are referred to as the "Management Agreement.") The Board also considered that the Adviser serves a variety of other investment advisory clients and has experience overseeing service providers. The Board also compared the nature of the services provided by the Adviser with similar services provided by non-affiliated advisers as presented to the Board by Broadridge Financial Solutions, Inc. ("Broadridge").

The Board reviewed and considered the qualifications of the portfolio managers, the senior administrative managers and other key personnel of the Adviser who provide the administrative and advisory services to the Fund. The Board determined that the Adviser's portfolio managers and key personnel are well qualified by education and/or training and experience to perform the services in an efficient and professional manner. The Board concluded that the nature and extent of the advisory and administrative services provided were necessary and appropriate for the conduct of the business and investment activities of the Fund and supported its decision to approve the Management Agreement.

Performance, Fees and Expenses of the Fund

The Board reviewed the performance, fees and expenses of the Fund compared to its peers, as presented by Broadridge, and to appropriate benchmarks where applicable. The Board discussed with the Adviser the performance goals and the actual results achieved in managing the Fund. When considering a fund's performance, the Board and the Adviser place emphasis on trends and longer-term returns (focusing on one-year, three-year and five-year performance, as of December 31, 2016, or since inception, as applicable). When a fund underperforms its benchmark and/or its peer group average, the Board and the Adviser discuss the causes of such underperformance and, where necessary, they discuss specific changes to investment strategy or investment personnel. The Board noted that the Fund's performance was better than its peer group average for the one-, three- and five-year periods. The Board discussed with the Adviser the level of the advisory and administration fees (together, the "management fee") for this Fund relative to comparable funds and/or other accounts advised by the Adviser and/or compared to its peers as presented by Broadridge. In addition to the management fee, the Board also reviewed the Fund's total expense ratio. The Board noted that while the Fund's contractual management fee was higher than but close to its peer group average, the Fund's actual management fee and total expense ratio were lower than its peer group averages. After discussion, the Board concluded

that the Fund's (i) performance was competitive with its peer group average and (ii) management fee and total expense ratio were competitive with its peer group averages.

Economies of Scale

The Board considered the size and growth prospects of the Fund and how that relates to the Fund's total expense ratio and particularly the Fund's management fee rate, which includes breakpoints. In conjunction with its review of the Adviser's profitability, the Board discussed with the Adviser how a change in assets can affect the efficiency or effectiveness of managing the Fund and whether the management fee level is appropriate relative to current and projected asset levels and/or whether the management fee structure reflects economies of scale as asset levels change. The Board has determined that its review of the actual and/or potential economies of scale of the Fund supports its decision to approve the Management Agreement.

Profitability of the Adviser and Affiliates

The Board considered information concerning the costs incurred and profits realized by the Adviser and its 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. The Board has determined that its review of the analysis of the Adviser's expenses and profitability supports its decision to approve the Management Agreement.

Other Benefits of the Relationship

The Board considered other direct and indirect benefits to the Adviser and/or its affiliates derived from their relationship with the Fund and other funds advised by the Adviser. These benefits may include, among other things, fees for trading, distribution and/or shareholder servicing and for transaction processing and reporting platforms used by securities lending agents, and research received by the Adviser generated from commission dollars spent on funds' portfolio trading. The Board reviewed with the Adviser these arrangements and the reasonableness of the Adviser's costs relative to the services performed. The Board has determined that its review of the other benefits received by the Adviser or its affiliates supports its decision to approve the Management Agreement.

Resources of the Adviser and Historical Relationship Between the Fund and the Adviser

The Board considered whether the Adviser is financially sound and has the resources necessary to perform its obligations under the Management Agreement. 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 the Adviser has the financial resources necessary to

Morgan Stanley Investment Management Inc.
An Important Notice Concerning Our U.S. Privacy Policy

We are required by federal law to provide you with a copy of our privacy policy annually. This policy applies to current and former individual investors in funds managed or sponsored by Morgan Stanley Investment Management Inc. ("MSIM") as well as current and former individual clients of MSIM. This policy is not applicable to partnerships, corporations, trusts or other non-individual clients or investors. Please note that we may amend this policy at any time, and will inform you of any changes as required by law.

We Respect Your Privacy

We appreciate that you have provided us with your personal financial information. We strive to maintain the privacy of such information while we help you achieve your financial objectives. This Notice describes what non-public personal information we collect about you, why we collect it, when we may share it with others and how certain others may use it. It discusses the steps you may take to limit our sharing of certain information about you to affiliated companies in the Morgan Stanley family of companies ("other Morgan Stanley companies"). It also discloses how you may limit use of certain shared information for marketing purposes by other Morgan Stanley branded companies. Throughout this policy, we refer to the non-public information that personally identifies you or your accounts as ''personal information.''

1. What Personal Information Do We Collect About You?

We obtain personal information from applications and other forms you submit to us, from your dealings with us, from consumer reporting agencies, from our Web sites and from third parties and other sources.

For example:

• We may collect information such as your name, address, e-mail address, telephone/fax numbers, assets, income and investment objectives through subscription documents, applications and other forms you submit to us.

• We may obtain information about account balances, your use of account(s) and the types of products and services you prefer to receive from us through your dealings and transactions with us and other sources.

• We may obtain information about your creditworthiness and credit history from consumer reporting agencies.

• We may collect background information from and through third-party vendors to verify representations you have made and to comply with various regulatory requirements.

• If you interact with us through our public and private Web sites, we may collect information that you provide directly through online communications (such as an e-mail address). We may also collect information about your Internet service provider, your domain name, your computer's operating system and Web browser, your use of our Web sites and your product and service preferences, through the use of ''cookies.'' Please consult the Terms of Use of these sites for more details.

2. When Do We Disclose Personal Information We Collect About You?

We may disclose personal information we collect about you to other Morgan Stanley companies and to non-affiliated third parties.

a. Information We Disclose To Other Morgan Stanley Companies. We may disclose personal information to other Morgan Stanley companies for a variety of reasons, including to manage your account(s) effectively, to service and process your transactions, to let you know about products and services offered by us and other Morgan Stanley companies, to manage our business, and as otherwise required or permitted by law. Offers for products and services from other Morgan Stanley companies are developed under conditions designed to safeguard your personal information.

b. Information We Disclose To Non-affiliated Third Parties. We do not disclose personal information that we collect about you to non-affiliated third parties except to those who provide marketing services on our behalf, to financial institutions with whom we have joint marketing agreements, and as otherwise required or permitted by law. For example, we may disclose personal information to non-affiliated third parties for servicing and processing transactions, to offer our own products and services, to protect against fraud, for institutional risk control, to respond to judicial process or to perform services on our behalf. When we share personal information with a non-affiliated third party, they are required to limit their use of personal information to the particular purpose for which it was shared and they are not allowed to share personal information with others except to fulfill that limited purpose or as may be permitted or required by law.

3. How Do We Protect The Security And Confidentiality Of Personal Information We Collect About You?

We maintain physical, electronic and procedural security measures to help safeguard the personal information we collect about you. We have internal policies governing the proper handling of client information. Third parties that provide support or marketing services on our behalf may also receive personal information, and we require them to adhere to confidentiality standards with respect to such information.

4. How Can You Limit The Sharing Of Certain Types Of Personal Information With Other Morgan Stanley Companies?

We offer you choices as to whether we share with other Morgan Stanley companies the personal information that was collected to determine your eligibility for products and services you request ("eligibility information"). Eligibility information does not include your identification information or personal information pertaining to our transactions or experiences with you. Please note that, even if you direct us not to share eligibility information with other Morgan Stanley companies ("opt-out"), we may still share personal information, including eligibility information, with those companies in circumstances excluded from the opt-out under applicable law, such as to process transactions or to service your account.

5. How Can You Limit The Use Of Certain Types Of Personal Information By Other Morgan Stanley Companies For Marketing?

By following the opt-out instructions in Section 6 below, you may limit other Morgan Stanley branded companies from marketing their products or services to you based on personal information we disclose to them. This information may include, for example, your income and account history with us. Please note that, even if you choose to limit Other Morgan Stanley Companies from using personal information about you that we may share with them for marketing their products and services to you, Other Morgan Stanley Companies may use your personal information that they obtain from us to market to you in circumstances permitted by law, such as if the Other Morgan Stanley Company has its own relationship with you.

6. How Can You Send Us An Opt-Out Instruction?

If you wish to limit our sharing of eligibility information about you with other Morgan Stanley companies or other Morgan Stanley companies' use of personal information for marketing purposes, as described in this notice, you may do so by:

• Calling us at (800) 548-7786
Monday–Friday between 8a.m. and 6p.m.(EST)

• Writing to us at the following address:
Boston Financial Data Services, Inc.
c/o Privacy Coordinator
P.O. Box 219804
Kansas City, Missouri 64121

Your written request should include your name, address, telephone number and account number(s) to which the opt-out applies and whether you are opting out with respect to sharing of eligibility information (Section 4 above), or if information used for Marketing (Section 5 above) or both. Written opt-out

Item 2. Code of Ethics.