UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSRS CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-04020 Morgan Stanley California Tax-Free Income Fund (Exact name of registrant as specified in charter) 1221 Avenue of the Americas, New York, New York 10020 (Address of principal executive offices) (Zip code) Ronald E. Robison 1221 Avenue of the Americas, New York, New York 10020 (Name and address of agent for service) Registrant's telephone number, including area code: 212-762-4000 Date of fiscal year end: December 31, 2003 Date of reporting period: June 30, 2003 Item 1. Report to Shareholders Welcome, Shareholder: In this report, you'll learn about how your investment in Morgan Stanley California Tax-Free Income Fund performed during the semiannual period. The portfolio management team will provide an overview of the market climate, and discuss some of the factors that helped or hindered performance during the reporting period. In addition, this report includes the Fund's financial statements and a list of Fund investments, as well as other information. This material must be preceded or accompanied by a prospectus for the Fund being offered. Market forecasts provided in this report may not necessarily come to pass. There is no assurance that the Fund will achieve its investment objective. The Fund is subject to market risk, which is the possibility that the market values of securities owned by the Fund will decline and, therefore, the value of the Fund shares may be less than what you paid for them. Accordingly, you can lose money investing in this Fund. Fund Report For the six-month period ended June 30, 2003 TOTAL RETURN FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2003 <Table> <Caption> LEHMAN BROTHERS LIPPER MUNICIPAL CA DEBT BOND FUNDS CLASS A CLASS B CLASS C CLASS D INDEX(1) INDEX(2) 2.82% 2.71% 2.58% 2.96% 3.81% 3.11% </Table> The performance of the Fund's four share classes varies because each has different expenses. The Fund's total return figures assume the reinvestment of all distributions, but do not reflect the deduction of any applicable sales charges. Such costs would lower performance. Past performance is no guarantee of future results. See Performance Summary for standardized performance information. MARKET CONDITIONS The six-month period ended June 30, 2003, was a favorable time for the fixed-income markets. The U.S. economy continued to recover but at a slow pace. This led to investor concern that reaching the economy's full growth potential would be delayed. The Federal Reserve Board shared this concern and cut the federal funds rate in June. The reduction in the short-term borrowing rate was felt across the yield curve and drove yields down to levels not seen in decades. Several factors caused the rally in municipal bonds to lag Treasuries. First, states and municipalities sold a record amount of debt to meet cash flow needs and refinance higher cost issues. Municipal yields also adjusted to federal tax legislation, which included acceleration of scheduled tax bracket reductions and a lower tax on dividends. Finally, the yields of some credits were affected by potential budget deficits. These factors caused the municipal market to establish yield levels that attracted interest from crossover investors such as insurance companies and hedge funds seeking value relative to taxable bonds. Institutional crossover investors remained cautious on California exposure because of the state's budget deficit and potential recall election. However, retail investors needing state exemption absorbed record new-issue supply. PERFORMANCE ANALYSIS With rates at historically low levels, the market appeared to be anticipating a prolonged, weak economic recovery. This assessment seemed unduly pessimistic in light of monetary and fiscal policies seeking to stimulate growth. Since this stimulus should eventually result in stronger economic growth and higher interest rates, we maintained the Fund's shorter-than-average duration. This conservative portfolio structure underperformed the Lehman Brothers Municipal Bond Index during the period. We sought to preserve shareholder value by maintaining a high-grade portfolio with over 75 percent of long-term holdings rated either double- or -triple "A". The portfolio is structured with a greater-than-average weighting of premium coupon bonds. These bonds are somewhat more defensive than current-coupon (par) bonds in a rising-rate environment. The Fund benefited by offering securities with less favorable structure for sale to take advantage of demand for bonds with California tax-exemption. Purchases at the sector level focused on high-grade revenue bonds backed by electric, transportation and water and sewer projects. The Fund has maintained a cautious stance toward the general obligation sector because of a number of issuers under budgetary stress face potential credit rating downgrades. The Fund also benefited by our decision to avoid tobacco bonds. 2 <Table> <Caption> LONG-TERM CREDIT ANALYSIS Aaa/AAA 70% Aa/AA 6% A/A 14% Baa/BBB 8% Ba/BB or Less 2% Not Rated 0% </Table> <Table> <Caption> LONG-TERM SECTORS Water & Sewer 19% Transportation 18% General Obligation 15% Electric 9% Tax Allocation 9% </Table> Subject to change daily. All percentages are as a percentage of long-term investments. Provided for informational purposes only and should not be deemed as a recommendation to buy the securities mentioned. Morgan Stanley is a full-service securities firm engaged in securities trading and brokerage activities, investment banking, research and analysis, financing and financial advisory services. INVESTMENT STRATEGY 1. THE FUND SEEKS TO PROVIDE A HIGH LEVEL OF CURRENT INCOME EXEMPT FROM FEDERAL AND CALIFORNIA INCOME TAX, CONSISTENT WITH THE PRESERVATION OF CAPITAL. THE FUND INVESTS PRINCIPALLY IN LONG-TERM, INVESTMENT GRADE CALIFORNIA MUNICIPAL OBLIGATIONS THAT ARE RATED WITHIN THE FOUR HIGHEST GRADES BY MOODY'S, STANDARD & POOR'S OR FITCH IBCA. 2. THE PORTFOLIO MANAGEMENT TEAM SEEKS TO DIVERSIFY CREDIT AND INTEREST-RATE RISK BY INVESTING IN A MIX OF SECTORS AND INDIVIDUAL ISSUES THAT HAVE A VARIETY OF COUPONS, MATURITIES, CALL FEATURES AND DURATIONS. 3 Call and Cost (Book) Yield Structure PERCENT OF BONDS CALLABLE -- WEIGHTED AVERAGE CALL PROTECTION: 6 YEARS (Based on Long-Term Portfolio) As of 6/30/03 <Table> 2003(a) 12% 2004 4% 2005 8% 2006 5% 2007 6% 2008 15% 2009 4% 2010 2% 2011 16% 2012 8% 2013+ 20% </Table> COST (BOOK) YIELD(b) -- WEIGHTED AVERAGE BOOK YIELD: 5.7% (Based on Long-Term Portfolio) As of 6/30/03 <Table> 2003(a) 5.9% 2004 6.3% 2005 7.1% 2006 6.1% 2007 6.2% 2008 5.4% 2009 5.2% 2010 6.2% 2011 5.1% 2012 5.0% 2013+ 5.6% </Table> (a) Includes issues callable in previous years. (b) Cost or "book" yield is the annual income earned on a portfolio investment based on its original purchase price before the Fund's operating expenses. For example, the Fund is earning a book yield of 5.9% on 12% of the long-term portfolio that is callable in 2003. Portfolio structure is subject to change. 4 Performance Summary AVERAGE ANNUAL TOTAL RETURNS -- PERIOD ENDED JUNE 30, 2003 <Table> <Caption> CLASS A SHARES* CLASS B SHARES** CLASS C SHARES(+) CLASS D SHARES(++) (since 07/28/97) (since 07/11/84) (since 07/28/97) (since 07/28/97) CLFAX CLFBX CLFCX CLFDX 1 YEAR 7.80%(3) 7.62%(3) 7.18%(3) 7.99%(3) 3.22(4) 2.62(4) 6.18(4) 5 YEARS 5.18(3) 5.08(3) 4.68(3) 5.47(3) 4.27(4) 4.75(4) 4.68(4) 10 YEARS 5.02(3) 5.02(4) SINCE INCEPTION 5.25(3) 7.46(3) 4.77(3) 5.53(3) 4.48(4) 7.46(4) 4.77(4) </Table> Past performance is not predictive of future returns. Investment return and principal value will fluctuate. When you sell fund shares, they may be worth less than their original cost. The table does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Performance for Class A, Class B, Class C, and Class D shares will vary due to differences in sales charges and expenses. - -------------------------------------------------------------------------------- Notes on Performance (1) The Lehman Brothers Municipal Bond Index tracks the performance of municipal bonds rated at least Baa or BBB by Moody's Investors Service, Inc. or Standard & Poor's Corporation, respectively and with maturities of 2 years or greater. Indexes are unmanaged and their returns do not include any expenses, sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. (2) The Lipper California Municipal Debt Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper California Municipal Debt Funds classification. The Index is adjusted for capital gains distributions and income dividends. There are currently 30 funds represented in this Index. Indexes are unmanaged and their returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. (3) 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. * The maximum front-end sales charge for Class A is 4.25%. ** The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%. The CDSC declines to 0% after six years. + The maximum CDSC for Class C is 1% for shares redeemed within one year of purchase. ++ Class D has no sales charge. 5 Morgan Stanley California Tax-Free Income Fund PORTFOLIO OF INVESTMENTS - JUNE 30, 2003 (UNAUDITED) <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------------------------------- California Tax-Exempt Municipal Bonds (92.7%) General Obligation (14.3%) California, $ 5,000 Ser 1990................................................ 7.00 % 08/01/07 $ 5,865,900 5,000 Ser 1990................................................ 7.00 08/01/08 5,977,650 2,000 Veterans Ser AT......................................... 9.50 02/01/10 2,732,520 10,000 Refg Ser 2002........................................... 5.25 02/01/11 11,037,600 2,400 Veterans Ser BH (AMT) (FSA)............................. 5.40 12/01/16 2,590,080 5,000 Various Purpose dtd 04/01/93 (FSA)...................... 5.50 04/01/19 5,141,750 5,000 Various Purpose dtd 04/01/02............................ 6.00 04/01/19 5,820,900 10,000 Various Purpose Ser 1996 (Ambac)........................ 5.25 06/01/21 10,585,900 4,000 Various Purpose dtd 05/01/03............................ 5.00 02/01/32 3,945,920 2,250 Carlsbad Unified School District, Ser 1997 (FGIC)......... 0.00 11/01/16 1,255,950 Los Angeles Community College District, 5,000 2001 Ser A (MBIA)....................................... 5.50 08/01/20 5,528,300 5,000 2001 Ser A (MBIA)....................................... 5.50 08/01/21 5,502,850 Los Angeles Unified School District, 5,000 2003 Ser A (FSA)........................................ 5.25 07/01/20 5,502,450 10,000 1997 Ser B (FGIC)....................................... 5.00 07/01/23 10,379,200 6,500 North Orange County Community College District, Election of 2002 Ser A (MBIA).................................... 5.375 08/01/21 7,173,335 5,000 Placentia - Yorba Linda United School District, 2002 Election Ser A (FGIC)................................... 5.00 08/01/26 5,226,300 5,000 Solano County Community College District, Election of 2002 Ser A (MBIA)............................................ 4.75 08/01/26 5,100,250 Puerto Rico, 8,000 Public Improvement Ser 1999............................. 4.75 07/01/23 7,908,400 3,000 Public Improvement Ser 1998 (Secondary MBIA)............ 4.875 07/01/23 3,092,370 ------------ - -------- 110,367,625 103,150 ------------ - -------- Educational Facilities Revenue (2.6%) 5,000 California, Educational Facilities Authority, University of San Diego Ser 1998 (Ambac)........................... 5.00 10/01/22 5,181,850 University of California, 4,000 Multi Purpose Refg Ser 1993 C (Ambac)................... 5.125 09/01/18 4,099,840 5,000 Multi Purpose Ser 2003 Q (FSA).......................... 5.00 09/01/22 5,277,550 5,000 Multi Purpose Ser 2003 Q (FSA).......................... 5.00 09/01/23 5,263,400 ------------ - -------- 19,822,640 19,000 ------------ - -------- </Table> See Notes to Financial Statements 6 Morgan Stanley California Tax-Free Income Fund PORTFOLIO OF INVESTMENTS - JUNE 30, 2003 (UNAUDITED) continued <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------------------------------- Electric Revenue (8.6%) $ 10,000 California State Department of Water Resources, Power Supply Ser 2002 A....................................... 5.375% 05/01/21 $ 10,406,100 Los Angeles Department of Water & Power, 11,025 Second Issue of 1993 (Secondary Ambac).................. 5.40 11/15/13 11,387,171 25,000 2001 Ser A (FSA)........................................ 5.25 07/01/22 26,585,500 1,695 Second Issue of 1993 (Secondary Ambac).................. 5.375 09/01/23 1,738,019 Southern California Public Power Authority, 1,750 Transmission Refg Ser 1988 (FGIC)....................... 0.00 07/01/06 1,657,828 3,500 Mead-Adelanto 1994 Ser A (Ambac)........................ 8.67++ 07/01/15 4,375,280 2,500 Mead-Phoenix 1994 Ser A (Ambac)......................... 8.67++ 07/01/15 3,125,200 2,750 Transmission Refg Ser 2002 A (FSA)...................... 5.25 07/01/18 3,036,165 Puerto Rico Electric Power Authority, 2,000 Power Ser II (MBIA)..................................... 5.375 07/01/19 2,250,900 2,000 Power Ser X............................................. 5.50 07/01/25 2,070,100 ------------ - -------- 66,632,263 62,220 ------------ - -------- Hospital Revenue (6.9%) 8,000 Antelope Valley Healthcare District, Refg Ser 1997 A (FSA)................................................... 5.20 01/01/20 8,412,400 California Health Facilities Financing Authority, 2,500 Sutter/CHS Ser 1996 A (MBIA)............................ 5.875 08/15/16 2,808,800 3,000 Scripps Memorial Hospitals Ser 1992 A (MBIA)............ 6.375 10/01/22 3,061,140 5,000 California Infrastructure & Economic Development Bank, Kaiser Assistance Ser 2001 A............................ 5.55 08/01/31 5,191,450 2,000 California Statewide Communities Development Authority, Cedars-Sinai Medical Center Ser 1992 COPs............... 6.50 08/01/12 2,339,920 14,000 Duarte, City of Hope National Medical Center Ser 1999 A COPs.................................................... 5.25 04/01/19 14,181,160 7,500 Madera County, Valley Children's Hospital Ser 1995 COPs (MBIA).................................................. 6.50 03/15/15 9,537,750 4,000 Rancho Mirage Joint Powers Financing Authority, Eisenhower Medical Center Ser 1997 A COPs (MBIA)................... 5.25 07/01/17 4,352,640 3,000 University of California, UCLA Medical Center Refg Ser 1994 (MBIA)............................................. 5.50 12/01/14 3,102,810 ------------ - -------- 52,988,070 49,000 ------------ - -------- Industrial Development/Pollution Control Revenue (2.0%) California Pollution Control Financing Authority, 5,000 San Diego Gas & Electric Co 1996 Ser A.................. 5.90 06/01/14 5,342,300 10,000 Southern California Edison Co 1992 Ser B (AMT).......... 6.40 12/01/24 10,000,100 ------------ - -------- 15,342,400 15,000 ------------ - -------- Mortgage Revenue - Multi-Family (0.3%) 2,000 California Housing Finance Agency, Rental II 1992 Ser B... 6.70 08/01/15 2,039,000 ------------ - -------- </Table> See Notes to Financial Statements 7 Morgan Stanley California Tax-Free Income Fund PORTFOLIO OF INVESTMENTS - JUNE 30, 2003 (UNAUDITED) continued <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------------------------------- Mortgage Revenue - Single Family (1.5%) California Housing Finance Agency, $ 4,805 Home 1995 Ser J (Ambac)................................. 6.00 % 08/01/17 $ 5,038,283 3,215 Purchase 1995 Ser B-2 (AMT)............................. 6.30 08/01/24 3,316,433 California Rural Home Financing Authority, 955 Home 1997 Ser D-CL 5 (AMT).............................. 6.70 05/01/29 1,010,180 1,205 1997 Ser A-2 (AMT)...................................... 7.00 09/01/29 1,247,874 805 Home 1998 Ser A (AMT)................................... 6.35 12/01/29 896,802 ------------ - -------- 11,509,572 10,985 ------------ - -------- Public Facilities Revenue (3.1%) 4,000 Anaheim Public Financing Authority, Sub 1997 Ser C (FSA)................................................... 6.00 09/01/16 4,928,400 10,000 California Public Works Board, Department of Corrections Refg 1993 Ser A (Ambac)................................. 5.00 12/01/19 11,092,800 4,000 Sacramento City Financing Authority, 2002 Ser A (FSA)..... 5.25 12/01/17 4,455,520 5,000 Puerto Rico Public Buildings Authority, 2002 Ser D (Ambac)................................................. 0.00# 07/01/31 3,427,700 ------------ - -------- 23,904,420 23,000 ------------ - -------- Recreational Facilities Revenue (0.5%) 2,000 California State University, Fresno Event Center Sr Ser 2002.................................................... 6.00 07/01/26 2,102,900 2,000 San Diego County, San Diego Natural History Museum COPs... 5.70 02/01/28 2,074,100 ------------ - -------- 4,177,000 4,000 ------------ - -------- Tax Allocation Revenue (8.4%) Garden Grove Community Development Agency, 5,000 Refg Issue of 1993...................................... 5.70 10/01/13 5,117,900 6,000 Refg Issue of 1993...................................... 5.875 10/01/23 6,129,240 Long Beach Bond Finance Authority, 3,205 Downtown, North Long Beach 2002 Ser A (Ambac)........... 5.375 08/01/19 3,550,723 2,380 Downtown, North Long Beach 2002 Ser A (Ambac)........... 5.375 08/01/20 2,621,451 20,000 Long Beach Financing Authority, Ser 1992 (Ambac).......... 6.00 11/01/17 24,702,400 Pleasanton Joint Powers Financing Authority, 10,575 Reassessment 1993 Ser A................................. 6.15 09/02/12 10,854,497 1,500 Reassessment 1993 Ser A................................. 6.20 09/02/17 1,535,085 10,000 San Jose Redevelopment Agency, Ser 1999 (Ambac)........... 4.75 08/01/23 10,147,400 ------------ - -------- 64,658,696 58,660 ------------ - -------- Transportation Facilities Revenue (16.9%) 10,000 Alameda Corridor Transportation Authority, Sr Lien Ser 1999 A (MBIA)........................................... 5.25 10/01/21 10,719,200 4,000 Bay Area Toll Authority, San Francisco Bay Area Toll Bridge 2001 Ser D....................................... 5.00 04/01/18 4,266,880 </Table> See Notes to Financial Statements 8 Morgan Stanley California Tax-Free Income Fund PORTFOLIO OF INVESTMENTS - JUNE 30, 2003 (UNAUDITED) continued <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------------------------------- Foothills/Eastern Transportation Corridor Agency, $ 5,000 Toll Road Ser 1999 (MBIA)............................... 5.125% 01/15/19 $ 5,340,800 14,000 Toll Road Ser 1999...................................... 0.00## 01/15/23 10,352,020 Long Beach, 5,000 Harbor Refg Ser 1998 A (AMT) (FGIC)..................... 6.00 05/15/17 6,074,600 3,000 Harbor Refg Ser 1998 A (AMT) (FGIC)..................... 6.00 05/15/19 3,648,330 10,000 Harbor Ser 1995 (AMT) (MBIA)............................ 5.25 05/15/25 10,188,700 5,000 Orange County, Airport Refg Ser 1997 (AMT) (MBIA)......... 5.50 07/01/11 5,552,700 Port of Oakland, 5,200 Ser 2002 M (FGIC)....................................... 5.25 11/01/19 5,727,540 2,000 Ser 2002 M (FGIC)....................................... 5.25 11/01/20 2,189,800 15,000 San Diego County Regional Transportation Commission, Sales Tax 1994 Ser A (FGIC)................................... 4.75 04/01/08 16,695,150 5,000 San Francisco Airports Commission, San Francisco Int'l Airport Second Ser Refg Issue 27B (FGIC)................ 5.125 05/01/26 5,251,300 San Francisco Bay Area Rapid Transit District, 795 Sales Tax Ser 1995 (FGIC)............................... 5.50 07/01/15 854,712 9,500 Sales Tax Ser 1998 (Ambac).............................. 4.75 07/01/23 9,652,665 San Joaquin Hills Transportation Corridor Agency, 6,000 Toll Road Refg Ser 1997 A (MBIA)........................ 0.00 01/15/15 3,688,620 10,000 Toll Road Senior Lien Ser 1993.......................... 5.00 01/01/33 9,526,300 10,000 San Jose, Airport Ser 2001 A (FGIC)....................... 5.00 03/01/25 10,399,600 10,000 Puerto Rico Highway & Transportation Authority, Ser 1998 A....................................................... 4.75 07/01/38 9,799,300 ------------ - -------- 129,928,217 129,495 ------------ - -------- Water & Sewer Revenue (18.0%) 20,000 California Department of Water Resources, Center Valley Ser Y (FGIC)............................................ 5.00 12/01/25 20,988,200 8,000 Castaic Lake Water Agency, Refg Ser 1994 A COPs (MBIA).... 6.00 08/01/18 8,514,720 10,000 Contra Costa Water District, Ser G (MBIA)................. 5.50 10/01/19 10,606,200 4,000 Corona Public Financing Authority, Water Ser 1998 (FGIC).................................................. 4.75 09/01/23 4,077,640 10,000 East Bay Municipal Utility District, Water Ser 2001 (MBIA).................................................. 5.00 06/01/26 10,404,000 8,000 Eastern Municipal Water District, Water & Sewer Refg Ser 1998 A COPs (FGIC)...................................... 4.75 07/01/23 8,133,440 5,000 Los Angeles Department of Water & Power, Water 2001 Ser A....................................................... 5.125 07/01/41 5,140,050 15,000 Metropolitan Water District of Southern California, Waterworks 1997 Ser A................................... 5.00 07/01/26 15,435,750 10,000 Sacramento Financing Authority, Water & Capital Improvement 2001 Ser A (Ambac).......................... 5.00 12/01/26 10,404,000 3,000 San Diego, Water 1998 Ser (FGIC).......................... 4.75 08/01/28 3,028,200 5,000 San Diego County Water Authority, Ser 2002 A COPs (MBIA).................................................. 5.00 05/01/27 5,227,800 10,000 San Diego Public Facilities Authority, Sewer Ser 1993 A... 5.25 05/15/20 10,201,400 </Table> See Notes to Financial Statements 9 Morgan Stanley California Tax-Free Income Fund PORTFOLIO OF INVESTMENTS - JUNE 30, 2003 (UNAUDITED) continued <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------------------------------- San Francisco Public Utilities Commission, $ 5,650 Water 2002 Ser A (MBIA)................................. 5.00 % 11/01/20 $ 6,022,787 10,000 Water 1996 Ser A........................................ 5.00 11/01/21 10,286,800 10,000 Water Refg Ser A 2001 (FSA)............................. 5.00 11/01/31 10,400,200 ------------ - -------- 138,871,187 133,650 ------------ - -------- Refunded (9.6%) Foothill/Eastern Transportation Corridor Agency, 15,000 Toll Road Sr Lien Ser 1995 A............................ 6.00 01/01/07+ 17,239,500 4,000 Toll Road Sr Lien Ser 1995 A............................ 0.00### 01/01/10+ 4,675,280 Los Angeles Convention & Exhibition Center Authority, 10,000 Ser 1985 COPs........................................... 9.00 12/01/05+ 11,848,300 14,000 Ser 1985 COPs........................................... 9.00 12/01/05+ 16,587,620 10,000 Los Angeles, Department of Airports Refg 1995 Ser A (FGIC).................................................. 5.50 05/15/05+ 10,906,300 6,000 San Diego County Water Authority, Ser 1991 B COPs (MBIA).................................................. 11.42++ 04/27/06+ 7,832,040 5,250 Southern California Public Power Authority, Transmission Refg Ser 1988 A (FGIC) (ETM)............................ 0.00 07/01/06 4,998,735 ------------ - -------- 74,087,775 64,250 ------------ - -------- 674,410 Total California Tax-Exempt Municipal Bonds (Cost $654,275,779).................. 714,328,865 ------------ - -------- Short-Term California Tax-Exempt Municipal Obligations (5.3%) 2,000 California Department of Water Resources, Power Supply Ser 2002 B (Demand 07/01/03)................................ 1.00* 05/01/22 2,000,000 4,800 California Health Facilities Financing Authority, Adventist Health/West 1998 Ser B (MBIA) (Demand 07/01/03)............................................... 1.00* 09/01/28 4,800,000 1,065 California Housing Finance Agency, Home 1995 Ser M (AMT) (MBIA) (Called for redemption 08/01/03)................. 6.15 08/01/27 1,069,729 9,500 Los Angeles County, Public Properties Refg of 1987 COPs... 0.00 04/01/04 9,376,880 15,000 Los Angeles County Sanitation Districts Financing Authority, 1993 Ser A (Called for redemption 10/01/03)............................................... 5.375 10/01/13 15,468,150 8,000 Orange County Sanitation District, Ser 2000 A COPs (Demand 07/01/03)............................................... 0.85* 08/01/30 8,000,000 ------------ - -------- 40,365 Total Short-Term California Tax-Exempt Municipal Obligations (Cost $39,520,384)..................................................................... 40,714,759 ------------ - -------- </Table> <Table> $714,775 Total Investments (Cost $693,796,163) (a).......................... 98.0% 755,043,624 ======== Other Assets in Excess of Liabilities.............................. 2.0 15,017,573 ----- ------------ Net Assets......................................................... 100.0% $770,061,197 ===== ============ </Table> See Notes to Financial Statements 10 Morgan Stanley California Tax-Free Income Fund PORTFOLIO OF INVESTMENTS - JUNE 30, 2003 (UNAUDITED) continued - --------------------- <Table> AMT Alternative Minimum Tax. COPs Certificates of Participation. ETM Escrowed to maturity. * Current coupon of variable rate demand obligation. # Currently a zero coupon security; will convert to 5.45% on July 1, 2012. ## Currently a zero coupon security; will convert to 5.85% on July 15, 2009. ### Currently a zero coupon security; will convert to 7.15% on January 1, 2005. + Prerefunded to call date shown. ++ Current coupon rate for residual interest bonds. This rate resets periodically as the auction rate on the related short-term security fluctuates. (a) The aggregate cost for federal income tax purposes approximates the aggregate cost for book purposes. The aggregate gross unrealized appreciation is $61,365,248 and the aggregate gross unrealized depreciation is $117,787 resulting in net unrealized appreciation of $61,247,461. Bond Insurance: - --------------- Ambac Ambac Assurance Corporation. FGIC Financial Guaranty Insurance Company. FSA Financial Security Assurance Inc. MBIA MBIA Insurance Corporation. </Table> See Notes to Financial Statements 11 Morgan Stanley California Tax-Free Income Fund FINANCIAL STATEMENTS Statement of Assets and Liabilities June 30, 2003 (unaudited) <Table> Assets: Investments in securities, at value (cost $693,796,163)................... $755,043,624 Cash................................... 259,378 Receivable for: Interest........................... 10,340,947 Investments sold................... 5,202,334 Shares of beneficial interest sold.............................. 559,038 Prepaid expenses and other assets...... 50,901 ------------ Total Assets....................... 771,456,222 ------------ Liabilities: Payable for: Distribution fee................... 442,464 Investment management fee.......... 357,600 Dividends to shareholders.......... 323,238 Shares of beneficial interest redeemed.......................... 156,246 Accrued expenses....................... 115,477 ------------ Total Liabilities.................. 1,395,025 ------------ Net Assets......................... $770,061,197 ============ Composition of Net Assets: Paid-in-capital........................ $705,435,658 Net unrealized appreciation............ 61,247,461 Accumulated undistributed net investment income..................... 770,724 Accumulated undistributed net realized gain.................................. 2,607,354 ------------ Net Assets......................... $770,061,197 ============ Class A Shares: Net Assets............................. $16,829,163 Shares Outstanding (unlimited authorized, $.01 par value)........... 1,318,789 Net Asset Value Per Share.......... $12.76 ====== Maximum Offering Price Per Share, (net asset value plus 4.44% of net asset value)....................... $13.33 ====== Class B Shares: Net Assets............................. $651,898,043 Shares Outstanding (unlimited authorized, $.01 par value)........... 50,773,560 Net Asset Value Per Share.......... $12.84 ====== Class C Shares: Net Assets............................. $29,119,466 Shares Outstanding (unlimited authorized, $.01 par value)........... 2,269,091 Net Asset Value Per Share.......... $12.83 ====== Class D Shares: Net Assets............................. $72,214,525 Shares Outstanding (unlimited authorized, $.01 par value)........... 5,642,264 Net Asset Value Per Share.......... $12.80 ====== </Table> Statement of Operations For the six months ended June 30, 2003 (unaudited) <Table> Net Investment Income: Interest Income........................ $ 19,851,216 ------------- Expenses Distribution fee (Class A shares)...... 10,444 Distribution fee (Class B shares)...... 2,464,694 Distribution fee (Class C shares)...... 101,032 Investment management fee.............. 2,096,698 Transfer agent fees and expenses....... 109,128 Shareholder reports and notices........ 38,414 Professional fees...................... 22,313 Custodian fees......................... 16,664 Trustees' fees and expenses............ 10,659 Other.................................. 20,560 ------------- Total Expenses..................... 4,890,606 Less: expense offset................... (16,599) Less: distribution fee rebate (Class B shares)............................... (1,600,405) ------------- Net Expenses....................... 3,273,602 ------------- Net Investment Income.............. 16,577,614 ------------- Net Realized and Unrealized Gain: Net realized gain...................... 3,108,113 Net change in unrealized appreciation.......................... 2,367,612 ------------- Net Gain........................... 5,475,725 ------------- Net Increase........................... $ 22,053,339 ============= </Table> See Notes to Financial Statements 12 Morgan Stanley California Tax-Free Income Fund FINANCIAL STATEMENTS continued Statement of Changes in Net Assets <Table> <Caption> FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED JUNE 30, 2003 DECEMBER 31, 2002 ------------- ----------------- (unaudited) Increase (Decrease) in Net Assets: Operations: Net investment income....................................... $ 16,577,614 $ 35,877,781 Net realized gain........................................... 3,108,113 6,149,149 Net change in unrealized appreciation....................... 2,367,612 21,160,505 ------------ ------------ Net Increase............................................ 22,053,339 63,187,435 ------------ ------------ Dividends and Distributions to Shareholders from: Net investment income Class A shares.......................................... (368,254) (849,237) Class B shares.......................................... (13,721,688) (30,349,709) Class C shares.......................................... (504,384) (854,240) Class D shares.......................................... (1,706,065) (3,701,807) Net realized gain Class A shares.......................................... (4,124) (168,726) Class B shares.......................................... (158,615) (5,503,318) Class C shares.......................................... (7,071) (205,844) Class D shares.......................................... (17,623) (609,510) ------------ ------------ Total Dividends and Distributions....................... (16,487,824) (42,242,391) ------------ ------------ Net decrease from transactions in shares of beneficial interest.................................................. (39,482,666) (30,977,572) ------------ ------------ Net Decrease............................................ (33,917,151) (10,032,528) Net Assets: Beginning of period......................................... 803,978,348 814,010,876 ------------ ------------ End of Period (Including accumulated undistributed net investment income of $770,724 and $493,501, respectively)..................... $770,061,197 $803,978,348 ============ ============ </Table> See Notes to Financial Statements 13 Morgan Stanley California Tax-Free Income Fund NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2003 (UNAUDITED) 1. Organization and Accounting Policies Morgan Stanley California Tax-Free Income Fund (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "Act"), as a diversified, open-end management investment company. The Fund's investment objective is to provide a high level of current income which is exempt from federal and California income tax, consistent with the preservation of capital. The Fund was organized as a Massachusetts business trust on April 9, 1984 and commenced operations on July 11, 1984. On July 28, 1997, the Fund converted to a multiple class share structure. The Fund offers Class A shares, Class B shares, Class C shares and Class D shares. The four classes are substantially the same except that most Class A shares are subject to a sales charge imposed at the time of purchase and some Class A shares, and most Class B shares and Class C shares are subject to a contingent deferred sales charge imposed on shares redeemed within one year, six years and one year, respectively. Class D shares are not subject to a sales charge. Additionally, Class A shares, Class B shares and Class C shares incur distribution expenses. The following is a summary of significant accounting policies: A. Valuation of Investments -- (1) portfolio securities are valued by an outside independent pricing service approved by the Trustees. The pricing service uses both a computerized grid matrix of tax-exempt securities and evaluations by its staff, in each case based on information concerning market transactions and quotations from dealers which reflect the bid side of the market each day. The portfolio securities are thus valued by reference to a combination of transactions and quotations for the same or other securities believed to be comparable in quality, coupon, maturity, type of issue, call provisions, trading characteristics and other features deemed to be relevant; (2) futures are valued at the latest sale price on the commodities exchange on which they trade unless it is determined that such price does not reflect their market value, in which case they will be valued at their fair value as determined in good faith under procedures established by and under the supervision of the Trustees; and (3) short-term debt securities having a maturity date of more than sixty days at time of purchase are valued on a mark-to-market basis until sixty days prior to maturity and thereafter at amortized cost based on their value on the 61st day. Short-term debt securities having a maturity date of sixty days or less at the time of purchase are valued at amortized cost. B. Accounting for Investments -- Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on security transactions are 14 Morgan Stanley California Tax-Free Income Fund NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2003 (UNAUDITED) continued determined by the identified cost method. Discounts are accreted and premiums are amortized over the life of the respective securities. Interest income is accrued daily. C. Multiple Class Allocations -- Investment income, expenses (other than distribution fees), and realized and unrealized gains and losses are allocated to each class of shares based upon the relative net asset value on the date such items are recognized. Distribution fees are charged directly to the respective class. D. Futures Contracts -- A futures contract is an agreement between two parties to buy and sell financial instruments or contracts based on financial indices at a set price on a future date. Upon entering into such a contract, the Fund is required to pledge to the broker cash, U.S. Government securities or other liquid portfolio securities equal to the minimum initial margin requirements of the applicable futures exchange. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments known as variation margin are recorded by the Fund as unrealized gains and losses. Upon closing of the contract, the Fund realizes a gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. E. Federal Income Tax Policy -- It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable and nontaxable income to its shareholders. Accordingly, no federal income tax provision is required. F. Dividends and Distributions to Shareholders -- Dividends and distributions to shareholders are recorded on the ex-dividend date. The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations which may differ from generally accepted accounting principles. These "book/tax" differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment; temporary differences do not require reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for financial reporting purposes but not for tax purposes are reported as dividends in excess of net investment income or distributions in excess of net realized capital gains. To the extent they exceed net investment income and net realized capital gains for tax purposes, they are reported as distributions of paid-in capital. 15 Morgan Stanley California Tax-Free Income Fund NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2003 (UNAUDITED) continued G. Use of Estimates -- The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. 2. Investment Management Agreement Pursuant to an Investment Management Agreement with Morgan Stanley Investment Advisors Inc. (the "Investment Manager") the Fund pays the Investment Manager a management fee, accrued daily and payable monthly, by applying the following annual rates to the Fund's net assets determined as of the close of each business day: 0.55% to the portion of daily net assets not exceeding $500 million; 0.525% to the portion of daily net assets exceeding $500 million but not exceeding $750 million; 0.50% to the portion of daily net assets exceeding $750 million but not exceeding $1 billion; 0.475% to the portion of daily net assets exceeding $1 billion but not exceeding $1.25 billion; and 0.45% to the portion of daily net assets in excess of $1.25 billion. 3. Plan of Distribution Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the Investment Manager. The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan provides that the Fund will pay the Distributor a fee which is accrued daily and paid monthly at the following annual rates: (i) Class A -- up to 0.25% of the average daily net assets of Class A; (ii) Class B -- 0.75% of the lesser of: (a) the average daily aggregate gross sales of the Class B shares since the inception of the Fund (not including reinvestment of dividend or capital gain distributions) less the average daily aggregate net asset value of the Class B shares redeemed since the Fund's inception upon which a contingent deferred sales charge has been imposed or waived; or (b) the average daily net assets of Class B; and (iii) Class C -- up to 0.75% of the average daily net assets of Class C. In the case of Class B shares, provided that the Plan continues in effect, any cumulative expenses incurred by the Distributor but not yet recovered may be recovered through the payment of future distribution fees from the Fund pursuant to the Plan and contingent deferred sales charges paid by investors upon redemption of Class B shares. Although there is no legal obligation for the Fund to pay expenses incurred in excess of payments made to the Distributor under the Plan and the proceeds of contingent deferred sales charges paid by investors upon redemption of shares, if for any reason the Plan is terminated, the Trustees will consider at that time the manner in which to treat such expenses. The Distributor has advised the Fund that there were no excess expenses as of June 30, 2003. 16 Morgan Stanley California Tax-Free Income Fund NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2003 (UNAUDITED) continued For the six months ended June 30, 2003, the Distributor rebated a portion of the distribution fees paid by the Fund on Class B shares in the amount of $1,600,405. In the case of Class A shares and Class C shares, expenses incurred pursuant to the Plan in any calendar year in excess of 0.25% or 0.75% of the average daily net assets of Class A or Class C, respectively, will not be reimbursed by the Fund through payments in any subsequent year, except that expenses representing a gross sales credit to Morgan Stanley Financial Advisors or other selected broker-dealer representatives may be reimbursed in the subsequent calendar year. For the six months ended June 30, 2003, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.12% and 0.75%, respectively. The Distributor has informed the Fund that for the six months ended June 30, 2003, it received contingent deferred sales charges from certain redemptions of the Fund's Class B shares and Class C shares of $205,115 and $1,806, respectively and received $64,245 in front-end sales charges from sales of the Fund's Class A shares. The respective shareholders pay such charges which are not an expense of the Fund. 4. Security Transactions and Transactions with Affiliates The cost of purchases and proceeds from sales of portfolio securities, excluding short-term investments, for the six months ended June 30, 2003 aggregated $24,833,460 and $58,008,184, respectively. Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is the Fund's transfer agent. At June 30, 2003, the Fund had transfer agent fees and expenses payable of approximately $3,600. The Fund has an unfunded noncontributory defined benefit pension plan covering all 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 years of service and compensation during the last five years of service. Aggregate pension costs for the six months ended June 30, 2003 included in Trustees' fees and expenses in the Statement of Operations amounted to $3,589. At June 30, 2003, the Fund had an accrued pension liability of $58,189 which is included in accrued expenses in the Statement of Assets and Liabilities. 5. Federal Income Tax Status At December 31, 2002, the Fund had temporary book/tax differences primarily attributable to capital loss deferrals on wash sales and book amortization of discounts on debt securities. 17 Morgan Stanley California Tax-Free Income Fund NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2003 (UNAUDITED) continued 6. Risks Relating to Certain Financial Instruments The Fund may invest a portion of its assets in residual interest bonds, which are inverse floating rate municipal obligations. The prices of these securities are subject to greater market fluctuations during periods of changing prevailing interest rates than are comparable fixed rate obligations. At June 30, 2003, the Fund held positions in residual interest bonds having a total value of $15,332,520, which represents 2.0% of the Fund's net assets. To hedge against adverse interest rate changes, the Fund may invest in financial futures contracts or municipal bond index futures contracts ("futures contracts"). These futures contracts involve elements of market risk in excess of the amount reflected in the Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the value of the underlying securities. At June 30, 2003, the Fund had no outstanding futures contracts. 18 Morgan Stanley California Tax-Free Income Fund NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2003 (UNAUDITED) continued 7. Shares of Beneficial Interest Transactions in shares of beneficial interest were as follows: <Table> <Caption> FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED JUNE 30, 2003 DECEMBER 31, 2002 ---------------------------- ---------------------------- (unaudited) SHARES AMOUNT SHARES AMOUNT ------------- ------------ ------------ ------------- CLASS A SHARES Sold.......................................... 551,511 $ 6,970,863 1,512,568 $ 19,130,260 Reinvestment of dividends and distributions... 9,874 125,377 24,313 305,853 Redeemed...................................... (881,629) (11,118,502) (1,287,894) (16,262,010) ---------- ------------ ---------- ------------- Net increase (decrease) - Class A............. (320,244) (4,022,262) 248,987 3,174,103 ---------- ------------ ---------- ------------- CLASS B SHARES Sold.......................................... 1,407,844 17,969,128 4,323,553 54,537,774 Reinvestment of dividends and distributions... 533,644 6,814,009 1,476,631 18,642,590 Redeemed...................................... (4,677,115) (59,635,181) (8,364,080) (105,528,439) ---------- ------------ ---------- ------------- Net decrease - Class B........................ (2,735,627) (34,852,044) (2,563,896) (32,348,075) ---------- ------------ ---------- ------------- CLASS C SHARES Sold.......................................... 467,645 5,974,984 1,819,979 22,969,858 Reinvestment of dividends and distributions... 24,126 308,093 54,241 685,522 Redeemed...................................... (249,338) (3,188,966) (1,195,628) (15,076,874) ---------- ------------ ---------- ------------- Net increase - Class C........................ 242,433 3,094,111 678,592 8,578,506 ---------- ------------ ---------- ------------- CLASS D SHARES Sold.......................................... 686,128 8,718,709 497,912 6,303,223 Reinvestment of dividends and distributions... 65,992 839,927 171,997 2,165,228 Redeemed...................................... (1,036,138) (13,261,107) (1,495,708) (18,850,557) ---------- ------------ ---------- ------------- Net decrease - Class D........................ (284,018) (3,702,471) (825,799) (10,382,106) ---------- ------------ ---------- ------------- Net decrease in Fund.......................... (3,097,456) $(39,482,666) (2,462,116) $ (30,977,572) ========== ============ ========== ============= </Table> 8. Expense Offset The expense offset represents a reduction of the custodian fees for earnings on cash balances maintained by the Fund. 19 Morgan Stanley California Tax-Free Income Fund FINANCIAL HIGHLIGHTS Selected ratios and per share data for a share of beneficial interest outstanding throughout each period: <Table> <Caption> FOR THE SIX FOR THE YEAR ENDED DECEMBER 31, MONTHS ENDED ---------------------------------------------------------------------------- JUNE 30, 2003 2002 2001 2000 1999 1998 ------------- -------- -------- -------- ------- ------- (unaudited) Class A Shares Selected Per Share Data: Net asset value, beginning of period.................. $12.68 $12.34 $12.49 $11.67 $12.75 $12.89 ------ ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income... 0.28 0.57 0.57 0.58 0.58 0.59 Net realized and unrealized gain (loss).................. 0.08 0.44 (0.10) 0.82 (1.06) 0.10 ------ ------ ------ ------ ------ ------ Total income (loss) from investment operations...... 0.36 1.01 0.47 1.40 (0.48) 0.69 ------ ------ ------ ------ ------ ------ Less dividends and distributions from: Net investment income... (0.28) (0.57) (0.58) (0.58) (0.58) (0.59) Net realized gain....... (0.00)++ (0.10) (0.04) -- (0.02) (0.24) ------ ------ ------ ------ ------ ------ Total dividends and distributions.............. (0.28) (0.67) (0.62) (0.58) (0.60) (0.83) ------ ------ ------ ------ ------ ------ Net asset value, end of period..................... $12.76 $12.68 $12.34 $12.49 $11.67 $12.75 ====== ====== ====== ====== ====== ====== Total Return+............... 2.82%(1) 8.37% 3.90% 12.17% (3.91)% 5.50% Ratios to Average Net Assets(3): Expenses (before expense offset).................... 0.72%(2) 0.80% 0.80% 0.83% 0.78%(4) 0.83% Net investment income....... 4.39%(2) 4.53% 4.62% 4.80% 4.70% 4.58% Supplemental Data: Net assets, end of period, in thousands............... $16,829 $20,775 $17,147 $12,336 $6,253 $3,788 Portfolio turnover rate..... 3%(1) 12% 13% 4% 5% 20% </Table> - --------------------- <Table> + Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. ++ Less than $0.005 per share. (1) Not annualized. (2) Annualized. (3) Reflects overall fund ratios for investment income and non-class specific expenses. (4) Does not reflect the effect of expense offset of 0.01%. </Table> See Notes to Financial Statements 20 Morgan Stanley California Tax-Free Income Fund FINANCIAL HIGHLIGHTS continued <Table> <Caption> FOR THE SIX FOR THE YEAR ENDED DECEMBER 31, MONTHS ENDED -------------------------------------------------------------------------------- JUNE 30, 2003 2002 2001 2000 1999 1998 ------------- -------- -------- -------- -------- -------- (unaudited) Class B Shares Selected Per Share Data: Net asset value, beginning of period..... $12.75 $12.42 $12.57 $11.73 $12.81 $12.92 ------ ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income............... 0.27 0.56 0.55 0.57 0.57 0.58 Net realized and unrealized gain (loss)............... 0.08 0.42 (0.11) 0.84 (1.06) 0.13 ------ ------ ------ ------ ------ ------ Total income (loss) from investment operations... 0.35 0.98 0.44 1.41 (0.49) 0.71 ------ ------ ------ ------ ------ ------ Less dividends and distributions from: Net investment income............... (0.26) (0.55) (0.55) (0.57) (0.57) (0.58) Net realized gain.... (0.00)++ (0.10) (0.04) -- (0.02) (0.24) ------ ------ ------ ------ ------ ------ Total dividends and distributions........... (0.26) (0.65) (0.59) (0.57) (0.59) (0.82) ------ ------ ------ ------ ------ ------ Net asset value, end of period.................. $12.84 $12.75 $12.42 $12.57 $11.73 $12.81 ====== ====== ====== ====== ====== ====== Total Return+............ 2.71%(1) 8.13% 3.56% 12.29% (3.99)% 5.63% Ratios to Average Net Assets(3)(5): Expenses (before expense offset)................. 0.86%(2) 0.93% 1.04% 0.93% 0.91%(4) 0.95% Net investment income.... 4.25%(2) 4.40% 4.38% 4.70% 4.57% 4.46% Supplemental Data: Net assets, end of period, in thousands.... $651,898 $682,046 $696,481 $732,668 $761,548 $896,685 Portfolio turnover rate.................... 3%(1) 12% 13% 4% 5% 20% </Table> - --------------------- <Table> + Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. ++ Less than $0.005 per share. (1) Not annualized. (2) Annualized. (3) Reflects overall fund ratios for investment income and non-class specific expenses. (4) Does not reflect the effect of expense offset of 0.01%. (5) If the Fund had borne all of its expenses that were reimbursed or waived by the Investment Manager, the annualized expense and net investment income ratios would have been as follows: EXPENSE NET INVESTMENT PERIOD ENDED RATIO INCOME RATIO ----------------- ---- ---- June 30, 2003 1.35% 3.76% December 31, 2002 1.35 3.98 December 31, 2001 1.34 4.06 December 31, 2000 1.34 4.29 December 31, 1999 1.34 4.14 December 31, 1998 1.33 4.08 </Table> See Notes to Financial Statements 21 Morgan Stanley California Tax-Free Income Fund FINANCIAL HIGHLIGHTS continued <Table> <Caption> FOR THE SIX FOR THE YEAR ENDED DECEMBER 31, MONTHS ENDED ------------------------------------------------------------------- JUNE 30, 2003 2002 2001 2000 1999 1998 ------------- ------- ------- ------- ------- ------ (unaudited) Class C Shares Selected Per Share Data: Net asset value, beginning of period............................... $12.74 $12.42 $12.57 $11.73 $12.81 $12.92 ------ ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income............. 0.24 0.50 0.51 0.52 0.51 0.53 Net realized and unrealized gain (loss)............................ 0.09 0.42 (0.11) 0.84 (1.06) 0.13 ------ ------ ------ ------ ------ ------ Total income (loss) from investment operations........................... 0.33 0.92 0.40 1.36 (0.55) 0.66 ------ ------ ------ ------ ------ ------ Less dividends and distributions from: Net investment income............. (0.24) (0.50) (0.51) (0.52) (0.51) (0.53) Net realized gain................. (0.00)++ (0.10) (0.04) -- (0.02) (0.24) ------ ------ ------ ------ ------ ------ Total dividends and distributions..... (0.24) (0.60) (0.55) (0.52) (0.53) (0.77) ------ ------ ------ ------ ------ ------ Net asset value, end of period........ $12.83 $12.74 $12.42 $12.57 $11.73 $12.81 ====== ====== ====== ====== ====== ====== Total Return+......................... 2.58%(1) 7.59% 3.33% 11.74% (4.41)% 5.22% Ratios to Average Net Assets(3): Expenses (before expense offset)...... 1.35%(2) 1.35% 1.34% 1.34% 1.34%(4) 1.33% Net investment income................. 3.76%(2) 3.98% 4.09% 4.29% 4.14% 4.08% Supplemental Data: Net assets, end of period, in thousands............................ $29,119 $25,825 $16,745 $14,534 $13,099 $9,849 Portfolio turnover rate............... 3%(1) 12% 13% 4% 5% 20% </Table> - --------------------- + Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. ++ Less than $0.005 per share. (1) Not annualized. (2) Annualized. (3) Reflects overall fund ratios for investment income and non-class specific expenses. (4) Does not reflect the effect of expense offset of 0.01%. See Notes to Financial Statements 22 Morgan Stanley California Tax-Free Income Fund FINANCIAL HIGHLIGHTS continued <Table> <Caption> FOR THE SIX FOR THE YEAR ENDED DECEMBER 31, MONTHS ENDED ------------------------------------------------------------------- JUNE 30, 2003 2002 2001 2000 1999 1998 ------------- ------- ------- ------- ------ ------ (unaudited) Class D Shares Selected Per Share Data: Net asset value, beginning of period.............................. $12.71 $12.39 $12.53 $11.71 $12.78 $12.92 ------ ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income............ 0.29 0.60 0.60 0.61 0.60 0.63 Net realized and unrealized gain (loss)........................... 0.08 0.41 (0.10) 0.82 (1.05) 0.10 ------ ------ ------ ------ ------ ------ Total income (loss) from investment operations.......................... 0.37 1.01 0.50 1.43 (0.45) 0.73 ------ ------ ------ ------ ------ ------ Less dividends and distributions from: Net investment income............ (0.28) (0.59) (0.60) (0.61) (0.60) (0.63) Net realized gain................ (0.00)++ (0.10) (0.04) -- (0.02) (0.24) ------ ------ ------ ------ ------ ------ Total dividends and distributions.... (0.28) (0.69) (0.64) (0.61) (0.62) (0.87) ------ ------ ------ ------ ------ ------ Net asset value, end of period....... $12.80 $12.71 $12.39 $12.53 $11.71 $12.78 ====== ====== ====== ====== ====== ====== Total Return+........................ 2.96%(1) 8.41% 4.12% 12.50% (3.63)% 5.77% Ratios to Average Net Assets(3): Expenses (before expense offset)..... 0.60%(2) 0.60% 0.59% 0.59% 0.59%(4) 0.58% Net investment income................ 4.51%(2) 4.73% 4.84% 5.04% 4.89% 4.83% Supplemental Data: Net assets, end of period, in thousands........................... $72,215 $75,332 $83,638 $95,132 $1,021 $554 Portfolio turnover rate.............. 3%(1) 12% 13% 4% 5% 20% </Table> - --------------------- + Calculated based on the net asset value as of the last business day of the period. ++ Less than $0.005 per share. (1) Not annualized. (2) Annualized. (3) Reflects overall fund ratios for investment income and non-class specific expenses. (4) Does not reflect the effect of expense offset of 0.01%. See Notes to Financial Statements 23 TRUSTEES Michael Bozic Charles A. Fiumefreddo Edwin J. Garn Wayne E. Hedien James F. Higgins Dr. Manuel H. Johnson Joseph J. Kearns Michael E. Nugent Philip J. Purcell Fergus Reid OFFICERS Charles A. Fiumefreddo Chairman of the Board Mitchell M. Merin President Ronald E. Robison Executive Vice President and Principal Executive Officer Barry Fink Vice President and General Counsel Joseph J. McAlinden Vice President Stefanie V. Chang Vice President Francis Smith Treasurer and Chief Financial Officer Thomas F. Caloia Vice President Mary E. Mullin Secretary TRANSFER AGENT Morgan Stanley Trust Harborside Financial Center, Plaza Two Jersey City, New Jersey 07311 INDEPENDENT AUDITORS Deloitte & Touche LLP Two World Financial Center New York, New York 10281 INVESTMENT MANAGER Morgan Stanley Investment Advisors Inc. 1221 Avenue of the Americas New York, New York 10020 The financial statements included herein have been taken from the records of the Fund without examination by the independent auditors and accordingly they do not express an opinion thereon. This report is submitted for the general information of shareholders of the Fund. For more detailed information about the Fund, its fees and expenses and other pertinent information, please read its Prospectus. The Fund's Statement of Additional Information contains additional information about the Fund, including its trustees. It is available, without charge, by calling (800) 869-NEWS. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective Prospectus. Read the prospectus carefully before investing. Investments and services offered through Morgan Stanley DW Inc., member SIPC. Morgan Stanley Distributors Inc., member NASD. (c) 2003 Morgan Stanley [MORGAN STANLEY LOGO] MUNICIPAL CALIFORNIA LONG Morgan Stanley California Tax-Free Income Fund Semiannual Report June 30, 2003 [MORGAN STANLEY LOGO] 37900RPT-11785G03-AP-7/03 Item 9 - Controls and Procedures The Fund's principal executive officer and principal financial officer have concluded that the Fund's disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Fund in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, based upon such officers' evaluation of these controls and procedures as of a date within 90 days of the filing date of the report. There were no significant changes or corrective actions with regard to significant deficiencies or material weaknesses in the Fund's internal controls or in other factors that could significantly affect the Fund's internal controls subsequent to the date of their evaluation. Item 10b Exhibits A separate certification for each principal executive officer and principal financial officer of the registrant are attached hereto as part of EX-99.CERT. Items 2 - 8 and Item 10a are not applicable SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Morgan Stanley California Tax-Free Income Fund Ronald E. Robison Principal Executive Officer August 19, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Ronald E. Robison Principal Executive Officer August 19, 2003 Francis Smith Principal Financial Officer August 19, 2003 2