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: 811-07243 Morgan Stanley Balanced 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: January 31, 2004 Date of reporting period: July 31, 2003 Item 1 Report to Shareholders Welcome, Shareholder: In this report, you'll learn about how your investment in Morgan Stanley Balanced 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 July 31, 2003 TOTAL RETURN FOR THE SIX-MONTH PERIOD ENDED JULY 31, 2003 <Table> <Caption> CLASS A CLASS B CLASS C CLASS D 5.56% 5.19% 5.18% 5.68% </Table> <Table> <Caption> LEHMAN BROTHERS RUSSELL U.S. LIPPER 1000 VALUE S&P 500 GOVERNMENT/ INCOME INDEX(1) INDEX(2) CREDIT INDEX(3) FUNDS INDEX(4) 16.04% 16.79% 0.82% 7.90% </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 no 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 At the start of the six-month period ended July 31, 2003, the equity markets were plagued by concerns over the near-term future path of the economy and uncertainty about the possibility of war in Iraq. Traditionally defensive sectors outperformed in this environment as investors favored their perceived safety. From March through July, however, the equity market rallied sharply as investors began to perceive the beneficial effects of accommodative monetary and fiscal policy on economic results and corporate earnings. The defensive sectors and securities that had led the market during the bear market period fell behind more cyclical sectors as investors' expectations for the economy improved. Bonds performed strongly through much of the equity rally. In June, however, signs of economic growth led investors to fear that interest rates were unsustainably low. Bond prices (which move in opposition to yields) fell sharply through the end of the period as investors allocated assets out of the debt markets. These shifts were reflected in the yield on the 10-year Treasury bond. After declining sharply from May through mid-June, to 3.11 percent, it backed up to 4.41 percent at the end of July. PERFORMANCE ANALYSIS The performance of the Fund's fixed-income portion was mixed. With rates at historically low levels, our analysis indicated that the Treasury yield curve appeared to be priced as if the U.S. economy would remain well below full employment level for five years, and somewhat below full employment for a decade. We believed this assessment to be unduly pessimistic in light of the potential for the economy's return to positive growth. Given that such a return would be likely to result in interest rates rising, we kept the Fund's interest-rate sensitivity below that of its benchmark, which caused it to lag as interest rates fell. This position became a net positive, however, when interest rates soared in the last weeks of the period. On the equity side, the Fund's overweighting in energy detracted from performance relative to the Russell 1000 Value Index, because energy did not participate as fully as other sectors in the rally. We remain confident in the Fund's overweighted stance, however, because we consider the portfolio's energy holdings to be favorably valued. Strong performance in segments of the Fund's equity portfolio contributed positively to its performance. Stock selection in the consumer discretionary sector was a case in point. Many of these securities presented compelling values and appreciated strongly from their relatively low valuations at the beginning of the period. The Fund's investments in health care, including select pharmaceutical and health-care services holdings, also contributed positively to performance. 2 <Table> <Caption> TOP 10 HOLDINGS U.S. Treasury Securities 20.8% Fed. Home Ln. Mtge Corp. 9.4% Fed. Natl. Mtge. Assoc. 9.3% Bristol Myers Squibb 1.7% Bank of America Corp. 1.2% Chubb Corp. 1.0% Schlumberger LTD. 0.9% AOL Time Warner 0.9% BP PLC-ADR 0.9% J.P. Morgan Chase 0.8% </Table> <Table> <Caption> TOP FIVE INDUSTRIES Common Stocks 33.8% U.S. Government Agencies 20.6% Mortgage-Backed Securities 18.9% Corporate Bonds 18.2% Short Term 16.6% </Table> Subject to change daily. All percentages are as a percentage of net assets. 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 - - TYPICALLY, MORGAN STANLEY BALANCED INCOME FUND WILL INVEST AT LEAST 60% OF ITS ASSETS IN INVESTMENT-GRADE CORPORATE DEBT SECURITIES, BANK OBLIGATIONS, INVESTMENT-GRADE MORTGAGE-BACKED SECURITIES, INCLUDING COLLATERALIZED MORTGAGE OBLIGATIONS, INVESTMENT-GRADE ASSET-BACKED SECURITIES, AND U.S. GOVERNMENT SECURITIES. - - THE FUND WILL ALSO NORMALLY INVEST AT LEAST 25% OF ITS ASSETS IN THE COMMON STOCKS OF COMPANIES THAT HAVE A RECORD OF PAYING DIVIDENDS AND, IN THE OPINION OF THE FUND'S MANAGER, HAVE THE POTENTIAL FOR INCREASING DIVIDENDS AND INVEST IN SECURITIES CONVERTIBLE INTO STOCK. PROXY VOTING POLICIES AND PROCEDURES A DESCRIPTION OF THE FUND'S POLICIES AND PROCEDURES WITH RESPECT TO THE VOTING OF PROXIES RELATING TO THE FUND'S PORTFOLIO SECURITIES IS AVAILABLE WITHOUT CHARGE, UPON REQUEST, BY CALLING (800) 869-NEWS. THIS INFORMATION IS ALSO AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEBSITE AT HTTP://WWW.SEC.GOV. 3 PERFORMANCE SUMMARY AVERAGE ANNUAL TOTAL RETURNS -- PERIOD ENDED JULY 31, 2003 <Table> <Caption> CLASS A SHARES* CLASS B SHARES** CLASS C SHARES(+) CLASS D SHARES(++) (since 07/28/97) (since 07/28/97) (since 03/28/95) (since 07/28/97) SYMBOL BINAX BINBX BINCX BINDX 1 YEAR 4.17%(5) 3.41%(5) 3.40%(5) 4.42%(5) (1.30)(6) (1.59)(6) 2.40(6) 5 YEARS 4.29(5) 3.47(5) 3.47(5) 4.49(5) 3.17(6) 3.14(6) 3.47(6) SINCE INCEPTION 5.00(5) 4.18(5) 7.11(5) 5.22(5) 4.06(6) 4.18(6) 7.11(6) </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 Russell 1000 Value Index measures the performance of those companies in the Russell 1000 Index with lower price-to-book ratios and lower forecasted growth values. Indexes are unmanaged and their returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. (2) The Standard and Poor's 500 Index (S&P 500(R)) is a broad-based index, the performance of which is based on the performance of 500 widely-held common stocks chosen for market size, liquidity and industry group representation. Indexes are unmanaged and their returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. (3) The Lehman Brothers U.S. Government/Credit Index tracks the performance of government and corporate obligations, including U.S. government agency and Treasury securities and corporate and Yankee bonds. 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. (4) The Lipper Income Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Income Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 30 funds represented in this Index. (5) Figure shown assumes reinvestment of all distributions and does not reflect the deduction of any sales charges. (6) 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 5.25%. ** 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 1.0% for shares redeemed within one year of purchase. ++ Class D has no sales charge. 4 Morgan Stanley Balanced Income Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2003 (UNAUDITED) <Table> <Caption> NUMBER OF SHARES VALUE - -------------------------------------------------------------------------------------- Common Stocks (33.8%) Advertising/Marketing Services (0.2%) 36,120 Interpublic Group of Companies, Inc.*....................... $ 498,456 ----------- Aerospace & Defense (0.2%) 16,710 Raytheon Co. ............................................... 512,997 ----------- Auto Parts: O.E.M. (0.5%) 14,690 Magna International Inc. (Class A) (Canada)................. 1,117,615 ----------- Beverages: Non-Alcoholic (0.2%) 10,920 Coca-Cola Co. (The)......................................... 491,072 ----------- Chemicals: Agricultural (0.2%) 16,410 Monsanto Co. ............................................... 377,430 ----------- Chemicals: Major Diversified (0.7%) 22,430 Dow Chemical Co. (The)...................................... 791,779 13,750 Du Pont (E.I.) de Nemours & Co. ............................ 604,175 ----------- 1,395,954 ----------- Computer Processing Hardware (0.4%) 40,580 Hewlett-Packard Co. ........................................ 859,079 ----------- Containers/Packaging (0.5%) 22,520 Temple-Inland Inc. ......................................... 1,044,703 ----------- Contract Drilling (0.6%) 26,240 ENSCO International Inc. ................................... 657,837 34,290 Transocean Inc.*............................................ 671,055 ----------- 1,328,892 ----------- Data Processing Services (0.6%) 22,760 Automatic Data Processing, Inc. ............................ 843,941 9,030 Computer Sciences Corp.*.................................... 366,347 ----------- 1,210,288 ----------- </Table> See Notes to Financial Statements 5 Morgan Stanley Balanced Income Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2003 (UNAUDITED) continued <Table> <Caption> NUMBER OF SHARES VALUE - -------------------------------------------------------------------------------------- Discount Stores (0.7%) 12,720 Target Corp. ............................................... $ 487,430 18,060 Wal-Mart Stores, Inc. ...................................... 1,009,735 ----------- 1,497,165 ----------- Electric Utilities (1.6%) 11,900 Edison International*....................................... 195,279 26,310 Entergy Corp. .............................................. 1,355,228 13,010 Exelon Corp. ............................................... 747,685 25,680 PPL Corp. .................................................. 1,016,671 ----------- 3,314,863 ----------- Financial Conglomerates (2.0%) 35,290 Citigroup Inc. ............................................. 1,580,992 47,080 J.P. Morgan Chase & Co. .................................... 1,650,154 24,590 Prudential Financial, Inc. ................................. 874,912 ----------- 4,106,058 ----------- Financial Publishing/Services (0.5%) 50,430 Equifax, Inc. .............................................. 1,174,515 ----------- Food: Major Diversified (0.3%) 14,460 PepsiCo, Inc. .............................................. 666,172 ----------- Hospital/Nursing Management (0.3%) 40,600 Tenet Healthcare Corp.*..................................... 559,468 ----------- Hotels/Resorts/Cruiselines (1.1%) 73,280 Hilton Hotels Corp. ........................................ 1,069,888 39,530 Starwood Hotels & Resorts Worldwide, Inc. .................. 1,288,678 ----------- 2,358,566 ----------- Household/Personal Care (0.7%) 24,840 Kimberly-Clark Corp. ....................................... 1,202,256 2,130 Procter & Gamble Co. (The).................................. 187,163 ----------- 1,389,419 ----------- Industrial Conglomerates (1.2%) 5,510 3M Co. ..................................................... 772,502 18,270 Ingersoll-Rand Co. Ltd. (Class A) (Bermuda)................. 990,965 16,870 Textron, Inc. .............................................. 732,495 ----------- 2,495,962 ----------- </Table> See Notes to Financial Statements 6 Morgan Stanley Balanced Income Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2003 (UNAUDITED) continued <Table> <Caption> NUMBER OF SHARES VALUE - -------------------------------------------------------------------------------------- Industrial Machinery (0.3%) 14,100 Parker-Hannifin Corp. ...................................... $ 650,010 ----------- Information Technology Services (0.2%) 22,390 Electronic Data Systems Corp. .............................. 498,625 ----------- Integrated Oil (2.1%) 45,780 BP PLC (ADR) (United Kingdom)............................... 1,902,159 16,510 ConocoPhillips.............................................. 864,133 43,630 Exxon Mobil Corp. .......................................... 1,552,355 ----------- 4,318,647 ----------- Investment Banks/Brokers (1.1%) 26,080 Edwards (A.G.), Inc. ....................................... 964,699 24,230 Merrill Lynch & Co., Inc. .................................. 1,317,385 ----------- 2,282,084 ----------- Life/Health Insurance (0.3%) 19,780 MetLife, Inc. .............................................. 548,302 ----------- Major Banks (2.4%) 29,750 Bank of America Corp. ...................................... 2,456,457 17,610 FleetBoston Financial Corp. ................................ 547,495 29,620 PNC Financial Services Group, Inc. ......................... 1,449,899 14,750 Wachovia Corp. ............................................. 644,427 ----------- 5,098,278 ----------- Major Telecommunications (1.4%) 49,060 SBC Communications Inc. .................................... 1,146,042 65,410 Sprint Corp. (FON Group).................................... 923,589 23,720 Verizon Communications Inc. ................................ 826,879 ----------- 2,896,510 ----------- Managed Health Care (0.4%) 13,540 Aetna Inc. ................................................. 834,335 ----------- Media Conglomerates (1.6%) 126,650 AOL Time Warner Inc.*....................................... 1,954,209 65,490 Disney (Walt) Co. (The)..................................... 1,435,541 ----------- 3,389,750 ----------- </Table> See Notes to Financial Statements 7 Morgan Stanley Balanced Income Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2003 (UNAUDITED) continued <Table> <Caption> NUMBER OF SHARES VALUE - -------------------------------------------------------------------------------------- Medical Specialties (0.4%) 18,440 Bausch & Lomb, Inc. ........................................ $ 779,459 ----------- Motor Vehicles (0.3%) 35,500 Honda Motor Co., Ltd. (ADR) (Japan)......................... 701,480 ----------- Multi-Line Insurance (0.9%) 26,770 Hartford Financial Services Group, Inc. (The)............... 1,397,126 13,700 Safeco Corp. ............................................... 510,051 ----------- 1,907,177 ----------- Oil & Gas Production (0.6%) 14,350 Anadarko Petroleum Corp. ................................... 628,530 18,230 EOG Resources, Inc. ........................................ 706,959 ----------- 1,335,489 ----------- Oil Refining/Marketing (0.3%) 15,310 Valero Energy Corp. ........................................ 557,284 ----------- Oilfield Services/Equipment (1.0%) 44,970 Schlumberger Ltd. .......................................... 2,026,798 ----------- Other Metals/Minerals (0.5%) 23,010 Phelps Dodge Corp.*......................................... 970,792 ----------- Packaged Software (0.6%) 44,260 Microsoft Corp. ............................................ 1,168,464 ----------- Pharmaceuticals: Major (3.2%) 134,470 Bristol-Myers Squibb Co. ................................... 3,523,114 7,370 Johnson & Johnson........................................... 381,692 21,746 Pfizer Inc. ................................................ 725,447 12,470 Roche Holdings Ltd (ADR) (Switzerland)...................... 1,041,869 60,450 Schering-Plough Corp. ...................................... 1,026,441 ----------- 6,698,563 ----------- Precious Metals (0.4%) 24,230 Newmont Mining Corp. ....................................... 874,703 ----------- </Table> See Notes to Financial Statements 8 Morgan Stanley Balanced Income Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2003 (UNAUDITED) continued <Table> <Caption> NUMBER OF SHARES VALUE - -------------------------------------------------------------------------------------- Property - Casualty Insurers (1.6%) 33,570 Chubb Corp. (The)........................................... $ 2,175,336 77,144 Travelers Property Casualty Corp. (Class A)................. 1,249,733 ----------- 3,425,069 ----------- Railroads (0.9%) 65,320 Norfolk Southern Corp. ..................................... 1,256,104 11,040 Union Pacific Corp. ........................................ 672,778 ----------- 1,928,882 ----------- Restaurants (0.5%) 43,270 McDonald's Corp. ........................................... 995,643 ----------- Tobacco (0.3%) 16,680 Altria Group, Inc. ......................................... 667,367 ----------- Total Common Stocks (Cost $60,443,571)...................... 70,952,385 ----------- </Table> <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE - --------- ------ -------- Corporate Bonds (18.2%) Aerospace & Defense (0.8%) $ 180 Boeing Co. ............................................... 6.625% 02/15/38 173,282 105 Goodrich Corp. ........................................... 7.625 12/15/12 114,095 240 Lockheed Martin Corp. .................................... 7.75 05/01/26 271,843 235 Lockheed Martin Corp. .................................... 8.50 12/01/29 288,314 235 Raytheon Co. ............................................. 8.30 03/01/10 274,089 439 Systems 2001 Asset Trust - 144A**......................... 6.664 09/15/13 490,646 ------------ 1,612,269 ------------ Airlines (0.4%) 272 American West Airlines.................................... 7.10 04/02/21 278,389 48 Continental Airlines, Inc. ............................... 6.648 03/15/19 44,975 345 Continental Airlines, Inc. ............................... 6.90 07/02/19 325,193 48 Continental Airlines, Inc. ............................... 6.545 08/02/20 45,226 170 Southwest Airlines Co. ................................... 5.496 11/01/06 180,171 ------------ 873,954 ------------ Broadcasting (0.2%) 415 Clear Channel Communications, Inc. ....................... 7.65 09/15/10 474,818 ------------ </Table> See Notes to Financial Statements 9 Morgan Stanley Balanced Income Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2003 (UNAUDITED) continued <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------------- Building Products (0.1%) $ 110 Celulosa Arauco Constitution S.A. - 144A** (Chile)........ 5.125% 07/09/13 $ 103,030 95 Masco Corp. .............................................. 6.50 08/15/32 94,262 ------------ 197,292 ------------ Cable/Satellite TV (0.6%) 500 Comcast Corp. ............................................ 6.50 01/15/15 521,385 290 Cox Communications, Inc. ................................. 7.125 10/01/12 323,957 250 Liberty Media Corp. ...................................... 5.70 05/15/13 232,620 105 TCI Communications, Inc. ................................. 7.875 02/15/26 114,327 ------------ 1,192,289 ------------ Chemicals: Agricultural (0.1%) 155 Monsanto Co. ............................................. 7.375 08/15/12 174,519 ------------ Containers/Packaging (0.1%) 205 Sealed Air Corp - 144A**.................................. 5.625 07/15/13 196,034 ------------ Department Stores (0.5%) 50 Federated Department Stores, Inc. ........................ 6.625 09/01/08 54,940 110 Federated Department Stores, Inc. ........................ 7.00 02/15/28 113,137 360 Federated Department Stores, Inc. ........................ 6.90 04/01/29 366,057 80 May Department Stores Co., Inc. .......................... 5.95 11/01/08 84,389 335 May Department Stores Co., Inc. .......................... 6.70 09/15/28 325,421 100 May Department Stores Co., Inc. .......................... 7.875 03/01/30 110,407 60 May Department Stores Co., Inc. .......................... 6.90 01/15/32 59,519 ------------ 1,113,870 ------------ Drugstore Chains (0.1%) 290 CVS Corp. ................................................ 5.625 03/15/06 312,251 ------------ Electric Utilities (0.9%) 145 Appalachian Power Co. (Series H).......................... 5.95 05/15/33 130,379 145 Cincinnati Gas & Electric Co. ............................ 5.70 09/15/12 150,385 105 Cincinnati Gas & Electric Co. (Series A).................. 5.40 06/15/33 91,602 130 Cincinnati Gas & Electric Co. (Series B).................. 5.375 06/15/33 112,979 95 Columbus Southern Power Co.- 144A**....................... 6.60 03/01/33 95,785 270 Constellation Energy Group, Inc. ......................... 7.60 04/01/32 290,234 65 Detroit Edison Co. ....................................... 6.125 10/01/10 68,987 120 Detroit Edison Co. ....................................... 6.35 10/15/32 119,827 200 Duke Energy Corp. ........................................ 4.50 04/01/10 197,863 150 Exelon Corp. ............................................. 6.75 05/01/11 165,164 </Table> See Notes to Financial Statements 10 Morgan Stanley Balanced Income Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2003 (UNAUDITED) continued <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------------- $ 70 Florida Power & Light Co. ................................ 4.85 % 02/01/13 $ 69,577 135 Ohio Power Co. - 144A**................................... 6.60 02/15/33 136,129 165 Public Service Electric & Gas Co. ........................ 5.00 01/01/13 162,168 85 South Carolina Electric & Gas Co. ........................ 5.30 05/15/33 75,082 35 Wisconsin Electric Power Co. ............................. 5.625 05/15/33 32,216 65 Wisconsin Energy Corp. ................................... 6.20 04/01/33 62,774 ------------ 1,961,151 ------------ Electrical Products (0.1%) 240 Cooper Industries Inc. ................................... 5.25 07/01/07 252,588 ------------ Environmental Services (0.1%) 170 Waste Management, Inc. ................................... 6.875 05/15/09 188,484 ------------ Finance/Rental/Leasing (1.1%) 265 American General Finance Corp. ........................... 5.875 07/14/06 287,397 385 Countrywide Home Loans, Inc. ............................. 3.25 05/21/08 372,174 315 Ford Motor Credit Co. .................................... 7.25 10/25/11 311,808 105 Household Finance Corp. .................................. 6.40 06/17/08 115,203 225 Household Finance Corp. .................................. 6.75 05/15/11 246,120 105 Household Finance Corp. .................................. 6.375 10/15/11 112,190 135 International Lease Finance Corp. ........................ 3.75 08/01/07 135,127 435 MBNA Corp. ............................................... 6.125 03/01/13 450,005 235 Prime Property Funding II - 144A**........................ 7.00 08/15/04 246,959 ------------ 2,276,983 ------------ Financial Conglomerates (2.2%) 500 Associates Corp. of North America......................... 6.25 11/01/08 552,551 55 Boeing Capital Corp. ..................................... 5.75 02/15/07 58,679 235 Boeing Capital Corp. ..................................... 6.10 03/01/11 243,758 70 Boeing Capital Corp. ..................................... 6.50 02/15/12 73,599 125 Chase Manhattan Corp. .................................... 6.00 02/15/09 134,626 50 Chase Manhattan Corp. .................................... 7.00 11/15/09 55,556 185 Citigroup Inc. ........................................... 5.625 08/27/12 188,773 670 General Electric Capital Corp. ........................... 6.75 03/15/32 702,352 135 General Motors Acceptance Corp. .......................... 4.50 07/15/06 135,256 570 General Motors Acceptance Corp. .......................... 6.875 09/15/11 556,872 695 General Motors Acceptance Corp. .......................... 8.00 11/01/31 641,263 570 Prudential Holdings, LLC (Series C) - 144A**............. 8.695 12/18/23 664,141 635 Prudential Holdings, LLC (Series B) (FSA) - 144A**........ 7.245 12/18/23 684,524 ------------ 4,691,950 ------------ </Table> See Notes to Financial Statements 11 Morgan Stanley Balanced Income Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2003 (UNAUDITED) continued <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------------- Food Retail (0.5%) $ 190 Albertson's, Inc. ........................................ 7.45 % 08/01/29 $ 198,299 195 Albertson's, Inc. ........................................ 7.50 02/15/11 218,308 150 Kroger Co. ............................................... 6.80 04/01/11 162,677 345 Kroger Co. ............................................... 7.70 06/01/29 378,454 110 Kroger Co. ............................................... 8.00 09/15/29 124,686 ------------ 1,082,424 ------------ Food: Major Diversified (0.2%) 80 General Mills Inc. ....................................... 3.875 11/30/07 80,902 115 Kraft Foods Inc. ......................................... 5.25 06/01/07 120,487 45 Kraft Foods Inc. ......................................... 5.625 11/01/11 45,453 230 Kraft Foods Inc. ......................................... 6.25 06/01/12 240,763 ------------ 487,605 ------------ Forest Products (0.2%) 110 Weyerhaeuser Co. ......................................... 6.125 03/15/07 118,680 375 Weyerhaeuser Co. ......................................... 6.75 03/15/12 399,471 ------------ 518,151 ------------ Gas Distributors (0.2%) 230 Consolidated Natural Gas Co. ............................. 6.25 11/01/11 247,867 120 Ras Laffan Liquid Natural Gas Co. Ltd. - 144A** (Qatar)... 8.294 03/15/14 135,600 125 Sempra Energy............................................. 6.00 02/01/13 129,292 ------------ 512,759 ------------ Home Building (0.2%) 50 Centex Corp. ............................................. 7.875 02/01/11 57,181 90 Centex Corp. ............................................. 7.50 01/15/12 101,506 210 Pulte Homes, Inc. ........................................ 6.375 05/15/33 189,786 ------------ 348,473 ------------ Home Furnishings (0.1%) 95 Mohawk Industries Inc. ................................... 7.20 04/15/12 104,447 ------------ Home Improvement Chains (0.1%) 225 Lowe's Companies, Inc. ................................... 8.25 06/01/10 271,487 ------------ Hotels/Resorts/Cruiselines (0.4%) 230 Hyatt Equities LLC - 144A**............................... 6.875 06/15/07 233,356 580 Marriott International, Inc. (Series E)................... 7.00 01/15/08 640,094 ------------ 873,450 ------------ </Table> See Notes to Financial Statements 12 Morgan Stanley Balanced Income Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2003 (UNAUDITED) continued <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------------- Industrial Conglomerates (0.3%) $ 455 Honeywell International, Inc. ............................ 6.125% 11/01/11 $ 487,592 195 Hutchinson Whampoa International Ltd. - 144A** (Virgin Islands)................................................ 6.50 02/13/13 194,313 ------------ 681,905 ------------ Information Technology Services (0.1%) 25 Electronic Data Systems Corp. ............................ 7.125 10/15/09 26,375 145 Electronic Data Systems Corp. - 144A**.................... 6.00 08/01/13 135,611 ------------ 161,986 ------------ Integrated Oil (0.5%) 110 Amerada Hess Corp. ....................................... 6.65 08/15/11 118,119 290 Amerada Hess Corp. ....................................... 7.875 10/01/29 314,680 505 Conoco Inc. .............................................. 6.95 04/15/29 545,776 ------------ 978,575 ------------ Investment Banks/Brokers (0.4%) 235 Goldman Sachs Group Inc. ................................. 6.875 01/15/11 261,939 345 Goldman Sachs Group Inc. ................................. 6.60 01/15/12 376,055 225 Goldman Sachs Group Inc. ................................. 6.125 02/15/33 214,388 ------------ 852,382 ------------ Life/Health Insurance (0.4%) 185 American General Corp. ................................... 7.50 07/15/25 208,826 145 Hartford Life, Inc. ...................................... 7.65 06/15/27 161,834 90 Hartford Life, Inc. ...................................... 7.375 03/01/31 97,467 295 John Hancock Financial Services, Inc. .................... 7.375 02/15/24 315,656 ------------ 783,783 ------------ Major Banks (0.5%) 230 Bank One Corp. ........................................... 6.00 02/17/09 248,559 160 Citicorp.................................................. 6.75 08/15/05 174,416 290 FleetBoston Financial Corp. .............................. 7.25 09/15/05 320,423 350 UFJ Finance Aruba AEC (Aruba)............................. 6.75 07/15/13 338,791 ------------ 1,082,189 ------------ Major Telecommunications (0.9%) 240 AT&T Corp. ............................................... 8.50 11/15/31 253,842 130 British Telecom PLC (United Kingdom)...................... 8.875 12/15/30 159,687 330 Deutsche Telekom International Finance Corp. (Netherlands)........................................... 8.75 06/15/30 386,381 475 GTE Corp. ................................................ 6.94 04/15/28 482,267 270 Verizon Global Funding Corp. ............................. 7.75 12/01/30 301,247 300 Verizon New England Inc. ................................. 6.50 09/15/11 325,977 ------------ 1,909,401 ------------ </Table> See Notes to Financial Statements 13 Morgan Stanley Balanced Income Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2003 (UNAUDITED) continued <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------------- Managed Health Care (0.4%) $ 505 Aetna, Inc. .............................................. 7.875% 03/01/11 $ 582,820 105 Cigna Corp. .............................................. 6.375 10/15/11 110,159 195 Wellpoint Health Network, Inc. ........................... 6.375 06/15/06 214,639 ------------ 907,618 ------------ Media Conglomerates (0.5%) 175 AOL Time Warner Inc. ..................................... 7.70 05/01/32 183,556 210 News America Holdings, Inc. .............................. 8.875 04/26/23 253,702 90 News America Holdings, Inc. .............................. 7.75 02/01/24 97,475 470 News America Holdings, Inc. .............................. 7.28 06/30/28 485,930 135 Time Warner, Inc. ........................................ 6.625 05/15/29 125,199 ------------ 1,145,862 ------------ Motor Vehicles (0.6%) 140 DaimlerChrysler North American Holdings Co. .............. 7.20 09/01/09 152,464 220 DaimlerChrysler North American Holdings Co. .............. 8.50 01/18/31 240,238 90 Ford Motor Co. ........................................... 6.625 10/01/28 70,890 945 Ford Motor Co. ........................................... 7.45 07/16/31 807,022 ------------ 1,270,614 ------------ Multi-Line Insurance (0.8%) 285 AIG SunAmerica Global Finance VI - 144A**................. 6.30 05/10/11 308,626 670 Farmers Exchange Capital - 144A**......................... 7.05 07/15/28 571,142 120 Hartford Financial Services Group, Inc. .................. 2.375 06/01/06 118,044 265 Hartford Financial Services Group, Inc. .................. 7.90 06/15/10 310,282 300 Nationwide Mutual Insurance Co. .......................... 7.50 02/15/24 296,208 100 Nationwide Mutual Insurance Co. - 144A**.................. 8.25 12/01/31 111,679 ------------ 1,715,981 ------------ Oil & Gas Production (0.9%) 30 Devon Financing Corp. .................................... 6.875 09/30/11 33,096 85 Devon Financing Corp. .................................... 7.875 09/30/31 97,088 55 Kerr-McGee Corp. ......................................... 5.875 09/15/06 58,856 115 Kerr-McGee Corp. ......................................... 6.875 09/15/11 125,148 290 Pemex Project Funding Master Trust........................ 9.125 10/13/10 334,950 390 Pemex Project Funding Master Trust........................ 8.00 11/15/11 423,150 610 Pemex Project Funding Master Trust........................ 8.625 02/01/22 637,450 40 Petro-Canada (Canada)..................................... 4.00 07/15/13 36,083 195 Petro-Canada (Canada)..................................... 5.35 07/15/33 167,620 ------------ 1,913,441 ------------ Oil Refining/Marketing (0.1%) 210 Marathon Oil Corp. ....................................... 6.80 03/15/32 211,835 ------------ </Table> See Notes to Financial Statements 14 Morgan Stanley Balanced Income Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2003 (UNAUDITED) continued <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------------- Other Consumer Services (0.3%) $ 250 Cendant Corp. ............................................ 7.375% 01/15/13 $ 277,775 225 Cendant Corp. ............................................ 7.125 03/15/15 243,812 ------------ 521,587 ------------ Other Metals/Minerals (0.3%) 180 BHP Finance USA Ltd. (Australia).......................... 4.80 04/15/13 174,448 105 Inco Ltd. (Canada)........................................ 7.75 05/15/12 116,777 320 Inco Ltd. (Canada)........................................ 7.20 09/15/32 317,652 ------------ 608,877 ------------ Property - Casualty Insurers (0.1%) 135 Florida Windstorm Underwrting Assoc. - 144A**............. 7.125 02/25/19 148,275 ------------ Pulp & Paper (0.4%) 200 International Paper Co. .................................. 5.85 10/30/12 204,851 190 International Paper Co. - 144A**.......................... 5.30 04/01/15 180,470 135 MeadWestVaco Corp. ....................................... 6.85 04/01/12 147,243 190 Sappi Papier Holding AG - 144A** (Austria)................ 6.75 06/15/12 201,973 ------------ 734,537 ------------ Railroads (0.1%) 110 Union Pacific Corp. ...................................... 6.79 11/09/07 121,581 105 Union Pacific Corp. ...................................... 3.625 06/01/10 97,228 ------------ 218,809 ------------ Real Estate Development (0.4%) 200 World Financial Properties - 144A**....................... 6.91 09/01/13 219,041 477 World Financial Properties - 144A**....................... 6.95 09/01/13 523,742 ------------ 742,783 ------------ Real Estate Investment Trusts (0.6%) 245 EOP Operating L.P. ....................................... 6.763 06/15/07 269,746 225 EOP Operating L.P. ....................................... 7.25 06/15/28 230,749 50 EOP Operating L.P. ....................................... 7.50 04/19/29 52,769 215 Simon Property Group L.P. ................................ 6.375 11/15/07 233,121 225 Simon Property Group L.P. ................................ 6.35 08/28/12 235,215 170 Vordano Reality Trust..................................... 5.625 06/15/07 176,876 ------------ 1,198,476 ------------ Savings Banks (0.1%) 195 Washington Mutual Bank.................................... 5.50 01/15/13 197,361 70 Washington Mutual Inc. ................................... 8.25 04/01/10 83,962 ------------ 281,323 ------------ </Table> See Notes to Financial Statements 15 Morgan Stanley Balanced Income Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2003 (UNAUDITED) continued <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------------- Services to the Health Industry (0.2%) $ 90 Anthem Insurance - 144A**................................. 9.125% 04/01/10 $ 108,476 215 Anthem Insurance - 144A**................................. 9.00 04/01/27 262,597 ------------ 371,073 ------------ Tobacco (0.1%) 215 Altria Group, Inc. ....................................... 7.75 01/15/27 207,272 ------------ Total Corporate Bonds (Cost $37,772,980)..................................... 38,365,832 ------------ Foreign Government Obligation (0.1%) 120 United Mexican States Corp. (Mexico) (Cost $143,465)......................................... 8.30 08/15/31 125,100 ------------ U.S. Government & Agency Obligations (20.6%) 740 Tennessee Valley Authority................................ 0.00 10/15/04 724,173 U.S. Treasury Bonds 4,190 .......................................................... 0.00 08/15/20 1,579,089 2,700 .......................................................... 7.625 02/15/25 3,444,188 1,000 .......................................................... 8.125 08/15/19 1,311,797 1,850 .......................................................... 8.125 08/15/21 2,442,361 1,150 .......................................................... 8.75 08/15/20 1,596,704 U. S. Treasury Notes 12,000 .......................................................... 3.50 11/15/06 12,349,692 6,100 .......................................................... 6.50 02/15/10 7,024,052 6,245 .......................................................... 6.75 05/15/05 6,799,487 4,845 ***....................................................... 7.50 02/15/05 5,280,483 1,000 U.S. Treasury Strip....................................... 0.00 05/15/11 709,235 ------------ Total U.S. Government & Agency Obligations (Cost $42,556,994)................ 43,261,261 ------------ Mortgage-Backed Securities (18.9%) Federal Home Loan Mortgage Corp. 17,450 .......................................................... 6.50 + 17,957,097 775 .......................................................... 7.50 + 823,922 949 .......................................................... 7.50 10/01/29 - 08/01/32 1,009,016 </Table> See Notes to Financial Statements 16 Morgan Stanley Balanced Income Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2003 (UNAUDITED) continued <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------------- Federal National Mortgage Assoc. $ 1,300 .......................................................... 6.50 % + $ 1,337,778 1,600 .......................................................... 7.00 + 1,677,000 9,168 .......................................................... 7.00 07/01/11 - 07/01/32 9,614,635 4,257 .......................................................... 7.50 08/01/23 - 07/01/32 4,512,068 2,141 .......................................................... 8.00 05/01/24 - 08/01/31 2,300,824 Government National Mortgage Assoc. 317 .......................................................... 7.50 08/15/25 - 10/15/26 335,398 130 .......................................................... 8.00 06/15/26 - 07/15/26 139,753 ------------ Total Mortgage-Backed Securities (Cost $39,809,086).......................... 39,707,491 ------------ Asset-Backed Securities (1.4%) Finance/Rental/Leasing (1.3%) 54 BMW Vehicle Owner Trust 2002-A............................ 2.83 12/25/04 54,533 145 Capital Auto Receivables Asset Trust 2002-2............... 2.89 04/15/04 144,915 315 Chase Credit Card Master Trust............................ 5.50 11/17/08 338,688 1 Chase Manhattan Auto Owner Trust 2002-A................... 2.63 10/15/04 1,125 263 Chase Manhattan Auto Owner Trust 2002-B................... 2.70 01/18/05 263,411 300 Citibank Credit Issuance Trust............................ 6.90 10/15/07 328,700 142 Daimler Chrysler Auto Trust 2000-E........................ 6.11 11/08/04 142,215 311 Daimler Chrysler Auto Trust 2002-A........................ 2.90 12/06/04 311,769 190 Ford Credit Auto Owner Trust 2001-B....................... 5.12 10/15/04 190,708 83 Ford Credit Auto Owner Trust 2002-B....................... 2.97 06/15/04 82,737 318 Harley-Davidson Motorcycle Trust 2002-1................... 3.02 09/15/06 319,831 215 Honda Auto Receivables Owner Trust 2002-2................. 2.91 09/15/04 214,972 140 MBNA Master Credit Card Trust............................. 5.90 08/15/11 152,145 18 National City Auto Receivables Trust 2002-A............... 3.00 01/15/05 18,453 200 Nissan Auto Receivables Owner Trust....................... 4.80 02/15/07 207,419 130 Nissan Auto Receivables Owner Trust 2002-B................ 3.07 08/16/04 130,437 ------------ Total Asset-Backed Securities (Cost $2,843,081)........... 2,902,058 ------------ </Table> See Notes to Financial Statements 17 Morgan Stanley Balanced Income Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2003 (UNAUDITED) continued <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------------- Short-Term Investments (16.6%) U.S. Government Obligations (a) (0.1%) U.S. Treasury Bills $ 100 ***....................................................... 1.15 % 09/25/03 $ 99,824 100 ***....................................................... 0.934 01/15/04 99,567 ------------ Total U.S. Government Obligations (Cost $199,391)............................ 199,391 ------------ Repurchase Agreements (16.5%) 34,193 Joint repurchase agreement account (dated 07/31/03; proceeds $34,194,054) (b) (Cost $34,193,000)............ 1.11 08/01/03 34,193,000 547 The Bank of New York (dated 07/31/03; proceeds $546,877) (c) (Cost $546,864)..................................... 0.875 08/01/03 546,864 ------------ Total Repurchase Agreements (Cost $34,739,864)............................... 34,739,864 ------------ Total Short-Term Investments (Cost $34,939,255).............................. 34,939,255 ------------ </Table> <Table> Total Investments (Cost $218,508,432) (d)(e)....................... 109.6% 230,253,382 Liabilities in Excess of Other Assets.............................. (9.6) (20,213,200) ----- ------------ Net Assets......................................................... 100.0% $210,040,182 ===== ============ </Table> - --------------------- <Table> ADR American Depository Receipt. FSA Financial Security Assurance. * Non-income producing security. ** Resale is restricted to qualified institutional investors. *** All or a portion of these securities have been physically segregated in connection with open futures contracts. + Securities purchased on a forward commitment basis with an approximate principal amount and no definite maturity date; the actual principal amount and maturity date will be determined upon settlement. (a) Purchased on a discount basis. The interest rate shown has been adjusted to reflect a money market equivalent yield. (b) Collateralized by federal agency and U.S. Treasury obligations. (c) Collateralized by U.S. Treasury Note 2.00% due 11/30/04 value at $557,802. (d) Securities have been designated as collateral in a amount equal to $36,931,735 in connection with securities purchased on a forward commitment basis and open futures contracts. (e) The aggregate cost for federal income tax purposes approximates the aggregate cost for book purposes. The aggregate gross unrealized appreciation is $13,898,693 and the aggregate gross unrealized depreciation is $2,153,743, resulting in net unrealized appreciation of $11,744,950. </Table> See Notes to Financial Statements 18 Morgan Stanley Balanced Income Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2003 (UNAUDITED) continued Futures Contracts Open at July 31, 2003: <Table> <Caption> NUMBER OF DESCRIPTION/DELIVERY UNDERLYING FACE UNREALIZED CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE APPRECIATION - --------- ---------- --------------------------- ------------------------ -------------- 100 Short U.S Treasury Notes 5 year, $(11,132,813) $ 67,966 September/2003 19 Short U.S Treasury Notes 10 year, (2,101,875) 30,583 September/2003 100 Short U.S Treasury Bonds (1,901,250) 81,145 September/2003 -------- Total Unrealized Appreciation........................ $179,694 ======== </Table> See Notes to Financial Statements 19 Morgan Stanley Balanced Income Fund FINANCIAL STATEMENTS Statement of Assets and Liabilities July 31, 2003 (unaudited) <Table> Assets: Investments in securities, at value (including repurchase agreements of $34,739,864) (cost $218,508,432)....................... $230,253,382 Cash....................................... 325,691 Receivable for: Investments sold....................... 1,015,943 Interest............................... 1,594,167 Shares of beneficial interest sold..... 688,763 Variation margin....................... 131,749 Dividends.............................. 116,822 Prepaid expenses........................... 55,575 ------------ Total Assets........................... 234,182,092 ------------ Liabilities: Payable for: Investments purchased.................. 23,555,385 Shares of beneficial interest redeemed.............................. 247,877 Distribution fee....................... 173,419 Investment management fee.............. 107,376 Accrued expenses and other payables........ 57,853 ------------ Total Liabilities...................... 24,141,910 ------------ Net Assets............................. $210,040,182 ============ Composition of Net Assets: Paid-in-capital............................ $210,971,635 Net unrealized appreciation................ 11,924,644 Dividends in excess of net investment income.................................... (953,400) Accumulated net realized loss.............. (11,902,697) ------------ Net Assets............................. $210,040,182 ============ Class A Shares: Net Assets................................. $6,217,220 Shares Outstanding (unlimited authorized, $.01 par value)........................... 521,642 Net Asset Value Per Share.............. $11.92 ============ Maximum Offering Price Per Share, (net asset value plus 5.54% of net asset value).......................... $12.58 ============ Class B Shares: Net Assets................................. $160,115,258 Shares Outstanding (unlimited authorized, $.01 par value)........................... 13,488,929 Net Asset Value Per Share.............. $11.87 ============ Class C Shares: Net Assets................................. $41,699,311 Shares Outstanding (unlimited authorized, $.01 par value)........................... 3,507,848 Net Asset Value Per Share.............. $11.89 ============ Class D Shares: Net Assets................................. $2,008,393 Shares Outstanding (unlimited authorized, $.01 par value)........................... 168,926 Net Asset Value Per Share.............. $11.89 ============ </Table> Statement of Operations For the six months ended July 31, 2003 (unaudited) <Table> Net Investment Income: Income Interest..................................... $2,326,721 Dividends (net of $5,552 foreign withholding tax)........................................ 754,426 ---------- Total Income............................. 3,081,147 ---------- Expenses Distribution fee (Class A shares)............ 5,499 Distribution fee (Class B shares)............ 740,228 Distribution fee (Class C shares)............ 180,487 Investment management fee.................... 570,190 Transfer agent fees and expenses............. 115,826 Registration fees............................ 52,717 Shareholder reports and notices.............. 33,483 Custodian fees............................... 28,077 Professional fees............................ 25,248 Trustees' fees and expenses.................. 6,092 Other........................................ 9,946 ---------- Total Expenses........................... 1,767,793 ---------- Net Investment Income.................... 1,313,354 ---------- Net Realized and Unrealized Gain (Loss): Net Realized Gain (Loss) on: Investments................................. 2,727,786 Futures contracts........................... (474,333) ---------- Net Realized Gain........................ 2,253,453 ---------- Net Change in Unrealized Appreciation/Depreciation on: Investments................................. 5,394,861 Futures contracts........................... 335,058 ---------- Net Appreciation......................... 5,729,919 ---------- Net Gain................................. 7,983,372 ---------- Net Increase................................. $9,296,726 ========== </Table> See Notes to Financial Statements 20 Morgan Stanley Balanced Income Fund FINANCIAL STATEMENTS continued Statement of Changes in Net Assets <Table> <Caption> FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED JULY 31, 2003 JANUARY 31, 2003 ------------- ---------------- (unaudited) Increase (Decrease) in Net Assets: Operations: Net investment income....................................... $ 1,313,354 $ 3,190,919 Net realized gain (loss).................................... 2,253,453 (9,867,933) Net change in unrealized appreciation....................... 5,729,919 (1,351,196) ------------ ------------ Net Increase (Decrease)................................. 9,296,726 (8,028,210) ------------ ------------ Dividends to Shareholders from Net Investment Income: Class A shares.............................................. (65,379) (105,607) Class B shares.............................................. (1,523,458) (3,035,062) Class C shares.............................................. (373,565) (841,038) Class D shares.............................................. (21,600) (26,804) ------------ ------------ Total Dividends......................................... (1,984,002) (4,008,511) ------------ ------------ Net increase from transactions in shares of beneficial interest.................................................. 30,541,444 46,232,396 ------------ ------------ Net Increase............................................ 37,854,168 34,195,675 Net Assets: Beginning of period......................................... 172,186,014 137,990,339 ------------ ------------ End of Period (Including dividends in excess of net investment income of $953,400 and $282,752, respectively)........................ $210,040,182 $172,186,014 ============ ============ </Table> See Notes to Financial Statements 21 Morgan Stanley Balanced Income Fund NOTES TO FINANCIAL STATEMENTS - JULY 31, 2003 (UNAUDITED) 1. Organization and Accounting Policies Morgan Stanley Balanced 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 current income and moderate capital growth. The Fund seeks to achieve its objective by investing in investment grade fixed income securities and, to a lesser extent, common stock of companies which have a record of paying dividends and have the potential for increasing dividends and securities convertible into common stock. The Fund was organized as a Massachusetts business trust on November 23, 1994 and commenced operations on March 28, 1995. 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) an equity portfolio security listed or traded on the New York or American Stock Exchange or other exchange is valued at its latest sale price prior to the time when assets are valued; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (2) an equity portfolio security listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (3) all other equity portfolio securities for which over-the-counter market quotations are readily available are valued at the mean between the last reported bid and asked price. In cases where a security is traded on more than one exchange, the security is valued on the exchange designated as the primary market; (4) for equity securities traded on foreign exchanges, the last reported sale price or the latest bid price may be used if there were no sales on a particular day; (5) futures are valued at the latest price published by the commodities exchange on which they trade; (6) when market quotations are not readily available or Morgan Stanley Investment Advisors Inc. (the "Investment Manager") determines that the latest sale price, the bid price or the mean between the last reported bid and asked price do not reflect a security's market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Fund's Trustees; (7) certain portfolio securities may be valued by an outside pricing service approved by the Fund's Trustees; and (8) short-term debt securities having a maturity date of more than sixty days at time of 22 Morgan Stanley Balanced Income Fund NOTES TO FINANCIAL STATEMENTS - JULY 31, 2003 (UNAUDITED) continued purchase are valued on a mark-to-market basis until sixty days prior to maturity and thereafter at amortized cost based on their value on the 61st day. Short-term debt securities having a maturity date of sixty days or less at the time of purchase are valued at amortized cost. B. Accounting for Investments -- Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on security transactions are determined by the identified cost method. Dividend income and other distributions are recorded on the ex-dividend date. Discounts are accreted and premiums are amortized over the life of the respective securities. Interest income is accrued daily. C. Repurchase Agreements -- Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund, along with other affiliated entities managed by the Investment Manager, may transfer uninvested cash balances into one or more joint repurchase agreement accounts. These balances are invested in one or more repurchase agreements and are collateralized by cash, U.S. Treasury or federal agency obligations. The Fund may also invest directly with institutions in repurchase agreements. The Fund's custodian receives the collateral, which is marked-to-market daily to determine that the value of the collateral does not decrease below the repurchase price plus accrued interest. D. Multiple Class Allocations -- Investment income, expenses (other than distribution fees), and realized and unrealized gains and losses are allocated to each class of shares based upon the relative net asset value on the date such items are recognized. Distribution fees are charged directly to the respective class. E. Futures Contracts -- A futures contract is an agreement between two parties to buy and sell financial instruments or contracts based on financial indices at a set price on a future date. Upon entering into such a contract, the Fund is required to pledge to the broker cash, U.S. Government securities or other liquid portfolio securities equal to the minimum initial margin requirements of the applicable futures exchange. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments known as variation margin are recorded by the Fund as unrealized gains and losses. Upon closing of the contract, the Fund realizes a gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. F. Federal Income Tax Policy -- It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Accordingly, no federal income tax provision is required. 23 Morgan Stanley Balanced Income Fund NOTES TO FINANCIAL STATEMENTS - JULY 31, 2003 (UNAUDITED) continued G. Dividends and Distributions to Shareholders -- Dividends and distributions to shareholders are recorded on the ex-dividend date. H. Use of Estimates -- The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. 2. Investment Management Agreement Pursuant to an Investment Management Agreement, the Fund pays the Investment Manager a management fee, accrued daily and payable monthly, by applying the annual rate of 0.60% to the portion of daily net assets not exceeding $500 million and 0.575% to the portion of the daily net assets in excess of $500 million. 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 -- 1.0% of the average daily net assets of Class B; and (iii) Class C -- up to 1.0% of the average daily net assets of Class C. In the case of Class B shares, provided that the Plan continues in effect, any cumulative expenses incurred by the Distributor but not yet recovered may be recovered through the payment of future distribution fees from the Fund pursuant to the Plan and contingent deferred sales charges paid by investors upon redemption of Class B shares. Although there is no legal obligation for the Fund to pay expenses incurred in excess of payments made to the Distributor under the Plan and the proceeds of contingent deferred sales charges paid by investors upon redemption of shares, if for any reason the Plan is terminated, the Trustees will consider at that time the manner in which to treat such expenses. The Distributor has advised the Fund that such excess amounts totaled $8,232,931 at July 31, 2003. 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 1.0% 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 24 Morgan Stanley Balanced Income Fund NOTES TO FINANCIAL STATEMENTS - JULY 31, 2003 (UNAUDITED) continued six months ended July 31, 2003, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.25% and 1.0%, respectively. The Distributor has informed the Fund that for the six months ended July 31, 2003, it received contingent deferred sales charges from certain redemptions of the Fund's Class B shares and Class C shares of $240,870 and $2,971, respectively and received $89,657 in front-end sales charges from sales of the Fund's Class A shares. The respective shareholders pay such charges which are not an expense of the Fund. 4. Security Transactions and Transactions with Affiliates The cost of purchases and proceeds from sales/prepayments of portfolio securities, excluding short-term investments, for the six months ended July 31, 2003, aggregated $216,276,705 and $195,297,400, respectively. Included in the aforementioned are purchases and sales of U.S. Government securities of $40,089,102 and $30,054,627, respectively and purchases of $2,389,698 with other Morgan Stanley Funds. For the six months ended July 31, 2003, the Fund incurred brokerage commissions of $2,394 with Morgan Stanley & Co., Inc., an affiliate of the Investment Manager and Distributor, for portfolio transactions executed on behalf of the Fund. At July 31, 2003, the Fund's receivable for investments sold included unsettled trades with Morgan Stanley & Co., Inc. of $114,318. Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is the Fund's transfer agent. At July 31, 2003, the Fund had transfer agent fees and expenses payable of approximately $2,500. 25 Morgan Stanley Balanced Income Fund NOTES TO FINANCIAL STATEMENTS - JULY 31, 2003 (UNAUDITED) continued 5. Shares of Beneficial Interest Transactions in shares of beneficial interest were as follows: <Table> <Caption> FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED JULY 31, 2003 JANUARY 31, 2003 ------------------------- ------------------------- (unaudited) SHARES AMOUNT SHARES AMOUNT ---------- ------------ ---------- ------------ CLASS A SHARES Sold.............................................. 313,796 $ 3,749,712 327,689 $ 3,912,674 Reinvestment of dividends......................... 3,992 47,345 5,573 65,645 Redeemed.......................................... (69,099) (811,924) (239,692) (2,786,959) ---------- ------------ ---------- ------------ Net increase - Class A............................ 248,689 2,985,133 93,570 1,191,360 ---------- ------------ ---------- ------------ CLASS B SHARES Sold.............................................. 3,855,670 45,088,725 8,290,094 97,695,125 Reinvestment of dividends......................... 89,792 1,053,262 179,210 2,103,131 Redeemed.......................................... (2,310,352) (27,014,621) (4,897,510) (57,560,883) ---------- ------------ ---------- ------------ Net increase - Class B............................ 1,635,110 19,127,366 3,571,794 42,237,373 ---------- ------------ ---------- ------------ CLASS C SHARES Sold.............................................. 892,887 10,585,690 904,376 10,678,414 Reinvestment of dividends......................... 24,826 291,705 58,065 684,235 Redeemed.......................................... (250,845) (2,935,149) (824,928) (9,587,655) ---------- ------------ ---------- ------------ Net increase - Class C............................ 666,868 7,942,246 137,513 1,774,994 ---------- ------------ ---------- ------------ CLASS D SHARES Sold.............................................. 115,228 1,364,786 134,333 1,560,341 Reinvestment of dividends......................... 1,292 15,268 1,695 19,695 Redeemed.......................................... (76,888) (893,355) (46,958) (551,367) ---------- ------------ ---------- ------------ Net increase - Class D............................ 39,632 486,699 89,070 1,028,669 ---------- ------------ ---------- ------------ Net increase in Fund.............................. 2,590,299 $ 30,541,444 3,891,947 $ 46,232,396 ========== ============ ========== ============ </Table> 6. Federal Income Tax Status The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations which may differ from generally accepted accounting principles. These "book/tax" differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment; temporary differences do not require reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for tax purposes are reported as distributions of paid-in-capital. 26 Morgan Stanley Balanced Income Fund NOTES TO FINANCIAL STATEMENTS - JULY 31, 2003 (UNAUDITED) continued As of January 31, 2003, the Fund had a net capital loss carryforward of $13,332,190 of which $5,240 will expire on January 31, 2009 and $13,326,950 will expire on January 31, 2011 to offset future capital gains to the extent provided by regulations. As of January 31, 2003, the Fund had temporary book/tax differences primarily attributable to capital loss deferrals on wash sales and amortization of premiums on debt securities. 7. Purposes of and Risks Relating to Certain Financial Instruments The Fund may invest in interest rate and stock index futures contracts ("futures contracts"). These future 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 July 31, 2003, the Fund had outstanding futures contracts. 27 Morgan Stanley Balanced 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 JANUARY 31, MONTHS ENDED -------------------------------------------------------------------------- JULY 31, 2003 2003 2002 2001 2000 1999 ------------- -------- -------- -------- -------- -------- (unaudited) Class A Shares: Selected Per Share Data: Net asset value, beginning of period....................... $11.45 $12.35 $12.42 $11.80 $12.75 $12.41 ------ ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income++... 0.12 0.33 0.43 0.47 0.47 0.46 Net realized and unrealized gain (loss).... 0.51 (0.84) (0.06) 0.94 (0.69) 0.87 ------ ------ ------ ------ ------ ------ Total income (loss) from investment operations........ 0.63 (0.51) 0.37 1.41 (0.22) 1.33 ------ ------ ------ ------ ------ ------ Less dividends and distributions from: Net investment income..... (0.16) (0.39) (0.44) (0.47) (0.47) (0.47) Net realized gain......... -- -- -- (0.32) (0.26) (0.52) ------ ------ ------ ------ ------ ------ Total dividends and distributions................ (0.16) (0.39) (0.44) (0.79) (0.73) (0.99) ------ ------ ------ ------ ------ ------ Net asset value, end of period....................... $11.92 $11.45 $12.35 $12.42 $11.80 $12.75 ====== ====== ====== ====== ====== ====== Total Return+................. 5.56%(1) (4.19)% 3.13% 12.66% (1.84)% 11.11% Ratios to Average Net Assets(3): Expenses...................... 1.14%(2) 1.08% 1.16% 1.20% 1.20% 1.23% Net investment income......... 2.10%(2) 2.79% 3.44% 3.97% 3.82% 3.73% Supplemental Data: Net assets, end of period, in thousands.................... $6,217 $3,125 $2,216 $2,043 $2,187 $5,448 Portfolio turnover rate....... 105%(1) 173% 99% 21% 35% 32% </Table> - --------------------------------------------------- <Table> ++ The per share amounts were computed using an average number of shares outstanding during the period. + Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. (1) Annualized. (2) Not annualized. (3) Reflects overall Fund ratios for investment income and non-class specific expenses. </Table> See Notes to Financial Statements 28 Morgan Stanley Balanced Income Fund FINANCIAL HIGHLIGHTS continued <Table> <Caption> FOR THE SIX FOR THE YEAR ENDED JANUARY 31, MONTHS ENDED ------------------------------------------------------------------ JULY 31, 2003 2003 2002 2001 2000 1999 ------------- --------- --------- -------- -------- -------- (unaudited) Class B Shares: Selected Per Share Data: Net asset value, beginning of period.... $11.40 $12.31 $12.39 $11.77 $12.74 $12.41 ------ ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income++............ 0.08 0.24 0.34 0.37 0.38 0.38 Net realized and unrealized gain (loss).............. 0.51 (0.85) (0.07) 0.95 (0.71) 0.85 ------ ------ ------ ------ ------ ------ Total income (loss) from investment operations.. 0.59 (0.61) 0.27 1.32 (0.33) 1.23 ------ ------ ------ ------ ------ ------ Less dividends and distributions from: Net investment income.............. (0.12) (0.30) (0.35) (0.38) (0.38) (0.38) Net realized gain... -- -- -- (0.32) (0.26) (0.52) ------ ------ ------ ------ ------ ------ Total dividends and distributions.......... (0.12) (0.30) (0.35) (0.70) (0.64) (0.90) ------ ------ ------ ------ ------ ------ Net asset value, end of period................. $11.87 $11.40 $12.31 $12.39 $11.77 $12.74 ====== ====== ====== ====== ====== ====== Total Return+........... 5.19%(1) (4.98)% 2.32% 11.82% (2.69)% 10.32% Ratios to Average Net Assets(3): Expenses................ 1.89%(2) 1.84% 1.91% 2.00% 1.95% 1.99% Net investment income... 1.35%(2) 2.03% 2.68% 3.17% 3.07% 2.97% Supplemental Data: Net assets, end of period, in thousands... $160,115 $135,146 $101,957 $45,803 $56,827 $56,919 Portfolio turnover rate................... 105%(1) 173% 99% 21% 35% 32% </Table> - --------------------------------------------------- <Table> ++ The per share amounts were computed using an average number of shares outstanding during the period. + Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. (1) Annualized. (2) Not annualized. (3) Reflects overall Fund ratios for investment income and non-class specific expenses. </Table> See Notes to Financial Statements 29 Morgan Stanley Balanced Income Fund FINANCIAL HIGHLIGHTS continued <Table> <Caption> FOR THE SIX FOR THE YEAR ENDED JANUARY 31, MONTHS ENDED ---------------------------------------------------------------- JULY 31, 2003 2003 2002 2001 2000 1999 ------------- -------- -------- -------- -------- -------- (unaudited) Class C Shares: Selected Per Share Data: Net asset value, beginning of period.... $11.42 $12.33 $12.41 $11.78 $12.74 $12.41 ------ ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income++............ 0.08 0.24 0.33 0.38 0.38 0.38 Net realized and unrealized gain (loss).............. 0.51 (0.85) (0.05) 0.95 (0.70) 0.85 ------ ------ ------ ------ ------ ------ Total income (loss) from investment operations............. 0.59 (0.61) 0.28 1.33 (0.32) 1.23 ------ ------ ------ ------ ------ ------ Less dividends and distributions from: Net investment income.............. (0.12) (0.30) (0.36) (0.38) (0.38) (0.38) Net realized gain... -- -- -- (0.32) (0.26) (0.52) ------ ------ ------ ------ ------ ------ Total dividends and distributions.......... (0.12) (0.30) (0.36) (0.70) (0.64) (0.90) ------ ------ ------ ------ ------ ------ Net asset value, end of period................. $11.89 $11.42 $12.33 $12.41 $11.78 $12.74 ====== ====== ====== ====== ====== ====== Total Return+........... 5.18%(1) (5.00)% 2.32% 11.89% (2.62)% 10.32% Ratios to Average Net Assets(3): Expenses................ 1.89%(2) 1.84% 1.91% 1.94% 1.95% 1.94% Net investment income... 1.35%(2) 2.03% 2.68% 3.23% 3.07% 3.02% Supplemental Data: Net assets, end of period, in thousands... $41,699 $32,439 $33,321 $24,205 $29,535 $35,291 Portfolio turnover rate................... 105%(1) 173% 99% 21% 35% 32% </Table> - --------------------------------------------------- <Table> ++ The per share amounts were computed using an average number of shares outstanding during the period. + Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. (1) Annualized. (2) Not annualized. (3) Reflects overall Fund ratios for investment income and non-class specific expenses. </Table> See Notes to Financial Statements 30 Morgan Stanley Balanced Income Fund FINANCIAL HIGHLIGHTS continued <Table> <Caption> FOR THE SIX FOR THE YEAR ENDED JANUARY 31, MONTHS ENDED ---------------------------------------------------------------- JULY 31, 2003 2003 2002 2001 2000 1999 ------------- -------- -------- -------- -------- -------- (unaudited) Class D Shares: Selected Per Share Data: Net asset value, beginning of period.... $11.42 $12.33 $12.40 $ 11.79 $12.75 $12.42 ------ ------ ------ ------- ------ ------ Income (loss) from investment operations: Net investment income++............ 0.14 0.34 0.45 0.50 0.50 0.48 Net realized and unrealized gain (loss).............. 0.51 (0.83) (0.05) 0.93 (0.70) 0.87 ------ ------ ------ ------- ------ ------ Total income (loss) from investment operations............. 0.65 (0.49) 0.40 1.43 (0.20) 1.35 ------ ------ ------ ------- ------ ------ Less dividends and distributions from: Net investment income.............. (0.18) (0.42) (0.47) (0.50) (0.50) (0.50) Net realized gain... -- -- -- (0.32) (0.26) (0.52) ------ ------ ------ ------- ------ ------ Total dividends and distributions.......... (0.18) (0.42) (0.47) (0.82) (0.76) (1.02) ------ ------ ------ ------- ------ ------ Net asset value, end of period................. $11.89 $11.42 $12.33 $ 12.40 $11.79 $12.75 ====== ====== ====== ======= ====== ====== Total Return+........... 5.68%(1) (4.04)% 3.37% 12.88% (1.63)% 11.27% Ratios to Average Net Assets(3): Expenses................ 0.89%(2) 0.84% 0.91% 1.00% 0.95% 0.99% Net investment income... 2.35%(2) 3.03% 3.68% 4.17% 4.07% 3.97% Supplemental Data: Net assets, end of period, in thousands... $2,008 $1,476 $496 $107 $1,546 $1,679 Portfolio turnover rate................... 105%(1) 173% 99% 21% 35% 32% </Table> - --------------------------------------------------- <Table> ++ The per share amounts were computed using an average number of shares outstanding during the period. + Calculated based on the net asset value as of the last business day of the period. (1) Annualized. (2) Not annualized. (3) Reflects overall Fund ratios for investment income and non-class specific expenses. </Table> See Notes to Financial Statements 31 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] Morgan Stanley Balanced Income Fund Semiannual Report July 31, 2003 [MORGAN STANLEY LOGO] 38400RPT-12078AP-H03-8/03 Item 2. Code of Ethics. (a) The Fund has adopted a code of ethics (the "Code of Ethics") that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the Fund or a third party. (b) No information need be disclosed pursuant to this paragraph. (c) The Fund has amended its Code of Ethics during the period covered by the shareholder report presented in Item 1 hereto (d) The Fund has granted a waiver or an implicit waiver from a provision of its Code of Ethics. (e) Not applicable. (f) (1) The Fund's Code of Ethics is attached hereto as Exhibit A. (2) Not applicable. (3) Not applicable. Item 3. Audit Committee Financial Expert. The Fund's Board of Trustees has determined that it has two "audit committee financial experts" serving on its audit committee, each of whom are "independent" Trustees: Dr. Manuel H. Johnson and Joseph J. Kearns. Under applicable securities laws, a person who is determined to be an audit committee financial expert will not be deemed an "expert" for any purpose, including without limitation for the purposes of Section 11 of the Securities Act of 1933, as a result of being designated or identified as an audit committee financial expert. The designation or identification of a person as an audit committee financial expert does not impose on such person any duties, obligations, or liabilities that are greater than the duties, obligations, and liabilities imposed on such person as a member of the audit committee and Board of Trustees in the absence of such designation or identification. Item 9 - Controls and Procedures (a) The Fund's principal executive officer and principal financial officer have concluded that the Fund's disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Fund in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, based upon such officers' evaluation of these controls and procedures as of a date within 90 days of the filing date of the report. 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. (b) There were no changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 10 Exhibits (a) The Code of Ethics for Principal Executive and Senior Financial Officers is attached hereto. (b) A separate certification for each principal executive officer and principal financial officer of the registrant are attached hereto as part of EX-99.CERT. Items 4 - 8 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 Balanced Income Fund Ronald E. Robison Principal Executive Officer September 22, 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 September 22, 2003 Francis Smith Principal Financial Officer September 22, 2003 2 EXHIBIT 10 A CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS ADOPTED JULY 31, 2003 I. This Code of Ethics (the "Code") for the investment companies within the Morgan Stanley complex identified in Exhibit A (collectively, "Funds" and each, a "Fund") applies to each Fund's Principal Executive Officer, President, Principal Financial Officer and Treasurer (or persons performing similar functions) ("Covered Officers" each of whom are set forth in Exhibit B) for the purpose of promoting: - honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships. - full, fair, accurate, timely and understandable disclosure in reports and documents that a company files with, or submits to, the Securities and Exchange Commission ("SEC") and in other public communications made by the Fund; - compliance with applicable laws and governmental rules and regulations; - prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and - accountability for adherence to the Code. Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. Any question about the application of the Code should be referred to the General Counsel or his/her designee (who is set forth in Exhibit C). II. COVERED OFFICERS SHOULD HANDLE ETHICALLY ACTUAL AND APPARENT CONFLICTS OF INTEREST 4 OVERVIEW. A "conflict of interest" occurs when a Covered Officer's private interest interferes, or appears to interfere, with the interests of, or his service to, the Fund. For example, a conflict of interest would arise if a Covered Officer, or a member of his family, receives improper personal benefits as a result of his position with the Fund. Certain conflicts of interest arise out of the relationships between Covered Officers and the Fund and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the Fund because of their status as "affiliated persons" (as defined in the Investment Company Act) of the Fund. The Fund's and its investment adviser's compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside the parameters of this Code, unless or until the General Counsel determines that any violation of such programs and procedures is also a violation of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts may arise from, or as a result of, the contractual relationship between the Fund and its investment adviser of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the Fund or for the investment adviser, or for both), be involved in establishing policies and implementing decisions that will have different effects on the Fund and its investment adviser. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the Fund and the investment adviser and is consistent with the performance by the Covered Officers of their duties as officers of the Fund. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the Funds' Boards of Directors/Trustees ("Boards") that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the Fund. Each Covered Officer must not: - use his personal influence or personal relationships improperly to influence investment decisions or financial reporting by the Fund whereby the Covered Officer would benefit personally (directly or indirectly) to the detriment of the Fund; 5 - cause the Fund to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit of the Fund; or - use material non-public knowledge of portfolio transactions made or contemplated for, or actions proposed to be taken by, the Fund to trade personally or cause others to trade personally in contemplation of the market effect of such transactions. Each Covered Officer must, at the time of signing this Code, report to the General Counsel all affiliations or significant business relationships outside the Morgan Stanley complex and must update the report annually. Conflict of interest situations should always be approved by the General Counsel and communicated to the relevant Fund or Fund's Board. Any activity or relationship that would present such a conflict for a Covered Officer would likely also present a conflict for the Covered Officer if an immediate member of the Covered Officer's family living in the same household engages in such an activity or has such a relationship. Examples of these include: - service or significant business relationships as a director on the board of any public or private company; - accepting directly or indirectly, anything of value, including gifts and gratuities in excess of $100 per year from any person or entity with which the Fund has current or prospective business dealings, not including occasional meals or tickets for theatre or sporting events or other similar entertainment; provided it is business-related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety; - any ownership interest in, or any consulting or employment relationship with, any of the Fund's service providers, other than its investment adviser, principal underwriter, or any affiliated person thereof; and - a direct or indirect financial interest in commissions, transaction charges or spreads paid by the Fund for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer's employment, such as compensation or equity ownership. III. DISCLOSURE AND COMPLIANCE - Each Covered Officer should familiarize himself/herself with the disclosure and compliance requirements generally applicable to the Funds; - each Covered Officer must not knowingly misrepresent, or cause others to misrepresent, facts about the Fund to others, whether within or outside the 6 Fund, including to the Fund's Directors/Trustees and auditors, or to governmental regulators and self-regulatory organizations; - each Covered Officer should, to the extent appropriate within his area of responsibility, consult with other officers and employees of the Funds and their investment advisers with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the Funds file with, or submit to, the SEC and in other public communications made by the Funds; and - it is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations. IV. REPORTING AND ACCOUNTABILITY Each Covered Officer must: - upon adoption of the Code (thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Boards that he has received, read and understands the Code; - annually thereafter affirm to the Boards that he has complied with the requirements of the Code; - not retaliate against any other Covered Officer, other officer or any employee of the Funds or their affiliated persons for reports of potential violations that are made in good faith; and - notify the General Counsel promptly if he/she knows or suspects of any violation of this Code. Failure to do so is itself a violation of this Code. The General Counsel is responsible for applying this Code to specific situations in which questions are presented under it and has the authority to interpret this Code in any particular situation. However, any waivers(1) sought by a Covered Officer must be considered by the Board of the relevant Fund or Funds. The Funds will follow these procedures in investigating and enforcing this Code: - the General Counsel will take all appropriate action to investigate any potential violations reported to him; - -------------------------- (1) Item 2 of Form N-CSR defines "waiver" as "the approval by the registrant of a material departure from a provision of the code of ethics." 7 - if, after such investigation, the General Counsel believes that no violation has occurred, the General Counsel is not required to take any further action; - any matter that the General Counsel believes is a violation will be reported to the relevant Fund's Audit Committee; - if the directors/trustees/managing general partners who are not "interested persons" as defined by the Investment Company Act (the "Independent Directors/Trustees/Managing General Partners") of the relevant Fund concur that a violation has occurred, they will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer or other appropriate disciplinary actions; - the Independent Directors/Trustees/Managing General Partners of the relevant Fund will be responsible for granting waivers of this Code, as appropriate; and - any changes to or waivers of this Code will, to the extent required, be disclosed as provided by SEC rules. V. OTHER POLICIES AND PROCEDURES This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the Funds, the Funds' investment advisers, principal underwriters, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code unless any provision of this Code conflicts with any applicable federal or state law, in which case the requirements of such law will govern. The Funds' and their investment advisers' and principal underwriters' codes of ethics under Rule 17j-1 under the Investment Company Act and Morgan Stanley's Code of Ethics are separate requirements applying to the Covered Officers and others, and are not part of this Code. VI. AMENDMENTS Any amendments to this Code, other than amendments to Exhibits A, B or C, must be approved or ratified by a majority vote of the Board of each Fund, including a majority of Independent Directors/Trustees/Managing General Partners. VII. CONFIDENTIALITY 8 All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the Independent Directors/Trustees/Managing General Partners of the relevant Fund or Funds and their counsel, the relevant Fund or Funds and their counsel and the relevant investment adviser and its counsel. 9 VIII. INTERNAL USE The Code is intended solely for the internal use by the Funds and does not constitute an admission, by or on behalf of any Fund, as to any fact, circumstance, or legal conclusion I have read and understand the terms of the above Code. I recognize the responsibilities and obligations incurred by me as a result of my being subject to the Code. I hereby agree to abide by the above Code. - --------------------------- Date: ---------------------- 10 EXHIBIT A FUND LIST MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS AT JULY 31, 2003 RETAIL FUNDS OPEN-END RETAIL FUNDS TAXABLE MONEY MARKET FUNDS 1. Active Assets Government Securities Trust ("AA Government") 2. Active Assets Institutional Government Securities Trust ("AA Institutional Government") 3. Active Assets Institutional Money Trust ("AA Institutional Money") 4. Active Assets Money Trust ("AA Money") 5. Morgan Stanley Liquid Asset Fund Inc. ("Liquid Asset") 6. Morgan Stanley U.S. Government Money Market Trust ("Government Money") Tax-Exempt Money Market Funds 7. Active Assets California Tax-Free Trust ("AA California") 8. Active Assets Tax-Free Trust ("AA Tax-Free") 9. Morgan Stanley California Tax-Free Daily Income Trust ("California Tax-Free Daily") 10. Morgan Stanley New York Municipal Money Market Trust ("New York Money") 11. Morgan Stanley Tax-Free Daily Income Trust ("Tax-Free Daily") EQUITY FUNDS 12. Morgan Stanley 21st Century Trend Fund ("21st Century Trend")* 13. Morgan Stanley Aggressive Equity Fund ("Aggressive Equity")* 14. Morgan Stanley Allocator Fund ("Allocator Fund")* 15. Morgan Stanley All Star Growth Fund ("All Star Growth")* 16. Morgan Stanley American Opportunities Fund ("American Opportunities")* 17. Morgan Stanley Biotechnology Fund ("Biotechnology Fund")* 18. Morgan Stanley Capital Opportunities Trust ("Capital Opportunities")* 19. Morgan Stanley Developing Growth Securities Trust ("Developing Growth")* 20. Morgan Stanley Dividend Growth Securities Inc. ("Dividend Growth")* 21. Morgan Stanley Equity Fund ("Equity Fund")* 22. Morgan Stanley European Growth Fund Inc. ("European Growth")* 23. Morgan Stanley Financial Services Trust ("Financial Services")* 11 24. Morgan Stanley Fund of Funds ("Fund of Funds")* - Domestic Portfolio - International Portfolio 25. Morgan Stanley Fundamental Value Fund ("Fundamental Value")* 26. Morgan Stanley Global Advantage Fund ("Global Advantage")* 27. Morgan Stanley Global Dividend Growth Securities ("Global Dividend Growth")* 28. Morgan Stanley Global Utilities Fund ("Global Utilities")* 29. Morgan Stanley Growth Fund ("Growth Fund")* 30. Morgan Stanley Health Sciences Trust ("Health Sciences")* 31. Morgan Stanley Income Builder Fund ("Income Builder")* 32. Morgan Stanley Information Fund ("Information Fund")* 33. Morgan Stanley International Fund ("International Fund")* 34. Morgan Stanley International SmallCap Fund ("International SmallCap")* 35. Morgan Stanley International Value Equity Fund ("International Value")* 36. Morgan Stanley Japan Fund ("Japan Fund")* 37. Morgan Stanley KLD Social Index Fund ("KLD Social Index")* 38. Morgan Stanley Latin American Growth Fund ("Latin American")* 39. Morgan Stanley Market Leader Trust ("Market Leader")* 40. Morgan Stanley Mid-Cap Value Fund (Mid-Cap Value")* 41. Morgan Stanley Nasdaq-100 Index Fund ("Nasdaq-100")* 42. Morgan Stanley Natural Resource Development Securities Inc. ("Natural Resource")* 43. Morgan Stanley New Discoveries Fund ("New Discoveries")* 44. Morgan Stanley Next Generation Trust ("Next Generation")* 45. Morgan Stanley Pacific Growth Fund Inc. ("Pacific Growth")* 46. Morgan Stanley Real Estate Fund ("Real Estate")* 47. Morgan Stanley Small-Mid Special Value Fund (Small-Mid Special Value")* 48. Morgan Stanley S&P 500 Index Fund ("S&P500 Index")* 49. Morgan Stanley Special Growth Fund ("Small Cap Growth")* 50. Morgan Stanley Special Value Fund ("Special Value")* 51. Morgan Stanley Tax-Managed Growth Fund ("Tax-Managed Growth")* 52. Morgan Stanley Technology Fund ("Technology Fund")* 53. Morgan Stanley Total Market Index Fund ("Total Market Index")* 54. Morgan Stanley Total Return Trust ("Total Return")* 55. Morgan Stanley Utilities Fund ("Utilities Fund")* 56. Morgan Stanley Value-Added Market Series ("Value-Added")* 57. Morgan Stanley Value Fund ("Value Fund")* BALANCED FUNDS 58. Morgan Stanley Balanced Growth Fund ("Balanced Growth")* 59. Morgan Stanley Balanced Income Fund ("Balanced Income")* ASSET ALLOCATION FUND 60. Morgan Stanley Strategist Fund ("Strategist Fund")* 12 TAXABLE FIXED-INCOME FUNDS 61. Morgan Stanley Convertible Securities Trust ("Convertible Securities")* 62. Morgan Stanley Diversified Income Trust ("Diversified Income")* 63. Morgan Stanley Federal Securities Trust ("Federal Securities")* 64. Morgan Stanley High Yield Securities Inc ("High Yield Securities")* 65. Morgan Stanley Intermediate Income Securities ("Intermediate Income")* 66. Morgan Stanley Limited Duration Fund ("Limited Duration Fund") 67. Morgan Stanley Limited Duration U.S. Treasury Trust ("Limited Duration Treasury") 68. Morgan Stanley Total Return Income Securities Fund ("Total Return Income")* 69. Morgan Stanley U.S. Government Securities Trust ("Government Securities")* TAX-EXEMPT FIXED-INCOME FUNDS 70. Morgan Stanley California Tax-Free Income Fund ("California Tax-Free")* 71. Morgan Stanley Hawaii Municipal Trust ("Hawaii Municipal") 72. Morgan Stanley Limited Term Municipal Trust ("Limited Term Municipal") 73. Morgan Stanley Multi-State Municipal Series Trust ("Multi-State Series") - Arizona Series - Florida Series - New Jersey Series - Pennsylvania Series 74. Morgan Stanley New York Tax-Free Income Fund ("New York Tax-Free")* 75. Morgan Stanley Tax-Exempt Securities Trust ("Tax-Exempt Securities")* SPECIAL PURPOSE FUNDS 76. Morgan Stanley Select Dimensions Investment Series ("Select Dimensions") - American Opportunities Portfolio - Balanced Growth Portfolio - Capital Opportunities Portfolio - Developing Growth Portfolio - Dividend Growth Portfolio - Flexible Income Portfolio - Global Equity Portfolio - Growth Portfolio - Money Market Portfolio - Utilities Portfolio - Value-Added Portfolio 77. Morgan Stanley Variable Investment Series ("Variable Investment") - Aggressive Equity Portfolio - Dividend Growth Portfolio 13 - Equity Portfolio - European Growth Portfolio - Global Advantage Portfolio - Global Dividend Growth Portfolio - High Yield Portfolio - Income Builder Portfolio - Information Portfolio - Limited Duration Portfolio - Money Market Portfolio - Pacific Growth Protfolio - Quality Income Plus Portfolio - S&P 500 Index Portfolio - Strategist Portfolio - Utilities Portfolio CLOSED-END RETAIL FUNDS TAXABLE FIXED-INCOME CLOSED-END FUNDS 78. Morgan Stanley Government Income Trust ("Government Income") 79. Morgan Stanley Income Securities Inc. ("Income Securities") 80. Morgan Stanley Prime Income Trust ("Prime Income") TAX-EXEMPT FIXED-INCOME CLOSED-END FUNDS 81. Morgan Stanley California Insured Municipal Income Trust ("California Insured Municipal") 82. Morgan Stanley California Quality Municipal Securities ("California Quality Municipal") 83. Morgan Stanley Insured California Municipal Securities ("Insured California Securities") 84. Morgan Stanley Insured Municipal Bond Trust ("Insured Municipal Bond") 85. Morgan Stanley Insured Municipal Income Trust ("Insured Municipal Income") 86. Morgan Stanley Insured Municipal Securities ("Insured Municipal Securities") 87. Morgan Stanley Insured Municipal Trust ("Insured Municipal Trust") 88. Morgan Stanley Municipal Income Opportunities Trust ("Municipal Opportunities") 89. Morgan Stanley Municipal Income Opportunities Trust II ("Municipal Opportunities II") 90. Morgan Stanley Municipal Income Opportunities Trust III ("Municipal Opportunities III") 91. Morgan Stanley Municipal Premium Income Trust ("Municipal Premium") 92. Morgan Stanley New York Quality Municipal Securities ("New York Quality Municipal") 93. Morgan Stanley Quality Municipal Income Trust ("Quality Municipal Income") 94. Morgan Stanley Quality Municipal Investment Trust ("Quality Municipal Investment") 14 95. Morgan Stanley Quality Municipal Securities ("Quality Municipal Securities") *- Denotes Retail Multi-Class Fund TERM TRUST 1. TCW/DW Term Trust 2003 ("Term Trust 2003") 15 INSTITUTIONAL FUNDS OPEN-END INSTITUTIONAL FUNDS 1. Morgan Stanley Institutional Fund, Inc. ("Institutional Fund Inc.") Active Portfolios: - Active International Allocation Portfolio - Asian Equity Portfolio - Asian Real Estate Portfolio - Emerging Markets Portfolio - Emerging Markets Debt Portfolio - Equity Growth Portfolio - European Value Equity Portfolio - European Real Estate Portfolio - Focus Equity Portfolio - Global Franchise Portfolio - Global Value Equity Portfolio - International Equity Portfolio - International Magnum Portfolio - International Small Cap Portfolio - Japanese Value Equity Portfolio - Latin American Portfolio - Money Market Portfolio - Municipal Money Market Portfolio - Small Company Growth Portfolio - Technology Portfolio - U.S. Real Estate Portfolio - Value Equity Portfolio Inactive Portfolios: - China Growth Portfolio - Gold Portfolio - Micro-Cap Portfolio - Mortgage Backed Securities Portfolio - U.S. Equity Portfolio - Municipal Bond Portfolio 2. Morgan Stanley Institutional Fund Trust ("Institutional Fund Trust") Active Portfolios: - Advisory Foreign Fixed Income Portfolio 16 - Advisory Foreign Fixed Income II Portfolio - Advisory Mortgage Portfolio - Balanced Portfolio - Cash Reserves Portfolio - U.S. Core Fixed Income Portfolio - Equity Portfolio - Core Plus Fixed Income Portfolio - Investment Grade Fixed Income Portfolio - High Yield Portfolio - Intermediate Duration Portfolio - International Fixed income Portfolio - Limited Duration Portfolio - Mid-Cap Growth Portfolio - Multi-Asset Class Portfolio - Municipal Portfolio - Small-Cap Growth Portfolio - Strategic Small Value Portfolio - U.S. Small-Cap Growth Portfolio - U.S. Mid-Cap Core Portfolio - Value Portfolio Inactive Portfolios: - Balanced Plus Portfolio - Growth Portfolio - New York Municipal Portfolio - Targeted Duration Portfolio - Value II Portfolio 3. The Universal Institutional Funds, Inc. ("Universal Funds") Active Portfolios: - Active International Allocation Portfolio - Core Plus Fixed Income Portfolio - Emerging Markets Debt Portfolio - Emerging Markets Equity Portfolio - Equity and Income Portfolio - Equity Growth Portfolio - Global Franchise Portfolio - Global Value Equity Portfolio - High Yield Portfolio - International Magnum Portfolio - Mid-Cap Growth Portfolio - Money Market Portfolio - Small Company Growth Portfolio 17 - Technology Portfolio - U.S. Mid-Cap Core Portfolio - U.S. Real Estate Portfolio - Value Portfolio Inactive Portfolios: - Asian Equity Portfolio - Balanced Portfolio - Capital Preservation Portfolio - Core Equity Portfolio - International Fixed Income Portfolio - Investment Grade Fixed Income Portfolio - Latin American Portfolio - Multi-Asset Class Portfolio - Targeted Duration Portfolio 4. Morgan Stanley Institutional Liquidity Funds ("Liquidity Funds") CLOSED-END INSTITUTIONAL FUNDS 5. Morgan Stanley Asia-Pacific Fund, Inc. ("Asia-Pacific Fund") 6. Morgan Stanley Eastern Europe Fund, Inc. ("Eastern Europe") 7. Morgan Stanley Emerging Markets Debt Fund, Inc. ("Emerging Markets Debt") 8. Morgan Stanley Emerging Markets Fund, Inc. ("Emerging Markets Fund") 9. Morgan Stanley Global Opportunity Bond Fund, Inc. ("Global Opportunity") 10. Morgan Stanley High Yield Fund, Inc. ("High Yield Fund") 11. The Latin American Discovery Fund, Inc. ("Latin American Discovery") 12 The Malaysia Fund, Inc. ("Malaysia Fund") 13. The Thai Fund, Inc. ("Thai Fund") 14. The Turkish Investment Fund, Inc. ("Turkish Investment") CLOSED-END HEDGE FUND 15. Morgan Stanley Institutional Fund of Hedge Funds ("Fund of Hedge Funds") 18 EXHIBIT B INSTITUTIONAL FUNDS COVERED OFFICERS Mitchell M. Merin - President Ronald E. Robison - Executive Vice President and Principal Executive Officer James W. Garrett - Chief Financial Officer and Treasurer RETAIL FUNDS COVERED OFFICERS Mitchell M. Merin - President Ronald E. Robison - Executive Vice President and Principal Executive Officer Frank Smith - Chief Financial Officer and Treasurer 19 EXHIBIT C GENERAL COUNSEL Barry Fink 20