UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR/A CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-07245 Morgan Stanley Balanced Growth 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 Growth 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 MONTHS ENDED JULY 31, 2003 <Table> <Caption> CLASS A CLASS B CLASS C CLASS D 10.77% 10.35% 10.34% 10.89% </Table> <Table> <Caption> LEHMAN BROTHERS RUSSELL U.S. LIPPER 1000 VALUE S&P 500 GOVERNMENT/ BALANCED INDEX(1) INDEX(2) CREDIT INDEX(3) FUNDS INDEX(4) 16.04% 16.79% 0.82% 10.78% </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 Much of the Fund's underperformance relative to its benchmark, the Russell 1000 Value Index, during the period stemmed from its holdings of fixed-income securities, which lagged the equity market. On the equity side, the Fund's overweighting in energy detracted from performance because that sector did not participate as fully in the rally as others. We remain confident in the Fund's overweighted stance, however, because we consider our energy holdings to be favorably valued. These negatives were partially offset by strong performance in other segments of the Fund's equity portfolio. Strong stock selection in the consumer discretionary sector was one such case. 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. The fixed-income portfolio's performance 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 2 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. <Table> <Caption> TOP 10 HOLDINGS U.S. Treasury Bonds and Notes 7.3% Fed. Natl. Mtge. Assoc. 5.3% Fed. Home Ln. Mtge. Corp. 4.7% Bristol-Myers Squibb Co. 3.2% Bank of America Corp. 2.4% AOL Time Warner Inc. 2.0% Schlumberger Ltd. 1.9% Chubb Corp. 1.8% BP PLC -- ADR 1.7% Exxon Mobil Corporation 1.5% </Table> <Table> <Caption> TOP FIVE INDUSTRIES Common Stocks 65.6% U.S. Government Agencies & Obligations 17.8% Short Term 9.8% Corporate Bonds 9.2% Asset Backed 1.4% </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 - - THE FUND'S INVESTMENT OBJECTIVE IS TO SEEK TO PROVIDE CAPITAL GROWTH WITH REASONABLE CURRENT INCOME. - - TYPICALLY, THE MANAGER INVESTS AT LEAST 60% OF THE PORTFOLIO IN THE COMMON STOCKS OF COMPANIES THAT HAVE A RECORD OF PAYING DIVIDENDS AND, IN THE OPINION OF THE MANAGER, HAVE THE POTENTIAL FOR INCREASING DIVIDENDS AND IN INVESTMENT GRADE SECURITIES CONVERTIBLE INTO COMMON STOCKS. - - THE FUND ALSO INVESTS AT LEAST 25% OF ITS TOTAL ASSETS IN FIXED-INCOME SECURITIES SUCH AS 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. 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(++) 07/28/97 07/28/97 03/28/95 07/28/97 SYMBOL BGRAX BGRBX BGRCX BGRDX 1 YEAR 4.06%(5) 3.35%(5) 3.33%(5) 4.40%(5) (1.40)(6) (1.65)(6) 2.33(6) 5 YEARS 2.41(5) 1.64(5) 1.64(5) 2.67(5) 1.31(6) 1.35(6) 1.64(6) SINCE INCEPTION 3.98(5) 3.19(5) 8.15(5) 4.22(5) 3.05(6) 3.19(6) 8.15(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. The Index does not include any expenses, fees or charges. 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. The Index does not include any expenses, fees or charges. Such costs would lower performance. It is not possible to invest directly in an index. (4) The Lipper Balanced Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Balanced 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 Growth Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2003 (UNAUDITED) <Table> <Caption> NUMBER OF SHARES VALUE - ------------------------------------------------------------------------------------------------------- Common Stocks (65.6%) Advertising/Marketing Services (0.5%) 61,300 Interpublic Group of Companies, Inc. (The)*................................. $ 845,940 ------------ Aerospace & Defense (0.5%) 26,790 Raytheon Co. ............................................................... 822,453 ------------ Auto Parts: O.E.M. (0.9%) 21,150 Magna International Inc. (Class A) (Canada)................................. 1,609,092 ------------ Beverages: Non-Alcoholic (0.4%) 17,360 Coca-Cola Co. (The)......................................................... 780,679 ------------ Chemicals: Agricultural (0.4%) 28,920 Monsanto Co. ............................................................... 665,160 ------------ Chemicals: Major Diversified (1.2%) 36,530 Dow Chemical Co. (The)...................................................... 1,289,509 22,000 Du Pont (E.I.) de Nemours & Co. ............................................ 966,680 ------------ 2,256,189 ------------ Computer Processing Hardware (0.8%) 70,100 Hewlett-Packard Co. ........................................................ 1,484,017 ------------ Containers/Packaging (1.0%) 39,740 Temple-Inland, Inc. ........................................................ 1,843,539 ------------ Contract Drilling (1.3%) 46,270 ENSCO International Inc. ................................................... 1,159,989 60,380 Transocean Inc.*............................................................ 1,181,637 ------------ 2,341,626 ------------ Data Processing Services (1.1%) 36,300 Automatic Data Processing, Inc. ............................................ 1,346,004 15,160 Computer Sciences Corp.*.................................................... 615,041 ------------ 1,961,045 ------------ </Table> See Notes to Financial Statements 5 Morgan Stanley Balanced Growth Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2003 (UNAUDITED) continued <Table> <Caption> NUMBER OF SHARES VALUE - ------------------------------------------------------------------------------------------------------- Discount Stores (1.5%) 22,430 Target Corp. ............................................................... $ 859,518 31,690 Wal-Mart Stores, Inc. ...................................................... 1,771,788 ------------ 2,631,306 ------------ Electric Utilities (3.1%) 18,800 Edison International*....................................................... 308,508 46,370 Entergy Corp. .............................................................. 2,388,519 21,840 Exelon Corp. ............................................................... 1,255,145 40,290 PPL Corp. .................................................................. 1,595,081 ------------ 5,547,253 ------------ Financial Conglomerates (3.5%) 57,300 Citigroup Inc. ............................................................. 2,567,040 67,570 J.P. Morgan Chase & Co. .................................................... 2,368,328 39,380 Prudential Financial, Inc. ................................................. 1,401,140 ------------ 6,336,508 ------------ Financial Publishing/Services (1.2%) 88,830 Equifax, Inc. .............................................................. 2,068,851 ------------ Food: Major Diversified (0.7%) 25,440 PepsiCo, Inc. .............................................................. 1,172,021 ------------ Hospital/Nursing Management (0.5%) 64,700 Tenet Healthcare Corp.*..................................................... 891,566 ------------ Hotels/Resorts/Cruiselines (2.3%) 128,940 Hilton Hotels Corp. ........................................................ 1,882,524 69,600 Starwood Hotels & Resorts Worldwide, Inc. .................................. 2,268,960 ------------ 4,151,484 ------------ Household/Personal Care (1.3%) 42,390 Kimberly-Clark Corp. ....................................................... 2,051,676 3,400 Procter & Gamble Co. (The).................................................. 298,758 ------------ 2,350,434 ------------ Industrial Conglomerates (2.3%) 8,700 3M Co. ..................................................................... 1,219,740 29,240 Ingersoll-Rand Co., Ltd. (Class A) (Bermuda)................................ 1,585,978 29,630 Textron, Inc. .............................................................. 1,286,535 ------------ 4,092,253 ------------ </Table> See Notes to Financial Statements 6 Morgan Stanley Balanced Growth Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2003 (UNAUDITED) continued <Table> <Caption> NUMBER OF SHARES VALUE - ------------------------------------------------------------------------------------------------------- Industrial Machinery (0.5%) 20,100 Parker-Hannifin Corp. ...................................................... $ 926,610 ------------ Information Technology Services (0.5%) 40,200 Electronic Data Systems Corp. .............................................. 895,254 ------------ Integrated Oil (4.0%) 74,360 BP PLC (ADR) (United Kingdom)............................................... 3,089,658 29,040 ConocoPhillips.............................................................. 1,519,954 73,740 Exxon Mobil Corp. .......................................................... 2,623,669 ------------ 7,233,281 ------------ Investment Banks/Brokers (2.1%) 41,400 Edwards (A.G.), Inc. ....................................................... 1,531,386 42,600 Merrill Lynch & Co., Inc. .................................................. 2,316,162 ------------ 3,847,548 ------------ Life/Health Insurance (0.5%) 34,870 MetLife, Inc. .............................................................. 966,596 ------------ Major Banks (4.7%) 52,450 Bank of America Corp. ...................................................... 4,330,796 28,670 FleetBoston Financial Corp. ................................................ 891,350 42,560 PNC Financial Services Group................................................ 2,083,312 25,920 Wachovia Corp. ............................................................. 1,132,445 ------------ 8,437,903 ------------ Major Telecommunications (2.7%) 78,850 SBC Communications, Inc. ................................................... 1,841,936 105,760 Sprint Corp. (FON Group).................................................... 1,493,331 41,810 Verizon Communications Inc. ................................................ 1,457,497 ------------ 4,792,764 ------------ Managed Health Care (0.7%) 21,520 Aetna Inc. ................................................................. 1,326,062 ------------ Media Conglomerates (3.3%) 222,960 AOL Time Warner Inc.*....................................................... 3,440,273 115,350 Disney (Walt) Co. (The)..................................................... 2,528,472 ------------ 5,968,745 ------------ Medical Specialties (0.8%) 32,470 Bausch & Lomb, Inc. ........................................................ 1,372,507 ------------ </Table> See Notes to Financial Statements 7 Morgan Stanley Balanced Growth Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2003 (UNAUDITED) continued <Table> <Caption> NUMBER OF SHARES VALUE - ------------------------------------------------------------------------------------------------------- Motor Vehicles (0.6%) 56,100 Honda Motor Co., Ltd. (ADR) (Japan)......................................... $ 1,108,536 ------------ Multi-Line Insurance (1.7%) 42,550 Hartford Financial Services Group, Inc. (The)............................... 2,220,684 22,990 Safeco Corp. ............................................................... 855,918 ------------ 3,076,602 ------------ Oil & Gas Production (1.3%) 23,460 Anadarko Petroleum Corp. ................................................... 1,027,548 32,050 EOG Resources, Inc. ........................................................ 1,242,899 ------------ 2,270,447 ------------ Oil Refining/Marketing (0.6%) 27,270 Valero Energy Corp. ........................................................ 992,628 ------------ Oilfield Services/Equipment (1.9%) 73,800 Schlumberger Ltd. .......................................................... 3,326,166 ------------ Other Metals/Minerals (0.9%) 37,070 Phelps Dodge Corp.*......................................................... 1,563,983 ------------ Packaged Software (1.1%) 77,920 Microsoft Corp. ............................................................ 2,057,088 ------------ Pharmaceuticals: Major (6.1%) 216,760 Bristol-Myers Squibb Co. ................................................... 5,679,112 11,840 Johnson & Johnson........................................................... 613,194 35,626 Pfizer Inc. ................................................................ 1,188,483 22,000 Roche Holdings Ltd (ADR) (Switzerland)...................................... 1,838,100 97,060 Schering-Plough Corp. ...................................................... 1,648,079 ------------ 10,966,968 ------------ Precious Metals (0.8%) 38,790 Newmont Mining Corp. ....................................................... 1,400,319 ------------ Property - Casualty Insurers (2.9%) 48,490 Chubb Corp. (The)........................................................... 3,142,152 126,006 Travelers Property Casualty Corp. (Class A)................................. 2,041,297 ------------ 5,183,449 ------------ </Table> See Notes to Financial Statements 8 Morgan Stanley Balanced Growth Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2003 (UNAUDITED) continued <Table> <Caption> NUMBER OF SHARES VALUE - ------------------------------------------------------------------------------------------------------- Railroads (1.8%) 105,370 Norfolk Southern Corp. ..................................................... $ 2,026,265 19,380 Union Pacific Corp. ........................................................ 1,181,017 ------------ 3,207,282 ------------ Restaurants (1.0%) 76,210 McDonald's Corp. ........................................................... 1,753,592 ------------ Tobacco (0.6%) 26,290 Altria Group, Inc. ......................................................... 1,051,863 ------------ Total Common Stocks (Cost $101,016,271)..................................... 117,577,609 ------------ </Table> <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE - --------- ------ -------- Corporate Bonds (9.2%) Aerospace & Defense (0.4%) $ 90 Boeing Co. ............................................... 6.625% 02/15/38 $ 86,641 45 Goodrich Corp. ........................................... 7.625 12/15/12 48,898 115 Lockheed Martin Corp. .................................... 7.75 05/01/26 130,258 85 Lockheed Martin Corp. .................................... 8.50 12/01/29 104,284 60 Raytheon Co. ............................................. 8.20 03/01/06 68,245 193 Systems 2001 Asset Trust - 144A**......................... 6.664 09/15/13 216,064 ------------ 654,390 ------------ Airlines (0.3%) 127 American West Airlines.................................... 7.10 04/02/21 129,915 274 Continental Airlines, Inc. ............................... 6.90 01/02/18 257,775 75 Southwest Airlines Co. ................................... 5.496 11/01/06 79,487 ------------ 467,177 ------------ Broadcasting (0.1%) 130 Clear Channel Communications, Inc. ....................... 7.65 09/15/10 148,738 ------------ Building Products (0.1%) 45 Celulosa Arauco Constitution - 144A**(Chile).............. 5.125 07/09/13 42,148 60 Masco Corp. .............................................. 6.50 08/15/32 59,534 ------------ 101,682 ------------ Cable/Satellite TV (0.2%) 140 Comcast Corp. ............................................ 6.50 01/15/15 145,988 95 Cox Communications, Inc. ................................. 7.125 10/01/12 106,124 </Table> See Notes to Financial Statements 9 Morgan Stanley Balanced Growth Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2003 (UNAUDITED) continued <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------------- $ 105 Liberty Media Corp. ...................................... 5.70 % 05/15/13 $ 97,700 80 TCI Communications, Inc. ................................. 7.875 02/15/26 87,106 ------------ 436,918 ------------ Chemicals: Agricultural (0.0%) 65 Monsanto Co. ............................................. 7.375 08/15/12 73,186 ------------ Containers/Packaging (0.1%) 85 Sealed Air Corp - 144A**.................................. 5.625 07/15/13 81,282 ------------ Department Stores (0.2%) 25 Federated Department Stores, Inc. ........................ 7.00 02/15/28 25,713 200 Federated Department Stores, Inc. ........................ 6.90 04/01/29 203,365 215 May Department Stores Co., Inc. .......................... 6.70 09/15/28 208,852 ------------ 437,930 ------------ Drugstore Chains (0.2%) 275 CVS Corp. ................................................ 5.625 03/15/06 296,100 ------------ Electric Utilities (0.4%) 55 Appalachian Power Co. (Series H).......................... 5.95 05/15/33 49,454 60 Cincinnati Gas & Electric Co. ............................ 5.70 09/15/12 62,228 40 Cincinnati Gas & Electric Co. (Series A).................. 5.40 06/15/33 34,896 40 Cincinnati Gas & Electric Co. (Series B).................. 5.375 06/15/33 34,763 40 Columbus Southern Power Co. - 144A**...................... 6.60 03/01/33 40,331 105 Constellation Energy Group, Inc. ......................... 7.60 04/01/32 112,869 50 Detroit Edison Co. ....................................... 6.125 10/01/10 53,067 15 Detroit Edison Co. ....................................... 6.35 10/15/32 14,978 85 Duke Energy Corp. ........................................ 4.50 04/01/10 84,092 60 Exelon Corp. ............................................. 6.75 05/01/11 66,066 35 Florida Power & Light Co. ................................ 4.85 02/01/13 34,789 45 Ohio Power Co. - 144A**................................... 6.60 02/15/33 45,376 75 Public Service Electric & Gas Co. ........................ 5.00 01/01/13 73,713 35 South Carolina Electric & Gas Co. ........................ 5.30 05/15/33 30,916 15 Wisconsin Electric Power Co. ............................. 5.625 05/15/33 13,807 30 Wisconsin Energy Corp. ................................... 6.20 04/01/33 28,973 ------------ 780,318 ------------ Electrical Products (0.1%) 125 Cooper Industries Inc. ................................... 5.25 07/01/07 131,556 ------------ </Table> See Notes to Financial Statements 10 Morgan Stanley Balanced Growth Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2003 (UNAUDITED) continued <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------------- Environmental Services (0.0%) $ 70 Waste Management, Inc. ................................... 6.875% 05/15/09 $ 77,611 ------------ Finance/Rental/Leasing (0.5%) 165 Countrywide Home Loans, Inc. ............................. 3.25 05/21/08 159,503 75 Ford Motor Credit Co. .................................... 7.25 10/25/11 74,240 45 Household Finance Corp. .................................. 6.40 06/17/08 49,373 65 Household Finance Corp. .................................. 6.75 05/15/11 71,101 45 Household Finance Corp. .................................. 6.375 10/15/11 48,081 55 International Lease Finance Corp. ........................ 3.75 08/01/07 55,052 185 MBNA Corp. ............................................... 6.125 03/01/13 191,382 205 Prime Property Funding II - 144A**........................ 7.00 08/15/04 215,432 ------------ 864,164 ------------ Financial Conglomerates (1.1%) 500 Associates Corp. of North America......................... 6.25 11/01/08 552,551 75 Boeing Capital Corp. ..................................... 6.10 03/01/11 77,795 15 Boeing Capital Corp. ..................................... 6.50 02/15/12 15,771 20 Boeing Capital Corp. ..................................... 5.80 01/15/13 19,923 140 Chase Manhattan Corp. .................................... 6.00 02/15/09 150,781 280 General Electric Capital Corp. ........................... 6.75 03/15/32 293,520 55 General Motors Acceptance Corp. .......................... 4.50 07/15/06 55,104 45 General Motors Acceptance Corp. .......................... 6.875 09/15/11 43,964 185 General Motors Acceptance Corp. .......................... 8.00 11/01/31 170,696 255 Prudential Holdings, LLC (Series C) - 144A**............. 8.695 12/18/23 297,116 325 Prudential Holdings, LLC (Series B) (FSA) - 144A**........ 7.245 12/18/23 350,347 ------------ 2,027,568 ------------ Food Retail (0.2%) 30 Albertson's Inc. ......................................... 7.45 08/01/29 31,310 100 Albertson's, Inc. ........................................ 7.50 02/15/11 111,953 180 Kroger Co. ............................................... 6.80 04/01/11 195,212 30 Kroger Co. ............................................... 7.70 06/01/29 32,909 ------------ 371,384 ------------ Food: Major Diversified (0.1%) 25 Kraft Foods Inc. ......................................... 5.625 11/01/11 25,252 85 Kraft Foods Inc. ......................................... 6.25 06/01/12 88,977 ------------ 114,229 ------------ Forest Products (0.1%) 155 Weyerhaeuser Co. ......................................... 6.75 03/15/12 165,115 ------------ </Table> See Notes to Financial Statements 11 Morgan Stanley Balanced Growth Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2003 (UNAUDITED) continued <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------------- Gas Distributors (0.1%) $ 110 Consolidated Natural Gas Co. ............................. 6.25 % 11/01/11 $ 118,545 40 Sempra Energy............................................. 6.00 02/01/13 41,373 ------------ 159,918 ------------ Home Building (0.1%) 75 Centex Corp. ............................................. 7.50 01/15/12 84,589 55 Pulte Homes, Inc. ........................................ 6.375 05/15/33 49,706 ------------ 134,295 ------------ Home Furnishings (0.1%) 75 Mohawk Industries Inc. ................................... 7.20 04/15/12 82,458 ------------ Home Improvement Chains (0.1%) 175 Lowe's Companies, Inc. ................................... 8.25 06/01/10 211,156 ------------ Hotels/Resorts/Cruiselines (0.2%) 105 Hyatt Equities LLC - 144A**............................... 6.875 06/15/07 106,532 245 Marriott International, Inc. (Series E)................... 7.00 01/15/08 270,384 ------------ 376,916 ------------ Industrial Conglomerates (0.2%) 185 Honeywell International, Inc. ............................ 6.125 11/01/11 198,252 85 Hutchinson Whampoa International Ltd. - 144A** (Virgin Islands)................................................ 6.50 02/13/13 84,700 ------------ 282,952 ------------ Information Technology Services (0.0%) 10 Electronic Data Systems................................... 7.125 10/15/09 10,550 60 Electronic Data Systems Corp. - 144A**.................... 6.00 08/01/13 56,115 ------------ 66,665 ------------ Integrated Oil (0.2%) 170 Amerada Hess Corp. ....................................... 7.875 10/01/29 184,468 215 Conoco Inc. .............................................. 6.95 04/15/29 232,360 ------------ 416,828 ------------ Investment Banks/Brokers (0.2%) 100 Goldman Sachs Group Inc................................... 6.125 02/15/33 95,284 130 Goldman Sachs Group Inc. ................................. 6.875 01/15/11 144,903 115 Goldman Sachs Group Inc. ................................. 6.60 01/15/12 125,352 ------------ 365,539 ------------ </Table> See Notes to Financial Statements 12 Morgan Stanley Balanced Growth Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2003 (UNAUDITED) continued <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------------- Life/Health Insurance (0.2%) $ 140 American General Corp. ................................... 7.50 % 07/15/25 $ 158,031 250 John Hancock.............................................. 7.375 02/15/24 267,505 ------------ 425,536 ------------ Major Banks (0.3%) 180 Bank One Corp. ........................................... 6.00 02/17/09 194,525 70 Citicorp.................................................. 6.75 08/15/05 76,307 120 Fleetboston Financial Corp. .............................. 7.25 09/15/05 132,589 145 UFJ Finance Aruba AEC (Aruba)............................. 6.75 07/15/13 140,356 ------------ 543,777 ------------ Major Telecommunications (0.4%) 100 AT&T Corp. ............................................... 8.50 11/15/31 105,768 55 British Telecom PLC (United Kingdom)...................... 8.875 12/15/30 67,560 135 Deutsche Telekom International Finance Corp. (Netherlands)........................................... 8.75 06/15/30 158,065 50 GTE Corp. ................................................ 6.94 04/15/28 50,765 120 Verizon Global Funding Corp. ............................. 7.75 12/01/30 133,888 260 Verizon New England Inc. ................................. 6.50 09/15/11 282,513 ------------ 798,559 ------------ Managed Health Care (0.2%) 210 Aetna, Inc. .............................................. 7.875 03/01/11 242,361 40 Cigna Corp. .............................................. 6.375 10/15/11 41,965 100 Wellpoint Health Network, Inc. ........................... 6.375 06/15/06 110,071 ------------ 394,397 ------------ Media Conglomerates (0.3%) 60 AOL Time Warner Inc. ..................................... 7.70 05/01/32 62,933 40 News America Holdings, Inc. .............................. 8.875 04/26/23 48,324 60 News America Holdings, Inc. .............................. 7.75 02/01/24 64,984 225 News America Holdings, Inc. .............................. 7.28 06/30/28 232,626 65 Time Warner, Inc. ........................................ 6.625 05/15/29 60,281 ------------ 469,148 ------------ Motor Vehicles (0.4%) 40 DaimlerChrysler North American Holdings Co. .............. 7.20 09/01/09 43,561 105 DaimlerChrysler North American Holdings Co. .............. 8.50 01/18/31 114,659 35 Ford Motor Co............................................. 6.625 10/01/28 27,568 455 Ford Motor Co. ........................................... 7.45 07/16/31 388,566 200 General Motors Corp. ..................................... 8.10 06/15/24 181,757 ------------ 756,111 ------------ </Table> See Notes to Financial Statements 13 Morgan Stanley Balanced Growth Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2003 (UNAUDITED) continued <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------------- Multi-Line Insurance (0.7%) $ 290 AIG SunAmerica Global Finance VI - 144A**................. 6.30 % 05/10/11 $ 314,040 455 Farmers Exchange Capital - 144A**......................... 7.05 07/15/28 387,865 50 Hartford Financial Services Group, Inc. .................. 2.375 06/01/06 49,185 180 Hartford Financial Services Group, Inc. .................. 7.90 06/15/10 210,758 205 Nationwide Mutual Insurance Co. - 144A**.................. 7.50 02/15/24 202,409 100 Nationwide Mutual Insurance Co. - 144A**.................. 8.25 12/01/31 111,679 ------------ 1,275,936 ------------ Oil & Gas Production (0.4%) 15 Devon Financing Corp. .................................... 6.875 09/30/11 16,548 40 Devon Financing Corp. .................................... 7.875 09/30/31 45,688 55 Kerr-McGee Corp. ......................................... 6.875 09/15/11 59,853 160 Pemex Project Funding Master Trust........................ 8.00 11/15/11 173,600 395 Pemex Project Funding Master Trust........................ 8.625 02/01/22 412,775 80 Petro-Canada.............................................. 5.35 07/15/33 68,767 ------------ 777,231 ------------ Oil Refining/Marketing (0.0%) 65 Marathon Oil Corp. ....................................... 6.80 03/15/32 65,568 ------------ Other Consumer Services (0.1%) 95 Cendant Corp. ............................................ 7.375 01/15/13 105,554 90 Cendant Corp. ............................................ 7.125 03/15/15 97,525 ------------ 203,079 ------------ Other Metals/Minerals (0.1%) 75 BHP Finance USA Ltd. (Australia).......................... 4.80 04/15/13 72,687 35 Inco Ltd. (Canada)........................................ 7.75 05/15/12 38,926 140 Inco Ltd. (Canada)........................................ 7.20 09/15/32 138,973 ------------ 250,586 ------------ Pulp & Paper (0.2%) 95 International Paper Co. .................................. 5.85 10/30/12 97,304 65 International Paper Co. - 144A**.......................... 5.30 04/01/15 61,740 60 MeadWestVaco Corp. ....................................... 6.85 04/01/12 65,441 70 Sappi Papier Holding AG - 144A** (Austria)................ 6.75 06/15/12 74,411 ------------ 298,896 ------------ Real Estate Development (0.1%) 200 World Financial Properties - 144A**....................... 6.91 09/01/13 219,041 ------------ </Table> See Notes to Financial Statements 14 Morgan Stanley Balanced Growth Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2003 (UNAUDITED) continued <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------------- Real Estate Investment Trusts (0.3%) $ 205 EOP Operating L.P. ....................................... 7.25 % 06/15/28 $ 210,238 120 Simon Property Group L.P. ................................ 6.375 11/15/07 130,114 65 Simon Property Group L.P. ................................ 6.35 08/28/12 67,951 75 Vordano Reality Trust..................................... 5.625 06/15/07 78,033 ------------ 486,336 ------------ Savings Banks (0.1%) 95 Washington Mutual Bank.................................... 5.50 01/15/13 96,150 ------------ Services to the Health Industry (0.1%) 55 Anthem Insurance - 144A**................................. 9.125 04/01/10 66,291 110 Anthem Insurance - 144A**................................. 9.00 04/01/27 134,352 ------------ 200,643 ------------ Tobacco (0.0%) 90 Altria Group, Inc. ....................................... 7.75 01/15/27 86,765 ------------ Total Corporate Bonds (Cost $16,123,803)..................................... 16,673,834 ------------ Foreign Government Obligations (0.0%) 35 United Mexican States Corp. (Mexico) (Cost $41,843)....... 8.30 08/15/31 36,488 ------------ U.S. Government Obligations (7.3%) U.S. Treasury Bonds 1850 .......................................................... 7.625 02/15/25 2,359,906 1,000 .......................................................... 8.125 08/15/19 - 08/15/21 1,314,316 U.S. Treasury Notes 5,200 .......................................................... 3.50 11/15/06 5,351,533 800 .......................................................... 3.875 02/15/13 762,687 2,900 .......................................................... 6.50 02/15/10 3,339,304 ------------ Total U.S. Government Obligations (Cost $13,089,345)......................... 13,127,746 ------------ </Table> See Notes to Financial Statements 15 Morgan Stanley Balanced Growth Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2003 (UNAUDITED) continued <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------------- Mortgage Backed Securities (10.5%) Federal Home Loan Mortgage Corp. $ 7,750 .......................................................... 6.50 % + $ 7,975,215 350 .......................................................... 7.50 06/01/11 - 01/01/30 372,432 Federal National Mortgage Assoc. 1,100 .......................................................... 7.00 + 1,152,937 3,428 .......................................................... 7.00 04/01/12 - 07/01/32 3,599,820 3,278 .......................................................... 7.50 08/01/25 - 06/01/32 3,474,690 1,253 .......................................................... 8.00 05/01/24 - 02/01/32 1,346,431 59 .......................................................... 9.50 12/01/20 65,275 Government National Mortgage Assoc. I 348 .......................................................... 7.50 09/15/25 - 04/15/27 369,068 384 .......................................................... 8.00 04/15/26 - 08/15/26 413,298 ------------ Total Mortgage Backed Securities (Cost $18,692,696).......................... 18,769,166 ------------ Asset-Backed Securities (1.4%) Finance/Rental/Leasing (1.4%) 44 BMW Vehicle Owner Trust 2002-A............................ 2.83 12/25/04 43,626 124 Capital Auto Receivables Asset Trust 2002-2............... 2.89 04/15/04 124,213 335 Chase Credit Card Master Trust............................ 5.50 11/17/08 360,193 1 Chase Manhattan Auto Owner Trust 2002-A................... 2.63 10/15/04 875 197 Chase Manhattan Auto Owner Trust 2002-B................... 2.70 01/18/05 197,558 350 Citibank Credit Issuance Trust............................ 6.90 10/15/07 383,484 113 Daimler Chrysler Auto Trust 2000-E........................ 6.11 11/08/04 113,772 233 Daimler Chrysler Auto Trust 2002-A........................ 2.90 12/06/04 233,826 135 Ford Credit Auto Owner Trust 2001-B....................... 5.12 10/15/04 136,220 71 Ford Credit Auto Owner Trust 2002-B....................... 2.97 06/15/04 70,917 238 Harley-Davidson Motorcycle Trust 2002-1................... 3.02 09/15/06 239,873 153 Honda Auto Receivables Owner Trust 2002-2................. 2.91 09/15/04 153,551 150 MBNA Master Credit Card Trust............................. 5.90 08/15/11 163,013 15 National City Auto Receivables Trust 2002-A............... 3.00 01/15/05 14,762 </Table> See Notes to Financial Statements 16 Morgan Stanley Balanced Growth Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2003 (UNAUDITED) continued <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------------- $ 200 Nissan Auto Receivables Owner Trust....................... 4.80 % 02/15/07 $ 207,419 104 Nissan Auto Receivables Owner Trust 2002-B................ 3.07 08/16/04 104,350 ------------ Total Asset-Backed Securities (Cost $2,483,174).............................. 2,547,652 ------------ Short-Term Investments (9.8%) U.S. Government Obligations (a) (0.2%) U.S. Treasury Bills 250 ***....................................................... 1.15 09/25/03 249,560 45 ***....................................................... 0.94 01/15/04 44,805 ------------ Total U.S. Government Obligations (Cost $294,365)............................ 294,365 ------------ Repurchase Agreement (9.6%) 17,204 Joint repurchase agreement account (dated 07/31/03; proceeds $17,204,530) (b) (Cost $17,204,000)............ 1.11 08/01/03 17,204,000 ------------ Total Short-Term Investments (Cost $17,498,365).............................. 17,498,365 ------------ </Table> <Table> Total Investments (Cost $168,945,497) (c)(d)......................... 103.8% 186,230,860 Liabilities in Excess of Other Assets................................ (3.8) (6,868,000) ----- ------------ Net Assets........................................................... 100.0% $179,362,860 ===== ============ </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 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) Securities have been designated as collateral in a amount equal to $14,341,590 in connection with securities purchased on a forward commitment basis and open futures contracts. (d) The aggregate cost for federal income tax purposes approximates the aggregate cost for book purposes. The aggregate gross unrealized appreciation is $20,682,320 and the aggregate gross unrealized depreciation is $3,396,957, resulting in net unrealized appreciation of $17,285,363. </Table> See Notes to Financial Statements 17 Morgan Stanley Balanced Growth 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 - ----------------------------------------------------------------------------------------------- 20 Short U.S. Treasury Note 5 year, $(2,226,563) $13,070 September/2003 27 Short U.S. Treasury Notes 10 year, (2,986,875) 47,165 September/2003 ------- Total Unrealized Appreciation.......................... $60,235 ======= </Table> See Notes to Financial Statements 18 Morgan Stanley Balanced Growth Fund FINANCIAL STATEMENTS Statement of Assets and Liabilities July 31, 2003 (unaudited) <Table> Assets: Investments in securities, at value (cost $168,945,497)....................................... $186,230,860 Receivable for: Investments sold........................................ 1,832,159 Shares of beneficial interest sold...................... 807,377 Interest................................................ 611,450 Dividends............................................... 181,188 Variation margin........................................ 48,250 Prepaid expenses and other assets........................... 78,009 ------------ Total Assets............................................ 189,789,293 ------------ Liabilities: Payable for: Investments purchased................................... 9,969,536 Shares of beneficial interest redeemed.................. 173,418 Distribution fee........................................ 146,570 Investment management fee............................... 90,555 Accrued expenses and other payables......................... 46,354 ------------ Total Liabilities....................................... 10,426,433 ------------ Net Assets.............................................. $179,362,860 ============ Composition of Net Assets: Paid-in-capital............................................. $190,546,037 Net unrealized appreciation................................. 17,345,598 Dividends in excess of net investment income................ (219,640) Accumulated net realized loss............................... (28,309,135) ------------ Net Assets.............................................. $179,362,860 ============ Class A Shares: Net Assets.................................................. $6,212,505 Shares Outstanding (unlimited authorized, $.01 par value)... 528,141 Net Asset Value Per Share............................... $11.76 ============ Maximum Offering Price Per Share, (net asset value plus 5.54% of net asset value)....... $12.41 ============ Class B Shares: Net Assets.................................................. $94,119,188 Shares Outstanding (unlimited authorized, $.01 par value)... 8,004,897 Net Asset Value Per Share............................... $11.76 ============ Class C Shares: Net Assets.................................................. $78,367,938 Shares Outstanding (unlimited authorized, $.01 par value)... 6,662,907 Net Asset Value Per Share............................... $11.76 ============ Class D Shares: Net Assets.................................................. $663,229 Shares Outstanding (unlimited authorized, $.01 par value)... 56,407 Net Asset Value Per Share............................... $11.76 ============ </Table> See Notes to Financial Statements 19 Morgan Stanley Balanced Growth Fund FINANCIAL STATEMENTS continued Statement of Operations For the six months ended July 31, 2003 (unaudited) <Table> Net Investment Income: Income Dividends (net of $5,913 foreign withholding tax)........... $ 1,257,640 Interest.................................................... 1,039,808 ----------- Total Income............................................ 2,297,448 ----------- Expenses Investment management fee................................... 495,085 Distribution fee (Class A shares)........................... 7,321 Distribution fee (Class B shares)........................... 419,491 Distribution fee (Class C shares)........................... 373,193 Transfer agent fees and expenses............................ 128,142 Shareholder reports and notices............................. 28,230 Professional fees........................................... 25,755 Registration fees........................................... 23,949 Custodian fees.............................................. 14,844 Trustees' fees and expenses................................. 6,415 Other....................................................... 7,286 ----------- Total Expenses.......................................... 1,529,711 ----------- Net Investment Income................................... 767,737 ----------- Net Realized and Unrealized Gain (Loss): Net Realized Gain/Loss on: Investments............................................. 4,349,613 Futures contracts....................................... (35,498) ----------- Net Realized Gain....................................... 4,314,115 ----------- Net Change in Unrealized Appreciation/Depreciation on: Investments............................................. 11,135,862 Futures contracts....................................... 100,601 ----------- Net Appreciation........................................ 11,236,463 ----------- Net Gain................................................ 15,550,578 ----------- Net Increase................................................ $16,318,315 =========== </Table> See Notes to Financial Statements 20 Morgan Stanley Balanced Growth 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....................................... $ 767,737 $ 2,629,456 Net realized gain (loss).................................... 4,314,115 (15,837,149) Net change in unrealized appreciation....................... 11,236,463 (17,593,434) ------------ ------------ Net Increase (Decrease)................................. 16,318,315 (30,801,127) ------------ ------------ Dividends to Shareholders from Net Investment Income: Class A shares.............................................. (62,661) (150,076) Class B shares.............................................. (576,718) (1,417,896) Class C shares.............................................. (502,169) (1,464,942) Class D shares.............................................. (6,048) (35,835) ------------ ------------ Total Dividends......................................... (1,147,596) (3,068,749) ------------ ------------ Net increase (decrease) from transactions in shares of beneficial interest....................................... 2,043,175 (9,494,759) ------------ ------------ Net Increase (Decrease)................................. 17,213,894 (43,364,635) Net Assets: Beginning of period......................................... 162,148,966 205,513,601 ------------ ------------ End of Period (Including dividends in excess of net investment income of $219,640 and accumulated undistributed net investment income of $160,219, respectively).................................. $179,362,860 $162,148,966 ============ ============ </Table> See Notes to Financial Statements 21 Morgan Stanley Balanced Growth Fund NOTES TO FINANCIAL STATEMENTS - JULY 31, 2003 (UNAUDITED) 1. Organization and Accounting Policies Morgan Stanley Balanced Growth 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 capital growth with reasonable current income. The Fund seeks to achieve its objective by investing in common stock of companies which have a record of paying dividends and have the potential for increasing dividends, securities convertible into common stock and in investment grade fixed income securities. 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 Growth 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 Growth 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 following annual rates to the net assets of the Fund determined as of the close of each business day: 0.60% to the portion of daily net assets not exceeding $500 million and 0.575% to the portion of 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 $3,646,544 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 Growth 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 A shares, Class B shares and Class C shares of $109, $118,487 and $1,835, respectively and received $27,428 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 $106,095,193 and $110,372,352, respectively. Included in the aforementioned are purchases and sales of U.S. Government securities in the amount of $16,146,369 and $11,067,430, respectively, and purchases with other Morgan Stanley Funds of $597,913. For the six months ended July 31, 2003, the Fund incurred brokerage commissions of $4,037 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 $455,754. 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 $500. 25 Morgan Stanley Balanced Growth 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.............................................. 91,322 $ 1,034,090 232,913 $ 2,811,714 Reinvestment of dividends......................... 4,692 52,204 10,917 127,005 Redeemed.......................................... (112,809) (1,272,195) (187,248) (2,160,038) ---------- ------------ ---------- ------------ Net increase (decrease) - Class A................. (16,795) (185,901) 56,582 778,681 ---------- ------------ ---------- ------------ CLASS B SHARES Sold.............................................. 1,774,618 19,976,254 3,621,512 42,937,984 Reinvestment of dividends......................... 41,966 469,127 98,082 1,143,993 Redeemed.......................................... (1,235,868) (13,673,853) (3,477,963) (40,483,040) ---------- ------------ ---------- ------------ Net increase - Class B............................ 580,716 6,771,528 241,631 3,598,937 ---------- ------------ ---------- ------------ CLASS C SHARES Sold.............................................. 319,243 3,643,776 448,808 5,346,292 Reinvestment of dividends......................... 39,873 445,136 111,038 1,296,529 Redeemed.......................................... (717,205) (7,909,845) (1,813,488) (20,867,708) ---------- ------------ ---------- ------------ Net decrease - Class C............................ (358,089) (3,820,933) (1,253,642) (14,224,887) ---------- ------------ ---------- ------------ CLASS D SHARES Sold.............................................. 19,079 218,913 65,956 779,348 Reinvestment of dividends......................... 522 5,830 2,998 34,787 Redeemed.......................................... (88,829) (946,262) (40,381) (461,625) ---------- ------------ ---------- ------------ Net increase (decrease) - Class D................. (69,228) (721,519) 28,573 352,510 ---------- ------------ ---------- ------------ Net increase (decrease) in Fund................... 136,604 $ 2,043,175 (926,856) $ (9,494.759) ========== ============ ========== ============ </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 Growth Fund NOTES TO FINANCIAL STATEMENTS - JULY 31, 2003 (UNAUDITED) continued As of January 31, 2003, the Fund had a net capital loss carryforward of $29,817,209 of which $3,271,494 will expire on January 31, 2009, $87,164 will expire on January 31, 2010 and $26,458,551 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 book 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 futures contracts involve elements of market risk in excess of the amount reflected in the Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the value of the underlying securities. At July 31, 2003, the Fund had outstanding futures contracts. 27 Morgan Stanley Balanced Growth 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............................... $10.73 $12.82 $13.29 $13.11 $15.01 $14.68 ------ ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income++........... 0.09 0.25 0.33 0.37 0.41 0.36 Net realized and unrealized gain (loss)............................ 1.06 (2.06) (0.42) 0.87 (0.59) 2.01 ------ ------ ------ ------ ------ ------ Total income (loss) from investment operations........................... 1.15 (1.81) (0.09) 1.24 (0.18) 2.37 ------ ------ ------ ------ ------ ------ Less dividends and distributions from: Net investment income............. (0.12) (0.28) (0.38) (0.38) (0.40) (0.39) Net realized gain................. -- -- -- (0.68) (1.32) (1.65) ------ ------ ------ ------ ------ ------ Total dividends and distributions..... (0.12) (0.28) (0.38) (1.06) (1.72) (2.04) ------ ------ ------ ------ ------ ------ Net asset value, end of period........ $11.76 $10.73 $12.82 $13.29 $13.11 $15.01 ====== ====== ====== ====== ====== ====== Total Return+......................... 10.77%(1) (14.27)% (0.53)% 10.65% (1.35)% 17.02% Ratios to Average Net Assets(3): Expenses.............................. 1.13%(2) 1.10% 1.07% 1.03% 1.04% 1.06% Net investment income................. 1.65%(2) 2.14% 2.56% 2.95% 2.81% 2.62% Supplemental Data: Net assets, end of period, in thousands............................ $6,213 $5,848 $6,259 $7,440 $6,308 $3,670 Portfolio turnover rate............... 56%(1) 145% 67% 33% 48% 49% </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 Growth 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.... $10.73 $12.81 $13.28 $13.09 $14.99 $14.67 ------ ----- ------ ------ ------ ------ Income (loss) from investment operations: Net investment income++............. 0.05 0.16 0.23 0.27 0.30 0.21 Net realized and unrealized gain (loss).............................. 1.06 (2.05) (0.42) 0.88 (0.60) 2.03 ------ ----- ------ ------ ------ ------ Total income (loss) from investment operations............................. 1.11 (1.89) (0.19) 1.15 (0.30) 2.24 ------ ----- ------ ------ ------ ------ Less dividends and distributions from: Net investment income............... (0.08) (0.19) (0.28) (0.28) (0.28) (0.27) Net realized gain................... -- -- -- (0.68) (1.32) (1.65) ------ ----- ------ ------ ------ ------ Total dividends and distributions....... (0.08) (0.19) (0.28) (0.96) (1.60) (1.92) ------ ----- ------ ------ ------ ------ Net asset value, end of period.......... $11.76 $10.73 $12.81 $13.28 $13.09 $14.99 ====== ===== ====== ====== ====== ====== Total Return+........................... 10.35%(1) (14.86)% (1.32)% 9.83% (2.15)% 16.09% Ratios to Average Net Assets(3): Expenses................................ 1.88%(2) 1.87% 1.83% 1.83% 1.80% 1.81% Net investment income................... 0.90%(2) 1.37% 1.80% 2.15% 2.05% 1.87% Supplemental Data: Net assets, end of period, in thousands.............................. $94,119 $79,631 $92,009 $57,490 $87,554 $99,666 Portfolio turnover rate................. 56%(1) 145% 67% 33% 48% 49% </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 Growth 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..... $10.73 $12.81 $13.28 $13.09 $14.99 $14.66 ------ ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income++.............. 0.05 0.16 0.23 0.27 0.30 0.22 Net realized and unrealized gain (loss)............................... 1.06 (2.05) (0.42) 0.88 (0.60) 2.04 ------ ------ ------ ------ ------ ------ Total income (loss) from investment operations.............................. 1.11 (1.89) (0.19) 1.15 (0.30) 2.26 ------ ------ ------ ------ ------ ------ Less dividends and distributions from: Net investment income................ (0.08) (0.19) (0.28) (0.28) (0.28) (0.28) Net realized gain.................... -- -- -- (0.68) (1.32) (1.65) ------ ------ ------ ------ ------ ------ Total dividends and distributions........ (0.08) (0.19) (0.28) (0.96) (1.60) (1.93) ------ ------ ------ ------ ------ ------ Net asset value, end of period........... $11.76 $10.73 $12.81 $13.28 $13.09 $14.99 ====== ====== ====== ====== ====== ====== Total Return+............................ 10.34%(1) (14.88)% (1.34)% 9.86% (2.14)% 16.23% Ratios to Average Net Assets(3): Expenses................................. 1.88%(2) 1.87% 1.83% 1.80% 1.79% 1.80% Net investment income.................... 0.90%(2) 1.37% 1.80% 2.18% 2.06% 1.88% Supplemental Data: Net assets, end of period, in thousands............................... $78,368 $75,323 $106,002 $117,927 $163,953 $203,132 Portfolio turnover rate.................. 56%(1) 145% 67% 33% 48% 49% </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 Growth 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......... $10.73 $12.81 $13.28 $13.10 $15.01 $14.68 ------ ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income++.................. 0.11 0.27 0.37 0.39 0.44 0.37 Net realized and unrealized gain (loss)................................... 1.05 (2.04) (0.43) 0.88 (0.60) 2.03 ------ ------ ------ ------ ------ ------ Total income (loss) from investment operations.................................. 1.16 (1.77) (0.06) 1.27 (0.16) 2.40 ------ ------ ------ ------ ------ ------ Less dividends and distributions from: Net investment income.................... (0.13) (0.31) (0.41) (0.41) (0.43) (0.42) Net realized gain........................ -- -- -- (0.68) (1.32) (1.65) ------ ------ ------ ------ ------ ------ Total dividends and distributions............ (0.13) (0.31) (0.41) (1.09) (1.75) (2.07) ------ ------ ------ ------ ------ ------ Net asset value, end of period............... $11.76 $10.73 $12.81 $13.28 $13.10 $15.01 ====== ====== ====== ====== ====== ====== Total Return+................................ 10.89%(1) (13.99)% (0.32)% 10.93% (1.20)% 17.28% Ratios to Average Net Assets(3): Expenses..................................... 0.88%(2) 0.87% 0.83% 0.83% 0.80% 0.81% Net investment income........................ 1.90%(2) 2.37% 2.80% 3.15% 3.05% 2.87% Supplemental Data: Net assets, end of period, in thousands...... $663 $1,347 $1,244 $2,702 $3,188 $1,853 Portfolio turnover rate...................... 56%(1) 145% 67% 33% 48% 49% </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 Growth Fund Semiannual Report July 31, 2003 [MORGAN STANLEY LOGO] 37896RPT-12077H03-AP-8/03 Item 2. Code of Ethics. Not applicable for semiannual reports. Item 3. Audit Committee Financial Expert. Not applicable for semiannual reports. Item 4. Principal Accountant Fees and Services Not applicable for semiannual reports. Item 5. Audit Committee of Listed Registrants. Not applicable for semiannual reports. Item 6. [Reserved.] Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable for semiannual reports. Item 8. [Reserved.] 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) Code of Ethics - Not applicable for semiannual reports. (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. 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 Growth Fund /s/ Ronald E. Robison 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. /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer September 22, 2003 /s/ Francis Smith Francis Smith Principal Financial Officer September 22, 2003 2 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 Growth Fund /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer December 8, 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. /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer December 8, 2003 /s/ Francis Smith Francis Smith Principal Financial Officer December 8, 2003 3