UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number: 811-07243

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, 2005

Date of reporting period: July 31, 2004

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. We will provide an
overview of the market conditions, and discuss some of the factors that affected
performance during the reporting period. In addition, this report includes the
Fund's financial statements and a list of Fund investments.

This material must be preceded or accompanied by a prospectus for the fund being
offered. Market forecasts provided in this report may not necessarily come to
pass. There is no assurance that the Fund will achieve its investment objective.
The Fund is subject to market risk, which is the possibility that market values
of securities owned by the Fund will decline and, therefore, the value of the
Fund's shares may be less than what you paid for them. Accordingly, you can lose
money investing in this Fund.

FUND REPORT

For the six-month period ended July 31, 2004

TOTAL RETURN FOR THE SIX-MONTH PERIOD ENDED JULY 31, 2004

<Table>
<Caption>
RUSSELL LIPPER
1000 LEHMAN BROTHERS INCOME
VALUE U.S. GOVERNMENT/ FUNDS
CLASS A CLASS B CLASS C CLASS D INDEX(1) CREDIT INDEX(2) INDEX(3)

-0.25% -0.57% -0.64% -0.15% 0.70% -0.04% -0.76%
</Table>

The performance of the Fund's four share classes varies because each has
different expenses. The Fund's total return figures assume the reinvestment of
all distributions but do not reflect the deduction of any applicable sales
charges. Such costs would lower performance. Past performance is no guarantee of
future results. See Performance Summary for standardized performance
information.

MARKET CONDITIONS

After having expanded appreciably in 2003, the U.S. economy slowed considerably
in the six-month period ended July 31, 2004. The domestic equity market suffered
from the mixed economic news that marked the period as investors lost confidence
in the momentum of economic recovery and faced mounting uncertainties related to
the market. While concern that the Federal Reserve would soon move to raise
interest rates was a major factor hindering equities, investors were also
affected by anxieties over rising oil prices and geopolitical difficulties such
as the threat of terrorism.

Value stocks generally outperformed growth securities for the six months, as
small and mid-cap companies outpaced their larger counterparts. The energy
sector was the strongest-performing over the period as oil prices continued to
rise. Technology stocks suffered greatly as the market continued to slow, and
the technology sector was the period's worst-performing as the market's
expectations for increased spending in information technology were not realized.
The bond market was hampered over the period by rising interest rates, which in
turn raised yields and lowered bond prices.

PERFORMANCE ANALYSIS

Morgan Stanley Balanced Income Fund underperformed the Russell 1000 Value Index
and the Lehman Brothers U.S. Government/Credit Index, but outperformed the
Lipper Income Funds Index. The Fund's performance was hampered primarily by
stock selection within the health care, industrials and financial services
sectors. Our stock selection in health care led to the Fund's having an
overweighted position in pharmaceuticals relative to the Russell 1000 Value
Index, which turned out to be detrimental as these stocks generally suffered
over this six-month period from an unfavorable environment.

One of the Fund's largest holdings, Bristol-Myers, also became the period's
worst performer; while the pharmaceutical company had made efforts to resolve
problems with its financial statements, lingering fears among investors about
the prospect of drug reimportation and the expectation of continuing competition
from generic brands greatly hurt the security. Similarly, several names within
the industrials sector also hurt the Fund. Equifax, a credit reporting company,
experienced losses as the jobless data failed to improve significantly during
the period and rising interest rates contributed to lower numbers of mortgage
and loan applications. Union Pacific was

hurt by rising oil prices as well as by complications surrounding the
organization of its distribution network and scheduling. While we maintained an
underweighted position in the financial services sector relative to the Russell
1000 Value Index, stock selection within the sector also hurt performance as the
brokerage companies Merrill Lynch and Lehman Brothers underperformed.

Stock selection in other sectors contributed positively to performance. We
maintained an overweighted position in the consumer discretionary sector
relative to the Russell 1000 Value Index. The Fund benefited greatly from gains
made by hotel and leisure stocks, as both recreational and business travel
picked up and aided the hotel industry. Two of the top-performing securities
included Starwood Hotels & Resorts, which owns both the Sheraton and Westin
Hotels companies, and Hilton Hotels. Holdings in automakers and parts companies
were also gainers within the consumer discretionary sector, with Honda Motor,
for instance, performing strongly because of improvements in its product line
and increasing market share. Although the Fund's holdings within the technology
sector provided negative returns, stock selection within technologies was
beneficial relative to benchmark performance, as the Fund did not hold a number
of underperforming securities, such as Sun Microsystems, Agilent Technology and
Electronic Data Systems. Holdings in telecommunications services companies also
had a positive impact on performance, as gains were made by Sprint when that
company saw a return of growth in wireless services.

INVESTMENT STRATEGY

THE FUND WILL NORMALLY INVEST AT LEAST 80% OF ITS ASSETS IN INCOME-PRODUCING
SECURITIES, CONSISTING OF (1) FIXED-INCOME SECURITIES AND (2) DIVIDEND PAYING
COMMON STOCKS AND SECURITIES CONVERTIBLE INTO COMMON STOCKS. WITHIN THE
LIMITATIONS DETAILED BELOW, THE FUND'S "INVESTMENT MANAGER," MORGAN STANLEY
INVESTMENT ADVISORS INC., MAY PURCHASE OR SELL SECURITIES IN ANY PROPORTION IT
BELIEVES DESIRABLE BASED ON ITS ASSESSMENT OF BUSINESS, ECONOMIC AND INVESTMENT
CONDITIONS.

FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS

EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN
ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND
AND FOURTH FISCAL QUARTERS BY FILING THE SCHEDULE ELECTRONICALLY WITH THE
SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON
FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON FORM N-CSR. MORGAN STANLEY ALSO
DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO FUND SHAREHOLDERS, AND MAKES THESE
REPORTS AVAILABLE ON ITS PUBLIC WEB SITE, WWW.MORGANSTANLEY.COM. EACH MORGAN
STANLEY FUND ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC
FOR THE FUND'S FIRST AND THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES
NOT DELIVER THE REPORTS FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS,
NOR ARE THE REPORTS POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY,
HOWEVER, OBTAIN THE FORM N-Q FILINGS (AS WELL AS THE FORM N-CSR AND N-CSRS
FILINGS) BY ACCESSING THE SEC'S WEB SITE, HTTP://WWW.SEC.GOV. YOU MAY ALSO
REVIEW AND COPY THEM AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC.
INFORMATION ON THE OPERATION OF THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED
BY

<Table>
<Caption>
TOP 10 HOLDINGS

U.S. Treasuries 32.7%
Fed. Nat. Mtge. Assoc 7.5
Fed. Home Ln. Mtge. Corp. 2.1
AOL Time Warner 1.2
Bristol Myers Squibb 1.1
JP Morgan Chase & Co. 1.0
BP PLC -- ADR 1.0
Prudential Holdings 1.0
Schlumberger Limited 0.9
General Motors 0.9
</Table>

<Table>
<Caption>
PORTFOLIO COMPOSITION*

US Government Agencies & Obligations 35.9%
Common Stocks 30.5
Corporate Bonds 19.1
Short-Term 8.8
Mortgage-Backed 4.9
Asset-Backed 0.6
Foreign Government Bond 0.2
</Table>

Data as of July 31, 2004. Subject to change daily. All percentages for top 10
holdings are as a percentage of net assets and all percentages for portfolio
composition are as a percentage of total investments. Provided for informational
purposes only and should not be deemed a recommendation to buy or sell the
securities mentioned. Morgan Stanley is a full-service securities firm engaged
in securities trading and brokerage activities, investment banking, research and
analysis, financing and financial advisory services.

* The Fund has outstanding short futures contracts with an underlying face
amount of $26,507,782 with unrealized depreciation of $923,157.

CALLING THE SEC AT 1-800-SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE
MATERIALS, UPON PAYMENT OF A DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S
E-MAIL ADDRESS (PUBLICINFO@SEC.GOV) OR BY WRITING THE PUBLIC REFERENCE SECTION
OF THE SEC, WASHINGTON, DC 20549-0102. YOU MAY OBTAIN COPIES OF A FUND'S FISCAL
QUARTER FILINGS BY CONTACTING MORGAN STANLEY CLIENT RELATIONS AT (800) 847-2424.

PROXY VOTING POLICIES AND PROCEDURES

A DESCRIPTION OF (1) THE FUND'S POLICIES AND PROCEDURES WITH RESPECT TO THE
VOTING OF PROXIES RELATING TO THE FUND'S PORTFOLIO SECURITIES; AND (2) HOW THE
FUND VOTED PROXIES RELATING TO PORTFOLIO SECURITIES DURING THE MOST RECENT
TWELVE-MONTH PERIOD ENDED JULY 31 IS AVAILABLE WITHOUT CHARGE, UPON REQUEST, BY
CALLING (800) 869-NEWS OR BY VISITING THE MUTUAL FUND CENTER ON OUR WEBSITE AT
WWW.MORGANSTANLEY.COM. THIS INFORMATION IS ALSO AVAILABLE ON THE SECURITIES AND
EXCHANGE COMMISSION'S WEBSITE AT HTTP://WWW.SEC.GOV.

PERFORMANCE SUMMARY

AVERAGE ANNUAL TOTAL RETURNS -- PERIOD ENDED JULY 31, 2004

<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 7.39%(4) 6.59%(4) 6.50%(4) 7.66%(4)
1.75(5) 1.59(5) 5.50(5) --
5 YEARS 4.31(4) 3.50(4) 3.50(4) 4.53(4)
3.19(5) 3.15(5) 3.50(5) --
SINCE INCEPTION 5.34(4) 4.52(4) 7.04(4) 5.56(4)
4.53(5) 4.52(5) 7.04(5) --
</Table>

Performance data quoted represents past performance, which is no guarantee of
future results and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
morganstanley.com or speak with your financial advisor. Investment returns and
principal value will fluctuate and fund shares, when redeemed, may be worth more
or less than their original cost. The 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.

* 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 contingent deferred sales charge for Class C is 1% for shares
redeemed within one year of purchase.

++ Class D has no sales charge.

(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 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.

(3) 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.

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

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

EXPENSE EXAMPLE

As a shareholder of the Fund, you incur ongoing costs, including management
fees; distribution and service (12b-1) fees; and other Fund expenses. This
example is intended to help you understand your ongoing costs (in dollars) of
investing in the Fund and to compare these costs with the ongoing costs of
investing in other mutual funds.

The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period 02/01/04 - 07/31/04.

ACTUAL EXPENSES

The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.

HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES

The second line of the table below provides information about hypothetical
expenses based on the Fund's actual expense ratio and an assumed rate of return
of 5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use this
information to compare the ongoing cost of investing in the Fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of the other funds.

Please note that the expenses shown in the table are meant to highlight your
ongoing costs only. Therefore, the second line of the table is useful in
comparing ongoing costs, and will not help you determine the relative total cost
of owning different funds that have transactional costs, such as sales charges
(loads), and redemption fees, or exchange fees.

<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
02/01/04 -
02/01/04 07/31/04 07/31/04
------------- ------------- ---------------

CLASS A
Actual...................................................... $1,000.00 $ 997.51 $5.41
Hypothetical (5% return before expenses).................... $1,000.00 $1,019.44 $5.47
CLASS B
Actual...................................................... $1,000.00 $ 994.29 $9.12
Hypothetical (5% return before expenses).................... $1,000.00 $1,015.71 $9.22
CLASS C
Actual...................................................... $1,000.00 $ 993.62 $9.12
Hypothetical (5% return before expenses).................... $1,000.00 $1,015.17 $9.22
CLASS D
Actual...................................................... $1,000.00 $ 998.54 $4.17
Hypothetical (5% return before expenses).................... $1,000.00 $1,020.69 $4.22
</Table>

- ------------------

* Expenses are equal to the Fund's annualized expense ratio of 1.09%, 1.84%,
1.84% and 0.84% respectively, multiplied by the average account value over
the period, multiplied by 182/366 (to reflect the one-half year period).

Morgan Stanley Balanced Income Fund
PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED)

<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------------

Common Stocks (31.5%)
Advertising/Marketing Services (0.2%)
36,120 Interpublic Group of Companies, Inc. (The)*................. $ 461,975
-----------

Aerospace & Defense (0.3%)
12,400 Northrop Grumman Corp. ..................................... 652,240
-----------

Auto Parts: O.E.M. (0.6%)
14,490 Magna International, Inc. (Class A) (Canada)................ 1,166,445
-----------

Broadcasting (0.5%)
29,600 Clear Channel Communications, Inc. ......................... 1,056,720
-----------

Chemicals: Major Diversified (1.2%)
56,800 Bayer AG (ADR) (Germany).................................... 1,532,464
22,430 Dow Chemical Co. (The)...................................... 894,733
-----------
2,427,197
-----------
Computer Processing Hardware (0.3%)
30,230 Hewlett-Packard Co. ........................................ 609,135
-----------

Containers/Packaging (0.3%)
10,420 Temple-Inland, Inc. ........................................ 711,165
-----------

Data Processing Services (0.9%)
14,610 Automatic Data Processing, Inc. ............................ 613,328
17,100 First Data Corp. ........................................... 762,831
19,400 SunGard Data Systems Inc.*.................................. 452,214
-----------
1,828,373
-----------
Discount Stores (0.4%)
21,250 Target Corp. ............................................... 926,500
-----------

Electric Utilities (1.4%)
9,900 Consolidated Edison, Inc. .................................. 405,603
14,200 Edison International........................................ 380,560
13,010 Entergy Corp. .............................................. 748,075
</Table>

See Notes to Financial Statements

Morgan Stanley Balanced Income Fund
PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued

<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------------

20,820 Exelon Corp. ............................................... $ 726,618
15,900 FirstEnergy Corp. .......................................... 621,690
-----------
2,882,546
-----------
Finance/Rental/Leasing (0.5%)
17,200 Freddie Mac................................................. 1,106,132
-----------

Financial Conglomerates (2.0%)
25,990 Citigroup, Inc. ............................................ 1,145,899
58,256 J.P. Morgan Chase & Co. .................................... 2,174,696
16,790 Prudential Financial, Inc. ................................. 781,742
-----------
4,102,337
-----------
Financial Publishing/Services (0.4%)
36,730 Equifax, Inc. .............................................. 885,928
-----------

Food: Major Diversified (0.9%)
23,200 Kraft Foods Inc. (Class A).................................. 708,760
7,100 Nestle SA (ADR) (Registered Shares) (Switzerland)........... 455,110
15,910 PepsiCo, Inc. .............................................. 795,500
-----------
1,959,370
-----------
Foods: Specialty/Candy (0.4%)
23,150 Cadbury Schweppes PLC (ADR) (United Kingdom)................ 764,876
-----------

Hotels/Resorts/Cruiselines (0.8%)
20,780 Hilton Hotels Corp. ........................................ 370,507
12,400 Marriott International, Inc. (Class A)...................... 605,120
14,630 Starwood Hotels & Resorts Worldwide, Inc. .................. 658,350
-----------
1,633,977
-----------
Household/Personal Care (0.6%)
19,190 Kimberly-Clark Corp. ....................................... 1,229,503
-----------

Industrial Conglomerates (0.7%)
27,300 General Electric Co. ....................................... 907,725
7,570 Ingersoll-Rand Co. Ltd. (Class A) (Bermuda)................. 519,983
-----------
1,427,708
-----------
Industrial Machinery (0.3%)
11,600 Parker-Hannifin Corp. ...................................... 665,608
-----------
</Table>

See Notes to Financial Statements

Morgan Stanley Balanced Income Fund
PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued

<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------------

Information Technology Services (0.6%)
30,800 Accenture Ltd. (Class A) (Bermuda) (ADR)*................... $ 758,604
6,350 International Business Machines Corp. ...................... 552,895
-----------
1,311,499
-----------
Integrated Oil (3.0%)
37,880 BP PLC (ADR) (United Kingdom)............................... 2,134,916
16,410 ConocoPhillips.............................................. 1,292,616
28,330 Exxon Mobil Corp. .......................................... 1,311,679
26,400 Royal Dutch Petroleum Co. (NY Registered Shares)
(Netherlands)............................................. 1,327,920
-----------
6,067,131
-----------
Investment Banks/Brokers (1.1%)
16,800 Lehman Brothers Holdings, Inc. ............................. 1,177,680
24,230 Merrill Lynch & Co., Inc. .................................. 1,204,716
-----------
2,382,396
-----------
Life/Health Insurance (0.3%)
19,680 Metlife, Inc. .............................................. 701,986
-----------

Major Banks (0.7%)
11,350 Bank of America Corp. ...................................... 964,864
9,120 PNC Financial Services Group................................ 461,472
-----------
1,426,336
-----------
Major Telecommunications (1.2%)
16,200 SBC Communications, Inc. ................................... 410,508
56,610 Sprint Corp. (FON Group).................................... 1,057,475
27,120 Verizon Communications Inc. ................................ 1,045,205
-----------
2,513,188
-----------
Managed Health Care (0.4%)
12,050 CIGNA Corp. ................................................ 747,221
-----------

Media Conglomerates (1.5%)
60,490 Disney (Walt) Co. (The)..................................... 1,396,714
108,250 Time Warner Inc.*........................................... 1,802,362
-----------
3,199,076
-----------
Medical Specialties (0.6%)
18,440 Bausch & Lomb, Inc. ........................................ 1,135,720
-----------
</Table>

See Notes to Financial Statements

Morgan Stanley Balanced Income Fund
PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued

<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------------

Motor Vehicles (0.8%)
65,400 Honda Motor Co., Ltd. (ADR) (Japan)......................... $ 1,587,258
-----------

Multi-Line Insurance (0.5%)
17,170 Hartford Financial Services Group, Inc. (The)............... 1,117,767
-----------

Oil Refining/Marketing (0.3%)
9,610 Valero Energy Corp. ........................................ 719,981
-----------

Oilfield Services/Equipment (0.9%)
30,070 Schlumberger Ltd. (Netherlands) ............................ 1,934,102
-----------

Package Software (0.7%)
21,300 Computer Associates International, Inc. .................... 537,612
28,710 Microsoft Corp. ............................................ 817,087
-----------
1,354,699
-----------
Pharmaceuticals: Major (2.7%)
6,600 AstraZeneca PLC (ADR) (United Kingdom)...................... 296,472
97,490 Bristol-Myers Squibb Co. ................................... 2,232,520
12,470 Roche Holdings Ltd. (ADR) (Switzerland)..................... 1,234,031
60,450 Schering-Plough Corp. ...................................... 1,176,357
16,200 Wyeth....................................................... 573,480
-----------
5,512,860
-----------
Precious Metals (0.3%)
17,430 Newmont Mining Corp. ....................................... 705,392
-----------

Property - Casualty Insurers (1.2%)
24,070 Chubb Corp. (The)........................................... 1,655,535
24,034 St. Paul Travelers Companies, Inc. (The).................... 890,940
-----------
2,546,475
-----------
Railroads (0.9%)
49,620 Norfolk Southern Corp. ..................................... 1,324,357
11,040 Union Pacific Corp. ........................................ 621,994
-----------
1,946,351
-----------
Restaurants (0.3%)
19,320 McDonald's Corp. ........................................... 531,300
-----------
</Table>

See Notes to Financial Statements

Morgan Stanley Balanced Income Fund
PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued

<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------------------------------------

Semiconductors (0.3%)
25,250 Intel Corp. ........................................................................ $ 615,595
-----------

Tobacco (0.2%)
9,680 Altria Group, Inc. ................................................................. 460,768
-----------

Wireless Communications (0.3%)
36,300 AT&T Wireless Services. Inc.*....................................................... 524,172
-----------
Total Common Stocks (Cost $52,624,239).............................................. 65,539,008
-----------
</Table>

<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
- --------- ---------- ----------

Corporate Bonds (19.8%)
Advertising/Marketing Services (0.2%)
$ 350 WPP Finance (UK) Corp. - 144A** (United Kingdom)......... 5.875% 06/15/14 355,742
------------

Aerospace & Defense (0.4%)
235 Raytheon Co. ............................................ 8.30 03/01/10 277,536
586 Systems 2001 Asset Trust - 144A**........................ 6.664 09/15/13 634,629
------------
912,165
------------
Air Freight/Couriers (0.1%)
225 Fedex Corp. - 144A**..................................... 2.65 04/01/07 219,587
------------

Airlines (0.5%)
350 America West Airlines, (Series 01-1)..................... 7.10 04/02/21 370,278
47 Continental Airlines, Inc. (Series 981A)................. 6.648 09/15/17 43,597
359 Continental Airlines, Inc. (Series 974A)................. 6.90 01/02/18 339,750
89 Continental Airlines, Inc. (Series 991A)................. 6.545 02/02/19 83,530
195 Southwest Airlines Co. (Series 01-1)..................... 5.496 11/01/06 202,780
------------
1,039,935
------------
Beverages: Alcoholic (0.1%)
235 Miller Brewing Co. - 144A**.............................. 4.25 08/15/08 235,645
------------

Broadcasting (0.1%)
245 Clear Channel Communications, Inc. ...................... 7.65 09/15/10 277,429
------------
</Table>

See Notes to Financial Statements

Morgan Stanley Balanced Income Fund
PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued

<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------

Cable/Satellite TV (0.3%)
$ 95 Comcast Cable Communications Inc. ....................... 6.75 % 01/30/11 $ 103,616
410 Comcast Corp. ........................................... 6.50 01/15/15 432,203
40 Comcast Corp. ........................................... 7.625 02/15/08 43,988
105 TCI Communications, Inc. ................................ 7.875 02/15/26 120,262
------------
700,069
------------
Chemicals: Major Diversified (0.1%)
170 ICI Wilmington Inc. ..................................... 4.375 12/01/08 168,210
------------

Containers/Packaging (0.2%)
320 Sealed Air Corp - 144A**................................. 5.625 07/15/13 319,321
------------

Department Stores (0.5%)
50 Federated Department Stores, Inc. ....................... 6.625 09/01/08 54,369
160 Federated Department Stores, Inc. ....................... 6.90 04/01/29 169,323
110 Federated Department Stores, Inc. ....................... 7.00 02/15/28 117,618
80 May Department Stores Co., Inc. ......................... 5.95 11/01/08 84,356
415 May Department Stores Co., Inc. ......................... 6.70 09/15/28 419,117
60 May Department Stores Co., Inc. ......................... 6.90 01/15/32 62,113
100 May Department Stores Co., Inc. ......................... 7.875 03/01/30 115,354
------------
1,022,250
------------
Drugstore Chains (0.2%)
290 CVS Corp. ............................................... 5.625 03/15/06 302,612
64 CVS Corp. - 144A**....................................... 6.204 10/10/25 65,114
------------
367,726
------------
Electric Utilities (1.8%)
145 Appalachian Power Co. (Series H)......................... 5.95 05/15/33 137,361
340 Arizona Public Service Co. .............................. 5.80 06/30/14 344,553
325 Carolina Power & Light Co. .............................. 5.125 09/15/13 323,206
145 Cincinnati Gas & Electric Co. ........................... 5.70 09/15/12 149,731
130 Cincinnati Gas & Electric Co. (Series A)................. 5.375 06/15/33 114,088
105 Cincinnati Gas & Electric Co. (Series B)................. 5.40 06/15/33 92,495
95 Columbus Southern Power Co. ............................. 6.60 03/01/33 99,267
230 Consolidated Natural Gas Co. ............................ 6.25 11/01/11 246,531
100 Consolidated Natural Gas Co. (Series A).................. 5.00 03/01/14 97,101
85 Detroit Edison Co. ...................................... 6.125 10/01/10 91,354
160 Duke Energy Corp. ....................................... 3.75 03/05/08 158,957
200 Duke Energy Corp. ....................................... 4.50 04/01/10 199,525
130 Entergy Gulf States, Inc. ............................... 3.60 06/01/08 126,808
225 Exelon Corp. ............................................ 6.75 05/01/11 246,321
</Table>

See Notes to Financial Statements
12

Morgan Stanley Balanced Income Fund
PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued

<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------

$ 230 Ohio Power Co. (Series G)................................ 6.60 % 02/15/33 $ 239,392
345 Pacific Gas & Electric Co. .............................. 6.05 03/01/34 333,475
220 Public Service Electric & Gas Co. (Series MTNB).......... 5.00 01/01/13 219,527
115 South Carolina Electric & Gas Co. ....................... 5.30 05/15/33 104,457
50 Southern California Edison Co. .......................... 5.00 01/15/14 49,476
155 Texas Eastern Transmission, L.P. ........................ 7.00 07/15/32 168,415
190 TXU Energy Co. .......................................... 7.00 03/15/13 209,043
35 Wisconsin Electric Power Co. ............................ 5.625 05/15/33 33,300
------------
3,784,383
------------
Electrical Products (0.1%)
240 Cooper Industries Inc. .................................. 5.25 07/01/07 251,133
------------

Environmental Services (0.3%)
85 Waste Management, Inc. .................................. 5.00 03/15/14 82,254
435 Waste Management, Inc. .................................. 6.875 05/15/09 480,430
------------
562,684
------------
Finance/Rental/Leasing (1.1%)
240 CIT Group Inc. .......................................... 2.875 09/29/06 237,622
105 CIT Group Inc. .......................................... 7.375 04/02/07 115,015
460 Countrywide Home Loans, Inc. ............................ 3.25 05/21/08 445,855
225 Ford Motor Credit Co. ................................... 7.375 10/28/09 241,663
315 Ford Motor Credit Co. ................................... 7.25 10/25/11 331,745
530 MBNA Corp. .............................................. 6.125 03/01/13 553,298
350 SLM Corp. ............................................... 5.00 10/01/13 341,687
------------
2,266,885
------------
Financial Conglomerates (2.9%)
500 Associates Corp. of North America........................ 6.25 11/01/08 540,753
230 Bank One Corp. .......................................... 6.00 02/17/09 245,372
370 Chase Manhattan Corp. ................................... 6.00 02/15/09 395,100
80 Chase Manhattan Corp. ................................... 7.00 11/15/09 89,607
160 Citicorp................................................. 6.75 08/15/05 166,935
185 Citigroup Inc. .......................................... 5.625 08/27/12 192,662
255 Citigroup Inc. .......................................... 5.75 05/10/06 267,336
125 Citigroup Inc. .......................................... 6.00 02/21/12 134,007
165 General Electric Capital Corp. .......................... 4.25 12/01/10 162,207
650 General Electric Capital Corp. .......................... 6.75 03/15/32 712,041
1,010 General Motors Acceptance Corp. ......................... 6.875 09/15/11 1,038,282
735 General Motors Acceptance Corp. ......................... 8.00 11/01/31 748,430
135 John Hancock Financial Services.......................... 5.625 12/01/08 142,858
</Table>

See Notes to Financial Statements
13

Morgan Stanley Balanced Income Fund
PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued

<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------

$ 910 Prudential Holdings, LLC (Series B) (FSA) - 144A**....... 7.245% 12/18/23 $ 1,038,213
220 Prudential Holdings, LLC (Series C) - 144A**............. 8.695 12/18/23 270,241
------------
6,144,044
------------
Food Retail (0.2%)
195 Albertson's Inc. ........................................ 7.50 02/15/11 221,127
150 Kroger Co. .............................................. 6.80 04/01/11 164,951
110 Kroger Co. .............................................. 8.00 09/15/29 129,896
------------
515,974
------------
Food: Major Diversified (0.4%)
80 General Mills Inc. ...................................... 3.875 11/30/07 80,152
115 Kraft Foods Inc. ........................................ 5.25 06/01/07 120,028
325 Kraft Foods Inc. ........................................ 5.625 11/01/11 335,844
230 Kraft Foods Inc. ........................................ 6.25 06/01/12 245,893
------------
781,917
------------
Forest Products (0.4%)
160 Weyerhaeuser Co. ........................................ 6.00 08/01/06 168,459
110 Weyerhaeuser Co. ........................................ 6.125 03/15/07 117,135
515 Weyerhaeuser Co. ........................................ 6.75 03/15/12 563,908
------------
849,502
------------
Gas Distributors (0.2%)
295 Ras Laffan Liquid Natural Gas Co. Ltd. - 144A** 8.294 03/15/14 336,300
(Qatar)................................................
------------

Home Furnishings (0.1%)
95 Mohawk Industries, Inc. ................................. 7.20 04/15/12 106,422
------------

Home Improvement Chains (0.1%)
40 Lowe's Companies, Inc. .................................. 6.875 02/15/28 44,427
65 Lowe's Companies, Inc. .................................. 6.50 03/15/29 69,278
------------
113,705
------------
Hotels/Resorts/Cruiselines (0.4%)
305 Hyatt Equities LLC - 144A**.............................. 6.875 06/15/07 325,168
505 Marriott International, Inc. (Series E).................. 7.00 01/15/08 550,700
------------
875,868
------------
</Table>

See Notes to Financial Statements
14

Morgan Stanley Balanced Income Fund
PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued

<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------

Industrial Conglomerates (0.4%)
$ 365 Honeywell International, Inc. ........................... 6.125% 11/01/11 $ 394,320
155 Hutchison Whampoa International Ltd. - 144A** (Virgin 5.45 11/24/10 154,244
Islands)...............................................
230 Hutchison Whampoa International Ltd. - 144A** (Virgin 6.50 02/13/13 232,751
Islands)...............................................
------------
781,315
------------
Information Technology Services (0.1%)
120 Electronic Data Systems.................................. 7.125 10/15/09 125,469
------------

Insurance Brokers/Services (0.3%)
670 Farmers Exchange Capital - 144A**........................ 7.05 07/15/28 658,146
------------

Integrated Oil (0.2%)
110 Amerada Hess Corp. ...................................... 6.65 08/15/11 118,130
40 Petro-Canada............................................. 4.00 07/15/13 36,196
195 Petro-Canada............................................. 5.35 07/15/33 169,081
145 Amerada Hess Corp. ...................................... 7.875 10/01/29 160,170
------------
483,577
------------
Investment Banks/Brokers (0.4%)
260 Goldman Sachs Group Inc. ................................ 5.25 10/15/13 256,183
345 Goldman Sachs Group Inc. ................................ 6.60 01/15/12 375,694
235 Goldman Sachs Group Inc. ................................ 6.875 01/15/11 260,380
------------
892,257
------------
Major Banks (0.7%)
120 Bank of New York (The)................................... 5.20 07/01/07 125,679
290 FleetBoston Financial Corp. ............................. 7.25 09/15/05 304,898
195 Household Finance Corp. ................................. 4.125 12/15/08 193,937
220 Household Finance Corp. ................................. 5.875 02/01/09 234,174
105 Household Finance Corp. ................................. 6.375 10/15/11 113,337
230 Household Finance Corp. ................................. 6.40 06/17/08 249,148
225 Household Finance Corp. ................................. 6.75 05/15/11 248,204
------------
1,469,377
------------
Major Telecommunications (0.9%)
400 Deutsche Telekom International Finance Corp. 8.75 06/15/30 498,331
(Netherlands)..........................................
170 France Telecom S.A. (France)............................. 9.50 03/01/31 217,072
345 GTE Corp. ............................................... 6.94 04/15/28 357,646
95 Sprint Capital Corp. .................................... 8.75 03/15/32 115,455
210 Telecom Italia Capital SpA - 144A** (Luxembourg)......... 4.00 11/15/08 207,744
</Table>

See Notes to Financial Statements
15

Morgan Stanley Balanced Income Fund
PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued

<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------

$ 205 Verizon Global Funding Corp. ............................ 7.75 % 12/01/30 $ 235,929
300 Verizon New England Inc. ................................ 6.50 09/15/11 323,829
------------
1,956,006
------------
Managed Health Care (0.6%)
605 Aetna, Inc. ............................................. 7.875 03/01/11 703,818
30 Anthem Inc. ............................................. 6.80 08/01/12 33,198
135 Anthem Insurance - 144A**................................ 9.125 04/01/10 166,633
345 Wellpoint Health Network, Inc. .......................... 6.375 06/15/06 364,633
------------
1,268,282
------------
Media Conglomerates (0.6%)
295 AOL Time Warner Inc. .................................... 7.625 04/15/31 325,522
140 AOL Time Warner, Inc. ................................... 7.70 05/01/32 155,987
405 News America Holdings, Inc. ............................. 7.28 06/30/28 444,296
10 News America Holdings, Inc. ............................. 8.875 04/26/23 12,603
90 News America Holdings, Inc. ............................. 7.75 02/01/24 102,770
135 Time Warner, Inc. ....................................... 6.625 05/15/29 133,605
------------
1,174,783
------------
Motor Vehicles (0.7%)
140 DaimlerChrysler North American Holdings Co. ............. 7.20 09/01/09 153,987
450 DaimlerChrysler North American Holdings Co. ............. 7.30 01/15/12 496,689
220 DaimlerChrysler North American Holdings Co. ............. 8.50 01/18/31 259,043
135 General Motors Acceptance Corp. ......................... 4.50 07/15/06 136,951
90 Ford Motor Co. .......................................... 6.625 10/01/28 78,960
290 Ford Motor Co. .......................................... 7.45 07/16/31 276,593
------------
1,402,223
------------
Multi-Line Insurance (1.0%)
780 AIG SunAmerica Global Finance VI - 144A**................ 6.30 05/10/11 847,004
265 American General Finance Corp. .......................... 5.875 07/14/06 278,406
130 American General Finance Corp. (Series MTNH)............. 4.625 09/01/10 129,592
60 AXA Financial Inc. ...................................... 6.50 04/01/08 65,551
120 Hartford Financial Services Group, Inc. (The)............ 2.375 06/01/06 118,452
265 Hartford Financial Services Group, Inc. (The)............ 7.90 06/15/10 309,216
135 International Lease Finance Corp. ....................... 3.75 08/01/07 135,016
100 Nationwide Mutual Insurance Co. - 144A**................. 8.25 12/01/31 119,657
------------
2,002,894
------------
Oil & Gas Pipelines (0.0%)
70 Panhandle Eastern Pipe Line Co. ......................... 2.75 03/15/07 67,533
------------
</Table>

See Notes to Financial Statements
16

Morgan Stanley Balanced Income Fund
PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued

<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------

Oil & Gas Production (1.0%)
$ 55 Kerr-McGee Corp. ........................................ 5.875% 09/15/06 $ 57,582
135 Kerr-McGee Corp. ........................................ 6.875 09/15/11 146,866
215 Nexen Inc. (Canada)...................................... 5.05 11/20/13 208,760
220 Pemex Project Funding Master Trust....................... 7.375 12/15/14 231,000
390 Pemex Project Funding Master Trust....................... 8.00 11/15/11 429,975
610 Pemex Project Funding Master Trust....................... 8.625 02/01/22 660,325
290 Pemex Project Funding Master Trust....................... 9.125 10/13/10 337,125
------------
2,071,633
------------
Oil Refining/Marketing (0.1%)
145 Marathon Oil Corp. ...................................... 5.375 06/01/07 151,858
------------

Other Metals/Minerals (0.3%)
415 Inco Ltd. (Canada)....................................... 7.20 09/15/32 442,995
105 Inco Ltd. (Canada)....................................... 7.75 05/15/12 120,040
------------
563,035
------------
Pharmaceuticals: Major (0.0%)
80 Schering-Plough Corp. ................................... 5.30 12/01/13 80,132
------------

Property - Casualty Insurers (0.2%)
460 Mantis Reef Ltd. - 144A** (Australia).................... 4.692 11/14/08 456,910
------------

Pulp & Paper (0.2%)
245 International Paper Co. ................................. 4.25 01/15/09 242,113
225 Sappi Papier Holding AG-144A** (Austria)................. 6.75 06/15/12 241,983
------------
484,096
------------
Railroads (0.1%)
105 Union Pacific Corp. ..................................... 3.625 06/01/10 98,812
110 Union Pacific Corp. ..................................... 6.79 11/09/07 119,832
------------
218,644
------------
Real Estate Development (0.5%)
451 World Financial Properties - 144A**...................... 6.91 09/01/13 495,456
443 World Financial Properties - 144A**...................... 6.95 09/01/13 488,823
------------
984,279
------------
Real Estate Investment Trust (0.3%)
30 EOP Operating L.P. ...................................... 4.75 03/15/14 28,041
245 EOP Operating L.P. ...................................... 6.763 06/15/07 264,164
45 EOP Operating L.P. ...................................... 7.25 06/15/28 47,068
</Table>

See Notes to Financial Statements
17

Morgan Stanley Balanced Income Fund
PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued

<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------

$ 140 Rouse Co. (The).......................................... 3.625% 03/15/09 $ 134,238
60 Rouse Co. (The).......................................... 5.375 11/26/13 58,876
------------
532,387
------------
Savings Banks (0.2%)
195 Washington Mutual Inc. .................................. 5.50 01/15/13 198,086
195 Washington Mutual Inc. .................................. 8.25 04/01/10 228,438
------------
426,524
------------
Tobacco (0.2%)
265 Altria Group, Inc. ...................................... 7.00 11/04/13 274,013
215 Altria Group, Inc. ...................................... 7.75 01/15/27 221,866
------------
495,879
------------
Wireless Communications (0.1%)
160 AT&T Wireless Services, Inc. ............................ 8.75 03/01/31 199,739
------------
Total Corporate Bonds (Cost $40,037,927).......................................... 41,153,874
------------
Foreign Government Obligation (0.2%)
390 United Mexican States Corp. (Mexico) (Cost $449,125)..... 8.30 08/15/31 422,175
------------
U.S. Government Agency & Obligations (37.0%)
1,300 Federal Home Loan Mortgage Corp. ........................ 5.125 11/07/13 1,292,129
7,060 Federal National Mortgage Assoc.......................... 4.25 05/15/09 7,121,620
740 Tennessee Valley Authority............................... 0.00 10/15/04 737,350
U.S. Treasury Bonds
5,000 ......................................................... 5.50 08/15/28 5,136,330
3,260 ......................................................... 6.125 08/15/29 3,636,556
7,700 ......................................................... 7.625 02/15/25 10,004,286
1,450 ......................................................... 8.125 08/15/19 1,921,365
6,850 ......................................................... 8.125 08/15/21 9,169,903
1,150 ......................................................... 8.75 08/15/20 1,611,708
U.S. Treasury Notes
10,050 ......................................................... 1.875 01/31/06 9,974,635
15,000 ......................................................... 3.50 11/15/06 15,225,014
4,950 ......................................................... 3.875 02/15/13 4,785,066
500 ......................................................... 6.50 02/15/10 566,114
U.S. Treasury Strips
1,000 ......................................................... 0.00 05/15/11 750,724
4,190 ......................................................... 0.00 08/15/20 1,766,265
5,750 ......................................................... 0.00 02/15/25 1,849,625
5,555 ......................................................... 0.00 02/15/25 1,779,778
------------
Total U.S. Government & Agency Obligations (Cost $77,185,320)..................... 77,328,468
------------
</Table>

See Notes to Financial Statements
18

Morgan Stanley Balanced Income Fund
PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued

<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------

Mortgage-Backed Securities (5.1%)
Federal Home Loan Mortgage Corp. Gold
$ 978 ......................................................... 6.50 % 08/01/29-
08/01/33 $ 1,024,983
836 ......................................................... 7.50 10/01/29-
08/01/32 897,983
Federal National Mortgage Assoc.
3,755 ......................................................... 6.50 01/01/33 3,924,620
1,222 ......................................................... 7.00 07/01/11-
07/01/32 1,293,303
965 ......................................................... 7.50 08/01/23-
06/01/32 1,033,874
1,000 ......................................................... 7.50 + 1,069,688
997 ......................................................... 8.00 05/01/24-
08/01/31 1,082,746
Government National Mortgage Assoc.
185 ......................................................... 7.50 08/15/25-
09/15/26 199,088
87 ......................................................... 8.00 06/15/26-
07/15/26 95,988
------------
Total Mortgage-Backed Securities (Cost $10,477,479)............................... 10,622,273
------------
Asset-Backed Securities (0.7%)
Finance/Rental/Leasing
315 Chase Credit Card Master Trust 2001-4A................... 5.50 11/17/08 329,602
300 Citibank Credit Issuance Trust 2001-A/A1................. 6.90 10/15/07 315,551
17 Harley-Davidson Motorcycle Trust 2002-1.................. 3.02 09/15/06 17,075
140 MBNA Master Credit Card Trust............................ 5.90 08/15/11 150,726
365 Nissan Auto Receivables Owner Trust 2001-C A4............ 4.80 02/15/07 368,412
175 TXU Electric Delivery Transition Bond Co. LLC 2004-1 4.81 11/15/12 176,319
A2.....................................................
------------
Total Asset-Backed Securities (Cost $1,323,153)................................... 1,357,685
------------
Short-Term Investments (9.0%)
U.S. Government Obligations (a) (0.2%)
U.S. Treasury Bills
400 ***...................................................... 0.98 09/23/04 399,412
100 ***...................................................... 1.645 01/13/05 99,251
------------
Total U.S. Government Obligations (Cost $498,669)................................. 498,663
------------
</Table>

See Notes to Financial Statements
19

Morgan Stanley Balanced Income Fund
PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued

<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------

]
Repurchase Agreement (8.8%)
$18,337 Joint repurchase agreement account (dated 07/30/04; 1.355% 08/02/04 $ 18,337,000
proceeds $18,339,071) (b) (Cost $18,337,000)...........
------------
Total Short-Term Investments (Cost $18,835,669)................................... 18,835,663
------------
</Table>

<Table>

Total Investments (Cost $200,932,912) (c) (d)........................ 103.3% 215,259,146

Liabilities in Excess of Other Assets................................ (3.3) (6,905,122)
----- ------------
Net Assets........................................................... 100.0% $208,354,024
===== ============
</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 this security has been physically
segregated in connection with open futures contracts in an
amount equal to $321,700.
+ Security 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 rates shown have
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 $33,504,323 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 $16,105,924 and
the aggregate gross unrealized depreciation is $1,779,690,
resulting in net unrealized appreciation of $14,326,234.
</Table>

Futures Contracts Open at July 31, 2004:

<Table>
<Caption>
NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE UNREALIZED
CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE DEPRECIATION
- --------- ---------- ------------------------ --------------- ------------

37 Short U.S. Treasury Notes
5 Year September 2004 $ (4,051,500) $ (59,915)
22 Short U.S. Treasury Notes
5 Year September 2004 (2,435,813) (61,745)
185 Short U.S. Treasury Bonds
20 Year September 2004 (20,020,469) (801,497)
---------
Total unrealized depreciation............................ $(923,157)
=========
</Table>

20
See Notes to Financial Statements

Morgan Stanley Balanced Income Fund
FINANCIAL STATEMENTS

Statement of Assets and Liabilities
July 31, 2004 (unaudited)

<Table>

Assets:
Investments in securities, at value
(cost $200,932,912)....................................... $215,259,146
Receivable for:
Interest................................................ 1,968,238
Investments sold........................................ 161,292
Shares of beneficial interest sold...................... 91,457
Dividends............................................... 73,476
Prepaid expenses and other assets........................... 71,435
------------
Total Assets............................................ 217,625,044
------------
Liabilities:
Payable for:
Investments purchased................................... 8,519,662
Variation margin........................................ 263,938
Distribution fee........................................ 170,812
Shares of beneficial interest redeemed.................. 161,450
Investment management fee............................... 106,664
Accrued expenses and other payables......................... 48,494
------------
Total Liabilities....................................... 9,271,020
------------
Net Assets.............................................. $208,354,024
============
Composition of Net Assets:
Paid-in-capital............................................. $199,780,850
Net unrealized appreciation................................. 13,403,077
Dividends in excess of net investment income................ (754,004)
Accumulated net realized loss............................... (4,075,899)
------------
Net Assets.............................................. $208,354,024
============
Class A Shares:
Net Assets.................................................. $8,032,423
Shares Outstanding (unlimited authorized, $.01 par value)... 644,785
Net Asset Value Per Share............................... $12.46
============
Maximum Offering Price Per Share,
(net asset value plus 5.54% of net asset value)....... $13.15
============
Class B Shares:
Net Assets.................................................. $155,155,606
Shares Outstanding (unlimited authorized, $.01 par value)... 12,506,454
Net Asset Value Per Share............................... $12.41
============
Class C Shares:
Net Assets.................................................. $43,124,186
Shares Outstanding (unlimited authorized, $.01 par value)... 3,470,939
Net Asset Value Per Share............................... $12.42
============
Class D Shares:
Net Assets.................................................. $2,041,809
Shares Outstanding (unlimited authorized, $.01 par value)... 164,313
Net Asset Value Per Share............................... $12.43
============
</Table>

See Notes to Financial Statements
21

Morgan Stanley Balanced Income Fund
FINANCIAL STATEMENTS continued

Statement of Operations
For the six months ended July 31, 2004 (unaudited)

<Table>

Net Investment Income:
Income
Interest.................................................... $ 3,105,631
Dividends (net of $21,222 foreign withholding tax).......... 645,511
-----------
Total Income............................................ 3,751,142
-----------
Expenses
Distribution fee (Class A shares)........................... 9,567
Distribution fee (Class B shares)........................... 816,187
Distribution fee (Class C shares)........................... 216,582
Investment management fee................................... 649,738
Transfer agent fees and expenses............................ 125,399
Professional fees........................................... 34,278
Shareholder reports and notices............................. 33,902
Registration fees........................................... 27,848
Custodian fees.............................................. 21,338
Trustees' fees and expenses................................. 1,516
Other....................................................... 11,774
-----------
Total Expenses.......................................... 1,948,129
-----------
Net Investment Income................................... 1,803,013
-----------
Net Realized and Unrealized Gain (Loss):
Net Realized Gain on:
Investments................................................. 3,759,473
Futures contracts........................................... 397,251
-----------
Net Realized Gain....................................... 4,156,724
-----------
Net Change in Unrealized Appreciation/Depreciation on:
Investments................................................. (7,000,159)
Futures contracts........................................... (408,669)
-----------
Net Depreciation........................................ (7,408,828)
-----------
Net Loss................................................ (3,252,104)
-----------
Net Decrease................................................ $(1,449,091)
===========
</Table>

See Notes to Financial Statements
22

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, 2004 JANUARY 31, 2004
------------- ----------------
(unaudited)

Increase (Decrease) in Net Assets:
Operations:
Net investment income....................................... $ 1,803,013 $ 2,886,139
Net realized gain........................................... 4,156,724 7,018,523
Net change in unrealized appreciation....................... (7,408,828) 14,617,180
------------ ------------
Net Increase (Decrease)................................. (1,449,091) 24,521,842
------------ ------------
Dividends to Shareholders from Net Investment Income:
Class A shares.............................................. (105,672) (152,122)
Class B shares.............................................. (1,550,100) (3,159,058)
Class C shares.............................................. (416,463) (780,828)
Class D shares.............................................. (33,615) (57,992)
------------ ------------
Total Dividends......................................... (2,105,850) (4,150,000)
------------ ------------

Net increase (decrease) from transactions in shares of
beneficial interest....................................... (10,670,536) 30,021,645
------------ ------------
Net Increase (Decrease)................................. (14,225,477) 50,393,487
Net Assets:
Beginning of period......................................... 222,579,501 172,186,014
------------ ------------
End of Period
(Including dividends in excess of net investment income of
$754,004 and $451,167, respectively)...................... $208,354,024 $222,579,501
============ ============
</Table>

See Notes to Financial Statements
23

Morgan Stanley Balanced Income Fund
NOTES TO FINANCIAL STATEMENTS - JULY 31, 2004 (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 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 Stock Exchange ("NYSE") or American Stock Exchange or other
exchange is valued at its latest sale price prior to the time when assets are
valued; if there were no sales that day, the security is valued at the mean
between the last reported bid and asked price; (2) an equity portfolio security
listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price;
if there were no sales that day, the security is valued at the mean between the
last reported bid and asked price; (3) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the mean
between the last reported bid and asked price. In cases where a security is
traded on more than one exchange, the security is valued on the exchange
designated as the primary market; (4) for equity securities traded on foreign
exchanges, the last reported sale price or the latest bid price may be used if
there were no sales on a particular day; (5) 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. Occasionally, developments affecting the
closing prices of securities and other assets may occur between the times at
which valuations of such securities are determined (that is, close of the
foreign market on which the securities trade) and the close of business on the
NYSE. If developments occur during such periods that are expected to materially
affect the value of such securities, such valuations may be adjusted to reflect
the estimated fair value of such securities as

Morgan Stanley Balanced Income Fund
NOTES TO FINANCIAL STATEMENTS - JULY 31, 2004 (UNAUDITED) continued

of the close of the NYSE, as determined in good faith by the Fund's Trustees or
by the Investment Manager using a pricing service and/or procedures approved by
the Trustees of the Fund; (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 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.

Morgan Stanley Balanced Income Fund
NOTES TO FINANCIAL STATEMENTS - JULY 31, 2004 (UNAUDITED) continued

F. Federal Income Tax Policy -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Accordingly, no federal income tax provision is required.

G. Dividends and Distributions to Shareholders -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.

H. Use of Estimates -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.

2. Investment 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 - up to 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 $7,743,702
at July 31, 2004.

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

Morgan Stanley Balanced Income Fund
NOTES TO FINANCIAL STATEMENTS - JULY 31, 2004 (UNAUDITED) continued

that expenses representing a gross sales credit to Morgan Stanley Financial
Advisors or other selected broker-dealer representatives may be reimbursed in
the subsequent calendar year. For the six months ended July 31, 2004, 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,
2004, it received contingent deferred sales charges from certain redemptions of
the Fund's Class B shares and Class C shares of $228,558 and $4,973,
respectively and received $26,920 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,
2004, aggregated $70,027,900 and $86,394,740, respectively. Included in the
aforementioned are purchases and sales of U.S. Government securities of
$20,378,229 and $16,085,596, respectively.

For the six months ended July 31, 2004, the Fund incurred brokerage commissions
of $431 with Morgan Stanley & Co., Inc., an affiliate of the Investment Manager
and Distributor, for portfolio transactions executed on behalf of the Fund.

Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is
the Fund's transfer agent. At July 31, 2004, the Fund had transfer agent fees
and expenses payable of approximately $1,700.

Effective April 1, 2004, the Fund began an unfunded Deferred Compensation Plan
(the "Compensation Plan") which allows each independent Trustee to defer payment
of all, or a portion, of the fees he receives for serving on the Board of
Trustees. Each eligible Trustee generally may elect to have the deferred amounts
credited with a return equal to the total return on one or more of the Morgan
Stanley funds that are offered as investment options under the Compensation
Plan. Appreciation/depreciation and distributions received from these
investments are recorded with an offsetting increase/decrease in the deferred
compensation obligation and do not affect the net asset value of the Fund.

Morgan Stanley Balanced Income Fund
NOTES TO FINANCIAL STATEMENTS - JULY 31, 2004 (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, 2004 JANUARY 31, 2004
------------------------- -------------------------
(unaudited)
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------

CLASS A SHARES
Sold.............................................. 173,432 $ 2,172,755 458,941 $ 5,545,611
Reinvestment of dividends......................... 6,145 76,924 8,979 108,282
Redeemed.......................................... (112,837) (1,413,559) (162,828) (1,962,686)
---------- ------------ ---------- ------------
Net increase - Class A............................ 66,740 836,120 305,092 3,691,207
---------- ------------ ---------- ------------
CLASS B SHARES
Sold.............................................. 1,393,372 17,524,473 6,190,170 73,503,551
Reinvestment of dividends......................... 87,497 1,092,490 183,758 2,197,677
Redeemed.......................................... (2,392,029) (29,908,854) (4,810,133) (57,539,950)
---------- ------------ ---------- ------------
Net increase (decrease) - Class B................. (911,160) (11,291,891) 1,563,795 18,161,278
---------- ------------ ---------- ------------
CLASS C SHARES
Sold.............................................. 349,694 4,394,470 1,380,443 16,559,967
Reinvestment of dividends......................... 25,239 315,610 50,778 608,265
Redeemed.......................................... (317,127) (3,967,807) (859,068) (10,354,912)
---------- ------------ ---------- ------------
Net increase - Class C............................ 57,806 742,273 572,153 6,813,320
---------- ------------ ---------- ------------
CLASS D SHARES
Sold.............................................. 15,847 201,776 239,592 2,881,351
Reinvestment of dividends......................... 1,988 24,849 3,633 43,824
Redeemed.......................................... (93,766) (1,183,663) (132,275) (1,569,335)
---------- ------------ ---------- ------------
Net increase (decrease) - Class D................. (75,931) (957,038) 110,950 1,355,840
---------- ------------ ---------- ------------
Net increase (decrease) in Fund................... (862,545) $(10,670,536) 2,551,990 $ 30,021,645
========== ============ ========== ============
</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.

Morgan Stanley Balanced Income Fund
NOTES TO FINANCIAL STATEMENTS - JULY 31, 2004 (UNAUDITED) continued

As of January 31, 2004, the Fund had a net capital loss carryforward of
$6,999,142 which will expire on January 31, 2011 to offset future capital gains
to the extent provided by regulations.

As of January 31, 2004, 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 futures with respect to financial instruments and
interest rate indexes ("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. Risks may also
arise from the potential inability of the counterparties to meet the terms of
their contracts.

8. Legal Matters

The Investment Manager, certain affiliates of the Investment Manager, certain
officers of such affiliates and certain investment companies advised by the
Investment Manager or its affiliates, including the Fund, are named as
defendants in a number of similar class action complaints which were recently
consolidated. This consolidated action also names as defendants certain
individual Trustees and Directors of the Morgan Stanley funds. The consolidated
amended complaint generally alleges that defendants, including the Fund,
violated their statutory disclosure obligations and fiduciary duties by failing
properly to disclose (i) that the Investment Manager and certain affiliates of
the Investment Manager allegedly offered economic incentives to brokers and
others to recommend the funds advised by the Investment Manager or its
affiliates to investors rather than funds managed by other companies, and (ii)
that the funds advised by the Investment Manager or its affiliates, including
the Fund, allegedly paid excessive commissions to brokers in return for their
efforts to recommend these funds to investors. The complaint seeks, among other
things, unspecified compensatory damages, rescissionary damages, fees and costs.
The defendants have moved to dismiss the action and intend to otherwise
vigorously defend it. While the Fund believes that it has meritorious defenses,
the ultimate outcome of this matter is not presently determinable at this early
stage of the litigation, and no provision has been made in the Fund's financial
statements for the effect, if any, of this matter.

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, 2004 2004 2003 2002 2001 2000
------------- ------ ------ ------ ------ ------
(unaudited)

Class A Shares:
Selected Per Share Data:

Net asset value, beginning of period............ $12.66 $11.45 $12.35 $12.42 $11.80 $12.75
------ ------ ------ ------ ------ ------

Income (loss) from investment operations:
Net investment income++..................... 0.15 0.26 0.33 0.43 0.47 0.47
Net realized and unrealized gain (loss)..... (0.18) 1.28 (0.84) (0.06) 0.94 (0.69)
------ ------ ------ ------ ------ ------

Total income (loss) from investment
operations..................................... (0.03) 1.54 (0.51) 0.37 1.41 (0.22)
------ ------ ------ ------ ------ ------

Less dividends and distributions from:
Net investment income....................... (0.17) (0.33) (0.39) (0.44) (0.47) (0.47)
Net realized gain........................... -- -- -- -- (0.32) (0.26)
------ ------ ------ ------ ------ ------

Total dividends and distributions............... (0.17) (0.33) (0.39) (0.44) (0.79) (0.73)
------ ------ ------ ------ ------ ------

Net asset value, end of period.................. $12.46 $12.66 $11.45 $12.35 $12.42 $11.80
====== ====== ====== ====== ====== ======

Total Return+................................... (0.25)%(1) 13.65% (4.19)% 3.13% 12.66% (1.84)%

Ratios to Average Net Assets(3):
Expenses........................................ 1.09 %(2) 1.09% 1.08 % 1.16% 1.20% 1.20 %

Net investment income........................... 2.37 %(2) 2.15% 2.79 % 3.44% 3.97% 3.82 %

Supplemental Data:
Net assets, end of period, in thousands......... $8,032 $7,318 $3,125 $2,216 $2,043 $2,187

Portfolio turnover rate......................... 34 %(1) 174% 173 % 99% 21% 35 %
</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) Not annualized.
(2) 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, 2004 2004 2003 2002 2001 2000
------------- -------- -------- -------- ------- -------
(unaudited)

Class B Shares:
Selected Per Share Data:

Net asset value, beginning of period... $12.61 $11.40 $12.31 $12.39 $11.77 $12.74
------ ------ ------ ------ ------ ------

Income (loss) from investment
operations:
Net investment income++............ 0.10 0.17 0.24 0.34 0.37 0.38
Net realized and unrealized gain
(loss)............................. (0.24) 1.28 (0.85) (0.07) 0.95 (0.71)
------ ------ ------ ------ ------ ------

Total income (loss) from investment
operations............................ (0.14) 1.45 (0.61) 0.27 1.32 (0.33)
------ ------ ------ ------ ------ ------

Less dividends and distributions from:
Net investment income.............. (0.06) (0.24) (0.30) (0.35) (0.38) (0.38)
Net realized gain.................. -- -- -- -- (0.32) (0.26)
------ ------ ------ ------ ------ ------

Total dividends and distributions...... (0.06) (0.24) (0.30) (0.35) (0.70) (0.64)
------ ------ ------ ------ ------ ------

Net asset value, end of period......... $12.41 $12.61 $11.40 $12.31 $12.39 $11.77
====== ====== ====== ====== ====== ======

Total Return+.......................... (0.57)%(1) 12.77% (4.98)% 2.32% 11.82% (2.69)%

Ratios to Average Net Assets(3):
Expenses............................... 1.84 %(2) 1.86% 1.84 % 1.91% 2.00% 1.95 %

Net investment income.................. 1.62 %(2) 1.38% 2.03 % 2.68% 3.17% 3.07 %

Supplemental Data:
Net assets, end of period, in
thousands............................. $155,156 $169,135 $135,146 $101,957 $45,803 $56,827

Portfolio turnover rate................ 34 %(1) 174% 173 % 99% 21% 35 %
</Table>

- ---------------------

<Table>

See Notes to Financial Statements
31

Morgan Stanley Balanced Income Fund
FINANCIAL HIGHLIGHTS continued

<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED JANUARY 31,
MONTHS ENDED ------------------------------------------------------------
JULY 31, 2004 2004 2003 2002 2001 2000
------------- ------- ------- ------- ------- -------
(unaudited)

Class C Shares:
Selected Per Share Data:

Net asset value, beginning of period...... $12.63 $11.42 $12.33 $12.41 $11.78 $12.74
------ ------ ------ ------ ------ ------

Income (loss) from investment operations:
Net investment income++............... 0.10 0.17 0.24 0.33 0.38 0.38
Net realized and unrealized gain
(loss)................................ (0.19) 1.28 (0.85) (0.05) 0.95 (0.70)
------ ------ ------ ------ ------ ------

Total income (loss) from investment
operations............................... (0.09) 1.45 (0.61) 0.28 1.33 (0.32)
------ ------ ------ ------ ------ ------

Less dividends and distributions from:
Net investment income................. (0.12) (0.24) (0.30) (0.36) (0.38) (0.38)
Net realized gain..................... -- -- -- -- (0.32) (0.26)
------ ------ ------ ------ ------ ------

Total dividends and distributions......... (0.12) (0.24) (0.30) (0.36) (0.70) (0.64)
------ ------ ------ ------ ------ ------

Net asset value, end of period............ $12.42 $12.63 $11.42 $12.33 $12.41 $11.78
====== ====== ====== ====== ====== ======

Total Return+............................. (0.64)%(1) 12.74% (5.00)% 2.32% 11.89% (2.62)%

Ratios to Average Net Assets(3):
Expenses.................................. 1.84 %(2) 1.85% 1.84 % 1.91% 1.94% 1.95 %

Net investment income..................... 1.62 %(2) 1.39% 2.03 % 2.68% 3.23% 3.07 %

Supplemental Data:
Net assets, end of period, in thousands... $43,124 $43,092 $32,439 $33,321 $24,205 $29,535

Portfolio turnover rate................... 34 %(1) 174% 173 % 99% 21% 35 %
</Table>

- ---------------------

<Table>

See Notes to Financial Statements
32

Morgan Stanley Balanced Income Fund
FINANCIAL HIGHLIGHTS continued

<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED JANUARY 31
MONTHS ENDED -------------------------------------------------------
JULY 31, 2004 2004 2003 2002 2001 2000
------------- ------ ------ ------ ------ ------
(unaudited)

Class D Shares:
Selected Per Share Data:

Net asset value, beginning of period............ $12.63 $11.42 $12.33 $12.40 $11.79 $12.75
------ ------ ------ ------ ------ ------

Income (loss) from investment operations:
Net investment income++..................... 0.16 0.29 0.34 0.45 0.50 0.50
Net realized and unrealized gain (loss)..... (0.18) 1.28 (0.83) (0.05) 0.93 (0.70)
------ ------ ------ ------ ------ ------

Total income (loss) from investment
operations..................................... (0.02) 1.57 (0.49) 0.40 1.43 (0.20)
------ ------ ------ ------ ------ ------

Less dividends and distributions from:
Net investment income....................... (0.18) (0.36) (0.42) (0.47) (0.50) (0.50)
Net realized gain........................... -- -- -- -- (0.32) (0.26)
------ ------ ------ ------ ------ ------

Total dividends and distributions............... (0.18) (0.36) (0.42) (0.47) (0.82) (0.76)
------ ------ ------ ------ ------ ------

Net asset value, end of period.................. $12.43 $12.63 $11.42 $12.33 $12.40 $11.79
====== ====== ====== ====== ====== ======

Total Return+................................... (0.15)%(1) 13.94% (4.04)% 3.37% 12.88% (1.63)%

Ratios to Average Net Assets(3):
Expenses........................................ 0.84 %(2) 0.86% 0.84 % 0.91% 1.00% 0.95 %

Net investment income........................... 2.62 %(2) 2.38% 3.03 % 3.68% 4.17% 4.07 %

Supplemental Data:
Net assets, end of period, in thousands......... $2,042 $3,034 $1,476 $496 $107 $1,546

Portfolio turnover rate......................... 34 %(1) 174% 173 % 99% 21% 35 %
</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) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and
non-class specific expenses.
</Table>

See Notes to Financial Statements
33

(This Page Intentionally Left Blank)

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
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

Joseph J. McAlinden
Vice President

Stefanie V. Chang
Vice President

Francis J. 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 REGISTERED PUBLIC ACCOUNTING FIRM

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 the shareholders of the
Fund. For more detailed information about the Fund, its fees and expenses and
other pertinent information, please read its Prospectus. The Fund's Statement of
Additional Information contains additional information about the Fund, including
its 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.

[MORGAN STANLEY LOGO]

MORGAN STANLEY FUNDS

Morgan Stanley
Balanced Income Fund

Semiannual Report
July 31, 2004

[MORGAN STANLEY LOGO]

38400RPT-RA04-00542P-Y07/04

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 Income Fund

/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
September 20, 2004

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 20, 2004

/s/ Francis Smith
Francis Smith
Principal Financial Officer
September 20, 2004