<Page>
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: 811-04020
Morgan Stanley California Tax - Free Income Fund
(Exact name of registrant as specified in charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip code)
Ronald E. Robison
1221 Avenue of the Americas, New York, New York 10020
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-762-4000
Date of fiscal year end: December 31, 2003
Date of reporting period: December 31, 2003
Item 1 - Report to Shareholders
<Page>
WELCOME, SHAREHOLDER:
IN THIS REPORT, YOU'LL LEARN ABOUT HOW YOUR INVESTMENT IN MORGAN STANLEY
CALIFORNIA TAX-FREE INCOME FUND PERFORMED DURING THE ANNUAL 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.
<Page>
FUND REPORT
for the year ended December 31, 2003
TOTAL RETURN FOR THE 12 MONTHS ENDED DECEMBER 31, 2003
<Table>
<Caption>
LEHMAN LIPPER
BROTHERS CALIFORNIA
MUNICIPAL MUNICIPAL DEBT
CLASS A CLASS B CLASS C CLASS D BOND INDEX(1) FUNDS INDEX(2)
4.31% 4.27% 3.80% 4.50% 5.31% 4.57%
</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
In 2003, municipal bonds experienced a wide range of market conditions with
yields reaching record lows before spiking upward and ending the year near where
they began. Interest rates fell through the first six months of the period as
investors sought the relative safe haven of the bond market. This war-induced
"flight to quality" included municipal bonds, which appreciated as a result of
falling yields. That said, municipals lagged the market leadership of Treasuries
and yields on 10- and 30-year insured municipal bonds at times surpassed
comparable Treasury yields. This disparity created demand from value-oriented
taxable institutional investors who "crossed over" to buy municipal bonds.
The bond rally reversed in mid-year, however, when 10-year Treasury yields
suffered their single greatest one-month increase in more than 20 years. While
municipal yields also rose, performance relative to Treasuries improved as the
ratio of municipal yields to Treasuries declined across maturities.
Issuance was heavy during the first half of the year as municipalities sought to
take advantage of low interest rates. Volume began to drop off in August as
rising interest rates slowed refundings. Even with the slowdown, municipal
volume reached a record $383 billion for the year. California increased that
state's share of total volume to 15 percent. New York, Illinois, Texas and
Florida, the next largest states in terms of issuance, represented an additional
29 percent of the national total. Issues enhanced with bond insurance maintained
a 49 percent market share.
California's economic recovery has been slower than expected with the
unemployment rate continuing above the national average. As a result of the
recall election the new governor is also attempting to address the country's
largest budget gap measured as a percent of appropriations. This difficult
situation led both Standard & Poor's and Moody's to downgrade the state's
general obligations during the summer of 2003, with additional downgrades by
Moody's and Fitch in December. Because of these credit concerns California
general obligation bonds underperformed the municipal market.
PERFORMANCE ANALYSIS
Because the California market lagged the national averages, the Fund
underperformed the national Lehman Brothers Municipal Bond Index for the period.
The Fund also slightly underperformed the Lipper California Municipal Debt Funds
Index.
One of our primary strategies in managing the Fund was a cautious approach to
credit allocations. The Portfolio's exposure to uninsured California General
Obligations was underweighted relative to the Lehman Brothers Municipal Bond
Index. These bonds were affected by the state's fiscal problems and
underperformed. The Fund emphasized "AAA" rated insured bonds, which
2
<Page>
capitalized on this investor preference. The Fund also benefited from refunding
activity. Several holdings were refunded by issuers, who refinanced their debt
to take advantage of the available lower interest costs. Refunding had the
effect of increasing the bonds' prices and was a positive contributor to
performance.
Not all of the Fund's strategies were as successful. The Fund's duration (a
measure of interest rate sensitivity) was positioned shorter than its benchmark
to limit interest rate volatility. While this approach proved beneficial when
rates jumped in the summer of 2003, it limited upside performance in the first
half of the year when rates declined.
LARGEST SECTORS
<Table>
WATER & SEWER 20.8%
TRANSPORTATION 18.7
GENERAL OBLIGATION 14.7
REFUNDED 10.2
TAX ALLOCATION 8.1
</Table>
LONG-TERM CREDIT ANALYSIS
<Table>
Aaa/AAA 72.1%
Aa/AA 3.9
A/A 10.8
Baa/BBB OR LESS 13.2
</Table>
SUBJECT TO CHANGE DAILY. LARGEST SECTORS ARE AS A PERCENTAGE OF NET ASSETS AND
LONG-TERM CREDIT ANALYSIS IS AS A PERCENTAGE OF LONG-TERM INVESTMENTS. PROVIDED
FOR INFORMATIONAL PURPOSES ONLY. MORGAN STANLEY IS A FULL-SERVICE SECURITIES
FIRM ENGAGED IN SECURITIES TRADING AND BROKERAGE ACTIVITIES, INVESTMENT BANKING,
RESEARCH AND ANALYSIS, FINANCING AND FINANCIAL ADVISORY SERVICES.
INVESTMENT STRATEGY
1. TO ACHIEVE ITS GOAL OF A HIGH LEVEL OF CURRENT INCOME EXEMPT FROM FEDERAL AND
CALIFORNIA STATE INCOME TAXES, THE FUND INVESTS PRINCIPALLY IN SECURITIES
THAT PAY INTEREST EXEMPT FROM FEDERAL AND CALIFORNIA STATE INCOME TAXES,
WHICH AT THE TIME OF PURCHASE ARE RATED WITHIN THE FOUR HIGHEST GRADES BY
STANDARD & POOR'S CORPORATION, MOODY'S INVESTOR SERVICE OR FITCH RATINGS
SERVICE.
2. BY SELECTING INVESTMENT-GRADE MUNICIPAL OBLIGATIONS, THE FUND OFFERS THE
POTENTIAL FOR ATTRACTIVE CURRENT INCOME WITH LESS CREDIT RISK.
ANNUAL HOUSEHOLDING NOTICE
TO REDUCE PRINTING AND MAILING COSTS, THE FUND ATTEMPTS TO ELIMINATE DUPLICATE
MAILINGS TO THE SAME ADDRESS. THE FUND DELIVERS A SINGLE COPY OF CERTAIN
SHAREHOLDER DOCUMENTS, INCLUDING SHAREHOLDER REPORTS, PROSPECTUSES AND PROXY
MATERIALS, TO INVESTORS WITH THE SAME LAST NAME WHO RESIDE AT THE SAME ADDRESS.
YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME
UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE
DOCUMENTS BY CALLING (800) 350-6414, 8:00 A.M. TO 8:00 P.M. ET. ONCE OUR
CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING
INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS.
3
<Page>
DISTRIBUTION BY MATURITY
(% of Long-Term Portfolio) As of December 31, 2003
[CHART]
WEIGHTED AVERAGE MATURITY: 16 YEARS
<Table>
1-5 17.0%
5-10 6.0%
10-20 53.0%
20-30 22.0%
30+ YEARS 2.0%
</Table>
Portfolio structure is subject to change.
4
<Page>
CALL AND COST (BOOK) YIELD STRUCTURE
(Based on Long-Term Portfolio) As of December 31, 2003
[CHART]
YEARS BONDS CALLABLE--WEIGHTED AVERAGE CALL PROTECTION: 6 YEARS
<Table>
2004(a) 8%
2005 10%
2006 5%
2007 6%
2008 16%
2009 3%
2010 2%
2011 17%
2012 9%
2013 8%
2014+ 16%
</Table>
[CHART]
COST (BOOK) YIELD(b)--WEIGHTED AVERAGE BOOK YIELD: 5.7%
<Table>
2004(a) 6.2%
2005 7.0%
2006 6.1%
2007 6.2%
2008 5.4%
2009 5.2%
2010 6.1%
2011 5.1%
2012 5.0%
2013 4.9%
2014+ 5.8%
</Table>
(a) MAY INCLUDE ISSUES CALLABLE IN PREVIOUS YEARS.
(b) COST OR "BOOK" YIELD IS THE ANNUAL INCOME EARNED ON A PORTFOLIO INVESTMENT
BASED ON ITS ORIGINAL PURCHASE PRICE BEFORE THE FUND'S OPERATING EXPENSES.
FOR EXAMPLE, THE FUND IS EARNING A BOOK YIELD OF 6.2% ON 8% OF THE LONG-TERM
PORTFOLIO THAT IS CALLABLE IN 2004.
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
5
<Page>
PERFORMANCE SUMMARY
[CHART]
PERFORMANCE OF A $10,000 INVESTMENT -- CLASS B
<Table>
<Caption>
CLASS B## LEHMAN(1) LIPPER(2)
December 31, 1993 $ 10,000 $ 10,000 $ 10,000
December 31, 1994 $ 9,403 $ 9,483 $ 9,278
December 31, 1995 $ 10,810 $ 11,138 $ 10,985
December 31, 1996 $ 11,148 $ 11,632 $ 11,421
December 31, 1997 $ 11,986 $ 12,701 $ 12,491
December 31, 1998 $ 12,661 $ 13,524 $ 13,260
December 31, 1999 $ 12,155 $ 13,246 $ 12,685
December 31, 2000 $ 13,649 $ 14,793 $ 14,328
December 31, 2001 $ 14,135 $ 15,552 $ 14,888
December 31, 2002 $ 15,284 $ 17,045 $ 16,075
December 31, 2003 $ 15,937 $ 17,951 $ 16,810
</Table>
ENDING VALUE
Class B## Lehman(1) Lipper(2)
- --------- --------- ---------
$15,937 $17,951 $16,810
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 GRAPH AND TABLE DO 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.
6
<Page>
AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED DECEMBER 31, 2003
<Table>
<Caption>
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS D SHARES++
(SINCE 07/28/97) (SINCE 07/11/84) (SINCE 07/28/97) (SINCE 07/28/97)
SYMBOL CLFAX CLFBX CLFCX CLFDX
1 YEAR 4.31%(3) 4.27%(3) 3.80%(3) 4.50%(3)
(0.13)(4) (0.69)(4) 2.81(4) --
5 YEARS 4.83(3) 4.71(3) 4.27(3) 5.04(3)
3.92(4) 4.38(4) 4.27(4) --
10 YEARS -- 4.48(3) -- --
-- 4.48(4) -- --
SINCE INCEPTION 5.06(3) 7.34(3) 4.58(3) 5.33(3)
4.35(4) 7.34(4) 4.58(4) --
</Table>
- ----------
Notes on Performance
(1) THE LEHMAN BROTHERS MUNICIPAL BOND INDEX TRACKS THE PERFORMANCE OF MUNICIPAL
BONDS RATED AT LEAST Baa OR BBB BY MOODY'S INVESTORS SERVICE, INC. OR
STANDARD & POOR'S CORPORATION, RESPECTIVELY AND WITH MATURITIES OF 2 YEARS
OR GREATER. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES
CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO
INVEST DIRECTLY IN AN INDEX.
(2) THE LIPPER CALIFORNIA MUNICIPAL DEBT FUNDS INDEX IS AN EQUALLY WEIGHTED
PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN
THE LIPPER CALIFORNIA MUNICIPAL DEBT FUNDS CLASSIFICATION. THE INDEX, 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.
(3) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT
THE DEDUCTION OF ANY SALES CHARGES.
(4) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND THE DEDUCTION OF
THE MAXIMUM APPLICABLE SALES CHARGE. SEE THE FUND'S CURRENT PROSPECTUS FOR
COMPLETE DETAILS ON FEES AND SALES CHARGES.
* THE MAXIMUM FRONT-END SALES CHARGE FOR CLASS A IS 4.25%.
** THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B IS 5.0%. THE
CDSC DECLINES TO 0% AFTER SIX YEARS.
+ THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE FOR CLASS C IS 1% FOR SHARES
REDEEMED WITHIN ONE YEAR OF PURCHASE.
++ CLASS D HAS NO SALES CHARGE.
## CLOSING VALUE ASSUMING A COMPLETE REDEMPTION ON DECEMBER 31, 2003.
7
<Page>
MORGAN STANLEY CALIFORNIA TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2003
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------
CALIFORNIA TAX-EXEMPT MUNICIPAL BONDS (95.8%)
GENERAL OBLIGATION (14.7%)
California,
$ 5,000 Ser 1990 7.00% 08/01/07 $ 5,732,250
5,000 Ser 1990 7.00 08/01/08 5,847,500
2,000 Veterans Ser AT 9.50 02/01/10 2,663,440
10,000 Refg Ser 2002 5.25 02/01/11 10,942,100
2,400 Veterans Ser BH (AMT) (FSA) 5.40 12/01/16 2,531,424
5,000 Various Purpose dtd 04/01/93 (FSA) 5.50 04/01/19 5,095,500
5,000 Various Purpose dtd 04/01/02 6.00 04/01/19 5,745,900
10,000 Various Purpose Ser 1996 (Ambac) 5.25 06/01/21 10,641,300
4,000 Various Purpose dtd 05/01/03 5.00 02/01/32 3,907,200
2,250 Carlsbad Unified School District, Ser 1997 (FGIC) 0.00 11/01/16 1,267,043
Los Angeles Community College District,
5,000 2001 Ser A (MBIA) 5.50 08/01/20 5,555,650
5,000 2001 Ser A (MBIA) 5.50 08/01/21 5,532,400
Los Angeles Unified School District,
5,000 2003 Ser A (FSA) 5.25 07/01/20 5,450,750
10,000 1997 Ser B (FGIC) 5.00 07/01/23 10,314,400
6,500 North Orange County Community College District,
Election of 2002 Ser A (MBIA) 5.375 08/01/21 7,132,775
5,000 Placentia - Yorba Linda United School District,
2002 Election Ser A (FGIC) 5.00 08/01/26 5,145,700
Puerto Rico,
8,000 Public Improvement Ser 1999 4.75 07/01/23 8,060,080
3,000 Public Improvement Ser 1998 (Secondary MBIA) 4.875 07/01/23 3,087,480
- ------------ --------------
98,150 104,652,892
- ------------ --------------
EDUCATIONAL FACILITIES REVENUE (1.5%)
5,000 California, Educational Facilities Authority, University of
San Diego Ser 1998 (Ambac) 5.00 10/01/22 5,240,650
5,000 University California, Ser 2003 Q (FSA) 5.00 09/01/24 5,187,950
- ------------ --------------
10,000 10,428,600
- ------------ --------------
ELECTRIC REVENUE (7.5%)
10,000 California State Department of Water Resources,
Power Supply Ser 2002 A 5.375 05/01/21 10,446,900
25,000 Los Angeles Department of Water & Power,
2001 Ser A (FSA) 5.25 07/01/22 26,687,250
Southern California Public Power Authority,
1,750 Transmission Refg Ser 1988 (FGIC) 0.00 07/01/06 1,669,815
3,500 Mead-Adelanto 1994 A (Ambac) 9.02++ 07/01/15 4,349,555
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
8
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------
$ 2,500 Mead-Phoenix 1994 Ser A (Ambac) 9.02++% 07/01/15 $ 3,028,350
2,750 Transmission Refg Ser 2002 A (FSA) 5.25 07/01/18 3,009,105
Puerto Rico Electric Power Authority,
2,000 Power Ser II (MBIA) 5.375 07/01/19 2,236,100
2,000 Power Ser X 5.50 07/01/25 2,073,100
- ------------ --------------
49,500 53,500,175
- ------------ --------------
HOSPITAL REVENUE (7.4%)
8,000 Antelope Valley Healthcare District, Refg Ser 1997 A (FSA) 5.20 01/01/20 8,444,880
California Health Facilities Financing Authority,
2,500 Sutter/CHS Ser 1996 A (MBIA) 5.875 08/15/16 2,775,100
3,000 Scripps Memorial Hospitals Ser 1992 A (MBIA) 6.375 10/01/22 3,065,790
5,000 California Infrastructure & Economic Development
Bank, Kaiser Assistance Ser 2001 A 5.55 08/01/31 5,180,550
2,000 California Statewide Communities Development
Authority, Cedars-Sinai Medical Center Ser 1992 COPs 6.50 08/01/12 2,298,080
14,000 Duarte, City of Hope National Medical Center
Ser 1999 A COPs 5.25 04/01/19 14,171,360
7,500 Madera County, Valley Children's Hospital
Ser 1995 COPs (MBIA) 6.50 03/15/15 9,313,950
4,000 Rancho Mirage Joint Powers Financing Authority,
Eisenhower Medical Center Ser 1997 A COPs (MBIA) 5.25 07/01/17 4,303,840
3,000 University of California, UCLA Medical Center
Refg Ser 1994 (MBIA) 5.50 12/01/14 3,069,900
- ------------ --------------
49,000 52,623,450
- ------------ --------------
INDUSTRIAL DEVELOPMENT/POLLUTION CONTROL REVENUE (2.2%)
5,000 California Pollution Control Financing Authority,
San Diego Gas & Electric Co 1996 Ser A 5.90 06/01/14 5,348,700
10,000 Southern California Edison Co 1992 Ser B (AMT) 6.40 12/01/24 10,055,500
- ------------ --------------
15,000 15,404,200
- ------------ --------------
MORTGAGE REVENUE - MULTI-FAMILY (0.3%)
2,000 California Housing Finance Agency, Rental II
- ------------ 1992 Ser B 6.70 08/01/15 2,019,820
--------------
MORTGAGE REVENUE - SINGLE FAMILY (0.6%)
2,250 California Housing Finance Agency, Purchase
1995 Ser B-2 (AMT) 6.30 08/01/24 2,279,182
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
9
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------------------------------------
California Rural Home Financing Authority,
$ 955 Home 1997 Ser D-CL 5 (AMT) 6.70% 05/01/29 $ 995,454
745 1997 Ser A-2 (AMT) 7.00 09/01/29 758,321
405 Home 1998 Ser A (AMT) 6.35 12/01/29 424,262
- ------------ --------------
4,355 4,457,219
- ------------ --------------
PUBLIC FACILITIES REVENUE (3.3%)
4,000 Anaheim Public Financing Authority, 1997 Ser C (FSA) 6.00 09/01/16 4,826,400
10,000 California Public Works Board, Department of
Corrections Refg 1993 Ser A (Ambac) 5.00 12/01/19 10,915,400
4,000 Sacramento City Financing Authority,
2002 Ser A (FSA) 5.25 12/01/17 4,417,560
5,000 Puerto Rico Public Buildings Authority,
2002 Ser D (Ambac) 0.00# 07/01/31 3,443,450
- ------------ --------------
23,000 23,602,810
- ------------ --------------
RECREATIONAL FACILITIES REVENUE (0.5%)
2,000 California State University, Fresno Event Center
Sr Ser 2002 6.00 07/01/26 2,079,780
2,000 San Diego County, San Diego Natural History
Museum COPs 5.70 02/01/28 1,674,360
- ------------ --------------
4,000 3,754,140
- ------------ --------------
TAX ALLOCATION REVENUE (8.1%)
1,500 Fontana Public Finance Authority, Ser 2003 A (Ambac) 5.375 09/01/25 1,598,220
Long Beach Bond Finance Authority,
3,205 Downtown North Long Beach 2002 Ser A (Ambac) 5.375 08/01/19 3,508,994
2,380 Downtown North Long Beach 2002 Ser A (Ambac) 5.375 08/01/20 2,593,129
20,000 Long Beach Financing Authority, Ser 1992 (Ambac) 6.00 11/01/17 24,205,000
Pleasanton Joint Powers Financing Authority,
10,575 Reassessment 1993 Ser A 6.15 09/02/12 10,822,032
1,500 Reassessment 1993 Ser A 6.20 09/02/17 1,532,340
5,000 Poway Redevelopment Agency, Pagway
Ser 2003A (MBIA) 5.00 06/15/33 5,099,950
8,000 San Jose Redevelopment Agency, Ser 1999 (Ambac) 4.75 08/01/23 8,060,160
- ------------ --------------
52,160 57,419,825
- ------------ --------------
TRANSPORTATION FACILITIES REVENUE (18.7%)
10,000 Alameda Corridor Transportation Authority, Sr Lien
Ser 1999 A (MBIA) 5.25 10/01/21 10,780,100
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
10
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------
$ 4,000 Bay Area Toll Authority, San Francisco Bay Area
Toll Bridge 2001 Ser D 5.00% 04/01/18 $ 4,256,840
3,000 California Infrastructure and Economic Development
Bank, Bay Area Toll Bridges Seismic Retrofit
First Lien Ser 2003 A (FSA) 5.25 07/01/21 3,255,690
Foothill/Eastern Transportation Corridor Agency,
5,000 Toll Road Ser 1999 (MBIA) 5.125 01/15/19 5,317,650
14,000 Toll Road Ser 1999 0.00## 01/15/23 10,596,180
Long Beach,
5,000 Harbor Refg Ser 1998 A (AMT) (FGIC) 6.00 05/15/17 5,927,550
3,000 Harbor Refg Ser 1998 A (AMT) (FGIC) 6.00 05/15/19 3,559,830
10,000 Harbor Ser 1995 (AMT) (MBIA) 5.25 05/15/25 10,161,300
5,000 Orange County, Airport Refg Ser 1997 (AMT) (MBIA) 5.50 07/01/11 5,567,550
Port of Oakland,
5,200 Ser 2002 M (FGIC) 5.25 11/01/19 5,673,356
2,000 Ser 2002 M (FGIC) 5.25 11/01/20 2,169,660
15,000 San Diego County Regional Transportation
Commission, Sales Tax 1994 Ser A (FGIC) 4.75 04/01/08 16,585,050
5,000 San Francisco Airports Commission, San Francisco
Int'l Airport Second Ser Refg Issue 27B (FGIC) 5.125 05/01/26 5,175,650
San Francisco Bay Area Rapid Transit District,
795 Sales Tax Ser 1995 (FGIC) 5.50 07/01/15 846,325
9,500 Sales Tax Ser 1998 (Ambac) 4.75 07/01/23 9,603,170
San Joaquin Hills Transportation Corridor Agency,
6,000 Toll Road Refg Ser 1997 A (MBIA) 0.00 01/15/15 3,717,060
10,000 Toll Road Senior Lien Ser 1993 5.00 01/01/33 9,354,800
10,000 San Jose, Airport Ser 2001 A (FGIC) 5.00 03/01/25 10,213,700
10,000 Puerto Rico Highway & Transportation Authority,
Ser 1998 A 4.75 07/01/38 9,792,300
- ------------ --------------
132,495 132,553,761
- ------------ --------------
WATER & SEWER REVENUE (20.8%)
20,000 California Department of Water Resources, Central
Valley Ser Y (FGIC) 5.00 12/01/25 20,643,600
8,000 Castaic Lake Water Agency, Refg Ser 1994 A COPs (MBIA) 6.00 08/01/18 8,363,920
4,000 Corona Public Financing Authority, Water Ser 1998 (FGIC) 4.75 09/01/23 4,053,360
10,000 East Bay Municipal Utility District, Water Ser 2001 (MBIA) 5.00 06/01/26 10,258,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
11
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------
$ 8,000 Eastern Municipal Water District, Water & Sewer
Refg Ser 1998 A COPs (FGIC) 4.75% 07/01/23 $ 8,091,440
10,000 Los Angeles Wastewater, ROLS Ser II-R 234 8.64++ 06/01/22 11,018,700
5,000 Los Angeles Department of Water & Power, Water
2001 Ser A 5.125 07/01/41 5,105,750
15,000 Metropolitan Water District of Southern California,
Waterworks 1997 Ser A 5.00 07/01/26 15,276,000
4,500 Sacramento County Water Financing Authority, 2003
Water Project (Ambac) 4.75 06/01/28 4,521,915
10,000 Sacramento Financing Authority, Water & Capital
Improvement 2001 Ser A (Ambac) 5.00 12/01/26 10,258,000
3,000 San Diego, Water 1998 Ser (FGIC) 4.75 08/01/28 3,006,630
5,000 San Diego County Water Authority, Ser 2002 A
COPs (MBIA) 5.00 05/01/27 5,140,500
10,000 San Diego Public Facilities Authority, Sewer Ser 1993 A 5.25 05/15/20 10,138,700
San Francisco Public Utilities Commission,
5,650 Water 2002 Ser A (MBIA) 5.00 11/01/20 5,991,090
10,000 Water 1996 Ser A 5.00 11/01/21 10,260,300
10,000 Water Refg Ser A 2001 (FSA) 5.00 11/01/31 10,223,700
5,000 West Basin Municipal Water District, Refg Ser 2003 A
COPs (MBIA) 5.00 08/01/30 5,135,850
- ------------ --------------
143,150 147,487,455
- ------------ --------------
REFUNDED (10.2%)
Foothill/Eastern Transportation Corridor Agency,
15,000 Toll Road Sr Lien Ser 1995 A 6.00 01/01/07+ 16,881,000
4,000 Toll Road Sr Lien Ser 1995 A 0.00### 01/01/10+ 4,695,040
Los Angeles Convention & Exhibition Center Authority,
14,000 Ser 1985 COPs 9.00 12/01/05+ 16,009,280
10,000 Ser 1985 COPs 9.00 12/01/05+ 11,435,200
10,000 Los Angeles, Department of Airports
Refg 1995 Ser A (FGIC) 5.50 05/15/05+ 10,682,600
6,000 San Diego County Water Authority, Ser 1991 B
COPs (MBIA) 11.27++ 04/27/06+ 7,502,160
5,250 Southern California Public Power Authority,
Transmission Refg Ser 1988 A (FGIC) (ETM) 0.00 07/01/06 5,030,602
- ------------ --------------
64,250 72,235,882
- ------------ --------------
647,060 TOTAL CALIFORNIA TAX-EXEMPT MUNICIPAL BONDS (COST $628,752,101) 680,140,229
- ------------ --------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
12
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------
SHORT-TERM CALIFORNIA TAX-EXEMPT MUNICIPAL OBLIGATIONS (3.3%)
$ 335 California Housing Finance Agency, Home 1995 Ser J
(Ambac) (Called for Redemption 02/01/04) 6.00% 08/01/17 $ 336,367
10,000 Contra Costa Water District, Ser G (MBIA) 5.50 10/01/04+ 10,533,000
9,500 Los Angeles County, Public Properties Refg 1987 COPs 0.00 04/01/04 9,455,635
1,500 Los Angeles Department of Water & Power, 2001 Ser B
Subser B-6 (Demand 01/02/04) 1.27* 07/01/34 1,500,000
1,400 Orange County Sanitation District Ser, 2000 A COPs
(Demand 01/02/04) 1.27* 08/01/30 1,400,000
- ------------ --------------
22,735 TOTAL SHORT-TERM CALIFORNIA TAX-EXEMPT MUNICIPAL OBLIGATIONS
(COST $22,108,175) 23,225,002
- ------------ --------------
$ 669,795 TOTAL INVESTMENTS (COST $650,860,276) (a) 99.1% 703,365,231
============
OTHER ASSETS IN EXCESS OF LIABILITIES 0.9 6,372,714
---------- --------------
NET ASSETS 100.0% $ 709,737,945
========== ==============
</Table>
- ----------
AMT ALTERNATIVE MINIMUM TAX.
COPs CERTIFICATES OF PARTICIPATION.
ETM ESCROWED TO MATURITY.
ROLS RESET OPTION LONGS.
* CURRENT COUPON OF VARIABLE RATE DEMAND OBLIGATION.
# CURRENTLY A ZERO COUPON SECURITY; WILL CONVERT TO 5.45% ON 07/01/12.
## CURRENTLY A ZERO COUPON SECURITY; WILL CONVERT TO 5.85% ON 07/15/09.
### CURRENTLY A ZERO COUPON SECURITY; WILL CONVERT TO 7.15% ON 01/01/05.
+ PREREFUNDED TO CALL DATE SHOWN.
++ CURRENT COUPON RATE FOR INVERSE FLOATING RATE MUNICIPAL OBLIGATIONS.
THIS RATE RESETS PERIODICALLY AS THE AUCTION RATE ON THE RELATED
SECURITY CHANGES. POSITIONS IN INVERSE FLOATING RATE MUNICIPAL
OBLIGATIONS HAVE A TOTAL VALUE OF $25,898,765 WHICH REPRESENTS 3.6%
OF NET ASSETS.
(a) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $650,935,147.
THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $52,807,604 AND THE
AGGREGATE GROSS UNREALIZED DEPRECIATION IS $377,520 RESULTING IN NET
UNREALIZED APPRECIATION OF $52,430,084.
BOND INSURANCE:
Ambac AMBAC ASSURANCE CORPORATION.
FGIC FINANCIAL GUARANTY INSURANCE COMPANY.
FSA FINANCIAL SECURITY ASSURANCE INC.
MBIA MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION.
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
MORGAN STANLEY CALIFORNIA TAX-FREE INCOME FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
<Table>
ASSETS:
Investments in securities, at value
(cost $650,860,276) $ 703,365,231
Cash 69,454
Receivable for:
Interest 9,994,747
Shares of beneficial interest sold 501,715
Investments sold 92,100
Prepaid Expenses and Other Assets 16,816
---------------
TOTAL ASSETS 714,040,063
---------------
LIABILITIES:
Payable for:
Dividends and distributions to shareholders 3,327,627
Distribution fee 429,107
Investment management fee 348,583
Shares of beneficial interest redeemed 83,369
Accrued expenses 113,432
---------------
TOTAL LIABILITIES 4,302,118
---------------
NET ASSETS $ 709,737,945
===============
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 657,208,946
Net unrealized appreciation 52,504,955
Accumulated undistributed net
investment income 445,193
ACCUMULATED NET REALIZED LOSS (421,149)
---------------
NET ASSETS $ 709,737,945
===============
CLASS A SHARES:
Net Assets $ 17,422,238
Shares Outstanding (unlimited
authorized, $.01 par value) 1,385,260
NET ASSET VALUE PER SHARE $ 12.58
===============
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 4.44%
of net asset value) $ 13.14
===============
CLASS B SHARES:
Net Assets $ 599,737,417
Shares Outstanding (unlimited
authorized, $.01 par value) 47,416,722
NET ASSET VALUE PER SHARE $ 12.65
===============
CLASS C SHARES:
Net Assets $ 26,435,166
Shares Outstanding (unlimited
authorized, $.01 par value) 2,089,995
NET ASSET VALUE PER SHARE $ 12.65
===============
CLASS D SHARES:
Net Assets $ 66,143,124
Shares Outstanding (unlimited
authorized, $.01 par value) 5,244,983
NET ASSET VALUE PER SHARE $ 12.61
===============
</Table>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
<Table>
NET INVESTMENT INCOME:
INTEREST INCOME $ 38,475,964
---------------
EXPENSES
Distribution fee (Class A shares) 31,832
Distribution fee (Class B shares) 4,771,143
Distribution fee (Class C shares) 201,947
Investment management fee 4,067,028
Transfer agent fees and expenses 216,654
Shareholder reports and notices 67,220
Professional fees 37,970
Custodian fees 32,655
Trustees' fees and expenses 19,071
Other 49,121
---------------
TOTAL EXPENSES 9,494,641
Less: expense offset (32,526)
Less: distribution fee rebate
(Class B shares) (3,299,473)
---------------
NET EXPENSES 6,162,642
---------------
NET INVESTMENT INCOME 32,313,322
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain 4,612,431
Net change in unrealized appreciation (6,374,894)
---------------
NET LOSS (1,762,463)
---------------
NET INCREASE $ 30,550,859
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
14
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 32,313,322 $ 35,877,781
Net realized gain 4,612,431 6,149,149
Net change in unrealized appreciation (6,374,894) 21,160,505
--------------- ---------------
NET INCREASE 30,550,859 63,187,435
--------------- ---------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A shares (732,776) (849,237)
Class B shares (27,255,860) (30,349,709)
Class C shares (1,010,881) (854,240)
Class D shares (3,233,583) (3,701,807)
Net realized gain
Class A shares (118,724) (168,726)
Class B shares (4,075,235) (5,503,318)
Class C shares (179,557) (205,844)
Class D shares (450,944) (609,510)
--------------- ---------------
TOTAL DIVIDENDS AND DISTRIBUTIONS (37,057,560) (42,242,391)
--------------- ---------------
Net decrease from transactions in shares of
beneficial interest (87,733,702) (30,977,572)
--------------- ---------------
NET DECREASE (94,240,403) (10,032,528)
NET ASSETS:
Beginning of period 803,978,348 814,010,876
--------------- ---------------
END OF PERIOD
(INCLUDING ACCUMULATED UNDISTRIBUTED NET
INVESTMENT INCOME OF $445,193
AND $493,501, RESPECTIVELY) $ 709,737,945 $ 803,978,348
=============== ===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
15
<Page>
MORGAN STANLEY CALIFORNIA TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2003
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley California Tax-Free Income Fund (the "Fund") is registered under
the Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Fund's investment objective is to
provide a high level of current income which is exempt from federal and
California income tax, consistent with the preservation of capital. The Fund was
organized as a Massachusetts business trust on April 9, 1984 and commenced
operations on July 11, 1984. On July 28, 1997, the Fund converted to a multiple
class share structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) portfolio securities are valued by an outside
independent pricing service approved by the Trustees. The pricing service uses
both a computerized grid matrix of tax-exempt securities and evaluations by its
staff, in each case based on information concerning market transactions and
quotations from dealers which reflect the mean between the last reported bid and
asked price. The portfolio securities are thus valued by reference to a
combination of transactions and quotations for the same or other securities
believed to be comparable in quality, coupon, maturity, type of issue, call
provisions, trading characteristics and other features deemed to be relevant.
The Trustees believe that timely and reliable market quotations are generally
not readily available for purposes of valuing tax-exempt securities and that the
valuations supplied by the pricing service are more likely to approximate the
fair value of such securities; (2) futures are valued at the latest sale price
on the commodities exchange on which they trade unless it is determined that
such price does not reflect their market value, in which case they will be
valued at their fair value as determined in good faith under procedures
established by and under the supervision of the Trustees; and (3) short-term
debt securities having a maturity date of more than sixty days at time of
purchase are valued on a mark-to-market basis until sixty days prior to maturity
and thereafter at amortized cost based on their value on the 61st day.
Short-term debt securities having a maturity date of sixty days or less at the
time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Discounts are accreted and premiums are amortized over the life of the
respective securities. Interest income is accrued daily.
16
<Page>
C. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
D. FUTURES CONTRACTS -- A futures contract is an agreement between two parties
to buy and sell financial instruments or contracts based on financial indices at
a set price on a future date. Upon entering into such a contract, the Fund is
required to pledge to the broker cash, U.S. Government securities or other
liquid portfolio securities equal to the minimum initial margin requirements of
the applicable futures exchange. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in the value of the contract. Such receipts or payments known as
variation margin are recorded by the Fund as unrealized gains and losses. Upon
closing of the contract, the Fund realizes a gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed.
E. FEDERAL INCOME TAX POLICY -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable and nontaxable
income to its shareholders. Accordingly, no federal income tax provision is
required.
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.
G. USE OF ESTIMATES -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement with Morgan Stanley Investment
Advisors Inc. (the "Investment Manager") the Fund pays the Investment Manager a
management fee, accrued daily and payable monthly, by applying the following
annual rates to the Fund's net assets determined as of the close of each
business day: 0.55% to the portion of daily net assets not exceeding $500
million; 0.525% to the portion of daily net assets exceeding $500 million but
not exceeding $750 million; 0.50% to the portion of daily net assets exceeding
$750 million but not exceeding $1 billion; 0.475% to the portion of daily net
assets exceeding $1 billion but not exceeding $1.25 billion; and 0.45% to the
portion of daily net assets in excess of $1.25 billion.
17
<Page>
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the
"Distributor"), an affiliate of the Investment Manager. The Fund has adopted a
Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan
provides that the Fund will pay the Distributor a fee which is accrued daily and
paid monthly at the following annual rates: (i) Class A -- up to 0.25% of the
average daily net assets of Class A; (ii) Class B -- 0.75% of the lesser of: (a)
the average daily aggregate gross sales of the Class B shares since the
inception of the Fund (not including reinvestment of dividend or capital gain
distributions) less the average daily aggregate net asset value of the Class B
shares redeemed since the Fund's inception upon which a contingent deferred
sales charge has been imposed or waived; or (b) the average daily net assets of
Class B; and (iii) Class C -- up to 0.75% of the average daily net assets of
Class C.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that there were no excess expenses as of
December 31, 2003.
For the year ended December 31, 2003, the Distributor rebated a portion of the
distribution fees paid by the Fund on Class B shares in the amount of
$3,299,473.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 0.75% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Financial Advisors or other selected
broker-dealer representatives may be reimbursed in the subsequent calendar year.
For the year ended December 31, 2003, the distribution fee was accrued for Class
A shares and Class C shares at the annual rate of 0.18% and 0.75%, respectively.
The Distributor has informed the Fund that for the year ended December 31, 2003,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class B shares and Class C shares of $512,813 and $16,968, respectively
and received $118,071 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.
18
<Page>
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended December 31, 2003 aggregated
$80,879,115 and $147,314,721, respectively. Included in aforementioned
transactions are purchases of $9,428,920 and sales of $25,217,211 with other
Morgan Stanley funds including net realized gain of $1,288,443.
Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is
the Fund's transfer agent. At December 31, 2003, the Fund had transfer agent
fees and expenses payable of approximately $5,500.
The Fund has an unfunded noncontributory defined benefit pension plan covering
certain independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on factors which include years of service and compensation.
Aggregate pension costs for the year ended December 31, 2003 included in
Trustees' fees and expenses in the Statement of Operations amounted to $7,268.
At December 31, 2003, the Fund had an accrued pension liability of $60,393 which
is included in accrued expenses in the Statement of Assets and Liabilities.
On December 2, 2003, the Trustees voted to close the plan to new participants,
eliminate the future benefits growth due to increases to compensation after July
31, 2003 and effective April 1, 2004, establish an unfunded deferred
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
throughout the year.
5. EXPENSE OFFSET
The expense offset represents a reduction of the custodian fees for earnings on
cash balances maintained by the Fund.
6. RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Fund may invest a portion of its assets in inverse floating rate municipal
obligations. The prices of these securities are subject to greater market
fluctuations during periods of changing prevailing interest rates than are
comparable fixed rate obligations.
To hedge against adverse interest rate changes, the Fund may invest in financial
futures contracts or municipal bond index futures contracts ("futures
contracts").
These futures contracts involve elements of market risk in excess of the amount
reflected in the Statement of Assets and Liabilities. The Fund bears the risk of
an unfavorable change in the value of the underlying securities. Risks may also
arise upon entering into these contracts from the potential inability of the
counterparties to meet the terms of their contracts.
19
<Page>
7. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
------------------------------ ------------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- -------------
CLASS A SHARES
Sold 798,027 $ 10,035,431 1,512,568 $ 19,130,260
Reinvestment of dividends and distributions 24,442 307,515 24,313 305,853
Redeemed (1,076,242) (13,544,718) (1,287,894) (16,262,010)
------------- ------------- ------------- -------------
Net increase (decrease) -- Class A (253,773) (3,201,772) 248,987 3,174,103
------------- ------------- ------------- -------------
CLASS B SHARES
Sold 2,241,508 28,434,334 4,323,553 54,537,774
Reinvestment of dividends and distributions 1,276,233 16,142,176 1,476,631 18,642,590
Redeemed (9,610,206) (121,340,302) (8,364,080) (105,528,439)
------------- ------------- ------------- -------------
Net decrease -- Class B (6,092,465) (76,763,792) (2,563,896) (32,348,075)
------------- ------------- ------------- -------------
CLASS C SHARES
Sold 871,904 11,075,117 1,819,979 22,969,858
Reinvestment of dividends and distributions 59,793 756,188 54,241 685,522
Redeemed (868,360) (10,970,699) (1,195,628) (15,076,874)
------------- ------------- ------------- -------------
Net increase -- Class C 63,337 860,606 678,592 8,578,506
------------- ------------- ------------- -------------
CLASS D SHARES
Sold 885,580 11,217,139 497,912 6,303,223
Reinvestment of dividends and distributions 151,366 1,909,249 171,997 2,165,228
Redeemed (1,718,245) (21,755,132) (1,495,708) (18,850,557)
------------- ------------- ------------- -------------
Net decrease -- Class D (681,299) (8,628,744) (825,799) (10,382,106)
------------- ------------- ------------- -------------
Net decrease in Fund (6,964,200) $ (87,733,702) (2,462,116) $ (30,977,572)
============= ============= ============= =============
</Table>
8. LEGAL MATTERS
The Investment Manager, certain affiliates of the Investment Manager and certain
investment companies advised by the Investment Manager or its affiliates,
including the Fund, are named as defendants in a number of recently filed,
similar class action complaints. These complaints generally allege 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 steer investors to the funds
advised by the Investment Manager or its affiliates 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 alleged efforts to steer investors to these funds.
The complaints seek, among other things, unspecified compensatory
20
<Page>
damages, rescissionary damages, fees and costs. The defendants intend to move to
dismiss these actions and otherwise vigorously to defend them. While the Fund
believes that it has meritorious defenses, the ultimate outcome of these matters
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 these matters.
9. 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.
The tax character of distributions paid was as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
Tax-exempt income $ 32,233,100 $ 35,754,993
Long-term capital gains 4,824,460 6,487,398
----------------- -----------------
Total distributions $ 37,057,560 $ 42,242,391
================= =================
</Table>
As of December 31, 2003, the tax-basis components of accumulated earnings were
as follows:
<Table>
Undistributed tax-exempt income $ 79,720
Undistributed long-term gains 79,588
-----------------
Net accumulated earnings 159,308
Temporary differences (60,393)
Net unrealized appreciation 52,430,084
-----------------
Total accumulated earnings $ 52,528,999
=================
</Table>
As of December 31, 2003, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on wash sales and book amortization of
discounts on debt securities and permanent book/tax differences primarily
attributable to tax adjustments on debt securities sold by the Fund. To reflect
reclassifications arising from the permanent differences, accumulated
undistributed net investment income was charged $128,530, paid-in-capital was
credited $24,324 and accumulated net realized loss was credited $104,206.
21
<Page>
MORGAN STANLEY CALIFORNIA TAX-FREE INCOME FUND
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 12.68 $ 12.34 $ 12.49 $ 11.67 $ 12.75
---------- ---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income 0.55 0.57 0.57 0.58 0.58
Net realized and unrealized gain (loss) (0.01) 0.44 (0.10) 0.82 (1.06)
---------- ---------- ---------- ---------- ----------
Total income (loss) from investment operations 0.54 1.01 0.47 1.40 (0.48)
---------- ---------- ---------- ---------- ----------
Less dividends and distributions from:
Net investment income (0.55) (0.57) (0.58) (0.58) (0.58)
Net realized gain (0.09) (0.10) (0.04) - (0.02)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (0.64) (0.67) (0.62) (0.58) (0.60)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 12.58 $ 12.68 $ 12.34 $ 12.49 $ 11.67
========== ========== ========== ========== ==========
TOTAL RETURN+ 4.31% 8.37% 3.90% 12.17% (3.91)%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses (before expense offset) 0.78% 0.80% 0.80% 0.83% 0.78%(2)
Net investment income 4.34% 4.53% 4.62% 4.80% 4.70%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 17,422 $ 20,775 $ 17,147 $ 12,336 $ 6,253
Portfolio turnover rate 11% 12% 13% 4% 5%
</Table>
- ----------
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(2) DOES NOT REFLECT THE EFFECT OF EXPENSE OFFSET OF 0.01%
SEE NOTES TO FINANCIAL STATEMENTS
22
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 12.75 $ 12.42 $ 12.57 $ 11.73 $ 12.81
---------- ---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income 0.55 0.56 0.55 0.57 0.57
Net realized and unrealized gain (loss) (0.02) 0.42 (0.11) 0.84 (1.06)
---------- ---------- ---------- ---------- ----------
Total income (loss) from investment operations 0.53 0.98 0.44 1.41 (0.49)
---------- ---------- ---------- ---------- ----------
Less dividends and distributions from:
Net investment income (0.54) (0.55) (0.55) (0.57) (0.57)
Net realized gain (0.09) (0.10) (0.04) - (0.02)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (0.63) (0.65) (0.59) (0.57) (0.59)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 12.65 $ 12.75 $ 12.42 $ 12.57 $ 11.73
========== ========== ========== ========== ==========
TOTAL RETURN+ 4.27% 8.13% 3.56% 12.29% (3.99)%
RATIOS TO AVERAGE NET ASSETS(1)(3):
Expenses (before expense offset) 0.83% 0.93% 1.04% 0.93% 0.91%(2)
Net investment income 4.29% 4.40% 4.38% 4.70% 4.57%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 599,737 $ 682,046 $ 696,481 $ 732,668 $ 761,548
Portfolio turnover rate 11% 12% 13% 4% 5%
</Table>
- ----------
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(2) DOES NOT REFLECT THE EFFECT OF EXPENSE OFFSET OF 0.01%
(3) IF THE FUND HAD BORNE ALL OF ITS EXPENSES THAT WERE REIMBURSED BY THE
DISTRIBUTOR, THE ANNUALIZED EXPENSE AND NET INVESTMENT INCOME RATIOS WOULD
HAVE BEEN AS FOLLOWS:
<Table>
<Caption>
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO INCOME RATIO
----------------- ---------- --------------
DECEMBER 31, 2003 1.35% 3.77%
DECEMBER 31, 2002 1.35 3.98
DECEMBER 31, 2001 1.34 4.06
DECEMBER 31, 2000 1.34 4.29
DECEMBER 31, 1999 1.34 4.14
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
23
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 12.74 $ 12.42 $ 12.57 $ 11.73 $ 12.81
---------- ---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income 0.48 0.50 0.51 0.52 0.51
Net realized and unrealized gain (loss) 0.00 0.42 (0.11) 0.84 (1.06)
---------- ---------- ---------- ---------- ----------
Total income (loss) from investment operations 0.48 0.92 0.40 1.36 (0.55)
---------- ---------- ---------- ---------- ----------
Less dividends and distributions from:
Net investment income (0.48) (0.50) (0.51) (0.52) (0.51)
Net realized gain (0.09) (0.10) (0.04) - (0.02)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (0.57) (0.60) (0.55) (0.52) (0.53)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 12.65 $ 12.74 $ 12.42 $ 12.57 $ 11.73
========== ========== ========== ========== ==========
TOTAL RETURN+ 3.80% 7.59% 3.33% 11.74% (4.41)%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses (before expense offset) 1.35% 1.35% 1.34% 1.34% 1.34%(2)
Net investment income 3.77% 3.98% 4.09% 4.29% 4.14%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 26,435 $ 25,825 $ 16,745 $ 14,534 $ 13,099
Portfolio turnover rate 11% 12% 13% 4% 5%
</Table>
- ----------
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(2) DOES NOT REFLECT THE EFFECT OF EXPENSE OFFSET OF 0.01%
SEE NOTES TO FINANCIAL STATEMENTS
24
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 12.71 $ 12.39 $ 12.53 $ 11.71 $ 12.78
---------- ---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income 0.57 0.60 0.60 0.61 0.60
Net realized and unrealized gain (loss) (0.01) 0.41 (0.10) 0.82 (1.05)
---------- ---------- ---------- ---------- ----------
Total income (loss) from investment operations 0.56 1.01 0.50 1.43 (0.45)
---------- ---------- ---------- ---------- ----------
Less dividends and distributions from:
Net investment income (0.57) (0.59) (0.60) (0.61) (0.60)
Net realized gain (0.09) (0.10) (0.04) - (0.02)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (0.66) (0.69) (0.64) (0.61) (0.62)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 12.61 $ 12.71 $ 12.39 $ 12.53 $ 11.71
========== ========== ========== ========== ==========
TOTAL RETURN+ 4.50% 8.41% 4.12% 12.50% (3.63)%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses (before expense offset) 0.60% 0.60% 0.59% 0.59% 0.59%(2)
Net investment income 4.52% 4.73% 4.84% 5.04% 4.89%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 66,143 $ 75,332 $ 83,638 $ 95,132 $ 1,021
Portfolio turnover rate 11% 12% 13% 4% 5%
</Table>
- ----------
+ CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE
PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(2) DOES NOT REFLECT THE EFFECT OF EXPENSE OFFSET OF 0.01%
SEE NOTES TO FINANCIAL STATEMENTS
25
<Page>
MORGAN STANLEY CALIFORNIA TAX-FREE INCOME FUND
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
MORGAN STANLEY CALIFORNIA TAX-FREE INCOME FUND:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley California Tax-Free Income Fund (the "Fund"), including the portfolio of
investments, as of December 31, 2003, and the related statements of operations
for the year then ended and changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of the five years
in the period then ended. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 2003, by correspondence with the custodian.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Morgan
Stanley California Tax-Free Income Fund as of December 31, 2003, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended, and the financial highlights for each
of the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America.
Deloitte & Touche LLP
NEW YORK, NEW YORK
FEBRUARY 12, 2004
2003 FEDERAL TAX NOTICE (UNAUDITED)
During the year ended December 31, 2003, the Fund paid to its
shareholders the following per share amounts from the sources
indicated below:
<Table>
<Caption>
CLASS A CLASS B CLASS C CLASS D
---------------------------------------
Tax-Exempt Income $ 0.55 $ 0.54 $ 0.48 $ 0.57
Long-Term Capital Gains $ 0.09 $ 0.09 $ 0.09 $ 0.09
</Table>
26
<Page>
MORGAN STANLEY CALIFORNIA TAX-FREE INCOME FUND
TRUSTEE AND OFFICER INFORMATION
INDEPENDENT TRUSTEES:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- --------------------------- ----------- ------------ ---------------------------------- ------------- -------------------------
Michael Bozic (62) Trustee Since Retired; Director or Trustee of 216 Director of Weirton Steel
c/o Mayer, Brown, April 1994 the Retail Funds (since April Corporation.
Rowe & Maw LLP 1994) and the Institutional Funds
Counsel to the Independent (since July 2003); formerly Vice
Directors Chairman of Kmart Corporation
1675 Broadway (December 1998- October 2000),
New York, NY Chairman and Chief Executive
Officer of Levitz Furniture
Corporation (November 1995-
November 1998) and President and
Chief Executive Officer of Hills
Department Stores (May 1991-July
1995); formerly variously
Chairman, Chief Executive Officer,
President and Chief Operating
Officer (1987-1991) of the Sears
Merchandise Group of Sears,
Roebuck & Co.
Edwin J. Garn (71) Trustee Since Director or Trustee of the 216 Director of Franklin
c/o Summit Ventures LLC January Retail Funds (since January 1993) Covey (time management
1 Utah Center 1993 and the Institutional Funds (since systems), BMW Bank of
201 S. Main Street July 2003); member of the Utah North America, Inc.
Salt Lake City, UT Regional Advisory Board of Pacific (industrial loan
Corp.; formerly United States corporation), United
Senator (R-Utah) (1974-1992) and Space Alliance (joint
Chairman, Senate Banking Committee venture between Lockheed
(1980-1986), Mayor of Salt Lake Martin and the Boeing
City, Utah (1971-1974), Astronaut, Company) and Nuskin Asia
Space Shuttle Discovery Pacific (multilevel
(April 12-19, 1985), and Vice marketing); member of the
Chairman, Huntsman Corporation board of various civic
(chemical company). and charitable
organizations.
Wayne E. Hedien (69) Trustee Since Retired; Director or Trustee of 216 Director of The PMI Group
c/o Mayer, Brown, September the Retail Funds (since Inc. (private mortgage
Rowe & Maw LLP 1997 September 1997) and the insurance); Trustee and
Counsel to the Independent Institutional Funds (since Vice Chairman of The
Directors July 2003); formerly associated Field Museum of Natural
1675 Broadway with the Allstate Companies History; director of
New York, NY (1966-1994), most recently as various other business
Chairman of The Allstate and charitable
Corporation (March 1993- organizations.
December 1994) and Chairman and
Chief Executive Officer of its
wholly-owned subsidiary, Allstate
Insurance Company (July
1989-December 1994).
</Table>
27
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- --------------------------- ----------- ------------ ---------------------------------- ------------- -------------------------
Dr. Manuel H. Johnson (54) Trustee Since Chairman of the Audit Committee 216 Director of NVR, Inc.
c/o Johnson Smick July 1991 and Director or Trustee of the (home construction);
International, Inc. Retail Funds (since July 1991) and Chairman and Trustee of
2099 Pennsylvania the Institutional Funds (since the Financial Accounting
Avenue, N.W. July 2003); Senior Partner, Foundation (oversight
Suite 950 Johnson Smick International, Inc., organization of the
Washington, D.C. a consulting firm; Co-Chairman and Financial Accounting
a founder of the Group of Seven Standards Board);
Council (G7C), an international Director of RBS Greenwich
economic commission; formerly Vice Capital Holdings
Chairman of the Board of Governors (financial holding
of the Federal Reserve System and company).
Assistant Secretary of the U.S.
Treasury.
Joseph J. Kearns (61) Trustee Since Deputy Chairman of the Audit 217 Director of Electro Rent
PMB754 July 2003 Committee and Director or Trustee Corporation (equipment
23852 Pacific Coast Highway of the Retail Funds (since July leasing), The Ford Family
Malibu, CA 2003) and the Institutional Funds Foundation, and the UCLA
(since August 1994); previously Foundation.
Chairman of the Audit Committee of
the Institutional Funds (October
2001-July 2003); President, Kearns
& Associates LLC (investment
consulting); formerly CFO of the
J. Paul Getty Trust.
Michael E. Nugent (67) Trustee Since Chairman of the Insurance 216 Director of various
c/o Triumph Capital, L.P. July 1991 Committee and Director or Trustee business organizations.
445 Park Avenue of the Retail Funds (since July
New York, NY 1991) and the Institutional Funds
(since July 2001); General Partner
of Triumph Capital, L.P., a
private investment partnership;
formerly Vice President, Bankers
Trust Company and BT Capital
Corporation (1984-1988).
Fergus Reid (71) Trustee Since Chairman of the Governance 217 Trustee and Director of
85 Charles Colman Blvd. July 2003 Committee and Director or Trustee certain investment
Pawling, NY of the Retail Funds (since July companies in the JPMorgan
2003) and the Institutional Funds Funds complex managed by
(since June 1992); Chairman of JP Morgan Investment
Lumelite Plastics Corporation. Management Inc.
</Table>
28
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
INTERESTED TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- --------------------------- ----------- ------------ ---------------------------------- ------------- -------------------------
Charles A. Fiumefreddo (70) Chairman of Since Chairman and Director or Trustee 216 None
c/o Morgan Stanley Trust the Board July 1991 of the Retail Funds (since July
Harborside Financial and Trustee 1991) and the Institutional Funds
Center, (since July 2003); formerly Chief
Plaza Two, Executive Officer of the Retail
Jersey City, NJ Funds (until September 2002).
James F. Higgins (55) Trustee Since Director or Trustee of the Retail 216 Director of AXA
c/o Morgan Stanley Trust June 2000 Funds (since June 2000) and the Financial, Inc. and The
Harborside Financial Institutional Funds (since July Equitable Life Assurance
Center, 2003); Senior Advisor of Morgan Society of the United
Plaza Two, Stanley (since August 2000); States (financial
Jersey City, NJ Director of the Distributor and services).
Dean Witter Realty Inc.;
previously President and Chief
Operating Officer of the Private
Client Group of Morgan Stanley
(May 1999-August 2000), and
President and Chief Operating
Officer of Individual Securities
of Morgan Stanley (February
1997-May 1999).
Philip J. Purcell (60) Trustee Since Director or Trustee of the Retail 216 Director of American
1585 Broadway April 1994 Funds (since April 1994) and the Airlines, Inc. and its
New York, NY Institutional Funds (since July parent company, AMR
2003); Chairman of the Board of Corporation.
Directors and Chief Executive
Officer of Morgan Stanley and
Morgan Stanley DW Inc.; Director
of the Distributor; Chairman of
the Board of Directors and Chief
Executive Officer of Novus Credit
Services Inc.; Director and/or
officer of various Morgan Stanley
subsidiaries.
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE TRUSTEE BEGAN SERVING THE FUNDS ADVISED BY
MORGAN STANLEY INVESTMENT ADVISORS INC. (THE "INVESTMENT MANAGER") (THE
"RETAIL FUNDS").
** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICES AS
DIRECTOR/TRUSTEE FOR THE RETAIL FUNDS AND THE FUNDS ADVISED BY MORGAN
STANLEY INVESTMENT MANAGEMENT INC., MORGAN STANLEY INVESTMENTS LP AND
MORGAN STANLEY AIP GP LP (THE "INSTITUTIONAL FUNDS") REFLECT THE EARLIEST
DATE THE DIRECTOR/TRUSTEE BEGAN SERVING THE RETAIL OR INSTITUTIONAL FUNDS
AS APPLICABLE.
*** THE FUND COMPLEX INCLUDES ALL OPEN-END AND CLOSED-END FUNDS (INCLUDING ALL
OF THEIR PORTFOLIOS) ADVISED BY THE INVESTMENT MANAGER AND ANY FUNDS THAT
HAVE AN INVESTMENT ADVISOR THAT IS AN AFFILIATED PERSON OF THE INVESTMENT
MANAGER (INCLUDING BUT NOT LIMITED TO MORGAN STANLEY INVESTMENT MANAGEMENT
INC. AND MORGAN STANLEY INVESTMENTS LP).
29
<Page>
OFFICERS:
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- ------------------------ -------------- -------------- -----------------------------------------------------------------
Mitchell M. Merin (50) President Since May 1999 President and Chief Operating Officer of Morgan Stanley
1221 Avenue of the Investment Management Inc.; President, Director and Chief
Americas Executive Officer of the Investment Manager and Morgan Stanley
New York, NY Services; Chairman, Chief Executive Officer and Director of the
Distributor; Chairman and Director of the Transfer Agent;
Director of various Morgan Stanley subsidiaries; President Morgan
Stanley Investments LP (since February 2003); President of the
Institutional Funds (since July 2003) and President of the Retail
Funds (since May 1999); Trustee (since July 2003) and President
(since December 2002) of the Van Kampen Closed-End Funds; Trustee
(since May 1999) and President (since October 2002) of the
Van Kampen Open-End Funds.
Ronald E. Robison (64) Executive Vice Since Chief Global Operations Officer and Managing Director of Morgan
1221 Avenue of the President and April 2003 Stanley Investment Management Inc.; Managing DIrector of Morgan
Americas Principal Stanley & Co. Incorporated; Managing DIrector of Morgan Stanley;
New York, NY Executive Managing Director, Chief Administrative Officer and Director of
Officer the Investment Manager and Morgan Stanley Services; Chief
Executive Officer and Director of the Transfer Agent; Managing
Director and Director of the Distributor; Executive Vice
President and Principal Executive Officer of the Institutional
Funds (since July 2003); previously President of the Institutional
Funds (March 2001-July 2003) and Director of the Institutional
Funds (March 2001-July 2003).
Barry Fink (48) Vice President Since General Counsel (since May 2000) and Managing Director (since
1221 Avenue of the and General February 1997 December 2000) of Morgan Stanley Investment Management; Managing
Americas Counsel Director (since December 2000), Secretary (since February 1997)
New York, NY and Director (since July 1998) of the Investment Manager and
Morgan Stanley Services; Assistant Secretary of Morgan Stanley
DW; Chief Legal Officer of Morgan Stanley Investments LP (since
July 2002); Vice President of the Institutional Funds (since July
2003); Vice President and Secretary of the Distributor;
previously Secretary of the Retail Funds (February 1997-July
2003); previously Vice President and Assistant General Counsel of
the Investment Manager and Morgan Stanley Services (February
1997-December 2001).
Joseph J. McAlinden (60) Vice President Since Managing Director and Chief Investment Officer of the Investment
1221 Avenue of the July 1995 Manager, Morgan Stanley Investment Management Inc. and Morgan
Americas Stanley Investments LP; Director of the Transfer Agent, Chief
New York, NY Investment Officer of the Van Kampen Funds; Vice President of the
Institutional Funds (since July 2003) and the Retail Funds (since
July 1995).
Stefanie V. Chang (37) Vice President Since Executive Director of Morgan Stanley & Co. and Morgan Stanley
1221 Avenue of the July 2003 Investment Management Inc. and Vice President of the
Americas Institutional Funds (since December 1997) and the Retail Funds
New York, NY (since July 2003); formerly practiced law with the New York law
firm of Rogers & Wells (now Clifford Chance LLP).
</Table>
30
<Page>
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- ------------------------ -------------- -------------- -----------------------------------------------------------------
Francis J. Smith (38) Treasurer and Treasurer Executive Director of the Investment Manager and Morgan Stanley
c/o Morgan Stanley Trust Chief since July Services (since December 2001); previously Vice President of the
Harborside Financial Financial 2003 and Retail Funds (September 2002-July 2003); previously Vice
Center, Officer Chief President of the Investment Manager and Morgan Stanley Services
Plaza Two, Financial (August 2000-November 2001) and Senior Manager at
Jersey City, NJ Officer PricewaterhouseCoopers LLP (January 1998-August 2000).
since
September
2002
Thomas F. Caloia (57) Vice President Since Executive Director (since December 2002) and Assistant Treasurer
c/o Morgan Stanley Trust July 2003 of the Investment Manager, the Distributor and Morgan Stanley
Harborside Financial Services; previously Treasurer of the Retail Funds (April
Center, 1989-July 2003); formerly First Vice President of the Investment
Plaza Two, Manager, the Distributor and Morgan Stanley Services.
Jersey City, NJ
Mary E. Mullin (36) Secretary Since Vice President of Morgan Stanley & Co. Incorporated and Morgan
1221 Avenue of the July 2003 Stanley Investment Management Inc.; Secretary of the
Americas Institutional Funds (since June 1999) and the Retail Funds (since
New York, NY July 2003); formerly practiced law with the New York law firms of
McDermott, Will & Emery and Skadden, Arps, Slate, Meagher & Flom
LLP.
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE OFFICER BEGAN SERVING THE RETAIL FUNDS. EACH
OFFICER SERVES AN INDEFINITE TERM, UNTIL HIS OR HER SUCCESSOR IS ELECTED.
** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICE AS AN OFFICER
FOR THE RETAIL AND INSTITUTIONAL FUNDS REFLECT THE EARLIEST DATE THE
OFFICER BEGAN SERVING THE RETAIL OR INSTITUTIONAL FUNDS AS APPLICABLE.
31
<Page>
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 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 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
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.
(C) 2003 Morgan Stanley
[MORGAN STANLEY LOGO]
37900RPT-00-13681B04-AP-1/04
[GRAPHIC]
MORGAN STANLEY FUNDS
MORGAN STANLEY
CALIFORNIA TAX-FREE
INCOME FUND
ANNUAL REPORT
DECEMBER 31, 2003
[MORGAN STANLEY LOGO]
<Page>
Item 2. Code of Ethics.
(a) The Fund has adopted a code of ethics (the "Code of Ethics") that
applies to its principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by the Fund or a
third party.
(b) No information need be disclosed pursuant to this paragraph.
(c) Not applicable.
(d) Not applicable.
(e) Not applicable.
(f)
(1) The Fund's Code of Ethics is attached hereto as Exhibit A.
(2) Not applicable.
(3) Not applicable.
Item 3. Audit Committee Financial Expert.
The Fund's Board of Trustees has determined that it has two "audit committee
financial experts" serving on its audit committee, each of whom are
"independent" Trustees: Dr. Manuel H. Johnson and Joseph J. Kearns. Under
applicable securities laws, a person who is determined to be an audit committee
financial expert will not be deemed an "expert" for any purpose, including
without limitation for the purposes of Section 11 of the Securities Act of 1933,
as a result of being designated or identified as an audit committee financial
expert. The designation or identification of a person as an audit committee
financial expert does not impose on such person any duties, obligations, or
liabilities that are greater than the duties, obligations, and liabilities
imposed on such person as a member of the audit committee and Board of Trustees
in the absence of such designation or identification.
<Page>
Item 4. Principal Accountant Fees and Services.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
2003
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 27,930 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 684(2) $2,847,161(2)
TAX FEES $ 4,884(3) $ 736,810(4)
ALL OTHER FEES $ 0 $ 0
TOTAL NON-AUDIT FEES $ 5,568 $3,583,971
TOTAL $ 33,498 $3,583,971
</Table>
2002
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 25,600 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 657(2) $2,818,115(2)
TAX FEES $ 4,904(3) $ 365,427(4)
ALL OTHER FEES $ 0 $ 501,166(5)
TOTAL NON-AUDIT FEES $ 5,561 $3,684,708
TOTAL $ 31,161 $3,684,708
</Table>
N/A- Not applicable, as not required by Item 4.
(1) Covered Entities include the Adviser (excluding sub-advisors)
and any entity controlling, controlled by or under common
control with the Adviser that provides ongoing services to the
Registrant.
(2) Audit-Related Fees represent assurance and related services
provided that are reasonably related to the performance of the
audit of the financial statements of the Covered Entities' and
funds advised by the Adviser or its affiliates, specifically
data verification and agreed-upon procedures related to asset
securitizations and agreed-upon procedures engagements.
(3) Tax Fees represent tax compliance, tax planning and tax advice
services provided in connection with the preparation and review
of the Registrant's tax returns.
(4) Tax Fees represent tax compliance, tax planning and tax advice
services provided in connection with the review of Covered
Entities' tax returns.
(5) All other fees represent project management for future business
applications and improving business and operational processes.
<Page>
(e)(1) The audit committee's pre-approval policies and procedures are as
follows:
AUDIT COMMITTEE
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS
AS ADOPTED JULY 31, 2003(1)
1. STATEMENT OF PRINCIPLES
The Audit Committee of the Board is required to review and, in its sole
discretion, pre-approve all Covered Services to be provided by the Independent
Auditors to the Fund and Covered Entities in order to assure that services
performed by the Independent Auditors do not impair the auditor's independence
from the Fund.
The SEC has issued rules specifying the types of services that an
independent auditor may not provide to its audit client, as well as the audit
committee's administration of the engagement of the independent auditor. The
SEC's rules establish two different approaches to pre-approving services, which
the SEC considers to be equally valid. Proposed services either: may be
pre-approved without consideration of specific case-by-case services by the
Audit Committee ("GENERAL PRE-APPROVAL"); or require the specific pre-approval
of the Audit Committee or its delegate ("SPECIFIC PRE-APPROVAL"). The Audit
Committee believes that the combination of these two approaches in this Policy
will result in an effective and efficient procedure to pre-approve services
performed by the Independent Auditors. As set forth in this Policy, unless a
type of service has received general pre-approval, it will require specific
pre-approval by the Audit Committee (or by any member of the Audit Committee to
which pre-approval authority has been delegated) if it is to be provided by the
Independent Auditors. Any proposed services exceeding pre-approved cost levels
or budgeted amounts will also require specific pre-approval by the Audit
Committee.
The appendices to this Policy describe the Audit, Audit-related, Tax
and All Other services that have the general pre-approval of the Audit
Committee. The term of any general pre-approval is 12 months from the date of
pre-approval, unless the Audit Committee considers and provides a different
period and states otherwise. The Audit Committee will annually review and
pre-approve the services that may be provided by the Independent Auditors
without obtaining specific pre-approval from the Audit Committee. The Audit
Committee will add to or subtract from the list of general pre-approved services
from time to time, based on subsequent determinations.
(1) This Audit Committee Audit and Non-Audit Services Pre-Approval Policy
and Procedures (the "POLICY"), adopted as of the date above, supercedes
and replaces all prior versions that may have been adopted from time to
time.
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The purpose of this Policy is to set forth the policy and procedures by
which the Audit Committee intends to fulfill its responsibilities. It does not
delegate the Audit Committee's responsibilities to pre-approve services
performed by the Independent Auditors to management.
The Fund's Independent Auditors have reviewed this Policy and believes
that implementation of the Policy will not adversely affect the Independent
Auditors' independence.
2. DELEGATION
As provided in the Act and the SEC's rules, the Audit Committee may
delegate either type of pre-approval authority to one or more of its members.
The member to whom such authority is delegated must report, for informational
purposes only, any pre-approval decisions to the Audit Committee at its next
scheduled meeting.
3. AUDIT SERVICES
The annual Audit services engagement terms and fees are subject to the
specific pre-approval of the Audit Committee. Audit services include the annual
financial statement audit and other procedures required to be performed by the
Independent Auditors to be able to form an opinion on the Fund's financial
statements. These other procedures include information systems and procedural
reviews and testing performed in order to understand and place reliance on the
systems of internal control, and consultations relating to the audit. The Audit
Committee will approve, if necessary, any changes in terms, conditions and fees
resulting from changes in audit scope, Fund structure or other items.
In addition to the annual Audit services engagement approved by the
Audit Committee, the Audit Committee may grant general pre-approval to other
Audit services, which are those services that only the Independent Auditors
reasonably can provide. Other Audit services may include statutory audits and
services associated with SEC registration statements (on Forms N-1A, N-2, N-3,
N-4, etc.), periodic reports and other documents filed with the SEC or other
documents issued in connection with securities offerings.
The Audit Committee has pre-approved the Audit services in Appendix
B.1. All other Audit services not listed in Appendix B.1 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
4. AUDIT-RELATED SERVICES
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Audit-related services are assurance and related services that are
reasonably related to the performance of the audit or review of the Fund's
financial statements and, to the extent they are Covered Services, the Covered
Entities or that are traditionally performed by the Independent Auditors.
Because the Audit Committee believes that the provision of Audit-related
services does not impair the independence of the auditor and is consistent with
the SEC's rules on auditor independence, the Audit Committee may grant general
pre-approval to Audit-related services. Audit-related services include, among
others, accounting consultations related to accounting, financial reporting or
disclosure matters not classified as "Audit services"; assistance with
understanding and implementing new accounting and financial reporting guidance
from rulemaking authorities; agreed-upon or expanded audit procedures related to
accounting and/or billing records required to respond to or comply with
financial, accounting or regulatory reporting matters; and assistance with
internal control reporting requirements under Forms N-SAR and/or N-CSR.
The Audit Committee has pre-approved the Audit-related services in
Appendix B.2. All other Audit-related services not listed in Appendix B.2 must
be specifically pre-approved by the Audit Committee (or by any member of the
Audit Committee to which pre-approval has been delegated).
5. TAX SERVICES
The Audit Committee believes that the Independent Auditors can provide
Tax services to the Fund and, to the extent they are Covered Services, the
Covered Entities, such as tax compliance, tax planning and tax advice without
impairing the auditor's independence, and the SEC has stated that the
Independent Auditors may provide such services.
Pursuant to the preceding paragraph, the Audit Committee has
pre-approved the Tax Services in Appendix B.3. All Tax services in Appendix B.3
must be specifically pre-approved by the Audit Committee (or by any member of
the Audit Committee to which pre-approval has been delegated).
6. ALL OTHER SERVICES
The Audit Committee believes, based on the SEC's rules prohibiting the
Independent Auditors from providing specific non-audit services, that other
types of non-audit services are permitted. Accordingly, the Audit Committee
believes it may grant general pre-approval to those permissible non-audit
services classified as All Other services that it believes are routine and
recurring services, would not impair the independence of the auditor and are
consistent with the SEC's rules on auditor independence.
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The Audit Committee has pre-approved the All Other services in Appendix
B.4. Permissible All Other services not listed in Appendix B.4 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
7. PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS
Pre-approval fee levels or budgeted amounts for all services to be
provided by the Independent Auditors will be established annually by the Audit
Committee. Any proposed services exceeding these levels or amounts will require
specific pre-approval by the Audit Committee. The Audit Committee is mindful of
the overall relationship of fees for audit and non-audit services in determining
whether to pre-approve any such services.
8. PROCEDURES
All requests or applications for services to be provided by the
Independent Auditors that do not require specific approval by the Audit
Committee will be submitted to the Fund's Chief Financial Officer and must
include a detailed description of the services to be rendered. The Fund's Chief
Financial Officer will determine whether such services are included within the
list of services that have received the general pre-approval of the Audit
Committee. The Audit Committee will be informed on a timely basis of any such
services rendered by the Independent Auditors. Requests or applications to
provide services that require specific approval by the Audit Committee will be
submitted to the Audit Committee by both the Independent Auditors and the Fund's
Chief Financial Officer, and must include a joint statement as to whether, in
their view, the request or application is consistent with the SEC's rules on
auditor independence.
The Audit Committee has designated the Fund's Chief Financial Officer
to monitor the performance of all services provided by the Independent Auditors
and to determine whether such services are in compliance with this Policy. The
Fund's Chief Financial Officer will report to the Audit Committee on a periodic
basis on the results of its monitoring. Both the Fund's Chief Financial Officer
and management will immediately report to the chairman of the Audit Committee
any breach of this Policy that comes to the attention of the Fund's Chief
Financial Officer or any member of management.
9. ADDITIONAL REQUIREMENTS
The Audit Committee has determined to take additional measures on an
annual basis to meet its responsibility to oversee the work of the Independent
Auditors and to assure the auditor's independence from the Fund, such as
reviewing a formal written statement from the Independent Auditors delineating
all relationships between the Independent Auditors and the Fund, consistent with
Independence Standards Board No.
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1, and discussing with the Independent Auditors its methods and procedures for
ensuring independence.
10. COVERED ENTITIES
Covered Entities include the Fund's investment adviser(s) and any
entity controlling, controlled by or under common control with the Fund's
investment adviser(s) that provides ongoing services to the Fund(s). Beginning
with non-audit service contracts entered into on or after May 6, 2003, the
Fund's audit committee must pre-approve non-audit services provided not only to
the Fund but also to the Covered Entities if the engagements relate directly to
the operations and financial reporting of the Fund. This list of Covered
Entities would include:
MORGAN STANLEY RETAIL FUNDS
Morgan Stanley Investment Advisors Inc.
Morgan Stanley & Co. Incorporated
Morgan Stanley DW Inc.
Morgan Stanley Investment Management
Morgan Stanley Investments LP
Van Kampen Asset Management Inc.
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
MORGAN STANLEY INSTITUTIONAL FUNDS
Morgan Stanley Investment Management Inc.
Morgan Stanley Investments LP
Morgan Stanley & Co. Incorporated
Morgan Stanley Distribution, Inc.
Morgan Stanley AIP GP LP
Morgan Stanley Alternative Investment Partners LP
(e)(2) Beginning with non-audit service contracts entered into on or after
May 6, 2003, the audit committee also is required to pre-approve services to
Covered Entities to the extent that the services are determined to have a
direct impact on the operations or financial reporting of the Registrant. 100%
of such services were pre-approved by the audit committee pursuant to the
Audit Committee's pre-approval policies and procedures (attached hereto).
(f) Not applicable.
(g) See table above.
(h) The audit committee of the Board of Trustees has considered whether the
provision of services other than audit services performed by the auditors to the
Registrant and Covered Entities is compatible with maintaining the auditors'
independence in performing audit services.
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Item 5. Audit Committee of Listed Registrants.
Applicable only for reports covering periods ending on or after the earlier of
(i) the first annual shareholder meeting after January 15, 2004 or (ii) October
31, 2004.
Item 6. [Reserved.]
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Applicable only to annual reports filed by closed-end funds.
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) The Code of Ethics for Principal Executive and Senior Financial Officers is
attached hereto.
(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Morgan Stanley California Tax - Free Income Fund
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
February 18, 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
February 18, 2004
/s/ Francis Smith
Francis Smith
Principal Financial Officer
February 18, 2004