<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, 2004 Date of reporting period: December 31, 2004 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, 2004 TOTAL RETURN FOR THE 12-MONTH PERIOD ENDED DECEMBER 31, 2004 <Table> <Caption> LEHMAN BROTHERS LIPPER CA MUNICIPAL MUNICIPAL DEBT CLASS A CLASS B CLASS C CLASS D BOND INDEX(1) FUNDS INDEX(2) 4.26% 4.22% 3.61% 4.48% 4.48% 4.62% </Table> PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF FUTURE RESULTS, AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT morganstanley.com OR SPEAK WITH YOUR FINANCIAL ADVISOR. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE AND FUND SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE 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. SEE PERFORMANCE SUMMARY FOR STANDARDIZED PERFORMANCE INFORMATION. MARKET CONDITIONS Growth in consumer spending and business investment helped the U.S. economy expand at a solid pace in 2004. Even with this positive backdrop, however, fixed income markets were confronted with contradictory economic data. At the beginning of the year, weak employment growth and the possibility of deflation kept interest rates at historically low levels. Market sentiment changed in April, when the release of the March employment report was significantly higher than expected and included upward revisions of previous periods. The bond market also began to focus on the rapid climb in oil prices. These new signals led investors to conclude that the Federal Open Market Committee (the "Fed") would begin to raise rates sooner than had been anticipated. Beginning in June, the Fed raised short-term interest rates five times over the remainder of the year. This brought the overnight federal funds rate to 2.25 percent, and reversed a portion of the Fed's 13 rate reductions that occurred between January 2001 and June 2003. Despite these actions, a series of soft economic indicators caused yields on intermediate and longer maturity bonds to move lower in the second half. Against this setting, intermediate and long-term municipal bond yields peaked in June but subsequently trended lower before ending the year with little overall change. In contrast, yields on shorter bonds rose steadily in the second half of the period when the Fed began tightening. Relative to U.S. Treasuries, municipal bonds outperformed early in the year but then gave ground. The municipal-to-Treasury yield ratio, which gauges relative performance, remained attractive for municipals. As a result, fixed income investors such as insurance companies and hedge funds that normally focus on taxable sectors supported municipals by "crossing over" to purchase bonds. Municipal underwriting volume of $359 billion in 2004 finished 7 percent below last year's record-setting level. California continued to lead all states with $55 billion in issuance. The state's credit outlook improved during the year, with all three major credit rating agencies upgrading the state's general obligations. This improvement was driven by a series of positive developments including gains in employment, higher tax revenues and the successful issuance of Economic Recovery Bonds to fund past budget deficits. 2 <Page> PERFORMANCE ANALYSIS Morgan Stanley California Tax-Free Income Fund's Class A, B and C shares underperformed the Lehman Brothers Municipal Bond Index and the Lipper California Municipal Debt Funds Index for the 12 months ended December 31, 2004. Its Class D shares underperformed the Lipper peer group and matched the return of the Lehman Index. The Fund's performance in 2004 was driven primarily by its duration* target and quality composition. The Fund's duration during the year was gradually reduced relative to its benchmark in anticipation of rising interest rates. This reduced the Fund's exposure to securities with longer maturities, which were among the best performers in the index. The Fund also maintained its traditional high quality profile, with more than 90 percent of the bonds in the portfolio rated "A" or higher. During the period, the yield spread between higher and lower quality bonds tightened and lower quality municipal bonds outperformed. The Fund remained well diversified, with 63 individual credits in 14 municipal sectors. * A MEASURE OF THE SENSITIVITY OF A BOND'S PRICE TO CHANGES IN INTEREST RATES, EXPRESSED IN YEARS. EACH YEAR OF DURATION REPRESENTS AN EXPECTED 1 PERCENT CHANGE IN THE PRICE OF A BOND FOR EVERY 1 PERCENT CHANGE IN INTEREST RATES. THE LONGER A BOND'S DURATION, THE GREATER THE EFFECT OF INTEREST-RATE MOVEMENTS ON ITS PRICE. TYPICALLY, FUNDS WITH SHORTER DURATIONS PERFORM BETTER IN RISING-INTEREST-RATE ENVIRONMENTS, WHILE FUNDS WITH LONGER DURATIONS PERFORM BETTER WHEN RATES DECLINE. THERE IS NO GUARANTEE THAT ANY SECURITIES MENTIONED WILL CONTINUE TO PERFORM WELL OR BE HELD BY THE FUND IN THE FUTURE. <Table> <Caption> TOP FIVE SECTORS - ------------------------------------------------ Water & Sewer 18.5% Transportation 18.1 General Obligation 15.0 Electric 8.3 Hospital 7.8 - ------------------------------------------------ LONG-TERM CREDIT ANALYSIS - ------------------------------------------------ Aaa/AAA 75.2% Aa/AA 4.0 A/A 13.0 Baa/BBB 6.2 Ba/BB or less 1.6 </Table> DATA AS OF DECEMBER 31, 2004. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR TOP FIVE SECTORS ARE AS A PERCENTAGE OF NET ASSETS. ALL PERCENTAGES FOR LONG-TERM CREDIT ANALYSIS ARE AS A PERCENTAGE OF TOTAL LONG-TERM INVESTMENTS. PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED A RECOMMENDATION TO BUY OR SELL THE SECURITIES MENTIONED. MORGAN STANLEY IS A FULL-SERVICE SECURITIES FIRM ENGAGED IN SECURITIES TRADING AND BROKERAGE ACTIVITIES, INVESTMENT BANKING, RESEARCH AND ANALYSIS, FINANCING AND FINANCIAL ADVISORY SERVICES. 3 <Page> INVESTMENT STRATEGY THE FUND WILL NORMALLY INVEST AT LEAST 80 PERCENT OF ITS NET ASSETS IN SECURITIES THAT PAY INTEREST EXEMPT FROM FEDERAL AND CALIFORNIA STATE INCOME TAXES. THE FUND'S "INVESTMENT MANAGER," MORGAN STANLEY INVESTMENT ADVISORS INC., GENERALLY INVESTS THE FUND'S ASSETS IN INVESTMENT GRADE, CALIFORNIA MUNICIPAL OBLIGATIONS. MUNICIPAL OBLIGATIONS ARE BONDS, NOTES OR SHORT-TERM COMMERCIAL PAPER ISSUED BY STATE GOVERNMENTS, LOCAL GOVERNMENTS OR THEIR RESPECTIVE AGENCIES. FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND AND FOURTH FISCAL QUARTERS BY FILING THE SCHEDULE ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON FORM N-CSR. MORGAN STANLEY ALSO DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO FUND SHAREHOLDERS AND MAKES THESE REPORTS AVAILABLE ON ITS PUBLIC WEB SITE, www.morganstanley.com. EACH MORGAN STANLEY FUND ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE FUND'S FIRST AND THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES NOT DELIVER THE REPORTS FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS, NOR ARE THE REPORTS POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY, HOWEVER, OBTAIN THE FORM N-Q FILINGS (AS WELL AS THE FORM N-CSR AND N-CSRS FILINGS) BY ACCESSING THE SEC'S WEB SITE, http://www.sec.gov. YOU MAY ALSO REVIEW AND COPY THEM AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE OPERATION OF THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE SEC AT (800) SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT OF A DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS (publicinfo@sec.gov) OR BY WRITING THE PUBLIC REFERENCE SECTION OF THE SEC, WASHINGTON, DC 20549-0102. YOU MAY OBTAIN COPIES OF A FUND'S FISCAL QUARTER FILINGS BY CONTACTING MORGAN STANLEY CLIENT RELATIONS AT (800) 869-NEWS. 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. 4 <Page> DISTRIBUTION BY MATURITY (% of Long-Term Portfolio) As of December 31, 2004 [CHART] WEIGHTED AVERAGE MATURITY: 15 YEARS <Table> 1 - 5 14% 5 - 10 6% 10 - 20 68% 20 - 30 11% 30+ Years 1% </Table> Portfolio structure is subject to change. 5 <Page> CALL AND COST (BOOK) YIELD STRUCTURE (Based on Long-Term Portfolio) As of December 31, 2004 [CHART] YEARS BONDS CALLABLE--WEIGHTED AVERAGE CALL PROTECTION: 6 YEARS <Table> 2005(a) 11% 2006 6% 2007 7% 2008 14% 2009 4% 2010 2% 2011 18% 2012 10% 2013 9% 2014 5% 2015+ 14% </Table> COST (BOOK) YIELD(b)--WEIGHTED AVERAGE BOOK YIELD: 5.6% [CHART] <Table> 2005(a) 7.0% 2006 6.1% 2007 6.2% 2008 5.3% 2009 5.2% 2010 6.1% 2011 5.1% 2012 5.1% 2013 5.0% 2014 5.2% 2015+ 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 7.0% ON 11% OF THE LONG-TERM PORTFOLIO THAT IS CALLABLE IN 2005. PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE. 6 <Page> (This page has been left blank intentionally.) 7 <Page> PERFORMANCE SUMMARY [CHART] PERFORMANCE OF A $10,000 INVESTMENT--CLASS B <Table> <Caption> CLASS B@@ LEHMAN(1) LIPPER(2) December 31, 1994 $ 10,000 $ 10,000 $ 10,000 December 31, 1995 $ 11,496 $ 11,746 $ 11,840 December 31, 1996 $ 11,855 $ 12,266 $ 12,310 December 31, 1997 $ 12,746 $ 13,393 $ 13,463 December 31, 1998 $ 13,464 $ 14,261 $ 14,291 December 31, 1999 $ 12,926 $ 13,968 $ 13,671 December 31, 2000 $ 14,515 $ 15,600 $ 15,442 December 31, 2001 $ 15,032 $ 16,399 $ 16,046 December 31, 2002 $ 16,254 $ 17,974 $ 17,326 December 31, 2003 $ 16,948 $ 18,929 $ 18,117 December 31, 2004 $ 17,663 $ 19,778 $ 18,955 </Table> 8 <Page> AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED DECEMBER 31, 2004 <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 4.26%(3) 4.22%(3) 3.61%(3) 4.48%(3) (0.17)(4) (0.73)(4) 2.63(4) -- 5 YEARS 6.56(3) 6.44(3) 5.97(3) 6.75(3) 5.63(4) 6.13(4) 5.97(4) -- 10 YEARS -- 5.85(3) -- -- -- 5.85(4) -- -- SINCE INCEPTION 4.95(3) 7.19(3) 4.45(3) 5.21(3) 4.34(4) 7.19(4) 4.45(4) -- </Table> PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT morganstanley.com OR SPEAK WITH YOUR FINANCIAL ADVISOR. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE AND FUND SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE 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. * 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. (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. @@ ENDING VALUE ASSUMING A COMPLETE REDEMPTION ON DECEMBER 31, 2004. 9 <Page> EXPENSE EXAMPLE As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments and redemption fees; and (2) ongoing costs, including management fees; distribution and service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period 07/01/04 - 12/31/04. ACTUAL EXPENSES The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of the table below provides information about hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing cost of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs, and will not help you determine the relative total cost of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. <Table> <Caption> BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD* --------------- --------------- --------------- 07/01/04 - 07/01/04 12/31/04 12/31/04 --------------- --------------- --------------- CLASS A Actual (5.10% return) $ 1,000.00 $ 1,051.00 $ 4.49 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,020.76 $ 4.42 CLASS B Actual (5.10% return) $ 1,000.00 $ 1,051.00 $ 4.07 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,021.17 $ 4.01 CLASS C Actual (4.73% return) $ 1,000.00 $ 1,047.30 $ 7.05 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,018.25 $ 6.95 CLASS D Actual (5.22% return) $ 1,000.00 $ 1,052.20 $ 3.20 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,022.02 $ 3.15 </Table> - ---------- * EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.87%, 0.79%, 1.37% AND 0.62% RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 184/366 (TO REFLECT THE ONE-HALF YEAR PERIOD). 10 <Page> MORGAN STANLEY CALIFORNIA TAX-FREE INCOME FUND PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2004 <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------------------------------------- California Tax-Exempt Municipal Bonds (91.4%) GENERAL OBLIGATION (15.0%) California, $ 5,000 Ser 1990 7.00 % 08/01/07 $ 5,567,050 5,000 Ser 1990 7.00 08/01/08 5,743,850 2,000 Veterans Ser AT 9.50 02/01/10 2,581,800 2,400 Veterans Ser BH (AMT) (FSA) 5.40 12/01/16 2,448,288 2,850 Various Purpose Dtd 04/01/93 (FSA) 5.50 04/01/19 2,872,857 5,000 Various Purpose Dtd 04/01/02 6.00 04/01/19 5,972,250 10,000 Various Purpose Ser 1996 (Ambac) 5.25 06/01/21 10,423,700 3,000 Huntington Beach Union High School District, Ser 2004 (FSA) 5.00 08/01/27 3,128,670 5,000 Los Angeles, Ser 2004 A (MBIA) 5.00 09/01/24 5,292,400 Los Angeles Community College District, 5,000 2001 Ser A (MBIA) 5.50 08/01/20 5,598,900 5,000 2001 Ser A (MBIA) 5.50 08/01/21 5,598,900 Los Angeles Unified School District, 5,000 2003 Ser A (FSA) 5.25 07/01/20 5,481,350 10,000 1997 Ser B (FGIC) 5.00 07/01/23 10,539,700 6,500 North Orange County Community College District, 2002 Ser A (MBIA) 5.375 08/01/21 7,184,645 5,000 Placentia - Yorba Linda United School District, 2002 Election Ser A (FGIC) 5.00 08/01/26 5,196,400 Puerto Rico, 8,000 Public Impr Ser 1999 4.75 07/01/23 8,104,240 3,000 Public Impr Ser 1999 (Secondary MBIA) 4.875 07/01/23 3,086,760 - --------- ------------- 87,750 94,821,760 - --------- ------------- EDUCATIONAL FACILITIES REVENUE (1.7%) 5,000 California Educational Facilities Authority, University of San Diego Ser 1998 (Ambac) 5.00 10/01/22 5,294,000 5,000 University California, Ser 2003 Q (FSA) 5.00 09/01/24 5,236,900 - --------- ------------- 10,000 10,530,900 - --------- ------------- ELECTRIC REVENUE (8.3%) 10,000 California Department of Water Resources, Power Supply Ser 2002 A 5.375 05/01/21 10,814,700 25,000 Los Angeles Department of Water & Power, 2001 Ser A (FSA) 5.25 07/01/22 27,189,000 Southern California Public Power Authority, 3,500 Mead-Adelanto 1994 A (Ambac) 8.52++ 07/01/15 4,308,745 2,500 Mead-Phoenix 1994 Ser A (Ambac) 8.52++ 07/01/15 3,077,675 </Table> SEE NOTES TO FINANCIAL STATEMENTS 11 <Page> <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------------------------------------- $ 1,750 Transmission Refg Ser 1988 (FGIC) 0.00 % 07/01/06 $ 1,690,360 2,750 Transmission Refg Ser 2002 A (FSA) 5.25 07/01/18 3,022,222 2,000 Puerto Rico Electric Power Authority, Power Ser II (MBIA) 5.375 07/01/19 2,221,060 - --------- ------------- 47,500 52,323,762 - --------- ------------- HOSPITAL REVENUE (7.8%) 8,000 Antelope Valley Healthcare District, Refg Ser 1997 A (FSA) 5.20 01/01/20 8,551,760 California Health Facilities Financing Authority, 3,000 Scripps Memorial Hospitals Ser 1992 A (MBIA) 6.375 10/01/22 3,029,670 2,500 Sutter/CHS Ser 1996 A (MBIA) 5.875 08/15/16 2,683,650 5,000 California Infrastructure & Economic Development Bank, Kaiser Assistance Ser 2001 A 5.55 08/01/31 5,242,400 1,805 California Statewide Communities Development Authority, Cedars-Sinai Medical Center Ser 1992 COPs 6.50 08/01/12 2,029,019 14,000 Duarte, City of Hope National Medical Center Ser 1999 A COPs 5.25 04/01/19 14,301,560 7,500 Madera County, Valley Children's Hospital Ser 1995 COPs (MBIA) 6.50 03/15/15 9,078,975 4,000 Rancho Mirage Joint Powers Financing Authority, Eisenhower Medical Center Ser 1997 A COPs (MBIA) 5.25 07/01/17 4,320,320 - --------- ------------- 45,805 49,237,354 - --------- ------------- INDUSTRIAL DEVELOPMENT/POLLUTION CONTROL REVENUE (2.5%) California Pollution Control Financing Authority, 5,000 San Diego Gas & Electric Co 1996 Ser A 5.90 06/01/14 5,606,500 10,000 Southern California Edison Co 1992 Ser B (AMT) 6.40 12/01/24 10,024,600 - --------- ------------- 15,000 15,631,100 - --------- ------------- MORTGAGE REVENUE - MULTI-FAMILY (0.3%) California Housing Finance Agency, Rental II 2,000 1992 Ser B 6.70 08/01/15 2,003,020 - --------- ------------- MORTGAGE REVENUE - SINGLE FAMILY (0.3%) 1,125 California Housing Finance Agency, 1995 Ser B-2 (AMT) 6.30 08/01/24 1,158,907 California Rural Home Financing Authority, 390 Home 1997 Ser D-CL 5 (AMT) 6.70 05/01/29 392,239 340 1997 Ser A-2 (AMT) 7.00 09/01/29 342,951 205 Home 1998 Ser A (AMT) 6.35 12/01/29 208,653 - --------- ------------- 2,060 2,102,750 - --------- ------------- </Table> SEE NOTES TO FINANCIAL STATEMENTS 12 <Page> <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------------------------------------- PUBLIC FACILITIES REVENUE (4.6%) $ 4,000 Anaheim Public Financing Authority, 1997 Ser C (FSA) 6.00 % 09/01/16 $ 4,790,240 California Public Works Board, 5,000 Department of Corrections 2004 Ser E (XLCA) 5.00 06/01/18 5,427,800 10,000 Department of Corrections Refg 1993 Ser A (Ambac) 5.00 12/01/19 10,929,800 4,000 Sacramento City Financing Authority, 2002 Ser A (FSA) 5.25 12/01/17 4,421,120 5,000 Puerto Rico Public Buildings Authority, 2002 Ser D (Ambac) 0.00# 07/01/31 3,661,100 - --------- ------------- 28,000 29,230,060 - --------- ------------- RECREATIONAL FACILITIES REVENUE (0.5%) 2,000 California State University, Fresno Event Center Sr Ser 2002 6.00 07/01/26 2,130,520 1,000 San Diego County, San Diego Natural History Museum COPs 5.70 02/01/28 930,430 - --------- ------------- 3,000 3,060,950 - --------- ------------- TAX ALLOCATION REVENUE (6.3%) 1,500 Fontana Public Finance Authority, Ser 2003 A (Ambac) 5.375 09/01/25 1,628,430 Long Beach Bond Finance Authority, 3,205 Downtown North Long Beach 2002 Ser A (Ambac) 5.375 08/01/19 3,542,999 2,380 Downtown North Long Beach 2002 Ser A (Ambac) 5.375 08/01/20 2,625,878 20,000 Long Beach Financing Authority, Ser 1992 (Ambac) 6.00 11/01/17 23,686,600 8,000 San Jose Redevelopment Agency, Ser 1999 (Ambac) 4.75 08/01/23 8,119,760 - --------- ------------- 35,085 39,603,667 - --------- ------------- TRANSPORTATION FACILITIES REVENUE (18.1%) 10,000 Alameda Corridor Transportation Authority, Sr Lien Ser 1999 A (MBIA) 5.25 10/01/21 10,908,200 4,000 Bay Area Toll Authority, San Francisco Bay Area Toll Bridge 2001 Ser D 5.00 04/01/18 4,298,440 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 3,286,770 Foothill/Eastern Transportation Corridor Agency, 5,000 Toll Road Ser 1999 (MBIA) 5.125 01/15/19 5,404,400 14,000 Toll Road Ser 1999 0.00## 01/15/23 11,439,120 Long Beach, 5,000 Harbor Refg Ser 1998 A (AMT)(FGIC) 6.00 05/15/17 5,858,600 3,000 Harbor Refg Ser 1998 A (AMT)(FGIC) 6.00 05/15/19 3,529,980 10,000 Harbor Ser 1995 (AMT)(MBIA) 5.25 05/15/25 10,273,200 5,000 Orange County, Airport Refg Ser 1997 (AMT)(MBIA) 5.50 07/01/11 5,410,100 </Table> SEE NOTES TO FINANCIAL STATEMENTS 13 <Page> <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------------------------------------- Port of Oakland, $ 5,200 Ser 2002 M (FGIC) 5.25% 11/01/19 $ 5,708,664 2,000 Ser 2002 M (FGIC) 5.25 11/01/20 2,180,780 5,000 San Diego County Regional Transportation Commission, Sales Tax 1994 Ser A (FGIC) 4.75 04/01/08 5,395,200 5,000 San Francisco Airports Commission, San Francisco Int'l Airport Second Ser Refg Issue 27B (FGIC) 5.125 05/01/26 5,193,950 San Francisco Bay Area Rapid Transit District, 795 Sales Tax Ser 1995 (FGIC) 5.50 07/01/15 816,099 9,500 Sales Tax Ser 1998 (Ambac) 4.75 07/01/23 9,695,795 San Joaquin Hills Transportation Corridor Agency, 6,000 Toll Road Refg Ser 1997 A (MBIA) 0.00 01/15/15 3,908,280 10,000 Toll Road Senior Lien Ser 1993 5.00 01/01/33 8,854,900 10,000 San Jose, Airport Ser 2001 A (FGIC) 5.00 03/01/25 10,338,400 2,000 Puerto Rico Highway & Transportation Authority, Ser 1998 A 4.75 07/01/38 2,001,980 - --------- ------------- 114,495 114,502,858 - --------- ------------- WATER & SEWER REVENUE (18.5%) 20,000 California Department of Water Resources, Central Valley Ser Y (FGIC) 5.00 12/01/25 20,959,000 4,000 Corona Public Financing Authority, Water Ser 1998 (FGIC) 4.75 09/01/23 4,080,360 10,000 East Bay Municipal Utility District, Water Ser 2001 (MBIA) 5.00 06/01/26 10,340,400 8,000 Eastern Municipal Water District, Water & Sewer Refg Ser 1998 A COPs (FGIC) 4.75 07/01/23 8,125,680 5,000 Los Angeles Department of Water & Power, Water 2001 Ser A 5.125 07/01/41 5,105,200 20,000 Los Angeles, Wastewater Refg Ser 2003 B (FSA) 5.00 06/01/22 21,247,800 10,000 Sacramento Financing Authority, Water & Capital Impr 2001 Ser A (Ambac) 5.00 12/01/26 10,340,400 5,000 San Diego County Water Authority, Ser 2004 A (FSA) 5.00 05/01/29 5,181,450 10,000 San Diego Public Facilities Authority, Sewer Ser 1993 A 5.25 05/15/20 10,079,100 San Francisco Public Utilities Commission, 5,650 Water 2002 Ser A (MBIA) 5.00 11/01/20 6,024,482 10,000 Water 1996 Ser A 5.00 11/01/21 10,279,100 5,000 West Basin Municipal Water District, Refg Ser 2003 A COPs (MBIA) 5.00 08/01/30 5,127,850 - --------- ------------- 112,650 116,890,822 - --------- ------------- </Table> SEE NOTES TO FINANCIAL STATEMENTS 14 <Page> <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------------------------------------- OTHER REVENUE (1.7%) $ 10,000 California, Economic Recovery Ser 2004 A 5.00% 07/01/16 $ 10,694,300 - --------- ------------- REFUNDED (5.8%) Foothill/Eastern Transportation Corridor Agency, 15,000 Toll Road Sr Lien Ser 1995 A 6.00 01/01/07+ 16,132,200 4,000 Toll Road Sr Lien Ser 1995 A 0.00### 01/01/10+ 4,842,720 3,195 Metropolitan Water District of Southern California, 2004 Ser A 5.00 01/01/08+ 3,486,672 6,000 San Diego County Water Authority, Ser 1991 B COPs CARs (MBIA) 11.12++ 04/27/06+ 6,862,380 5,250 Southern California Public Power Authority, Transmission Refg Ser 1988 A (FGIC) (ETM) 0.00 07/01/06 5,074,860 - --------- ------------- 33,445 36,398,832 - --------- ------------- Total California Tax-Exempt Municipal Bonds 546,790 (COST $533,633,927) 577,032,135 - --------- ------------- Short-Term California Tax-Exempt Municipal Obligations (7.9%) 19,000 California Department of Water Resources, Power Supply Ser 2002 B (Demand 01/03/05) 2.20* 05/01/22 19,000,000 Los Angeles Convention & Exhibition Center Authority, 10,000 Ser 1985 COPs 9.00 12/01/05+ 10,628,400 14,000 Ser 1985 COPs 9.00 12/01/05+ 14,879,760 1,450 Newport Beach, Hoag Memorial/Presbyterian Hospital Ser 1992 (Demand 01/03/05) 2.18* 10/01/22 1,450,000 1,300 Orange County Sanitation District Ser 2000 A COPs (Demand 01/03/05) 2.15* 08/01/30 1,300,000 2,150 Puerto Rico Electric Power Authority, Power Ser X 5.50 07/01/05+ 2,187,625 - --------- ------------- Total Short-Term California Tax-Exempt Municipal Obligations 47,900 (COST $47,738,479) 49,445,785 - --------- ------------- $ 594,690 Total Investments (COST $581,372,406)(a) 99.3% 626,477,920 ========= Other Assets in Excess of Liabilities 0.7 4,669,413 -------- ------------- Net Assets 100.0% $ 631,147,333 ======== ============= </Table> SEE NOTES TO FINANCIAL STATEMENTS 15 <Page> - ---------- AMT ALTERNATIVE MINIMUM TAX. CARs COMPLEMENTARY AUCTION RATE CERTIFICATES. COPs CERTIFICATES OF PARTICIPATION. ETM ESCROWED TO MATURITY. * CURRENT COUPON OF VARIABLE RATE DEMAND OBLIGATION. # CURRENTLY A ZERO COUPON SECURITY; WILL CONVERT TO 5.45% ON 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 $14,248,800 WHICH REPRESENTS 2.3% OF NET ASSETS. (a) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $581,228,476. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $45,689,038 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $439,594, RESULTING IN NET UNREALIZED APPRECIATION OF $45,249,444. BOND INSURANCE: - ---------- Ambac AMBAC ASSURANCE CORPORATION. FGIC FINANCIAL GUARANTY INSURANCE COMPANY. FSA FINANCIAL SECURITY ASSURANCE INC. MBIA MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION. XLCA XL CAPITAL ASSURANCE INC. SEE NOTES TO FINANCIAL STATEMENTS 16 <Page> MORGAN STANLEY CALIFORNIA TAX-FREE INCOME FUND FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2004 <Table> ASSETS: Investments in securities, at value (cost $581,372,406) $ 626,477,920 Cash 2,922 Receivable for: Interest 8,628,594 Shares of beneficial interest sold 169,137 Prepaid expenses and other assets 19,741 --------------- TOTAL ASSETS 635,298,314 --------------- LIABILITIES: Payable for: Dividends and distributions to shareholders 3,281,196 Distribution fee 356,307 Investment advisory fee 248,745 Shares of beneficial interest redeemed 98,801 Administration fee 42,815 Accrued expenses and other payables 123,117 --------------- TOTAL LIABILITIES 4,150,981 --------------- NET ASSETS $ 631,147,333 =============== COMPOSITION OF NET ASSETS: Paid-in-capital $ 585,888,255 Net unrealized appreciation 45,105,514 Accumulated undistributed net investment income 429,306 Distributions in excess of net realized gain (275,742) --------------- NET ASSETS $ 631,147,333 =============== CLASS A SHARES: Net Assets $ 19,203,113 Shares Outstanding (unlimited authorized, $.01 par value) 1,541,527 NET ASSET VALUE PER SHARE $ 12.46 =============== MAXIMUM OFFERING PRICE PER SHARE, (net asset value plus 4.44% of net asset value) $ 13.01 =============== CLASS B SHARES: Net Assets $ 526,026,336 Shares Outstanding (unlimited authorized, $.01 par value) 41,999,388 NET ASSET VALUE PER SHARE $ 12.52 =============== CLASS C SHARES: Net Assets $ 27,518,866 Shares Outstanding (unlimited authorized, $.01 par value) 2,197,257 NET ASSET VALUE PER SHARE $ 12.52 =============== CLASS D SHARES: Net Assets $ 58,399,018 Shares Outstanding (unlimited authorized, $.01 par value) 4,676,314 NET ASSET VALUE PER SHARE $ 12.49 =============== </Table> STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2004 <Table> NET INVESTMENT INCOME: INTEREST INCOME $ 34,000,455 --------------- EXPENSES Investment advisory fee 3,539,393 Distribution fee (Class A shares) 36,056 Distribution fee (Class B shares) 2,333,203 Distribution fee (Class C shares) 205,464 Transfer agent fees and expenses 211,880 Administration fee 84,598 Professional fees 76,981 Shareholder reports and notices 65,359 Custodian fees 29,054 Trustees' fees and expenses 16,616 Other 56,090 --------------- TOTAL EXPENSES 6,654,694 Less: expense offset (28,258) Less: distribution fee rebate (Class B shares) (1,379,167) --------------- NET EXPENSES 5,247,269 --------------- NET INVESTMENT INCOME 28,753,186 --------------- NET REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain 5,439,032 Net change in unrealized appreciation (7,399,441) --------------- NET LOSS (1,960,409) --------------- NET INCREASE $ 26,792,777 =============== </Table> SEE NOTES TO FINANCIAL STATEMENTS 17 <Page> STATEMENT OF CHANGES IN NET ASSETS <Table> <Caption> FOR THE YEAR FOR THE YEAR ENDED ENDED DECEMBER 31, 2004 DECEMBER 31, 2003 ----------------- ----------------- Increase (Decrease) in Net Assets: Operations: Net investment income $ 28,753,186 $ 32,313,322 Net realized gain 5,439,032 4,612,431 Net change in unrealized appreciation (7,399,441) (6,374,894) -------------- -------------- Net Increase 26,792,777 30,550,859 -------------- -------------- Dividends and Distributions to Shareholders from: Net investment income Class A shares (760,362) (732,776) Class B shares (24,171,667) (27,255,860) Class C shares (1,021,650) (1,010,881) Class D shares (2,765,747) (3,233,583) Net realized gain Class A shares (163,452) (118,724) Class B shares (4,452,125) (4,075,235) Class C shares (232,466) (179,557) Class D shares (495,229) (450,944) -------------- -------------- Total Dividends and Distributions (34,062,698) (37,057,560) -------------- -------------- Net decrease from transactions in shares of beneficial interest (71,320,691) (87,733,702) -------------- -------------- Net Decrease (78,590,612) (94,240,403) Net Assets: Beginning of period 709,737,945 803,978,348 -------------- -------------- End of Period (Including accumulated undistributed net investment income of $429,306 and $445,193, respectively) $ 631,147,333 $ 709,737,945 ============== ============== </Table> SEE NOTES TO FINANCIAL STATEMENTS 18 <Page> MORGAN STANLEY CALIFORNIA TAX-FREE INCOME FUND NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2004 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. 19 <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 ADVISORY/ADMINISTRATION AGREEMENTS Effective November 1, 2004, pursuant to an Investment Advisory Agreement with Morgan Stanley Investment Advisors Inc. (the "Investment Adviser") the Fund pays the Investment Adviser an advisory 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: 0.47% to the portion of daily net assets not exceeding $500 million; 0.445% to the portion of daily net assets exceeding $500 million but not exceeding $750 million; 0.42% to the portion of daily net assets exceeding $750 million but not exceeding $1 billion; 0.395% to the portion of daily net assets exceeding $1 billion but not exceeding $1.25 billion; and 0.37% to the portion of daily net assets in excess of $1.25 billion. Effective November 1, 2004, pursuant to an Administration Agreement with Morgan Stanley Services Company Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Fund pays an administration fee, accrued daily and payable monthly, by applying the annual rate of 0.08% to the fund's daily net assets. 20 <Page> Prior to November 1, 2004, the Fund had retained the Investment Adviser to provide administrative services and to manage the investment of the Fund's assets pursuant to an investment management agreement pursuant to which the Fund paid the Investment Adviser a monthly 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; and 0.475% to the portion of daily net assets in excess of $1 billion but not exceeding $1.25 billion; and 0.45% to the portion of daily net assets in excess of $1.25 billion. 3. PLAN OF DISTRIBUTION Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the Investment Adviser and Administrator. The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan provides that the Fund will pay the Distributor a fee which is accrued daily and paid monthly at the following annual rates: (i) Class A -- up to 0.25% of the average daily net assets of Class A; (ii) Class B -- up to 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 expenses as of December 31, 2004. For the period January 1, 2004 through April 30, 2004, the Distributor rebated a portion of the distribution fees paid by the Fund on Class B shares in the amount of $1,379,167. For the year ended December 31, 2004, the net distribution fee was accrued for Class B shares at the annual rate of 0.17%. 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 21 <Page> broker-dealer representatives may be reimbursed in the subsequent calendar year. For the year ended December 31, 2004, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.20% and 0.75%, respectively. The Distributor has informed the Fund that for the year ended December 31, 2004, it received contingent deferred sales charges from certain redemptions of the Fund's Class B shares and Class C shares of $346,524, and $2,261, respectively and received $98,365 in front-end sales charges from sales of the Fund's Class A shares. The respective shareholders pay such charges which are not an expense of the Fund. 4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES The cost of purchases and proceeds from sales of portfolio securities, excluding short-term investments, for the year ended December 31, 2004 aggregated $61,333,270 and $156,670,595, respectively. Included in the aforementioned transactions are purchases of $152,720 with other Morgan Stanley funds. Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and Distributor, is the Fund's transfer agent. At December 31, 2004, the Fund had transfer agent fees and expenses payable of approximately $13,000. 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, 2004 included in Trustees' fees and expenses in the Statement of Operations amounted to $7,414. At December 31, 2004, the Fund had an accrued pension liability of $61,911 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 and eliminate the future benefits growth due to increases to compensation after July 31, 2003. Effective April 1, 2004, the Fund began an unfunded Deferred Compensation Plan (the "Compensation Plan") which allows each independent Trustee to defer payment of all, or a portion, of the fees he receives for serving on the Board of Trustees. Each eligible Trustee generally may elect to have the deferred amounts credited with a return equal to the total return on one or more of the Morgan Stanley funds that are offered as investment options under the Compensation Plan. Appreciation/depreciation and distributions received from these investments are recorded with an offsetting increase/decrease in the deferred compensation obligation and do not affect the net asset value of the Fund. 5. EXPENSE OFFSET The expense offset represents a reduction of the custodian fees for earnings on cash balances maintained by the Fund. 22 <Page> 6. RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS The Fund may invest a portion of its assets in residual interest bonds, which are inverse floating rate municipal obligations. The prices of these securities are subject to greater market fluctuations during periods of changing prevailing interest rates than are comparable fixed rate obligations. 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. 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, 2004 DECEMBER 31, 2003 ------------------------------------ --------------------------------- SHARES AMOUNT SHARES AMOUNT ------------- -------------- ------------- -------------- CLASS A SHARES Sold 559,337 $ 7,038,418 798,027 $ 10,035,431 Reinvestment of dividends and distributions 28,186 350,747 24,442 307,515 Redeemed (431,256) (5,340,734) (1,076,242) (13,544,718) ------------- -------------- ------------- -------------- Net increase (decrease) -- Class A 156,267 2,048,431 (253,773) (3,201,772) ------------- -------------- ------------- -------------- CLASS B SHARES Sold 1,325,952 16,676,138 2,241,508 28,434,334 Reinvestment of dividends and distributions 1,188,509 14,881,743 1,276,233 16,142,176 Redeemed (7,931,795) (99,245,593) (9,610,206) (121,340,302) ------------- -------------- ------------- -------------- Net decrease -- Class B (5,417,334) (67,687,712) (6,092,465) (76,763,792) ------------- -------------- ------------- -------------- CLASS C SHARES Sold 382,653 4,832,637 871,904 11,075,117 Reinvestment of dividends and distributions 65,456 819,425 59,793 756,188 Redeemed (340,847) (4,273,996) (868,360) (10,970,699) ------------- -------------- ------------- -------------- Net increase -- Class C 107,262 1,378,066 63,337 860,606 ------------- -------------- ------------- -------------- CLASS D SHARES Sold 274,779 3,446,290 885,580 11,217,139 Reinvestment of dividends and distributions 139,106 1,737,213 151,366 1,909,249 Redeemed (982,554) (12,242,979) (1,718,245) (21,755,132) ------------- -------------- ------------- -------------- Net decrease -- Class D (568,669) (7,059,476) (681,299) (8,628,744) ------------- -------------- ------------- -------------- Net decrease in Fund (5,722,474) $ (71,320,691) (6,964,200) $ (87,733,702) ============= ============== ============= ============== </Table> 23 <Page> 8. LEGAL MATTERS The Investment Adviser, certain affiliates of the Investment Adviser, certain officers of such affiliates and certain investment companies advised by the Investment Adviser or its affiliates, including the Fund, are named as defendants in a number of similar class action complaints which were recently consolidated. This consolidated action also names as defendants certain individual Trustees and Directors of the Morgan Stanley funds. The consolidated amended complaint generally alleges that defendants, including the Fund, violated their statutory disclosure obligations and fiduciary duties by failing properly to disclose (i) that the Investment Adviser and certain affiliates of the Investment Adviser allegedly offered economic incentives to brokers and others to recommend the funds advised by the Investment Adviser or its affiliates to investors rather than funds managed by other companies, and (ii) that the funds advised by the Investment Adviser or its affiliates, including the Fund, allegedly paid excessive commissions to brokers in return for their efforts to recommend these funds to investors. The complaint seeks, among other things, unspecified compensatory damages, rescissionary damages, fees and costs. The defendants have moved to dismiss the action and intend to otherwise vigorously defend it. While the Fund believes that it has meritorious defenses, the ultimate outcome of this matter is not presently determinable at this early stage of the litigation, and no provision has been made in the Fund's financial statements for the effect, if any, of this matter. 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, 2004 DECEMBER 31, 2003 ----------------- ----------------- Tax-exempt income $ 28,687,522 $ 32,233,100 Ordinary income 31,904 -- Long-term capital gains 5,343,272 4,824,460 ------------- ------------- Total distributions $ 34,062,698 $ 37,057,560 ============= ============= </Table> 24 <Page> As of December 31, 2004, the tax-basis components of accumulated earnings were as follows: <Table> Undistributed tax-exempt income $ 88,038 Undistributed long-term gains -- ------------- Net accumulated earnings 88,038 Post-October losses (15,818) Temporary differences (62,586) Net unrealized appreciation 45,249,444 ------------- Total accumulated earnings $ 45,259,078 ============= </Table> As of December 31, 2004, the Fund had temporary book/tax differences primarily attributable to post-October losses (capital losses incurred after October 31 within the taxable year which are deemed to arise on the first business day of the Fund's next taxable year), capital loss deferrals on wash sales and book amortization of discounts on debt securities and permanent book/tax differences 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 and distributions in excess of net realized gain was credited $49,647. 25 <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, ------------------------------------------------------------------ 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- CLASS A SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 12.58 $ 12.68 $ 12.34 $ 12.49 $ 11.67 ---------- ---------- ---------- ---------- ---------- Income (loss) from investment operations: Net investment income 0.54 0.55 0.57 0.57 0.58 Net realized and unrealized gain (loss) (0.02) (0.01) 0.44 (0.10) 0.82 ---------- ---------- ---------- ---------- ---------- Total income from investment operations 0.52 0.54 1.01 0.47 1.40 ---------- ---------- ---------- ---------- ---------- Less dividends and distributions from: Net investment income (0.53) (0.55) (0.57) (0.58) (0.58) Net realized gain (0.11) (0.09) (0.10) (0.04) -- ---------- ---------- ---------- ---------- ---------- Total dividends and distributions (0.64) (0.64) (0.67) (0.62) (0.58) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 12.46 $ 12.58 $ 12.68 $ 12.34 $ 12.49 ========== ========== ========== ========== ========== TOTAL RETURN+ 4.26% 4.31% 8.37% 3.90% 12.17% RATIOS TO AVERAGE NET ASSETS(1): Expenses (before expense offset) 0.81% 0.78% 0.80% 0.80% 0.83% Net investment income 4.29% 4.34% 4.53% 4.62% 4.80% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 19,203 $ 17,422 $ 20,775 $ 17,147 $ 12,336 Portfolio turnover rate 10% 11% 12% 13% 4% </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. SEE NOTES TO FINANCIAL STATEMENTS 26 <Page> <Table> <Caption> FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- CLASS B SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 12.65 $ 12.75 $ 12.42 $ 12.57 $ 11.73 ---------- ---------- ---------- ---------- ---------- Income (loss) from investment operations: Net investment income 0.54 0.55 0.56 0.55 0.57 Net realized and unrealized gain (loss) (0.02) (0.02) 0.42 (0.11) 0.84 ---------- ---------- ---------- ---------- ---------- Total income from investment operations 0.52 0.53 0.98 0.44 1.41 ---------- ---------- ---------- ---------- ---------- Less dividends and distributions from: Net investment income (0.54) (0.54) (0.55) (0.55) (0.57) Net realized gain (0.11) (0.09) (0.10) (0.04) -- ---------- ---------- ---------- ---------- ---------- Total dividends and distributions (0.65) (0.63) (0.65) (0.59) (0.57) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 12.52 $ 12.65 $ 12.75 $ 12.42 $ 12.57 ========== ========== ========== ========== ========== TOTAL RETURN+ 4.22% 4.27% 8.13% 3.56% 12.29% RATIOS TO AVERAGE NET ASSETS(1)(2): Expenses (before expense offset) 0.78% 0.83% 0.93% 1.04% 0.93% Net investment income 4.32% 4.29% 4.40% 4.38% 4.70% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 526,026 $ 599,737 $ 682,046 $ 696,481 $ 732,668 Portfolio turnover rate 10% 11% 12% 13% 4% </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) 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, 2004 1.03% 4.07% 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% </Table> SEE NOTES TO FINANCIAL STATEMENTS 27 <Page> <Table> <Caption> FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- CLASS C SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 12.65 $ 12.74 $ 12.42 $ 12.57 $ 11.73 ---------- ---------- ---------- ---------- ---------- Income (loss) from investment operations: Net investment income 0.47 0.48 0.50 0.51 0.52 Net realized and unrealized gain (loss) (0.02) -- 0.42 (0.11) 0.84 ---------- ---------- ---------- ---------- ---------- Total income from investment operations 0.45 0.48 0.92 0.40 1.36 ---------- ---------- ---------- ---------- ---------- Less dividends and distributions from: Net investment income (0.47) (0.48) (0.50) (0.51) (0.52) Net realized gain (0.11) (0.09) (0.10) (0.04) -- ---------- ---------- ---------- ---------- ---------- Total dividends and distributions (0.58) (0.57) (0.60) (0.55) (0.52) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 12.52 $ 12.65 $ 12.74 $ 12.42 $ 12.57 ========== ========== ========== ========== ========== TOTAL RETURN+ 3.61% 3.80% 7.59% 3.33% 11.74% RATIOS TO AVERAGE NET ASSETS(1): Expenses (before expense offset) 1.36% 1.35% 1.35% 1.34% 1.34% Net investment income 3.74% 3.77% 3.98% 4.09% 4.29% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 27,519 $ 26,435 $ 25,825 $ 16,745 $ 14,534 Portfolio turnover rate 10% 11% 12% 13% 4% </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. SEE NOTES TO FINANCIAL STATEMENTS 28 <Page> <Table> <Caption> FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- CLASS D SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 12.61 $ 12.71 $ 12.39 $ 12.53 $ 11.71 ---------- ---------- ---------- ---------- ---------- Income (loss) from investment operations: Net investment income 0.56 0.57 0.60 0.60 0.61 Net realized and unrealized gain (loss) (0.01) (0.01) 0.41 (0.10) 0.82 ---------- ---------- ---------- ---------- ---------- Total income from investment operations 0.55 0.56 1.01 0.50 1.43 ---------- ---------- ---------- ---------- ---------- Less dividends and distributions from: Net investment income (0.56) (0.57) (0.59) (0.60) (0.61) Net realized gain (0.11) (0.09) (0.10) (0.04) -- ---------- ---------- ---------- ---------- ---------- Total dividends and distributions (0.67) (0.66) (0.69) (0.64) (0.61) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 12.49 $ 12.61 $ 12.71 $ 12.39 $ 12.53 ========== ========== ========== ========== ========== TOTAL RETURN+ 4.48% 4.50% 8.41% 4.12% 12.50% RATIOS TO AVERAGE NET ASSETS(1): Expenses (before expense offset) 0.61% 0.60% 0.60% 0.59% 0.59% Net investment income 4.49% 4.52% 4.73% 4.84% 5.04% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 58,399 $ 66,143 $ 75,332 $ 83,638 $ 95,132 Portfolio turnover rate 10% 11% 12% 13% 4% </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. SEE NOTES TO FINANCIAL STATEMENTS 29 <Page> REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM MORGAN STANLEY CALIFORNIA TAX-FREE INCOME FUND 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, 2004, 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 the standards of the Public Company Accounting Oversight Board (United States). 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2004, by correspondence with the custodian. 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, 2004, 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 14, 2005 30 <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 HELD INDEPENDENT TRUSTEE REGISTRAT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** BY TRUSTEE - ----------------------------------- ----------- ------------ -------------------------- ------------- ------------------------ Michael Bozic (63) Trustee Since Private Investor; 208 None. c/o Kramer Levin Naftalis & April 1994 Director or Trustee of Frankel LLP the Retail Funds (since Counsel to the Independent Trustees April 1994) and the 919 Third Avenue New Institutional Funds York, NY 10022-3902 (since July 2003); formerly Vice Chairman of Kmart Corporation (December 1998-October 2000), 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 (72) Trustee Since Consultant; Managing 208 Director of Franklin 1031 N. Chartwell Court January 1993 Director of Summit Covey (time management Salt Lake City, UT 84103 Ventures LLC; Director systems), BMW Bank of or Trustee of the North America, Inc. Retail Funds (since (industrial loan January 1993) and the corporation), United Institutional Funds Space Alliance (joint (since July 2003); venture between Lockheed member of the Utah Martin and the Boeing Regional Advisory Board Company) and Nuskin Asia of Pacific Corp.; Pacific (multilevel formerly Managing marketing); member of Director of Summit the board of various Ventures LLC civic and charitable (2000-2004); United organizations. States Senator (R-Utah) (1974-1992) and Chairman, Senate Banking Committee (1980-1986), Mayor of Salt Lake City, Utah (1971-1974), Astronaut, Space Shuttle Discovery (April 12-19, 1985), and Vice Chairman, Huntsman Corporation (chemical company). Wayne E. Hedien (70) Trustee Since Retired; Director or 208 Director of The PMI c/o Kramer Levin Naftalis September Trustee of the Retail Group Inc. (private & Frankel LLP 1997 Funds (since September mortgage insurance); Counsel to the Independent Trustees 1997) and the Trustee and Vice 919 Third Avenue Institutional Funds Chairman of The Field New York, NY 10022-3902 (since July 2003); Museum of Natural formerly associated History; director of with the Allstate various other business Companies (1966-1994), and charitable most recently as organizations. Chairman of The Allstate Corporation (March 1993-December 1994) and Chairman and Chief Executive Officer of its wholly-owned subsidiary, Allstate Insurance Company (July 1989-December 1994). </Table> 31 <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 HELD INDEPENDENT TRUSTEE REGISTRAT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** BY TRUSTEE - ----------------------------------- ----------- ------------ -------------------------- ------------- ------------------------ Dr. Manuel H. Johnson (55) c/o Johnson Smick International, Inc. Trustee Since Senior Partner, Johnson 208 Director of NVR, Inc. 2099 Pennsylvania Avenue, N.W. July 1991 Smick International, (home construction); Suite 950 Inc., a consulting Director of KFX Energy; Washington, D.C. 20006 firm; Chairman of the Director of RBS Audit Committee and Greenwich Capital Director or Trustee of Holdings (financial the Retail Funds (since holding company). July 1991) and the Institutional Funds (since July 2003); Co-Chairman and a founder of the Group of Seven Council (G7C), an international economic commission; formerly Vice Chairman of the Board of Governors of the Federal Reserve System and Assistant Secretary of the U.S. Treasury. Joseph J. Kearns (62) Trustee Since President, Kearns & 209 Director of Electro Rent c/o Kearns & Associates LLC July 2003 Associates LLC Corporation (equipment PMB754 (investment leasing), The Ford 23852 Pacific Coast Highway consulting); Deputy Family Foundation, and Malibu, CA 90265 Chairman of the Audit the UCLA Foundation. Committee and Director or Trustee of the Retail Funds (since July 2003) and the Institutional Funds (since August 1994); previously Chairman of the Audit Committee of the Institutional Funds (October 2001- July 2003); formerly CFO of the J. Paul Getty Trust. Michael E. Nugent (68) Trustee Since General Partner of 208 Director of various c/o Triumph Capital, L.P. July 1991 Triumph Capital, L.P., business organizations. 445 Park Avenue a private investment New York, NY 10022 partnership; Chairman of the Insurance Committee and Director or Trustee of the Retail Funds (since July 1991) and the Institutional Funds (since July 2001); formerly Vice President, Bankers Trust Company and BT Capital Corporation (1984-1988). Fergus Reid (72) Trustee Since Chairman of Lumelite 209 Trustee and Director of c/o Lumelite Plastics Corporation July 2003 Plastics Corporation; certain investment 85 Charles Colman Blvd. Chairman of the companies in the Pawling, NY 12564 Governance Committee JPMorgan Funds complex and Director or managed by J.P. Morgan Trustee of the Retail Investment Management Funds (since July Inc. 2003) and the Institutional Funds (since June 1992). </Table> 32 <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 HELD INDEPENDENT TRUSTEE REGISTRAT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** BY TRUSTEE - ----------------------------------- ----------- ------------ -------------------------- ------------- ------------------------ Charles A. Fiumefreddo (71) Chairman of Since Chairman and Director 208 None. c/o Morgan Stanley Trust the Board July 1991 or Trustee of the Harborside Financial Center, and Trustee Retail Funds (since Plaza Two, July 1991) and the Jersey City, NJ 07311 Institutional Funds (since July 2003); formerly Chief Executive Officer of the Retail Funds (until September 2002). James F. Higgins (56) Trustee Since Director or Trustee of 208 Director of AXA c/o Morgan Stanley Trust June 2000 the Retail Funds Financial, Inc. and The Harborside Financial Center, (since June 2000) and Equitable Life Assurance Plaza Two, the Institutional Society of the United Jersey City, NJ 07311 Funds (since July States (financial 2003); Senior Advisor services). of Morgan Stanley (since August 2000); Director of the Distributor and 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). </Table> - ---------- * THIS IS THE EARLIEST DATE THE TRUSTEE BEGAN SERVING THE FUNDS ADVISED BY MORGAN STANLEY INVESTMENT ADVISORS INC. (THE "INVESTMENT ADVISER ") (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. 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 ADVISER AND ANY FUNDS THAT HAVE AN INVESTMENT ADVISER THAT IS AN AFFILIATED PERSON OF THE INVESTMENT ADVISER (INCLUDING, BUT NOT LIMITED TO, MORGAN STANLEY INVESTMENT MANAGEMENT INC.) 33 <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 (51) President Since May 1999 President and Chief Operating Officer of Morgan Stanley 1221 Avenue of the Americas Investment Management Inc.; President, Director and Chief New York, NY 10020 Executive Officer of the Investment Adviser and the Administrator; Chairman and Director of the Distributor; Chairman and Director of the Transfer Agent; Director of various Morgan Stanley subsidiaries; President of the Institutional Funds (since July 2003) and President of the Retail Funds; Trustee (since July 2003) and President (since December 2002) of the Van Kampen Closed-End Funds; Trustee and President (since October 2002) of the Van Kampen Open-End Funds. Ronald E. Robison (65) Executive Vice Since Principal Executive Officer of Funds in the Fund Complex 1221 Avenue of the Americas President and April 2003 (since May 2003); Managing Director of Morgan Stanley & Co. New York, NY 10020 Principal Incorporated, Morgan Stanley Investment Management Inc. and Executive Morgan Stanley; Managing Director, Chief Administrative Officer Officer and Director of the Investment Adviser and the Administrator; 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) and the Retail Funds (since April 2003); Director of Morgan Stanley SICAV (since May 2004); previously President and Director of the Retail Funds (March 2001-July 2003) and Chief Global Operations Officer and Managing Director of Morgan Stanley Investment Management Inc. Joseph J. McAlinden (61) Vice President Since July 1995 Managing Director and Chief Investment Officer of the 1221 Avenue of the Americas Investment Adviser and Morgan Stanley Investment Management New York, NY 10020 Inc., Director of the Transfer Agent, Chief Investment Officer of the Van Kampen Funds; Vice President of the Institutional Funds (since July 2003) and the Retail Funds (since July 1995). Barry Fink (49) Vice President Since General Counsel (since May 2000) and Managing Director 1221 Avenue of the Americas February 1997 (since December 2000) of Morgan Stanley Investment New York, NY 10020 Management; Managing Director (since December 2000), Secretary (since February 1997) and Director of the Investment Adviser and the Administrator; Vice President of the Retail Funds; Assistant Secretary of Morgan Stanley DW; Vice President of the Institutional Funds (since July 2003); Managing Director, Secretary and Director of the Distributor; previously Secretary (February 1997-July 2003) and General Counsel (February 1997-April 2004) of the Retail Funds; Vice President and Assistant General Counsel of the Investment Adviser and the Administrator (February 1997-December 2001). Amy R. Doberman (42) Vice President Since July 2004 Managing Director and General Counsel, U.S. Investment 1221 Avenue of the Americas Management; Managing Director of Morgan Stanley Investment New York, NY 10020 Management Inc. and the Investment Adviser, Vice President of the Institutional and Retail Funds (since July 2004); Vice President of the Van Kampen Funds (since August 2004); previously, Managing Director and General Counsel - Americas, UBS Global Asset Management (July 2000 - July 2004) and General Counsel, Aeltus Investment Management, Inc. (January 1997 - July 2000). Carsten Otto (41) Chief Since October Executive Director and U.S. Director of Compliance for 1221 Avenue of the Americas Compliance 2004 Morgan Stanley Investment Management (since October 2004); New York, NY 10020 Officer Executive Director of the Investment Adviser and Morgan Stanley Investment Management Inc.; formerly Assistant Secretary and Assistant General Counsel of the Morgan Stanley Retail Funds. </Table> 34 <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** - ------------------------------ ---------------- ------------------ ----------------------------------------------------------- Stefanie V. Chang (38) Vice President Since July 2003 Executive Director of Morgan Stanley & Co. Incorporated, 1221 Avenue of the Americas Morgan Stanley Investment Management Inc., and the New York, NY 10020 Investment Adviser; Vice President of the Institutional Funds and the Retail Funds (since July 2003); formerly practiced law with the New York law firm of Rogers & Wells (now Clifford Chance US LLP). Francis J. Smith (39) Treasurer and Treasurer since Executive Director of the Investment Adviser and Morgan c/o Morgan Stanley Trust Chief Financial July 2003 and Stanley Services (since December 2001); previously, Vice Harborside Financial Center, Officer Chief Financial President of the Retail Funds (September 2002-July 2003), Plaza Two, Officer since and Vice President of the Investment Adviser and the Jersey City, NJ 07311 September 2002 Administrator (August 2000-November 2001) and Senior Manager at PricewaterhouseCoopers LLP (January 1998- August 2000). Thomas F. Caloia (58) Vice President Since July 2003 Executive Director (since December 2002) and Assistant c/o Morgan Stanley Trust Treasurer of the Investment Adviser, the Distributor and Harborside Financial Center, the Administrator; previously Treasurer of the Retail Funds Plaza Two, (April 1989-July 2003); formerly First Vice President of Jersey City, NJ 07311 the Investment Adviser, the Distributor and the Administrator. Mary E. Mullin (37) Secretary Since July 2003 Executive Director of Morgan Stanley & Co. Incorporated, 1221 Avenue of the Americas Morgan Stanley Investment Management Inc. and the New York, NY 10020 Investment Adviser; Secretary of the Institutional Funds and the Retail Funds (since 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. 2004 FEDERAL TAX NOTICE (UNAUDITED) During the year ended December 31, 2004, 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 $ 0.53 $ 0.54 $ 0.47 $ 0.56 Long-Term Capital Gains $ 0.11 $ 0.11 $ 0.11 $ 0.11 </Table> 35 <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 Fergus Reid OFFICERS Charles A. Fiumefreddo CHAIRMAN OF THE BOARD Mitchell M. Merin PRESIDENT Ronald E. Robison EXECUTIVE VICE PRESIDENT and PRINCIPAL EXECUTIVE OFFICER Joseph J. McAlinden VICE PRESIDENT Barry Fink VICE PRESIDENT Amy R. Doberman VICE PRESIDENT Carsten Otto CHIEF COMPLIANCE OFFICER Stefanie V. Chang VICE PRESIDENT Francis J. Smith TREASURER and CHIEF FINANCIAL OFFICER Thomas F. Caloia VICE PRESIDENT Mary E. Mullin SECRETARY TRANSFER AGENT Morgan Stanley Trust Harborside Financial Center, Plaza Two Jersey City, New Jersey 07311 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Deloitte & Touche LLP Two World Financial Center New York, New York 10281 INVESTMENT ADVISER 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) 2004 Morgan Stanley [MORGAN STANLEY FUNDS LOGO] 37900RPT-RA05-00093P-Y12/04 [GRAPHIC] MORGAN STANLEY FUNDS MORGAN STANLEY CALIFORNIA TAX-FREE INCOME FUND ANNUAL REPORT DECEMBER 31, 2004 [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) The Fund has amended its Code of Ethics during the period covered by the shareholder report presented in Item 1 hereto to delete from the end of the following paragraph on page 2 of the Code the phrase "to the detriment of the Fund.": "Each Covered Officer must not use his personal influence or personal relationship improperly to influence investment decisions or financial reporting by the Fund whereby the Covered Officer would benefit personally (directly or indirectly)." (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: 2004 <Table> <Caption> REGISTRANT COVERED ENTITIES(1) AUDIT FEES $ 29,002 N/A NON-AUDIT FEES AUDIT-RELATED FEES $ 452(2) $ 3,746,495(2) TAX FEES $ 5,335(3) $ 79,800(4) ALL OTHER FEES $ - $ - TOTAL NON-AUDIT FEES $ 5,787 $ 3,826,295 TOTAL $ 34,789 $ 3,826,295 </Table> 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 $ - $ -(5) TOTAL NON-AUDIT FEES $ 5,568 $ 3,583,971 TOTAL $ 33,498 $ 3,583,971 </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: APPENDIX A AUDIT COMMITTEE AUDIT AND NON-AUDIT SERVICES PRE-APPROVAL POLICY AND PROCEDURES OF THE MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS AS ADOPTED AND AMENDED JULY 23, 2004,(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, supersedes and replaces all prior versions that may have been adopted from time to time. <Page> 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 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 <Page> 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. 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 <Page> 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. 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 Inc. Morgan Stanley Investment Management Limited Morgan Stanley Investment Management Private Limited Morgan Stanley Asset & Investment Trust Management Co., Limited Morgan Stanley Investment Management Company Van Kampen Asset Management Morgan Stanley Services Company, Inc. Morgan Stanley Distributors Inc. Morgan Stanley Trust FSB <Page> MORGAN STANLEY INSTITUTIONAL FUNDS Morgan Stanley Investment Management Inc. Morgan Stanley Investment Advisors Inc. Morgan Stanley Investment Management Limited Morgan Stanley Investment Management Private Limited Morgan Stanley Asset & Investment Trust Management Co., Limited Morgan Stanley Investment Management Company 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. Item 5. Audit Committee of Listed Registrants. (a) The Fund has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act whose members are: Michael Bozic, Edwin J. Garn, Wayne E. Hedien, Manual H. Johnson, Joseph J. Kearns, Michael Nugent and Fergus Reid. (b) Not applicable. Item 6. Schedule of Investments Refer to Item 1. <Page> 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. Closed-End Fund Repurchases Applicable to reports filed by closed-end funds. Item 9. Submission of Matters to a Vote of Security Holders Not applicable. Item 10 - 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. (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 11 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. <Page> 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 17, 2005 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 17, 2005 /s/ Francis Smith Francis Smith Principal Financial Officer February 17, 2005