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

                                   FORM N-CSR

                   CERTIFIED SHAREHOLDER REPORT OF REGISTERED
                         MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number: 811-07243

Morgan Stanley Balanced Income Fund
               (Exact name of registrant as specified in charter)

1221 Avenue of the Americas, New York, New York 10020
    (Address of principal executive offices)                      (Zip code)

Ronald E. Robison
1221 Avenue of the Americas, New York, New York 10020
                     (Name and address of agent for service)

Registrant's telephone number, including area code: 212-762-4000

Date of fiscal year end: January 31, 2004

Date of reporting period: January 31, 2004


Item 1 - Report to Shareholders

Welcome, Shareholder:

In this report, you'll learn about how your investment in Morgan Stanley Balanced Income Fund performed during the 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.

	Fund Report
	For the year ended January 31, 2004

Total Return for the 12-month period ended January 31, 2004

Class A						Class B						Class C						Class D						Russell 1000 Value Index1						Lehman Brothers U.S. Government/ Credit Index2						Lipper Income Funds Index3
13.65%							12.77	%					12.74	%					13.94	%					35.60	%					5.62	%					17.88	%

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

Market Conditions

The U.S. economy continued its recovery from the early part of 2003 through the 12-month period ended January 31, 2004. The U.S. equities market gained in every month except September as key economic indicators appeared to boost investor confidence. Strong gross domestic product growth data for the U.S. economy in both the third and fourth quarters of 2003, plus a rebound in corporate earnings and an inflow of assets from pension and other institutional investors combined to drive equities higher.

From a capitalization perspective, many small-, mid- and large-cap companies posted gains in this reporting period. Many smaller-cap companies outraced their larger counterparts as investors sought cheap companies that had been beaten down during 2001 and 2002. This preference was also reflected in the rally by the leadership of higher-beta, lower-quality stocks. Highly cyclical information technology stocks were buoyed by investor anticipation of increased capital spending, while industrials and basic materials benefited from accelerated manufacturing activity. Financial-services stocks also performed well, boosted by low interest rates and high-profile merger and acquisition activity. Some of the more conservative sectors, such as consumer staples and utilities stocks, lagged their peers, though all sectors returned positive gains. Across performance styles, growth outperformed value in the first half of the year, while value came back and outperformed growth in the second half.

In this 12-month period the bond markets were dominated by perceptions that the Federal Reserve Bank was concerned about deflation as well as by evidence that the U.S. economy was recovering. Non-Treasury bonds entered the year with very wide yield spreads following a number of corporate accounting scandals, though spreads had begun to narrow from their widest levels of 2002. Corporate bonds continued to do well through 2003 as investors were drawn to their relatively attractive yields. Sector performance was varied, with economically sensitive segments such as telecommunications, industrials and basic materials leading the pack.

Performance Analysis

Morgan Stanley Balanced Income Fund underperformed its peer group as defined by the Lipper Income Funds Index for the twelve months ended January 31, 2004. Given its portfolio mix of equities and bonds, it underperformed the Russell 1000 Value Index and outperformed the Lehman Brothers U.S. Government/Credit Index.

2

The Fund's biggest detractor was its reduced exposure to information technology stocks. Though the U.S. equity market rallied, we maintained a cautious view toward technology stocks as a result of their high valuations and what we felt were unrealistic expectations for increased capital spending. This strategy limited the Fund's exposure to one of the top-performing equity sectors during the period. Our underweighted stance relative to the Russell 1000 Value Index in financials also hurt the Fund. Though its holdings performed well, our defensive posture toward regional banks and thrifts hurt as low interest rates and refinancing activity buoyed those companies.

The Fund benefited most from both its overweighted position relative to the Russell 1000 Value Index and our stock selection in the basic materials sector. During this 12-month period, basic materials companies experienced higher demand as manufacturing activity increased. The mining companies Phelps-Dodge and Newmont contributed the most to performance.

Our overweighted stance relative to the Russell 1000 Value Index in consumer discretionary stocks also helped relative performance. This traditionally market-sensitive sector rebounded as the economic outlook for the U.S. economy improved. Time Warner emerged as one of our strongest performers as it shed its America Online management group, reduced debt and streamlined operations. Our holdings in the McDonald's restaurant franchise and Starwood Hotels also aided relative performance in the consumer discretionary sector.

We focused on positioning the fixed-income portion of the Fund to benefit from the cyclical upturn the U.S. economy was experiencing during 2003. We maintained duration^* at a lower level than that of the Lehman Brothers U.S. Government/Credit Index. This position mitigated Fund exposure to interest rates' tendency to rise during periods of economic growth. We also felt that lower-quality corporate paper presented better value and accordingly increased the Fund's exposure to lower-rated, non-Treasury bonds.

Our allocation to BBB-rated industrials provided the strongest returns, as investors favored companies most likely to benefit from an upswing in economic activity. The Fund's focus on highly rated mortgage-backed securities also contributed modestly. The largest detractors from performance stemmed from the Fund's underweighted positions relative to the Lehman Brothers U.S. Government/Credit Index in utilities and telecommunications bonds. Utilities rebounded from poor performance in 2002 as the industry laid to rest concerns surrounding speculative trading and corporate governance, while telecommunications companies benefited from an optimistic economic outlook for the U.S. economy.

* Duration: 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 one percent change in the price of a bond for every one 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-rate environments, while funds with longer durations perform better when rates decline.

3

TOP 10 HOLDINGS
U.S. Treasury Securities					29.6	%
Fed. Natl. Mtge. Assoc					11.9
Fed. Home Ln. Mtge Corp.					1.8
Bristol Myers Squibb					1.7
AOL Time Warner					1.3
Chubb Corp					1.1
Hartford Financial Services Group					1.0
Citigroup Inc					1.0
Schlumberger LTD					0.9
PEMEX Project Funding Master Trust					0.8

PORTFOLIO COMPOSITION
Common Stocks					33.2	%
U.S. Government & Agency Obligations					30.3
Corporate Bonds					19.7
Pass-Through Securities					13.8
Short-Term					3.0

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

Investment Strategy

	1.	Morgan Stanley Balanced Income Fund seeks to provide current income and moderate capital growth.

	2.	The Fund will normally invest at least 80% of its assets in income-producing securities, consisting of (1) fixed-income securities and (2) dividend-paying common stocks and securities convertible into common stocks. Within the limitations detailed in the prospectus, the Fund's "Investment Manager," Morgan Stanley Investment Advisors Inc., may purchase or sell securities in any proportion it believes desirable based on its assessment of business, economic and investment conditions.

Annual Householding Notice

To reduce printing and mailing costs, the Fund attempts to eliminate duplicate mailings to the same address. The Fund delivers a single copy of certain shareholder documents, including shareholder reports, prospectuses and proxy materials, to investors with the same last name who reside at the same address. Your participation in this program will continue for an unlimited period of time unless you instruct us otherwise. You can request multiple copies of these documents by calling (800) 350-6414, 8:00 a.m. to 8:00 p.m. ET. Once our Customer Service Center has received your instructions, we will begin sending individual copies for each account within 30 days.

Proxy Voting Policies and Procedures

A description of the Fund's policies and procedures with respect to the voting of proxies relating to the Fund's portfolio securities is available without charge, upon request, by calling (800) 869-NEWS (6397). This information is also available on the Securities and Exchange Commission's Web site at http://www.sec.gov.

4

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	Performance Summary

Performance of a $10,000 Investment — Class C

Past performance is not predictive of future returns. Investment return and principal value will fluctuate. When you sell fund shares, they may be worth less than their original cost. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Performance for Class A, Class B, Class C, and Class D shares will vary due to differences in sales charges and expenses.

6

Average Annual Total Returns — Period Ended January 31, 2004

						Class A Shares* (since 07/28/97)						Class B Shares** (since 07/28/97)						Class C Shares† (since 03/28/95)						Class D Shares†† (since 07/28/97)
Symbol						BINAX						BINBX						BINCX						BINDX
1 Year							13.65%	4					12.77%	4					12.74%	4					13.94%	4
							7.68	5					7.77	5					11.74	5					—
5 Years							4.43	4					3.59	4					3.61	4					4.65	4
							3.31	5					3.24	5					3.61	5					—
Since Inception							5.80	4					4.97	4					7.53	4					6.02	4
							4.93	5					4.97	5					7.53	5					—

Notes on Performance

(1) The Russell 1000 Value Index measures the performance of those companies in the Russell 1000 Index with lower price-to-book ratios and lower forecasted growth values. The Index does not include any expenses, fees or charges. The Index is unmanaged and should not be considered an investment.

(2) The Lehman Brothers U.S. Government/Credit Index tracks the performance of government and corporate obligations, including U.S. government agency and Treasury securities and corporate and Yankee bonds. The Index does not include any expenses, fees or charges. The Index is unmanaged and should not be considered an investment.

(3) The Lipper Income Funds Index is an equally-weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Income Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 30 funds represented in this Index.

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

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

* The maximum front-end sales charge for Class A is 5.25%.

** The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%. The CDSC declines to 0% after six years.

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

†† Class D has no sales charge.

‡ Closing value assuming a complete redemption on January 31, 2004.

7

Morgan Stanley Balanced Income Fund

Portfolio of Investments January 31, 2004

NUMBER OF SHARES								VALUE
				Common Stocks (33.3%)
				Advertising/Marketing Services (0.3%)
	36,120			Interpublic Group of Companies Inc. (The) *				$	597,425
				Aerospace & Defense (0.2%)
	4,000			Northrop Grumman Corp.					386,840
	4,210			Raytheon Co.					128,447
									515,287
				Auto Parts: O.E.M. (0.4%)
	10,890			Magna International Inc. (Class A) (Canada)					884,050
				Broadcasting (0.4%)
	17,700			Clear Channel Communications, Inc.					796,323
				Chemicals: Major Diversified (1.3%)
	51,500			Bayer AG (ADR) (Germany)					1,570,235
	22,430			Dow Chemical Co. (The)					940,938
	6,950			Du Pont (E.I.) de Nemours & Co.					305,105
									2,816,278
				Computer Processing Hardware (0.4%)
	37,880			Hewlett-Packard Co.					901,165
				Containers/Packaging (0.3%)
	13,020			Temple-Inland Inc.					768,831
				Data Processing Services (0.3%)
	18,160			Automatic Data Processing, Inc.					776,340
				Department Stores (0.4%)
	17,850			Kohl's Corp. *					790,755
				Discount Stores (0.4%)
	18,060			Wal-Mart Stores, Inc.					972,531
				Electric Utilities (1.2%)
	700			Consolidated Edison, Inc.					30,681
	27,000			Edison International					594,000
	11,410			Entergy Corp.					667,257
	11,210			Exelon Corp.					750,846
	16,300			FirstEnergy Corp.					611,576
									2,654,360

See Notes to Financial Statements

8

Morgan Stanley Balanced Income Fund

Portfolio of Investments January 31, 2004 continued

NUMBER OF SHARES								VALUE
				Finance/Rental/Leasing (1.1%)
	17,400			Fannie Mae				$	1,341,540
	17,200			Freddie Mac					1,073,624
									2,415,164
				Financial Conglomerates (1.9%)
	34,590			Citigroup Inc.					1,711,513
	35,680			JP Morgan Chase & Co.					1,387,595
	24,590			Prudential Financial, Inc.					1,069,665
									4,168,773
				Financial Publishing/Services (0.6%)
	50,430			Equifax, Inc.					1,311,684
				Food: Major Diversified (0.8%)
	18,350			Kraft Foods Inc. (Class A)					591,053
	8,850			Nestle SA (ADR) (Registered Shares) (Switzerland)					578,790
	12,560			PepsiCo, Inc.					593,586
									1,763,429
				Food: Specialty/Candy (0.3%)
	23,150			Cadbury Schweppes PLC (ADR) (United Kingdom)					693,342
				Hospital/Nursing Management (0.3%)
	59,890			Tenet Healthcare Corp.*					742,636
				Hotels/Resorts/Cruiselines (0.9%)
	71,280			Hilton Hotels Corp.					1,140,480
	27,630			Starwood Hotels & Resorts Worldwide, Inc.					976,444
									2,116,924
				Household/Personal Care (0.6%)
	23,190			Kimberly-Clark Corp.					1,369,601
				Industrial Conglomerates (0.6%)
	11,470			Ingersoll-Rand Co. (Class A) (Bermuda)					763,099
	9,570			Textron, Inc.					509,890
									1,272,989
				Industrial Machinery (0.4%)
	14,500			Parker-Hannifin Corp.					797,355
				Information Technology Services (0.7%)
	16,300			Accenture Ltd. (Class A) (Bermuda) *					385,821
	12,200			International Business Machines Corp.					1,210,606
									1,596,427

See Notes to Financial Statements

9

Morgan Stanley Balanced Income Fund

Portfolio of Investments January 31, 2004 continued

NUMBER OF SHARES								VALUE
				Integrated Oil (2.1%)
	41,380			BP PLC (ADR) (United Kingdom)				$	1,969,688
	16,410			ConocoPhillips					1,081,091
	38,730			Exxon Mobil Corp.					1,579,797
									4,630,576
				Investment Banks/Brokers (1.3%)
	12,180			Edwards (A.G.), Inc.					463,449
	13,400			Lehman Brothers Holdings Inc.					1,100,140
	24,230			Merrill Lynch & Co., Inc.					1,424,482
									2,988,071
				Life/Health Insurance (0.3%)
	19,780			MetLife, Inc.					663,619
				Major Banks (1.5%)
	9,650			Bank of America Corp.					786,089
	21,800			Bank One Corp.					1,103,298
	17,020			PNC Financial Services Group, Inc.					961,800
	11,550			Wachovia Corp.					534,072
									3,385,259
				Major Telecommunications (0.9%)
	38,610			Sprint Corp. (FON Group)					672,200
	34,820			Verizon Communications Inc.					1,283,465
									1,955,665
				Managed Health Care (0.4%)
	13,650			CIGNA Corp.					846,573
				Media Conglomerates (1.6%)
	60,490			Disney (Walt) Co. (The)					1,451,760
	126,650			Time Warner Inc. *					2,225,241
									3,677,001
				Medical Specialties (0.4%)
	18,440			Bausch & Lomb, Inc.					991,150
				Motor Vehicles (0.5%)
	49,100			Honda Motor Co., Ltd. (ADR) (Japan)					1,047,794
				Multi-Line Insurance (0.8%)
	26,770			Hartford Financial Services Group, Inc. (The)					1,722,382

See Notes to Financial Statements

10

Morgan Stanley Balanced Income Fund

Portfolio of Investments January 31, 2004 continued

NUMBER OF SHARES								VALUE
				Oil & Gas Production (0.3%)
	15,730			EOG Resources, Inc.				$	712,569
				Oil Refining/Marketing (0.4%)
	15,310			Valero Energy Corp.					810,205
				Oilfield Services/Equipment (0.9%)
	34,170			Schlumberger Ltd. (Netherlands Antilles)					2,090,521
				Other Metals/Minerals (0.5%)
	13,910			Phelps Dodge Corp.*					1,052,570
				Packaged Software (0.5%)
	44,260			Microsoft Corp.					1,223,789
				Pharmaceuticals: Major (3.1%)
	15,000			AstraZeneca PLC (ADR) (United Kingdom)					724,050
	134,470			Bristol-Myers Squibb Co.					3,771,884
	12,470			Roche Holdings (A.G.) (ADR) (Switzerland)					1,286,904
	60,450			Schering-Plough Corp.					1,060,293
									6,843,131
				Precious Metals (0.3%)
	15,630			Newmont Mining Corp.					651,146
				Property – Casualty Insurers (1.7%)
	33,570			Chubb Corp. (The)					2,399,919
	77,144			Travelers Property Casualty Corp. (Class A)					1,400,935
									3,800,854
				Railroads (0.9%)
	55,620			Norfolk Southern Corp.					1,240,326
	11,040			Union Pacific Corp.					710,976
									1,951,302
				Restaurants (0.3%)
	22,020			McDonald's Corp.					566,795
				Telecommunication Equipment (0.5%)
	51,450			Nokia Oyj Corp. (ADR) (Finland)					1,062,957
				Tobacco (0.3%)
	10,730			Altria Group, Inc.					596,481
				Total Common Stocks (Cost $57,433,642)					73,992,079

See Notes to Financial Statements

11

Morgan Stanley Balanced Income Fund

Portfolio of Investments January 31, 2004 continued

PRINCIPAL AMOUNT IN THOUSANDS								COUPON RATE				MATURITY DATE				VALUE
				Corporate Bonds (19.7%)
				Aerospace & Defense (0.6%)
$	100			Boeing Co.					6.625	%			02/15/38			$	107,869
	105			Goodrich Corp.					7.625				12/15/12				123,996
	80			Lockheed Martin Corp.					7.75				05/01/26				98,277
	90			Lockheed Martin Corp.					8.50				12/01/29				119,853
	235			Raytheon Co.					8.30				03/01/10				282,709
	620			Systems 2001 Asset Trust – 144A**					6.664				09/15/13				686,977
																	1,419,681
				Airlines (0.4%)
	270			American West Airlines					7.10				04/02/21				293,101
	48			Continental Airlines, Inc.					6.545				08/02/20				48,367
	48			Continental Airlines, Inc.					6.648				03/15/19				47,570
	362			Continental Airlines, Inc.					6.90				07/02/19				367,100
	195			Southwest Airlines Co.					5.496				11/01/06				209,383
																	965,521
				Beverages: Alcoholic (0.1%)
	235			Miller Brewing Co. – 144A**					4.25				08/15/08				240,590
				Broadcasting (0.1%)
	245			Clear Channel Communications, Inc.					7.65				09/15/10				288,800
				Cable/Satellite TV (0.4%)
	95			Comcast Cable Communications Inc.					6.75				01/30/11				106,571
	590			Comcast Corp.					6.50				01/15/15				647,392
	40			Comcast Corp.					7.625				02/15/08				45,105
	105			TCI Communications, Inc.					7.875				02/15/26				124,061
																	923,129
				Chemicals: Major Diversified (0.1%)
	170			ICI Wilmington Inc.					4.375				12/01/08				171,609
				Containers/Packaging (0.1%)
	205			Sealed Air Corp – 144A**					5.625				07/15/13				212,594
				Department Stores (0.5%)
	50			Federated Department Stores, Inc.					6.625				09/01/08				55,934
	160			Federated Department Stores, Inc.					6.90				04/01/29				176,228

See Notes to Financial Statements

12

Morgan Stanley Balanced Income Fund

Portfolio of Investments January 31, 2004 continued

PRINCIPAL AMOUNT IN THOUSANDS								COUPON RATE				MATURITY DATE				VALUE
$	110			Federated Department Stores, Inc.					7.00	%			02/15/28			$	122,322
	80			May Department Stores Co., Inc.					5.95				11/01/08				87,040
	415			May Department Stores Co., Inc.					6.70				09/15/28				445,857
	60			May Department Stores Co., Inc.					6.90				01/15/32				66,100
	100			May Department Stores Co., Inc.					7.875				03/01/30				122,323
																	1,075,804
				Drugstore Chains (0.2%)
	290			CVS Corp.					5.625				03/15/06				309,819
	65			CVS Corp. – 144A**					6.204				10/10/25				69,149
																	378,968
				Electric Utilities (1.3%)
	145			Appalachian Power Co. (Series H)					5.95				05/15/33				143,341
	325			Carolina Power & Light Co.					5.125				09/15/13				331,409
	145			Cincinnati Gas & Electric Co.					5.70				09/15/12				154,452
	105			Cincinnati Gas & Electric Co. (Series A)					5.40				06/15/33				97,724
	130			Cincinnati Gas & Electric Co. (Series B)					5.375				06/15/33				120,541
	95			Columbus Southern Power Co.					6.60				03/01/33				103,543
	100			Consolidated Natural Gas Co. (Series A)					5.00				03/01/14				100,125
	200			Constellation Energy Group, Inc.					7.60				04/01/32				237,498
	85			Detroit Edison Co.					6.125				10/01/10				93,976
	50			Detroit Edison Co.					6.35				10/15/32				53,780
	200			Duke Energy Corp.					4.50				04/01/10				203,792
	130			Entergy Gulf States, Inc. – 144A**					3.60				06/01/08				125,874
	225			Exelon Corp.					6.75				05/01/11				253,956
	135			Ohio Power Co.					6.60				02/15/33				147,146
	165			Public Service Electric & Gas					5.00				01/01/13				168,008
	115			South Carolina Electric & Gas Co.					5.30				05/15/33				108,718
	50			Southern California Edison Co.					5.00				01/15/14				50,365
	190			TXU Energy Co.					7.00				03/15/13				212,279
	35			Wisconsin Electric Power Co.					5.625				05/15/33				34,656
	65			Wisconsin Energy Corp.					6.20				04/01/33				66,008
																	2,807,191
				Electrical Products (0.1%)
	240			Cooper Industries Inc.					5.25				07/01/07				257,163
				Environmental Services (0.2%)
	310			Waste Management, Inc.					6.875				05/15/09				349,376

See Notes to Financial Statements

13

Morgan Stanley Balanced Income Fund

Portfolio of Investments January 31, 2004 continued

PRINCIPAL AMOUNT IN THOUSANDS								COUPON RATE				MATURITY DATE				VALUE
				Finance/Rental/Leasing (2.1%)
$	130			American General Finance Corp.					4.625	%			09/01/10			$	132,715
	265			American General Finance Corp.					5.875				07/14/06				286,060
	500			Associates Corp. of North America					6.25				11/01/08				556,593
	240			CIT Group Inc.					2.875				09/29/06				241,391
	460			Countrywide Home Loans, Inc.					3.25				05/21/08				455,698
	315			Ford Motor Credit Co.					7.25				10/25/11				342,745
	225			Ford Motor Credit Co.					7.375				10/28/09				247,662
	195			Household Finance Corp.					4.125				12/15/08				198,049
	220			Household Finance Corp.					5.875				02/01/09				240,581
	105			Household Finance Corp.					6.375				10/15/11				117,090
	230			Household Finance Corp.					6.40				06/17/08				256,053
	225			Household Finance Corp.					6.75				05/15/11				255,993
	135			International Lease Finance Corp.					3.75				08/01/07				137,094
	530			MBNA Corp.					6.125				03/01/13				576,572
	235			Prime Property Funding II – 144A**					7.00				08/15/04				241,561
	350			SLM Corp.					5.00				10/01/13				351,970
																	4,637,827
				Financial Conglomerates (2.3%)
	370			Chase Manhattan Corp.					6.00				02/15/09				407,682
	80			Chase Manhattan Corp.					7.00				11/15/09				92,774
	185			Citigroup Inc.					5.625				08/27/12				197,697
	255			Citigroup Inc.					5.75				05/10/06				274,223
	160			Citicorp.					6.75				08/15/05				172,265
	90			General Electric Capital Corp.					4.25				12/01/10				90,405
	650			General Electric Capital Corp.					6.75				03/15/32				735,567
	135			General Motors Acceptance Corp.					4.50				07/15/06				138,958
	570			General Motors Acceptance Corp.					6.875				09/15/11				614,595
	735			General Motors Acceptance Corp.					8.00				11/01/31				808,376
	135			John Hancock Financial Services, Inc.					5.625				12/01/08				145,858
	810			Prudential Holdings, LLC (Series B) (FSA) – 144A**					7.245				12/18/23				906,381
	465			Prudential Holdings, LLC (Series C) – 144A**					8.695				12/18/23				581,549
																	5,166,330
				Food Retail (0.2%)
	195			Albertson's, Inc.					7.50				02/15/11				224,839
	150			Kroger Co.					6.80				04/01/11				168,942
	110			Kroger Co.					8.00				09/15/29				134,829
																	528,610

See Notes to Financial Statements

14

Morgan Stanley Balanced Income Fund

Portfolio of Investments January 31, 2004 continued

PRINCIPAL AMOUNT IN THOUSANDS								COUPON RATE				MATURITY DATE				VALUE
				Food: Major Diversified (0.2%)
$	80			General Mills Inc.					3.875	%			11/30/07			$	81,566
	115			Kraft Foods Inc.					5.25				06/01/07				122,728
	45			Kraft Foods Inc.					5.625				11/01/11				47,989
	230			Kraft Foods Inc.					6.25				06/01/12				253,726
																	506,009
				Forest Products (0.4%)
	160			Weyerhaeuser Co.					6.00				08/01/06				171,618
	110			Weyerhaeuser Co.					6.125				03/15/07				119,734
	515			Weyerhaeuser Co.					6.75				03/15/12				572,070
																	863,422
				Gas Distributors (0.3%)
	230			Consolidated Natural Gas Co.					6.25				11/01/11				256,258
	295			Ras Laffan Liquid Natural Gas Co. Ltd. – 144A** (Qatar)					8.294				03/15/14				343,675
																	599,933
				Home Building (0.2%)
	90			Centex Corp.					7.50				01/15/12				105,302
	50			Centex Corp.					7.875				02/01/11				59,306
	210			Pulte Homes, Inc.					6.375				05/15/33				206,961
																	371,569
				Home Furnishings (0.1%)
	95			Mohawk Industries Inc.					7.20				04/15/12				108,802
				Hotels/Resorts/Cruiselines (0.4%)
	305			Hyatt Equities LLC – 144A**					6.875				06/15/07				328,303
	505			Marriott International, Inc. (Series E)					7.00				01/15/08				568,910
																	897,213
				Industrial Conglomerates (0.3%)
	365			Honeywell International, Inc.					6.125				11/01/11				405,282
	155			Hutchison Whampoa International Ltd. – 144A** (Virgin Islands)					5.45				11/24/10				157,869
	195			Hutchison Whampoa International Ltd. – 144A** (Virgin Islands)					6.50				02/13/13				204,818
																	767,969

See Notes to Financial Statements

15

Morgan Stanley Balanced Income Fund

Portfolio of Investments January 31, 2004 continued

PRINCIPAL AMOUNT IN THOUSANDS								COUPON RATE				MATURITY DATE				VALUE
				Information Technology Services (0.1%)
$	120			Electronic Data Systems Corp.					7.125	%			10/15/09			$	132,039
	145			Electronic Data Systems Corp. (Series B)					6.00				08/01/13				145,979
																	278,018
				Integrated Oil (0.4%)
	110			Amerada Hess Corp.					6.65				08/15/11				120,169
	145			Amerada Hess Corp.					7.875				10/01/29				162,537
	505			Conoco Inc.					6.95				04/15/29				585,443
																	868,149
				Investment Banks/Brokers (0.4%)
	260			Goldman Sachs Group Inc.					5.25				10/15/13				264,385
	345			Goldman Sachs Group Inc.					6.60				01/15/12				389,217
	235			Goldman Sachs Group Inc.					6.875				01/15/11				268,697
																	922,299
				Life/Health Insurance (0.3%)
	185			American General Corp.					7.50				07/15/25				225,540
	460			Mantis Reef Ltd. – 144A** (Australia)					4.692				11/14/08				464,261
																	689,801
				Major Banks (0.3%)
	120			Bank of New York (The)					5.20				07/01/07				128,899
	230			Bank One Corp.					6.00				02/17/09				253,594
	290			FleetBoston Financial Corp.					7.25				09/15/05				314,823
																	697,316
				Major Telecommunications (0.9%)
	240			AT&T Corp.					8.75				11/15/31				281,606
	330			Deutsche Telekom International Finance Corp. (Netherlands)					8.75				06/15/30				419,782
	345			GTE Corp.					6.94				04/15/28				367,504
	95			Sprint Capital Corp.					8.75				03/15/32				115,782
	210			Telecom Italia Capital SpA – 144A** (Luxembourg)					4.00				11/15/08				209,691
	205			Verizon Global Funding Corp.					7.75				12/01/30				241,570
	300			Verizon New England Inc.					6.50				09/15/11				334,291
																	1,970,226
				Managed Health Care (0.5%)
	605			Aetna, Inc.					7.875				03/01/11				721,303
	105			Cigna Corp.					6.375				10/15/11				115,460
	345			Wellpoint Health Network, Inc.					6.375				06/15/06				375,204
																	1,211,967

See Notes to Financial Statements

16

Morgan Stanley Balanced Income Fund

Portfolio of Investments January 31, 2004 continued

PRINCIPAL AMOUNT IN THOUSANDS								COUPON RATE				MATURITY DATE				VALUE
				Media Conglomerates (0.5%)
$	245			AOL Time Warner, Inc.					6.125	%			04/15/06			$	263,284
	175			AOL Time Warner, Inc.					7.70				05/01/32				204,136
	405			News America Holdings, Inc.					7.28				06/30/28				458,229
	90			News America Holdings, Inc.					7.75				02/01/24				104,760
	10			News America Holdings, Inc.					8.875				04/26/23				12,988
	135			Time Warner, Inc.					6.625				05/15/29				139,366
																	1,182,763
				Motor Vehicles (0.9%)
	140			DaimlerChrysler North American Holdings Co.					7.20				09/01/09				157,911
	450			DaimlerChrysler North American Holdings Co.					7.30				01/15/12				506,446
	220			DaimlerChrysler North American Holdings Co.					8.50				01/18/31				264,200
	90			Ford Motor Co.					6.625				10/01/28				84,106
	945			Ford Motor Co.					7.45				07/16/31				962,213
																	1,974,876
				Multi-Line Insurance (1.0%)
	475			AIG SunAmerica Global Finance VI – 144A**					6.30				05/10/11				529,351
	670			Farmers Exchange Capital – 144A**					7.05				07/15/28				651,313
	120			Hartford Financial Services Group, Inc.					2.375				06/01/06				119,804
	265			Hartford Financial Services Group, Inc.					7.90				06/15/10				316,855
	575			Nationwide Mutual Insurance Co. – 144A**					7.50				02/15/24				593,808
	100			Nationwide Mutual Insurance Co. – 144A**					8.25				12/01/31				122,142
																	2,333,273
				Oil & Gas Pipelines (0.1%)
	155			Texas Eastern Transmission, L.P.					7.00				07/15/32				172,254
				Oil & Gas Production (1.2%)
	55			Kerr-McGee Corp.					5.875				09/15/06				59,164
	115			Kerr-McGee Corp.					6.875				09/15/11				128,884
	250			Kerr-McGee Corp.					7.875				09/15/31				293,997
	215			Nexen Inc. (Canada)					5.05				11/20/13				215,709
	220			PEMEX Project Funding Master Trust					7.375				12/15/14				236,500
	390			PEMEX Project Funding Master Trust					8.00				11/15/11				442,650
	610			PEMEX Project Funding Master Trust					8.625				02/01/22				677,100
	290			PEMEX Project Funding Master Trust					9.125				10/13/10				348,725
	40			Petro-Canada (Canada)					4.00				07/15/13				37,429
	195			Petro-Canada (Canada)					5.35				07/15/33				178,953
																	2,619,111

See Notes to Financial Statements

17

Morgan Stanley Balanced Income Fund

Portfolio of Investments January 31, 2004 continued

PRINCIPAL AMOUNT IN THOUSANDS								COUPON RATE				MATURITY DATE				VALUE
				Oil Refining/Marketing (0.2%)
$	145			Marathon Oil Corp.					5.375	%			06/01/07			$	155,645
	210			Marathon Oil Corp.					6.80				03/15/32				229,780
																	385,425
				Other Consumer Services (0.1%)
	60			Cendant Corp.					7.125				03/15/15				68,528
	160			Cendant Corp.					7.375				01/15/13				185,434
																	253,962
				Other Metals/Minerals (0.3%)
	180			BHP Finance USA Ltd. (Australia)					4.80				04/15/13				182,935
	415			Inco Ltd. (Canada)					7.20				09/15/32				476,698
	105			Inco Ltd. (Canada)					7.75				05/15/12				125,830
																	785,463
				Pharmaceuticals: Major (0.1%)
	145			Schering-Plough Corp.					5.30				12/01/13				149,060
				Pulp & Paper (0.2%)
	245			International Paper Co.					4.25				01/15/09				247,759
	190			Sappi Papier Holding AG – 144A** (Austria)					6.75				06/15/12				210,760
																	458,519
				Railroads (0.1%)
	105			Union Pacific Corp.					3.625				06/01/10				101,000
	110			Union Pacific Corp.					6.79				11/09/07				123,198
																	224,198
				Real Estate Development (0.5%)
	468			World Financial Properties – 144A**					6.91				09/01/13				522,736
	460			World Financial Properties – 144A**					6.95				09/01/13				515,572
																	1,038,308
				Real Estate Investment Trusts (0.5%)
	245			EOP Operating L.P.					6.763				06/15/07				271,970
	225			EOP Operating L.P.					7.25				06/15/28				249,761
	50			EOP Operating L.P.					7.50				04/19/29				57,140
	60			Rouse Co. (The)					5.375				11/26/13				60,598
	215			Simon Property Group L.P.					6.375				11/15/07				238,188
	225			Vornado Realty Trust					5.625				06/15/07				241,391
																	1,119,048

See Notes to Financial Statements

18

Morgan Stanley Balanced Income Fund

Portfolio of Investments January 31, 2004 continued

PRINCIPAL AMOUNT IN THOUSANDS								COUPON RATE				MATURITY DATE				VALUE
				Savings Banks (0.1%)
$	195			Washington Mutual, Inc.					5.50	%			01/15/13			$	203,459
	70			Washington Mutual, Inc.					8.25				04/01/10				84,602
																	288,061
				Services to the Health Industry (0.1%)
	90			Anthem Insurance – 144A**					9.125				04/01/10				113,959
				Tobacco (0.2%)
	175			Altria Group, Inc.					7.00				11/04/13				190,752
	215			Altria Group, Inc.					7.75				01/15/27				237,634
																	428,386
				Wireless Telecommunications (0.1%)
	160			AT&T Wireless Services Inc.					8.75				03/01/31				203,487
				Total Corporate Bonds (Cost $41,278,476)													43,906,039
				Foreign Government Obligation (0.2%)
	425			United Mexican States Corp. (Mexico) (Cost $492,366)					8.30				08/15/31				480,887
				U.S. Government & Agency Obligations (30.3%)
	1,300			Federal Home Loan Mortgage Corp.					5.125				11/07/13				1,306,311
	740			Tennessee Valley Authority					0.00				10/15/04				732,237
				U.S. Treasury Bonds
	5,000								5.50				08/15/28				5,296,290
	135								6.125				08/15/29				155,519
	7,700								7.625				02/15/25				10,318,909
	1,325								8.125				08/15/19				1,811,731
	6,850								8.125				08/15/21				9,462,905
	1,150								8.75				08/15/20				1,664,625
				U. S. Treasury Notes
	13,000								3.50				11/15/06				13,441,298
	3,650								3.875				02/15/13				3,605,944
	6,100								6.50				02/15/10				7,112,460
	6,245								6.75				05/15/05				6,669,953
	3,095			***					7.50				02/15/05				3,294,485

See Notes to Financial Statements

19

Morgan Stanley Balanced Income Fund

Portfolio of Investments January 31, 2004 continued

PRINCIPAL AMOUNT IN THOUSANDS								COUPON RATE				MATURITY DATE				VALUE
				U.S. Treasury Strips
$	1,000								0.00	%			05/15/11			$	751,480
	4,190								0.00				08/15/20				1,778,471
				Total U.S. Government & Agency Obligations (Cost $65,641,523)													67,402,618
				Mortgage-Backed Securities (13.3%)
				Federal Home Loan Mortgage Corp.
	1,265								6.50			08/01/29-08/01/33					1,328,745
	1,208								7.50			10/01/29-08/01/32					1,297,233
				Federal National Mortgage Assoc.
	16,201								6.50			03/01/31-06/01/33					17,007,004
	3,250								7.00				†				3,448,047
	1,621								7.00			07/01/11-07/01/32					1,723,285
	2,664								7.50			08/01/23-07/01/32					2,849,774
	1,446								8.00			05/01/24-08/01/31					1,561,143
				Government National Mortgage Assoc.
	223								7.50			08/15/25-10/15/26					239,197
	109								8.00				06/15/26				118,550
				Total Mortgage-Backed Securities (Cost $29,239,313)													29,572,978
				Asset-Backed Securities (0.5%)
				Finance/Rental/Leasing
	315			Chase Credit Card Master Trust					5.50				11/17/08				338,763
	300			Citibank Credit Issuance Trust					6.90				10/15/07				324,746
	156			Harley-Davidson Motorcycle Trust 2002-1					3.02				09/15/06				156,821
	140			MBNA Master Credit Card Trust					5.90				08/15/11				155,077
	200			Nissan Auto Receivables Owner Trust					4.80				02/15/07				204,127
				Total Asset-Backed Securities (Cost $1,122,414)													1,179,534

See Notes to Financial Statements

20

Morgan Stanley Balanced Income Fund

Portfolio of Investments January 31, 2004 continued

PRINCIPAL AMOUNT IN THOUSANDS								COUPON RATE				MATURITY DATE				VALUE
				Short-Term Investments (3.0%)
				U.S. Government Obligations (a) (0.2%)
				U.S. Treasury Bills
$	100			***					1.00	%			03/25/04			$	99,850
	100			***					0.87				03/25/04				99,870
	200			***					0.93				03/25/04				199,721
	100			***					0.945				07/15/04				99,569
				Total U.S. Government Obligations (Cost $499,018)													499,010
				Repurchase Agreement (2.8%)
	6,107			Joint repurchase agreement account (dated 01/30/04; proceeds $6,107,519) (b) (Cost $6,107,000)					1.02				02/02/04				6,107,000
				Total Short-Term Investments (Cost $6,606,018)													6,606,010
				Total Investments (Cost $201,813,752) (c) (d)									100.3	%			223,140,145
				Liabilities in Excess of Other Assets									(0.3)				(560,644	)
				Net Assets									100.0	%		$	222,579,501

ADR American Depository Receipt.

FSA Financial Security Assurance.

* Non-income producing security.

** Resale is restricted to qualified institutional investors.

*** All or a portion of this security has been physically segregated in connection with open futures contracts in an amount equal to $605,456.

† Security purchased on a forward commitment basis with an approximate principal amount and no definite maturity date; the actual principal amount and maturity date will be determined upon settlement.

(a) Purchased on a discount basis. The interest rates shown have been adjusted to reflect a money market equivalent yield.

(b) Collateralized by federal agency and U.S. Treasury obligations.

(c) Securities have been designated as collateral in a amount equal to $27,435,224 in connection with securities purchased on a forward commitment basis and open futures contracts.

(d) The aggregate cost for federal income tax purposes is $204,532,416. The aggregate gross unrealized appreciation is $19,114,475 and the aggregate gross unrealized depreciation is $506,746, resulting in net unrealized appreciation of $18,607,729.

Futures Contracts Open at January 31, 2004:

NUMBER OF CONTRACTS				LONG/SHORT				DESCRIPTION/ DELIVERY MONTH AND YEAR				UNDERLYING FACE AMOUNT AT VALUE				UNREALIZED DEPRECIATION
54				Short				U.S. Treasury Notes 5 Year March 2004				$(6,065,719)				$(65,946)
171				Short				U.S. Treasury Bonds 20 Year March 2004				(19,039,781)				(448,542)
Total unrealized depreciation																$   (514,488)

See Notes to Financial Statements

21

Morgan Stanley Balanced Income Fund

Financial Statements

Statement of Assets and Liabilities

January 31, 2004

Assets:
Investments in securities, at value (cost $201,813,752)				$	223,140,145
Receivable for:
Interest					2,159,982
Investments sold					1,359,131
Shares of beneficial interest sold					578,407
Dividends					122,959
Prepaid expenses and other assets					52,017
Total Assets					227,412,641
Liabilities:
Payable for:
Investments purchased					4,148,757
Distribution fee					182,730
Shares of beneficial interest
redeemed					168,310
Variation margin					142,594
Investment management fee					113,926
Accrued expenses and other payables					76,823
Total Liabilities					4,833,140
Net Assets				$	222,579,501
Composition of Net Assets:
Paid-in-capital				$	210,451,386
Net unrealized appreciation					20,811,905
Dividends in excess of net investment income					(451,167	)
Accumulated net realized loss					(8,232,623	)
Net Assets				$	222,579,501
Class A Shares:
Net Assets				$	7,318,289
Shares Outstanding (unlimited authorized, $.01 par value)					578,045
Net Asset Value Per Share				$	12.66
Maximum Offering Price Per Share,
(net asset value plus 5.54% of net
asset value)				$	13.36
Class B Shares:
Net Assets				$	169,135,332
Shares Outstanding (unlimited authorized, $.01 par value)					13,417,614
Net Asset Value Per Share				$	12.61
Class C Shares:
Net Assets				$	43,092,375
Shares Outstanding (unlimited authorized, $.01 par value)					3,413,133
Net Asset Value Per Share				$	12.63
Class D Shares:
Net Assets				$	3,033,505
Shares Outstanding (unlimited authorized, $.01 par value)					240,244
Net Asset Value Per Share				$	12.63

Statement of Operations

For the year ended January 31, 2004

Net Investment Income:
Income
Interest				$	5,084,653
Dividends (net of $10,834 foreign withholding tax)					1,523,377
Total Income					6,608,030
Expenses
Distribution fee (Class A shares)					12,541
Distribution fee (Class B shares)					1,573,633
Distribution fee (Class C shares)					389,121
Investment management fee					1,224,067
Transfer agent fees and expenses					245,586
Shareholder reports and notices					69,272
Registration fees					68,630
Custodian fees					54,372
Professional fees					54,185
Trustees' fees and expenses					8,619
Other					21,865
Total Expenses					3,721,891
Net Investment Income					2,886,139
Net Realized and Unrealized Gain (Loss):
Net Realized Gain (Loss) on:
Investments					7,645,079
Futures contracts					(626,556	)
Net Realized Gain					7,018,523
Net Change in Unrealized Appreciation/Depreciation on:
Investments					14,976,304
Futures contracts					(359,124	)
Net Appreciation					14,617,180
Net Gain					21,635,703
Net Increase				$	24,521,842

See Notes to Financial Statements

22

Morgan Stanley Balanced Income Fund

Financial Statements continued

Statement of Changes in Net Assets

				FOR THE YEAR ENDED JANUARY 31, 2004				FOR THE YEAR ENDED JANUARY 31, 2003
Increase (Decrease) in Net Assets:
Operations:
Net investment income				$	2,886,139			$	3,190,919
Net realized gain (loss)					7,018,523				(9,867,933	)
Net change in unrealized appreciation/depreciation					14,617,180				(1,351,196	)
Net Increase (Decrease)					24,521,842				(8,028,210	)
Dividends to Shareholders from Net Investment Income:
Class A shares					(152,122	)			(105,607	)
Class B shares					(3,159,058	)			(3,035,062	)
Class C shares					(780,828	)			(841,038	)
Class D shares					(57,992	)			(26,804	)
Total Dividends					(4,150,000	)			(4,008,511	)
Net increase from transactions in shares of beneficial interest					30,021,645				46,232,396
Net Increase					50,393,487				34,195,675
Net Assets:
Beginning of period					172,186,014				137,990,339
End of Period
(Including dividends in excess of net investment income of $451,167 and $282,752, respectively)				$	222,579,501			$	172,186,014

See Notes to Financial Statements

23

Morgan Stanley Balanced Income Fund

Notes to Financial Statements January 31, 2004

1.   Organization and Accounting Policies

Morgan Stanley Balanced Income Fund (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "Act"), as a diversified, open-end management investment company. The Fund's investment objective is to provide current income and moderate capital growth. The Fund seeks to achieve its objective by investing in investment grade fixed income securities and, to a lesser extent, common stock of companies which have a record of paying dividends and have the potential for increasing dividends and securities convertible into common stock. The Fund was organized as a Massachusetts business trust on November 23, 1994 and commenced operations on March 28, 1995. On July 28, 1997, the Fund converted to a multiple class share structure.

The Fund offers Class A shares, Class B shares, Class C shares and Class D shares. The four classes are substantially the same except that most Class A shares are subject to a sales charge imposed at the time of purchase and some Class A shares, and most Class B shares and Class C shares are subject to a contingent deferred sales charge imposed on shares redeemed within one year, six years and one year, respectively. Class D shares are not subject to a sales charge. Additionally, Class A shares, Class B shares and Class C shares incur distribution expenses.

The following is a summary of significant accounting policies:

A.   Valuation of Investments — (1) an equity portfolio security listed or traded on the New York Stock Exchange ("NYSE") or American Stock Exchange or other exchange is valued at its latest sale price prior to the time when assets are valued; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (2) an equity portfolio security listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (3) all other portfolio securities for which over-the-counter market quotations are readily available are valued at the mean between the last reported bid and asked price. In cases where a security is traded on more than one exchange, the security is valued on the exchange designated as the primary market; (4) for equity securities traded on foreign exchanges, the last reported sale price or the latest bid price may be used if there were no sales on a particular day; (5) certain portfolio securities may be valued by an outside pricing service approved by the Fund's Trustees; and; (6) when market quotations are not readily available or Morgan Stanley Investment Advisors Inc. (the "Investment Manager") determines that the latest sale price, the bid price or the mean between the last reported bid and asked price do not reflect a security's market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Fund's Trustees. Occasionally, developments affecting the closing prices of securities and other assets may occur between the times at which valuations of such securities are determined (that is, close of the foreign market on which the securities trade) and the close of business on the NYSE. If developments occur during such periods that are expected to materially affect the value of such securities, such valuations may be adjusted to reflect the

24

Morgan Stanley Balanced Income Fund

Notes to Financial Statements January 31, 2004 continued

estimated fair value of such securities as of the close of the NYSE, as determined in good faith by the Fund's Trustees or by the Investment Manager using a pricing service and/or procedures approved by the Trustees of the Fund; (7) futures are valued at the latest price published by the commodities exchange on which they trade (8) short-term debt securities having a maturity date of more than sixty days at time of purchase are valued on a mark-to-market basis until sixty days prior to maturity and thereafter at amortized cost based on their value on the 61st day. Short-term debt securities having a maturity date of sixty days or less at the time of purchase are valued at amortized cost.

B.   Accounting for Investments — Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on security transactions are determined by the identified cost method. Dividend income and other distributions are recorded on the ex-dividend date. Discounts are accreted and premiums are amortized over the life of the respective securities. Interest income is accrued daily.

C.   Repurchase Agreements — Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund, along with other affiliated entities managed by the Investment Manager, may transfer uninvested cash balances into one or more joint repurchase agreement accounts. These balances are invested in one or more repurchase agreements and are collateralized by cash, U.S. Treasury or federal agency obligations. The Fund may also invest directly with institutions in repurchase agreements. The Fund's custodian receives the collateral, which is marked-to-market daily to determine that the value of the collateral does not decrease below the repurchase price plus accrued interest.

D.   Multiple Class Allocations — Investment income, expenses (other than distribution fees), and realized and unrealized gains and losses are allocated to each class of shares based upon the relative net asset value on the date such items are recognized. Distribution fees are charged directly to the respective class.

E.   Futures Contracts — A futures contract is an agreement between two parties to buy and sell financial instruments or contracts based on financial indices at a set price on a future date. Upon entering into such a contract, the Fund is required to pledge to the broker cash, U.S. Government securities or other liquid portfolio securities equal to the minimum initial margin requirements of the applicable futures exchange. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments known as variation margin are recorded by the Fund as unrealized gains and losses. Upon closing of the contract, the Fund realizes a gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.

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

25

Morgan Stanley Balanced Income Fund

Notes to Financial Statements January 31, 2004 continued

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

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

2.   Investment Management Agreement

Pursuant to an Investment Management Agreement, the Fund pays the Investment Manager a management fee, accrued daily and payable monthly, by applying the annual rate of 0.60% to the portion of daily net assets not exceeding $500 million and 0.575% to the portion of the daily net assets in excess of $500 million.

3.   Plan of Distribution

Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the Investment Manager. The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan provides that the Fund will pay the Distributor a fee which is accrued daily and paid monthly at the following annual rates: (i) Class A – up to 0.25% of the average daily net assets of Class A; (ii) Class B – 1.0% of the average daily net assets of Class B; and (iii) Class C – up to 1.0% of the average daily net assets of Class C.

In the case of Class B shares, provided that the Plan continues in effect, any cumulative expenses incurred by the Distributor but not yet recovered may be recovered through the payment of future distribution fees from the Fund pursuant to the Plan and contingent deferred sales charges paid by investors upon redemption of Class B shares. Although there is no legal obligation for the Fund to pay expenses incurred in excess of payments made to the Distributor under the Plan and the proceeds of contingent deferred sales charges paid by investors upon redemption of shares, if for any reason the Plan is terminated, the Trustees will consider at that time the manner in which to treat such expenses. The Distributor has advised the Fund that such excess amounts totaled $8,169,913 at January 31, 2004.

In the case of Class A shares and Class C shares, expenses incurred pursuant to the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily net assets of Class A or Class C, respectively, will not be reimbursed by the Fund through payments in any subsequent year, except that expenses representing a gross sales credit to Morgan Stanley Financial Advisors or other selected broker-dealer representatives may be reimbursed in the subsequent calendar year. For the year ended January 31, 2004, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.23% and 0.99%, respectively.

The Distributor has informed the Fund that for the year ended January 31, 2004, it received contingent deferred sales charges from certain redemptions of the Fund's Class B shares and Class C shares of $462,539 and $6,874 , respectively and received $130,322 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.

26

Morgan Stanley Balanced Income Fund

Notes to Financial Statements January 31, 2004 continued

4.   Security Transactions and Transactions with Affiliates

The cost of purchases and proceeds from sales/prepayments of portfolio securities, excluding short-term investments, for the year ended January 31, 2004, aggregated $367,404,198 and $339,059,843, respectively. Included in the aforementioned are purchases and sales of U.S. Government securities of $68,403,959 and $36,672,144, respectively and purchases of $2,389,698 with other Morgan Stanley Funds.

For the year ended January 31, 2004, the Fund incurred brokerage commissions of $3,490 with Morgan Stanley & Co., Inc., an affiliate of the Investment Manager and Distributor, for portfolio transactions executed on behalf of the Fund.

Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is the Fund's transfer agent. At January 31, 2004, the Fund had transfer agent fees and expenses payable of approximately $2,600.

5.   Legal Matters

The Investment Manager, certain affiliates of the Investment Manager and certain investment companies advised by the Investment Manager or its affiliates, including the Fund, are named as defendants in a number of recently filed, similar class action complaints. These complaints generally allege that defendants, including the Fund, violated their statutory disclosure obligations and fiduciary duties by failing properly to disclose (i) that the Investment Manager and certain affiliates of the Investment Manager allegedly offered economic incentives to brokers and others to steer investors to the funds advised by the Investment Manager or its affiliates rather than funds managed by other companies, and (ii) that the funds advised by the Investment Manager or its affiliates, including the Fund, allegedly paid excessive commissions to brokers in return for their alleged efforts to steer investors to these funds. The complaints seek, among other things, unspecified compensatory damages, rescissionary damages, fees and costs. The defendants intend to move to dismiss these actions and otherwise vigorously to defend them. While the Fund believes that it has meritorious defenses, the ultimate outcome of these matters is not presently determinable at this early stage of the litigation, and no provision has been made in the Fund's financial statements for the effect, if any, of these matters.

27

Morgan Stanley Balanced Income Fund

Notes to Financial Statements January 31, 2004 continued

6.   Shares of Beneficial Interest

Transactions in shares of beneficial interest were as follows:

				FOR THE YEAR ENDED JANUARY 31, 2004								FOR THE YEAR ENDED JANUARY 31, 2003
				SHARES				AMOUNT				SHARES				AMOUNT
CLASS A SHARES
Sold					458,941			$	5,545,611				327,689			$	3,912,674
Reinvestment of dividends					8,979				108,282				5,573				65,645
Redeemed					(162,828	)			(1,962,686	)			(239,692	)			(2,786,959	)
Net increase – Class A					305,092				3,691,207				93,570				1,191,360
CLASS B SHARES
Sold					6,190,170				73,503,551				8,290,094				97,695,125
Reinvestment of dividends					183,758				2,197,677				179,210				2,103,131
Redeemed					(4,810,133	)			(57,539,950	)			(4,897,510	)			(57,560,883	)
Net increase – Class B					1,563,795				18,161,278				3,571,794				42,237,373
CLASS C SHARES
Sold					1,380,443				16,559,967				904,376				10,678,414
Reinvestment of dividends					50,778				608,265				58,065				684,235
Redeemed					(859,068	)			(10,354,912	)			(824,928	)			(9,587,655	)
Net increase – Class C					572,153				6,813,320				137,513				1,774,994
CLASS D SHARES
Sold					239,592				2,881,351				134,333				1,560,341
Reinvestment of dividends					3,633				43,824				1,695				19,695
Redeemed					(132,275	)			(1,569,335	)			(46,958	)			(551,367	)
Net increase – Class D					110,950				1,355,840				89,070				1,028,669
Net increase in Fund					2,551,990			$	30,021,645				3,891,947			$	46,232,396

7.   Purposes of and Risks Relating to Certain Financial Instruments

The Fund may invest in futures with respect to financial instruments and interest rate indexes
("futures contracts").

These future contracts involve elements of market risk in excess of the amount reflected in the Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the value of the underlying securities. Risk may also arise from the potential inability of the counterparties to meet the terms of their contracts.

28

Morgan Stanley Balanced Income Fund

Notes to Financial Statements January 31, 2004 continued

8.   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:

				FOR THE YEAR ENDED JANUARY 31, 2004				FOR THE YEAR ENDED JANUARY 31, 2003
Ordinary income				$	4,150,000			$	4,008,511
As of January 31, 2004, the tax-basis components of accumulated earnings were as follows:
Undistributed ordinary income				$	519,528
Undistributed long-term gains					—
Net accumulated earnings					519,528
Capital loss carryforward*					(6,999,142	)
Net unrealized appreciation					18,607,729
Total accumulated earnings				$	12,128,115

*During the year ended January 31, 2004 the Fund utilized $5,644,845 of its net capital loss carryforward. As of January 31, 2004, the Fund had a net capital loss carryforward of $6,999,142 which will expire on January 31, 2011 to offset future capital gains to the extent provided by regulations.

As of January 31, 2004, the Fund had temporary book/tax differences primarily attributable to capital loss deferrals on wash sales and book amortization of premiums on debt securities and permanent book/tax differences primarily attributable to losses on paydowns and tax adjustments on debt securities sold by the Fund. To reflect reclassifications arising from the permanent differences, paid-in-capital was charged $450, accumulated net realized loss was charged $1,094,996 and dividends in excess of net investment income was credited $1,095,446.

29

Morgan Stanley Balanced Income Fund

Financial Highlights

Selected ratios and per share data for a share of beneficial interest outstanding throughout each period:

				FOR THE YEAR ENDED JANUARY 31,
				2004				2003				2002				2001				2000
Class A Shares:
Selected Per Share Data:
Net asset value, beginning of period				$	11.45			$	12.35			$	12.42			$	11.80			$	12.75
Income (loss) from investment operations:
Net investment income‡					0.26				0.33				0.43				0.47				0.47
Net realized and unrealized gain (loss)					1.28				(0.84	)			(0.06	)			0.94				(0.69	)
Total income (loss) from investment operations					1.54				(0.51	)			0.37				1.41				(0.22	)
Less dividends and distributions from:
Net investment income					(0.33	)			(0.39	)			(0.44	)			(0.47	)			(0.47	)
Net realized gain					—				—				—				(0.32	)			(0.26	)
Total dividends and distributions					(0.33	)			(0.39	)			(0.44	)			(0.79	)			(0.73	)
Net asset value, end of period				$	12.66			$	11.45			$	12.35			$	12.42			$	11.80
Total Return†					13.65	%			(4.19	)%			3.13	%			12.66	%			(1.84	)%
Ratios to Average Net Assets(1):
Expenses					1.09	%			1.08	%			1.16	%			1.20	%			1.20	%
Net investment income					2.15	%			2.79	%			3.44	%			3.97	%			3.82	%
Supplemental Data:
Net assets, end of period, in thousands					$7,318				$3,125				$2,216				$2,043				$2,187
Portfolio turnover rate					174	%			173	%			99	%			21	%			35	%

‡ The per share amounts were computed using an average number of shares outstanding during the period.

† Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period.

(1) Reflects overall Fund ratios for investment income and non-class specific expenses.

See Notes to Financial Statements

30

Morgan Stanley Balanced Income Fund

Financial Highlights continued

				FOR THE YEAR ENDED JANUARY 31,
				2004				2003				2002				2001				2000
Class B Shares:
Selected Per Share Data:
Net asset value, beginning of period				$	11.40			$	12.31			$	12.39			$	11.77			$	12.74
Income (loss) from investment operations:
Net investment income‡					0.17				0.24				0.34				0.37				0.38
Net realized and unrealized gain (loss)					1.28				(0.85	)			(0.07	)			0.95				(0.71	)
Total income (loss) from investment operations					1.45				(0.61	)			0.27				1.32				(0.33	)
Less dividends and distributions from:
Net investment income					(0.24	)			(0.30	)			(0.35	)			(0.38	)			(0.38	)
Net realized gain					—				—				—				(0.32	)			(0.26	)
Total dividends and distributions					(0.24	)			(0.30	)			(0.35	)			(0.70	)			(0.64	)
Net asset value, end of period				$	12.61			$	11.40			$	12.31			$	12.39			$	11.77
Total Return†					12.77	%			(4.98	)%			2.32	%			11.82	%			(2.69	)%
Ratios to Average Net Assets(1):
Expenses					1.86	%			1.84	%			1.91	%			2.00	%			1.95	%
Net investment income					1.38	%			2.03	%			2.68	%			3.17	%			3.07	%
Supplemental Data:
Net assets, end of period, in thousands					$169,135				$135,146				$101,957				$45,803				$56,827
Portfolio turnover rate					174	%			173	%			99	%			21	%			35	%

‡ The per share amounts were computed using an average number of shares outstanding during the period.

† Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period.

(1) Reflects overall Fund ratios for investment income and non-class specific expenses.

See Notes to Financial Statements

31

Morgan Stanley Balanced Income Fund

Financial Highlights continued

				FOR THE YEAR ENDED JANUARY 31,
				2004				2003				2002				2001				2000
Class C Shares:
Selected Per Share Data:
Net asset value, beginning of period				$	11.42			$	12.33			$	12.41			$	11.78			$	12.74
Income (loss) from investment operations:
Net investment income‡					0.17				0.24				0.33				0.38				0.38
Net realized and unrealized gain (loss)					1.28				(0.85	)			(0.05	)			0.95				(0.70	)
Total income (loss) from investment operations					1.45				(0.61	)			0.28				1.33				(0.32	)
Less dividends and distributions from:
Net investment income					(0.24	)			(0.30	)			(0.36	)			(0.38	)			(0.38	)
Net realized gain					—				—				—				(0.32	)			(0.26	)
Total dividends and distributions					(0.24	)			(0.30	)			(0.36	)			(0.70	)			(0.64	)
Net asset value, end of period				$	12.63			$	11.42			$	12.33			$	12.41			$	11.78
Total Return†					12.74	%			(5.00	)%			2.32	%			11.89	%			(2.62	)%
Ratios to Average Net Assets(1):
Expenses					1.85	%			1.84	%			1.91	%			1.94	%			1.95	%
Net investment income					1.39	%			2.03	%			2.68	%			3.23	%			3.07	%
Supplemental Data:
Net assets, end of period, in thousands					$43,092				$32,439				$33,321				$24,205				$29,535
Portfolio turnover rate					174	%			173	%			99	%			21	%			35	%

‡ The per share amounts were computed using an average number of shares outstanding during the period.

† Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period.

(1) Reflects overall Fund ratios for investment income and non-class specific expenses.

See Notes to Financial Statements

32

Morgan Stanley Balanced Income Fund

Financial Highlights continued

				FOR THE YEAR ENDED JANUARY 31,
				2004				2003				2002				2001				2000
Class D Shares:
Selected Per Share Data:
Net asset value, beginning of period				$	11.42			$	12.33			$	12.40			$	11.79			$	12.75
Income (loss) from investment operations:
Net investment income‡					0.29				0.34				0.45				0.50				0.50
Net realized and unrealized gain (loss)					1.28				(0.83	)			(0.05	)			0.93				(0.70	)
Total income (loss) from investment operations					1.57				(0.49	)			0.40				1.43				(0.20	)
Less dividends and distributions from:
Net investment income					(0.36	)			(0.42	)			(0.47	)			(0.50	)			(0.50	)
Net realized gain					—				—				—				(0.32	)			(0.26	)
Total dividends and distributions					(0.36	)			(0.42	)			(0.47	)			(0.82	)			(0.76	)
Net asset value, end of period				$	12.63			$	11.42			$	12.33			$	12.40			$	11.79
Total Return†					13.94	%			(4.04	)%			3.37	%			12.88	%			(1.63	)%
Ratios to Average Net Assets(1):
Expenses					0.86	%			0.84	%			0.91	%			1.00	%			0.95	%
Net investment income					2.38	%			3.03	%			3.68	%			4.17	%			4.07	%
Supplemental Data:
Net assets, end of period, in thousands					$3,034				$1,476				$496				$107				$1,546
Portfolio turnover rate					174	%			173	%			99	%			21	%			35	%

‡ The per share amounts were computed using an average number of shares outstanding during the period.

† Calculated based on the net asset value as of the last business day of the period.

(1) Reflects overall Fund ratios for investment income and non-class specific expenses.

See Notes to Financial Statements

33

Morgan Stanley Balanced Income Fund

Independent Auditors' Report

To the Shareholders and Board of Trustees of
Morgan Stanley Balanced Income Fund:

We have audited the accompanying statement of assets and liabilities of Morgan Stanley Balanced Income Fund (the "Fund"), including the portfolio of investments, as of January 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of January 31, 2004, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Morgan Stanley Balanced Income Fund as of January 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
March 17, 2004

2004 Federal Tax Notice (unaudited)

During the fiscal year ended January 31, 2004, 31.63% of the income dividends paid by the Fund qualified for the dividends received deduction available to corporations. Additionally, please note that 33.63% of the Fund's income dividends paid during the fiscal year ended January 31, 2004 qualified for the lower income tax rate available to individuals under the Jobs and Growth Tax Relief Reconciliation Act of 2003.

Of the Fund's ordinary income dividends paid during the fiscal year, 36.22% was attributable to qualifying Federal obligations. Please consult your tax advisor to determine if any portion of the dividends you received is exempt from state income tax.

34

Morgan Stanley Balanced Income Fund

Trustee and Officer Information

Independent Trustees:

Name, Age and Address of Independent Trustee

Position(s) Held with Registrant

Term of Office and Length of Time Served*

Principal Occupation(s) During Past 5 Years**

Number of Portfolios in Fund Complex Overseen by Trustee***

Other Directorships Held by Trustee

Michael Bozic (63) c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Trustees 919 Third Avenue New York, NY

Trustee

Since April 1994

Retired; Director or Trustee of the Retail Funds (since April 1994) and the Institutional Funds (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.

208

Director of Weirton Steel Corporation.

Edwin J. Garn (71) c/o Summit Ventures LLC 1 Utah Center 201 S. Main Street Salt Lake City, UT

Trustee

Since January 1993

Director or Trustee of the Retail Funds (since January 1993) and the Institutional Funds (since July 2003); member of the Utah Regional Advisory Board of Pacific Corp.; formerly United 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).

208

Director of Franklin Covey (time management systems), BMW Bank of North America, Inc. (industrial loan corporation), United Space Alliance (joint venture between Lockheed Martin and the Boeing Company) and Nuskin Asia Pacific (multilevel marketing); member of the board of various civic and charitable organizations.

Wayne E. Hedien (69) c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Trustees 919 Third Avenue New York, NY

Trustee

Since September 1997

Retired; Director or Trustee of the Retail Funds; (Since September 1997) and the Institutional Funds (since July 2003); formerly associated with the Allstate Companies (1966-1994), most recently as 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).

208

Director of The PMI Group Inc. (private mortgage insurance); Trustee and Vice Chairman of The Field Museum of Natural History; director of various other business and charitable organizations.

35

Morgan Stanley Balanced Income Fund

Trustee and Officer Information continued

Name, Age and Address of Independent Trustee

Position(s) Held with Registrant

Term of Office and Length of Time Served*

Principal Occupation(s) During Past 5 Years**

Number of Portfolios in Fund Complex Overseen by Trustee***

Other Directorships Held by Trustee

Dr. Manuel H. Johnson (54) c/o Johnson Smick International, Inc. 2099 Pennsylvania Avenue, N.W. Suite 950 Washington, D.C.

Trustee

Since July 1991

Chairman of the Audit Committee and Director or Trustee of the Retail Funds (since July 1991) and the Institutional Funds (since July 2003); Senior Partner, Johnson Smick International, Inc., a consulting firm; 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.

208

Director of NVR, Inc. (home construction); Chairman and Trustee of the Financial Accounting Foundation (oversight organization of the Financial Accounting Standards Board); Director of RBS Greenwich Capital Holdings (financial holding company).

Joseph J. Kearns (61) PMB754 23852 Pacific Coast Highway Malibu, CA

Trustee

Since July 2003

Deputy Chairman of the Audit 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); President, Kearns & Associates LLC (investment consulting); formerly CFO of the J. Paul Getty Trust.

209

Director of Electro Rent Corporation (equipment leasing), The Ford Family Foundation, and the UCLA Foundation.

Michael E. Nugent (67) c/o Triumph Capital, L.P. 445 Park Avenue New York, NY

Trustee

Since July 1991

Chairman of the Insurance Committee and Director or Trustee of the Retail Funds (since July 1991) and the Institutional Funds (since July 2001); General Partner of Triumph Capital, L.P., a private investment partnership; formerly Vice President, Bankers Trust Company and BT Capital Corporation (1984-1988).

208

Director of various business organizations.

Fergus Reid (71) c/o Lumelite Plastics Corporation 85 Charles Colman Blvd. Pawling, NY

Trustee

Since July 2003

Chairman of the Governance Committee and Director or Trustee of the Retail Funds (since July 2003) and the Institutional Funds (since June 1992); Chairman of Lumelite Plastics Corporation.

209

Trustee and Director of certain investment companies in the JPMorgan Funds complex managed by JP Morgan Investment Management Inc.

36

Morgan Stanley Balanced Income Fund

Trustee and Officer Information continued

Interested Trustees:

Name, Age and Address of Interested Trustee

Position(s) Held with Registrant

Term of Office and Length of Time Served*

Principal Occupation(s) During Past 5 Years**

Number of Portfolios in Fund Complex Overseen by Trustee***

Other Directorships Held by Trustee

Charles A. Fiumefreddo (70) c/o Morgan Stanley Trust Harborside Financial Center, Plaza Two, Jersey City, NJ

Chairman of the Board and Trustee

Since July 1991

Chairman and Director or Trustee of the Retail Funds (since July 1991) and the Institutional Funds (since July 2003); formerly Chief Executive Officer of the Retail Funds (until September 2002).

208

None

James F. Higgins (55) c/o Morgan Stanley Trust Harborside Financial Center, Plaza Two, Jersey City, NJ

Trustee

Since June 2000

Director or Trustee of the Retail Funds (since June 2000) and the Institutional Funds (since July 2003); Senior Advisor 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).

208

Director of AXA Financial, Inc. and The Equitable Life Assurance Society of the United States (financial services).

Philip J. Purcell (60) 1585 Broadway New York, NY

Trustee

Since April 1994

Director or Trustee of the Retail Funds (since April 1994) and the Institutional Funds (since July 2003); Chairman of the Board of Directors and Chief Executive Officer of Morgan Stanley and Morgan Stanley DW Inc.; Director of the Distributor; Chairman of the Board of Directors and Chief Executive Officer of Novus Credit Services Inc.; Director and/or officer of various Morgan Stanley subsidiaries.

208

Director of American Airlines, Inc. and its parent company, AMR Corporation.

    * This is the earliest date the Trustee began serving the funds advised by Morgan Stanley Investment Advisors Inc. (the "Investment Manager") (the "Retail Funds").

  ** The dates referenced below indicating commencement of services as Director/Trustee for the Retail Funds and the funds advised by Morgan Stanley Investment Management Inc., Morgan Stanley Investments LP and Morgan Stanley AIP GP LP (the "Institutional Funds") reflect the earliest date the Director/Trustee began serving the Retail or Institutional Funds as applicable.

*** The Fund Complex includes all open-end and closed-end funds (including all of their portfolios) advised by the Investment Manager and any funds that have an investment advisor that is an affiliated person of the Investment Manager (including but not limited to Morgan Stanley Investment Management Inc. and Morgan Stanley Investments LP).

37

Morgan Stanley Balanced Income Fund

Trustee and Officer Information continued

Officers:

Name, Age and Address of Executive Officer

Position(s) Held with Registrant

Term of Office and Length of Time Served*

Principal Occupation(s) During Past 5 Years**

Mitchell M. Merin (50) 1221 Avenue of the Americas New York, NY

President

Since May 1999

President and Chief Operating Officer of Morgan Stanley Investment Management Inc.; President, Director and Chief Executive Officer of the Investment Manager and Morgan Stanley Services; 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 (since May 1999); Trustee (since July 2003) and President (since December 2002) of the Van Kampen Closed-End Funds; Trustee (since May 1999) and President (since October 2002) of the Van Kampen Open-End Funds.

Ronald E. Robison (65) 1221 Avenue of the Americas New York, NY

Executive Vice President and Principal Executive Officer

Since April 2003

Chief Global Operations Officer and Managing Director of Morgan Stanley Investment Management Inc.; Managing Director of Morgan Stanley & Co. Incorporated; Managing Director of Morgan Stanley; Managing Director, Chief Administrative Officer and Director of the Investment Manager and Morgan Stanley Services; Chief Executive Officer and Director of the Transfer Agent; Managing Director and Director of the Distributor; Executive Vice President and Principal Executive Officer of the Institutional Funds (since July 2003); previously President and Director of the Institutional Funds (March 2001-July 2003).

Barry Fink (49) 1221 Avenue of the Americas New York, NY

Vice President and General Counsel

Since February 1997

General Counsel (since May 2000) and Managing Director (since December 2000) of Morgan Stanley Investment Management; Managing Director (since December 2000), Secretary (since February 1997) and Director (since July 1998) of the Investment Manager and Morgan Stanley Services; 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 of the Retail Funds (February 1997-July 2003); previously Vice President and Assistant General Counsel of the Investment Manager and Morgan Stanley Services (February 1997-December 2001).

Joseph J. McAlinden (61) 1221 Avenue of the Americas New York, NY

Vice President

Since July 1995

Managing Director and Chief Investment Officer of the Investment Manager and Morgan Stanley Investment Management 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).

Stefanie V. Chang (37) 1221 Avenue of the Americas New York, NY

Vice President

Since July 2003

Executive Director of Morgan Stanley & Co. Incorporated and Morgan Stanley Investment Management Inc. and Vice President of the Institutional Funds (since December 1997) and the Retail Funds (since July 2003); formerly practiced law with the New York law firm of Rogers & Wells (now Clifford Chance LLP).

38

Morgan Stanley Balanced Income Fund

Trustee and Officer Information continued

Name, Age and Address of Executive Officer

Position(s) Held with Registrant

Term of Office and Length of Time Served*

Principal Occupation(s) During Past 5 Years**

Francis J. Smith (38) c/o Morgan Stanley Trust Harborside Financial Center, Plaza Two, Jersey City, NJ

Treasurer and Chief Financial Officer

Treasurer since July 2003 and Chief Financial Officer since September 2002

Executive Director of the Investment Manager and Morgan Stanley Services (since December 2001); previously Vice President of the Retail Funds (September 2002-July 2003); previously Vice President of the Investment Manager and Morgan Stanley Services (August 2000-November 2001) and Senior Manager at PricewaterhouseCoopers LLP (January 1998-August 2000).

Thomas F. Caloia (57) c/o Morgan Stanley Trust Harborside Financial Center, Plaza Two, Jersey City, NJ

Vice President

Since July 2003

Executive Director (since December 2002) and Assistant Treasurer of the Investment Manager, the Distributor and Morgan Stanley Services; previously Treasurer of the Retail Funds (April 1989-July 2003); formerly First Vice President of the Investment Manager, the Distributor and Morgan Stanley Services.

Mary E. Mullin (36) 1221 Avenue of the Americas New York, NY

Secretary

Since July 2003

Vice President of Morgan Stanley & Co. Incorporated and Morgan Stanley Investment Management Inc.; Secretary of the Institutional Funds (since June 1999) 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.

    * 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.

39

Trustees Michael Bozic Charles A. Fiumefreddo Edwin J. Garn Wayne E. Hedien James F. Higgins Dr. Manuel H. Johnson Joseph J. Kearns Michael E. Nugent Philip J. Purcell Fergus Reid Officers Charles A. Fiumefreddo Chairman of the Board Mitchell M. Merin President Ronald E. Robison Executive Vice President and Principal Executive Officer Barry Fink Vice President and General Counsel Joseph J. McAlinden Vice President Stefanie V. Chang Vice President Francis J. Smith Treasurer and Chief Financial Officer Thomas F. Caloia Vice President Mary E. Mullin Secretary Transfer Agent Morgan Stanley Trust Harborside Financial Center, Plaza Two Jersey City, New Jersey 07311 Independent Auditors Deloitte & Touche LLP Two World Financial Center New York, New York 10281 Investment Manager Morgan Stanley Investment Advisors Inc. 1221 Avenue of the Americas New York, New York 10020 This report is submitted for the general information of the shareholders of the Fund. For more detailed information about the Fund, its fees and expenses and other pertinent information, please read its Prospectus. The Fund's Statement of Additional Information contains additional information about the Fund, including its trustees. It is available, without charge, by calling (800) 869-NEWS. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective Prospectus. Read the Prospectus carefully before investing. Investments and services offered through Morgan Stanley DW Inc., member SIPC. Morgan Stanley Distributors Inc., member NASD. © 2004 Morgan Stanley 38400RPT-00-13930c04-AP-3/04		MORGAN STANLEY FUNDS
		Morgan Stanley Balanced Income Fund Annual Report January 31, 2004

Item 2.  Code of Ethics.

(a)      The Fund has adopted a code of ethics (the "Code of Ethics") that
applies to its principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by the Fund or a
third party.

(b)      No information need be disclosed pursuant to this paragraph.

(c)      Not applicable.

(d)      Not applicable.

(e)      Not applicable.

(f)

         (1)      The Fund's Code of Ethics is attached hereto as Exhibit A.

         (2)      Not applicable.

         (3)      Not applicable.


Item 3.  Audit Committee Financial Expert.

The Fund's Board of Trustees has determined that it has two "audit committee
financial experts" serving on its audit committee, each of whom are
"independent" Trustees: Dr. Manuel H. Johnson and Joseph J. Kearns. Under
applicable securities laws, a person who is determined to be an audit committee
financial expert will not be deemed an "expert" for any purpose, including
without limitation for the purposes of Section 11 of the Securities Act of 1933,
as a result of being designated or identified as an audit committee financial
expert. The designation or identification of a person as an audit committee
financial expert does not impose on such person any duties, obligations, or
liabilities that are greater than the duties, obligations, and liabilities
imposed on such person as a member of the audit committee and Board of Trustees
in the absence of such designation or identification.






Item 4.  Principal Accountant Fees and Services.

(a)(b)(c)(d) and (g).  Based on fees billed for the periods shown:

    2004
                                           REGISTRANT       COVERED ENTITIES(1)
       AUDIT FEES.....................     $32,170                N/A

       NON-AUDIT FEES
                 AUDIT-RELATED FEES...        $684(2)         $2,847,161(2)
                 TAX FEES.............      $5,893(3)           $736,810(4)
                 ALL OTHER FEES.......          $0                    $0
       TOTAL NON-AUDIT FEES...........      $6,577            $3,583,971

       TOTAL..........................     $38,747            $3,583,971


    2003
                                           REGISTRANT       COVERED ENTITIES(1)
       AUDIT FEES.....................     $31,340                N/A

       NON-AUDIT FEES
                 AUDIT-RELATED FEES...        $657(2)         $2,818,115(2)
                 TAX FEES.............      $4,950(3)           $365,427(4)
                 ALL OTHER FEES.......          $0              $501,166(5)
       TOTAL NON-AUDIT FEES...........      $5,607            $3,684,708

       TOTAL..........................     $36,947            $3,684,708

       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.




                                       2



(e)(1) The audit committee's pre-approval policies and procedures are as follows:

                                 AUDIT COMMITTEE
                          AUDIT AND NON-AUDIT SERVICES
                       PRE-APPROVAL POLICY AND PROCEDURES
                                     OF THE
                  MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS

                            AS ADOPTED JULY 31, 2003(1)


1.       STATEMENT OF PRINCIPLES

         The Audit Committee of the Board is required to review and, in its sole
discretion, pre-approve all Covered Services to be provided by the Independent
Auditors to the Fund and Covered Entities in order to assure that services
performed by the Independent Auditors do not impair the auditor's independence
from the Fund.

         The SEC has issued rules specifying the types of services that an
independent auditor may not provide to its audit client, as well as the audit
committee's administration of the engagement of the independent auditor. The
SEC's rules establish two different approaches to pre-approving services, which
the SEC considers to be equally valid. Proposed services either: may be
pre-approved without consideration of specific case-by-case services by the
Audit Committee ("general pre-approval"); or require the specific pre-approval
of the Audit Committee or its delegate ("specific pre-approval"). The Audit
Committee believes that the combination of these two approaches in this Policy
will result in an effective and efficient procedure to pre-approve services
performed by the Independent Auditors. As set forth in this Policy, unless a
type of service has received general pre-approval, it will require specific
pre-approval by the Audit Committee (or by any member of the Audit Committee to
which pre-approval authority has been delegated) if it is to be provided by the
Independent Auditors. Any proposed services exceeding pre-approved cost levels
or budgeted amounts will also require specific pre-approval by the Audit
Committee.

         The appendices to this Policy describe the Audit, Audit-related, Tax
and All Other services that have the general pre-approval of the Audit
Committee. The term of any general pre-approval is 12 months from the date of
pre-approval, unless the Audit Committee considers and provides a different
period and states otherwise. The Audit Committee will annually review and
pre-approve the services that may be provided by the Independent Auditors
without obtaining specific pre-approval from the Audit Committee. The Audit
Committee will add to or subtract from the list of general pre-approved services
from time to time, based on subsequent determinations.


---------------
(1)  This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and
     Procedures (the "Policy"), adopted as of the date above, supercedes and
     replaces all prior versions that may have been adopted from time to time.



                                       3


         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


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 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.



                                       5


         The Audit Committee has pre-approved the All Other services in Appendix
B.4. Permissible All Other services not listed in Appendix B.4 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).


7.       PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS

         Pre-approval fee levels or budgeted amounts for all services to be
provided by the Independent Auditors will be established annually by the Audit
Committee. Any proposed services exceeding these levels or amounts will require
specific pre-approval by the Audit Committee. The Audit Committee is mindful of
the overall relationship of fees for audit and non-audit services in determining
whether to pre-approve any such services.


8.       PROCEDURES

         All requests or applications for services to be provided by the
Independent Auditors that do not require specific approval by the Audit
Committee will be submitted to the Fund's Chief Financial Officer and must
include a detailed description of the services to be rendered. The Fund's Chief
Financial Officer will determine whether such services are included within the
list of services that have received the general pre-approval of the Audit
Committee. The Audit Committee will be informed on a timely basis of any such
services rendered by the Independent Auditors. Requests or applications to
provide services that require specific approval by the Audit Committee will be
submitted to the Audit Committee by both the Independent Auditors and the Fund's
Chief Financial Officer, and must include a joint statement as to whether, in
their view, the request or application is consistent with the SEC's rules on
auditor independence.

         The Audit Committee has designated the Fund's Chief Financial Officer
to monitor the performance of all services provided by the Independent Auditors
and to determine whether such services are in compliance with this Policy. The
Fund's Chief Financial Officer will report to the Audit Committee on a periodic
basis on the results of its monitoring. Both the Fund's Chief Financial Officer
and management will immediately report to the chairman of the Audit Committee
any breach of this Policy that comes to the attention of the Fund's Chief
Financial Officer or any member of management.


9.       ADDITIONAL REQUIREMENTS

         The Audit Committee has determined to take additional measures on an
annual basis to meet its responsibility to oversee the work of the Independent
Auditors and to assure the auditor's independence from the Fund, such as
reviewing a formal written statement from the Independent Auditors delineating
all relationships between the Independent Auditors and the Fund, consistent with
Independence Standards Board No.



                                       6


1, and discussing with the Independent Auditors its methods and procedures for
ensuring independence.


10.      COVERED ENTITIES

         Covered Entities include the Fund's investment adviser(s) and any
entity controlling, controlled by or under common control with the Fund's
investment adviser(s) that provides ongoing services to the Fund(s). Beginning
with non-audit service contracts entered into on or after May 6, 2003, the
Fund's audit committee must pre-approve non-audit services provided not only to
the Fund but also to the Covered Entities if the engagements relate directly to
the operations and financial reporting of the Fund. This list of Covered
Entities would include:

         Morgan Stanley Retail Funds
         ---------------------------
         Morgan Stanley Investment Advisors Inc.
         Morgan Stanley & Co. Incorporated
         Morgan Stanley DW Inc.
         Morgan Stanley Investment Management
         Morgan Stanley Investments LP
         Van Kampen Asset Management Inc.
         Morgan Stanley Services Company, Inc.
         Morgan Stanley Distributors Inc.
         Morgan Stanley Trust FSB

         Morgan Stanley Institutional Funds
         ----------------------------------
         Morgan Stanley Investment Management Inc.
         Morgan Stanley Investments LP
         Morgan Stanley & Co. Incorporated
         Morgan Stanley Distribution, Inc.
         Morgan Stanley AIP GP LP
         Morgan Stanley Alternative Investment Partners LP


(e)(2) Beginning with non-audit service contracts entered into on or after May
6, 2003, the audit committee also is required to pre-approve services to Covered
Entities to the extent that the services are determined to have a direct impact
on the operations or financial reporting of the Registrant. 100% of such
services were pre-approved by the audit committee pursuant to the Audit
Committee's pre-approval policies and procedures (attached hereto).

(f)    Not applicable.

(g)    See table above.

(h)    The audit committee of the Board of Trustees has considered whether the
provision of services other than audit services performed by the auditors to the
Registrant and



                                       7


Covered Entities is compatible with maintaining the auditors' independence in
performing audit services.


Item 5. Audit Committee of Listed Registrants.

Applicable only for reports covering periods ending on or after the earlier of
(i) the first annual shareholder meeting after January 15, 2004 or (ii) October
31, 2004.


Item 6. [Reserved.]


Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.

Applicable only to annual reports filed by closed-end funds.


Item 8. [Reserved.]


Item 9 - Controls and Procedures

(a) The Fund's principal executive officer and principal financial officer have
concluded that the Fund's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Fund in this Form N-CSR
was recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, based
upon such officers' evaluation of these controls and procedures as of a date
within 90 days of the filing date of the report.

    There were no significant changes or corrective actions with regard to
significant deficiencies or material weaknesses in the Fund's internal controls
or in other factors that could significantly affect the Fund's internal controls
subsequent to the date of their evaluation.


(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.



                                       8


Item 10 Exhibits

(a) The Code of Ethics for Principal Executive and Senior Financial Officers is
attached hereto.

(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.


                                   SIGNATURES

         Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.

Morgan Stanley Balanced Income Fund

/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
March 19, 2004

         Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.

/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
March 19, 2004

/s/ Francis Smith
Francis Smith
Principal Financial Officer
March 19, 2004









                                       9


                                                                    EXHIBIT 10 A

           CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL
                                    OFFICERS
                              ADOPTED JULY 31, 2003



I.       This Code of Ethics (the "Code") for the investment companies within
         the Morgan Stanley complex identified in Exhibit A (collectively,
         "Funds" and each, a "Fund") applies to each Fund's Principal Executive
         Officer, President, Principal Financial Officer and Treasurer (or
         persons performing similar functions) ("Covered Officers" each of whom
         are set forth in Exhibit B) for the purpose of promoting:

         o        honest and ethical conduct, including the ethical handling of
                  actual or apparent conflicts of interest between personal and
                  professional relationships.

         o        full, fair, accurate, timely and understandable disclosure in
                  reports and documents that a company files with, or submits
                  to, the Securities and Exchange Commission ("SEC") and in
                  other public communications made by the Fund;

         o        compliance with applicable laws and governmental rules and
                  regulations;

         o        prompt internal reporting of violations of the Code to an
                  appropriate person or persons identified in the Code; and

         o        accountability for adherence to the Code.

                  Each Covered Officer should adhere to a high standard of
business ethics and should be sensitive to situations that may give rise to
actual as well as apparent conflicts of interest. Any question about the
application of the Code should be referred to the General Counsel or his/her
designee (who is set forth in Exhibit C).



                                       10


II.      COVERED OFFICERS SHOULD HANDLE ETHICALLY ACTUAL AND APPARENT CONFLICTS
         OF INTEREST

         OVERVIEW. A "conflict of interest" occurs when a Covered Officer's
private interest interferes, or appears to interfere, with the interests of, or
his service to, the Fund. For example, a conflict of interest would arise if a
Covered Officer, or a member of his family, receives improper personal benefits
as a result of his position with the Fund.

         Certain conflicts of interest arise out of the relationships between
Covered Officers and the Fund and already are subject to conflict of interest
provisions in the Investment Company Act of 1940 ("Investment Company Act") and
the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example,
Covered Officers may not individually engage in certain transactions (such as
the purchase or sale of securities or other property) with the Fund because of
their status as "affiliated persons" (as defined in the Investment Company Act)
of the Fund. The Fund's and its investment adviser's compliance programs and
procedures are designed to prevent, or identify and correct, violations of these
provisions. This Code does not, and is not intended to, repeat or replace these
programs and procedures, and such conflicts fall outside the parameters of this
Code, unless or until the General Counsel determines that any violation of such
programs and procedures is also a violation of this Code.

         Although typically not presenting an opportunity for improper personal
benefit, conflicts may arise from, or as a result of, the contractual
relationship between the Fund and its investment adviser of which the Covered
Officers are also officers or employees. As a result, this Code recognizes that
the Covered Officers will, in the normal course of their duties (whether
formally for the Fund or for the investment adviser, or for both), be involved
in establishing policies and implementing decisions that will have different
effects on the Fund and its investment adviser. The participation of the Covered
Officers in such activities is inherent in the contractual relationship between
the Fund and the investment adviser and is consistent with the performance by
the Covered Officers of their duties as officers of the Fund. Thus, if performed
in conformity with the provisions of the Investment Company Act and the
Investment Advisers Act, such activities will be deemed to have been handled
ethically. In addition, it is recognized by the Funds' Boards of
Directors/Trustees ("Boards") that the Covered Officers may also be officers or
employees of one or more other investment companies covered by this or other
codes.

         Other conflicts of interest are covered by the Code, even if such
conflicts of interest are not subject to provisions in the Investment Company
Act and the Investment Advisers Act. The following list provides examples of
conflicts of interest under the Code, but Covered Officers should keep in mind
that these examples are not exhaustive. The overarching principle is that the
personal interest of a Covered Officer should not be placed improperly before
the interest of the Fund.

         Each Covered Officer must not:

         o        use his personal influence or personal relationships
                  improperly to influence investment decisions or financial
                  reporting by the Fund whereby the Covered Officer would
                  benefit personally (directly or indirectly) to the detriment
                  of the Fund;



                                       11


         o        cause the Fund to take action, or fail to take action, for the
                  individual personal benefit of the Covered Officer rather than
                  the benefit of the Fund; or

         o        use material non-public knowledge of portfolio transactions
                  made or contemplated for, or actions proposed to be taken by,
                  the Fund to trade personally or cause others to trade
                  personally in contemplation of the market effect of such
                  transactions.

         Each Covered Officer must, at the time of signing this Code, report to
the General Counsel all affiliations or significant business relationships
outside the Morgan Stanley complex and must update the report annually.

         Conflict of interest situations should always be approved by the
General Counsel and communicated to the relevant Fund or Fund's Board. Any
activity or relationship that would present such a conflict for a Covered
Officer would likely also present a conflict for the Covered Officer if an
immediate member of the Covered Officer's family living in the same household
engages in such an activity or has such a relationship. Examples of these
include:

         o        service or significant business relationships as a director on
                  the board of any public or private company;

         o        accepting directly or indirectly, anything of value, including
                  gifts and gratuities in excess of $100 per year from any
                  person or entity with which the Fund has current or
                  prospective business dealings, not including occasional meals
                  or tickets for theatre or sporting events or other similar
                  entertainment; provided it is business-related, reasonable in
                  cost, appropriate as to time and place, and not so frequent as
                  to raise any question of impropriety;

         o        any ownership interest in, or any consulting or employment
                  relationship with, any of the Fund's service providers, other
                  than its investment adviser, principal underwriter, or any
                  affiliated person thereof; and

         o        a direct or indirect financial interest in commissions,
                  transaction charges or spreads paid by the Fund for effecting
                  portfolio transactions or for selling or redeeming shares
                  other than an interest arising from the Covered Officer's
                  employment, such as compensation or equity ownership.

III.     DISCLOSURE AND COMPLIANCE

         o        Each Covered Officer should familiarize himself/herself with
                  the disclosure and compliance requirements generally
                  applicable to the Funds;

         o        each Covered Officer must not knowingly misrepresent, or cause
                  others to misrepresent, facts about the Fund to others,
                  whether within or outside the



                                       12


                  Fund, including to the Fund's Directors/Trustees and auditors,
                  or to governmental regulators and self-regulatory
                  organizations;

         o        each Covered Officer should, to the extent appropriate within
                  his area of responsibility, consult with other officers and
                  employees of the Funds and their investment advisers with the
                  goal of promoting full, fair, accurate, timely and
                  understandable disclosure in the reports and documents the
                  Funds file with, or submit to, the SEC and in other public
                  communications made by the Funds; and

         o        it is the responsibility of each Covered Officer to promote
                  compliance with the standards and restrictions imposed by
                  applicable laws, rules and regulations.

IV.      REPORTING AND ACCOUNTABILITY

         Each Covered Officer must:

         o        upon adoption of the Code (thereafter as applicable, upon
                  becoming a Covered Officer), affirm in writing to the Boards
                  that he has received, read and understands the Code;

         o        annually thereafter affirm to the Boards that he has complied
                  with the requirements of the Code;

         o        not retaliate against any other Covered Officer, other officer
                  or any employee of the Funds or their affiliated persons for
                  reports of potential violations that are made in good faith;
                  and

         o        notify the General Counsel promptly if he/she knows or
                  suspects of any violation of this Code. Failure to do so is
                  itself a violation of this Code.

         The General Counsel is responsible for applying this Code to specific
situations in which questions are presented under it and has the authority to
interpret this Code in any particular situation. However, any waivers(2) sought
by a Covered Officer must be considered by the Board of the relevant Fund or
Funds.

         The Funds will follow these procedures in investigating and enforcing
this Code:

         o        the General Counsel will take all appropriate action to
                  investigate any potential violations reported to him;


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

(2)  Item 2 of Form N-CSR defines "waiver" as "the approval by the registrant of
     a material departure from a provision of the code of ethics."



                                       13


         o        if, after such investigation, the General Counsel believes
                  that no violation has occurred, the General Counsel is not
                  required to take any further action;

         o        any matter that the General Counsel believes is a violation
                  will be reported to the relevant Fund's Audit Committee;

         o        if the directors/trustees/managing general partners who are
                  not "interested persons" as defined by the Investment Company
                  Act (the "Independent Directors/Trustees/Managing General
                  Partners") of the relevant Fund concur that a violation has
                  occurred, they will consider appropriate action, which may
                  include review of, and appropriate modifications to,
                  applicable policies and procedures; notification to
                  appropriate personnel of the investment adviser or its board;
                  or a recommendation to dismiss the Covered Officer or other
                  appropriate disciplinary actions;

         o        the Independent Directors/Trustees/Managing General Partners
                  of the relevant Fund will be responsible for granting waivers
                  of this Code, as appropriate; and

         o        any changes to or waivers of this Code will, to the extent
                  required, be disclosed as provided by SEC rules.

V.       OTHER POLICIES AND PROCEDURES

         This Code shall be the sole code of ethics adopted by the Funds for
purposes of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules and
forms applicable to registered investment companies thereunder. Insofar as other
policies or procedures of the Funds, the Funds' investment advisers, principal
underwriters, or other service providers govern or purport to govern the
behavior or activities of the Covered Officers who are subject to this Code,
they are superseded by this Code to the extent that they overlap or conflict
with the provisions of this Code unless any provision of this Code conflicts
with any applicable federal or state law, in which case the requirements of such
law will govern. The Funds' and their investment advisers' and principal
underwriters' codes of ethics under Rule 17j-1 under the Investment Company Act
and Morgan Stanley's Code of Ethics are separate requirements applying to the
Covered Officers and others, and are not part of this Code.

VI.      AMENDMENTS

         Any amendments to this Code, other than amendments to Exhibits A, B or
C, must be approved or ratified by a majority vote of the Board of each Fund,
including a majority of Independent Directors/Trustees/Managing General
Partners.



                                       14


VII.     CONFIDENTIALITY

         All reports and records prepared or maintained pursuant to this Code
will be considered confidential and shall be maintained and protected
accordingly. Except as otherwise required by law or this Code, such matters
shall not be disclosed to anyone other than the Independent
Directors/Trustees/Managing General Partners of the relevant Fund or Funds and
their counsel, the relevant Fund or Funds and their counsel and the relevant
investment adviser and its counsel.













                                       15


VIII.    INTERNAL USE

         The Code is intended solely for the internal use by the Funds and does
not constitute an admission, by or on behalf of any Fund, as to any fact,
circumstance, or legal conclusion



I have read and understand the terms of the above Code. I recognize the
responsibilities and obligations incurred by me as a result of my being subject
to the Code. I hereby agree to abide by the above Code.


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

Date:
     --------------------




                                       16


                                    EXHIBIT B

                               INSTITUTIONAL FUNDS
                                COVERED OFFICERS

                          Mitchell M. Merin - President
  Ronald E. Robison - Executive Vice President and Principal Executive Officer
            James W. Garrett - Chief Financial Officer and Treasurer

                                  RETAIL FUNDS
                                COVERED OFFICERS

                          Mitchell M. Merin - President
  Ronald E. Robison - Executive Vice President and Principal Executive Officer
               Frank Smith - Chief Financial Officer and Treasurer












                                       17


                                    EXHIBIT C

                                 GENERAL COUNSEL

                                   Barry Fink



                                       18


                                                                   EXHIBIT 10 B1

                  CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

                                 CERTIFICATIONS

I, Ronald E. Robison, certify that:

1.   I have reviewed this report on Form N-CSR of Morgan Stanley Balanced Income
     Fund;

2.   Based on my knowledge, this report does not contain any untrue statement of
     a material fact or omit to state a material fact necessary to make the
     statements made, in light of the circumstances under which such statements
     were made, not misleading with respect to the period covered by this
     report;

3.   Based on my knowledge, the financial statements and other financial
     information included in this report, fairly present in all material
     respects the financial condition, results of operations, changes in net
     assets, and cash flows (if the financial statements are required to include
     a statement of cash flows) of the registrant as of, and for, the periods
     presented in this report;

4.   The registrant's other certifying officers and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Rule 30a-3(c) under the Investment Company Act of 1940) for the
     registrant and have:

a)   designed such disclosure controls and procedures, or caused such disclosure
     controls and procedures to be designed under our supervision, to ensure
     that material information relating to the registrant, including its
     consolidated subsidiaries, is made known to us by others within those
     entities, particularly during the period in which this report is being
     prepared;

[b)  Omitted.]

c)   evaluated the effectiveness of the registrant's disclosure controls and
     procedures and presented in this report our conclusions about the
     effectiveness of the disclosure controls and procedures, as of a date
     within 90 days prior to the filing date of this report based on such
     evaluation; and

d)   disclosed in this report any change 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; and

5.   The registrant's other certifying officer(s) and I have disclosed to the
     registrant's auditors and the audit committee of the registrant's board of
     directors (or persons performing the equivalent functions):

a)   all significant deficiencies and material weaknesses in the design or
     operation of internal control over financial reporting which are reasonably
     likely to adversely affect the registrant's ability to record, process,
     summarize, and report financial information; and



                                       19


b)   any fraud, whether or not material, that involves management or other
     employees who have a significant role in the registrant's internal controls
     over financial reporting.

Date:  March 19, 2004

                                                /s/ Ronald E. Robison
                                                Ronald E. Robison
                                                Principal Executive Officer






                                       20



                                                                   EXHIBIT 10 B2

                  CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

                                 CERTIFICATIONS

I, Francis Smith, certify that:

6.   I have reviewed this report on Form N-CSR of Morgan Stanley Balanced Income
     Fund;

7.   Based on my knowledge, this report does not contain any untrue statement of
     a material fact or omit to state a material fact necessary to make the
     statements made, in light of the circumstances under which such statements
     were made, not misleading with respect to the period covered by this
     report;

8.   Based on my knowledge, the financial statements and other financial
     information included in this report, fairly present in all material
     respects the financial condition, results of operations, changes in net
     assets, and cash flows (if the financial statements are required to include
     a statement of cash flows) of the registrant as of, and for, the periods
     presented in this report;

9.   The registrant's other certifying officers and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Rule 30a-3(c) under the Investment Company Act of 1940) for the
     registrant and have:

b)   designed such disclosure controls and procedures, or caused such disclosure
     controls and procedures to be designed under our supervision, to ensure
     that material information relating to the registrant, including its
     consolidated subsidiaries, is made known to us by others within those
     entities, particularly during the period in which this report is being
     prepared;

[b)  Omitted.]

e)   evaluated the effectiveness of the registrant's disclosure controls and
     procedures and presented in this report our conclusions about the
     effectiveness of the disclosure controls and procedures, as of a date
     within 90 days prior to the filing date of this report based on such
     evaluation; and

f)   disclosed in this report any change 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; and

10.  The registrant's other certifying officer(s) and I have disclosed to the
     registrant's auditors and the audit committee of the registrant's board of
     directors (or persons performing the equivalent functions):

c)   all significant deficiencies and material weaknesses in the design or
     operation of internal control over financial reporting which are reasonably
     likely to adversely affect the registrant's ability to record, process,
     summarize, and report financial information; and



                                       21


d)   any fraud, whether or not material, that involves management or other
     employees who have a significant role in the registrant's internal controls
     over financial reporting.

Date:  March 19, 2004

                                         /s/ Francis Smith
                                         Francis Smith
                                         Principal Financial Officer



                                       22


                            SECTION 906 CERTIFICATION

                Certification Pursuant to 18 U.S.C. Section 1350,
                             As Adopted Pursuant to
                  Section 906 of the Sarbanes-Oxley Act of 2002

Morgan Stanley Balanced Income Fund

         In connection with the Report on Form N-CSR (the "Report") of the
above-named issuer for the period ended January 31, 2004 that is accompanied by
this certification, the undersigned hereby certifies that:

1.       The Report fully complies with the requirements of Section 13(a) or
         15(d) of the Securities Exchange Act of 1934; and

2.       The information contained in the Report fairly presents, in all
         material respects, the financial condition and results of operations of
         the Issuer.



Date: March 19, 2004                          /s/ Ronald E. Robison
                                              ---------------------------
                                              Ronald E. Robison
                                              Principal Executive Officer


A signed original of this written statement required by Section 906 has been
provided to Morgan Stanley Balanced Income Fund and will be retained by Morgan
Stanley Balanced Income Fund and furnished to the Securities and Exchange
Commission or its staff upon request.



                                       23



                            SECTION 906 CERTIFICATION

                Certification Pursuant to 18 U.S.C. Section 1350,
                             As Adopted Pursuant to
                  Section 906 of the Sarbanes-Oxley Act of 2002

Morgan Stanley Balanced Income Fund

         In connection with the Report on Form N-CSR (the "Report") of the
above-named issuer for the period ended January 31, 2004 that is accompanied by
this certification, the undersigned hereby certifies that:

1.       The Report fully complies with the requirements of Section 13(a) or
         15(d) of the Securities Exchange Act of 1934; and

2.       The information contained in the Report fairly presents, in all
         material respects, the financial condition and results of operations of
         the Issuer.



Date: March 19, 2004                      /s/ Francis Smith
                                          ------------------
                                          Francis Smith
                                          Principal Financial Officer


A signed original of this written statement required by Section 906 has been
provided to Morgan Stanley Balanced Income Fund and will be retained by Morgan
Stanley Balanced Income Fund and furnished to the Securities and Exchange
Commission or its staff upon request.




                                       24