<Page>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-05654
Morgan Stanley Income Trust
(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: August 31, 2005
Date of reporting period: August 31, 2005
Item 1 - Report to Shareholders
<Page>
WELCOME, SHAREHOLDER:
IN THIS REPORT, YOU'LL LEARN ABOUT HOW YOUR INVESTMENT IN MORGAN STANLEY INCOME
TRUST 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. PLEASE SEE THE PROSPECTUS FOR MORE COMPLETE
INFORMATION ON INVESTMENT RISKS.
<Page>
FUND REPORT
For the year ended August 31, 2005
TOTAL RETURN FOR THE 12 MONTHS ENDED AUGUST 31, 2005
<Table>
<Caption>
LIPPER
LEHMAN BROTHERS CORPORATE
INTERMEDIATE U.S. DEBT FUNDS
GOVERNMENT/ BBB-RATED
CLASS A CLASS B CLASS C CLASS D CREDIT INDEX(1) INDEX(2)
5.81% 5.13% 5.16% 6.03% 2.55% 5.23%
</Table>
The performance of the Fund's four share classes varies because each has
different expenses. The Fund's total returns assume the reinvestment of all
distributions but do not reflect the deduction of any applicable sales charges.
Such costs would lower performance. See Performance Summary for standardized
performance and benchmark information.
MARKET CONDITIONS
Throughout the reporting period, the Federal Open Market Committee (the "Fed")
continued the tightening cycle it began in June of 2004. In a series of eight 25
basis-point increases, the Fed brought the federal funds target rate from 1.50
percent at the start of the reporting period to 3.50 percent at the close.
Despite these steady increases, most U.S. Treasury yields see-sawed throughout
the period. Overall, the yield curve flattened as the yields of short- and
intermediate-term Treasuries rose while those of long-term Treasuries declined.
Within the corporate bond market, the period was generally uneventful until the
first quarter of 2005, when General Motors reported lower-than-expected
earnings. Shortly thereafter, the beleaguered auto manufacturer saw its debt
downgraded to below-investment grade, alongside that of Ford Motor and their
financial subsidiaries. Although the travails of the auto industry gave
investors pause, generally good corporate earnings announcements and positive
economic news helped the market regain its bearings in the following months. The
utilities sector garnered the highest gains during the annual period, while the
financials sector posted the lowest returns.
As the end of the period approached, it was apparent that the full effects of
the Fed's actions had yet to ripple through the economy. For the most part,
concerns about rising energy prices and inflation as well as faltering growth
had muted the impact of the Fed's rate increases, and the market reflected
neither underlying fundamental trends nor a more likely course for Fed policy.
Moreover, the final days of the reporting period brought heightened uncertainty
and anxiety as Hurricane Katrina unleashed catastrophic devastation to the Gulf
Coast. While the long-term economic impact remained immeasurable, the immediate
economic impact was most evident in the energy sector, as gasoline and natural
gas prices soared.
PERFORMANCE ANALYSIS
Morgan Stanley Income Trust outperformed the Lehman Brothers Intermediate U.S.
Government/Credit Index for the 12 months ended August 31, 2005, assuming no
deduction of applicable sales charges. For the same period, Class A and Class D
shares outperformed the Lipper Corporate Debt Funds BBB-Rated Index, while Class
B and Class C shares underperformed, assuming no deduction of applicable sales
charges.
A focus on corporate bonds and a reduced emphasis on government bonds buoyed
performance relative to the Lehman Brothers benchmark. The Fund's emphasis on
medium-quality investment grade credits enhanced performance during the period.
As investors sought income, medium quality credits outpaced higher quality
bonds. (Bonds with higher credit qualities typically offer lower yields.)
However, in keeping with its mandated strategy, the Fund did not invest heavily
in below-investment grade issues, which performed even more briskly. The Fund's
performance relative to the Lehman benchmark benefited from underweightings in
the energy sector and the banking and finance sector.
The Fund's overall interest rate strategy produced mixed results for the period.
The low level of interest rates across the yield curve at the beginning of the
period led us to conclude that they had little room to fall. As a result, we
kept the Fund's overall interest rate exposure below that of its benchmark. This
posture was
2
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unfavorable to the Fund's returns early in the period when the market rallied,
but was more beneficial during periods of rising rates, especially in the later
half of the period.
THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL
OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE FUND IN THE FUTURE.
PORTFOLIO COMPOSITION *
<Table>
Corporate Bonds 72.7%
U.S. Government Obligations 10.9
Asset-Backed Securities 7.2
Short-Term Investments 7.0
Foreign Government Obligations 2.1
Mortgage-Backed Securities 0.1
</Table>
LONG-TERM CREDIT ANALYSIS
<Table>
Aaa/AAA 27.8%
Aa/AA 11.2
A/A 21.8
Baa/BBB 30.0
Ba/BB 9.2
</Table>
* DOES NOT INCLUDE OUTSTANDING LONG FUTURES CONTRACTS WITH AN UNDERLYING FACE
AMOUNT OF $5,963,953 WITH UNREALIZED APPRECIATION OF $74,460 AND SHORT FUTURES
CONTRACTS WITH AN UNDERLYING FACE AMOUNT OF $18,919,813 WITH NET UNREALIZED
DEPRECIATION OF $29,185.
DATA AS OF AUGUST 31, 2005. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR
PORTFOLIO COMPOSITION ARE AS A PERCENTAGE OF TOTAL INVESTMENTS AND ALL
PERCENTAGES FOR CREDIT ANALYSIS ARE AS A PERCENTAGE OF TOTAL LONG-TERM
INVESTMENTS. THESE DATA ARE 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
THE FUND WILL NORMALLY INVEST AT LEAST 80 PERCENT OF ITS ASSETS IN INVESTMENT
GRADE FIXED-INCOME SECURITIES. THESE SECURITIES MAY INCLUDE CORPORATE DEBT
SECURITIES, PREFERRED STOCKS, U.S. GOVERNMENT SECURITIES, MORTGAGE-BACKED
SECURITIES, INCLUDING COLLATERALIZED MORTGAGE OBLIGATIONS AND COMMERCIAL
MORTGAGE-BACKED SECURITIES, ASSET-BACKED SECURITIES AND SECURITIES ISSUED BY
FOREIGN GOVERNMENTS OR CORPORATIONS. IN DECIDING WHICH SECURITIES TO BUY, HOLD
OR SELL, THE FUND'S "INVESTMENT ADVISER," MORGAN STANLEY INVESTMENT ADVISORS
INC., CONSIDERS DOMESTIC AND INTERNATIONAL ECONOMIC DEVELOPMENTS, INTEREST RATE
TRENDS, BOND RATINGS AND OTHER FACTORS RELATING TO THE ISSUERS.
FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS
EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN
ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND
AND FOURTH FISCAL QUARTERS BY FILING THE SCHEDULE ELECTRONICALLY WITH THE
SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON
FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON FORM N-CSR. MORGAN STANLEY ALSO
DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO FUND SHAREHOLDERS AND MAKES THESE
REPORTS AVAILABLE ON ITS PUBLIC WEB SITE, www.morganstanley.com. EACH MORGAN
STANLEY FUND ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC
FOR THE FUND'S FIRST AND THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES
NOT DELIVER THE REPORTS FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS,
NOR ARE THE REPORTS POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY,
HOWEVER, OBTAIN THE FORM N-Q FILINGS
3
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(AS WELL AS THE FORM N-CSR AND N-CSRS FILINGS) BY ACCESSING THE SEC'S WEB SITE,
http://www.sec.gov. YOU MAY ALSO REVIEW AND COPY THEM AT THE SEC'S PUBLIC
REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE OPERATION OF THE SEC'S
PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE SEC AT (800) SEC-0330. YOU
CAN ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT OF A DUPLICATING FEE,
BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS (publicinfo@sec.gov) OR BY
WRITING THE PUBLIC REFERENCE SECTION OF THE SEC, WASHINGTON, DC 20549-0102.
PROXY VOTING POLICY AND PROCEDURES AND PROXY VOTING RECORD
YOU MAY OBTAIN A COPY OF THE FUND'S PROXY VOTING POLICY AND PROCEDURES WITHOUT
CHARGE, UPON REQUEST, BY CALLING TOLL FREE 800-869-NEWS OR BY VISITING THE
MUTUAL FUND CENTER ON OUR WEB SITE AT www.morganstanley.com. IT IS ALSO
AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT
http://www.sec.gov.
YOU MAY OBTAIN INFORMATION REGARDING HOW THE FUND VOTED PROXIES RELATING TO
PORTFOLIO SECURITIES DURING THE MOST RECENT TWELVE-MONTH PERIOD ENDED JUNE 30 BY
VISITING THE MUTUAL FUND CENTER ON OUR WEB SITE AT www.morganstanley.com. THIS
INFORMATION IS ALSO AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB
SITE AT http://www.sec.gov.
HOUSEHOLDING NOTICE
TO REDUCE PRINTING AND MAILING COSTS, THE FUND ATTEMPTS TO ELIMINATE DUPLICATE
MAILINGS TO THE SAME ADDRESS. THE FUND DELIVERS A SINGLE COPY OF CERTAIN
SHAREHOLDER DOCUMENTS, INCLUDING SHAREHOLDER REPORTS, PROSPECTUSES AND PROXY
MATERIALS, TO INVESTORS WITH THE SAME LAST NAME WHO RESIDE AT THE SAME ADDRESS.
YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME
UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE
DOCUMENTS BY CALLING (800) 350-6414, 8:00 A.M. TO 8:00 P.M., ET. ONCE OUR
CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING
INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS.
4
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(This page has been left blank intentionally.)
5
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PERFORMANCE SUMMARY
[CHART]
PERFORMANCE OF $10,000 INVESTMENT--CLASS B
($ IN THOUSANDS)
<Table>
<Caption>
FUND^ LEHMAN(1) LIPPER CORP - BBB INDEX(2)
August 31, 1995 $ 10,000 $ 10,000 $ 10,000
August 31, 1996 $ 10,258 $ 10,444 $ 10,441
August 31, 1997 $ 11,071 $ 11,325 $ 11,663
August 31, 1998 $ 11,793 $ 12,342 $ 12,540
August 31, 1999 $ 11,902 $ 12,614 $ 12,618
August 31, 2000 $ 12,117 $ 13,405 $ 13,363
August 31, 2001 $ 13,274 $ 15,052 $ 14,793
August 31, 2002 $ 13,882 $ 16,218 $ 15,245
August 31, 2003 $ 14,108 $ 17,069 $ 16,589
August 31, 2004 $ 14,923 $ 17,934 $ 17,887
August 31, 2005 $ 15,689 $ 18,391 $ 18,822
</Table>
6
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AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED AUGUST 31, 2005
<Table>
<Caption>
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS D SHARES++
(SINCE 07/28/97) (SINCE 05/03/89) (SINCE 07/28/97) (SINCE 07/28/97)
SYMBOL IISAX IISBX IISCX IISDX
1 YEAR 5.81%(3) 5.13%(3) 5.16%(3) 6.03%(3)
1.31(4) 0.13(4) 4.16(4) --
5 YEARS 6.18(3) 5.30(3) 5.33(3) 6.13(3)
5.26(4) 4.98(4) 5.33(4) --
10 YEARS -- 4.61(3) -- --
-- 4.61(4) -- --
SINCE INCEPTION 5.12(3) 5.51(3) 4.36(3) 5.18(3)
4.56(4) 5.51(4) 4.36(4) --
</Table>
Performance data quoted represents past performance, which is no guarantee of
future results and current performance may be lower or higher than the figures
shown. For most recent month-end performance figures, please visit
www.morganstanley.com or speak with your Financial Advisor. Investment returns
and principal value will fluctuate and fund shares, when redeemed, may be worth
more or less than their original cost. The graph and table do not reflect the
deduction of taxes that a shareholder would pay on fund distributions or the
redemption of fund shares. Performance for Class A, Class B, Class C, and Class
D shares will vary due to differences in sales charges and expenses.
* THE MAXIMUM FRONT-END SALES CHARGE FOR CLASS A IS 4.25%.
** THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B IS 5.0%.
THE CDSC DECLINES TO 0% AFTER SIX YEARS.
+ THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE FOR CLASS C IS 1% FOR SHARES
REDEEMED WITHIN ONE YEAR OF PURCHASE.
++ CLASS D HAS NO SALES CHARGE.
(1) THE LEHMAN BROTHERS INTERMEDIATE U.S. GOVERNMENT/CREDIT INDEX TRACKS THE
PERFORMANCE OF U.S. GOVERNMENT AND CORPORATE OBLIGATIONS, INCLUDING U.S.
GOVERNMENT AGENCY AND TREASURY SECURITIES, AND CORPORATE AND YANKEE BONDS
WITH MATURITIES OF 1 TO 10 YEARS. INDEXES ARE UNMANAGED AND THEIR RETURNS
DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER
PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
(2) THE LIPPER CORPORATE DEBT FUNDS BBB-RATED INDEX IS AN EQUALLY-WEIGHTED
PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN
THE LIPPER CORPORATE DEBT FUNDS BBB-RATED CLASSIFICATION. THE INDEX, WHICH
IS ADJUSTED FOR CAPITAL GAINS DISTRIBUTIONS AND INCOME DIVIDENDS, IS
UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT. THERE ARE CURRENTLY
30 FUNDS REPRESENTED IN THIS INDEX.
(3) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT
THE DEDUCTION OF ANY SALES CHARGES.
(4) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND THE DEDUCTION OF
THE MAXIMUM APPLICABLE SALES CHARGE. SEE THE FUND'S CURRENT PROSPECTUS FOR
COMPLETE DETAILS ON FEES AND SALES CHARGES.
^ ENDING VALUE ASSUMING A COMPLETE REDEMPTION ON AUGUST 31, 2005.
7
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EXPENSE EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments and redemption fees;
and (2) ongoing costs, including advisory fees; distribution and service (12b-1)
fees; and other Fund expenses. This example is intended to help you understand
your ongoing costs (in dollars) of investing in the Fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period 03/01/05 - 08/31/05.
ACTUAL EXPENSES
The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table below provides information about hypothetical
expenses based on the Fund's actual expense ratio and an assumed rate of return
of 5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use this
information to compare the ongoing cost of investing in the Fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) and redemption fees. Therefore, the second line of the table is
useful in comparing ongoing costs, and will not help you determine the relative
total cost of owning different funds. In addition, if these transactional costs
were included, your costs would have been higher.
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
03/01/05 -
03/01/05 08/31/05 08/31/05
------------- ------------- ---------------
CLASS A
Actual (3.06% return) $ 1,000.00 $ 1,030.60 $ 5.37
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,019.91 $ 5.35
CLASS B
Actual (2.70% return) $ 1,000.00 $ 1,027.00 $ 8.43
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,016.89 $ 8.39
CLASS C
Actual (2.74% return) $ 1,000.00 $ 1,027.40 $ 8.43
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,016.89 $ 8.39
CLASS D
Actual (3.15% return) $ 1,000.00 $ 1,031.50 $ 4.10
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,021.17 $ 4.08
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 1.05%, 1.65%,
1.65% AND 0.80% FOR CLASS A, CLASS B, CLASS C AND CLASS D SHARES,
RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD,
MULTIPLIED BY 184/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). IF THE FUND
HAD BORNE ALL OF ITS EXPENSES, THE ANNUALIZED EXPENSE RATIOS WOULD HAVE
BEEN 1.23%, 1.83%, 1.83% AND 0.98% FOR CLASS A, CLASS B, CLASS C AND CLASS
D SHARES, RESPECTIVELY.
8
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INVESTMENT ADVISORY AGREEMENT APPROVAL
NATURE, EXTENT AND QUALITY OF SERVICES
The Board reviewed and considered the nature and extent of the investment
advisory services provided by the Investment Adviser under the Advisory
Agreement, including portfolio management, investment research and fixed income
securities trading. The Board also reviewed and considered the nature and extent
of the non-advisory, administrative services provided by the Fund's
Administrator under the Administration Agreement, including accounting,
clerical, bookkeeping, compliance, business management and planning, and the
provision of supplies, office space and utilities. (The Investment Adviser and
the Administrator together are referred to as the "Adviser" and the Advisory and
Administration Agreements together are referred to as the "Management
Agreement.") The Board also compared the nature of the services provided by the
Adviser with similar services provided by non-affiliated advisers as reported to
the Board by Lipper Inc. ("Lipper").
The Board reviewed and considered the qualifications of the portfolio managers,
the senior administrative managers and other key personnel of the Adviser who
provide the administrative and investment advisory services to the Fund. The
Board determined that the Adviser's portfolio managers and key personnel are
well qualified by education and/or training and experience to perform the
services in an efficient and professional manner. The Board concluded that the
nature and extent of the advisory and administrative services provided were
necessary and appropriate for the conduct of the business and investment
activities of the Fund. The Board also concluded that the overall quality of the
advisory and administrative services was satisfactory.
PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the Fund's performance for the one-, three- and five-year
periods ended November 30, 2004, as shown in reports provided by Lipper (the
"Lipper Reports"), compared to the performance of comparable funds selected by
Lipper (the "performance peer group"), and noted that the Fund's performance was
lower than its performance peer group average for all three periods. The Board
noted that the Fund's performance had improved, relative to its performance peer
group, from the five- to the three- to the one-year period. The Board concluded
that the Fund's performance was improving and can reasonably be expected to be
competitive with that of its performance peer group.
FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the advisory and administrative fees (together, the
"management fee") paid by the Fund under the Management Agreement and the total
expense ratio of the Fund. The Board noted that: (i) the Fund's management fee
rate was higher than the average management fee rate for funds, selected by
Lipper (the "expense peer group"), managed by other advisers with investment
strategies comparable to those of the Fund, as shown in the Lipper Report for
the Fund; but (ii) the Fund's total expense ratio was lower than the average
total expense ratio of the funds included in the Fund's expense peer group
because the Adviser had implemented a total expense cap of 0.80%. The Board
concluded that the management fee rate was competitive in light of the fact that
9
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the Adviser managed the Fund so that the total expense ratio, including the
expense cap, of the Fund was less than the total expense ratio of the funds in
the expense peer group average.
BREAKPOINTS AND ECONOMIES OF SCALE
The Board reviewed the structure of the Fund's management fee schedule under the
Management Agreement and noted that includes a breakpoint. The Board also
reviewed the level of the Fund's anticipated new management fee and noted that
the fee, as a percentage of the Fund's net assets, would decrease as net assets
increase because of the new breakpoint. The Board concluded that the Fund's
management fee would reflect economies of scale as assets increase.
PROFITABILITY OF ADVISER AND AFFILIATES
The Board considered and reviewed information concerning the costs incurred and
profits realized by the Adviser and its affiliates during the last two years
from their relationship with the Fund and the Morgan Stanley Fund Complex and
reviewed with the Controller of the Adviser the cost allocation methodology used
to determine the Adviser's profitability. Based on their review of the
information they received, the Board concluded that the profits earned by the
Adviser and its affiliates were not excessive in light of the advisory,
administrative and other services provided to the Fund.
FALL-OUT BENEFITS
The Board considered so-called "fall-out benefits" derived by the Adviser and
its affiliates from their relationship with the Fund and the Morgan Stanley Fund
Complex, such as "float" benefits derived from handling of checks for purchases
and redemptions of Fund shares through a broker-dealer affiliate of the Adviser.
The Board also considered that a broker-dealer affiliate of the Adviser receives
from the Fund 12b-1 fees for distribution and shareholder services. The Board
concluded that the float benefits were relatively small and that the 12b-1 fees
were competitive with those of other broker-dealer affiliates of investment
advisers.
SOFT DOLLAR BENEFITS
The Board considered whether the Adviser realizes any benefits from commissions
paid to brokers who execute securities transactions for the Fund ("soft
dollars"). The Board noted that the Fund invests only in fixed income
securities, which do not generate soft dollars.
ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE FUND'S NEEDS
The Board considered whether the Adviser is financially sound and has the
resources necessary to perform its obligations under the Management Agreement.
The Board noted that the Adviser's operations remain profitable, although
increased expenses in recent years have reduced the Adviser's profitability. The
Board concluded that the Adviser has the financial resources necessary to
fulfill its obligations under the Management Agreement.
10
<Page>
HISTORICAL RELATIONSHIP BETWEEN THE FUND AND THE ADVISER
The Board also reviewed and considered the historical relationship between the
Fund and the Adviser, including the organizational structure of the Adviser, the
policies and procedures formulated and adopted by the Adviser for managing the
Fund's operations and the Board's confidence in the competence and integrity of
the senior managers and key personnel of the Adviser. The Board concluded that
it is beneficial for the Fund to continue its relationship with the Adviser.
OTHER FACTORS AND CURRENT TRENDS
The Board considered the controls and procedures adopted and implemented by the
Adviser and monitored by the Fund's Chief Compliance Officer and concluded that
the conduct of business by the Adviser indicates a good faith effort on its part
to adhere to high ethical standards in the conduct of the Fund's business.
GENERAL CONCLUSION
After considering and weighing all of the above factors, the Board concluded it
would be in the best interest of the Fund and its shareholders to approve
renewal of the Management Agreement for another year.
11
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MORGAN STANLEY INCOME TRUST
PORTFOLIO OF INVESTMENTS - AUGUST 31, 2005
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
CORPORATE BONDS (72.1%)
ADVERTISING/MARKETING SERVICES (1.0%)
$ 395 Interpublic Group of Companies, Inc. (The) 5.40% 11/15/09 $ 373,167
385 WPP Finance Corp. (United Kingdom) 5.875 06/15/14 409,081
------------
782,248
------------
AEROSPACE & DEFENSE (0.9%)
175 Raytheon Co. 4.50 11/15/07 175,304
32 Raytheon Co. 6.75 08/15/07 33,359
100 Raytheon Co. 8.30 03/01/10 114,997
375 Systems 2001 Asset Trust - 144A**
(Cayman Islands) 6.664 09/15/13 407,861
------------
731,521
------------
AIR FREIGHT/COURIERS (0.5%)
125 Fedex Corp. 2.65 04/01/07 121,912
220 Fedex Corp. 7.25 02/15/11 247,115
------------
369,027
------------
AIRLINES (0.3%)
238 America West Airlines, Inc. (Series 01-1) 7.10 04/02/21 251,031
------------
APPAREL/FOOTWEAR RETAIL (0.3%)
235 Limited Brands, Inc. 6.95 03/01/33 245,827
------------
AUTO PARTS: O.E.M. (0.6%)
265 Johnson Controls, Inc. 5.00 11/15/06 266,799
130 Lear Corp. (Series B) 8.11 05/15/09 135,591
100 Meritor Automotive Inc. 6.80 02/15/09 99,000
------------
501,390
------------
BEVERAGES: ALCOHOLIC (1.3%)
485 FBG Finance Ltd. - 144A** (Australia) 5.125 06/15/15 489,156
505 Miller Brewing Co. - 144A** 4.25 08/15/08 502,080
------------
991,236
------------
BUILDING PRODUCTS (0.2%)
160 Masco Corp. 4.625 08/15/07 160,523
------------
CABLE/SATELLITE TV (1.0%)
395 Cox Communications, Inc. 4.625 01/15/10 391,906
335 Echostar DBS Corp. 6.375 10/01/11 334,581
25 Echostar DBS Corp. 6.625 10/01/14 24,906
------------
751,393
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
12
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
CONTAINERS/PACKAGING (0.7%)
$ 565 Sealed Air Corp. - 144A** 5.625% 07/15/13 $ 582,556
------------
DEPARTMENT STORES (1.9%)
1,045 May Department Stores Co., Inc. 5.95 11/01/08 1,090,105
130 May Department Stores Co., Inc. 6.875 11/01/05 130,454
260 Penny (JC) Co., Inc. 7.40 04/01/37 290,273
------------
1,510,832
------------
DRUGSTORE CHAINS (0.9%)
577 CVS Corp. - 144A** 5.789 01/10/26 620,240
53 CVS Corp. - 144A** 6.204 10/10/25 57,681
------------
677,921
------------
ELECTRIC UTILITIES (6.8%)
490 Arizona Public Service Co. 5.80 06/30/14 525,505
285 Arizona Public Service Co. 6.75 11/15/06 293,140
395 CC Funding Trust I 6.90 02/16/07 408,690
105 Cincinnati Gas & Electric Co. 5.70 09/15/12 111,271
265 Consolidated Natural Gas Co. 5.00 12/01/14 268,069
470 Consolidated Natural Gas Co. (Series B) 5.375 11/01/06 475,812
460 Consumers Energy Co. 4.80 02/17/09 463,780
475 Detroit Edison Co. (THE) 4.80 02/15/15 474,201
285 Entergy Gulf States, Inc. 3.60 06/01/08 278,310
365 Entergy Gulf States, Inc. 3.73+ 12/01/09 366,374
590 Exelon Corp. 6.75 05/01/11 651,169
315 Jersey Central Power & Light Company 5.625 05/01/16 335,317
230 Pacific Gas & Electric Co. 6.05 03/01/34 252,542
140 Panhandle Eastern Pipe Line Co. (Series B) 2.75 03/15/07 136,609
130 Public Service Electric & Gas Co.
(Series MTNB) 5.00 01/01/13 133,664
170 Texas Eastern Transmission, LP 7.00 07/15/32 207,340
------------
5,381,793
------------
ELECTRICAL PRODUCTS (0.6%)
480 Cooper Industries Inc. 5.25 07/01/07 487,714
------------
ELECTRONICS/APPLIANCES (0.3%)
260 LG Electronics Inc. - 144A** (South Korea) 5.00 06/17/10 258,519
------------
FINANCE/RENTAL/LEASING (7.3%)
510 CIT Group, Inc. 2.875 09/29/06 502,237
320 CIT Group, Inc. 7.375 04/02/07 335,246
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
$ 855 Countrywide Home Loans, Inc. (Series MTN) 3.25% 05/21/08 $ 829,919
430 Ford Motor Credit Co. 7.25 10/25/11 420,947
765 Ford Motor Credit Co. 7.375 10/28/09 762,448
60 Hertz Corp. 7.40 03/01/11 59,442
185 Hertz Corp. 7.625 06/01/12 183,604
435 MBNA Corp. 6.125 03/01/13 474,601
650 Nationwide Building Society - 144A**
(United Kingdom) 4.25 02/01/10 645,215
445 Residential Capital Corp. - 144A** 6.375 06/30/10 454,722
495 SLM Corp. (Series MTNA) 5.00 10/01/13 506,584
525 Toyota Motor Credit Corp. 5.65 01/15/07 533,890
------------
5,708,855
------------
FINANCIAL CONGLOMERATES (5.6%)
735 Chase Manhattan Corp. 6.00 02/15/09 772,553
500 Citicorp 6.375 11/15/08 530,300
235 Citigroup Inc. 5.625 08/27/12 249,726
265 Citigroup Inc. 6.00 02/21/12 286,958
810 General Electric Capital Corp.
(Series MTNA) 6.75 03/15/32 991,579
420 General Motors Acceptance Corp. 6.875 09/15/11 398,211
830 General Motors Acceptance Corp. 8.00 11/01/31 769,869
410 Prudential Funding LLC
(Series MTN) - 144A** 6.60 05/15/08 435,693
------------
4,434,889
------------
FOOD RETAIL (0.2%)
160 Safeway Inc. 6.15 03/01/06 161,027
------------
FOOD: MAJOR DIVERSIFIED (0.3%)
230 Conagra Foods, Inc. 6.00 09/15/06 232,350
------------
FOREST PRODUCTS (0.2%)
150 Weyerhaeuser Co. 6.00 08/01/06 151,928
------------
GAS DISTRIBUTORS (1.8%)
370 NiSource Finance Corp. 4.393+ 11/23/09 371,932
330 Nisource Finance Corp. 7.625 11/15/05 332,181
23 Ras Laffan Liquid Natural Gas
Co. Ltd. - 144A** (Qatar) 7.628 09/15/06 23,719
335 Ras Laffan Liquid Natural Gas
Co. Ltd. - 144A** (Qatar) 8.294 03/15/14 397,089
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
14
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
$ 320 Sempra Energy 4.621% 05/17/07 $ 321,361
------------
1,446,282
------------
HOME FURNISHINGS (0.4%)
130 Mohawk Industries, Inc. (Class C) 6.50 04/15/07 134,141
170 Mohawk Industries, Inc. (Series D) 7.20 04/15/12 193,078
------------
327,219
------------
HOME IMPROVEMENT CHAINS (0.4%)
300 Lowe's Companies, Inc. 7.50 12/15/05 302,822
------------
HOSPITAL/NURSING MANAGEMENT (0.9%)
625 HCA, Inc. 6.30 10/01/12 641,396
50 HCA, Inc. 7.875 02/01/11 55,087
------------
696,483
------------
HOTELS/RESORTS/CRUISELINES (1.5%)
695 Hyatt Equities LLC - 144A** 6.875 06/15/07 713,600
265 Marriott International, Inc. (Series E) 7.00 01/15/08 279,725
170 Starwood Hotels & Resorts Worldwide, Inc. 7.375 05/01/07 177,013
------------
1,170,338
------------
HOUSEHOLD/PERSONAL CARE (0.8%)
590 Clorox Co. (The) 3.525+ 12/14/07 591,382
------------
INDUSTRIAL CONGLOMERATES (1.5%)
515 Honeywell International, Inc. 5.125 11/01/06 520,144
315 Hutchison Whampoa International
Ltd. - 144A** (Cayman Islands) 5.45 11/24/10 326,029
340 Hutchison Whampoa International
Ltd. - 144A** (Cayman Islands) 6.50 02/13/13 367,457
------------
1,213,630
------------
INSURANCE BROKERS/SERVICES (2.7%)
1,135 Farmers Exchange Capital - 144A** 7.05 07/15/28 1,228,069
960 Marsh & McLennan Co., Inc. 5.875 08/01/33 908,446
------------
2,136,515
------------
INVESTMENT BANKS/BROKERS (0.5%)
330 Goldman Sachs Group Inc. (The) 5.25 10/15/13 339,137
60 Goldman Sachs Group Inc. (The) 6.60 01/15/12 66,225
------------
405,362
------------
LIFE/HEALTH INSURANCE (0.7%)
475 John Hancock Global Funding II - 144A** 7.90 07/02/10 547,963
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
15
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
MAJOR BANKS (2.8%)
$ 805 Bank of America Corp. 3.375% 02/17/09 $ 782,213
250 Bank of New York Co., Inc. (The) 5.20 07/01/07 254,284
560 HSBC Finance Corp. 6.75 05/15/11 619,620
475 Wachovia Bank NA (Series BKNT) 7.80 08/18/10 547,897
------------
2,204,014
------------
MAJOR TELECOMMUNICATIONS (4.5%)
630 AT&T Corp. 9.75 11/15/31 828,450
150 Deutsche Telekom International
Finance Corp. (Netherlands) 8.50 06/15/10 172,665
355 Deutsche Telekom International
Finance Corp. BV (Netherlands) 8.75 06/15/30 481,133
485 France Telecom S.A. (France) 8.75 03/01/31 680,137
80 GTE Corp. 6.36 04/15/06 81,072
345 Sprint Capital Corp. 8.75 03/15/32 482,917
310 Telecom Italia Capital SpA - 144A**
(Luxembourg 4.00 01/15/10 302,130
365 Telecom Italia Capital SpA (Luxembourg) 4.00 11/15/08 359,941
165 Verizon Global Funding Corp. 7.25 12/01/10 185,705
------------
3,574,150
------------
MANAGED HEALTH CARE (2.7%)
565 Aetna, Inc. 7.875 03/01/11 654,416
790 Health Net, Inc. 9.875 04/15/11 945,410
175 WellPoint Health Networks Inc. 6.375 06/15/06 177,726
265 WellPoint Inc. 3.75 12/14/07 260,927
55 WellPoint Inc. 4.25 12/15/09 54,583
------------
2,093,062
------------
MEDIA CONGLOMERATES (1.2%)
600 News America Holdings, Inc. 7.75 02/01/24 724,013
220 News America Inc. 7.28 06/30/28 255,017
------------
979,030
------------
MOTOR VEHICLES (1.6%)
100 DaimlerChrysler North American
Holdings Co. 8.00 06/15/10 112,299
425 DaimlerChrysler North American
Holdings Co. 8.50 01/18/31 534,605
720 General Motors Corp. 8.375 07/15/33 608,400
------------
1,255,304
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
16
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
MULTI-LINE INSURANCE (2.3%)
$ 450 AIG Sun America Global
Finance VI - 144A** 6.30% 05/10/11 $ 491,068
300 American General Finance Corp.
(Series MTNF) 5.875 07/14/06 304,193
485 American General Finance Corp.
(Series MTNH) 4.625 09/01/10 486,063
365 Equitable Life Assurance Society - 144A** 6.95 12/01/05 367,415
135 Hartford Financial Services Group, Inc. (The) 2.375 06/01/06 133,118
------------
1,781,857
------------
OIL & GAS PRODUCTION (3.1%)
145 Chesapeake Energy Corp. - 144A** 6.50 08/15/17 148,625
410 Kerr-McGee Corp. 5.875 09/15/06 417,630
230 Kerr-McGee Corp. 6.625 10/15/07 238,400
55 Pemex Project Funding Master Trust 7.375 12/15/14 62,177
210 Pemex Project Funding Master Trust 7.875 02/01/09 230,055
1,170 Pemex Project Funding Master Trust 8.00 11/15/11 1,340,235
------------
2,437,122
------------
OTHER METALS/MINERALS (0.5%)
375 Brascan Corp. (Canada) 7.125 06/15/12 423,219
------------
PROPERTY - CASUALTY INSURERS (2.1%)
645 Mantis Reef Ltd. - 144A** (Austria) 4.692 11/14/08 642,187
110 Platinum Underwriters
Holdings, Ltd. - 144A** 6.371 11/16/07 111,796
250 St. Paul Travelers 5.01 08/16/07 252,433
675 XLLIAC Global Funding - 144A** 4.80 08/10/10 681,018
------------
1,687,434
------------
PUBLISHING: NEWSPAPERS (0.5%)
415 Knight Ridder, Inc. 5.75 09/01/17 422,353
------------
PULP & PAPER (1.9%)
405 Abitibi-Consolidated Inc. (Canada) 8.55 08/01/10 416,137
245 Abitibi-Consolidated Inc. (Canada) 8.85 08/01/30 232,750
505 Bowater Canada Finance (Canada) 7.95 11/15/11 522,675
300 Sappi Papier Holding AG - 144A** (Austria) 6.75 06/15/12 314,173
------------
1,485,735
------------
RAILROADS (1.5%)
267 Burlington North Santa Fe Railway Co. 4.575 01/15/21 266,562
270 Norfolk Southern Corp. 7.35 05/15/07 283,134
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
17
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
$ 245 Union Pacific Corp. 6.625% 02/01/08 $ 257,563
210 Union Pacific Corp. 6.65 01/15/11 230,251
160 Union Pacific Corp. (Series MTNE) 6.79 11/09/07 168,170
------------
1,205,680
------------
REAL ESTATE DEVELOPMENT (0.8%)
340 World Financial Properties - 144A** 6.91 09/01/13 365,174
251 World Financial Properties - 144A** 6.95 09/01/13 269,727
------------
634,901
------------
REAL ESTATE INVESTMENT TRUSTS (0.1%)
100 EOP Operating L.P. 4.75 03/15/14 98,238
------------
REGIONAL BANKS (1.3%)
815 Marshall & Ilsley Bank (Series BKNT) 3.80 02/08/08 806,182
175 US Bancorp 5.10 07/15/07 177,786
------------
983,968
------------
SAVINGS BANKS (1.6%)
70 Household Finance Corp. 4.125 11/16/09 69,220
70 Household Finance Corp. 6.375 10/15/11 76,343
215 Household Finance Corp. 8.00 07/15/10 246,356
685 Washington Mutual Bank 5.50 01/15/13 715,948
105 Washington Mutual Inc. 8.25 04/01/10 119,642
------------
1,227,509
------------
TOBACCO (0.9%)
125 Altria Group, Inc. 7.00 11/04/13 139,810
435 Altria Group, Inc. 7.75 01/15/27 524,963
------------
664,773
------------
WIRELESS TELECOMMUNICATIONS (0.4%)
285 AT&T Wireless Services, Inc. 7.875 03/01/11 329,771
------------
TOTAL CORPORATE BONDS
(COST $55,863,655) 56,698,696
------------
ASSET-BACKED SECURITIES (7.1%)
FINANCE/RENTAL/LEASING
550 Chase Manhattan Auto Owner Trust
2004-A A4 2.83 09/15/10 536,477
350 CIT Equipment Collateral 2004-EF1 A3 3.50 09/20/08 345,706
550 Daimler Chrysler Auto Trust 2003-B A4 2.86 03/09/09 541,062
325 Ford Credit Auto Owner Trust 2005-B A3 4.17 01/15/09 325,138
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
18
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
$ 450 Harley-Davidson Motorcycle
Trust 2004-2 A2 3.56% 02/15/12 $ 445,738
600 Harley-Davidson Motorcycle Trust
2005-1 A2 3.76 12/17/12 595,001
550 Honda Auto Receivables Owner Trust
2004-1 A4 3.06 10/21/09 540,287
800 MBNA Credit Card Master Note Trust
2004-A4 A4 2.70 09/15/09 782,518
500 TXU Electric Delivery Transition
Bond Co. LLC 2004-1 A2 4.81 11/17/14 509,399
650 USAA Auto Owner Trust 2004-2 A4 3.58 02/15/11 643,306
350 Volkswagen Auto Lease Trust 2005-A A3 3.82 05/20/08 348,876
------------
TOTAL ASSET-BACKED SECURITIES
(COST $5,684,518) 5,613,508
------------
FOREIGN GOVERNMENT OBLIGATIONS (2.1%)
395 Russian Federation (Russia) - 144A** 5.00# 03/31/30 451,288
110 United Mexican States (Mexico) 8.375 01/14/11 128,535
860 United Mexican States (Mexico) 9.875 02/01/10 1,039,740
------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(COST $1,556,172) 1,619,563
------------
U.S. GOVERNMENT AGENCIES -
MORTGAGE-BACKED SECURITIES (0.1%)
21 Federal Home Loan Mortgage Corp. 7.50 09/01/30 22,556
37 Federal National Mortgage Association 7.50 09/01/29 - 04/01/32 38,836
------------
TOTAL U.S. GOVERNMENT AGENCIES -
MORTGAGE-BACKED SECURITIES
(COST $60,966) 61,392
------------
U.S. GOVERNMENT OBLIGATIONS (10.8%)
5,125 U.S. Treasury Bonds 6.125 - 6.375 08/15/27 - 08/15/29 6,567,242
1,150 U.S. Treasury Note 4.25 08/15/13 1,171,564
1,900 U.S. Treasury Strips 0.00 02/15/25 - 02/15/27 780,771
------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $8,146,288) 8,519,577
------------
SHORT-TERM INVESTMENTS (6.9%)
U.S. GOVERNMENT OBLIGATION (a) (0.1%)
100 U.S. Treasury Bill*
(COST $98,762) 3.35 01/12/06 98,762
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
19
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT (6.8%)
$ 5,374 Joint repurchase agreement account
(dated 08/31/05; proceeds $5,374,534) (b)
(COST $5,374,000) 3.575% 09/01/05 $ 5,374,000
------------
TOTAL SHORT-TERM INVESTMENTS
(COST $5,472,762) 5,472,762
------------
Total Investments
(COST $76,784,361) (c) (d) 99.1% 77,985,498
OTHER ASSETS IN EXCESS OF LIABILITIES 0.9 701,925
----- ------------
NET ASSETS 100.0% $ 78,687,423
===== ============
</Table>
- ----------
* A PORTION OF THIS SECURITY HAS BEEN PHYSICALLY SEGREGATED IN CONNECTION
WITH OPEN FUTURES CONTRACTS IN AN AMOUNT EQUAL TO $8,870.
** RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS.
# STEP UP COUPON; WILL CONVERT TO 7.5% ON APRIL 1, 2007.
+ FLOATING RATE SECURITY, RATE SHOWN IS THE RATE IN EFFECT AT AUGUST 31,
2005.
(a) PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED
TO REFLECT A MONEY MARKET EQUIVALENT YIELD.
(b) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(c) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN A AMOUNT EQUAL TO
$24,771,374 IN CONNECTION WITH OPEN FUTURES CONTRACTS.
(d) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $77,484,898. THE
AGGREGATE GROSS UNREALIZED APPRECIATION IS $1,496,739 AND THE AGGREGATE
GROSS UNREALIZED DEPRECIATION IS $996,139 RESULTING IN NET UNREALIZED
APPRECIATION OF $500,600.
FUTURES CONTRACTS OPEN AT AUGUST 31, 2005:
<Table>
<Caption>
UNREALIZED
NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE APPRECIATION
CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE (DEPRECIATION)
- ----------------------------------------------------------------------------------------------------------
49 Long U.S. Treasury Notes 10 year $ 5,491,828 $ 68,106
December 2005
4 Long U.S. Treasury Bonds 20 year 472,125 6,354
December 2005
5 Short U.S. Treasury Notes 5 year (542,656) (6,420)
September 2005
9 Short U.S. Treasury Notes 5 year (975,375) (8,214)
December 2005
27 Short U.S. Treasury Notes 2 year (5,597,438) 21,435
September 2005
57 Short U.S. Treasury Notes 2 year (11,804,344) (35,986)
December 2005
------------
Net unrealized appreciation $ 45,275
============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
20
<Page>
MORGAN STANLEY INCOME TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 2005
<Table>
ASSETS:
Investments in securities, at value
(cost $76,784,361) $ 77,985,498
Receivable for:
Interest 886,294
Shares of beneficial interest sold 61,014
Prepaid expenses and other assets 41,822
---------------
TOTAL ASSETS 78,974,628
---------------
LIABILITIES:
Payable for:
Distribution fee 39,488
Shares of beneficial interest redeemed 37,204
Investments purchased 36,642
Dividends and distributions to shareholders 17,647
Variation margin 13,701
Administration fee 5,683
Transfer agent fee 3,003
Investment advisory fee 2,113
Accrued expenses and other payables 131,724
---------------
TOTAL LIABILITIES 287,205
---------------
NET ASSETS $ 78,687,423
===============
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 84,257,940
Net unrealized appreciation 1,246,412
Dividends in excess of net
investment income (695,546)
Accumulated net realized loss (6,121,383)
---------------
NET ASSETS $ 78,687,423
===============
CLASS A SHARES:
Net Assets $ 32,037,971
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 3,319,726
NET ASSET VALUE PER SHARE $ 9.65
===============
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 4.44% OF NET ASSET VALUE) $ 10.08
===============
CLASS B SHARES:
Net Assets $ 35,738,936
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 3,733,987
NET ASSET VALUE PER SHARE $ 9.57
===============
CLASS C SHARES:
Net Assets $ 6,215,274
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 648,185
NET ASSET VALUE PER SHARE $ 9.59
===============
CLASS D SHARES:
NET ASSETS $ 4,695,242
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 492,282
NET ASSET VALUE PER SHARE $ 9.54
===============
</Table>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 2005
<Table>
NET INVESTMENT INCOME:
INTEREST INCOME $ 4,431,254
---------------
EXPENSES
Distribution fee (Class A shares) 37,054
Distribution fee (Class B shares) 493,791
Distribution fee (Class C shares) 57,123
Investment advisory fee 392,067
Transfer agent fees and expenses 114,743
Professional fees 81,125
Shareholder reports and notices 79,351
Administration fee 56,807
Registration fees 38,687
Custodian fees 29,667
Trustees' fees and expenses 8,399
Other 23,662
---------------
TOTAL EXPENSES 1,412,476
Less: amounts waived/reimbursed (131,331)
---------------
NET EXPENSES 1,281,145
---------------
NET INVESTMENT INCOME 3,150,109
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
NET REALIZED GAIN ON:
Investments 1,094,726
Futures contracts 8,707
---------------
NET REALIZED GAIN 1,103,433
---------------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments (237,528)
Futures contracts 362,706
---------------
NET APPRECIATION 125,178
---------------
NET GAIN 1,228,611
---------------
NET INCREASE $ 4,378,720
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
21
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
AUGUST 31, 2005 AUGUST 31, 2004
--------------- ---------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 3,150,109 $ 3,655,611
Net realized gain 1,103,433 62,074
Net change in unrealized appreciation 125,178 2,654,295
--------------- ---------------
NET INCREASE 4,378,720 6,371,980
--------------- ---------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A shares (753,287) (350,990)
Class B shares (2,357,036) (3,453,039)
Class C shares (284,981) (332,476)
Class D shares (258,588) (321,400)
--------------- ---------------
TOTAL DIVIDENDS (3,653,892) (4,457,905)
--------------- ---------------
NET DECREASE FROM TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST (16,476,445) (34,307,978)
--------------- ---------------
NET DECREASE (15,751,617) (32,393,903)
NET ASSETS:
Beginning of period 94,439,040 126,832,943
--------------- ---------------
END OF PERIOD
(INCLUDING DIVIDENDS IN EXCESS OF NET INVESTMENT INCOME OF $695,546
AND $549,749, RESPECTIVELY) $ 78,687,423 $ 94,439,040
=============== ===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
22
<Page>
MORGAN STANLEY INCOME TRUST
NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2005
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Income Trust (the "Fund"), formerly Morgan Stanley Quality Income
Trust, (the Fund's name changed effective April 29, 2005) 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 high
current income consistent with safety of principal. The Fund was organized as a
Massachusetts business trust on September 1, 1988 and commenced operations on
May 3, 1989. 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 eighteen
months, 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.
Effective August 29, 2005, the Board of Trustees of the Fund approved the
implementation of a 2% redemption fee on Class A shares, Class B shares, Class C
shares, and Class D shares, which is paid directly to the Fund, for shares
redeemed within seven days of purchase. The redemption fee is designed to
protect the Fund and its remaining shareholders from the effects of short-term
trading.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) certain portfolio securities may be valued by
an outside pricing service approved by the Fund's Trustees; (2) 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; (3) when
market quotations are not readily available or Morgan Stanley Investment
Advisors Inc. (the "Investment Adviser") determines that the market quotations
are not reflective of 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; and (4) short-term
debt securities having a maturity date of more than sixty days at time of
purchase are valued on a mark-to-market basis until sixty days prior to maturity
and thereafter at amortized cost based on their value on the 61st day.
Short-term debt securities having a maturity date of sixty days or less at the
time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Discounts are accreted and premiums are amortized over the life of the
respective securities. Interest income is accrued daily.
23
<Page>
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 Adviser, 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.
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 ADVISORY/ADMINISTRATION AGREEMENTS
Effective November 1, 2004, pursuant to an Investment Advisory Agreement, the
Fund pays the Investment Adviser an advisory fee, accrued daily and payable
monthly, by applying the following annual rates to the net assets of the Fund
determined as of the close of each business day: 0.42% to the portion of the
daily net assets not exceeding $500 million; 0.35% to the portion of the daily
net assets
24
<Page>
exceeding $500 million but not exceeding $1.25 billion; 0.22% to the portion of
the daily net assets in excess of $1.25 billion.
Effective November 1, 2004 pursuant to an Administration Agreement with Morgan
Stanley Services Company Inc. (the "Administrator"), an affiliate of the
Investment Adviser, the Fund pays an administration fee, accrued daily and
payable monthly, by applying the annual rate of 0.08% to the Fund's daily net
assets.
Prior to November 1, 2004, the Fund had retained the Investment Adviser to
provide administrative services and to manage the investment of the Fund's
assets pursuant to an investment management agreement pursuant to which the Fund
paid the Investment Adviser a monthly management fee accrued daily and payable
monthly, by applying the following annual rates to the net assets of the Fund
determined as of the close of each business day: 0.60% to the portion of the
daily net assets not exceeding $500 million; 0.50% to the portion of the daily
net assets exceeding $500 million but not exceeding $750 million; 0.40% to the
portion of the daily net assets exceeding $750 million but not exceeding $1
billion; and 0.30% to the portion of the daily net assets in excess of $1
billion.
For the period September 1, 2004 through August 31, 2005, the Investment Adviser
waived its fee and reimbursed expenses to the extent they exceeded 0.80%,
excluding distribution fees, of the daily net assets of the Fund.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the
"Distributor"), an affiliate of the Investment Adviser and Administrator. The
Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1
under the Act. The Plan provides that the Fund will pay the Distributor a fee
which is accrued daily and paid monthly at the following annual rates: (i) Class
A -- up to 0.25% of the average daily net assets of Class A; (ii) Class B -- up
to 0.85% of the lesser of: (a) the average daily aggregate gross sales of the
Class B shares since the inception of the Fund (not including reinvestment of
dividend or capital gain distributions) less the average daily aggregate net
asset value of the Class B shares redeemed since the Fund's inception upon which
a contingent deferred sales charge has been imposed or waived; or (b) the
average daily net assets of Class B; and (iii) Class C -- up to 0.85% 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
25
<Page>
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 $4,542,528 at August 31, 2005.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 0.85% 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 August 31, 2005, the distribution fee was accrued for Class A
shares and Class C shares at the annual rate of 0.23% and 0.82%, respectively.
The Distributor has informed the Fund that for the year ended August 31, 2005,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class B shares and Class C shares of $128,211 and $3,241, respectively
and received $25,055 in front-end sales charges from sales of the Fund's Class A
shares. The respective shareholders pay such charges which are not an expense of
the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales/prepayments of portfolio
securities, excluding short-term investments, for the year ended August 31,
2005, aggregated $38,120,599, and $56,949,066, respectively. Included in the
aforementioned are purchases and sales/prepayments of U.S. Government securities
of $13,828,450 and $5,733,902, respectively.
Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and
Distributor, is the Fund's transfer agent.
The Fund has an unfunded noncontributory defined benefit pension plan covering
certain independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on factors which include years of service and compensation. The
Trustees voted to close the plan to new participants and eliminate the future
benefits growth due to increases to compensation after July 31, 2003. Aggregate
pension costs for the year ended August 31, 2005 included in Trustees' fees and
expenses in the Statement of Operations amounted to $7,311. At August 31, 2005,
the Fund had an accrued pension liability of $62,308 which is included in
accrued expenses in the Statement of Assets and Liabilities.
The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan")
which allows each independent Trustee to defer payment of all, or a portion, of
the fees he receives for serving on the Board of Trustees. Each eligible Trustee
generally may elect to have the deferred amounts credited with a return equal to
the total return on one or more of the Morgan Stanley funds that are offered as
investment options under the Compensation Plan. Appreciation/depreciation and
distributions received
26
<Page>
from these investments are recorded with an offsetting increase/decrease in the
deferred compensation obligation and do not affect the net asset value of the
Fund.
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
AUGUST 31, 2005 AUGUST 31, 2004
-------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------- ---------- -------------
CLASS A SHARES
Sold 221,589 $ 2,132,992 704,453 $ 6,705,247
Conversion from Class B 2,729,474 25,880,591 -- --
Reinvestment of dividends 52,537 502,897 24,923 237,640
Redeemed (481,353) (4,601,088) (958,026) (9,092,170)
---------- ------------- ---------- -------------
Net increase (decrease) -- Class A 2,522,247 23,915,392 (228,650) (2,149,283)
---------- ------------- ---------- -------------
CLASS B SHARES
Sold 523,679 4,969,424 923,982 8,779,096
Conversion to Class A (2,752,699) (25,880,591) -- --
Reinvestment of dividends 160,297 1,521,702 238,171 2,253,505
Redeemed (1,965,508) (18,649,225) (4,090,065) (38,614,692)
---------- ------------- ---------- -------------
Net decrease -- Class B (4,034,231) (38,038,690) (2,927,912) (27,582,091)
---------- ------------- ---------- -------------
CLASS C SHARES
Sold 127,272 1,208,754 195,232 1,846,576
Reinvestment of dividends 22,019 209,341 25,345 240,274
Redeemed (287,875) (2,733,330) (546,505) (5,137,914)
---------- ------------- ---------- -------------
Net decrease -- Class C (138,584) (1,315,235) (325,928) (3,051,064)
---------- ------------- ---------- -------------
CLASS D SHARES
Sold 70,246 665,641 279,178 2,647,709
Reinvestment of dividends 21,317 201,615 23,723 223,653
Redeemed (201,163) (1,905,168) (466,532) (4,396,902)
---------- ------------- ---------- -------------
Net decrease -- Class D (109,600) (1,037,912) (163,631) (1,525,540)
---------- ------------- ---------- -------------
Net decrease in Fund (1,760,168) $ (16,476,445) (3,646,121) $ (34,307,978)
========== ============= ========== =============
</Table>
6. FEDERAL INCOME TAX STATUS
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary
27
<Page>
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.
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
AUGUST 31, 2005 AUGUST 31, 2004
--------------- ---------------
Ordinary income $ 3,679,846 $ 4,434,750
=============== ===============
</Table>
As of August 31, 2005, the tax-basis components of accumulated losses were as
follows:
<Table>
Undistributed ordinary income $ 73,498
Undistributed long-term gains --
------------
Net accumulated earnings 73,498
Capital loss carryforward* (6,064,561)
Temporary differences (80,054)
Net unrealized appreciation 500,600
------------
Total accumulated losses $ (5,570,517)
============
</Table>
*During the year ended August 31, 2005, the Fund utilized $455,226 of its net
capital loss carryforward. As of August 31, 2005, the Fund had a net capital
loss carryforward of $6,064,561 of which $199,882 will expire on August 31,
2006, $1,146,203 will expire on August 31, 2008, $2,891,735 will expire on
August 31, 2009, $313,469 will expire on August 31, 2010 and $1,513,272 will
expire on August 31, 2012 to offset future capital gains to the extent provided
by regulations.
As of August 31, 2005, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on wash sales, mark-to-market of open
futures contracts, dividend payable and book amortization of premiums on debt
securities and permanent book/tax differences primarily attributable to losses
on paydowns, tax adjustments on debt securities sold by the Fund and an expired
capital loss carryforward. To reflect reclassifications arising from the
permanent differences, paid-in-capital was charged $1,896,040, accumulated net
realized loss was credited $1,538,054 and dividends in excess of net investment
income was credited $357,986.
7. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
To hedge against adverse interest rate, foreign currency and market risks, the
Fund may purchase and sell interest rate, currency and index futures contracts
("futures contract").
Futures contracts involve elements of market risk in excess of the amount
reflected in the Statement of Assets and Liabilities. The Fund bears the risk of
an unfavorable change in the value of the underlying
28
<Page>
securities. Risks may also arise upon entering into these contracts from the
potential inability of the counterparties to meet the terms of their contracts.
8. LEGAL MATTERS
The Investment Adviser, certain affiliates of the Investment Adviser, certain
officers of such affiliates and certain investment companies advised by the
Investment Adviser or its affiliates, including the Fund, are named as
defendants in a consolidated class action. This consolidated action also names
as defendants certain individual Trustees and Directors of the Morgan Stanley
funds. The consolidated amended complaint, filed in the United States District
Court Southern District of New York on April 16, 2004, generally alleges that
defendants, including the Fund, violated their statutory disclosure obligations
and fiduciary duties by failing properly to disclose (i) that the Investment
Adviser and certain affiliates of the Investment Adviser allegedly offered
economic incentives to brokers and others to recommend the funds advised by the
Investment Adviser or its affiliates to investors rather than funds managed by
other companies, and (ii) that the funds advised by the Investment Adviser or
its affiliates, including the Fund, allegedly paid excessive commissions to
brokers in return for their efforts to recommend these funds to investors. The
complaint seeks, among other things, unspecified compensatory damages,
rescissionary damages, fees and costs. The defendants have moved to dismiss the
action and intend to otherwise vigorously defend it. On March 9, 2005,
Plaintiffs sought leave to supplement their complaint to assert claims on behalf
of other investors. While the Fund and Adviser believe that each has meritorious
defenses, the ultimate outcome of this matter is not presently determinable at
this early stage of the litigation, and no provision has been made in the Fund's
financial statements for the effect, if any, of this matter.
29
<Page>
MORGAN STANLEY INCOME TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<Table>
<Caption>
FOR THE YEAR ENDED AUGUST 31,
--------------------------------------------------------------------
2005 2004 2003 2002 2001
---------- ---------- ---------- ---------- ----------
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.56 $ 9.39 $ 9.53 $ 9.35 $ 8.97
---------- ---------- ---------- ---------- ----------
Income from investment operations:
Net investment income 0.38 0.35 0.20 0.37 0.52
Net realized and unrealized gain 0.16 0.26 0.01 0.19 0.38
---------- ---------- ---------- ---------- ----------
Total income from investment operations 0.54 0.61 0.21 0.56 0.90
---------- ---------- ---------- ---------- ----------
Less dividends from net investment income (0.45) (0.44) (0.35) (0.38) (0.52)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 9.65 $ 9.56 $ 9.39 $ 9.53 $ 9.35
========== ========== ========== ========== ==========
TOTAL RETURN+ 5.81% 6.57% 2.17% 6.17% 10.34%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 1.03%(2) 1.19%(2) 1.14% 1.04% 1.21%
Net investment income 4.08%(2) 3.86%(2) 2.14% 4.03% 5.71%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 32,038 $ 7,628 $ 9,636 $ 10,730 $ 4,177
Portfolio turnover rate 46% 164% 429% 400% 358%
</Table>
- ----------
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(2) IF THE FUND HAD BORNE ALL EXPENSES THAT WERE WAIVED BY THE INVESTMENT
ADVISER, THE ANNUALIZED EXPENSES AND NET INVESTMENT INCOME RATIOS WOULD
HAVE BEEN AS FOLLOWS:
<Table>
<Caption>
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO INCOME RATIO
--------------- ------- --------------
AUGUST 31, 2005 1.18% 3.93%
AUGUST 31, 2004 1.24 3.81
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
30
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED AUGUST 31,
--------------------------------------------------------------------
2005 2004 2003 2002 2001
---------- ---------- ---------- ---------- ----------
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.48 $ 9.32 $ 9.45 $ 9.35 $ 8.98
---------- ---------- ---------- ---------- ----------
Income from investment operations:
Net investment income 0.31 0.29 0.14 0.31 0.47
Net realized and unrealized gain 0.16 0.24 0.02 0.10 0.37
---------- ---------- ---------- ---------- ----------
Total income from investment operations 0.47 0.53 0.16 0.41 0.84
---------- ---------- ---------- ---------- ----------
Less dividends from net investment income (0.38) (0.37) (0.29) (0.31) (0.47)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 9.57 $ 9.48 $ 9.32 $ 9.45 $ 9.35
========== ========== ========== ========== ==========
TOTAL RETURN+ 5.13% 5.78% 1.63% 4.58% 9.55%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 1.65%(2) 1.85%(2) 1.79% 1.72% 1.84%
Net investment income 3.46%(2) 3.20%(2) 1.49% 3.35% 5.08%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 35,739 $ 73,650 $ 99,695 $ 103,238 $ 97,452
Portfolio turnover rate 46% 164% 429% 400% 358%
</Table>
- ----------
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(2) IF THE FUND HAD BORNE ALL EXPENSES THAT WERE WAIVED BY THE INVESTMENT
ADVISER, THE ANNUALIZED EXPENSES AND NET INVESTMENT INCOME RATIOS WOULD
HAVE BEEN AS FOLLOWS:
<Table>
<Caption>
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO INCOME RATIO
--------------- ------- --------------
AUGUST 31, 2005 1.80% 3.31%
AUGUST 31, 2004 1.90 3.15
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
31
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED AUGUST 31,
--------------------------------------------------------------------
2005 2004 2003 2002 2001
---------- ---------- ---------- ---------- ----------
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.50 $ 9.34 $ 9.46 $ 9.36 $ 8.99
---------- ---------- ---------- ---------- ----------
Income from investment operations:
Net investment income 0.31 0.29 0.14 0.31 0.47
Net realized and unrealized gain 0.17 0.24 0.03 0.10 0.37
---------- ---------- ---------- ---------- ----------
Total income from investment operations 0.48 0.53 0.17 0.41 0.84
---------- ---------- ---------- ---------- ----------
Less dividends from net investment income (0.39) (0.37) (0.29) (0.31) (0.47)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 9.59 $ 9.50 $ 9.34 $ 9.46 $ 9.36
========== ========== ========== ========== ==========
TOTAL RETURN+ 5.16% 5.77% 1.74% 4.57% 9.54%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 1.62%(2) 1.85%(2) 1.79% 1.72% 1.84%
Net investment income 3.49%(2) 3.20%(2) 1.49% 3.35% 5.08%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 6,215 $ 7,474 $ 10,389 $ 6,415 $ 4,226
Portfolio turnover rate 46% 164% 429% 400% 358%
</Table>
- ----------
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(2) IF THE FUND HAD BORNE ALL EXPENSES THAT WERE WAIVED BY THE INVESTMENT
ADVISER, THE ANNUALIZED EXPENSES AND NET INVESTMENT INCOME RATIOS WOULD
HAVE BEEN AS FOLLOWS:
<Table>
<Caption>
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO INCOME RATIO
--------------- ------- --------------
AUGUST 31, 2005 1.77% 3.34%
AUGUST 31, 2004 1.90 3.15
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
32
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED AUGUST 31,
--------------------------------------------------------------------
2005 2004 2003 2002 2001
---------- ---------- ---------- ---------- ----------
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.45 $ 9.29 $ 9.43 $ 9.35 $ 8.98
---------- ---------- ---------- ---------- ----------
Income from investment operations:
Net investment income 0.39 0.37 0.22 0.38 0.55
Net realized and unrealized gain 0.16 0.24 0.01 0.09 0.37
---------- ---------- ---------- ---------- ----------
Total income from investment operations 0.55 0.61 0.23 0.47 0.92
---------- ---------- ---------- ---------- ----------
Less dividends from net investment income (0.46) (0.45) (0.37) (0.39) (0.55)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 9.54 $ 9.45 $ 9.29 $ 9.43 $ 9.35
========== ========== ========== ========== ==========
TOTAL RETURN+ 6.03% 6.68% 2.39% 5.23% 10.48%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 0.80%(2) 1.00%(2) 0.94% 0.87% 0.99%
Net investment income 4.31%(2) 4.05%(2) 2.34% 4.20% 5.93%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 4,695 $ 5,687 $ 7,113 $ 11,943 $ 3,018
Portfolio turnover rate 46% 164% 429% 400% 358%
</Table>
- ----------
+ CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE
PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(2) IF THE FUND HAD BORNE ALL EXPENSES THAT WERE WAIVED BY THE INVESTMENT
ADVISER, THE ANNUALIZED EXPENSES AND NET INVESTMENT INCOME RATIOS WOULD
HAVE BEEN AS FOLLOWS:
<Table>
<Caption>
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO INCOME RATIO
--------------- ------- --------------
AUGUST 31, 2005 0.95% 4.16%
AUGUST 31, 2004 1.05 4.00
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
33
<Page>
MORGAN STANLEY INCOME TRUST
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS AND BOARD OF
TRUSTEES OF MORGAN STANLEY INCOME TRUST:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Income Trust (the "Fund"), formerly Morgan Stanley Quality Income Trust,
including the portfolio of investments, as of August 31, 2005, and the related
statements of operations for the year then ended and changes in net assets for
each of the two years in the period then ended, and the financial highlights for
each of the five years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of August 31, 2005, by correspondence with the custodian
and brokers. 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 Income Trust as of August 31, 2005, 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
OCTOBER 17, 2005
34
<Page>
MORGAN STANLEY INCOME TRUST
TRUSTEE AND OFFICER INFORMATION
INDEPENDENT TRUSTEES:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS HELD BY
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* PAST 5 YEARS** BY TRUSTEE*** TRUSTEE
- -------------------------- ----------- -------------- ------------------------------ ------------- ---------------------------
Michael Bozic (64) Trustee Since Private Investor; 197 Director of various business
Trustee of c/o Kramer April 1994 Director or Trustee of the organizations.
Levin Naftalis & Frankel Retail Funds (since April
LLP 1994) and the Institutional
Counsel to the Funds (since July 2003);
Independent Trustees formerly Vice Chairman of
1177 Avenue of the Kmart Corporation
Americas (December 1998-
New York, NY 10036 October 2000), Chairman
and Chief Executive
Officer of Levitz
Furniture Corporation
(November 1995-November
1998) and President
and Chief Executive
Officer of Hills
Department Stores (May
1991-July 1995); formerly
variously Chairman, Chief
Executive Officer,
President and Chief
Operating Officer
(1987-1991) of the Sears
Merchandise Group of
Sears, Roebuck & Co.
Edwin J. Garn (72) Trustee Since Consultant; Director or 197 Director of Franklin
1031 N. Chartwell Court January 1993 Trustee of the Retail Covey (time management
Salt Lake City, UT 84103 Funds (since January 1993) systems), BMW Bank of
and the Institutional North America, Inc.
Funds (since July 2003); (industrial loan
member of the Utah corporation), Escrow Bank
Regional Advisory Board USA (industrial loan
of Pacific Corp. (utility corporation), United
company); formerly Space Alliance (joint
Managing Director of venture between Lockheed
Summit Ventures LLC Martin and the Boeing
(lobbying and consulting Company) and Nuskin Asia
firm) (2000-2004); United Pacific (multilevel
States Senator (R-Utah) marketing); member of the
(1974-1992) and Chairman, board of various civic
Senate Banking Committee and charitable
(1980-1986), Mayor of organizations.
Salt Lake City, Utah
(1971-1974), Astronaut,
Space Shuttle Discovery
(April 12-19, 1985), and
Vice Chairman, Huntsman
Corporation (chemical
company).
Wayne E. Hedien (71) Trustee Since Retired; Director or 197 Director of The PMI Group
c/o Kramer Levin Naftalis September Trustee of the Retail Inc. (private mortgage
& Frankel LLP 1997 Funds (since September 1997) insurance); Trustee and
Counsel to the Independent and the Institutional Funds Vice Chairman of The
Trustees (since July 2003); Field Museum of Natural
1177 Avenue of the formerly associated with History; director of
Americas the Allstate Companies various other business
New York, NY 10036 (1966-1994), most recently as and charitable
Chairman of The Allstate organizations.
Corporation (March 1993-
December 1994) and
Chairman and Chief
Executive Officer of its
wholly-owned subsidiary,
Allstate Insurance
Company (July 1989-December
1994).
</Table>
35
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS HELD BY
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* PAST 5 YEARS** BY TRUSTEE*** TRUSTEE
- -------------------------- ----------- -------------- ------------------------------ ------------- ---------------------------
Dr. Manuel H. Johnson (56) Trustee Since Senior Partner, Johnson 197 Director of NVR, Inc.
c/o Johnson Smick Group, July 1991 Smick International, (home construction);
Inc. Inc., a consulting firm; Director of KFX Energy;
888 16th Street, NW Chairman of the Audit Director of RBS Greenwich
Suite 740 Committee and Director or Capital Holdings
Washington, D.C. 20006 Trustee of the Retail (financial holding
Funds (since July 1991) company).
and the Institutional
Funds (since July 2003);
Co-Chairman and a founder
of the Group of Seven
Council (G7C), an
international economic
commission; formerly Vice
Chairman of the Board of
Governors of the Federal
Reserve System and
Assistant Secretary of
the U.S. Treasury.
Joseph J. Kearns (63) Trustee Since President, Kearns & 198 Director of Electro Rent
c/o Kearns & Associates July 2003 Associates LLC Corporation (equipment
LLC (investment consulting); leasing), The Ford Family
PMB754 Deputy Chairman of the Foundation, and the UCLA
23852 Pacific Coast Highway Audit Committee and Foundation.
Malibu, CA 90265 Director or Trustee of
the Retail Funds (since
July 2003) and the
Institutional Funds (since
August 1994); previously
Chairman of the Audit
Committee of the
Institutional Funds
(October 2001-July 2003);
formerly CFO of the
J. Paul Getty Trust.
Michael E. Nugent (69) Trustee Since General Partner of 197 Director of various business
c/o Triumph Capital, L.P. July 1991 Triumph Capital, L.P., a organizations.
445 Park Avenue private investment
New York, NY 10022 partnership; Chairman of
the Insurance Committee
and Director or Trustee
of the Retail Funds
(since July 1991) and the
Institutional Funds
(since July 2001);
formerly Vice President,
Bankers Trust Company and
BT Capital Corporation
(1984-1988).
Fergus Reid (73) Trustee Since Chairman of Lumelite 198 Trustee and Director of
c/o Lumelite Plastics July 2003 Plastics Corporation; certain investment
Corporation Chairman of the companies in the
85 Charles Colman Blvd. Governance Committee and JPMorgan Funds complex
Pawling, NY 12564 Director or Trustee of the managed by J.P. Morgan
Retail Funds (since Investment Management
July 2003) and the Inc.
Institutional Funds (since
June 1992).
</Table>
36
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS HELD BY
INTERESTED TRUSTEE REGISTRANT TIME SERVED* PAST 5 YEARS** BY TRUSTEE*** TRUSTEE
- -------------------------- ----------- -------------- ------------------------------ ------------- ---------------------------
Charles A. Chairman of Since Chairman and Director or 197 None.
Fiumefreddo (72) the Board July 1991 Trustee of the Retail Funds
c/o Morgan Stanley Trust and Trustee (since July 1991) and the
Harborside Financial Institutional Funds
Center, Plaza Two, (since July 2003);
Jersey City, NJ 07311 formerly Chief Executive
Officer of the Retail Funds
(until September 2002).
James F. Higgins (57) Trustee Since Director or Trustee of 197 Director of AXA
c/o Morgan Stanley Trust June 2000 the Retail Funds (since Financial, Inc. and The
Harborside Financial June 2000) and the Equitable Life Assurance
Center, Plaza Two, Institutional Funds Society of the United
Jersey City, NJ 07311 (since July 2003); Senior States (financial
Advisor of Morgan Stanley services).
(since August 2000);
Director of the
Distributor and Dean
Witter Realty Inc.;
previously President and
Chief Operating Officer
of the Private Client
Group of Morgan Stanley
(May 1999-August 2000),
and President and Chief
Operating Officer of
Individual Securities of
Morgan Stanley (February
1997-May 1999).
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE TRUSTEE BEGAN SERVING THE FUNDS ADVISED BY
MORGAN STANLEY INVESTMENT ADVISORS INC. (THE "INVESTMENT ADVISER") (THE
"RETAIL FUNDS").
** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICES AS
DIRECTOR/TRUSTEE FOR THE RETAIL FUNDS AND THE FUNDS ADVISED BY MORGAN
STANLEY INVESTMENT MANAGEMENT INC. AND MORGAN STANLEY AIP GP LP (THE
"INSTITUTIONAL FUNDS") REFLECT THE EARLIEST DATE THE DIRECTOR/TRUSTEE BEGAN
SERVING THE RETAIL OR INSTITUTIONAL FUNDS, AS APPLICABLE.
*** THE FUND COMPLEX INCLUDES ALL OPEN-END AND CLOSED-END FUNDS (INCLUDING ALL
OF THEIR PORTFOLIOS) ADVISED BY THE INVESTMENT ADVISER AND ANY FUNDS THAT
HAVE AN INVESTMENT ADVISER THAT IS AN AFFILIATED PERSON OF THE INVESTMENT
ADVISER (INCLUDING, BUT NOT LIMITED TO, MORGAN STANLEY INVESTMENT
MANAGEMENT INC.).
37
<Page>
OFFICERS:
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- --------------------------- ------------- -------------- ----------------------------------------------
Ronald E. Robison (66) President and Since May 2003 President (since September 2005) and
1221 Avenue of the Americas Principal Principal Executive Officer of funds in the
New York, NY 10020 Executive Fund Complex (since May 2003); Managing
Officer Director of Morgan Stanley & Co. Incorporated
and Morgan Stanley; Managing Director and
Director of Morgan Stanley Investment
Management Inc., Morgan Stanley Distribution
Inc. and Morgan Stanley Distributors Inc.;
Managing Director, Chief Administrative
Officer and Director of Morgan Stanley
Investment Advisors Inc. and Morgan Stanley
Services Company Inc.; Chief Executive
Officer and Director of Morgan Stanley Trust;
Director of Morgan Stanley SICAV (since May
2004); President (since September 2005) and
Principal Executive Officer (since May 2003)
of the Van Kampen Funds; previously,
Executive Vice President (July 2003-September
2005) of funds in the Fund Complex and the
Van Kampen Funds. He was also previously
President and Director of the Institutional
Funds (March 2001-July 2003), Chief Global
Operations Officer of Morgan Stanley
Investment Management Inc. and Chief
Executive Officer and Chairman of Van Kampen
Investor Services.
Joseph J. McAlinden (62) Vice President Since July Managing Director and Chief Investment
1221 Avenue of the Americas 1995 Officer of the Investment Adviser and Morgan
New York, NY 10020 Stanley Investment Management Inc.; Chief
Investment Officer of the Van Kampen Funds;
Vice President of the Institutional Funds
(since July 2003) and the Retail Funds (since
July 1995).
Barry Fink (50) Vice President Since February General Counsel (since May 2000) and Managing
1221 Avenue of the Americas 1997 Director (since December 2000) of Morgan
New York, NY 10020 Stanley Investment Management; Managing
Director (since December 2000), Secretary
(since February 1997) and Director of the
Investment Adviser and the Administrator;
Vice President of the Retail Funds; Assistant
Secretary of Morgan Stanley DW; Vice
President of the Institutional Funds (since
July 2003); Managing Director, Secretary and
Director of the Distributor; previously
Secretary (February 1997-July 2003) and
General Counsel (February 1997-April 2004) of
the Retail Funds; Vice President and
Assistant General Counsel of the Investment
Adviser and the Administrator (February 1997-
December 2001).
Amy R. Doberman (43) Vice President Since July Managing Director and General Counsel, U.S.
1221 Avenue of the Americas 2004 Investment Management; Managing Director of
New York, NY 10020 Morgan Stanley Investment Management Inc. and
the Investment Adviser, Vice President of the
Institutional and Retail Funds (since July
2004); Vice President of the Van Kampen Funds
(since August 2004); previously, Managing
Director and General Counsel - Americas, UBS
Global Asset Management (July 2000-July 2004)
and General Counsel, Aeltus Investment
Management, Inc. (January 1997-July 2000).
Carsten Otto (41) Chief Since October Executive Director and U.S. Director of
1221 Avenue of the Americas Compliance 2004 Compliance for Morgan Stanley Investment
New York, NY 10020 Officer Management (since October 2004); Executive
Director of the Investment Adviser and Morgan
Stanley Investment Management Inc.; formerly
Assistant Secretary and Assistant General
Counsel of the Morgan Stanley Retail Funds.
</Table>
38
<Page>
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- -------------------------- ------------- -------------- ----------------------------------------------
Stefanie V. Chang (38) Vice President Since July Executive Director of Morgan Stanley & Co.
1221 Avenue of the Americas 2003 Incorporated, Morgan Stanley Investment
New York, NY 10020 Management Inc. and the Investment Adviser;
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 US LLP).
Francis J. Smith (40) Treasurer and Treasurer Executive Director of the Investment Adviser
c/o Morgan Stanley Trust Chief since July and the Administration (since December 2001);
Harborside Financial Financial 2003 and Chief previously, Vice President of the Retail
Center, Plaza Two, Officer Financial Funds (September 2002-July 2003); Vice
Jersey City, NJ 07311 Officer since President of the Investment Adviser and the
September 2002 Administrator (August 2000-November 2001) and
Senior Manager at PricewaterhouseCoopers LLP
(January 1998-August 2000).
Thomas F. Caloia (59) Vice President Since July Executive Director (since December 2002) and
c/o Morgan Stanley Trust 2003 Assistant Treasurer of the Investment
Harborside Financial Adviser, the Distributor and the
Center, Plaza Two, Administrator; previously Treasurer of the
Jersey City, NJ 07311 Retail Funds (April 1989-July 2003); formerly
First Vice President of the Investment
Adviser, the Distributor and the
Administrator.
Mary E. Mullin (38) Secretary Since July Executive Director of Morgan Stanley & Co.
1221 Avenue of the Americas 2003 Incorporated, Morgan Stanley Investment
New York, NY 10020 Management Inc. and the Investment Adviser;
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.
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE OFFICER BEGAN SERVING THE RETAIL FUNDS. EACH
OFFICER SERVES AN INDEFINITE TERM, UNTIL HIS OR HER SUCCESSOR IS ELECTED.
** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICE AS AN OFFICER
FOR THE RETAIL AND INSTITUTIONAL FUNDS REFLECT THE EARLIEST DATE THE
OFFICER BEGAN SERVING THE RETAIL OR INSTITUTIONAL FUNDS, AS APPLICABLE.
2005 FEDERAL TAX NOTICE (UNAUDITED)
Of the Fund's ordinary dividends paid during the fiscal year
ended August 31, 2005, 4.17% 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.
39
<Page>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael E. Nugent
Fergus Reid
OFFICERS
Charles A. Fiumefreddo
CHAIRMAN OF THE BOARD
Ronald E. Robison
PRESIDENT and PRINCIPAL EXECUTIVE OFFICER
Joseph J. McAlinden
VICE PRESIDENT
Barry Fink
VICE PRESIDENT
Amy R. Doberman
VICE PRESIDENT
Carsten Otto
CHIEF COMPLIANCE OFFICER
Stefanie V. Chang
VICE PRESIDENT
Francis J. Smith
TREASURER and CHIEF FINANCIAL OFFICER
Thomas F. Caloia
VICE PRESIDENT
Mary E. Mullin
SECRETARY
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT ADVISER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
This report is submitted for the general information of the shareholders of the
Fund. For more detailed information about the Fund, its fees and expenses and
other pertinent information, please read its Prospectus. The Fund's Statement of
Additional Information contains additional information about the Fund, including
its trustees. It is available, without charge, by calling (800) 869-NEWS.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective Prospectus. Read the
Prospectus carefully before investing.
Investments and services offered through Morgan Stanley DW Inc., member SIPC.
Morgan Stanley Distributors Inc., member NASD.
(C) 2005 Morgan Stanley
[MORGAN STANLEY LOGO]
38557RPT-RA05-00840P-Y08/05
[GRAPHIC]
MORGAN STANLEY FUNDS
MORGAN STANLEY
INCOME TRUST
ANNUAL REPORT
AUGUST 31, 2005
[MORGAN STANLEY LOGO]
<Page>
Item 2. Code of Ethics.
(a) The Fund has adopted a code of ethics (the "Code of Ethics") that applies
to its principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the Fund or a third
party.
(b) No information need be disclosed pursuant to this paragraph.
(c) The Fund has amended its Code of Ethics during the period covered by the
shareholder report presented in Item 1 hereto to delete from the end of the
following paragraph on page 2 of the Code the phrase "to the detriment of the
Fund.":
"Each Covered Officer must not use his personal influence or personal
relationship improperly to influence investment decisions or financial reporting
by the Fund whereby the Covered Officer would benefit personally (directly or
indirectly)."
Additionally, Exhibit B was amended to remove Mitchell M. Merin as a covered
officer.
(d) Not applicable.
(e) Not applicable.
(f)
(1) The Fund's Code of Ethics is attached hereto as Exhibit A.
(2) Not applicable.
(3) Not applicable.
Item 3. Audit Committee Financial Expert.
The Fund's Board of Trustees has determined that it has two "audit committee
financial experts" serving on its audit committee, each of whom are
"independent" Trustees: Dr. Manuel H. Johnson and Joseph J. Kearns. Under
applicable securities laws, a person who is determined to be an audit committee
financial expert will not be deemed an "expert" for any purpose, including
without limitation for the purposes of Section 11 of the Securities Act of 1933,
as a result of being designated or identified as an audit committee financial
expert. The designation or identification of a person as an audit committee
financial expert does not impose on such person any duties, obligations, or
liabilities that are greater than the duties, obligations, and liabilities
imposed on such person as a member of the audit committee and Board of Trustees
in the absence of such designation or identification.
<Page>
Item 4. Principal Accountant Fees and Services.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
2005
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 32,666 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 540 (2) $ (2)
TAX FEES $ 6,161 (3) $ (4)
ALL OTHER FEES $ - $ -
TOTAL NON-AUDIT FEES $ 6,701 $
TOTAL $ 39,367 $
</Table>
2004
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 31,830 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 452 (2) $ 5,067,400 (2)
TAX FEES $ 5,598 (3) $ 545,053 (4)
ALL OTHER FEES $ - $ - (5)
TOTAL NON-AUDIT FEES $ 6,050 $ 5,612,453
TOTAL $ 37,880 $ 5,612,453
</Table>
N/A- Not applicable, as not required by Item 4.
(1) Covered Entities include the Adviser (excluding sub-advisors) and
any entity controlling, controlled by or under common control
with the Adviser that provides ongoing services to the
Registrant.
(2) Audit-Related Fees represent assurance and related services
provided that are reasonably related to the performance of the
audit of the financial statements of the Covered Entities' and
funds advised by the Adviser or its affiliates, specifically data
verification and agreed-upon procedures related to asset
securitizations and agreed-upon procedures engagements.
(3) Tax Fees represent tax compliance, tax planning and tax advice
services provided in connection with the preparation and review
of the Registrant's tax returns.
(4) Tax Fees represent tax compliance, tax planning and tax advice
services provided in connection with the review of Covered
Entities' tax returns.
(5) All other fees represent project management for future business
applications and improving business and operational processes.
<Page>
(e)(1) The audit committee's pre-approval policies and procedures are as
follows:
APPENDIX A
AUDIT COMMITTEE
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS
AS ADOPTED AND AMENDED JULY 23, 2004,(1)
1. STATEMENT OF PRINCIPLES
The Audit Committee of the Board is required to review and, in its sole
discretion, pre-approve all Covered Services to be provided by the Independent
Auditors to the Fund and Covered Entities in order to assure that services
performed by the Independent Auditors do not impair the auditor's independence
from the Fund.
The SEC has issued rules specifying the types of services that an independent
auditor may not provide to its audit client, as well as the audit committee's
administration of the engagement of the independent auditor. The SEC's rules
establish two different approaches to pre-approving services, which the SEC
considers to be equally valid. Proposed services either: may be pre-approved
without consideration of specific case-by-case services by the Audit Committee
("GENERAL PRE-APPROVAL"); or require the specific pre-approval of the Audit
Committee or its delegate ("SPECIFIC PRE-APPROVAL"). The Audit Committee
believes that the combination of these two approaches in this Policy will result
in an effective and efficient procedure to pre-approve services performed by the
Independent Auditors. As set forth in this Policy, unless a type of service has
received general pre-approval, it will require specific pre-approval by the
Audit Committee (or by any member of the Audit Committee to which pre-approval
authority has been delegated) if it is to be provided by the Independent
Auditors. Any proposed services exceeding pre-approved cost levels or budgeted
amounts will also require specific pre-approval by the Audit Committee.
The appendices to this Policy describe the Audit, Audit-related, Tax and All
Other services that have the general pre-approval of the Audit Committee. The
term of any general pre-approval is 12 months from the date of pre-approval,
unless the Audit Committee considers and provides a different period and states
otherwise. The Audit Committee will annually review and pre-approve the services
that may be provided by the Independent Auditors without obtaining specific
pre-approval from the Audit Committee. The Audit Committee will add to or
subtract from the list of general pre-approved services from time to time, based
on subsequent determinations.
- ----------
(1) This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and
Procedures (the "POLICY"), adopted as of the date above, supersedes and
replaces all prior versions that may have been adopted from time to time.
<Page>
The purpose of this Policy is to set forth the policy and procedures by which
the Audit Committee intends to fulfill its responsibilities. It does not
delegate the Audit Committee's responsibilities to pre-approve services
performed by the Independent Auditors to management.
The Fund's Independent Auditors have reviewed this Policy and believes that
implementation of the Policy will not adversely affect the Independent Auditors'
independence.
2. DELEGATION
As provided in the Act and the SEC's rules, the Audit Committee may delegate
either type of pre-approval authority to one or more of its members. The member
to whom such authority is delegated must report, for informational purposes
only, any pre-approval decisions to the Audit Committee at its next scheduled
meeting.
3. AUDIT SERVICES
The annual Audit services engagement terms and fees are subject to the specific
pre-approval of the Audit Committee. Audit services include the annual financial
statement audit and other procedures required to be performed by the Independent
Auditors to be able to form an opinion on the Fund's financial statements. These
other procedures include information systems and procedural reviews and testing
performed in order to understand and place reliance on the systems of internal
control, and consultations relating to the audit. The Audit Committee will
approve, if necessary, any changes in terms, conditions and fees resulting from
changes in audit scope, Fund structure or other items.
In addition to the annual Audit services engagement approved by the Audit
Committee, the Audit Committee may grant general pre-approval to other Audit
services, which are those services that only the Independent Auditors reasonably
can provide. Other Audit services may include statutory audits and services
associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4,
etc.), periodic reports and other documents filed with the SEC or other
documents issued in connection with securities offerings.
The Audit Committee has pre-approved the Audit services in Appendix B.1. All
other Audit services not listed in Appendix B.1 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
4. AUDIT-RELATED SERVICES
Audit-related services are assurance and related services that are reasonably
related to the performance of the audit or review of the Fund's financial
statements and, to the extent they are Covered Services, the Covered Entities or
that are traditionally performed by the Independent Auditors. Because the Audit
Committee believes that the provision of Audit-related services does not impair
the independence of the auditor and is consistent with the SEC's rules on
auditor independence, the Audit Committee may grant general pre-approval to
Audit-related services. Audit-related services include, among others, accounting
consultations related to accounting, financial reporting or disclosure matters
<Page>
not classified as "Audit services"; assistance with understanding and
implementing new accounting and financial reporting guidance from rulemaking
authorities; agreed-upon or expanded audit procedures related to accounting
and/or billing records required to respond to or comply with financial,
accounting or regulatory reporting matters; and assistance with internal control
reporting requirements under Forms N-SAR and/or N-CSR.
The Audit Committee has pre-approved the Audit-related services in Appendix B.2.
All other Audit-related services not listed in Appendix B.2 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
5. TAX SERVICES
The Audit Committee believes that the Independent Auditors can provide Tax
services to the Fund and, to the extent they are Covered Services, the Covered
Entities, such as tax compliance, tax planning and tax advice without impairing
the auditor's independence, and the SEC has stated that the Independent Auditors
may provide such services.
Pursuant to the preceding paragraph, the Audit Committee has pre-approved the
Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
6. ALL OTHER SERVICES
The Audit Committee believes, based on the SEC's rules prohibiting the
Independent Auditors from providing specific non-audit services, that other
types of non-audit services are permitted. Accordingly, the Audit Committee
believes it may grant general pre-approval to those permissible non-audit
services classified as All Other services that it believes are routine and
recurring services, would not impair the independence of the auditor and are
consistent with the SEC's rules on auditor independence.
The Audit Committee has pre-approved the All Other services in Appendix B.4.
Permissible All Other services not listed in Appendix B.4 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
7. PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS
Pre-approval fee levels or budgeted amounts for all services to be provided by
the Independent Auditors will be established annually by the Audit Committee.
Any proposed services exceeding these levels or amounts will require specific
pre-approval by the Audit Committee. The Audit Committee is mindful of the
overall relationship of fees for audit and non-audit services in determining
whether to pre-approve any such services.
8. PROCEDURES
All requests or applications for services to be provided by the Independent
Auditors that do not require specific approval by the Audit Committee will be
submitted to the Fund's Chief Financial Officer and must include a detailed
description of the services to be
<Page>
rendered. The Fund's Chief Financial Officer will determine whether such
services are included within the list of services that have received the general
pre-approval of the Audit Committee. The Audit Committee will be informed on a
timely basis of any such services rendered by the Independent Auditors. Requests
or applications to provide services that require specific approval by the Audit
Committee will be submitted to the Audit Committee by both the Independent
Auditors and the Fund's Chief Financial Officer, and must include a joint
statement as to whether, in their view, the request or application is consistent
with the SEC's rules on auditor independence.
The Audit Committee has designated the Fund's Chief Financial Officer to monitor
the performance of all services provided by the Independent Auditors and to
determine whether such services are in compliance with this Policy. The Fund's
Chief Financial Officer will report to the Audit Committee on a periodic basis
on the results of its monitoring. Both the Fund's Chief Financial Officer and
management will immediately report to the chairman of the Audit Committee any
breach of this Policy that comes to the attention of the Fund's Chief Financial
Officer or any member of management.
9. ADDITIONAL REQUIREMENTS
The Audit Committee has determined to take additional measures on an annual
basis to meet its responsibility to oversee the work of the Independent Auditors
and to assure the auditor's independence from the Fund, such as reviewing a
formal written statement from the Independent Auditors delineating all
relationships between the Independent Auditors and the Fund, consistent with
Independence Standards Board No. 1, and discussing with the Independent Auditors
its methods and procedures for ensuring independence.
10. COVERED ENTITIES
Covered Entities include the Fund's investment adviser(s) and any entity
controlling, controlled by or under common control with the Fund's investment
adviser(s) that provides ongoing services to the Fund(s). Beginning with
non-audit service contracts entered into on or after May 6, 2003, the Fund's
audit committee must pre-approve non-audit services provided not only to the
Fund but also to the Covered Entities if the engagements relate directly to the
operations and financial reporting of the Fund. This list of Covered Entities
would include:
MORGAN STANLEY RETAIL FUNDS
Morgan Stanley Investment Advisors Inc.
Morgan Stanley & Co. Incorporated
Morgan Stanley DW Inc.
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Van Kampen Asset Management
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
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MORGAN STANLEY INSTITUTIONAL FUNDS
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Advisors Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Morgan Stanley & Co. Incorporated
Morgan Stanley Distribution, Inc.
Morgan Stanley AIP GP LP
Morgan Stanley Alternative Investment Partners LP
(e)(2) Beginning with non-audit service contracts entered into on or after May
6, 2003, the audit committee also is required to pre-approve services to Covered
Entities to the extent that the services are determined to have a direct impact
on the operations or financial reporting of the Registrant. 100% of such
services were pre-approved by the audit committee pursuant to the Audit
Committee's pre-approval policies and procedures (attached hereto).
(f) Not applicable.
(g) See table above.
(h) The audit committee of the Board of Trustees has considered whether the
provision of services other than audit services performed by the auditors to the
Registrant and Covered Entities is compatible with maintaining the auditors'
independence in performing audit services.
Item 5. Audit Committee of Listed Registrants.
(a) The Fund has a separately-designated standing audit committee established
in accordance with Section 3(a)(58)(A) of the Exchange Act whose members are:
Michael Bozic, Edwin J. Garn, Wayne E. Hedien, Manual H. Johnson, Joseph J.
Kearns, Michael Nugent and Fergus Reid.
(b) Not applicable.
Item 6. Schedule of Investments
Refer to Item 1.
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Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Applicable only to reports filed by closed-end funds.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Applicable only to reports filed by closed-end funds.
Item 9. Closed-End Fund Repurchases
Applicable only to reports filed by closed-end funds.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures
(a) The Fund's principal executive officer and principal financial officer have
concluded that the Fund's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Fund in this Form N-CSR
was recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, based
upon such officers' evaluation of these controls and procedures as of a date
within 90 days of the filing date of the report.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 12. Exhibits
(a) The Code of Ethics for Principal Executive and Senior Financial Officers is
attached hereto.
(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Morgan Stanley Income Trust
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
October 20, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
October 20, 2005
/s/ Francis Smith
Francis Smith
Principal Financial Officer
October 20, 2005