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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, 2006
Date of reporting period: August 31, 2006
Item 1 - Report to Shareholders
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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.
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FUND REPORT
FOR THE YEAR ENDED AUGUST 31, 2006
TOTAL RETURN FOR THE 12 MONTHS ENDED AUGUST 31, 2006
<Table>
<Caption>
LEHMAN LEHMAN LIPPER
BROTHERS BROTHERS CORPORATE
U.S. INTERMEDIATE DEBT FUNDS
CORPORATE U.S. GOVERNMENT/ BBB-RATED
CLASS A CLASS B CLASS C CLASS D INDEX(1) CREDIT INDEX(2) INDEX(3)
1.01% 0.48% 0.42% 1.33% 0.53% 1.87% 2.15%
</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
Several events shaped trends in the fixed-income markets during the 12-month
review period. The series of natural disasters that struck the U.S. in mid-2005,
combined with sharply rising energy prices, generated concern regarding their
effect on economic growth. As the months progressed, however, it became apparent
that the impact on the economy would be less than anticipated. In fact, the
economy demonstrated considerable resilience and real gross domestic product
(GDP) growth averaged near 4 percent throughout 2005.
The first months of 2006 provided few surprises in the bond market. To virtually
no one's surprise, the Federal Open Market Committee (the "Fed") continued to
raise the target federal funds rate by 25 basis points at each of its meetings
during the first half of the year, bringing the rate to 5.25 percent at the end
of June.
Also as expected, comments made by Fed members after their May and June meetings
indicated that they will rely heavily on economic data in making future
decisions concerning the direction of interest rates. Based on these comments,
it appears that the Fed will be driven by the weight of the economic data more
so now than perhaps at anytime over the past few years.
During the last months of the period, in response to the expectation of a pause
in the Fed's tightening campaign, the U.S. bond market enjoyed the best
three-month run of positive returns since the Fed began its tightening cycle in
2004. In fact, despite negative returns in the first half of 2006, all
fixed-income asset classes ended August with positive year-to-date returns. As
anticipated, the Fed did finally pause at its August meeting, ending a run of 17
consecutive increases in the target federal funds rate.
Due mainly to concerns over inflation and increased risk in the corporate market
during the period, the credit sector had trouble keeping pace with other
fixed-income sectors. Within the investment-grade portion of the market,
higher-rated issues outperformed lower-rated issues. Improving economic
conditions boosted the financials sector, leading it to outpace both utilities
and industrials.
PERFORMANCE ANALYSIS
Morgan Stanley Income Trust Class A and Class D shares outperformed the Lehman
Brothers U.S. Corporate Index, while the Class B and Class C shares
underperformed the Lehman Brothers U.S. Corporate Index for the 12 months ended
August 31, 2006, assuming no deduction of applicable sales charges. The Fund
underperformed the Lehman Brothers Intermediate
2
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U.S. Government/Credit Index and the Lipper Corporate Debt Funds BBB-Rated Index
for the same time period, assuming no deduction of applicable sales charges.
While the Fund emphasizes investment-grade credits, it also includes a smaller
allocation to higher yielding securities. Within the high-yield portion, a
conservative approach detracted from performance as higher-rated issues
underperformed the riskiest segment of the high-yield market (issues rated CCC
and below).
During the period, we kept the Fund's overall duration** well below that of the
Lehman Brothers U.S. Corporate Index. This posture was beneficial to performance
as interest rates rose across the market, especially in the short- and
intermediate-portions of the yield curve.
Within the credit portion of the portfolio, we continued to employ a defensive
strategy with a focus on higher-quality securities, which benefited the Fund's
relative performance. Additionally, strong security selection -- particularly in
the paper and forest products, financial and automotive sectors -- contributed
positively to performance.
There is no guarantee that any sectors mentioned will continue to perform as
discussed herein or that securities in such sectors will be held by the Fund in
the future.
** A MEASURE OF THE SENSITIVITY OF A BOND'S PRICE TO CHANGES IN INTEREST RATES,
EXPRESSED IN YEARS. EACH YEAR OF DURATION REPRESENTS AN EXPECTED 1 PERCENT
CHANGE IN THE PRICE OF A BOND FOR EVERY 1 PERCENT CHANGE IN INTEREST RATES. THE
LONGER A BOND'S DURATION, THE GREATER THE EFFECT OF INTEREST-RATE MOVEMENTS ON
ITS PRICE. TYPICALLY, FUNDS WITH SHORTER DURATIONS PERFORM BETTER IN
RISING-INTEREST-RATE ENVIRONMENTS, WHILE FUNDS WITH LONGER DURATIONS PERFORM
BETTER WHEN RATES DECLINE.
PORTFOLIO COMPOSITION*
Corporate Bonds 63.1%
Short-Term Investments 21.3
U.S. Government Obligations 9.5
Asset-Backed Securities 5.4
Foreign Government Obligation 0.6
Mortgage-Backed Securities 0.1
LONG-TERM CREDIT ANALYSIS
Aaa/AAA 38.0%
Aa/AA 6.8
A/A 19.1
Baa/BBB 29.7
Ba/BB 4.9
B/B 1.5
* DOES NOT INCLUDE OPEN LONG FUTURES CONTRACTS WITH AN UNDERLYING FACE AMOUNT OF
$13,169,281 WITH UNREALIZED APPRECIATION OF $74,955 AND OPEN SHORT FUTURES
CONTRACTS WITH AN UNDERLYING FACE AMOUNT OF $6,334,657 WITH UNREALIZED
DEPRECIATION OF $11,255.
DATA AS OF AUGUST 31, 2006. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR
PORTFOLIO COMPOSITION ARE AS A PERCENTAGE OF TOTAL INVESTMENTS AND ALL
PERCENTAGES FOR LONG-TERM 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.
3
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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 ("CMOs") AND
COMMERCIAL MORTGAGE-BACKED SECURITIES ("CMBS"), 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. THE SEMIANNUAL REPORTS AND THE ANNUAL REPORTS ARE
FILED ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC) ON FORM
N-CSRS AND FORM N-CSR, RESPECTIVELY. MORGAN STANLEY ALSO DELIVERS THE SEMIANNUAL
AND ANNUAL REPORTS TO FUND SHAREHOLDERS AND MAKES THESE REPORTS AVAILABLE ON ITS
PUBLIC WEB SITE, www.morganstanley.com. EACH MORGAN STANLEY FUND ALSO FILES A
COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE FUND'S FIRST AND
THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES NOT DELIVER THE REPORTS
FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS, NOR ARE THE REPORTS
POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY, HOWEVER, OBTAIN THE FORM
N-Q FILINGS (AS WELL AS THE FORM N-CSR AND N-CSRS FILINGS) BY ACCESSING THE
SEC'S WEB SITE, http://www.sec.gov. YOU MAY ALSO REVIEW AND COPY THEM AT THE
SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE OPERATION OF
THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE SEC AT (800)
SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT OF A
DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS
(publicinfo@sec.gov) OR BY WRITING THE PUBLIC REFERENCE SECTION OF THE SEC,
WASHINGTON, DC 20549-0102.
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
WITHOUT CHARGE 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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PERFORMANCE SUMMARY
PERFORMANCE OF $10,000 INVESTMENT--CLASS B
[CHART]
($ IN THOUSANDS)
ENDING VALUE
<Table>
<Caption>
LEHMAN BROTHERS LEHMAN BROTHERS INTERMEDIATE LIPPER CORPORATE DEBT
FUND ~ U.S. CORPORATE INDEX(1) U.S. GOVERNMENT/CREDIT INDEX(2) FUNDS BBB-RATED INDEX(3)
- --------- ------- ----------------------- ------------------------------- -------------------------
31-Aug-96 $10,000 $10,000 $10,000 $10,000
31-Aug-97 $10,793 $11,124 $10,844 $11,170
31-Aug-98 $11,497 $12,177 $11,818 $12,010
31-Aug-99 $11,603 $12,262 $12,078 $12,085
31-Aug-00 $11,812 $13,048 $12,836 $12,798
31-Aug-01 $12,940 $14,843 $14,413 $14,167
31-Aug-02 $13,532 $15,614 $15,529 $14,601
31-Aug-03 $13,753 $17,070 $16,344 $15,887
31-Aug-04 $14,548 $18,386 $17,172 $17,131
31-Aug-05 $15,294 $19,286 $17,610 $18,026
31-Aug-06 $15,369 $19,388 $17,938 $18,414
</Table>
6
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AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED AUGUST 31, 2006
<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 1.01%(4) 0.48%(4) 0.42%(4) 1.33%(4)
(3.28)(5) (4.34)(5) (0.54)(5) --
5 YEARS 4.32(4) 3.50(4) 3.51(4) 4.31(4)
3.42(5) 3.15(5) 3.51(5) --
10 YEARS -- 4.39(4) -- --
-- 4.39(5) -- --
SINCE INCEPTION 4.66(4) 5.22(4) 3.92(4) 4.75(4)
4.16(5) 5.22(5) 3.92(5) --
</Table>
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF
FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES
SHOWN. FOR 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 1.0% FOR SHARES
REDEEMED WITHIN ONE YEAR OF PURCHASE.
++ CLASS D HAS NO SALES CHARGE.
(1) THE LEHMAN BROTHERS U.S. CORPORATE INDEX COVERS U.S. DOLLAR-DENOMINATED,
INVESTMENT-GRADE, FIXED RATE, TAXABLE SECURITIES SOLD BY INDUSTRIAL,
UTILITY AND FINANCIAL ISSUERS. IT INCLUDES PUBLICLY ISSUED U.S. CORPORATE
AND FOREIGN DEBENTURES AND SECURED NOTES THAT MEET SPECIFIED MATURITY,
LIQUIDITY AND QUALITY REQUIREMENTS. 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. THE FUND'S
BENCHMARK WAS CHANGED FROM THE LEHMAN BROTHERS INTERMEDIATE U.S.
GOVERNMENT/CREDIT INDEX TO THE LEHMAN BROTHERS U.S. CORPORATE INDEX TO MORE
ACCURATELY REFLECT THE FUND'S INVESTIBLE UNIVERSE.
(2) 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.
(3) 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.
(4) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT
THE DEDUCTION OF ANY SALES CHARGES.
(5) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND THE DEDUCTION OF
THE MAXIMUM APPLICABLE SALES CHARGE. SEE THE FUND'S CURRENT PROSPECTUS FOR
COMPLETE DETAILS ON FEES AND SALES CHARGES.
~ ENDING VALUE ASSUMING A COMPLETE REDEMPTION ON AUGUST 31, 2006.
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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 03/01/06 - 08/31/06.
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 *
------------- ------------- ---------------
03/01/06 -
03/01/06 08/31/06 08/31/06
------------- ------------- ---------------
CLASS A
Actual (1.64% return) $1,000.00 $1,016.40 $5.34
Hypothetical (5% annual return before expenses) $1,000.00 $1,019.91 $5.35
CLASS B
Actual (1.43% return) $1,000.00 $1,014.30 $8.38
Hypothetical (5% annual return before expenses) $1,000.00 $1,016.89 $8.39
CLASS C
Actual (1.35% return) $1,000.00 $1,013.50 $8.37
Hypothetical (5% annual return before expenses) $1,000.00 $1,016.89 $8.39
CLASS D
Actual (1.76% return) $1,000.00 $1,017.60 $4.07
Hypothetical (5% annual return before expenses) $1,000.00 $1,021.17 $4.08
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIOS 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 THAT WERE WAIVED BY THE INVESTMENT ADVISER
AND ADMINISTRATOR, THE ANNUALIZED EXPENSE RATIOS WOULD HAVE BEEN 1.38%,
1.98%, 1.98% AND 1.13% 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 at the Investment Adviser's
expense. (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 advisory and administrative 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
On a regular basis, the Board reviews the performance of all funds in the Morgan
Stanley Fund Complex, including the Fund, compared to their peers, paying
specific attention to the underperforming funds. In addition, the Board
specifically reviewed the Fund's performance for the one-, three- and five-year
periods ended November 30, 2005, as shown in a report provided by Lipper (the
"Lipper Report"), compared to the performance of comparable funds selected by
Lipper (the "performance peer group"). The Board also discussed with the Adviser
the performance goals and the actual results achieved in managing the Fund. The
Board concluded that the Fund's performance was competitive with that of its
performance peer group.
FEES RELATIVE TO OTHER PROPRIETARY FUNDS MANAGED BY THE ADVISER WITH COMPARABLE
INVESTMENT STRATEGIES
The Board reviewed the advisory and administrative fee (together, the
"management fee") rate paid by the Fund under the Management Agreement. The
Board noted that the management fee rate was comparable to the management fee
rates charged by the Adviser to other proprietary funds it manages with
investment strategies comparable to those of the Fund taking into account the
scope of the services provided.
9
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FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the management fee rate and total expense ratio of the Fund
as compared to the average management fee rate and average total expense ratio
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. The Board concluded that the Fund's management fee rate and
total expense ratio were competitive with those of its expense peer group.
BREAKPOINTS AND ECONOMIES OF SCALE
The Board reviewed the structure of the Fund's management fee schedule under the
Management Agreement and noted that it includes breakpoints. The Board also
reviewed the level of the Fund's management fee and noted that the fee, as a
percentage of the Fund's net assets, would decrease as net assets increase
because the management fee includes breakpoints. The Board concluded that the
Fund's management fee would reflect economies of scale as assets increase.
PROFITABILITY OF THE ADVISER AND AFFILIATES
The Board considered information concerning the costs incurred and profits
realized by the Adviser and affiliates during the last year from their
relationship with the Fund and during the last two years from their relationship
with the Morgan Stanley Fund Complex and reviewed with the Adviser the cost
allocation methodology used to determine the profitability of the Adviser and
affiliates. Based on its review of the information it received, the Board
concluded that the profits earned by the Adviser and 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
affiliates from their relationship with the Fund and the Morgan Stanley Fund
Complex, such as sales charges on sales of Class A shares and "float" benefits
derived from handling of checks for purchases and sales 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 the sales charges and 12b-1 fees were
competitive with those of other broker-dealers.
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.
10
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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.
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
that it would be in the best interest of the Fund and its shareholders to
approve renewal of the Management Agreement for another year.
11
<Page>
MORGAN STANLEY INCOME TRUST
PORTFOLIO OF INVESTMENTS - AUGUST 31, 2006
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
Corporate Bonds (62.6%)
ADVERTISING/MARKETING SERVICES (0.5%)
$275 Interpublic Group of Companies, Inc. (The) 5.40% 11/15/09 $253,688
--------
AEROSPACE & DEFENSE (1.0%)
175 Raytheon Co. 4.50 11/15/07 172,891
32 Raytheon Co. 6.75 08/15/07 32,309
321 Systems 2001 Asset Trust - 144A** 6.664 09/15/13 336,503
--------
541,703
--------
AIR FREIGHT/COURIERS (0.5%)
65 FedEx Corp. 2.65 04/01/07 63,894
220 FedEx Corp. 7.25 02/15/11 235,649
--------
299,543
--------
AIRLINES (0.4%)
229 America West Airlines, Inc. (Series 01-1) 7.10 04/02/21 236,095
--------
APPAREL/FOOTWEAR RETAIL (0.2%)
100 Limited Brands, Inc. 6.95 03/01/33 99,340
--------
AUTO PARTS: O.E.M. (0.5%)
265 Johnson Controls, Inc. 5.00 11/15/06 264,576
--------
BEVERAGES: ALCOHOLIC (1.4%)
375 FBG Finance Ltd. - 144A** (Australia) 5.125 06/15/15 355,378
430 Miller Brewing Co. - 144A** 4.25 08/15/08 420,735
--------
776,113
--------
BUILDING PRODUCTS (0.3%)
160 Masco Corp. 4.625 08/15/07 158,202
--------
CABLE/SATELLITE TV (1.2%)
270 Comcast Cable Communications, Inc. 6.75 01/30/11 282,605
80 Comcast Cable Communications, Inc. 7.125 06/15/13 85,647
300 EchoStar DBS Corp. 6.375 10/01/11 292,875
--------
661,127
--------
CASINO/GAMING (1.3%)
580 Harrah's Operating Co., Inc. 5.625 06/01/15 543,754
160 Harrah's Operating Co., Inc. 6.50 06/01/16 159,016
--------
702,770
--------
COMPUTER PROCESSING HARDWARE (0.6%)
335 Hewlett-Packard Co. 5.524+ 05/22/09 335,543
--------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
12
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------
CONTAINERS/PACKAGING (0.3%)
$ 200 Sealed Air Corp. - 144A** 5.625% 07/15/13 $ 195,571
----------
DEPARTMENT STORES (1.9%)
1,045 May Department Stores Co. 5.95 11/01/08 1,054,874
----------
DRUGSTORE CHAINS (0.2%)
105 CVS Corp. 5.75 08/15/11 106,050
----------
ELECTRIC UTILITIES (8.7%)
420 Ameren Corp. 4.263 05/15/07 416,565
350 Arizona Public Service Co. 5.80 06/30/14 347,670
285 Arizona Public Service Co. 6.75 11/15/06 285,573
395 CC Funding Trust I 6.90 02/16/07 397,327
190 Cincinnati Gas & Electric Co. 5.70 09/15/12 190,687
105 Consolidated Natural Gas Co. (Series A) 5.00 12/01/14 99,183
470 Consolidated Natural Gas Co. (Series B) 5.375 11/01/06 469,820
310 Consumers Energy Co. (Series H) 4.80 02/17/09 305,203
205 Detroit Edison Co. (The) 6.125 10/01/10 210,295
340 Duquesne Light Co. (Series O) 6.70 04/15/12 357,663
200 Entergy Gulf States, Inc. - 144A** 6.02+ 12/08/08 200,447
255 Entergy Gulf States, Inc. 3.60 06/01/08 246,404
365 Entergy Gulf States, Inc. 5.631+ 12/01/09 364,756
205 Monongahela Power Co. 5.00 10/01/06 204,873
345 Ohio Power Company - IBC (Series K) 6.00 06/01/16 351,945
140 Panhandle Eastern Pipe Line Co. (Series B) 2.75 03/15/07 137,967
70 PSEG Energy Holdings Inc. 8.625 02/15/08 72,450
220 Texas Eastern Transmission, LP 7.00 07/15/32 242,358
----------
4,901,186
----------
ELECTRICAL PRODUCTS (1.5%)
480 Cooper Industries, Inc. 5.25 07/01/07 477,441
360 Cooper Industries, Inc. 5.25 11/15/12 356,244
----------
833,685
----------
ELECTRONICS/APPLIANCES (0.4%)
260 LG Electronics Inc. - 144A** (South Korea) 5.00 06/17/10 251,357
----------
FINANCE/RENTAL/LEASING (4.9%)
510 CIT Group, Inc. 2.875 09/29/06 509,196
620 Countrywide Home Loans, Inc. (Series MTN) 3.25 05/21/08 599,495
475 Nationwide Building Society - 144A**
(United Kingdom) 4.25 02/01/10 459,420
675 Residential Capital Corp. 6.375 06/30/10 681,426
525 Toyota Motor Credit Corp. (Series MTN) 5.65 01/15/07 525,363
----------
2,774,900
----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------
FINANCIAL CONGLOMERATES (3.0%)
$ 735 Chase Manhattan Corp. 6.00% 02/15/09 $ 746,229
520 GMAC LLC 6.875 09/15/11 512,672
410 Prudential Funding LLC
(Series MTN) - 144A** 6.60 05/15/08 418,411
----------
1,677,312
----------
FOOD RETAIL (0.3%)
135 Delhaize America, Inc. 9.00 04/15/31 158,621
----------
FOOD: MAJOR DIVERSIFIED (0.6%)
190 ConAgra Foods, Inc. 7.00 10/01/28 203,717
130 ConAgra Foods, Inc. 8.25 09/15/30 158,289
----------
362,006
----------
FOOD: MEAT/FISH/DAIRY (0.1%)
50 Pilgrim's Pride Corp. 9.625 09/15/11 52,625
----------
GAS DISTRIBUTORS (1.2%)
370 NiSource Finance Corp. 5.968+ 11/23/09 370,517
8 Ras Laffan Liquid Natural Gas
Co. Ltd. - 144A** (Qatar) 7.628 09/15/06 7,736
270 Sempra Energy 4.621 05/17/07 268,432
----------
646,685
----------
HOME FURNISHINGS (0.6%)
130 Mohawk Industries, Inc. (Class C) 6.50 04/15/07 130,672
210 Mohawk Industries, Inc. (Series D) 7.20 04/15/12 220,054
----------
350,726
----------
HOTELS/RESORTS/CRUISELINES (1.6%)
695 Hyatt Equities LLC - 144A** 6.875 06/15/07 699,844
170 Starwood Hotels & Resorts Worldwide,
Inc. 7.375+ 05/01/07 172,338
----------
872,182
----------
INSURANCE BROKERS/SERVICES (2.3%)
935 Farmers Exchange Capital - 144A** 7.05 07/15/28 941,803
390 Marsh & McLennan Companies, Inc. 5.875 08/01/33 353,015
----------
1,294,818
----------
MAJOR BANKS (3.4%)
485 HSBC Finance Corp. 6.75 05/15/11 512,533
285 USB Capital IX 6.189+ ++ 286,475
1,140 Wachovia Capital Trust III 5.80+ ++ 1,136,042
----------
1,935,050
----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
14
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------
MAJOR TELECOMMUNICATIONS (5.3%)
$505 AT&T Corp. 8.00+% 11/15/31 $ 605,135
150 Deutsche Telekom International
Finance BV (Netherlands) 8.00+ 06/15/10 163,257
380 France Telecom SA (France) 8.50+ 03/01/31 486,309
300 SBC Communications, Inc. 6.15 09/15/34 286,789
305 Sprint Capital Corp. 8.75 03/15/32 370,889
255 Telecom Italia Capital SA
(Luxembourg) 4.00 11/15/08 247,217
215 Telecom Italia Capital SA
(Luxembourg) 4.00 01/15/10 204,443
385 Telefonica Europe BV (Netherlands) 8.25 09/15/30 455,095
165 Verizon Global Funding Corp. 7.25 12/01/10 176,222
----------
2,995,356
----------
MANAGED HEALTH CARE (0.1%)
55 WellPoint, Inc. 4.25 12/15/09 53,226
----------
MEDIA CONGLOMERATES (1.5%)
250 News America Holdings, Inc. 7.75 02/01/24 273,886
220 News America, Inc. 7.28 06/30/28 232,546
355 Viacom, Inc. - 144A** 6.875 04/30/36 349,310
----------
855,742
----------
MOTOR VEHICLES (2.0%)
335 DaimlerChrysler North American
Holdings Co. 8.50 01/18/31 403,428
855 General Motors Corp. 8.375 07/15/33 720,337
----------
1,123,765
----------
MULTI-LINE INSURANCE (1.7%)
450 AIG SunAmerica Global
Financing VI - 144A** 6.30 05/10/11 468,434
485 American General Finance Corp.
(Series MTNH) 4.625 09/01/10 472,447
----------
940,881
----------
OIL & GAS PIPELINES (1.5%)
130 Kinder Morgan Energy Partners, L.P. 5.125 11/15/14 122,993
390 Kinder Morgan Finance Co. (Canada) 5.70 01/05/16 355,495
360 Plains All American Pipeline LP/PAA
Finance Corp. - 144A** 6.70 05/15/36 371,544
----------
850,032
----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
15
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------
OIL & GAS PRODUCTION (1.1%)
$410 Kerr-McGee Corp. 5.875% 09/15/06 $ 409,947
230 Kerr-McGee Corp. 6.625 10/15/07 233,494
----------
643,441
----------
OTHER METALS/MINERALS (0.7%)
385 Brascan Corp. (Canada) 7.125 06/15/12 409,956
----------
PROPERTY - CASUALTY INSURERS (3.9%)
645 Mantis Reef Ltd. - 144A** (Australia) 4.692 11/14/08 632,031
285 Platinum Underwriters Finance, Inc.
(Series B) 7.50 06/01/17 288,616
350 Platinum Underwriters Holdings, Ltd.
(Series B) (Bermuda) 6.371 11/16/07 347,723
250 St. Paul Travelers Companies, Inc.
(The) 5.01 08/16/07 247,978
675 Xlliac Global Funding - 144A** 4.80 08/10/10 659,457
----------
2,175,805
----------
PULP & PAPER (1.2%)
100 Abitibi-Consolidated Inc. (Canada) 8.85 08/01/30 85,750
440 Bowater Canada Finance (Canada) 7.95 11/15/11 424,600
150 Sappi Papier Holding AG - 144A**
(Austria) 6.75 06/15/12 143,392
----------
653,742
----------
RAILROADS (1.1%)
270 Norfolk Southern Corp. 7.35 05/15/07 273,284
200 Union Pacific Corp. 6.625 02/01/08 203,153
160 Union Pacific Corp. (Series MTNE) 6.79 11/09/07 162,130
----------
638,567
----------
REAL ESTATE DEVELOPMENT (1.0%)
307 World Financial Properties - 144A** 6.91 09/01/13 321,559
227 World Financial Properties - 144A** 6.95 09/01/13 237,851
----------
559,410
----------
REGIONAL BANKS (0.3%)
175 US Bancorp (Series MTNN) 5.10 07/15/07 174,422
----------
RESTAURANTS (0.3%)
160 Tricon Global Restaurants, Inc. 8.875 04/15/11 180,491
----------
SAVINGS BANKS (1.7%)
70 Household Finance Corp. 4.125 11/16/09 67,599
170 Household Finance Corp. 8.00 07/15/10 185,468
685 Washington Mutual Bank 5.50 01/15/13 681,234
----------
934,301
----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
16
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
TOBACCO (0.3%)
$ 155 Reynolds American Inc. - 144A** 7.25% 06/01/13 $ 159,547
-----------
Total Corporate Bonds
(COST $35,684,212) 35,145,032
-----------
Asset-Backed Securities (5.4%)
FINANCE/RENTAL/LEASING
198 CIT Equipment Collateral 2004-EF1 A3 3.50 09/20/08 195,773
457 DaimlerChrysler Auto Trust 2003-B A4 2.86 03/09/09 450,050
325 Ford Credit Auto Owner Trust 2005-B A3 4.17 01/15/09 322,930
450 Harley-Davidson Motorcycle Trust
2004-2 A2 3.56 02/15/12 443,609
800 MBNA Credit Card Master Note Trust
2004-A4 A4 2.70 09/15/09 788,045
500 TXU Electric Delivery Transition Bond
Co. LLC 2004-1 A2 4.81 11/17/14 489,870
350 Volkswagen Auto Lease Trust 2005-A A3 3.82 05/20/08 348,078
-----------
Total Asset-Backed Securities
(COST $3,085,267) 3,038,355
-----------
U.S. Government Agencies -
Mortgage-Backed Securities (0.1%)
15 Federal Home Loan Mortgage Corp. 7.50 09/01/30 15,079
28 Federal National Mortgage Association 7.50 09/01/29
-
04/01/32 28,676
-----------
Total U.S. Government Agencies -
Mortgage-Backed Securities
(COST $44,502) 43,755
-----------
U.S. Government Obligations (9.5%)
2,310 U.S. Treasury Bond 6.125 08/15/29 2,686,098
900 U.S. Treasury Bond 6.375 08/15/27 1,066,852
1,600 U.S. Treasury Note 4.25 11/15/13 1,554,376
-----------
Total U.S. Government Obligations
(COST $5,468,397) 5,307,326
-----------
Foreign Government Obligation (0.6%)
MXN 2,985 Mexican Fixed Rate Bonds (Series M20)
(Mexico) (COST $295,652) 10.00 12/05/24 313,308
-----------
Short-Term Investments (21.2%)
U.S. Government Obligation (a) (0.2%)
$ 100 U.S. Treasury Bill* (COST $98,134) 5.09 01/11/07 98,134
-----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
17
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT (21.0%)
$11,778 Joint repurchase agreement account
(dated 08/31/06; proceeds $11,779,724) (b)
(COST $11,778,000) 5.27% 09/01/06 $11,778,000
-----------
TOTAL SHORT-TERM INVESTMENTS
(COST $11,876,134) 11,876,134
-----------
TOTAL INVESTMENTS
(COST $56,454,164) (C) (D) 99.4% 55,723,910
OTHER ASSETS IN EXCESS OF LIABILITIES 0.6 354,239
----- -----------
NET ASSETS 100.0% $56,078,149
===== ===========
</Table>
- ----------
MXN MEXICAN NEW PESO.
* A PORTION OF THIS SECURITY HAS BEEN PHYSICALLY SEGREGATED IN CONNECTION
WITH OPEN FUTURES CONTRACTS IN AN AMOUNT EQUAL TO $70,020.
** RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS.
+ FLOATING RATE SECURITY, RATE SHOWN IS THE RATE IN EFFECT AT AUGUST 31,
2006.
++ SECURITIES REPRESENT BENEFICIAL INTEREST IN TRUSTS. THE CORRESPONDING
ASSETS OF THE TRUSTS ARE JUNIOR SUBORDINATED NOTES DUE 2042 AND A STOCK
PURCHASE CONTRACT TO PURCHASE PREFERRED STOCK ON OR ABOUT MARCH 15, 2011
FOR WACHOVIA CAPITAL TRUST III AND ON OR ABOUT APRIL 15, 2011 FOR USB
CAPITAL IX. SECURITIES HAVE A PERPETUAL MATURITY AND THE TRUSTS WILL REDEEM
THEM ONLY TO THE EXTENT THE PREFERRED STOCK IS REDEEMED.
(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 AN AMOUNT EQUAL TO
$19,347,458 IN CONNECTION WITH OPEN FUTURES CONTRACTS.
(d) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $56,927,855. THE
AGGREGATE GROSS UNREALIZED APPRECIATION IS $121,891 AND THE AGGREGATE GROSS
UNREALIZED DEPRECIATION IS $1,325,836 RESULTING IN NET UNREALIZED
DEPRECIATION OF $1,203,945.
FUTURES CONTRACTS OPEN AT AUGUST 31, 2006:
<Table>
<Caption>
UNREALIZED
NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE APPRECIATION
CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE (DEPRECIATION)
- ---------------------------------------------------------------------------------------
87 Long U.S. Treasury Notes 10 year $ 9,341,625 $ 54,327
December 2006
25 Long U.S. Treasury Bonds 20 year 2,776,563 16,659
December 2006
10 Long U.S. Treasury Notes 5 year 1,051,093 3,969
December 2006
31 Short U.S. Treasury Notes 2 year (6,334,657) (11,255)
December 2006
--------
Net Unrealized Appreciation $ 63,700
========
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
18
<Page>
MORGAN STANLEY INCOME TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 2006
Assets:
Investments in securities, at value (cost $56,454,164) (including
a repurchase agreement of $11,778,000) $55,723,910
Receivable for:
Interest 589,145
Shares of beneficial interest sold 44,240
Variation margin 24,279
Prepaid expenses and other assets 43,344
-----------
Total Assets 56,424,918
-----------
Liabilities:
Payable for:
Investments purchased 95,328
Shares of beneficial interest redeemed 64,003
Distribution fee 25,847
Dividends and distributions to shareholders 13,295
Administration fee 3,809
Transfer agent fee 1,450
Investment advisory fee 373
Accrued expenses and other payables 142,664
-----------
Total Liabilities 346,769
-----------
Net Assets $56,078,149
===========
COMPOSITION OF NET ASSETS:
Paid-in-capital $64,287,627
Net unrealized depreciation (666,540)
Dividends in excess of net investment income (468,099)
Accumulated net realized loss (7,074,839)
-----------
Net Assets $56,078,149
===========
CLASS A SHARES:
Net Assets $27,444,668
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 2,946,802
Net Asset Value Per Share $ 9.31
===========
Maximum Offering Price Per Share,
(NET ASSET VALUE PLUS 4.44% OF NET ASSET VALUE) $ 9.72
===========
CLASS B SHARES:
Net Assets $23,610,264
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 2,556,266
Net Asset Value Per Share $ 9.24
===========
CLASS C SHARES:
Net Assets $ 3,986,356
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 430,791
Net Asset Value Per Share $ 9.25
===========
CLASS D SHARES:
Net Assets $ 1,036,861
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 112,592
Net Asset Value Per Share $ 9.21
===========
SEE NOTES TO FINANCIAL STATEMENTS
19
<Page>
Statement of Operations
FOR THE YEAR ENDED AUGUST 31, 2006
Net Investment Income:
Interest Income $ 3,355,911
-----------
Expenses
Investment advisory fee 272,729
Distribution fee (Class A shares) 73,549
Distribution fee (Class B shares) 244,972
Distribution fee (Class C shares) 39,283
Transfer agent fees and expenses 101,020
Professional fees 97,662
Shareholder reports and notices 68,806
Registration fees 54,272
Administration fee 51,948
Custodian fees 29,097
Trustees' fees and expenses 8,209
Other 28,704
-----------
Total Expenses 1,070,251
Less: amounts waived/reimbursed (192,583)
Less: expense offset (381)
-----------
Net Expenses 877,287
-----------
Net Investment Income 2,478,624
-----------
Net Realized and Unrealized Gain (Loss):
Net Realized Gain (Loss) on:
Investments (507,498)
Futures contracts (40,840)
Foreign exchange transactions 222
-----------
Net Realized Loss (548,116)
-----------
Net Change in Unrealized Appreciation/Depreciation on:
Investments (1,931,391)
Futures contracts 18,425
Translation of other assets and liabilities denominated in
foreign currencies 14
-----------
Net Depreciation (1,912,952)
-----------
Net Loss (2,461,068)
-----------
Net Increase $ 17,556
===========
SEE NOTES TO FINANCIAL STATEMENTS
20
<Page>
Statements of Changes in Net Assets
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
AUGUST 31, 2006 AUGUST 31, 2005
--------------- ---------------
Increase (Decrease) in Net Assets:
Operations:
Net investment income $ 2,478,624 $ 3,150,109
Net realized gain (loss) (548,116) 1,103,433
Net change in unrealized appreciation/depreciation (1,912,952) 125,178
------------ ------------
Net Increase 17,556 4,378,720
------------ ------------
Dividends to Shareholders from Net Investment Income:
Class A shares (1,351,335) (753,287)
Class B shares (1,148,059) (2,357,036)
Class C shares (195,369) (284,981)
Class D shares (87,255) (258,588)
------------ ------------
Total Dividends (2,782,018) (3,653,892)
------------ ------------
Net decrease from transactions in shares of
beneficial interest (19,844,812) (16,476,445)
------------ ------------
Net Decrease (22,609,274) (15,751,617)
Net Assets:
Beginning of period 78,687,423 94,439,040
------------ ------------
End of Period
(INCLUDING DIVIDENDS IN EXCESS OF NET INVESTMENT
INCOME OF $468,099 AND $695,546, RESPECTIVELY) $ 56,078,149 $ 78,687,423
============ ============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
21
<Page>
MORGAN STANLEY INCOME TRUST
NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2006
1. Organization and Accounting Policies
Morgan Stanley Income Trust (the "Fund") is registered under the Investment
Company Act of 1940, as amended (the "Act"), as a diversified, open-end
management investment company. The Fund's investment objective is 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.
The Fund will assess 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, subject to certain exceptions.
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)
futures are valued at the latest price published by the commodities exchange on
which they trade; (4) when market quotations are not readily available including
circumstances under which 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 (5) 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.
22
<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. Foreign Currency Translation and Forward Foreign Currency Contracts -- The
books and records of the Fund are maintained in U.S. dollars as follows: (1) the
foreign currency market value of investment securities, other assets and
liabilities and forward foreign currency contracts ("forward contracts") are
translated at the exchange rates prevailing at the end of the period; and (2)
purchases, sales, income and expenses are translated at the exchange rates
prevailing on the respective dates of such transactions. The resultant exchange
gains and losses are recorded as realized and unrealized gain/loss on foreign
exchange transactions. Pursuant to U.S. federal income tax regulations, certain
foreign exchange gains/losses included in realized and unrealized gain/loss are
included in or are a reduction of ordinary income for federal income tax
purposes. The Fund does not isolate that portion of the results of operations
arising as a result of changes in the foreign exchange rates from the changes in
the market prices of the securities. Forward contracts are valued daily at the
appropriate exchange rates. The resultant unrealized exchange gains and losses
are recorded as unrealized foreign currency gain or loss. The Fund records
realized gains or losses on delivery of the currency or at the time the forward
contract is extinguished (compensated) by entering into a closing transaction
prior to delivery.
F. 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.
23
<Page>
G. 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.
H. Dividends and Distributions to Shareholders -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.
I. 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
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 exceeding $500
million but not exceeding $1.25 billion; 0.22% to the portion of the daily net
assets exceeding $1.25 billion.
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.
The Investment Adviser has agreed to cap the Fund's operating expenses (except
for brokerage and 12b-1 fees) by assuming the Fund's "other expenses" and/or
waiving the Fund's advisory fees, and the Administrator has agreed to waive the
Fund's administrative fees, to the extent such operating expenses on an
annualized basis exceed 0.80% of the average 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.
24
<Page>
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts totaled $4,273,519
at August 31, 2006.
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 and other authorized
financial representatives at the time of sale may be reimbursed in the
subsequent calendar year. For the year ended August 31, 2006, the distribution
fee was accrued for Class A shares and Class C shares at the annual rate of
0.25% and 0.81%, respectively.
The Distributor has informed the Fund that for the year ended August 31, 2006,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class B shares and Class C shares of $88,057 and $857, respectively and
received $8,985 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/maturities of
portfolio securities, excluding short-term investments, for the year ended
August 31, 2006, aggregated $15,931,941, and $41,555,751, respectively. Included
in the aforementioned are purchases and sales/prepayments/maturities of U.S.
Government securities of $2,101,629 and $4,728,206, respectively. Also included
are sales of $2,243,199 including realized losses of $29,301 with other Morgan
Stanley funds.
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
25
<Page>
the year ended August 31, 2006 included in Trustees' fees and expenses in the
Statement of Operations amounted to $7,311. At August 31, 2006, the Fund had an
accrued pension liability of $63,774 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 they receive for serving on the Board of Trustees. Each eligible
Trustee generally may elect to have their deferred amounts credited with a
return equal to the total return on one or more of the Morgan Stanley funds that
are offered as investment options under the Compensation Plan.
Appreciation/depreciation and distributions received from these investments are
recorded with an offsetting increase/decrease in the deferred compensation
obligation and do not affect the net asset value of the Fund.
5. 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, 2006 AUGUST 31, 2005
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
CLASS A SHARES
Sold 156,715 $ 1,466,141 221,589 $ 2,132,992
Conversion from Class B 190,685 1,777,314 2,729,474 25,880,591
Reinvestment of dividends 94,149 875,029 52,537 502,897
Redeemed (814,473) (7,559,395) (481,353) (4,601,088)
---------- ------------ ---------- ------------
Net increase (decrease) -- Class A (372,924) (3,440,911) 2,522,247 23,915,392
---------- ------------ ---------- ------------
CLASS B SHARES
Sold 208,457 1,938,867 523,679 4,969,424
Conversion to Class A (192,286) (1,777,314) (2,752,699) (25,880,591)
Reinvestment of dividends 83,528 770,628 160,297 1,521,702
Redeemed (1,277,420) (11,801,546) (1,965,508) (18,649,225)
---------- ------------ ---------- ------------
Net decrease -- Class B (1,177,721) (10,869,365) (4,034,231) (38,038,690)
---------- ------------ ---------- ------------
CLASS C SHARES
Sold 32,134 297,455 127,272 1,208,754
Reinvestment of dividends 16,168 149,433 22,019 209,341
Redeemed (265,696) (2,463,606) (287,875) (2,733,330)
---------- ------------ ---------- ------------
Net decrease -- Class C (217,394) (2,016,718) (138,584) (1,315,235)
---------- ------------ ---------- ------------
CLASS D SHARES
Sold 19,239 177,050 70,246 665,641
Reinvestment of dividends 6,396 59,077 21,317 201,615
Redeemed (405,325) (3,753,945) (201,163) (1,905,168)
---------- ------------ ---------- ------------
Net decrease -- Class D (379,690) (3,517,818) (109,600) (1,037,912)
---------- ------------ ---------- ------------
Net decrease in Fund (2,147,729) $(19,844,812) (1,760,168) $(16,476,445)
========== ============ ========== ============
</Table>
26
<Page>
6. FEDERAL INCOME TAX STATUS
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for tax purposes are reported as distributions of paid-in-capital.
The tax character of distributions paid was as follows:
FOR THE YEAR FOR THE YEAR
ENDED ENDED
AUGUST 31, 2006 AUGUST 31, 2005
--------------- ---------------
Ordinary income $2,786,370 $3,679,846
========== ==========
As of August 31, 2006, the tax-basis components of accumulated losses were as
follows:
Undistributed ordinary income $ 70,889
Undistributed long-term gains --
-----------
Net accumulated earnings 70,889
Capital loss carryforward* (6,091,410)
Post-October losses (907,796)
Temporary differences (77,230)
Net unrealized depreciation (1,203,931)
-----------
Total accumulated losses $(8,209,478)
===========
* As of August 31, 2006, the Fund had a net capital loss carryforward of
$6,091,410 of which $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,
$1,513,272 will expire on August 31, 2012 and $226,731 will expire on
August 31, 2014 to offset future capital gains to the extent provided by
regulations.
As of August 31, 2006, the Fund had temporary book/tax differences primarily
attributable to post-October losses (capital losses incurred after October 31
within the taxable year which are deemed to arise on the first business day of
the Fund's next taxable year), mark-to-market of open futures contracts 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 $125,501, accumulated net realized loss was charged $405,340 and
dividends in excess of net investment income was credited $530,841.
27
<Page>
7. EXPENSE OFFSET
The expense offset represents a reduction of the transfer agent fees and
expenses for earnings on cash balances maintained by the Fund.
8. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Fund may enter into forward contracts for many purposes, including to
facilitate settlement of foreign currency denominated portfolio transactions or
to manage foreign currency exposure associated with foreign currency denominated
securities.
To hedge against adverse interest rate, foreign currency and market risks, the
Fund may purchase and sell interest rate, currency and index futures ("futures
contracts").
Forward contracts and 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 foreign exchange rates
underlying the forward contracts. Risks may also rise upon entering into these
contracts from the potential inability of the counterparties to meet the terms
of their contracts.
9. 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, were named as
defendants in a consolidated class action. This consolidated action also named
as defendants certain individual Trustees and Directors of the Morgan Stanley
funds. The consolidated amended complaint, filed in the United States District
Court for the Southern District of New York on April 16, 2004, generally alleged
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 alleged efforts to recommend these
funds to investors. The complaint sought, among other things, unspecified
compensatory damages, rescissionary damages, fees and costs. On July 2, 2004,
defendants moved to dismiss the action. On March 9, 2005, plaintiffs filed a
Motion for Leave to File a Supplemental Pleading that would, among other things,
expand the allegations and alleged class. On April 14, 2006, the Court granted
defendants' motion to dismiss in its entirety, with prejudice. Additionally,
plaintiffs' Motion for Leave to File a Supplemental Pleading was denied. The
time for plaintiffs to appeal the orders granting defendants' motion to dismiss
and denying plaintiffs' motion for supplemental pleading has expired. This case
is now concluded.
28
<Page>
10. NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation 48, Accounting for Uncertainty in Income Taxes -- an
interpretation of FASB Statement 109 (FIN 48). FIN 48 clarifies the accounting
for income taxes by prescribing the minimum recognition threshold a tax position
must meet before being recognized in the financial statements. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The Fund will
adopt FIN 48 during 2007 and the impact to the Fund's financial statements, if
any, is currently being assessed.
In addition, in September 2006, Statement of Financial Accounting Standards No.
157, Fair Value Measurements (SFAS 157), was issued and is effective for fiscal
years beginning after November 15, 2007. SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. Management is currently evaluating the impact the
adoption of SFAS 157 will have on the Fund's financial statement disclosures.
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,
---------------------------------------------------
2006 2005 2004 2003 2002
------- ------- ------- ------ -------
Class A Shares:
Selected Per Share Data:
Net asset value, beginning of period $ 9.65 $ 9.56 $ 9.39 $ 9.53 $ 9.35
------- ------- ------ ------ -------
Income (loss) from investment operations:
Net investment income 0.40 0.38 0.35 0.20 0.37
Net realized and unrealized gain (loss) (0.31) 0.16 0.26 0.01 0.19
------- ------- ------ ------ -------
Total income from investment operations 0.09 0.54 0.61 0.21 0.56
------- ------- ------ ------ -------
Less dividends from net investment income (0.43) (0.45) (0.44) (0.35) (0.38)
------- ------- ------ ------ -------
Net asset value, end of period $ 9.31 $ 9.65 $ 9.56 $ 9.39 $ 9.53
======= ======= ====== ====== =======
Total Return+ 1.01% 5.81% 6.57% 2.17% 6.17%
Ratios to Average Net Assets(1):
Total expenses (before expense offset) 1.05%(2) 1.03%(2) 1.19%(2) 1.14% 1.04%
Net investment income 4.12%(2) 4.08%(2) 3.86%(2) 2.14% 4.03%
Supplemental Data:
Net assets, end of period, in thousands $27,445 $32,038 $7,628 $9,636 $10,730
Portfolio turnover rate 28% 46% 164% 429% 400%
</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 AND ADMINISTRATOR, THE ANNUALIZED EXPENSE AND NET INVESTMENT INCOME
RATIOS WOULD HAVE BEEN AS FOLLOWS:
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO INCOME RATIO
--------------- ------- --------------
AUGUST 31, 2006 1.35% 3.82%
AUGUST 31, 2005 1.18 3.93
AUGUST 31, 2004 1.24 3.81
SEE NOTES TO FINANCIAL STATEMENTS
30
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED AUGUST 31,
-----------------------------------------------------------
2006 2005 2004 2003 2002
------- ------- ------- ------- --------
Class B Shares:
Selected Per Share Data:
Net asset value, beginning of period $ 9.57 $ 9.48 $ 9.32 $ 9.45 $ 9.35
------- ------- ------- ------- --------
Income (loss) from investment operations:
Net investment income 0.37 0.31 0.29 0.14 0.31
Net realized and unrealized gain (loss) (0.33) 0.16 0.24 0.02 0.10
------- ------- ------- ------- --------
Total income from investment operations 0.04 0.47 0.53 0.16 0.41
------- ------- ------- ------- --------
Less dividends from net investment income (0.37) (0.38) (0.37) (0.29) (0.31)
------- ------- ------- ------- --------
Net asset value, end of period $ 9.24 $ 9.57 $ 9.48 $ 9.32 $ 9.45
======= ======= ======= ======= ========
Total Return+ 0.48% 5.13% 5.78% 1.63% 4.58%
Ratios to Average Net Assets(1):
Total expenses (before expense offset) 1.65%(2) 1.65%(2) 1.85%(2) 1.79% 1.72%
Net investment income 3.52%(2) 3.46%(2) 3.20%(2) 1.49% 3.35%
Supplemental Data:
Net assets, end of period, in thousands $23,610 $35,739 $73,650 $99,695 $103,238
Portfolio turnover rate 28% 46% 164% 429% 400%
</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 AND ADMINISTRATOR, THE ANNUALIZED EXPENSE AND NET INVESTMENT INCOME
RATIOS WOULD HAVE BEEN AS FOLLOWS:
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO INCOME RATIO
--------------- ------- --------------
AUGUST 31, 2006 1.95% 3.22%
AUGUST 31, 2005 1.80 3.31
AUGUST 31, 2004 1.90 3.15
SEE NOTES TO FINANCIAL STATEMENTS
31
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED AUGUST 31,
----------------------------------------------------
2006 2005 2004 2003 2002
------ ------ ------ ------- ------
Class C Shares:
Selected Per Share Data:
Net asset value, beginning of period $ 9.59 $ 9.50 $ 9.34 $ 9.46 $ 9.36
------ ------ ------ ------- ------
Income (loss) from investment operations:
Net investment income 0.37 0.31 0.29 0.14 0.31
Net realized and unrealized gain
(loss) (0.34) 0.17 0.24 0.03 0.10
------ ------ ------ ------- ------
Total income from investment operations 0.03 0.48 0.53 0.17 0.41
------ ------ ------ ------- ------
Less dividends from net investment income (0.37) (0.39) (0.37) (0.29) (0.31)
------ ------ ------ ------- ------
Net asset value, end of period $ 9.25 $ 9.59 $ 9.50 $ 9.34 $ 9.46
====== ====== ====== ======= ======
Total Return+ 0.42% 5.16% 5.77% 1.74% 4.57%
Ratios to Average Net Assets(1):
Total expenses (before expense offset) 1.61%(2) 1.62%(2) 1.85%(2) 1.79% 1.72%
Net investment income 3.56%(2) 3.49%(2) 3.20%(2) 1.49% 3.35%
Supplemental Data:
Net assets, end of period, in thousands $3,986 $6,215 $7,474 $10,389 $6,415
Portfolio turnover rate 28% 46% 164% 429% 400%
</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 AND ADMINISTRATOR, THE ANNUALIZED EXPENSE AND NET INVESTMENT INCOME
RATIOS WOULD HAVE BEEN AS FOLLOWS:
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO INCOME RATIO
--------------- ------- --------------
AUGUST 31, 2006 1.91% 3.26%
AUGUST 31, 2005 1.77 3.34
AUGUST 31, 2004 1.90 3.15
SEE NOTES TO FINANCIAL STATEMENTS
32
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED AUGUST 31,
----------------------------------------------------
2006 2005 2004 2003 2002
------ ------ ------ ------ -------
Class D Shares:
Selected Per Share Data:
Net asset value, beginning of period $ 9.54 $ 9.45 $ 9.29 $ 9.43 $ 9.35
------ ------ ------ ------ -------
Income (loss) from investment operations:
Net investment income 0.43 0.39 0.37 0.22 0.38
Net realized and unrealized gain (loss) (0.31) 0.16 0.24 0.01 0.09
------ ------ ------ ------ -------
Total income from investment operations 0.12 0.55 0.61 0.23 0.47
------ ------ ------ ------ -------
Less dividends from net investment income (0.45) (0.46) (0.45) (0.37) (0.39)
------ ------ ------ ------ -------
Net asset value, end of period $ 9.21 $ 9.54 $ 9.45 $ 9.29 $ 9.43
====== ====== ====== ====== =======
Total Return+ 1.33% 6.03% 6.68% 2.39% 5.23%
Ratios to Average Net Assets(1):
Total expenses (before expense offset) 0.80%(2) 0.80%(2) 1.00%(2) 0.94% 0.87%
Net investment income 4.37%(2) 4.31%(2) 4.05%(2) 2.34% 4.20%
Supplemental Data:
Net assets, end of period, in thousands $1,037 $4,695 $5,687 $7,113 $11,943
Portfolio turnover rate 28% 46% 164% 429% 400%
</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 AND ADMINISTRATOR, THE ANNUALIZED EXPENSE AND NET INVESTMENT INCOME
RATIOS WOULD HAVE BEEN AS FOLLOWS:
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO INCOME RATIO
--------------- ------- -------------
AUGUST 31, 2006 1.10% 4.07%
AUGUST 31, 2005 0.95 4.16
AUGUST 31, 2004 1.05 4.00
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"), including the portfolio of investments, as of
August 31, 2006, 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, 2006, 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, 2006, 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 23, 2006
34
<Page>
MORGAN STANLEY INCOME TRUST
RESULTS OF SPECIAL SHAREHOLDER MEETING
On August 1, 2006, a Special Meeting of Shareholders of the Fund was scheduled
in order to vote on the proposals set forth below. The proposals failed to
obtain the quorum necessary in order to hold the meeting, and, therefore, the
meeting was adjourned until August 23, 2006, to permit further solicitation of
proxies. The meeting was held on August 23, 2006 and the voting results with
respect to these proposals were as follows:
(1) Election of Trustees:
FOR WITHHOLD ABSTAIN
--------- -------- -------
Frank L. Bowman 3,373,253 110,191 0
Kathleen A. Dennis 3,373,820 109,624 0
James F. Higgins 3,375,967 107,477 0
Joseph J. Kearns 3,371,053 112,391 0
Michael F. Klein 3,375,967 107,477 0
W. Allen Reed 3,370,419 113,025 0
Fergus Reid 3,369,173 114,271 0
(2) Elimination of certain fundamental investment restrictions:
<Table>
<Caption>
FOR AGAINST ABSTAIN
--------- ------- -------
Elimination of the fundamental policy restricting the Fund's
ability to pledge assets 2,940,013 79,557 129,203
Elimination of the fundamental policy restricting purchases of
securities on margin 2,931,021 75,120 142,632
Elimination of the fundamental policy prohibiting investments
in oil, gas, and other types of minerals or mineral leases 2,946,614 75,250 126,909
Elimination of the fundamental policy prohibiting or
restricting the purchase of securities of issuers in which
Directors or Officers have an interest 2,922,010 81,032 145,731
Elimination of the fundamental policy prohibiting investments
for purposes of exercising control 2,941,102 72,734 134,937
Elimination of the fundamental policy regarding investments in
unseasoned companies 2,931,644 75,196 141,933
</Table>
(3) Modify certain fundamental investment restrictions for:
<Table>
<Caption>
FOR AGAINST ABSTAIN
--------- ------- -------
Modify fundamental policy regarding diversification 2,962,733 63,448 122,592
Modify fundamental policy regarding borrowing money 2,946,951 75,657 126,165
Modify fundamental policy regarding loans 2,938,124 72,575 138,074
Modify fundamental policy regarding investment in commodities,
commodity contracts and futures contracts 2,934,508 83,031 131,234
Modify fundamental policy regarding issuance of senior
securities 2,954,018 67,059 127,696
</Table>
35
<Page>
(4) Reclassify certain fundamental policies as non-fundamental policies:
<Table>
<Caption>
FOR AGAINST ABSTAIN
--------- ------- -------
Reclassification as non-fundamental the fundamental policy
regarding the short sale of securities 2,945,867 79,574 123,332
Reclassification as non-fundamental the fundamental policy
prohibiting investments in other investment companies 2,954,301 76,385 118,087
Reclassification as non-fundamental the fundamental policy
prohibiting or limiting investments in illiquid or
restricted securities 2,937,188 71,788 139,797
</Table>
36
<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) OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS BY TRUSTEE** HELD BY TRUSTEE
- --------------------------------------- ----------- ------------ ----------------------- ------------- ------------------------
Frank L. Bowman (61) Trustee Since President and Chief 161 Director of the National
c/o Kramer Levin Naftalis & Frankel LLP August 2006 Executive Officer of Energy Foundation, the
Counsel to the Independent Trustees the Nuclear Energy U.S. Energy Association,
1177 Avenue of the Americas Institute (policy the American Council for
New York, NY 10036 organization) (since Capital Formation and
February 2005); the Armed Services YMCA
Director or Trustee of of the USA.
various Retail and
Institutional Funds
(since August 2006)
formerly variously,
Admiral in the U.S.
Navy, Director of Naval
Nuclear Propulsion
Program and Deputy
Administrator - Naval
Reactors in the
National Nuclear
Security Administration
at the U.S. Department
of Energy (1996-2004),
Honorary Knight
Commander of the Most
Excellent Order of the
British Empire.
Michael Bozic (65) Trustee Since Private investor; 175 Director of various
c/o Kramer Levin Naftalis & Frankel LLP April 1994 Chairperson of the business organizations.
Counsel to the Independent Trustees Valuation, Insurance
1177 Avenue of the Americas and Compliance
New York, NY 10036 Committee (since
October 2006); Director
or Trustee of the
Retail Funds (since
April 1994) and the
Institutional Funds
(since July 2003);
formerly Chairperson of
the Insurance Committee
(July 2006-September
2006); Vice Chairman of
Kmart Corporation
(December 1998-October
2000), Chairman and
Chief Executive Officer
of Levitz Furniture
Corporation (November
1995-November 1998) and
President and Chief
Executive Officer of
Hills Department Stores
(May 1991-July 1995);
variously Chairman,
Chief Executive
Officer, President and
Chief Operating Officer
(1987-1991) of the
Sears Merchandise Group
of Sears, Roebuck & Co.
Kathleen A. Dennis (53) Trustee Since President, Cedarwood 161 None.
c/o Kramer Levin Naftalis & Frankel LLP August 2006 Associates (mutual fund
Counsel to the Independent Trustees consulting) (since
1177 Avenue of the Americas 2006); Chairperson of
New York, NY 10036 the Closed-End, Money
Market and Alternatives
Sub-Committee of the
Investment Committee
(since October 2006)
and Director or Trustee
of various Retail and
Institutional Funds
(since August 2006);
formerly, Senior
Managing Director of
Victory Capital
Management (1993-2006).
</Table>
37
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS BY TRUSTEE** HELD BY TRUSTEE
- --------------------------------------- ----------- ------------ ----------------------- ------------- ------------------------
Edwin J. Garn (73) Trustee Since Consultant; Director or 175 Director of Franklin
1031 N. Chartwell Court January 1993 Trustee of the Retail Covey (time management
Salt Lake City, UT 84103 Funds (since January systems), BMW Bank of
1993) and the North America, Inc.
Institutional Funds (industrial loan
(since July 2003); corporation), Escrow
Member of the Utah Bank USA (industrial
Regional Advisory Board loan corporation);
of Pacific Corp. United Space Alliance
(utility company); (joint venture between
formerly Managing Lockheed Martin and the
Director of Summit Boeing Company) and
Ventures LLC Nuskin Asia Pacific
(2000-2004) (lobbying (multilevel marketing);
and consulting firm); member of the board of
(2000-2004) United various civic and
States Senator (R-Utah) charitable
(1974-1992) and organizations.
Chairman, Senate
Banking Committee
(1980-1986), Mayor of
Salt Lake City, Utah
(1971-1974), Astronaut,
Space Shuttle Discovery
(April 12-19, 1985),
and Vice Chairman,
Huntsman Corporation
(chemical company).
Wayne E. Hedien (72) Trustee Since Retired; Director or 175 Director of The PMI
c/o Kramer Levin Naftalis & Frankel LLP September Trustee of the Retail Group Inc. (private
Counsel to the Independent Trustees 1997 Funds; (Since September mortgage insurance);
1177 Avenue of the Americas 1997) and the Trustee and Vice
New York, NY 10036 Institutional Funds Chairman of The Field
(since July 2003); Museum of Natural
formerly associated History; director of
with the Allstate various other business
Companies (1966-1994), and charitable
most recently as organizations.
Chairman of The
Allstate Corporation
(March 1993-December
1994) and Chairman and
Chief Executive Officer
of its wholly-owned
subsidiary, Allstate
Insurance Company (July
1989-December 1994).
Dr. Manuel H. Johnson (57) Trustee Since Senior Partner, Johnson 175 Director of NVR, Inc.
c/o Johnson Smick Group, Inc. July 1991 Smick International, (home construction);
888 16th Street, N.W. Inc., a consulting Director of KFX Energy;
Suite 740 firm; Chairperson of Director of RBS
Washington, D.C. 20006 the Investment Greenwich Capital
Committee (since Holdings (financial
October 2006) and holding company).
Director or Trustee of
the Retail Funds (since
July 1991) and the
Institutional Funds
(since July 2003);
Co-Chairman and a
founder of the Group of
Seven Council (G7C), an
international economic
commission; formerly
Chairman of the Audit
Committee (July
1991-September 2006);
Vice Chairman of the
Board of Governors of
the Federal Reserve
System and Assistant
Secretary of the U.S.
Treasury.
</Table>
38
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND OTHER
POSITION(S) OFFICE AND COMPLEX DIRECTORSHIPS
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN HELD BY
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS BY TRUSTEE** TRUSTEE
- --------------------------------------- ----------- ------------ ----------------------- ------------- ------------------------
Joseph J. Kearns (64) Trustee Since President, Kearns & 176 Director of Electro Rent
c/o Kearns & Associates LLC July 2003 Associates LLC Corporation (equipment
PMB754 23852 (investment leasing), The Ford
Pacific Coast Highway consulting); Family Foundation, and
Malibu, CA 90265 Chairperson of the the UCLA Foundation.
Audit Committee (since
October 2006) and
Director or Trustee of
the Retail Funds (since
July 2003) and the
Institutional Funds
(since August 1994);
previously Deputy
Chairperson of the
Audit Committee (July
2003-September 2006)
and Chairperson of the
Audit Committee of the
Institutional Funds
(October 2001-July
2003); formerly CFO of
the J. Paul Getty
Trust.
Michael F. Klein (47) Trustee Since Chief Operating Officer 161 Director of certain
c/o Kramer Levin Naftalis & Frankel LLP August 2006 and Managing Director, investment funds managed
Counsel to the Independent Trustees Aetos Capital, LLC or sponsored by Aetos
1177 Avenue of the Americas (since March 2000); Capital LLC.
New York, NY 10036 Chairman of the
Fixed-Income
Sub-Committee of the
Investment Committee
(since October 2006)
and Director or Trustee
(since August 2006) of
various Retail and
Institutional Funds;
formerly Managing
Director, Morgan
Stanley & Co. Inc. and
Morgan Stanley Dean
Witter Investment
Management, President,
Morgan Stanley
Institutional Funds
(June 1998-March 2000)
and Principal, Morgan
Stanley & Co. Inc. and
Morgan Stanley Dean
Witter Investment
Management (August
1997-December 1999).
Michael E. Nugent (70) Chairman Chairman of General Partner of 175 None.
c/o Triumph Capital, L.P. of the the Board Triumph Capital, L.P.,
445 Park Avenue Board since July a private investment
New York, NY 10022 and 2006 and partnership; Chairman
Trustee Trustee of the Board of the
since Retail Funds and
July 1991 Institutional Funds
(since July 2006) and
Director or Trustee of
the Retail Funds (since
July 1991) and the
Institutional Funds
(since July 2001);
formerly Chairman of
the Insurance Committee
(until July 2006); Vice
President, Bankers
Trust Company and BT
Capital Corporation
(1984-1988).
</Table>
39
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND OTHER
POSITION(S) OFFICE AND COMPLEX DIRECTORSHIPS
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN HELD BY
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS BY TRUSTEE** TRUSTEE
- --------------------------------------- ----------- ------------ ----------------------- ------------- ------------------------
W. Allen Reed (59) Trustee Since Chairperson of the 161 Director of GMAC
c/o Kramer Levin Naftalis & Frankel LLP August 2006 Equity Sub-Commitee of (financial services),
Counsel to the Independent Trustees the Investment GMAC Insurance Holdings
1177 Avenue of the Americas Committee (since and Temple-Inland
New York, NY 10036 October 2006) and Industries (Packaging,
Director or Trustee Banking and Forrest
(since August 2006) of Products); member of the
various Retail and Board of Executives of
Institutional Funds. the Morgan Stanley
President and CEO of Capital International
General Motors Asset Editorial Board;
Management; Chairman Director of Legg Mason
and Chief Executive and Director of various
Officer of the GM Trust investment fund advisory
Bank and Corporate Vice boards.
President of General
Motors Corporation
(August 1994-December
2005).
Fergus Reid (74) Trustee Since Chairman of Lumelite 176 Trustee and Director of
c/o Lumelite Plastics Corporation July 2003 Plastics Corporation; certain investment
85 Charles Colman Blvd. Chairperson of the companies in the
Pawling, NY 12564 Governance Committee JPMorgan Funds complex
and Director or Trustee managed by J.P. Morgan
of the Retail Funds Investment Management
(since July 2003) and Inc.
the Institutional Funds
(since June 1992).
</Table>
40
<Page>
Interested Trustee:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
IN FUND
TERM OF COMPLEX OTHER
POSITION(S) OFFICE AND OVERSEEN BY DIRECTORSHIPS
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) INTERESTED HELD BY INTERESTED
INTERESTED TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS TRUSTEE** TRUSTEE
- --------------------------------------- ----------- ------------ ----------------------- ------------- ------------------------
James F. Higgins (58) Trustee Since Director or Trustee of 175 Director of AXA
c/o Morgan Stanley Trust June 2000 the Retail Funds (since Financial, Inc. and The
Harborside Financial Center June 2000) and the Equitable Life Assurance
Plaza Two Institutional Funds Society of the United
Jersey City, NJ 07311 (since July 2003); States (financial
Senior Advisor of services).
Morgan Stanley (since
August 2000).
</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") OR THE FUNDS ADVISED BY MORGAN STANLEY INVESTMENT
MANAGEMENT INC. AND MORGAN STANLEY AIP GP LP (THE "INSTITUTIONAL FUNDS").
** 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.) AS OF OCTOBER 2, 2006.
41
<Page>
Executive 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 (67) President and President since President (since September 2005) and Principal Executive Officer
1221 Avenue of the Americas Principal September (since May 2003) of funds in the Fund Complex; President (since
New York, NY 10020 Executive 2005 and September 2005) and Principal Executive Officer (since May 2003) of
Officer Principal the Van Kampen Funds; Managing Director, Director and/or Officer of
Executive the Investment Adviser and various entities affiliated with the
Officer since Investment Adviser; Director of Morgan Stanley SICAV (since May
May 2003 2004). Formerly, Executive Vice President (July 2003 to September
2005) of funds in the Fund Complex and the Van Kampen Funds;
President and Director of the Institutional Funds (March 2001 to
July 2003); Chief Global Operating Officer of Morgan Stanley
Investment Management Inc.; Chief Administrative Officer of Morgan
Stanley Investment Advisors Inc.; Chief Administrative Officer of
Morgan Stanley Services Company Inc.
J. David Germany (52) Vice President Since February Managing Director and (since December 2005) Chief Investment
Morgan Stanley Investment 2006 Officer - Global Fixed Income of Morgan Stanley Investment
Management Ltd. Management; Managing Director and Director of Morgan Stanley
25 Cabot Square Investment Management Limited; Vice President of the Retail and
Canary Wharf, London Institutional Funds (since February 2006).
United Kingdom E144QA
Dennis F. Shea (53) Vice President Since February Managing Director and (since February 2006) Chief Investment
1221 Avenue of the Americas 2006 Officer - Global Equity of Morgan Stanley Investment Management;
New York, NY 10020 Vice President of the Retail and Institutional Funds (since
February 2006). Formerly, Managing Director and Director of Global
Equity Research at Morgan Stanley.
Barry Fink (51) Vice President Since Managing Director and General Counsel of Morgan Stanley Investment
1221 Avenue of the Americas February 1997 Management; Managing Director of the Investment Adviser and various
New York, NY 10020 entities affiliated with the Investment Adviser; Vice President of
the Retail Funds and (since July 2003) the Institutional Funds.
Formerly, Secretary, General Counsel and/or Director of the
Investment Adviser and various entities affiliated with the
Investment Adviser; Secretary and General Counsel of the Retail
Funds.
Amy R. Doberman (44) Vice President Since July 2004 Managing Director and General Counsel, U.S. Investment Management
1221 Avenue of the Americas of Morgan Stanley Investment Management (since July 2004); Vice
New York, NY 10020 President of the Retail Funds and the Institutional Funds (since
July 2004); Vice President of the Van Kampen Funds (since
August 2004); Secretary (since February 2006) and Managing Director
(since July 2004) of the Investment Adviser and various entities
affiliated with the Investment Adviser. Formerly, Managing Director
and General Counsel - Americas, UBS Global Asset Management
(July 2000 to July 2004).
Carsten Otto (42) Chief Since October Managing Director and U.S. Director of Compliance for Morgan
1221 Avenue of the Americas Compliance 2004 Stanley Investment Management (since October 2004); Managing
New York, NY 10020 Officer Director and Chief Compliance Officer of Morgan Stanley Investment
Management. Formerly, Assistant Secretary and Assistant General
Counsel of the Retail Funds.
</Table>
42
<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 Yu (39) Vice President Since Executive Director of the Investment Adviser and various entities
1221 Avenue of the Americas December 1997 affiliated with the Investment Adviser; Vice President of the
New York, NY 10020 Retail Funds (since July 2002) and the Institutional Funds (since
December 1997). Formerly, Secretary of various entities affiliated
with the Investment Adviser.
Francis J. Smith (41) Treasurer and Treasurer since Executive Director of the Investment Adviser and various entities
c/o Morgan Stanley Trust Chief July 2003 and affiliated with the Investment Adviser; Treasurer and Chief
Harborside Financial Center Financial Chief Financial Financial Officer of the Retail Funds (since July 2003). Formerly,
Plaza Two Officer Officer since Vice President of the Retail Funds (September 2002 to July 2003).
Jersey City, NJ 07311 September 2002
Mary E. Mullin (39) Secretary Since July 1999 Executive Director of the Investment Adviser and various entities
1221 Avenue of the Americas affiliated with the Investment Adviser; Secretary of the Retail
New York, NY 10020 Funds (since July 2003) and the Institutional Funds (since June
1999).
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE OFFICER BEGAN SERVING THE RETAIL FUNDS OR THE
INSTITUTIONAL FUNDS.
2006 FEDERAL TAX NOTICE (UNAUDITED)
Of the Fund's ordinary dividends paid during the fiscal year ended August
31, 2006, 8.19% 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.
43
<Page>
TRUSTEES
Frank L. Bowman
Michael Bozic
Kathleen A. Dennis
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael F. Klein
Michael E. Nugent W.
Allen Reed
Fergus Reid
OFFICERS
Michael E. Nugent
CHAIRMAN OF THE BOARD
Ronald E. Robison
PRESIDENT AND PRINCIPAL EXECUTIVE OFFICER
J. David Germany
VICE PRESIDENT
Dennis F. Shea
VICE PRESIDENT
Barry Fink
VICE PRESIDENT
Amy R. Doberman
VICE PRESIDENT
Carsten Otto
CHIEF COMPLIANCE OFFICER
Stefanie V. Chang Yu
VICE PRESIDENT
Francis J. Smith
TREASURER AND CHIEF FINANCIAL OFFICER
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) 2006 Morgan Stanley
Morgan Stanley
MORGAN STANLEY FUNDS
MORGAN STANLEY
INCOME TRUST
Annual Report
August 31, 2006
Morgan Stanley
IISRPT 38557RPT RA06-00936P-Y08/06
<Page>
Item 2. Code of Ethics.
(a) The Fund has adopted a code of ethics (the "Code of Ethics") that applies to
its principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the Fund or a third
party.
(b) No information need be disclosed pursuant to this paragraph.
(c) Not applicable.
(d) Not applicable.
(e) Not applicable.
(f)
(1) The Fund's Code of Ethics is attached hereto as Exhibit 12 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:
2006
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $32,720 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 531(2) $5,328,768(2)
TAX FEES $ 5,500(3) $1,640,675(4)
ALL OTHER FEES $ -- $ --
TOTAL NON-AUDIT FEES $ 6,031 $6,969,443
TOTAL $38,751 $6,969,443
2005
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $32,666 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 540(2) $3,215,745(2)
TAX FEES $ 6,161(3) $ 24,000(4)
ALL OTHER FEES $ -- $ --
TOTAL NON-AUDIT FEES $ 6,701 $3,239,745
TOTAL $39,367 $3,239,745
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.
<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
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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 second fiscal quarter of the period covered
by this 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 19, 2006
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 19, 2006
/s/ Francis Smith
- -------------------------------------
Francis Smith
Principal Financial Officer
October 19, 2006