N-CSRS 1 a2156095zn-csrs.txt N-CSRS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-05654 Morgan Stanley Income Trust (Exact name of registrant as specified in charter) 1221 Avenue of the Americas, New York, New York 10020 (Address of principal executive offices) (Zip code) Ronald E. Robison 1221 Avenue of the Americas, New York, New York 10020 (Name and address of agent for service) Registrant's telephone number, including area code: 212-762-4000 Date of fiscal year end: August 31, 2005 Date of reporting period: February 28, 2005 Item 1 - Report to Shareholders WELCOME, SHAREHOLDER: IN THIS REPORT, YOU'LL LEARN ABOUT HOW YOUR INVESTMENT IN MORGAN STANLEY INCOME TRUST PERFORMED DURING THE SEMIANNUAL 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. FUND REPORT FOR THE SIX-MONTHS ENDED FEBRUARY 28, 2005 TOTAL RETURN FOR THE SIX MONTHS ENDED FEBRUARY 28, 2005
LEHMAN BROTHERS LIPPER INTERMEDIATE CORPORATE U.S. DEBT FUNDS GOVERNMENT/ BBB-RATED CLASS A CLASS B CLASS C CLASS D CREDIT INDEX(1) INDEX(2) 2.67% 2.36% 2.36% 2.80% 0.25% 2.81%
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH IS NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT morganstanley.com, OR SPEAK WITH YOUR FINANCIAL ADVISOR. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE AND FUND SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE PERFORMANCE OF THE FUND'S FOUR SHARE CLASSES VARIES BECAUSE EACH HAS DIFFERENT EXPENSES. THE FUND'S TOTAL 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 The period began in the midst of a sluggish economic recovery brought on by less-than-expected payroll gains. Investors responded to this perceived softness in the economy by pushing yields down well into the third quarter. Despite these factors, the Federal Reserve Open Market Committee reaffirmed its pledge to raise the federal funds target rate at a measured pace and did so in its meetings through the end of the period. This stance was supported by the overall trend in economic growth, which picked up steam at the end of 2004. The first two months of 2005 continued much as the ending weeks of 2004. The yield curve (which measures the difference in yields between short-, intermediate- and long-maturity Treasuries) flattened further as yields of short- and intermediate-maturity bonds rose while longer-term yields fell. The bulk of the increase in short-term yields occurred in February, when a recent string of strong payroll numbers, evidence of an upward trend in inflation numbers and testimony by Alan Greenspan finally turned the bond market psychology to anticipation of an improving economy. The generally optimistic economic environment was strongly positive for corporate bonds, which also benefited from investors' ongoing hunger for yield. Spreads -- a measure of the additional yield over Treasuries demanded by investors for assuming credit risk -- tightened over the period, though not uniformly. Performance at the sector level varied, with gaming and lodging, energy and insurance among the best-performing components of the market. Each sector benefited from improved earnings from key companies. By contrast, automobile companies and their suppliers were among the worst performers. The electronics sector also suffered. PERFORMANCE ANALYSIS Morgan Stanley Income Trust outperformed the Lehman Brothers Intermediate U.S. Government/Credit Index and underperformed the Lipper Corporate Debt Funds BBB-Rated Index for the six months ended February 28, 2005, assuming no deduction of applicable sales charges. The Fund's strong performance relative to the Lehman index was driven in large part by its focus on corporate securities, which boosted its performance relative to the more broadly constructed Lehman benchmark. Within its 2 portfolio, the Fund benefited from an emphasis on the debt of insurance companies, which outperformed strongly for the period. The Fund also profited from strong security selection in the paper and energy sectors. However, the Fund's interest-rate posture produced mixed results for the period. The low level of interest rates across the yield curve at the beginning of the period led us to conclude that they had little room left to fall. As a result, we kept the Fund's overall interest-rate exposure well below that of its benchmark. This posture was unfavorable to the Fund's returns in those months early in the period when the market rallied, but was more beneficial during periods of rising rates such as in January and February. THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL OR BE HELD BY THE FUND IN THE FUTURE. 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, ASSET-BACKED SECURITIES AND SECURITIES ISSUED BY FOREIGN GOVERNMENTS OR CORPORATIONS. IN DECIDING WHICH SECURITIES TO BUY, HOLD OR SELL, THE FUND'S "INVESTMENT ADVISER," MORGAN STANLEY INVESTMENT ADVISORS INC., CONSIDERS DOMESTIC AND INTERNATIONAL ECONOMIC DEVELOPMENTS, INTEREST RATE TRENDS, BOND RATINGS AND OTHER FACTORS RELATING TO THE ISSUERS. FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND AND FOURTH FISCAL QUARTERS BY FILING THE SCHEDULE ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON FORM N-CSR. MORGAN STANLEY ALSO DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO FUND SHAREHOLDERS AND MAKES THESE REPORTS AVAILABLE ON ITS PUBLIC WEB SITE, www.morganstanley.com. EACH MORGAN STANLEY FUND ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE FUND'S FIRST AND THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES NOT DELIVER THE REPORTS FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS, NOR ARE THE REPORTS POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY, HOWEVER, OBTAIN THE FORM N-Q FILINGS (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. 3 PORTFOLIO COMPOSITION Corporate Bonds 82.5% US Government Agencies & Obligations 7.0 Asset-Backed 5.7 Foreign Government Obligations 2.9 Short-Term Paper 1.9
LONG-TERM CREDIT ANALYSIS Aaa/AAA 17.1% Aa/AA 9.4 A/A 24.8 Baa/BBB 41.7 Ba/BB 7.0
DATA AS OF FEBRUARY 28, 2005. 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. INFORMATION ON THE OPERATION OF THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE SEC AT (800) SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT OF A DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS (publicinfo@sec.gov) OR BY WRITING THE PUBLIC REFERENCE SECTION OF THE SEC, WASHINGTON, DC 20549-0102. YOU MAY OBTAIN COPIES OF A FUND'S FISCAL QUARTER FILINGS BY CONTACTING MORGAN STANLEY CLIENT RELATIONS AT (800) 869-NEWS. PROXY VOTING POLICIES AND PROCEDURES A DESCRIPTION OF (1) THE FUND'S POLICIES AND PROCEDURES WITH RESPECT TO THE VOTING OF PROXIES RELATING TO THE FUND'S PORTFOLIO SECURITIES AND (2) HOW THE FUND VOTED PROXIES RELATING TO PORTFOLIO SECURITIES DURING THE MOST RECENT 12-MONTH PERIOD ENDED JUNE 30, 2004, IS AVAILABLE WITHOUT CHARGE, UPON REQUEST, BY CALLING (800) 869-NEWS OR 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 PERFORMANCE SUMMARY AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED FEBRUARY 28, 2005
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 3.47%(3) 2.68%(3) 2.79%(3) 3.66%(3) (0.92)(4) (2.25)(4) 1.80(4) -- 5 YEARS 5.93(3) 5.09(3) 5.08(3) 5.91(3) 5.01(4) 4.75(4) 5.08(4) -- 10 YEARS -- 4.96(3) -- -- -- 4.96(4) -- -- SINCE INCEPTION 5.05(3) 5.52(3) 4.28(3) 5.10(3) 4.45(4) 5.52(4) 4.28(4) --
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT morganstanley.com OR SPEAK WITH YOUR FINANCIAL ADVISOR. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE AND FUND SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE TABLE DOES NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PERFORMANCE FOR CLASS A, CLASS B, CLASS C, AND CLASS D SHARES WILL VARY DUE TO DIFFERENCES IN SALES CHARGES AND EXPENSES. * THE MAXIMUM FRONT-END SALES CHARGE FOR CLASS A IS 4.25%. ** THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B IS 5.0%. THE CDSC DECLINES TO 0% AFTER SIX YEARS. + THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE FOR CLASS C IS 1% FOR SHARES REDEEMED WITHIN ONE YEAR OF PURCHASE. ++ CLASS D HAS NO SALES CHARGE. (1) THE LEHMAN BROTHERS INTERMEDIATE U.S. GOVERNMENT/CREDIT INDEX TRACKS THE PERFORMANCE OF U.S. GOVERNMENT AND CORPORATE OBLIGATIONS, INCLUDING U.S. GOVERNMENT AGENCY AND TREASURY SECURITIES, AND CORPORATE AND YANKEE BONDS WITH MATURITIES OF 1 TO 10 YEARS. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. (2) THE LIPPER CORPORATE DEBT FUNDS BBB-RATED INDEX IS AN EQUALLY WEIGHTED PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN THE LIPPER CORPORATE DEBT FUNDS BBB-RATED CLASSIFICATION. THE INDEX, WHICH IS ADJUSTED FOR CAPITAL GAINS DISTRIBUTIONS AND INCOME DIVIDENDS, IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT. THERE ARE CURRENTLY 30 FUNDS REPRESENTED IN THIS INDEX. (3) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT THE DEDUCTION OF ANY SALES CHARGES. (4) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND THE DEDUCTION OF THE MAXIMUM APPLICABLE SALES CHARGE. SEE THE FUND'S CURRENT PROSPECTUS FOR COMPLETE DETAILS ON FEES AND SALES CHARGES. 5 EXPENSE EXAMPLE As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments and redemption fees; and (2) ongoing costs, including management fees; distribution and service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period 09/01/04 - 02/28/05. ACTUAL EXPENSES The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of the table below provides information about hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing cost of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs, and will not help you determine the relative total cost of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD * --------------- --------------- --------------- 09/01/04 - 09/01/04 02/28/05 02/28/05 --------------- --------------- --------------- CLASS A Actual (2.67% return) $ 1,000.00 $ 1,026.70 $ 4.77 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,020.08 $ 4.76 CLASS B Actual (2.36% return) $ 1,000.00 $ 1,023.60 $ 8.28 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,016.61 $ 8.25 CLASS C Actual (2.36% return) $ 1,000.00 $ 1,023.60 $ 7.98 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,016.91 $ 7.95 CLASS D Actual (2.80% return) $ 1,000.00 $ 1,028.00 $ 4.02 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,020.83 $ 4.01
---------- * EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.95%, 1.65%, 1.59% AND 0.80% RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). IF THE FUND HAD BORNE ALL OF ITS EXPENSES, THE ANNUALIZED EXPENSE RATIOS WOULD HAVE BEEN 1.07%, 1.77%, 1.71% AND 0.92%, RESPECTIVELY. 6 MORGAN STANLEY INCOME TRUST PORTFOLIO OF INVESTMENTS - FEBRUARY 28, 2005 (UNAUDITED)
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE -------------------------------------------------------------------------------------------------------- Corporate Bonds (82.5%) ADVERTISING/MARKETING SERVICES (1.1%) $ 395 Interpublic Group of Companies, Inc. (The) 5.40% 11/15/09 $ 398,322 535 WPP Finance Corp. - 144A** (United Kingdom) 5.875 06/15/14 559,873 ---------- 958,195 ---------- AEROSPACE & DEFENSE (1.2%) 175 Raytheon Co. 4.50 11/15/07 177,957 300 Raytheon Co. 4.85 01/15/11 302,531 32 Raytheon Co. 6.75 08/15/07 33,921 100 Raytheon Co. 8.30 03/01/10 116,173 405 Systems 2001 Asset Trust - 144A** (Cayman Islands) 6.664 09/15/13 441,850 ---------- 1,072,432 ---------- AIR FREIGHT/COURIERS (0.5%) 125 Fedex Corp. 2.65 04/01/07 121,441 280 Fedex Corp. 7.25 02/15/11 313,883 ---------- 435,324 ---------- AIRLINES (0.6%) 247 America West Airlines, Inc. (Series 01-1) 7.10 04/02/21 260,023 233 Continental Airlines, Inc. 6.648 09/15/17 224,240 ---------- 484,263 ---------- AUTO PARTS: O.E.M. (0.3%) 265 Johnson Controls, Inc. 5.00 11/15/06 269,455 ---------- BEVERAGES: ALCOHOLIC (0.6%) 530 Miller Brewing Co. - 144A** 4.25 08/15/08 529,068 ---------- BROADCASTING (0.4%) 340 Clear Channel Communications, Inc. 7.65 09/15/10 380,814 ---------- BUILDING PRODUCTS (0.2%) 160 Masco Corp. 4.625 08/15/07 161,778 ---------- CABLE/SATELLITE TV (2.2%) 1,040 Comcast Corp. 6.50 01/15/15 1,147,126 445 Cox Communications, Inc. - 144A** 4.625 01/15/10 440,177 360 Echostar DBS Corp. 6.375 10/01/11 372,600 ---------- 1,959,903 ---------- CASINO/GAMING (0.7%) 30 MGM Mirage Inc. 6.00 10/01/09 30,900 540 MGM Mirage Inc. 8.50 09/15/10 619,650 ---------- 650,550 ----------
SEE NOTES TO FINANCIAL STATEMENTS 7
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE -------------------------------------------------------------------------------------------------------- CHEMICALS: MAJOR DIVERSIFIED (0.4%) $ 345 ICI Wilmington Inc. 4.375% 12/01/08 $ 343,835 ---------- CONTAINERS/PACKAGING (0.6%) 540 Sealed Air Corp. - 144A** 5.625 07/15/13 557,035 ---------- DEPARTMENT STORES (1.4%) 1,045 May Department Stores Co., Inc. 5.95 11/01/08 1,094,787 130 May Department Stores Co., Inc. 6.875 11/01/05 132,784 ---------- 1,227,571 ---------- DRUGSTORE CHAINS (0.8%) 584 CVS Corp. - 144A** 5.789 01/10/26 601,112 53 CVS Corp. - 144A** 6.204 10/10/25 56,973 ---------- 658,085 ---------- ELECTRIC UTILITIES (8.7%) 520 Arizona Public Service Co. 5.80 06/30/14 551,697 285 Arizona Public Service Co. 6.75 11/15/06 297,195 235 CC Funding Trust I 6.90 02/16/07 247,136 105 Cincinnati Gas & Electric Co. 5.70 09/15/12 110,344 365 Consolidated Natural Gas Co. 5.00 12/01/14 364,025 470 Consolidated Natural Gas Co. (Series B) 5.375 11/01/06 480,541 35 Consolidated Natural Gas Co. (Series C) 6.25 11/01/11 37,957 460 Consumers Energy Co. 4.80 02/17/09 464,774 55 Detroit Edison Co. 6.125 10/01/10 59,167 475 Detroit Edison Co. - 144A** 4.80 02/15/15 467,465 535 Duke Energy Corp. 4.50 04/01/10 535,705 365 Entergy Gulf States, Inc. 2.80 12/01/09 365,303 285 Entergy Gulf States, Inc. 3.60 06/01/08 278,837 795 Exelon Corp. 6.75 05/01/11 878,379 315 Jersey Central Power & Light Company 5.625 05/01/16 327,449 235 Ohio Edison Co. 5.45 05/01/15 238,573 495 Pacific Gas & Electric Co. 6.05 03/01/34 523,661 140 Panhandle Eastern Pipe Line Co. (Series B) 2.75 03/15/07 136,233 130 Public Service Electric & Gas Co. (Series MTNB) 5.00 01/01/13 131,977 110 Southern California Edison Co. 5.00 01/15/14 110,510 170 Texas Eastern Transmission 7.00 07/15/32 198,190 180 Texas-New Mexico Power Co. 6.25 01/15/09 187,590 270 TXU Energy Co. 7.00 03/15/13 302,819
SEE NOTES TO FINANCIAL STATEMENTS 8
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE -------------------------------------------------------------------------------------------------------- $ 20 Wisconsin Electric Power Co. 3.50% 12/01/07 $ 19,684 235 Wisconsin Electric Power Co. 5.625 05/15/33 244,263 ---------- 7,559,474 ---------- ELECTRICAL PRODUCTS (0.6%) 480 Cooper Industries Inc. 5.25 07/01/07 491,015 ---------- ELECTRONIC EQUIPMENT/INSTRUMENTS (0.7%) 585 Xerox Corp. 7.125 06/15/10 634,725 ---------- FINANCE/RENTAL/LEASING (6.1%) 510 CIT Group Inc. 2.875 09/29/06 502,669 320 CIT Group Inc. 7.375 04/02/07 341,167 960 Countrywide Home Loans, Inc. (Series MTN) 3.25 05/21/08 928,521 430 Ford Motor Credit Co. 7.25 10/25/11 448,325 765 Ford Motor Credit Co. 7.375 10/28/09 802,817 835 MBNA Corp. 6.125 03/01/13 892,593 135 Nationwide Building Society - 144A** (United Kingdom) 4.25 02/01/10 133,436 745 SLM Corp. (Series MTNA) 5.00 10/01/13 749,176 525 Toyota Motor Credit Corp. 5.65 01/15/07 541,162 ---------- 5,339,866 ---------- FINANCIAL CONGLOMERATES (7.6%) 735 Chase Manhattan Corp. 6.00 02/15/09 773,307 500 Citicorp 6.375 11/15/08 537,690 330 Citigroup Inc. 5.625 08/27/12 348,094 265 Citigroup Inc. 6.00 02/21/12 285,429 40 General Electric Capital Corp. 4.75 09/15/14 39,753 830 General Electric Capital Corp. (Series MTNA) 6.75 03/15/32 981,023 385 General Motors Acceptance Corp. 4.50 07/15/06 384,566 2,095 General Motors Acceptance Corp. 6.875 09/15/11 2,080,040 605 General Motors Acceptance Corp. 8.00 11/01/31 608,560 410 Prudential Funding LLC (Series MTN) - 144A** 6.60 05/15/08 438,235 170 Prudential Holdings, LLC (Series B) (FSA) - 144A** 7.245 12/18/23 204,126 ---------- 6,680,823 ---------- FOOD RETAIL (0.2%) 160 Safeway Inc. 6.15 03/01/06 163,844 ----------
SEE NOTES TO FINANCIAL STATEMENTS 9
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE -------------------------------------------------------------------------------------------------------- FOOD: MAJOR DIVERSIFIED (1.1%) $ 230 Conagra Foods, Inc. 6.00% 09/15/06 $ 237,023 700 Kraft Foods Inc. 5.625 11/01/11 737,484 ---------- 974,507 ---------- FOREST PRODUCTS (0.2%) 150 Weyerhaeuser Co. 6.00 08/01/06 154,545 ---------- GAS DISTRIBUTORS (1.4%) 370 Nisource Finance Corp. 3.43 11/23/09 371,628 330 Nisource Finance Corp. 7.625 11/15/05 339,196 31 Ras Laffan Liquid Natural Gas Co. Ltd. - 144A** (Qatar) 7.628 09/15/06 32,228 335 Ras Laffan Liquid Natural Gas Co. Ltd. - 144A** (Qatar) 8.294 03/15/14 393,848 105 Sempra Energy 4.621 05/17/07 105,963 ---------- 1,242,863 ---------- HOME FURNISHINGS (0.3%) 130 Mohawk Industries, Inc. (Class C) 6.50 04/15/07 136,284 110 Mohawk Industries, Inc. (Series D) 7.20 04/15/12 123,719 ---------- 260,003 ---------- HOME IMPROVEMENT CHAINS (0.4%) 300 Lowe's Companies, Inc. 7.50 12/15/05 309,497 ---------- HOSPITAL/NURSING MANAGEMENT (0.8%) 625 HCA, Inc. 6.30 10/01/12 639,028 50 HCA, Inc. 7.875 02/01/11 55,405 ---------- 694,433 ---------- HOTELS/RESORTS/CRUISELINES (1.6%) 695 Hyatt Equities LLC - 144A** 6.875 06/15/07 721,606 195 Marriott International, Inc. (Series D) 8.125 04/01/05 195,724 265 Marriott International, Inc. (Series E) 7.00 01/15/08 284,342 170 Starwood Hotels & Resorts Worldwide, Inc. 7.375 05/01/07 181,475 ---------- 1,383,147 ---------- HOUSEHOLD/PERSONAL CARE (0.7%) 590 Clorox Co. (The) -144A** 2.543 12/14/07 590,508 ---------- INDUSTRIAL CONGLOMERATES (1.5%) 515 Honeywell International, Inc. 5.125 11/01/06 525,246
SEE NOTES TO FINANCIAL STATEMENTS 10
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE -------------------------------------------------------------------------------------------------------- $ 315 Hutchison Whampoa International Ltd. - 144A** (Cayman Islands) 5.45% 11/24/10 $ 325,198 400 Hutchison Whampoa International Ltd. - 144A** (Cayman Islands) 6.50 02/13/13 431,612 ---------- 1,282,056 ---------- INSURANCE BROKERS/SERVICES (2.7%) 1,335 Farmers Exchange Capital - 144A** 7.05 07/15/28 1,416,666 960 Marsh & McLennan Co., Inc. 5.875 08/01/33 910,533 ---------- 2,327,199 ---------- INTEGRATED OIL (1.9%) 750 Amerada Hess Corp. 7.875 10/01/29 926,695 345 Conoco Funding Co. (Canada) 6.35 10/15/11 380,634 40 Petro-Canada (Canada) 4.00 07/15/13 37,202 350 Petro-Canada (Canada) 5.35 07/15/33 330,409 ---------- 1,674,940 ---------- INVESTMENT BANKS/BROKERS (1.1%) 400 Goldman Sachs Group Inc. 5.25 10/15/13 407,572 60 Goldman Sachs Group Inc. 6.60 01/15/12 66,373 455 Goldman Sachs Group Inc. 6.875 01/15/11 506,875 ---------- 980,820 ---------- LIFE/HEALTH INSURANCE (0.6%) 475 John Hancock Global Funding II - 144A** 7.90 07/02/10 547,244 ---------- MAJOR BANKS (3.4%) 980 Bank of America Corp. 3.375 02/17/09 948,934 250 Bank of New York Co., Inc. (The) 5.20 07/01/07 256,468 675 HSBC Finance Corp. 6.75 05/15/11 745,834 480 Huntington National Bank 2.75 10/16/06 471,722 475 Wachovia Bank NA (Series BKNT) 7.80 08/18/10 548,976 ---------- 2,971,934 ---------- MAJOR TELECOMMUNICATIONS (3.5%) 340 AT&T Corp. 9.75 11/15/31 433,925 150 Deutsche Telekom International Finance Corp. (Netherlands) 8.50 06/15/10 176,454 400 Deutsche Telekom International Finance Corp. (Netherlands) 8.75 06/15/30 540,710 305 France Telecom S.A. (France) 9.25 03/01/31 416,849 80 GTE Corp. 6.36 04/15/06 82,123 380 Sprint Capital Corp. 8.75 03/15/32 511,782
SEE NOTES TO FINANCIAL STATEMENTS 11
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE -------------------------------------------------------------------------------------------------------- $ 370 Telecom Italia Capital SpA - 144A** (Luxembourg) 4.00% 01/15/10 $ 359,146 365 Telecom Italia Capital SpA (Luxembourg) 4.00 11/15/08 359,068 165 Verizon Global Funding Corp. 7.25 12/01/10 186,393 ---------- 3,066,450 ---------- MANAGED HEALTH CARE (3.2%) 945 Aetna, Inc. 7.875 03/01/11 1,094,001 790 Health Net, Inc. 9.875 04/15/11 946,281 270 UnitedHealth Group Inc. 7.50 11/15/05 276,573 175 WellPoint Health Networks Inc. 6.375 06/15/06 180,539 265 WellPoint Inc. - 144A** 3.75 12/14/07 261,335 55 WellPoint Inc. - 144A** 4.25 12/15/09 54,259 ---------- 2,812,988 ---------- MEDIA CONGLOMERATES (3.2%) 730 News America Holdings, Inc. 7.28 06/30/28 846,255 600 News America Holdings, Inc. 7.75 02/01/24 721,664 50 News America Holdings, Inc. 8.875 04/26/23 65,975 65 News America Inc. 4.75 03/15/10 65,261 530 Time Warner Co., Inc. 7.57 02/01/24 631,919 360 Time Warner, Inc. 7.625 04/15/31 440,387 ---------- 2,771,461 ---------- MEDICAL SPECIALTIES (0.2%) 190 Fisher Scientific International, Inc. - 144A** 6.75 08/15/14 201,400 ---------- METAL FABRICATIONS (0.1%) 95 Northwest Pipeline Corp. 8.125 03/01/10 104,856 ---------- MOTOR VEHICLES (1.8%) 345 DaimlerChrysler North American Holdings Co. 7.30 01/15/12 387,306 100 DaimlerChrysler North American Holdings Co. 8.00 06/15/10 113,746 490 DaimlerChrysler North American Holdings Co. 8.50 01/18/31 626,299 430 General Motors Corp. 8.375 07/15/33 423,521 ---------- 1,550,872 ---------- MULTI-LINE INSURANCE (3.2%) 505 AIG Sun America Global Finance VI - 144A** 6.30 05/10/11 542,032
SEE NOTES TO FINANCIAL STATEMENTS 12
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE -------------------------------------------------------------------------------------------------------- $ 565 American General Finance Corp. (Series MTNH) 4.625% 09/01/10 $ 563,637 625 American General Finance Corp. (Series MTNF) 5.875 07/14/06 642,287 365 Equitable Life Assurance Society - 144A** 6.95 12/01/05 373,872 135 Hartford Financial Services Group, Inc. 2.375 06/01/06 132,062 500 Hartford Financial Services Group, Inc. 7.75 06/15/05 506,289 ---------- 2,760,179 ---------- OIL & GAS PRODUCTION (4.0%) 410 Kerr-McGee Corp. 5.875 09/15/06 421,333 230 Kerr-McGee Corp. 6.625 10/15/07 242,519 370 Nexen Inc. (Canada) 5.05 11/20/13 366,147 605 Occidental Petroleum Corp. 8.45 02/15/29 832,355 55 Pemex Project Funding Master Trust 7.375 12/15/14 61,188 210 Pemex Project Funding Master Trust 7.875 02/01/09 233,100 1,170 Pemex Project Funding Master Trust 8.00 11/15/11 1,339,650 ---------- 3,496,292 ---------- OIL REFINING/MARKETING (0.7%) 140 Ashland Inc. (Series MTNJ) 7.83 08/15/05 142,711 300 Marathon Oil Corp. 5.375 06/01/07 308,026 120 Marathon Oil Corp. 6.00 07/01/12 129,033 ---------- 579,770 ---------- PROPERTY - CASUALTY INSURERS (1.0%) 875 Mantis Reef Ltd. - 144A** (Australia) 4.692 11/14/08 870,605 ---------- PULP & PAPER (1.8%) 590 Abitibi-Consolidated Inc. (Canada) 8.55 08/01/10 629,825 505 Bowater Canada Finance (Canada) 7.95 11/15/11 553,317 335 Sappi Papier Holding AG - 144A** (Austria) 6.75 06/15/12 366,454 ---------- 1,549,596 ---------- RAILROADS (1.5%) 305 Burlington North Santa Fe Railway Co. 4.575 01/15/21 300,090 230 CSX Corp. 2.75 02/15/06 227,388 160 CSX Corp. 9.00 08/15/06 170,872 190 Norfolk Southern Corp. 7.35 05/15/07 202,806 210 Union Pacific Corp. 6.65 01/15/11 231,118 160 Union Pacific Corp. (Series MTNE) 6.79 11/09/07 170,349 ---------- 1,302,623 ----------
SEE NOTES TO FINANCIAL STATEMENTS 13
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE -------------------------------------------------------------------------------------------------------- REAL ESTATE DEVELOPMENT (0.8%) $ 355 World Financial Properties - 144A** 6.91% 09/01/13 $ 384,604 262 World Financial Properties - 144A** 6.95 09/01/13 284,049 ---------- 668,653 ---------- REAL ESTATE INVESTMENT TRUSTS (0.5%) 100 EOP Operating L.P. 4.75 03/15/14 96,738 270 Rouse Co. (The) 3.625 03/15/09 251,673 135 Rouse Co. (The) 5.375 11/26/13 128,568 ---------- 476,979 ---------- REGIONAL BANKS (1.2%) 890 Marshall & Isley Bank (Series BKNT) 3.80 02/08/08 880,460 175 US Bancorp 5.10 07/15/07 178,903 ---------- 1,059,363 ---------- SAVINGS BANKS (1.4%) 70 Household Finance Corp. 4.125 11/16/09 68,930 70 Household Finance Corp. 6.375 10/15/11 76,472 215 Household Finance Corp. 8.00 07/15/10 248,611 685 Washington Mutual Bank 5.50 01/15/13 709,561 105 Washington Mutual Inc. 8.25 04/01/10 120,703 ---------- 1,224,277 ---------- SPECIALTY STORES (0.2%) 185 Autonation, Inc. 9.00 08/01/08 209,975 ---------- TOBACCO (1.1%) 305 Altria Group, Inc. 7.00 11/04/13 335,769 535 Altria Group, Inc. 7.75 01/15/27 626,967 ---------- 962,736 ---------- WIRELESS TELECOMMUNICATIONS (0.5%) 390 AT&T Wireless Services, Inc. 7.875 03/01/11 453,064 ---------- Total Corporate Bonds (COST $70,943,549) 72,073,890 ---------- Asset-Backed Securities (5.7%) FINANCE/RENTAL/LEASING 550 Chase Manhattan Auto Owner Trust 2004-A A4 2.83 09/15/10 535,222 350 CIT Equipment Collateral 2004-EF1 A3 3.50 09/20/08 345,591 550 Daimler Chrysler Auto Trust 2003-B A4 2.86 03/09/09 540,383
SEE NOTES TO FINANCIAL STATEMENTS 14
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ------------------------------------------------------------------------------------------------------------------ $ 450 Harley-Davidson Motorcycle Trust 2004-2 A2 3.56% 02/15/12 $ 446,512 450 Harley-Davidson Motorcycle Trust 2005-1 A2 3.76 12/17/12 446,903 550 Honda Auto Receivables Owner Trust 2004-1 A4 3.06 10/21/09 539,824 800 MBNA Credit Card Master Trust 2004-A4 A4 2.70 09/15/09 780,750 500 TXU Electric Delivery Trans 2004-1 A2 4.81 11/17/14 505,072 500 USAA Auto Owner Trust 2004-2 3.58 02/15/11 495,511 350 Volkswagen Auto Lease Trust 2005-A A3 3.82 05/20/08 350,000 ------------ Total Asset-Backed Securities (COST $5,062,381) 4,985,768 ------------ Foreign Government Obligations (2.9%) 455 Russian Federation 5.00 03/31/30 480,025 755 United Mexican States (Mexico) 8.30 08/15/31 912,040 110 United Mexican States (Mexico) 8.375 01/14/11 128,260 860 United Mexican States (Mexico) 9.875 02/01/10 1,046,620 ------------ Total Foreign Government Obligations (COST $2,520,048) 2,566,945 ------------ U.S. Government Agency Mortgage-Backed Securities (0.1%) 21 Federal Home Loan Mortgage Corp. 7.50 09/01/30 22,903 43 Federal National Mortgage Association 7.50 01/01/30 - 04/01/32 46,408 ------------ Total U.S. Government Agency Mortgage-Backed Securities (COST $68,215) 69,311 ------------ U.S. Government Obligations (6.9%) 2,075 U.S. Treasury Bond 6.125 08/15/29 2,474,682 2,850 U.S. Treasury Note 4.25 08/15/13 2,837,756 950 U.S. Treasury Strip 0.00 02/15/25 358,056 950 U.S. Treasury Strip 0.00 02/15/27 331,864 ------------ Total U.S. Government Obligations (COST $6,120,309) 6,002,358 ------------
SEE NOTES TO FINANCIAL STATEMENTS 15
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ------------------------------------------------------------------------------------------------------------------ Short-Term Investments (1.8%) U.S. Government Obligation (a) (0.3%) $ 300 U.S. Treasury Bill* (COST $299,637) 1.895% 03/24/05 $ 299,637 ------------ Repurchase Agreement (1.5%) 1,318 Joint repurchase agreement account (dated 02/28/05; proceeds $1,318,096) (b) (COST $1,318,000) 2.62 03/01/05 1,318,000 ------------ Total Short-Term Investments (COST $1,617,637) 1,617,637 ------------ Total Investments (COST $86,332,139) 99.9% 87,315,909 Other Assets in Excess of Liablities 0.1 65,102 ----- ------------ Net Assets 100.0% $ 87,381,011 ===== ============
---------- * A PORTION OF THESE SECURITIES HAVE BEEN PHYSICALLY SEGREGATED IN CONNECTION WITH OPEN FUTURES CONTRACTS IN THE AMOUNT OF $55,950. ** RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. (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 $21,014,792 IN CONNECTION WITH OPEN FUTURES CONTRACTS. (d) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $2,103,044 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $1,119,274, RESULTING IN NET UNREALIZED APPRECIATION OF $983,770. BOND INSURANCE: FSA FINANCIAL SECURITY ASSURANCE. FUTURES CONTRACTS OPEN AT FEBRUARY 28, 2005:
NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE UNREALIZED CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE APPRECIATION --------------------------------------------------------------------------------------------------------- 65 Short U.S. Treasury Notes 2 year June 2005 $ (13,480,390) $ 44,922 19 Short U.S. Treasury Notes 2 year March 2005 (3,955,859) 13,670 30 Short U.S. Treasury Notes 5 year June 2005 (3,227,354) 19,509 3 Short U.S. Treasury Notes 5 year March 2005 (324,375) 4,351 --------- Total unrealized appreciation $ 82,452 =========
SEE NOTES TO FINANCIAL STATEMENTS 16 MORGAN STANLEY INCOME TRUST FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES FEBRUARY 28, 2005 (UNAUDITED) ASSETS: Investments in securities, at value (cost $86,332,139) $ 87,315,909 Receivable for: Interest 1,159,180 Investments sold 283,203 Shares of beneficial interest sold 34,226 Variation margin 29,115 Prepaid expenses and other assets 17,703 --------------- TOTAL ASSETS 88,839,336 --------------- LIABILITIES: Payable for: Investments purchased 1,046,183 Shares of beneficial interest redeemed 175,530 Distribution fee 51,179 Dividends and distributions to shareholders 36,602 Investment advisory fee 17,441 Administration fee 5,473 Accrued expenses and other payables 125,917 --------------- TOTAL LIABILITIES 1,458,325 --------------- NET ASSETS $ 87,381,011 =============== COMPOSITION OF NET ASSETS: Paid-in-capital $ 95,268,806 Net unrealized appreciation 1,066,222 Dividends in excess of net investment income (806,440) Accumulated net realized loss (8,147,577) --------------- NET ASSETS $ 87,381,011 =============== CLASS A SHARES: Net Assets $ 7,730,725 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 805,440 NET ASSET VALUE PER SHARE $ 9.60 =============== MAXIMUM OFFERING PRICE PER SHARE, (NET ASSET VALUE PLUS 4.44% OF NET ASSET VALUE) $ 10.03 =============== CLASS B SHARES: Net Assets $ 67,223,569 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 7,069,450 NET ASSET VALUE PER SHARE $ 9.51 =============== CLASS C SHARES: Net Assets $ 7,142,987 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 749,434 NET ASSET VALUE PER SHARE $ 9.53 =============== CLASS D SHARES: Net Assets $ 5,283,730 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 557,555 NET ASSET VALUE PER SHARE $ 9.48 ===============
SEE NOTES TO FINANCIAL STATEMENTS 17 STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED FEBRUARY 28, 2005 (UNAUDITED) NET INVESTMENT INCOME: INTEREST INCOME $ 2,340,497 --------------- EXPENSES Distribution fee (Class A shares) 5,864 Distribution fee (Class B shares) 299,945 Distribution fee (Class C shares) 28,849 Investment advisory fee 219,158 Transfer agent fees and expenses 56,417 Shareholder reports and notices 37,986 Professional fees 33,676 Administration fee 23,872 Registration fees 19,334 Custodian fees 12,667 Trustees' fees and expenses 4,246 Other 12,943 --------------- TOTAL EXPENSES 754,957 Less: amounts waived/reimbursed (56,887) --------------- NET EXPENSES 698,070 --------------- NET INVESTMENT INCOME 1,642,427 --------------- NET REALIZED AND UNREALIZED GAIN (LOSS): NET REALIZED GAIN/LOSS ON: Investments 832,716 Futures contracts (217,423) --------------- NET REALIZED GAIN 615,293 --------------- NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON: Investments (454,895) Futures contracts 399,883 --------------- NET DEPRECIATION (55,012) --------------- NET GAIN 560,281 --------------- NET INCREASE $ 2,202,708 ===============
SEE NOTES TO FINANCIAL STATEMENTS 18 STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED FEBRUARY 28, 2005 AUGUST 31, 2004 ----------------- --------------- (UNAUDITED) INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income $ 1,642,427 $ 3,655,611 Net realized gain 615,293 62,074 Net change in unrealized appreciation (55,012) 2,654,295 ----------------- --------------- NET INCREASE 2,202,708 6,371,980 ----------------- --------------- DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME: Class A shares (177,078) (350,990) Class B shares (1,438,673) (3,453,039) Class C shares (149,255) (332,476) Class D shares (134,112) (321,400) ----------------- --------------- TOTAL DIVIDENDS (1,899,118) (4,457,905) ----------------- --------------- Net decrease from transactions in shares of beneficial interest (7,361,619) (34,307,978) ----------------- --------------- NET DECREASE (7,058,029) (32,393,903) NET ASSETS: Beginning of period 94,439,040 126,832,943 ----------------- --------------- END OF PERIOD (Including dividends in excess of net investment income of $806,440 and $549,749, respectively) $ 87,381,011 $ 94,439,040 ================= ===============
SEE NOTES TO FINANCIAL STATEMENTS 19 MORGAN STANLEY INCOME TRUST NOTES TO FINANCIAL STATEMENTS - FEBRUARY 28, 2005 (UNAUDITED) 1. ORGANIZATION AND ACCOUNTING POLICIES Morgan Stanley Income Trust (the "Fund"), formerly Morgan Stanley Quality Income Trust, (the Fund's name changed effective April 29, 2005) is registered under the Investment Company Act of 1940, as amended (the "Act"), as a diversified, open-end management investment company. The Fund's investment objective is high current income consistent with safety of principal. The Fund was organized as a Massachusetts business trust on September 1, 1988 and commenced operations on May 3, 1989. On July 28, 1997, the Fund converted to a multiple class share structure. The Fund offers Class A shares, Class B shares, Class C shares and Class D shares. The four classes are substantially the same except that most Class A shares are subject to a sales charge imposed at the time of purchase and some Class A shares, and most Class B shares and Class C shares are subject to a contingent deferred sales charge imposed on shares redeemed within one year, six years and one year, respectively. Class D shares are not subject to a sales charge. Additionally, Class A shares, Class B shares and Class C shares incur distribution expenses. The following is a summary of significant accounting policies: A. VALUATION OF INVESTMENTS -- (1) certain portfolio securities may be valued by an outside pricing service approved by the Fund's Trustees; (2) portfolio securities for which over-the-counter market quotations are readily available are valued at the mean between the last reported bid and asked price; (3) when market quotations are not readily available or Morgan Stanley Investment Advisors Inc. (the "Investment Adviser") determines that the market quotations are not reflective of a security's market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Fund's Trustees; and (4) short-term debt securities having a maturity date of more than sixty days at time of purchase are valued on a mark-to-market basis until sixty days prior to maturity and thereafter at amortized cost based on their value on the 61st day. Short-term debt securities having a maturity date of sixty days or less at the time of purchase are valued at amortized cost. B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on security transactions are determined by the identified cost method. Discounts are accreted and premiums are amortized over the life of the respective securities. Interest income is accrued daily. 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. 20 D. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than distribution fees), and realized and unrealized gains and losses are allocated to each class of shares based upon the relative net asset value on the date such items are recognized. Distribution fees are charged directly to the respective class. E. FUTURES CONTRACTS -- A futures contract is an agreement between two parties to buy and sell financial instruments or contracts based on financial indices at a set price on a future date. Upon entering into such a contract, the Fund is required to pledge to the broker cash, U.S. Government securities or other liquid portfolio securities equal to the minimum initial margin requirements of the applicable futures exchange. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments known as variation margin are recorded by the Fund as unrealized gains and losses. Upon closing of the contract, the Fund realizes a gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. F. FEDERAL INCOME TAX POLICY -- It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Accordingly, no federal income tax provision is required. G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions to shareholders are recorded on the ex-dividend date. H. USE OF ESTIMATES -- The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. 2. INVESTMENT ADVISORY/ADMINISTRATION AGREEMENTS Effective November 1, 2004, pursuant to an Investment Advisory Agreement, the Fund pays the Investment Adviser an advisory fee, accrued daily and payable monthly, by applying the following annual rates to the net assets of the Fund determined as of the close of each business day: 0.42% to the portion of daily net assets not exceeding $500 million; 0.35% to the portion of daily net assets exceeding $500 million but not exceeding $1.25 billion; and 0.22% to the portion of the daily net assets exceeding $1.25 billion. Effective November 1, 2004 pursuant to an Administration Agreement with Morgan Stanley Services Company Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Fund pays an administration fee, accrued daily and payable monthly, by applying the annual rate of 0.08% to the Fund's daily net assets. 21 Prior to November 1, 2004, the Fund had retained the Investment Adviser to provide administrative services and to manage the investment of the Fund's assets pursuant to an investment management agreement pursuant to which the Fund paid the Investment Adviser a monthly management fee accrued daily and payable monthly, by applying the following annual rates to the net assets of the Fund determined as of the close of each business day: 0.60% to the portion of daily net assets not exceeding $500 million; 0.50% to the portion of daily net assets exceeding $500 million but not exceeding $750 million; 0.40% to the portion of the daily net assets exceeding $750 million but not exceeding $1 billion; and 0.30% to the portion of the daily net asset exceeding $1 billion. The Investment Adviser has agreed to assume all operating expenses (except distribution fees) and to waive the compensation provided for in its Investment Advisory Agreement to the extent that such expenses and compensation on an annualized basis exceed 0.80% of the daily net assets of the Fund. 3. PLAN OF DISTRIBUTION Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the Investment Adviser and Administrator. The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan provides that the Fund will pay the Distributor a fee which is accrued daily and paid monthly at the following annual rates: (i) Class A -- up to 0.25% of the average daily net assets of Class A; (ii) Class B -- up to 0.85% of the lesser of: (a) the average daily aggregate gross sales of the Class B shares since the inception of the Fund (not including reinvestment of dividend or capital gain distributions) less the average daily aggregate net asset value of the Class B shares redeemed since the Fund's inception upon which a contingent deferred sales charge has been imposed or waived; or (b) the average daily net assets of Class B; and (iii) Class C -- up to 0.85% of the average daily net assets of Class C. In the case of Class B shares, provided that the Plan continues in effect, any cumulative expenses incurred by the Distributor but not yet recovered may be recovered through the payment of future distribution fees from the Fund pursuant to the Plan and contingent deferred sales charges paid by investors upon redemption of Class B shares. Although there is no legal obligation for the Fund to pay expenses incurred in excess of payments made to the Distributor under the Plan and the proceeds of contingent deferred sales charges paid by investors upon redemption of shares, if for any reason the 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 $4,743,043 at February 28, 2005. In the case of Class A shares and Class C shares, expenses incurred pursuant to the Plan in any calendar year in excess of 0.25% or 0.85% of the average daily net assets of Class A or Class C, respectively, will not be reimbursed by the Fund through payments in any subsequent year, except that 22 expenses representing a gross sales credit to Morgan Stanley Financial Advisors or other selected broker-dealer representatives may be reimbursed in the subsequent calendar year. For the six months ended February 28, 2005, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.15% and 0.79%, respectively. The Distributor has informed the Fund that for the six months ended February 28, 2005, it received contingent deferred sales charges from certain redemptions of the Fund's Class B shares and Class C shares of $56,968 and $523, respectively and received $14,556 in front-end sales charges from sales of the Fund's Class A shares. The respective shareholders pay such charges which are not an expense of the Fund. 4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES The cost of purchases and proceeds from sales/prepayments of portfolio securities, excluding short-term investments, for the six months ended February 28, 2005, aggregated $19,794,131, and $25,178,314, respectively. Included in the aforementioned are purchases and sales/prepayments of U.S. Government securities of $6,121,305 and $51,260, respectively. Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and Distributor, is the Fund's transfer agent. At February 29, 2005, the Fund had transfer agent fees and expenses payable of approximately $10,000. The Fund has an unfunded noncontributory defined benefit pension plan covering certain independent Trustees of the Fund who will have served as independent Trustees for at least five years at the time of retirement. Benefits under this plan are based on factors which include years of service and compensation. Aggregate pension costs for the six months ended February 28, 2005 included in Trustees' fees and expenses in the Statement of Operations amounted to $3,625. At February 28, 2005, the Fund had an accrued pension liability of $61,545 which is included in accrued expenses in the Statement of Assets and Liabilities. On December 2, 2003, the Trustees voted to close the plan to new participants and eliminate the future benefits growth due to increases to compensation after July 31, 2003. Effective April 1, 2004, the Fund began an unfunded Deferred Compensation Plan (the "Compensation Plan") which allows each independent Trustee to defer payment of all, or a portion, of the fees he receives for serving on the Board of Trustees. Each eligible Trustee generally may elect to have the deferred amounts credited with a return equal to the total return on one or more of the Morgan Stanley funds that are offered as investment options under the Compensation Plan. Appreciation/depreciation and distributions received from these investments are recorded with an offsetting increase/decrease in the deferred compensation obligation and do not affect the net asset value of the Fund. 23 5. SHARES OF BENEFICIAL INTEREST Transactions in shares of beneficial interest were as follows:
FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED FEBRUARY 28, 2005 AUGUST 31, 2004 ---------------------------------- ---------------------------------- (UNAUDITED) SHARES AMOUNT SHARES AMOUNT --------------- --------------- --------------- --------------- CLASS A SHARES Sold 134,451 $ 1,300,261 704,453 $ 6,705,247 Reinvestment of dividends 12,799 123,080 24,923 237,640 Redeemed (139,289) (1,343,418) (958,026) (9,092,170) --------------- --------------- --------------- --------------- Net increase (decrease) -- Class A 7,961 79,923 (228,650) (2,149,283) --------------- --------------- --------------- --------------- CLASS B SHARES Sold 288,449 2,748,867 923,982 8,779,096 Reinvestment of dividends 98,095 934,974 238,171 2,253,505 Redeemed (1,085,312) (10,345,957) (4,090,065) (38,614,692) --------------- --------------- --------------- --------------- Net decrease -- Class B (698,768) (6,662,116) (2,927,912) (27,582,091) --------------- --------------- --------------- --------------- CLASS C SHARES Sold 70,030 668,573 195,232 1,846,576 Reinvestment of dividends 11,127 106,258 25,345 240,274 Redeemed (118,492) (1,132,625) (546,505) (5,137,914) --------------- --------------- --------------- --------------- Net decrease -- Class C (37,335) (357,794) (325,928) (3,051,064) --------------- --------------- --------------- --------------- CLASS D SHARES Sold 48,344 459,335 279,178 2,647,709 Reinvestment of dividends 10,762 102,235 23,723 223,653 Redeemed (103,433) (983,202) (466,532) (4,396,902) --------------- --------------- --------------- --------------- Net decrease -- Class D (44,327) (421,632) (163,631) (1,525,540) --------------- --------------- --------------- --------------- Net decrease in Fund (772,469) $ (7,361,619) (3,646,121) $ (34,307,978) =============== =============== =============== ===============
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. As of August 31, 2004, the Fund had a net capital loss carryforward of $8,415,827 of which $2,351,266 will expire on August 31, 2005, $199,882 will expire on August 31, 2006, $1,146,203 24 will expire on August 31, 2008, $2,891,735 will expire on August 31, 2009, $313,469 will expire on August 31, 2010 and $1,513,272 will expire on August 31, 2012 to offset future capital gains to the extent provided by regulations. As of August 31, 2004, the Fund had temporary book/tax differences primarily attributable to post-October losses (capital losses incurred after October 31 within the taxable year 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. 7. PURPOSES OF RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS To hedge against adverse interest rate, foreign currency and market risks, the Fund may purchase and sell interest rate, currency and index futures contracts ("futures contracts"). Futures contracts involve elements of market risk in excess of the amount reflected in the Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the value of the underlying securities. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts. 8. LEGAL MATTERS The Investment Adviser, certain affiliates of the Investment Adviser, certain officers of such affiliates and certain investment companies advised by the Investment Adviser or its affiliates, including the Fund, are named as defendants in a consolidated class action. This consolidated action also names as defendants certain individual Trustees and Directors of the Morgan Stanley funds. The consolidated amended complaint generally alleges that defendants, including the Fund, violated their statutory disclosure obligations and fiduciary duties by failing properly to disclose (i) that the Investment Adviser and certain affiliates of the Investment Adviser allegedly offered economic incentives to brokers and others to recommend the funds advised by the Investment Adviser or its affiliates to investors rather than funds managed by other companies, and (ii) that the funds advised by the Investment Adviser or its affiliates, including the Fund, allegedly paid excessive commissions to brokers in return for their efforts to recommend these funds to investors. The complaint seeks, among other things, unspecified compensatory damages, rescissionary damages, fees and costs. The defendants have moved to dismiss the action and intend to otherwise vigorously defend it. On March 10, 2005, Plaintiffs sought leave to supplement their complaint to assert claims on behalf of other investors. While the Fund and Adviser believe that each has meritorious defenses, the ultimate outcome of this matter is not presently determinable at this early stage of the litigation, and no provision has been made in the Fund's financial statements for the effect, if any, of this matter. 25 MORGAN STANLEY INCOME TRUST FINANCIAL HIGHLIGHTS Selected ratios and per share data for a share of beneficial interest outstanding throughout each period:
FOR THE SIX FOR THE YEAR ENDED AUGUST 31, MONTHS ENDED ---------------------------------------------------------- FEBRUARY 28, 2005 2004 2003 2002 2001 2000 ----------------- ------- ------- ------- ------- ------- (UNAUDITED) CLASS A SHARES: SELECTED PER SHARE DATA: Net asset value, beginning of period $ 9.56 $ 9.39 $ 9.53 $ 9.35 $ 8.97 $ 9.30 -------- ------- ------- -------- ------- ------- Income (loss) from investment operations: Net investment income 0.19 0.35 0.20 0.37 0.52 0.55 Net realized and unrealized gain (loss) 0.07 0.26 0.01 0.19 0.38 (0.33) -------- ------- ------- -------- ------- ------- Total income from investment operations 0.26 0.61 0.21 0.56 0.90 0.22 -------- ------- ------- -------- ------- ------- Less dividends from net investment income (0.22) (0.44) (0.35) (0.38) (0.52) (0.55) -------- ------- ------- -------- ------- ------- Net asset value, end of period $ 9.60 $ 9.56 $ 9.39 $ 9.53 $ 9.35 $ 8.97 ======== ======= ======= ======== ======= ======= TOTAL RETURN+ 2.67%(1) 6.57% 2.17% 6.17% 10.34% 2.49% RATIOS TO AVERAGE NET ASSETS(3): Expenses 0.95%(2)(4) 1.19%(4) 1.14% 1.04% 1.21% 1.10% Net investment income 4.20%(2)(4) 3.86%(4) 2.14% 4.03% 5.71% 6.02% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 7,731 $ 7,628 $ 9,636 $ 10,730 $ 4,177 $ 4,196 Portfolio turnover rate 22%(1) 164% 429% 400% 358% 114%
---------- + 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) NOT ANNUALIZED. (2) ANNUALIZED. (3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. (4) IF THE FUND HAD BORNE ALL EXPENSES THAT WERE WAIVED BY THE INVESTMENT ADVISER, THE ANNUALIZED EXPENSE AND NET INVESTMENT INCOME RATIOS WOULD HAVE BEEN AS FOLLOWS:
EXPENSE NET INVESTMENT PERIOD ENDED RATIO INCOME RATIO ---------------------- ------------ -------------- FEBRUARY 28, 2005 1.07% 4.08% AUGUST 31, 2004 1.24% 3.81%
SEE NOTES TO FINANCIAL STATEMENTS 26
FOR THE SIX FOR THE YEAR ENDED AUGUST 31, MONTHS ENDED ------------------------------------------------------------ FEBRUARY 28, 2005 2004 2003 2002 2001 2000 ----------------- -------- -------- --------- --------- --------- (UNAUDITED) CLASS B SHARES: SELECTED PER SHARE DATA: Net asset value, beginning of period $ 9.48 $ 9.32 $ 9.45 $ 9.35 $ 8.98 $ 9.31 --------- -------- -------- --------- --------- --------- Income (loss) from investment operations: Net investment income 0.16 0.29 0.14 0.31 0.47 0.49 Net realized and unrealized gain (loss) 0.06 0.24 0.02 0.10 0.37 (0.33) --------- -------- -------- --------- --------- --------- Total income from investment operations 0.22 0.53 0.16 0.41 0.84 0.16 --------- -------- ------- --------- --------- --------- Less dividends from net investment income (0.19) (0.37) (0.29) (0.31) (0.47) (0.49) --------- -------- -------- --------- --------- --------- Net asset value, end of period $ 9.51 $ 9.48 $ 9.32 $ 9.45 $ 9.35 $ 8.98 ========= ======== ======== ========= ========= ========= TOTAL RETURN+ 2.36%(1) 5.78% 1.63% 4.58% 9.55% 1.80% RATIOS TO AVERAGE NET ASSETS(3): Expenses 1.65%(2)(4) 1.85%(4) 1.79% 1.72% 1.84% 1.77% Net investment income 3.50%(2)(4) 3.20%(4) 1.49% 3.35% 5.08% 5.35% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 67,224 $ 73,650 $ 99,695 $ 103,238 $ 97,452 $ 82,964 Portfolio turnover rate 22%(1) 164% 429% 400% 358% 114%
---------- + 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) NOT ANNUALIZED. (2) ANNUALIZED. (3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. (4) IF THE FUND HAD BORNE ALL EXPENSES THAT WERE WAIVED BY THE INVESTMENT ADVISER, THE ANNUALIZED EXPENSE AND NET INVESTMENT INCOME RATIOS WOULD HAVE BEEN AS FOLLOWS:
EXPENSE NET INVESTMENT PERIOD ENDED RATIO INCOME RATIO ---------------------- ------------ -------------- FEBRUARY 28, 2005 1.77% 3.38% AUGUST 31, 2004 1.90% 3.15%
SEE NOTES TO FINANCIAL STATEMENTS 27
FOR THE SIX FOR THE YEAR ENDED AUGUST 31, MONTHS ENDED ---------------------------------------------------------- FEBRUARY 28, 2005 2004 2003 2002 2001 2000 ----------------- ------- ------- ------- ------- ------- (UNAUDITED) CLASS C SHARES: SELECTED PER SHARE DATA: Net asset value, beginning of period $ 9.50 $ 9.34 $ 9.46 $ 9.36 $ 8.99 $ 9.32 -------- ------- -------- ------- ------- ------- Income (loss) from investment operations: Net investment income 0.16 0.29 0.14 0.31 0.47 0.49 Net realized and unrealized gain (loss) 0.06 0.24 0.03 0.10 0.37 (0.33) -------- ------- -------- ------- ------- ------- Total income from investment operations 0.22 0.53 0.17 0.41 0.84 0.16 -------- ------- -------- ------- ------- ------- Less dividends from net investment income (0.19) (0.37) (0.29) (0.31) (0.47) (0.49) -------- ------- -------- ------- ------- ------- Net asset value, end of period $ 9.53 $ 9.50 $ 9.34 $ 9.46 $ 9.36 $ 8.99 ======== ======= ======== ======= ======= ======= TOTAL RETURN+ 2.36%(1) 5.77% 1.74% 4.57% 9.54% 1.80% RATIOS TO AVERAGE NET ASSETS(3): Expenses 1.59%(2)(4) 1.85%(4) 1.79% 1.72% 1.84% 1.77% Net investment income 3.56%(2)(4) 3.20%(4) 1.49% 3.35% 5.08% 5.35% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 7,143 $ 7,474 $ 10,389 $ 6,415 $ 4,226 $ 1,738 Portfolio turnover rate 22%(1) 164% 429% 400% 358% 114%
---------- + 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) NOT ANNUALIZED. (2) ANNUALIZED. (3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. (4) IF THE FUND HAD BORNE ALL EXPENSES THAT WERE WAIVED BY THE INVESTMENT ADVISER, THE ANNUALIZED EXPENSE AND NET INVESTMENT INCOME RATIOS WOULD HAVE BEEN AS FOLLOWS:
EXPENSE NET INVESTMENT PERIOD ENDED RATIO INCOME RATIO ---------------------- ------------ -------------- FEBRUARY 28, 2005 1.71% 3.44% AUGUST 31, 2004 1.90% 3.15%
SEE NOTES TO FINANCIAL STATEMENTS 28
FOR THE SIX FOR THE YEAR ENDED AUGUST 31, MONTHS ENDED ---------------------------------------------------------- FEBRUARY 28, 2005 2004 2003 2002 2001 2000 ----------------- ------- ------- ------- ------- ------- (UNAUDITED) CLASS D SHARES: SELECTED PER SHARE DATA: Net asset value, beginning of period $ 9.45 $ 9.29 $ 9.43 $ 9.35 $ 8.98 $ 9.31 ------- ------- ------- -------- ------- ------- Income (loss) from investment operations: Net investment income 0.20 0.37 0.22 0.38 0.55 0.57 Net realized and unrealized gain (loss) 0.06 0.24 0.01 0.09 0.37 (0.33) ------- ------- ------- -------- ------- ------- Total income from investment operations 0.26 0.61 0.23 0.47 0.92 0.24 ------- ------- ------- -------- ------- ------- Less dividends from net investment income (0.23) (0.45) (0.37) (0.39) (0.55) (0.57) ------- ------- ------- -------- ------- ------- Net asset value, end of period $ 9.48 $ 9.45 $ 9.29 $ 9.43 $ 9.35 $ 8.98 ======= ======= ======= ======== ======= ======= TOTAL RETURN+ 2.80%(1) 6.68% 2.39% 5.23% 10.48% 2.67% RATIOS TO AVERAGE NET ASSETS(3): Expenses 0.80%(2)(4) 1.00%(4) 0.94% 0.87% 0.99% 0.92% Net investment income 4.35%(2)(4) 4.05%(4) 2.34% 4.20% 5.93% 6.20% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 5,284 $ 5,687 $ 7,113 $ 11,943 $ 3,018 $ 6,834 Portfolio turnover rate 22%(1) 164% 429% 400% 358% 114%
---------- + CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. (1) NOT ANNUALIZED. (2) ANNUALIZED. (3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. (4) IF THE FUND HAD BORNE ALL EXPENSES THAT WERE WAIVED BY THE INVESTMENT ADVISER, THE ANNUALIZED EXPENSE AND NET INVESTMENT INCOME RATIOS WOULD HAVE BEEN AS FOLLOWS:
EXPENSE NET INVESTMENT PERIOD ENDED RATIO INCOME RATIO ---------------------- ------------ -------------- FEBRUARY 28, 2005 0.92% 4.23% AUGUST 31, 2004 1.05% 4.00%
SEE NOTES TO FINANCIAL STATEMENTS 29 (This page has been left blank intentionally.) (This page has been left blank intentionally.) TRUSTEES Michael Bozic Charles A. Fiumefreddo Edwin J. Garn Wayne E. Hedien James F. Higgins Dr. Manuel H. Johnson Joseph J. Kearns Michael E. Nugent Fergus Reid OFFICERS Charles A. Fiumefreddo CHAIRMAN OF THE BOARD Mitchell M. Merin PRESIDENT Ronald E. Robison EXECUTIVE VICE PRESIDENT and PRINCIPAL EXECUTIVE OFFICER Joseph J. McAlinden VICE PRESIDENT Barry Fink VICE PRESIDENT Amy R. Doberman VICE PRESIDENT Carsten Otto CHIEF COMPLIANCE OFFICER Stefanie V. Chang VICE PRESIDENT Francis J. Smith TREASURER and CHIEF FINANCIAL OFFICER Thomas F. Caloia VICE PRESIDENT Mary E. Mullin SECRETARY TRANSFER AGENT Morgan Stanley Trust Harborside Financial Center, Plaza Two Jersey City, New Jersey 07311 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Deloitte & Touche LLP Two World Financial Center New York, New York 10281 INVESTMENT ADVISER Morgan Stanley Investment Advisors Inc. 1221 Avenue of the Americas New York, New York 10020 The financial statements included herein have been taken from the records of the Fund without examination by the independent auditors and accordingly they do not express an opinion thereon. This report is submitted for the general information of the shareholders of the Fund. For more detailed information about the Fund, its fees and expenses and other pertinent information, please read its Prospectus. The Fund's Statement of Additional Information contains additional information about the Fund, including its trustees. It is available, without charge, by calling (800) 869-NEWS. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective Prospectus. Read the Prospectus carefully before investing. Investments and services offered through Morgan Stanley DW Inc., member SIPC. Morgan Stanley Distributors Inc., member NASD. (C) 2005 Morgan Stanley [MORGAN STANLEY LOGO] 38557RPT-RA05-00292P-Y02/05 [GRAPHIC] [MORGAN STANLEY FUNDS] MORGAN STANLEY INCOME TRUST SEMIANNUAL REPORT FEBRUARY 28, 2005 [MORGAN STANLEY LOGO] Item 2. Code of Ethics. Not applicable for semiannual reports. Item 3. Audit Committee Financial Expert. Not applicable for semiannual reports. Item 4. Principal Accountant Fees and Services Not applicable for semiannual reports. Item 5. Audit Committee of Listed Registrants. Not applicable for semiannual reports. Item 6. Refer to Item 1. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable for semiannual reports. 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 to reports filed by closed-end funds. Item 10. Submission of Matters to a Vote of Security Holders Not applicable. Item 11. Controls and Procedures (a) The Fund's principal executive officer and principal financial officer have concluded that the Fund's disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Fund in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, based upon such officers' evaluation of these controls and procedures as of a date within 90 days of the filing date of the report. (b) There were no changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12. Exhibits (a) Code of Ethics - Not applicable for semiannual reports. (b) A separate certification for each principal executive officer and principal financial officer of the registrant are attached hereto as part of EX-99.CERT. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Morgan Stanley Income Trust /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer April 19, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer April 19, 2005 /s/ Francis Smith Francis Smith Principal Financial Officer April 19, 2005