-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CY9JfFLJCNLz/gVveYuZ926cN8rGb8f2slj3M8syetX7QNd9F0/lmaQrgqCY9AyU RiuTNTl0q0ScIdxMXmTm0Q== 0001047469-05-025783.txt : 20051101 0001047469-05-025783.hdr.sgml : 20051101 20051101171416 ACCESSION NUMBER: 0001047469-05-025783 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050831 FILED AS OF DATE: 20051101 DATE AS OF CHANGE: 20051101 EFFECTIVENESS DATE: 20051101 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN STANLEY QUALITY INCOME TRUST CENTRAL INDEX KEY: 0000839302 IRS NUMBER: 000000000 STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-05654 FILM NUMBER: 051170605 BUSINESS ADDRESS: STREET 1: C/O MORGAN STANLEY TRUST STREET 2: HARBORSIDE FINANCIAL CENTER, PLAZA TWO CITY: JERSEY CITY STATE: NJ ZIP: 07311 BUSINESS PHONE: (212) 869-6397 MAIL ADDRESS: STREET 1: C/O MORGAN STANLEY TRUST STREET 2: HARBORSIDE FINANCIAL CENTER, PLAZA TWO CITY: JERSEY CITY STATE: NJ ZIP: 07311 FORMER COMPANY: FORMER CONFORMED NAME: MORGAN STANLEY INTERMEDIATE INCOME SECURITIES DATE OF NAME CHANGE: 20010618 FORMER COMPANY: FORMER CONFORMED NAME: MORGAN STANLEY DEAN WITTER INTERMEDIATE INCOME SECURITIES DATE OF NAME CHANGE: 19980622 FORMER COMPANY: FORMER CONFORMED NAME: WITTER DEAN INTERMEDIATE INCOME SECURITIES DATE OF NAME CHANGE: 19920703 N-CSR 1 a2164168zn-csr.txt N-CSR UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-05654 Morgan Stanley Income Trust (Exact name of registrant as specified in charter) 1221 Avenue of the Americas, New York, New York 10020 (Address of principal executive offices) (Zip code) Ronald E. Robison 1221 Avenue of the Americas, New York, New York 10020 (Name and address of agent for service) Registrant's telephone number, including area code: 212-762-4000 Date of fiscal year end: August 31, 2005 Date of reporting period: August 31, 2005 Item 1 - Report to Shareholders 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. FUND REPORT For the year ended August 31, 2005 TOTAL RETURN FOR THE 12 MONTHS ENDED AUGUST 31, 2005
LIPPER LEHMAN BROTHERS CORPORATE INTERMEDIATE U.S. DEBT FUNDS GOVERNMENT/ BBB-RATED CLASS A CLASS B CLASS C CLASS D CREDIT INDEX(1) INDEX(2) 5.81% 5.13% 5.16% 6.03% 2.55% 5.23%
The performance of the Fund's four share classes varies because each has different expenses. The Fund's total returns assume the reinvestment of all distributions but do not reflect the deduction of any applicable sales charges. Such costs would lower performance. See Performance Summary for standardized performance and benchmark information. MARKET CONDITIONS Throughout the reporting period, the Federal Open Market Committee (the "Fed") continued the tightening cycle it began in June of 2004. In a series of eight 25 basis-point increases, the Fed brought the federal funds target rate from 1.50 percent at the start of the reporting period to 3.50 percent at the close. Despite these steady increases, most U.S. Treasury yields see-sawed throughout the period. Overall, the yield curve flattened as the yields of short- and intermediate-term Treasuries rose while those of long-term Treasuries declined. Within the corporate bond market, the period was generally uneventful until the first quarter of 2005, when General Motors reported lower-than-expected earnings. Shortly thereafter, the beleaguered auto manufacturer saw its debt downgraded to below-investment grade, alongside that of Ford Motor and their financial subsidiaries. Although the travails of the auto industry gave investors pause, generally good corporate earnings announcements and positive economic news helped the market regain its bearings in the following months. The utilities sector garnered the highest gains during the annual period, while the financials sector posted the lowest returns. As the end of the period approached, it was apparent that the full effects of the Fed's actions had yet to ripple through the economy. For the most part, concerns about rising energy prices and inflation as well as faltering growth had muted the impact of the Fed's rate increases, and the market reflected neither underlying fundamental trends nor a more likely course for Fed policy. Moreover, the final days of the reporting period brought heightened uncertainty and anxiety as Hurricane Katrina unleashed catastrophic devastation to the Gulf Coast. While the long-term economic impact remained immeasurable, the immediate economic impact was most evident in the energy sector, as gasoline and natural gas prices soared. PERFORMANCE ANALYSIS Morgan Stanley Income Trust outperformed the Lehman Brothers Intermediate U.S. Government/Credit Index for the 12 months ended August 31, 2005, assuming no deduction of applicable sales charges. For the same period, Class A and Class D shares outperformed the Lipper Corporate Debt Funds BBB-Rated Index, while Class B and Class C shares underperformed, assuming no deduction of applicable sales charges. A focus on corporate bonds and a reduced emphasis on government bonds buoyed performance relative to the Lehman Brothers benchmark. The Fund's emphasis on medium-quality investment grade credits enhanced performance during the period. As investors sought income, medium quality credits outpaced higher quality bonds. (Bonds with higher credit qualities typically offer lower yields.) However, in keeping with its mandated strategy, the Fund did not invest heavily in below-investment grade issues, which performed even more briskly. The Fund's performance relative to the Lehman benchmark benefited from underweightings in the energy sector and the banking and finance sector. The Fund's overall interest rate strategy produced mixed results for the period. The low level of interest rates across the yield curve at the beginning of the period led us to conclude that they had little room to fall. As a result, we kept the Fund's overall interest rate exposure below that of its benchmark. This posture was 2 unfavorable to the Fund's returns early in the period when the market rallied, but was more beneficial during periods of rising rates, especially in the later half of the period. THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE FUND IN THE FUTURE. PORTFOLIO COMPOSITION * Corporate Bonds 72.7% U.S. Government Obligations 10.9 Asset-Backed Securities 7.2 Short-Term Investments 7.0 Foreign Government Obligations 2.1 Mortgage-Backed Securities 0.1
LONG-TERM CREDIT ANALYSIS Aaa/AAA 27.8% Aa/AA 11.2 A/A 21.8 Baa/BBB 30.0 Ba/BB 9.2
* DOES NOT INCLUDE OUTSTANDING LONG FUTURES CONTRACTS WITH AN UNDERLYING FACE AMOUNT OF $5,963,953 WITH UNREALIZED APPRECIATION OF $74,460 AND SHORT FUTURES CONTRACTS WITH AN UNDERLYING FACE AMOUNT OF $18,919,813 WITH NET UNREALIZED DEPRECIATION OF $29,185. DATA AS OF AUGUST 31, 2005. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR PORTFOLIO COMPOSITION ARE AS A PERCENTAGE OF TOTAL INVESTMENTS AND ALL PERCENTAGES FOR CREDIT ANALYSIS ARE AS A PERCENTAGE OF TOTAL LONG-TERM INVESTMENTS. THESE DATA ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED A RECOMMENDATION TO BUY OR SELL THE SECURITIES MENTIONED. MORGAN STANLEY IS A FULL-SERVICE SECURITIES FIRM ENGAGED IN SECURITIES TRADING AND BROKERAGE ACTIVITIES, INVESTMENT BANKING, RESEARCH AND ANALYSIS, FINANCING AND FINANCIAL ADVISORY SERVICES. INVESTMENT STRATEGY THE FUND WILL NORMALLY INVEST AT LEAST 80 PERCENT OF ITS ASSETS IN INVESTMENT GRADE FIXED-INCOME SECURITIES. THESE SECURITIES MAY INCLUDE CORPORATE DEBT SECURITIES, PREFERRED STOCKS, U.S. GOVERNMENT SECURITIES, MORTGAGE-BACKED SECURITIES, INCLUDING COLLATERALIZED MORTGAGE OBLIGATIONS AND COMMERCIAL MORTGAGE-BACKED SECURITIES, ASSET-BACKED SECURITIES AND SECURITIES ISSUED BY FOREIGN GOVERNMENTS OR CORPORATIONS. IN DECIDING WHICH SECURITIES TO BUY, HOLD OR SELL, THE FUND'S "INVESTMENT ADVISER," MORGAN STANLEY INVESTMENT ADVISORS INC., CONSIDERS DOMESTIC AND INTERNATIONAL ECONOMIC DEVELOPMENTS, INTEREST RATE TRENDS, BOND RATINGS AND OTHER FACTORS RELATING TO THE ISSUERS. FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND AND FOURTH FISCAL QUARTERS BY FILING THE SCHEDULE ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON FORM N-CSR. MORGAN STANLEY ALSO DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO FUND SHAREHOLDERS AND MAKES THESE REPORTS AVAILABLE ON ITS PUBLIC WEB SITE, www.morganstanley.com. EACH MORGAN STANLEY FUND ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE FUND'S FIRST AND THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES NOT DELIVER THE REPORTS FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS, NOR ARE THE REPORTS POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY, HOWEVER, OBTAIN THE FORM N-Q FILINGS 3 (AS WELL AS THE FORM N-CSR AND N-CSRS FILINGS) BY ACCESSING THE SEC'S WEB SITE, http://www.sec.gov. YOU MAY ALSO REVIEW AND COPY THEM AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE OPERATION OF THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE SEC AT (800) SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT OF A DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS (publicinfo@sec.gov) OR BY WRITING THE PUBLIC REFERENCE SECTION OF THE SEC, WASHINGTON, DC 20549-0102. PROXY VOTING POLICY AND PROCEDURES AND PROXY VOTING RECORD YOU MAY OBTAIN A COPY OF THE FUND'S PROXY VOTING POLICY AND PROCEDURES WITHOUT CHARGE, UPON REQUEST, BY CALLING TOLL FREE 800-869-NEWS OR BY VISITING THE MUTUAL FUND CENTER ON OUR WEB SITE AT www.morganstanley.com. IT IS ALSO AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT http://www.sec.gov. YOU MAY OBTAIN INFORMATION REGARDING HOW THE FUND VOTED PROXIES RELATING TO PORTFOLIO SECURITIES DURING THE MOST RECENT TWELVE-MONTH PERIOD ENDED JUNE 30 BY VISITING THE MUTUAL FUND CENTER ON OUR WEB SITE AT www.morganstanley.com. THIS INFORMATION IS ALSO AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT http://www.sec.gov. HOUSEHOLDING NOTICE TO REDUCE PRINTING AND MAILING COSTS, THE FUND ATTEMPTS TO ELIMINATE DUPLICATE MAILINGS TO THE SAME ADDRESS. THE FUND DELIVERS A SINGLE COPY OF CERTAIN SHAREHOLDER DOCUMENTS, INCLUDING SHAREHOLDER REPORTS, PROSPECTUSES AND PROXY MATERIALS, TO INVESTORS WITH THE SAME LAST NAME WHO RESIDE AT THE SAME ADDRESS. YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE DOCUMENTS BY CALLING (800) 350-6414, 8:00 A.M. TO 8:00 P.M., ET. ONCE OUR CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS. 4 (This page has been left blank intentionally.) 5 PERFORMANCE SUMMARY [CHART] PERFORMANCE OF $10,000 INVESTMENT--CLASS B ($ IN THOUSANDS)
FUND^ LEHMAN(1) LIPPER CORP - BBB INDEX(2) August 31, 1995 $ 10,000 $ 10,000 $ 10,000 August 31, 1996 $ 10,258 $ 10,444 $ 10,441 August 31, 1997 $ 11,071 $ 11,325 $ 11,663 August 31, 1998 $ 11,793 $ 12,342 $ 12,540 August 31, 1999 $ 11,902 $ 12,614 $ 12,618 August 31, 2000 $ 12,117 $ 13,405 $ 13,363 August 31, 2001 $ 13,274 $ 15,052 $ 14,793 August 31, 2002 $ 13,882 $ 16,218 $ 15,245 August 31, 2003 $ 14,108 $ 17,069 $ 16,589 August 31, 2004 $ 14,923 $ 17,934 $ 17,887 August 31, 2005 $ 15,689 $ 18,391 $ 18,822
6 AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED AUGUST 31, 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 5.81%(3) 5.13%(3) 5.16%(3) 6.03%(3) 1.31(4) 0.13(4) 4.16(4) -- 5 YEARS 6.18(3) 5.30(3) 5.33(3) 6.13(3) 5.26(4) 4.98(4) 5.33(4) -- 10 YEARS -- 4.61(3) -- -- -- 4.61(4) -- -- SINCE INCEPTION 5.12(3) 5.51(3) 4.36(3) 5.18(3) 4.56(4) 5.51(4) 4.36(4) --
Performance data quoted represents past performance, which is no guarantee of future results and current performance may be lower or higher than the figures shown. For most recent month-end performance figures, please visit www.morganstanley.com or speak with your Financial Advisor. Investment returns and principal value will fluctuate and fund shares, when redeemed, may be worth more or less than their original cost. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Performance for Class A, Class B, Class C, and Class D shares will vary due to differences in sales charges and expenses. * THE MAXIMUM FRONT-END SALES CHARGE FOR CLASS A IS 4.25%. ** THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B IS 5.0%. THE CDSC DECLINES TO 0% AFTER SIX YEARS. + THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE FOR CLASS C IS 1% FOR SHARES REDEEMED WITHIN ONE YEAR OF PURCHASE. ++ CLASS D HAS NO SALES CHARGE. (1) THE LEHMAN BROTHERS INTERMEDIATE U.S. GOVERNMENT/CREDIT INDEX TRACKS THE PERFORMANCE OF U.S. GOVERNMENT AND CORPORATE OBLIGATIONS, INCLUDING U.S. GOVERNMENT AGENCY AND TREASURY SECURITIES, AND CORPORATE AND YANKEE BONDS WITH MATURITIES OF 1 TO 10 YEARS. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. (2) THE LIPPER CORPORATE DEBT FUNDS BBB-RATED INDEX IS AN EQUALLY-WEIGHTED PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN THE LIPPER CORPORATE DEBT FUNDS BBB-RATED CLASSIFICATION. THE INDEX, WHICH IS ADJUSTED FOR CAPITAL GAINS DISTRIBUTIONS AND INCOME DIVIDENDS, IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT. THERE ARE CURRENTLY 30 FUNDS REPRESENTED IN THIS INDEX. (3) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT THE DEDUCTION OF ANY SALES CHARGES. (4) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND THE DEDUCTION OF THE MAXIMUM APPLICABLE SALES CHARGE. SEE THE FUND'S CURRENT PROSPECTUS FOR COMPLETE DETAILS ON FEES AND SALES CHARGES. ^ ENDING VALUE ASSUMING A COMPLETE REDEMPTION ON AUGUST 31, 2005. 7 EXPENSE EXAMPLE As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments and redemption fees; and (2) ongoing costs, including advisory fees; distribution and service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period 03/01/05 - 08/31/05. ACTUAL EXPENSES The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of the table below provides information about hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing cost of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs, and will not help you determine the relative total cost of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD * ------------- ------------- --------------- 03/01/05 - 03/01/05 08/31/05 08/31/05 ------------- ------------- --------------- CLASS A Actual (3.06% return) $ 1,000.00 $ 1,030.60 $ 5.37 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,019.91 $ 5.35 CLASS B Actual (2.70% return) $ 1,000.00 $ 1,027.00 $ 8.43 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,016.89 $ 8.39 CLASS C Actual (2.74% return) $ 1,000.00 $ 1,027.40 $ 8.43 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,016.89 $ 8.39 CLASS D Actual (3.15% return) $ 1,000.00 $ 1,031.50 $ 4.10 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,021.17 $ 4.08
- ---------- * EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 1.05%, 1.65%, 1.65% AND 0.80% FOR CLASS A, CLASS B, CLASS C AND CLASS D SHARES, RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 184/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). IF THE FUND HAD BORNE ALL OF ITS EXPENSES, THE ANNUALIZED EXPENSE RATIOS WOULD HAVE BEEN 1.23%, 1.83%, 1.83% AND 0.98% FOR CLASS A, CLASS B, CLASS C AND CLASS D SHARES, RESPECTIVELY. 8 INVESTMENT ADVISORY AGREEMENT APPROVAL NATURE, EXTENT AND QUALITY OF SERVICES The Board reviewed and considered the nature and extent of the investment advisory services provided by the Investment Adviser under the Advisory Agreement, including portfolio management, investment research and fixed income securities trading. The Board also reviewed and considered the nature and extent of the non-advisory, administrative services provided by the Fund's Administrator under the Administration Agreement, including accounting, clerical, bookkeeping, compliance, business management and planning, and the provision of supplies, office space and utilities. (The Investment Adviser and the Administrator together are referred to as the "Adviser" and the Advisory and Administration Agreements together are referred to as the "Management Agreement.") The Board also compared the nature of the services provided by the Adviser with similar services provided by non-affiliated advisers as reported to the Board by Lipper Inc. ("Lipper"). The Board reviewed and considered the qualifications of the portfolio managers, the senior administrative managers and other key personnel of the Adviser who provide the administrative and investment advisory services to the Fund. The Board determined that the Adviser's portfolio managers and key personnel are well qualified by education and/or training and experience to perform the services in an efficient and professional manner. The Board concluded that the nature and extent of the advisory and administrative services provided were necessary and appropriate for the conduct of the business and investment activities of the Fund. The Board also concluded that the overall quality of the advisory and administrative services was satisfactory. PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS The Board reviewed the Fund's performance for the one-, three- and five-year periods ended November 30, 2004, as shown in reports provided by Lipper (the "Lipper Reports"), compared to the performance of comparable funds selected by Lipper (the "performance peer group"), and noted that the Fund's performance was lower than its performance peer group average for all three periods. The Board noted that the Fund's performance had improved, relative to its performance peer group, from the five- to the three- to the one-year period. The Board concluded that the Fund's performance was improving and can reasonably be expected to be competitive with that of its performance peer group. FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS The Board reviewed the advisory and administrative fees (together, the "management fee") paid by the Fund under the Management Agreement and the total expense ratio of the Fund. The Board noted that: (i) the Fund's management fee rate was higher than the average management fee rate for funds, selected by Lipper (the "expense peer group"), managed by other advisers with investment strategies comparable to those of the Fund, as shown in the Lipper Report for the Fund; but (ii) the Fund's total expense ratio was lower than the average total expense ratio of the funds included in the Fund's expense peer group because the Adviser had implemented a total expense cap of 0.80%. The Board concluded that the management fee rate was competitive in light of the fact that 9 the Adviser managed the Fund so that the total expense ratio, including the expense cap, of the Fund was less than the total expense ratio of the funds in the expense peer group average. BREAKPOINTS AND ECONOMIES OF SCALE The Board reviewed the structure of the Fund's management fee schedule under the Management Agreement and noted that includes a breakpoint. The Board also reviewed the level of the Fund's anticipated new management fee and noted that the fee, as a percentage of the Fund's net assets, would decrease as net assets increase because of the new breakpoint. The Board concluded that the Fund's management fee would reflect economies of scale as assets increase. PROFITABILITY OF ADVISER AND AFFILIATES The Board considered and reviewed information concerning the costs incurred and profits realized by the Adviser and its affiliates during the last two years from their relationship with the Fund and the Morgan Stanley Fund Complex and reviewed with the Controller of the Adviser the cost allocation methodology used to determine the Adviser's profitability. Based on their review of the information they received, the Board concluded that the profits earned by the Adviser and its affiliates were not excessive in light of the advisory, administrative and other services provided to the Fund. FALL-OUT BENEFITS The Board considered so-called "fall-out benefits" derived by the Adviser and its affiliates from their relationship with the Fund and the Morgan Stanley Fund Complex, such as "float" benefits derived from handling of checks for purchases and redemptions of Fund shares through a broker-dealer affiliate of the Adviser. The Board also considered that a broker-dealer affiliate of the Adviser receives from the Fund 12b-1 fees for distribution and shareholder services. The Board concluded that the float benefits were relatively small and that the 12b-1 fees were competitive with those of other broker-dealer affiliates of investment advisers. SOFT DOLLAR BENEFITS The Board considered whether the Adviser realizes any benefits from commissions paid to brokers who execute securities transactions for the Fund ("soft dollars"). The Board noted that the Fund invests only in fixed income securities, which do not generate soft dollars. ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE FUND'S NEEDS The Board considered whether the Adviser is financially sound and has the resources necessary to perform its obligations under the Management Agreement. The Board noted that the Adviser's operations remain profitable, although increased expenses in recent years have reduced the Adviser's profitability. The Board concluded that the Adviser has the financial resources necessary to fulfill its obligations under the Management Agreement. 10 HISTORICAL RELATIONSHIP BETWEEN THE FUND AND THE ADVISER The Board also reviewed and considered the historical relationship between the Fund and the Adviser, including the organizational structure of the Adviser, the policies and procedures formulated and adopted by the Adviser for managing the Fund's operations and the Board's confidence in the competence and integrity of the senior managers and key personnel of the Adviser. The Board concluded that it is beneficial for the Fund to continue its relationship with the Adviser. OTHER FACTORS AND CURRENT TRENDS The Board considered the controls and procedures adopted and implemented by the Adviser and monitored by the Fund's Chief Compliance Officer and concluded that the conduct of business by the Adviser indicates a good faith effort on its part to adhere to high ethical standards in the conduct of the Fund's business. GENERAL CONCLUSION After considering and weighing all of the above factors, the Board concluded it would be in the best interest of the Fund and its shareholders to approve renewal of the Management Agreement for another year. 11 MORGAN STANLEY INCOME TRUST PORTFOLIO OF INVESTMENTS - AUGUST 31, 2005
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------------- CORPORATE BONDS (72.1%) ADVERTISING/MARKETING SERVICES (1.0%) $ 395 Interpublic Group of Companies, Inc. (The) 5.40% 11/15/09 $ 373,167 385 WPP Finance Corp. (United Kingdom) 5.875 06/15/14 409,081 ------------ 782,248 ------------ AEROSPACE & DEFENSE (0.9%) 175 Raytheon Co. 4.50 11/15/07 175,304 32 Raytheon Co. 6.75 08/15/07 33,359 100 Raytheon Co. 8.30 03/01/10 114,997 375 Systems 2001 Asset Trust - 144A** (Cayman Islands) 6.664 09/15/13 407,861 ------------ 731,521 ------------ AIR FREIGHT/COURIERS (0.5%) 125 Fedex Corp. 2.65 04/01/07 121,912 220 Fedex Corp. 7.25 02/15/11 247,115 ------------ 369,027 ------------ AIRLINES (0.3%) 238 America West Airlines, Inc. (Series 01-1) 7.10 04/02/21 251,031 ------------ APPAREL/FOOTWEAR RETAIL (0.3%) 235 Limited Brands, Inc. 6.95 03/01/33 245,827 ------------ AUTO PARTS: O.E.M. (0.6%) 265 Johnson Controls, Inc. 5.00 11/15/06 266,799 130 Lear Corp. (Series B) 8.11 05/15/09 135,591 100 Meritor Automotive Inc. 6.80 02/15/09 99,000 ------------ 501,390 ------------ BEVERAGES: ALCOHOLIC (1.3%) 485 FBG Finance Ltd. - 144A** (Australia) 5.125 06/15/15 489,156 505 Miller Brewing Co. - 144A** 4.25 08/15/08 502,080 ------------ 991,236 ------------ BUILDING PRODUCTS (0.2%) 160 Masco Corp. 4.625 08/15/07 160,523 ------------ CABLE/SATELLITE TV (1.0%) 395 Cox Communications, Inc. 4.625 01/15/10 391,906 335 Echostar DBS Corp. 6.375 10/01/11 334,581 25 Echostar DBS Corp. 6.625 10/01/14 24,906 ------------ 751,393 ------------
SEE NOTES TO FINANCIAL STATEMENTS 12
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------------- CONTAINERS/PACKAGING (0.7%) $ 565 Sealed Air Corp. - 144A** 5.625% 07/15/13 $ 582,556 ------------ DEPARTMENT STORES (1.9%) 1,045 May Department Stores Co., Inc. 5.95 11/01/08 1,090,105 130 May Department Stores Co., Inc. 6.875 11/01/05 130,454 260 Penny (JC) Co., Inc. 7.40 04/01/37 290,273 ------------ 1,510,832 ------------ DRUGSTORE CHAINS (0.9%) 577 CVS Corp. - 144A** 5.789 01/10/26 620,240 53 CVS Corp. - 144A** 6.204 10/10/25 57,681 ------------ 677,921 ------------ ELECTRIC UTILITIES (6.8%) 490 Arizona Public Service Co. 5.80 06/30/14 525,505 285 Arizona Public Service Co. 6.75 11/15/06 293,140 395 CC Funding Trust I 6.90 02/16/07 408,690 105 Cincinnati Gas & Electric Co. 5.70 09/15/12 111,271 265 Consolidated Natural Gas Co. 5.00 12/01/14 268,069 470 Consolidated Natural Gas Co. (Series B) 5.375 11/01/06 475,812 460 Consumers Energy Co. 4.80 02/17/09 463,780 475 Detroit Edison Co. (THE) 4.80 02/15/15 474,201 285 Entergy Gulf States, Inc. 3.60 06/01/08 278,310 365 Entergy Gulf States, Inc. 3.73+ 12/01/09 366,374 590 Exelon Corp. 6.75 05/01/11 651,169 315 Jersey Central Power & Light Company 5.625 05/01/16 335,317 230 Pacific Gas & Electric Co. 6.05 03/01/34 252,542 140 Panhandle Eastern Pipe Line Co. (Series B) 2.75 03/15/07 136,609 130 Public Service Electric & Gas Co. (Series MTNB) 5.00 01/01/13 133,664 170 Texas Eastern Transmission, LP 7.00 07/15/32 207,340 ------------ 5,381,793 ------------ ELECTRICAL PRODUCTS (0.6%) 480 Cooper Industries Inc. 5.25 07/01/07 487,714 ------------ ELECTRONICS/APPLIANCES (0.3%) 260 LG Electronics Inc. - 144A** (South Korea) 5.00 06/17/10 258,519 ------------ FINANCE/RENTAL/LEASING (7.3%) 510 CIT Group, Inc. 2.875 09/29/06 502,237 320 CIT Group, Inc. 7.375 04/02/07 335,246
SEE NOTES TO FINANCIAL STATEMENTS 13
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------------- $ 855 Countrywide Home Loans, Inc. (Series MTN) 3.25% 05/21/08 $ 829,919 430 Ford Motor Credit Co. 7.25 10/25/11 420,947 765 Ford Motor Credit Co. 7.375 10/28/09 762,448 60 Hertz Corp. 7.40 03/01/11 59,442 185 Hertz Corp. 7.625 06/01/12 183,604 435 MBNA Corp. 6.125 03/01/13 474,601 650 Nationwide Building Society - 144A** (United Kingdom) 4.25 02/01/10 645,215 445 Residential Capital Corp. - 144A** 6.375 06/30/10 454,722 495 SLM Corp. (Series MTNA) 5.00 10/01/13 506,584 525 Toyota Motor Credit Corp. 5.65 01/15/07 533,890 ------------ 5,708,855 ------------ FINANCIAL CONGLOMERATES (5.6%) 735 Chase Manhattan Corp. 6.00 02/15/09 772,553 500 Citicorp 6.375 11/15/08 530,300 235 Citigroup Inc. 5.625 08/27/12 249,726 265 Citigroup Inc. 6.00 02/21/12 286,958 810 General Electric Capital Corp. (Series MTNA) 6.75 03/15/32 991,579 420 General Motors Acceptance Corp. 6.875 09/15/11 398,211 830 General Motors Acceptance Corp. 8.00 11/01/31 769,869 410 Prudential Funding LLC (Series MTN) - 144A** 6.60 05/15/08 435,693 ------------ 4,434,889 ------------ FOOD RETAIL (0.2%) 160 Safeway Inc. 6.15 03/01/06 161,027 ------------ FOOD: MAJOR DIVERSIFIED (0.3%) 230 Conagra Foods, Inc. 6.00 09/15/06 232,350 ------------ FOREST PRODUCTS (0.2%) 150 Weyerhaeuser Co. 6.00 08/01/06 151,928 ------------ GAS DISTRIBUTORS (1.8%) 370 NiSource Finance Corp. 4.393+ 11/23/09 371,932 330 Nisource Finance Corp. 7.625 11/15/05 332,181 23 Ras Laffan Liquid Natural Gas Co. Ltd. - 144A** (Qatar) 7.628 09/15/06 23,719 335 Ras Laffan Liquid Natural Gas Co. Ltd. - 144A** (Qatar) 8.294 03/15/14 397,089
SEE NOTES TO FINANCIAL STATEMENTS 14
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------------- $ 320 Sempra Energy 4.621% 05/17/07 $ 321,361 ------------ 1,446,282 ------------ HOME FURNISHINGS (0.4%) 130 Mohawk Industries, Inc. (Class C) 6.50 04/15/07 134,141 170 Mohawk Industries, Inc. (Series D) 7.20 04/15/12 193,078 ------------ 327,219 ------------ HOME IMPROVEMENT CHAINS (0.4%) 300 Lowe's Companies, Inc. 7.50 12/15/05 302,822 ------------ HOSPITAL/NURSING MANAGEMENT (0.9%) 625 HCA, Inc. 6.30 10/01/12 641,396 50 HCA, Inc. 7.875 02/01/11 55,087 ------------ 696,483 ------------ HOTELS/RESORTS/CRUISELINES (1.5%) 695 Hyatt Equities LLC - 144A** 6.875 06/15/07 713,600 265 Marriott International, Inc. (Series E) 7.00 01/15/08 279,725 170 Starwood Hotels & Resorts Worldwide, Inc. 7.375 05/01/07 177,013 ------------ 1,170,338 ------------ HOUSEHOLD/PERSONAL CARE (0.8%) 590 Clorox Co. (The) 3.525+ 12/14/07 591,382 ------------ INDUSTRIAL CONGLOMERATES (1.5%) 515 Honeywell International, Inc. 5.125 11/01/06 520,144 315 Hutchison Whampoa International Ltd. - 144A** (Cayman Islands) 5.45 11/24/10 326,029 340 Hutchison Whampoa International Ltd. - 144A** (Cayman Islands) 6.50 02/13/13 367,457 ------------ 1,213,630 ------------ INSURANCE BROKERS/SERVICES (2.7%) 1,135 Farmers Exchange Capital - 144A** 7.05 07/15/28 1,228,069 960 Marsh & McLennan Co., Inc. 5.875 08/01/33 908,446 ------------ 2,136,515 ------------ INVESTMENT BANKS/BROKERS (0.5%) 330 Goldman Sachs Group Inc. (The) 5.25 10/15/13 339,137 60 Goldman Sachs Group Inc. (The) 6.60 01/15/12 66,225 ------------ 405,362 ------------ LIFE/HEALTH INSURANCE (0.7%) 475 John Hancock Global Funding II - 144A** 7.90 07/02/10 547,963 ------------
SEE NOTES TO FINANCIAL STATEMENTS 15
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------------- MAJOR BANKS (2.8%) $ 805 Bank of America Corp. 3.375% 02/17/09 $ 782,213 250 Bank of New York Co., Inc. (The) 5.20 07/01/07 254,284 560 HSBC Finance Corp. 6.75 05/15/11 619,620 475 Wachovia Bank NA (Series BKNT) 7.80 08/18/10 547,897 ------------ 2,204,014 ------------ MAJOR TELECOMMUNICATIONS (4.5%) 630 AT&T Corp. 9.75 11/15/31 828,450 150 Deutsche Telekom International Finance Corp. (Netherlands) 8.50 06/15/10 172,665 355 Deutsche Telekom International Finance Corp. BV (Netherlands) 8.75 06/15/30 481,133 485 France Telecom S.A. (France) 8.75 03/01/31 680,137 80 GTE Corp. 6.36 04/15/06 81,072 345 Sprint Capital Corp. 8.75 03/15/32 482,917 310 Telecom Italia Capital SpA - 144A** (Luxembourg 4.00 01/15/10 302,130 365 Telecom Italia Capital SpA (Luxembourg) 4.00 11/15/08 359,941 165 Verizon Global Funding Corp. 7.25 12/01/10 185,705 ------------ 3,574,150 ------------ MANAGED HEALTH CARE (2.7%) 565 Aetna, Inc. 7.875 03/01/11 654,416 790 Health Net, Inc. 9.875 04/15/11 945,410 175 WellPoint Health Networks Inc. 6.375 06/15/06 177,726 265 WellPoint Inc. 3.75 12/14/07 260,927 55 WellPoint Inc. 4.25 12/15/09 54,583 ------------ 2,093,062 ------------ MEDIA CONGLOMERATES (1.2%) 600 News America Holdings, Inc. 7.75 02/01/24 724,013 220 News America Inc. 7.28 06/30/28 255,017 ------------ 979,030 ------------ MOTOR VEHICLES (1.6%) 100 DaimlerChrysler North American Holdings Co. 8.00 06/15/10 112,299 425 DaimlerChrysler North American Holdings Co. 8.50 01/18/31 534,605 720 General Motors Corp. 8.375 07/15/33 608,400 ------------ 1,255,304 ------------
SEE NOTES TO FINANCIAL STATEMENTS 16
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------------- MULTI-LINE INSURANCE (2.3%) $ 450 AIG Sun America Global Finance VI - 144A** 6.30% 05/10/11 $ 491,068 300 American General Finance Corp. (Series MTNF) 5.875 07/14/06 304,193 485 American General Finance Corp. (Series MTNH) 4.625 09/01/10 486,063 365 Equitable Life Assurance Society - 144A** 6.95 12/01/05 367,415 135 Hartford Financial Services Group, Inc. (The) 2.375 06/01/06 133,118 ------------ 1,781,857 ------------ OIL & GAS PRODUCTION (3.1%) 145 Chesapeake Energy Corp. - 144A** 6.50 08/15/17 148,625 410 Kerr-McGee Corp. 5.875 09/15/06 417,630 230 Kerr-McGee Corp. 6.625 10/15/07 238,400 55 Pemex Project Funding Master Trust 7.375 12/15/14 62,177 210 Pemex Project Funding Master Trust 7.875 02/01/09 230,055 1,170 Pemex Project Funding Master Trust 8.00 11/15/11 1,340,235 ------------ 2,437,122 ------------ OTHER METALS/MINERALS (0.5%) 375 Brascan Corp. (Canada) 7.125 06/15/12 423,219 ------------ PROPERTY - CASUALTY INSURERS (2.1%) 645 Mantis Reef Ltd. - 144A** (Austria) 4.692 11/14/08 642,187 110 Platinum Underwriters Holdings, Ltd. - 144A** 6.371 11/16/07 111,796 250 St. Paul Travelers 5.01 08/16/07 252,433 675 XLLIAC Global Funding - 144A** 4.80 08/10/10 681,018 ------------ 1,687,434 ------------ PUBLISHING: NEWSPAPERS (0.5%) 415 Knight Ridder, Inc. 5.75 09/01/17 422,353 ------------ PULP & PAPER (1.9%) 405 Abitibi-Consolidated Inc. (Canada) 8.55 08/01/10 416,137 245 Abitibi-Consolidated Inc. (Canada) 8.85 08/01/30 232,750 505 Bowater Canada Finance (Canada) 7.95 11/15/11 522,675 300 Sappi Papier Holding AG - 144A** (Austria) 6.75 06/15/12 314,173 ------------ 1,485,735 ------------ RAILROADS (1.5%) 267 Burlington North Santa Fe Railway Co. 4.575 01/15/21 266,562 270 Norfolk Southern Corp. 7.35 05/15/07 283,134
SEE NOTES TO FINANCIAL STATEMENTS 17
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------------- $ 245 Union Pacific Corp. 6.625% 02/01/08 $ 257,563 210 Union Pacific Corp. 6.65 01/15/11 230,251 160 Union Pacific Corp. (Series MTNE) 6.79 11/09/07 168,170 ------------ 1,205,680 ------------ REAL ESTATE DEVELOPMENT (0.8%) 340 World Financial Properties - 144A** 6.91 09/01/13 365,174 251 World Financial Properties - 144A** 6.95 09/01/13 269,727 ------------ 634,901 ------------ REAL ESTATE INVESTMENT TRUSTS (0.1%) 100 EOP Operating L.P. 4.75 03/15/14 98,238 ------------ REGIONAL BANKS (1.3%) 815 Marshall & Ilsley Bank (Series BKNT) 3.80 02/08/08 806,182 175 US Bancorp 5.10 07/15/07 177,786 ------------ 983,968 ------------ SAVINGS BANKS (1.6%) 70 Household Finance Corp. 4.125 11/16/09 69,220 70 Household Finance Corp. 6.375 10/15/11 76,343 215 Household Finance Corp. 8.00 07/15/10 246,356 685 Washington Mutual Bank 5.50 01/15/13 715,948 105 Washington Mutual Inc. 8.25 04/01/10 119,642 ------------ 1,227,509 ------------ TOBACCO (0.9%) 125 Altria Group, Inc. 7.00 11/04/13 139,810 435 Altria Group, Inc. 7.75 01/15/27 524,963 ------------ 664,773 ------------ WIRELESS TELECOMMUNICATIONS (0.4%) 285 AT&T Wireless Services, Inc. 7.875 03/01/11 329,771 ------------ TOTAL CORPORATE BONDS (COST $55,863,655) 56,698,696 ------------ ASSET-BACKED SECURITIES (7.1%) FINANCE/RENTAL/LEASING 550 Chase Manhattan Auto Owner Trust 2004-A A4 2.83 09/15/10 536,477 350 CIT Equipment Collateral 2004-EF1 A3 3.50 09/20/08 345,706 550 Daimler Chrysler Auto Trust 2003-B A4 2.86 03/09/09 541,062 325 Ford Credit Auto Owner Trust 2005-B A3 4.17 01/15/09 325,138
SEE NOTES TO FINANCIAL STATEMENTS 18
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------------- $ 450 Harley-Davidson Motorcycle Trust 2004-2 A2 3.56% 02/15/12 $ 445,738 600 Harley-Davidson Motorcycle Trust 2005-1 A2 3.76 12/17/12 595,001 550 Honda Auto Receivables Owner Trust 2004-1 A4 3.06 10/21/09 540,287 800 MBNA Credit Card Master Note Trust 2004-A4 A4 2.70 09/15/09 782,518 500 TXU Electric Delivery Transition Bond Co. LLC 2004-1 A2 4.81 11/17/14 509,399 650 USAA Auto Owner Trust 2004-2 A4 3.58 02/15/11 643,306 350 Volkswagen Auto Lease Trust 2005-A A3 3.82 05/20/08 348,876 ------------ TOTAL ASSET-BACKED SECURITIES (COST $5,684,518) 5,613,508 ------------ FOREIGN GOVERNMENT OBLIGATIONS (2.1%) 395 Russian Federation (Russia) - 144A** 5.00# 03/31/30 451,288 110 United Mexican States (Mexico) 8.375 01/14/11 128,535 860 United Mexican States (Mexico) 9.875 02/01/10 1,039,740 ------------ TOTAL FOREIGN GOVERNMENT OBLIGATIONS (COST $1,556,172) 1,619,563 ------------ U.S. GOVERNMENT AGENCIES - MORTGAGE-BACKED SECURITIES (0.1%) 21 Federal Home Loan Mortgage Corp. 7.50 09/01/30 22,556 37 Federal National Mortgage Association 7.50 09/01/29 - 04/01/32 38,836 ------------ TOTAL U.S. GOVERNMENT AGENCIES - MORTGAGE-BACKED SECURITIES (COST $60,966) 61,392 ------------ U.S. GOVERNMENT OBLIGATIONS (10.8%) 5,125 U.S. Treasury Bonds 6.125 - 6.375 08/15/27 - 08/15/29 6,567,242 1,150 U.S. Treasury Note 4.25 08/15/13 1,171,564 1,900 U.S. Treasury Strips 0.00 02/15/25 - 02/15/27 780,771 ------------ TOTAL U.S. GOVERNMENT OBLIGATIONS (COST $8,146,288) 8,519,577 ------------ SHORT-TERM INVESTMENTS (6.9%) U.S. GOVERNMENT OBLIGATION (a) (0.1%) 100 U.S. Treasury Bill* (COST $98,762) 3.35 01/12/06 98,762 ------------
SEE NOTES TO FINANCIAL STATEMENTS 19
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT (6.8%) $ 5,374 Joint repurchase agreement account (dated 08/31/05; proceeds $5,374,534) (b) (COST $5,374,000) 3.575% 09/01/05 $ 5,374,000 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $5,472,762) 5,472,762 ------------ Total Investments (COST $76,784,361) (c) (d) 99.1% 77,985,498 OTHER ASSETS IN EXCESS OF LIABILITIES 0.9 701,925 ----- ------------ NET ASSETS 100.0% $ 78,687,423 ===== ============
- ---------- * A PORTION OF THIS SECURITY HAS BEEN PHYSICALLY SEGREGATED IN CONNECTION WITH OPEN FUTURES CONTRACTS IN AN AMOUNT EQUAL TO $8,870. ** RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. # STEP UP COUPON; WILL CONVERT TO 7.5% ON APRIL 1, 2007. + FLOATING RATE SECURITY, RATE SHOWN IS THE RATE IN EFFECT AT AUGUST 31, 2005. (a) PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (b) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS. (c) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN A AMOUNT EQUAL TO $24,771,374 IN CONNECTION WITH OPEN FUTURES CONTRACTS. (d) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $77,484,898. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $1,496,739 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $996,139 RESULTING IN NET UNREALIZED APPRECIATION OF $500,600. FUTURES CONTRACTS OPEN AT AUGUST 31, 2005:
UNREALIZED NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE APPRECIATION CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE (DEPRECIATION) - ---------------------------------------------------------------------------------------------------------- 49 Long U.S. Treasury Notes 10 year $ 5,491,828 $ 68,106 December 2005 4 Long U.S. Treasury Bonds 20 year 472,125 6,354 December 2005 5 Short U.S. Treasury Notes 5 year (542,656) (6,420) September 2005 9 Short U.S. Treasury Notes 5 year (975,375) (8,214) December 2005 27 Short U.S. Treasury Notes 2 year (5,597,438) 21,435 September 2005 57 Short U.S. Treasury Notes 2 year (11,804,344) (35,986) December 2005 ------------ Net unrealized appreciation $ 45,275 ============
SEE NOTES TO FINANCIAL STATEMENTS 20 MORGAN STANLEY INCOME TRUST FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES AUGUST 31, 2005 ASSETS: Investments in securities, at value (cost $76,784,361) $ 77,985,498 Receivable for: Interest 886,294 Shares of beneficial interest sold 61,014 Prepaid expenses and other assets 41,822 --------------- TOTAL ASSETS 78,974,628 --------------- LIABILITIES: Payable for: Distribution fee 39,488 Shares of beneficial interest redeemed 37,204 Investments purchased 36,642 Dividends and distributions to shareholders 17,647 Variation margin 13,701 Administration fee 5,683 Transfer agent fee 3,003 Investment advisory fee 2,113 Accrued expenses and other payables 131,724 --------------- TOTAL LIABILITIES 287,205 --------------- NET ASSETS $ 78,687,423 =============== COMPOSITION OF NET ASSETS: Paid-in-capital $ 84,257,940 Net unrealized appreciation 1,246,412 Dividends in excess of net investment income (695,546) Accumulated net realized loss (6,121,383) --------------- NET ASSETS $ 78,687,423 =============== CLASS A SHARES: Net Assets $ 32,037,971 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 3,319,726 NET ASSET VALUE PER SHARE $ 9.65 =============== MAXIMUM OFFERING PRICE PER SHARE, (NET ASSET VALUE PLUS 4.44% OF NET ASSET VALUE) $ 10.08 =============== CLASS B SHARES: Net Assets $ 35,738,936 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 3,733,987 NET ASSET VALUE PER SHARE $ 9.57 =============== CLASS C SHARES: Net Assets $ 6,215,274 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 648,185 NET ASSET VALUE PER SHARE $ 9.59 =============== CLASS D SHARES: NET ASSETS $ 4,695,242 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 492,282 NET ASSET VALUE PER SHARE $ 9.54 ===============
STATEMENT OF OPERATIONS FOR THE YEAR ENDED AUGUST 31, 2005 NET INVESTMENT INCOME: INTEREST INCOME $ 4,431,254 --------------- EXPENSES Distribution fee (Class A shares) 37,054 Distribution fee (Class B shares) 493,791 Distribution fee (Class C shares) 57,123 Investment advisory fee 392,067 Transfer agent fees and expenses 114,743 Professional fees 81,125 Shareholder reports and notices 79,351 Administration fee 56,807 Registration fees 38,687 Custodian fees 29,667 Trustees' fees and expenses 8,399 Other 23,662 --------------- TOTAL EXPENSES 1,412,476 Less: amounts waived/reimbursed (131,331) --------------- NET EXPENSES 1,281,145 --------------- NET INVESTMENT INCOME 3,150,109 --------------- NET REALIZED AND UNREALIZED GAIN (LOSS): NET REALIZED GAIN ON: Investments 1,094,726 Futures contracts 8,707 --------------- NET REALIZED GAIN 1,103,433 --------------- NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON: Investments (237,528) Futures contracts 362,706 --------------- NET APPRECIATION 125,178 --------------- NET GAIN 1,228,611 --------------- NET INCREASE $ 4,378,720 ===============
SEE NOTES TO FINANCIAL STATEMENTS 21 STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR ENDED ENDED AUGUST 31, 2005 AUGUST 31, 2004 --------------- --------------- INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income $ 3,150,109 $ 3,655,611 Net realized gain 1,103,433 62,074 Net change in unrealized appreciation 125,178 2,654,295 --------------- --------------- NET INCREASE 4,378,720 6,371,980 --------------- --------------- DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME: Class A shares (753,287) (350,990) Class B shares (2,357,036) (3,453,039) Class C shares (284,981) (332,476) Class D shares (258,588) (321,400) --------------- --------------- TOTAL DIVIDENDS (3,653,892) (4,457,905) --------------- --------------- NET DECREASE FROM TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST (16,476,445) (34,307,978) --------------- --------------- NET DECREASE (15,751,617) (32,393,903) NET ASSETS: Beginning of period 94,439,040 126,832,943 --------------- --------------- END OF PERIOD (INCLUDING DIVIDENDS IN EXCESS OF NET INVESTMENT INCOME OF $695,546 AND $549,749, RESPECTIVELY) $ 78,687,423 $ 94,439,040 =============== ===============
SEE NOTES TO FINANCIAL STATEMENTS 22 MORGAN STANLEY INCOME TRUST NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2005 1. ORGANIZATION AND ACCOUNTING POLICIES Morgan Stanley Income Trust (the "Fund"), formerly Morgan Stanley Quality Income Trust, (the Fund's name changed effective April 29, 2005) is registered under the Investment Company Act of 1940, as amended (the "Act"), as a diversified, open-end management investment company. The Fund's investment objective is high current income consistent with safety of principal. The Fund was organized as a Massachusetts business trust on September 1, 1988 and commenced operations on May 3, 1989. On July 28, 1997, the Fund converted to a multiple class share structure. The Fund offers Class A shares, Class B shares, Class C shares and Class D shares. The four classes are substantially the same except that most Class A shares are subject to a sales charge imposed at the time of purchase and some Class A shares, and most Class B shares and Class C shares are subject to a contingent deferred sales charge imposed on shares redeemed within eighteen months, six years and one year, respectively. Class D shares are not subject to a sales charge. Additionally, Class A shares, Class B shares and Class C shares incur distribution expenses. Effective August 29, 2005, the Board of Trustees of the Fund approved the implementation of a 2% redemption fee on Class A shares, Class B shares, Class C shares, and Class D shares, which is paid directly to the Fund, for shares redeemed within seven days of purchase. The redemption fee is designed to protect the Fund and its remaining shareholders from the effects of short-term trading. The following is a summary of significant accounting policies: A. VALUATION OF INVESTMENTS -- (1) certain portfolio securities may be valued by an outside pricing service approved by the Fund's Trustees; (2) portfolio securities for which over-the-counter market quotations are readily available are valued at the mean between the last reported bid and asked price; (3) when market quotations are not readily available or Morgan Stanley Investment Advisors Inc. (the "Investment Adviser") determines that the market quotations are not reflective of a security's market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Fund's Trustees; and (4) short-term debt securities having a maturity date of more than sixty days at time of purchase are valued on a mark-to-market basis until sixty days prior to maturity and thereafter at amortized cost based on their value on the 61st day. Short-term debt securities having a maturity date of sixty days or less at the time of purchase are valued at amortized cost. B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on security transactions are determined by the identified cost method. Discounts are accreted and premiums are amortized over the life of the respective securities. Interest income is accrued daily. 23 C. REPURCHASE AGREEMENTS -- Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund, along with other affiliated entities managed by the Investment Adviser, may transfer uninvested cash balances into one or more joint repurchase agreement accounts. These balances are invested in one or more repurchase agreements and are collateralized by cash, U.S. Treasury or federal agency obligations. The Fund may also invest directly with institutions in repurchase agreements. The Fund's custodian receives the collateral, which is marked-to-market daily to determine that the value of the collateral does not decrease below the repurchase price plus accrued interest. D. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than distribution fees), and realized and unrealized gains and losses are allocated to each class of shares based upon the relative net asset value on the date such items are recognized. Distribution fees are charged directly to the respective class. E. FUTURES CONTRACTS -- A futures contract is an agreement between two parties to buy and sell financial instruments or contracts based on financial indices at a set price on a future date. Upon entering into such a contract, the Fund is required to pledge to the broker cash, U.S. Government securities or other liquid portfolio securities equal to the minimum initial margin requirements of the applicable futures exchange. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments known as variation margin are recorded by the Fund as unrealized gains and losses. Upon closing of the contract, the Fund realizes a gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. F. FEDERAL INCOME TAX POLICY -- It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Accordingly, no federal income tax provision is required. G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions to shareholders are recorded on the ex-dividend date. H. USE OF ESTIMATES -- The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. 2. INVESTMENT ADVISORY/ADMINISTRATION AGREEMENTS Effective November 1, 2004, pursuant to an Investment Advisory Agreement, the Fund pays the Investment Adviser an advisory fee, accrued daily and payable monthly, by applying the following annual rates to the net assets of the Fund determined as of the close of each business day: 0.42% to the portion of the daily net assets not exceeding $500 million; 0.35% to the portion of the daily net assets 24 exceeding $500 million but not exceeding $1.25 billion; 0.22% to the portion of the daily net assets in excess of $1.25 billion. Effective November 1, 2004 pursuant to an Administration Agreement with Morgan Stanley Services Company Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Fund pays an administration fee, accrued daily and payable monthly, by applying the annual rate of 0.08% to the Fund's daily net assets. Prior to November 1, 2004, the Fund had retained the Investment Adviser to provide administrative services and to manage the investment of the Fund's assets pursuant to an investment management agreement pursuant to which the Fund paid the Investment Adviser a monthly management fee accrued daily and payable monthly, by applying the following annual rates to the net assets of the Fund determined as of the close of each business day: 0.60% to the portion of the daily net assets not exceeding $500 million; 0.50% to the portion of the daily net assets exceeding $500 million but not exceeding $750 million; 0.40% to the portion of the daily net assets exceeding $750 million but not exceeding $1 billion; and 0.30% to the portion of the daily net assets in excess of $1 billion. For the period September 1, 2004 through August 31, 2005, the Investment Adviser waived its fee and reimbursed expenses to the extent they exceeded 0.80%, excluding distribution fees, of the daily net assets of the Fund. 3. PLAN OF DISTRIBUTION Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the Investment Adviser and Administrator. The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan provides that the Fund will pay the Distributor a fee which is accrued daily and paid monthly at the following annual rates: (i) Class A -- up to 0.25% of the average daily net assets of Class A; (ii) Class B -- up to 0.85% of the lesser of: (a) the average daily aggregate gross sales of the Class B shares since the inception of the Fund (not including reinvestment of dividend or capital gain distributions) less the average daily aggregate net asset value of the Class B shares redeemed since the Fund's inception upon which a contingent deferred sales charge has been imposed or waived; or (b) the average daily net assets of Class B; and (iii) Class C -- up to 0.85% of the average daily net assets of Class C. In the case of Class B shares, provided that the Plan continues in effect, any cumulative expenses incurred by the Distributor but not yet recovered may be recovered through the payment of future distribution fees from the Fund pursuant to the Plan and contingent deferred sales charges paid by investors upon redemption of Class B shares. Although there is no legal obligation for the Fund to pay expenses incurred in excess of payments made to the Distributor under the Plan and the proceeds of contingent deferred sales charges paid by investors upon redemption of shares, if for any reason the 25 Plan is terminated, the Trustees will consider at that time the manner in which to treat such expenses. The Distributor has advised the Fund that such excess amounts totaled $4,542,528 at August 31, 2005. In the case of Class A shares and Class C shares, expenses incurred pursuant to the Plan in any calendar year in excess of 0.25% or 0.85% of the average daily net assets of Class A or Class C, respectively, will not be reimbursed by the Fund through payments in any subsequent year, except that expenses representing a gross sales credit to Morgan Stanley Financial Advisors or other selected broker-dealer representatives may be reimbursed in the subsequent calendar year. For the year ended August 31, 2005, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.23% and 0.82%, respectively. The Distributor has informed the Fund that for the year ended August 31, 2005, it received contingent deferred sales charges from certain redemptions of the Fund's Class B shares and Class C shares of $128,211 and $3,241, respectively and received $25,055 in front-end sales charges from sales of the Fund's Class A shares. The respective shareholders pay such charges which are not an expense of the Fund. 4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES The cost of purchases and proceeds from sales/prepayments of portfolio securities, excluding short-term investments, for the year ended August 31, 2005, aggregated $38,120,599, and $56,949,066, respectively. Included in the aforementioned are purchases and sales/prepayments of U.S. Government securities of $13,828,450 and $5,733,902, respectively. Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and Distributor, is the Fund's transfer agent. The Fund has an unfunded noncontributory defined benefit pension plan covering certain independent Trustees of the Fund who will have served as independent Trustees for at least five years at the time of retirement. Benefits under this plan are based on factors which include years of service and compensation. The Trustees voted to close the plan to new participants and eliminate the future benefits growth due to increases to compensation after July 31, 2003. Aggregate pension costs for the year ended August 31, 2005 included in Trustees' fees and expenses in the Statement of Operations amounted to $7,311. At August 31, 2005, the Fund had an accrued pension liability of $62,308 which is included in accrued expenses in the Statement of Assets and Liabilities. The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan") which allows each independent Trustee to defer payment of all, or a portion, of the fees he receives for serving on the Board of Trustees. Each eligible Trustee generally may elect to have the deferred amounts credited with a return equal to the total return on one or more of the Morgan Stanley funds that are offered as investment options under the Compensation Plan. Appreciation/depreciation and distributions received 26 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:
FOR THE YEAR FOR THE YEAR ENDED ENDED AUGUST 31, 2005 AUGUST 31, 2004 -------------------------- --------------------------- SHARES AMOUNT SHARES AMOUNT ---------- ------------- ---------- ------------- CLASS A SHARES Sold 221,589 $ 2,132,992 704,453 $ 6,705,247 Conversion from Class B 2,729,474 25,880,591 -- -- Reinvestment of dividends 52,537 502,897 24,923 237,640 Redeemed (481,353) (4,601,088) (958,026) (9,092,170) ---------- ------------- ---------- ------------- Net increase (decrease) -- Class A 2,522,247 23,915,392 (228,650) (2,149,283) ---------- ------------- ---------- ------------- CLASS B SHARES Sold 523,679 4,969,424 923,982 8,779,096 Conversion to Class A (2,752,699) (25,880,591) -- -- Reinvestment of dividends 160,297 1,521,702 238,171 2,253,505 Redeemed (1,965,508) (18,649,225) (4,090,065) (38,614,692) ---------- ------------- ---------- ------------- Net decrease -- Class B (4,034,231) (38,038,690) (2,927,912) (27,582,091) ---------- ------------- ---------- ------------- CLASS C SHARES Sold 127,272 1,208,754 195,232 1,846,576 Reinvestment of dividends 22,019 209,341 25,345 240,274 Redeemed (287,875) (2,733,330) (546,505) (5,137,914) ---------- ------------- ---------- ------------- Net decrease -- Class C (138,584) (1,315,235) (325,928) (3,051,064) ---------- ------------- ---------- ------------- CLASS D SHARES Sold 70,246 665,641 279,178 2,647,709 Reinvestment of dividends 21,317 201,615 23,723 223,653 Redeemed (201,163) (1,905,168) (466,532) (4,396,902) ---------- ------------- ---------- ------------- Net decrease -- Class D (109,600) (1,037,912) (163,631) (1,525,540) ---------- ------------- ---------- ------------- Net decrease in Fund (1,760,168) $ (16,476,445) (3,646,121) $ (34,307,978) ========== ============= ========== =============
6. FEDERAL INCOME TAX STATUS The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations which may differ from generally accepted accounting principles. These "book/tax" differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment; temporary 27 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.
FOR THE YEAR FOR THE YEAR ENDED ENDED AUGUST 31, 2005 AUGUST 31, 2004 --------------- --------------- Ordinary income $ 3,679,846 $ 4,434,750 =============== ===============
As of August 31, 2005, the tax-basis components of accumulated losses were as follows: Undistributed ordinary income $ 73,498 Undistributed long-term gains -- ------------ Net accumulated earnings 73,498 Capital loss carryforward* (6,064,561) Temporary differences (80,054) Net unrealized appreciation 500,600 ------------ Total accumulated losses $ (5,570,517) ============
*During the year ended August 31, 2005, the Fund utilized $455,226 of its net capital loss carryforward. As of August 31, 2005, the Fund had a net capital loss carryforward of $6,064,561 of which $199,882 will expire on August 31, 2006, $1,146,203 will expire on August 31, 2008, $2,891,735 will expire on August 31, 2009, $313,469 will expire on August 31, 2010 and $1,513,272 will expire on August 31, 2012 to offset future capital gains to the extent provided by regulations. As of August 31, 2005, the Fund had temporary book/tax differences primarily attributable to capital loss deferrals on wash sales, mark-to-market of open futures contracts, dividend payable and book amortization of premiums on debt securities and permanent book/tax differences primarily attributable to losses on paydowns, tax adjustments on debt securities sold by the Fund and an expired capital loss carryforward. To reflect reclassifications arising from the permanent differences, paid-in-capital was charged $1,896,040, accumulated net realized loss was credited $1,538,054 and dividends in excess of net investment income was credited $357,986. 7. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS To hedge against adverse interest rate, foreign currency and market risks, the Fund may purchase and sell interest rate, currency and index futures contracts ("futures contract"). Futures contracts involve elements of market risk in excess of the amount reflected in the Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the value of the underlying 28 securities. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts. 8. LEGAL MATTERS The Investment Adviser, certain affiliates of the Investment Adviser, certain officers of such affiliates and certain investment companies advised by the Investment Adviser or its affiliates, including the Fund, are named as defendants in a consolidated class action. This consolidated action also names as defendants certain individual Trustees and Directors of the Morgan Stanley funds. The consolidated amended complaint, filed in the United States District Court Southern District of New York on April 16, 2004, generally alleges that defendants, including the Fund, violated their statutory disclosure obligations and fiduciary duties by failing properly to disclose (i) that the Investment Adviser and certain affiliates of the Investment Adviser allegedly offered economic incentives to brokers and others to recommend the funds advised by the Investment Adviser or its affiliates to investors rather than funds managed by other companies, and (ii) that the funds advised by the Investment Adviser or its affiliates, including the Fund, allegedly paid excessive commissions to brokers in return for their efforts to recommend these funds to investors. The complaint seeks, among other things, unspecified compensatory damages, rescissionary damages, fees and costs. The defendants have moved to dismiss the action and intend to otherwise vigorously defend it. On March 9, 2005, Plaintiffs sought leave to supplement their complaint to assert claims on behalf of other investors. While the Fund and Adviser believe that each has meritorious defenses, the ultimate outcome of this matter is not presently determinable at this early stage of the litigation, and no provision has been made in the Fund's financial statements for the effect, if any, of this matter. 29 MORGAN STANLEY INCOME TRUST FINANCIAL HIGHLIGHTS Selected ratios and per share data for a share of beneficial interest outstanding throughout each period:
FOR THE YEAR ENDED AUGUST 31, -------------------------------------------------------------------- 2005 2004 2003 2002 2001 ---------- ---------- ---------- ---------- ---------- CLASS A SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 9.56 $ 9.39 $ 9.53 $ 9.35 $ 8.97 ---------- ---------- ---------- ---------- ---------- Income from investment operations: Net investment income 0.38 0.35 0.20 0.37 0.52 Net realized and unrealized gain 0.16 0.26 0.01 0.19 0.38 ---------- ---------- ---------- ---------- ---------- Total income from investment operations 0.54 0.61 0.21 0.56 0.90 ---------- ---------- ---------- ---------- ---------- Less dividends from net investment income (0.45) (0.44) (0.35) (0.38) (0.52) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 9.65 $ 9.56 $ 9.39 $ 9.53 $ 9.35 ========== ========== ========== ========== ========== TOTAL RETURN+ 5.81% 6.57% 2.17% 6.17% 10.34% RATIOS TO AVERAGE NET ASSETS(1): Expenses 1.03%(2) 1.19%(2) 1.14% 1.04% 1.21% Net investment income 4.08%(2) 3.86%(2) 2.14% 4.03% 5.71% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 32,038 $ 7,628 $ 9,636 $ 10,730 $ 4,177 Portfolio turnover rate 46% 164% 429% 400% 358%
- ---------- + DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. (1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. (2) IF THE FUND HAD BORNE ALL EXPENSES THAT WERE WAIVED BY THE INVESTMENT ADVISER, THE ANNUALIZED EXPENSES AND NET INVESTMENT INCOME RATIOS WOULD HAVE BEEN AS FOLLOWS:
EXPENSE NET INVESTMENT PERIOD ENDED RATIO INCOME RATIO --------------- ------- -------------- AUGUST 31, 2005 1.18% 3.93% AUGUST 31, 2004 1.24 3.81
SEE NOTES TO FINANCIAL STATEMENTS 30
FOR THE YEAR ENDED AUGUST 31, -------------------------------------------------------------------- 2005 2004 2003 2002 2001 ---------- ---------- ---------- ---------- ---------- CLASS B SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 9.48 $ 9.32 $ 9.45 $ 9.35 $ 8.98 ---------- ---------- ---------- ---------- ---------- Income from investment operations: Net investment income 0.31 0.29 0.14 0.31 0.47 Net realized and unrealized gain 0.16 0.24 0.02 0.10 0.37 ---------- ---------- ---------- ---------- ---------- Total income from investment operations 0.47 0.53 0.16 0.41 0.84 ---------- ---------- ---------- ---------- ---------- Less dividends from net investment income (0.38) (0.37) (0.29) (0.31) (0.47) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 9.57 $ 9.48 $ 9.32 $ 9.45 $ 9.35 ========== ========== ========== ========== ========== TOTAL RETURN+ 5.13% 5.78% 1.63% 4.58% 9.55% RATIOS TO AVERAGE NET ASSETS(1): Expenses 1.65%(2) 1.85%(2) 1.79% 1.72% 1.84% Net investment income 3.46%(2) 3.20%(2) 1.49% 3.35% 5.08% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 35,739 $ 73,650 $ 99,695 $ 103,238 $ 97,452 Portfolio turnover rate 46% 164% 429% 400% 358%
- ---------- + DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. (1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. (2) IF THE FUND HAD BORNE ALL EXPENSES THAT WERE WAIVED BY THE INVESTMENT ADVISER, THE ANNUALIZED EXPENSES AND NET INVESTMENT INCOME RATIOS WOULD HAVE BEEN AS FOLLOWS:
EXPENSE NET INVESTMENT PERIOD ENDED RATIO INCOME RATIO --------------- ------- -------------- AUGUST 31, 2005 1.80% 3.31% AUGUST 31, 2004 1.90 3.15
SEE NOTES TO FINANCIAL STATEMENTS 31
FOR THE YEAR ENDED AUGUST 31, -------------------------------------------------------------------- 2005 2004 2003 2002 2001 ---------- ---------- ---------- ---------- ---------- CLASS C SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 9.50 $ 9.34 $ 9.46 $ 9.36 $ 8.99 ---------- ---------- ---------- ---------- ---------- Income from investment operations: Net investment income 0.31 0.29 0.14 0.31 0.47 Net realized and unrealized gain 0.17 0.24 0.03 0.10 0.37 ---------- ---------- ---------- ---------- ---------- Total income from investment operations 0.48 0.53 0.17 0.41 0.84 ---------- ---------- ---------- ---------- ---------- Less dividends from net investment income (0.39) (0.37) (0.29) (0.31) (0.47) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 9.59 $ 9.50 $ 9.34 $ 9.46 $ 9.36 ========== ========== ========== ========== ========== TOTAL RETURN+ 5.16% 5.77% 1.74% 4.57% 9.54% RATIOS TO AVERAGE NET ASSETS(1): Expenses 1.62%(2) 1.85%(2) 1.79% 1.72% 1.84% Net investment income 3.49%(2) 3.20%(2) 1.49% 3.35% 5.08% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 6,215 $ 7,474 $ 10,389 $ 6,415 $ 4,226 Portfolio turnover rate 46% 164% 429% 400% 358%
- ---------- + DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. (1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. (2) IF THE FUND HAD BORNE ALL EXPENSES THAT WERE WAIVED BY THE INVESTMENT ADVISER, THE ANNUALIZED EXPENSES AND NET INVESTMENT INCOME RATIOS WOULD HAVE BEEN AS FOLLOWS:
EXPENSE NET INVESTMENT PERIOD ENDED RATIO INCOME RATIO --------------- ------- -------------- AUGUST 31, 2005 1.77% 3.34% AUGUST 31, 2004 1.90 3.15
SEE NOTES TO FINANCIAL STATEMENTS 32
FOR THE YEAR ENDED AUGUST 31, -------------------------------------------------------------------- 2005 2004 2003 2002 2001 ---------- ---------- ---------- ---------- ---------- CLASS D SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 9.45 $ 9.29 $ 9.43 $ 9.35 $ 8.98 ---------- ---------- ---------- ---------- ---------- Income from investment operations: Net investment income 0.39 0.37 0.22 0.38 0.55 Net realized and unrealized gain 0.16 0.24 0.01 0.09 0.37 ---------- ---------- ---------- ---------- ---------- Total income from investment operations 0.55 0.61 0.23 0.47 0.92 ---------- ---------- ---------- ---------- ---------- Less dividends from net investment income (0.46) (0.45) (0.37) (0.39) (0.55) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 9.54 $ 9.45 $ 9.29 $ 9.43 $ 9.35 ========== ========== ========== ========== ========== TOTAL RETURN+ 6.03% 6.68% 2.39% 5.23% 10.48% RATIOS TO AVERAGE NET ASSETS(1): Expenses 0.80%(2) 1.00%(2) 0.94% 0.87% 0.99% Net investment income 4.31%(2) 4.05%(2) 2.34% 4.20% 5.93% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 4,695 $ 5,687 $ 7,113 $ 11,943 $ 3,018 Portfolio turnover rate 46% 164% 429% 400% 358%
- ---------- + CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. (1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. (2) IF THE FUND HAD BORNE ALL EXPENSES THAT WERE WAIVED BY THE INVESTMENT ADVISER, THE ANNUALIZED EXPENSES AND NET INVESTMENT INCOME RATIOS WOULD HAVE BEEN AS FOLLOWS:
EXPENSE NET INVESTMENT PERIOD ENDED RATIO INCOME RATIO --------------- ------- -------------- AUGUST 31, 2005 0.95% 4.16% AUGUST 31, 2004 1.05 4.00
SEE NOTES TO FINANCIAL STATEMENTS 33 MORGAN STANLEY INCOME TRUST REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF MORGAN STANLEY INCOME TRUST: We have audited the accompanying statement of assets and liabilities of Morgan Stanley Income Trust (the "Fund"), formerly Morgan Stanley Quality Income Trust, including the portfolio of investments, as of August 31, 2005, and the related statements of operations for the year then ended and changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of August 31, 2005, by correspondence with the custodian and brokers. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Morgan Stanley Income Trust as of August 31, 2005, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP NEW YORK, NEW YORK OCTOBER 17, 2005 34 MORGAN STANLEY INCOME TRUST TRUSTEE AND OFFICER INFORMATION INDEPENDENT TRUSTEES:
NUMBER OF PORTFOLIOS TERM OF IN FUND POSITION(S) OFFICE AND COMPLEX NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS HELD BY INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* PAST 5 YEARS** BY TRUSTEE*** TRUSTEE - -------------------------- ----------- -------------- ------------------------------ ------------- --------------------------- Michael Bozic (64) Trustee Since Private Investor; 197 Director of various business Trustee of c/o Kramer April 1994 Director or Trustee of the organizations. Levin Naftalis & Frankel Retail Funds (since April LLP 1994) and the Institutional Counsel to the Funds (since July 2003); Independent Trustees formerly Vice Chairman of 1177 Avenue of the Kmart Corporation Americas (December 1998- New York, NY 10036 October 2000), Chairman and Chief Executive Officer of Levitz Furniture Corporation (November 1995-November 1998) and President and Chief Executive Officer of Hills Department Stores (May 1991-July 1995); formerly variously Chairman, Chief Executive Officer, President and Chief Operating Officer (1987-1991) of the Sears Merchandise Group of Sears, Roebuck & Co. Edwin J. Garn (72) Trustee Since Consultant; Director or 197 Director of Franklin 1031 N. Chartwell Court January 1993 Trustee of the Retail Covey (time management Salt Lake City, UT 84103 Funds (since January 1993) systems), BMW Bank of and the Institutional North America, Inc. Funds (since July 2003); (industrial loan member of the Utah corporation), Escrow Bank Regional Advisory Board USA (industrial loan of Pacific Corp. (utility corporation), United company); formerly Space Alliance (joint Managing Director of venture between Lockheed Summit Ventures LLC Martin and the Boeing (lobbying and consulting Company) and Nuskin Asia firm) (2000-2004); United Pacific (multilevel States Senator (R-Utah) marketing); member of the (1974-1992) and Chairman, board of various civic Senate Banking Committee and charitable (1980-1986), Mayor of organizations. Salt Lake City, Utah (1971-1974), Astronaut, Space Shuttle Discovery (April 12-19, 1985), and Vice Chairman, Huntsman Corporation (chemical company). Wayne E. Hedien (71) Trustee Since Retired; Director or 197 Director of The PMI Group c/o Kramer Levin Naftalis September Trustee of the Retail Inc. (private mortgage & Frankel LLP 1997 Funds (since September 1997) insurance); Trustee and Counsel to the Independent and the Institutional Funds Vice Chairman of The Trustees (since July 2003); Field Museum of Natural 1177 Avenue of the formerly associated with History; director of Americas the Allstate Companies various other business New York, NY 10036 (1966-1994), most recently as and charitable Chairman of The Allstate organizations. Corporation (March 1993- December 1994) and Chairman and Chief Executive Officer of its wholly-owned subsidiary, Allstate Insurance Company (July 1989-December 1994).
35
NUMBER OF PORTFOLIOS TERM OF IN FUND POSITION(S) OFFICE AND COMPLEX NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS HELD BY INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* PAST 5 YEARS** BY TRUSTEE*** TRUSTEE - -------------------------- ----------- -------------- ------------------------------ ------------- --------------------------- Dr. Manuel H. Johnson (56) Trustee Since Senior Partner, Johnson 197 Director of NVR, Inc. c/o Johnson Smick Group, July 1991 Smick International, (home construction); Inc. Inc., a consulting firm; Director of KFX Energy; 888 16th Street, NW Chairman of the Audit Director of RBS Greenwich Suite 740 Committee and Director or Capital Holdings Washington, D.C. 20006 Trustee of the Retail (financial holding Funds (since July 1991) company). and the Institutional Funds (since July 2003); Co-Chairman and a founder of the Group of Seven Council (G7C), an international economic commission; formerly Vice Chairman of the Board of Governors of the Federal Reserve System and Assistant Secretary of the U.S. Treasury. Joseph J. Kearns (63) Trustee Since President, Kearns & 198 Director of Electro Rent c/o Kearns & Associates July 2003 Associates LLC Corporation (equipment LLC (investment consulting); leasing), The Ford Family PMB754 Deputy Chairman of the Foundation, and the UCLA 23852 Pacific Coast Highway Audit Committee and Foundation. Malibu, CA 90265 Director or Trustee of the Retail Funds (since July 2003) and the Institutional Funds (since August 1994); previously Chairman of the Audit Committee of the Institutional Funds (October 2001-July 2003); formerly CFO of the J. Paul Getty Trust. Michael E. Nugent (69) Trustee Since General Partner of 197 Director of various business c/o Triumph Capital, L.P. July 1991 Triumph Capital, L.P., a organizations. 445 Park Avenue private investment New York, NY 10022 partnership; Chairman of the Insurance Committee and Director or Trustee of the Retail Funds (since July 1991) and the Institutional Funds (since July 2001); formerly Vice President, Bankers Trust Company and BT Capital Corporation (1984-1988). Fergus Reid (73) Trustee Since Chairman of Lumelite 198 Trustee and Director of c/o Lumelite Plastics July 2003 Plastics Corporation; certain investment Corporation Chairman of the companies in the 85 Charles Colman Blvd. Governance Committee and JPMorgan Funds complex Pawling, NY 12564 Director or Trustee of the managed by J.P. Morgan Retail Funds (since Investment Management July 2003) and the Inc. Institutional Funds (since June 1992).
36 INTERESTED TRUSTEES:
NUMBER OF PORTFOLIOS TERM OF IN FUND POSITION(S) OFFICE AND COMPLEX NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS HELD BY INTERESTED TRUSTEE REGISTRANT TIME SERVED* PAST 5 YEARS** BY TRUSTEE*** TRUSTEE - -------------------------- ----------- -------------- ------------------------------ ------------- --------------------------- Charles A. Chairman of Since Chairman and Director or 197 None. Fiumefreddo (72) the Board July 1991 Trustee of the Retail Funds c/o Morgan Stanley Trust and Trustee (since July 1991) and the Harborside Financial Institutional Funds Center, Plaza Two, (since July 2003); Jersey City, NJ 07311 formerly Chief Executive Officer of the Retail Funds (until September 2002). James F. Higgins (57) Trustee Since Director or Trustee of 197 Director of AXA c/o Morgan Stanley Trust June 2000 the Retail Funds (since Financial, Inc. and The Harborside Financial June 2000) and the Equitable Life Assurance Center, Plaza Two, Institutional Funds Society of the United Jersey City, NJ 07311 (since July 2003); Senior States (financial Advisor of Morgan Stanley services). (since August 2000); Director of the Distributor and Dean Witter Realty Inc.; previously President and Chief Operating Officer of the Private Client Group of Morgan Stanley (May 1999-August 2000), and President and Chief Operating Officer of Individual Securities of Morgan Stanley (February 1997-May 1999).
- ---------- * THIS IS THE EARLIEST DATE THE TRUSTEE BEGAN SERVING THE FUNDS ADVISED BY MORGAN STANLEY INVESTMENT ADVISORS INC. (THE "INVESTMENT ADVISER") (THE "RETAIL FUNDS"). ** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICES AS DIRECTOR/TRUSTEE FOR THE RETAIL FUNDS AND THE FUNDS ADVISED BY MORGAN STANLEY INVESTMENT MANAGEMENT INC. AND MORGAN STANLEY AIP GP LP (THE "INSTITUTIONAL FUNDS") REFLECT THE EARLIEST DATE THE DIRECTOR/TRUSTEE BEGAN SERVING THE RETAIL OR INSTITUTIONAL FUNDS, AS APPLICABLE. *** THE FUND COMPLEX INCLUDES ALL OPEN-END AND CLOSED-END FUNDS (INCLUDING ALL OF THEIR PORTFOLIOS) ADVISED BY THE INVESTMENT ADVISER AND ANY FUNDS THAT HAVE AN INVESTMENT ADVISER THAT IS AN AFFILIATED PERSON OF THE INVESTMENT ADVISER (INCLUDING, BUT NOT LIMITED TO, MORGAN STANLEY INVESTMENT MANAGEMENT INC.). 37 OFFICERS:
TERM OF POSITION(S) OFFICE AND NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS** - --------------------------- ------------- -------------- ---------------------------------------------- Ronald E. Robison (66) President and Since May 2003 President (since September 2005) and 1221 Avenue of the Americas Principal Principal Executive Officer of funds in the New York, NY 10020 Executive Fund Complex (since May 2003); Managing Officer Director of Morgan Stanley & Co. Incorporated and Morgan Stanley; Managing Director and Director of Morgan Stanley Investment Management Inc., Morgan Stanley Distribution Inc. and Morgan Stanley Distributors Inc.; Managing Director, Chief Administrative Officer and Director of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc.; Chief Executive Officer and Director of Morgan Stanley Trust; Director of Morgan Stanley SICAV (since May 2004); President (since September 2005) and Principal Executive Officer (since May 2003) of the Van Kampen Funds; previously, Executive Vice President (July 2003-September 2005) of funds in the Fund Complex and the Van Kampen Funds. He was also previously President and Director of the Institutional Funds (March 2001-July 2003), Chief Global Operations Officer of Morgan Stanley Investment Management Inc. and Chief Executive Officer and Chairman of Van Kampen Investor Services. Joseph J. McAlinden (62) Vice President Since July Managing Director and Chief Investment 1221 Avenue of the Americas 1995 Officer of the Investment Adviser and Morgan New York, NY 10020 Stanley Investment Management Inc.; Chief Investment Officer of the Van Kampen Funds; Vice President of the Institutional Funds (since July 2003) and the Retail Funds (since July 1995). Barry Fink (50) Vice President Since February General Counsel (since May 2000) and Managing 1221 Avenue of the Americas 1997 Director (since December 2000) of Morgan New York, NY 10020 Stanley Investment Management; Managing Director (since December 2000), Secretary (since February 1997) and Director of the Investment Adviser and the Administrator; Vice President of the Retail Funds; Assistant Secretary of Morgan Stanley DW; Vice President of the Institutional Funds (since July 2003); Managing Director, Secretary and Director of the Distributor; previously Secretary (February 1997-July 2003) and General Counsel (February 1997-April 2004) of the Retail Funds; Vice President and Assistant General Counsel of the Investment Adviser and the Administrator (February 1997- December 2001). Amy R. Doberman (43) Vice President Since July Managing Director and General Counsel, U.S. 1221 Avenue of the Americas 2004 Investment Management; Managing Director of New York, NY 10020 Morgan Stanley Investment Management Inc. and the Investment Adviser, Vice President of the Institutional and Retail Funds (since July 2004); Vice President of the Van Kampen Funds (since August 2004); previously, Managing Director and General Counsel - Americas, UBS Global Asset Management (July 2000-July 2004) and General Counsel, Aeltus Investment Management, Inc. (January 1997-July 2000). Carsten Otto (41) Chief Since October Executive Director and U.S. Director of 1221 Avenue of the Americas Compliance 2004 Compliance for Morgan Stanley Investment New York, NY 10020 Officer Management (since October 2004); Executive Director of the Investment Adviser and Morgan Stanley Investment Management Inc.; formerly Assistant Secretary and Assistant General Counsel of the Morgan Stanley Retail Funds.
38
TERM OF POSITION(S) OFFICE AND NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS** - -------------------------- ------------- -------------- ---------------------------------------------- Stefanie V. Chang (38) Vice President Since July Executive Director of Morgan Stanley & Co. 1221 Avenue of the Americas 2003 Incorporated, Morgan Stanley Investment New York, NY 10020 Management Inc. and the Investment Adviser; Vice President of the Institutional Funds (since December 1997) and the Retail Funds (since July 2003); formerly practiced law with the New York law firm of Rogers & Wells (now Clifford Chance US LLP). Francis J. Smith (40) Treasurer and Treasurer Executive Director of the Investment Adviser c/o Morgan Stanley Trust Chief since July and the Administration (since December 2001); Harborside Financial Financial 2003 and Chief previously, Vice President of the Retail Center, Plaza Two, Officer Financial Funds (September 2002-July 2003); Vice Jersey City, NJ 07311 Officer since President of the Investment Adviser and the September 2002 Administrator (August 2000-November 2001) and Senior Manager at PricewaterhouseCoopers LLP (January 1998-August 2000). Thomas F. Caloia (59) Vice President Since July Executive Director (since December 2002) and c/o Morgan Stanley Trust 2003 Assistant Treasurer of the Investment Harborside Financial Adviser, the Distributor and the Center, Plaza Two, Administrator; previously Treasurer of the Jersey City, NJ 07311 Retail Funds (April 1989-July 2003); formerly First Vice President of the Investment Adviser, the Distributor and the Administrator. Mary E. Mullin (38) Secretary Since July Executive Director of Morgan Stanley & Co. 1221 Avenue of the Americas 2003 Incorporated, Morgan Stanley Investment New York, NY 10020 Management Inc. and the Investment Adviser; Secretary of the Institutional Funds (since June 1999) and the Retail Funds (since July 2003); formerly practiced law with the New York law firms of McDermott, Will & Emery and Skadden, Arps, Slate, Meagher & Flom LLP.
- ---------- * THIS IS THE EARLIEST DATE THE OFFICER BEGAN SERVING THE RETAIL FUNDS. EACH OFFICER SERVES AN INDEFINITE TERM, UNTIL HIS OR HER SUCCESSOR IS ELECTED. ** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICE AS AN OFFICER FOR THE RETAIL AND INSTITUTIONAL FUNDS REFLECT THE EARLIEST DATE THE OFFICER BEGAN SERVING THE RETAIL OR INSTITUTIONAL FUNDS, AS APPLICABLE. 2005 FEDERAL TAX NOTICE (UNAUDITED) Of the Fund's ordinary dividends paid during the fiscal year ended August 31, 2005, 4.17% was attributable to qualifying Federal obligations. Please consult your tax advisor to determine if any portion of the dividends you received is exempt from state income tax. 39 TRUSTEES Michael Bozic Charles A. Fiumefreddo Edwin J. Garn Wayne E. Hedien James F. Higgins Dr. Manuel H. Johnson Joseph J. Kearns Michael E. Nugent Fergus Reid OFFICERS Charles A. Fiumefreddo CHAIRMAN OF THE BOARD Ronald E. Robison PRESIDENT and PRINCIPAL EXECUTIVE OFFICER Joseph J. McAlinden VICE PRESIDENT Barry Fink VICE PRESIDENT Amy R. Doberman VICE PRESIDENT Carsten Otto CHIEF COMPLIANCE OFFICER Stefanie V. Chang VICE PRESIDENT Francis J. Smith TREASURER and CHIEF FINANCIAL OFFICER Thomas F. Caloia VICE PRESIDENT Mary E. Mullin SECRETARY TRANSFER AGENT Morgan Stanley Trust Harborside Financial Center, Plaza Two Jersey City, New Jersey 07311 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Deloitte & Touche LLP Two World Financial Center New York, New York 10281 INVESTMENT ADVISER Morgan Stanley Investment Advisors Inc. 1221 Avenue of the Americas New York, New York 10020 This report is submitted for the general information of the shareholders of the Fund. For more detailed information about the Fund, its fees and expenses and other pertinent information, please read its Prospectus. The Fund's Statement of Additional Information contains additional information about the Fund, including its trustees. It is available, without charge, by calling (800) 869-NEWS. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective Prospectus. Read the Prospectus carefully before investing. Investments and services offered through Morgan Stanley DW Inc., member SIPC. Morgan Stanley Distributors Inc., member NASD. (C) 2005 Morgan Stanley [MORGAN STANLEY LOGO] 38557RPT-RA05-00840P-Y08/05 [GRAPHIC] MORGAN STANLEY FUNDS MORGAN STANLEY INCOME TRUST ANNUAL REPORT AUGUST 31, 2005 [MORGAN STANLEY LOGO] Item 2. Code of Ethics. (a) The Fund has adopted a code of ethics (the "Code of Ethics") that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the Fund or a third party. (b) No information need be disclosed pursuant to this paragraph. (c) The Fund has amended its Code of Ethics during the period covered by the shareholder report presented in Item 1 hereto to delete from the end of the following paragraph on page 2 of the Code the phrase "to the detriment of the Fund.": "Each Covered Officer must not use his personal influence or personal relationship improperly to influence investment decisions or financial reporting by the Fund whereby the Covered Officer would benefit personally (directly or indirectly)." Additionally, Exhibit B was amended to remove Mitchell M. Merin as a covered officer. (d) Not applicable. (e) Not applicable. (f) (1) The Fund's Code of Ethics is attached hereto as Exhibit A. (2) Not applicable. (3) Not applicable. Item 3. Audit Committee Financial Expert. The Fund's Board of Trustees has determined that it has two "audit committee financial experts" serving on its audit committee, each of whom are "independent" Trustees: Dr. Manuel H. Johnson and Joseph J. Kearns. Under applicable securities laws, a person who is determined to be an audit committee financial expert will not be deemed an "expert" for any purpose, including without limitation for the purposes of Section 11 of the Securities Act of 1933, as a result of being designated or identified as an audit committee financial expert. The designation or identification of a person as an audit committee financial expert does not impose on such person any duties, obligations, or liabilities that are greater than the duties, obligations, and liabilities imposed on such person as a member of the audit committee and Board of Trustees in the absence of such designation or identification. Item 4. Principal Accountant Fees and Services. (a)(b)(c)(d) and (g). Based on fees billed for the periods shown: 2005
REGISTRANT COVERED ENTITIES(1) AUDIT FEES $ 32,666 N/A NON-AUDIT FEES AUDIT-RELATED FEES $ 540 (2) $ (2) TAX FEES $ 6,161 (3) $ (4) ALL OTHER FEES $ - $ - TOTAL NON-AUDIT FEES $ 6,701 $ TOTAL $ 39,367 $
2004
REGISTRANT COVERED ENTITIES(1) AUDIT FEES $ 31,830 N/A NON-AUDIT FEES AUDIT-RELATED FEES $ 452 (2) $ 5,067,400 (2) TAX FEES $ 5,598 (3) $ 545,053 (4) ALL OTHER FEES $ - $ - (5) TOTAL NON-AUDIT FEES $ 6,050 $ 5,612,453 TOTAL $ 37,880 $ 5,612,453
N/A- Not applicable, as not required by Item 4. (1) Covered Entities include the Adviser (excluding sub-advisors) and any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Registrant. (2) Audit-Related Fees represent assurance and related services provided that are reasonably related to the performance of the audit of the financial statements of the Covered Entities' and funds advised by the Adviser or its affiliates, specifically data verification and agreed-upon procedures related to asset securitizations and agreed-upon procedures engagements. (3) Tax Fees represent tax compliance, tax planning and tax advice services provided in connection with the preparation and review of the Registrant's tax returns. (4) Tax Fees represent tax compliance, tax planning and tax advice services provided in connection with the review of Covered Entities' tax returns. (5) All other fees represent project management for future business applications and improving business and operational processes. (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. 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 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 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 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. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Applicable only to reports filed by closed-end funds. Item 8. Portfolio Managers of Closed-End Management Investment Companies Applicable only to reports filed by closed-end funds. Item 9. Closed-End Fund Repurchases Applicable only to reports filed by closed-end funds. Item 10. Submission of Matters to a Vote of Security Holders Not applicable. Item 11. Controls and Procedures (a) The Fund's principal executive officer and principal financial officer have concluded that the Fund's disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Fund in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, based upon such officers' evaluation of these controls and procedures as of a date within 90 days of the filing date of the report. (b) There were no changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12. Exhibits (a) The Code of Ethics for Principal Executive and Senior Financial Officers is attached hereto. (b) A separate certification for each principal executive officer and principal financial officer of the registrant are attached hereto as part of EX-99.CERT. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Morgan Stanley Income Trust /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer October 20, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer October 20, 2005 /s/ Francis Smith Francis Smith Principal Financial Officer October 20, 2005
EX-99.CODEETH 2 a2164168zex-99_codeeth.txt EXHIBIT 99.CODEETH Exhibit 99.CODEETH EXHIBIT 12 A CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS ADOPTED SEPTEMBER 28, 2004, AS AMENDED SEPTEMBER 20, 2005 I. This Code of Ethics (the "Code") for the investment companies within the Morgan Stanley complex identified in Exhibit A (collectively, "Funds" and each, a "Fund") applies to each Fund's Principal Executive Officer, President, Principal Financial Officer and Treasurer (or persons performing similar functions) ("Covered Officers" each of whom are set forth in Exhibit B) for the purpose of promoting: - honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships. - full, fair, accurate, timely and understandable disclosure in reports and documents that a company files with, or submits to, the Securities and Exchange Commission ("SEC") and in other public communications made by the Fund; - compliance with applicable laws and governmental rules and regulations; - prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and - accountability for adherence to the Code. Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. Any question about the application of the Code should be referred to the General Counsel or his/her designee (who is set forth in Exhibit C). II. COVERED OFFICERS SHOULD HANDLE ETHICALLY ACTUAL AND APPARENT CONFLICTS OF INTEREST OVERVIEW. A "conflict of interest" occurs when a Covered Officer's private interest interferes, or appears to interfere, with the interests of, or his service to, the Fund. For example, a conflict of interest would arise if a Covered Officer, or a member of his family, receives improper personal benefits as a result of his position with the Fund. Certain conflicts of interest arise out of the relationships between Covered Officers and the Fund and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the Fund because of their status as "affiliated persons" (as defined in the Investment Company Act) of the Fund. The Fund's and its investment adviser's compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside the parameters of this Code, unless or until the General Counsel determines that any violation of such programs and procedures is also a violation of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts may arise from, or as a result of, the contractual relationship between the Fund and its investment adviser of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the Fund or for the investment adviser, or for both), be involved in establishing policies and implementing decisions that will have different effects on the Fund and its investment adviser. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the Fund and the investment adviser and is consistent with the performance by the Covered Officers of their duties as officers of the Fund. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the Funds' Boards of Directors/Trustees ("Boards") that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the Fund. Each Covered Officer must not: - use his personal influence or personal relationships improperly to influence investment decisions or financial reporting by the Fund whereby the Covered Officer would benefit personally (directly or indirectly); - cause the Fund to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit of the Fund; or - use material non-public knowledge of portfolio transactions made or contemplated for, or actions proposed to be taken by, the Fund to trade personally or cause others to trade personally in contemplation of the market effect of such transactions. Each Covered Officer must, at the time of signing this Code, report to the General Counsel all affiliations or significant business relationships outside the Morgan Stanley complex and must update the report annually. Conflict of interest situations should always be approved by the General Counsel and communicated to the relevant Fund or Fund's Board. Any activity or relationship that would present such a conflict for a Covered Officer would likely also present a conflict for the Covered Officer if an immediate member of the Covered Officer's family living in the same household engages in such an activity or has such a relationship. Examples of these include: - service or significant business relationships as a director on the board of any public or private company; - accepting directly or indirectly, anything of value, including gifts and gratuities in excess of $100 per year from any person or entity with which the Fund has current or prospective business dealings, not including occasional meals or tickets for theatre or sporting events or other similar entertainment; provided it is business-related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety; - any ownership interest in, or any consulting or employment relationship with, any of the Fund's service providers, other than its investment adviser, principal underwriter, or any affiliated person thereof; and - a direct or indirect financial interest in commissions, transaction charges or spreads paid by the Fund for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer's employment, such as compensation or equity ownership. III. DISCLOSURE AND COMPLIANCE - Each Covered Officer should familiarize himself/herself with the disclosure and compliance requirements generally applicable to the Funds; - each Covered Officer must not knowingly misrepresent, or cause others to misrepresent, facts about the Fund to others, whether within or outside the Fund, including to the Fund's Directors/Trustees and auditors, or to governmental regulators and self-regulatory organizations; - each Covered Officer should, to the extent appropriate within his area of responsibility, consult with other officers and employees of the Funds and their investment advisers with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the Funds file with, or submit to, the SEC and in other public communications made by the Funds; and - it is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations. IV. REPORTING AND ACCOUNTABILITY Each Covered Officer must: - upon adoption of the Code (thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Boards that he has received, read and understands the Code; - annually thereafter affirm to the Boards that he has complied with the requirements of the Code; - not retaliate against any other Covered Officer, other officer or any employee of the Funds or their affiliated persons for reports of potential violations that are made in good faith; and - notify the General Counsel promptly if he/she knows or suspects of any violation of this Code. Failure to do so is itself a violation of this Code. The General Counsel is responsible for applying this Code to specific situations in which questions are presented under it and has the authority to interpret this Code in any particular situation. However, any waivers(2) sought by a Covered Officer must be considered by the Board of the relevant Fund or Funds. The Funds will follow these procedures in investigating and enforcing this Code: - the General Counsel will take all appropriate action to investigate any potential violations reported to him; - if, after such investigation, the General Counsel believes that no violation has occurred, the General Counsel is not required to take any further action; - any matter that the General Counsel believes is a violation will be reported to the relevant Fund's Audit Committee; - ---------- (2) Item 2 of Form N-CSR defines "waiver" as "the approval by the registrant of a material departure from a provision of the code of ethics." - if the directors/trustees/managing general partners who are not "interested persons" as defined by the Investment Company Act (the "Independent Directors/Trustees/Managing General Partners") of the relevant Fund concur that a violation has occurred, they will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer or other appropriate disciplinary actions; - the Independent Directors/Trustees/Managing General Partners of the relevant Fund will be responsible for granting waivers of this Code, as appropriate; and - any changes to or waivers of this Code will, to the extent required, be disclosed as provided by SEC rules. V. OTHER POLICIES AND PROCEDURES This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the Funds, the Funds' investment advisers, principal underwriters, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code unless any provision of this Code conflicts with any applicable federal or state law, in which case the requirements of such law will govern. The Funds' and their investment advisers' and principal underwriters' codes of ethics under Rule 17j-1 under the Investment Company Act and Morgan Stanley's Code of Ethics are separate requirements applying to the Covered Officers and others, and are not part of this Code. VI. AMENDMENTS Any amendments to this Code, other than amendments to Exhibits A, B or C, must be approved or ratified by a majority vote of the Board of each Fund, including a majority of Independent Directors/Trustees/Managing General Partners. VII. CONFIDENTIALITY All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the Independent Directors/Trustees/Managing General Partners of the relevant Fund or Funds and their counsel, the relevant Fund or Funds and their counsel and the relevant investment adviser and its counsel. VIII. INTERNAL USE The Code is intended solely for the internal use by the Funds and does not constitute an admission, by or on behalf of any Fund, as to any fact, circumstance, or legal conclusion I have read and understand the terms of the above Code. I recognize the responsibilities and obligations incurred by me as a result of my being subject to the Code. I hereby agree to abide by the above Code. - ------------------------- Date: -------------------- EXHIBIT A FUND LIST AT SEPTEMBER 20, 2005 RETAIL FUNDS OPEN-END RETAIL FUNDS TAXABLE MONEY MARKET FUNDS 1. Active Assets Government Securities Trust ("AA GOVERNMENT") 2. Active Assets Institutional Government Securities Trust ("AA INSTITUTIONAL GOVERNMENT") 3. Active Assets Institutional Money Trust ("AA INSTITUTIONAL MONEY") 4. Active Assets Money Trust ("AA MONEY") 5. Morgan Stanley Liquid Asset Fund Inc. ("LIQUID ASSET") 6. Morgan Stanley U.S. Government Money Market Trust ("GOVERNMENT MONEY") TAX-EXEMPT MONEY MARKET FUNDS 7. Active Assets California Tax-Free Trust ("AA CALIFORNIA") 8. Active Assets Tax-Free Trust ("AA TAX-FREE") 9. Morgan Stanley California Tax-Free Daily Income Trust ("CALIFORNIA TAX-FREE DAILY") 10. Morgan Stanley New York Municipal Money Market Trust ("NEW YORK MONEY") 11. Morgan Stanley Tax-Free Daily Income Trust ("TAX-FREE DAILY") EQUITY FUNDS 12. Morgan Stanley Aggressive Equity Fund ("AGGRESSIVE EQUITY")+ 13. Morgan Stanley Allocator Fund ("ALLOCATOR FUND")+ 14. Morgan Stanley American Opportunities Fund ("AMERICAN OPPORTUNITIES")+ 15. Morgan Stanley Biotechnology Fund ("BIOTECHNOLOGY FUND")+ 16. Morgan Stanley Capital Opportunities Trust ("CAPITAL OPPORTUNITIES")+ 17. Morgan Stanley Developing Growth Securities Trust ("DEVELOPING GROWTH")+ 18. Morgan Stanley Dividend Growth Securities Inc. ("DIVIDEND GROWTH")+ 19. Morgan Stanley Equally-Weighted S&P 500 Fund ("EQUALLY-WEIGHTED S&P 500")+ 20. Morgan Stanley European Equity Fund Inc. ("EUROPEAN EQUITY")+ 21. Morgan Stanley Financial Services Trust ("FINANCIAL SERVICES")+ 22. Morgan Stanley Fundamental Value Fund ("FUNDAMENTAL VALUE")+ 23. Morgan Stanley Global Advantage Fund ("GLOBAL ADVANTAGE")+ 24. Morgan Stanley Global Dividend Growth Securities ("GLOBAL DIVIDEND GROWTH")+ 25. Morgan Stanley Global Utilities Fund ("GLOBAL UTILITIES")+ 26. Morgan Stanley Growth Fund ("GROWTH FUND")+ 27. Morgan Stanley Health Sciences Trust ("HEALTH SCIENCES")+ 28. Morgan Stanley Income Builder Fund ("INCOME BUILDER")+ 29. Morgan Stanley Information Fund ("INFORMATION FUND")+ 30. Morgan Stanley International Fund ("INTERNATIONAL FUND")+ 31. Morgan Stanley International SmallCap Fund ("INTERNATIONAL SMALLCAP")+ 32. Morgan Stanley International Value Equity Fund ("INTERNATIONAL VALUE")+ 33. Morgan Stanley Japan Fund ("JAPAN FUND")+ 34. Morgan Stanley KLD Social Index Fund ("KLD SOCIAL INDEX")+ 35. Morgan Stanley Mid-Cap Value Fund (MID-CAP VALUE")+ 36. Morgan Stanley Multi-Asset Class Fund ("MULTI-ASSET CLASS")+ - Domestic Portfolio 37. Morgan Stanley Nasdaq-100 Index Fund ("NASDAQ-100")+ 38. Morgan Stanley Natural Resource Development Securities Inc. ("NATURAL RESOURCE")+ 39. Morgan Stanley Pacific Growth Fund Inc. ("PACIFIC GROWTH")+ 40. Morgan Stanley Real Estate Fund ("REAL ESTATE")+ 41. Morgan Stanley Small-Mid Special Value Fund (SMALL-MID SPECIAL VALUE")+ 42. Morgan Stanley S&P 500 Index Fund ("S&P500 INDEX")+ 43. Morgan Stanley Special Growth Fund ("SPECIAL GROWTH")+ 44. Morgan Stanley Special Value Fund ("SPECIAL VALUE")+ 45. Morgan Stanley Total Market Index Fund ("TOTAL MARKET INDEX")+ 46. Morgan Stanley Total Return Trust ("TOTAL RETURN")+ 47. Morgan Stanley Utilities Fund ("UTILITIES FUND")+ 48. Morgan Stanley Value Fund ("VALUE FUND")+ BALANCED FUNDS 49. Morgan Stanley Balanced Growth Fund ("BALANCED GROWTH")+ 50. Morgan Stanley Balanced Income Fund ("BALANCED INCOME")+ ASSET ALLOCATION FUND 51. Morgan Stanley Strategist Fund ("STRATEGIST FUND")+ TAXABLE FIXED-INCOME FUNDS 52. Morgan Stanley Convertible Securities Trust ("CONVERTIBLE SECURITIES")+ 53. Morgan Stanley Flexible Income Trust ("FLEXIBLE INCOME")+ 54. Morgan Stanley Income Trust ("INCOME TRUST")+ 55. Morgan Stanley High Yield Securities Inc. ("HIGH YIELD SECURITIES")+ 56. Morgan Stanley Limited Duration Fund ("LIMITED DURATION FUND") 57. Morgan Stanley Mortgage Securities Trust ("MORTGAGE SECURITIES")+ 58. Morgan Stanley Limited Duration U.S. Treasury Trust ("LIMITED DURATION TREASURY") 59. Morgan Stanley Total Return Income Securities Fund ("TOTAL RETURN INCOME")+ 60. Morgan Stanley U.S. Government Securities Trust ("GOVERNMENT SECURITIES")+ TAX-EXEMPT FIXED-INCOME FUNDS 61. Morgan Stanley California Tax-Free Income Fund ("CALIFORNIA TAX-FREE")+ 62. Morgan Stanley Limited Term Municipal Trust ("LIMITED TERM MUNICIPAL") 63. Morgan Stanley New York Tax-Free Income Fund ("NEW YORK TAX-FREE")+ 64. Morgan Stanley Tax-Exempt Securities Trust ("TAX-EXEMPT SECURITIES")+ SPECIAL PURPOSE FUNDS 65. Morgan Stanley Select Dimensions Investment Series ("SELECT DIMENSIONS") - American Opportunities Portfolio - Balanced Growth Portfolio - Capital Opportunities Portfolio - Developing Growth Portfolio - Dividend Growth Portfolio - Equally-Weighted S&P 500 Portfolio - Flexible Income Portfolio - Global Equity Portfolio - Growth Portfolio - Money Market Portfolio - Utilities Portfolio 66. Morgan Stanley Variable Investment Series ("VARIABLE INVESTMENT") - Aggressive Equity Portfolio - Dividend Growth Portfolio - Equity Portfolio - European Growth Portfolio - Global Advantage Portfolio - Global Dividend Growth Portfolio - High Yield Portfolio - Income Builder Portfolio - Information Portfolio - Limited Duration Portfolio - Money Market Portfolio - Quality Income Plus Portfolio - S&P 500 Index Portfolio - Strategist Portfolio - Utilities Portfolio CLOSED-END RETAIL FUNDS TAXABLE FIXED-INCOME CLOSED-END FUNDS 67. Morgan Stanley Government Income Trust ("GOVERNMENT INCOME") 68. Morgan Stanley Income Securities Inc. ("INCOME SECURITIES") 69. Morgan Stanley Prime Income Trust ("PRIME INCOME") TAX-EXEMPT FIXED-INCOME CLOSED-END FUNDS 70. Morgan Stanley California Insured Municipal Income Trust ("CALIFORNIA INSURED MUNICIPAL") 71. Morgan Stanley California Quality Municipal Securities ("CALIFORNIA QUALITY MUNICIPAL") 72. Morgan Stanley Insured California Municipal Securities ("INSURED CALIFORNIA SECURITIES") 73. Morgan Stanley Insured Municipal Bond Trust ("INSURED MUNICIPAL BOND") 74. Morgan Stanley Insured Municipal Income Trust ("INSURED MUNICIPAL INCOME") 75. Morgan Stanley Insured Municipal Securities ("INSURED MUNICIPAL SECURITIES") 76. Morgan Stanley Insured Municipal Trust ("INSURED MUNICIPAL TRUST") 77. Morgan Stanley Municipal Income Opportunities Trust ("MUNICIPAL OPPORTUNITIES") 78. Morgan Stanley Municipal Income Opportunities Trust II ("MUNICIPAL OPPORTUNITIES II") 79. Morgan Stanley Municipal Income Opportunities Trust III ("MUNICIPAL OPPORTUNITIES III") 80. Morgan Stanley Municipal Premium Income Trust ("MUNICIPAL PREMIUM") 81. Morgan Stanley New York Quality Municipal Securities ("NEW YORK QUALITY MUNICIPAL") 82. Morgan Stanley Quality Municipal Income Trust ("QUALITY MUNICIPAL INCOME") 83. Morgan Stanley Quality Municipal Investment Trust ("QUALITY MUNICIPAL INVESTMENT") 84. Morgan Stanley Quality Municipal Securities ("QUALITY MUNICIPAL SECURITIES") +- Denotes Retail Multi-Class Fund INSTITUTIONAL FUNDS OPEN-END INSTITUTIONAL FUNDS 1. Morgan Stanley Institutional Fund, Inc. ("INSTITUTIONAL FUND INC.") ACTIVE PORTFOLIOS: - Active International Allocation Portfolio - Emerging Markets Portfolio - Emerging Markets Debt Portfolio - Equity Growth Portfolio - European Real Estate Portfolio - Focus Equity Portfolio - Global Franchise Portfolio - Global Value Equity Portfolio - International Equity Portfolio - International Magnum Portfolio - International Small Cap Portfolio - Money Market Portfolio - Municipal Money Market Portfolio - Small Company Growth Portfolio - U.S. Real Estate Portfolio - Value Equity Portfolio INACTIVE PORTFOLIOS*: - China Growth Portfolio - Gold Portfolio - Large Cap Relative Value Portfolio - MicroCap Portfolio - Mortgage-Backed Securities Portfolio - Municipal Bond Portfolio - U.S. Equity Plus Portfolio 2. Morgan Stanley Institutional Fund Trust ("INSTITUTIONAL FUND TRUST") ACTIVE PORTFOLIOS: - Advisory Foreign Fixed Income II Portfolio - Advisory Foreign Fixed Income Portfolio - Advisory Mortgage Portfolio - Balanced Portfolio - Core Plus Fixed Income Portfolio - Equity Portfolio - High Yield Portfolio - Intermediate Duration Portfolio - International Fixed Income Portfolio - Investment Grade Fixed Income Portfolio - Limited Duration Portfolio - Mid-Cap Growth Portfolio - Municipal Portfolio - U.S. Core Fixed Income Portfolio - U.S. Mid-Cap Value Portfolio - U.S. Small-Cap Value Portfolio - Value Portfolio - ---------- * Have not commenced or have ceased operations INACTIVE PORTFOLIOS*: - Balanced Plus Portfolio - Growth Portfolio - Investment Grade Credit Advisory Portfolio - Mortgage Advisory Portfolio - New York Municipal Portfolio - Targeted Duration Portfolio - Value II Portfolio 3. The Universal Institutional Funds, Inc. ("UNIVERSAL FUNDS") ACTIVE PORTFOLIOS: - Core Plus Fixed Income Portfolio - Emerging Markets Debt Portfolio - Emerging Markets Equity Portfolio - Equity and Income Portfolio - Equity Growth Portfolio - Global Franchise Portfolio - Global Value Equity Portfolio - High Yield Portfolio - International Magnum Portfolio - Mid-Cap Growth Portfolio - Money Market Portfolio - Small Company Growth Portfolio - Technology Portfolio - U.S. Mid-Cap Value Portfolio - U.S. Real Estate Portfolio - Value Portfolio INACTIVE PORTFOLIOS*: - Balanced Portfolio - Capital Preservation Portfolio - Core Equity Portfolio - International Fixed Income Portfolio - Investment Grade Fixed Income Portfolio - Latin American Portfolio - Multi-Asset Class Portfolio - Targeted Duration Portfolio 4. Morgan Stanley Institutional Liquidity Funds ("LIQUIDITY FUNDS") ACTIVE PORTFOLIOS: - Government Portfolio - Money Market Portfolio - Prime Portfolio - Tax-Exempt Portfolio - Treasury Portfolio INACTIVE PORTFOLIOS*: - Government Securities Portfolio - Treasury Securities Portfolio CLOSED-END INSTITUTIONAL FUNDS 5. Morgan Stanley Asia-Pacific Fund, Inc. ("ASIA-PACIFIC FUND") 6. Morgan Stanley Eastern Europe Fund, Inc. ("EASTERN EUROPE") 7. Morgan Stanley Emerging Markets Debt Fund, Inc. ("EMERGING MARKETS DEBT") 8. Morgan Stanley Emerging Markets Fund, Inc. ("EMERGING MARKETS FUND") 9. Morgan Stanley Global Opportunity Bond Fund, Inc. ("GLOBAL OPPORTUNITY") 10. Morgan Stanley High Yield Fund, Inc. ("HIGH YIELD FUND") 11. The Latin American Discovery Fund, Inc. ("LATIN AMERICAN DISCOVERY") 12 The Malaysia Fund, Inc. ("MALAYSIA FUND") 13. The Thai Fund, Inc. ("THAI FUND") 14. The Turkish Investment Fund, Inc. ("TURKISH INVESTMENT") CLOSED-END FUND OF HEDGE FUNDS 15. Morgan Stanley Institutional Fund of Hedge Funds ("FUND OF HEDGE FUNDS") IN REGISTRATION MORGAN STANLEY RETAIL FUNDS 1. Morgan Stanley American Franchise Fund FUNDS OF HEDGE FUNDS 1. Morgan Stanley Absolute Return Fund 2. Morgan Stanley Institutional Fund of Hedge Funds II - ---------- * Have not commenced or have ceased operations EXHIBIT B INSTITUTIONAL FUNDS COVERED OFFICERS Ronald E. Robison -President and Principal Executive Officer James W. Garrett - Chief Financial Officer and Treasurer RETAIL FUNDS COVERED OFFICERS Ronald E. Robison -President and Principal Executive Officer Frank Smith - Chief Financial Officer and Treasurer MORGAN STANLEY INDIA INVESTMENT FUND, INC. COVERED OFFICERS Ronald E. Robison - President and Principal Executive Officer James W. Garrett - Chief Financial Officer and Treasurer EXHIBIT C GENERAL COUNSEL Barry Fink EX-99.CERT 3 a2164168zex-99_cert.txt EXHIBIT 99.CERT Exhibit 99.CERT EXHIBIT 12 B1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER CERTIFICATIONS I, Ronald E. Robison, certify that: 1. I have reviewed this report on Form N-CSR of Morgan Stanley Income Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: October 20, 2005 /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer EXHIBIT 12 B2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER CERTIFICATIONS I, Francis Smith, certify that: 1. I have reviewed this report on Form N-CSR of Morgan Stanley Income Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: October 20, 2005 /s/ Francis Smith Francis Smith Principal Financial Officer EX-99.906CERT 4 a2164168zex-99_906cert.txt EXHIBIT 99.906CERT Exhibit 99.906CERT SECTION 906 CERTIFICATION Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Morgan Stanley Income Trust In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended August 31, 2005 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: October 20, 2005 /s/ Ronald E. Robison --------------------- Ronald E. Robison Principal Executive Officer A signed original of this written statement required by Section 906 has been provided to Morgan Stanley Income Trust and will be retained by Morgan Stanley Income Trust and furnished to the Securities and Exchange Commission or its staff upon request. SECTION 906 CERTIFICATION Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Morgan Stanley Income Trust In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended August 31, 2005 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: October 20, 2005 /s/ Francis Smith ----------------- Francis Smith Principal Financial Officer A signed original of this written statement required by Section 906 has been provided to Morgan Stanley Income Trust and will be retained by Morgan Stanley Income Trust and furnished to the Securities and Exchange Commission or its staff upon request.
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