-----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, SYBt6nMhoUwWspjQHwOQhCeDpj45eB5uLf2DMdfrX0wuaLjWeiDH36VoUh82sS+u Hzjd883lv9CEMFZVdvGCYw== 0001047469-06-006546.txt : 20060505 0001047469-06-006546.hdr.sgml : 20060505 20060505123813 ACCESSION NUMBER: 0001047469-06-006546 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20060228 FILED AS OF DATE: 20060505 DATE AS OF CHANGE: 20060505 EFFECTIVENESS DATE: 20060505 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN STANLEY INCOME TRUST CENTRAL INDEX KEY: 0000839302 IRS NUMBER: 000000000 STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-05654 FILM NUMBER: 06811680 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 QUALITY INCOME TRUST DATE OF NAME CHANGE: 20030711 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 0000839302 S000002398 NONE C000006364 A IISAX C000006365 B IISBX C000006366 C IISCX C000006367 D IISDX N-CSRS 1 a2169276zn-csrs.txt N-CSRS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-05654 Morgan Stanley Income Trust (Exact name of registrant as specified in charter) 1221 Avenue of the Americas, New York, New York 10020 (Address of principal executive offices) (Zip code) Ronald E. Robison 1221 Avenue of the Americas, New York, New York 10020 (Name and address of agent for service) Registrant's telephone number, including area code: 212-762-4000 Date of fiscal year end: August 31, 2006 Date of reporting period: February 28, 2006 Item 1 - Report to Shareholders WELCOME, SHAREHOLDER: IN THIS REPORT, YOU'LL LEARN ABOUT HOW YOUR INVESTMENT IN MORGAN STANLEY INCOME TRUST PERFORMED DURING THE SEMIANNUAL PERIOD. WE WILL PROVIDE AN OVERVIEW OF THE MARKET CONDITIONS, AND DISCUSS SOME OF THE FACTORS THAT AFFECTED PERFORMANCE DURING THE REPORTING PERIOD. IN ADDITION, THIS REPORT INCLUDES THE FUND'S FINANCIAL STATEMENTS AND A LIST OF FUND INVESTMENTS. THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS FOR THE FUND BEING OFFERED. MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. THE FUND IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT MARKET VALUES OF SECURITIES OWNED BY THE FUND WILL DECLINE AND, THEREFORE, THE VALUE OF THE FUND'S SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE MONEY INVESTING IN THIS FUND. PLEASE SEE THE PROSPECTUS FOR MORE COMPLETE INFORMATION ON INVESTMENT RISKS. FUND REPORT FOR THE SIX MONTHS ENDED FEBRUARY 28, 2006 TOTAL RETURN FOR THE 6 MONTHS ENDED FEBRUARY 28, 2006
LEHMAN BROTHERS LIPPER INTERMEDIATE CORPORATE U.S. DEBT FUNDS GOVERNMENT/ BBB-RATED CLASS A CLASS B CLASS C CLASS D CREDIT INDEX(1) INDEX(2) -0.62% -0.94% -0.91% -0.43% -0.28% 0.34%
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 Despite high energy prices and the devastation of the Gulf Coast hurricanes, the U.S. economy demonstrated resilience during the reporting period. While some observers initially expected that Hurricane Katrina would deliver a significant blow to the U.S. economy, it became apparent as the weeks progressed that the impact on the economy would be much smaller and more temporary than many had anticipated. Moreover, sharply higher energy prices failed to interrupt the positive economic momentum. The first two months of 2006 proved somewhat uneventful. As many expected, the Federal Open Market Committee (the "Fed") once again raised the federal funds target rate by a quarter-point to 4.50 percent in January. Also as expected, Alan Greenspan retired in January after more than 18 years as chairman of the Federal Reserve Board of Governors. Ben S. Bernanke replaced him, and in his first Congressional testimony as chairman, Bernanke acknowledged some risks to the Fed's relatively contained inflation forecast and recognized the potential for upward pressure on inflation if certain conditions persisted unchecked. The chairman also indicated that he concurred with the Fed's January policy statement which noted the potential for further tightening of monetary policy. U.S. Treasury yields rose for the period overall. Short- and intermediate-term Treasury yields were more responsive to stronger-than-expected economic data and rose more rapidly than longer-term Treasury yields. Accordingly, the yield curve (which measures the difference between short- and long-term bond yields) flattened during the six-month period. U.S. investment-grade corporate bonds underperformed other major bond market sectors. Sector returns were unevenly distributed, with a few key names driving performance within each sector. Overall, Aa-rated issues posted the highest returns while medium quality, Baa-rated issues lagged. Among the investment-grade corporate sub-sectors, the best performers were energy, utilities and banking issues. Within the high yield sector, lower-rated issues posted the best performance with forest products, telecom and consumer products leading the way. PERFORMANCE ANALYSIS Morgan Stanley Income Trust underperformed the Lehman Brothers Intermediate U.S. Government/Credit Index and the Lipper Corporate Debt Funds BBB-Rated 2 Index for the six months ended February 28, 2006, assuming no deduction of applicable sales charges. During the period, we kept the Fund's overall interest-rate exposure well below that of its Lehman benchmark. This posture was beneficial as interest rates rose across the yield curve, especially in the short-term and intermediate-term portions of the curve. Favorable sector and security selection decisions, most notably an underweight in the automotive sector, benefited relative performance versus the Lehman benchmark. Within the investment-grade portion of the Fund, a focus on higher-rated issues contributed positively to both absolute and relative performance. While the Fund emphasizes investment-grade credits, it also includes a smaller allocation to higher yielding securities. Within the high yield portion, a conservative approach detracted from performance as higher-rated issues underperformed the riskiest segment of the high yield market (issues rated CCC and below). THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM AS DISCUSSED HEREIN OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE FUND IN THE FUTURE. PORTFOLIO COMPOSITION* Corporate Bonds 68.8% Short-Term Investments 13.1 U.S. Government Obligations 9.1 Asset-Backed Securities 8.8 Mortgage-Backed Securities 0.2
LONG-TERM CREDIT ANALYSIS AAA 36.2% AA 8.5 A 20.1 BBB 27.4 BB 5.2 B or Below 2.6
* DOES NOT INCLUDE OPEN LONG FUTURES CONTRACTS WITH AN UNDERLYING FACE AMOUNT OF $11,110,188 AND NET UNREALIZED APPRECIATION OF $611 AND OPEN SHORT FUTURES CONTRACTS WITH AN UNDERLYING FACE AMOUNT OF $1,635,000 AND UNREALIZED DEPRECIATION OF $209. DATA AS OF FEBRUARY 28, 2006. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR PORTFOLIO COMPOSITION ARE AS A PERCENTAGE OF TOTAL INVESTMENTS AND ALL PERCENTAGES FOR LONG-TERM CREDIT ANALYSIS ARE AS A PERCENTAGE OF TOTAL LONG-TERM INVESTMENTS. THESE DATA ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED A RECOMMENDATION TO BUY OR SELL THE SECURITIES MENTIONED. MORGAN STANLEY IS A FULL-SERVICE SECURITIES FIRM ENGAGED IN SECURITIES TRADING AND BROKERAGE ACTIVITIES, INVESTMENT BANKING, RESEARCH AND ANALYSIS, FINANCING AND FINANCIAL ADVISORY SERVICES. 3 INVESTMENT STRATEGY THE FUND WILL NORMALLY INVEST AT LEAST 80 PERCENT OF ITS ASSETS IN INVESTMENT GRADE FIXED-INCOME SECURITIES. THESE SECURITIES MAY INCLUDE CORPORATE DEBT SECURITIES, PREFERRED STOCKS, U.S. GOVERNMENT SECURITIES, MORTGAGE-BACKED SECURITIES, INCLUDING COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS") AND COMMERCIAL MORTGAGE-BACKED SECURITIES ("CMBS"), ASSET-BACKED SECURITIES AND SECURITIES ISSUED BY FOREIGN GOVERNMENTS OR CORPORATIONS. IN DECIDING WHICH SECURITIES TO BUY, HOLD OR SELL, THE FUND'S "INVESTMENT ADVISER," MORGAN STANLEY INVESTMENT ADVISORS INC., CONSIDERS DOMESTIC AND INTERNATIONAL ECONOMIC DEVELOPMENTS, INTEREST RATE TRENDS, BOND RATINGS AND OTHER FACTORS RELATING TO THE ISSUERS. FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND AND FOURTH FISCAL QUARTERS BY FILING THE SCHEDULE ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON FORM N-CSR. MORGAN STANLEY ALSO DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO FUND SHAREHOLDERS AND MAKES THESE REPORTS AVAILABLE ON ITS PUBLIC WEB SITE, www.morganstanley.com. EACH MORGAN STANLEY FUND ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE FUND'S FIRST AND THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES NOT DELIVER THE REPORTS FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS, NOR ARE THE REPORTS POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY, HOWEVER, OBTAIN THE FORM N-Q FILINGS (AS WELL AS THE FORM N-CSR AND N-CSRS FILINGS) BY ACCESSING THE SEC'S WEB SITE, http://www.sec.gov. YOU MAY ALSO REVIEW AND COPY THEM AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE OPERATION OF THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE SEC AT (800) SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT OF A DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS (publicinfo@sec.gov) OR BY WRITING THE PUBLIC REFERENCE SECTION OF THE SEC, WASHINGTON, DC 20549-0102. PROXY VOTING POLICY AND PROCEDURES AND PROXY VOTING RECORD YOU MAY OBTAIN A COPY OF THE FUND'S PROXY VOTING POLICY AND PROCEDURES WITHOUT CHARGE, UPON REQUEST, BY CALLING TOLL FREE (800) 869-NEWS OR BY VISITING THE MUTUAL FUND CENTER ON OUR WEB SITE AT www.morganstanley.com. IT IS ALSO AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT http://www.sec.gov. YOU MAY OBTAIN INFORMATION REGARDING HOW THE FUND VOTED PROXIES RELATING TO PORTFOLIO SECURITIES DURING THE MOST RECENT TWELVE-MONTH PERIOD ENDED JUNE 30 WITHOUT CHARGE BY VISITING THE MUTUAL FUND CENTER ON OUR WEB SITE AT www.morganstanley.com. THIS INFORMATION IS ALSO AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT http://www.sec.gov. HOUSEHOLDING NOTICE TO REDUCE PRINTING AND MAILING COSTS, THE FUND ATTEMPTS TO ELIMINATE DUPLICATE MAILINGS TO THE SAME ADDRESS. THE FUND DELIVERS A SINGLE COPY OF CERTAIN SHAREHOLDER DOCUMENTS, INCLUDING SHAREHOLDER REPORTS, PROSPECTUSES AND PROXY MATERIALS, TO INVESTORS WITH THE SAME LAST NAME WHO RESIDE AT THE SAME ADDRESS. YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE DOCUMENTS BY CALLING (800) 350-6414, 8:00 A.M. TO 8:00 P.M., ET. ONCE OUR CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS. 4 PERFORMANCE SUMMARY AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED FEBRUARY 28, 2006
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 2.42%(3) 1.74%(3) 1.80%(3) 2.71%(3) (1.93)(4) (3.15)(4) 0.82(4) -- 5 YEARS 4.67(3) 3.85(3) 3.88(3) 4.68(3) 3.77(4) 3.50(4) 3.88(4) -- 10 YEARS -- 4.23(3) -- -- -- 4.23(4) -- -- SINCE INCEPTION 4.74(3) 5.29(3) 3.99(3) 4.82(3) 4.21(4) 5.29(4) 3.99(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 TABLE DOES NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PERFORMANCE FOR CLASS A, CLASS B, CLASS C, AND CLASS D SHARES WILL VARY DUE TO DIFFERENCES IN SALES CHARGES AND EXPENSES. * THE MAXIMUM FRONT-END SALES CHARGE FOR CLASS A IS 4.25%. ** THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B IS 5.0%. THE CDSC DECLINES TO 0% AFTER SIX YEARS. + THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE FOR CLASS C IS 1.0% FOR SHARES REDEEMED WITHIN ONE YEAR OF PURCHASE. ++ CLASS D HAS NO SALES CHARGE. (1) THE LEHMAN BROTHERS INTERMEDIATE U.S. GOVERNMENT/CREDIT INDEX TRACKS THE PERFORMANCE OF U.S. GOVERNMENT AND CORPORATE OBLIGATIONS, INCLUDING U.S. GOVERNMENT AGENCY AND TREASURY SECURITIES, AND CORPORATE AND YANKEE BONDS WITH MATURITIES OF 1 TO 10 YEARS. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. (2) THE LIPPER CORPORATE DEBT FUNDS BBB-RATED INDEX IS AN EQUALLY WEIGHTED PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN THE LIPPER CORPORATE DEBT FUNDS BBB-RATED CLASSIFICATION. THE INDEX, WHICH IS ADJUSTED FOR CAPITAL GAINS DISTRIBUTIONS AND INCOME DIVIDENDS, IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT. THERE ARE CURRENTLY 30 FUNDS REPRESENTED IN THIS INDEX. (3) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT THE DEDUCTION OF ANY SALES CHARGES. (4) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND THE DEDUCTION OF THE MAXIMUM APPLICABLE SALES CHARGE. SEE THE FUND'S CURRENT PROSPECTUS FOR COMPLETE DETAILS ON FEES AND SALES CHARGES. 5 EXPENSE EXAMPLE As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments and redemption fees; and (2) ongoing costs, including 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 09/01/05 - 02/28/06. ACTUAL EXPENSES The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of the table below provides information about hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing cost of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs, and will not help you determine the relative total cost of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD * ------------- ------------- --------------- 09/01/05 - 09/01/05 02/28/06 02/28/06 ------------- ------------- --------------- CLASS A Actual (-0.62% return) $ 1,000.00 $ 993.80 $ 5.19 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,019.59 $ 5.26 CLASS B Actual (-0.94% return) $ 1,000.00 $ 990.60 $ 8.14 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,016.61 $ 8.25 CLASS C Actual (-0.91% return) $ 1,000.00 $ 990.90 $ 7.80 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,016.96 $ 7.90 CLASS D Actual (-0.43% return) $ 1,000.00 $ 995.70 $ 3.96 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,020.83 $ 4.01
- ---------- * EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 1.05%, 1.65%, 1.58% 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 181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). IF THE FUND HAD BORNE ALL OF ITS EXPENSES THAT WERE WAIVED BY THE INVESTMENT ADVISER AND ADMINISTRATOR, THE ANNUALIZED EXPENSE RATIOS WOULD HAVE BEEN 1.32%, 1.92%, 1.85% AND 1.07% FOR CLASS A, CLASS B, CLASS C AND CLASS D SHARES, RESPECTIVELY. 6 MORGAN STANLEY INCOME TRUST PORTFOLIO OF INVESTMENTS - FEBRUARY 28, 2006 (UNAUDITED)
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------------- CORPORATE BONDS (66.1%) ADVERTISING/MARKETING SERVICES (1.2%) $ 395 Interpublic Group of Companies, Inc. (The) 5.40% 11/15/09 $ 365,375 385 WPP Finance (UK) Corp. (United Kingdom) 5.875 06/15/14 386,964 ------------ 752,339 ------------ AEROSPACE & DEFENSE (1.0%) 175 Raytheon Co. 4.50 11/15/07 173,002 32 Raytheon Co. 6.75 08/15/07 32,651 100 Raytheon Co. 8.30 03/01/10 110,805 323 Systems 2001 Asset Trust - 144A** (Cayman Islands) 6.664 09/15/13 342,734 ------------ 659,192 ------------ AIR FREIGHT/COURIERS (0.5%) 65 Fedex Corp. 2.65 04/01/07 63,182 220 Fedex Corp. 7.25 02/15/11 237,811 ------------ 300,993 ------------ AIRLINES (0.4%) 238 America West Airlines, Inc. (Series 01-1) 7.10 04/02/21 250,642 ------------ APPAREL/FOOTWEAR RETAIL (0.4%) 270 Limited Brands, Inc. 6.95 03/01/33 277,176 ------------ AUTO PARTS: O.E.M. (0.8%) 265 Johnson Controls, Inc. 5.00 11/15/06 264,204 270 Lear Corp. (Series B) 8.11 05/15/09 238,435 ------------ 502,639 ------------ BEVERAGES: ALCOHOLIC (1.3%) 430 FBG Finance Ltd.- 144A** (Australia) 5.125 06/15/15 412,568 430 Miller Brewing Co. - 144A** 4.25 08/15/08 420,657 ------------ 833,225 ------------ BUILDING PRODUCTS (0.2%) 160 Masco Corp. 4.625 08/15/07 158,216 ------------ CABLE/SATELLITE TV (1.5%) 270 Comcast Cable Communications Inc. 6.75 01/30/11 283,666 345 Cox Communications, Inc. 4.625 01/15/10 332,622 315 Echostar DBS Corp. 6.375 10/01/11 309,488 20 Echostar DBS Corp. 6.625 10/01/14 19,550 ------------ 945,326 ------------
SEE NOTES TO FINANCIAL STATEMENTS 7
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------------- CASINO/GAMING (0.8%) $ 530 Harrah's Operating Co., Inc. 5.625% 06/01/15 $ 518,752 ------------ CONTAINERS/PACKAGING (0.8%) 540 Sealed Air Corp. - 144A** 5.625 07/15/13 534,916 ------------ DEPARTMENT STORES (1.6%) 1,045 May Department Stores Co., Inc. 5.95 11/01/08 1,061,034 ------------ ELECTRIC UTILITIES (8.5%) 420 Ameren Corp. 4.263 05/15/07 414,776 400 Arizona Public Service Co. 5.80 06/30/14 403,852 285 Arizona Public Service Co. 6.75 11/15/06 287,678 395 CC Funding Trust I 6.90 02/16/07 400,868 265 Cincinnati Gas & Electric Co. 5.70 09/15/12 269,730 105 Consolidated Natural Gas Co. 5.00 12/01/14 101,019 470 Consolidated Natural Gas Co. (Series B) 5.375 11/01/06 470,525 390 Consumers Energy Co. 4.80 02/17/09 384,856 205 Detroit Edison Co. (The) 6.125 10/01/10 211,818 340 Duquesne Light Co. (Series O) 6.70 04/15/12 365,263 255 Entergy Gulf States, Inc. 3.60 06/01/08 244,526 365 Entergy Gulf States, Inc. 4.81+ 12/01/09 361,101 200 Entergy Gulf States, Inc. - 144A** 5.207+ 12/08/08 200,228 315 Jersey Central Power & Light Company 5.625 05/01/16 320,166 205 Monongahela Power Co. 5.00 10/01/06 204,658 395 Pacific Gas & Electric Co. 6.05 03/01/34 410,155 140 Panhandle Eastern Pipe Line Co. (Series B) 2.75 03/15/07 136,333 70 PSEG Energy Holdings Inc. 8.625 02/15/08 74,025 220 Texas Eastern Transmission, LP 7.00 07/15/32 257,578 ------------ 5,519,155 ------------ ELECTRICAL PRODUCTS (1.3%) 480 Cooper Industries Inc. 5.25 07/01/07 479,237 360 Cooper Industries Inc. - 144A** 5.25 11/15/12 358,404 ------------ 837,641 ------------ ELECTRONICS/APPLIANCES (0.7%) 175 Eastman Kodak Co. 7.25 11/15/13 172,853 260 LG Electronics Inc. - 144A** (South Korea) 5.00 06/17/10 254,093 ------------ 426,946 ------------
SEE NOTES TO FINANCIAL STATEMENTS 8
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------------- FINANCE/RENTAL/LEASING (5.3%) $ 510 CIT Group, Inc. 2.875% 09/29/06 $ 503,908 705 Countrywide Home Loans, Inc. (Series MTN) 3.25 05/21/08 676,315 570 Nationwide Building Society - 144A** (United Kingdom) 4.25 02/01/10 551,212 790 Residential Capital Corp. 6.375 06/30/10 798,414 415 SLM Corp. (Series MTNA) 5.00 10/01/13 404,715 525 Toyota Motor Credit Corp. 5.65 01/15/07 527,444 ------------ 3,462,008 ------------ FINANCIAL CONGLOMERATES (4.3%) 735 Chase Manhattan Corp. 6.00 02/15/09 748,527 500 Citicorp 6.375 11/15/08 516,345 680 General Electric Capital Corp. (Series MTNA) 6.75 03/15/32 798,470 375 General Motors Acceptance Corp. 6.875 09/15/11 336,137 410 Prudential Funding LLC (Series MTN) - 144A** 6.60 05/15/08 421,983 ------------ 2,821,462 ------------ FOOD RETAIL (0.9%) 425 Albertson's Inc. 8.00 05/01/31 407,880 160 Safeway Inc. 6.15 03/01/06 160,000 ------------ 567,880 ------------ FOOD: MAJOR DIVERSIFIED (0.6%) 215 ConAgra Foods, Inc. 7.00 10/01/28 232,033 130 ConAgra Foods, Inc. 8.25 09/15/30 160,030 ------------ 392,063 ------------ GAS DISTRIBUTORS (1.0%) 370 NiSource Finance Corp. 5.344+ 11/23/09 371,622 15 Ras Laffan Liquid Natural Gas Co. Ltd. - 144A** (Qatar) 7.628 09/15/06 15,573 270 Sempra Energy 4.621 05/17/07 267,997 ------------ 655,192 ------------ HOME FURNISHINGS (0.8%) 155 Mohawk Industries, Inc. 6.125 01/15/16 156,817 130 Mohawk Industries, Inc. (Class C) 6.50 04/15/07 131,264 210 Mohawk Industries, Inc. (Series D) 7.20 04/15/12 222,024 ------------ 510,105 ------------
SEE NOTES TO FINANCIAL STATEMENTS 9
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------------- HOTELS/RESORTS/CRUISELINES (1.3%) $ 695 Hyatt Equities LLC - 144A** 6.875% 06/15/07 $ 704,069 170 Starwood Hotels & Resorts Worldwide, Inc. 7.375 05/01/07 174,250 ------------ 878,319 ------------ HOUSEHOLD/PERSONAL CARE (0.9%) 560 Clorox Co. (The) 4.614+ 12/14/07 561,426 ------------ INDUSTRIAL CONGLOMERATES (0.8%) 515 Honeywell International, Inc. 5.125 11/01/06 514,790 ------------ INSURANCE BROKERS/SERVICES (2.9%) 1,135 Farmers Exchange Capital - 144A** 7.05 07/15/28 1,195,709 705 Marsh & McLennan Companies, Inc. 5.875 08/01/33 674,483 ------------ 1,870,192 ------------ INVESTMENT BANKS/BROKERS (0.5%) 330 Goldman Sachs Group Inc. (The) 5.25 10/15/13 327,461 ------------ MAJOR BANKS (0.9%) 560 HSBC Finance Corp. 6.75 05/15/11 595,781 ------------ MAJOR TELECOMMUNICATIONS (5.0%) 540 AT&T Corp. 9.75 11/15/31 677,735 150 Deutsche Telekom International Finance Corp. (Netherlands) 8.00 06/15/10 165,043 295 Deutsche Telekom International Finance Corp. BV (Netherlands) 8.25 06/15/30 372,018 420 France Telecom S.A. (France) 8.75 03/01/31 552,932 80 GTE Corp. 6.36 04/15/06 80,106 300 SBC Communications, Inc. 6.15 09/15/34 299,911 305 Sprint Capital Corp. 8.75 03/15/32 401,830 255 Telecom Italia Capital SA (Luxembourg) 4.00 11/15/08 246,392 310 Telecom Italia Capital SA (Luxembourg) 4.00 01/15/10 293,508 165 Verizon Global Funding Corp. 7.25 12/01/10 177,850 ------------ 3,267,325 ------------ MANAGED HEALTH CARE (1.4%) 600 Health Net, Inc. 9.875 04/15/11 692,656 175 WellPoint Health Networks Inc. 6.375 06/15/06 175,725 55 WellPoint Inc. 4.25 12/15/09 53,077 ------------ 921,458 ------------
SEE NOTES TO FINANCIAL STATEMENTS 10
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------------- MEDIA CONGLOMERATES (1.1%) $ 400 News America Holdings, Inc. 7.75% 02/01/24 $ 450,655 220 News America Inc. 7.28 06/30/28 239,091 ------------ 689,746 ------------ MEDICAL DISTRIBUTORS (0.3%) 210 AmerisourceBergen Corp. - 144A* 5.625 09/15/12 209,955 ------------ MOTOR VEHICLES (2.3%) 100 DaimlerChrysler North American Holdings Co. 8.00 06/15/10 108,639 380 DaimlerChrysler North American Holdings Co. 8.50 01/18/31 464,628 1,305 General Motors Corp. 8.375 07/15/33 926,550 ------------ 1,499,817 ------------ MULTI-LINE INSURANCE (2.1%) 450 AIG Sun America Global Finance VI - 144A** 6.30 05/10/11 472,648 300 American General Finance Corp. (Series MTNF) 5.875 07/14/06 301,073 485 American General Finance Corp. (Series MTNH) 4.625 09/01/10 470,108 135 Hartford Financial Services Group, Inc. (The) 2.375 06/01/06 134,157 ------------ 1,377,986 ------------ OIL & GAS PRODUCTION (1.0%) 410 Kerr-McGee Corp. 5.875 09/15/06 412,878 230 Kerr-McGee Corp. 6.625 10/15/07 234,859 ------------ 647,737 ------------ OTHER METALS/MINERALS (0.6%) 385 Brascan Corp. (Canada) 7.125 06/15/12 415,653 ------------ PROPERTY - CASUALTY INSURERS (3.4%) 645 Mantis Reef Ltd. - 144A** (Australia) 4.692 11/14/08 630,853 350 Platinum Underwriters Finance Holdings, Ltd. 6.371 11/16/07 349,554 335 Platinum Underwriters Finance Holdings, Ltd. 7.50 06/01/17 342,731 250 St. Paul Travelers Companies, Inc. (The) 5.01 08/16/07 248,615 675 XLLIAC Global Funding - 144A** 4.80 08/10/10 660,849 ------------ 2,232,602 ------------
SEE NOTES TO FINANCIAL STATEMENTS 11
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------------- PULP & PAPER (2.0%) $ 276 Abitibi-Consolidated Inc. (Canada) 8.55% 08/01/10 $ 273,930 350 Abitibi-Consolidated Inc. (Canada) 8.85 08/01/30 309,313 460 Bowater Canada Finance (Canada) 7.95 11/15/11 453,100 300 Sappi Papier Holding AG - 144A** (Austria) 6.75 06/15/12 287,803 ------------ 1,324,146 ------------ RAILROADS (1.8%) 252 Burlington North Santa Fe Railway Co. 4.575 01/15/21 241,075 270 Norfolk Southern Corp. 7.35 05/15/07 277,041 245 Union Pacific Corp. 6.625 02/01/08 251,118 210 Union Pacific Corp. 6.65 01/15/11 221,373 160 Union Pacific Corp. (Series MTNE) 6.79 11/09/07 164,141 ------------ 1,154,748 ------------ REAL ESTATE DEVELOPMENT (0.9%) 239 World Financial Properties - 144A** 6.95 09/01/13 250,048 324 World Financial Properties - 144A** (Series 1996 WFP- B) 6.91 09/01/13 338,490 ------------ 588,538 ------------ REAL ESTATE INVESTMENT TRUSTS (0.2%) 100 EOP Operating L.P. 4.75 03/15/14 94,361 45 EOP Operating L.P. 7.875 07/15/31 53,492 ------------ 147,853 ------------ REGIONAL BANKS (1.4%) 740 Marshall & Ilsley Bank (Series BKNT) 3.80 02/08/08 722,819 175 US Bancorp 5.10 07/15/07 174,765 ------------ 897,584 ------------ SAVINGS BANKS (1.4%) 70 Household Finance Corp. 4.125 11/16/09 67,476 170 Household Finance Corp. 8.00 07/15/10 187,372 685 Washington Mutual Bank 5.50 01/15/13 687,428 ------------ 942,276 ------------ TOTAL CORPORATE BONDS (COST $43,723,672) 43,052,295 ------------
SEE NOTES TO FINANCIAL STATEMENTS 12
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------------------- ASSET-BACKED SECURITIES (8.5%) FINANCE/RENTAL/LEASING $ 550 Chase Manhattan Auto Owner Trust 2004-A A4 2.83% 09/15/10 $ 533,174 308 CIT Equipment Collateral 2004-EF1 A3 3.50 09/20/08 303,571 550 DaimlerChrysler Auto Trust 2003-B A4 2.86 03/09/09 539,621 325 Ford Credit Auto Owner Trust 2005B A3 4.17 01/15/09 322,349 450 Harley-Davidson Motorcycle Trust 2004-2 A2 3.56 02/15/12 441,579 600 Harley-Davidson Motorcycle Trust 2005-1 A2 3.76 12/17/12 587,424 550 Honda Auto Receivables Owner Trust 2004-1 A4 3.06 10/21/09 536,408 800 MBNA Credit Card Master Note Trust 2004-A4 A4 2.70 09/15/09 780,043 500 TXU Electric Delivery Transition Bond Co. LLC 2004-1 A2 4.81 11/17/14 491,596 650 USAA Auto Owner Trust 2004-2 A-4 3.58 02/15/11 636,761 350 Volkswagen Auto Lease Trust 2005-A A3 3.82 05/20/08 346,868 ------------- TOTAL ASSET-BACKED SECURITIES (COST $5,642,727) 5,519,394 ------------- U.S. Government Agencies - Mortgage-Backed Securities (0.1%) 21 Federal Home Loan Mortgage Corp. 7.50 09/01/30 22,066 35 Federal National Mortgage Association 7.50 01/01/30 - 04/01/32 36,665 ------------- TOTAL U.S. GOVERNMENT AGENCIES - MORTGAGE-BACKED SECURITIES (COST $59,094) 58,731 ------------- U.S. GOVERNMENT OBLIGATIONS (8.8%) 3,210 U.S. Treasury Bonds 6.125 - 6.375 08/15/27 - 08/15/29 3,894,419 1,500 U.S. Treasury Note 4.25 11/15/13 1,464,903 950 U.S. Treasury Strip 0.00 02/15/27 361,816 ------------- TOTAL U.S. GOVERNMENT OBLIGATIONS (COST $5,744,055) 5,721,138 -------------
SEE NOTES TO FINANCIAL STATEMENTS 13
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS (12.6%) U.S. GOVERNMENT OBLIGATION (a) (0.2%) $ 100 U.S. Treasury Bill* (COST $98,414) 4.26% 07/13/06 $ 98,414 ------------ REPURCHASE AGREEMENT (12.4%) 8,117 Joint repurchase agreement account (dated 02/28/06; proceeds $8,118,027) (b) (COST $8,117,000) 4.555 03/01/06 8,117,000 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $8,215,414) 8,215,414 ------------ TOTAL INVESTMENTS (COST $63,384,962) (c) (d) 96.1% 62,566,972 OTHER ASSETS IN EXCESS OF LIABILITIES 3.9 2,553,440 ----- ------------ NET ASSETS 100.0% $ 65,120,412 ===== ============
- ---------- * A PORTION OF THIS SECURITY HAS BEEN PHYSICALLY SEGREGATED IN CONNECTION WITH OPEN FUTURES CONTRACTS IN AN AMOUNT EQUAL TO $67,280. ** RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. + FLOATING RATE SECURITY, RATE SHOWN IS THE RATE IN EFFECT AT FEBRUARY 28, 2006. (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 $12,245,203 IN CONNECTION WITH OPEN FUTURES CONTRACTS. (d) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $235,871 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $1,053,861 RESULTING IN NET UNREALIZED DEPRECIATION OF $817,990. FUTURES CONTRACTS OPEN AT FEBRUARY 28, 2006:
UNREALIZED NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE APPRECIATION CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE (DEPRECIATION) - ------------------------------------------------------------------------------------------------------ 82 Long U.S. Treasury Note 10 Year $ 8,848,313 $ (3,897) June 2006 20 Long U.S. Treasury Bond 20 Year 2,261,875 4,508 June 2006 8 Short U.S. Treasury Note 2 Year (1,635,000) (209) June 2006 -------------- Net Unrealized Appreciation $ 402 ==============
SEE NOTES TO FINANCIAL STATEMENTS 14 MORGAN STANLEY INCOME TRUST FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES FEBRUARY 28, 2006 (UNAUDITED) ASSETS: Investments in securities, at value (cost $63,384,962) (including a repurchase agreement of $8,117,000) $ 62,566,972 Cash 991 Receivable for: Investments sold 2,123,633 Interest 685,291 Variation margin 39,489 Shares of beneficial interest sold 3,152 Prepaid expenses and other assets 31,372 --------------- TOTAL ASSETS 65,450,900 --------------- LIABILITIES: Payable for: Shares of beneficial interest redeemed 131,755 Dividends to shareholders 31,323 Distribution fee 28,248 Transfer agent fee 6,709 Investment advisory fee 4,901 Administration fee 4,033 Accrued expenses and other payables 123,519 --------------- TOTAL LIABILITIES 330,488 --------------- NET ASSETS $ 65,120,412 =============== COMPOSITION OF NET ASSETS: Paid-in-capital $ 72,888,067 Net unrealized depreciation (817,588) Dividends in excess of net investment income (874,306) Accumulated net realized loss (6,075,761) --------------- NET ASSETS $ 65,120,412 =============== CLASS A SHARES: Net Assets $ 30,237,587 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 3,223,936 NET ASSET VALUE PER SHARE $ 9.38 =============== MAXIMUM OFFERING PRICE PER SHARE, (NET ASSET VALUE PLUS 4.44% OF NET ASSET VALUE) $ 9.80 =============== CLASS B SHARES: Net Assets $ 28,850,069 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 3,101,580 NET ASSET VALUE PER SHARE $ 9.30 =============== CLASS C SHARES: Net Assets $ 4,843,183 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 519,591 NET ASSET VALUE PER SHARE $ 9.32 =============== CLASS D SHARES: Net Assets $ 1,189,573 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 128,252 NET ASSET VALUE PER SHARE $ 9.28 ===============
SEE NOTES TO FINANCIAL STATEMENTS 15 STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED FEBRUARY 28, 2006 (UNAUDITED) NET INVESTMENT INCOME: Interest Income $ 1,779,463 --------------- EXPENSES Investment advisory fee 147,733 Distribution fee (Class A shares) 37,965 Distribution fee (Class B shares) 135,983 Distribution fee (Class C shares) 20,854 Transfer agent fees and expenses 60,329 Professional fees 50,592 Shareholder reports and notices 34,994 Administration fee 28,140 Registration fees 20,855 Custodian fees 15,367 Trustees' fees and expenses 4,095 Other 13,791 --------------- TOTAL EXPENSES 570,698 Less: amounts waived/reimbursed (94,501) --------------- NET EXPENSES 476,197 --------------- NET INVESTMENT INCOME 1,303,266 --------------- NET REALIZED AND UNREALIZED GAIN (LOSS): NET REALIZED GAIN ON: Investments 6,743 Futures contracts 38,879 --------------- NET REALIZED GAIN 45,622 --------------- NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON: Investments (2,019,127) Futures contracts (44,873) --------------- NET DEPRECIATION (2,064,000) --------------- NET LOSS (2,018,378) --------------- NET DECREASE $ (715,112) ===============
SEE NOTES TO FINANCIAL STATEMENTS 16 STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED FEBRUARY 28, 2006 AUGUST 31, 2005 ------------------ ------------------ (UNAUDITED) INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income $ 1,303,266 $ 3,150,109 Net realized gain 45,622 1,103,433 Net change in unrealized appreciation (2,064,000) 125,178 ------------------ ------------------ NET INCREASE (DECREASE) (715,112) 4,378,720 ------------------ ------------------ DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME: Class A shares (687,543) (753,287) Class B shares (627,108) (2,357,036) Class C shares (106,465) (284,981) Class D shares (60,910) (258,588) ------------------ ------------------ TOTAL DIVIDENDS (1,482,026) (3,653,892) ------------------ ------------------ Net decrease from transactions in shares of beneficial interest (11,369,873) (16,476,445) ------------------ ------------------ NET DECREASE (13,567,011) (15,751,617) NET ASSETS: Beginning of period 78,687,423 94,439,040 ------------------ ------------------ END OF PERIOD (INCLUDING DIVIDENDS IN EXCESS OF NET INVESTMENT INCOME OF $874,306 AND $695,546, RESPECTIVELY) $ 65,120,412 $ 78,687,423 ================== ==================
SEE NOTES TO FINANCIAL STATEMENTS 17 MORGAN STANLEY INCOME TRUST NOTES TO FINANCIAL STATEMENTS - FEBRUARY 28, 2006 (UNAUDITED) 1. ORGANIZATION AND ACCOUNTING POLICIES Morgan Stanley Income Trust (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "Act"), as a diversified, open-end management investment company. The Fund's investment objective is high current income consistent with safety of principal. The Fund was organized as a Massachusetts business trust on September 1, 1988 and commenced operations on May 3, 1989. On July 28, 1997, the Fund converted to a multiple class share structure. The Fund offers Class A shares, Class B shares, Class C shares and Class D shares. The four classes are substantially the same except that most Class A shares are subject to a sales charge imposed at the time of purchase and some Class A shares, and most Class B shares and Class C shares are subject to a contingent deferred sales charge imposed on shares redeemed within eighteen months, six years and one year, respectively. Class D shares are not subject to a sales charge. Additionally, Class A shares, Class B shares and Class C shares incur distribution expenses. The Fund will assess a 2% redemption fee on Class A shares, Class B shares, Class C shares, and Class D shares, which is paid directly to the Fund, for shares redeemed within seven days of purchase. 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. 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 18 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 Pursuant to an Investment Advisory Agreement, the Fund pays the Investment Adviser an advisory fee, accrued daily and payable monthly, by applying the following annual rates to the net assets of the Fund determined as of the close of each business day: 0.42% to the portion of the daily net assets not exceeding $500 million; 0.35% to the portion of the daily net assets exceeding $500 million but not exceeding $1.25 billion; 0.22% to the portion of the daily net assets exceeding $1.25 billion. 19 Pursuant to an Administration Agreement with Morgan Stanley Services Company Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Fund pays an administration fee, accrued daily and payable monthly, by applying the annual rate of 0.08% to the Fund's daily net assets. The Investment Adviser has agreed to cap the Fund's operating expenses (except for brokerage and 12b-1 fees) by assuming the Fund's "other expenses" and/or waiving the Fund's advisory fees, and the Administrator has agreed to waive the Fund's administrative fees, to the extent such operating expenses on an annualized basis exceed 0.80% of the average daily net assets of the Fund. 3. PLAN OF DISTRIBUTION Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the Investment Adviser and Administrator. The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan provides that the Fund will pay the Distributor a fee which is accrued daily and paid monthly at the following annual rates: (i) Class A -- up to 0.25% of the average daily net assets of Class A; (ii) Class B -- up to 0.85% of the lesser of: (a) the average daily aggregate gross sales of the Class B shares since the inception of the Fund (not including reinvestment of dividend or capital gain distributions) less the average daily aggregate net asset value of the Class B shares redeemed since the Fund's inception upon which a contingent deferred sales charge has been imposed or waived; or (b) the average daily net assets of Class B; and (iii) Class C -- up to 0.85% of the average daily net assets of Class C. In the case of Class B shares, provided that the Plan continues in effect, any cumulative expenses incurred by the Distributor but not yet recovered may be recovered through the payment of future distribution fees from the Fund pursuant to the Plan and contingent deferred sales charges paid by investors upon redemption of Class B shares. Although there is no legal obligation for the Fund to pay expenses incurred in excess of payments made to the Distributor under the Plan and the proceeds of contingent deferred sales charges paid by investors upon redemption of shares, if for any reason the Plan is terminated, the Trustees will consider at that time the manner in which to treat such expenses. The Distributor has advised the Fund that such excess amounts totaled $4,389,432 at February 28, 2006. In the case of Class A shares and Class C shares, expenses incurred pursuant to the Plan in any calendar year in excess of 0.25% or 0.85% of the average daily net assets of Class A or Class C, respectively, will not be reimbursed by the Fund through payments in any subsequent year, except that expenses representing a gross sales credit to Morgan Stanley Financial Advisors or other selected broker-dealer representatives may be reimbursed in the subsequent calendar year. For the six months ended February 28, 2006, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.25% and 0.78%, respectively. 20 The Distributor has informed the Fund that for the six months ended February 28, 2006, it received contingent deferred sales charges from certain redemptions of the Fund's Class A shares, Class B shares and Class C shares of $6, $55,536 and $137, respectively and received $5,127 in front-end sales charges from sales of the Fund's Class A shares. The respective shareholders pay such charges which are not an expense of the Fund. 4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES The cost of purchases and proceeds from sales/prepayments of portfolio securities, excluding short-term investments, for the six months ended February 28, 2006, aggregated $10,126,378, and $25,786,028, respectively. Included in the aforementioned are purchases and sales of U.S. Government securities of $1,725,129 and $4,116,015, respectively. The Fund had sales of $2,243,199 including a realized loss of $29,301 with other Morgan Stanley funds. Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and Distributor, is the Fund's transfer agent. The Fund has an unfunded noncontributory defined benefit pension plan covering certain independent Trustees of the Fund who will have served as independent Trustees for at least five years at the time of retirement. Benefits under this plan are based on factors which include years of service and compensation. The Trustees voted to close the plan to new participants and eliminate the future benefits growth due to increases to compensation after July 31, 2003. Aggregate pension costs for the six months ended February 28, 2006 included in Trustees' fees and expenses in the Statement of Operations amounted to $3,625. At February 28, 2006, the Fund had an accrued pension liability of $63,011 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 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. 21 5. SHARES OF BENEFICIAL INTEREST Transactions in shares of beneficial interest were as follows:
FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED FEBRUARY 28, 2006 AUGUST 31, 2005 ---------------------------------- ---------------------------------- (UNAUDITED) SHARES AMOUNT SHARES AMOUNT --------------- --------------- --------------- --------------- CLASS A SHARES Sold 104,914 $ 988,699 221,589 $ 2,132,992 Conversion from Class B 104,746 986,811 2,729,474 25,880,591 Reinvestment of dividends 47,218 444,275 52,537 502,897 Redeemed (352,668) (3,315,654) (481,353) (4,601,088) --------------- --------------- --------------- --------------- Net increase (decrease) -- Class A (95,790) (895,869) 2,522,247 23,915,392 --------------- --------------- --------------- --------------- CLASS B SHARES Sold 136,801 1,284,661 523,679 4,969,424 Conversion to Class A (105,634) (986,811) (2,752,699) (25,880,591) Reinvestment of dividends 44,733 417,454 160,297 1,521,702 Redeemed (708,307) (6,610,572) (1,965,508) (18,649,225) --------------- --------------- --------------- --------------- Net decrease -- Class B (632,407) (5,895,268) (4,034,231) (38,038,690) --------------- --------------- --------------- --------------- CLASS C SHARES Sold 15,064 141,204 127,272 1,208,754 Reinvestment of dividends 8,621 80,585 22,019 209,341 Redeemed (152,279) (1,425,289) (287,875) (2,733,330) --------------- --------------- --------------- --------------- Net decrease -- Class C (128,594) (1,203,500) (138,584) (1,315,235) --------------- --------------- --------------- --------------- CLASS D SHARES Sold 11,084 103,090 70,246 665,641 Reinvestment of dividends 4,322 40,252 21,317 201,615 Redeemed (379,436) (3,518,578) (201,163) (1,905,168) --------------- --------------- --------------- --------------- Net decrease -- Class D (364,030) (3,375,236) (109,600) (1,037,912) --------------- --------------- --------------- --------------- Net decrease in Fund (1,220,821) $ (11,369,873) (1,760,168) $ (16,476,445) =============== =============== =============== ===============
6. FEDERAL INCOME TAX STATUS The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations which may differ from generally accepted accounting principles. These "book/tax" differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment; temporary differences do not require reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for tax purposes are reported as distributions of paid-in-capital. 22 As of August 31, 2005, the Fund 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. 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 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, which motion defendants opposed. While the Fund and Adviser believe that each has meritorious defenses, the ultimate outcome of this matter is not presently determinable and no provision has been made in the Fund's financial statements for the effect, if any, of this matter. 23 MORGAN STANLEY INCOME TRUST FINANCIAL HIGHLIGHTS Selected ratios and per share data for a share of beneficial interest outstanding throughout each period:
FOR THE SIX FOR THE YEAR ENDED AUGUST 31, MONTHS ENDED ------------------------------------------------------------------- FEBRUARY 28, 2006 2005 2004 2003 2002 2001 ----------------- --------- --------- --------- --------- --------- (UNAUDITED) CLASS A SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 9.65 $ 9.56 $ 9.39 $ 9.53 $ 9.35 $ 8.97 ----------------- --------- --------- --------- --------- --------- Income (loss) from investment operations: Net investment income 0.17 0.38 0.35 0.20 0.37 0.52 Net realized and unrealized gain (loss) (0.23) 0.16 0.26 0.01 0.19 0.38 ----------------- --------- --------- --------- --------- --------- Total income (loss) from investment operations (0.06) 0.54 0.61 0.21 0.56 0.90 ----------------- --------- --------- --------- --------- --------- Less dividends from net investment income (0.21) (0.45) (0.44) (0.35) (0.38) (0.52) ----------------- --------- --------- --------- --------- --------- Net asset value, end of period $ 9.38 $ 9.65 $ 9.56 $ 9.39 $ 9.53 $ 9.35 ================= ========= ========= ========= ========= ========= TOTAL RETURN+ (0.62)%(1) 5.81% 6.57% 2.17% 6.17% 10.34% RATIOS TO AVERAGE NET ASSETS(3): Expenses 1.05%(2)(4) 1.03%(4) 1.19%(4) 1.14% 1.04% 1.21% Net investment income 4.01%(2)(4) 4.08%(4) 3.86%(4) 2.14% 4.03% 5.71% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 30,238 $ 32,038 $ 7,628 $ 9,636 $ 10,730 $ 4,177 Portfolio turnover rate 16%(1) 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) NOT ANNUALIZED. (2) ANNUALIZED. (3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. (4) IF THE FUND HAD BORNE ALL EXPENSES THAT WERE WAIVED BY THE INVESTMENT ADVISER AND ADMINISTRATOR, THE ANNUALIZED EXPENSE AND NET INVESTMENT INCOME RATIOS WOULD HAVE BEEN AS FOLLOWS:
EXPENSE NET INVESTMENT PERIOD ENDED RATIO INCOME RATIO ----------------- --------- -------------- FEBRUARY 28, 2006 1.32% 3.74% AUGUST 31, 2005 1.18 3.93 AUGUST 31, 2004 1.24 3.81
SEE NOTES TO FINANCIAL STATEMENTS 24
FOR THE SIX FOR THE YEAR ENDED AUGUST 31, MONTHS ENDED ------------------------------------------------------------------- FEBRUARY 28, 2006 2005 2004 2003 2002 2001 ----------------- --------- --------- --------- --------- --------- (UNAUDITED) CLASS B SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 9.57 $ 9.48 $ 9.32 $ 9.45 $ 9.35 $ 8.98 ----------------- --------- --------- --------- --------- --------- Income (loss) from investment operations: Net investment income 0.14 0.31 0.29 0.14 0.31 0.47 Net realized and unrealized gain (loss) (0.23) 0.16 0.24 0.02 0.10 0.37 ----------------- --------- --------- --------- --------- --------- Total income (loss) from investment operations (0.09) 0.47 0.53 0.16 0.41 0.84 ----------------- --------- --------- --------- --------- --------- Less dividends from net investment income (0.18) (0.38) (0.37) (0.29) (0.31) (0.47) ----------------- --------- --------- --------- --------- --------- Net asset value, end of period $ 9.30 $ 9.57 $ 9.48 $ 9.32 $ 9.45 $ 9.35 ================= ========= ========= ========= ========= ========= TOTAL RETURN+ (0.94)%(1) 5.13% 5.78% 1.63% 4.58% 9.55% RATIOS TO AVERAGE NET ASSETS(3): Expenses 1.65%(2)(4) 1.65%(4) 1.85%(4) 1.79% 1.72% 1.84% Net investment income 3.41%(2)(4) 3.46%(4) 3.20%(4) 1.49% 3.35% 5.08% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 28,850 $ 35,739 $ 73,650 $ 99,695 $ 103,238 $ 97,452 Portfolio turnover rate 16%(1) 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) NOT ANNUALIZED. (2) ANNUALIZED. (3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. (4) IF THE FUND HAD BORNE ALL EXPENSES THAT WERE WAIVED BY THE INVESTMENT ADVISER AND ADMINISTRATOR, THE ANNUALIZED EXPENSE AND NET INVESTMENT INCOME RATIOS WOULD HAVE BEEN AS FOLLOWS:
EXPENSE NET INVESTMENT PERIOD ENDED RATIO INCOME RATIO ----------------- --------- -------------- FEBRUARY 28, 2006 1.92% 3.14% AUGUST 31, 2005 1.80 3.31 AUGUST 31, 2004 1.90 3.15
SEE NOTES TO FINANCIAL STATEMENTS 25
FOR THE SIX FOR THE YEAR ENDED AUGUST 31, MONTHS ENDED ------------------------------------------------------------------- FEBRUARY 28, 2006 2005 2004 2003 2002 2001 ----------------- --------- --------- --------- --------- --------- (UNAUDITED) CLASS C SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 9.59 $ 9.50 $ 9.34 $ 9.46 $ 9.36 $ 8.99 ----------------- --------- --------- --------- --------- --------- Income (loss) from investment operations: Net investment income 0.14 0.31 0.29 0.14 0.31 0.47 Net realized and unrealized gain (loss) (0.23) 0.17 0.24 0.03 0.10 0.37 ----------------- --------- --------- --------- --------- --------- Total income (loss) from investment operations (0.09) 0.48 0.53 0.17 0.41 0.84 ----------------- --------- --------- --------- --------- --------- Less dividends from net investment income (0.18) (0.39) (0.37) (0.29) (0.31) (0.47) ----------------- --------- --------- --------- --------- --------- Net asset value, end of period $ 9.32 $ 9.59 $ 9.50 $ 9.34 $ 9.46 $ 9.36 ================= ========= ========= ========= ========= ========= TOTAL RETURN+ (0.91)%(1) 5.16% 5.77% 1.74% 4.57% 9.54% RATIOS TO AVERAGE NET ASSETS(3): Expenses 1.58%(2)(4) 1.62%(4) 1.85%(4) 1.79% 1.72% 1.84% Net investment income 3.48%(2)(4) 3.49%(4) 3.20%(4) 1.49% 3.35% 5.08% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 4,843 $ 6,215 $ 7,474 $ 10,389 $ 6,415 $ 4,226 Portfolio turnover rate 16%(1) 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) NOT ANNUALIZED. (2) ANNUALIZED. (3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. (4) IF THE FUND HAD BORNE ALL EXPENSES THAT WERE WAIVED BY THE INVESTMENT ADVISER AND ADMINISTRATOR, THE ANNUALIZED EXPENSE AND NET INVESTMENT INCOME RATIOS WOULD HAVE BEEN AS FOLLOWS:
EXPENSE NET INVESTMENT PERIOD ENDED RATIO INCOME RATIO ----------------- --------- -------------- FEBRUARY 28, 2006 1.85% 3.21% AUGUST 31, 2005 1.77 3.34 AUGUST 31, 2004 1.90 3.15
SEE NOTES TO FINANCIAL STATEMENTS 26
FOR THE SIX FOR THE YEAR ENDED AUGUST 31, MONTHS ENDED ------------------------------------------------------------------- FEBRUARY 28, 2006 2005 2004 2003 2002 2001 ----------------- --------- --------- --------- --------- --------- (UNAUDITED) CLASS D SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 9.54 $ 9.45 $ 9.29 $ 9.43 $ 9.35 $ 8.98 ----------------- --------- --------- --------- --------- --------- Income (loss) from investment operations: Net investment income 0.18 0.39 0.37 0.22 0.38 0.55 Net realized and unrealized gain (loss) (0.22) 0.16 0.24 0.01 0.09 0.37 ----------------- --------- --------- --------- --------- --------- Total income (loss) from investment operations (0.04) 0.55 0.61 0.23 0.47 0.92 ----------------- --------- --------- --------- --------- --------- Less dividends from net investment income (0.22) (0.46) (0.45) (0.37) (0.39) (0.55) ----------------- --------- --------- --------- --------- --------- Net asset value, end of period $ 9.28 $ 9.54 $ 9.45 $ 9.29 $ 9.43 $ 9.35 ================= ========= ========= ========= ========= ========= TOTAL RETURN+ (0.43)%(1) 6.03% 6.68% 2.39% 5.23% 10.48% RATIOS TO AVERAGE NET ASSETS(3): Expenses 0.80%(2)(4) 0.80%(4) 1.00%(4) 0.94% 0.87% 0.99% Net investment income 4.26%(2)(4) 4.31%(4) 4.05%(4) 2.34% 4.20% 5.93% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 1,190 $ 4,695 $ 5,687 $ 7,113 $ 11,943 $ 3,018 Portfolio turnover rate 16%(1) 46% 164% 429% 400% 358%
- ---------- + CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. (1) NOT ANNUALIZED. (2) ANNUALIZED. (3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. (4) IF THE FUND HAD BORNE ALL EXPENSES THAT WERE WAIVED BY THE INVESTMENT ADVISER AND ADMINISTRATOR, THE ANNUALIZED EXPENSE AND NET INVESTMENT INCOME RATIOS WOULD HAVE BEEN AS FOLLOWS:
EXPENSE NET INVESTMENT PERIOD ENDED RATIO INCOME RATIO ----------------- --------- -------------- FEBRUARY 28, 2006 1.07% 3.99% AUGUST 31, 2005 0.95 4.16 AUGUST 31, 2004 1.05 4.00
SEE NOTES TO FINANCIAL STATEMENTS 27 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 J. David Germany VICE PRESIDENT Dennis F. Shea VICE PRESIDENT Barry Fink VICE PRESIDENT Amy R. Doberman VICE PRESIDENT Carsten Otto CHIEF COMPLIANCE OFFICER Stefanie V. Chang Yu VICE PRESIDENT Francis J. Smith TREASURER and CHIEF FINANCIAL OFFICER Thomas F. Caloia VICE PRESIDENT Mary E. Mullin SECRETARY TRANSFER AGENT Morgan Stanley Trust Harborside Financial Center, Plaza Two Jersey City, New Jersey 07311 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Deloitte & Touche LLP Two World Financial Center New York, New York 10281 INVESTMENT ADVISER Morgan Stanley Investment Advisors Inc. 1221 Avenue of the Americas New York, New York 10020 The financial statements included herein have been taken from the records of the Fund without examination by the independent auditors and accordingly they do not express an opinion thereon. This report is submitted for the general information of the shareholders of the Fund. For more detailed information about the Fund, its fees and expenses and other pertinent information, please read its Prospectus. The Fund's Statement of Additional Information contains additional information about the Fund, including its trustees. It is available, without charge, by calling (800) 869-NEWS. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective Prospectus. Read the Prospectus carefully before investing. Investments and services offered through Morgan Stanley DW Inc., member SIPC. Morgan Stanley Distributors Inc., member NASD (C) 2006 Morgan Stanley [MORGAN STANLEY LOGO] [GRAPHIC] MORGAN STANLEY FUNDS Morgan Stanley Income Trust Semiannual Report February 28, 2006 [MORGAN STANLEY LOGO] 38557RPT-RA06-00323P-Y02/06 Item 2. Code of Ethics. Not applicable for semiannual reports. Item 3. Audit Committee Financial Expert. Not applicable for semiannual reports. Item 4. Principal Accountant Fees and Services Not applicable for semiannual reports. Item 5. Audit Committee of Listed Registrants. Not applicable for semiannual reports. Item 6. Refer to Item 1. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable for semiannual reports. Item 8. Portfolio Managers of Closed-End Management Investment Companies Applicable only to reports filed by closed-end funds. Item 9. Closed-End Fund Repurchases Applicable to reports filed by closed-end funds. Item 10. Submission of Matters to a Vote of Security Holders Not applicable. Item 11. Controls and Procedures (a) The Fund's principal executive officer and principal financial officer have concluded that the Fund's disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Fund in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, based upon such officers' evaluation of these controls and procedures as of a date within 90 days of the filing date of the report. (b) There were no changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12. Exhibits (a) Code of Ethics - Not applicable for semiannual reports. (b) A separate certification for each principal executive officer and principal financial officer of the registrant are attached hereto as part of EX-99.CERT. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Morgan Stanley Income Trust /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer April 19, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer April 19, 2006 /s/ Francis Smith Francis Smith Principal Financial Officer April 19, 2006 EX-99.CERT 2 a2169276zex-99_cert.txt EX-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: April 19, 2006 /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: April 19, 2006 /s/ Francis Smith Francis Smith Principal Financial Officer EX-99.906CERT 3 a2169276zex-99_906cert.txt EX-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 February 28, 2006 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: April 19, 2006 /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 February 28, 2006 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: April 19, 2006 /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. -----END PRIVACY-ENHANCED MESSAGE-----