I am married to a U.S. citizen and we moved from Europe to the U.S. in May 2007. Over 2007 I have around $12000 of income from running a small business with a partner. This business is registered in Europe, which means that that income would be qualified as 'foreign income'

It seems I have two (relevant)options:

1. Filing jointly as a 'full year resident', which means that the whole $12000 will be taxed in the U.S, but we can get the standard deduction for married couples.

2. Filing as a dual status citizen the first year, but that requires me to file separately instead of jointly (if I understand correctly). This means that only the income generated after I came here will be taxed, which would be around $6000. I can't use the standard deduction in that case.

So if we go with option 1 is all I have to do is add the foreign income to our U.S. income and fill in the total amount on line 7 on the 1040 form?

Or should the foreign income be treated differently? Do I need other forms?

Yes, you do add the income to your tax return, but on Schedule E Page 2.

Further, part of the income can be redacted out of the return under the Foreign Income Exclusion using Form 2555.