MORGAN STANLEY DEAN WITTER TAX EXEMPT SECURITIES TRUST, 497, 1999-05-05

MORGAN STANLEY DEAN WITTER TAX EXEMPT SECURITIES TRUST
497, 1999-05-05

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<PAGE>
Filed Pursuant to Rule 497(c)
Registration File No.: 2-66268

PROSPECTUS - MAY 1, 1999

MORGAN STANLEY DEAN WITTER

---------------------------------------------------------------------

TAX-EXEMPT SECURITIES TRUST

A MUTUAL FUND THAT SEEKS TO PROVIDE A HIGH LEVEL OF CURRENT INCOME EXEMPT FROM
FEDERAL INCOME TAX, CONSISTENT WITH THE PRESERVATION OF CAPITAL

The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation
to the contrary is a criminal offense.

<PAGE>

CONTENTS

<TABLE>
<CAPTION>
<S> <C>
The Fund Investment Objective ............................ 1
Principal Investment Strategies.................. 1
Principal Risks ................................. 2
Past Performance ................................ 3
Fees and Expenses ............................... 4
Additional Investment Strategy Information ...... 5
Additional Risk Information ..................... 6
Fund Management ................................. 7

Shareholder Information Pricing Fund Shares ............................. 8
How to Buy Shares ............................... 8
How to Exchange Shares .......................... 10
How to Sell Shares .............................. 12
Distributions ................................... 13
Tax Consequences ................................ 14
Share Class Arrangements ........................ 15

Financial Highlights ................................................. 21

Our Family of Funds .....................................Inside Back Cover

This Prospectus contains important information about the Fund.
Please read it carefully and keep it for future reference.
</TABLE>

FUND CATEGORY
-------------
[ ] Growth

[ ] Growth and Income

[X] INCOME

[ ] Money Market

<PAGE>

THE FUND

[GRAPHIC OMITTED]

INVESTMENT OBJECTIVE
- --------------------------------------------------
Morgan Stanley Dean Witter Tax-Exempt Securities Trust (the "Fund") is a mutual
fund that seeks to provide a high level of current income exempt from federal
income tax, consistent with the preservation of capital. There is no guarantee
that the Fund will achieve this objective.

[GRAPHIC OMITTED]

[sidebar]
INCOME
An investment objective having the goal of selecting securities to pay out
income rather than rise in value.
[end sidebar]

PRINCIPAL INVESTMENT STRATEGIES
- ----------------------------------------------------------------

The Fund will normally invest at least 80% of its assets in securities that pay
interest exempt from federal income taxes. The Fund's "Investment Manager,"
Morgan Stanley Dean Witter Advisors Inc., generally invests the Fund's assets in
municipal obligations. Municipal obligations are bonds, notes or short-term
commercial paper issued by state governments, local governments, and their
respective agencies. At least 75% of these municipal obligations will have the
following ratings at the time of purchase:

o municipal bonds -- within the three highest grades by Moody's
Investors Service Inc. ("Moody's"), Standard
& Poor's Corporation ("S&P"), or Fitch IBCA,
Inc. ("Fitch");

o municipal notes -- within the two highest grades or, if not rated,
have outstanding bonds within the three
highest grades by Moody's, S&P or Fitch; and

o municipal commercial paper -- within the highest grade by Moody's, S&P or
Fitch.

The Fund may invest up to 25% of its assets in municipal obligations that are
rated below the limits stated above or are not rated by those rating agencies.
However, the Fund may only invest up to 5% of its assets in municipal
obligations rated below investment grade or, if unrated, of comparable quality
as determined by the Investment Manager (commonly known as "junk bonds").

The Fund may invest up to 20% of its assets in taxable money market instruments
or securities that pay interest income subject to the "alternative minimum
tax," and some taxpayers may have to pay tax on a Fund distribution of this
income. The Fund therefore may not be a suitable investment for these
investors. See the "Tax Consequences" section for more details.

Municipal bonds, notes and commercial paper are commonly classified as either
"general obligation" or "revenue." General obligation bonds, notes, and
commercial paper are secured by the issuer's faith and credit, as well as its
taxing power, for payment of principal and interest. Revenue bonds, notes and
commercial paper, however, are generally payable from a specific source of
income. They are issued to fund a wide variety of public and private projects
in sectors such as transportation, education and industrial development.
Included within the revenue category are participations in lease obligations.
The Fund's municipal obligation investments may include zero coupon securities,
which are purchased at a discount and make no interest payments until maturity.

<PAGE>

In addition to the securities described above, the Fund may also invest in
futures.

In pursuing the Fund's investment objective, the Investment Manager has
considerable leeway in deciding which investments it buys, holds or sells on a
day-to-day basis -- and which investment strategies it uses. For example, the
Investment Manager in its discretion may determine to use some permitted
investment strategies while not using others.

[GRAPHIC OMITTED]

PRINCIPAL RISKS
- -------------------------------------------
The Fund's share price will fluctuate with changes in the market value of the
Fund's portfolio securities. When you sell Fund shares, they may be worth less
than what you paid for them and, accordingly, you can lose money investing in
this Fund.

CREDIT AND INTEREST RATE RISKS. Municipal obligations, like other debt
securities, are subject to two types of risks: credit risk and interest rate
risk.

Credit risk refers to the possibility that the issuer of a security will be
unable to make interest payments and/or repay the principal on its debt. In the
case of revenue bonds, notes or commercial paper, for example, the credit risk
is the possibility that the user fees from a project or other specified revenue
sources are insufficient to meet interest and/or principal payment obligations.
The issuers of private activity bonds, used to finance projects in sectors such
as industrial development and pollution control, also may be negatively
impacted by the general credit of the user of the project.

Interest rate risk refers to fluctuations in the value of a fixed-income
security resulting from changes in the general level of interest rates. When
the general level of interest rates goes up, the prices of most fixed-income
securities go down. When the general level of interest rates goes down, the
prices of most fixed-income securities go up. Zero coupon securities are
typically subject to greater price fluctuations than comparable securities that
pay current interest. As a general illustrative of the relationship between
fixed-income securities and interest rates, the following table shows how
interest rates affect bond prices.

HOW INTEREST RATES AFFECT BOND PRICES

<TABLE>
<CAPTION>
- --------------------------------------------------------------------
PRICE PER $1,000 OF A MUNICIPAL BOND
IF INTEREST RATES:
-----------------------------------
INCREASE* DECREASE**
-----------------------------------
<S> <C> <C> <C> <C> <C>
BOND MATURITY COUPON 1% 2% 1% 2%
- --------------------------------------------------------------------
1 Year 1999 3.00% $990 $981 $1,010 $1,020
- --------------------------------------------------------------------
5 Years 2003 3.75% $956 $914 $1,046 $1,095
- --------------------------------------------------------------------
10 Years 2008 4.10% $922 $852 $1,085 $1,180
- --------------------------------------------------------------------
20 Years 2018 4.90% $883 $785 $1,138 $1,302
- --------------------------------------------------------------------
30 Years 2028 4.95% $861 $749 $1,175 $1,396
- --------------------------------------------------------------------
</TABLE>

Source: Municipal Market Data (a division of Thomson Financial Municipal
Group); "Aaa" yield curve as of 12/31/98.
* Assumes no effect from market discount calculation.
**Assumes bonds are non-callable.

<PAGE>

The Fund is not limited as to the maturities of the municipal obligations in
which it may invest. Thus, a rise in the general level of interest rates may
cause the price of the Fund's portfolio securities to fall substantially.

OTHER RISKS. The performance of the Fund also will depend on whether the
Investment Manager is successful in pursuing the Fund's investment strategy.
The Fund is also subject to other risks from its permissible investments
including the risks associated with its futures and lease obligations
investments.

Shares of the Fund are not bank deposits and are not guaranteed or insured by
any bank, governmental entity, or the FDIC.

[GRAPHIC OMITTED]

[sidebar]
ANNUAL TOTAL RETURNS

This chart shows how the performance of the Fund's Class D shares has varied
from year to year over the last 10 calendar years.

[end sidebar]

PAST PERFORMANCE
- ----------------------------------------------
The bar chart and table below provide some indication of the risks of investing
in the Fund. The Fund's past performance does not indicate how the Fund will
perform in the future.

[THE NARRATIVE AND/OR TABULAR INFORMATION BELOW IS A FAIR AND
ACCURATE DESCRIPTION OF GRAPHIC OR IMAGE MATERIAL OMITTED FOR
THE PURPOSE OF EDGAR FILING.]

ANNUAL TOTAL RETURNS -- CALENDAR YEARS

1989 '90 '91 '92 '93 '94 '95 '96 '97 '98
- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
10.61% 5.86% 12.71% 9.09% 11.23% -5.55% 17.37% 3.61% 8.73% 6.11%

The bar chart reflects the performance of Class D shares. All shares held prior
to the Fund adopting its Multi-Class Structure on July 28, 1997 were designated,
Class D Shares. The performance of the other Classes will differ because the
Classes have different ongoing fees.

During the periods shown in the bar chart, the highest return for a calendar
quarter was 6.89% (quarter ended March 31, 1995) and the lowest return for a
calendar quarter was --5.50% (quarter ended March 31, 1994). Year-to-date total
return as of March 31, 1999 was 0.63%.

<PAGE>

[sidebar]
AVERAGE ANNUAL
TOTAL RETURNS

This table compares the Fund's average annual returns with those of a broad
measure of market performance over time. The Fund's returns include the maximum
applicable sales charge for each Class and assume you sold your shares at the
end of each period.
[end sidebar]

AVERAGE ANNUAL TOTAL RETURNS (FOR THE PERIOD ENDED THE 1998 CALENDAR YEAR)
- -------------------------------------------------------------------------------------------
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A 1.36% -- --
- -------------------------------------------------------------------------------------------
Class B 0.50% -- --
- -------------------------------------------------------------------------------------------
Class C 4.37% -- --
- -------------------------------------------------------------------------------------------
Class D(1) 6.11% 5.79% 7.81%
- -------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index(2) 6.48% 6.22% 8.22%
- -------------------------------------------------------------------------------------------
Lipper General Municipal Debt Funds Index(3) 5.64% 5.70% 7.75%
- -------------------------------------------------------------------------------------------
</TABLE>

(1) Prior to July 28, 1997, the Fund only issued Class D shares.

(2) The Lehman Brothers Municipal Bond Index tracks the performance of Municipal
bonds with maturities of 2 years or more and a minimum credit rating of Baa
or BBB, as measured by Moody's Investor Service, Inc. or Standard & Poor's
Corp. The Index does not include any expenses, fees, or changes. The Index
is unmanaged and should not be considered an investment.

(3) The Lipper General Municipal Debt Funds Index is an equally-weighted
performance index of the largest qualifying funds (based on net assets) in
the Lipper General Municipal Debt Funds objective. 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.

[sidebar]
SHAREHOLDER FEES

These fees are paid directly from your investment.

ANNUAL FUND OPERATING EXPENSES

These expenses are deducted from the Fund's assets and are based on expenses
paid for the fiscal year ended December 31, 1998.
[end sidebar]

[GRAPHIC OMITTED]

FEES AND EXPENSES
- -----------------------------------------------
The Fund offers four Classes of shares: Classes A, B, C and D. Each Class has a
different combination of fees, expenses and other features. The table below
briefly describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. The Fund does not charge account or exchange fees. See the
"Share Class Arrangements" section for further fee and expense information.
<PAGE>
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES
- --------------------------------------------------------------------------------------------------------------
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) 4.25%(1) None None None
- --------------------------------------------------------------------------------------------------------------
Maximum deferred sales charge (load) (as a
percentage based on the lesser of the offering None(2) 5.00%(3) 1.00%(4) None
price or net asset value at redemption)
- --------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
- --------------------------------------------------------------------------------------------------------------
Management fee 0.43% 0.43% 0.43% 0.43%
- --------------------------------------------------------------------------------------------------------------
Distribution and service (12b-1) fees 0.24% 0.60% 0.70% None
- --------------------------------------------------------------------------------------------------------------
Other expenses 0.07% 0.07% 0.07% 0.07%
- --------------------------------------------------------------------------------------------------------------
Total annual Fund operating expenses 0.74% 1.10% 1.20% 0.50%
- --------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Reduced for purchases of $25,000 and over.

(2) Investments that are not subject to any sales charge at the time of purchase
are subject to a contingent deferred sales charge ("CDSC") of 1.00% that
will be imposed on sales made within one year after purchase, except for
certain specific circumstances.

(3) The CDSC is scaled down to 1.00% during the sixth year, reaching zero
thereafter. See "Share Class Arrangements" for a complete discussion of the
CDSC.

(4) Only applicable to sales made within one year after purchase.

<PAGE>

EXAMPLE

This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.

The example assumes that you invest $10,000 in the Fund, your investment has a
5% return each year, and the Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, the tables below show your
costs at the end of each period based on these assumptions depending upon
whether or not you sell (redeem) your shares at the end of each period.

<TABLE>
<CAPTION>
IF YOU SOLD YOUR SHARES IF YOU HELD YOUR SHARES
- -------------------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------- ----------------------------------------------
CLASS A $497 $651 $818 $1,302 $497 $651 $818 $1,302
- -------------------------------------------------------- ----------------------------------------------
CLASS B $612 $649 $805 $1,337 $112 $349 $605 $1,337
- -------------------------------------------------------- ----------------------------------------------
CLASS C $222 $380 $607 $1,450 $122 $380 $657 $1,450
- -------------------------------------------------------- ----------------------------------------------
CLASS D $51 $160 $278 $625 $51 $160 $278 $625
- -------------------------------------------------------- ----------------------------------------------

</TABLE>

[GRAPHIC OMITTED]

ADDITIONAL INVESTMENT STRATEGY INFORMATION
- -------------------------------------------------------------------------------

The Fund's investment objective is to seek to provide a high level of current
income exempt from federal income tax, consistent with the preservation of
capital. There is no guarantee that the Fund will achieve its objective.

This section provides additional information concerning the Fund's principal
strategies.

LEASE OBLIGATIONS. Included within the revenue bonds category are
participations in lease obligations or installment purchase contracts of
municipalities. Generally, state and local agencies or authorities issue lease
obligations to acquire equipment and facilities for public and private
purposes.

FUTURES. The Fund may purchase or sell futures contracts with respect to
financial instruments and municipal bond indexes. Futures may be used to seek
to hedge against interest rate changes.

DEFENSIVE INVESTING. The Fund may take temporary "defensive" positions in
attempting to respond to adverse market conditions. The Fund may invest any
amount of its assets in taxable securities, or in tax-exempt securities subject
to the federal alternative minimum tax for individual shareholders when the
Investment Manager believes it is advisable to do so. Although taking a
defensive posture is designed to protect the Fund from an anticipated market
downturn, it could have the effect of reducing the Fund's ability to provide
tax-exempt income.

<PAGE>

[GRAPHIC OMITTED]

ADDITIONAL RISK INFORMATION
- -----------------------------------------------------------
This section provides additional information regarding the principal risks of
investing in the Fund.

BOND INSURANCE RISK. Many of the municipal obligations the Fund invests in will
be covered by insurance at the time of issuance or at a later date. Such
insurance covers the remaining term of the security. Insured municipal
obligations would generally be assigned a lower rating if the rating were based
primarily on the credit quality of the issuer without regard to the insurance
feature. If the claims-paying ability of the insurer were downgraded, the
ratings on the municipal obligations it insures may also be downgraded.

LEASE OBLIGATIONS. Lease obligations may have risks not normally associated
with general obligation or other revenue bonds. Leases and installment purchase
or conditional sale contracts (which may provide for title to the leased asset
to pass eventually to the issuer) have developed, in part, as a means for
governmental issuers to acquire property and equipment without the necessity of
complying with the constitutional and statutory requirements generally
applicable for the issuance of debt. Certain lease obligations contain
"non-appropriation" clauses that provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for that purpose by the appropriate legislative body on an annual
or other periodic basis. Consequently, continued lease payments on those lease
obligations containing "non-appropriation" clauses are dependent on future
legislative actions. If these legislative actions do not occur, the holders of
the lease obligation may experience difficulty in exercising their rights,
including disposition of the property.

FUTURES. If the Fund purchases or sells in futures contracts, its participation
in these markets would subject the Fund's portfolio to certain risks. The
Investment Manager's predictions of movements in the direction of interest rate
markets may be inaccurate, and the adverse consequences to the Fund (e.g., a
reduction in the Fund's net asset value or a reduction in the amount of income
available for distribution) may leave the Fund in a worse position than if
these strategies were not used. Other risks inherent in the use of futures
include, for example, the possible imperfect correlation between the price of
futures contracts and movements in the prices of the securities being hedged,
and the possible absence of a liquid secondary market for any particular
instrument. The risk of imperfect correlations may be increased by the fact
that futures contracts in which the Fund may invest are taxable securities
rather than tax-exempt securities. The prices of taxable securities may not
move in a similar manner to prices of tax-exempt securities.

YEAR 2000. The Fund could be adversely affected if the computer systems
necessary for the efficient operation of the Investment Manager, the Fund's
other service providers and the markets and individual and governmental issuers
in which the Fund invests do not properly process and calculate date-related
information from and after January 1, 2000. While year 2000-related computer
problems could have a negative effect on the Fund, the Investment Manager and
affiliates are working hard to avoid any problems and to obtain assurances from
their service providers that they are taking similar steps.

<PAGE>

In addition, it is possible that the markets for securities in which the Fund
invests may be detrimentally affected by computer failures throughout the
financial services industry beginning January 1, 2000. Improperly functioning
trading systems may result in settlement problems and liquidity issues. In
addition, governmental data processing errors may result in overall economic
uncertainties. Earnings of individual issuers will be affected by remediation
costs, which may be substantial. Accordingly, the Fund's investments may be
adversely affected.

[GRAPHIC OMITTED]

[sidebar]
MORGAN STANLEY DEAN WITTER ADVISORS INC.

The Investment Manager is widely recognized as a leader in the mutual fund
industry and together with Morgan Stanley Dean Witter Services Company Inc.,
its wholly-owned subsidiary, has more than $129 billion in assets under
management or administration as of March 31, 1999.
[end sidebar]

FUND MANAGEMENT
- ---------------------------------------------

The Fund has retained the Investment Manager -- Morgan Stanley Dean Witter
Advisors Inc. -- to provide administrative services, manage its business
affairs and invest its assets, including the placing of orders for the purchase
and sale of portfolio securities. The Investment Manager is a wholly-owned
subsidiary of Morgan Stanley Dean Witter & Co., a preeminent global financial
services firm that maintains leading market positions in each of its three
primary businesses: securities, asset management and credit services. Its main
business office is located at Two World Trade Center, New York, New York 10048.

The Fund's portfolio is managed within the Investment Manager's Tax-Exempt
Group. James F. Willison, a Senior Vice President of the Investment Manager,
has been a primary portfolio manager of the Fund since its inception. Joseph R.
Arcieri, a Vice President of the Investment Manager, has been a primary
portfolio manager of the Fund since February 1997. Mr. Willison and Mr. Arcieri
have been portfolio managers with the Investment Manager for over five years.

The Fund pays the Investment Manager a monthly management fee as full
compensation for the services and facilities furnished to the Fund, and for
Fund expenses assumed by the Investment Manager. The fee is based on the Fund's
average daily net assets. For the fiscal year ended December 31, 1998, the Fund
accrued total compensation to the Investment Manager amounting to 0.43% of the
Fund's average daily net assets.

<PAGE>

SHAREHOLDER INFORMATION

[GRAPHIC OMITTED]

PRICING FUND SHARES
- -------------------------------------------------
The price of Fund shares (excluding sales charges), called "net asset value,"
is based on the value of the Fund's portfolio securities. While the assets of
each Class are invested in a single portfolio of securities, the net asset
value of each Class will differ because the Classes have different ongoing
distribution fees.

The net asset value per share of the Fund is determined once daily at 4:00 p.m.
Eastern time, on each day that the New York Stock Exchange is open (or, on days
when the New York Stock Exchange closes prior to 4:00 p.m., at such earlier
time). Shares will not be priced on days that the New York Stock Exchange is
closed.

The value of the Fund's portfolio securities (except for short-term taxable
debt securities and certain other investments) are valued by an outside
independent pricing service. The service uses a computerized grid matrix of
tax-exempt securities and its evaluations in determining what it believes is
the fair value of the portfolio securities. The Fund's Board of Trustees
believes that timely and reliable market quotations are generally not readily
available to the Fund to value tax-exempt securities and the valuations that
the pricing service supplies are more likely to approximate the fair value of
the securities.

An exception to the Fund's general pricing policy concerns its short-term debt
securities. Debt securities with remaining maturities of sixty days or less at
the time of purchase are valued at amortized cost. However, if the cost does
not reflect the securities' market value, these securities will be valued at
their fair value.

[GRAPHIC OMITTED]

[sidebar]
CONTACTING A FINANCIAL ADVISOR

If you are new to the Morgan Stanley Dean Witter Family of Funds and would like
to contact a Financial Advisor, call (800) THE-DEAN for the telephone number of
the Morgan Stanley Dean Witter office nearest you. You may also access our
office locator on our Internet site at: www.deanwitter.com/funds
[end sidebar]

HOW TO BUY SHARES
- -----------------------------------------------

You may open a new account to buy Fund shares or buy additional Fund shares for
an existing account by contacting your Morgan Stanley Dean Witter Financial
Advisor. Your Financial Advisor or other authorized financial representative
will assist you, step-by-step, with the procedures to invest in the Fund. You
may also purchase shares directly by calling the Fund's transfer agent and
requesting an application.

Because every investor has different immediate financial needs and long-term
investment goals, the Fund offers investors four Classes of shares: Classes A,
B, C and D. Class D shares are only offered to a limited group of investors.
Each Class of shares offers a distinct structure of sales charges, distribution
and service fees, and other features that are designed to address a variety of
needs. Your Financial Advisor or other authorized financial representative can
help you decide which Class may be most appropriate for you. When purchasing
Fund shares, you must specify which Class of shares you wish to purchase.

When you buy Fund shares, the shares are purchased at the next share price
calculated (less any applicable front-end sales charge for Class A shares)
after we receive your investment order in proper form. We reserve the right to
reject any order for the purchase of Fund shares.

<PAGE>
[sidebar]
EASYINVEST(SM)

A purchase plan that allows you to transfer money automatically from your
checking or savings account or from a Money Market Fund on a semi-monthly,
monthly or quarterly basis. Contact your Morgan Stanley Dean Witter Financial
Advisor for further information about this service.
[end sidebar]

MINIMUM INVESTMENT AMOUNTS

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT
--------------------------
INVESTMENT OPTIONS INITIAL ADDITIONAL
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Regular Accounts $1,000 $100
- --------------------------------------------------------------------------------
EasyInvest(SM) (Automatically from your
checking or savings account
or Money Market Fund) $100* $100*
- --------------------------------------------------------------------------------
</TABLE>
* Provided your schedule of investments totals $1,000 in twelve months.

There is no minimum investment amount if you purchase Fund shares through: (1)
the Investment Manager's mutual fund asset allocation plan, (2) a program,
approved by the Fund's distributor, in which you pay an asset-based fee for
advisory, administrative and/or brokerage services, or (3) employer-sponsored
employee benefit plan accounts.

INVESTMENT OPTIONS FOR CERTAIN INSTITUTIONAL AND OTHER INVESTORS/CLASS D SHARES.
To be eligible to purchase Class D shares, you must qualify under one of the
investor categories specified in the "Share Class Arrangements" section of this
Prospectus.

THREE DAY SETTLEMENT. Fund shares are sold through the Fund's distributor,
Morgan Stanley Dean Witter Distributors Inc., on a normal three business day
basis; that is, your payment for Fund shares is due on the third business day
(settlement day) after you place a purchase order.

SUBSEQUENT INVESTMENTS SENT DIRECTLY TO THE FUND. In addition to buying
additional Fund shares for an existing account by contacting your Morgan
Stanley Dean Witter Financial Advisor, you may send a check directly to the
Fund. To buy additional shares in this manner:

o Write a "letter of instruction" to the Fund specifying the name(s) on the
account, the account number, the social security or tax identification
number, the Class of shares you wish to purchase and the investment amount
(which would include any applicable front-end sales charge). The letter must
be signed by the account owner(s).

o Make out a check for the total amount payable to: Morgan Stanley Dean Witter
Tax-Exempt Securities Trust.

o Mail the letter and check to Morgan Stanley Dean Witter Trust FSB at P.O. Box
1040, Jersey City, NJ 07303.

<PAGE>

[GRAPHIC OMITTED]

HOW TO EXCHANGE SHARES
- -------------------------------------------------------
PERMISSIBLE FUND EXCHANGES. You may exchange shares of any Class of the Fund
for the same Class of any other continuously offered Multi-Class Fund, or for
shares of a No-Load Fund, Money Market Fund or Short-Term U.S. Treasury Trust,
without the imposition of an exchange fee. See the inside back cover of this
Prospectus for each Morgan Stanley Dean Witter Fund's designation as a
Multi-Class Fund, No-Load Fund or Money Market Fund. If a Morgan Stanley Dean
Witter Fund is not listed, consult the inside back cover of that Fund's
Prospectus for its designation. For purposes of exchanges, shares of FSC Funds
(subject to a front-end sales charge) are treated as Class A shares of a
Multi-Class Fund.

Exchanges may be made after shares of the Fund acquired by purchase have been
held for thirty days. There is no waiting period for exchanges of shares
acquired by exchange or dividend reinvestment. The current Prospectus for each
fund describes its investment objective(s), policies and investment minimums,
and should be read before investment.

EXCHANGE PROCEDURES. You can process an exchange by contacting your Morgan
Stanley Dean Witter Financial Advisor or other authorized financial
representative. Otherwise, you must forward an exchange privilege authorization
form to the Fund's transfer agent -- Morgan Stanley Dean Witter Trust FSB --
and then write the transfer agent or call (800) 869-NEWS to place an exchange
order. You can obtain an exchange privilege authorization form by contacting
your Financial Advisor or other authorized financial representative, or by
calling (800) 869-NEWS. If you hold share certificates, no exchanges may be
processed until we have received all applicable share certificates.

An exchange to any Morgan Stanley Dean Witter Fund (except a Money Market Fund)
is made on the basis of the next calculated net asset values of the Funds
involved after the exchange instructions are accepted. When exchanging into a
Money Market Fund, the Fund's shares are sold at their next calculated net
asset value and the Money Market Fund's shares are purchased at their net asset
value on the following business day.

The Fund may terminate or revise the exchange privilege upon required notice.
Certain services normally available to shareholders of Money Market Funds,
including the check writing privilege, are not available for Money Market Fund
shares you acquire in an exchange.

TELEPHONE EXCHANGES. For your protection when calling Morgan Stanley Dean
Witter Trust FSB, we will employ reasonable procedures to confirm that exchange
instructions communicated over the telephone are genuine. These procedures may
include requiring various forms of personal identification such as name,
mailing address, social security or other tax identification number. Telephone
instructions also may be recorded.

Telephone instructions will be accepted if received by the Fund's transfer
agent between 9:00 a.m. and 4:00 p.m. Eastern time, on any day the New York
Stock Exchange is open for business. During periods of drastic economic or
market changes, it is possible that the telephone exchange procedures may be
difficult to implement, although this has not been the case with the Fund in
the past.

<PAGE>

MARGIN ACCOUNTS. If you have pledged your Fund shares in a margin account,
contact your Morgan Stanley Dean Witter Financial Advisor or other authorized
financial representative regarding restrictions on the exchange of such shares.

TAX CONSIDERATIONS OF EXCHANGES. If you exchange shares of the Fund for shares
of another Morgan Stanley Dean Witter Fund there are important tax
considerations. For tax purposes, the exchange out of the Fund is considered a
sale of Fund shares -- and the exchange into the other Fund is considered a
purchase. As a result, you may realize a capital gain or loss.

You should review the "Tax Consequences" section and consult your own tax
professional about the tax consequences of an exchange.

FREQUENT EXCHANGES. A pattern of frequent exchanges may result in the Fund
limiting or prohibiting, at its discretion, additional purchases and/or
exchanges. The Fund will notify you in advance of limiting your exchange
privileges.

CDSC CALCULATIONS ON EXCHANGES. See the "Share Class Arrangements" section of
this Prospectus for a further discussion of how applicable contingent deferred
sales charges (CDSCs) are calculated for shares of one Morgan Stanley Dean
Witter Fund that are exchanged for shares of another.

For further information regarding exchange privileges, you should contact your
Morgan Stanley Dean Witter Financial Advisor or call (800) 869-NEWS.

<PAGE>

[GRAPHIC OMITTED]

HOW TO SELL SHARES
- ------------------------------------------------

You can sell some or all of your Fund shares at any time. If you sell Class A,
Class B or Class C shares, your net sale proceeds are reduced by the amount of
any applicable CDSC. Your shares will be sold at the next price calculated
after we receive your order to sell as described below.

<TABLE>
<CAPTION>
<S> <C>
OPTIONS PROCEDURES
- -------------------- -----------------------------------------------------------------------------------
Contact Your To sell your shares, simply call your Morgan Stanley Dean Witter Financial Advisor
Financial Advisor or other authorized financial representative.
-----------------------------------------------------------------------------------
[GRAPHIC OMITTED] Payment will be sent to the address to which the account is registered or
deposited in your brokerage account.
- --------------------------------------------------------------------------------------------------------
By Letter You can also sell your shares by writing a "letter of instruction" that includes:

o your account number;
[GRAPHIC OMITTED]
o the dollar amount or the number of shares you wish to sell;

o the Class of shares you wish to sell; and

o the signature of each owner as it appears on the account.
-----------------------------------------------------------------------------------
If you are requesting payment to anyone other than the registered owner(s) or
that payment be sent to any address other than the address of the registered
owner(s) or pre-designated bank account, you will need a signature guarantee. You
can obtain a signature guarantee from an eligible guarantor acceptable to Morgan
Stanley Dean Witter Trust FSB. (You should contact Morgan Stanley Dean Witter
Trust FSB at (800) 869-NEWS for a determination as to whether a particular
institution is an eligible guarantor.) A notary public cannot provide a signature
guarantee. Additional documentation may be required for shares held by a
corporation, partnership, trustee or executor.
-----------------------------------------------------------------------------------
Mail the letter to Morgan Stanley Dean Witter Trust FSB at P.O. Box 983, Jersey
City, New Jersey 07303. If you hold share certificates, you must return the
certificates, along with the letter and any required additional documentation.
-----------------------------------------------------------------------------------
A check will be mailed to the name(s) and address in which the account is
registered, or otherwise according to your instructions.
- --------------------------------------------------------------------------------------------------------
Systematic If your investment in all of the Morgan Stanley Dean Witter Family of Funds has a
Withdrawal Plan total market value of at least $10,000, you may elect to withdraw amounts of $25
or more, or in any whole percentage of a Fund's balance (provided the amount is
[GRAPHIC OMITTED] at least $25), on a monthly, quarterly, semi-annual or annual basis, from any Fund
with a balance of at least $1,000. Each time you add a Fund to the plan, you must
meet the plan requirements.
-----------------------------------------------------------------------------------
Amounts withdrawn are subject to any applicable CDSC. A CDSC may be waived
under certain circumstances. See the Class B waiver categories listed in the
"Share Class Arrangements" section of this Prospectus.
-----------------------------------------------------------------------------------
To sign up for the Systematic Withdrawal Plan, contact your Morgan Stanley Dean
Witter Financial Advisor or call (800) 869-NEWS. You may terminate or suspend
your plan at any time. Please remember that withdrawals from the plan are sales
of shares, not Fund "distributions," and ultimately may exhaust your account
balance. The Fund may terminate or revise the plan at any time.
- --------------------------------------------------------------------------------------------------------
</TABLE>

PAYMENT FOR SOLD SHARES. After we receive your complete instructions to sell as
described above, a check will be mailed to you within seven days, although we
will attempt to make payment within one business day. Payment may also be sent
to your brokerage account.

Payment may be postponed or the right to sell your shares suspended, under
unusual circumstances. If you request to sell shares that were recently
purchased by check, payment of the sale proceeds may be delayed for the minimum
time needed to verify that the check has been honored (not more than fifteen
days from the time we receive the check).

<PAGE>

REINSTATEMENT PRIVILEGE. If you sell Fund shares and have not previously
exercised the reinstatement privilege, you may, within 35 days after the date
of sale, invest any portion of the proceeds in the same Class of Fund shares at
their net asset value and receive a pro rata credit for any CDSC paid in
connection with the sale.

INVOLUNTARY SALES. The Fund reserves the right, on sixty days' notice, to sell
the shares of any shareholder (other than shares held in an IRA or 403(b)
Custodial Account) whose shares, due to sales by the shareholder, have a value
below $100, or in the case of an account opened through EasyInvest,SM if after
12 months the shareholder has invested less than $1,000 in the account.

However, before the Fund sells your shares in this manner, we will notify you
and allow you sixty days to make an additional investment in an amount that
will increase the value of your account to at least the required amount before
the sale is processed. No CDSC will be imposed on any involuntary sale.

MARGIN ACCOUNTS. Certain restrictions may apply to Fund shares pledged in
margin accounts with Dean Witter Reynolds or another authorized broker-dealer
of Fund shares. If you hold Fund shares in this manner, please contact your
Morgan Stanley Dean Witter Financial Advisor or other authorized financial
representative for more details.

[GRAPHIC OMITTED]

[sidebar]
TARGETED DIVIDENDS(SM)
You may select to have your Fund distributions automatically invested in other
Classes of Fund shares or Classes of another Morgan Stanley Dean Witter Fund
that you own. Contact your Morgan Stanley Dean Witter Financial Advisor for
further information about this service.
[end sidebar]

DISTRIBUTIONS
- ----------------------------------------
The Fund passes substantially all of its earnings from income and capital gains
along to its investors as "distributions." The Fund earns interest from
fixed-income

investments. These amounts are passed along to Fund shareholders as "income
dividend distributions." The Fund realizes capital gains whenever it sells
securities for a higher price than it paid for them. These amounts may be
passed along as "capital gain distributions."

The Fund declares income dividends separately for each Class. Distributions
paid on Class A and Class D shares will be higher than for Class B and Class C
because distribution fees that Class B and Class C pay are higher. Normally,
income dividends are declared on each day the New York Stock Exchange is open
for business, and distributed monthly, and capital gains are distributed at
least annually in December. The Fund, however, may retain and reinvest any
long-term capital gains. The Fund may at times make payments from sources other
than income or capital gains that represent a return of a portion of your
investment.

Distributions are reinvested automatically in additional shares of the same
Class and automatically credited to your account, unless you request in writing
that all distributions be paid in cash. If you elect the cash option,
processing of your dividend checks begins immediately following the monthly
payment date, and the Fund will mail a monthly dividend check to you normally
during the first seven days of the following month. No interest will accrue on
uncashed checks. If you wish to change how your distributions are paid, your
request should be received by the Fund's transfer agent, Morgan Stanley Dean
Witter Trust FSB, at least five business days prior to the record date of the
distributions.

<PAGE>

[GRAPHIC OMITTED]

TAX CONSEQUENCES
- ----------------------------------------------
As with any investment, you should consider how your Fund investment will be
taxed. The tax information in this Prospectus is provided as general
information. You should consult your own tax professional about the tax
consequences of an investment in the Fund.

You need to be aware of the possible tax consequences when:

o The Fund makes distributions; and

o You sell Fund shares, including an exchange to another Morgan Stanley Dean
Witter Fund.

TAXES ON DISTRIBUTIONS. Your income dividend distributions are normally exempt
from federal income taxes -- to the extent they are derived from municipal
obligations. Income derived from other portfolio securities may be subject to
federal, state and/or local income taxes.

Income derived from some municipal securities is subject to the federal
"alternative minimum tax." Certain tax-exempt securities whose proceeds are
used to finance private, for-profit organizations are subject to this special
tax system that ensures that individuals pay at least some federal taxes.
Although interest on these securities is generally exempt from federal income
tax, some taxpayers who have many tax deductions or exemptions nevertheless may
have to pay tax on the income.

If you borrow money to purchase shares of the Fund, the interest on the
borrowed money is generally not deductible for personal income tax purposes.

If the Fund makes any capital gain distributions, those distributions will
normally be subject to federal income tax when they are paid, whether you take
them in cash or reinvest them in the Fund shares. Any short-term capital gain
distributions are taxable to you as long-term capital gains, no matter how long
you have owned shares in the Fund.

The Fund may derive gains in part from municipal obligations the Fund purchased
below their principal or face values. All, or a portion, of these gains may be
taxable to you as ordinary income rather than capital gains.

TAXES ON SALES. Your sale of Fund shares normally is subject to federal and
state income tax and may result in a taxable gain or loss to you. A sale also
may be subject to local income tax. Your exchange of Fund shares for shares of
another Morgan Stanley Dean Witter Fund is treated for tax purposes like a sale
of your original shares and a purchase of your new shares. Thus, the exchange
may, like a sale, result in a taxable gain or loss to you and will give you a
new tax basis for your new shares.

When you open your Fund account, you should provide your social security or tax
identification number on your investment application. By providing this
information, you will avoid being subject to a federal backup withholding tax
of 31% on taxable distributions and redemption proceeds. Any withheld amount
would be sent to the IRS as an advance tax payment.

<PAGE>

[GRAPHIC OMITTED]

SHARE CLASS ARRANGEMENTS
- --------------------------------------------------------
The Fund offers several Classes of shares having different distribution
arrangements designed to provide you with different purchase options according
to your investment needs. Your Morgan Stanley Dean Witter Financial Advisor or
other authorized financial representative can help you decide which Class may
be appropriate for you.

The general public is offered three Classes: Class A shares, Class B shares and
Class C shares, which differ principally in terms of sales charges and ongoing
expenses. A fourth Class, Class D shares, is offered only to a limited category
of investors. Shares that you acquire through reinvested distributions will not
be subject to any front-end sales charge or CDSC -- contingent deferred sales
charge. Sales personnel may receive different compensation for selling each
Class of shares. The sales charges applicable to each Class provide for the
distribution financing of shares of that Class.

The chart below compares the sales charge and annual 12b-1 fee applicable to
each Class:

<TABLE>
<CAPTION>
CLASS SALES CHARGE ANNUAL 12b-1 FEE
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
A Maximum 4.25% initial sales charge reduced for purchases of
$25,000 or more; shares sold without an initial sales charge are
enerally subject to a 1.0% CDSC during the first year 0.25%
- ---------------------------------------------------------------------------------------------
B Maximum 5.0% CDSC during the first year decreasing to 0%
after six years 0.60%
- ---------------------------------------------------------------------------------------------
C 1.0% CDSC during the first year 0.70%
- ---------------------------------------------------------------------------------------------
D None None
- ---------------------------------------------------------------------------------------------
</TABLE>

[sidebar]
FRONT-END SALES
CHARGE OR FSC

An initial sales charge you pay when purchasing Class A shares that is based on
a percentage of the offering price. The percentage declines based upon the
dollar value of Class A shares you purchase. We offer three ways to reduce your
Class A sales charges -- the Combined Purchase Privilege, Right of Accumulation
and Letter of Intent.
[end sidebar]

CLASS A SHARES Class A shares are sold at net asset value plus an initial
sales charge of up to 4.25%. The initial sales charge is reduced for purchases
of $25,000 or more according to the schedule below. Investments of $1 million
or more are not subject to an initial sales charge, but are generally subject
to a contingent deferred sales charge, or CDSC, of 1.0% on sales made within
one year after the last day of the month of purchase. The CDSC will be assessed
in the same manner and with the same CDSC waivers as with Class B shares. Class
A shares are also subject to a distribution (12b-1) fee of up to 0.25% of the
average daily net assets of the Class.

The offering price of Class A shares includes a sales charge (expressed as a
percentage of the offering price) on a single transaction as shown in the
following table:

<TABLE>
<CAPTION>
FRONT-END SALES CHARGE
-------------------------------------------------
PERCENTAGE OF APPROXIMATE PERCENTAGE
AMOUNT OF SINGLE TRANSACTION PUBLIC OFFERING PRICE OF AMOUNT INVESTED
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Less than $25,000 4.25% 4.44%
- ----------------------------------------------------------------------------------------
$25,000 but less than $50,000 4.00% 4.17%
- ----------------------------------------------------------------------------------------
$50,000 but less than $100,000 3.50% 3.63%
- ----------------------------------------------------------------------------------------
$100,000 but less than $250,000 2.75% 2.83%
- ----------------------------------------------------------------------------------------
$250,000 but less than $1 million 1.75% 1.78%
- ----------------------------------------------------------------------------------------
$1 million and over 0 0
- ----------------------------------------------------------------------------------------
</TABLE>

The reduced sales charge schedule is applicable to purchases of Class A shares
in a single transaction by:

o A single account (including an individual, trust or fiduciary account).

<PAGE>

o Family member accounts (limited to husband, wife and children under the age
of 21).
o Pension, profit sharing or other employee benefit plans of companies and
their affiliates.
o Tax-exempt organizations.
o Groups organized for a purpose other than to buy mutual fund shares.

COMBINED PURCHASE PRIVILEGE. You also will have the benefit of reduced sales
charges by combining purchases of Class A shares of the Fund in a single
transaction with purchases of Class A shares of other Multi-Class Funds and
shares of FSC Funds.

RIGHT OF ACCUMULATION. You also may benefit from a reduction of sales charges
if the cumulative net asset value of Class A shares of the Fund purchased in a
single transaction, together with shares of other Funds you currently own which
were previously purchased at a price including a front-end sales charge
(including shares acquired through reinvestment of distributions), amounts to
$25,000 or more. Also, if you have a cumulative net asset value of all your
Class A and Class D shares equal to at least $5 million (or $25 million for
certain employee benefit plans), you are eligible to purchase Class D shares of
any Fund subject to the Fund's minimum initial investment requirement.

You must notify your Morgan Stanley Dean Witter Financial Advisor or other
authorized financial representative (or Morgan Stanley Dean Witter Trust FSB if
you purchase directly through the Fund), at the time a purchase order is
placed, that the purchase qualifies for the reduced charge under the Right of
Accumulation. Similar notification must be made in writing when an order is
placed by mail. The reduced sales charge will not be granted if: (i)
notification is not furnished at the time of the order; or (ii) a review of the
records of Dean Witter Reynolds or other authorized dealer of Fund shares or
the Fund's transfer agent does not confirm your represented holdings.

LETTER OF INTENT. The schedule of reduced sales charges for larger purchases
also will be available to you if you enter into a written "letter of intent." A
letter of intent provides for the purchase of Class A shares of the Fund or
other Multi-Class Funds and/or shares of FSC Funds within a thirteen-month
period. The initial purchase under a letter of intent must be at least 5% of
the stated investment goal. To determine the applicable sales charge reduction,
you may also include: (1) the cost of shares of other Morgan Stanley Dean
Witter Funds which were previously purchased at a price including a front-end
sales charge during the 90-day period prior to the distributor receiving the
letter of intent, and (2) the cost of shares of other Funds you currently own
acquired in exchange for shares of Funds purchased during that period at a
price including a front-end sales charge. You can obtain a letter of intent by
contacting
your Morgan Stanley Dean Witter Financial Advisor or other authorized financial
representative, or by calling (800) 869-NEWS. If you do not achieve the stated
investment goal within the thirteen-month period, you are required to pay the
difference between the sales charges otherwise applicable and sales charges
actually paid.

OTHER FRONT-END SALES CHARGE WAIVERS. In addition to investments of $1 million
or more, your purchase of Class A shares is not subject to a front-end sales
charge (or a CDSC upon sale) if your account qualifies under one of the
following categories:

<PAGE>

o A trust for which Morgan Stanley Dean Witter Trust FSB provides discretionary
trustee services.

o Persons participating in a fee-based investment program (subject to all of
its terms and conditions, including mandatory sale or transfer restrictions
on termination) approved by the Fund's distributor pursuant to which they
pay an asset-based fee for investment advisory, administrative and/or
brokerage services.

o A client of a Morgan Stanley Dean Witter Financial Advisor who joined us from
another investment firm within six months prior to the date of purchase of
Fund shares, and you used the proceeds from the sale of shares of a
proprietary mutual fund of that Financial Advisor's previous firm that
imposed either a front-end or deferred sales charge to purchase Class A
shares, provided that: (1) you sold the shares not more than 60 days prior
to the purchase of fund shares, and (2) the sale proceeds were maintained in
the interim in cash or a money market fund.

o Current or retired Directors/Trustees of the Morgan Stanley Dean Witter
Funds, such persons' spouses and children under the age of 21, and trust
accounts for which any of such persons is a beneficiary.

o Current or retired directors, officers and employees of Morgan Stanley Dean
Witter & Co. and any of its subsidiaries, such persons' spouses and children
under the age of 21, and trust accounts for which any of such persons is a
beneficiary.

[sidebar]
CONTINGENT DEFERRED SALES CHARGE OR CDSC
A fee you pay when you sell shares of certain Morgan Stanley Dean Witter Funds
purchased without an initial sales charge. This fee declines the longer you
hold your shares as set forth in the table. [end sidebar]

CLASS B SHARES Class B shares are offered at net asset value with no initial
sales charge but are subject to a contingent deferred sales charge, or CDSC, as
set forth in the table below. For the purpose of calculating the CDSC, shares
are deemed to have been purchased on the last day of the month during which
they were purchased.

<TABLE>
<CAPTION>
YEAR SINCE PURCHASE PAYMENT MADE CDSC AS A PERCENTAGE OF AMOUNT REDEEMED
- --------------------------------------------------------------------------
<S> <C>
First 5.0%
- --------------------------------------------------------------------------
Second 4.0%
- --------------------------------------------------------------------------
Third 3.0%
- --------------------------------------------------------------------------
Fourth 2.0%
- --------------------------------------------------------------------------
Fifth 2.0%
- --------------------------------------------------------------------------
Sixth 1.0%
- --------------------------------------------------------------------------
Seventh and thereafter None
- --------------------------------------------------------------------------
</TABLE>

Each time you place an order to sell or exchange shares, shares with no CDSC
will be sold or exchanged first, then shares with the lowest CDSC will be sold
or exchanged next. For any shares subject to a CDSC, the CDSC will be assessed
on an amount equal to the lesser of the current market value or the cost of the
shares being sold. A lower CDSC schedule applies in most cases to shares of the
Fund acquired in connection with the reorganization of Dean Witter National
Municipal and the Fund on November 7, 1997.

CDSC WAIVERS. A CDSC, if otherwise applicable, will be waived in the case of:

o Sales of shares held at the time you die or become disabled (within the
definition in Section 72(m)(7) of the Internal Revenue Code which relates to
the ability to engage in gainful employment), if the shares are: (i)
registered either in your name (not a

<PAGE>

trust) or in the names of you and your spouse as joint tenants with right of
survivorship; or (ii) held in a qualified corporate or self-employed
retirement plan, IRA or 403(b) Custodial Account, provided in either case that
the sale is requested within one year of your death or initial determination
of disability.

o Sales in connection with the following retirement plan "distributions":
(i) lump-sum or other distributions from a qualified corporate or
self-employed retirement plan following retirement (or, in the case of a "key
employee" of a "top heavy" plan, following attainment of age 59 1/2); (ii)
distributions from an IRA or 403(b) Custodial Account following attainment of
age 59 1/2; or (iii) a tax-free return of an excess IRA contribution (a
"distribution" does not include a direct transfer of IRA, 403(b) Custodial
Account or retirement plan assets to a successor custodian or trustee).

o Sales of shares in connection with the Systematic Withdrawal Plan of up to
12% annually of the value of each Fund from which plan sales are made. The
percentage is determined on the date you establish the Systematic Withdrawal
Plan and based on the next calculated share price. You may have this CDSC
waiver applied in amounts up to 1% per month, 3% per quarter, 6%
semi-annually or 12% annually. Shares with no CDSC will be sold first,
followed by those with the lowest CDSC. As such, the waiver benefit will be
reduced by the amount of your shares that are not subject to a CDSC. If you
suspend your participation in the plan, you may later resume plan payments
without requiring a new determination of the account value for the 12% CDSC
waiver.

All waivers will be granted only following the Distributor receiving
confirmation of your entitlement. If you believe you are eligible for a CDSC
waiver, please contact your Financial Advisor or call (800) 869-NEWS.

DISTRIBUTION FEE. Class B shares are also subject to an annual 12b-1 fee of
0.60% of the average daily net assets of Class B.

CONVERSION FEATURE. After ten (10) years, Class B shares will convert
automatically to Class A shares of the Fund with no initial sales charge. The
ten year period runs from the last day of the month in which the shares were
purchased, or in the case of Class B shares acquired through an exchange, from
the last day of the month in which the original Class B shares were purchased;
the shares will convert to Class A shares based on their relative net asset
values in the month following the ten year period. At the same time, an equal
proportion of Class B shares acquired through automatically reinvested
distributions will convert to Class A shares on the same basis. (Class B shares
held before May 1, 1997, however, will convert to Class A shares in May 2007.)

Currently, the Class B share conversion is not a taxable event; the conversion
feature may be cancelled if it is deemed a taxable event in the future by the
Internal Revenue Service.

If you exchange your Class B shares for shares of a Money Market Fund, No-Load
Fund or Short-Term U.S. Treasury Trust, the holding period for conversion is
frozen as of the last day of the month of the exchange and resumes on the last
day of the month you exchange back into Class B shares.

<PAGE>

EXCHANGING SHARES SUBJECT TO A CDSC. There are special considerations when you
exchange Fund shares that are subject to a CDSC. When determining the length of
time you held the shares and the corresponding CDSC rate, any period (starting
at the end of the month) during which you held shares of a fund that does not
charge a CDSC will not be counted. Thus, in effect the "holding period" for
purposes of calculating the CDSC is frozen upon exchanging into a fund that
does not charge a CDSC.

For example, if you held Class B shares of the Fund for one year, exchanged to
Class B of another Morgan Stanley Dean Witter Multi-Class Fund for another
year, then sold your shares, a CDSC rate of 4% would be imposed on the shares
based on a two year holding period -- one year for each Fund. However, if you
had exchanged the shares of the Fund for a Money Market Fund (which does not
charge a CDSC) instead of the Multi-Class Fund, then sold your shares, a CDSC
rate of 5% would be imposed on the shares based on a one year holding period.
The one year in the Money Market Fund would not be counted. Nevertheless, if
shares subject to a CDSC are exchanged for a Fund that does not charge a CDSC,
you will receive a credit when you sell the shares equal to the distribution
(12b-1) fees, if any, you paid on those shares while in that Fund up to the
amount of any applicable CDSC.

In addition, shares that are exchanged into or from a Morgan Stanley Dean
Witter Fund subject to a higher CDSC rate will be subject to the higher rate,
even if the shares are re-exchanged into a Fund with a lower CDSC rate.

CLASS C SHARES Class C shares are sold at net asset value with no initial
sales charge but are subject to a CDSC of 1.0% on sales made within one year
after the last day of the month of purchase. The CDSC will be assessed in the
same manner and with the same CDSC waivers as with Class B shares.

DISTRIBUTION FEE. Class C shares are subject to an annual distribution (12b-1)
fee of up to 0.70% of the average daily net assets of that Class. The Class C
shares' distribution fee may cause that Class to have higher expenses and pay
lower dividends than Class A or Class D shares. Unlike Class B shares, Class C
shares have no conversion feature and, accordingly, an investor that purchases
Class C shares may be subject to distribution (12b-1) fees applicable to Class
C shares for an indefinite period.

CLASS D SHARES Class D shares are offered without any sales charge on
purchases or sales and without any distribution (12b-1) fee. Class D shares are
offered only to investors meeting an initial investment minimum of $5 million
and the following investor categories:

o Investors participating in the Investment Manager's mutual fund asset
allocation program (subject to all of its terms and conditions, including
mandatory sale or transfer restrictions on termination) pursuant to which
they pay an asset-based fee.

o Certain unit investment trusts sponsored by Dean Witter Reynolds.

<PAGE>

o Certain other open-end investment companies whose shares are distributed by
the Fund's distributor.

o Investors who were shareholders of the Dean Witter Retirement Series on
September 11, 1998 for additional purchases for their former Dean Witter
Retirement Series accounts.

MEETING CLASS D ELIGIBILITY MINIMUMS. To meet the $5 million initial investment
to qualify to purchase Class D shares you may combine: (1) purchases in a
single transaction of Class D shares of the Fund and other Morgan Stanley Dean
Witter Multi-Class Funds and/or (2) previous purchases of Class A and Class D
shares of Multi-Class Funds and shares of FSC Funds you currently own, along
with shares of Morgan Stanley Dean Witter Funds you currently own that you
acquired in exchange for those shares.

NO SALES CHARGES FOR REINVESTED CASH DISTRIBUTIONS. If you receive a cash
payment representing an income dividend or capital gain and you reinvest that
amount in the applicable Class of shares by returning the check within 30 days
of the payment date, the purchased shares would not be subject to an initial
sales charge or CDSC.

PLAN OF DISTRIBUTION (RULE 12B-1 FEES) The Fund has adopted a Plan
of Distribution in accordance with Rule 12b-1 under the Investment Company Act
of 1940 with respect to the distribution of Class A, Class B and Class C
shares. The Plan allows the Fund to pay distribution fees for the sale and
distribution of these shares. It also allows the Fund to pay for services to
shareholders of Class A, Class B and Class C shares. Because these fees are
paid out of the Fund's assets on an ongoing basis, over time these fees will
increase the cost of your investment in these Classes and may cost you more
than paying other types of sales charges.

<PAGE>

FINANCIAL HIGHLIGHTS

The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 fiscal years of the Fund. Certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate an investor would have earned or lost
on an investment in the Fund (assuming reinvestment of all dividends and
distributions).

This information has been audited by PricewaterhouseCoopers LLP, whose report,
along with the Fund's financial statements, is included in the annual report,
which is available upon request.

<TABLE>
<CAPTION>
CLASS D
- ---------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 1998 1997* 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
- ---------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $12.08 $11.77 $12.09 $11.01 $12.41
- ---------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.62 0.63 0.65 0.67 0.70
Net realized and unrealized gain (loss) 0.10 0.36 (0.24) 1.19 (1.37)
------ ------ ------ ------ ------
Total income (loss) from investment operations 0.72 0.99 0.41 1.86 (0.67)
- ---------------------------------------------------------------------------------------------------------------
Less dividends and distributions from:
Net investment income (0.62) (0.63) (0.65) (0.67) (0.70)
Net realized gain (0.17) (0.05) (0.08) (0.11) (0.03)
------ ------ ------ ------ ------
Total dividends and distributions (0.79) (0.68) (0.73) (0.78) (0.73)
- ---------------------------------------------------------------------------------------------------------------
Net asset value, end of period 12.01 12.08 11.77 12.09 11.01
- ---------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ 6.11% 8.73% 3.61% 17.37% (5.55)%
- ---------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------------------------------------------------------------
Expenses 0.50%(1)(2) 0.49% 0.48% 0.48% 0.47%
- ---------------------------------------------------------------------------------------------------------------
Net investment income 5.12%(2) 5.34% 5.52% 5.76% 6.02%
- ---------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------------------
Net assets, end of period, in millions $1,023 $1,097 $1,190 $1,325 $1,295
- ---------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 15% 16% 18% 21% 16%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>

* Prior to July 28, 1997, the Fund issued one class of shares. All shares
of the Fund held prior to that date have been designated Class D shares.

+ Calculated based on the net asset value as of the last business day of
the period.

(1) Does not reflect the effect of expense offset of 0.01%.

(2) Reflects overall Fund ratios for investment income and non-class specific
expenses.

21
<PAGE>

CLASS A

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD JULY 28, 1997*
SELECTED PER-SHARE DATA DECEMBER 31, 1998 THROUGH DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $12.09 $12.00
- ------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.59 0.25
Net realized and unrealized gain 0.10 0.14
-------- ---------
Total income from investment operations 0.69 0.39
- ------------------------------------------------------------------------------------------------
Less dividends and distributions from:
Net investment income (0.59) (0.25)
Net realized gain (0.17) (0.05)
-------- ---------
Total dividends and distributions (0.76) (0.30)
- ------------------------------------------------------------------------------------------------
Net asset value, end of period $12.02 $12.09
- ------------------------------------------------------------------------------------------------
TOTAL RETURN+ 5.86% 3.31%(1)
- ------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------------------------
Expenses 0.74%(4)(5) 0.76%(2)(3)
- ------------------------------------------------------------------------------------------------
Net investment income 4.88%(5) 4.96%(2)
- ------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $15,041 $3,857
- ------------------------------------------------------------------------------------------------
Portfolio turnover rate 15% 16%
- ------------------------------------------------------------------------------------------------
</TABLE>

CLASS B
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
SELECTED PER-SHARE DATA
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $12.14 $12.00
- ------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.55 0.23
Net realized and unrealized gain 0.10 0.19
-------- --------
Total income from investment operations 0.65 0.42
- ------------------------------------------------------------------------------------------------
Less dividends and distributions from:
Net investment income (0.55) (0.23)
Net realized gain (0.17) (0.05)
-------- --------
Total dividends and distributions (0.72) (0.28)
- ------------------------------------------------------------------------------------------------
Net asset value, end of period 12.07 12.14
- ------------------------------------------------------------------------------------------------
TOTAL RETURN+ 5.47% 3.57%(1)
- ------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------------------------
Expenses 1.10%(4)(5) 1.14%(2)(3)
- ------------------------------------------------------------------------------------------------
Net investment income 4.52%(5) 4.87%(2)
- ------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $132,303 $95,573
- ------------------------------------------------------------------------------------------------
Portfolio turnover rate 15% 16%
- ------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>
* The date shares were first issued.

+ 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) Does not reflect the effect of expense offset of 0.02%.

(4) Does not reflect the effect of expense offset of 0.01%.

(5) Reflects overall Fund ratios for investment income and non-class specific
expenses.

22
<PAGE>

CLASS C

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD JULY 28, 1997*
SELECTED PER-SHARE DATA DECEMBER 31, 1998 THROUGH DECEMBER 31, 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $12.11 $12.00
- --------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.53 0.23
Net realized and unrealized gain 0.10 0.16
--------- ---------
Total income from investment operations 0.63 0.39
- --------------------------------------------------------------------------------------------------
Less dividends and distributions from:
Net investment income (0.53) (0.23)
Net realized gain (0.17) (0.05)
--------- ---------
Total dividends and distributions (0.70) (0.28)
- --------------------------------------------------------------------------------------------------
Net asset value, end of period $12.04 $12.11
- --------------------------------------------------------------------------------------------------
TOTAL RETURN+ 5.36% 3.28%(1)
- --------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------------
Expenses 1.20%(4)(5) 1.20%(2)(3)
- --------------------------------------------------------------------------------------------------
Net investment income 4.42%(5) 4.41%(2)
- --------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $7,599 $2,953
- --------------------------------------------------------------------------------------------------
Portfolio turnover rate 15% 16%
- --------------------------------------------------------------------------------------------------
</TABLE>

* The date shares were first issued.

+ 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) Does not reflect the effect of expense offset of 0.02%.

(4) Does not reflect the effect of expense offset of 0.01%.

(5) Reflects overall Fund ratios for investment income and non-class specific
expenses.

23
<PAGE>

NOTES

------------------------------------------------------------------------

<PAGE>

MORGAN STANLEY DEAN WITTER
FAMILY OF FUNDS
The Morgan Stanley Dean Witter Family of Funds
offers investors a wide range of investment choices.
Come on in and meet the family!

- --------------------------------------------------------------------------------

GROWTH FUNDS

Aggressive Equity Fund

American Opportunities Fund

Capital Growth Securities

Developing Growth Securities

Equity Fund

Growth Fund

Market Leader Trust

Mid-Cap Growth Fund

Special Value Fund

Value Fund

THEME FUNDS

Financial Services Trust

Health Sciences Trust

Information Fund

Natural Resource Development Securities

Precious Metals and Minerals Trust

GLOBAL/INTERNATIONAL FUNDS

Competitive Edge Fund - "Best Ideas" Portfolio

European Growth Fund

Fund of Funds - International Portfolio

Global Dividend Growth Securities

Global Utilities Fund

International SmallCap Fund

Japan Fund

Pacific Growth Fund

- --------------------------------------------------------------------------------

GROWTH & INCOME FUNDS

Balanced Growth Fund

Balanced Income Fund

Convertible Securities Trust

Dividend Growth Securities

Fund of Funds - Domestic Portfolio

Income Builder Fund

Mid-Cap Dividend Growth Securities

S&P 500 Index Fund

S&P 500 Select Fund

Strategist Fund

Value/Added Market Series/Equity Portfolio

THEME FUNDS

Global Utilities Fund

Real Estate Fund

Utilities Fund

- --------------------------------------------------------------------------------

INCOME FUNDS

GOVERNMENT INCOME FUNDS

Federal Securities Trust

Short-Term U.S. Treasury Trust

U.S. Government Securities Trust

DIVERSIFIED INCOME FUNDS

Diversified Income Trust

CORPORATE INCOME FUNDS

High Yield Securities

Intermediate Income Securities

Short-Term Bond Fund(NL)

GLOBAL INCOME FUNDS

World Wide Income Trust

TAX-FREE INCOME FUNDS

California Tax-Free Income Fund

Hawaii Municipal Trust(FSC)

Limited Term Municipal Trust(NL)

Multi-State Municipal Series Trust(FSC)

New York Tax-Free Income Fund

Tax-Exempt Securities Trust

- --------------------------------------------------------------------------------

MONEY MARKET FUNDS

TAXABLE MONEY MARKET FUNDS

Liquid Asset Fund(MM)

U.S. Government Money Market Trust(MM)

TAX-FREE MONEY MARKET FUNDS

California Tax-Free Daily Income Trust(MM)

New York Municipal Money Market Trust(MM)

Tax-Free Daily Income Trust(MM)

There may be funds created after this Prospectus was published. Please consult
the inside front cover of a new Fund's Prospectus for its designation, e.g.,
Multi-Class Fund or Money Market Fund.

Unless otherwise noted, each listed Morgan Stanley Dean Witter Fund, except for
Short-Term U.S. Treasury Trust, is a Multi-Class Fund. A Multi-Class Fund is a
mutual fund offering multiple Classes of shares. The other types of Funds are:
NL -- No-Load (Mutual) Fund; MM -- Money Market Fund; FSC -- A mutual fund sold
with a front-end sales charge and a distribution (12b-1) fee.

<PAGE>

MORGAN STANLEY DEAN WITTER
TAX-EXEMPT SECURITIES TRUST

[sidebar]
TICKER SYMBOLS:
Class A: TAXAX
- ------------------
Class B: TAXBX
- ------------------
Class C: TAXCX
- ------------------
Class D: TAXDX
- ------------------
[end sidebar]

Additional information about the Fund's investments is available in the Fund's
Annual and Semi-Annual Reports to Shareholders. In the Fund's Annual Report,
you will find a discussion of the market conditions and investment strategies
that significantly affected the Fund's performance during its last fiscal year.
The Fund's Statement of Additional Information also provides additional
information about the Fund. The Statement of Additional Information is
incorporated herein by reference (legally is part of this Prospectus). For a
free copy of any of these documents, to request other information about the
Fund, or to make shareholder inquiries, please call:

(800) 869-NEWS

You also may obtain information about the Fund by calling your Morgan Stanley
Dean Witter Financial Advisor or by visiting our Internet site at:

WWW.DEANWITTER.COM/FUNDS

Information about the Fund (including the Statement of Additional Information)
can be viewed and copied at the Securities and Exchange Commission's Public
Reference Room in Washington, DC. Information about the Reference Room's
operations may be obtained by calling the SEC at (800) SEC-0330. Reports and
other information about the Fund are available on the SEC's Internet site
(www.sec.gov), and copies of this information may be obtained, upon payment of
a duplicating fee, by writing the Public Reference Section of the SEC,
Washington, DC 20549-6009.

(INVESTMENT COMPANY ACT FILE NO. 811-2979)

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION
MORGAN STANLEY DEAN WITTER
TAX-EXEMPT SECURITIES TRUST
MAY 1, 1999

- --------------------------------------------------------------------------------
This Statement of Additional Information is not a Prospectus. The
Prospectus (dated May 1, 1999) for the Morgan Stanley Dean Witter Tax-Exempt
Securities Trust may be obtained without charge from the Fund at its address or
telephone number listed below or from Dean Witter Reynolds at any of its branch
offices.

Morgan Stanley Dean Witter Tax-Exempt Securities Trust
Two World Trade Center
New York, New York 10048
(800) 869-NEWS
<PAGE>

TABLE OF CONTENTS
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
I. Fund History ................................................................. 4
II. Description of the Fund and Its Investments and Risks ....................... 4
A. Classification .......................................................... 4
B. Investment Strategies and Risks ......................................... 4
C. Fund Policies/Investment Restrictions ................................... 9
III. Management of the Fund ....................................................... 11
A. Board of Trustees ....................................................... 11
B. Management Information .................................................. 11
C. Compensation ............................................................ 16
IV. Control Persons and Principal Holders of Securities .......................... 17
V. Investment Management and Other Services ..................................... 18
A. Investment Manager ...................................................... 18
B. Principal Underwriter ................................................... 18
C. Services Provided by the Investment Manager and Fund Expenses Paid by
Third Parties .......................................................... 19
D. Dealer Reallowances ..................................................... 19
E. Rule 12b-1 Plan ......................................................... 20
F. Other Service Providers ................................................. 23
VI. Brokerage Allocation and Other Practices ..................................... 24
A. Brokerage Transactions .................................................. 24
B. Commissions ............................................................. 24
C. Brokerage Selection ..................................................... 25
D. Directed Brokerage ...................................................... 25
E. Regular Broker-Dealers .................................................. 25
VII. Capital Stock and Other Securities ........................................... 26
VIII. Purchase, Redemption and Pricing of Shares ................................... 26
A. Purchase/Redemption of Shares ........................................... 26
B. Offering Price .......................................................... 27
IX. Taxation of the Fund and Shareholders ........................................ 28
X. Underwriters ................................................................. 30
XI. Calculation of Performance Data .............................................. 30
XII. Financial Statements ......................................................... 32
XIII. Appendix ..................................................................... 54
</TABLE>

2
<PAGE>

GLOSSARY OF SELECTED DEFINED TERMS

The terms defined in this glossary are frequently used in this Statement
of Additional Information (other terms used occasionally are defined in the
text of the document).

"Custodian" -- The Bank of New York is the Custodian of the Fund's assets.

"Dean Witter Reynolds" -- Dean Witter Reynolds Inc., a wholly-owned
broker-dealer subsidiary of MSDW.

"Distributor" -- Morgan Stanley Dean Witter Distributors Inc., a
wholly-owned broker-dealer subsidiary of MSDW.

"Financial Advisors" -- Morgan Stanley Dean Witter authorized financial
services representatives.

"Fund" -- Morgan Stanley Dean Witter Tax-Exempt Securities Trust, a
registered open-end investment company.

"Investment Manager" -- Morgan Stanley Dean Witter Advisors Inc., a
wholly-owned investment advisor subsidiary of MSDW.

"Independent Trustees" -- Trustees who are not "interested persons" (as
defined by the Investment Company Act) of the Fund.

"Morgan Stanley & Co." -- Morgan Stanley & Co. Incorporated, a
wholly-owned broker-dealer subsidiary of MSDW.

"Morgan Stanley Dean Witter Funds" -- Registered investment companies (i)
for which the Investment Manager serves as the investment advisor and (ii) that
hold themselves out to investors as related companies for investment and
investor services.

"MSDW" -- Morgan Stanley Dean Witter & Co., a preeminent global financial
services firm.

"MSDW Services Company" -- Morgan Stanley Dean Witter Services Company
Inc., a wholly-owned fund services subsidiary of the Investment Manager.

"Transfer Agent" -- Morgan Stanley Dean Witter Trust FSB, a wholly-owned
transfer agent subsidiary of MSDW.

"Trustees" -- The Board of Trustees of the Fund.

3
<PAGE>

I. FUND HISTORY
- --------------------------------------------------------------------------------

The Fund was incorporated in the State of Maryland on December 31, 1979
under the name InterCapital Tax-Exempt Securities Inc. On March 17, 1983, the
Fund's shareholders approved a change in the Fund's name, effective March 21,
1983, to Dean Witter Tax-Exempt Securities Inc. On April 30, 1987, the Fund
reorganized as a Massachusetts business trust, with the name Dean Witter
Tax-Exempt Securities Trust. Effective June 22, 1998, the Fund's name was
changed to Morgan Stanley Dean Witter Tax-Exempt Securities Trust.

II. DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
- --------------------------------------------------------------------------------

A. CLASSIFICATION

The Fund is an open-end, diversified management investment company whose
investment objective is to provide a high level of current income exempt from
federal income tax, consistent with the preservation of capital.

B. INVESTMENT STRATEGIES AND RISKS

The following discussion of the Fund's investment strategies and risks
should be read with the sections of the Fund's Prospectus titled "Principal
Investment Strategies," "Principal Risks," "Additional Investment Strategy
Information," and "Additional Risk Information."

TAXABLE SECURITIES. The Fund may invest up to 20% of its total assets, or
more than 20% of its total assets when assuming a temporary defensive position,
in taxable money market instruments or in tax-exempt securities subject to the
federal alternative minimum tax for individual shareholders. Investments in
taxable money market instruments would generally be made under any one of the
following circumstances: (a) pending investment of proceeds of the sale of the
Fund's shares or of portfolio securities, (b) pending settlement of purchases
of portfolio securities and (c) to maintain liquidity for the purpose of
meeting anticipated redemptions.

The types of taxable money market instruments in which the Fund may invest
are limited to the following short-term fixed-income securities (maturing in
one year or less from the time of purchase): (i) obligations of the United
States Government, its agencies, instrumentalities or authorities; (ii)
commercial paper rated P-1 by Moody's Investors Services, Inc. ("Moody's") or
A-1 by Standard & Poor's Corporation ("S&P"); (iii) certificates of deposit of
domestic banks with assets of $1 billion or more; and (iv) repurchase
agreements with respect to portfolio securities.

VARIABLE RATE AND FLOATING RATE OBLIGATIONS. The Fund may invest in
Municipal Bonds and Municipal Notes ("Municipal Obligations") of the type
called variable rate. The interest rate payable on a variable rate obligation
is adjusted either at predesignated periodic intervals or whenever there is a
change in the market rate of interest on which the interest rate payable is
based. Other features may include the right whereby the Fund may demand
prepayment of the principal amount of the obligation prior to its stated
maturity (a "demand feature") and the right of the issue to prepay the
principal amount prior to maturity. The principal benefit of a variable rate
obligation is that the interest rate adjustment minimizes changes in the market
value of the obligation. The principal benefit to the Fund of purchasing
obligations with a demand feature is that liquidity, and the ability of the
Fund to obtain repayment of the full principal amount of an obligation prior to
maturity, is enhanced.

FUTURES CONTRACTS AND OPTIONS ON FUTURES. The Fund may invest in financial
futures contracts ("futures contracts") and related options thereon. These
futures contracts and related options thereon will be used only as a hedge
against anticipated interest rate changes. A futures contract sale creates an
obligation by the Fund, as seller, to deliver the specific type of instrument
called for in the contract at a specified future time for a specified price. A
futures contract purchase would create an obligation by the Fund, as purchaser,
to take delivery of the specific type of financial instrument at a specified
future time at a specified price. The specific securities delivered or taken,
respectively, at settlement date, would not be determined until on or near that
date. The determination would be in accordance with the rules of the exchange
on which the futures contract sale or purchase was effected.

4
<PAGE>

Although the terms of futures contracts specify actual delivery or receipt
of securities, in most instances the contracts are closed out before the
settlement date without the making or taking of delivery of the securities.
Closing out of a futures contract is usually effected by entering into an
offsetting transaction. An offsetting transaction for a futures contract sale
is effected by the Fund entering into a futures contract purchase for the same
aggregate amount of the specific type of financial instrument at the same
delivery date. If the price in the sale exceeds the price in the offsetting
purchase, the Fund is immediately paid the difference and thus realizes a gain.
If the offsetting purchase price exceeds the sale price, the Fund pays the
difference and realizes a loss. Similarly, the closing out of a futures
contract purchase is effected by the Fund entering into a futures contract
sale. If the offsetting sale price exceeds the purchase price, the Fund
realizes a gain, and if the offsetting sale price is less than the purchase
price, the Fund realizes a loss.

Unlike a futures contract, which requires the parties to buy and sell a
security on a set date, an option on a futures contract entitles its holder to
decide on or before a future date whether to enter into such a contract (a long
position in the case of a call option and a short position in the case of a put
option). If the holder decides not to enter into the contract, the premium paid
for the contract is lost. Since the value of the option is fixed as the point
of sale, there are no daily payments of cash to reflect the change in the value
of the underlying contract, as discussed below for futures contracts. The value
of the option change is reflected in the net asset value of the particular Fund
holding the options.

The Fund is required to maintain margin deposits with brokerage firms
through which it effects futures contracts and options thereon. The initial
margin requirements vary according to the type of the underlying security. In
addition, due to current industry practice, daily variations in gains and
losses on open contracts are required to be reflected in cash in the form of
variation margin payments. The Fund may be required to make additional margin
payments during the term of the contract.

Currently, futures contracts can be purchased on debt securities such as
U.S. Treasury Bills and Bonds, U.S. Treasury Notes with maturities between
6 1/2 and 10 years, Certificates of the Government National Mortgage
Association, Bank Certificates of Deposit and on a municipal bond index. The
Fund may invest in interest rate futures contracts covering these types of
financial instruments as well as in new types of contracts that become
available in the future.

Financial futures contracts are traded in an auction environment on the
floors of several Exchanges -- principally, the Chicago Board of Trade, the
Chicago Mercantile Exchange and the New York Futures Exchange. Each Exchange
guarantees performance under contract provisions through a clearing
corporation, a nonprofit organization managed by the Exchange membership which
is also responsible for handling daily accounting of deposits or withdrawals of
margin. A risk in employing futures contracts may correlate imperfectly with
the behavior of the cash prices of the Fund's portfolio securities. The
correlation may be distorted by the fact that the futures market is dominated
by short-term traders seeking to profit from the difference between a contract
or security price objective and a short time period. The correlation may be
further distorted since the futures contracts that are being used to hedge are
not based on municipal obligations.

Another risk is that the Fund's Investment Manager could be incorrect in
its expectations as to the direction or extent of various interest rate
movements or the time span within which the movements take place. For example,
if the Fund sold futures contracts for the sale of securities in anticipation
of an increase in interest rates, and the interest rates went down instead,
causing bond prices to rise, the Fund would lose money on the sale. Put and
call options on financial futures have characteristics similar to Exchange
traded options.

In addition to the risks associated in investing in options on securities,
there are particular risks associated with investing in options on futures. In
particular, the ability to establish and close out positions on such options
will be subject to the development and maintenance of a liquid secondary
market. It is not certain that such a market will develop.

The Fund may not enter into futures contracts or related options thereon
if, immediately thereafter, the amount committed to margin plus the amount paid
for option premiums exceeds 5% of the value of the Fund's total assets. There
is no limit, however, on the percentage of the Fund's assets that may be
committed to hedging transactions.

5
<PAGE>

Municipal Bond Index Futures. The Fund may utilize municipal bond index
futures contracts for hedging purposes. The strategies in employing such
contracts will be similar to that discussed above with respect to financial
futures and options thereon. A municipal bond index is a method of reflecting
in a single number the market value of many different municipal bonds and is
designed to be representative of the municipal bond market generally. The index
fluctuates in response to changes in the market values of the bonds included
within the index. Unlike futures contracts on particular financial instruments,
transactions in futures on a municipal bond index will be settled in cash, if
held until the close of trading in the contract. However, like any other
futures contract, a position in the contract may be closed out by a purchase or
sale of an offsetting contract for the same delivery month prior to expiration
of the contract.

OPTIONS. The Fund may purchase or sell (write) options on debt securities
as a means of achieving additional return or hedging the value of the Fund's
portfolio. The Fund will only buy options listed on national securities
exchanges. The Fund will not purchase options if, as a result, the aggregate
cost of all outstanding options exceeds 10% of the Fund's total assets.

Presently there are no options on tax-exempt securities traded on national
securities exchanges. The Fund will not invest in options on debt securities in
the coming year or until such time as they become available on national
securities exchanges.

A call option is a contract that gives the holder of the option the right
to buy from the writer of the call option, in return for a premium, the
security underlying the option at a specified exercise price at any time during
the term of the option. The writer of the call option has the obligation, upon
exercise of the option, to deliver the underlying security upon payment of the
exercise price during the option period. A put option is a contract that gives
the holder of the option the right to sell to the writer, in return for a
premium, the underlying security at a specified price during the term of the
option. The writer of the put has the obligation to buy the underlying security
upon exercise, at the exercise price during the option period.

The Fund will only write covered call or covered put options listed on
national exchanges. The Fund may not write covered options in an amount
exceeding 20% of the value of the total assets of the Fund. A call option is
"covered" if the Fund owns the underlying security covered by the call or has
an absolute and immediate right to acquire that security or futures contract
without additional cash consideration (or for additional cash consideration
held in a segregated account by its custodian) upon conversion or exchange of
other securities held in its portfolio. A call option is also covered if the
Fund holds a call on the same security or futures contract as the call written,
where the exercise price of the call held is (i) equal to or less than the
exercise price of the call written or (ii) greater than the exercise price of
the call written if the difference is maintained by the Fund in cash, Treasury
bills or other liquid portfolio securities in a segregated account with its
custodian. A put option is "covered" if the Fund maintains cash, Treasury bills
or other liquid portfolio securities with a value equal to the exercise price
in a segregated account with its custodian, or else holds a put on the same
security or futures contract as the put written where the exercise price of the
put held is equal to or greater than the exercise price of the put written.

If the Fund has written an option, it may terminate its obligation by
effecting a closing purchase transaction. This is accomplished by purchasing an
option of the same series as the option previously written. However, once the
Fund has been assigned an exercise notice, the Fund will be unable to effect a
closing purchase transaction. Similarly, if the Fund is the holder of an
option, it may liquidate its position by effecting a closing sale transaction.
This is accomplished by selling an option of the same fund as the option
previously purchased. There can be no assurance that either a closing purchase
or sale transaction on behalf of the Fund can be effected when the Fund so
desires.

The Fund will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; the Fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Since call option prices generally reflect increases in
the price of the underlying security, any loss resulting from the purchase of a
call option may also be wholly or partially offset by unrealized appreciation
of the underlying security. If a put option written by the Fund is exercised,
the Fund may incur a loss equal to

6
<PAGE>

the difference between the exercise price of the option and the sum of the sale
price of the underlying security plus the premiums received from the sale of
the option. Other principal factors affecting the market value of a put or a
call option include supply and demand, interest rates, the current market price
and price volatility of the underlying security and the time remaining until
the expiration date.

An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. Although the Fund will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market
on an exchange will exist for any particular option. In such event, it might
not be possible to effect closing transactions in particular options, so that
the Fund would have to exercise its options in order to realize any profit and
would incur brokerage commission upon the exercise of call options and upon
covered call option writer is unable to effect a closing purchase transaction
in a secondary market, it will not be able to sell the underlying security
until the option expires or it delivers the underlying security upon exercise.

REPURCHASE AGREEMENTS. The Fund may invest in repurchase agreements. When
cash may be available for only a few days, it may be invested by the Fund in
repurchase agreements until such time as it may otherwise be invested or used
for payments of obligations of the Fund. These agreements, which may be viewed
as a type of secured lending by the Fund, typically involve the acquisition by
the Fund of debt securities from a selling financial institution such as a
bank, savings and loan association or broker-dealer. The agreement provides
that the Fund will sell back to the institution, and that the institution will
repurchase, the underlying security serving as collateral at a specified price
and at a fixed time in the future, usually not more than seven days from the
date of purchase. The collateral will be marked-to-market daily to determine
that the value of the collateral, as specified in the agreement, does not
decrease below the purchase price plus accrued interest. If such decrease
occurs, additional collateral will be requested and, when received, added to
the account to maintain full collateralization. The Fund will accrue interest
form the institution until the time when the repurchase is to occur. Although
this date is deemed by the Fund to be the maturity date of a repurchase
agreement, the maturities of securities subject to repurchase agreements are
not subject to any limits.

While repurchase agreements involve certain risks not associated with
direct investments in debt securities, the Fund follows procedures designed to
minimize such risks. These procedures include effecting repurchase transactions
only with large, well-capitalized and well-established financial institutions
whose financial condition will be continually monitored by the Investment
Manager subject to procedures established by the Trustees. In addition, as
described above, the value of the collateral underlying the repurchase
agreement will be at least equal to the repurchase price, including any accrued
interest earned on the repurchase agreement. In the event of a default or
bankruptcy by a selling financial institution, the Fund will seek to liquidate
such collateral. However, the exercising of the Fund's right to liquidate such
collateral could involve certain costs or delays and, to the extent that
proceeds form any sale upon a default of the obligation to repurchase were less
than the repurchase price, the Fund could suffer a loss. It is the current
policy of the Fund not to invest in repurchase agreements that do not mature
within seven days if any such investment, together with any other illiquid
assets held by the Fund, amounts to more than 10% of its net assets.

LENDING PORTFOLIO SECURITIES. The Fund may lend its portfolio securities
to brokers, dealers and other financial institutions, provided that the loans
are callable at any time by the Fund, and are at all times secured by cash or
cash equivalents, which are maintained in a segregated account pursuant to
applicable regulations and that are equal to at least 100% of the market value,
determined daily, of the loaned securities. The advantage of these loans is
that the Fund continues to receive the income on the loaned securities while at
the same time earning interest on the cash amounts deposited as collateral,
which will be invested in short-term obligations. The Fund will not lend more
than 25% of the value of its total assets.

As with any extensions of credit, there are risks of delay in recovery
and, in some cases, even loss of rights in the collateral should the borrower
of the securities fail financially. However, these loans of

7
<PAGE>

portfolio securities will only be made to firms deemed by the Fund's management
to be creditworthy and when the income which can be earned from such loans
justifies the attendant risks. Upon termination of the loan, the borrower is
required to return the securities to the Fund. Any gain or loss in the market
price during the loan period would inure to the Fund.

When voting or consent rights which accompany loaned securities pass to
the borrower, the Fund will follow the policy of calling the loaned securities,
to be delivered within one day after notice, to permit the exercise of the
rights if the matters involved would have a material effect on the Fund's
investment in the loaned securities. The Fund will pay reasonable finder's,
administrative and custodial fees in connection with a loan of its securities.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. From
time to time the Fund may purchase securities on a when-issued or delayed
delivery basis or may purchase or sell securities on a forward commitment
basis. When these transactions are negotiated, the price is fixed at the time
of the commitment, but delivery and payment can take place a month or more
after the date of commitment. While the Fund will only purchase securities on a
when-issued, delayed delivery or forward commitment basis with the intention of
acquiring the securities, the Fund may sell the securities before the
settlement date, if it is deemed advisable. The securities so purchased or sold
are subject to market fluctuation and no interest or dividends accrue to the
purchaser prior to the settlement date.

At the time the Fund makes the commitment to purchase or sell securities
on a when-issued, delayed delivery or forward commitment basis, it will record
the transaction and thereafter reflect the value, each day, of such security
purchased, or if a sale, the proceeds to be received, in determining its net
asset value. At the time of delivery of the securities, their value may be more
or less than the purchase or sale price. An increase in the percentage of the
Fund's assets committed to the purchase of securities on a when-issued, delayed
delivery or forward commitment basis may increase the volatility of its net
asset value. The Fund will also establish a segregated account on the Fund's
books in which it will continually maintain cash or cash equivalents or other
liquid portfolio securities equal in value to commitments to purchase
securities on a when-issued, delayed delivery or forward commitment basis.

WHEN, AS AND IF ISSUED SECURITIES. The Fund may purchase securities on a
"when, as and if issued" basis under which the issuance of the security depends
upon the occurrence of a subsequent event, such as approval of a merger,
corporate reorganization or debt restructuring. The commitment for the purchase
of any such security will not be recognized in the portfolio of the Fund until
the Investment Manager determines that issuance of the security is probable. At
that time, the Fund will record the transaction and, in determining its net
asset value, will reflect the value of the security daily. At that time, the
Fund will also establish a segregated account on the Fund's books in which it
will maintain cash or cash equivalents or other liquid portfolio securities
equal in value to recognized commitments for such securities.

The value of the Fund's commitments to purchase the securities of any one
issuer, together with the value of all securities of such issuer owned by the
Fund, may not exceed 5% of the value of the Fund's total assets at the time the
initial commitment to purchase such securities is made. An increase in the
percentage of the Fund's assets committed to the purchase of securities on a
"when, as and if issued" basis may increase the volatility of its net asset
value. The Fund may also sell securities on a "when, as and if issued" basis
provided that the issuance of the security will result automatically from the
exchange or conversion of a security owned by the Fund at the time of sale.

YEAR 2000. The investment management services provided to the Fund by the
Investment Manager and the services provided to shareholders by the Distributor
and the Transfer Agent depend on the smooth functioning of their computer
systems. Many computer software systems in use today cannot recognize the year
2000, but revert to 1900 or some other date, due to the manner in which dates
were encoded and calculated. That failure could have a negative impact on the
handling of securities trades, pricing and account services. The Investment
Manager, the Distributor and the Transfer Agent have been actively working on
necessary changes to their own computer systems to prepare for the year 2000
and expect that their systems will be adapted before that date, but there can
be no assurance that they will be successful, or that interaction with other
non-complying computer systems will not impair their services at that time.

8
<PAGE>

In addition, it is possible that the markets for securities in which the
Fund invests may be detrimentally affected by computer failures throughout the
financial services industry beginning January 1, 2000. Improperly functioning
trading systems may result in settlement problems and liquidity issues. In
addition, corporate and governmental data processing errors may result in
production problems for individual companies and overall economic
uncertainties. Earnings of individual issuers will be affected by remediation
costs, which may be substantial and may be reported inconsistently in U.S. and
foreign financial statements. Accordingly, the Fund's investments may be
adversely affected.

C. FUND POLICIES/INVESTMENT RESTRICTIONS

The investment objective, policies and restrictions listed below have been
adopted by the Fund as fundamental policies. Under the Investment Company Act
of 1940 (the "Investment Company Act"), a fundamental policy may not be changed
without the vote of a majority of the outstanding voting securities of the
Fund. The Investment Company Act defines a majority as the lesser of (a) 67% or
more of the shares present at a meeting of shareholders, if the holders of 50%
of the outstanding shares of the Fund are present or represented by proxy; or
(b) more than 50% of the outstanding shares of the Fund.

In addition, for purposes of the following restrictions: (a) an "issuer"
of a security is the entity whose assets and revenues are committed to the
payment of interest and principal on that particular security, provided that
the guarantee of a security will be considered a separate security and provided
further that a guarantee of a security shall not be deemed a security issued by
the guarantor if the value of all securities guaranteed by the guarantor and
owned by the Fund does not exceed 10% of the value of the total assets of the
Fund; (b) a "taxable security" is any security the interest on which is subject
to federal income tax; and (c) all percentage limitations apply immediately
after a purchase or initial investment, and any subsequent change in any
applicable percentage resulting from market fluctuations or other changes in
total or net assets does not require elimination of any security from the
portfolio.

The Fund will:

1. Seek to provide a high level of current income exempt from federal
income tax, consistent with the preservation of capital.

The Fund may not:

1. Invest more than 5% of the value of its total assets in the securities
of any one issuer (other than obligations issued or guaranteed by the
United States Government, its agencies or instrumentalities).

2. Purchase more than 10% of all outstanding taxable debt securities of
any one issuer (other than obligations issued, or guaranteed as to
principal and interest by, the United States Government, its agencies or
instrumentalities).

3. Invest more than 25% of the value of its total assets in taxable
securities of issuers in any one industry (industrial development and
pollution control bonds are grouped into industries based upon the
business in which the issuers of such obligations are engaged). This
restriction does not apply to obligations issued or guaranteed by the
United States Government, its agencies or instrumentalities or to cash
equivalents.

4. Invest more than 5% of the value of its total assets in taxable
securities of issuers having a record, together with predecessors, of
less than three years of continuous operation. This restriction shall not
apply to any obligations of the United States Government, its agencies or
instrumentalities.

5. Invest in common stock.

6. Write, purchase or sell puts, calls, or combinations thereof, except
for options on futures contracts or options on debt securities.

7. Invest in securities of any issuer, if, to the knowledge of the Fund,
any officer or trustee of the Fund or of the Investment Manager owns more
than 1/2 of 1% of the outstanding securities of

9
<PAGE>

the issuer, and the officers and trustees who own more than 1/2 of 1%
own in the aggregate more than 5% of the outstanding securities of the
issuer.

8. Purchase or sell real estate or interests therein, although it may
purchase securities secured by real estate or interests therein.

9. Purchase or sell commodities except that the Fund may purchase
financial futures contracts and related options.

10. Borrow money, except that the Fund may borrow from a bank for temporary
or emergency purposes in amounts not exceeding 5% (taken at the lower of
cost or current value) of the value of its total assets (not including
the amount borrowed).

11. Pledge its assets or assign or otherwise encumber them except to secure
permitted borrowing. However, for the purpose of this restriction,
collateral arrangements with respect to the writing of options and
collateral arrangements with respect to initial margin for futures are
not deemed to be pledges of assets.

12. Issue senior securities as defined in the Investment Company Act,
except insofar as the Fund may be deemed to have issued a senior security
by reason of: (a) entering into any repurchase agreement; (b) purchasing
any securities on a when-issued or delayed delivery basis; (c) purchasing
or selling any financial futures contracts; (d) borrowing money; or (e)
lending portfolio securities.

13. Make loans of money or securities, except: (a) by the purchase of debt
obligations and (b) by investment in repurchase agreements.

14. Make short sales of securities.

15. Purchase securities on margin, except for such short-term loans as are
necessary for the clearance of purchases of portfolio securities.

16. Engage in the underwriting of securities, except insofar as the Fund
may be deemed an underwriter under the Securities Act in disposing of a
portfolio security.

17. Invest for the purpose of exercising control or management of any
other issuer.

18. Purchase oil, gas or other mineral leases, rights or royalty contracts,
or exploration or development programs.

19. Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.

Notwithstanding any other investment policy or restriction, the Fund may
seek to achieve its investment objective by investing all or substantially all
of its assets in another investment company having substantially the same
investment objective and policies as the Fund.

10
<PAGE>

III. MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------

A. BOARD OF TRUSTEES

The Board of Trustees of the Fund oversees the management of the Fund but
does not itself manage the Fund. The Trustees review various services provided
by or under the direction of the Investment Manager to ensure that the Fund's
general investment policies and programs are properly carried out. The Trustees
also conduct their review to ensure that administrative services are provided
to the Fund in a satisfactory manner.

Under state law, the duties of the Trustees are generally characterized as
a duty of loyalty and a duty of care. The duty of loyalty requires a Trustee to
exercise his or her powers in the interest of the Fund and not the Trustee's
own interest or the interest of another person or organization. A Trustee
satisfies his or her duty of care by acting in good faith with the care of an
ordinarily prudent person and in a manner the Trustee reasonably believes to be
in the best interest of the Fund and its shareholders.

B. MANAGEMENT INFORMATION

TRUSTEES AND OFFICERS. The Board of the Fund consists of eight (8)
Trustees. These same individuals also serve as directors or trustees for all of
the Morgan Stanley Dean Witter Funds. Six Trustees (75% of the total number)
have no affiliation or business connection with the Investment Manager or any
of its affiliated persons and do not own any stock or other securities issued
by the Investment Manager's parent company, MSDW. These are the
"non-interested" or "independent" Trustees. The other two Trustees (the
"management Trustees") are affiliated with the Investment Manager. All of the
Independent Trustees also serve as Independent Trustees of "Discover Brokerage
Index Series," a mutual fund for which the Investment Manager is the investment
advisor. Three of the six Independent Trustees are also Independent Trustees of
certain other mutual funds, referred to as the "TCW/DW Funds," for which MSDW
Services Company is the manager and TCW Funds Management, Inc. is the
investment advisor.

The Trustees and executive officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any, with the
Investment Manager, and with the 85 Morgan Stanley Dean Witter Funds, the 11
TCW/DW Funds and Discover Brokerage Index Series, are shown below.

<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------- ---------------------------------------------------
<S> <C>
Michael Bozic (58) ........................ Vice Chairman of Kmart Corporation (since
Trustee December, 1998); Director or Trustee of the Morgan
c/o Kmart Corporation Stanley Dean Witter Funds and of Discover
3100 West Big Beaver Road Brokerage Index Series; formerly Chairman and
Troy, Michigan 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
and Co.; Director of Eaglemark Financial Services,
Inc. and Weirton Steel Corporation.
</TABLE>

11
<PAGE>

<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------- ----------------------------------------------------
<S> <C>
Charles A. Fiumefreddo* (65) .............. Chairman, Director or Trustee, and Chief Executive
Chairman of the Board, Officer of the Morgan Stanley Dean Witter Funds,
Chief Executive Officer and Trustee the TCW/DW Funds, and Discover Brokerage Index
Two World Trade Center Series; formerly Chairman, Chief Executive Officer
New York, New York and Director of the Investment Manager, the
Distributor and MSDW Services Company;
Executive Vice President and Director of Dean
Witter Reynolds; Chairman and Director of the
Transfer Agent; formerly Director and/or officer of
various MSDW subsidiaries (until June, 1998).
Edwin J. Garn (66) ........................ Director or Trustee of the Morgan Stanley Dean
Trustee Witter Funds, and Trustee of Discover Brokerage
c/o Huntsman Corporation Index Series; formerly United States Senator
500 Huntsman Way (R-Utah)(1974-1992) and Chairman, Senate
Salt Lake City, Utah Banking Committee (1980-1986); formerly Mayor
of Salt Lake City, Utah (1971-1974); formerly
Astronaut, Space Shuttle Discovery (April 12-19,
1985); Vice Chairman, Huntsman Corporation;
Director of Franklin Covey (time management
systems), BMW Bank of North America, Inc.
(industrial loan corporation), United Space
Alliance (joint venture between Lockheed
Martin and the Boeing Company) and Nuskin Asia
Pacific (multilevel marketing); member of the board
of various civic and charitable organizations.
Wayne E. Hedien (65) ...................... Retired; Director or Trustee of the Morgan Stanley
Trustee Dean Witter Funds and Discover Brokerage Index
c/o Gordon Altman Butowsky Series; Director of The PMI Group, Inc. (private
Weitzen Shalov & Wein mortgage insurance); Trustee and Vice Chairman
Counsel to the Independent Trustees of The Field Museum of Natural History; formerly
114 West 47th Street associated with the Allstate Companies
New York, New York (1966-1994), most recently as Chairman of The
Allstate Corporation (March, 1993-December,
1994) and Chairman and Chief Executive Officer of
its wholly-owned subsidiary, Allstate Insurance
Company (July, 1989-December, 1994); director of
various other business and charitable
organizations.
Dr. Manuel H. Johnson (50) ................ Senior Partner, Johnson Smick International, Inc.,
Trustee a consulting firm; Co-Chairman and a founder of
c/o Johnson Smick International, Inc. the Group of Seven Council (G7C), an international
1133 Connecticut Avenue, N.W. economic commission; Chairman of the Audit
Washington, D.C. Committee and Director or Trustee of the Morgan
Stanley Dean Witter Funds, the TCW/DW Funds
and Discover Brokerage Index Series; Director of
Greenwich Capital Markets, Inc. (broker-dealer)
and NVR, Inc. (home construction); Chairman and
Trustee of the Financial Accounting Foundation
(oversight organization of the Financial Accounting
Standards Board); formerly Vice Chairman of the
Board of Governors of the Federal Reserve System
(1986-1990) and Assistant Secretary of the U.S.
Treasury.
</TABLE>

12
<PAGE>

<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------- -----------------------------------------------------
<S> <C>
Michael E. Nugent (62) .................... General Partner, Triumph Capital, L.P., a private
Trustee investment partnership; Chairman of the Insurance
c/o Triumph Capital, L.P. Committee and Director or Trustee of the Morgan
237 Park Avenue Stanley Dean Witter Funds, the TCW/DW Funds
New York, New York and Discover Brokerage Index Series; formerly
Vice President, Bankers Trust Company and BT
Capital Corporation (1984-1988); director of various
business organizations.
Philip J. Purcell* (55) ................... Chairman of the Board of Directors and Chief
Trustee Executive Officer of MSDW, Dean Witter Reynolds
1585 Broadway and Novus Credit Services Inc.; Director of the
New York, New York Distributor; Director or Trustee of the Morgan
Stanley Dean Witter Funds and Discover Brokerage
Index Series; Director and/or officer of various
MSDW subsidiaries.
John L. Schroeder (68) .................... Retired; Chairman of the Derivatives Committee
Trustee and Director or Trustee of the Morgan Stanley
c/o Gordon Altman Butowsky Dean Witter Funds, the TCW/DW Funds and
Weitzen Shalov & Wein Discover Brokerage Index Series; Director of
Counsel to the Independent Trustees Citizens Utilities Company; formerly Executive Vice
114 West 47th Street President and Chief Investment Officer of the
New York, New York Home Insurance Company (August, 1991-
September, 1995).
Mitchell M. Merin (45) .................... President and Chief Operating Officer of Asset
President Management of MSDW (since December, 1998);
Two World Trade Center President and Director (since April, 1997) and
New York, New York Chief Executive Officer (since June, 1998) of the
Investment Manager and MSDW Services
Company; Chairman, Chief Executive Officer and
Director of the Distributor (since June, 1998);
Chairman and Chief Executive Officer (since
June, 1998) and Director (since January, 1998) of
the Transfer Agent; Director of various MSDW
subsidiaries; President of the Morgan Stanley Dean
Witter Funds, the TCW/DW Funds and Discover
Brokerage Index Series (since May, 1999);
previously Chief Strategic Officer of the Investment
Manager and MSDW Services Company and
Executive Vice President of the Distributor
(April, 1997-June, 1998), Vice President of the
Morgan Stanley Dean Witter Funds, the TCW/DW
Funds and Discover Brokerage Index Series
(May, 1997-April, 1999), and Executive Vice
President of Dean Witter, Discover & Co.
</TABLE>

13
<PAGE>

<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------- ----------------------------------------------------
<S> <C>
Barry Fink (44) ........................... Senior Vice President (since March, 1997) and
Vice President, Secretary and General Counsel (since February,
Secretary and General Counsel 1997) and Director (since July, 1998) of the
Two World Trade Center Investment Manager and MSDW Services
New York, New York Company; Senior Vice President (since March,
1997) and Assistant Secretary and Assistant
General Counsel (since February, 1997) of the
Distributor; Assistant Secretary of Dean Witter
Reynolds (since August, 1996); Vice President,
Secretary and General Counsel of the Morgan
Stanley Dean Witter Funds and the TCW/DW
Funds (since February, 1997); Vice President,
Secretary and General Counsel of Discover
Brokerage Index Series; previously First Vice
President (June, 1993-February, 1997), Vice
President and Assistant Secretary and Assistant
General Counsel of the Investment Manager and
MSDW Services Company and Assistant Secretary
of the Morgan Stanley Dean Witter Funds and the
TCW/DW Funds.
James F. Willison (55) .................... Senior Vice President of the Investment Manager;
Vice President Vice President of various Morgan Stanley Dean
Two World Trade Center Witter Funds.
New York, New York
Joseph R. Arcieri (50) .................... Vice President of the Investment Manager; Vice
Vice President President of various Morgan Stanley Dean Witter
Two World Trade Center Funds.
New York, New York
Thomas F. Caloia (53) ..................... First Vice President and Assistant Treasurer of the
Treasurer Investment Manager and MSDW Services
Two World Trade Center Company; Treasurer of the Morgan Stanley Dean
New York, New York Witter Funds, the TCW/DW Funds and Discover
Brokerage Index Series.
</TABLE>

- ----------
* Denotes Trustees who are "interested persons" of the Fund as defined by the
Investment Company Act.

In addition, Ronald E. Robison, Executive Vice President, Chief
Administrative Officer and Director of the Investment Manager and MSDW Services
Company, Robert S. Giambrone, Senior Vice President of the Investment Manager,
MSDW Services Company, the Distributor and the Transfer Agent and Director of
the Transfer Agent, and Joseph J. McAlinden, Executive Vice President and Chief
Investment Officer of the Investment Manager and Director of the Transfer
Agent, Peter M. Avelar, and Jonathan R. Page, Senior Vice Presidents of the
Investment Manager, Katherine H. Stromberg and Gerard J. Lian, Vice Presidents
of the Investment Manager, are Vice Presidents of the Funds.

In addition, Frank Bruttomesso, Marilyn K. Cranney, Lou Anne D. McInnis,
Carsten Otto and Ruth Rossi, First Vice Presidents and Assistant General
Counsels of the Investment Manager and MSDW Services Company, and Todd Lebo,
Vice President and Assistant General Counsel of the Investment Manager and MSDW
Services Company, are Assistant Secretaries of the Fund.

INDEPENDENT TRUSTEES AND THE COMMITTEES. Law and regulation establish both
general guidelines and specific duties for the Independent Trustees. The Morgan
Stanley Dean Witter Funds seek as Independent Trustees individuals of
distinction and experience in business and finance, government service or
academia; these are people whose advice and counsel are in demand by others and
for whom

14
<PAGE>

there is often competition. To accept a position on the Funds' Boards, such
individuals may reject other attractive assignments because the Funds make
substantial demands on their time. All of the Independent Trustees serve
as members of the Audit Committee. In addition, three of the Trustees,
including two Independent Trustees, serve as members of the Derivatives
Committee and the Insurance Committee.

The Independent Trustees are charged with recommending to the full Board
approval of management, advisory and administration contracts, Rule 12b-1 plans
and distribution and underwriting agreements; continually reviewing Fund
performance; checking on the pricing of portfolio securities, brokerage
commissions, transfer agent costs and performance, and trading among Funds in
the same complex; and approving fidelity bond and related insurance coverage
and allocations, as well as other matters that arise from time to time. The
Independent Trustees are required to select and nominate individuals to fill
any Independent Trustee vacancy on the Board of any Fund that has a Rule 12b-1
plan of distribution. Most of the Morgan Stanley Dean Witter Funds have a Rule
12b-1 plan.

The Audit Committee is charged with recommending to the full Board the
engagement or discharge of the Fund's independent accountants; directing
investigations into matters within the scope of the independent accountants'
duties, including the power to retain outside specialists; reviewing with the
independent accountants the audit plan and results of the auditing engagement;
approving professional services provided by the independent accountants and
other accounting firms prior to the performance of the services; reviewing the
independence of the independent accountants; considering the range of audit and
non-audit fees; reviewing the adequacy of the Fund's system of internal
controls; and preparing and submitting Committee meeting minutes to the full
Board.

The Board of each Fund has a Derivatives Committee to approve parameters
for and monitor the activities of the Fund with respect to derivative
investments, if any, made by the Fund.

Finally, the Board of each Fund has formed an Insurance Committee to
review and monitor the insurance coverage maintained by the Fund.

ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT TRUSTEES FOR ALL
MORGAN STANLEY DEAN WITTER FUNDS. The Independent Trustees and the Funds'
management believe that having the same Independent Trustees for each of the
Morgan Stanley Dean Witter Funds avoids the duplication of effort that would
arise from having different groups of individuals serving as Independent
Trustees for each of the Funds or even of sub-groups of Funds. They believe
that having the same individuals serve as Independent Trustees of all the Funds
tends to increase their knowledge and expertise regarding matters which affect
the Fund complex generally and enhances their ability to negotiate on behalf of
each Fund with the Fund's service providers. This arrangement also precludes
the possibility of separate groups of Independent Trustees arriving at
conflicting decisions regarding operations and management of the Funds and
avoids the cost and confusion that would likely ensue. Finally, having the same
Independent Trustees serve on all Fund Boards enhances the ability of each Fund
to obtain, at modest cost to each separate Fund, the services of Independent
Trustees, of the caliber, experience and business acumen of the individuals who
serve as Independent Trustees of the Morgan Stanley Dean Witter Funds.

TRUSTEE AND OFFICER INDEMNIFICATION. The Fund's Declaration of Trust
provides that no Trustee, officer, employee or agent of the Fund is liable to
the Fund or to a shareholder, nor is any Trustee, officer, employee or agent
liable to any third persons in connection with the affairs of the Fund, except
as such liability may arise from his/her or its own bad faith, willful
misfeasance, gross negligence or reckless disregard of his/her or its duties.
It also provides that all third persons shall look solely to the Fund property
for satisfaction of claims arising in connection with the affairs of the Fund.
With the exceptions stated, the Declaration of Trust provides that a Trustee,
officer, employee or agent is entitled to be indemnified against all liability
in connection with the affairs of the Fund.

15
<PAGE>

C. COMPENSATION

The Fund pays each Independent Trustee an annual fee of $800 plus a per
meeting fee of $50 for meetings of the Board of Trustees, the Independent
Trustees or Committees of the Board of Trustees attended by the Trustee (the
Fund pays the Chairman of the Audit Committee an additional annual fee of $750,
and the Chairmen of the Derivatives and Insurance Committees additional annual
fees of $500). If a Board meeting and a meeting of the Independent Trustees or
a Committee meeting, or a meeting of the Independent Trustees and/or more than
one Committee meeting, take place on a single day, the Trustees are paid a
single meeting fee by the Fund. The Fund also reimburses such Trustees for
travel and other out-of-pocket expenses incurred by them in connection with
attending such meetings. Trustees and officers of the Fund who are or have been
employed by the Investment Manager or an affiliated company receive no
compensation or expense reimbursement from the Fund for their services as
Trustee.

The following table illustrates the compensation that the Fund paid to its
Independent Trustees for the fiscal year ended December 31, 1998.

FUND COMPENSATION

<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME OF INDEPENDENT TRUSTEE FROM THE FUND
- ------------------------------- --------------
<S> <C>
Michael Bozic ................. $1,450
Edwin J. Garn ................. 1,600
Wayne E. Hedien ............... 1,600
Dr. Manuel H. Johnson ......... 1,550
Michael E. Nugent ............. 1,600
John L. Schroeder ............. 1,600
</TABLE>

The following table illustrates the compensation paid to the Fund's
Independent Trustees for the calendar year ended December 31, 1998 for services
to the 85 Morgan Stanley Dean Witter Funds and, in the case of Messrs. Johnson,
Nugent and Schroeder, the 11 TCW/DW Funds that were in operation at December
31, 1998. With respect to Messrs. Haire, Johnson, Nugent and Schroeder, the
TCW/DW Funds are included solely because of a limited exchange privilege
between those Funds and five Morgan Stanley Dean Witter Money Market Funds. No
compensation was paid to the Fund's Independent Trustees by Discover Brokerage
Index Series for the calendar year ended December 31, 1998.

CASH COMPENSATION FROM MORGAN STANLEY DEAN WITTER FUNDS AND TCW/DW FUNDS

<TABLE>
<CAPTION>
FOR SERVICE TOTAL CASH
AS DIRECTOR OR COMPENSATION
TRUSTEE AND FOR SERVICES TO
COMMITTEE FOR SERVICE AS 85 MORGAN
MEMBER OF TRUSTEE AND STANLEY DEAN
85 MORGAN COMMITTEE WITTER FUNDS AND
NAME OF STANLEY DEAN MEMBER OF 11 11 TCW/DW
INDEPENDENT TRUSTEE WITTER FUNDS TCW/DW FUNDS FUNDS
- ------------------------------- ---------------- ---------------- -----------------
<S> <C> <C> <C>
Michael Bozic ................. $120,150 -- $120,150
Edwin J. Garn ................. 132,450 -- 132,450
Wayne E. Hedien ............... 132,350 -- 132,350
Dr. Manuel H. Johnson ......... 128,400 62,331 190,731
Michael E. Nugent ............. 132,450 62,131 194,581
John L. Schroeder ............. 132,450 64,731 197,181
</TABLE>

As of the date of this Statement of Additional Information, 55 of the
Morgan Stanley Dean Witter Funds, including the Fund, have adopted a retirement
program under which an Independent Trustee who retires after serving for at
least five years (or such lesser period as may be determined by the Board) as
an Independent Director or Trustee of any Morgan Stanley Dean Witter Fund that
has adopted the retirement program (each such Fund referred to as an "Adopting
Fund" and each such Trustee referred to as an "Eligible Trustee") is entitled
to retirement payments upon reaching the eligible retirement age (normally,
after attaining age 72). Annual payments are based upon length of service.

16
<PAGE>

Currently, upon retirement, each Eligible Trustee is entitled to receive
from the Adopting Fund, commencing as of his or her retirement date and
continuing for the remainder of his or her life, an annual retirement benefit
(the "Regular Benefit") equal to 30.22% of his or her Eligible Compensation
plus 0.5036667% of such Eligible Compensation for each full month of service as
an Independent Director or Trustee of any Adopting Fund in excess of five years
up to a maximum of 60.44% after ten years ofservice. The foregoing percentages
may be changed by the Board.(1) "Eligible Compensation" is one-fifth of the
total compensation earned by such Eligible Trustee for service to the Adopting
Fund in the five year period prior to the date of the Eligible Trustee's
retirement. Benefits under the retirement program are not secured or funded by
the Adopting Funds.

The following table illustrates the retirement benefits accrued to the
Fund's Independent Trustees by the Fund for the fiscal year ended December 31,
1998 and by the 55 Morgan Stanley Dean Witter Funds (including the Fund) for
the year ended December 31, 1998, and the estimated retirement benefits for the
Independent Trustees, to commence upon their retirement, from the Fund as of
December 31, 1998 and from the 55 Morgan Stanley Dean Witter Funds as of
December 31, 1998.

RETIREMENT BENEFITS FROM THE FUND AND ALL MORGAN STANLEY DEAN WITTER FUNDS

<TABLE>
<CAPTION>
FOR ALL ADOPTING FUNDS
------------------------------
ESTIMATED ANNUAL
RETIREMENT BENEFITS BENEFITS
ESTIMATED ACCRUED AS EXPENSES UPON RETIREMENT(2)
CREDITED YEARS ESTIMATED ------------------- --------------------
OF SERVICE AT PERCENTAGE BY ALL FROM ALL
NAME OF RETIREMENT OF ELIGIBLE BY THE ADOPTING FROM THE ADOPTING
INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUND FUNDS FUND FUNDS
- -------------------------- ---------------- ------------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Michael Bozic ............ 10 60.44% $396 $22,377 $997 $52,250
Edwin J. Garn ............ 10 60.44 599 35,225 997 52,250
Wayne E. Hedien .......... 9 51.37 740 41,979 848 44,413
Dr. Manuel H. Johnson..... 10 60.44 240 14,047 997 52,250
Michael E. Nugent ........ 10 60.44 421 25,336 997 52,250
John L. Schroeder ........ 8 50.37 807 45,117 838 44,343
</TABLE>

- ----------
(1) An Eligible Trustee may elect alternative payments of his or her
retirement benefits based upon the combined life expectancy of the
Eligible Trustee and his or her spouse on the date of such Eligible
Trustee's retirement. In addition, the Eligible Trustee may elect that
the surviving spouse's periodic payment of benefits will be equal to a
lower percentage of the periodic amount when both spouses were alive. The
amount estimated to be payable under this method, through the remainder
of the later of the lives of the Eligible Trustee and spouse, will be the
actuarial equivalent of the Regular Benefit.

(2) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1)
above.

IV. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
- --------------------------------------------------------------------------------

The following owned 5% or more of the outstanding shares of Class A on
April 6, 1999: Morgan Stanley Dean Witter Trust FSB Trustee FBO Richard K.
Allen and Dorothy B. Allen Revocable Trust Husband and Wife Share, P.O. Box
503, Jersey City, NJ 07311 -- 5.71%; WM J Dick III, 1409 Old Tale Road,
Boulder, CO 80303 -- 5.70%; Howard C. Kauffmann & Suzanne M. Kauffmann JTTEN,
2724 Peachtree Road NW, Atlanta, GA 30305 -- 5.20%; Sylvia Corcoran and Edward
V. Corcoran JTTEN, 5355 Nautilus Drive, Cape Coral, FL 33904 -- 5.20%; Robert
T. Smylie, Times Newspaper Inc., 2512 Metropolitan Drive, Trevose, PA 19053 --
5.20%; Jack Biegger & Shirley Biegger TTE for the Jack Biegger Revocable Living
Trust DTD 10-3-79, 20 Wild Dunes Court, Las Vegas, NV 89113 -- 5.20%; Sharon R
Frank, 338 Waycliffe North, Wayzata, MN 55391 -- 5.20%. The following owned 5%
or more of the outstanding shares of Class C on April 6, 1999: Robert P.
Scurich, Sole and Separate Property, P.O. Box 502, GlenBrook, NV 89413 -- 5.9%.

17
<PAGE>

As of the date of this Statement of Additional Information, the aggregate
number of shares of beneficial interest of the Fund owned by the Fund's
officers and Trustees as a group was less than 1% of the Fund's shares of
beneficial interest outstanding.

V. INVESTMENT MANAGEMENT AND OTHER SERVICES
- --------------------------------------------------------------------------------

A. INVESTMENT MANAGER

The Investment Manager to the Fund is Morgan Stanley Dean Witter Advisors
Inc., a Delaware corporation, whose address is Two World Trade Center, New
York, New York 10048. The Investment Manager is a wholly-owned subsidiary of
MSDW, a Delaware corporation. MSDW is a preeminent global financial services
firm that maintains leading market positions in each of its three primary
businesses: securities, asset management and credit services.

Pursuant to an Investment Management Agreement (the "Management
Agreement") with the Investment Manager, the Fund has retained the Investment
Manager to provide administrative services and manage the investment of the
Fund's assets, including the placing of orders for the purchase and sale of
portfolio securities. The Fund pays the Investment Manager monthly compensation
calculated daily by applying the following annual rates to the net assets of
the Fund determined as of the close of each business day: 0.50% of the portion
of the daily net assets not exceeding $500 million; 0.425% of the portion of
the daily net assets exceeding $500 million but not exceeding $750 million;
0.375% of the portion of the daily net assets exceeding $750 million but not
exceeding $1 billion; 0.35% of the portion of the daily net assets exceeding $1
billion but not exceeding $1.25 billion; and 0.325% of the portion of the daily
net assets exceeding $1.25 billion. The management fee is allocated among the
Classes pro rata based on the net assets of the Fund attributable to each
Class. For the fiscal years ended December 31, 1996, 1997 and 1998, the
Investment Manager accrued total compensation under the Management Agreement in
the amounts of $5,320,578, $5,004,702 and $5,139,570, respectively.

The Investment Manager has retained its wholly-owned subsidiary, MSDW
Services Company, to perform administrative services for the Fund.

B. PRINCIPAL UNDERWRITER

The Fund's principal underwriter is the Distributor (which has the same
address as the Investment Manager). In this capacity, the Fund's shares are
distributed by the Distributor. The Distributor has entered into a selected
dealer agreement with Dean Witter Reynolds, which through its own sales
organization sells shares of the Fund. In addition, the Distributor may enter
into similar agreements with other selected broker-dealers. The Distributor, a
Delaware corporation, is a wholly-owned subsidiary of MSDW.

The Distributor bears all expenses it may incur in providing services
under the Distribution Agreement. These expenses include the payment of
commissions for sales of the Fund's shares and incentive compensation to
Financial Advisors. The Distributor also pays certain expenses in connection
with the distribution of the Fund's shares, including the costs of preparing,
printing and distributing advertising or promotional materials, and the costs
of printing and distributing prospectuses and supplements thereto used in
connection with the offering and sale of the Fund's shares. The Fund bears the
costs of initial typesetting, printing and distribution of prospectuses and
supplements thereto to shareholders. The Fund also bears the costs of
registering the Fund and its shares under federal and state securities laws and
pays filing fees in accordance with state securities laws.

The Fund and the Distributor have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act. Under the
Distribution Agreement, the Distributor uses its best efforts in rendering
services to the Fund, but in the absence of willful misfeasance, bad faith,
gross negligence or reckless disregard of its obligations, the Distributor is
not liable to the Fund or any of its shareholders for any error of judgment or
mistake of law or for any act or omission or for any losses sustained by the
Fund or its shareholders.

18
<PAGE>

C. SERVICES PROVIDED BY THE INVESTMENT MANAGER AND FUND EXPENSES PAID BY THIRD
PARTIES

The Investment Manager manages the investment of the Fund's assets,
including the placing of orders for the purchase and sale of portfolio
securities. The Investment Manager obtains and evaluates the information and
advice relating to the economy, securities markets, and specific securities as
it considers necessary or useful to continuously manage the assets of the Fund
in a manner consistent with its investment objective.

Under the terms of the Management Agreement, in addition to managing the
Fund's investments, the Investment Manager maintains certain of the Fund's
books and records and furnishes, at its own expense, the office space,
facilities, equipment, clerical help, bookkeeping and certain legal services as
the Fund may reasonably require in the conduct of its business, including the
preparation of prospectuses, proxy statements and reports required to be filed
with federal and state securities commissions (except insofar as the
participation or assistance of independent accountants and attorneys is, in the
opinion of the Investment Manager, necessary or desirable). In addition, the
Investment Manager pays the salaries of all personnel, including officers of
the Fund, who are employees of the Investment Manager. The Investment Manager
also bears the cost of telephone service, heat, light, power and other
utilities provided to the Fund.

Expenses not expressly assumed by the Investment Manager under the
Management Agreement or by the Distributor, will be paid by the Fund. These
expenses will be allocated among the four Classes of shares pro rata based on
the net assets of the Fund attributable to each Class, except as described
below. Such expenses include, but are not limited to: expenses of the Plan of
Distribution pursuant to Rule 12b-1; charges and expenses of any registrar,
custodian, stock transfer and dividend disbursing agent; brokerage commissions;
taxes; engraving and printing share certificates; registration costs of the
Fund and its shares under federal and state securities laws; the cost and
expense of printing, including typesetting, and distributing prospectuses of
the Fund and supplements thereto to the Fund's shareholders; all expenses of
shareholders' and Trustees' meetings and of preparing, printing and mailing of
proxy statements and reports to shareholders; fees and travel expenses of
Trustees or members of any advisory board or committee who are not employees of
the Investment Manager or any corporate affiliate of the Investment Manager;
all expenses incident to any dividend, withdrawal or redemption options;
charges and expenses of any outside service used for pricing of the Fund's
shares; fees and expenses of legal counsel, including counsel to the Trustees
who are not interested persons of the Fund or of the Investment Manager (not
including compensation or expenses of attorneys who are employees of the
Investment Manager); fees and expenses of the Fund's independent accountants;
membership dues of industry associations; interest on Fund borrowings; postage;
insurance premiums on property or personnel (including officers and Trustees)
of the Fund which inure to its benefit; extraordinary expenses (including, but
not limited to, legal claims and liabilities and litigation costs and any
indemnification relating thereto); and all other costs of the Fund's operation.
The 12b-1 fees relating to a particular Class will be allocated directly to
that Class. In addition, other expenses associated with a particular Class
(except advisory or custodial fees) may be allocated directly to that Class,
provided that such expenses are reasonably identified as specifically
attributable to that Class and the direct allocation to that Class is approved
by the Trustees.

The Management Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Investment Manager is not liable to the Fund or any
of its investors for any act or omission by the Investment Manager or for any
losses sustained by the Fund or its investors.

The Management Agreement will remain in effect from year to year, provided
continuance of the Management Agreement is approved at least annually by the
vote of the holders of a majority, as defined in the Investment Company Act, of
the outstanding shares of the Fund, or by the Trustees; provided that in either
event such continuance is approved annually by the vote of a majority of the
Trustees.

D. DEALER REALLOWANCES

Upon notice to selected broker-dealers, the Distributor may reallow up to
the full applicable front-end sales charge during periods specified in such
notice. During periods when 90% or more of the sales charge is reallowed, such
selected broker-dealers may be deemed to be underwriters as that term is
defined in the Securities Act.

19
<PAGE>

E. RULE 12b-1 PLAN

The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under
the Investment Company Act (the "Plan") pursuant to which each Class, other
than Class D, pays the Distributor compensation accrued daily and payable
monthly at the following annual rates: 0.25%, 0.60% and 0.70% of the average
daily net assets of Class A, Class B and Class C, respectively.

The Distributor also receives the proceeds of front-end sales charges
("FSCs") and of contingent deferred sales charges ("CDSCs") imposed on certain
redemptions of shares, which are separate and apart from payments made pursuant
to the Plan. The Distributor has informed the Fund that it and/or Dean Witter
Reynolds received the proceeds of CDSCs and FSCs, for the last two fiscal years
ended December 31, in approximate amounts as provided in the table below (the
Distributor did not retain any of these amounts).

<TABLE>
<CAPTION>
1998 1997 1996
------------------- --------------------- ---------------------
<S> <C> <C> <C>
Class A .......... FSCs:(1) $168,708 FSCs: $ 69,207(2) FSCs: $ -- (2)
CDSCs: $ 0 CDSCs: $ 0(2) CDSCs: $ -- (2)
Class B .......... CDSCs: $119,895 CDSCs: $ 10,314(2) CDSCs: $ -- (2)
Class C .......... CDSCs: $ 6,087 CDSCs: $ 530(2) CDSCs: $ -- (2)
Class D .......... FSCs: $ 0 FSCs: $448,316(3) FSCs: $1,050,000(3)
</TABLE>

- ----------
(1) FSCs apply to Class A only.

(2) This Class commenced operations on July 28, 1997.

(3) Prior to July 27, 1997 the Fund charged an FSC. On July 28, 1997 existing
shares of the Fund were designated Class D shares, which have no FSC.

The Distributor has informed the Fund that the entire fee payable by Class
A and a portion of the fees payable by each of Class B and Class C each year
pursuant to the Plan equal to 0.15% of the average daily net assets of Class B
and 0.25% of the average daily net assets of Class C are currently each
characterized as a "service fee" under the Rules of the National Association of
Securities Dealers, Inc. (of which the Distributor is a member). The "service
fee" is a payment made for personal service and/or the maintenance of
shareholder accounts. The remaining portion of the Plan fees payable by a
Class, if any, is characterized as an "asset-based sales charge" as such is
defined by the Rules of the Association.

Under the Plan and as required by Rule 12b-1, the Trustees receive and
review promptly after the end of each calendar quarter a written report
provided by the Distributor of the amounts expended under the Plan and the
purpose for which such expenditures were made. Class B shares of the Fund
accrued amounts payable to the Distributor under the Plan, during the fiscal
year ended December 31, 1998, of $670,261. This amount is equal to 0.60% of the
average daily net assets of Class B for the fiscal year and was calculated
pursuant to clause (b) of the compensation formula under the Plan. For the
fiscal year ended December 31, 1998, Class A and Class C shares of the Fund
accrued payments under the Plan amounting to $23,305 and $35,313, respectively,
which amounts are equal to 0.24% and 0.70% of the average daily net assets of
Class A and Class C, respectively, for the fiscal year.

The Plan was adopted in order to permit the implementation of the Fund's
method of distribution. Under this distribution method the Fund offers four
Classes, each with a different distribution arrangement.

With respect to Class A shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from proceeds of the FSC, commissions for
the sale of Class A shares, currently a gross sales credit of up to 4.0% of the
amount sold (except as provided in the following sentence) and an annual
residual commission, currently a residual of up to 0.15% of the current value
of the respective accounts for which they are the Financial Advisors or dealers
of record in all cases. On orders of $1 million or more (for which no sales
charge was paid), the Investment Manager compensates Financial Advisors by
paying them, from its own funds, a gross sales credit of 1.0% of the amount
sold.

20
<PAGE>

With respect to Class B shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from its own funds, commissions for the sale
of Class B shares, currently a gross sales credit of up to 4.0% of the amount
sold and an annual residual commission, currently a residual of up to 0.15% of
the current value (not including reinvested dividends or distributions) of the
amount sold in all cases.

With respect to Class C shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from its own funds, commissions for the sale
of Class C shares, currently a gross sales credit of up to 1.0% of the amount
sold and an annual residual commission, currently up to 0.70% of the current
value of the respective accounts for which they are the Financial Advisors of
record.

With respect to Class D shares other than shares held by participants in
the Investment Manager's mutual fund asset allocation program, the Investment
Manager compensates Dean Witter Reynolds's Financial Advisors by paying them,
from its own funds, commissions for the sale of Class D shares, currently a
gross sales credit of up to 1.0% of the amount sold. There is a chargeback of
100% of the amount paid if the Class D shares are redeemed in the first year
and a chargeback of 50% of the amount paid if the Class D shares are redeemed
in the second year after purchase. The Investment Manager also compensates Dean
Witter Reynolds's Financial Advisors by paying them, from its own funds, an
annual residual commission, currently up to 0.10% of the current value of the
respective accounts for which they are the Financial Advisors of record (not
including accounts of participants in the Investment Manager's mutual fund
asset allocation program).

The gross sales credit is a charge which reflects commissions paid by Dean
Witter Reynolds to its Financial Advisors and Dean Witter Reynolds's
Fund-associated distribution-related expenses, including sales compensation,
and overhead and other branch office distribution-related expenses including
(a) the expenses of operating Dean Witter Reynolds's branch offices in
connection with the sale of Fund shares, including lease costs, the salaries
and employee benefits of operations and sales support personnel, utility costs,
communications costs and the costs of stationery and supplies, (b) the costs of
client sales seminars, (c) travel expenses of mutual fund sales coordinators to
promote the sale of Fund shares and (d) other expenses relating to branch
promotion of Fund sales.

The distribution fee that the Distributor receives from the Fund under the
Plan, in effect, offsets distribution expenses incurred under the Plan on
behalf of the Fund and, in the case of Class B shares, opportunity costs, such
as the gross sales credit and an assumed interest charge thereon ("carrying
charge"). In the Distributor's reporting of the distribution expenses to the
Fund, in the case of Class B shares, such assumed interest (computed at the
"broker's call rate") has been calculated on the gross credit as it is reduced
by amounts received by the Distributor under the Plan and any contingent
deferred sales charges received by the Distributor upon redemption of shares of
the Fund. No other interest charge is included as a distribution expense in the
Distributor's calculation of its distribution costs for this purpose. The
broker's call rate is the interest rate charged to securities brokers on loans
secured by exchange-listed securities.

The Fund is authorized to reimburse expenses incurred or to be incurred in
promoting the distribution of the Fund's Class A and Class C shares and in
servicing shareholder accounts. Reimbursement will be made through payments at
the end of each month. The amount of each monthly payment may in no event
exceed an amount equal to a payment at the annual rate of 0.25%, in the case of
Class A, and 0.70%, in the case of Class C, of the average net assets of the
respective Class during the month. No interest or other financing charges, if
any, incurred on any distribution expenses on behalf of Class A and Class C
will be reimbursable under the Plan. With respect to Class A, in the case of
all expenses other than expenses representing the service fee, and, with
respect to Class C, in the case of all expenses other than expenses
representing a gross sales credit or a residual to Financial Advisors and other
authorized financial representatives, such amounts shall be determined at the
beginning of each calendar quarter by the Trustees, including, a majority of
the Independent Trustees. Expenses representing the service fee (for Class A)
or a gross sales credit or a residual to Financial Advisors and other
authorized financial representatives (for Class C) may be reimbursed without
prior determination. In the event that the Distributor proposes that monies
shall be reimbursed for other than such expenses, then in making quarterly
determinations of the amounts that may be reimbursed by the Fund, the

21
<PAGE>

Distributor will provide and the Trustees will review a quarterly budget of
projected distribution expenses to be incurred on behalf of the Fund, together
with a report explaining the purposes and anticipated benefits of incurring
such expenses. The Trustees will determine which particular expenses, and the
portions thereof, that may be borne by the Fund, and in making such a
determination shall consider the scope of the Distributor's commitment to
promoting the distribution of the Fund's Class A and Class C shares.

Each Class paid 100% of the amounts accrued under the Plan with respect to
that Class for the fiscal year ended December 31, 1998 to the Distributor. The
Distributor and Dean Witter Reynolds estimate that they have spent, pursuant to
the Plan, $4,860,199 on behalf of Class B since the inception of the Plan. It
is estimated that this amount was spent in approximately the following ways:
(i) 11.78% ($572,309)--advertising and promotional expenses; (ii) 0.29%
($13,883)--printing of prospectuses for distribution to other than current
shareholders; and (iii) 87.93% ($4,274,007)--other expenses, including the
gross sales credit and the carrying charge, of which 0.64% ($27,173) represents
carrying charges, 17.14% ($732,682) represents commission credits to Dean
Witter Reynolds branch offices and other selected broker-dealers for payments
of commissions to Financial Advisors and other authorized financial
representatives, and 24.77% ($1,058,716) represents overhead and other branch
office distribution-related expenses. The amounts accrued by Class A and Class
C for distribution during the fiscal year ended December 31, 1998 were for
expenses which relate to compensation of sales personnel and associated
overhead expenses.

In the case of Class B shares, at any given time, the expenses of
distributing shares of the Fund may be more or less than the total of (i) the
payments made by the Fund pursuant to the Plan; and (ii) the proceeds of CDSCs
paid by investors upon redemption of shares. For example, if $1 million in
expenses in distributing Class B shares of the Fund had been incurred and
$750,000 had been received as described in (i) and (ii) above, the excess
expense would amount to $250,000. The Distributor has advised the Fund that in
the case of Class B shares the excess distribution expenses, including the
carrying charge designed to approximate the opportunity costs incurred by Dean
Witter Reynolds which arise from it having advanced monies without having
received the amount of any sales charges imposed at the time of sale of the
Fund's Class B shares, totaled $3,972,552 as of December 31, 1998 (the end of
the Fund's fiscal year), which was equal to 3.00% of the net assets of Class B
on such date. Of this amount, $2,455,436 represents excess distribution
expenses of Dean Witter National Municipal Trust the net assets of which were
combined with those of the Fund on November 7, 1997 pursuant to an Agreement
and Plan of Reorganization. Because there is no requirement under the Plan that
the Distributor be reimbursed for all distribution expenses with respect to
Class B shares or any requirement that the Plan be continued from year to year,
this excess amount does not constitute a liability of the Fund. 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 CDSCs 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. Any cumulative expenses incurred, but not yet recovered
through distribution fees or CDSCs, may or may not be recovered through future
distribution fees or CDSCs.

In the case of Class A and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 0.70% 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 commission credited to Morgan Stanley Dean Witter Financial
Advisors and other authorized financial representatives at the time of sale may
be reimbursed in the subsequent calendar year. The Distributor has advised the
Fund that there were no such expenses that may be reimbursed in the subsequent
year in the case of Class A or Class C on such date. No interest or other
financing charges will be incurred on any Class A or Class C distribution
expenses incurred by the Distributor under the Plan or on any unreimbursed
expenses due to the Distributor pursuant to the Plan.

No interested person of the Fund nor any Independent Trustee has any
direct financial interest in the operation of the Plan except to the extent
that the Distributor, the Investment Manager, Dean Witter Reynolds, MSDW
Services Company or certain of their employees may be deemed to have such an
interest as a result of benefits derived from the successful operation of the
Plan or as a result of receiving a portion of the amounts expended thereunder
by the Fund.

22
<PAGE>

On an annual basis, the Trustees, including a majority of the Independent
Trustees, consider whether the Plan should be continued. Prior to approving the
last continuation of the Plan, the Trustees requested and received from the
Distributor and reviewed all the information which they deemed necessary to
arrive at an informed determination. In making their determination to continue
the Plan, the Trustees considered: (1) the Fund's experience under the Plan and
whether such experience indicates that the Plan is operating as anticipated;
(2) the benefits the Fund had obtained, was obtaining and would be likely to
obtain under the Plan, including that: (a) the Plan is essential in order to
give Fund investors a choice of alternatives for payment of distribution and
service charges and to enable the Fund to continue to grow and avoid a pattern
of net redemptions which, in turn, are essential for effective investment
management; and (b) without the compensation to individual brokers and the
reimbursement of distribution and account maintenance expenses of Dean Witter
Reynolds's branch offices made possible by the 12b-1 fees, Dean Witter Reynolds
could not establish and maintain an effective system for distribution,
servicing of Fund shareholders and maintenance of shareholder accounts; and (3)
what services had been provided and were continuing to be provided under the
Plan to the Fund and its shareholders. Based upon their review, the Trustees,
including each of the Independent Trustees, determined that continuation of the
Plan would be in the best interest of the Fund and would have a reasonable
likelihood of continuing to benefit the Fund and its shareholders. In the
Trustees' quarterly review of the Plan, they will consider its continued
appropriateness and the level of compensation provided therein.

The Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval by the shareholders of the
affected Class or Classes of the Fund, and all material amendments to the Plan
must also be approved by the Trustees in the manner described above. The Plan
may be terminated at any time, without payment of any penalty, by vote of a
majority of the Independent Trustees or by a vote of a majority of the
outstanding voting securities of the Fund (as defined in the Investment Company
Act) on not more than thirty days' written notice to any other party to the
Plan. So long as the Plan is in effect, the election and nomination of
Independent Trustees shall be committed to the discretion of the Independent
Trustees.

F. OTHER SERVICE PROVIDERS

(1) TRANSFER AGENT/DIVIDEND-PAYING AGENT

Morgan Stanley Dean Witter Trust FSB is the Transfer Agent for the Fund's
shares and the Dividend Disbursing Agent for payment of dividends and
distributions on Fund shares and Agent for shareholders under various
investment plans. The principal business address of the Transfer Agent is
Harborside Financial Center, Plaza Two, Jersey City, New Jersey 07311.

(2) CUSTODIAN AND INDEPENDENT ACCOUNTANTS

The Bank of New York, 90 Washington Street, New York, New York 10286 is
the Custodian for the portion of the Fund's assets in groupings 2 and 3 in the
Fund's Prospectus. The Chase Manhattan Bank, One Chase Plaza, New York, New
York 10005 is the Custodian for the portion of the Fund's assets in grouping 1
in the Prospectus. As Custodian, The Chase Manhattan Bank has contracted with
various foreign banks and depositaries to hold portfolio securities of non-U.S.
issuers on behalf of the Fund. Any of the Fund's cash balances with either
Custodian in excess of $100,000 are unprotected by federal deposit insurance.
These balances may, at times, be substantial.

PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New
York 10036, serves as the independent accountants of the Fund. The independent
accountants are responsible for auditing the annual financial statements of the
Fund.

(3) AFFILIATED PERSONS

The Transfer Agent is an affiliate of the Investment Manager, and of the
Distributor. As Transfer Agent and Dividend Disbursing Agent, the Transfer
Agent's responsibilities include maintaining share-

23
<PAGE>

holder accounts, disbursing cash dividends and reinvesting dividends,
processing account registration changes, handling purchase and redemption
transactions, mailing prospectuses and reports, mailing and tabulating proxies,
processing share certificate transactions, and maintaining shareholder records
and lists. For these services, the Transfer Agent receives a per shareholder
account fee from the Fund and is reimbursed for its out-of-pocket expenses in
connection with such service.

VI. BROKERAGE ALLOCATION AND OTHER PRACTICES
- --------------------------------------------------------------------------------

A. BROKERAGE TRANSACTIONS

Subject to the general supervision of the Board of Trustees, the
Investment Manager is responsible for decisions to buy and sell securities for
the Fund, the selection of brokers and dealers to effect the transactions, and
the negotiation of brokerage commissions, if any. Purchases and sales of
securities on a stock exchange are effected through brokers who charge a
commission for their services. The Fund expects that the primary market for the
securities in which it intends to invest will generally be the over-the-counter
market. In the over-the-counter market, securities are generally traded on a
"net" basis with dealers acting as principal for their own accounts without a
stated commission, although the price of the security usually includes a profit
to the dealer. The Fund expects that securities will be purchased at times in
underwritten offerings where the price includes a fixed amount of compensation,
generally referred to as the underwriter's concession or discount. Options and
futures transactions will usually be effected through a broker and a commission
will be charged. On occasion, the Fund may also purchase certain money market
instruments directly from an issuer, in which case no commissions or discounts
are paid.

For the fiscal years ended December 31, 1996, 1997 and 1998, the Fund paid
no brokerage commissions.

B. COMMISSIONS

Pursuant to an order of the SEC, the Fund may effect principal
transactions in certain money market instruments with Dean Witter Reynolds. The
Fund will limit its transactions with Dean Witter Reynolds to U.S. Government
and government agency securities, bank money instruments (i.e., certificates of
deposit and bankers' acceptances) and commercial paper. The transactions will
be effected with Dean Witter Reynolds only when the price available from Dean
Witter Reynolds is better than that available from other dealers.

During the fiscal years ended December 31, 1996, 1997 and 1998, the Fund
did not effect any principal transactions with Dean Witter Reynolds.

Consistent with the policy described above, brokerage transactions in
securities listed on exchanges or admitted to unlisted trading privileges may
be effected through Dean Witter Reynolds, Morgan Stanley & Co. and other
affiliated brokers and dealers. In order for an affiliated broker or dealer to
effect any portfolio transactions on an exchange for the Fund, the commissions,
fees or other remuneration received by the affiliated broker or dealer must be
reasonable and fair compared to the commissions, fees or other remuneration
paid to other brokers in connection with comparable transactions involving
similar securities being purchased or sold on an exchange during a comparable
period of time. This standard would allow the affiliated broker or dealer to
receive no more than the remuneration which would be expected to be received by
an unaffiliated broker in a commensurate arm's-length transaction. Furthermore,
the Trustees, including the Independent Trustees, have adopted procedures which
are reasonably designed to provide that any commissions, fees or other
remuneration paid to an affiliated broker or dealer are consistent with the
foregoing standard. The Fund does not reduce the management fee it pays to the
Investment Manager by any amount of the brokerage commissions it may pay to an
affiliated broker or dealer.

During the fiscal years ended December 31, 1996, 1997 and 1998, the Fund
did not effect any securities transactions through any affiliated brokers or
dealers.

24
<PAGE>

C. BROKERAGE SELECTION

The policy of the Fund regarding purchases and sales of securities for its
portfolio is that primary consideration will be given to obtaining the most
favorable prices and efficient executions of transactions. Consistent with this
policy, when securities transactions are effected on a stock exchange, the
Fund's policy is to pay commissions which are considered fair and reasonable
without necessarily determining that the lowest possible commissions are paid
in all circumstances. The Fund believes that a requirement always to seek the
lowest possible commission cost could impede effective portfolio management and
preclude the Fund and the Investment Manager from obtaining a high quality of
brokerage and research services. In seeking to determine the reasonableness of
brokerage commissions paid in any transaction, the Investment Manager relies
upon its experience and knowledge regarding commissions generally charged by
various brokers and on its judgment in evaluating the brokerage and research
services received from the broker effecting the transaction. These
determinations are necessarily subjective and imprecise, as in most cases an
exact dollar value for those services is not ascertainable.

The Fund anticipates that certain of its transactions involving foreign
securities will be effected on securities exchanges. Fixed commissions on such
transactions are generally higher than negotiated commissions on domestic
transactions. There is also generally less government supervision and
regulation of foreign securities exchanges and brokers than in the United
States.

In seeking to implement the Fund's policies, the Investment Manager
effects transactions with those brokers and dealers who the Investment Manager
believes provide the most favorable prices and are capable of providing
efficient executions. If the Investment Manager believes the prices and
executions are obtainable from more than one broker or dealer, it may give
consideration to placing portfolio transactions with those brokers and dealers
who also furnish research and other services to the Fund or the Investment
Manager. The services may include, but are not limited to, any one or more of
the following: information as to the availability of securities for purchase or
sale; statistical or factual information or opinions pertaining to investment;
wire services; and appraisals or evaluations of portfolio securities. The
information and services received by the Investment Manager from brokers and
dealers may be of benefit to the Investment Manager in the management of
accounts of some of its other clients and may not in all cases benefit the Fund
directly.

The Investment Manager currently serves as investment manager to a number
of clients, including other investment companies, and may in the future act as
investment manager or advisor to others. It is the practice of the Investment
Manager to cause purchase and sale transactions to be allocated among the Fund
and others whose assets it manages in such manner as it deems equitable. In
making such allocations among the Fund and other client accounts, various
factors may be considered, including the respective investment objectives, the
relative size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held and the opinions of the persons responsible for managing the
portfolios of the Fund and other client accounts. In the case of certain
initial and secondary public offerings, the Investment Manager utilizes a pro
rata allocation process based on the size of the Morgan Stanley Dean Witter
Funds involved and the number of shares available from the public offering.

D. DIRECTED BROKERAGE

During the fiscal year ended December 31, 1998, the Fund did not pay any
brokerage commissions to brokers because of research services provided.

E. REGULAR BROKER-DEALERS

During the fiscal year ended December 31, 1998, the Fund did not purchase
securities issued by brokers or dealers that were among the ten brokers or the
ten dealers that executed transactions for or with the Fund in the largest
dollar amounts during the year.

25
<PAGE>

VII. CAPITAL STOCK AND OTHER SECURITIES
- --------------------------------------------------------------------------------

The shareholders of the Fund are entitled to a full vote for each full
share of beneficial interest held. The Fund is authorized to issue an unlimited
number of shares of beneficial interest. All shares of beneficial interest of
the Fund are of $0.01 par value and are equal as to earnings, assets and voting
privileges except that each Class will have exclusive voting privileges with
respect to matters relating to distribution expenses borne solely by such Class
or any other matter in which the interests of one Class differ from the
interests of any other Class. In addition, Class B shareholders will have the
right to vote on any proposed material increase in Class A's expenses, if such
proposal is submitted separately to Class A shareholders. Also, Class A, Class
B and Class C bear expenses related to the distribution of their respective
shares.

The Fund's Declaration of Trust permits the Trustees to authorize the
creation of additional series of shares (the proceeds of which would be
invested in separate, independently managed portfolios) and additional Classes
of shares within any series. The Trustees have not presently authorized any
such additional series or Classes of shares other than as set forth in the
Prospectus.

The Fund is not required to hold annual meetings of shareholders and in
ordinary circumstances the Fund does not intend to hold such meetings. The
Trustees may call special meetings of shareholders for action by shareholder
vote as may be required by the Investment Company Act or the Declaration of
Trust. Under certain circumstances, the Trustees may be removed by action of
the Trustees or by the shareholders.

Under Massachusetts law, shareholders of a business trust may, under
certain limited circumstances, be held personally liable as partners for the
obligations of the Fund. However, the Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Fund,
requires that notice of such Fund obligations include such disclaimer, and
provides for indemnification out of the Fund's property for any shareholder
held personally liable for the obligations of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations. Given the above limitations on shareholder personal liability, and
the nature of the Fund's assets and operations, the possibility of the Fund
being unable to meet its obligations is remote and thus, in the opinion of
Massachusetts counsel to the Fund, the risk to Fund shareholders of personal
liability is remote.

All of the Trustees have been elected by the shareholders of the Fund,
most recently at a Special Meeting of Shareholders held on May 21, 1997. The
Trustees themselves have the power to alter the number and the terms of office
of the Trustees (as provided for in the Declaration of Trust), and they may at
any time lengthen or shorten their own terms or make their terms of unlimited
duration and appoint their own successors, provided that always at least a
majority of the Trustees has been elected by the shareholders of the Fund.

VIII. PURCHASE, REDEMPTION AND PRICING OF SHARES
- --------------------------------------------------------------------------------

A. PURCHASE/REDEMPTION OF SHARES

Information concerning how Fund shares are offered to the public (and how
they are redeemed and exchanged) is provided in the Fund's Prospectus.

In the case of Class B shares of the Fund issued in exchange for shares of
Dean Witter National Municipal Trust ("National Municipal") in connection with
the reorganization of National Municipal with the Fund on November 7, 1997
pursuant to an Agreement and Plan of Reorganization (the "Reorganization"),
that were subject to the lower CDSC schedule of National Municipal (as
described below), will continue to be subject to that lower CDSC Schedule
unless (i) such shares are subsequently exchanged for shares of a fund with a
higher CDSC schedule or (ii) having been exchanged for shares of Morgan Stanley
Dean Witter Global Short-Term Income Fund Inc. ("Global Short-Term") or Morgan
Stanley Dean Witter Short-Term U.S. Treasury Trust, Morgan Stanley Dean Witter
Limited Term Municipal Trust, Morgan Stanley Dean Witter Short-Term Bond Fund,
and five Morgan Stanley Dean Witter funds which are money market funds (the
"Exchange Funds") are re-exchanged back into the Fund. Under such

26
<PAGE>

circumstances, the CDSC schedule applicable to shares of the fund with the
higher CDSC schedule acquired in the exchange will apply to redemptions of such
fund's shares or, in the case of shares of Global Short-Term or any of the
Exchange Funds acquired in an exchange and then subsequently re-exchanged back
into the Fund, the CDSC schedule set forth in the above table will apply to
redemptions of any of such shares. The CDSC schedule applicable to National
Municipal was as follows: Shares held for three years or more after purchase
(calculated as described in the paragraph above) are not subject to any CDSC
upon redemption. However, shares redeemed earlier than three years after
purchase may be subject to a CDSC (calculated as described in the paragraph
above), the percentage of which depends on how long the shares have been held,
as set forth in the following table:

<TABLE>
<CAPTION>
YEAR SINCE CDSC AS A PERCENTAGE
PURCHASE PAYMENT MADE OF AMOUNT REDEEMED
- ------------------------------- ---------------------
<S> <C>
First ......................... 3.0%
Second ........................ 2.0%
Third ......................... 1.0%
Fourth and thereafter ......... None
</TABLE>

TRANSFER AGENT AS AGENT. With respect to the redemption or repurchase of
Fund shares, the application of proceeds to the purchase of new shares in the
Fund or any other Morgan Stanley Dean Witter Funds and the general
administration of the exchange privilege, the Transfer Agent acts as agent for
the Distributor and for the shareholder's authorized broker-dealer, if any, in
the performance of such functions. With respect to exchanges, redemptions or
repurchases, the Transfer Agent shall be liable for its own negligence and not
for the default or negligence of its correspondents or for losses in transit.
The Fund shall not be liable for any default or negligence of the Transfer
Agent, the Distributor or any authorized broker-dealer.

The Distributor and any authorized broker-dealer have appointed the
Transfer Agent to act as their agent in connection with the application of
proceeds of any redemption of Fund shares to the purchase of shares of any
other Morgan Stanley Dean Witter Fund and the general administration of the
exchange privilege. No commission or discounts will be paid to the Distributor
or any authorized broker-dealer for any transaction pursuant to the exchange
privilege.

TRANSFERS OF SHARES. In the event a shareholder requests a transfer of
Fund shares to a new registration, the shares will be transferred without sales
charge at the time of transfer. With regard to the status of shares which are
either subject to the CDSC or free of such charge (and with regard to the
length of time shares subject to the charge have been held), any transfer
involving less than all of the shares in an account will be made on a pro rata
basis (that is, by transferring shares in the same proportion that the
transferred shares bear to the total shares in the account immediately prior to
the transfer). The transferred shares will continue to be subject to any
applicable CDSC as if they had not been so transferred.

B. OFFERING PRICE

The Fund's Class B, Class C and Class D shares are offered at net asset
value per share and the Class A shares are offered at net asset value per share
plus any applicable FSC which is distributed among the Fund's Distributor, Dean
Witter Reynolds and other authorized dealers as described in Section "V.
Investment Management and Other Services -- E. Rule 12b-1 Plan." The price of
the Fund, called "net asset value," is based on the value of the Fund's
portfolio securities.

Portfolio securities (other than short-term debt securities and futures
and options) are valued for the Fund by an outside independent pricing service
approved by the Trustees. The pricing service has informed the Fund that in
valuing the portfolio securities for the Fund it uses both a computerized grid
matrix of tax-exempt securities and evaluations by its staff, in each case
based on information concerning market transactions and quotations from dealers
which reflect the bid side of the market each day. The portfolio securities for
the Fund are thus valued by reference to a combination of transactions and
quotations for the same or other securities believed to be comparable in
quality, coupon, maturity,

27
<PAGE>

type of issue, call provisions, trading characteristics and other features
deemed to be relevant. The Trustees believe that timely and reliable market
quotations are generally not readily available to the Fund for purposes of
valuing tax-exempt securities and that the valuations supplied by the pricing
service, using the procedures outlined above and subject to periodic review,
are more likely to approximate the fair value of such securities. The
Investment Manager will periodically review and evaluate the procedures,
methods and quality of services provided by the pricing service then being used
by the Fund and may, from time to time, recommend to the Trustees the use of
other pricing services or discontinuance of the use of any pricing service in
whole or part. The Trustees may determine to approve such recommendation or
take other provisions for pricing of the portfolio securities for the Fund.

Short-term taxable debt securities with remaining maturities of 60 days or
less at time of purchase are valued at amortized cost, unless the Trustees
determine such does not reflect the securities' market value, in which case
these securities will be valued at their fair value as determined by the
Trustees. Other taxable short-term debt securities with maturities of more than
60 days will be valued on a mark to market basis until such time as they reach
a maturity of 60 days, whereupon they will be valued at amortized cost using
their value on the 61st day unless the Trustees determine such does not reflect
the securities' fair value, in which case these securities will be valued at
their fair market value as determined by the Trustees. Listed options on debt
securities are valued at the latest sale price on the exchange on which they
are listed unless no sales of such options have taken place that day, in which
case, they will be valued at the mean between their closing bid and asked
prices. Unlisted options on debt securities are valued at the mean between
their latest bid and asked price. Futures are valued at the latest sale price
on the commodities exchange on which they trade unless the Trustees determines
that such price does not reflect their fair value, in which case they will be
valued at their fair market value as determined by the Trustees. All other
securities and other assets are valued at their fair value as determined in
good faith under procedures established by and under the supervision of the
Trustees.

IX. TAXATION OF THE FUND AND SHAREHOLDERS
- --------------------------------------------------------------------------------

The Fund generally will make three basic types of distributions: tax
exempt dividends, ordinary dividends and long-term capital gain distributions.
These types of distributions are reported differently on a shareholder's income
tax return and they are also subject to different rates of tax. The tax
treatment of the investment activities of the Fund will affect the amount and
timing and character of the distributions made by the Fund. Shareholders are
urged to consult their own tax professionals regarding specific questions as to
federal, state or local taxes.

INVESTMENT COMPANY TAXATION. The Fund intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986. As such, the Fund will not be subject to federal income tax on its net
investment income and capital gains, if any, to the extent that it distributes
such income and capital gains to its shareholders.

The Fund generally intends to distribute sufficient income and gains so
that the Fund will not pay corporate income tax on its earnings. The Fund also
generally intends to distribute to its shareholders in each calendar year a
sufficient amount of ordinary income and capital gains to avoid the imposition
of a 4% excise tax. However, the Fund may instead determine to retain all or
part of any ordinary income or capital gains in any year for reinvestment. In
such event, the Fund will pay federal income tax (and possibly excise tax) on
such retained gains.

Gains or losses on sales of securities by the Fund will be long-term
capital gains or losses if the securities have a tax holding period of more
than one year. Gains or losses on the sale of securities with a tax holding
period of one year or less will be short-term gains or losses.

In computing net investment income, the Fund will amortize any premiums
and original issue discounts on securities owned, if applicable. Capital gains
or losses realized upon sale or maturity of such securities will be based on
their amortized cost.

All or a portion of any gain from tax-exempt obligations purchased at a
market discount may be treated as ordinary income rather than capital gain.

28
<PAGE>

From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal securities. Similar proposals may be introduced in the
future. If such a proposal were enacted, the availability of municipal
securities for investment by the Fund could be affected. In that event, the
Fund would re-evaluate its investment objective and policies.

TAXATION OF DIVIDENDS AND DISTRIBUTIONS. The Fund intends to qualify to
pay "exempt-interest dividends" to its shareholders by maintaining, as of the
close of each of its taxable years, at least 50% of the value of its assets in
tax-exempt securities. An exempt-interest dividend is that part of the dividend
distributions made by the Fund which consists of interest received by the Fund
on tax-exempt securities upon which the shareholder incurs no federal income
taxes. Exempt-interest dividends are included, however, in determining what
portion, if any, of a person's Social Security benefits are subject to federal
income tax.

The Fund intends to invest a portion of its assets in certain "private
activity bonds". As a result, a portion of the exempt-interest dividends paid
by the Fund will be an item of tax preference to shareholders subject to the
alternative minimum tax. Certain corporations which are subject to the
alternative minimum tax may also have to include exempt-interest dividends in
calculating their alternative minimum taxable income in situations where the
"adjusted current earnings" of the corporation exceeds its alternative minimum
taxable income.

Shareholders will be subject to federal income tax on dividends paid from
interest income derived from taxable securities and on distributions of net
short-term capital gains. Such dividends and distributions are taxable to the
shareholder as ordinary dividend income regardless of whether the shareholder
receives such distributions in additional shares or in cash. Distributions of
long-term capital gains, if any, are taxable as long-term capital gains,
regardless of how long the shareholder has held the Fund shares and regardless
of whether the distribution is received in additional shares or in cash. Since
the income of the Fund is expected to be derived entirely from interest rather
than dividends, it is anticipated that no portion of such dividend
distributions will be eligible for the federal dividends received deduction
available to corporations.

Shareholders are generally taxed on any ordinary dividend or capital gain
distributions from the Fund in the year they are actually distributed. However,
if any such dividends or distributions are declared in October, November or
December and paid in January then such amounts will be treated for tax purposes
as received by the shareholders on December 31, to shareholders of record of
such month.

Shareholders who are not citizens or residents of the United States and
certain foreign entities may be subject to withholding of United States tax on
distributions made by the Fund of any taxable interest income and short term
capital gains.

After the end of each calendar year, shareholders will be sent full
information on their dividends and capital gain distributions for tax purposes,
including the portion taxable as ordinary income, the portion taxable as
long-term capital gains and the percentage of any distributions which
constitute an item of tax preference for purposes of the alternative minimum
tax.

PURCHASES AND REDEMPTIONS AND EXCHANGES OF FUND SHARES. Any dividend or
capital gains distribution received by a shareholder from the Fund will have
the effect of reducing the net asset value of the shareholder's stock in the
Fund by the exact amount of the dividend or capital gains distribution.
Furthermore, capital gains distributions and some portion of the dividends may
be subject to federal income taxes. If the net asset value of the shares should
be reduced below a shareholder's cost as a result of the payment of dividends
or the distribution of realized long-term capital gains, such payment or
distribution would be in part a return of the shareholder's investment but
nonetheless would be taxable to the shareholder. Therefore, an investor should
consider the tax implications of purchasing shares of the Fund immediately
prior to a distribution record date.

In general, a sale of shares results in capital gain or loss, and for
individual shareholders, is taxable at a federal rate dependent upon the length
of time the shares were held. A redemption of a shareholder's shares is
normally treated as a sale for tax purposes. Shares of the Fund held for a
period of one year

29
<PAGE>

or less will, for tax purposes, generally result in short-term gains or losses
and those held for more than one year generally result in long-term gain or
loss. Any loss realized by shareholders upon a redemption of shares within six
months of the date of their purchase will be treated as a long-term capital
loss to the extent of any distributions of net long-term capital gains with
respect to such shares during the six-month period.

Gain or loss on the sale or redemption of shares in the Fund is measured
by the difference between the amount received and the tax basis of the shares.
Shareholders should keep records of investments made (including shares acquired
through reinvestment of dividends and distributions) so they can compute the
tax basis of their shares. Under certain circumstances a shareholder may
compute and use an average cost basis in determining the gain or loss on the
sale or redemption of shares.

Exchanges of shares in the Fund for shares of other Morgan Stanley Dean
Witter Funds, are also subject to similar tax treatment. Such an exchange is
treated for tax purposes as a sale of the original shares in the Fund, followed
by the purchase of shares in the Fund.

If a shareholder realizes a loss on the redemption or exchange of a shares
in the Fund and reinvests in shares of the Fund within 30 days before or after
the redemption or exchange, the transactions may be subject to the "wash sale"
rules, resulting in a postponement of the recognition of such loss for tax
purposes.

Interest on indebtedness incurred by shareholders to purchase or carry
shares of the Fund is not deductible. Furthermore, entities or persons who are
"substantial users" (or related persons) of facilities financed by industrial
development bonds should consult their tax advisers before purchasing shares of
the Fund. "Substantial user" is defined generally by Income Tax Regulation
1.103-11(b) as including a "non-exempt person" who regularly uses in a trade or
business a part of a facility financed from the proceeds of industrial
development bonds.

X. UNDERWRITERS
- --------------------------------------------------------------------------------

The Fund's shares are offered to the public on a continuous basis. The
Distributor, as the principal underwriter of the shares, has certain
obligations under the Distribution Agreement concerning the distribution of the
shares. These obligations and the compensation the Distributor receives are
described above in the sections titled "Principal Underwriter" and "Rule 12b-1
Plans."

XI. CALCULATION OF PERFORMANCE DATA
- --------------------------------------------------------------------------------

From time to time the Fund may quote its "yield" and/or its "total return"
in advertisements and sales literature. These figures are computed separately
for Class A, Class B, Class C and Class D shares.

Prior to July 28, 1997, the Fund offered only one Class of shares subject
to a maximum sales charge of 4.0% and no 12b-1 fee. Because the distribution
arrangement for Class A most closely resembles the distribution arrangement
applicable prior to the implementation of multiple classes (i.e. Class A is
sold with a front-end sales charge), historical performance information has
been restated to reflect (i) the actual maximum sales charges applicable to
Class A (i.e., 4.25%) and (ii) the ongoing 12b-1 fee applicable to Class A
Shares. Furthermore, because all shares of the Fund held prior to July 28, 1997
have been designated Class D shares, the Fund's historical performance has also
been restated to reflect the absence of any sales charge in the class of Class
D shares. Following the restated performance information for Class A and Class
D is the actual performance of the Fund based on its original, single class
sales charge structure as of its last fiscal year. Also set forth below is the
actual performance of Class B and Class C as of their last fiscal year.

Yield is calculated for any 30-day period as follows: the amount of
interest income for each security in the Fund's portfolio is determined in
accordance with regulatory requirements; the total for the entire portfolio
constitutes the Fund's gross income for the period. Expenses accrued during the
period are subtracted to arrive at "net investment income" of each Class. The
resulting amount is divided by the product of the maximum offering price per
share on the last day of the period, multiplied by the average number of shares
of the applicable Class outstanding during the period that were entitled to
dividends.

30
<PAGE>

This amount is added to 1 and raised to the sixth power. 1 is then subtracted
from the result and the difference is multiplied by 2 to arrive at the
annualized yield. For the 30-day period ended December 31, 1998, the yield,
calculated pursuant to the formula described above, was approximately 4.05%,
3.88%, 3.77% and 4.49% for Class A, Class B, Class C and Class D, respectively.

The Fund may also quote a "tax-equivalent yield" for each Class determined
by dividing the tax-exempt portion of quoted yield by 1 minus the stated income
tax rate and adding the result to the portion of the yield that is not
tax-exempt. The yield for Class A, Class B, Class C and Class D shares, based
upon a Federal personal income tax bracket of 39.60% (the highest current
individual marginal tax rate), for the 30-day period ended December 31, 1998
were 6.71%, 6.42%, 6.24% and 7.43% respectively, based upon the yield quoted
above.

The Fund's "average annual total return" represents an annualization of
the Fund's total return over a particular period and is computed by finding the
annual percentage rate which will result in the ending redeemable value of a
hypothetical $1,000 investment made at the beginning of a one, five or ten year
period, or for the period from the date of commencement of operations, if
shorter than any of the foregoing. The ending redeemable value is reduced by
any contingent deferred sales charge ("CDSC") at the end of the one, five, ten
year or other period. For the purpose of this calculation, it is assumed that
all dividends and distributions are reinvested. The formula for computing the
average annual total return involves a percentage obtained by dividing the
ending redeemable value by the amount of the initial investment (which in the
case of Class A shares is reduced by the Class A initial sales charge), taking
a root of the quotient (where the root is equivalent to the number of years in
the period) and subtracting 1 from the result. The average annual total returns
of the Class A and Class D shares of the Fund for the year ended December 31,
1998 were 1.36% and 6.11%, respectively; the restated average annual total
returns for the five years ended December 31, 1998 were 4.62% and 5.79%,
respectively; and the restated average annual total returns for the ten years
ended December, 1998 were 7.08% and 7.81%, respectively. The average annual
total returns of Class B for the fiscal year ended December 31, 1998 and for
the period July 28, 1997 (inception of the Class) through December 31, 1998
were 0.50% and 3.65%, respectively. The average annual total returns of Class C
for the fiscal year ended December 31, 1998 and for the period July 28, 1997
(inception of the Class) through December 31, 1998 were 4.37% and 6.10%,
respectively.

In addition, the Fund may advertise its total return for each Class over
different periods of time by means of aggregate, average, year-by-year or other
types of total return figures. These calculations may or may not reflect the
imposition of the maximum front-end sales charge for Class A or the deduction
of the CDSC for each of Class B and Class C which, if reflected, would reduce
the performance quoted. For example, the average annual total return of the
Fund may be calculated in the manner described above, but without deduction for
any applicable sales charge. Based on the foregoing calculation, the Fund's
average annual total return for Class A shares for the year ended December 31,
1998 was 5.86% and the restated average annual total return for the five years
ended December 31, 1998 was 5.53% and the restated average annual total return
for the ten years ended December 31, 1998 was 7.55%. Because the Class D shares
are not subject to any sales charge, the Fund would only advertise average
annual returns as calculated in the previous paragraph. The average annual
total returns of Class B for the fiscal year ended December 31, 1998 and for
the period July 28, 1997 through December 31, 1998 were 5.47% and 6.39%,
respectively. The average annual total returns of Class C for the fiscal year
ended December 31, 1998 and for the period July 28, 1997 through December 31,
1998 were 5.36% and 6.10%, respectively.

In addition, the Fund may compute its aggregate total return for each
Class for specified periods by determining the aggregate percentage rate which
will result in the ending value of a hypothetical $1,000 investment made at the
beginning of the period. For the purpose of this calculation, it is assumed
that all dividends and distributions are reinvested. The formula for computing
aggregate total return involves a percentage obtained by dividing the ending
value (without reduction for any sales charge) by the initial $1,000 investment
and subtracting 1 from the result. Based on the foregoing calculation, the
Fund's total returns for Class A and Class D shares for the year ended December
31, 1998 were 5.86% and 6.11%, respectively, the restated total returns for the
five years ended December 31, 1998 were 30.90% and

31
<PAGE>

32.52%, and the restated total returns for the ten years ended December 31,
1998 were 107.73% and 112.19%. Based on the foregoing calculation, the Fund's
total returns for Class B and Class C shares for the year ended December 31,
1998 were 5.47% and 5.36%, respectively, the total returns for the period July
28, 1997 through December 31, 1998 were 9.24% and 8.82%, respectively.

The Fund may also advertise the growth of hypothetical investments of
$10,000, $50,000 and $100,000 in each Class of shares of the Fund by adding 1
to the Fund's aggregate total return to date (expressed as a decimal and
without taking into account the effect of any applicable CDSC) and multiplying
by $9,575, $48,250 and $97,250 in the case of Class A (investments of $10,000,
$50,000 and $100,000 adjusted for the initial sales charge) or by $10,000,
$50,000 and $100,000 in the case of each of Class B, Class C and Class D, as
the case may be. Investments of $10,000, $50,000 and $100,000 in each Class at
inception of the Class would have grown to the following amounts at December
31, 1998:

<TABLE>
<CAPTION>
INVESTMENT AT INCEPTION OF:
-------------------------------------
INCEPTION
CLASS DATE: $10,000 $50,000 $100,000
- ----------------- ---------------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Class A ......... 3/27/80(1) $49,584 $249,863 $503,609
Class B ......... 07/28/97 10,924 54,620 109,240
Class C ......... 07/28/97 10,882 54,410 108,820
Class D ......... 03/27/80 54,243 271,215 542,430
</TABLE>

- ----------
(1) For purposes of restating the performance of Class A, the inception date
set forth in the above table is the inception date of the Fund. However,
Class A did not actually commence operation until July 28, 1997.

All shares of the Fund held prior to July 28, 1997 were designated Class D
shares and accordingly, the actual performance numbers set forth below
represent the actual performance of the continuing Class D. The actual average
annual total returns of the Fund, calculated with the deduction of maximum
applicable sales charge described above, for the five years ended December 31,
1998 and for the ten years ended December 31, 1998 were 4.93% and 7.37%,
respectively. The actual average annual total returns of the Fund calculated
without the deduction for any applicable sales charge for the five years ended
December 31, 1998 and for the ten years ended December 31, 1998, were 5.79% and
7.81%, respectively. The Fund's actual aggregate total return, without the
deduction for any application sales charge for the five years ended December
31, 1998 was 32.52% and the actual total return for the ten years ended
December 31, 1998 was 112.19%. Investments of $10,000, $50,000 and $100,000,
adjusted for the sales charges in effect at such time (4.0%, 3.25% or 2.75%,
respectively), in the Fund at inception would have grown to $52,073, $262,401
and $527,513, respectively, at December 31, 1998.

The Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by independent organizations.

XII. FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

EXPERTS. The financial statements of the Fund for the fiscal year ended
December 31, 1998 included in this Statement of Additional Information and
incorporated by reference in the Prospectus have been so included and
incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.

* * * * *

This Statement of Additional Information and the Prospectus do not contain
all of the information set forth in the Registration Statement the Fund has
filed with the SEC. The complete Registration Statement may be obtained from
the SEC.

<PAGE>

MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS December 31, 1998

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TAX-EXEMPT MUNICIPAL BONDS (95.9%)
General Obligation (12.1%)
North Slope Borough, Alaska,
$ 5,000 Ser 1992 A Conv (MBIA) .................................................. 5.90% 06/30/03 $ 5,421,950
18,000 Ser 1994 B (FSA) ........................................................ 0.00 06/30/05 13,738,500
18,500 Ser 1995 A (MBIA) ....................................................... 0.00 06/30/06 13,446,170
13,925 Ser 1996 B (MBIA) ....................................................... 0.00 06/30/06 10,120,969
10,000 Ser 1996 B (MBIA) ....................................................... 0.00 06/30/07 6,930,700
1,000 Santa Margarita/Dana Point Authority, California, Impr Dists
#3, 3A, 4 & 4A 1994 Ser B Refg (MBIA) ................................... 5.75 08/01/20 1,061,700
4,000 Connecticut, College Savings 1989 Ser A ................................... 0.00 07/01/08 2,677,600
20,000 Massachusetts, Refg 1996 Ser A (AMBAC) .................................... 6.00 11/01/10 23,090,000
4,000 Clark County, Nevada, Transportation Ser 1992 A (AMBAC) ................... 6.50 06/01/17 4,800,880
New York City, New York,
1,500 1995 Ser D (MBIA) ....................................................... 6.20 02/01/07 1,701,570
3,405 1990 Ser D .............................................................. 6.00 08/01/07 3,455,632
2,865 1990 Ser D .............................................................. 6.00 08/01/08 2,907,603
10,000 North Carolina, 1997 Ser A ................................................ 5.20 03/01/16 10,488,100
1,000 Delaware City School District, Ohio, Constr & Impr (FGIC) ................. 5.75 12/01/20 1,066,800
10,000 Pennsylvania, First Ser 1995 (FGIC) ....................................... 5.50 05/01/12 10,696,600
7,000 Shelby County, Tennessee, Refg 1995 Ser A ................................. 5.625 04/01/14 7,452,970
20,000 King County, Washington, Ltd Tax 1995 (MBIA) .............................. 6.00 01/01/23 22,057,600
2,000 Washington, 1995 Ser A .................................................... 5.80 09/01/08 2,169,920
-------- --------------
152,195 143,285,264
-------- --------------
Educational Facilities Revenue (6.3%)
1,000 California Educational Facilities Authority, Claremont Colleges Ser 1992 .. 6.375 05/01/22 1,071,380
10,000 Indiana University, Student Fee Ser K (MBIA) .............................. 5.875 08/01/20 10,771,300
6,000 Maryland Health & Educational Facilities Authority, The John Hopkins
University Refg Ser 1998 ................................................ 5.125 07/01/20 6,049,320
Massachusetts Health & Educational Facilities Authority,
7,000 Boston University Ser 1991 (MBIA) ....................................... 6.66 10/01/31 7,592,130
5,000 Brandeis University 1988 Ser I (MBIA) ................................... 4.75 10/01/28 4,704,050
5,000 Missouri Health & Educational Facilities Authority, Washington University
Ser 1998 A .............................................................. 4.75 11/15/37 4,697,000
10,000 New Hampshire Higher Educational & Health Facilities Authority,
Dartmouth College Ser 1993 .............................................. 5.375 06/01/23 10,181,300
2,000 New Jersey Development Authority, The Seeing Eye Inc 1991 ................. 7.30 04/01/11 2,111,420
New York State Dormitory Authority,
500 City University 1994 3rd Resolution Ser 1 (AMBAC) ....................... 6.30 07/01/24 559,310
5,000 State University Ser 1989 B ............................................. 0.00 05/15/02 4,374,900
20,000 State University Ser 1990 B ............................................. 7.00 05/15/16 21,245,800
1,000 Virginia Polytechnic Institute & State University, Ser 1996 A ............. 5.50 06/01/16 1,046,320
-------- --------------
72,500 74,404,230
-------- --------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

33
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS December 31, 1998, continued

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Electric Revenue (12.4%)
$ 25,000 Salt River Project Agricultural Improvement & Power District, Arizona,
Refg 1993 Ser C (Secondary MBIA) ...........................................
10,000 Sacramento Municipal Utility District, California, Refg 1994 Ser I (MBIA) .... 5.50% 01/01/10 $ 27,584,500
10,000 Municipal Electric Authority of Georgia, Ser Y (Secondary MBIA) .............. 5.75 01/01/15 10,718,900
5,000 Long Island Power Authority, New York, Ser 1998 A (FSA) ...................... 6.50 01/01/17 11,912,500
Eugene, Oregon, Electric Utility
1,000 Ser 1996 (FSA) ............................................................. 5.125 12/01/22 5,001,900
1,000 Ser 1996 (FSA) ............................................................. 5.375 08/01/12 1,058,550
Puerto Rico Electric Power Authority,
1,500 Power Ser X ................................................................ 5.375 08/01/13 1,058,550
15,000 Power Ser O ................................................................ 6.00 07/01/15 1,628,550
5,000 Power Ser EE (MBIA) ........................................................ 0.00 07/01/17 6,037,800
15,000 South Carolina Public Service Authority, 1995 Refg Ser A (AMBAC) ............. 4.50 07/01/18 4,790,050
1,000 Austin, Texas, Combined Utilities Refg Ser 1994 (FGIC) ....................... 6.25 01/01/22 16,906,650
San Antonio, Texas, Electric & Gas
20,000 Refg Ser 1994 C ............................................................ 6.25 05/15/16 1,122,264
5,000 Refg Ser 1998 A ............................................................ 4.70 02/01/06 20,642,800
Intermountain Power Agency, Utah,
5,000 Refg Ser 1998 A (MBIA) ..................................................... 4.50 02/01/21 4,648,850
10,000 Refg Ser 1997 B (MBIA) ..................................................... 5.25 07/01/15 5,165,150
15,000 Washington Public Power System, Proj #2 Refg Ser 1994 A 5.75 07/01/19 10,716,700
(Secondary MBIA) ........................................................... 6.00 07/01/07 16,776,900
-------- --------------
144,500 145,770,614
-------- --------------
Hospital Revenue (7.7%)
11,465 Birmingham -- Carraway Special Care Facilities Financing Authority,
Alabama, Carraway Methodist Ser 1995 A (Connie Lee) ........................ 6.25 08/15/09 13,168,814
3,000 Baxter County, Arkansas, Baxter County Regional Hospital Impr & Refg
Ser 1992 ................................................................... 7.50 09/01/21 3,289,200
4,000 Antelope Valley Healthcare District, California, Ser 1997 B (FSA) ............ 5.20 01/01/17 4,092,920
2,000 Orange County Health Facilities Authority, Florida, Adventist Health/Sunbelt
Ser 1995 (AMBAC) ........................................................... 5.25 11/15/20 2,023,920
10,000 Tampa, Florida, Catholic East Health Ser 1998 A (MBIA) ....................... 4.875 11/15/23 9,698,000
1,000 Maryland Health & Higher Educational Facilities Authority, Kernan Hospital
Ser 1994 (Connie Lee) ...................................................... 6.10 07/01/24 1,099,540
Rochester, Minnesota,
5,000 Mayo Foundation/Medical Center Ser 1992 I .................................. 5.75 11/15/21 5,222,050
3,700 Mayo Foundation/Medical Center Ser 1992 F .................................. 6.25 11/15/21 4,021,530
10,000 Missouri Health & Educational Facilities Authority, Barnes-Jewish Inc/
Christian Health Services Ser 1993 A ....................................... 5.25 05/15/14 10,473,600
1,300 New Hampshire Higher Educational & Health Facilities Authority,
St Joseph Hospital Ser 1994 (Connie Lee) ................................... 6.35 01/01/07 1,463,527
6,000 New York State Medical Care Facilities Finance Agency, Presbyterian
Hospital -- FHA Insured Mtge 1984 Ser A Refg ............................... 5.25 08/15/14 6,241,260
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

34
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS December 31, 1998, continued

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 5,000 University of North Carolina, Hospitals at Chapel Hill Ser 1996 ............. 5.00% 02/15/29 $ 4,840,950
2,000 Jackson, Tennessee, Jackson-Madison County General Hospital Refg & Impr
Ser 1995 (AMBAC) .......................................................... 5.625 04/01/15 2,116,460
5,000 North Central Texas Health Facilities Development Corporation, University
Medical Center Inc Ser 1997 (FSA) ......................................... 5.45 04/01/15 5,240,500
10,000 Fredericksburg Industrial Development Authority, Virginia, Medicorp
Health Refg Ser 1996 (AMBAC) .............................................. 5.25 06/15/16 10,251,400
2,000 Medical College of Virginia Hospitals Authority, Ser 1998 (MBIA) ............ 5.125 07/01/23 1,990,320
5,000 Washington Health Care Facilities, Swedish Health Ser 1998 (AMBAC) .......... 5.125 11/15/22 4,921,850
------- --------------
86,465 90,155,841
------- --------------
Industrial Development/Pollution Control Revenue (4.4%)
1,500 Hawaii Department of Budget & Finance, Hawaiian Electric Co
Ser 1995 A (AMT) (MBIA) ................................................... 6.60 01/01/25 1,673,010
1,375 Maryland Industrial Development Financing Authority, Medical Waste
Assocs LP 1989 Ser (AMT) .................................................. 8.75 11/15/10 1,390,675
10,000 Clark County, Nevada, Nevada Power Co Ser 1992 A (AMT) (FGIC) ............... 6.70 06/01/22 10,928,200
5,000 Washoe County, Nevada, Sierra Pacific Power Co Ser 1987 (AMBAC) ............. 6.30 12/01/14 5,426,900
5,000 New York City Industrial Development Agency, New York, Brooklyn Navy
Yard Cogeneration Partners LP Ser 1997 (AMT) .............................. 5.75 10/01/36 5,128,450
5,000 Alliance Airport Authority, Texas, AMR Corp Ser 1990 (AMT) .................. 7.50 12/01/29 5,370,750
10,000 Dallas-Fort Worth International Airport Facility Improvement Corporation,
Texas, American Airlines Inc Ser 1995 ..................................... 6.00 11/01/14 10,412,700
10,000 Weston, Wisconsin, Wisconsin Public Service Co Refg Ser 1993 A .............. 6.90 02/01/13 11,194,000
------- --------------
47,875 51,524,685
------- --------------
Mortgage Revenue -- Multi-Family (2.2%)
955 Massachusetts Housing Finance Agency, Rental 1994 Ser A (AMT) (AMBAC) 6.65 07/01/19 1,033,472
5,560 Michigan Housing Development Authority, Rental Ser A (Bifurcated FSA) ....... 6.50 04/01/23 5,937,802
9,000 New Jersey Housing & Mortgage Finance Agency, 1995 Ser A (AMBAC) ............ 6.05 11/01/20 9,598,950
New York City Housing Development Corporation, New York,
4,352 Ruppert Proj -- FHA Ins Sec 223F .......................................... 6.50 11/15/18 4,571,266
4,207 Stevenson Commons Proj -- FHA Ins Sec 223F ................................ 6.50 05/15/18 4,418,913
------- --------------
24,074 25,560,403
------- --------------
Mortgage Revenue -- Single Family (6.7%)
7,000 Alaska Housing Finance Corporation, Governmental 1995 Ser A (MBIA) .......... 5.875 12/01/24 7,379,330
2,440 California Housing Finance Agency, Home Cap Apprec 1983 Ser B ............... 0.00 08/01/15 448,472
Colorado Housing Finance Authority,
2,000 1998 Ser A-2 (AMT) ........................................................ 6.60 05/01/28 2,241,120
2,500 1997 Ser C-2 (AMT) ........................................................ 6.875 11/01/28 2,815,125
12,100 Illinios Housing Development Authority, Residential 1991 Ser C (AMT) ........ 6.875 02/01/18 12,863,994
Missouri Housing Development Commission, Homeownership,
3,735 GNMA-FNMA Collateralized 1996 Ser C (AMT) ................................. 7.45 09/01/27 4,256,817
3,910 GNMA-FNMA Collateralized 1997 Ser C-1 ..................................... 6.55 09/01/28 4,357,108
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

35
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS December 31, 1998, continued

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 4,200 Nebraska Investment Finance Authority, GNMA-Backed 1990 Ser (AMT) ............ 7.631% 09/10/30 $ 4,424,658
1,810 North Carolina Housing Finance Agency, Ser Q (AMT) ........................... 8.00 03/01/18 1,959,596
5,200 Ohio Housing Finance Agency, GNMA-Backed 1990 Ser A (AMT) .................... 6.903 03/01/31 5,503,264
10,000 Pennsylvania Housing Finance Agency, Ser 1991-31 (AMT) ....................... 7.00 10/01/23 10,653,100
Tennessee Housing Development Agency,
4,000 Mortgage Finance 1993 Ser A ................................................ 5.90 07/01/18 4,170,680
1,000 Mortgage Finance 1994 Ser B (AMT) .......................................... 6.55 07/01/19 1,064,450
11,000 Mortgage Finance 1993 Ser A ................................................ 5.95 07/01/28 11,437,800
440 Utah Housing Finance Agency, Federally Insured/Guaranteed Loans 1994
Issue E (AMT) .............................................................. 6.50 07/01/26 451,744
4,400 Wisconsin Housing & Economic Development Authority, Home Ownership
-------- 1991 Ser (AMT) ............................................................. 7.097 10/25/22 4,663,296
75,735 --------------
------- 78,690,554
Public Facilities Revenue (1.0%) --------------
2,000 North City West School Facilities Authority, California, Community Dist #1
Special Tax Ser 1995 B (FSA) ............................................... 6.00 09/01/19 2,207,660
3,500 Denver, Colorado, Excise Tax Ser 1985 A ...................................... 5.00 11/01/08 3,508,505
6,000 Saint Louis Industrial Development Authority, Missouri, Kiel Center Refg
------- Ser 1992 (AMT) ............................................................. 7.75 12/01/13 6,505,680
11,500 --------------
------- 12,221,845
Resource Recovery Revenue (2.4%) --------------
4,950 Connecticut Resources Development Authority, Bridgeport RESCO Ser A .......... 7.625 01/01/09 5,141,070
7,000 Savannah Resource Recovery Development Authority, Georgia, Savannah
Energy Systems Co Ser 1992 ................................................. 6.30 12/01/06 7,473,620
10,000 Northeast Maryland Waste Disposal Authority, Montgomery County
Ser 1993 A (AMT) ........................................................... 6.30 07/01/16 10,707,500
5,000 Onondaga County Resource Recovery Agency, New York, 1992 Ser (AMT) ........... 6.875 05/01/06 5,304,350
------- --------------
26,950 28,626,540
------- --------------
Transportation Facilities Revenue (15.8%)
5,000 San Francisco Bay Area Rapid Transit District, California, Sales Tax
Ser 1998 (AMBAC) ........................................................... 4.75 07/01/23 4,797,300
15,000 San Joaquin Hills Transportation Corridor Agency, California, Toll Road
Refg Ser 1997 A (MBIA) ..................................................... 0.00 01/15/31 2,914,050
10,000 E-470 Public Highway Authority, Colorado, Ser 1997 A (MBIA) .................. 5.00 09/01/26 9,822,800
1,000 Lee County, Florida, Ser 1995 (MBIA) ......................................... 5.75 10/01/22 1,069,360
Mid-Bay Bridge Authority, Florida,
8,965 Ser 1993 A (AMBAC) ......................................................... 5.85 10/01/13 9,999,471
1,500 Ser 1997 A (AMBAC) ......................................................... 0.00 10/01/20 483,030
3,000 Ser 1997 A (AMBAC) ......................................................... 0.00 10/01/21 915,480
10,000 Atlanta, Georgia, Airport Ser 1990 (AMT) ..................................... 6.25 01/01/21 10,502,300
5,000 Hawaii, Airports Second Ser 1991 (AMT) ....................................... 7.00 07/01/18 5,395,550
850 Regional Transportation Authority, Illinois, Ser 1994 A ...................... 6.25 06/01/15 942,803
3,000 Kansas, Highway Refg Ser 1998 ................................................ 5.50 09/01/12 3,307,770
</TABLE>

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36
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS December 31, 1998, continued

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kentucky Turnpike Authority,
$ 9,000 Economic Development Road Refg Ser 1995 (AMBAC) .......................... 6.50% 07/01/08 $ 10,584,720
1,000 Economic Development Road Refg Ser 1995 (AMBAC) .......................... 5.625 07/01/15 1,068,180
30,000 Resource Recovery Road 1987 Ser A ........................................ 5.00 07/01/08 30,011,100
1,500 Massachusetts Port Authority, Refg Ser 1998-A .............................. 5.75 07/01/12 1,682,505
Massachusetts Turnpike Authority,
10,000 Metropolitan Highway 1997 Ser A (MBIA) ................................... 5.00 01/01/37 9,718,400
13,885 Western 1997 Ser A (MBIA) ................................................ 5.55 01/01/17 14,075,919
10,000 Minneapolis -- St Paul Metropolitan Airports Commission, Minnesota,
Ser 1998 A (AMBAC) ....................................................... 5.00 01/01/30 9,845,100
11,000 New Jersey Highway Authority, Sr Parkway Refg 1992 Ser ..................... 6.25 01/01/14 11,843,040
6,595 Albuquerque, New Mexico, Airport Refg Ser 1997 (AMT) (AMBAC) ............... 6.375 07/01/15 7,420,892
1,500 Port Authority of New York & New Jersey, Cons One Hundredth Ser Second
Installment ++ ........................................................... 5.75 12/15/20 1,602,225
10,000 Ohio Turnpike Commission, Ser 1998 B (FGIC) ................................ 4.50 02/15/24 9,234,900
Pennsylvania Turnpike Commission,
5,000 Ser L of 1991 (MBIA) ..................................................... 6.00 06/01/15 5,331,050
5,000 Ser A 1998 (AMBAC) ....................................................... 4.75 12/01/27 4,722,200
10,000 Puerto Rico Highway & Transportation Authority, Refg Ser X ................. 5.50 07/01/15 10,857,200
4,000 North Texas Tollway Authority, Dallas North Tollway Ser 1998 (FGIC) ........ 4.75 01/01/22 3,801,320
4,000 Virginia Transportation Board, US Route 58 Corridor Ser 1993 B ............. 5.625 05/15/13 4,235,880
-------- --------------
195,795 186,184,545
-------- --------------
Water & Sewer Revenue (12.8%)
2,000 Jefferson County, Alabama, Sewer Refg Ser 1997-A (FGIC) .................... 5.375 02/01/27 2,051,960
10,000 Phoenix Civic Improvement Corporation, Arizona, Jr Lien Water Ser 1994 ..... 5.45 07/01/19 10,329,100
10,000 California Department of Water Resources, Central Valley Ser L ............. 5.50 12/01/23 10,372,000
10,000 Los Angeles, California, Wastewater Ser 1994-A (MBIA) ...................... 5.875 06/01/24 10,802,200
1,000 Dade County, Florida, Water & Sewer Ser 1995 (FGIC) ........................ 5.50 10/01/15 1,057,660
10,000 Tampa Bay Water, Florida, Utility Ser 1998 B (FGIC) ........................ 4.75 10/01/27 9,532,300
5,000 Fulton County, Georgia, Water & Sewerage Ser 1998 (FGIC) ................... 4.75 01/01/28 4,772,900
5,000 Upper Oconee Basin Water Authority, Georgia, Ser 1997 (FGIC) ............... 5.25 07/01/27 5,082,050
10,000 Louisville & Jefferson County Metropolitan Sewer District, Kentucky,
Ser 1998 A (FGIC) ........................................................ 4.75 05/15/28 9,528,000
10,000 Massachusetts Water Pollution Abatement Trust, MWRA Loan Ser 1998 A ........ 4.75 08/01/18 9,731,100
10,000 Massachusetts Water Resources Authority, Refg 1992 Ser B ................... 5.50 11/01/15 10,336,400
Detroit, Michigan,
4,000 Sewage Refg 1993 A (FGIC) ................................................ 5.70 07/01/13 4,312,640
10,000 Water Supply 1997 Ser A (MBIA) ........................................... 5.00 07/01/21 9,814,600
2,000 Asheville, North Carolina, Water Ser 1996 (FGIC) ........................... 5.70 08/01/25 2,140,380
10,000 Cleveland, Ohio, Waterworks Impr & Refg 1998 Ser I (FSA) ................... 5.00 01/01/23 9,889,800
Philadelphia, Pennsylvania,
1,250 Water & Wastewater Ser 1995 (MBIA) ....................................... 6.25 08/01/11 1,457,587
5,000 Water & Wastewater Ser 1993 (FSA) ........................................ 5.50 06/15/15 5,182,350
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

37
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS December 31, 1998, continued

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pittsburgh Water & Sewer Authority,
$ 20,000 1998 Ser B (FGIC) .......................................................... 0.00% 09/01/26 $ 4,846,000
20,000 1998 Ser B (FGIC) .......................................................... 0.00 09/01/28 4,374,000
5,000 Spartanburg, South Carolina, Jr Lien Water Ser 1998 (FGIC) ................... 5.25 06/01/28 5,122,200
11,000 Metropolitan Government of Nashville & Davidson County, Tennessee,
Refg Ser 1998 A (FGIC) ..................................................... 4.75 01/01/22 10,554,060
10,000 Dallas, Texas, Waterworks & Sewer Refg Ser 1998 (FSA) ........................ 5.00 10/01/29 9,784,000
----------- --------------
181,250 151,073,287
----------- --------------
Other Revenue (1.5%)
1,005 Mashantucket Western Pequot Tribe, Connecticut, Special 1996 Ser A (a) ....... 6.50 09/01/05 1,129,610
1,000 New Jersey Economic Development Authority, Market Transition Sr Lien
Ser 1994 A (MBIA) .......................................................... 5.875 07/01/11 1,097,930
5,000 New York Local Government Assistance Corporation, Ser 1994 C ................. 5.50 04/01/17 5,407,950
5,000 Ohio Building Authority, 1985 Ser C .......................................... 9.75 10/01/05 6,568,850
3,000 Houston, Texas, Sr Lien Hotel Occupancy Tax Refg Ser 1995 (FSA) .............. 5.50 07/01/11 3,182,310
----------- --------------
15,005 17,386,650
----------- --------------
Refunded (10.6%)
Birmingham Water Works & Sewer Board, Alabama,
1,000 Ser 1993-A ................................................................. 6.00 01/01/03+ 1,098,530
10,000 Ser 1994 ................................................................... 5.50 01/01/04+ 10,375,900
9,000 Los Angeles Convention and Exhibition Center Authority, California,
Ser 1985 COPs .............................................................. 9.00 12/01/05+ 11,766,330
2,500 Mid-Bay Bridge Authority, Florida, Ser 1991 A (ETM) .......................... 6.875 10/01/22 3,139,200
5,000 Maryland Health & Higher Educational Facilities Authority, Helix Health
Ser 1997 (AMBAC) (ETM) ..................................................... 5.00 07/01/27 5,013,000
1,500 Massachusetts Health & Educational Facilities Authority,
Malden Hospital -- FHA Ins Mtge Ser A (ETM) ................................ 5.00 08/01/16 1,543,215
10,000 Massachusetts Water Resources Authority, 1996 Ser A (FGIC) ................... 5.50 11/01/06+ 10,966,800
14,000 New York State Dormitory Authority, Suffolk County Judicial Ser 1986 (ETM) ... 7.375 07/01/16 17,828,160
25,000 Intermountain Power Agency, Utah, Refg 1985 Ser H GAINS ...................... 0.00 # 07/01/03+ 27,772,500
5,000 Salt Lake City, Utah, IHC Hospital Inc Ser 1983 (ETM) ........................ 5.00 06/01/15 5,152,200
28,000 Fairfax County Industrial Development Authority, Virginia, Fairfax Hospital
----------- Inova Health Ser 1991 ...................................................... 6.801 08/15/01+ 30,576,000
111,000 --------------
----------- 125,231,835
1,144,844 TOTAL TAX-EXEMPT MUNICIPAL BONDS (Identified Cost $1,031,056,358) ............ --------------
----------- 1,130,116,293
SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS (2.8%) --------------
10,000 Idaho Health Facilities Authority, St Luke's Regional Medical Center
Ser 1995 (Demand 01/04/99) ................................................. 5.10* 05/01/22 10,000,000
5,500 Illinois Health Facilities Authority, Northwestern Memorial Hospital
Ser 1995 (Demand 01/04/99) ................................................. 5.15* 08/15/25 5,500,000
3,180 Louisiana Public Facilities Authority, Kenner Hotel Ser 1985
(Demand 01/04/99) .......................................................... 5.05* 12/01/15 3,180,000
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

38
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS December 31, 1998, continued

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 9,500 Massachusetts Health & Educational Facilities Authority, Capital Asset
Ser D (MBIA) (Demand 01/04/99) ........................................ 5.00*% 01/01/35 $ 9,500,000
4,000 Harris County Health Facilities Development Corporation, Texas, Methodist
---------- Hospital Ser 1994 (Demand 01/04/99) ................................... 5.00* 12/01/25 4,000,000
32,180 TOTAL SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS --------------
---------- (Identified Cost $32,180,000) ........................................... 32,180,000

$1,177,024 TOTAL INVESTMENTS --------------
========== (Identified Cost $1,063,236,358) (b) .................................... 98.7% 1,162,296,293
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES .......................... 1.3 15,892,556
----- --------------
NET ASSETS .............................................................. 100.0% $1,178,188,849
===== ==============
</TABLE>

- ---------------
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
ETM Escrowed to maturity.
GAINS Growth and Income Security.
++ Joint exemption in New York and New Jersey.
+ Prerefunded to call date shown.
# Currently a zero coupon bond; will convert to 10.00% coupon on
July 1, 2000.
* Current coupon of variable rate demand obligation.
(a) Resale is restricted to qualified institutional investors.
(b) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation is
$100,059,253 and the aggregate gross unrealized depreciation is
$999,318, resulting in net unrealized appreciation of $99,059,935.

Bond Insurance:

AMBAC AMBAC Indemnity Corporation.
Connie Lee Connie Lee Insurance Company.
FGIC Financial Guaranty Insurance Company.
FSA Financial Security Assurance Inc.
MBIA Municipal Bond Investors Assurance Corporation.

SEE NOTES TO FINANCIAL STATEMENTS

39
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS December 31, 1998, continued

GEOGRAPHIC SUMMARY OF INVESTMENTS
Based on Market Value as a Percent of Net Assets
December 31, 1998

Alabama ................... 2.3%
Alaska .................... 4.8
Arizona ................. 3.2
Arkansas ................ 0.3
California ................ 5.1
Colorado .................. 1.6
Connecticut ............... 0.8
Florida ................... 3.2
Georgia ................... 3.4
Hawaii .................... 0.6
Idaho ..................... 0.9
Illinois ................ 1.6
Indiana ................... 0.9
Kansas .................... 0.3
Kentucky ................ 4.3%
Louisiana ............... 0.3
Maryland ................ 2.1
Massachusetts ............. 8.8
Michigan .................. 1.7
Minnesota ................. 1.6
Missouri .................. 2.6
Nebraska ................ 0.4
Nevada .................... 1.8
New Hampshire ............. 1.0
New Jersey .............. 2.2
New Mexico ................ 0.6
New York .................. 7.6
North Carolina ............ 1.6
Ohio ...................... 2.7%
Oregon .................... 0.2
Pennsylvania .............. 4.0
Puerto Rico ............... 2.0
South Carolina ............ 1.9
Tennessee ................. 3.1
Texas ..................... 5.8
Utah .................... 4.2
Virginia ................ 4.1
Washington ................ 3.9
Wisconsin ................. 1.3
Joint Exemptions* ......... (0.1)
----
Total ................... 98.7%
====

- ---------------------
* Joint exemptions have been included in more than one geographic location.

SEE NOTES TO FINANCIAL STATEMENTS

40
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998

<TABLE>
<S> <C>
ASSETS :
Investments in securities, at value
(identified cost $1,063,236,358).................................. $ 1,162,296,293
Cash ............................................................... 1,900,812
Receivable for :
Interest ......................................................... 17,613,930
Investments sold ................................................. 3,028,939
Shares of beneficial interest sold ............................... 752,644
Prepaid expenses and other assets .................................. 71,333
---------------
TOTAL ASSETS .................................................... 1,185,663,951
---------------
LIABILITIES:
Payable for:
Dividends and distributions to shareholders ..................... 6,660,662
Investment management fee ....................................... 435,962
Shares of beneficial interest repurchased ....................... 179,809
Plan of distribution fee ........................................ 73,871
Accrued expenses and other payables ................................ 124,798
---------------
TOTAL LIABILITIES ............................................... 7,475,102
---------------
NET ASSETS ...................................................... $ 1,178,188,849
===============
COMPOSITION OF NET ASSETS:
Paid-in-capital .................................................... $ 1,075,991,537
Net unrealized appreciation ........................................ 99,059,935
Accumulated undistributed net investment income .................... 18,572
Accumulated net realized gain ...................................... 3,118,805
---------------
NET ASSETS ...................................................... $ 1,178,188,849
===============
CLASS A SHARES:
Net Assets ......................................................... $15,041,235
Shares Outstanding (unlimited authorized, $.01 par value)........... 1,251,226
NET ASSET VALUE PER SHARE ........................................ $12.02
======
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 4.44% of net asset value) ................ $12.55
======
CLASS B SHARES:
Net Assets ......................................................... $132,302,664
Shares Outstanding (unlimited authorized, $.01 par value) .......... 10,959,373
NET ASSET VALUE PER SHARE ........................................ $12.07
======
CLASS C SHARES:
Net Assets ......................................................... $7,599,049
Shares Outstanding (unlimited authorized, $.01 par value) .......... 631,044
NET ASSET VALUE PER SHARE ....................................... $12.04
======
CLASS D SHARES:
Net Assets ......................................................... $1,023,245,901
Shares Outstanding (unlimited authoriized, $.01 par value) ......... 85,166,399
NET ASSET VALUE PER SHARE ........................................ $12.01
======
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

41
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
FINANCIAL STATEMENTS, continued

STATEMENT OF OPERATIONS
For the year ended December 31, 1998

<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME ................................... $ 66,369,139
------------
EXPENSES
Investment management fee ......................... 5,139,570
Plan of distribution fee (Class A shares) ......... 23,305
Plan of distribution fee (Class B shares) ......... 670,261
Plan of distribution fee (Class C shares) ......... 35,313
Transfer agent fees and expenses .................. 427,026
Shareholder reports and notices ................... 81,593
Registration fees ................................. 77,801
Professional fees ................................. 48,253
Custodian fees .................................... 47,924
Trustees' fees and expenses ....................... 18,914
Other ............................................. 43,155
------------
TOTAL EXPENSES ................................. 6,613,115
Less: expense offset .............................. (47,833)
------------
NET EXPENSES ................................... 6,565,282
------------
NET INVESTMENT INCOME .......................... 59,803,857
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain ................................. 15,111,631
Net change in unrealized appreciation ............. (5,416,357)
------------
NET GAIN ....................................... 9,695,274
------------
NET INCREASE ...................................... $ 69,499,131
============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

42
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
FINANCIAL STATEMENTS, continued

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997*
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income ................................ $ 59,803,857 $ 60,954,344
Net realized gain .................................... 15,111,631 9,545,783
Net change in unrealized appreciation ................ (5,416,357) 25,338,447
-------------- --------------
NET INCREASE ...................................... 69,499,131 95,838,574
-------------- --------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A shares .................................... (460,545) (48,774)
Class B shares .................................... (5,022,084) (673,417)
Class C shares .................................... (218,789) (30,406)
Class D shares .................................... (54,102,439) (60,167,993)
Net realized gain
Class A shares .................................... (187,529) (16,080)
Class B shares .................................... (1,743,115) (395,740)
Class C shares .................................... (93,965) (12,228)
Class D shares .................................... (14,360,329) (4,910,430)
-------------- --------------
TOTAL DIVIDENDS AND DISTRIBUTIONS ................. (76,188,795) (66,255,068)
-------------- --------------
Net decrease from transactions in shares of beneficial
interest ........................................... (14,502,186) (20,236,797)
-------------- --------------
NET INCREASE (DECREASE) ........................... (21,191,850) 9,346,709
NET ASSETS:
Beginning of period .................................. 1,199,380,699 1,190,033,990
-------------- --------------
END OF PERIOD
(Including undistributed net investment income of
$18,572 and $34,517, respectively)................. $1,178,188,849 $1,199,380,699
============== ==============
</TABLE>

- ---------------------
* Class A, Class B and Class C shares were issued July 28, 1997.

SEE NOTES TO FINANCIAL STATEMENTS

43
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1998

1. ORGANIZATION AND ACCOUNTING POLICIES

Morgan Stanley Dean Witter Tax-Exempt Securities Trust (the "Fund"), formerly
Dean Witter Tax-Exempt Securities Trust, is registered under the Investment
Company Act of 1940, as amended, as a diversified, open-end management
investment company. The Fund's investment objective is to provide a high level
of current income which is exempt from federal income tax, consistent with the
preservation of capital. The Fund was incorporated in Maryland in 1979,
commenced operations on March 27, 1980 and reorganized as a Massachusetts
business trust on April 30, 1987. On July 28, 1997, the Fund commenced offering
three additional classes of shares, with the then current shares designated as
Class D shares.

The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year,
six years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.

The 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.

The following is a summary of significant accounting policies:

A. VALUATION OF INVESTMENTS -- Portfolio securities are valued for the Fund by
an outside independent pricing service approved by the Trustees. The pricing
service has informed the Fund that in valuing the Fund's portfolio securities,
it uses both a computerized matrix of tax-exempt securities and evaluations by
its staff, in each case based on information concerning market transactions and
quotations from dealers which reflect the bid side of the market each day. The
Fund's portfolio securities are thus valued by reference to a combination of
transactions and quotations for the same or other securities believed to be
comparable in quality, coupon, maturity, type of issue, call provisions,
trading characteristics and other features deemed to be relevant. 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.

44
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1998, continued

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.
The Fund amortizes premiums and accretes discounts over the life of the
respective securities. Interest income is accrued daily.

C. 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.

D. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable and nontaxable income to its
shareholders. Accordingly, no federal income tax provision is required.

E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends
and distributions to its shareholders on the record date. 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 financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.

2. INVESTMENT MANAGEMENT AGREEMENT

Pursuant to an Investment Management Agreement with Morgan Stanley Dean Witter
Advisors Inc. (the "Investment Manager"), formerly Dean Witter Intercapital
Inc., the Fund pays the Investment Manager a management fee, accrued daily and
payable monthly, by applying the following annual rates to the Fund's net
assets determined as of the close of each business day: 0.50% to the portion of
daily net assets not exceeding $500 million; 0.425% to the portion of daily net
assets exceeding $500 million but not exceeding $750 million; 0.375% to the
portion of daily net assets exceeding $750 million but not exceeding $1
billion; 0.35% to the portion of daily net assets exceeding $1 billion but not
exceeding $1.25 billion; and 0.325% to the portion of daily net assets
exceeding $1.25 billion.

45
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1998, continued

Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Fund who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone services,
heat, light, power and other utilities provided to the Fund.

3. PLAN OF DISTRIBUTION

Shares of the Fund are distributed by Morgan Stanley Dean Witter Distributors
Inc. (the "Distributor"), an affiliate of the Investment Manager. 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 -- 0.60% of
the average daily net assets of Class B; and (iii) Class C -- up to 0.70% of
the average daily net assets of Class C. In the case of Class A shares, amounts
paid under the Plan are paid to the Distributor for services provided. In the
case of Class B and Class C shares, amounts paid under the Plan are paid to the
Distributor for (1) services provided and the expenses borne by it and others
in the distribution of the shares of these Classes, including the payment of
commissions for sales of these Classes and incentive compensation to, and
expenses of, the Morgan Stanley Dean Witter Financial Advisors and others who
engage in or support distribution of the shares or who service shareholder
accounts, including overhead and telephone expenses; (2) printing and
distribution of prospectuses and reports used in connection with the offering
of these shares to other than current shareholders; and (3) preparation,
printing and distribution of sales literature and advertising materials. In
addition, the Distributor may utilize fees paid pursuant to the Plan, in the
case of Class B shares, to compensate Dean Witter Reynolds Inc. ("DWR"), an
affiliate of the Investment Manager and Distributor, and other selected
broker-dealers for their opportunity costs in advancing such amounts, which
compensation would be in the form of a carrying charge on any unreimbursed
expenses.

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

46
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1998, continued

Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts, including
carrying charges, totaled $3,972,552 at December 31, 1998.

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 0.70% 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 Dean Witter Financial Advisors or other
selected broker-dealer representatives may be reimbursed in the subsequent
calendar year. For the year ended December 31, 1998, the distribution fee was
accrued for Class A shares and Class C shares at the annual rate of 0.24% and
0.70%, respectively.

The Distributor has informed the Fund that for the year ended December 31,
1998, it received contingent deferred sales charges from certain redemptions of
the Fund's Class B and Class C shares of $119,895 and $6,087, respectively and
received $168,708 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 of portfolio securities,
excluding short-term investments, for the year ended December 31, 1998
aggregated $177,148,205 and $232,551,397, respectively.

Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager
and Distributor, is the Fund's transfer agent. At December 31, 1998, the Fund
had transfer agent fees and expenses payable of approximately $18,900.

The Fund has an unfunded noncontributory defined benefit pension plan covering
all 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 years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended December 31, 1998
included in Trustees' fees and expenses in the Statement of Operations amounted
to $5,976. At December 31, 1998, the Fund had an accrued pension liability of
$51,129 which is included in accrued expenses in the Statement of Assets and
Liabilities.

47
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1998, continued

5. SHARES OF BENEFICIAL INTEREST

Transactions in shares of beneficial interest were as follows:

<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997*
-------------------------------- ----------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold ................................................... 1,188,860 $ 14,401,331 338,676 $ 4,050,692
Reinvestment of dividends and distributions ............ 23,219 279,925 2,037 24,532
Redeemed ............................................... (279,886) (3,403,298) (21,680) (260,983)
--------- -------------- ------- --------------
Net increase -- Class A ................................ 932,193 11,277,958 319,033 3,814,241
--------- -------------- ------- --------------
CLASS B SHARES
Sold ................................................... 4,978,407 60,561,390 966,475 10,102,415
Reinvestment of dividends and distributions ............ 307,110 3,717,941 50,270 609,389
Shares issued in connection with the acquisition of Dean
Witter National Municipal Trust ....................... -- -- 7,189,021 86,346,821
Redeemed ............................................... (2,198,759) (26,762,285) (333,151) (2,490,026)
---------- -------------- --------- --------------
Net increase -- Class B ................................ 3,086,758 37,517,046 7,872,615 94,568,599
---------- -------------- --------- --------------
CLASS C SHARES
Sold ................................................... 505,118 6,127,960 246,149 2,956,204
Reinvestment of dividends and distributions ............ 18,393 222,199 2,294 27,678
Redeemed ............................................... (136,298) (1,653,180) (4,612) (55,937)
---------- -------------- --------- --------------
Net increase -- Class C ................................ 387,213 4,696,979 243,831 2,927,945
---------- -------------- --------- --------------
CLASS D SHARES
Sold ................................................... 264,495 3,195,718 1,386,806 16,302,673
Reinvestment of dividends and distributions ............ 3,213,005 38,720,154 3,036,080 35,979,041
Redeemed ............................................... (9,095,698) (109,910,041) (14,721,910) (173,829,296)
---------- -------------- ----------- --------------
Net decrease -- Class D ................................ (5,618,198) (67,994,169) (10,299,024) (121,547,582)
---------- -------------- ----------- --------------
Net decrease in Fund ................................... (1,212,034) $ (14,502,186) (1,863,545) $ (20,236,797)
========== ============== =========== ==============
</TABLE>

- ---------------
* For Class A, B and C, for the period July 28, 1997 (issue date) through
December 31, 1997.

48
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1998, continued

6. ACQUISITION OF DEAN WITTER NATIONAL MUNICIPAL TRUST

As of the close of business on November 7, 1997, the Fund acquired all the net
assets of Dean Witter National Municipal Trust ("National Municipal") pursuant
to a plan of reorganization approved by the shareholders of National Municipal
on October 24, 1997. The acquisition was accomplished by a tax-free exchange of
7,189,021 Class B shares of the Fund at a net asset value of $12.01 per share
for 7,972,312 shares of National Municipal. The net assets of the Fund and
National Municipal immediately before the acquisition were $1,108,511,637 and
$86,346,821, respectively, including unrealized appreciation of $5,153,021.
Immediately after the acquisition, the combined net assets of the Fund amounted
to $1,194,858,458.

49
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
FINANCIAL HIGHLIGHTS

Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1998 1997* 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $ 12.08 $ 11.77 $ 12.09 $ 11.01 $12.41
---------- -------- ------- ------- ------
Income (loss) from investment operations:
Net investment income ................................. 0.62 0.63 0.65 0.67 0.70
Net realized and unrealized gain (loss) ............... 0.10 0.36 (0.24) 1.19 (1.37)
---------- -------- ------- ------- ------
Total income (loss) from investment operations ......... 0.72 0.99 0.41 1.86 (0.67)
---------- -------- ------- ------- ------
Less dividends and distributions from:
Net investment income ................................. (0.62) (0.63) (0.65) (0.67) (0.70)
Net realized gain ..................................... (0.17) (0.05) (0.08) (0.11) (0.03)
---------- -------- ------- ------- ------
Total dividends and distributions ...................... (0.79) (0.68) (0.73) (0.78) (0.73)
---------- -------- ------- ------- ------
Net asset value, end of period ......................... $ 12.01 $ 12.08 $ 11.77 $ 12.09 $11.01
========== ======== ======= ======= ======
TOTAL RETURN+ .......................................... 6.11% 8.73% 3.61% 17.37% (5.55)%

RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 0.50%(1)(2) 0.49% 0.48% 0.48% 0.47%
Net investment income .................................. 5.12%(2) 5.34% 5.52% 5.76% 6.02%

SUPPLEMENTAL DATA:
Net assets, end of period, in millions ................. $ 1,023 $ 1,097 $ 1,190 $ 1,325 $1,295
Portfolio turnover rate ................................ 15% 16% 18% 21% 16%
</TABLE>

- -------------
* Prior to July 28, 1997, the Fund issued one class of shares. All shares
of the Fund held prior to that date have been designated Class D shares.
+ Calculated based on the net asset value as of the last business day of
the period.
(1) Does not reflect the effect of expense offset of 0.01%.
(2) Reflects overall Fund ratios for investment income and non-class specific
expenses.

SEE NOTES TO FINANCIAL STATEMENTS

50
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
FINANCIAL HIGHLIGHTS, continued

<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR JULY 28, 1997*
ENDED THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period ............ $ 12.09 $ 12.00
---------- ----------
Income from investment operations:
Net investment income .......................... 0.59 0.25
Net realized and unrealized gain ............... 0.10 0.14
---------- ----------
Total income from investment operations ......... 0.69 0.39
---------- ----------
Less dividends and distributions from:
Net investment income .......................... (0.59) (0.25)
Net realized gain .............................. (0.17) (0.05)
---------- ----------
Total dividends and distributions ............... (0.76) (0.30)
---------- ----------
Net asset value, end of period .................. $ 12.02 $ 12.09
========== ==========
TOTAL RETURN+ ................................... 5.86% 3.31%(1)

RATIOS TO AVERAGE NET ASSETS:
Expenses ........................................ 0.74%(4)(5) 0.76%(2)(3)
Net investment income ........................... 4.88%(5) 4.96%(2)

SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ......... $ 15,041 $ 3,857
Portfolio turnover rate ......................... 15% 16%

CLASS B SHARES

SELECTED PER SHARE DATA:
Net asset value, beginning of period ............ $ 12.14 $ 12.00
Income from investment operations:
Net investment income .......................... 0.55 0.23
Net realized and unrealized gain ............... 0.10 0.19
------------- -------------
Total income from investment operations ......... 0.65 0.42
------------- -------------
Less dividends and distributions from:
Net investment income .......................... (0.55) (0.23)
Net realized gain .............................. (0.17) (0.05)
------------- -------------
Total dividends and distributions ............... (0.72) (0.28)
------------- -------------
Net asset value, end of period .................. $ 12.07 $ 12.14
============= =============
TOTAL RETURN + .................................. 5.47% 3.57%(1)

RATIOS TO AVERAGE NET ASSETS:
Expenses ........................................ 1.10%(4)(5) 1.14%(2)(3)
Net investment income ........................... 4.52%(5) 4.87%(2)

SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ......... $ 132,303 $ 95,573
Portfolio turnover rate ......................... 15% 16%
</TABLE>

- --------------
* The date shares were first issued.
+ 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) Does not reflect the effect of expense offset of 0.02%.
(4) Does not reflect the effect of expense offset of 0.01%.
(5) Reflects overall Fund ratios for investment income and non-class specific
expenses.

SEE NOTES TO FINANCIAL STATEMENTS

51
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
FINANCIAL HIGHLIGHTS, continued

<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR JULY 28, 1997*
ENDED THROUGH
DECEMBER 31, 1998 DECEMER 31, 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period ............ $ 12.11 $ 12.00
---------- ----------
Income from investment operations:
Net investment income .......................... 0.53 0.23
Net realized and unrealized gain ............... 0.10 0.16
---------- ----------
Total income from investment operations ......... 0.63 0.39
---------- ----------
Less dividends and distributions from:
Net investment income .......................... (0.53) (0.23)
Net realized gain .............................. (0.17) (0.05)
---------- ----------
Total dividends and distributions ............... (0.70) (0.28)
---------- ----------
Net asset value, end of period .................. $ 12.04 $ 12.11
========== ==========
TOTAL RETURN+ ................................... 5.36% 3.28%(1)

RATIOS TO AVERAGE NET ASSETS:
Expenses ........................................ 1.20%(4)(5) 1.20%(2)(3)
Net investment income ........................... 4.42%(5) 4.41%(2)

SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ......... $ 7,599 $ 2,953
Portfolio turnover rate ......................... 15% 16%
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

52
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
REPORT OF INDEPENDENT ACCOUNTANTS

TO THE SHAREHOLDERS AND TRUSTEES
OF MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST

In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Morgan Stanley Dean Witter
Tax-Exempt Securities Trust (the "Fund"), formerly Dean Witter Tax-Exempt
Securities Trust, at December 31, 1998, 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 periods
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit 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, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1998 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.

PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
February 10, 1999

- --------------------------------------------------------------------------------
1998 FEDERAL TAX NOTICE (unaudited)

During the year ended December 31, 1998, the Fund paid to shareholders
the following per share amounts from net investment income: Class A,
$0.59; Class B, $0.55; Class C, $0.53; and Class D, $0.62 per share. All
of these dividends from net investment income were exempt interest
dividends, excludable from gross income for Federal income tax purposes.
For the year ended December 31, 1998, the Fund paid to Class A, B, C and
D shareholders $0.16 per share from long-term capital gains, all of which
is taxable as 20% rate gain.
- --------------------------------------------------------------------------------

<PAGE>

XIII. APPENDIX

RATINGS OF INVESTMENTS
- --------------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE INC. ("MOODY'S")

MUNICIPAL BOND RATINGS

<TABLE>
<S> <C>
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree
of investment risk and are generally referred to as "gilt edge." Interest payments are protected
by a large or by an exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are most unlikely
to impair the fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa
group they comprise what are generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are to be considered
as upper medium grade obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations; i.e., they are neither
highly protected nor poorly secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
Bonds rated Aaa, Aa, A and Baa are considered investment grade bonds.
Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot be
considered as well assured. Often the protection of interest and principal payments may be very
moderate, and therefore not well safeguarded during both good and bad times in the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of a desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract over any long
period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be
present elements of danger with respect to principal or interest.
Ca Bonds which are rated Ca present obligations which are speculative in a high degree. Such
issues are often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real investment standing.
</TABLE>

Conditional Rating: Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These bonds are secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.

54
<PAGE>

Rating Refinements: Moody's may apply numerical modifiers, 1, 2, and 3 in
each generic rating classification from Aa through B in its municipal bond
rating system. The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and a modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.

MUNICIPAL NOTE RATINGS

Moody's ratings for state and municipal note and other short-term loans
are designated Moody's Investment Grade (MIG). MIG 1 denotes best quality and
means there is present strong protection for established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing. MIG 2 denotes high quality and means that margins of protection
are ample although not as large as in MIG 1. MIG 3 denotes favorable quality
and means that all security elements are accounted for but that the undeniable
strength of the previous grades, MIG 1 and MIG 2, is lacking. MIG 4 denotes
adequate quality and means that the protection commonly regarded as required of
an investment security is present and that while the notes are not distinctly
or predominantly speculative, there is specific risk.

VARIABLE RATE DEMAND OBLIGATIONS

A short-term rating, in addition to the Bond or MIG ratings, designated
VMIG may also be assigned to an issue having a demand feature. The assignment
of the VMIG symbol reflects such characteristics as payment upon periodic
demand rather than fixed maturity dates and payment relying on external
liquidity. The VMIG rating criteria are identical to the MIG criteria discussed
above.

COMMERCIAL PAPER RATINGS

Moody's Commercial Paper ratings are opinions of the ability to repay
punctually promissory obligations not having an original maturity in excess of
nine months. These ratings apply to Municipal Commercial Paper as well as
taxable Commercial Paper. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers: Prime-1, Prime-2, Prime-3.

Issuers rated Prime-1 have a superior capacity for repayment of short-term
promissory obligations. Issuers rated Prime-2 have a strong capacity for
repayment of short-term promissory obligations; and Issuers rated Prime-3 have
an acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating categories.

STANDARD & POOR'S CORPORATION ("STANDARD & POOR'S")

MUNICIPAL BOND RATINGS

A Standard & Poor's municipal bond rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers or
lessees.

The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. The
ratings are based, in varying degrees, on the following considerations: (1)
likelihood of default-capacity and willingness of the obligor as to the timely
payment of interest and repayment of principal in accordance with the terms of
the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.

Standard & Poor's does not perform an audit in connection with any rating
and may, on occasion, rely on unaudited financial information. The ratings may
be changed, suspended or withdrawn as a result of changes in, or unavailability
of, such information, or for other reasons.

55
<PAGE>

<TABLE>
<S> <C>
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay interest
and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay principal and differs from
the highest-rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay principal although they are
somewhat more susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in higher-rated categories.
Bonds rated AAA, AA, A and BBB are considered investment grade bonds.
BB Debt rated "BB" has less near-term vulnerability to default than other speculative grade debt.
However, it faces major ongoing uncertainties or exposure to adverse business, financial or
economic conditions which would lead to inadequate capacity or willingness to pay interest and
repay principal.
B Debt rated "B" has a greater vulnerability to default but presently has the capacity to meet
interest payments and principal repayments. Adverse business, financial or economic conditions
would likely impair capacity or willingness to pay interest and repay principal.
CCC Debt rated "CCC" has a current identifiable vulnerability to default, and is dependent upon
favorable business, financial and economic conditions to meet timely payments of interest and
repayments of principal. In the event of adverse business, financial or economic conditions, it is
not likely to have the capacity to pay interest and repay principal.
CC The rating "CC" is typically applied to debt subordinated to senior debt which is assigned an
actual or implied "CCC" rating.
C The rating "C" is typically applied to debt subordinated to senior debt which is assigned an actual
or implied "CCC-" debt rating.
Cl The rating "Cl" is reserved for income bonds on which no interest is being paid.
D Debt rated "D" is in payment default. The `D' rating category is used when interest payments or
principal payments are not made on the date due even if the applicable grace period has not
expired, unless S&P believes that such payments will be made during such grace period. The
'D' rating also will be used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
NR Indicates that no rating has been requested, that there is insufficient information on which to
base a rating or that Standard & Poor's does not rate a particular type of obligation as a matter
of policy.
Bonds rated "BB", "B", "CCC", "CC" and "C" are regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. "BB" indicates the
least degree of speculation and "C" the highest degree of speculation. While such debt will likely
have some quality and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
Plus (+) or minus(-): The ratings from "AA" to "CCC" may be modified by the addition of a plus
or minus sign to show relative standing within the major ratings categories.
</TABLE>

56
<PAGE>

The foregoing ratings are sometimes followed by a "p" which indicates that the
rating is provisional. A provisional rating assumes the successful completion
of the project being financed by the bonds being rated and indicates that
payment of debt service requirements is largely or entirely dependent upon the
successful and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood or risk of default upon failure of such completion.

MUNICIPAL NOTE RATINGS

Commencing on July 27, 1984, Standard & Poor's instituted a new rating
category with respect to certain municipal note issues with a maturity of less
than three years. The new note ratings denote the following:

SP-1 denotes a very strong or strong capacity to pay principal and
interest. Issues determined to possess overwhelming safety characteristics
are given a plus (+) designation (SP-1+).

SP-2 denotes a satisfactory capacity to pay principal and interest.

SP-3 denotes a speculative capacity to pay principal and interest.

COMMERCIAL PAPER RATINGS

Standard and Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. The commercial paper rating is not a recommendation to purchase
or sell a security. The ratings are based upon current information furnished by
the issuer or obtained by S&P from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information. Ratings are graded into group categories,
ranging from "A" for the highest quality obligations to "D" for the lowest.
Ratings are applicable to both taxable and tax-exempt commercial paper. The
categories are as follows:

Issues assigned A ratings are regarded as having the greatest capacity
for timely payment. Issues in this category are further refined with the
designation 1, 2 and 3 to indicate the relative degree of safety.

A-1 indicates that the degree of safety regarding timely payments is
very strong.

A-2 indicates capacity for timely payment on issues with this designation
is strong. However, the relative degree of safety is not as overwhelming as
for issues designated "A-1".

A-3 indicates a satisfactory capacity for timely payment. Obligations
carrying this designation are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying the
higher designations.

FITCH IBCA, INC. ("FITCH")

MUNICIPAL BOND RATINGS

Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The rating
represents Fitch's assessment of the issuer's ability to meet the obligations
of a specific debt issue or class of debt in a timely manner.

The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.

Fitch ratings do not reflect any credit enhancement that may be provided
by insurance policies or financial guarantees unless otherwise indicated.

Bonds carrying the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.

57
<PAGE>

Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.

Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.

<TABLE>
<S> <C>
AAA Bonds considered to be investment grade and of the highest credit quality. The obligor
has an exceptionally strong ability to pay interest and repay principal, which is unlikely
to be affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit quality. The obligor's
ability to pay interest and repay principal is very strong, although not quite as strong
as bonds rated "AAA." Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments, short-term debt of these
issuers is generally rated "F-1+."
A Bonds considered to be investment grade and of high credit quality. The obligor's
ability to pay interest and repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and circumstances than bonds
with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit quality. The
obligor's ability to pay interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances, however, are more
likely to have adverse impact on these bonds, and therefore impair timely payment.
The likelihood that the ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
Plus (+) or Plus and minus signs are used with a rating symbol to indicate the relative position of
Minus (-) a credit within the rating category. Plus and minus signs, however, are not used in the
"AAA" category.
NR Indicates that Fitch does not rate the specific issue.
Conditional A conditional rating is premised on the successful completion of a project or the
occurrence of a specific event.
Suspended A rating is suspended when Fitch deems the amount of information available from the
issuer to be inadequate for rating purposes.
Withdrawn A rating will be withdrawn when an issue matures or is called or refinanced and, at
Fitch's discretion, when an issuer fails to furnish proper and timely information.
FitchAlert Ratings are placed on FitchAlert to notify investors of an occurrence that is likely to
result in a rating change and the likely direction of such change. These are designated
as "Positive," indicating a potential upgrade, "Negative," for potential downgrade, or
"Evolving," where ratings may be raised or lowered. FitchAlert is relatively short-term,
and should be resolved within 12 months.
Ratings Outlook An outlook is used to describe the most likely direction of any rating change over the
intermediate term. It is described as "Positive" or "Negative." The absence of a
designation indicates a stable outlook.
</TABLE>

Speculative Grade Bond Ratings: Fitch speculative grade bond ratings
provide a guide to investors in determining the credit risk associated with a
particular security. The ratings ("BB" to "C") represent Fitch's assessment of
the likelihood of timely payment of principal and interest in accordance with
the terms of obligation for bond issues not in default. For defaulted bonds,
the rating ("DDD" to "D") is an assessment of the ultimate recovery value
through reorganization or liquidation.

58
<PAGE>

Bonds that have the rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.

<TABLE>
<S> <C>
BB Bonds are considered speculative. The obligor's ability to pay interest and repay
principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the obligor in
satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this class are currently
meeting debt service requirements, the probability of continued timely payment of
principal and interest reflects the obligor's limited margin of safety and the need for
reasonable business and economic activity throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied, may lead to
default. The ability to meet obligations requires an advantageous business and
economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or principal seems
probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD Bonds are in default on interest and/or principal payments. Such bonds are extremely
DD and D speculative and should be valued on the basis of their ultimate recovery value in
liquidation or reorganization of the obligor. "DDD" represents the highest potential for
recovery on these bonds, and "D" represents the lowest potential for recovery.
Plus (+) or Plus and minus signs are used with a rating symbol to indicate the relative position
Minus (-) of a credit within the rating category. Plus and minus signs, however, are not used in
the "DDD," "DD," or "D" categories.
</TABLE>

SHORT-TERM RATINGS

Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.

The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.

Fitch short-term ratings are as follows:

<TABLE>
<S> <C>
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as
having the strongest degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an assurance of timely
payment only slightly less in degree than issues rated "F-1+."
F-2 Good Credit Quality. Issues assigned this rating have a satisfactory degree of
assurance for timely payment, but the margin of safety is not as great as for issues
assigned "F-1+" and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have characteristics suggesting that
the degree of assurance for timely payment is adequate; however, near-term adverse
changes could cause these securities to be rated below investment grade.
</TABLE>

59
<PAGE>

<TABLE>
<S> <C>
F-S Weak Credit Quality. Issues assigned this rating have characteristics suggesting a
minimal degree of assurance for timely payment and are vulnerable to near-term
adverse changes in financial and economic conditions.
D Default. Issues assigned this rating are in actual or imminent payment default.
LOC The symbol "LOC" indicates that the rating is based on a letter of credit issued by a
commercial bank.
</TABLE>