MORGAN STANLEY DEAN WITTER TAX FREE DAILY INCOME TRUST, 497, 1999-04-30

MORGAN STANLEY DEAN WITTER TAX FREE DAILY INCOME TRUST
497, 1999-04-30

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Filed Pursuant to Rule 497(c)
Registration No.: 2-67087

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PROSPECTUS - APRIL 12, 1999
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MORGAN STANLEY DEAN WITTER

TAX-FREE DAILY INCOME TRUST

A MONEY MARKET FUND THAT SEEKS TO PROVIDE AS HIGH A
LEVEL OF DAILY INCOME EXEMPT FROM FEDERAL INCOME TAX AS
IS CONSISTENT WITH STABILITY OF PRINCIPAL AND LIQUIDITY

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

<PAGE>

CONTENTS

The Fund Investment Objective .............................1

Principal Investment Strategies ..................1

Principal Risks ..................................1

Past Performance .................................3

Fees and Expenses ................................4

Fund Management ..................................5

Shareholder Information Pricing Fund Shares ..............................6

How to Buy Shares ................................6

How to Exchange Shares ...........................8

How to Sell Shares ..............................10

Distributions ...................................13

Tax Consequences ................................13

Financial Highlights ................................................15

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.

FUND CATEGORY
[ ] Growth
[ ] Growth and Income
[ ] Income
[X] MONEY MARKET

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THE FUND

[GRAPHIC OMITTED]

INVESTMENT OBJECTIVE
- --------------------

Morgan Stanley Dean Witter Tax-Free Daily Income Trust (the "Fund") is a money
market fund that seeks to provide as high a level of daily income exempt from
federal income tax as is consistent with stability of principal and liquidity.
There is no guarantee that the Fund will achieve this objective.

[GRAPHIC OMITTED]

PRINCIPAL INVESTMENT STRATEGIES
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The Fund will invest in high quality, short-term securities that are normally
municipal obligations that pay interest exempt from federal income taxes. The
Fund's "Investment Manager," Morgan Stanley Dean Witter Advisors Inc., seeks to
maintain the Fund's share price at $1.00. The share price remaining stable at
$1.00 means that the Fund would preserve the principal value of your
investment.

(sidebar)
MONEY MARKET
A mutual fund having the goal to select securities to provide current income
while seeking to maintain a stable share price of $1.00.
(end sidebar)

(sidebar)
YIELD
The Fund's yield reflects the actual income the Fund pays to you expressed as a
percentage of the Fund's share price. Because the Fund's income from its
portfolio securities will fluctuate, the income it in turn distributes to you
and the Fund's yield will vary.
(end sidebar)

Municipal obligations are securities issued by state and local governments, and
their agencies. These securities typically are "general obligation" or
"revenue" bonds, notes or commercial paper. The general obligation securities
are secured by the issuer's faith and credit, as well as its taxing power, for
payment of principal and interest. Revenue bonds, however, are generally
payable from a specific revenue source. They are issued for a wide variety of
projects such as financing public utilities, housing units, airports and
highways, and schools. Included within the revenue bonds category are
participations in lease obligations and installment purchase contracts of
municipalities. The Fund's municipal obligation investments may include zero
coupon securities, which pay no interest to the Fund. The Fund may invest up to
20% of its assets in taxable money market securities or in 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 has a fundamental policy of investing at least eighty percent of its
assets in securities the interest on which is exempt from federal income tax,
and which are not subject to the "alternative minimum tax." The fundamental
policies may not be changed without shareholder approval.

[GRAPHIC OMITTED]

PRINCIPAL RISKS
- ---------------

Credit and Interest Rate Risks. Principal risks of investing in the Fund are
associated with its municipal investments. Municipal obligations, as with all
debt securities, are subject to two types of risks: credit risk and interest
rate risk.

1
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Credit risk refers to the possibility that the issuer of a security will be
unable to make interest payments and repay the principal on its debt. Interest
rate risk, another risk of debt securities, refers to fluctuations in the value
of a fixed-income security resulting from changes in the general level of
interest rates.

The Investment Manager, however, actively manages the Fund's assets to reduce
the risk of losing any principal investment as a result of credit or interest
rate risks. The Fund's assets are reviewed to maintain or improve
creditworthiness. In addition, federal regulations require money market funds,
such as the Fund, to invest only in debt obligations of high quality and short
maturities.

An investment in the Fund is not a deposit of a bank and is not insured or
guaranteed by the FDIC or any other government agency. Although the Fund seeks
to preserve the value of your investment at $1.00 per share, if it is unable to
do so, it is possible to lose money by investing in the Fund.

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.

2
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[GRAPHIC OMITTED]

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.

(sidebar)
ANNUAL TOTAL RETURNS
This chart shows how the performance of the Fund's shares has varied from year
to year over a 10-year period.
(end sidebar)

[GRAPHIC OMITTED]

ANNUAL TOTAL RETURNS -- CALENDAR YEARS

1989 '90 '91 '92 '93 '94 '95 '96 '97 '98
- ---- --- --- --- --- --- --- --- --- ---
5.96% 5.48% 4.02% 2.39% 1.85% 2.25% 3.22% 2.83% 2.98% 2.80%

During the periods shown in the bar chart, the highest return for a calendar
quarter was 1.59% (quarter ended June 30, 1989) and the lowest return for a
calendar quarter was 0.43% (quarter ended March 31, 1994). Year-to-date total
return information as of March 31, 1999 was 0.56%.

(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.
(end sidebar)

AVERAGE ANNUAL TOTAL RETURNS (FOR THE PERIODS ENDED THE 1998 CALENDAR YEAR)
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PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
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Tax-Free Daily Income Trust 2.80% 2.81% 3.37%
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Lipper Tax-Exempt
Money Market Funds Index(1) 3.04% 3.06% 3.58%
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(1) The Lipper Tax-Exempt Money Market Fund Index is an equally-weighted
performance index of the largest qualifying funds (based on net assets) in
the Lipper Tax-Exempt Money Market 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.

3
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FEES AND EXPENSES
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[GRAPHIC OMITTED]

The Fund is a no-load fund. 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 impose any sales charges and does not charge account or exchange fees.

(sidebar)
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)

ANNUAL FUND OPERATING EXPENSES

Management fee 0.50%
Distribution and service (12b-1) fees 0.10%
Other expenses 0.12%
Total annual Fund operating expenses 0.72%

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.

This example shows what expenses you could pay over time. 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 table below shows your costs at the end of each
period based on these assumptions.

1 YEAR 3 YEARS 5 YEARS 10 YEARS
$73 $229 $398 $890

4
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FUND MANAGEMENT
- ---------------

[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 $129.2 billion in assets under
management or administration as of March 31, 1999.
(end sidebar)

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, NY 10048.

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 0.50% of the
Fund's average daily net assets.

5
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SHAREHOLDER INFORMATION

PRICING FUND SHARES
- -------------------

[GRAPHIC OMITTED]

The price of Fund shares, called "net asset value," is based on the amortized
cost of the Fund's portfolio securities. The amortized cost valuation method
involves valuing a debt obligation in reference to its cost, rather than market
forces.

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.

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

[GRAPHIC OMITTED]

You may open a new account to buy Fund shares or buy additional Fund shares for
an existing account in several ways. When you buy Fund shares, the shares are
purchased at the next share price calculated after we receive your investment
in proper form and accompanied by federal or other immediately available funds.
You begin earning dividends the business day after the shares are purchased. We
reserve the right to reject any order for the purchase of Fund shares.

(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)

MINIMUM INVESTMENT AMOUNTS
- -------------------------------------------------------
MINIMUM INVESTMENT
- -------------------------------------------------------
INVESTMENT OPTIONS INITIAL ADDITIONAL
- -------------------------------------------------------
Regular Accounts: $5,000 $100
- -------------------------------------------------------
EasyInvestSM
(Automatically from your Not
checking or savings account) Available $100
- -------------------------------------------------------

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.

6
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INVESTMENT
OPTIONS PROCEDURES

Contact Your New Accounts and Subsequent Investments
Financial Advisor You may buy Fund shares by contacting your Morgan Stanley
Dean Witter Financial Advisor or other authorized
[GRAPHIC OMITTED] financial representative. Your Financial Advisor will
assist you, step-by-step, with the procedures to invest in
the Fund.

By Mail New Accounts
To open a new account to buy Fund shares:
[GRAPHIC OMITTED] o Complete and sign the attached Application.
o Make out a check for the investment amount to:
Morgan Stanley Dean Witter Tax-Free Daily Income Trust.
o Mail the Application and check to Morgan Stanley Dean
Witter Trust FSB at P.O. Box 1040, Jersey City,
New Jersey 07303.

Subsequent Investments
To buy additional shares for an existing Fund account:
o Write a "letter of instruction" to the Fund specifying
the name(s) on the account, the account number and the
social security or tax identification number, and the
additional investment amount. The letter must be signed
by the account owner(s).
o Make out a check for the investment amount to: Morgan
Stanley Dean Witter Tax-Free Daily Income Trust.
o Mail the letter and check to Morgan Stanley Dean Witter
Trust FSB at the same address as for new accounts.

By Wire New Accounts
To open a new account to buy Fund shares:
[GRAPHIC OMITTED] o Mail the attached Application, completed and signed, to
Morgan Stanley Dean Witter Trust FSB at P.O. Box 1040,
Jersey City, New Jersey 07303.
o Before sending instructions by wire, call us at (800)
869-NEWS advising us of your purchase and to confirm we
have received your Application.
o Wire the instructions specifying the name of the Fund
and your account number, along with the additional
investment amount, to The Bank of New York, for credit
to the account of "Morgan Stanley Dean Witter Trust
FSB, Harborside Financial Center, Plaza Two, Jersey
City, New Jersey 07303, Account No. 8900188413."
(When you buy Fund shares, wire purchase instructions
received by Morgan Stanley Dean Witter Trust FSB prior to
12:00 noon Eastern time are normally effective that day
and wire purchase instructions received after 12:00 noon
are normally effective the next business day.)

Subsequent Investments
To buy additional shares for an existing Fund account:
o Before sending instructions by wire, call us at (800)
869-NEWS advising us of your purchase.
o Wire the instructions specifying the name of the Fund
and your account number, along with the investment
amount, to The Bank of New York, for credit to the
account of Morgan Stanley Dean Witter Trust FSB in the
same manner as opening an account.
(Also, when you buy additional Fund shares, wire purchase
instructions received by Morgan Stanley Dean Witter Trust
FSB prior to 12:00 noon Eastern time are normally
effective that day and wire purchase instructions received
after 12:00 noon are normally effective the next business
day.)

7
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INVESTMENT
OPTIONS PROCEDURES

EasyInvestSM New Accounts
(Automatically This program is not available to open a new Fund account
from your or a new account of another Money Market Fund.
checking or
savings account) Subsequent Investments
EasyInvest is a purchase plan that allows you to transfer
[GRAPHIC OMITTED] money automatically from your checking or savings account
to an existing Fund account on a semi-monthly, monthly or
quarterly basis. Contact your Morgan Stanley Dean Witter
Financial Advisor or other authorized financial
representative for further information about this service.

Additional Purchase Information. If you are a customer of Dean Witter Reynolds
or another authorized dealer of Fund shares, you may upon request: (a) have the
proceeds from the sale of listed securities invested in Fund shares the day
after you receive the proceeds; and (b) pay for the purchase of certain listed
securities by automatic sale of Fund shares that you own. In addition, if you
are a customer of Dean Witter Reynolds or another authorized dealer of Fund
shares, you may have credit cash balances in your securities account (which do
not exceed $5,000) automatically invested in shares of the Fund on a weekly
basis. Plan of Distribution

Plan of Distribution. The Fund has adopted a Plan of Distribution in accordance
with Rule 12b-1 under the Investment Company Act of 1940. 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. 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 and may cost you more than paying
other types of sales charges.

HOW TO EXCHANGE SHARES
- ----------------------

[GRAPHIC OMITTED]

Permissible Fund Exchanges. You may only exchange shares of the Fund for shares
of other continuously offered Morgan Stanley Dean Witter Funds if the Fund
shares were acquired in an exchange of shares initially purchased in a
Multi-Class Fund or an FSC Fund (subject to a front-end sales charge). In that
case, the shares may be subsequently re-exchanged for shares of the same Class
of any Multi-Class Fund or FSC Fund or for shares of another Money Market Fund,
No-Load Fund or Short-Term U.S. Treasury Trust. Of course, if an exchange is
not permitted, you may sell shares of the Fund and buy another Fund's shares
with the proceeds.

See the inside back cover of this Prospectus for each Morgan Stanley Dean
Witter Fund's designation as a Multi-Class Fund, FSC 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

8
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are treated as Class A shares of a Multi-Class Fund. An exchange privilege
account also may be maintained for you if you acquired Fund shares in exchange
for shares of various TCW/DW Funds.

The current Prospectus for each fund describes its investment objective(s),
policies and investment minimums, and should be read before investing.

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.

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.

9
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Exchanging Shares of Another Fund Subject to a Contingent Deferred Sales Charge
("CDSC"). There are special considerations when you exchange shares subject to
a CDSC of another Morgan Stanley Dean Witter Fund for shares of the Fund. 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 the Fund will not be counted. Thus, in effect the "holding period"
for purposes of calculating the CDSC is frozen upon exchanging into the Fund.
Nevertheless, if shares subject to a CDSC are exchanged for shares of the Fund,
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 the Fund up to the
amount of any applicable CDSC. See the Prospectus of the Fund that charges the
CDSC for more details.

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.

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

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

[GRAPHIC OMITTED]

You can sell some or all of your Fund shares at any time. Your shares will be
sold at the next share price calculated after we receive your order to sell as
described below.

OPTIONS PROCEDURES

Contact Your To sell your shares, simply call your Morgan Stanley Dean
Financial Advisor Witter 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 Dean Witter Reynolds
brokerage account.

Check-writing You may order a supply of blank checks by requesting them
Option on the investment application or by contacting your Morgan
Stanley Dean Witter Financial Advisor.
[GRAPHIC OMITTED]
Checks may be written in any amount not less than $500.
You must sign checks exactly as their shares are
registered. If the account is a joint account, the check
may contain one signature unless the joint owners have
specified on an investment application that all owners are
required to sign checks. Only accounts in which no share
certificates have been issued are eligible for the
checkwriting privilege.

Payment of check proceeds normally will be made on the
next business day after we receive your check in proper
form. Shares purchased by check (including a certified or
bank cashier's check) are not normally available to cover
redemption checks until fifteen days after Morgan Stanley
Dean Witter Trust FSB receives the check used for
investment. A check will not be honored in an amount
exceeding the value of the account at the time the check
is presented for payment.

10
<PAGE>

OPTIONS PROCEDURES

By Letter You may also sell your shares by writing a "letter of
instruction" that includes:
[GRAPHIC OMITTED] o your account number;
o the dollar amount or the number 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
Withdrawal Plan Witter Family of Funds has a total market value of at
least $10,000, you may elect to withdraw amounts of $25 or
[GRAPHIC OMITTED] more, or in any whole percentage of a Fund's balance
(provided the amount is 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.

(sidebar)
SYSTEMATIC WITHDRAWAL PLAN
This plan allows you to withdraw money automatically from your Fund account at
regular intervals. Contact your Morgan Stanley Dean Witter Financial Advisor
for more details.
(end sidebar)

When you sell Fund shares through the Systematic
Withdrawal Plan, the shares may be subject to a contingent
deferred sales charge ("CDSC") if they were obtained in
exchange for shares subject to a CDSC of another Morgan
Stanley Dean Witter Fund. The CDSC, however, will be
waived in an amount up to 12% annually of the Fund's
value, although Fund 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. See the Prospectus
of the Fund that charges the CDSC for more details.

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.

By Telephone To sell shares by telephone or wire, first complete a
or Wire telephone redemption application designating a bank
account. Redemptions for more than $1,000 will be wired to
[GRAPHIC OMITTED] your bank account (your bank may charge a fee for this
service). For redemptions for less than $1,000, a check
will be mailed to your bank account. If you hold share
certificates, you may not redeem those shares by this
method. For more information or to request a telephone
redemption application, call Morgan Stanley Dean Witter
Trust FSB at (800) 869-NEWS.

11
<PAGE>

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).

Involuntary Sales. The Fund reserves the right, on sixty days' notice, to sell
the shares of any shareholder whose shares, due to sales by the shareholder,
have a value below $1,000. 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.

Money Market Fund Automatic Sale Procedures. If you maintain a brokerage
account with Dean Witter Reynolds or another authorized dealer of Fund shares,
you may elect to have your Fund shares automatically sold from your account to
satisfy amounts you owe as a result of purchasing securities or other
transactions in your brokerage account.

If you elect to participate by notifying Dean Witter Reynolds or another
authorized dealer of Fund shares, your brokerage account will be scanned each
business day prior to the close of business (4:00 p.m. Eastern time). After any
cash balances in the account are applied, a sufficient number of Fund shares
may be sold to satisfy any amounts you are obligated to pay to Dean Witter
Reynolds or another authorized dealer of fund shares. Sales will be effected on
the business day before the date you are obligated to make payment, and Dean
Witter Reynolds or another authorized dealer of Fund shares will receive the
sale proceeds on the following day.

EasyInvestSM-Automatic Redemption. You may invest in shares of certain other
Morgan Stanley Dean Witter Funds by subscribing to EasyInvestSM, an automatic
purchase plan that provides for the automatic investment of any amount from
$100 to $5,000 in shares of the specified fund. Under EasyInvestSM, you may
direct that a sufficient number of shares of the Fund be automatically sold and
the proceeds transferred to Morgan Stanley Dean Witter Trust FSB, on a
semi-monthly, monthly or quarterly basis, for investment in shares of the
specified fund. Sales of your Fund shares will be made on the business day
preceding the investment date and Morgan Stanley Dean Witter Trust FSB will
receive the proceeds for investment on the day following the sale date.

Margin Accounts. Certain restrictions may apply to Fund shares pledged in
margin accounts with Dean Witter Reynolds or another authorized broker-dealer
of Fund

12
<PAGE>

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.

DISTRIBUTIONS
- -------------

[GRAPHIC OMITTED]

(sidebar)
TARGETED DIVIDENDSSM
You may select to have your Fund distributions automatically invested in
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)

The Fund passes substantially all of its earnings 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 may realize 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 Investment Manager does not anticipate that
there will be significant capital gain distributions.

The Fund declares income dividends, payable on each day the New York Stock
Exchange is open for business, of all of its daily net income to shareholders
of record as of the close of business the preceding business day. Capital
gains, if any, are distributed periodically.

Distributions are reinvested automatically in additional shares of the Fund
(rounded to the last 1/100 of a share) and automatically credited to your
account unless you request in writing that distributions be paid in cash. If
you elect the cash option, the Fund will reinvest the additional shares and
credit your account during the month, then redeem the credited amount no later
than the last business day of the month, and mail a check to you no later than
seven business days after the end of the 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.

TAX CONSEQUENCES
- ----------------

[GRAPHIC OMITTED]

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.

Your income dividend distributions are exempt from federal income tax-- 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.

The income derived from some municipal securities is subject to the federal
"alternative minimum tax." Certain tax-exempt securities whose proceeds are
used to

13
<PAGE>

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

Every January, you will be sent a statement (IRS Form 1099-DIV) showing the
distributions paid to you in the previous year. The statement provides full
information on your dividends and capital gains for tax purposes.

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 sale proceeds. Any withheld amount would be
sent to the IRS as an advance tax payment.

14
<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>
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 $1.00 $1.00 $1.00 $1.00 $1.00
- ------------------------------------------------------------------------------------------------------
Net investment income 0.028 0.029 0.028 0.032 0.022
Less dividends from net investment income (0.028) (0.029) (0.028) (0.032) (0.022)
- ------------------------------------------------------------------------------------------------------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00
- ------------------------------------------------------------------------------------------------------
TOTAL RETURN 2.80% 2.98% 2.83% 3.22% 2.25%
- ------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------------------------------
Expenses 0.72%(1) 0.72%(1) 0.71% 0.72% 0.71%
Net investment income 2.75% 2.93% 2.76% 3.16% 2.22%
- ------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period, in millions $498 $517 $522 $522 $544
- ------------------------------------------------------------------------------------------------------
</TABLE>

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

15
<PAGE>

NOTES

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

16
<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 Value 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
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 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)
N.Y. 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 which
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>
----------------
| 210- |
----------------
for office use only

Morgan Stanley Dean Witter
Tax-Free Daily
Income Trust

Application
MORGAN STANLEY DEAN WITTER TAX-FREE DAILY INCOME TRUST
Send to: Morgan Stanley Dean Witter Trust FSB (the "Transfer Agent"), P.O. Box
1040, Jersey City, NJ 07303

- --------------------------------------------------------------------------------
INSTRUCTIONS For assistance in completing this application, telephone
Morgan Stanley Dean Witter Trust FSB at (800) 869-NEWS
(Toll-Free).
- --------------------------------------------------------------------------------
TO REGISTER
SHARES 1.
(please print) -----------------------------------------------------------
First Name Last Name

- -As joint tenants,
use line 1 & 2 2.
) -----------------------------------------------------------
First Name Last Name

(Joint tenants with rights of survivorship unless
otherwise specified) ----------------------
Social Security Number

- -As custodian
for a minor, 3.
use lines 1 & 3 -----------------------------------------------------------
Minor's Name

Under the Uniform Gifts to Minors Act
---------------------------
State of Residence of Minor

------------------------------
Minor's Social Security Number

- -In the name of
a corporation, 4.
trust, -----------------------------------------------------------
partnership Name of Corporation, Trust (including trustee name(s))
or other or Other Organization
institutional
investors, -----------------------------------------------------------
use line 4

-------------------------
Tax Identification Number

If Trust, Date of Trust Instrument:
--------------------------

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

ADDRESS
-----------------------------------------------------------

-----------------------------------------------------------
City State Zip Code

- --------------------------------------------------------------------------------
TO PURCHASE

SHARES:
Minimum Initial [ ] CHECK (enclosed) $ (Make Payable to Morgan Stanley
Investment: --------
$5,000 Dean Witter Tax-Free Daily Income Trust)
[ ] WIRE* On MF*
------------- ------------------------------
(Date) (Control number,
this transaction)

-------------------------------------------------------------
Name of Bank Branch

-------------------------------------------------------------
Address

-------------------------------------------------------------
Telephone Number

* For an initial investment made by wiring funds, obtain
a control number by calling: (800) 869-NEWS (Toll
Free) Your bank should wire to:

Bank of New York for credit to account of Morgan Stanley
Dean Witter Trust FSB

Account Number: 8900188413

Re: Morgan Stanley Dean Witter Tax-Free Daily Income Trust

Account Of:
--------------------------------------------------
(Investor's Account as Registered at
the Transfer Agent)

Control or Account Number:
-----------------------------------
(Assigned by Telephone)

- --------------------------------------------------------------------------------
OPTIONAL SERVICES
- --------------------------------------------------------------------------------
NOTE: If you are a current shareholder of Morgan Stanley
Dean Witter Tax-Free Daily Income Trust, please indicate
your fund account number here.
--------------------
210-
--------------------
- --------------------------------------------------------------------------------
DIVIDENDS All dividends will be reinvested daily in additional shares,
unless the following option is selected:
[ ] Pay income dividends by check at the end of each month.
- --------------------------------------------------------------------------------
WRITE YOUR [ ] Send an initial supply of checks.
OWN FOR JOINT ACCOUNTS:
CHECK [ ] Check this box if all owners are required to sign checks.
- --------------------------------------------------------------------------------

<PAGE>

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

PAYMENT TO [ ] Morgan Stanley Dean Witter Trust FSB is hereby
PREDESIGNATED authorized to honor telephonic or other instructions,
BANK ACCOUNT without signature guarantee, from any person for the
redemption of any or all shares of Morgan Stanley Dean
Witter Tax-Free Daily Income Trust held in my (our)
account provided that proceeds are transmitted only to
the following bank account. (Absent its own
negligence, neither Morgan Stanley Dean Witter
Tax-Free Daily Income Trust nor Morgan Stanley Dean
Witter Trust FSB (the "Transfer Agent") shall be
liable for any redemption caused by unauthorized
instruction(s)): Bank Account must be in same name as
shares are registered

------------------------------ ----------------------------
Name & Bank Account Number Bank's Routing Transmit Code
(Ask Your Bank)
Minimum Amount:
$1,000
-------------------------------------------
Name of Bank

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

( )
-------------------------------------------
Telephone Number of Bank
- --------------------------------------------------------------------------------
SIGNATURE AUTHORIZATION
- --------------------------------------------------------------------------------

FOR ALL ACCOUNTS NOTE: RETAIN A COPY OF THIS DOCUMENT FOR YOUR RECORDS. ANY
MODIFICATION OF THE INFORMATION BELOW WILL REQUIRE AN
AMENDMENT TO THIS FORM. THIS DOCUMENT IS IN FULL FORCE AND
EFFECT UNTIL ANOTHER DULY EXECUTED FORM IS RECEIVED BY THE
TRANSFER AGENT.

The "Transfer Agent" is hereby authorized to act as agent
for the registered owner of shares of Morgan Stanley Dean
Witter Tax-Free Daily Income Trust (the "Fund") in effecting
redemptions of shares and is authorized to recognize the
signature(s) below in payment of funds resulting from such
redemptions on behalf of the registered owners of such
shares. The Transfer Agent shall be liable only for its own
negligence and not for 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.

I (we) certify to my (our) legal capacity, or the capacity
of the investor named above, to invest in and redeem shares
of, and I (we) acknowledge receipt of a current prospectus
of Morgan Stanley Dean Witter Tax-Free Daily Income Trust
and (we) further certify my (our) authority to sign and act
for and on behalf of the investor.

Under penalties of perjury, I certify (1) that the number
shown on this form is my correct taxpayer identification
number and (2) that I am not subject to backup withholding
either because I have not been notified that I am subject to
backup withholding as a result of a failure to report all
interest or dividends, or the Internal Revenue Service has
notified me that I am no longer subject to backup
withholding. (Note: You must cross out item (2) above if you
have been notified by IRS that you are currently subject to
backup withholding because of underreporting interest or
dividends on your tax return.)

For Individual, Joint and Custodial Accounts for Minors,
Check Applicable Box:

[ ] I am a United States Citizen. [ ] I am not a United
States Citizen.

SIGNATURE(S) (IF JOINT TENANTS, ALL MUST SIGN)

Name(s) must be signed
exactly the same as shown on
lines 1 to 4 on the reverse
side of this application

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

SIGNED THIS ------------------ DAY OF ---------------------- ,
19 - .

FOR CORPORATIONS, TRUSTS, PARTNERSHIPS AND OTHER
ORGANIZATIONS

The following named persons are currently
officers/trustees/general partners/other authorized
signatories of the Registered Owner, and any -- * of them
("Authorized Person(s)") is/are currently authorized under
the applicable governing document to act with full power to
sell, assign or transfer securities of the Fund for the
Registered Owner and to execute and deliver any instrument
necessary to effectuate the authority hereby conferred:

In addition, complete
Section A or B below.

NAME/TITLE SIGNATURE
-----------------------------------------------------------------

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

SIGNED THIS ------------------ DAY OF ------------------- ,19 .

The Transfer Agent may, without inquiry, act only upon the
instruction of ANY PERSON(S) purporting to be (an)
Authorized Person(s) as named in the Certification Form last
received by the Transfer Agent. The Transfer Agent and the
Fund shall not be liable for any claims, expenses (including
legal fees) or losses resulting from the Transfer Agent
having acted upon any instruction reasonably believed
genuine.
-------------------------------------------------------------
* INSERT A NUMBER. UNLESS OTHERWISE INDICATED, THE TRANSFER
AGENT MAY HONOR INSTRUCTIONS OF ANY ONE OF THE PERSONS NAMED
ABOVE.
- --------------------------------------------------------------------------------
SECTION [A] NOTE: EITHER A SIGNATURE GUARANTEE OR CORPORATE SEAL IS
CORPORATIONS AND REQUIRED.
INCORPORATED
ASSOCIATIONS ONLY. I, _______________________,Secretary of the Registered
Owner, do hereby certify that at a meeting on _________ at
which a quorum was present throughout, the Board of
Directors of the corporation/the officers of the association
duly adopted a resolution, which is in full force and effect
and in accordance with the Registered Owner's charter and
by-laws, which resolution did the following: (1) empowered
the above-named Authorized Person(s) to effect securities
transactions for the Registered Owner on the terms described
SIGN ABOVE AND above; (2) authorized the Secretary to certify, from time to
COMPLETE THIS time, the names and titles of the officers of the Registered
SECTION Owner and to notify the Transfer Agent when changes in
office occur; and (3) authorized the Secretary to certify
that such a resolution has been duly adopted and will remain
in full force and effect until the Transfer Agent receives a
duly executed amendment to the Certification Form.

SIGNATURE Witness my hand on behalf of the corporation/association
GUARANTEE** this ________ day of ____________, 19__.
(or Corporate
Seal)

-------------------------------------
Secretary**

The undersigned officer (other than the Secretary) hereby
certifies that the foregoing instrument has been signed by
the Secretary of the corporation/association.

SIGNATURE
GUARANTEE**
(or Corporate Seal)
-------------------------------------------------------------
Certifying Officer of the Corporation or
Incorporated Association**
- --------------------------------------------------------------------------------
SECTION [B] NOTE: A SIGNATURE GUARANTEE IS REQUIRED.
ALL OTHER
INSTITUTIONAL
INVESTORS
-----------------------------------------------
Certifying
Trustee(s)/General Partner(s)Other(s)**
SIGNATURE
GUARANTEE**

SIGN ABOVE AND
COMPLETE THIS
SECTION
-----------------------------------------------
Certifying
Trustee(s)/General Partner(s)/Other(s)**
-------------------------------------------------------------
**SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR
- --------------------------------------------------------------------------------
DEALER Above signature(s) guaranteed. Prospectus has been delivered
(if any) by undersigned to above-named applicant(s).
Completion by
dealer only

------------------------- ----------------------------------
Firm Name Office Number-Account Number at
Dealer-F/A Number

------------------------- ----------------------------------
Address Financial Advisor's Last Name

------------------------- ----------------------------------
City, State, Zip Code Branch Office

* 1999 Morgan Stanley Dean
Witter Distributors Inc.

<PAGE>

PROSPECTUS - APRIL 12, 1999

Additional information about the Fund's investments is available in the Fund's
Annual and Semi-Annual Reports to Shareholders (the current annual report is
attached). 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 at
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.

TICKER SYMBOL: DSTXX

Morgan Stanley Dean Witter

TAX-FREE DAILY INCOME TRUST

A MONEY MARKET FUND THAT
SEEKS TO PROVIDE AS HIGH A
LEVEL OF DAILY INCOME EXEMPT
FROM FEDERAL INCOME TAX AS IS
CONSISTENT WITH STABILITY OF
PRINCIPAL AND LIQUIDITY

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION MORGAN STANLEY DEAN WITTER
TAX-FREE DAILY INCOME TRUST
APRIL 12, 1999

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

This Statement of Additional Information is not a Prospectus. The
Prospectus dated April 12, 1999 for the Morgan Stanley Dean Witter Tax-Free
Daily Income 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-Free Daily Income Trust
Two World Trade Center
New York, New York 10048
(800) 869-NEWS

<PAGE>

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

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 ............................. 7
III. Management of the Fund ............................................... 9
A. Board of Trustees ................................................. 9
B. Management Information ............................................ 9
C. Compensation ...................................................... 14
IV. Control Persons and Principal Holders of Securities .................. 16
V. Investment Management and Other Services ............................. 16
A. Investment Manager ................................................ 16
B. Principal Underwriter ............................................. 17
C. Services Provided by the Investment Manager and Fund Expenses
Paid by Third Parties ............................................. 17
D. Rule 12b-1 Plan ................................................... 18
E. Other Service Providers ........................................... 20
VI. Brokerage Allocation and Other Practices ............................. 21
A. Brokerage Transactions ............................................ 21
B. Commissions ....................................................... 21
C. Brokerage Selection ............................................... 21
D. Directed Brokerage ................................................ 22
E. Regular Broker-Dealers ............................................ 22
VII. Capital Stock and Other Securities ................................... 22
VIII. Purchase, Redemption and Pricing of Shares ........................... 23
A. Purchase/Redemption of Shares ..................................... 23
B. Offering Price .................................................... 23
IX. Taxation of the Fund and Shareholders ................................ 25
X. Underwriters ......................................................... 28
XI. Calculation of Performance Data ...................................... 28
XII. Financial Statements ................................................ 28

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-Free Daily Income Trust, a
registered no-load, 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 March 24, 1980 under
the name InterCapital Reserve Cash Management Inc. Effective October 13, 1980,
the Fund's name was changed to lnterCapital Tax-Free Daily Income Fund Inc. On
March 21, 1983, the Fund's name was changed to Dean Witter/Sears Tax-Free Daily
Income Fund Inc. On April 30, 1987, the Fund reorganized as a Massachusetts
business trust with the name Dean Witter/Sears Tax-Free Daily Income Trust. On
February 19, 1993, the Fund's name was changed to Dean Witter Tax-Free Daily
Income Trust. Effective June 22, 1998, the Fund's name was changed to Morgan
Stanley Dean Witter Tax-Free Daily Income Trust.

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

A. CLASSIFICATION

The Fund is a no-load, open-end, diversified management investment company
whose investment objective is to provide as high a level of daily income exempt
from federal income tax as is consistent with stability of principal and
liquidity.

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" and "Principal Risks."

LEASE OBLIGATIONS. Included within the revenue bonds category in which the
Fund may invest are participations in lease obligations or installment purchase
contracts (collectively called "lease obligations") of municipalities. State
and local governments issue lease obligations to acquire equipment and
facilities.

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 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 such
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 such legislative actions do not occur, the holders of the lease
obligation may experience difficulty in exercising their rights, including
disposition of the property.

TAXABLE SECURITIES. The Fund may invest up to 20% of its total assets in
taxable money market instruments. Investments in taxable money market
instruments would generally be made under any one of the following
circumstances: (a) pending investment proceeds of sale of Fund 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 and floating rate obligations. The interest rate payable
on a variable rate obligation is adjusted either at predesignated periodic
intervals and, on a floating rate obligation, whenever there is a change in the
market rate of interest on

4
<PAGE>

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 issuer 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. As a result, the
purchase of variable rate and floating rate obligations should enhance the
ability of the Fund to maintain a stable net asset value per share and to sell
obligations prior to maturity at a price that is approximately the full
principal amount of the obligations. 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. The payment of principal and interest by
issuers of certain obligations purchased by the Fund may be guaranteed by
letters of credit or other credit facilities offered by banks or other
financial institutions. Such guarantees will be considered in determining
whether an obligation meets the Fund's investment quality requirements.

INDUSTRIAL DEVELOPMENT AND POLLUTION CONTROL BONDS. The Fund may invest
more than 25% of its total assets in industrial development and pollution
control bonds (two kinds of tax-exempt municipal bonds) whether or not the
users of the facilities financed by such bonds are in the same industry. In
cases where such users are in the same industry, there may be additional risk
to the Fund in the event of an economic downturn in such industry, which may
result generally in a lowered need for such facilities and a lowered ability of
such users to pay for the use of such facilities.

PUT OPTIONS. The Fund may purchase securities together with the right to
resell them to the seller at an agreed upon price or yield within a specified
period prior to the maturity date of such securities. Such a right to resell is
commonly known as a "put," and the aggregate price which the Fund pays for
securities with puts may be higher than the price which otherwise would be paid
for the securities. The primary purpose of this practice is to permit the Fund
to be fully invested in securities, the interest on which is exempt from
Federal income tax, while preserving the necessary flexibility and liquidity to
purchase securities on a when-issued basis, to meet unusually large redemptions
and to purchase at a later date securities other than those subject to the put.
The Fund's policy is, generally, to exercise the puts on their expiration date,
when the exercise price is higher than the current market price for the related
securities. Puts may be exercised prior to the expiration date in order to fund
obligations to purchase other securities or to meet redemption requests. These
obligations may arise during periods in which proceeds from sales of Fund
shares and from recent sales of portfolio securities are insufficient to meet
such obligations or when the funds available are otherwise allocated for
investment. In addition, puts may be exercised prior to their expiration date
in the event the Investment Manager revises its evaluation of the
creditworthiness of the issuer of the underlying security. In determining
whether to exercise puts prior to their expiration date and in selecting which
puts to exercise in such circumstances, the Investment Manager considers, among
other things, the amount of cash available to the Fund, the expiration dates of
the available puts, any future commitments for securities purchases, the yield,
quality and maturity dates of the underlying securities, alternative investment
opportunities and the desirability of retaining the underlying securities in
the Fund's portfolio.

The Fund values securities which are subject to puts at their amortized
cost and values the put, apart from the security, at zero. Thus, the cost of
the put will be carried on the Fund's books as an unrealized loss from the date
of acquisition and will be reflected in realized gain or loss when the put is
exercised or expires. Since the value of the put is dependent on the ability of
the put writer to meet its obligation to repurchase, the Fund's policy is to
enter into put transactions only with municipal securities dealers who are
approved by the Fund's Trustees. Each dealer will be approved on its own merits
and it is the Fund's general policy to enter into put transactions only with
those dealers which are determined to present minimal credit risks. In
connection with such determination, the Board of Trustees will review, among
other things, the ratings, if available, of equity and debt securities of such
municipal securities dealers, their reputations in the municipal securities
markets, the net worth of such dealers and their efficiency in consummating
transactions. Bank dealers normally will be members of the Federal Reserve
System, and other dealers will be members of the National Association of
Securities Dealers, Inc. or members of a national securities exchange. The
Trustees have directed the Investment Manager not to

5
<PAGE>

enter into put transactions with, and to exercise outstanding puts of, any
municipal securities dealer which, in the judgment of the Investment Manager,
ceases at any time to present a minimal credit risk. In the event that a dealer
should default on its obligation to repurchase an underlying security, the Fund
is unable to predict whether all or any portion of any loss sustained could be
subsequently recovered from such dealer. During the fiscal year ended December
31, 1998, the Fund did not purchase any put options.

In Revenue Ruling 82-144, the Internal Revenue Service stated that, under
certain circumstances, a purchaser of tax-exempt obligations which are subject
to puts will be considered the owner of the obligations for Federal income tax
purposes.

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 Fund will accrue interest from 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 continuously monitored. In addition, the
value of the collateral underlying the repurchase agreement will always be at
least equal to the resale price which consists of the acquisition price paid to
the seller of the securities plus the accrued resale premium which is defined
as the amount specified in the repurchase agreement or the daily amortization
of the difference between the acquisition price and the resale price specified
in the repurchase agreement. Such collateral will consist entirely of
securities that are direct obligations of, or that are fully guaranteed as to
principal and interest by, the United States or any agency thereof, and/or
certificates of deposit, bankers' acceptances which are eligible for acceptance
by a Federal Reserve Bank, and, if the seller is a bank, mortgage related
securities (as such term is defined in section 3(a)(41) of the Securities
Exchange Act of 1934 that, at the time the repurchase agreement is entered
into, are rated in the highest rating category by the Requisite NRSROs (as
defined under Rule 2a-7 of the Investment Company Act of 1940). Additionally,
Upon an Event of Insolvency (as defined under Rule 2a-7) with respect to the
seller, the collateral must qualify the repurchase agreement for preferential
treatment under a provision of applicable insolvency law providing an exclusion
from any automatic stay of creditors' rights against the seller. 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 from 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, amount to more than 10% of its total
assets. The Fund's investments in repurchase agreements may at times be
substantial when, in the view of the Fund's investment manager, liquidity or
other considerations warrant.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. From time to time the Fund
may purchase tax-exempt securities on a when-issued or delayed delivery 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 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.

6
<PAGE>

At the time the Fund makes the commitment to purchase or sell securities
on a when-issued, delayed delivery, 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 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 or delayed delivery basis.
During the fiscal year ended December 31, 1998, the Fund's investment in
when-issued and delayed delivery securities did not exceed 5% of the Fund's net
assets.

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.

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. For purposes of the
following restrictions: (i) all percentage limitations apply immediately after
a purchase or initial investment; and (ii) 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.

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.

7
<PAGE>

The Fund will:

1. Seek to provide as high a level of daily income exempt from income tax
as is consistent with stability of principal and liquidity.

The Fund may not:

1. Invest in common stock.

2. Write, purchase or sell puts, calls, or combinations thereof, except
that it may acquire rights to resell municipal obligations at an
agreed upon price and at or within an agreed upon time.

3. 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).

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

5. 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 obligation of the Unites States Government, its
agencies or instrumentalities.

6. Invest 25% or more 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.

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 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 the Fund
may purchase securities secured by real estate or interests therein.

9. Purchase or sell commodities or commodity futures contracts.

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 borrowings. To meet the requirements of regulations
in certain states, the Fund, as a matter of operating policy but not
as a fundamental policy, will limit any pledge of its assets to 10% of
its net assets so long as shares of the Fund are being sold in those
states.

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;
or (c) borrowing money.

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.

8
<PAGE>

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.

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 nine (9)
Trustees. These same individuals also serve as directors or trustees for all of
the Morgan Stanley Dean Witter Funds. Seven Trustees (77% 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. Four of the seven 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.

9
<PAGE>

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 84 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; Trustee 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.

Charles A. Fiumefreddo* (65) .............. Chairman, Director or Trustee, President and Chief
Chairman of the Board, President, Chief Executive Officer of the Morgan Stanley Dean
Executive Officer and Trustee Witter Funds; Chairman, Chief Executive Officer
Two World Trade Center and Trustee of the TCW/DW Funds; Chairman and
New York, New York Trustee of Discover Brokerage Index Series;
formerly Chairman, Chief Executive Officer 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; Trustee of Discover Brokerage Index
c/o Huntsman Corporation 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., 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.
</TABLE>

10
<PAGE>

<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------- -----------------------------------------------------
<S> <C>
John R. Haire (74) ........................ Chairman of the Audit Committee and Director or
Trustee Trustee of the Morgan Stanley Dean Witter Funds;
Two World Trade Center Chairman of the Audit Committee and Trustee of
New York, New York the TCW/DW Funds; Chairman of the Audit
Committee and Chairman of the Audit Committee
and Trustee of Discover Brokerage Index Series;
formerly Chairman of the Independent Directors or
Trustees of the Morgan Stanley Dean Witter Funds
and the TCW/DW Funds (until June, 1998);
formerly President, Council for Aid to Education
(1978-1989) and Chairman and Chief Executive
Officer of Anchor Corporation, an investment
advisor (1964-1978).

Wayne E. Hedien (65) ...................... Retired; Director or Trustee of the Morgan Stanley
Trustee Dean Witter Funds; Trustee of Discover Brokerage
c/o Gordon Altman Butowsky Index Series; Director of The PMI Group, Inc.
Weitzen Shalov & Wein (private mortgage insurance); Trustee and Vice
Counsel to the Independent Trustees Chairman of The Field Museum of Natural History;
114 West 47th Street formerly 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; Director or Trustee of the
Washington, D.C. Morgan Stanley Dean Witter Funds; Trustee of the
TCW/DW Funds; Trustee of Discover Brokerage
Index Series; Director of NASDAQ (since June,
1995); 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.

Michael E. Nugent (62) .................... General Partner, Triumph Capital, L.P., a private
Trustee investment partnership; Director or Trustee of the
c/o Triumph Capital, L.P. Morgan Stanley Dean Witter Funds; Trustee of the
237 Park Avenue TCW/DW Funds; Trustee of Discover Brokerage
New York, New York Index Series; formerly Vice President, Bankers Trust
Company and BT Capital Corporation (1984-1988);
director of various business organizations.
</TABLE>

11
<PAGE>

John L. Schroeder (68) .................... Retired; Director or Trustee of the Morgan Stanley
Trustee Dean Witter Funds; Trustee of the TCW/DW Funds;
c/o Gordon Altman Butowsky Trustee of Discover Brokerage Index Series;
Weitzen Shalov & Wein Director of Citizens Utilities Company; formerly
Counsel to the Independent Trustees Executive Vice President and Chief Investment
114 West 47th Street Officer of the Home Insurance Company (August,
New York, New York 1991-September, 1995).

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.

Katherine H. Stromberg (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, Mitchell M. Merin, President and Chief Operating Officer of
Asset Management of MSDW, President, Chief Executive Officer and Director of
the Investment Manager and MSDW Services Company, Chairman and Director of the
Distributor and the Transfer Agent, Executive Vice President and Director of
Dean Witter Reynolds, and Director of various MSDW subsidiaries, Ronald E.
Robison, Executive Vice President, Chief Administrative Officer and Director of
the Investment Manager and

12
<PAGE>

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, and Peter M. Avelar, Jonathan R. Page and James
F. Willison, Senior Vice Presidents of the Investment Manager, and Joseph R.
Arcieri and Gerard J. Lian, Vice Presidents of the Investment Manager and
Michelle Kaufman, Vice President of the Investment Manager, are Vice Presidents
of the Fund.

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 with 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 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. Indeed, by serving on the Funds' Boards,
certain Trustees who would otherwise be qualified and in demand to serve on
bank boards would be prohibited by law from doing so. 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

13
<PAGE>

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.

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 pays the Chairman of the Committee of the Independent Trustees an
additional annual fee of $1,200). 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 reimbursment from the
Fund for their services as Trustee. Mr. Haire currently serves as Chairman of
the Audit Committee. Prior to June 1, 1998, Mr. Haire also served as Chairman
of the Independent Trustees for which services the Fund paid him an additional
annual fee of $1,200. Effective May 1, 1999, Mr. Johnson serves as Chairman of
the Audit Committee.

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
John R. Haire ................. 2,900
Wayne E. Hedien ............... 1,600
Dr. Manuel H. Johnson ......... 1,550
Michael E. Nugent ............. 1,600
John L. Schroeder ............. 1,600
</TABLE>

14
<PAGE>

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. Haire,
Johnson, Nugent and Schroeder, the 11 TCW/DW Funds that were in operation at
December 31, 1998. Mr. Haire serves as Chairman of the Audit Committee of each
Morgan Stanley Dean Witter Fund and each TCW/DW Fund and, prior to June 1,
1998, also served as Chairman of the Independent Directors or Trustees of those
Funds. Effective May 1, 1999, Mr. Johnson serves as Chairman of the Audit
Committee of each Morgan Stanley Dean Witter Fund and each TCW/DW Fund. 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 FOR SERVICE AS FOR SERVICE AS TOTAL CASH
AS DIRECTOR OR CHAIRMAN OF CHAIRMAN OF COMPENSATION
TRUSTEE AND INDEPENDENT INDEPENDENT FOR SERVICES TO
COMMITTEE FOR SERVICE AS DIRECTORS/TRUSTEES TRUSTEES AND 85 MORGAN
MEMBER OF TRUSTEE AND AND AUDIT AUDIT STANLEY DEAN
85 MORGAN COMMITTEE COMMITTEES OF 85 COMMITTEES OF WITTER FUNDS AND
NAME OF STANLEY DEAN MEMBER OF 11 MORGAN STANLEY 11 TCW/DW 11 TCW/DW
INDEPENDENT TRUSTEE WITTER FUNDS TCW/DW FUNDS DEAN WITTER FUNDS FUNDS FUNDS
- ------------------- ------------ ------------ ----------------- ----- -----
<S> <C> <C> <C> <C> <C>
Michael Bozic ............ $120,150 -- -- -- $120,150
Edwin J. Garn ............ 132,450 -- -- -- 132,450
John R. Haire ............ 136,450 $66,931 $101,338 $14,725 319,444
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.

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 of service. 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.

- ----------
(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.

15
<PAGE>

The following table illustrates the retirement benefits accrued to the
Fund's Independent Trustees by the Fund for the 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
John R. Haire ............ 10 60.44 271 (12,211)(3) 2,455 134,705
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>

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

(3) This number reflects the effect of the extension of Mr. Haire's term as
Director or Trustee until May 1, 1999.

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

As of March 16, 1999, no shareholder was known to own beneficially or of
record as much as 5% of the outstanding shares of the Fund.

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 business on every 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 $1.5 billion; 0.325% of the
portion of the daily net assets exceeding $1.5 billion but not exceeding $2
billion; 0.30% of the portion

16
<PAGE>

of the daily net assets exceeding $2 billion but not exceeding $2.5 billion;
0.275% of the portion of the daily net assets exceeding $2.5 billion but not
exceeding $3 billion; and 0.25% of the portion of the daily net assets
exceeding $3 billion.

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 $2,738,887, $2,695,933 and $2,647,549, 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. 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.

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 include, but are not limited to: expenses of the Plan of Distribution
pursuant to Rule 12b-1; charges and expenses of any registrar, custodian,

17
<PAGE>

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 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. RULE 12B-1 PLAN

In accordance with a Plan of Distribution pursuant to Rule 12b-1 under the
Investment Company Act between the Fund and the Distributor, the Distributor
provides certain services in connection with the promotion of sales of Fund
shares (the "Plan").

The Plan provides that the Distributor bears the expense of all
promotional and distribution related activities on behalf of the Fund, except
for expenses that the Trustees determine to reimburse, as described below. The
following activities and services may be provided by the Distributor under the
Plan: (1) compensation to and expenses of Dean Witter Reynolds' and other
selected Broker-Dealers' Financial Advisors and other employees, including
overhead and telephone expenses; (2) sales incentives and bonuses to sales
representatives and to marketing personnel in connection with promoting sales
of the Fund's shares; (3) expenses incurred in connection with promoting sales
of the Fund's shares; (4) preparing and distributing sales literature; and (5)
providing advertising and promotional activities, including direct mail
solicitation and television, radio, newspaper, magazine and other media
advertisements.

Dean Witter Reynolds Financial Advisors are paid an annual residual
commission, currently a residual of up to 0.10% of the current value of the
respective accounts for which they are the Financial Advisors of record. The
residual is a charge which reflects residual commissions paid by Dean Witter
Reynolds to its Financial Advisors and Dean Witter Reynolds' expenses
associated with the servicing of shareholders' accounts, including the expenses
of operating Dean Witter Reynolds' branch offices in connection with the
servicing of shareholders' accounts, which expenses include lease costs, the
salaries and employee benefits of operations and sales support personnel,
utility costs, communications costs and the costs of stationery and supplies
and other expenses relating to branch office serving of shareholder accounts.

The Fund is authorized to reimburse specific expenses incurred or to be
incurred in promoting the distribution of the Fund's shares. Reimbursement is
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 0.15 of 1% of the Fund's average daily net assets during the month. No
interest or other

18
<PAGE>

financing charges will be incurred for which reimbursement payments under the
Plan will be made. In addition, no interest charges, if any, incurred on any
distribution expense incurred by the Distributor or other selected dealers
pursuant to the Plan, will be reimbursable under the Plan. In the case of all
expenses other than expenses representing a residual to Financial Advisors,
such amounts shall be determined at the beginning of each calendar quarter by
the Trustees, including a majority of the Independent 12b-1 Trustees. Expenses
representing a residual to Financial Advisors 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 expended by the Fund, the Investment
Manager provides and the Trustees review a quarterly budget of projected
incremental 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 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 shares.

The Fund reimbursed $516,046 to the Distributor pursuant to the Plan which
amounted to 0.10 of 1% of the Fund's average daily net assets for the year
ended December 31, 1998. Based upon the total amounts spent by the Distributor
during the period, it is estimated that the amount paid by the Fund to the
Distributor for distribution was spent in approximately the following ways: (i)
advertising -- $0; (ii) printing and mailing Prospectuses to other than current
shareholders -- $0; (iii) compensation to underwriters -- $0; (iv) compensation
to dealers -- $0; (v) compensation to sales personnel -- $0; and (vi) other,
which includes payments to Dean Witter Reynolds for expenses substantially all
of which relate to compensation of sales personnel and associated overhead
expenses -- $516,046. No payments under the Plan were made for interest,
carrying or other financing charges.

Under the Plan, 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.

Under the Plan, the Distributor provides the Fund, for review by the
Trustees, and the Trustees review, promptly after the end of each calendar
quarter, a written report regarding the incremental distribution expenses
incurred on behalf of the Fund during such calendar quarter, which report
includes (1) an itemization of the types of expenses and the purposes
therefore; (2) the amounts of such expenses; and (3) a description of the
benefits derived by the Fund. In the Trustees' quarterly review of the Plan
they consider its continued appropriateness and the level of compensation
provided therein.

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.

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
implement the Fund's method and to enable the Fund to continue or grow and
avoid a pattern of net redemptions which, in turn, are essential for effective
investment management; and (b) without 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.

19
<PAGE>

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
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.

E. OTHER SERVICE PROVIDERS

(1) TRANSFER AGENT/DIVIDEND-PAYING AGENT

Morgan Stanley Dean Witter Trust FSB is the Transfer Agent. The Transfer
Agent 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 Fund's assets. Any of the Fund's cash balances with the
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 shareholder 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.

20
<PAGE>

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

A. BROKERAGE TRANSACTIONS

Subject to the general supervision of the 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. The Fund expects that the primary
market for the securities in which it intends to invest will generally be the
over-the-counter market. Securities are generally traded in the
over-the-counter market 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 also 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. On occasion the Fund may also purchase
certain money market instruments directly from an issuer, in which case no
commissions or discounts are paid.

During the fiscal years ended December 31, 1996, 1997 and 1998, the Fund
paid no such brokerage commissions or concessions.

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 (not including
Tax-Exempt Municipal 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
paid no brokerage commissions to an affiliated broker or dealer.

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.

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

21
<PAGE>

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. While the receipt of such information and services
is useful in varying degrees and would generally reduce the amount of research
or services otherwise performed by the Investment Manager and thereby reduce
its expenses, it is of indeterminable value and the Fund does not reduce the
management fee it pays to the Investment Manager by any amount that may be
attributable to the value of such services.

Subject to the principle of obtaining best price and execution, the
Investment Manager may consider a broker-dealer's sales of shares of the Fund
as a factor in selecting from among those broker-dealers qualified to provide
comparable prices and execution on the Fund's portfolio transactions. The Fund
does not, however, require a broker-dealer to sell shares of the Fund in order
for it to be considered to execute portfolio transactions, and will not enter
into any arrangement whereby a specific amount or percentage of the Fund's
transactions will be directed to a broker which sells shares of the Fund to
customers. The Trustees review, periodically, the allocation of brokerage
orders to monitor the operation of these policies.

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 which executed transactions for or with the Fund in the largest
dollar amounts during the year. At December 31, 1998, the Fund did not own any
securities issued by any of such issuers.

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.

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.

22
<PAGE>

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.

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 DWR or any
authorized broker-dealer for any transaction pursuant to the exchange
privilege.

REDEMPTIONS. A check drawn by a shareholder against his or her account in
the Fund constitutes a request or redemption of a number of shares sufficient
to provide proceeds equal to the amount of the check. Payment of the proceeds
will normally be made on the next business day after receipt by the Transfer
Agent of the check in proper form. If a check is presented for payment to the
Transfer Agent by a shareholder or payee in person, the Transfer Agent will
make payment by means of a check drawn on the Fund's account or, in the case of
a shareholder payee, to the shareholder's predesignated bank account, but will
not make payment in cash.

B. OFFERING PRICE

The Fund's shares are offered at net asset value per share which is
distributed among the Fund's Distributor, Dean Witter Reynolds and other
authorized dealers as described in Section "V. Investment

23
<PAGE>

Management and Other Services--E. Rule 12b-1 Plan." The price of Fund shares,
called "net asset value," is based on the amortized cost of the Fund's
portfolio securities.

The Fund utilizes the amortized cost method in valuing its portfolio
securities for purposes of determining the net asset value of its shares. The
Fund utilizes the amortized cost method in valuing its portfolio securities
even though the portfolio securities may increase or decrease in market value,
generally in connection with changes in interest rates. The amortized cost
method of valuation involves valuing a security at its cost at the time of
purchase adjusted by a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Fund would receive if it sold the
investment. During such periods, the yield to investors in the Fund may differ
somewhat from that obtained in a similar company which uses market-to-market
values for all of its portfolio securities. For example, if the use of
amortized cost resulted in a lower (higher) aggregate portfolio value on a
particular day, a prospective investor in the Fund would be able to obtain a
somewhat higher (lower) yield than would result from investment in such a
similar company and existing investors would receive less (more) investment
income. The purpose of this method of calculation is to facilitate the
maintenance of a constant net asset value per share of $1.00.

The use of the amortized cost method to value the portfolio securities of
the Fund and the maintenance of the per share net asset value of $1.00 is
permitted pursuant to Rule 2a-7 of the Act (the "Rule") and is conditioned on
its compliance with various conditions contained in the Rule including: (a) the
Trustees are obligated, as a particular responsibility within the overall duty
of care owed to the Fund's shareholders, to establish procedures reasonably
designed, taking into account current market conditions and the Fund's
investment objectives, to stabilize the net asset value per share as computed
for the purpose of distribution and redemption at $1.00 per share; (b) the
procedures include (i) calculation, at such intervals as the Trustees determine
are appropriate and as are reasonable in light of current market conditions, of
the deviation, if any, between net asset value per share using amortized cost
to value portfolio securities and net asset value per share based upon
available market quotations with respect to such portfolio securities; (ii)
periodic review by the Trustees of the amount of deviation as well as methods
used to calculate it; and (iii) maintenance of written records of the
procedures, and the Trustees' considerations made pursuant to them and any
actions taken upon such consideration; (c) the Trustees should consider what
steps should be taken, if any, in the event of a difference of more than 1/2 of
1% between the two methods of valuation; and (d) the Trustees should take such
action as they deem appropriate (such as shortening the average portfolio
maturity, realizing gains or losses, withholding dividends or, as provided by
the Declaration of Trust, reducing the number of outstanding shares of the
Fund) to eliminate or reduce to the extent reasonably practicable material
dilution or other unfair results to investors or existing shareholders which
might arise from differences between the two method of valuation.

Generally, for purposes of the procedures adopted under the Rule, the
maturity of a portfolio security is deemed to be the period remaining
(calculated from the trade date or such other date on which the Fund's interest
in the instrument is subject to market action) until the date on which in
accordance with the terms of the security the principal amount must
unconditionally be paid, or in the case of a security called for redemption,
the date on which the redemption payment must be made.

A variable rate security that is subject to a demand feature is deemed to
have a maturity equal to the period remaining until the principal amount can be
recovered through demand. A floating rate security that is subject to a demand
feature is deemed to have a maturity equal to the period remaining until the
principal amount can be recovered through demand.

An "NRSRO" is a nationally recognized statistical rating organization. The
term "Requisite NRSROs" means (i) any two NRSROs that have issued a rating with
respect to a security or class of debt obligations of an issuer, or (ii) if
only one NRSRO has issued a rating with respect to such security or issuer at
the time a fund purchases or rolls over the security, that NRSRO.

24
<PAGE>

An Eligible Security is generally defined in the Rule to mean (i) a rated
security with a remaining maturity of 397 calendar days or less that has
received a rating from the Requisite NRSROs in one of the two highest
short-term rating categories (within which there may be sub-categories or
gradations indicating relative standing); or (ii) An Unrated Security that is
of comparable quality to a security meeting the requirements of (1) above, as
determined by Trustees; (iii) In addition, in the case of a security that is
subject to a Demand Feature or Guarantee: (A) The Guarantee has received a
rating from an NRSRO or the Guarantee is issued by a guarantor that has
received a rating from an NRSRO with respect to a class of debt obligations (or
any debt obligation within that class) that is comparable in priority and
security the Guarantee; unless: (1) the Guarantee is issued by a person that
directly or indirectly, controls, is controlled by or is under a common control
with the issuer of the security subject to the Guarantee (other than a sponsor
or a Special Purpose Entity with respect to an Asset Backed Security; (2) the
security subject to the Guarantee is a repurchase agreement that is
Collateralized Fully, or (3) the Guarantee itself is a Government Security and
(B) the issuer of the Demand Feature, or another institution, has undertaken
promptly to notify the holder of the security in the event the Demand Feature
or Guarantee is substituted with another Demand Feature or Guarantee (if such
substitution is permissible under the terms of the Demand Feature or
Guarantee). The Fund will limit its investments to securities that meet the
requirements for Eligible Securities.

As permitted by the Rule, the Trustees have delegated to the Fund's
Investment Manager the authority to determine which securities present minimal
credit risks and which unrated securities are comparable in quality to rated
securities.

Also, as required by the Rule, the Fund will limit its investments in
securities, other than Government securities, so that, at the time of purchase:
(a) except as further limited in (b) below with regard to certain securities,
with respect to 75% of its total assets no more than 5% of its total assets
will be invested in the securities of any one issuer; and (b) with respect to
Eligible Securities that have received a rating in less than the highest
category by any one of the NRSROs whose ratings are used to qualify the
security as an Eligible Security, or that have been determined to be of
comparable quality: (i) no more than 5% in the aggregate of the Fund's total
assets in all such securities, and (ii) no more than the greater of 1% of total
assets, or $1 million, in the securities on any one issuer.

The presence of a line of credit or other credit facility offered by a
bank or other financial institution which guarantees the payment obligation of
the issuer, in the event of a default in the payment of principal or interest
of an obligation, may be taken into account in determining whether an
investment is an Eligible Security, provided that the guarantee itself is an
Eligible Security.

The Rule further requires that the Fund limit its investments to U.S.
dollar-denominated instruments which the Trustees determine present minimal
credit risks and which are Eligible Securities. The Rule also requires the Fund
to maintain a dollar-weighted average portfolio maturity (not more than 90
days) appropriate to its objective of maintaining a stable net asset value of
$1.00 per share and precludes the purchase of any instrument with a remaining
maturity of more than 397 days. Should the disposition of a portfolio security
result in a dollar-weighted average portfolio maturity of more than 90 days,
the Fund will invest its available cash in such a manner as to reduce such
maturity to 90 days or less a soon as is reasonably practicable.

If the Trustees determine that it is no longer in the best interests of
the Fund and its shareholders to maintain a stable price of $1 per share or if
the Trustees believe that maintaining such price no longer reflects a
market-based net asset value per share, the Trustees have the right to change
from an amortized cost basis of valuation to valuation based on market
quotations. The Fund will notify shareholders of the Fund of any such change.

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

25
<PAGE>

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 of the Fund's gain from tax-exempt obligations
purchased at a market discount may be treated as ordinary income rather than
capital gain.

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 Fund's income 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.

26
<PAGE>

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 Fund shares 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 Fund shares is
normally treated as a sale for tax purposes. Fund shares held for a period of
one year 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 Fund shares for shares of another fund, including 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 first fund, followed by the purchase of shares in the
second fund.

If a shareholder realizes a loss on the redemption or exchange of a fund's
shares and reinvests in that fund's shares 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.

27
<PAGE>

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

The Fund's current yield for the seven days ending December 31, 1998 was
2.69%. The effective annual yield on December 31, 1998, was 2.73% assuming
daily compounding.

The Fund's annualized current yield, as may be quoted from time to time in
advertisements and other communications to shareholders and potential
investors, is computed by determining, for a stated seven-day period, the net
change, exclusive of capital changes and including the value of additional
shares purchased with dividends and any dividends declared therefrom (which
reflect deductions of all expenses of the Fund such as management fees), in the
value of a hypothetical pre-existing account having a balance of one share at
the beginning of the period, and dividing the difference by the value of the
account at the beginning of the base period to obtain the base period return,
and then multiplying the base period return by (365/7).

The Fund's annualized effective yield, as may be quoted from time to time
in advertisements and other communications to shareholders and potential
investors, is computed by determining (for the same stated seven-day period as
for the current yield), the net change, exclusive of capital changes and
including the value of additional shares purchased with dividends and any
dividends declared therefrom (which reflect deductions of all expenses of the
Fund such as management fees), in the value of a hypothetical pre-existing
account having a balance of one share at the beginning of the period, and
dividing the difference by the value of the account at the beginning of the
base period to obtain the base period return, and then compounding the base
period return by adding 1, raising the sum to a power equal to 365 divided by
7, and subtracting 1 from the result.

The yields quoted in any advertisement or other communication should not
be considered a representation of the yields of the Fund in the future since
the yield is not fixed. Actual yields will depend not only on the type, quality
and maturities of the investments held by the Fund and changes in interest
rates on such investments, but also on changes in the Fund's expenses during
the period.

Yield information may be useful in reviewing the performance of the Fund
and for providing a basis for comparison with other investment alternatives.
However, unlike bank deposits or other investments which typically pay a fixed
yield for a stated period of time, the Fund's yield fluctuates.

Based upon a Federal personal income tax bracket of 39.6%, the Fund's
tax-equivalent yield for the seven days ending December 31, 1998, was 4.45%.

Tax-equivalent yield is computed by dividing that portion of the current
yield (calculated as described above) which is tax-exempt by 1 minus a stated
tax rate and adding the quotient to that portion, if any, of the yield of the
Fund that is not tax-exempt. The Fund may also advertise the growth of
hypothetical investments of $10,000, $50,000 and $100,000 in shares of the Fund
by adding the sum of all distributions on 10,000, 50,000 or 100,000 shares of
the Fund since inception to $10,000, $50,000 and $100,000, as the case may be.
Investments of $10,000, $50,000 and $100,000 in the Fund at inception would
have grown to $21,021, $105,105 and $210,210, respectively, at December 31,
1998.

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.

28
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-FREE DAILY INCOME TRUST
PORTFOLIO OF INVESTMENTS December 31, 1998

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN CURRENT DEMAND
THOUSANDS RATE+ DATE* VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT-TERM VARIABLE RATE MUNICIPAL OBLIGATIONS (56.0%)
ALABAMA
$ 5,000 Birmingham Medical Clinic Board, University of Alabama Health Services
Foundation Ser 1991 ........................................................... 3.85% 01/08/99 $ 5,000,000
ARIZONA
5,000 Maricopa County, Arizona Public Service Co Palo Verde 1994 Ser C .............. 5.00 01/04/99 5,000,000
3,900 Tempe, Excise Tax Ser 1998 .................................................... 5.00 01/04/99 3,900,000
CALIFORNIA
8,000 California Public Capital Improvements Financing Authority, Pooled
Ser 1988 C .................................................................... 3.10 03/15/99 8,000,000
6,000 Newport Beach, Hoag Memorial Hospital/Presbyterian Ser 1992 &
1996 Ser A .................................................................... 5.10 01/04/99 6,000,000
CONNECTICUT
2,500 Connecticut Health & Educational Facilities Authority, Yale University
Ser T ......................................................................... 3.75 01/08/99 2,500,000
6,000 Connecticut Special Assessment, Unemployment Compensation 1993 Ser C
(FGIC) ........................................................................ 3.60 07/01/99 6,000,000
DISTRICT OF COLUMBIA
4,800 District of Columbia, The American University Ser 1985 ........................ 4.00 01/08/99 4,800,000
FLORIDA
9,800 Dade County, Water & Sewer Ser 1994 (FGIC) .................................... 3.40 01/08/99 9,800,000
17,400 Dade County Industrial Development Authority, Dolphins Stadium
Ser 1985 A .................................................................... 3.90 01/08/99 17,400,000
2,000 Escambia County, Gulf Power Co Ser 1997 ....................................... 5.10 01/04/99 2,000,000
GEORGIA
9,500 Hapeville Development Authority, Hapeville Hotel Ltd Ser 1985 ................. 5.05 01/04/99 9,500,000
HAWAII
5,000 Hawaii Department of Budget & Finance, Kaiser Permanente Semiannual
Tender Ser 1984 B ............................................................. 3.80 03/01/99 5,000,000
ILLINOIS
10,000 Illinois Educational Facilities Authority, Northwestern University Ser 1988 ... 4.15 01/08/99 10,000,000
10,000 Oak Forest, Homewood South Suburban Mayors & Managers Assn Ser 1989 4.10 01/08/99 10,000,000
INDIANA
10,200 Indiana Health Facilities Authority, Charity Obligated Group Daughters of
Charity National Health System Ser 1997 E ..................................... 3.90 01/08/99 10,200,000
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

29
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-FREE DAILY INCOME TRUST
PORTFOLIO OF INVESTMENTS December 31, 1998, continued

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN CURRENT DEMAND
THOUSANDS RATE+ DATE* VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
KENTUCKY
$ 8,700 Mason County, East Kentucky Power Co-op Inc Ser 1984 (NRU-CFC Gtd) .......... 4.05% 01/08/99 $ 8,700,000
LOUISIANA
5,000 New Orleans Aviation Board, Ser 1993 B (MBIA) ............................... 4.05 01/08/99 5,000,000
MARYLAND
5,000 Washington Suburban Sanitary District, 1998 Ser BANs ........................ 4.05 01/08/99 5,000,000
MASSACHUSETTS
5,000 Massachusetts, Refg 1998 Ser A .............................................. 3.90 01/08/99 5,000,000
5,000 Massachusetts Bay Transportation Authority, 1984 Ser A ...................... 3.50 03/01/99 5,000,000
Massachusetts Health & Educational Facilities Authority,
5,500 Amherst College Ser F ...................................................... 3.90 01/08/99 5,500,000
9,330 Harvard University Ser 1985 I .............................................. 3.95 01/08/99 9,330,000
MINNESOTA
300 Beltrami County, Environmental Northwood Panelboard Co Ser 1991 ............. 5.05 01/04/99 300,000
MISSOURI
7,400 Missouri Health & Educational Facilities Authority, Cox Health Systems
Ser 1997 (MBIA) ............................................................. 5.00 01/04/99 7,400,000
NEW HAMPSHIRE
5,000 New Hampshire Higher Educational & Health Facilities Authority, St Paul's
School Ser 1998 ............................................................. 4.00 01/08/99 5,000,000
NEW JERSEY
4,000 Gloucester County, Mobil Oil Refining Corp Ser 1993 A ....................... 3.70 01/08/99 4,000,000
NEW YORK
7,000 Port Authority of New York & New Jersey, Ser 2 .............................. 5.05 01/04/99 7,000,000
NORTH CAROLINA
3,400 Asheville, Ser 1993 A COPs .................................................. 4.00 01/08/99 3,400,000
5,000 North Carolina Medical Care Commission, Duke University Hospital
Ser 1985 B .................................................................. 3.95 01/08/99 5,000,000
OHIO
9,400 Columbus, Unlimited Tax Ser 1995-1 .......................................... 3.85 01/08/99 9,400,000
10,000 Cuyahoga County, Cleveland Clinic Health System Obligated Group
Ser 1998A ................................................................... 4.10 01/08/99 10,000,000
1,000 Ohio Air Quality Development Authority, Mead Co 1986 Ser A .................. 4.90 01/04/99 1,000,000
OKLAHOMA
11,465 Oklahoma Water Resources Board, State Loan Ser 1994A & Ser 1995 ............. 3.50 03/01/99 11,465,000
OREGON
5,000 Oregon, Veterans' Ser 73 E .................................................. 4.00 01/08/99 5,000,000
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

30
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-FREE DAILY INCOME TRUST
PORTFOLIO OF INVESTMENTS December 31, 1998, continued

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN CURRENT DEMAND
THOUSANDS RATE+ DATE* VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PENNSYLVANIA
$ 2,100 Delaware County Industrial Development Authority, United Parcel Service
of America Ser 1985 ................................................... 4.90% 01/04/99 $ 2,100,000
5,000 York General Authority, Pooled Ser 1996 ............................... 4.10 01/08/99 5,000,000
SOUTH CAROLINA
York County,
7,600 North Carolina Electric Membership Corp, Ser 1984 N-5 (NRU-CFC Gtd) .. 3.30 03/15/99 7,600,000
8,410 Saluda River Electric Co-op Inc Ser 1984 E-1 & E-2 (NRU-CFC Gtd) ..... 3.45 02/16/99 8,410,000
TEXAS
4,700 Lower Neches Valley Authority, Chevron USA Inc Ser 1987 ............... 3.45 02/16/99 4,700,000
UTAH
10,000 Intermountain Power Agency, 1985 Ser F ................................ 3.45 03/15/99 10,000,000
WASHINGTON
8,500 Washington, Ser 1996 A ................................................ 3.90 01/08/99 8,500,000
WEST VIRGINIA
5,000 Pleasants County Commission, American Cyanamid Co Ser 1985 ............ 4.30 01/08/99 5,000,000
------------
TOTAL SHORT-TERM VARIABLE RATE MUNICIPAL OBLIGATIONS (Amortized Cost $278,905,000)........ 278,905,000
------------
</TABLE>

<TABLE>
<CAPTION>
YIELD TO
MATURITY
COUPON MATURITY ON DATE OF
RATE DATE PURCHASE
---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
TAX-EXEMPT COMMERCIAL PAPER (31.6%)
COLORADO
7,800 Platte River Power Authority, Electric Sub Lien S-1 ............. 3.10% 02/10/99 3.10% 7,800,000
GEORGIA
10,000 Georgia Municipal Gas Authority, Southern Portfolio I Ser D ..... 3.00 02/04/99 3.00 10,000,000
HAWAII
6,200 Hawaii Department of Budget & Finance, Citizens Utilities Co
Ser 1985 ........................................................ 3.20 01/19/99 3.20 6,200,000
LOUISIANA
4,250 Louisiana, Ser 1991-A ........................................... 3.10 02/17/99 3.10 4,250,000
Plaquemines Port Harbor & Terminal District,
10,000 Electric-Coal Transfer Co Ser 1985 D ........................... 3.00 02/17/99 3.00 10,000,000
4,200 Electric-Coal Transfer Co Ser 1985 D ........................... 2.90 02/18/99 2.90 4,200,000
MARYLAND
Baltimore County,
5,000 Metro District Ser 1995 BANs ................................... 2.95 02/09/99 2.95 5,000,000
5,000 Metro District Ser 1995 BANs ................................... 2.90 03/04/99 2.90 5,000,000
5,000 Montgomery County, 1995 Ser BANs ................................ 3.15 02/10/99 3.15 5,000,000
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

31
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-FREE DAILY INCOME TRUST
PORTFOLIO OF INVESTMENTS December 31, 1998, continued

<TABLE>
<CAPTION>
YIELD TO
PRINCIPAL MATURITY
AMOUNT IN COUPON MATURITY ON DATE OF
THOUSANDS RATE DATE PURCHASE VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NEW JERSEY
$ 5,000 New Jersey, Ser Fiscal 1999 A TRANs ........................... 3.00% 01/28/99 3.00% $ 5,000,000
NORTH CAROLINA
North Carolina Eastern Municipal Power Agency,
5,000 Ser 1988 B ................................................... 3.00 01/26/99 3.00 5,000,000
7,200 Ser 1996 ..................................................... 2.95 02/23/99 2.95 7,200,000
7,900 Ser 1996 ..................................................... 2.90 02/24/99 2.90 7,900,000
OHIO
5,500 Ohio Air Quality Development Authority, Cleveland Electric
Illuminating Co 1988 Ser B (FGIC) ............................. 3.05 02/08/99 3.05 5,500,000
OKLAHOMA
5,000 Oklahoma City Industrial & Cultural Facilities Trust, SSM
Health Care Ser 1998 B (MBIA) ................................. 2.90 03/09/99 2.90 5,000,000
SOUTH CAROLINA
5,000 South Carolina Public Service Authority, Santee Cooper
Ser 1998 ...................................................... 2.95 02/25/99 2.95 5,000,000
TEXAS
2,000 Dallas Area Rapid Transit, Sales Tax Ser B .................... 3.10 02/11/99 3.10 2,000,000
Houston,
5,100 Water & Sewer 1994 Ser A ..................................... 3.10 01/27/99 3.10 5,100,000
7,000 Water & Sewer 1994 Ser A ..................................... 2.90 03/04/99 2.90 7,000,000
8,000 Water & Sewer 1994 Ser A ..................................... 3.55 03/10/99 3.55 8,000,000
5,000 Texas, Ser 1997B TRANs ........................................ 2.90 04/28/99 2.90 5,000,000
WASHINGTON
Seattle,
5,000 Municipal Light & Power Ser 1990 ............................. 3.05 01/21/99 3.05 5,000,000
11,300 Municipal Light & Power Ser 1991 B ........................... 2.95 03/11/99 2.95 11,300,000
6,000 Municipal Light & Power Ser 1991 B ........................... 3.00 04/07/99 3.00 6,000,000
WISCONSIN
10,090 Wisconsin, Transportation Notes 1997 Ser A .................... 3.10 02/09/99 3.10 10,090,000
------------
TOTAL TAX-EXEMPT COMMERCIAL PAPER (Amortized Cost $157,540,000) ............................... 157,540,000
------------
SHORT-TERM MUNICIPAL NOTES (12.5%)
INDIANA
Indianapolis Local Improvement Bond Bank,
6,750 Ser 1998 D Notes, dtd 06/18/98 ............................... 4.25 01/11/99 3.65 6,751,086
3,450 Ser 1998 E Notes, dtd 12/17/98 ............................... 3.50 07/12/99 2.95 3,459,792
IOWA
11,000 Iowa School Corporations, Warrant Certificates 1998-99 Ser A
(FSA), dtd 06/25/98 ........................................... 4.50 06/25/99 3.65 11,043,246
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

32
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-FREE DAILY INCOME TRUST
PORTFOLIO OF INVESTMENTS December 31, 1998, continued

- --------------
BANs Bond Anticipation Notes.
COPs Certificates of Participation.
NRU-CFC National Rural Utilities - Cooperative Finance Corporation.
TANs Tax Anticipation Notes.
TRANs Tax and Revenue Anticipation Notes.
+ Rate shown is the rate in effect at December 31, 1998.
* Date on which the principal amount can be recovered through demand.
(a) Cost is the same for federal income tax purposes.

Bond Insurance:
- ---------------
FGIC Financial Guaranty Insurance Company.
FSA Financial Security Assurance Inc.
MBIA Municipal Bond Investors Assurance Corporation.

SEE NOTES TO FINANCIAL STATEMENTS

33
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-FREE DAILY INCOME TRUST
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998

<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(amortized cost $498,832,805)...................... $498,832,805
Cash ................................................. 767,181
Receivable for:
Interest .......................................... 3,333,344
Shares of beneficial interest sold ................ 5,603
Prepaid expenses and other assets .................... 65,333
------------
TOTAL ASSETS .................................... 503,004,266
------------
LIABILITIES:
Payable for:
Shares of beneficial interest repurchased ......... 4,549,952
Investment management fee ......................... 226,539
Plan of distribution fee .......................... 45,809
Accrued expenses ..................................... 109,838
------------
TOTAL LIABILITIES ................................. 4,932,138
------------
NET ASSETS ........................................ $498,072,128
============
COMPOSITION OF NET ASSETS:
Paid-in-capital ...................................... $498,071,908
Accumulated undistributed net investment
income ............................................ 575
Accumulated net realized loss ........................ (355)
------------
NET ASSETS ........................................ $498,072,128
============
NET ASSET VALUE PER SHARE,
498,071,908 shares outstanding
(unlimited shares authorized of $.01 par
value) ............................................ $1.00
=====
</TABLE>

STATEMENT OF OPERATIONS
For the year ended December 31, 1998

<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME ...................................... $18,523,307
-----------
EXPENSES
Investment management fee ............................ 2,647,549
Plan of distribution fee ............................. 516,046
Transfer agent fees and expenses ..................... 428,002
Registration fees .................................... 76,315
Shareholder reports and notices ...................... 58,179
Professional fees .................................... 44,255
Custodian fees ....................................... 26,348
Trustees' fees and expenses .......................... 18,919
Other ................................................ 13,347
-----------
TOTAL EXPENSES .................................. 3,828,960
Less: expense offset ................................. (26,245)
-----------
NET EXPENSES .................................... 3,802,715
-----------
NET INVESTMENT INCOME ........................... 14,720,592
NET REALIZED GAIN ............................... 2,153
-----------
NET INCREASE ......................................... $14,722,745
===========
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

34
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-FREE DAILY INCOME 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 ................................ $ 14,720,592 $ 16,002,243
Net realized gain .................................... 2,153 --
------------- -------------
NET INCREASE ...................................... 14,722,745 16,002,243
Dividends to shareholders from net investment income . (14,720,472) (16,002,394)
Net decrease from transactions in shares of beneficial
interest ........................................... (19,368,358) (4,440,989)
------------- -------------
NET DECREASE ...................................... (19,366,085) (4,441,140)
NET ASSETS:
Beginning of period .................................. 517,438,213 521,879,353
------------- -------------
END OF PERIOD
(Including undistributed net investment income of
$575 and $455, respectively)....................... $ 498,072,128 $ 517,438,213
============= =============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

35
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-FREE DAILY INCOME TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1998

1. ORGANIZATION AND ACCOUNTING POLICIES

Morgan Stanley Dean Witter Tax-Free Daily Income Trust (the "Fund"), formerly
Dean Witter Tax-Free Daily Income Trust, is registered under the Investment
Company Act of 1940, as amended (the "Act"), as a diversified, open-end
management investment company. The Fund's investment objective is to provide a
high level of daily income which is exempt from federal income tax, consistent
with stability of principal and liquidity. The Fund was incorporated in
Maryland on March 24, 1980, commenced operations on February 20, 1981 and
reorganized as a Massachusetts business trust on April 30, 1987.

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 at amortized
cost, which approximates market value.

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. 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.

D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends
and distributions to shareholders as of the close of each business day.

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 net assets of
the Fund determined as of the close of each business day: 0.50% to the portion
of the daily net assets not exceeding $500 million; 0.425% to the portion of
the daily net assets exceeding $500 million but not exceeding $750 million;
0.375% to the portion of the daily net assets exceeding $750 million but not

36
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-FREE DAILY INCOME TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1998, continued

exceeding $1 billion; 0.35% to the portion of the daily net assets exceeding $1
billion but not exceeding $1.5 billion; 0.325% to the portion of the daily net
assets exceeding $1.5 billion but not exceeding $2 billion; 0.30% to the
portion of the daily net assets exceeding $2 billion but not exceeding $2.5
billion; 0.275% to the portion of the daily net assets exceeding $2.5 billion
but not exceeding $3 billion; and 0.25% to the portion of the daily net assets
exceeding $3 billion.

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

Morgan Stanley Dean Witter Distributors Inc. (the "Distributor"), an affiliate
of the Investment Manager, is the distributor of the Fund's shares and, in
accordance with a Plan of Distribution (the "Plan") pursuant to Rule 12b-1
under the Act, finances certain expenses in connection therewith.

Under the Plan, the Distributor bears the expense of all promotional and
distribution related activities on behalf of the Fund, except for expenses that
the Trustees determine to reimburse, as described below. The following
activities and services may be provided by the Distributor and other
broker-dealers under the Plan: (1) compensation to, and expenses of, Morgan
Stanley Dean Witter Financial Advisors and other selected broker-dealers; (2)
sales incentives and bonuses to sales representatives and to marketing
personnel in connection with promoting sales of the Fund's shares; (3) expenses
incurred in connection with promoting sales of the Fund's shares; (4) preparing
and distributing sales literature; and (5) providing advertising and
promotional activities, including direct mail solicitation and television,
radio, newspaper, magazine and other media advertisements.

The Fund is authorized to reimburse the Distributor for specific expenses the
Distributor incurs or plans to incur in promoting the distribution of the
Fund's shares. The amount of each monthly reimbursement payment may in no event
exceed an amount equal to a payment at the annual rate of 0.15% of the Fund's
average daily net assets. For the year ended December 31, 1998, the
distribution fee was accrued at the annual rate of 0.10%.

37
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-FREE DAILY INCOME TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1998, continued

4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES

The cost of purchases and proceeds from sales/maturities of portfolio
securities for the year ended December 31, 1998 aggregated $1,104,511,283 and
$1,123,641,322, 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 $25,000.

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 $5,981. At December 31, 1998, the Fund had an accrued pension liability of
$51,037 which is included in accrued expenses in the Statement of Assets and
Liabilities.

5. SHARES OF BENEFICIAL INTEREST

Transactions in shares of beneficial interest, at $1.00 per share, were as
follows:

<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Shares sold ........................................ 1,102,902,492 1,145,733,981
Shares issued in reinvestment of dividends ......... 14,720,472 16,002,394
------------- -------------
1,117,622,964 1,161,736,375
Shares repurchased ................................. (1,136,991,322) (1,166,177,364)
-------------- --------------
Net decrease in shares outstanding ................. (19,368,358) (4,440,989)
============== ==============
</TABLE>

6. FEDERAL INCOME TAX STATUS

During the year ended December 31, 1998, the Trust utilized approximately
$2,100 of its capital loss carryover. At December 31, 1998 the Fund had a net
capital loss carryover of approximately $400, which will be available through
December 31, 2002 to offset future capital gains to the extent provided by
regulations.

38
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-FREE DAILY INCOME 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>
SELECTED PER SHARE DATA :
Net asset value, beginning of period .............. $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- -----
Net investment income ............................. 0.028 0.029 0.028 0.032 0.022
Less dividends from net investment income ......... (0.028) (0.029) (0.028) (0.032) (0.022)
----- ----- ----- ----- -----
Net asset value, end of period .................... $1.00 $1.00 $1.00 $1.00 $1.00
===== ===== ===== ===== =====
TOTAL RETURN ...................................... 2.80% 2.98% 2.83% 3.22% 2.25%
RATIOS TO AVERAGE NET ASSETS:
Expenses .......................................... 0.72%(1) 0.72%(1) 0.71% 0.72% 0.71%
Net investment income ............................. 2.75% 2.93% 2.76% 3.16% 2.22%
SUPPLEMENTAL DATA:
Net assets, end of period, in millions ............ $498 $517 $522 $522 $544
</TABLE>

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

SEE NOTES TO FINANCIAL STATEMENTS

39
<PAGE>

MORGAN STANLEY DEAN WITTER TAX-FREE DAILY INCOME TRUST
REPORT OF INDEPENDENT ACCOUNTANTS

TO THE SHAREHOLDERS AND TRUSTEES
OF MORGAN STANLEY DEAN WITTER TAX-FREE DAILY INCOME 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-Free Daily Income Trust (the "Fund"), formerly Dean Witter Tax-Free Daily
Income 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 five years in
the period then ended, 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 5, 1999

1998 FEDERAL TAX NOTICE (unaudited)

For the year ended December 31, 1998, all of the Fund's dividends from
net investment income were exempt interest dividends, excludable from
gross income for Federal income tax purposes.