WITTER DEAN NATURAL RESOURCE DEVELOPMENT SECURITIES INC
497, 1995-05-18
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<PAGE>

STATEMENT OF ADDITIONAL INFORMATION       Dean Witter
APRIL 26, 1995                            Natural Resource
                                          Development
                                          Securities

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

    Dean  Witter Natural Resource Development Securities Inc. (the "Fund") is an
open-end diversified management investment company whose investment objective is
capital growth. The Fund invests primarily  in common stock of companies in  the
natural  resources  and  related  areas,  including  companies  engaged  in  the
exploration  for  and  development,  production  and  distribution  of   natural
resources  or  in  the  development of  energy-efficient  technologies  or other
natural resource related  supplies or products.  (See "Investment Practices  and
Policies.")

    A  Prospectus for the  Fund dated April  26, 1995, which  provides the basic
information you  should know  before  investing in  the  Fund, may  be  obtained
without  charge from the Fund at the address or telephone number listed below or
from the Fund's Distributor, Dean Witter Distributors Inc., or from Dean  Witter
Reynolds  Inc.,  at any  of  its branch  offices.  This Statement  of Additional
Information is not a Prospectus. It contains information in addition to and more
detailed than  that set  forth in  the  Prospectus. It  is intended  to  provide
additional  information regarding the activities and operations of the Fund, and
should be read in conjunction with the Prospectus.

Dean Witter
Natural Resource Development
  Securities Inc.
Two World Trade Center
New York, New York 10048
(212) 392-2550
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------

<TABLE>
<S>                                                                                           <C>
The Fund and its Management.................................................................          3
Directors and Officers......................................................................          6
Investment Practices and Policies...........................................................         12
Investment Restrictions.....................................................................         23
Portfolio Transactions and Brokerage........................................................         24
The Distributor.............................................................................         26
Shareholder Services........................................................................         29
Redemptions and Repurchases.................................................................         33
Dividends, Distributions and Taxes..........................................................         35
Performance Information.....................................................................         37
Shares of the Fund..........................................................................         37
Custodian and Transfer Agent................................................................         38
Independent Accountants.....................................................................         38
Reports to Shareholders.....................................................................         38
Legal Counsel...............................................................................         38
Experts.....................................................................................         38
Registration Statement......................................................................         38
Report of Independent Accountants...........................................................         39
Financial Statements--February 28, 1995.....................................................         40
</TABLE>

                                       2
<PAGE>
THE FUND AND ITS MANAGEMENT
- --------------------------------------------------------------------------------

THE FUND

    The  Fund was  incorporated in  the State of  Maryland on  December 22, 1980
under the  name InterCapital  Natural Resource  Development Securities  Inc.  On
March  16, 1983 the  Fund's shareholders approved  a change in  the Fund's name,
effective March 21, 1983, to Dean Witter Natural Resource Development Securities
Inc.

THE INVESTMENT MANAGER

    Dean Witter InterCapital Inc. (the "Investment Manager" or  "InterCapital"),
a  Delaware corporation, whose address is Two  World Trade Center, New York, New
York 10048, is  the Fund's  Investment Manager. InterCapital  is a  wholly-owned
subsidiary  of Dean Witter, Discover &  Co. ("DWDC"), a Delaware corporation. In
an internal  reorganization  which took  place  in January,  1993,  InterCapital
assumed  the  investment  advisory,  administrative  and  management  activities
previously performed by the InterCapital  Division of Dean Witter Reynolds  Inc.
("DWR"), a broker-dealer affiliate of InterCapital. (As hereinafter used in this
Statement  of Additional  Information, the terms  "InterCapital" and "Investment
Manager"  refer  to   DWR's  InterCapital   Division  prior   to  the   internal
reorganization  and  to Dean  Witter  InterCapital Inc.  thereafter.)  The daily
management of  the  Fund  and  research relating  to  the  Fund's  portfolio  is
conducted  by  or  under  the direction  of  officers  of the  Fund  and  of the
Investment Manager, subject  to review  of investments  by the  Fund's Board  of
Directors.  In  addition, Directors  of the  Fund  provide guidance  on economic
factors and interest rate trends. Information as to these Directors and Officers
is contained under the caption "Directors and Officers."

    InterCapital is also  the investment  manager or investment  adviser of  the
following investment companies: Dean Witter Liquid Asset Fund Inc., InterCapital
Income  Securities Inc., InterCapital Insured Municipal Bond Trust, InterCapital
Insured Municipal Trust,  Dean Witter  High Yield Securities  Inc., Dean  Witter
Tax-Free  Daily Income  Trust, Dean  Witter Developing  Growth Securities Trust,
Dean Witter Tax-Exempt Securities Trust, Dean Witter Dividend Growth  Securities
Inc.,  Dean Witter American Value Fund, Dean Witter U.S. Government Money Market
Trust, Dean Witter Variable Investment Series, Dean Witter World Wide Investment
Trust,  Dean  Witter  Select  Municipal  Reinvestment  Fund,  Dean  Witter  U.S.
Government  Securities Trust, Dean Witter  California Tax-Free Income Fund, Dean
Witter New York Tax-Free Income Fund, Dean Witter Convertible Securities  Trust,
Dean  Witter Federal  Securities Trust,  Dean Witter  Value-Added Market Series,
High Income  Advantage  Trust,  High  Income Advantage  Trust  II,  High  Income
Advantage  Trust III, Dean Witter Government Income Trust, Dean Witter Utilities
Fund, Dean Witter Managed  Assets Trust, Dean  Witter California Tax-Free  Daily
Income  Trust, Dean Witter Strategist Fund, Dean Witter World Wide Income Trust,
Dean Witter Intermediate Income Securities, Dean Witter New York Municipal Money
Market Trust, Dean Witter Capital Growth Securities, Dean Witter European Growth
Fund Inc., Dean Witter  Precious Metals and Minerals  Trust, Dean Witter  Global
Short-Term  Income Fund Inc., Dean Witter  Pacific Growth Fund Inc., Dean Witter
Multi-State Municipal Series Trust, Dean Witter Short-Term U.S. Treasury  Trust,
Dean  Witter  Diversified  Income  Trust,  Dean  Witter  Premier  Income  Trust,
InterCapital Quality Municipal Investment Trust, InterCapital Quality  Municipal
Income  Trust, Dean Witter Retirement Series, Dean Witter Health Sciences Trust,
InterCapital Insured  Municipal Income  Trust, InterCapital  California  Insured
Municipal  Income  Trust, Dean  Witter Global  Dividend Growth  Securities, Dean
Witter  Limited  Term  Municipal  Trust,  Dean  Witter  Short-Term  Bond   Fund,
InterCapital  Quality  Municipal  Securities,  InterCapital  California  Quality
Municipal  Securities,  InterCapital  New  York  Quality  Municipal  Securities,
InterCapital  Insured  Municipal  Securities,  InterCapital  Insured  California
Municipal Securities, Dean  Witter Global Utilities  Fund, Dean Witter  National
Municipal  Trust, Dean Witter High  Income Securities, Dean Witter International
SmallCap Fund, Dean Witter  Mid-Cap Growth Fund,  Dean Witter Select  Dimensions
Series,  Dean Witter Global  Asset Allocation Fund,  Dean Witter Balanced Income
Fund, Dean Witter Balanced Growth Fund, Active Assets Money Trust, Active Assets
Tax-Free  Trust,  Active  Assets   California  Tax-Free  Trust,  Active   Assets
Government  Securities Trust, Municipal Income Trust, Municipal Income Trust II,
Municipal Income  Trust III,  Municipal  Income Opportunities  Trust,  Municipal
Income  Opportunities Trust II, Municipal  Income Opportunities Trust III, Prime
Income Trust  and  Municipal  Premium Income  Trust.  The  foregoing  investment
companies,  together with  the Fund,  are collectively  referred to  as the Dean
Witter Funds.  In  addition,  Dean  Witter Services  Company  Inc.  ("DWSC"),  a
wholly-owned subsidiary of InterCapital,

                                       3
<PAGE>
serves  as manager for  the following investment companies,  for which TCW Funds
Management Inc.  is the  investment adviser:  TCW/DW Core  Equity Trust,  TCW/DW
North  American Government  Income Trust,  TCW/ DW  Latin American  Growth Fund,
TCW/DW Income and  Growth Fund, TCW/DW  Small Cap Growth  Fund, TCW/DW  Balanced
Fund, TCW/DW North American Intermediate Income Trust, TCW/DW Global Convertible
Trust,  TCW/DW Total  Return Trust,  TCW/DW Term  Trust 2000,  TCW/DW Term Trust
2002, TCW/DW Term  Trust 2003  and TCW/DW Emerging  Markets Opportunities  Trust
(the  "TCW/DW Funds"). InterCapital also serves  as (i) sub-advisor to Templeton
Global Opportunities Trust, an  open-end investment company; (ii)  administrator
of  The Black Rock  Strategic Term Trust Inc.,  a closed-end investment company;
and (iii) sub-administrator of Mass Mutual Participation Investors and Templeton
Global Governments Income Trust, closed-end investment companies.

    The Investment Manager also serves as an investment adviser for Dean  Witter
World  Wide Investment Fund,  an investment company organized  under the laws of
Luxembourg, shares of which are not available for purchase in the United  States
or by American citizens outside the United States.

    Pursuant  to an Investment  Management Agreement (the  "Agreement") with the
Investment Manager, the Fund has retained  the Investment Manager to manage  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  such  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 and policies.

    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, such  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.

    Effective  December  31,  1993,  pursuant to  a  Services  Agreement between
InterCapital and DWSC, DWSC began to provide the administrative services to  the
Fund  which were  previously performed  directly by  InterCapital. The foregoing
internal reorganization did not result in any  change in the nature or scope  of
the  administrative services being provided to the Fund or any of the fees being
paid by the Fund for the overall services being performed under the terms of the
existing Agreement.

    Expenses not expressly assumed by the Investment Manager under the Agreement
or by  the  Distributor of  the  Fund's  shares Dean  Witter  Distributors  Inc.
("Distributors"  or the "Distributor")  (see "The Distributor")  will be paid by
the Fund.  The expenses  borne by  the Fund  include, but  are not  limited  to:
expenses  of  the  Plan  of  Distribution  pursuant  to  Rule  12b-1  (see  "The
Distributor"); charges and expenses of any registrar, custodian, stock  transfer
and  dividend  disbursing  agent; brokerage  commissions;  taxes;  engraving and
printing stock 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   and  Statements  of  Additional
Information of the Fund and supplements thereto to the Fund's shareholders;  all
expenses of shareholders' and Directors' meetings and of preparing, printing and
mailing  of  proxy  statements  and reports  to  shareholders;  fees  and travel
expenses of Directors 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
Directors 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) and  independent  accountants; membership  dues  of
industry  associations; interest on Fund borrowings; postage; insurance premiums
on

                                       4
<PAGE>
property or personnel (including officers and Directors) 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.

    As full compensation for the services  and facilities furnished to the  Fund
and  expenses of the Fund  assumed by the Investment  Manager, the Fund pays the
Investment  Manager  monthly  compensation  calculated  daily  by  applying  the
following  annual rates to the net assets of the Fund determined as of the close
of each  business  day: 0.625%  of  the portion  of  the daily  net  assets  not
exceeding  $250  million  and 0.50%  of  the  portion of  the  daily  net assets
exceeding $250 million. For the fiscal  years ended February 28, 1993,  February
28, 1994 and February 28, 1995, the Fund accrued to the Investment Manager total
compensation  under  the  Agreement in  the  amounts of  $718,454,  $819,273 and
$886,340, respectively.

    Pursuant to the Agreement, total operating expenses of the Fund are  subject
to  applicable limitations under rules and  regulations of states where the Fund
is authorized to sell its shares. Therefore, operating expenses are  effectively
subject  to the most restrictive of such  limitations as the same may be amended
from time to time. Presently, the most restrictive limitation is as follows. If,
in any fiscal  year, the Fund's  total operating expenses,  exclusive of  taxes,
interest,  brokerage fees, distribution fees  and extraordinary expenses (to the
extent permitted by  applicable state securities  laws and regulations),  exceed
2  1/2% of  the first $30,000,000  of average daily  net assets, 2%  of the next
$70,000,000 of  average  daily  net  assets  and  1  1/2%  of  any  excess  over
$100,000,000,  the Investment Manager will reimburse  the Fund for the amount of
such excess. Such amount,  if any, will  be calculated daily  and credited on  a
monthly  basis. During  the fiscal years  ended February 28,  1993, February 28,
1994 and February 28, 1995, the  Fund's expenses did not exceed the  limitations
set forth above.

    The  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  Agreement in no  way restricts the  Investment Manager  from
acting as investment manager or adviser to others.

    The  Agreement was initially  approved by the Directors  on October 30, 1992
and by the Shareholders at  a Meeting of Shareholders  on January 12, 1993.  The
Agreement  is substantially identical to a prior investment management agreement
which was initially approved by the Board  of Directors on January 18, 1983  and
by  the shareholders on  March 16, 1983.  The Agreement took  effect on June 30,
1993 upon the spin-off by Sears, Roebuck & Co. of its remaining shares of  DWDC.
The  Agreement may be terminated  at any time, without  penalty, on thirty days'
notice by the Board of Directors of the  Fund, by the holders of a majority,  as
defined  in the Investment Company  Act of 1940, as  amended (the "Act"), of the
outstanding shares of the Fund, or by the Investment Manager. The Agreement will
automatically terminate in the event of its assignment (as defined in the Act).

    Under its terms, the Agreement had an initial term ending April 30, 1994 and
provides  that  it  will  continue  from  year  to  year  thereafter,   provided
continuance  of the Agreement is  approved at least annually  by the vote of the
holders of a majority, as defined in  the Act, of the outstanding shares of  the
Fund,  or by the Board  of Directors of the Fund;  provided that in either event
such continuance is approved annually by the vote of a majority of the Directors
of the Fund who  are not parties  to the Agreement  or "interested persons"  (as
defined  in the Act) of any  such party, which vote must  be cast in person at a
meeting called for the purpose of  voting on such approval. The continuation  of
the  Agreement until April 30, 1996, was  approved by the Directors of the Fund,
including a majority  of the  Independent Directors,  at their  meeting held  on
April 20, 1995.

    The Fund has acknowledged that the name "Dean Witter" is a property right of
DWR.  The Fund has agreed that the DWR or  its parent company may use or, at any
time, permit others to  use, the name  "Dean Witter." The  Fund has also  agreed
that  in the event  the Agreement is  terminated, or if  the affiliation between
InterCapital and/or DWR  and its  parent company  is terminated,  the Fund  will
eliminate  the name "Dean Witter"  from its name if  InterCapital and/or DWR its
parent company shall so request.

                                       5
<PAGE>
DIRECTORS AND OFFICERS
- --------------------------------------------------------------------------------

    The Directors and Executive Officers  of the Fund, their principal  business
occupations  during the  last five  years and  their affiliations,  if any, with
InterCapital and with the 76 Dean Witter Funds and the 13 TCW/DW Funds are shown
below.

<TABLE>
<CAPTION>
      NAME, AGE, POSITION WITH FUND
               AND ADDRESS                                 PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- -----------------------------------------  -----------------------------------------------------------------------------

<S>                                        <C>
Jack F. Bennett (71)                       Retired; Director or Trustee of the  Dean Witter Funds; formerly Senior  Vice
Director                                   President  and Director of  Exxon Corporation (1975-January,  1989) and Under
c/o Gordon Altman Butowsky                 Secretary of the U.S. Treasury for Monetary Affairs (1974-1975); Director  of
Weitzen Shalov & Wein                      Philips  Electronics  N.V., Tandem  Computers  Inc. and  Massachusetts Mutual
Counsel to the Independent Directors       Insurance Company; director or trustee of various not-for-profit and business
114 West 47th Street                       organizations.
New York, New York

Michael Bozic (54)                         President and Chief Executive Officer of Hills Department Stores (since  May,
Director                                   1991);  formerly Chairman and Chief  Executive Officer (January, 1987-August,
c/o Hills Stores Inc.                      1990) and President and Chief Operating Officer (August, 1990-February, 1991)
15 Dan Road                                of the Sears Merchandise Group of Sears, Roebuck and Co.; Director or Trustee
Canton, Massachusetts                      of the Dean Witter Funds; Director of Eaglemark Financial Services, Inc., the
                                           United Negro College Fund and Domain Inc. (home decor retailer).

Charles A. Fiumefreddo* (61)               Chairman, Chief Executive Officer and  Director of InterCapital, Dean  Witter
Chairman, Director,                        Distributors  Inc. ("Distributors")  and DWSC;  Executive Vice  President and
President and Chief                        Director of DWR; Chairman, Trustee or Director, President and Chief Executive
Executive Officer                          Officer of  the Dean  Witter  Funds; Chairman,  Chief Executive  Officer  and
Two World Trade Center                     Trustee  of the TCW/DW Funds; formerly  Executive Vice President and Director
New York, New York                         of DWDC (until February,  1993); Chairman and Director  of Dean Witter  Trust
                                           Company  ("DWTC") (since October,  1989); Director and/or  officer of various
                                           DWDC subsidiaries.

Edwin J. Garn (62)                         Director or Trustee of the Dean Witter Funds; formerly United States  Senator
Director                                   (R-Utah)  (1974-1992)  and  Chairman, Senate  Banking  Committee (1980-1986);
c/o Huntsman Chemical Corporation          formerly Mayor of Salt Lake City, Utah (1971-1974); formerly Astronaut, Space
2000 Eagle Gate Tower                      Shuttle Discovery  (April  12-19,  1985); Vice  Chairman,  Huntsman  Chemical
Salt Lake City, Utah                       Corporation  (since January, 1993); member of  the board of various civic and
                                           charitable organizations.

John R. Haire (70)                         Chairman of  the  Audit  Committee  and Chairman  of  the  Committee  of  the
Director                                   Independent  Directors or Trustees and Director or Trustee of the Dean Witter
Two World Trade Center                     Funds; Trustee of the  TCW/DW Funds; formerly President,  Council for Aid  to
New York, New York                         Education  (1978-October, 1989) and  Chairman and Chief  Executive Officer of
                                           Anchor Corporation, an Investment Adviser (1964-1978); Director of Washington
                                           National Corporation (insurance).
</TABLE>

                                       6
<PAGE>

<TABLE>
<CAPTION>
      NAME, AGE, POSITION WITH FUND
               AND ADDRESS                                 PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- -----------------------------------------  -----------------------------------------------------------------------------

<S>                                        <C>
Dr. Manuel H. Johnson (46)                 Senior Partner, Johnson  Smick International, Inc.,  a consulting firm;  Koch
Director                                   Professor  of International Economics  and Director of  the Center for Global
c/o Johnson Smick International, Inc.      Market  Studies  at   George  Mason  University   (since  September,   1990);
1133 Connecticut Avenue, N.W.              Co-Chairman   and  a  founder  of  the  Group  of  Seven  Council  (G7C),  an
Washington, D.C.                           international  economic  commission  (since  September,  1990);  Director  or
                                           Trustee  of the Dean Witter  Funds; Trustee of the  TCW/DW Funds; Director of
                                           Greenwich Capital Markets Inc. (broker-dealer); formerly Vice Chairman of the
                                           Board of  Governors of  the Federal  Reserve System  (February,  1986-August,
                                           1990) and Assistant Secretary of the U.S. Treasury (1982-1986).

Paul Kolton (71)                           Director or Trustee of the Dean Witter Funds; Chairman of the Audit Committee
Director                                   and  Chairman of  the Committee  of Independent  Trustees and  Trustee of the
c/o Gordon Altman Butowsky                 TCW/DW  Funds;  formerly  Chairman  of  the  Financial  Accounting  Standards
Weitzen Shalov & Wein                      Advisory  Council and  Chairman and Chief  Executive Officer  of the American
Counsel to the Independent Directors       Stock Exchange; Director  of UCC  Investors Holding  Inc. (Uniroyal  Chemical
114 West 47th Street                       Company, Inc.); director or trustee of various not-for-profit organizations.
New York, New York

Michael E. Nugent (58)                     General  Partner,  Triumph  Capital, LP.,  a  private  investment partnership
Director                                   (since April, 1988); Director or Trustee of the Dean Witter Funds; Trustee of
c/o Triumph Capital, L.P.                  the TCW/DW  Funds; formerly  Vice  President, Bankers  Trust Company  and  BT
237 Park Avenue                            Capital  Corporation  (September,  1984-March,  1988);  Director  of  various
New York, New York                         business organizations.

Philip J. Purcell* (51)                    Chairman of the Board of Directors  and Chief Executive Officer of DWDC,  DWR
Director                                   and   Novus  Credit  Services  Inc.;   Director  of  InterCapital,  DWSC  and
Two World Trade Center                     Distributors; Director or Trustee of  the Dean Witter Funds; Director  and/or
New York, New York                         officer of various DWDC subsidiaries.

John L. Schroeder (64)                     Executive  Vice President and Chief Investment  Officer of the Home Insurance
Director                                   Company (since August, 1991); Director or  Trustee of the Dean Witter  Funds;
c/o The Home Insurance Company             Director   of  Citizens  Utilities  Company;   formerly  Chairman  and  Chief
59 Maiden Lane                             Investment Officer  of Axe-Houghton  Management  and the  Axe-Houghton  Funds
New York, New York                         (April,  1983-June,  1991) and  President of  USF&G Financial  Services, Inc.
                                           (June 1990-June, 1991).

Sheldon Curtis (63)                        Senior Vice  President, Secretary  and General  Counsel of  InterCapital  and
Vice President, Secretary                  DWSC;  Senior Vice  President and  Secretary of  DWTC (since  October, 1989);
and General Counsel                        Senior Vice President, Assistant Secretary  and Assistant General Counsel  of
Two World Trade Center                     Distributors;  Assistant  Secretary  of DWR;  Vice  President,  Secretary and
New York, New York                         General Counsel of the Dean Witter Funds and the TCW/DW Funds.

Konrad Krill (35)                          Vice President  of  InterCapital  (since  1991);  previously  Assistant  Vice
Vice President                             President and Portfolio Manager of InterCapital (May, 1986-1991).
Two World Trade Center
New York, New York
</TABLE>

                                       7
<PAGE>

<TABLE>
<CAPTION>
      NAME, AGE, POSITION WITH FUND
               AND ADDRESS                                 PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- -----------------------------------------  -----------------------------------------------------------------------------
<S>                                        <C>
Thomas F. Caloia (49)                      First  Vice  President  (since  May,  1991)  and  Assistant  Treasurer (since
Treasurer                                  January, 1993) of InterCapital; First Vice President and Assistant  Treasurer
Two World Trade Center                     of  DWSC  and  Treasurer of  the  Dean  Witter Funds  and  the  TCW/DW Funds;
New York, New York                         previously Vice President of InterCapital.
<FN>
- ------------------------
*Denotes Directors who are "interested persons" of the Fund, as defined in the
Act.
</TABLE>

    In  addition,  Robert  M.  Scanlan,  President  of  InterCapital  and  Chief
Operating  Officer  of  InterCapital  and  DWSC,  Executive  Vice  President  of
Distributors and DWTC  and Director  of DWTC,  David A.  Hughey, Executive  Vice
President  and Chief Administrative Officer  of InterCapital, DWSC, Distributors
and DWTC and Director of DWTC, Edmund C. Puckhaber, Executive Vice President  of
InterCapital,  and Paul  Vance, Senior Vice  President of  InterCapital, and Ira
Ross, Vice  President of  InterCapital,  are Vice  Presidents  of the  Fund.  In
addition, Marilyn K. Cranney and Barry Fink, First Vice Presidents and Assistant
General  Counsels of  InterCapital and  DWSC and  Lawrence S.  Lafer, LouAnne D.
McInnis and  Ruth  Rossi, Vice  Presidents  and Assistant  General  Counsels  of
InterCapital and DWSC are Assistant Secretaries of the Fund.

BOARD OF DIRECTORS; RESPONSIBILITIES AND COMPENSATION OF INDEPENDENT DIRECTORS

    As  mentioned above  the Fund is  one of the  Dean Witter Funds,  a group of
investment companies managed by InterCapital. As  of the date of this  Statement
of  Additional Information, there are a total of 76 Dean Witter Funds, comprised
of 116 portfolios. As  of March 31,  1995, the Dean Witter  Funds had total  net
assets of approximately $62.3 billion and more than five million shareholders.

    The  Board of  Directors or  Trustees, consisting  of ten  (10) directors or
trustees, is the same for each of the  Dean Witter Funds. Some of the Funds  are
organized  as business  trusts, others  as corporations,  but the  functions and
duties of  directors  and trustees  are  the same.  Accordingly,  directors  and
trustees of the Dean Witter Funds are referred to in this section as Directors.

    Eight  Directors, that is, 80%  of the total number,  have no affiliation or
business connection with InterCapital  or any of its  affiliated persons and  do
not  own any stock or other  securities issued by InterCapital's parent company,
DWDC. These  are the  "disinterested" or  "independent" Directors.  Five of  the
eight  Independent Directors are also Independent  Trustees of the TCW/DW Funds.
As of the date of this Statement of Additional Information, there are a total of
13 TCW/DW Funds. Two of the Funds' Directors, that is, the management Directors,
are affiliated with InterCapital.

    As noted in a federal court ruling,  "[T]he independent directors . . .  are
expected  to  look  after  the  interests  of  shareholders  by  'furnishing  an
independent check upon management,' especially with respect to fees paid to  the
investment  company's sponsor." In addition  to their general "watchdog" duties,
the Independent Directors are  charged with a  wide variety of  responsibilities
under  the Act.  In order to  perform their duties  effectively, the Independent
Directors are required to review and understand large amounts of material, often
of a highly technical and legal nature.

    The  Dean  Witter  Funds  seek  as  Independent  Directors  individuals   of
distinction  and  experience  in  business and  finance,  government  service or
academia; that is, people whose advice and counsel are valuable and 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
of the demands made on their time by  the Funds. Indeed, to serve on the  Funds'
Boards,  certain Directors who would be qualified and in demand to serve on bank
boards would be prohibited by law from serving at the same time as a director of
a national bank and as a Director of a Fund.

    The Independent Trustees are required to select and nominate individuals  to
fill  any Independent Director vacancy on the Board  of any Fund that has a Rule
12b-1 plan of  distribution. Since most  of the  Dean Witter Funds  have such  a
plan,  and since all of the Funds' Boards have the same members, the Independent
Directors effectively control  the selection of  other Independent Directors  of
all the Dean Witter Funds.

                                       8
<PAGE>
GOVERNANCE STRUCTURE OF THE DEAN WITTER FUNDS

    While the regulatory system establishes both general guidelines and specific
duties  for  the Independent  Directors,  the governance  arrangements  from one
investment company  group to  another  vary significantly.  In some  groups  the
Independent  Trustees perform their  role by attendance  at periodic meetings of
the board  of  directors with  study  of  materials furnished  to  them  between
meetings.  At  the other  extreme, an  investment company  complex may  employ a
full-time staff to assist the Independent Directors in the performance of  their
duties.

    The  governance structure  of the Dean  Witter Funds lies  between these two
extremes. The  Independent Directors  and the  Funds' Investment  Manager  alike
believe  that these  arrangements are effective  and serve the  interests of the
Funds' shareholders. All of  the Independent Directors serve  as members of  the
Audit  Committee and the  Committee of the Independent  Directors. Three of them
also serve as members of the Derivatives Committee.

    The Committee of the Independent  Directors is 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 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 such 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;  advising the  independent accountants  and management  personnel that
they have  direct  access to  the  Committee at  all  times; and  preparing  and
submitting Committee meeting minutes to the full Board.

    Finally,  the Board of each Fund  has established a Derivatives Committee to
establish parameters for and oversee the activities of the Fund with respect  to
derivative investments, if any, made by the Fund.

    During  the calendar year ended December 31, 1994, the three Committees held
a combined total of eleven meetings.  The Committee meetings are sometimes  held
away  from  the offices  of  InterCapital and  sometimes  in the  Board  room of
InterCapital. These meetings are held  without management directors or  officers
being  present, unless and until they may be invited to the meeting for purposes
of furnishing information or  making a report.  These separate meetings  provide
the  Independent Directors  an opportunity  to explore  in depth  with their own
independent  legal   counsel,  independent   auditors  and   other   independent
consultants, as needed, the issues they believe should be addressed and resolved
in the interests of the Funds' shareholders.

DUTIES OF CHAIRMAN OF COMMITTEES

    The   Chairman  of  the  Committees  maintains   an  office  at  the  Funds'
headquarters in New York.  He is responsible for  keeping abreast of  regulatory
and  industry developments and the Funds'  operations and management. He screens
and/or prepares  written  materials  and  identifies  critical  issues  for  the
Independent  Directors  to consider,  develops  agendas for  Committee meetings,
determines the type and amount of  information that the Committees will need  to
form  a judgment on the issues, and  arranges to have the information furnished.
He also arranges for the services of  independent experts to be provided to  the
Committees  and consults with them in advance of meetings to help refine reports
and to focus  on critical  issues. Members of  the Committees  believe that  the
person  who serves as Chairman of all  three Committees and guides their efforts
is pivotal to the effective functioning of the Committees.

    The Chairman of the  Committees also maintains  continuous contact with  the
Funds'  management, with  independent counsel  to the  Independent Directors and
with the  Funds' independent  auditors.  He arranges  for  a series  of  special
meetings  involving  the  annual  review  of  investment  management  and  other
operating

                                       9
<PAGE>
contracts of the Funds and, on  behalf of the Committees, conducts  negotiations
with the Investment Manager and other service providers. In effect, the Chairman
of  the Committees serves as a combination  of chief executive and support staff
of the Independent Directors.

    The Chairman of the Committees is not employed by any other organization and
devotes his time primarily to the services he performs as Committee Chairman and
Independent Trustee of the  Dean Witter Funds and  as an Independent Trustee  of
the  TCW/DW Funds.  The current  Committee Chairman has  had more  than 35 years
experience as a senior executive in the investment company industry.

VALUE OF HAVING SAME INDIVIDUALS AS INDEPENDENT DIRECTORS FOR ALL DEAN WITTER
FUNDS

    The Independent Directors and the Funds' management believe that having  the
same  Independent Directors  for each of  the Dean  Witter Funds is  in the best
interests  of  all  the  Funds'   shareholders.  This  arrangement  avoids   the
duplication  of  effort  that  would  arise  from  having  different  groups  of
individuals serving as Independent  Directors for each of  the Funds or even  of
sub-groups  of Funds. It is  believed that having the  same individuals serve as
Independent Directors 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 likelihood of separate groups  of
Independent Directors arriving at conflicting decisions regarding operations and
management  of the  Funds and  avoids the cost  and confusion  that would likely
ensue. Finally, it is believed that having the same Independent Directors  serve
on  all Fund Boards enhances the ability of  each Fund to obtain, at modest cost
to each separate Fund, the services of Independent Directors, and a Chairman  of
their  Committees,  of  the  caliber,  experience  and  business  acumen  of the
individuals who serve as Independent Directors of the Dean Witter Funds.

COMPENSATION OF INDEPENDENT DIRECTORS

    The Fund pays each Independent Director an  annual fee of $1,200 plus a  per
meeting  fee of $50 for meetings of the  Board of Directors or committees of the
Board of Directors attended by the Director  (the Fund pays the Chairman of  the
Audit  Committee an annual fee of $1,000  and pays the Chairman of the Committee
of the Independent Directors  an additional annual fee  of $2,400, in each  case
inclusive  of  the  Committee  meeting  fees).  The  Fund  also  reimburses such
Directors for  travel  and other  out-of-pocket  expenses incurred  by  them  in
connection  with attending such meetings. Directors and officers of the Fund who
are or have  been employed by  the Investment Manager  or an affiliated  company
receive no compensation or expense reimbursement from the Fund.

    The  Fund  has  adopted  a retirement  program  under  which  an Independent
Director 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 Dean Witter Fund that has adopted the retirement program (each such  Fund
referred  to as  an "Adopting  Fund" and  each such  Director referred  to as an
"Eligible Director")  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 Director
is entitled to receive  from the 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  28.75%  of  his  or  her  Eligible
Compensation  plus 0.4791666% 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  57.50% 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 Director for service
to the Fund in the five year period prior to the date of the Eligible Director's
retirement. Benefits under the retirement program  are not secured or funded  by
the  Fund. As of the  date of this Statement  of Additional Information, 58 Dean
Witter Funds have adopted the retirement program.

- ------------
(1) An Eligible Director may elect alternate  payments of his or her  retirement
    benefits  based upon the combined life  expectancy of such Eligible Director
    and his or her  spouse on the date  of such Eligible Director's  retirement.
    The  amount estimated to be payable under this method, through the remainder
    of the later of the lives of such Eligible Director and spouse, will be  the
    actuarial  equivalent  of the  Regular  Benefit. In  addition,  the Eligible
    Director may elect that the surviving spouse's periodic payment of  benefits
    will  be equal  to either 50%  or 100%  of the previous  periodic amount, an
    election that, respectively,  increases or decreases  the previous  periodic
    amount  so that the  resulting payments will be  the actuarial equivalent of
    the Regular Benefit.

                                       10
<PAGE>
    The following table  illustrates the  compensation paid  and the  retirement
benefits  accrued to the Fund's Independent Directors by the Fund for the fiscal
year ended  February 28,  1995 and  the estimated  retirement benefits  for  the
Fund's Independent Directors as of February 28, 1995.

   
<TABLE>
<CAPTION>
                             FUND COMPENSATION                             ESTIMATED RETIREMENT BENEFITS
                      -------------------------------   -------------------------------------------------------------------

                                                           ESTIMATED                                            ESTIMATED
                                         RETIREMENT       CREDIT YEARS       ESTIMATED                           ANNUAL
                        AGGREGATE         BENEFITS       OF SERVICE AT     PERCENTAGE OF       ESTIMATED        BENEFITS
NAME OF INDEPENDENT    COMPENSATION      ACCRUED AS        RETIREMENT         ELIGIBLE         ELIGIBLE           UPON
DIRECTOR              FROM THE FUND    FUND EXPENSES      (MAXIMUM 10)      COMPENSATION    COMPENSATION(2)   RETIREMENT(3)
- --------------------  --------------   --------------   ----------------   --------------   ---------------   -------------
<S>                   <C>              <C>              <C>                <C>              <C>               <C>
Jack F. Bennett.....     $ 2,000          $   798                 8            46.0%            $2,209           1$,016
Michael Bozic.......       1,777               76                10            57.5%             1,950           1,121
Edwin J. Garn.......       2,000              492                10            57.5%             1,950           1,121
John R. Haire.......       4,900(4)         1,930                10            57.5%             5,093           2,929
Dr. Manuel H.
 Johnson............       1,950              205                10            57.5%             1,950           1,121
Paul Kolton.........       2,050              847                 9            51.3%             2,370           1,215
Michael E. Nugent...       1,850              349                10            57.5%             1,950           1,121
John L. Schroeder...       1,827              149                 8            47.9%             1,950             934
<FN>
- --------------------------
(2)  Based on current levels of compensation.
(3)  Based  on current  levels of compensation.  Amount of  annual benefits also
     varies depending  on the  Director's elections  described in  Footnote  (1)
     above.
(4)  Of  Mr.  Haire's compensation  from  the Fund,  $3,400  is paid  to  him as
     Chairman of  the Committee  of the  Independent Directors  ($2,400) and  as
     Chairman of the Audit Committee ($1,000).
</TABLE>
    

    The  following  table  illustrates  the  compensation  paid  to  the  Fund's
Independent Directors for the calendar year ended December 31, 1994 for services
to the 73 Dean Witter Funds and,  in the case of Messrs. Haire, Johnson,  Kolton
and  Nugent, the 13  TCW/DW Funds that  were in operation  at December 31, 1994.
With respect to Messrs. Haire, Johnson, Kolton and Nugent, the TCW/DW Funds  are
included  solely because of a limited exchange privilege between those Funds and
five Dean Witter Money Market Funds. Mr.  Schroeder was elected as a Trustee  of
the TCW/DW Funds on April 20, 1995.

           CASH COMPENSATION FROM DEAN WITTER FUNDS AND TCW/DW FUNDS

<TABLE>
<CAPTION>
                                                                   FOR SERVICE AS    TOTAL CASH
                               FOR SERVICE                          CHAIRMAN OF     COMPENSATION
                              AS DIRECTOR OR                       COMMITTEES OF    FOR SERVICES
                               TRUSTEE AND       FOR SERVICE AS     INDEPENDENT          TO
                             COMMITTEE MEMBER     TRUSTEE AND        DIRECTORS/        73 DEAN
                                OF 73 DEAN      COMMITTEE MEMBER    TRUSTEES AND       WITTER
NAME OF INDEPENDENT               WITTER          OF 13 TCW/DW         AUDIT        FUNDS AND 13
 DIRECTOR                         FUNDS              FUNDS           COMMITTEES     TCW/DW FUNDS
- ---------------------------  ----------------   ----------------   --------------   -------------
<S>                          <C>                <C>                <C>              <C>
Jack F. Bennett............      $125,761           --                 --             $125,761
Michael Bozic..............        82,637           --                 --               82,637
Edwin J. Garn..............       125,711           --                 --              125,711
John R. Haire..............       101,061           $66,950           $225,563(5)      393,574
Dr. Manuel H. Johnson......       122,461            60,750            --              183,211
Paul Kolton................       128,961            51,850             34,200(6)      215,011
Michael E. Nugent..........       115,761            52,650            --              168,411
John L. Schroeder..........        85,938           --                 --               85,938
<FN>
- ------------------------
(5)  For the 73 Dean Witter Funds.
(6)  For the 13 TCW/DW Funds.
</TABLE>

    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 Directors  as a  group was  less  than 1  percent of  the Fund's  shares  of
beneficial interest outstanding.

                                       11
<PAGE>
INVESTMENT PRACTICES AND POLICIES
- --------------------------------------------------------------------------------

FOREIGN SECURITIES

    As discussed in the Prospectus, the Fund may invest in securities of foreign
companies.  It  should  be  noted  that there  may  be  less  publicly available
information about  foreign  issuers than  about  domestic issuers,  and  foreign
issuers  may  not be  subject to  accounting,  auditing and  financial reporting
standards and requirements comparable to  those of domestic issuers.  Securities
of  some foreign issuers  are less liquid  and more volatile  than securities of
comparable domestic  issuers and  foreign  brokerage commissions  are  generally
higher  than in the United  States. Foreign securities markets  may also be less
liquid, more volatile  and less subject  to government supervision  than in  the
United  States.  Investments in  foreign countries  could  be affected  by other
factors not present in the United States, including expropriation,  confiscatory
taxation and potential difficulties in enforcing contractual obligations. During
the  fiscal year ended February  28, 1995 the Fund's  purchases of securities of
foreign issuers did not exceed 5% of the Fund's net assets.

SECURITY LOANS

    Consistent with applicable  regulatory requirements, the  Fund may lend  its
portfolio  securities  to  brokers, dealers  and  other  financial institutions,
provided that such loans are callable at any time by the Fund (subject to notice
provisions described  below), and  are at  all  times secured  by cash  or  cash
equivalents, which are maintained in a segregated account pursuant to applicable
regulations  and that are at least equal  to the market value, determined daily,
of the loaned securities. The advantage of such loans is that the Fund continues
to receive the income on  the loaned securities while  at the same time  earning
interest  on the cash amounts deposited as collateral, which will be invested in
short-term obligations.

    A loan may be terminated by the borrower on one business day's notice, or by
the Fund on four  business days' notice.  If the borrower  fails to deliver  the
loaned  securities within four days after receipt  of notice, the Fund could use
the collateral to replace the securities  while holding the borrower liable  for
any  excess  of replacement  cost  over collateral.  As  with any  extensions of
credit, there are risks of  delay in recovery and, in  some cases, even loss  of
rights in the collateral should the borrower of the securities fail financially.
However,  these loans of portfolio securities will  only be made to firms deemed
by the Fund's management  to be creditworthy  and when the  income which can  be
earned  from such loans  justifies the attendant risks.  Upon termination of the
loan, the borrower is required to return the securities to the Fund. Any gain or
loss in the market price of the  securities during the period of the loan  would
inure  to the  Fund. The Fund  will pay reasonable  finder's, administrative and
custodial fees in connection with a loan of its securities. The creditworthiness
of firms to which the Fund lends  its portfolio securities will be monitored  on
an ongoing basis.

   
    When  voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the  policy of calling the loaned securities,  to
be  delivered within one day after notice, to permit the exercise of such rights
if the matters involved would have a material effect on the Fund's investment in
such loaned securities. During its fiscal year ended February 28, 1995, the Fund
did not loan any of its portfolio securities and it has no intention of doing so
in the foreseeable future.
    

BORROWING OF MONEY

    The Fund did not borrow any money during its fiscal year ended February  28,
1995  and it has no intention of  borrowing any money in the foreseeable future.
(See Investment Restriction 6.)

OPTIONS AND FUTURES TRANSACTIONS

    As discussed in  the Prospectus,  the Fund  may write  covered call  options
against  securities held  in its portfolio  and covered put  options on eligible
portfolio securities and stock indexes and  purchase options of the same  series
to  effect closing transactions, and may  hedge against potential changes in the
market value of investments (or  anticipated investments) by purchasing put  and
call  options on  portfolio (or eligible  portfolio) securities  and engaging in
transactions involving futures contracts and options on such contracts. Call and
put options on U.S.  Treasury notes, bonds and  bills and equity securities  are
listed  on  Exchanges and  are  written in  over-the-counter  transactions ("OTC
options"). Listed  options  are  issued  by  the  Options  Clearing  Corporation
("OCC").  Ownership of a listed call option gives the Fund the right to buy from
the OCC the

                                       12
<PAGE>
underlying security covered  by the  option at  the stated  exercise price  (the
price per unit of the underlying security) by filing an exercise notice prior to
the  expiration date of the option. The writer (seller) of the option would then
have the obligation to sell to the OCC the underlying security at that  exercise
price prior to the expiration date of the option, regardless of its then current
market  price. Ownership of a listed put option would give the Fund the right to
sell the  underlying security  to the  OCC at  the stated  exercise price.  Upon
notice  of exercise  of the  put option, the  writer of  the put  would have the
obligation to purchase  the underlying  security from  the OCC  at the  exercise
price.

    OPTIONS  ON TREASURY BONDS  AND NOTES.  Because  trading interest in options
written on  Treasury  bonds and  notes  tends to  center  on the  most  recently
auctioned issues, the exchanges on which such securities trade will not continue
indefinitely  to  introduce options  with  new expirations  to  replace expiring
options on  particular  issues.  Instead,  the  expirations  introduced  at  the
commencement  of options trading  on a particular  issue will be  allowed to run
their course, with the possible addition of a limited number of new  expirations
as  the original ones  expire. Options trading  on each issue  of bonds or notes
will thus be phased  out as new  options are listed on  more recent issues,  and
options  representing  a  full  range  of  expirations  will  not  ordinarily be
available for every issue on which options are traded.

    OPTIONS ON TREASURY BILLS.  Because a deliverable Treasury bill changes from
week to week, writers of Treasury bill calls cannot provide in advance for their
potential  exercise  settlement  obligations   by  acquiring  and  holding   the
underlying  security. However,  if the  Fund holds  a long  position in Treasury
bills with a principal amount of the securities deliverable upon exercise of the
option, the position may be  hedged from a risk standpoint  by the writing of  a
call  option. For so long as the call  option is outstanding, the Fund will hold
the Treasury bills in a segregated account with its Custodian, so that they will
be treated as being covered.

    OTC OPTIONS.  Exchange-listed  options are issued by  the OCC which  assures
that  all transactions  in such options  are properly executed.  OTC options are
purchased from or sold (written) to dealers or financial institutions which have
entered into direct agreements with the  Fund. With OTC options, such  variables
as  expiration date, exercise price and premium  will be agreed upon between the
Fund and the  transacting dealer, without  the intermediation of  a third  party
such as the OCC. If the transacting dealer fails to make or take delivery of the
securities  underlying an option it has written, in accordance with the terms of
that option, the Fund would lose the premium paid for the option as well as  any
anticipated  benefit of  the transaction.  This Fund  will engage  in OTC option
transactions only with primary U.S. Government securities dealers recognized  by
the Federal Reserve Bank of New York.

    COVERED CALL WRITING.  As stated in the Prospectus, the Fund is permitted to
write  covered call options on portfolio securities in order to aid in achieving
its investment objective.  Generally, a  call option  is "covered"  if the  Fund
owns, or has the right to acquire, without additional cash consideration (or for
additional cash consideration held for the Fund by its Custodian in a segregated
account)  the underlying security subject to the  option except that in the case
of call options on U.S. Treasury Bills,  the Fund might own U.S. Treasury  Bills
of  a  different  series from  those  underlying  the call  option,  but  with a
principal amount and value  corresponding to the exercise  price and a  maturity
date  no later than that of the  securities deliverable under the call option. A
call option is also covered if the Fund holds a call on the same security as the
underlying security of the written option, where the exercise price of the  call
used  for coverage  is equal  to or  less than  the exercise  price of  the call
written or greater than the  exercise price of the call  written if the mark  to
market  difference is maintained by the Fund in cash, U.S. Government securities
or other  high grade  debt obligations  which  the Fund  holds in  a  segregated
account maintained with its Custodian.

    The  Fund  will receive  from the  purchaser, in  return for  a call  it has
written, a "premium"; i.e., the price  of the option. Receipt of these  premiums
may  better enable  the Fund  to achieve  a greater  total return  than would be
realized from holding  the underlying  securities alone.  Moreover, the  premium
received will offset a portion of the potential loss incurred by the Fund if the
securities  underlying the option are ultimately sold by the Fund at a loss. The
premium received will fluctuate with varying economic market conditions. If  the
market  value  of the  portfolio securities  upon which  call options  have been
written increases, the Fund  may receive less total  return from the portion  of
its  portfolio upon which  calls have been  written than it  would have had such
calls not been written.

                                       13
<PAGE>
    During the option period, the Fund may be required, at any time, to  deliver
the  underlying security against payment  of the exercise price  on any calls it
has written  (exercise of  certain listed  options may  be limited  to  specific
expiration  dates). This  obligation is  terminated upon  the expiration  of the
option period or at such earlier time when the writer effects a closing purchase
transaction. A closing  purchase transaction  is accomplished  by purchasing  an
option  of the same series  as the option previously  written. However, once the
Fund has been assigned an exercise notice,  the Fund will be unable to effect  a
closing purchase transaction.

    Closing purchase transactions are ordinarily effected to realize a profit on
an outstanding call option, to prevent an underlying security from being called,
to  permit the  sale of an  underlying security or  to enable the  Fund to write
another call option on the underlying security with either a different  exercise
price or expiration date or both. Also, effecting a closing purchase transaction
will  permit the  cash or  proceeds from the  concurrent sale  of any securities
subject to the option to be used for other investments by the Fund. The Fund may
realize a net gain  or loss from a  closing purchase transaction depending  upon
whether  the amount of the  premium received on the call  option is more or less
than the cost of effecting the  closing purchase transaction. Any loss  incurred
in  a  closing  purchase  transaction  may  be  wholly  or  partially  offset by
unrealized  appreciation  in  the  market  value  of  the  underlying  security.
Conversely, a gain resulting from a closing purchase transaction could be offset
in  whole  or in  part or  exceeded  by a  decline in  the  market value  of the
underlying security.

    If a call option expires unexercised, the Fund realizes a gain in the amount
of the premium on the option less the commission paid. Such a gain, however, may
be offset by depreciation in the market value of the underlying security  during
the  option period. If a  call option is exercised, the  Fund realizes a gain or
loss from the sale  of the underlying security  equal to the difference  between
the  purchase price of the  underlying security and the  proceeds of the sale of
the security plus the premium received on the option less the commission paid.

    Options written by a Fund normally have expiration dates of from up to  nine
months (equity securities) to eighteen months (fixed-income securities) from the
date  written. The  exercise price of  a call option  may be below,  equal to or
above the current market value of the underlying security at the time the option
is written. See "Risks of Options and Futures Transactions," below.

    COVERED PUT WRITING.  As stated in the Prospectus, as a writer of a  covered
put  option, the Fund  incurs an obligation  to buy the  security underlying the
option from the purchaser of the put, at the option's exercise price at any time
during the  option  period, at  the  purchaser's election  (certain  listed  put
options  written by  the Fund  will be  exercisable by  the purchaser  only on a
specific date). A put is  "covered" if, at all times,  the Fund maintains, in  a
segregated  account maintained on its behalf at the Fund's Custodian, cash, U.S.
Government securities or other high grade  obligations in an amount equal to  at
least  the exercise price of the option,  at all times during the option period.
Similarly, a short put position could be covered by the Fund by its purchase  of
a  put option  on the same  security as  the underlying security  of the written
option, where the exercise  price of the  purchased option is  equal to or  more
than  the exercise price of  the put written or less  than the exercise price of
the put written if the  mark to market difference is  maintained by the Fund  in
cash,  U.S. Government securities or other high grade debt obligations which the
Fund holds in a segregated account maintained at its Custodian. In writing puts,
the Fund assumes  the risk of  loss should  the market value  of the  underlying
security  decline  below  the  exercise  price of  the  option  (any  loss being
decreased by  the receipt  of the  premium on  the option  written). During  the
option  period, the Fund  may be required, at  any time, to  make payment of the
exercise price against delivery of the underlying security. The operation of and
limitations on covered put options in other respects are substantially identical
to those of call options.

    The Fund will write put options for two purposes: (1) to receive the  income
derived  from  the premiums  paid  by purchasers;  and  (2) when  the Investment
Manager wishes to purchase the security  underlying the option at a price  lower
than its current market price, in which case it will write the covered put at an
exercise price reflecting the lower purchase price sought. The potential gain on
a  covered put option is limited to the premium received on the option (less the
commissions  paid  on   the  transaction)  while   the  potential  loss   equals

                                       14
<PAGE>
the  differences between the exercise price of the option and the current market
price of the  underlying securities  when the put  is exercised,  offset by  the
premium received (less the commissions paid on the transaction).

    PURCHASING  CALL AND PUT OPTIONS.  As stated in the Prospectus, the Fund may
purchase listed and OTC call and put options on securities and stock indexes  in
amounts  equalling up to  10% of its total  assets, with a maximum  of 5% of the
Fund's assets  invested in  stock  index options.  The  Fund may  purchase  call
options  only in order to  close out a covered  call position (see "Covered Call
Writing" above). The purchase of the call option to effect a closing transaction
on a call  written over-the-counter may  be a  listed or OTC  option. In  either
case,  the call purchased  is likely to be  on the same  securities and have the
same terms  as the  written option.  If purchased  over-the-counter, the  option
would  generally  be acquired  from the  dealer  or financial  institution which
purchased the call written by the Fund.

    The Fund may purchase put options on  securities which it holds (or has  the
right  to acquire) in its portfolio only  to protect itself against a decline in
the value of the security. If the value of the underlying security were to  fall
below  the exercise  price of the  put purchased  in an amount  greater than the
premium paid for the option, the Fund  would incur no additional loss. The  Fund
may  also purchase put  options to close  out written put  positions in a manner
similar to call options closing purchase transactions. In addition, the Fund may
sell a put option  which it has  previously purchased prior to  the sale of  the
securities  underlying such option.  Such a sale  would result in  a net gain or
loss depending on whether the amount received  on the sale is more or less  than
the  premium and other transaction  costs paid on the  put option which is sold.
And such gain or loss  could be offset in  whole or in part  by a change in  the
market  value of the underlying security. If  a put option purchased by the Fund
expired without being sold or exercised, the premium would be lost.

    RISKS OF OPTIONS TRANSACTIONS.  During  the option period, the covered  call
writer  has, in return for  the premium on the  option, given up the opportunity
for capital appreciation above the exercise price should the market price of the
underlying security increase, but has retained the risk of loss should the price
of the underlying security decline. The secured put writer also retains the risk
of loss should  the market value  of the underlying  security decline below  the
exercise  price  of the  option less  the premium  received on  the sale  of the
option. In both cases, the  writer has no control over  the time when it may  be
required  to fulfill its  obligation as a  writer of the  option. Once an option
writer has received  an exercise  notice, it  cannot effect  a closing  purchase
transaction  in  order to  terminate its  obligation under  the option  and must
deliver or receive the underlying securities at the exercise price.

    Prior to exercise or expiration, an  option position can only be  terminated
by  entering into  a closing  purchase or  sale transaction.  If a  covered call
option writer is unable to effect a closing purchase transaction, it cannot sell
the underlying security  until the option  expires or the  option is  exercised.
Accordingly,  a covered call option writer may not be able to sell an underlying
security at a time when it might  otherwise be advantageous to do so. A  secured
put  option writer who is unable to  effect a closing purchase transaction would
continue to bear  the risk  of decline  in the  market price  of the  underlying
security  until the option expires  or is exercised. In  addition, a secured put
writer would be unable to utilize the amount held in cash or U.S. Government  or
other  high grade  debt obligations  as security  for the  put option  for other
investment purposes until the exercise or expiration of the option.

    The Fund's ability to  close out its  position as a writer  of an option  is
dependent  upon the existence of a  liquid secondary market on Option Exchanges.
There is no assurance that such a market will exist, particularly in the case of
OTC options. However,  the Fund  may be able  to purchase  an offsetting  option
which  does not close out  its position as a writer  but constitutes an asset of
equal value to the obligation under the option written. If the Fund is not  able
to  either enter into  a closing purchase transaction  or purchase an offsetting
position, it will be required to maintain the securities subject to the call, or
the collateral underlying the put, even  though it might not be advantageous  to
do  so,  until a  closing  transaction can  be entered  into  (or the  option is
exercised or expires).

    Among the possible reasons for the  absence of a liquid secondary market  on
an  Exchange are:  (i) insufficient  trading interest  in certain  options; (ii)
restrictions on  transactions  imposed  by an  Exchange;  (iii)  trading  halts,
suspensions  or other restrictions imposed with respect to particular classes or
series of

                                       15
<PAGE>
options or underlying securities; (iv) interruption of the normal operations  on
an  Exchange; (v)  inadequacy of  the facilities  of an  Exchange or  the OCC to
handle current trading volume; or  (vi) a decision by  one or more Exchanges  to
discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that Exchange (or in that class or series
of  options) would cease to exist, although outstanding options on that Exchange
that had been issued  by the OCC as  a result of trades  on that Exchange  would
generally continue to be excercisable in accordance with their terms.

    In the event of the bankruptcy of a broker through which the Fund engages in
transactions  in  options, the  Fund could  experience  delays and/or  losses in
liquidating open positions purchased or sold  through the broker and/or incur  a
loss  of all or part  of its margin deposits with  the broker. Similarly, in the
event of the bankruptcy of  the writer of an OTC  option purchased by the  Fund,
the  Fund could experience  a loss of  all or part  of the value  of the option.
Transactions are  entered  into by  the  Fund  only with  brokers  or  financial
institutions deemed creditworthy by the Investment Manager.

    Each  of  the Exchanges  has established  limitations governing  the maximum
number of  call  or put  options  on the  same  underlying security  or  futures
contract  (whether or not  covered) which may  be written by  a single investor,
whether acting  alone or  in concert  with others  (regardless of  whether  such
options are written on the same or different Exchanges or are held or written on
one  or more accounts or through one or more brokers). An Exchange may order the
liquidation of positions found  to be in  violation of these  limits and it  may
impose  other sanctions or restrictions. These  position limits may restrict the
number of listed options which the Fund may write.

    The hours of trading for options may  not conform to the hours during  which
the  underlying securities  are traded.  To the  extent that  the option markets
close before the markets  for the underlying  securities, significant price  and
rate movements can take place in the underlying markets that cannot be reflected
in the option markets.

    STOCK  INDEX OPTIONS.  As stated in the Prospectus, options on stock indexes
are similar to options on  stock except that, rather than  the right to take  or
make  delivery of stock at  a specified price, an option  on a stock index gives
the holder the right to receive, upon exercise of the option, an amount of  cash
if  the closing  level of  the stock  index upon  which the  option is  based is
greater than, in the case  of a call, or  less than, in the  case of a put,  the
exercise  price of the option.  This amount of cash  is equal to such difference
between the closing  price of the  index and  the exercise price  of the  option
expressed  in  dollars  times  a  specified  multiple  (the  "multiplier").  The
multiplier for  an index  option performs  a  function similar  to the  unit  of
trading for a stock option. It determines the total dollar value per contract of
each  point in the  difference between the  exercise price of  an option and the
current level  of  the  underlying index.  A  multiplier  of 100  means  that  a
one-point  difference will  yield $100.  Options on  different indexes  may have
different multipliers. The writer of the option is obligated, in return for  the
premium  received, to  make delivery of  this amount. Unlike  stock options, all
settlements are in cash  and a gain  or loss depends on  price movements in  the
stock  market generally (or in  a particular segment of  the market) rather than
the price movements in individual stocks.  Currently, options are traded on  the
S&P  100 Index and the S&P 500 Index  on the Chicago Board Options Exchange, the
Major  Market  Index  and   the  Computer  Technology   Index,  Oil  Index   and
Institutional  Index on the American Stock Exchange  and the NYSE Index and NYSE
Beta Index on the New York Stock Exchange, The Financial News Composite Index on
the Pacific Stock Exchange  and the Value Line  Index, National O-T-C Index  and
Utilities  Index  on the  Philadelphia  Stock Exchange,  each  of which  and any
similar index on  which options are  traded in the  future which include  stocks
that  are not  limited to any  particular industry  or segment of  the market is
referred to as a "broadly based stock  market index." The Fund will invest  only
in  broadly based indexes. Options on broad-based stock indexes provide the Fund
with a  means of  protecting the  Fund against  the risk  of market  wide  price
movements.  If the  Investment Manager  anticipates a  market decline,  the Fund
could purchase  a  stock  index  put option.  If  the  expected  market  decline
materialized,  the resulting decrease in the value of the Fund's portfolio would
be offset to the extent of the increase  in the value of the put option. If  the
Investment  Manager anticipates  a market  rise, the  Fund may  purchase a stock
index call  option  to  enable  the  Fund to  participate  in  such  rise  until
completion  of anticipated  common stock  purchases by  the Fund.  Purchases and
sales of stock index options also enable the Investment Manager to more speedily
achieve changes in the Fund's equity positions.

                                       16
<PAGE>
    The  Fund will write put options on stock indexes only if such positions are
covered by cash, U.S. Government securities or other high grade debt obligations
equal to the aggregate  exercise price of the  puts, or by a  put option on  the
same  stock index with a strike price no  lower than the strike price of the put
option sold  by the  Fund, which  cover is  held for  the Fund  in a  segregated
account  maintained for it  by the Fund's  Custodian. All call  options on stock
indexes written by  the Fund will  be covered  either by a  portfolio of  stocks
substantially  replicating the movement of the  index underlying the call option
or by holding a separate call option on the same stock index with a strike price
no higher than the strike price of the call option sold by the Fund.

    RISKS OF OPTIONS ON INDEXES.   Because exercises of stock index options  are
settled  in cash, call  writers such as  the Fund cannot  provide in advance for
their potential settlement obligations by  acquiring and holding the  underlying
securities. A call writer can offset some of the risk of its writing position by
holding  a  diversified  portfolio  of  stocks similar  to  those  on  which the
underlying index  is  based. However,  most  investors cannot,  as  a  practical
matter,  acquire and hold a portfolio containing  exactly the same stocks as the
underlying index, and, as a result, bear a risk that the value of the securities
held will vary from the value of the  index. Even if an index call writer  could
assemble  a  stock  portfolio that  exactly  reproduced the  composition  of the
underlying index,  the writer  still would  not  be fully  covered from  a  risk
standpoint  because of the "timing risk" inherent in writing index options. When
an index option is exercised, the amount of cash that the holder is entitled  to
receive  is  determined by  the difference  between the  exercise price  and the
closing index level  on the date  when the  option is exercised.  As with  other
kinds  of options, the writer will not learn that it has been assigned until the
next business day, at the earliest. The time lag between exercise and notice  of
assignment  poses  no  risk for  the  writer of  a  covered call  on  a specific
underlying security,  such  as  a  common  stock,  because  there  the  writer's
obligation  is to deliver the underlying security, not  to pay its value as of a
fixed time  in the  past. So  long as  the writer  already owns  the  underlying
security, it can satisfy its settlement obligations by simply delivering it, and
the  risk that its value  may have declined since the  exercise date is borne by
the exercising holder. In contrast,  even if the writer  of an index call  holds
stocks  that exactly match the composition of  the underlying index, it will not
be able to satisfy its assignment obligations by delivering those stocks against
payment of the exercise price.  Instead, it will be required  to pay cash in  an
amount based on the closing index value on the exercise date; and by the time it
learns  that  it  has  been  assigned,  the  index  may  have  declined,  with a
corresponding decrease in the value of  its stock portfolio. This "timing  risk"
is  an inherent limitation on  the ability of index  call writers to cover their
risk exposure by holding stock positions.

    A holder of an index option who exercises it before the closing index  value
for  that day is available runs the risk  that the level of the underlying index
may subsequently change. If  such a change causes  the exercised option to  fall
out-of-the-money,  the exercising holder will be  required to pay the difference
between the closing index value and the exercise price of the option (times  the
applicable multiplier) to the assigned writer.

    If dissemination of the current level of an underlying index is interrupted,
or  if trading is interrupted in stocks  accounting for a substantial portion of
the value of an index, the trading  of options on that index will ordinarily  be
halted.  If the trading of options on an underlying index is halted, an exchange
may impose restrictions prohibiting the exercise of such options.

    FUTURES CONTRACTS.  As stated in  the Prospectus, the Fund may purchase  and
sell  interest rate and stock index futures contracts ("futures contracts") that
are traded on  U.S. commodity exchanges  on such underlying  securities as  U.S.
Treasury bonds, notes, bills and GNMA Certificates ("interest rate" futures) and
such  indexes as the S&P 500  Index, the Moody's Investment-Grade Corporate Bond
Index and the New York Stock Exchange Composite Index ("index" futures).

    As a  futures contract  purchaser, the  Fund incurs  an obligation  to  take
delivery  of a specified amount  of the obligation underlying  the contract at a
specified time in the  future for a  specified price. As a  seller of a  futures
contract,  the Fund incurs an obligation to  deliver the specified amount of the
underlying obligation at a specified time in return for an agreed upon price.

    The Fund will  purchase or  sell interest  rate futures  contracts and  bond
index  futures contracts for  the purpose of  hedging its fixed-income portfolio
(or  anticipated   portfolio)   securities   against   changes   in   prevailing

                                       17
<PAGE>
interest  rates. If the  Investment Manager anticipates  that interest rates may
rise and, concomitantly, the  price of fixed-income  securities falls, the  Fund
may  sell an interest rate futures contract or a bond index futures contract. If
declining interest rates are anticipated, the Fund may purchase an interest rate
futures contract to protect  against a potential increase  in the price of  U.S.
Government  securities the  Fund intends to  purchase. Subsequently, appropriate
fixed-income securities may be purchased by  the Fund in an orderly fashion;  as
securities are purchased, corresponding futures positions would be terminated by
offsetting sales of contracts.

    The Fund will purchase or sell stock index futures contracts for the purpose
of  hedging its equity  portfolio (or anticipated  portfolio) securities against
changes in their prices. If the  Investment Manager anticipates that the  prices
of  stock held by  the Fund may  fall, the Fund  may sell a  stock index futures
contract.  Conversely,  if  the  Investment  Manager  wishes  to  hedge  against
anticipated  price rises in those stocks which the Fund intends to purchase, the
Fund may purchase stock index futures contracts. In addition, interest rate  and
stock  index futures contracts  will be bought or  sold in order  to close out a
short or long position in a corresponding futures contract.

    Although most interest rate  futures contracts call  for actual delivery  or
acceptance  of  securities,  the contracts  usually  are closed  out  before the
settlement date without the  making or taking of  delivery. Stock index  futures
contracts  provide for the  delivery of an  amount of cash  equal to a specified
dollar amount times the difference between the stock index value at the open  or
close  of the last trading day of the contract and the futures contract price. A
futures contract sale is closed out by effecting a futures contract purchase for
the same aggregate amount of the specific  type of equity security and the  same
delivery  date. If  the sale  price exceeds  the offsetting  purchase price, the
seller would be paid the difference and would realize a gain. If the  offsetting
purchase  price exceeds the sale price, the  seller would pay the difference and
would realize a loss.  Similarly, a futures contract  purchase is closed out  by
effecting  a futures contract sale for the same aggregate amount of the specific
type of  security and  the same  delivery  date. If  the offsetting  sale  price
exceeds  the purchase price, the purchaser would  realize a gain, whereas if the
purchase price exceeds the offsetting sale price, the purchaser would realize  a
loss.  There is no assurance that the Fund  will be able to enter into a closing
transaction.

    INTEREST RATE FUTURES CONTRACTS.  When the Fund enters into an interest rate
futures contract, it is initially required to deposit with the Fund's Custodian,
in a segregated account in the name of the broker performing the transaction, an
"initial margin"  of cash  or U.S.  Government securities  or other  high  grade
short-term obligations equal to approximately 2% of the contract amount. Initial
margin  requirements are established by the Exchanges on which futures contracts
trade and may,  from time to  time, change. In  addition, brokers may  establish
margin deposit requirements in excess of those required by the Exchanges.

    Initial   margin  in  futures  transactions  is  different  from  margin  in
securities transactions in that initial margin does not involve the borrowing of
funds by a brokers' client but is,  rather, a good faith deposit on the  futures
contract  which will be returned to the  Fund upon the proper termination of the
futures contract. The margin  deposits made are marked  to market daily and  the
Fund  may be  required to  make subsequent deposits  of cash  or U.S. Government
securities called "variation margin," with the Fund's futures contract  clearing
broker,  which are  reflective of  price fluctuations  in the  futures contract.
Currently, interest rate futures contracts  can be purchased on debt  securities
such  as  U.S. Treasury  Bills and  Bonds, U.S.  Treasury Notes  with Maturities
between 6 1/2 and 10 years, GNMA Certificates and Bank Certificates of Deposit.

    INDEX FUTURES  CONTRACTS.   As discussed  in the  Prospectus, the  Fund  may
invest  in index  futures contracts. An  index futures contract  sale creates an
obligation by the Fund, as seller, to  deliver cash at a specified future  time.
An  index futures contract purchase  would create an obligation  by the Fund, as
purchaser, to  take  delivery  of  cash at  a  specified  future  time.  Futures
contracts  on indexes  do not require  the physical delivery  of securities, but
provide for  a final  cash  settlement on  the  expiration date  which  reflects
accumulated profits and losses credited or debited to each party's account.

    The  Fund  is  required to  maintain  margin deposits  with  brokerage firms
through which it  effects index futures  contracts in a  manner similar to  that
described  above  for interest  rate futures  contracts. Currently,  the initial
margin requirements  range from  3% to  10%  of the  contract amount  for  index
futures. In addition, due to

                                       18
<PAGE>
current  industry  practice,  daily  variations  in  gains  and  losses  on open
contracts are required to be reflected in  cash in the form of variation  margin
payments. The Fund may be required to make additional margin payments during the
term of the contract.

    At  any time prior to expiration of the futures contract, the Fund may elect
to close  the position  by taking  an opposite  position which  will operate  to
terminate  the Fund's position in the futures contract. A final determination of
variation margin is  then made, additional  cash is  required to be  paid by  or
released to the Fund and the Fund realizes a loss or a gain.

    Currently, index futures contracts can be purchased or sold with respect to,
among  others, the Standard  & Poor's 500  Stock Price Index  and the Standard &
Poor's 100 Stock Price  Index on the Chicago  Mercantile Exchange, the New  York
Stock  Exchange  Composite Index  on the  New York  Futures Exchange,  the Major
Market Index on the American Stock Exchange,  the Value Line Stock Index on  the
Kansas City Board of Trade and the Moody's Investment-Grade Corporate Bond Index
on the Chicago Board of Trade.

    OPTIONS  ON FUTURES CONTRACTS.  The Fund may purchase and write call and put
options on futures contracts and enter into closing transactions with respect to
such options to terminate an existing position. An option on a futures  contract
gives  the purchaser the right (in return  for the premium paid), and the writer
the obligation, to assume a position in  a futures contract (a long position  if
the option is a call and a short position if the option is a put) at a specified
exercise  price at any time during the term  of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the option to  the
holder  of the option is  accompanied by delivery of  the accumulated balance in
the writer's futures margin  account, which represents the  amount by which  the
market  price of the  futures contract at  the time of  exercise exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract.

    The Fund will purchase and write options on futures contracts for  identical
purposes  to  those set  forth  above for  the  purchase of  a  futures contract
(purchase of a call option or  sale of a put option)  and the sale of a  futures
contract  (purchase of a put option or sale of a call option), or to close out a
long or short  position in futures  contracts. If, for  example, the  Investment
Manager  wished  to  protect  against  an increase  in  interest  rates  and the
resulting negative  impact  on  the  value of  a  portion  of  its  fixed-income
portfolio,  it might write a  call option on an  interest rate futures contract,
the underlying security of  which correlates with the  portion of the  portfolio
the  Investment Manager seeks to hedge. Any  premiums received in the writing of
options on futures  contracts may, of  course, augment the  total return of  the
Fund  and thereby  provide a further  hedge against losses  resulting from price
declines in portions of the Fund's portfolio.

    The writer of an option on a futures contract is required to deposit initial
and variation margin  pursuant to  requirements similar to  those applicable  to
futures  contracts. Premiums received from the writing of an option on a futures
contract are included in initial margin deposits.

    LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS  ON FUTURES.  The Fund may  not
enter into futures contracts or purchase related options thereon if, immediately
thereafter, the amount committed to margin plus the amount paid for premiums for
unexpired  options on futures  contracts exceeds 5%  of the value  of the Fund's
total assets, after taking into  account unrealized gains and unrealized  losses
on such contracts it has entered into, provided, however, that in the case of an
option that is in-the-money (the exercise price of the call (put) option is less
(more)  than  the  market price  of  the  underlying security)  at  the  time of
purchase, the  in-the-money  amount  may  be excluded  in  calculating  the  5%.
However,  there is no overall limitation on  the percentage of the Fund's assets
which may be subject to  a hedge position. In  addition, in accordance with  the
regulations of the Commodity Futures Trading Commission ("CFTC") under which the
Fund  is exempted from registration  as a commodity pool  operator, the Fund may
only enter into futures contracts and options on futures contracts  transactions
for  purposes of hedging a part or all of its portfolio. If the CFTC changes its
regulations so that  the Fund  would be permitted  to write  options on  futures
contracts  for purposes other  than hedging the  Fund's investments without CFTC
registration, the  Fund may  engage  in such  transactions for  those  purposes.
Except  as described above, there are no other limitations on the use of futures
and options thereon by the Fund.

                                       19
<PAGE>
    RISKS OF TRANSACTIONS IN FUTURES CONTRACTS  AND RELATED OPTIONS.  As  stated
in  the Prospectus, the Fund may sell  a futures contract to protect against the
decline in the value  of securities held  by the Fund.  However, it is  possible
that  the futures  market may advance  and the  value of securities  held in the
portfolio of the Fund may decline. If  this occurred, the Fund would lose  money
on  the futures contract and also experience a decline in value of its portfolio
securities. However, while this could occur for a very brief period or to a very
small degree, over time the value of  a diversified portfolio will tend to  move
in the same direction as the futures contracts.

    If  the Fund purchases a  futures contract to hedge  against the increase in
value of  securities  it  intends to  buy,  and  the value  of  such  securities
decreases,  then  the Fund  may determine  not  to invest  in the  securities as
planned and will realize a loss on the futures contract that is not offset by  a
reduction in the price of the securities.

    In  order to assure that  the Fund is entering  into transactions in futures
contracts for hedging  purposes as  such is  defined by  the CFTC  either: 1)  a
substantial  majority  (i.e.,  approximately  75%)  of  all  anticipatory  hedge
transactions (transactions in which  the Fund does  not own at  the time of  the
transaction,  but  expects to  acquire, the  securities underlying  the relevant
futures contract) involving the purchase of futures contracts will be  completed
by  the purchase  of securities  which are the  subject of  the hedge  or 2) the
underlying value of all long positions in futures contracts will not exceed  the
total value of a) all short-term debt obligations held by the Fund; b) cash held
by the Fund; c) cash proceeds due to the Fund on investments within thirty days;
d)  the margin deposited on the contracts; and e) any unrealized appreciation in
the value of the contracts.

    If the Fund maintains a short position  in a futures contract or has sold  a
call  option in a futures contract, it will cover this position by holding, in a
segregated account maintained at its Custodian, cash, U.S. Government securities
or other high grade debt obligations equal  in value (when added to any  initial
or variation margin on deposit) to the market value of the securities underlying
the  futures contract or the  exercise price of the  option. Such a position may
also be covered by owning the securities underlying the futures contract (in the
case of a stock index futures  contract a portfolio of securities  substantially
replicating the relevant index), or by holding a call option permitting the Fund
to  purchase the same contract at a price  no higher than the price at which the
short position was established.

    In addition, if the Fund holds a long position in a futures contract or  has
sold  a put  option on a  futures contract,  it will hold  cash, U.S. Government
securities or other high grade debt  obligations equal to the purchase price  of
the contract or the exercise price of the put option (less the amount of initial
or  variation margin on deposit) in a segregated account maintained for the Fund
by its  Custodian. Alternatively,  the Fund  could cover  its long  position  by
purchasing  a put option on the same  futures contract with an exercise price as
high or higher than the price of the contract held by the Fund.

    Exchanges limit the amount by which the price of a futures contract may move
on any day. If the price moves equal the daily limit on successive days, then it
may prove impossible to liquidate a futures position until the daily limit moves
have ceased. In the event of adverse price movements, the Fund would continue to
be required to  make daily  cash payments of  variation margin  on open  futures
positions. In such situations, if the Fund has insufficient cash, it may have to
sell  portfolio securities to meet daily variation margin requirements at a time
when it may be disadvantageous to do  so. In addition, the Fund may be  required
to  take or  make delivery of  the instruments underlying  interest rate futures
contracts it holds at a time when it is disadvantageous to do so. The  inability
to  close out options and futures positions could also have an adverse impact on
the Fund's ability to effectively hedge its portfolio.

    In the event of the bankruptcy of a broker through which the Fund engages in
transactions in futures  or options  thereon, the Fund  could experience  delays
and/or losses in liquidating open positions purchased or sold through the broker
and/or  incur a  loss of  all or part  of its  margin deposits  with the broker.
Transactions are  entered  into by  the  Fund  only with  brokers  or  financial
institutions deemed creditworthy by the Investment Manager.

    As  stated  in  the Prospectus,  there  may exist  an  imperfect correlation
between the price movements of futures  contracts purchased by the Fund and  the
movements    in    the    prices    of   the    securities    which    are   the

                                       20
<PAGE>
subject of the hedge. If participants in  the futures market elect to close  out
their  contracts through offsetting transactions rather than meet margin deposit
requirements, distortions in the normal relationship between the securities  and
futures  markets could result. Price distortions  could also result if investors
in futures  contracts opt  to make  or take  delivery of  underlying  securities
rather than engage in closing transactions due to the resultant reduction in the
liquidity  of the futures  market. In addition,  due to the  fact that, from the
point of view of  speculators, the deposit requirements  in the futures  markets
are  less  onerous  than  margin  requirements  in  the  cash  market, increased
participation by speculators in the  futures market could cause temporary  price
distortions.  Due to the possibility of  price distortions in the futures market
and because of  the imperfect  correlation between  movements in  the prices  of
securities  and movements in the prices of futures contracts, a correct forecast
of stock price or interest rate trends  by the Investment Manager may still  not
result in a successful hedging transaction.

    As  stated in the Prospectus, there is  no assurance that a liquid secondary
market will exist for  futures contracts and related  options in which the  Fund
may  invest. In the event a liquid market does not exist, it may not be possible
to close out a futures  position and, in the  event of adverse price  movements,
the  Fund would continue to be required to make daily cash payments of variation
margin. In addition,  limitations imposed by  an exchange or  board of trade  on
which  futures contracts are traded may compel  or prevent the Fund from closing
out a contract which may result in  reduced gain or increased loss to the  Fund.
The absence of a liquid market in futures contracts might cause the Fund to make
or  take  delivery  of  the underlying  securities  at  a time  when  it  may be
disadvantageous to do so.

    Compared to the purchase or sale of futures contracts, the purchase of  call
or  put options on  futures contracts involves  less potential risk  to the Fund
because the maximum amount  at risk is  the premium paid  for the options  (plus
transaction  costs). However, there may be  circumstances when the purchase of a
call or put  option on a  futures contract would  result in a  loss to the  Fund
notwithstanding that the purchase or sale of a futures contract would not result
in  a loss, as in the  instance where there is no  movement in the prices of the
futures contract or underlying securities.

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  ("collateral")  at  a
specified  price and at a fixed time in  the future, usually not more than seven
days from  the  date  of  purchase.  The collateral  will  be  maintained  in  a
segregated  account and  will be  marked to market  daily to  determine that the
value of the collateral, as specified in the agreement, does not decrease  below
the  purchase price plus  accrued interest. If  such decrease occurs, additional
collateral will  be  requested and,  when  received,  added to  the  account  to
maintain  full  collateralization.  The  Fund  will  accrue  interest  from  the
institution until the time when the  repurchase is to occur. Although such  date
is  deemed by the  Fund to be the  maturity date of  a repurchase agreement, the
maturities of securities subject to repurchase agreements are not subject to any
limits.

    While repurchase agreements involve certain risks not associated with direct
investments in debt securities, the Fund follows procedures designed to minimize
such risks. These procedures include effecting repurchase transactions only with
large,  well-capitalized  and  well-established  financial  institutions   whose
financial  condition  will be  continually monitored  by the  Investment Manager
subject to procedures  established by  the Board of  Directors of  the Fund.  In
addition,  as  described  above,  the value  of  the  collateral  underlying the
repurchase agreement will be at least  equal to the repurchase price,  including
any  accrued interest  earned on  the repurchase  agreement. In  the event  of a
default or bankruptcy by a selling financial institution, the Fund will seek  to
liquidate  such  collateral.  However, the  exercising  of the  Fund's  right to
liquidate such collateral  could involve  certain costs  or delays  and, to  the
extent  that  proceeds  from  any  sale upon  a  default  of  the  obligation to
repurchase were  less  than  the  repurchase price,  the  Fund  could  suffer  a

                                       21
<PAGE>
loss.  It  is  the  current policy  of  the  Fund not  to  invest  in repurchase
agreements that do not mature within seven days if any such investment, together
with any other illiquid assets held by the Fund, amounts to more than 15% of its
total assets.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS

    From time  to time  the Fund  may purchase  securities on  a when-issued  or
delayed  delivery  basis  or  may  purchase  or  sell  securities  on  a forward
commitment basis. When such transactions are  negotiated, the price is fixed  at
the  time of the commitment, but delivery and  payment can take place a month or
more after the date of commitment. While the Fund will only purchase  securities
on  a  when-issued,  delayed  delivery  or  forward  commitment  basis  with the
intention of acquiring the securities, the  Fund may sell the securities  before
the  settlement date, if it is deemed  advisable. The securities so purchased or
sold are subject to  market fluctuation and no  interest or dividends accrue  to
the  purchaser prior  to the  settlement date.  At the  time the  Fund makes the
commitment to purchase or sell securities on a when-issued, delayed delivery  or
forward  commitment basis, it will record the transaction and thereafter reflect
the value, each day, of such security  purchased, or if a sale, the proceeds  to
be  received, in determining its net asset value. At the time of delivery of the
securities, their value may be more or less than the purchase or sale price. The
Fund will also establish a segregated  account with its custodian bank in  which
it  will continually maintain cash or cash  equivalents or other high grade debt
portfolio securities equal in value to  commitments to purchase securities on  a
when-issued,  delayed delivery  or forward  commitment basis.  During the fiscal
year ended  February  28,  1995, the  Fund  did  not purchase  securities  on  a
when-issued, delayed delivery or forward commitment basis.

WHEN, AS AND IF ISSUED SECURITIES

    The  Fund may purchase securities on a  "when, as and if issued" basis under
which the issuance of the security  depends upon the occurrence of a  subsequent
event,   such  as  approval  of  a  merger,  corporate  reorganization  or  debt
restructuring. The commitment for the purchase of any such security will not  be
recognized  in the portfolio of the Fund until the Investment Manager determines
that issuance of the security  is probable. At such  time, the Fund will  record
the  transaction and, in determining its net asset value, will reflect the value
of the security daily. At such time,  the Fund will also establish a  segregated
account  with  its  custodian  bank  in which  it  will  maintain  cash  or cash
equivalents or other  high grade  debt portfolio  securities equal  in value  to
recognized  commitments for such securities. The value of the Fund's commitments
to purchase the securities  of any one  issuer, together with  the value of  all
securities  of such issuer owned by the Fund,  may not exceed 5% of the value of
the Fund's total  assets at  the time the  initial commitment  to purchase  such
securities   is  made  (see  "Investment  Restrictions").  An  increase  in  the
percentage of the  Fund's assets committed  to the purchase  of securities on  a
"when,  as and  if issued" basis  may increase  the volatility of  its net asset
value. The Investment Manager and the Board of Directors do not believe that the
net asset  value of  the Fund  will be  adversely affected  by its  purchase  of
securities  on such basis. During  the fiscal year ended  February 28, 1995, the
Fund's commitments to purchase  securities on a "when,  as and if issued"  basis
did  not exceed 5% of the value of the Fund's net assets. The Fund may also sell
securities on a "when, as and if issued" basis provided that the issuance of the
security will result automatically from the exchange or conversion of a security
owned by the Fund at the time of sale.

PRIVATE PLACEMENTS

    The Fund may invest  up to 5%  of its total assets  in securities which  are
subject  to restrictions on  resale because they have  not been registered under
the Securities  Act of  1933, as  amended, or  which are  otherwise not  readily
marketable.  These securities are generally referred to as private placements or
restricted securities. Limitations on the resale of such securities may have  an
adverse  effect on their marketability, and  may prevent the Fund from disposing
of them promptly at reasonable prices. The Fund may have to bear the expense  of
registering  such securities  for resale and  the risk of  substantial delays in
effecting such registration.

    The Securities and Exchange Commission has recently adopted Rule 144A  under
the  Securities  Act of  1933, which  will  permit the  Fund to  sell restricted
securities to qualified  institutional buyers without  limitation. The Board  of
Directors  of the  Fund will make  a determination  as to the  liquidity of each
restricted  security  purchased  by  the  Fund.  If  a  restricted  security  is
determined    to   be   "liquid,"   such   security   will   not   be   included

                                       22
<PAGE>
within the category "illiquid  securities," which under  current policy may  not
exceed  15% of the Fund's total assets. The Rule 144A marketplace of sellers and
qualified institutional buyers is new and still developing and may take a period
of time to develop into a mature liquid market. As such, the market for  certain
private  placements purchased  pursuant to Rule  144A may be  initially small or
may, subsequent  to  purchase,  become  illiquid.  Furthermore,  the  Investment
Manager  may not  be possessed  of all  the information  concerning an  issue of
securities that it wishes to purchase in  a private placement to which it  would
normally  have  had access,  had the  registration  statement necessitated  by a
public offering been filed with  the Securities and Exchange Commission.  During
the  fiscal  year  ended  February  28, 1995,  the  Fund  did  not  purchase any
restricted securities.

INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------

    In addition to the investment restrictions enumerated in the Prospectus, the
investment  restrictions  listed  below  have  been  adopted  by  the  Fund   as
fundamental   policies,  except  as  otherwise   indicated.  Under  the  Act,  a
fundamental policy may  not be changed  without the  vote of a  majority of  the
outstanding  voting  securities of  the  Fund, as  defined  in the  Act.  Such a
majority is defined as the lesser of (a) 67% or more of the shares present at  a
meeting  of shareholders  of the Fund,  if the holders  of more than  50% of the
outstanding shares 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.

    The Fund may not:

        1. Invest  in securities of any issuer if, to the knowledge of the Fund,
           any officer or director of the Fund or of the Investment Manager owns
    more than 1/2 of 1% of the  outstanding securities of such issuer, and  such
    officers and directors who own more than 1/2 of 1% own in the aggregate more
    than 5% of the outstanding securities of such issuer.

        2. Purchase  or sell real estate or interests therein (including limited
           partnership interests), although the Fund may purchase securities  of
    issuers  which engage  in real  estate operations  and securities  which are
    secured by real estate or interests therein.

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

        4. Purchase  oil,  gas  or  other  mineral  leases,  rights  or  royalty
           contracts or  exploration or  development programs,  except that  the
    Fund  may invest in the securities of companies which operate, invest in, or
    sponsor such programs.

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

        6. 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 its total assets (not including the
    amount borrowed).

        7. Pledge its  assets or  assign or  otherwise encumber  them except  to
           secure  borrowings  effected  within  the  limitations  set  forth in
    restriction (6). (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  4.5% of its net  assets so long as
    shares of the Fund are being sold in those states.) For the purposes of this
    restriction, collateral arrangements with respect to the writing of  options
    and  collateral arrangements with respect to initial or variation margin for
    futures are not deemed to be pledges of assets.

        8. Issue senior securities as defined in  the 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) borrowing  money in accordance
    with restrictions described above; or (c) lending portfolio securities.

                                       23
<PAGE>
        9. Make loans of  money or securities,  except: (a) by  the purchase  of
           debt  obligations in  which the Fund  may invest  consistent with its
    investment  objective  and  policies;   (b)  by  investment  in   repurchase
    agreements; or (c) by lending its portfolio securities.

       10. Make short sales of securities.

       11. Purchase  securities on margin,  except for such  short-term loans as
           are necessary for the clearance of purchases of portfolio securities.
    The deposit  or  payment by  the  Fund of  initial  or variation  margin  in
    connection  with  futures  contracts  or  related  options  thereon  is  not
    considered the purchase of a security on margin.

       12. Engage in the underwriting of securities, except insofar as the  Fund
           may  be deemed  an underwriter  under the  Securities Act  of 1933 in
    disposing of a portfolio security and  then only in an aggregate amount  not
    to exceed 5% of the Fund's total assets.

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

    In addition, the  Fund, as a  non-fundamental policy, will  not invest  more
than  5% of the value of its net  assets in warrants, including not more than 2%
of such  assets  in warrants  not  listed on  the  New York  or  American  Stock
Exchange.  However, the acquisition of warrants  attached to other securities is
not subject to this restriction.

PORTFOLIO TRANSACTIONS AND BROKERAGE
- --------------------------------------------------------------------------------

    Subject to the general supervision of the Board of Directors, the Investment
Manager is responsible for  decisions to buy and  sell securities for the  Fund,
the  selection  of  brokers and  dealers  to  effect the  transactions,  and the
negotiation of brokerage commissions, if any. Purchases and sales of  securities
on  a stock exchange  are effected through  brokers who charge  a commission for
their services. In the over-the-counter market, securities are generally  traded
on a "net" basis with dealers acting as principal for their own accounts without
a  stated  commission, although  the price  of the  security usually  includes a
profit to the dealer. The Fund 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.
Options and futures transactions will usually be effected through a broker and a
commission  will be  charged. On  occasion, the  Fund may  also purchase certain
money market instruments directly from an  issuer, in which case no  commissions
or  discounts are paid. For  the fiscal years ended  February 28, 1993, February
28, 1994 and February 28, 1995, the Fund paid a total of $326,314, $439,781  and
$373,465, respectively, in brokerage commissions.

    The  Investment Manager currently serves as investment manager or adviser to
a number of clients, including other investment companies, and may in the future
act as  investment manager  or adviser  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,
the  main  factors  considered  are 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.

    The  policy of the Fund regarding purchases  and sales of securities for its
portfolio is that  primary consideration  will be  given to  obtaining the  most
favorable  prices and efficient executions of transactions. Consistent with this
policy, when  securities transactions  are  effected on  a stock  exchange,  the
Fund's  policy is  to pay commissions  which are considered  fair and reasonable
without necessarily determining that the lowest possible commissions are paid in
all circumstances.  The Fund  believes that  a requirement  always to  seek  the
lowest  possible commission cost could impede effective portfolio management and
preclude the Fund and  the Investment Manager from  obtaining a high quality  of
brokerage  and research services. In seeking  to determine the reasonableness of
brokerage commissions paid  in any  transaction, the  Investment Manager  relies
upon  its experience  and knowledge  regarding commissions  generally charged by
various brokers and

                                       24
<PAGE>
on its judgment in evaluating the brokerage and research services received  from
the  broker  effecting  the  transaction.  Such  determinations  are necessarily
subjective and  imprecise, as  in most  cases an  exact dollar  value for  those
services is not ascertainable.

    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  such price  and execution  are
obtainable  from more than  one broker or  dealer, it may  give consideration to
placing portfolio transactions with those  brokers and dealers who also  furnish
research and other services to the Fund or the Investment Manager. Such 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.  During  the
fiscal  year ended February 28, 1995, the  Fund directed the payment of $259,536
in brokerage commissions in connection with transactions in the aggregate amount
of $92,770,044 to brokers because of research services provided.

    Consistent with  the  policy  described  above,  brokerage  transactions  in
securities listed on exchanges or admitted to unlisted trading privileges may be
effected  through DWR. In order for DWR to effect any portfolio transactions for
the Fund, the commissions,  fees or other remuneration  received by DWR 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 DWR 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  Directors of the Fund,
including a majority of  the Directors who are  not "interested" persons of  the
Fund,  as  defined in  the  Act, have  adopted  procedures which  are reasonably
designed to provide that any commissions, fees or other remuneration paid to DWR
are consistent  with  the foregoing  standard.  During the  fiscal  years  ended
February  28, 1993,  February 28, 1994  and February  28, 1995, the  Fund paid a
total of $43,525, $52,240 and $84,230, respectively, in brokerage commissions to
DWR. 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 DWR. During the
year  ended February 28, 1995, the brokerage commissions paid to DWR represented
approximately 22.55% of the total brokerage commissions paid by the Fund  during
the  year and were  paid on account  of transactions having  an aggregate dollar
value equal  to  approximately 32.65%  of  the  aggregate dollar  value  of  all
portfolio  transactions of the  Fund during the year  for which commissions were
paid.

    Pursuant to an order of the Securities and Exchange Commission, the Fund may
effect principal transactions in certain money market instruments with DWR.  The
Fund  will limit  its transactions  with DWR  to U.S.  Government and Government
Agency Securities,  Bank Money  Instruments (i.e.  Certificates of  Deposit  and
Bankers'  Acceptances) and Commercial Paper.  Such transactions will be effected
with DWR only when the  price available from DWR  is better than that  available
from other dealers. During its fiscal year ended February 28, 1995, the Fund did
not effect any principal transactions with DWR.

    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.

PORTFOLIO TRADING

    It  is anticipated that  the Fund's portfolio turnover  rate will not exceed
100% during the fiscal year ending February 28, 1996. A 100% turnover rate would
occur, for  example, if  100% of  the securities  held in  the Fund's  portfolio
(excluding all securities whose maturities at acquisition were one year or less)
were  sold and replaced within one year.  During the fiscal years ended February
28, 1994 and February 28, 1995, the Fund's portfolio turnover rates were 69% and
59%, respectively.

                                       25
<PAGE>
THE DISTRIBUTOR
- --------------------------------------------------------------------------------

    As discussed in the Prospectus, shares  of the Fund are distributed by  Dean
Witter Distributors Inc. (the "Distributor"). The Distributor has entered into a
selected  dealer agreement  with DWR, which  through its  own sales organization
sells shares of the Fund. In  addition, the Distributor may enter into  selected
dealer  agreements  with  other  selected  broker-dealers.  The  Distributor,  a
Delaware corporation,  is  an  indirect wholly-owned  subsidiary  of  DWDC.  The
Directors  of the Fund, including  a majority of the  Directors who are not, and
were not at the time they voted,  interested persons of the Fund, as defined  in
the  Act  (the  "Independent Directors"),  approved,  at their  meeting  held on
October 30,  1992,  a  Distribution  Agreement  (the  "Distribution  Agreement")
appointing  the  Distributor  exclusive  distributor of  the  Fund's  shares and
providing for the  Distributor to bear  distribution expenses not  borne by  the
Fund.  The Distribution Agreement took effect on June 30, 1993 upon the spin-off
by Sears, Roebuck  & Co.  of its  remaining shares of  DWDC. By  its terms,  the
Distribution  Agreement has an initial term  ending April 30, 1994, and provides
that it will remain in  effect from year to year  thereafter if approved by  the
Board.  At their  meeting held  on April  20, 1995,  the Directors,  including a
majority  of  the  Independent  Directors,  approved  the  continuation  of  the
Distribution Agreement until April 30, 1996.

    The  Distributor bears all expenses it may incur in providing services under
the Distribution Agreement. Such expenses include the payment of commissions for
sales of the Fund's shares and incentive compensation to account executives. 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 prospective
shareholders. The Fund  also bears  the costs of  registering the  Fund and  its
shares  under federal  and state securities  laws. The Fund  and the Distributor
have agreed  to  indemnify each  other  against certain  liabilities,  including
liabilities under the Securities Act of 1933, as amended. 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 judgement or mistake of law or for
any act or omission or for any losses sustained by the Fund or its shareholders.

PLAN OF DISTRIBUTION

    The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the
Act (the "Plan"), pursuant to which  the Fund pays the Distributor  compensation
accrued  daily and payable monthly at the annual  rate of 1.0% of the lesser of:
(a) the  average daily  aggregate gross  sales of  the Fund's  shares since  the
inception  of the Plan on July 2, 1984 (not including reinvestments of dividends
or capital  gains distributions),  less the  average daily  aggregate net  asset
value  of the  Fund's shares  redeemed since the  Plan's inception  upon which a
contingent deferred sales charge has been imposed or upon which such charge  has
been  waived, or (b) the  Fund's average daily net  assets. The Distributor also
receives the proceeds of  contingent deferred sales  charges imposed on  certain
redemptions  of shares, which are separate and apart from payments made pursuant
to the  Plan (see  "Redemptions  and Repurchases  -- Contingent  Deferred  Sales
Charge" in the Prospectus). The Distributor has informed the Fund that it and/or
DWR  received  approximately  $182,000,  $143,000  and  $177,000  in  contingent
deferred sales charges for  the fiscal years ended  February 28, 1993,  February
28,  1994 and February 28, 1995, respectively, none of which was retained by the
Distributor.

    The Distributor has informed the Fund that a portion of the fees payable  by
the  Fund each year  pursuant to the Plan  equal to 0.25%  of the Fund's average
daily net assets, is characterized  as a "service fee  under" the Rules of  Fair
Practice  of  the  National  Association of  Securities  Dealers  (of  which the
Distributor is a member). Such portion of the fee is a payment made for personal
service and/or the maintenance of shareholder accounts. The remaining portion of
the Plan of Distribution fee  payments made by the  Fund is characterized as  an
"asset-based  sales  charge"  pursuant  to  the  aforementioned  Rules  of  Fair
Practice.

                                       26
<PAGE>
    The  Plan  was  originally  adopted  by a  majority  vote  of  the  Board of
Directors, including all of  the Directors who are  not "interested persons"  of
the  Fund, as defined in the Act, (the "Independent Directors") none of whom had
or have any direct or indirect financial  interest in the operation of the  Plan
(the  "Independent 12b-1 Directors"), cast in person at a meeting called for the
purpose of  voting on  the Plan,  on April  16, 1984,  and by  the  shareholders
holding  a majority,  as defined in  the Act,  of the outstanding  shares of the
Fund, at the Fund's Annual Meeting of Stockholders held on June 22, 1984.

    At their  meeting held  on October  30,  1992, the  Directors of  the  Fund,
including all of the Independent 12b-1 Directors, approved certain amendments to
the  Plan which took  effect in January,  1993 and were  designed to reflect the
fact that  upon  the  reorganization described  above,  the  share  distribution
activities  theretofore  performed  for the  Fund  by  DWR were  assumed  by the
Distributor and DWR's sales activities are  now being performed pursuant to  the
terms  of  a selected  dealer  agreement between  the  Distributor and  DWR. The
amendments provide that payments under the Plan will be made to the  Distributor
rather  than to DWR as before the amendment, and that the Distributor in turn is
authorized  to  make  payments  to   DWR,  its  affiliates  or  other   selected
broker-dealers  (or  direct  that  the Fund  pay  such  entities  directly). The
Distributor is also authorized  to retain part of  such fee as compensation  for
its own distribution-related expenses.

    Pursuant  to the Plan, and as required  by Rule 12b-1, the Distributor shall
provide the Fund, for review by  the Directors, and the Directors shall  review,
at  least quarterly, a written report of the amounts expended under the Plan and
the purpose for which such expenditures  were made. The Fund accrued  $1,368,666
to the Distributor, pursuant to the Plan, for the fiscal year ended February 28,
1995.  This is an accrual at an annual rate of 1% of the average daily aggregate
gross sales of the Fund's shares  issued, net of related shares redeemed,  since
the implementation of the Plan.

    The  Plan was adopted  in order to  permit the implementation  of the Fund's
method of distribution. Under  this distribution method shares  of the Fund  are
sold  without a sales load  being deducted at the time  of purchase, so that the
full amount of an investor's purchase payment will be invested in shares without
any deduction  for  sales charges.  Shares  of the  Fund  may be  subject  to  a
contingent deferred sales charge, payable to the Distributor, if redeemed during
the  six years after  their purchase. DWR compensates  its account executives by
paying them, from its own funds, commissions for the sale of the Fund's  shares,
currently  a gross sales  credit of up  to 5% of  the amount sold  and an annual
residual commission of up to .25 of 1%  of the current value of the amount  sold
(not  including reinvested dividends and  distributions). The gross sales credit
is a charge which reflects commissions paid by DWR to its account executives and
DWR's   Fund   associated   distribution-related   expenses,   including   sales
compensation  and overhead. The  distribution fee that  the Distributor receives
from the Fund under the Plan, in effect, offsets distribution expenses  incurred
on  behalf of  the Fund  and DWR's  opportunity costs,  such as  the gross sales
credit and  an  assumed interest  charge  thereon ("carrying  charge").  In  the
Distributor's  reporting  of distribution  expenses  to the  Fund,  such assumed
interest (computed at the "broker's call rate") has been calculated on the gross
sales credit as it is reduced by  amounts received by the Distributor under  the
Plan  and any contingent deferred sales charges received by the Distributor upon
redemption of shares  of the Fund.  No other  interest charge is  included as  a
distribution  expense in the Distributor's calculation of its distribution costs
for this  purpose.  The broker's  call  rate is  the  interest rate  charged  to
securities brokers on loans secured by exchange-listed securities.

    The  Fund paid 100% of the $1,368,666  accrued under the Plan for the fiscal
year ended February 28, 1995 to the Distributor and DWR. The Distributor and DWR
estimate that they have  spent, pursuant to the  Plan, $20,174,193 on behalf  of
the  Fund since the inception of the Plan.  It is estimated that this amount was
spent  in  approximately  the  following   ways:  (i)  11.69%  ($2,357,354)   --
advertising  and  promotional expenses;  (ii)  1.36% ($274,392)  --  printing of
prospectuses for  distribution to  other than  current shareholders;  and  (iii)
86.95% ($17,542,447) -- other expenses, including the gross sales credit and the
carrying  charge,  of  which 12.78%  ($2,242,722)  represents  carrying charges,
35.22% ($6,178,029)  represents commission  credits to  DWR branch  offices  for
payments  of commissions to account executives and 52.0% ($9,121,696) represents
overhead and other branch office distribution-related expenses.

    At any given time, the  expenses of distributing shares  of the Fund may  be
more or less than the total of (i) the payments made by the Fund pursuant to the
Plan and (ii) the proceeds of contingent deferred sales

                                       27
<PAGE>
charges paid by investors upon redemption of shares. The Distributor has advised
the  Fund that the  excess distribution expenses,  including the carrying charge
designed to approximate the opportunity costs  incurred by DWR which arise  from
it  having  advanced monies  without  having received  the  amount of  any sales
charges imposed at the time of sale of the Fund's shares, totalled $5,496,952 as
of February 28, 1995. Because  there is no requirement  under the Plan that  the
Distributor  be reimbursed for all its expenses or any requirement that the Plan
be continued  from  year to  year,  this excess  amount  does not  constitute  a
liability of the Fund. Although there is no legal obligation for the Fund to pay
expenses  incurred  by  the  Distributor  in  excess  of  payments  made  to the
Distributor under the Plan and the proceeds of contingent deferred sales charges
paid by investors  upon redemption  of shares,  if for  any reason  the Plan  is
terminated,  the Directors  will consider  at that time  the manner  in which to
treat such expenses.  Any cumulative  expenses incurred, but  not yet  recovered
through  distribution fees or contingent deferred  sales charges, may or may not
be recovered  through  future distribution  fees  or contingent  deferred  sales
charges.

    No  interested person of the Fund nor any Director of the Fund who is not an
interested person of the Fund, as defined in the Act, had any direct or indirect
financial interest in the operation  of the Plan except  to the extent that  the
Distributor,  InterCapital, DWR or  certain of their employees  may be deemed to
have such 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.

    Under  its  terms, the  Plan  will continue  in  effect from  year  to year,
provided such continuance is approved annually by a vote of the Directors in the
manner described above. Continuance  of the Plan for  one year, until April  30,
1996,  was approved by the Board of  Directors of the Fund, including a majority
of the Independent 12b-1 Directors, at a  Board meeting held on April 20,  1995.
At  that  meeting,  the Directors  of  the  Fund, including  a  majority  of the
Independent 12b-1 Directors, also approved  certain technical amendments to  the
Plan in connection with recent amendments adopted by the National Association of
Securities  Dealers  to  its Rules  of  Fair  Practice. Prior  to  approving the
continuation of the Plan, the Board requested and received from DWR and reviewed
all the  information  which  it  deemed  necessary  to  arrive  at  an  informed
determination. In making their determination to continue the Plan, the Directors
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;  and
(3) what services had been provided and were continuing to be provided under the
Plan  by the  Distributor to  the Fund  and its  stockholders. Based  upon their
review, the  Directors of  the Fund,  including each  of the  Independent  12b-1
Directors,  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 Directors' 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 of the shareholders of the
Fund, and all  material amendments  of the  Plan must  also be  approved by  the
Directors 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 Directors who are
not interested persons of the Fund and who have no direct or indirect  financial
interest  in  the operation  of the  Plan, or  by a  vote of  a majority  of the
outstanding voting securities of the  Fund (as defined in  the 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 Directors shall be
committed to the discretion of the Independent Directors.

DETERMINATION OF NET ASSET VALUE

    The net asset value per share of  the Fund is determined once daily at  4:00
p.m.,  New York time,  on each day that  the New York Stock  Exchange is open by
taking the  value  of all  assets  of  the Fund,  subtracting  its  liabilities,
dividing  by the number of shares outstanding and adjusting to the nearest cent.
The New  York Stock  Exchange  currently observes  the following  holidays:  New
Year's  Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas Day.

    As stated  in  the Prospectus,  short-term  debt securities  with  remaining
maturities  of 60 days or  less at the time of  purchase are valued at amortized
cost, unless  the Directors  determine  such does  not reflect  the  securities'
market  value, in which case these securities will be valued at their fair value
as determined by the

                                       28
<PAGE>
Trustees. Other short-term debt  securities will be  valued on a  mark-to-market
basis  until such time as they reach  a remaining maturity of 60 days, whereupon
they will be valued at amortized cost  using their value on the 61st day  unless
the  Directors determine such does not  reflect the securities' market value, in
which case these securities will be valued at their fair value as determined  by
the  Directors. Listed options on debt securities  are valued at the latest sale
price on the exchange on which they  are listed unless no sales of such  options
have taken place that day, in which case they will be valued at the mean between
their  latest bid and asked prices. Unlisted  options on debt securities and all
options on equity securities are valued at the mean between their latest bid and
asked prices. Futures  are valued at  the latest sale  price on the  commodities
exchange on which they trade unless the Directors determine that such price does
not  reflect their market value, in which case they will be valued at their fair
value as determined by the Directors. All other securities and other assets  are
valued  at  their  fair  value  as determined  in  good  faith  under procedures
established by and under the supervision of the Directors.

SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------

    Upon the purchase of shares of the Fund, a Shareholder Investment Account is
opened for the investor on the books  of the Fund and maintained by Dean  Witter
Trust  Company (the "Transfer Agent").  This is an open  account in which shares
owned by the investor are credited by the Transfer Agent in lieu of issuance  of
a  stock certificate. If a stock certificate is desired, it must be requested in
writing for each transaction. Certificates are  issued only for full shares  and
may  be  redeposited in  the account  at any  time.  There is  no charge  to the
investor for  issuance  of  a certificate.  Whenever  a  shareholder  instituted
transaction  takes place in the  Shareholder Investment Account, the shareholder
will be mailed a written confirmation of  the transaction from the Fund or  from
DWR or other broker-dealer.

    AUTOMATIC  INVESTMENT  OF DIVIDENDS  AND DISTRIBUTIONS.    As stated  in the
Prospectus,  all   income  dividends   and  capital   gains  distributions   are
automatically  paid  in  full and  fractional  shares  of the  Fund,  unless the
shareholder requests that they be paid in  cash. Each purchase of shares of  the
Fund is made upon the condition that the Transfer Agent is thereby automatically
appointed  as agent of the  investor to receive all  dividends and capital gains
distributions on shares owned by the investor. Such dividends and  distributions
will  be paid, at the  net asset value per  share, in shares of  the Fund (or in
cash if the shareholder so requests) as  of the close of business on the  record
date.  At any time  an investor may  request the Transfer  Agent, in writing, to
have subsequent dividends and/or capital gains distributions paid to him or  her
in  cash rather than  shares. To assure  sufficient time to  process the change,
such request should  be received by  the Transfer Agent  at least five  business
days  prior to the record  date of the dividend or  distribution. In the case of
recently purchased  shares for  which registration  instructions have  not  been
received on the record date, cash payments will be made to DWR or other selected
broker-dealer,  and will  be forwarded to  the shareholder, upon  the receipt of
proper instructions.

    TARGETED  DIVIDENDS.-TM-    In  states  where  it  is  legally  permissible,
shareholders  may also have all income dividends and capital gains distributions
automatically invested in shares of an open-end Dean Witter Fund other than Dean
Witter Natural Resource Development Securities. Such investment will be made  as
described above for automatic investment in shares of the Fund, at the net asset
value  per share of the selected Dean Witter Fund as of the close of business on
the payment  date  of  the dividend  or  distribution  and will  begin  to  earn
dividends,  if any, in the  selected Dean Witter Fund  the next business day. To
participate in the Targeted Dividends program, shareholders should contact their
DWR or other  selected broker-dealer  account executive of  the Transfer  Agent.
Shareholders  of the Fund must be shareholders  of the Dean Witter Fund targeted
to receive  investments from  dividends  at the  time  they enter  the  Targeted
Dividends  program. Investors should review the  prospectus of the targeted Dean
Witter Fund before entering the program.

    EASYINVEST.-TM-   Shareholders may  subscribe  to EasyInvest,  an  automatic
purchase  plan  which  provides  for  any  amount  from  $100  to  $5,000  to be
transferred automatically from a checking or savings account, on a semi-monthly,
monthly or quarterly basis,  to the Transfer Agent  for investment in shares  of
the Fund. Shares purchased through EasyInvest will be added to the shareholder's
existing account at the net asset value

                                       29
<PAGE>
calculated  the same business day the transfer of funds is effected. For further
information or to subscribe to EasyInvest, shareholders should contact their DWR
or other selected broker-dealer account executive or the Transfer Agent.

    INVESTMENT OF DIVIDENDS OR DISTRIBUTIONS RECEIVED IN CASH.  Any  shareholder
who  receives a cash payment representing  a dividend or distribution may invest
such dividend or distribution at net asset  value by returning the check or  the
proceeds to the Transfer Agent within thirty days after the payment date. If the
shareholder  returns the proceeds of a dividend or distribution, such funds must
be accompanied by a signed statement  indicating that the proceeds constitute  a
dividend or distribution to be invested. Such investment will be made at the net
asset  value per share next determined after receipt of the check or proceeds by
the Transfer Agent.

    SYSTEMATIC WITHDRAWAL PLAN.   As discussed in  the Prospectus, a  withdrawal
plan  (the "Withdrawal Plan") is available  for shareholders who own or purchase
shares of the Fund having a minimum value of $10,000 based upon the then current
net asset value. The Withdrawal Plan  provides for monthly or quarterly  (March,
June, September and December) checks in any dollar amount, not less than $25, or
in  any whole  percentage of  the account balance,  on an  annualized basis. Any
applicable contingent deferred sales charge  will be imposed on shares  redeemed
under  the  Withdrawal  Plan  (see "Redemptions  and  Repurchases  -- Contingent
Deferred  Sales  Charge"   in  the  Prospectus).   Therefore,  any   shareholder
participating  in the Withdrawal Plan will  have sufficient shares redeemed from
his or  her account  so that  the  proceeds (net  of any  applicable  contingent
deferred  sales charge)  to the  shareholder will  be the  designated monthly or
quarterly amount.

    The Transfer Agent  acts as agent  for the shareholder  in tendering to  the
Fund  for redemption sufficient full and fractional shares to provide the amount
of the periodic  withdrawal payment  designated in the  application. The  shares
will  be  redeemed at  their net  asset value  determined, at  the shareholder's
option, on the tenth or twenty-fifth day (or next following business day) of the
relevant month or quarter and normally a  check for the proceeds will be  mailed
by  the Transfer  Agent, or  amounts credited  to a  shareholder's DWR  or other
broker-dealer brokerage account,  within five  business days after  the date  of
redemption. The Withdrawal Plan may be terminated at any time by the Fund.

    Withdrawal  Plan payments should  not be considered  as dividends, yields or
income. If periodic Withdrawal Plan payments continuously exceed net  investment
income  and net  capital gains,  the shareholder's  original investment  will be
correspondingly reduced and ultimately exhausted.

    Each withdrawal constitutes  a redemption  of shares  and any  gain or  loss
realized  must  be  recognized for  federal  income tax  purposes.  Although the
shareholder may  make  additional  investments  of  $2,500  or  more  under  the
Withdrawal  Plan,  withdrawals made  concurrently  with purchases  of additional
shares may  be  inadvisable because  of  the contingent  deferred  sales  charge
applicable  to the redemption of shares purchased during the preceding six years
(see "Redemptions and Repurchases -- Contingent Deferred Sales Charge").

    Any shareholder who wishes to have  payments under the Withdrawal Plan  made
to  a third party or sent to an address other than the one listed on the account
must send complete written instructions to  the Transfer Agent to enroll in  the
Withdrawal  Plan.  The  shareholder's  signature on  such  instructions  must be
guaranteed  by  an   eligible  guarantor  acceptable   to  the  Transfer   Agent
(shareholders  should  contact  the Transfer  Agent  for a  determination  as to
whether a particular institution is  such an eligible guarantor). A  shareholder
may,  at any time, change the amount and interval of withdrawal payments through
his or her account executive or  by written notification to the Transfer  Agent.
In  addition, the  party and/or the  address to  which checks are  mailed may be
changed by written notification to the Transfer Agent, with signature guarantees
required in the manner described above.  The shareholder may also terminate  the
Withdrawal  Plan at  any time by  written notice  to the Transfer  Agent. In the
event  of  such  termination,  the  account  will  be  continued  as  a  regular
shareholder  investment account. The shareholder may  also redeem all or part of
the  shares  held  in  the   Withdrawal  Plan  account  (see  "Redemptions   and
Repurchases") at any time.

    DIRECT  INVESTMENTS THROUGH TRANSFER AGENT.  As discussed in the Prospectus,
a shareholder may  make additional  investments in Fund  shares at  any time  by
sending a check in any amount, not less than $100,

                                       30
<PAGE>
payable to Dean Witter Natural Resource Development Securities Inc., directly to
the  Fund's Transfer Agent. Such amounts will be applied to the purchase of Fund
shares at the net asset value per share next computed after receipt of the check
or purchase  payment by  the Transfer  Agent. The  shares so  purchased will  be
credited to the investor's account.

EXCHANGE PRIVILEGE

    As discussed in the Prospectus, the Fund makes available to its shareholders
an Exchange Privilege whereby shareholders of the Fund may exchange their shares
for  shares of  other Dean  Witter Funds sold  with a  contingent deferred sales
charge ("CDSC funds"), and  for shares of Dean  Witter Short-Term U.S.  Treasury
Trust,  Dean Witter  Limited Term Municipal  Trust, Dean  Witter Short-Term Bond
Fund, Dean Witter Balanced  Income Fund, Dean Witter  Balanced Growth Fund,  and
for  five Dean  Witter Funds  which are  money market  funds (the  foregoing ten
non-CDSC funds  are  hereinafter  collectively  referred  to  as  the  "Exchange
Funds"). Exchanges may be made after the shares of the Fund acquired by purchase
(not by exchange or dividend reinvestment) have been held for thirty days. There
is  no waiting period for  exchanges of shares acquired  by exchange or dividend
reinvestment. An exchange will  be treated for federal  income tax purposes  the
same  as a  repurchase or  redemption of  shares, on  which the  shareholder may
realize a capital gain or loss.

    Any new account  established through  the Exchange Privilege  will have  the
same registration and cash dividend or dividend reinvestment plan as the present
account,  unless  the  Transfer  Agent  receives  written  notification  to  the
contrary. For  telephone  exchanges,  the exact  registration  of  the  existing
account and the account number must be provided.

    Any  shares  held  in  certificate  form cannot  be  exchanged  but  must be
forwarded to the  Transfer Agent  and deposited into  the shareholder's  account
before  being eligible for exchange. (Certificates  mailed in for deposit should
not be endorsed.)

    As described  below, and  in  the Prospectus  under the  captions  "Exchange
Privilege"  and "Contingent Deferred Sales  Charge," a contingent deferred sales
charge ("CDSC")  may be  imposed upon  a redemption,  depending on  a number  of
factors,  including the number of years from the time of purchase until the time
of redemption or  exchange ("holding period").  When shares of  the Fund or  any
other  CDSC fund are exchanged  for shares of an  Exchange Fund, the exchange is
executed at no charge to the shareholder, without the imposition of the CDSC  at
the  time of the exchange. During the  period of time the shareholder remains in
the Exchange  Fund (calculated  from the  last day  of the  month in  which  the
Exchange  Fund shares were acquired), the holding period or "year since purchase
payment made" is frozen. When shares are redeemed out of the Exchange Fund, they
will be subject  to a  CDSC which would  be based  upon the period  of time  the
shareholder  held shares in the Fund. However, in the case of shares of the Fund
exchanged into an Exchange Fund on or after April 23, 1990, upon a redemption of
shares which results in a CDSC being imposed, a credit (not to exceed the amount
of the  CDSC) will  be given  in  an amount  equal to  the Exchange  Fund  12b-1
distribution fees incurred on or after that date which are attributable to those
shares.  Shareholders  acquiring shares  of an  Exchange  Fund pursuant  to this
exchange privilege  may  exchange those  shares  back  into the  Fund  from  the
Exchange  Fund, with no CDSC being imposed  on such exchange. The holding period
previously frozen when shares  were first exchanged for  shares of the  Exchange
Fund  resumes on the last  day of the month  in which shares of  a CDSC fund are
reacquired. A CDSC is imposed only  upon an ultimate redemption, based upon  the
time  (calculated as  described above)  the shareholder  was invested  in a CDSC
fund.

    In addition, shares of the  Fund may be acquired  in exchange for shares  of
Dean  Witter Funds sold  with a front-end sales  charge ("front-end sales charge
funds") but  shares of  the Fund,  however acquired,  may not  be exchanged  for
shares  of  front-end sales  charge funds.  Shares  of a  CDSC fund  acquired in
exchange for shares of a front-end sales charge fund (or in exchange for  shares
of  other Dean Witter  Funds for which  shares of a  front-end sales charge fund
have been exchanged) are not subject to any CDSC upon their redemption.

    When shares initially purchased in a  CDSC fund are exchanged for shares  of
an Exchange Fund, the date of purchase of the shares of the fund exchanged into,
for  purposes of the CDSC upon redemption, will  be the last day of the month in
which the shares being  exchanged were originally  purchased. In allocating  the

                                       31
<PAGE>
purchase  payments  between funds  for  purposes of  the  CDSC the  amount which
represents the current net  asset value of  shares at the  time of the  exchange
which  were (i) purchased  more than three  or six years  (depending on the CDSC
schedule applicable  to  the shares)  prior  to the  exchange,  (ii)  originally
acquired  through reinvestment of dividends  or distributions and (iii) acquired
in exchange for shares of front-end sales  charge funds, or for shares of  other
Dean  Witter Funds for  which shares of  front-end sales charge  funds have been
exchanged (all  such shares  called  "Free Shares"),  will be  exchanged  first.
Shares  of Dean Witter American Value Fund (formerly Dean Witter Industry-Valued
Securities Inc.) acquired prior to April 30,  1984, shares of the Fund and  Dean
Witter  Dividend  Growth Securities  Inc. acquired  prior to  July 2,  1984, and
shares of Dean Witter  Strategist Fund acquired prior  to November 8, 1989,  are
also  considered Free Shares and will be  the first Free Shares to be exchanged.
After an exchange, all dividends  earned on shares in  an Exchange Fund will  be
considered  Free Shares. If the exchanged amount  exceeds the value of such Free
Shares, an exchange is made, on a block-by-block basis, of non-Free Shares  held
for the longest period of time (except that if shares held for identical periods
of  time but subject to  different CDSC schedules are  held in the same Exchange
Privilege account, the shares  of that block  that are subject  to a lower  CDSC
rate  will be exchanged prior to the shares  of that block that are subject to a
higher CDSC rate).  Shares equal to  any appreciation in  the value of  non-Free
Shares  exchanged will be treated as Free Shares, and the amount of the purchase
payments for the non-Free Shares of the fund exchanged into will be equal to the
lesser of (a) the purchase payments for, or (b) the current net asset value  of,
the  exchanged non-Free  Shares. If  an exchange  between funds  would result in
exchange of only  part of  a particular block  of non-Free  Shares, then  shares
equal  to any appreciation  in the value of  the block (up to  the amount of the
exchange) will be treated as Free  Shares and exchanged first, and the  purchase
payment  for  that block  will  be allocated  on a  pro  rata basis  between the
non-Free Shares of  that block  to be  retained and  the non-Free  Shares to  be
exchanged.  The prorated  amount of  such purchase  payment attributable  to the
retained non-Free Shares will  remain as the purchase  payment for such  shares,
and  the amount of  purchase payment for  the exchanged non-Free  Shares will be
equal to the lesser of (a) the  prorated amount of the purchase payment for,  or
(b)  the current net asset value of, those exchanged non-Free Shares. Based upon
the procedures  described  in  the  Prospectus  under  the  caption  "Contingent
Deferred  Sales Charge," any  applicable CDSC will be  imposed upon the ultimate
redemption of shares of  any fund, regardless of  the number of exchanges  since
those shares were originally purchased.

    The  Transfer Agent acts as agent for  shareholders of the Fund in effecting
redemptions of Fund shares and in applying the proceeds to the purchase of other
fund shares. In  the absence  of negligence on  its part,  neither the  Transfer
Agent  nor the Fund shall be liable for  any redemption of Fund shares caused by
unauthorized telephone  instructions. Accordingly,  in such  event the  investor
shall bear the risk of loss. The staff of the Securities and Exchange Commission
is currently considering the propriety of such a policy.

    With  respect to  the redemption  or repurchase of  shares of  the Fund, the
application of proceeds to the purchase of  new shares in the Fund or any  other
of  the  funds and  the general  administration of  the Exchange  Privilege, the
Transfer Agent  acts as  agent for  the Distributor  and for  the  shareholder's
selected 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 selected
broker-dealer.

    The Distributor and any selected broker-dealer have authorized and 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
fund  and the general administration of the Exchange Privilege. No commission or
discounts will be paid to the Distributor or any selected broker-dealer for  any
transactions pursuant to this Exchange Privilege.

    Exchanges  are subject to  the minimum investment  requirement and any other
conditions imposed by each fund. (The  minimum initial investment is $5,000  for
Dean  Witter Liquid  Asset Fund Inc.,  Dean Witter Tax-Free  Daily Income Trust,
Dean Witter New  York Municipal Money  Market Trust and  Dean Witter  California
Tax-Free  Daily  Income Trust  although those  funds  may, at  their discretion,
accept initial investments of as low  as $1,000. The minimum initial  investment
for   Dean   Witter   Short-Term   U.S.   Treasury   Trust   is   $10,000.   The

                                       32
<PAGE>
minimum initial  investment  for all  other  Dean  Witter Funds  for  which  the
Exchange Privilege is available is $1,000.) Upon exchange into an Exchange Fund,
the  shares of that  fund will be  held in a  special Exchange Privilege Account
separately from accounts of  those shareholders who  have acquired their  shares
directly  from that  fund. As a  result, certain services  normally available to
shareholders of those funds,  including the check writing  feature, will not  be
available for funds held in that account.

    The  Fund and each  of the other Dean  Witter Funds may  limit the number of
times this  Exchange  Privilege  may  be exercised  by  any  investor  within  a
specified  period of  time. Also,  the Exchange  Privilege may  be terminated or
revised at any time by  the Fund and/or any of  the Dean Witter Funds for  which
shares  of the Fund have been exchanged, upon  such notice as may be required by
applicable regulatory agencies (presently sixty days for termination or material
revision), provided that six months' prior written notice of termination will be
given to the shareholders  who hold shares of  Exchange Funds, pursuant to  this
Exchange  Privilege  and provided  further that  the  Exchange Privilege  may be
terminated or materially revised without notice  at times (a) when the New  York
Stock  Exchange is  closed for other  than customary weekends  and holidays, (b)
when trading on that Exchange is restricted,  (c) when an emergency exists as  a
result of which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, (d) during any other period when the Securities and
Exchange  Commission by  order so  permits (provided  that applicable  rules and
regulations of the Securities and Exchange Commission shall govern as to whether
the conditions prescribed  in (b)  or (c)  exist) or (e)  if the  Fund would  be
unable   to  invest  amounts  effectively  in  accordance  with  its  investment
objective, policies and restrictions.

    The current prospectus for each  fund describes its investment  objective(s)
and  policies, and  shareholders should obtain  a copy and  examine it carefully
before investing. An exchange  will be treated for  federal income tax  purposes
the  same as a repurchase or redemption  of shares, on which the shareholder may
realize a capital gain or loss. However, the ability to deduct capital losses on
an exchange may be limited  in situations where there  is an exchange of  shares
within  ninety days  after the shares  are purchased. The  Exchange Privilege is
only available in states where an exchange may legally be made.

    For further  information  regarding  the  Exchange  Privilege,  shareholders
should  contact their DWR  or other selected  broker-dealer account executive or
the Transfer Agent.

REDEMPTIONS AND REPURCHASES
- --------------------------------------------------------------------------------

    REDEMPTION.  As stated in the Prospectus, shares of the Fund can be redeemed
for cash at any time at the net asset value per share next determined;  however,
such  redemption  proceeds  may  be  reduced by  the  amount  of  any applicable
contingent deferred  sales  charges  (see  below).  If  shares  are  held  in  a
shareholder's  account  without  a  share  certificate,  a  written  request for
redemption to the Fund's Transfer Agent at  P.O. Box 983, Jersey City, NJ  07303
is  required. If  certificates are  held by the  shareholder, the  shares may be
redeemed by surrendering the certificates with a written request for redemption.
The share  certificate, or  an accompanying  stock power,  and the  request  for
redemption  must be  signed by  the shareholder  or shareholders  exactly as the
shares are registered. Each request  for redemption, whether or not  accompanied
by  a share certificate, must  be sent to the  Fund's Transfer Agent, which will
redeem the shares at their net asset value next computed (see "Purchase of  Fund
Shares"  in the Prospectus)  after it receives the  request, and certificate, if
any, in good order. Any redemption request received after such computation  will
be  redeemed at the next determined net asset value. The Term "good order" means
that the share  certificate, if  any, and  request for  redemption are  properly
signed,  accompanied by  any documentation required  by the  Transfer Agent, and
bear signature guarantees when  required by the Fund  or the Transfer Agent.  If
redemption  is requested by a corporation,  partnership, trust or fiduciary, the
Transfer Agent may require that written evidence of authority acceptable to  the
Transfer Agent be submitted before such request is accepted.

    Whether  certificates are held  by the shareholder  or shares are  held in a
shareholder's account, if the proceeds are to  be paid to any person other  than
the record owner, or if the proceeds are to be paid to a corporation (other than
the Distributor or a selected broker-dealer for the account of the shareholder),
partnership,  trust or fiduciary, or sent to the shareholder at an address other
than the registered address,

                                       33
<PAGE>
signatures must  be  guaranteed  by  an eligible  guarantor  acceptable  to  the
Transfer   Agent  (shareholders  should   contact  the  Transfer   Agent  for  a
determination as  to  whether  a  particular institution  is  such  an  eligible
guarantor).  A stock power may  be obtained from any  dealer or commercial bank.
The Fund may change the signature guarantee requirements from time to time  upon
notice to shareholders, which may be by means of a new prospectus.

    CONTINGENT DEFERRED SALES CHARGE.  As stated in the Prospectus, a contingent
deferred  sales charge ("CDSC") will be imposed on any redemption by an investor
if after such redemption the current value of the investor's shares of the  Fund
is  less  than the  dollar amount  of all  payments by  the shareholder  for the
purchase of Fund shares during the preceding six years. However, no CDSC will be
imposed to the extent that the net  asset value of the shares redeemed does  not
exceed:  (a) the current net asset value of shares purchased more than six years
prior to  the  redemption,  plus (b)  the  current  net asset  value  of  shares
purchased  through reinvestment  of dividends  or distributions  of the  Fund or
another Dean Witter  Fund (see  "Shareholder Services  -- Targeted  Dividends"),
plus  (c) the  current net asset  value of  shares acquired in  exchange for (i)
shares of Dean Witter front-end sales charge funds, or (ii) shares of other Dean
Witter Funds  for  which  shares  of front-end  sales  charge  funds  have  been
exchanged (see "Shareholder Services -- Exchange Privilege"), plus (d) increases
in  the  net asset  value of  the investor's  shares above  the total  amount of
payments for the purchase  of Fund shares made  during the preceding six  years.
The  CDSC will be paid to the Distributor.  In addition, no CDSC will be imposed
on redemptions of shares which were purchased by certain Unit Investment  Trusts
(on  which  a  sales  charge  has  been  paid)  or  which  are  attributable  to
reinvestment of dividends or distributions from,  or the proceeds of, such  Unit
Investment Trusts.

    In  determining the applicability of the CDSC to each redemption, the amount
which represents an  increase in the  net asset value  of the investor's  shares
above  the amount of  the total payments  for the purchase  of shares within the
last six  years will  be redeemed  first.  In the  event the  redemption  amount
exceeds  such increase in value, the next portion of the amount redeemed will be
the amount  which  represents the  net  asset  value of  the  investor's  shares
purchased  more than six  years prior to the  redemption and/or shares purchased
through reinvestment of  dividends or  distributions and/or  shares acquired  in
exchange  for shares  of Dean  Witter front-end sales  charge funds,  or for the
shares of other  Dean Witter funds  for which shares  of front-end sales  charge
funds  have been exchanged.  A portion of  the amount redeemed  which exceeds an
amount which represents  both such  increase in value  and the  value of  shares
purchased  more than six  years prior to the  redemption and/or shares purchased
through reinvestment of dividends or distributions and/or shares acquired in the
above-described exchanges will be subject to a CDSC.

    The amount of the CDSC, if any,  will vary depending on the number of  years
from  the time  of payment  for the purchase  of Fund  shares until  the time of
redemption of such shares. For purposes of determining the number of years  from
the  time of any payment for the purchase  of shares, all payments made during a
month
will be aggregated and deemed  to have been made on  the last day of the  month.
The following table sets forth the rates of the CDSC:

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

    In  determining the rate of the CDSC it will be assumed that a redemption is
made of shares held by  the investor for the longest  period of time within  the
applicable  six-year period. This will result in  any such CDSC being imposed at
the  lowest  possible  rate.  Accordingly,  shareholders  may  redeem,   without
incurring  any CDSC,  amounts equal to  any net  increase in the  value of their
shares above the amount of their purchase

                                       34
<PAGE>
payments made within the past six years  and amounts equal to the current  value
of  shares purchased  more than  six years  prior to  the redemption  and shares
purchased through  reinvestment of  dividends or  distributions or  acquired  in
exchange  for shares of Dean Witter front-end  sales charge funds, or for shares
of other Dean Witter Funds for which shares of front-end sales charge funds have
been exchanged. The  CDSC will be  imposed, in accordance  with the table  shown
above,  on any redemptions within  six years of purchase  which are in excess of
these amounts and  which redemptions are  not (a) requested  within one year  of
death  or  initial determination  of disability  of a  shareholder, or  (b) made
pursuant to certain  taxable distributions from  retirement plans or  retirement
accounts, as described in the Prospectus.

    PAYMENT FOR SHARES REDEEMED OR REPURCHASED.  As discussed in the Prospectus,
payment  for shares presented for repurchase or redemption will be made by check
within seven days after receipt by the Transfer Agent of the certificate  and/or
written  request in good  order. Such payment  may be postponed  or the right of
redemption suspended at times (a) when the New York Stock Exchange is closed for
other than customary weekends and holidays, (b) when trading on that Exchange is
restricted, (c) when an emergency  exists as a result  of which disposal by  the
Fund  of  securities owned  by it  is not  reasonably practicable  or it  is not
reasonably practicable for  the Fund fairly  to determine the  value of its  net
assets,  or  (d)  during  any  other period  when  the  Securities  and Exchange
Commission by order so permits;  provided that applicable rules and  regulations
of  the  Securities  and Exchange  Commission  shall  govern as  to  whether the
conditions prescribed in (b)  or (c) exist.  If the shares  to be redeemed  have
recently  been  purchased  by check  (including  a certified  or  bank cashier's
check), payment  of redemption  proceeds may  be delayed  for the  minimum  time
needed  to verify that the check used  for investment has been honored (not more
than fifteen days  from the  time of  investment of  the check  by the  Transfer
Agent).  If the  shares to  be redeemed  have recently  been purchased  by check
(including a  certificate  or  bank  cashier's  check),  payment  of  redemption
proceeds  may be delayed  for the minimum  time needed to  verify that the check
used for investment has been honored (not  more than fifteen days from the  time
of  investment of  the check  by the  Transfer Agent).  Shareholders maintaining
margin accounts with DWR or another selected broker-dealer are referred to their
account executive regarding  restrictions on  redemption of shares  of the  Fund
pledged in the margin account.

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

    REINSTATEMENT  PRIVILEGE.  As discussed in the Prospectus, a shareholder who
has had  his  or her  shares  redeemed or  repurchased  and has  not  previously
exercised  this reinstatement  privilege may, within  30 days after  the date of
redemption or repurchase, reinstate any portion  or all of the proceeds of  such
redemption  or repurchase  in shares  of the  Fund at  the net  asset value next
determined after a reinstatement request is received by the Transfer Agent.

    Exercise of the reinstatement privilege  will not affect the federal  income
tax  treatment of any gain  or loss realized upon  the redemption or repurchase,
except that if the redemption or repurchase resulted in a loss and reinstatement
is made in shares of the Fund, some or all of the loss, depending on the  amount
reinstated,  will not be allowed as a  deduction for federal income tax purposes
but will  be applied  to  adjust the  cost basis  of  the shares  acquired  upon
reinstatement.

DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------

    As discussed in the Prospectus, the Fund will determine either to distribute
or  to retain all  or part of  any net long-term  capital gains in  any year for
reinvestment. If any such gains are  retained, the Fund will pay federal  income
tax  thereon, and shareholders will be able to claim their share of the tax paid
by the Fund as a credit against their individual federal income tax.

                                       35
<PAGE>
    Because the Fund intends to distribute all of its net investment income  and
capital  gains to shareholders and otherwise  continue to qualify as a regulated
investment company under Subchapter  M of the Internal  Revenue Code, it is  not
expected  that  the  Fund  will  be required  to  pay  any  federal  income tax.
Shareholders will  normally have  to pay  federal income  taxes, and  any  state
and/or  income taxes, on  the dividends and distributions  they receive from the
Fund. Such dividends and distributions, to the extent that they are derived from
net  investment  income  or  short-term  capital  gains,  are  taxable  to   the
shareholder  as ordinary income  regardless of whether  the shareholder receives
such payments in  additional shares or  in cash. Any  dividends declared in  the
last  quarter of any year which are paid in the following year prior to February
1 will be deemed received by the shareholder in the prior year.

    Gains or losses on sales of securities by the Fund will be long-term capital
gains or losses if the securities have been  held by the Fund for more than  one
year.  Gains or losses on the sale of  securities held for one year or less will
be short-term gains or losses.

    The Fund  has qualified  and  intends to  remain  qualified as  a  regulated
investment  company under Subchapter M of the  Internal Revenue Code of 1986. If
so qualified, the  Fund will not  be subject to  federal income tax  on its  net
investment  income  and  net short-term  and  long-term capital  gains,  if any,
realized during any fiscal year in which it distributes such income and  capital
gains to its shareholders. Distributions of net long-term capital gains, if any,
are  taxable to shareholders as long-term capital gains regardless of how long a
shareholder  has  held  the  Fund's   shares  and  regardless  of  whether   the
distribution  is  received  in  additional  shares  or  in  cash.  Capital gains
distributions are not eligible for the dividends received deduction.

    Dividends and  interest  received  by  the  Fund  with  respect  to  foreign
securities in its portfolio may give rise to withholding and other taxes imposed
by  foreign countries. Tax conventions between  certain countries and the United
States may reduce or eliminate such taxes.

    Any dividend or capital  gains distribution received  by a shareholder  from
any  investment company will have the effect  of reducing the net asset value of
the shareholder's stock in that company by  the exact amount of the dividend  or
capital  gains distribution.  Furthermore, capital gains  distributions and some
portion of the dividends are 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 a return of capital 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.

    Dividend  payments  will  be  eligible for  the  federal  dividends received
deduction available to the Fund's corporate shareholders only to the extent  the
aggregate  dividends received by the Fund would be eligible for the deduction if
the Fund were  the shareholder  claiming the dividends  received deduction.  The
amount  of  dividends paid  by  the Fund  which  may qualify  for  the dividends
received deduction is limited  to the aggregate  amount of qualifying  dividends
which the Fund derives from its portfolio investments which the Fund had held to
a  minimum period, usually 46 days. Any  distributions made by the Fund will not
be eligible for the  dividends received deduction with  respect to shares  which
are  held by  the shareholder for  45 days  or less. Any  long-term capital gain
distributions will also not  be eligible for  the dividends received  deduction.
The ability to take the dividends received deduction will also be limited in the
case  of  a Fund  shareholder which  incurs or  continues indebtedness  which is
directly attributable to its investment in the Fund.

    After the end  of the year,  shareholders will be  sent full information  on
their  dividends  and capital  gains distributions  for tax  purposes, including
information as to the portion taxable as ordinary income, the portion taxable as
long-term capital  gains and  the portion  eligible for  the dividends  received
deduction.  To avoid being  subject to a  31% federal backup  withholding tax on
taxable dividends, capital gains distributions  and the proceeds of  redemptions
and repurchases, shareholders' taxpayer identification numbers must be furnished
and certified as to their accuracy.

    Shareholders  are urged to consult their attorneys or tax advisers regarding
specific questions as to federal, state or local taxes.

                                       36
<PAGE>
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------

    As discussed in the  Prospectus, from time  to time the  Fund may quote  its
"total  return"  in advertisements  and  sales literature.  The  Fund's "average
annual total return" represents an annualization of the Fund's total return over
a particular period and is computed by finding the annual percentage rate  which
will  result in the ending redeemable  value of a hypothetical $1,000 investment
made at the beginning of a one,  five or ten year period. The ending  redeemable
value  is reduced by any contingent deferred sales charge at the end of the one,
five or ten year  or other period.  For the purpose of  this calculation, it  is
assumed  that all  dividends and distributions  are reinvested.  The formula for
computing the  average annual  total return  involves a  percentage obtained  by
dividing  the ending redeemable  value by the amount  of the initial investment,
taking a root of  the quotient (where  the root is equivalent  to the number  of
years in the period) and subtracting 1 from the result.

    The average annual total returns of the Fund for the year ended February 28,
1995,  the  five years  ended February  28, 1995,  and for  the ten  years ended
February 28, 1995, were -5.82%, 4.52% and 9.02%, respectively.

    In addition to the foregoing, the  Fund may advertise its total return  over
different  periods of time by means of aggregate, average, year-by-year or other
types of total  return figures.  Such calculations may  or may  not reflect  the
deduction  of the  contingent deferred sales  charge which,  if reflected, would
reduce the performance quoted. For example, the average total return of the Fund
may be  calculated in  the  manner described  in  the preceding  paragraph,  but
without  deduction of any applicable contingent  deferred sales charge. Based on
this calculation, the  average annual  total returns of  the Fund  for the  year
ended February 28, 1995, for the five years ended February 28, 1995, and for the
ten years ended February 28, 1995 were -1.26%, 4.83% and 9.02%, respectively.

    In  addition, the Fund may compute  its aggregate total return for specified
periods by determining the  aggregate percentage rate which  will result in  the
ending  value of a hypothetical  $1,000 investment made at  the beginning of the
period. For the purpose  of this calculation, it  is assumed that all  dividends
and  distributions  are reinvested.  The formula  for computing  aggregate total
return involves a percentage obtained by dividing the ending value (without  the
reduction  for  any  contingent deferred  sales  charge) by  the  initial $1,000
investment  and  subtracting  1  from   the  result.  Based  on  the   foregoing
calculation,  the Fund's total return  for the year ended  February 28, 1995 was
- -1.26%, the total return for the five years ended February 28, 1995 was  26.62%,
and the total return for the ten years ended February 28, 1995 was 137.08%.

    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 1 to the  Fund's
aggregate  total return to date (expressed as  a decimal and without taking into
account the effect of any applicable  CDSC) and multiplying by $10,000,  $50,000
and  $100,000.  Investments of  $10,000,  $50,000 and  $100,000  in the  Fund at
inception would have grown  to $21,516, $107,580  and $215,160, respectively  at
February 28, 1995.

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

SHARES OF THE FUND
- --------------------------------------------------------------------------------

    The Fund is authorized to issue 500,000,000 shares of common stock of  $0.01
par value. Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable  and redeemable at the option  of the holder. Except for agreements
entered into  by  the  Fund  in  its ordinary  course  of  business  within  the
limitations of the Fund's fundamental investment policies (which may be modified
only  by shareholder vote),  the Fund will  not issue any  securities other than
common stock.

    The shares of  the Fund do  not have cumulative  voting rights, which  means
that  the holders of more than 50% of  the shares voting for the election of the
directors can elect 100% of the directors if  they choose to do so, and in  such
event,  the holders of the remaining shares voting for the election of directors
will not be able to elect any person or persons to the Board of Directors.

                                       37
<PAGE>
CUSTODIAN AND TRANSFER AGENT
- --------------------------------------------------------------------------------

    The Bank of New York, 90 Washington Street, New York, New York 10286 is  the
Custodian  of  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.
Such balances may, at times, be substantial.

    Dean  Witter Trust Company,  Harborside Financial Center,  Plaza Two, Jersey
City, New Jersey 07311 is the Transfer  Agent of the Fund's shares and  Dividend
Disbursing  Agent for payment of dividends  and distributions on Fund shares and
Agent for shareholders  under various  investment plans  described herein.  Dean
Witter  Trust  Company is  an affiliate  of Dean  Witter InterCapital  Inc., the
Fund's Investment  Manager, and  of Dean  Witter Distributors  Inc., the  Fund's
Distributor.  As Transfer Agent and Dividend Disbursing Agent, Dean Witter Trust
Company's responsibilities include  maintaining shareholder accounts,  including
providing   sub-account  and  recordkeeping   services  for  certain  retirement
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, Dean Witter Trust Company receives a per shareholder account
fee from the Fund.

INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------

    Price Waterhouse LLP serves as the independent accountants of the Fund.  The
independent  accountants  are  responsible  for  auditing  the  annual financial
statements of the Fund.

REPORTS TO SHAREHOLDERS
- --------------------------------------------------------------------------------

    The Fund will send to shareholders, at least semi-annually, reports  showing
the  Fund's  portfolio  and  other  information.  An  annual  report, containing
financial statements  audited  by  independent  accountants,  will  be  sent  to
shareholders each year.

    The  Fund's fiscal  year ends  on the  last day  of February.  The financial
statements of the  Fund must  be audited  at least  once a  year by  independent
accountants whose selection is made annually by the Fund's Board of Directors.

LEGAL COUNSEL
- --------------------------------------------------------------------------------

    Sheldon  Curtis, Esq.,  who is  an officer  and the  General Counsel  of the
Investment Manager, is an officer and the General Counsel of the Fund.

EXPERTS
- --------------------------------------------------------------------------------

    The financial statements of the Fund for the fiscal year ended February  28,
1995  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 Price Waterhouse  LLP, independent accountants,  given on the
authority of said firm as experts in auditing and accounting.

REGISTRATION STATEMENT
- --------------------------------------------------------------------------------

    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  Securities and  Exchange Commission.  The complete  Registration
Statement  may  be obtained  from the  Securities  and Exchange  Commission upon
payment of the fee prescribed by the rules and regulations of the Commission.

                                       38
<PAGE>
DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
REPORT OF INDEPENDENT ACCOUNTANTS

TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
OF DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.

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 Dean Witter Natural Resource
Development Securities Inc. (the "Fund") at February 28, 1995, 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 ten 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 owned at February 28, 1995 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP
1177 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
APRIL 12, 1995

- --------------------------------------------------------------------------------
                      1995 FEDERAL TAX NOTICE (UNAUDITED)

       During  the year  ended February  28, 1995,  the Fund  paid to its
       shareholders $0.581522 per share from long-term capital gains. For
       such period, 75.12% of the income paid qualified for the dividends
       received deduction available to corporations.

                                       39
<PAGE>
DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
PORTFOLIO OF INVESTMENTS FEBRUARY 28, 1995
<TABLE>
<CAPTION>
 NUMBER OF
  SHARES                                                VALUE
- ------------------------------------------------------------------
<C>          <S>                                   <C>

             COMMON STOCKS (99.1%)
             BASIC ENERGY (44.9%)
             NATURAL GAS - DIVERSIFIED (4.0%)
    45,000   Enron Corp..........................  $     1,485,000
    52,000   Questar Corp........................        1,501,500
    40,000   Sonat, Inc..........................        1,160,000
    26,000   Tenneco, Inc........................        1,183,000
                                                   ---------------
                                                         5,329,500
                                                   ---------------
             NATURAL GAS - EXPLORATION & PRODUCTION (4.4%)
    40,000   Anardarko Petroleum Corp............        1,755,000
    50,000   Apache Corp.........................        1,250,000
    68,000   Canadian Natural Resources Ltd*.....          690,659
    50,000   Enron Oil & Gas Co..................        1,043,750
   100,000   Maxus Energy Corp.*.................          387,500
    40,000   Seagull Energy Corp.*...............          675,000
                                                   ---------------
                                                         5,801,909
                                                   ---------------
             OIL INTEGRATED - DOMESTIC (7.7%)
    33,800   Amerada Hess Corp...................        1,656,200
    35,000   Amoco Corp..........................        2,073,750
    31,000   Kerr-McGee Corp.....................        1,561,625
    56,000   Phillips Petroleum Co...............        1,869,000
    55,000   Unocal Corp.........................        1,560,625
    90,000   USX-Marathon Group..................        1,462,500
                                                   ---------------
                                                        10,183,700
                                                   ---------------

             OIL INTEGRATED - INTERNATIONAL (19.6%)
   117,000   Chevron Corp........................        5,557,500
    44,481   Elf Aquitane (ADR)..................        1,595,756
    94,000   Exxon Corp..........................        6,016,000
    50,000   Imperial Oil Ltd....................        1,700,000
    34,000   Mobil Corp..........................        2,958,000
    23,000   Royal Dutch Petroleum Co............        2,578,875
    64,000   Texaco, Inc.........................        4,080,000
    80,000   YPF S.A. (ADR)......................        1,520,000
                                                   ---------------
                                                        26,006,131
                                                   ---------------
             OIL INTERNATIONAL - EXPLORATION & PRODUCTION (3.7%)
   138,000   Occidental Petroleum Corp...........        2,742,750
    80,000   Oryx Energy Co*.....................          880,000
    65,000   Union Texas Petroleum Holdings,
             Inc.................................        1,251,250
                                                   ---------------
                                                         4,874,000
                                                   ---------------

<CAPTION>
 NUMBER OF
  SHARES                                                VALUE
- ------------------------------------------------------------------
<C>          <S>                                   <C>

             OIL PRODUCTION - DOMESTIC (2.9%)
    36,000   Louisiana Land & Exploration Co.....  $     1,246,500
    42,000   Murphy Oil Corp.....................        1,837,500
    44,700   Parker & Parsley Petroleum Co.......          815,775
                                                   ---------------
                                                         3,899,775
                                                   ---------------
             OIL REFINERIES (2.6%)
    65,000   Sun Co., Inc........................        1,893,125
    55,000   Tosco Corp..........................        1,588,125
                                                   ---------------
                                                         3,481,250
                                                   ---------------

             TOTAL BASIC ENERGY..................       59,576,265
                                                   ---------------

             ENERGY DEVELOPMENT & TECHNOLOGY (11.6%)
             OIL DRILLING (2.4%)
    60,000   Energy Service Co., Inc.............          705,000
    30,000   Helmerich & Payne, Inc..............          780,000
   130,000   Rowan Companies, Inc.*..............          812,500
    40,000   Sonat Offshore Drilling, Inc........          835,000
                                                   ---------------
                                                         3,132,500
                                                   ---------------
             OIL EQUIPMENT & SERVICES (9.2%)
    63,000   Baker Hughes Inc....................        1,212,750
    30,000   Camco International, Inc............          555,000
    55,000   Dresser Industries, Inc.............        1,134,375
    20,000   Halliburton Co......................          745,000
    55,000   J. Ray McDermott S.A................        1,223,750
    50,000   Offshore Logistics, Inc.*...........          631,250
    40,000   Schlumberger, Ltd...................        2,275,000
    29,000   SEACOR Holdings, Inc.*..............          529,250
    70,000   Smith International, Inc.*..........          936,250
    45,000   Tidewater, Inc......................          883,125
    96,500   Weatherford International, Inc.*....          832,313
    30,000   Western Atlas, Inc.*................        1,237,500
                                                   ---------------
                                                        12,195,563
                                                   ---------------

             TOTAL ENERGY DEVELOPMENT &
             TECHNOLOGY..........................       15,328,063
                                                   ---------------

             METALS & BASIC MATERIALS (42.6%)
             ALUMINUM (2.0%)
    45,000   Alumax Inc.*........................        1,288,125
    36,000   Aluminum Co. of America.............        1,404,000
                                                   ---------------
                                                         2,692,125
                                                   ---------------
</TABLE>

                       SEE NOTES TO FINANCIAL STATEMENTS
                                       40
<PAGE>
DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
PORTFOLIO OF INVESTMENTS FEBRUARY 28, 1995, CONTINUED
<TABLE>
<CAPTION>
 NUMBER OF
  SHARES                                                VALUE
- ------------------------------------------------------------------
<C>          <S>                                   <C>
             BUILDING MATERIALS (1.3%)
    70,000   Masco Corp..........................  $     1,758,750
                                                   ---------------
             CHEMICALS (9.7%)
    56,400   DuPont (E.I.) de Nemours & Co.......        3,165,450
    55,000   Ferro Corp..........................        1,409,375
    40,000   Georgia Gulf Corp.*.................        1,200,000
    29,000   Monsanto Co.........................        2,298,250
   170,000   Nova Corp...........................        1,381,250
    30,000   OM Group, Inc.......................          716,250
    40,000   PPG Industries, Inc.................        1,470,000
    55,000   Praxair, Inc........................        1,244,375
                                                   ---------------
                                                        12,884,950
                                                   ---------------
             CHEMICALS - SPECIALTY (3.6%)
   100,000   Calgon Carbon Corp..................        1,050,000
    90,000   Ethyl Corp..........................          922,500
    40,000   Morton International, Inc...........        1,170,000
    47,000   Nalco Chemical Co...................        1,615,625
                                                   ---------------
                                                         4,758,125
                                                   ---------------
             COAL (1.4%)
   100,000   Hanson PLC (ADR)....................        1,875,000
                                                   ---------------
             CONSTRUCTION & MATERIALS HANDLING (4.9%)
    25,000   Caterpillar, Inc....................        1,290,625
    22,000   Deere & Co..........................        1,685,750
    33,000   Fluor Corp..........................        1,608,750
    65,400   Indresco, Inc.*.....................          809,325
    34,000   Ingersoll-Rand Co...................        1,083,750
                                                   ---------------
                                                         6,478,200
                                                   ---------------
             COPPER (2.5%)
    45,000   Cyprus Amax Minerals Co.............        1,215,000
    75,687   Freeport-McMoran Copper & Gold, Inc.
             (Series A)..........................        1,589,427
    10,000   Phelps Dodge Corp...................          545,000
                                                   ---------------
                                                         3,349,427
                                                   ---------------
             GOLD MINING (5.3%)
    70,000   Barrick Gold Corp...................        1,522,500
    70,000   Hecla Mining Co*....................          656,250
    80,000   Homestake Mining Co.................        1,240,000
    34,954   Newmont Mining Corp.................        1,262,713
    80,000   Placer Dome Inc.....................        1,630,000
   120,000   TVX Gold, Inc.*.....................          780,000
                                                   ---------------
                                                         7,091,463
                                                   ---------------
             METALS & MINING (2.0%)
    55,000   Inco Ltd............................        1,478,125
    75,000   Stillwater Mining Co*...............        1,162,500
                                                   ---------------
                                                         2,640,625
                                                   ---------------

<CAPTION>
 NUMBER OF
  SHARES                                                VALUE
- ------------------------------------------------------------------
<C>          <S>                                   <C>
             PAPER & FOREST PRODUCTS (2.9%)
    60,000   Longview Fibre Co...................  $     1,065,000
    54,000   Louisiana-Pacific Corp..............        1,525,500
    25,000   Temple-Inland Inc...................        1,221,875
                                                   ---------------
                                                         3,812,375
                                                   ---------------
             RAILROADS (4.7%)
    20,000   Burlington Northern, Inc............        1,120,000
   100,000   Canadian Pacific Ltd................        1,400,000
    25,000   CSX Corp............................        1,943,750
    76,000   Santa Fe Pacific Gold Corp.*........          826,500
    50,000   Southern Pacific Rail Corp.*........          893,750
                                                   ---------------
                                                         6,184,000
                                                   ---------------
             STEEL (0.7%)
    55,000   Oregon Steel Mills, Inc.............          914,375
                                                   ---------------
             WASTE DISPOSAL (1.6%)
   110,000   Allwaste, Inc.*.....................          591,250
    60,000   WMX Technologies, Inc...............        1,582,500
                                                   ---------------
                                                         2,173,750
                                                   ---------------

             TOTAL METALS & BASIC MATERIALS......       56,613,165
                                                   ---------------

             TOTAL COMMON STOCKS
             (IDENTIFIED COST $125,788,276)......      131,517,493
                                                   ---------------

             CONVERTIBLE PREFERRED STOCK (0.7%)
             STEEL
    22,000   USX Corp. 6.50% (Identified Cost
             $1,106,050).........................          995,500
                                                   ---------------

TOTAL INVESTMENTS
(IDENTIFIED COST
$126,894,326) (A)...........       99.8%   132,512,993

CASH AND OTHER ASSETS IN
EXCESS OF LIABILITIES.......        0.2        298,621
                                  -----   ------------

NET ASSETS..................      100.0%  $132,811,614
                                  -----   ------------
                                  -----   ------------

<FN>
- ---------------------
ADR  American Depository Receipt.
 *   Non-income producing security.
(a)  The aggregate cost for federal income tax purposes is $126,978,727; the
     aggregate gross unrealized appreciation is $12,071,736 and the aggregate
     gross unrealized depreciation is $6,537,470, resulting in net unrealized
     appreciation of $5,534,266.
</TABLE>

                       SEE NOTES TO FINANCIAL STATEMENTS
                                       41
<PAGE>
DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1995

<TABLE>
<S>                                                           <C>
ASSETS:
Investments in securities, at value
  (identified cost $126,894,326)............................  $132,512,993
Cash........................................................        73,025
Receivable for:
    Dividends...............................................       572,905
    Capital stock sold......................................        75,439
    Foreign withholding taxes reclaimed.....................        13,555
Prepaid expenses............................................        27,128
                                                              ------------

     TOTAL ASSETS...........................................   133,275,045
                                                              ------------

LIABILITIES:
Payable for:
    Capital stock repurchased...............................       184,336
    Plan of distribution fee................................        98,964
    Investment management fee...............................        63,981
Accrued expenses............................................       116,150
                                                              ------------

     TOTAL LIABILITIES......................................       463,431
                                                              ------------

NET ASSETS:
Paid-in-capital.............................................   126,742,669
Net unrealized appreciation.................................     5,618,667
Distributions in excess of net investment income............       (32,132)
Accumulated undistributed net realized gain.................       482,410
                                                              ------------

     NET ASSETS.............................................  $132,811,614
                                                              ------------
                                                              ------------

NET ASSET VALUE PER SHARE,
  12,326,890 SHARES OUTSTANDING (500,000,000 SHARES
  AUTHORIZED OF $.01 PAR VALUE).............................
                                                                    $10.77
                                                              ------------
                                                              ------------
</TABLE>

                       SEE NOTES TO FINANCIAL STATEMENTS
                                       42
<PAGE>
DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
FINANCIAL STATEMENTS, CONTINUED

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 28, 1995

<TABLE>
<S>                                                           <C>
NET INVESTMENT INCOME:

INCOME
Dividends (net of $80,570 foreign withholding tax)..........  $ 3,693,741
Interest....................................................       89,819
                                                              -----------

     TOTAL INCOME...........................................    3,783,560
                                                              -----------

EXPENSES
Plan of distribution fee....................................    1,368,666
Investment management fee...................................      886,340
Transfer agent fees and expenses............................      239,964
Shareholder reports and notices.............................       63,526
Professional fees...........................................       52,912
Registration fees...........................................       29,742
Directors' fees and expenses................................       28,576
Custodian fees..............................................       18,451
Other.......................................................        4,201
                                                              -----------

     TOTAL EXPENSES.........................................    2,692,378
                                                              -----------

     NET INVESTMENT INCOME..................................    1,091,182
                                                              -----------

NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain...........................................    4,977,602
Net change in unrealized appreciation.......................   (7,920,860)
                                                              -----------

     NET LOSS...............................................   (2,943,258)
                                                              -----------

NET DECREASE................................................  $(1,852,076)
                                                              -----------
                                                              -----------
</TABLE>

                       SEE NOTES TO FINANCIAL STATEMENTS
                                       43
<PAGE>
DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
FINANCIAL STATEMENTS, CONTINUED

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
                                                                FOR THE YEAR        FOR THE YEAR
                                                                    ENDED               ENDED
                                                              FEBRUARY 28, 1995   FEBRUARY 28, 1994
- ---------------------------------------------------------------------------------------------------
<S>                                                           <C>                 <C>

INCREASE (DECREASE) IN NET ASSETS:

OPERATIONS:
Net investment income.......................................    $  1,091,182        $    958,628
Net realized gain...........................................       4,977,602          11,362,433
Net change in unrealized appreciation.......................      (7,920,860)          2,278,548
                                                              -----------------   -----------------

     NET INCREASE (DECREASE)................................      (1,852,076)         14,599,609
                                                              -----------------   -----------------

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.......................................      (1,433,023)           (923,181)
Net realized gain...........................................      (9,652,919)         (8,542,530)
                                                              -----------------   -----------------

     TOTAL..................................................     (11,085,942)         (9,465,711)
                                                              -----------------   -----------------
Net increase from capital stock transactions................       6,290,710          15,828,824
                                                              -----------------   -----------------

     TOTAL INCREASE (DECREASE)..............................      (6,647,308)         20,962,722

NET ASSETS:
Beginning of period.........................................     139,458,922         118,496,200
                                                              -----------------   -----------------

     END OF PERIOD
    (INCLUDING DISTRIBUTIONS IN EXCESS OF NET INVESTMENT
    INCOME OF $32,132 AND UNDISTRIBUTED NET INVESTMENT
    INCOME OF $309,709, RESPECTIVELY).......................    $132,811,614        $139,458,922
                                                              -----------------   -----------------
                                                              -----------------   -----------------
</TABLE>

                       SEE NOTES TO FINANCIAL STATEMENTS
                                       44
<PAGE>
DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1995

1. ORGANIZATION AND ACCOUNTING POLICIES

Dean Witter Natural Resource Development Securities Inc. (the "Fund") is
registered under the Investment Company Act of 1940, as amended (the "Act"), as
a diversified, open-end management investment company. The Fund was incorporated
in Maryland on December 22, 1980.

The following is a summary of significant accounting policies:

A. VALUATION OF INVESTMENTS --  (1) an equity security listed or traded on the
New York or American Stock Exchange is valued at its latest sale price on that
exchange prior to the time when assets are valued; if there were no sales that
day, the security is valued at the latest bid price; (2) all other portfolio
securities for which over-the-counter market quotations are readily available
are valued at the latest available bid price prior to the time of valuation; (3)
when market quotations are not readily available, including circumstances under
which it is determined by the Investment Manager that sale or bid prices are not
reflective of a security's market value, portfolio securities are valued at
their fair value as determined in good faith under procedures established by and
under the general supervision of the Directors (valuation of debt securities for
which market quotations are not readily available may be based upon current
market prices of securities which are comparable in coupon, rating and maturity
or an appropriate matrix utilizing similar factors); and (4) short-term debt
securities having a maturity date of more than sixty days at time of purchase
are valued on a mark-to-market basis until sixty days prior to maturity and
thereafter at amortized cost based on their value on the 61st day. Short-term
debt securities having a maturity date of sixty days or less at the time of
purchase are valued at amortized cost.

B. ACCOUNTING FOR INVESTMENTS --  Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income is recorded on the ex-dividend date. Interest income is accrued
daily and includes amortization of discounts on certain short-term securities.

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 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 its shareholders on the record date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which may
differ from generally accepted accounting principles. These "book/tax"

                                       45
<PAGE>
DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1995, CONTINUED

differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.

2. INVESTMENT MANAGEMENT AGREEMENT

Pursuant to an Investment Management Agreement with Dean Witter InterCapital
Inc. (the "Investment Manager"), the Fund pays its Investment Manager a
management fee, accrued daily and payable monthly, by applying the following
annual rates to the net assets of the Fund determined at the close of each
business day: 0.625% to the portion of daily net assets not exceeding $250
million and 0.50% to the portion of daily net assets exceeding $250 million.

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

3. PLAN OF DISTRIBUTION

Shares of the Fund are distributed by Dean Witter Distributors Inc. (the
"Distributor"), an affiliate of the Investment Manager. The Fund has adopted a
Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act, pursuant
to which the Fund pays the Distributor compensation, accrued daily and payable
monthly, at an annual rate of 1.0% of the lesser of: (a) the average daily
aggregate gross sales of the Fund's shares since the implementation of the Plan
on July 2, 1984 (not including reinvestment of dividend or capital gain
distributions) less the average daily aggregate net asset value of the Fund's
shares redeemed since the Fund's implementation of the Plan upon which a
contingent deferred sales charge has been imposed or upon which such charge has
been waived; or (b) the Fund's average daily net assets attributable to shares
issued, net of related shares redeemed, since implementation of the Plan.
Amounts paid under the Plan are paid to the Distributor to compensate it for the
services provided and the expenses borne by it and others in the distribution

                                       46
<PAGE>
DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1995, CONTINUED

of the Fund's shares, including the payment of commissions for sales of the
Fund's shares and incentive compensation to, and expenses of the account
executives of Dean Witter Reynolds Inc. ("DWR"), an affiliate of the Investment
Manager and Distributor, and other employees or selected dealers who engage in
or support distribution of the Fund's shares or who service shareholder
accounts, including overhead and telephone expenses, printing and distribution
of prospectuses and reports used in connection with the offering of the Fund's
shares to other than current shareholders and preparation, printing and
distribution of sales literature and advertising materials. In addition, the
Distributor may be compensated under the Plan for its opportunity costs in
advancing such amounts, which compensation would be in the form of a carrying
charge on any unreimbursed expenses incurred by the Distributor.

Provided that the Plan continues in effect, any cumulative expenses incurred but
not yet recovered may be recovered through future distribution fees from the
Fund and contingent deferred sales charges from the Fund's shareholders.

The Distributor has informed the Fund that for the year ended February 28, 1995,
it received approximately $177,000 in contingent deferred sales charges from
certain redemptions of the Fund's shares. The Fund's shareholders pay such
charges which are not an expense of the Fund.

4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES

The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended February 28, 1995 aggregated
$81,719,964 and $85,325,023, respectively.

For the year ended February 28, 1995, the Fund incurred brokerage commissions of
$84,230 with DWR for portfolio transactions executed on behalf of the Fund.

Dean Witter Trust Company, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At February 28, 1995, the Fund had
transfer agent fees and expenses payable of approximately $20,300.

The Fund established an unfunded noncontributory defined benefit pension plan
covering all independent Directors of the Fund who will have served as
independent Directors/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

                                       47
<PAGE>
DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1995, CONTINUED

February 28, 1995, included in Directors' fees and expenses in the Statement of
Operations, amounted to $8,288. At February 28, 1995, the Fund had an accrued
pension liability of $48,113 which is included in accrued expenses in the
Statement of Assets and Liabilities.

5. CAPITAL STOCK

Transactions in capital stock were as follows:

<TABLE>
<CAPTION>
                                                                        FOR THE YEAR ENDED            FOR THE YEAR ENDED
                                                                        FEBRUARY 28, 1995             FEBRUARY 28, 1994
                                                                   ----------------------------   --------------------------
                                                                     SHARES          AMOUNT         SHARES         AMOUNT
                                                                   -----------   --------------   -----------   ------------
<S>                                                                <C>           <C>              <C>           <C>
Sold.............................................................    8,003,288   $   91,308,700     6,076,972   $ 72,864,840
Reinvestment of dividends and distributions......................      943,312       10,339,857       774,911      8,863,719
                                                                   -----------   --------------   -----------   ------------
                                                                     8,946,600      101,648,557     6,851,883     81,728,559
Repurchased......................................................   (8,419,961)     (95,357,847)   (5,482,912)   (65,899,735)
                                                                   -----------   --------------   -----------   ------------
Net increase.....................................................      526,639   $    6,290,710     1,368,971   $ 15,828,824
                                                                   -----------   --------------   -----------   ------------
                                                                   -----------   --------------   -----------   ------------
</TABLE>

                                       48
<PAGE>
DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
FINANCIAL HIGHLIGHTS

Selected ratios and per share data for a share of capital stock outstanding
throughout each period:

<TABLE>
<CAPTION>
                                                           FOR THE YEAR ENDED FEBRUARY 28
                  ----------------------------------------------------------------------------------------------------------------
                     1995       1994       1993       1992*       1991       1990        1989       1988*      1987        1986
- ----------------------------------------------------------------------------------------------------------------------------------

<S>               <C>         <C>        <C>        <C>         <C>        <C>        <C>         <C>        <C>        <C>
PER SHARE
OPERATING PERFORMANCE:

Net asset value,
 beginning of
 period.......... $   11.82   $  11.36   $  10.20   $   11.03   $  11.33   $   9.93   $    9.46   $   9.10   $    7.43  $     7.41
                  ----------  ---------  ---------  ----------  ---------  ---------  ----------  ---------  ---------  ----------

Net investment
 income..........      0.09       0.09       0.16        0.20       0.25       0.30        0.23       0.20        0.14        0.22
Net realized and
 unrealized gain
 (loss)..........     (0.24)      1.25       1.18       (0.44)      0.02       1.80        0.72       0.44        1.75        0.03
                  ----------  ---------  ---------  ----------  ---------  ---------  ----------  ---------  ---------  ----------

Total from
 investment
 operations......     (0.15)      1.34       1.34       (0.24)      0.27       2.10        0.95       0.64        1.89        0.25
                  ----------  ---------  ---------  ----------  ---------  ---------  ----------  ---------  ---------  ----------

Less dividends
 and
 distributions
 from:
   Net investment
   income........     (0.12)     (0.09)     (0.18)      (0.20)     (0.28)     (0.32)      (0.21)     (0.28)      (0.22)      (0.23)
   Net realized
   gain..........     (0.78)     (0.79)     --          (0.39)     (0.29)     (0.38)      (0.27)     --         --          --
                  ----------  ---------  ---------  ----------  ---------  ---------  ----------  ---------  ---------  ----------

Total dividends
 and
 distributions...     (0.90)     (0.88)     (0.18)      (0.59)     (0.57)     (0.70)      (0.48)     (0.28)      (0.22)      (0.23)
                  ----------  ---------  ---------  ----------  ---------  ---------  ----------  ---------  ---------  ----------

Net asset value,
 end of period... $   10.77   $  11.82   $  11.36   $   10.20   $  11.03   $  11.33   $    9.93   $   9.46   $    9.10  $     7.43
                  ----------  ---------  ---------  ----------  ---------  ---------  ----------  ---------  ---------  ----------
                  ----------  ---------  ---------  ----------  ---------  ---------  ----------  ---------  ---------  ----------

TOTAL INVESTMENT
RETURN+..........     (1.26)%    12.16%     13.31%      (1.91)%     2.87%     21.11%      10.29%      7.32%      26.21%       3.50%

RATIOS TO AVERAGE
NET ASSETS:
Expenses.........      1.90%      1.91%      1.96%       1.93%      1.80%      1.81%       1.92%      1.81%       1.74%       1.39%

Net investment
 income..........      0.77%      0.73%      1.46%       1.67%      2.28%      2.57%       2.09%      2.14%       2.61%       3.07%

SUPPLEMENTAL DATA:
Net assets, end
 of period, in
 thousands.......   $132,812   $139,459   $118,496    $113,145   $150,636   $154,741    $136,911   $171,725    $82,985     $23,664

Portfolio
 turnover rate...        59%        69%        52%         31%        29%        22%          7%        26%         14%         78%
<FN>

- ---------------------
 *   Year ended February 29.
 +   Does not reflect the deduction of sales charge.
</TABLE>

                       SEE NOTES TO FINANCIAL STATEMENTS

                                       49


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