WITTER DEAN DIVERSIFIED INCOME TRUST, 497, 1994-12-28

WITTER DEAN DIVERSIFIED INCOME TRUST
497, 1994-12-28

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<PAGE>
Filed Pursuant to Rule 497(e)
Registration File No.: 33-44782

DEAN WITTER
DIVERSIFIED INCOME TRUST

PROSPECTUS--DECEMBER 22, 1994
- ------------------------------------------------------------------------------

DEAN WITTER DIVERSIFIED INCOME TRUST (THE "FUND") IS AN OPEN-END DIVERSIFIED
MANAGEMENT INVESTMENT COMPANY WHOSE PRIMARY INVESTMENT OBJECTIVE IS A HIGH
LEVEL OF CURRENT INCOME. AS A SECONDARY OBJECTIVE, THE FUND SEEKS TO MAXIMIZE
TOTAL RETURN BUT ONLY TO THE EXTENT CONSISTENT WITH ITS PRIMARY OBJECTIVE.
THE FUND SEEKS TO ACHIEVE ITS OBJECTIVES BY EQUALLY ALLOCATING ITS ASSETS
AMONG THREE SEPARATE GROUPINGS OF VARIOUS TYPES OF FIXED INCOME SECURITIES.
UP TO ONE-THIRD OF THE SECURITIES IN WHICH THE FUND MAY INVEST WILL INCLUDE
SECURITIES RATED Baa/BBB OR LOWER. (SEE "INVESTMENT OBJECTIVE AND POLICIES.")

Shares of the Fund are continuously offered at net asset value without the
imposition of a sales charge. However, redemptions and/or repurchases are
subject in most cases to a contingent deferred sales charge, scaled down from
5% to 1% of the amount redeemed, if made within six years of purchase, which
charge will be paid to the Fund's Distributor, Dean Witter Distributors Inc.
See "Redemptions and Repurchases--Contingent Deferred Sales Charge." In
addition, the Fund pays the Distributor a Rule 12b-1 distribution fee
pursuant to a Plan of Distribution at the annual rate of 0.85% of the lesser
of the (i) average daily aggregate net sales or (ii) average daily net assets
of the Fund. See "Purchase of Fund Shares--Plan of Distribution."

This Prospectus sets forth concisely the information you should know before
investing in the Fund. It should be read and retained for future reference.
Additional information about the Fund is contained in the Statement of
Additional Information, dated December 22, 1994, which has been filed with
the Securities and Exchange Commission, and which is available at no charge
upon request of the Fund at the address or telephone numbers listed below.
The Statement of Additional Information is incorporated herein by reference.

TABLE OF CONTENTS

Prospectus Summary .................................................... 2
Summary of Fund Expenses .............................................. 3
Financial Highlights .................................................. 4
The Fund and its Management ........................................... 4
Investment Objectives and Policies .................................... 5
Risk Considerations .................................................. 9
Investment Restrictions ............................................... 16
Purchase of Fund Shares ............................................... 17
Shareholder Services .................................................. 18
Redemptions and Repurchases ........................................... 20
Dividends, Distributions and Taxes .................................... 22
Performance Information ............................................... 23
Additional Information ................................................ 23
Appendix--Ratings of Investments ...................................... 24

SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER AGENCY.

DEAN WITTER
DIVERSIFIED INCOME TRUST
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 392-2550 OR
(800) 526-3143

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

Dean Witter Distributors Inc., Distributor

<PAGE>

PROSPECTUS SUMMARY
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<TABLE>
<CAPTION>
<S> <C>
THE FUND The Fund is organized as a Massachusetts business trust, and is an open-end
diversified management investment company which allocates an equal portion
of its total assets among three groupings of fixed-income securities.
- --------------- ---------------------------------------------------------------------------
SHARES OFFERED Shares of beneficial interest with $0.01 par value (see page 23).
- --------------- ---------------------------------------------------------------------------
OFFERING PRICE At net asset value without sales charge (see page 17). Shares redeemed
within six years of purchase are subject to a contingent deferred sales
charge under most circumstances (see pages 20-22).
- --------------- ---------------------------------------------------------------------------
MINIMUM Minimum initial investment, $1,000; minimum subsequent investment, $100
PURCHASE (see page 17).
- --------------- ---------------------------------------------------------------------------
INVESTMENT A high level of current income; total return (income plus capital
OBJECTIVES appreciation) is a secondary objective.
- --------------- ---------------------------------------------------------------------------
INVESTMENT A balanced allocation of assets consisting of approximately one-third of
POLICIES the Trust's assets invested equally in each of the following categories: 1.
high quality fixed-income securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, issued or guaranteed by
foreign governments, or issued by foreign or U.S. companies which include
bank instruments, commercial paper, loan participation interests and
certain indexed securities, which have remaining maturities at the time of
purchase of not more than three years; 2. high quality fixed rate and
adjustable rate mortgage-backed securities and asset-backed securities; and
3. high yield, high risk fixed-income securities, primarily rated Baa/BBB
or lower, and non-rated securities of comparable quality. (see pages 5-16).
- --------------- ---------------------------------------------------------------------------
INVESTMENT Dean Witter InterCapital Inc. ("InterCapital"), the Investment Manager of
MANAGER the Fund, and its wholly-owned subsidiary, Dean Witter Services Company
Inc., serve in various investment management, advisory, management and
administrative capacities to ninety investment companies and other
portfolios with assets of approximately $69.5 billion at October 31, 1994
(see page 4).
- --------------- ---------------------------------------------------------------------------
MANAGEMENT FEE The Investment Manager receives a monthly fee at the annual rate of 0.40%
of daily net assets (see page 5).
- --------------- ---------------------------------------------------------------------------
DIVIDENDS AND Dividends are declared and paid monthly. Capital gains distributions, if
CAPITAL GAINS any, are paid at least once a year or are retained for reinvestment by the
DISTRIBUTIONS Fund. Dividends and capital gains distributions are automatically invested
in additional shares at net asset value unless the shareholder elects to
receive cash (see page 22).
- --------------- ---------------------------------------------------------------------------
DISTRIBUTOR AND Dean Witter Distributors Inc. (the "Distributor"). The Distributor receives
DISTRIBUTION from the Fund a distribution fee accrued daily and payable monthly at the
FEE rate of 0.85% per annum of the lesser of (i) the Fund's average daily
aggregate net sales or (ii) the Fund's average daily net assets. This fee
compensates the Distributor for the services provided in distributing
shares of the Fund and for sales-related expenses. The Distributor also
receives the proceeds of any contingent deferred sales charges (see pages
17-18).
- --------------- ---------------------------------------------------------------------------
REDEMPTION-- Shares are redeemable by the shareholder at net asset value. An account may
CONTINGENT be involuntarily redeemed if the total value of the account is less than
DEFERRED SALES $100. Although no commission or sales load is imposed upon the purchase of
CHARGE shares, a contingent deferred sales charge (scaled down from 5% to 1%) is
imposed on any redemption of shares if after such redemption the aggregate
current value of an account with the Fund falls below the aggregate amount
of the investor's purchase payments made during the six years preceding the
redemption. However, there is no charge imposed on redemption of shares
purchased through reinvestment of dividends or distributions (see pages
20-22).
- --------------- ---------------------------------------------------------------------------

<PAGE>

RISKS The value of the Fund's portfolio securities, and therefore the net asset
value of the Fund's shares, may increase or decrease due to various
factors, principally changes in prevailing interest rates. Generally, a
rise in interest rates will result in a decrease in net asset value, while
a drop in interest rates will result in an increase in net asset value.
Mortgage-backed securities are subject to prepayments or refinancings of
the mortgage pools underlying such securities which may have an impact upon
the yield and the net asset value of the Fund's shares. Asset-backed
securities involve risks resulting mainly from the fact that such
securities do not usually contain the complete benefit of a security
interest in the related collateral. Certain of the high yield, high risk
fixed-income securities in which the Fund may invest are subject to greater
risk of loss of income and principal than the higher rated lower yielding
fixed-income securities. The foreign securities and markets in which the
Fund will invest pose different and generally greater risks than those
risks customarily associated with domestic securities and markets including
fluctuations in foreign currency exchange rates, foreign tax rates and
foreign securities exchange controls. The Fund may enter into repurchase
agreements and reverse repurchase agreements, may purchase securities on a
when-issued and delayed delivery basis and may utilize certain investment
techniques including options and futures for hedging purposes all of which
involve certain special risks (see pages 9 through 15).
- --------------- ---------------------------------------------------------------------------
</TABLE>

The above is qualified in its entirety by the detailed information appearing
elsewhere in the Prospectus and in the Statement of Additional Information.

<PAGE>

SUMMARY OF FUND EXPENSES
- -----------------------------------------------------------------------------

The following table illustrates all expenses and fees that a shareholder
of the Fund will incur. The expenses and fees set forth in the table are for
the fiscal year ended October 31, 1994.

<TABLE>
<CAPTION>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases ............................................ None
Maximum Sales Charge Imposed on Reinvested Dividends ................................. None
Deferred Sales Charge
(as a percentage of the lesser of original purchase price or redemption proceeds) ... 5.0%
</TABLE>

A contingent deferred sales charge is imposed at the following declining
rates:

<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT MADE PERCENTAGE
- --------------------------- --------------
<S> <C>
First ...................... 5.0%
Second ..................... 4.0%
Third ...................... 3.0%
Fourth ..................... 2.0%
Fifth ...................... 2.0%
Sixth ...................... 1.0%
Seventh and thereafter .... None

<CAPTION>
<S> <C>
Redemption Fees ...................................... None
Exchange Fee .......................................... None

<CAPTION>
<S> <C>
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees ...................................................... 0.40%
12b-1 Fees* .......................................................... 0.85%
Other Expenses ....................................................... 0.26%
Total Fund Operating Expenses ........................................ 1.51%
<FN>
- ---------------
* A portion of the 12b-1 fee equal to 0.20% of the Fund's average daily
net assets is characterized as a service fee within the meaning of
National Association of Securities Dealers, Inc. ("NASD") guidelines.

<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------- -------- --------- --------- ----------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each time period: ........................................ $65 $78 $102 $180
You would pay the following expenses on the same investment,
assuming no redemption: ..................................... $15 $48 $ 82 $180
</TABLE>

The above example should not be considered a representation of past or
future expenses or performance. Actual expenses of the Fund may be greater or
less than those shown.

The purpose of this table is to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. For a more complete description of these costs and expenses, see
"The Fund and its Management," "Plan of Distribution" and "Redemptions and
Repurchases."

Long-term shareholders of the Fund may pay more in sales charges and
distribution fees than the economic equivalent of the maximum front-end sales
charges permitted by the NASD.

<PAGE>

FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------
The following ratios and per share data for a share of beneficial interest
outstanding throughout each period have been audited by Price Waterhouse LLP,
independent accountants. The financial highlights should be read in
conjunction with the financial statements, notes thereto and the unqualified
report of independent accountants which are contained in the Statement of
Additional Information. Further information about the performance of the Fund
is contained in the Fund's Annual Report to Shareholders, which may be
obtained without charge upon request to the Fund.
<TABLE>
<CAPTION>

FOR THE YEAR ENDED FOR THE PERIOD
OCTOBER 31, APRIL 9, 1992*
------------------ THROUGH
1994 1993 OCTOBER 31, 1992
---- ---- ----------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ... $ 10.20 $ 10.01 $ 10.00
---------- ---------- ------------
Net investment income ................... 0.74 0.77 0.37
Net realized and unrealized gain (loss) (0.80) 0.20 --
---------- ---------- ------------
Total from investment operations ....... (0.06) 0.97 0.37
---------- ---------- ------------
Less dividends and distributions from:
Net investment income .................. (0.64) (0.73) (0.36)
Net realized gains on investments ..... (0.01) (0.05) --
Paid-in-capital ........................ (0.12) -- --
---------- ---------- ------------
Total dividends and distributions ...... (0.77) (0.78) (0.36)
---------- ---------- ------------
Net asset value, end of period .......... $ 9.37 $ 10.20 $ 10.01
========== ========== ============
TOTAL INVESTMENT RETURN+ ................ (0.69)% 10.00% 3.73%(1)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $ 407,038 $ 167,137 $ 55,297
Ratios to average net assets:
Expenses .............................. 1.51% 1.58%(4) 0.85%(2)(3)
Net investment income ................. 7.91% 7.92%(4) 7.86%(2)(3)
Portfolio turnover rate ................. 60% 117% 37%(1)
<FN>
- ---------------
* Commencement of operations.
+ Does not reflect the deduction of sales load.
(1) Not annualized.
(2) Annualized.
(3) If the Fund had borne all expenses that were assumed or waived by the
Investment Manager, the above annualized expense and net investment
income ratios would have been 2.08% and 6.63%, respectively.
(4) If the Fund had borne all expenses that were assumed or waived by the
Investment Manager, the above annualized expense and net investment
income ratios would have been 1.66% and 7.84%, respectively.
</TABLE>
See Notes to Financial Statements

THE FUND AND ITS MANAGEMENT
- -----------------------------------------------------------------------------
Dean Witter Diversified Income Trust (the "Fund") is an open-end
diversified management investment company. The Fund is a trust of the type
commonly known as a "Massachusetts business trust" and was organized under
the laws of The Commonwealth of Massachusetts on December 20, 1991.

Dean Witter InterCapital Inc. ("InterCapital" or the "Investment
Manager"), whose address is Two World Trade Center, New York, New York 10048,
is the Fund's Investment Manager. The Investment Manager, which was
incorporated in July, 1992, is a wholly-owned subsidiary of Dean Witter,
Discover & Co. ("DWDC"), a balanced financial services organization providing
a broad range of nationally marketed credit and investment products.

InterCapital and its wholly-owned subsidiary, Dean Witter Services Company
Inc., serve in various investment management, advisory, management and
administrative capacities to ninety investment companies, thirty of which are
listed on the New York Stock Exchange, with combined total assets of
approximately $67.5 billion as of October 31, 1994. The Investment Manager
also manages portfolios of pension plans, other institutions and individuals
which aggregated approximately $2.0 billion at such date.

The Fund has retained the Investment Manager to provide administrative
services, manage its business affairs and manage the investment of the Fund's
assets, including the placing of orders for the purchase and sale of
portfolio securities. InterCapital has retained Dean

<PAGE>

Witter Services Company Inc. to perform the aforementioned administrative
services for the Fund. The Fund's Trustees review the various services
provided by or under the direction of the Investment Manager to ensure that
the Fund's general investment policies and programs are being properly
carried out and that administrative services are being provided to the Fund
in a satisfactory manner.

As full compensation for the services and facilities furnished to the Fund
and for expenses of the Fund assumed by the Investment Manager, the Fund pays
the Investment Manager monthly compensation calculated daily by applying the
annual rate of 0.40% to the Fund's net assets determined as of the close of
each business day. For the fiscal year ended October 31, 1994, the Fund
accrued total compensation to the Investment Manager amounting to 0.40% of
the Fund's average daily net assets and the Fund's total expenses amounted to
1.51% of the Fund's average daily net assets.

INVESTMENT OBJECTIVES AND POLICIES
- -----------------------------------------------------------------------------
The primary investment objective of the Fund is to provide a high level of
current income. As a secondary objective the Fund seeks to maximize total
return but only to the extent consistent with its primary objective. The
investment objectives of the Fund are fundamental policies and may not be
changed without the approval of the holders of a majority of the Fund's
shares. There is no assurance that the Fund's investment objectives will be
achieved.

The Fund will seek to achieve its investment objectives by investing at
least 65% of its total assets in fixed-income securities and by equally
allocating, under normal circumstances, an approximately one-third portion of
its total assets among three separate groupings of various types of
fixed-income securities. The Investment Manager will adjust the Fund's assets
not less than quarterly to reflect any changes in the relative values of the
securities in each grouping so that following the adjustment the value of the
Fund's investments in each grouping will be equal to the extent practicable.

The three groupings in which the Fund will invest its total assets are as
follows:

1. High quality fixed-income securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities or high quality fixed income
securities issued or guaranteed by a foreign government or supranational
organization or any of their political subdivisions, authorities, agencies or
instrumentalities or fixed income securities issued by a corporation, all of
which are rated AAA or AA by Standard & Poor's Corporation ("S&P") or Aaa or
Aa by Moody's Investors Service, Inc. ("Moody's") or, if unrated, are
determined by the Investment Manager to be of equivalent quality; in
certificates of deposit and bankers' acceptances issued or guaranteed by, or
time deposits maintained at, banks (including foreign branches of U.S. banks
or U.S. or foreign branches of foreign banks) having total assets of more
than $500 million and determined by the Investment Manager to be of high
creditworthiness; commercial paper rated A-1 or A-2 by S&P, Prime-1 or
Prime-2 by Moody's or Duff 1 or Duff 2 by Duff & Phelps Inc. or, if unrated,
issued by U.S. or foreign companies having outstanding debt securities rated
A or higher by S&P or Moody's; and in loan participation interests having a
remaining term not exceeding one year in loans extended by banks to such
companies. Certain foreign securities purchased by the Fund will not have
received ratings by a recognized U.S. rating agency. In such cases the
Investment Manager will review the issuers of such securities with respect to
the quality of their management, balance sheet and financial ratios, cash
flows and earnings to establish that the securities purchased by the Fund are
of a comparable quality to issuers receiving high quality ratings by a
recognized U.S. rating agency. All of the securities described above will
have remaining maturities, at the time of purchase, of not more than three
years.

The Investment Manager will actively manage the Fund's assets in this
grouping in accordance with a global market strategy (see "Portfolio
Management," page 18). Consistent with such a strategy, the Investment
Manager intends to allocate the Fund's investments among securities
denominated in the currencies of a number of foreign countries and, within
each such country, among different types of debt securities. The Investment
Manager will adjust the Fund's exposure to different currencies based on its
perception of the most favorable markets and issuers. In allocating the
Fund's assets among various markets, the Investment Manager will assess the
relative yield and anticipated direction of interest rates in particular
markets, the level of inflation, liquidity and financial soundness of each
market, and the general market and economic conditions existing in each
market as well as the relationship of currencies of various countries to the
U.S. dollar and to each other. In its evaluations, the Investment Manager
will utilize its internal financial, economic and credit analysis resources
as well as information obtained from other sources.

A portion of the Fund's investments in securities of U.S. issuers are
likely to be in commercial paper, bankers acceptances and other short-term
debt instruments issued

<PAGE>

by U.S. corporations. However, at times during which there exists large-scale
political or economic uncertainty, the Fund is likely to increase its
investments in U.S. Government securities. In such cases, the securities
which the Fund are most likely to purchase are U.S. Treasury bills and U.S.
Treasury notes with remaining maturities of under three years, both of which
are direct obligations of the U.S. Government. The Fund may also purchase
securities issued by various agencies and instrumentalities of the U.S.
Government. These will include obligations backed by the full faith and
credit of the United States (such as those issued by the Government National
Mortgage Association); obligations whose issuing agency or instrumentality
has the right to borrow, to meet its obligations, from an existing line of
credit with the U.S. Treasury (such as those issued by the Federal National
Mortgage Association); and obligations backed by the credit of the issuing
agency or instrumentality (such as those issued by the Federal Farm Credit
System).

The securities in which the Fund will be investing may be denominated in
any currency or multinational currency, including the U.S. dollar. In
addition to the U.S. dollar, such currencies will include, among others: the
Australian dollar; Deutsche mark; Japanese yen; French franc; British pound;
Canadian dollar; Swiss franc; Dutch guilder; Austrian schilling; Spanish
peseta; Swedish krona; and European Currency Unit ("ECU").

The Fund may invest, without limitation in this grouping, in notes and
commercial paper, the principal amount of which is indexed to certain
specific foreign currency exchange rates. Indexed notes and commercial paper
typically provide that their principal amount is adjusted upwards or
downwards (but not below zero) at maturity to reflect fluctuations in the
exchange rate between two currencies during the period the obligation is
outstanding, depending on the terms of the specific security. In selecting
the two currencies, the Investment Manager will consider the correlation and
relative yields of various currencies. The Fund will purchase an indexed
obligation using the currency in which it is denominated and, at maturity,
will receive interest and principal payments thereon in that currency. The
amount of principal payable by the issuer at maturity, however, will vary
(i.e., increase or decrease) in response to the change (if any) in the
exchange rates between the two specified currencies during the period from
the date the instrument is issued to its maturity date. The potential for
realizing gains as a result of changes in foreign currency exchange rates may
enable the Fund to hedge the currency in which the obligation is denominated
(or to effect cross-hedges against other currencies) against a decline in the
U.S. dollar value of investments denominated in foreign currencies, while
providing an attractive money market rate of return. The Fund will purchase
such indexed obligations to generate current income or for hedging purposes
and will not speculate in such obligations.

As indicated above, the Fund may invest in securities denominated in a
multi-national currency unit. An illustration of a multi-national currency
unit is the ECU, which is a "basket" consisting of specified amounts of the
currencies of the member states of the European Community, a Western European
economic cooperative organization that includes, among other countries,
France, West Germany, The Netherlands and the United Kingdom. The specific
amounts of currencies comprising the ECU may be adjusted by the Council of
Ministers of the European Community to reflect changes in relative values of
the underlying currencies. The Investment Manager does not believe that such
adjustments will adversely affect holders of ECU-denominated obligations or
the marketability of such securities. European supranational entities, in
particular, issue ECU-denominated obligations. The Fund may invest in
securities denominated in the currency of one nation although issued by a
governmental entity, corporation or financial institution of another nation.
For example, the Fund may invest in a British pound-denominated obligation
issued by a United States corporation. Such investments involve credit risks
associated with the issuer and currency risks associated with the currency in
which the obligation is denominated.

2. (i) Fixed-rate and adjustable rate mortgage-backed securities
("Mortgage-Backed Securities") which are issued or guaranteed by the United
States Government, its agencies or instrumentalities or by private issuers
which are rated Aaa by Moody's or AAA by S&P or, if not rated, are determined
to be of comparable quality by the Investment Manager and (ii) securities
backed by other assets such as automobile or credit card receivables and home
equity loans ("Asset-Backed Securities") which are rated Aaa by Moody's or
AAA by S&P or, if not rated are determined to be of comparable quality by the
Investment Manager. The term Mortgage-Backed Securities as used herein
includes adjustable rate mortgage securities and derivative mortgage products
such as collateralized mortgage obligations and stripped mortgage-backed
securities, all as described below.

There are currently three basic types of Mortgage-Backed Securities: (i)
those issued or guaranteed by the United States Government or one of its
agencies or instrumentalities, such as the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and
the Federal Home Loan Mortgage Corporation ("FHLMC") (securities issued by
GNMA, but not those issued by FNMA or FHLMC, are backed by the "full faith
and credit" of the United States); (ii) those issued by private

<PAGE>

issuers that represent an interest in or are collateralized by
Mortgage-Backed Securities issued or guaranteed by the United States
Government or one of its agencies or instrumentalities; and (iii) those
issued by private issuers that represent an interest in or are collateralized
by whole mortgage loans or Mortgage-Backed Securities without a government
guarantee but usually having some form of private credit enhancement.

The Fund will invest in mortgage pass-through securities representing
participation interests in pools of residential mortgage loans originated by
United States governmental or private lenders such as banks, broker-dealers
and financing corporations and guaranteed, to the extent provided in such
securities, by the United States Government or one of its agencies or
instrumentalities. Such securities, which are ownership interests in the
underlying mortgage loans, differ from conventional debt securities, which
provide for periodic payment of interest in fixed amounts (usually
semiannually) and principal payments at maturity or on specified call dates.
Mortgage pass-through securities provide for monthly payments that are a
"pass-through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans,
net of any fees paid to the guarantor of such securities and the servicer of
the underlying mortgage loans.

The guaranteed mortgage pass-through securities in which the Fund may
invest include those issued or guaranteed by GNMA, FNMA and FHLMC. GNMA
certificates are direct obligations of the U.S. Government and, as such, are
backed by the "full faith and credit" of the United States. FNMA is a
federally chartered, privately owned corporation and FHLMC is a corporate
instrumentality of the United States. FNMA and FHLMC certificates are not
backed by the full faith and credit of the United States, but the issuing
agency or instrumentality has the right to borrow, to meet its obligations,
from an existing line of credit with the U.S. Treasury. The U.S. Treasury has
no legal obligation to provide such line of credit and may choose not to do
so.

Certificates for Mortgage-Backed Securities evidence an interest in a
specific pool of mortgages. These certificates are, in most cases, "modified
pass-through" instruments, wherein the issuing agency guarantees the payment
of principal and interest on mortgages underlying the certificates, whether
or not such amounts are collected by the issuer on the underlying mortgages.

ADJUSTABLE RATE MORTGAGE SECURITIES. The Fund may also invest in adjustable
rate mortgage securities ("ARMs"), which are pass-through mortgage securities
collateralized by mortgages with adjustable rather than fixed rates. ARMs
eligible for inclusion in a mortgage pool generally provide for a fixed
initial mortgage interest rate for either the first three, six, twelve or
thirteen scheduled monthly payments. Thereafter, the interest rates are
subject to periodic adjustment based on changes to a designated benchmark
index.

ARMs contain maximum and minimum rates beyond which the mortgage interest
rate may not vary over the lifetime of the security. In addition, certain
ARMs provide for additional limitations on the maximum amount by which the
mortgage interest rate may adjust for any single adjustment period.
Alternatively, certain ARMs contain limitations on changes in the required
monthly payment. In the event that a monthly payment is not sufficient to pay
the interest accruing on an ARM, any such excess interest is added to the
principal balance of the mortgage loan, which is repaid through future
monthly payments. If the monthly payment for such an instrument exceeds the
sum of the interest accrued at the applicable mortgage interest rate and the
principal payment required at such point to amortize the outstanding
principal balance over the remaining term of the loan, the excess is utilized
to reduce the then outstanding principal balance of the ARM.

PRIVATE MORTGAGE PASS-THROUGH SECURITIES. Private mortgage pass-through
securities are structured similarly to the GNMA, FNMA and FHLMC mortgage
pass-through securities and are issued by originators of and investors in
mortgage loans, including savings and loan associations, mortgage banks,
commercial banks, investment banks and special purpose subsidiaries of the
foregoing. These securities usually are backed by a pool of conventional
fixed rate or adjustable rate mortgage loans. Since private mortgage
pass-through securities typically are not guaranteed by an entity having the
credit status of GNMA, FNMA and FHLMC, such securities generally are
structured with one or more types of credit enhancement.

COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES. Collateralized mortgage obligations or "CMOs" are debt
obligations collateralized by mortgage loans or mortgage pass-through
securities. Typically, CMOs are collateralized by GNMA, FNMA or FHLMC
Certificates, but also may be collateralized by whole loans or private
mortgage pass-through securities (such collateral collectively hereinafter
referred to as "Mortgage Assets"). Multiclass pass-through securities are
equity interests in a trust composed of Mortgage Assets. Payments of
principal of and interest on the Mortgage Assets, and any reinvestment income
thereon, provide the funds to pay debt service on the CMOs or make scheduled
distributions on the multiclass pass-through

<PAGE>

securities. CMOs may be issued by agencies or instrumentalities of the United
States government, or by private originators of, or investors in, mortgage
loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing.
The issuer of a series of CMOs may elect to be treated as a Real Estate
Mortgage Investment Conduit ("REMIC"). REMICs include governmental and/or
private entities that issue a fixed pool of mortgages secured by an interest
in real property. REMICs are similar to CMOs in that they issue multiple
classes of securities, but unlike CMOs, which are required to be structured
as debt securities, REMICs may be structured as indirect ownership interests
in the underlying assets of the REMICs themselves. However, there are no
effects on the Fund from investing in CMOs issued by entities that have
elected to be treated as REMICs, and all future references to CMOs shall also
be deemed to include REMICs. In addition, in reliance upon a recent
interpretation by the staff of the Securities and Exchange Commission, the
Fund may invest without limitation in CMOs and other Mortgage-Backed
Securities which are not by definition excluded from the provisions of the
Investment Company Act of 1940, as amended, and which have obtained exemptive
orders from such provisions from the Securities and Exchange Commission.

In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche", is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on
a monthly, quarterly or semi-annual basis. Certain CMOs may have variable or
floating interest rates and others may be stripped (securities which provide
only the principal or interest feature of the underlying security).

The principal of and interest on the Mortgage Assets may be allocated
among the several classes of a CMO series in a number of different ways.
Generally, the purpose of the allocation of the cash flow of a CMO to the
various classes is to obtain a more predictable cash flow to the individual
tranches than exists with the underlying collateral of the CMO. As a general
rule, the more predictable the cash flow is on a CMO tranche, the lower the
anticipated yield will be on that tranche at the time of issuance relative to
prevailing market yields on Mortgage-Backed Securities. As part of the
process of creating more predictable cash flows on most of the tranches in a
series of CMOs, one or more tranches generally must be created that absorb
most of the volatility in the cash flows on the underlying mortgage loans.
The yields on these tranches are generally higher than prevailing market
yields on Mortgage-Backed Securities with similar maturities. As a result of
the uncertainty of the cash flows of these tranches, the market prices of and
yield on these tranches generally are more volatile.

The Fund also may invest in, among other things, parallel pay CMOs and
Planned Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are
structured to provide payments of principal on each payment date to more than
one class. These simultaneous payments are taken into account in calculating
the stated maturity date or final distribution date of each class, which, as
with other CMO structures, must be retired by its stated maturity date or
final distribution date but may be retired earlier. PAC Bonds generally
require payments of a specified amount of principal on each payment date. PAC
Bonds always are parallel pay CMOs with the required principal payment on
such securities having the highest priority after interest has been paid to
all classes.

STRIPPED MORTGAGE-BACKED SECURITIES. Stripped Mortgage-Backed Securities are
derivative multiclass mortgage securities. Stripped Mortgage-Backed
Securities may be issued by agencies or instrumentalities of the United
States Government, or by private originators of, or investors in, mortgage
loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing.

Stripped Mortgage-Backed Securities usually are structured with two
classes that receive different proportions of the interest and principal
distribution on a pool of Mortgage Assets. A common type of Stripped
Mortgage-Backed Securities will have one class receiving some of the interest
and most of the principal from the Mortgage Assets, while the other class
will receive most of the interest and the remainder of the principal. In the
most extreme case, one class will receive all of the interest (the
interest-only or "IO" class), while the other class will receive all of the
principal (the principal-only or "PO" class). PO classes generate income
through the accretion of the deep discount at which such securities are
purchased, and, while PO classes do not receive periodic payments of
interest, they receive monthly payments associated with scheduled
amortization and principal prepayment from the Mortgage Assets underlying the
PO class. The yield to maturity on an IO class is extremely sensitive to the
rate of principal payments (including prepayments) on the related underlying
Mortgage Assets, and a rapid rate of principal repayments may have a material
adverse effect on the

<PAGE>

Fund's yield to maturity. If the underlying Mortgage Assets experience
greater than anticipated prepayments of principal, the Fund may fail to fully
recoup its initial investment in these securities even if the securities are
rated Aaa by Moody's or AAA by S&P.

The Fund may purchase Stripped Mortgage-Backed Securities for income, or
for hedging purposes to protect the Fund's portfolio against interest rate
fluctuations. For example, since an IO class will tend to increase in value
as interest rates rise, it may be utilized to hedge against a decrease in
value of other fixed-income securities in a rising interest rate environment.
The Fund understands that the staff of the Securities and Exchange Commission
considers Stripped Mortgage-Backed Securities representing interest only or
principal only components of U.S. Government or other debt securities to be
illiquid securities. The Fund will treat such securities as illiquid so long
as the staff maintains such a position. The Fund may not invest more than 10%
of its total assets in illiquid securities.

ASSET-BACKED SECURITIES. The securitization techniques used to develop
Mortgage-Backed Securities are also applied to a broad range of other assets.
Through the use of trusts and special purpose corporations, various types of
assets, primarily automobile and credit card receivables and home equity
loans, are being securitized in pass-through structures similar to the
mortgage pass-through structures described above or in a pay-through
structure similar to the CMO structure.

New instruments and variations of existing Mortgage-Backed Securities and
Asset-Backed Securities continue to be developed. The Fund may invest in any
such instruments or variations as may be developed, to the extent consistent
with its investment objectives and policies and applicable regulatory
requirements.

3. High yield, high risk fixed-income securities rated Baa or lower by
Moody's or BBB or lower by S&P or, if not rated, are determined by the
Investment Manager to be of comparable quality. The high yield, high risk
fixed-income securities in this grouping may include both convertible and
nonconvertible debt securities and preferred stock. Fixed-income securities
rated Baa by Moody's or BBB by S&P have speculative characteristics greater
than those of more highly rated bonds, while fixed-income securities rated Ba
or BB or lower by Moody's and Standard & Poor's, respectively, are considered
to be speculative investments. Furthermore, the Fund does not have any
minimum quality rating standard for its investments. As such, the Fund may
invest in securities rated as low as Caa, Ca or C by Moody's or CCC, CC, C or
C1 by Standard & Poor's. Fixed-income securities rated Caa or Ca by Moody's
may already be in default on payment of interest or principal, while bonds
rated C by Moody's, their lowest bond rating, can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
Bonds rated C1 by S&P, their lowest bond rating, are no longer making
interest payments.

A description of corporate bond ratings is contained in the Appendix.
Non-rated securities will also be considered for investment by the Fund when
the terms of the securities themselves makes them appropriate investments for
the Fund.

The ratings of fixed-income securities by Moody's and S&P are a generally
accepted barometer of credit risk. However, as the creditworthiness of
issuers of lower-rated fixed-income securities is more problematical than
that of issuers of higher-rated fixed-income securities, the achievement of
the Fund's investment objectives will be more dependent upon the Investment
Manager's own credit analysis than would be the case with a mutual fund
investing primarily in higher quality bonds. The Investment Manager will
utilize a security's credit rating as simply one indication of an issuer's
creditworthiness and will principally rely upon its own analysis of any
security currently held by the Fund or potentially purchasable by the Fund
for its portfolio.

RISK CONSIDERATIONS

All fixed-income securities are subject to two types of risks: the credit
risk and the interest rate risk. The credit risk relates to the ability of
the issuer to meet interest or principal payments or both as they come due.
Generally, higher yielding fixed-income securities are subject to a credit
risk to a greater extent than lower yielding fixed-income securities. The
interest rate risk refers to the fluctuations in the net asset value of any
portfolio of fixed-income securities resulting from the inverse relationship
between price and yield of fixed-income securities; that is, when the general
level of interest rates rises, the prices of outstanding fixed-income
securities decline, and when interest rates fall, prices rise.

FOREIGN SECURITIES. Investors should carefully consider the risks of
investing in securities of foreign issuers and securities denominated in
non-U.S. currencies. Fluctuations in the relative rates of exchange between
the currencies of different nations may affect the value of the Fund's
investments. Changes in foreign currency exchange rates relative to the U.S.
dollar will affect the U.S. dollar value of the Fund's assets denominated in
that currency and thereby impact upon the Fund's yield on such assets and the
net asset value of a share of the Fund as well as the value of the Fund's
distributions. For example, if a substantial portion of the Fund's assets are
denominated in Japanese yen and the relative exchange

<PAGE>

rate of the yen falls with respect to the U.S. dollar (i.e., a yen is worth a
smaller fraction of a dollar than it had been) then the Fund will be
receiving a lesser amount of interest on its fixed-income securities
denominated in yen (when converted into U.S. dollars) and when the Fund's
assets are valued for purposes of determining the net asset value per share
of the Fund, the net assets of the Fund reflected by the yen-denominated
securities will have declined in U.S. dollar value and the net asset value of
the Fund (always stated in U.S. dollars) may have also declined.

Foreign currency exchange rates are determined by forces of supply and
demand on the foreign exchange markets. These forces are themselves affected
by the international balance of payments and other economic and financial
conditions, government intervention, speculation and other factors. Moreover,
foreign currency exchange rates may be affected by the regulatory control of
the exchanges on which the currencies trade. The foreign currency
transactions of the Fund will be conducted on a spot basis or through forward
contracts or futures contracts (see below). The Fund may incur certain costs
in connection with these currency transactions.

Investments in foreign securities will also occasion risks relating to
political and economic developments abroad, including the possibility of
expropriations or confiscatory taxation, limitations on the use or transfer
of Fund assets and any effects of foreign social, economic or political
instability. Foreign companies are not subject to the regulatory requirements
of U.S. companies and, as such, there may be less publicly available
information about such companies. Moreover, foreign companies are generally
not subject to uniform accounting, auditing and financial standards and
requirements comparable to those applicable to U.S. companies.

Securities of foreign issuers may be less liquid than comparable
securities of U.S. issuers and, as such, their price changes may be more
volatile. Furthermore, foreign exchanges and broker-dealers are generally
subject to less government and exchange scrutiny and regulation than their
American counterparts. Brokerage commissions, dealer concessions and other
transaction costs may be higher on foreign markets than the U.S. In addition,
differences in clearance and settlement procedures on foreign markets may
occasion delays in settlements of Fund trades effected in such markets.
Inability to dispose of portfolio securities due to settlement delays could
result in losses to the Fund due to subsequent declines in value of such
securities and the inability of the Fund to make intended security purchases
due to settlement problems could result in a failure of the Fund to make
potentially advantageous investments.

MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. Mortgage-Backed and Asset-Backed
Securities have certain different characteristics than traditional debt
securities. Among the major differences are that interest and principal
payments are made more frequently, usually monthly, and that principal may be
prepaid at any time because the underlying mortgage loans or other assets
generally may be prepaid at any time. As a result, if the Fund purchases such
a security at a premium, a prepayment rate that is faster than expected may
reduce yield to maturity, while a prepayment rate that is slower than
expected may have the opposite effect of increasing yield to maturity.
Alternatively, if the Fund purchases these securities at a discount, faster
than expected prepayments will increase, while slower than expected
prepayments may reduce, yield to maturity. The Fund may invest a portion of
its assets in derivative Mortgage-Backed Securities such as Stripped
Mortgage-Backed Securities which are highly sensitive to changes in
prepayment and interest rates. The Investment Manager will seek to manage
these risks (and potential benefits) by investing in a variety of such
securities and through hedging techniques.

Mortgage-Backed and Asset-Backed Securities, like all fixed income
securities, generally decrease in value as a result of increases in interest
rates. In addition, although generally the value of fixed-income securities
increases during periods of falling interest rates and, as stated above,
decreases during periods of rising interest rates, as a result of prepayments
and other factors, this is not always the case with respect to
Mortgage-Backed and Asset-Backed Securities.

Although the extent of prepayments on a pool of mortgage loans depends on
various economic and other factors, as a general rule prepayments on fixed
rate mortgage loans will increase during a period of falling interest rates
and decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by the Fund are likely to be greater during a
period of declining interest rates and, as a result, likely to be reinvested
at lower interest rates than during a period of rising interest rates.
Asset-Backed Securities, although less likely to experience the same
prepayment rates as Mortgage-Backed Securities, may respond to certain of the
same factors influencing prepayments, while at other times different factors,
such as changes in credit use and payment patterns resulting from social,
legal and economic factors, will predominate. Mortgage-Backed and
Asset-Backed Securities generally decrease in value as a result of increases
in interest rates and may benefit less than other fixed income securities
from declining interest rates because of the risk of prepayment.

<PAGE>

There are certain risks associated specifically with CMOs. CMOs issued by
private entities are not U.S. Government securities and are not guaranteed by
any government agency, although the securities underlying a CMO may be
subject to a guarantee. Therefore, if the collateral securing the CMO, as
well as any third party credit support or guarantees, is insufficient to make
payment, the holder could sustain a loss. However, as stated above, the Fund
will invest only in CMOs which are rated AAA by S&P or Aaa by Moody's or, if
unrated, are determined to be of comparable quality. Also, a number of
different factors, including the extent of prepayment of principal of the
Mortgage Assets, affect the availability of cash for principal payments by
the CMO issuer on any payment date and, accordingly, affect the timing of
principal payments on each CMO class.

Asset-Backed Securities involve certain risks that are not posed by
Mortgage-Backed Securities, resulting mainly from the fact that Asset-Backed
Securities do not usually contain the complete benefit of a security interest
in the related collateral. For example, credit card receivables generally are
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, some of which may reduce the ability to
obtain full payment. In the case of automobile receivables, due to various
legal and economic factors, proceeds from repossessed collateral may not
always be sufficient to support payments on these securities.
----------------
HIGH YIELD SECURITIES. Because of the special nature of the Fund's investment
in high yield securities, commonly known as "junk bonds", the Investment
Manager must take account of certain special considerations in assessing the
risks associated with such investments. Although the growth of the high yield
securities market in the 1980s had paralleled a long economic expansion,
recently many issuers have been affected by adverse economic and market
conditions. It should be recognized that an economic downturn or increase in
interest rates is likely to have a negative effect on the high yield bond
market and on the value of the high yield securities held by the Fund, as
well as on the ability of the securities' issuers to repay principal and
interest on their borrowings.

The prices of high yield securities have been found to be less sensitive
to changes in prevailing interest rates than higher-rated investments, but
are likely to be more sensitive to adverse economic changes or individual
corporate developments. During an economic downturn or substantial period of
rising interest rates, highly leveraged issuers may experience financial
stress which would adversely affect their ability to service their principal
and interest payment obligations, to meet their projected business goals or
to obtain additional financing. If the issuer of a fixed-income security
owned by the Fund defaults, the Fund may incur additional expenses to seek
recovery. In addition, periods of economic uncertainty and change can be
expected to result in an increased volatility of market prices of high yield
securities and a concomitant volatility in the net asset value of a share of
the Fund. Moreover, the market prices of certain of the Fund's portfolio
securities which are structured as zero coupon and payment-in-kind securities
are affected to a greater extent by interest rate changes and thereby tend to
be more volatile than securities which pay interest periodically and in cash
(see "Dividends, Distributions and Taxes" for a discussion of the tax
ramifications of investments in such securities).

The secondary market for high yield securities may be less liquid than the
markets for higher quality securities and, as such, may have an adverse
effect on the market prices of certain securities. The limited liquidity of
the market may also adversely affect the ability of the Fund's Trustees to
arrive at a fair value for certain high yield securities at certain times and
could make it difficult for the Fund to sell certain securities.

New laws and proposed new laws may have a potentially negative impact on
the market for high yield bonds. For example, present legislation requires
federally-insured savings and loan associations to divest their investments
in high yield bonds. This legislation and other proposed legislation may have
an adverse effect upon the value of high yield securities and a concomitant
negative impact upon the net asset value of a share of the Fund.

During the fiscal year ended October 31, 1994, the monthly dollar weighted
average ratings of the debt obligations held by the Fund, expressed as a
percentage of the Fund's total investments, were as follows:

<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
RATINGS INVESTMENTS
- ----------- ---------------------
<S> <C>
AAA/Aaa 65.5%
AA/Aa 0.0%
A/A 0.0%
BBB/Baa 0.2%
BB/Ba 1.3%
B/B 21.5%
CCC/Caa 4.8%
CC/Ca 0.0%
C/C 0.0%
D 0.0%
Unrated 6.7%
</TABLE>

<PAGE>

OTHER INVESTMENT POLICIES

REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements, which
may be viewed as a type of secured lending by the Fund, and which 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,

<PAGE>

and that the institution will repurchase, the underlying security at a
specified price and at a fixed time in the future, usually not more than
seven days from the date of purchase. While repurchase agreements involve
certain risks not associated with direct investments in debt securities, the
Fund follows procedures designed to minimize those 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 Trustees of the Fund. In addition, 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.

REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. The Fund may also use reverse
repurchase agreements and dollar rolls as part of its investment strategy.
Reverse repurchase agreements involve sales by the Fund of portfolio assets
concurrently with an agreement by the Fund to repurchase the same assets at a
later date at a fixed price. During the reverse repurchase agreement period,
the Fund continues to receive principal and interest payments on these
securities. Generally, the effect of such a transaction is that the Fund can
recover all or most of the cash invested in the portfolio securities involved
during the term of the reverse repurchase agreement, while it will be able to
keep the interest income associated with those portfolio securities. Such
transactions are only advantageous if the interest cost to the Fund of the
reverse repurchase transaction is less than the cost of obtaining the cash
otherwise.

The Fund may enter into dollar rolls in which the Fund sells securities
for delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type and coupon) securities on a specified future
date. During the roll period, the Fund foregoes principal and interest paid
on the securities. The Fund is compensated by the difference between the
current sales price and the lower forward price for the future purchase
(often referred to as the "drop") as well as by the interest earned on the
cash proceeds of the initial sale.

The Fund will establish a segregated account with its custodian bank in
which it will maintain cash, U.S. Government securities or other liquid high
grade debt obligations equal in value to its obligations in respect of
reverse repurchase agreements and dollar rolls. Reverse repurchase agreements
and dollar rolls involve the risk that the market value of the securities the
Fund is obligated to repurchase under the agreement may decline below the
repurchase price. In the event the buyer of securities under a reverse
repurchase agreement or dollar roll files for bankruptcy or becomes
insolvent, the Fund's use of the proceeds of the agreement may be restricted
pending a determination by the other party, or its trustee or receiver,
whether to enforce the Fund's obligation to repurchase the securities.
Reverse repurchase agreements and dollar rolls are speculative techniques
involving leverage, and are considered borrowings by the Fund. Under the
requirements of the Investment Company Act of 1940, as amended (the "Act"),
the Fund is required to maintain an asset coverage (including the proceeds of
the borrowings) of at least 300% of all borrowings. The Fund does not expect
to engage in reverse repurchase agreements and dollar rolls with respect to
greater than 25% of the Fund's total assets.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. From
time to time, in the ordinary course of business, 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 the commitment.
There is no overall limit on the percentage of the Fund's assets which may be
committed to the purchase of securities on a when-issued, delayed delivery or
forward commitment basis. An increase in the percentage of the Fund's assets
committed to the purchase of securities on a when-issued, delayed delivery or
forward commitment basis may increase the volatility of the Fund's net asset
value.

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, leveraged buyout or debt restructuring. If
the anticipated event does not occur and the securities are not issued, the
Fund will have lost an investment opportunity. There is no overall limit on
the percentage of the Fund's assets which may be committed to the purchase of
securities on a "when, as and if issued" basis. 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.

RESTRICTED SECURITIES. The Fund may invest up to 5% of its total assets in
securities for which there is no readily available market including certain
of those which are subject to restrictions on resale because they have not
been registered under the Securities Act of 1933, as amended (the "Securities
Act") or which are otherwise not readily marketable. (Securities eligible for
resale

<PAGE>

pursuant to Rule 144A under the Securities Act, and determined to be liquid
pursuant to the procedures discussed in the following paragraph, are not
subject to the foregoing restriction.) 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 adopted Rule 144A under the
Securities Act of 1933, which permits the Fund to sell restricted securities
to qualified institutional buyers without limitation. The Investment Manager,
pursuant to procedures adopted by the Trustees 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 within the category "illiquid securities,"
which under current policy may not exceed 15% of the Fund's total assets.

LENDING OF PORTFOLIO SECURITIES. 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 certain notice provisions described in the
Statement of Additional Information), and are at all times secured by cash or
cash equivalents such as money market instruments, 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. In the
event the borrower defaults on its obligation to return the loaned
securities, as a result of bankruptcy or otherwise, the Fund will seek to
sell the collateral, which action could involve costs or delays. In such case
the Fund's ability to recover its investment may be restricted or delayed.

COMMON STOCKS. The Fund may invest in common stocks in an amount up to 20% of
its total assets in the circumstances described below when consistent with
the Fund's investment objectives.

The Fund may acquire common stocks when attached to or included in a unit
with fixed-income securities, or when acquired upon conversion of
fixed-income securities or upon exercise of warrants attached to fixed-income
securities and may purchase common stocks directly when such acquisitions are
determined by the Investment Manager to further the Fund's investment
objectives.

For example, the Fund may purchase the common stock of companies involved
in takeovers or recapitalizations where the issuer, or a controlling
stockholder, has offered, or pursuant to a "going private" transaction is
effecting, an exhange of its common stock for newly-issued fixed-income
securities. By purchasing the common stock of the company issuing the
fixed-income securities prior to the consummation of the transaction or
exchange offer, the Fund will be able to obtain the fixed-income securities
directly from the issuer at their face value, eliminating the payment of a
dealer's mark-up otherwise payable when fixed-income securities are acquired
from third parties, thereby increasing the net yield to the shareholders of
the Fund. While the Fund will incur brokerage commissions in connection with
its purchase of common stocks, it is anticipated that the amount of such
commissions will be significantly less than the amount of such mark-up.

Fixed-income securities acquired by the Fund through the purchase of
common stocks under the circumstances described in the preceding paragraph
are subject to the general credit risks and interest rate risks to which all
fixed-income securities purchased by the Fund are subject. Such securities
generally will be rated Baa/BBB or lower as are the other high yield, high
risk fixed income securities in which the Fund may invest. In addition, since
corporations involved in takeover situations are often highly leveraged, that
factor will be evaluated by the Investment Manager as part of its credit risk
determination with respect to the purchase of particular common stocks for
the Fund's investment portfolio. In the event the Fund purchases common stock
of a corporation in anticipation of a transaction (pursuant to which the
common stock is to be exchanged for fixed-income securities) which fails to
take place, the Investment Manager will continue to hold such common stocks
for the Fund's portfolio only if it determines that continuing to hold such
common stock under those circumstances is consistent with the Fund's
investment objectives.

OPTIONS AND FUTURES TRANSACTIONS

The Fund is permitted to enter into call and put options on its portfolio
securities, including U.S. Government Securities and Mortgage-Backed
Securities and on various foreign currencies which are listed on several U.S.
and foreign securities exchanges and are written in over-the-counter
transactions ("OTC options"). Listed options are issued or guaranteed by the
exchange on which they trade or by a clearing corporation such as the Options
Clearing Corporation ("OCC"). The Fund is permitted to write covered call
options on portfolio securities which are denominated in either U.S. dollars
or foreign currencies, without limit, in order to hedge

<PAGE>

against the decline in the value of a security or currency in which such
security is denominated and to close out long call option positions. The Fund
may purchase listed and OTC call and put options in amounts equalling up to
5% of its total assets. The Fund may purchase call options only to close out
a covered call position or to protect against an increase in the price of a
security it anticipates purchasing or, in the case of call options on a
foreign currency, to hedge against an adverse exchange rate change of the
currency in which the security it anticipates purchasing is denominated
vis-a-vis the currency in which the exercise price is denominated. The Fund
may purchase put options on securities which it holds in its portfolio only
to protect itself against a decline in the value of the security. The Fund
may also purchase put options to close out written put positions. There are
no other limits on the Fund's ability to purchase call and put options.

The Fund may purchase and sell financial futures contracts that are
currently traded, or may in the future be traded, on U.S. and foreign
commodity exchanges on such underlying fixed-income securities as U.S.
Treasury bonds, notes, and bills, Mortgage-Backed Securities and/or any
foreign government fixed-income security ("interest rate" futures), on
various currencies ("currency" futures) and on such indexes of U.S. or
foreign fixed-income securities as may exist or come into being, such as the
Moody's Investment Grade Corporate Bond Index ("index" futures). The Fund
will purchase or sell interest rate futures contracts for the purpose of
hedging some or all of the value of its portfolio securities (or anticipated
portfolio securities) against changes in prevailing interest rates. The Fund
will purchase or sell index futures contracts for the purpose of hedging some
or all of its portfolio (or anticipated portfolio) securities against changes
in their prices.

The Fund may also purchase and write call and put options on futures
contracts which are traded on an exchange and enter into closing transactions
with respect to such options to terminate an existing position. 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 and the sale of
a futures contract or to close out a long or short position in futures
contracts.

RISKS OF OPTIONS AND FUTURES TRANSACTIONS. The Fund may close out its
position as writer of an option, or as a buyer or seller of a futures
contract, only if a liquid secondary market exists for options or futures
contracts of that series. There is no assurance that such a market will
exist, particularly in the case of OTC options, as such options will
generally only be closed out by entering into a closing purchase transaction
with the purchasing dealer. Also, Exchanges may limit the amount by which the
price of many futures contracts 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.

While the futures contracts and options transactions to be engaged in by
the Fund for the purpose of hedging the Fund's portfolio securities are not
speculative in nature, there are risks inherent in the use of such
instruments. One such risk is that the Fund's Investment Manager could be
incorrect in its expectations as to the direction or extent of various
interest rate or price movements or the time span within which the movements
take place. For example, if the Fund sold futures contracts for the sale of
securities in anticipation of an increase in interest rates, and then
interest rates went down instead, causing bond prices to rise, the Fund would
lose money on the sale. Another risk which will arise in employing futures
contracts to protect against the price volatility of portfolio securities is
that the prices of securities, currencies and indexes subject to futures
contracts (and thereby the futures contract prices) may correlate imperfectly
with the behavior of the U.S. dollar cash prices of the Fund's portfolio
securities and their denominated currencies. Another such risk is that prices
of interest rate futures contracts may not move in tandem with the changes in
prevailing interest rates against which the Fund seeks a hedge. See the
Statement of Additional Information for further discussion of such risks.

FORWARD FOREIGN CURRENCY
EXCHANGE CONTRACTS

In order to hedge against adverse price movements in the securities held in
its portfolio and the currencies in which they are denominated (as well as
the securities it might wish to purchase and their denominated currencies)
the Fund may engage in transactions in forward foreign currency contracts. A
forward foreign currency exchange contract ("forward contract") involves an
obligation to purchase or sell a currency at a future date, which may be any
fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. The Fund may enter into
forward contracts as a hedge against fluctuations in future foreign exchange
rates.

The Fund will enter into forward contracts under various circumstances.
When the Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may, for example, desire to "lock in"
the price of the security in U.S. dollars or some other foreign currency
which the Fund is temporarily holding in its portfolio. By entering into a
forward contract for the purchase or sale, for a fixed amount of dollars or
other

<PAGE>

currency, of the amount of foreign currency involved in the underlying
security transactions, the Fund will be able to protect itself against a
possible loss resulting from an adverse change in the relationship between
the U.S. dollar or other currency which is being used for the security
purchase and the foreign currency in which the security is denominated during
the period between the date on which the security is purchased or sold and
the date on which payment is made or received.

At other times, when, for example, the Investment Manager believes that
the currency of a particular foreign country may suffer a substantial decline
against the U.S. dollar or some other foreign currency, the Fund may enter
into a forward contract to sell, for a fixed amount of dollars or other
currency, the amount of foreign currency approximating the value of some or
all of the Fund's portfolio securities (or securities which the Fund has
purchased for its portfolio) denominated in such foreign currency. Under
identical circumstances, the Fund may enter into a forward contract to sell,
for a fixed amount of U.S. dollars or other currency, an amount of foreign
currency other than the currency in which the securities to be hedged are
denominated approximating the value of some or all of the portfolio
securities to be hedged. This method of hedging, called "cross-hedging," will
be selected by the Investment Manager when it is determined that the foreign
currency in which the portfolio securities are denominated has insufficient
liquidity or are trading at a discount as compared with some other foreign
currency with which it tends to move in tandem.

In addition, when the Fund's Investment Manager anticipates purchasing
securities at some time in the future, and wishes to lock in the current
exchange rate of the currency in which those securities are denominated
against the U.S. dollar or some other foreign currency, the Fund may enter
into a forward contract to purchase an amount of currency equal to some or
all of the value of the anticipated purchase, for a fixed amount of U.S.
dollars or other currency.

Lastly, the Fund is permitted to enter into forward contracts with respect
to currencies in which certain of its portfolio securities are denominated
and on which options have been written (see "Options and Futures
Transactions").

In all of the above circumstances, if the currency in which the Fund's
portfolio securities (or anticipated portfolio securities) are denominated
rises in value with respect to the currency which is being purchased (or
sold), then the Fund will have realized fewer gains than had the Fund not
entered into the forward contracts. Moreover, the precise matching of the
forward contract amounts and the value of the securities involved will not
generally be possible, since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and
the date it matures. The successful use of the foregoing investment practices
draws upon the Investment Manager's special skills and experience with
respect to such instruments and usually depends upon the Investment Manager's
ability to forecast currency exchange rate movements correctly. Should
exchange rates move in an unexpected manner, the Fund may not achieve the
anticipated benefits of forward contracts or may realize losses and thus be
in a worse position than if such strategies had not been used. Unlike many
exchange-traded futures contracts and options on futures contracts, there are
no daily price fluctuation limits with respect to options on currencies and
forward contracts, and adverse market movements could therefore continue to
an unlimited extent over a period of time. In addition, the correlation
between movements in the prices of such instruments and movements in the
price of currencies hedged or used for cover will not be perfect and could
produce unanticipated losses.

The Fund is not required to enter into such transactions with regard to
its foreign currency-denominated securities and will not do so unless deemed
appropriate by the Investment Manager. The Fund generally will not enter into
a forward contract with a term of greater than one year, although it may
enter into forward contracts for periods of up to five years. The Fund may be
limited in its ability to enter into hedging transactions involving forward
contracts by the Internal Revenue Code requirements relating to
qualifications as a regulated investment company (see "Dividends,
Distributions and Taxes").

Except as specified, the investment policies and practices discussed above
are not fundamental policies of the Fund and may be changed without
shareholder approval.

PORTFOLIO MANAGEMENT

The Fund's portfolio is actively managed by its Investment Manager with a
view to achieving the Fund's investment objectives. In determining which
securities to purchase for the Fund or hold in the Fund's portfolio, the
Investment Manager will rely on information from various sources, including
the rating of the security, research, analysis and appraisals of brokers and
dealers, including Dean Witter Reynolds Inc. ("DWR"), a broker-dealer
affiliate of InterCapital, the views of Trustees of the Fund and others
regarding economic developments and interest rate trends, and the Investment
Manager's own analysis of factors they deem relevant. The Fund is managed
within InterCapital's High Yield Bond Group, which manages six funds and fund
portfolios, with approximately

<PAGE>

$1.3 billion in assets at October 31, 1994. Peter M. Avelar, Rajesh K. Gupta
and Vinh Q. Tran have been the primary portfolio managers of the Fund since
its inception. Peter M. Avelar, Senior Vice President of InterCapital, has
been managing portfolios comprised of high yield fixed-income securities at
InterCapital since December, 1990. Prior to joining InterCapital, Mr. Avelar
was affiliated with PaineWebber Asset Management as a First Vice President
and Portfolio Manager. Rajesh K. Gupta, Senior Vice President of
InterCapital, has been managing portfolios comprised of government securities
at InterCapital for over five years. Vinh Q. Tran, Vice President of
InterCapital, has been managing portfolios comprised of worldwide
fixed-income securities at InterCapital for over five years.

Securities purchased by the Fund are generally sold by dealers acting as
principal for their own accounts. Brokerage commissions are not normally
charged but such transactions generally involve costs in the form of spreads
between bid and asked prices. Orders for transactions in other portfolio
securities and commodities are placed for the Fund with a number of brokers
and dealers, including Dean Witter Reynolds Inc. ("DWR") a broker-dealer
affiliate of InterCapital. Pursuant to an order of the Securities and
Exchange Commission, the Fund may effect principal transactions in certain
money market instruments with DWR. In addition, the Fund may incur brokerage
commissions on transactions conducted through DWR.

The Fund may sell portfolio securities without regard to the length of
time that they have been held, in order to take advantage of new investment
opportunities or yield differentials, or because the Fund desires to preserve
gains or limit losses due to changing economic conditions, interest rate
trends, or the financial condition of the issuer.

The expenses of the Fund relating to its portfolio management are likely
to be greater than those incurred by other investment companies investing
primarily in securities issued by domestic issuers such as custodial costs,
brokerage commissions and other transaction charges related to investing on
foreign markets are generally higher than in the United States. Short-term
gains and losses may result from the aforementioned portfolio transactions.
See "Dividends, Distributions and Taxes" for a discussion of the tax
implications of the Fund's trading policy.

INVESTMENT RESTRICTIONS
- -----------------------------------------------------------------------------
The investment restrictions listed below are among the restrictions which
have been adopted by the Fund as fundamental policies. 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. For
purposes of the following limitations (with the exception of Restriction 4):
(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 more than 5% of its total assets in the securities of any one
issuer (other than obligations of, or guaranteed by, the United States
Government, its agencies or instrumentalities).

2. Invest more than 5% of the value of its total assets in securities of
issuers having a record, together with predecessors, of less than three years
of continuous operation. This restriction shall not apply to Mortgage-Backed
and Asset-Backed Securities or to any obligation issued or guaranteed by the
United States Government, its agencies or instrumentalities.

3. Invest 25% or more of the value of its total assets in securities of
issuers in any one industry, except that the Fund will invest at least 25% of
its total assets in Mortgage-Backed Securities under normal market
conditions. For the purpose of this restriction, gas, electric, water and
telephone utilities will be treated as being a separate industry. This
restriction does not apply to obligations issued or guaranteed by the United
States Government or its agencies or instrumentalities.

4. Borrow money in excess of 33 1/3 % of the Fund's total assets (including
the proceeds of the borrowings).

5. Purchase more than 10% of the voting securities, or more than 10% of any
class of securities, of any issuer. For purposes of this restriction, all
outstanding debt securities of an issuer are considered as one class and all
preferred stocks of an issuer are considered as one class.

<PAGE>

PURCHASE OF FUND SHARES
- -----------------------------------------------------------------------------

The Fund offers its shares for sale to the public on a continuous basis.
Pursuant to a Distribution Agreement between the Fund and Dean Witter
Distributors Inc. (the "Distributor"), an affiliate of the Investment
Manager, shares of the Fund are distributed by the Distributor and offered by
DWR and other dealers who have entered into selected dealer agreements with
the Distributor ("Selected Broker-Dealers"). The principal executive office
of the Distributor is located at Two World Trade Center, New York, New York
10048.

The minimum initial purchase is $1,000. Subsequent purchases of $100 or
more may be made by sending a check, payable to Dean Witter Diversified
Income Trust, directly to Dean Witter Trust Company (the "Transfer Agent") at
P.O. Box 1040, Jersey City, NJ 07303 or by contacting an account executive of
DWR or other Selected-Broker Dealer. In the case of investments pursuant to
Systematic Payroll Deduction Plans (including Individual Retirement Plans),
the Fund, in its discretion, may accept investments without regard to any
minimum amounts which would otherwise be required if the Fund has reason to
believe that additional investments will increase the investment in all
accounts under such Plans to at least $1,000. Certificates for shares
purchased will not be issued unless a request is made by the shareholder in
writing to the Transfer Agent. The offering price will be the net asset value
per share next determined following receipt of an order (see "Determination
of Net Asset Value").

Shares of the Fund are sold through the Distributor on a normal five
business day settlement basis; that is payment is due on the fifth business
day (settlement date) after the order is placed with the Distributor. Since
DWR and other Selected Broker-Dealers forward investors' funds on settlement
date, they will benefit from the temporary use of the funds if payment is
made prior thereto. As noted above, orders placed directly with the Transfer
Agent must be accompanied by payment. Investors will be entitled to receive
dividends and capital gains distributions if their order is received by the
close of business on the day prior to the record date for such distributions.
While no sales charge is imposed at the time shares are purchased, a
contingent deferred sales charge may be imposed at the time of redemption
(see "Redemptions and Repurchases"). Sales personnel are compensated for
selling shares of the Fund at the time of their sale by the Distributor
and/or Selected Broker-Dealer. In addition, some sales personnel of the
Selected Broker-Dealer will receive various types of non-cash compensation as
special sales incentives, including trips, educational and/or business
seminars and merchandise. The Fund and the Distributor reserve the right to
reject any purchase orders.

PLAN OF DISTRIBUTION

The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the
Act (the "Plan"), under which the Fund pays the Distributor a fee, which is
accrued daily and payable monthly, at an annual rate of 0.85% of the lesser
of: (a) the average daily aggregate gross sales of the Fund's shares since
the inception of the Fund (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 Fund's inception upon which a
contingent deferred sales charge has been imposed or waived; or (b) the
Fund's average daily net assets. This fee is treated by the Fund as an
expense in the year it is accrued. A portion of the fee payable pursuant to
the Plan, equal to 0.20% of the Fund's average daily net assets, is
characterized as a service fee within the meaning of NASD guidelines.

Amounts paid under the Plan are paid to the Distributor to compensate it
for the services provided and the expenses borne by the Distributor and
others in the distribution of the Fund's shares, including the payment of
commissions for sales of the Fund's shares and incentive compensation to and
expenses of DWR's account executives and others who engage in or support
distribution of shares, 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 utilize fees paid pursuant to the
Plan to compensate DWR and other Selected Broker-Dealers for their
opportunity costs in advancing such amounts, which compensation would be in
the form of a carrying charge on any unreimbursed distribution expenses.

For the fiscal year ended October 31, 1994, the Fund accrued payments
under the Plan amounting to $2,672,003, which amount is equal to 0.85% of the
Fund's average daily net assets for the fiscal period. These payments accrued
under the Plan were calculated pursuant to clause (b) of the compensation
formula under the Plan.

At any given time, the expenses in distributing shares of the Fund may be
in excess of the total of (i) the payments made by the Fund pursuant to the
Plan, and (ii) the proceeds of contingent deferred sales charges paid by
investors upon the redemption of shares (see "Redemptions and
Repurchases--Contingent Deferred Sales Charge"). For example, if $1 million
in expenses in distributing shares of the Fund had been incurred and $750,000
had been received as described in (i) and (ii) above, the excess expense
would amount to $250,000.

<PAGE>

The Distributor has advised the Fund that such excess amount, including the
carrying charge described above, totalled $8,911,498 at October 31, 1994,
which was equal to 2.19% of the Fund's net assets on such date. Because there
is no requirement under the Plan that the Distributor be reimbursed for all
distribution 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
in excess of payments made to the Distributor under the Plan, and the
proceeds of contingent deferred sales charges paid by investors upon
redemption of shares, if for any reason the Plan is terminated the Trustees
will consider at that time the manner in which to treat such expenses. 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.

DETERMINATION OF NET ASSET VALUE

The net asset value per share of the Fund is determined by taking the value
of all the assets of the Fund, subtracting all liabilities, dividing by the
number of shares outstanding and adjusting the result to the nearest cent.
The net asset value per share is determined by the Investment Manager as of
4:00 P.M. New York time on each day that the New York Stock Exchange is open.
The net asset value per share will not be determined on Good Friday and on
such other federal and non-federal holidays as are observed by the New York
Stock Exchange.

In the calculation of the Fund's net asset value: (1) an equity portfolio
security listed or traded on the New York or American Stock Exchange or other
domestic or foreign stock exchange is valued at its latest sale price on that
exchange; if there were no sales that day, the security is valued at the
latest bid price (in cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated as the primary
market by the Trustees); and (2) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest bid price. 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 Fund's
Trustees. For valuation purposes, quotations of foreign portfolio securities,
other assets and liabilities and forward contracts stated in foreign currency
are translated into U.S. dollar equivalents at the prevailing market rates
prior to the close of the New York Stock Exchange.

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

Certain of the Fund's portfolio securities may be valued by an outside
pricing service approved by the Fund's Trustees. The pricing service utilizes
a matrix system incorporating security quality, maturity and coupon as the
evaluation model parameters, and/or research evaluations by its staff,
including review of broker-dealer market price quotations in determining what
it believes is the fair valuation of the portfolio securities valued by such
pricing service.

Generally, trading in foreign securities, as well as corporate bonds,
United States Government securities and money market instruments, is
substantially completed each day at various times prior to the regular close
of the New York Stock Exchange. The values of such securities used in
computing the net asset value of the Fund's shares are determined as of such
times. Foreign currency exchange rates are also generally determined prior to
the regular close of the New York Stock Exchange. Occasionally, events which
affect the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of the New York
Stock Exchange and will therefore not be reflected in the computation of the
Fund's net asset value. If events materially affecting the value of such
securities occur during such period, then these securities will be valued at
their fair value as determined in good faith under procedures established by
and under the supervision of the Trustees.

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

AUTOMATIC INVESTMENT OF DIVIDENDS AND DISTRIBUTIONS. All income dividends
and capital gains distributions are automatically paid in full and fractional
shares of the Fund (or, if specified by the shareholder, any other open-end
investment company for which InterCapital serves as investment manager
(collectively, with the Fund, the "Dean Witter Funds")), unless the
shareholder requests that they be paid in cash. Shares so acquired are not
subject to the imposition of a contingent deferred sales charge upon their
redemption (see "Redemptions and Repurchases").

<PAGE>

EASYINVEST(SM). 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 Fund's Transfer Agent for
investment in shares of the Fund.

SYSTEMATIC WITHDRAWAL PLAN. A systematic 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, 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"). 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.

Shareholders should contact their DWR or other Selected Broker-Dealer
account executive or the Transfer Agent for further information about any of
the above services.

TAX SHELTERED RETIREMENT PLANS. Retirement plans are available through the
Distributor for use by corporations, the self-employed, eligible Individual
Retirement Accounts and Custodial Accounts under Section 403(b)(7) of the
Internal Revenue Code. Adoption of such plans should be on advice of legal
counsel or tax adviser.

For further information regarding plan administration, custodial fees and
other details, investors should contact their account executive or the
Transfer Agent.

EXCHANGE PRIVILEGE

The Fund makes available to its shareholders an "Exchange Privilege" allowing
the exchange of shares of the Fund 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 and five Dean Witter Funds
which are money market funds (the foregoing eight non-CDSC funds are
hereinafter 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 to another CDSC fund or any Exchange Fund that is not a money
market fund is on the basis of the next calculated net asset value per share
of each fund after the exchange order is received. When exchanging into a
money market fund from the Fund, shares of the Fund are redeemed out of the
Fund at their next calculated net asset value and the proceeds of the
redemption are used to purchase shares of the money market fund at their net
asset value determined the following business day. Subsequent exchanges
between any of the money market funds and any of the CDSC funds can be
effected on the same basis. No contingent deferred sales charge ("CDSC") is
imposed at the time of any exchange, although any applicable CDSC will be
imposed upon ultimate redemption. Shares of the Fund acquired in exchange for
shares of another CDSC fund having a different CDSC schedule than that of
this Fund will be subject to the CDSC schedule of this Fund, even if such
shares are subsequently re-exchanged for shares of the CDSC fund originally
purchased. 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 (for the purpose of determining the
rate of the CDSC) is frozen. If those shares are subsequently reexchanged for
shares of a CDSC fund, the holding period previously frozen when the first
exchange was made resumes on the last day of the month in which shares of a
CDSC fund are reacquired. Thus, the CDSC is based upon the time (calculated
as described above) the shareholder was invested in a CDSC fund (see
"Redemptions and Repurchases--Contingent Deferred Sales Charge"). However, in
the case of shares of the Fund exchanged into an Exchange Fund, 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 which are attributable to those shares.
(Exchange Fund 12b-1 distribution fees are described in the prospectuses for
those funds.)

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.

<PAGE>

Purchases and exchanges should be made for investment purposes only. A
pattern of frequent exchanges may be deemed by the Investment Manager to be
abusive and contrary to the best interests of the Fund's other shareholders
and, at the Investment Manager's discretion, may be limited by the Fund's
refusal to accept additional purchases and/or exchanges from the investor.
Although the Fund does not have any specific definition of what constitutes a
pattern of frequent exchanges, and will consider all relevant factors in
determining whether a particular situation is abusive and contrary to the
best interests of the Fund and its other shareholders, investors should be
aware that the Fund and each of the other Dean Witter Funds may in their
discretion limit or otherwise restrict the number of times this Exchange
Privilege may be exercised by any investor. Any such restriction will be made
by the Fund on a prospective basis only, upon notice to the shareholder not
later than ten days following such shareholder's most recent exchange.

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. Exchanges are subject to the minimum investment requirement
and any other conditions imposed by each fund. 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.

Also, the Exchange Privilege may be terminated or revised at any time by
the Fund and/or any of such Dean Witter Funds for which shares of the Fund
may be exchanged, upon such notice as may be required by applicable
regulatory agencies.

If DWR or other Selected Broker-Dealer is the current dealer of record and
its account numbers are part of the account information, shareholders may
initiate an exchange of shares of the Fund for shares of any of the Dean
Witter Funds (for which the Exchange Privilege is available) pursuant to this
Exchange Privilege by contacting their account executive (no Exchange
Privilege Authorization Form is required). Other shareholders (and those
shareholders who are clients of DWR or another Selected Broker-Dealer but who
wish to make exchanges directly by writing or telephoning the Transfer Agent)
must complete and forward to the Transfer Agent an Exchange Privilege
Authorization Form, copies of which may be obtained from the Transfer Agent,
to initiate an exchange. If the Authorization Form is used, exchanges may be
made in writing or by contacting the Transfer Agent at (800) 526-3143 (toll
free). The Fund will employ reasonable procedures to confirm that exchange
instructions communicated over the telephone are genuine. Such procedures may
include requiring various forms of personal identification such as name,
mailing address, social security or other tax identification number and DWR
or other Selected Broker-Dealer account number (if any). Telephone
instructions may also be recorded. If such procedures are not employed, the
Fund may be liable for any losses due to unauthorized or fraudulent
instructions. Telephone exchange instructions will be accepted if received by
the Transfer Agent between 9:00 and 4:00 p.m., New York time, on any day the
New York Stock Exchange is open. Any shareholder wishing to make an exchange
who has previously filed an Exchange Privilege Authorization Form and who is
unable to reach the Fund by telephone should contact his or her DWR or other
Selected Broker-Dealer account executive, if appropriate, or make a written
exchange request. Shareholders are advised that during periods of drastic
economic or market changes it is possible that the telephone exchange
procedures may be difficult to implement, although this has not been the
experience of the Dean Witter Funds in the past.

Shareholders should contact their DWR or other Selected Broker-Dealer
account executive or the Transfer Agent for further information about the
Exchange Privilege.

REDEMPTIONS AND REPURCHASES
- -----------------------------------------------------------------------------
REDEMPTION. Shares of the Fund can be redeemed for cash at any time at
their current 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 sent to
the Fund's Transfer Agent at P.O. Box 983, Jersey City, NJ 07303 is required.
If certificates are held by the shareholder(s), the shares may be redeemed by
surrendering the certificate(s) with a written request for redemption, along
with any additional information required by the Transfer Agent.

CONTINGENT DEFERRED SALES CHARGE. Shares of the Fund which are held for six
years or more after purchase (calculated from the last day of the month in
which the shares were purchased) will not be subject to any charge upon
redemption. Shares redeemed sooner than six years after purchase may,
however, be subject to a charge

<PAGE>

<PAGE>
upon redemption. This charge is called a "contingent deferred sales charge"
("CDSC"), which will be a percentage of the dollar amount of shares redeemed
and will be assessed on an amount equal to the lesser of the current market
value or the cost of the shares being redeemed. The size of this percentage
will depend upon how long the shares have been held, as set forth in the
table below:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
YEAR SINCE PURCHASE PERCENTAGE OF AMOUNT
PAYMENT MADE 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>
A CDSC will not be imposed on: (i) any amount which represents an increase
in value of shares purchased within the six years preceding the redemption;
(ii) the current net asset value of shares purchased more than six years
prior to the redemption; and (iii) the current net asset value of shares
purchased through reinvestment of dividends or distributions and/or shares
acquired in exchange for shares of Dean Witter Funds sold with a front-end
sales charge or of other Dean Witter Funds acquired in exchange for such
shares. Moreover, in determining whether a CDSC is applicable it will be
assumed that amounts described in (i), (ii) and (iii) above (in that order)
are redeemed first.

In addition, the CDSC, if otherwise applicable, will be waived in the case
of: (i) redemptions of shares held at the time a shareholder dies or becomes
disabled, only if the shares are (a) registered either in the name of an
individual shareholder (not a trust), or in the names of such shareholder and
his or her spouse as joint tenants with right of survivorship, or (b) held in
a qualified corporate or self-employed retirement plan, Individual Retirement
Account or Custodial Account under Section 403(b)(7) of the Internal Revenue
Code, provided in either case that the redemption is requested within one
year of the death or initial determination of disability, and (ii)
redemptions in connection with the following retirement plan distributions:
(a) lump-sum or other distributions from a qualified corporate or
self-employed retirement plan following retirement (or in the case of a "key
employee" of a "top heavy" plan, following attainment of age 59 1/2 ); (b)
distributions from an Individual Retirement Account or Custodial Account
under Section 403(b)(7) of the Internal Revenue Code following attainment of
age 59 1/2 ; and (c) a tax-free return of an excess contribution to an IRA.
For the purpose of determining disability, the Distributor utilizes the
definition of disability contained in Section 72(m)(7) of the Internal
Revenue Code, which relates to the inability to engage in gainful employment.
All waivers will be granted only following receipt by the Distributor of
confirmation of the shareholder's entitlement.

REPURCHASE. DWR and other Selected Broker-Dealers are authorized to
repurchase shares represented by a share certificate which is delivered to
any of their offices. Shares held in a shareholder's account without a share
certificate may also be repurchased by DWR and other Selected Broker-Dealers
upon the telephonic request of the shareholder. The repurchase price is the
net asset value next computed (see "Purchase of Fund Shares") after such
repurchase order is received by DWR or other Selected Broker-Dealer, reduced
by any applicable CDSC.

The CDSC, if any, will be the only fee imposed by the Fund, the
Distributor, DWR, and other Selected Broker-Dealers. The offer by DWR and
other Selected Broker-Dealers to repurchase shares may be suspended without
notice by them at any time. In that event, shareholders may redeem their
shares through the Fund's Transfer Agent as set forth above under
"Redemption."

PAYMENT FOR SHARES REDEEMED OR REPURCHASED. 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 under unusual circumstances. If the shares to be redeemed have
recently been purchased by check, payment of the 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
receipt 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.

REINSTATEMENT PRIVILEGE. A shareholder who has had his or her shares redeemed
or repurchased and has not previously exercised this reinstatement privilege
may, within thirty days after the date of the 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, together with the proceeds, is received by the
Transfer Agent and receive a pro rata credit for any CDSC paid in connection
with such redemption or repurchase.

<PAGE>

INVOLUNTARY REDEMPTION. The Fund reserves the right, on sixty days' notice,
to redeem at their net asset value the shares of any shareholder (other than
shares held in an Individual Retirement Account or custodial account under
Section 403(b)(7) of the Internal Revenue Code) whose shares have a value of
less than $100 as a result of redemptions or repurchases, or such lesser
amount as may be fixed by the Board of Trustees. However, before the Fund
redeems such shares and sends the proceeds to the shareholder, it will notify
the shareholder that the value of the shares is less than $100 and allow the
shareholder sixty days to make an additional investment in an amount which
will increase the value of the account to $100 or more before the redemption
is processed. No CDSC will be imposed on any involuntary redemption.

DIVIDENDS, DISTRIBUTIONS AND TAXES
- -----------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS. The Fund intends to declare and pay monthly
income dividends and to distribute net short-term and net long-term capital
gains, if any, at least once each year. The Fund may, however, determine
either to distribute or to retain all or a portion of any long-term capital
gains in any year for reinvestment.

All dividends and capital gains distributions will be paid in additional
Fund shares and automatically credited to the shareholder's account without
issuance of a share certificate unless the shareholder requests in writing
that all dividends and/or distributions be paid in cash. (See "Shareholder
Services--Automatic Investment of Dividends and Distributions".)

TAXES. Because the Fund intends to distribute all of its net investment
income and net capital gains to shareholders and otherwise remain qualified
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 on such income and capital gains.

Gains or losses on the Fund's transactions in certain listed options on
and futures and options on futures traded on U.S. exchanges generally are
treated as 60% long-term gain or loss and 40% short-term gain or loss. When
the Fund engages in options and futures transactions, various tax regulations
applicable to the Fund may have the effect of causing the Fund to recognize a
gain or loss for tax purposes before that gain or loss is realized, or to
defer recognition of a realized loss for tax purposes. Recognition, for tax
purposes, of an unrealized loss may result in a lesser amount of the Fund's
realized net gains being available for distribution.

Shareholders who are required to pay taxes on their income will normally
have to pay federal income taxes, and any applicable state and/or local
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 and net short-term capital gains, are taxable to the
shareholder as ordinary dividend income regardless of whether the shareholder
receives such distributions in additional shares or in cash.

Distributions of 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. Since the Fund's income is expected
to be derived primarily from interest rather than dividends, only a small
portion, if any, of the Fund's dividends and distributions is expected to be
eligible for the dividends received deduction to corporation shareholders.

After the end of the calendar year, shareholders will receive full
information on their dividends and capital gains distributions for tax
purposes.

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 who are not citizens or
residents of, or entities organized in, the United States may be subject to
withholding taxes of up to 30% on certain payments received from the Fund.

Dividends, interest and gains received by the Fund may give rise to
withholding and other taxes imposed by foreign countries. If it qualifies for
and has made the appropriate election with the Internal Revenue Service, the
Fund will report annually to its shareholders the amount per share of such
taxes, to enable shareholders to claim United States foreign tax credits or
deductions with respect to such taxes. In the absence of such an election,
the Fund would deduct foreign tax in computing the amount of its
distributable income.

The foregoing discussion relates solely to the federal income tax
consequences of an investment in the Fund. Distributions may also be subject
to state and local taxes; therefore, each shareholder is advised to consult
his or her own tax adviser.

<PAGE>

PERFORMANCE INFORMATION
- -----------------------------------------------------------------------------

From time to time the Fund may quote its "yield" and/or its "total return"
in advertisements and sales literature. Both the yield and the total return
of the Fund are based on historical earnings and are not intended to indicate
future performance. The yield of the Fund is computed by dividing the Fund's
net investment income over a 30-day period by an average value (using the
average number of shares entitled to receive dividends and the net asset
value per share at the end of the period), all in accordance with applicable
regulatory requirements. Such amount is compounded for six months and then
annualized for a twelve-month period to derive the Fund's yield.

The "average annual total return" of the Fund refers to a figure
reflecting the average annualized percentage increase (or decrease) in the
value of an initial investment in the Fund of $1,000 over the life of the
Fund. Average annual total return reflects all income earned by the Fund, any
appreciation or depreciation of the Fund's assets and all expenses incurred
by the Fund, for the stated periods. It also assumes reinvestment of all
dividends and distributions paid by the Fund.

In addition to the foregoing, the Fund may advertise its total return over
different periods of time by means of aggregate, average, and year-by-year or
other types of total return figures. The Fund may also advertise the growth
of hypothetical investments of $10,000, $50,000 and $100,000 in shares of the
Fund. The Fund from time to time may also advertise its performance relative
to certain performance rankings and indexes compiled by independent
organizations (such as mutual fund performance rankings of Lipper Analytical
Services, Inc.).

ADDITIONAL INFORMATION
- -----------------------------------------------------------------------------

VOTING RIGHTS. All shares of beneficial interest of the Fund are of $0.01
par value and are equal as to earnings, assets and voting privileges.

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

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

SHAREHOLDER INQUIRIES. All inquiries regarding the Fund should be directed to
the Fund at the telephone number or address set forth on the front cover of
this Prospectus.

<PAGE>

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

BOND RATINGS
<TABLE>
<CAPTION>
<S> <C>
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such issues.

Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise
what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities.

A Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.

Baa Bonds which are rated Baa are considered as medium grade obligations; i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements
may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as well.

Bonds rated Aaa, Aa, A and Baa are considered investment grade bonds.

Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be very moderate, and therefore not well safeguarded
during both good and bad times over the future. Uncertainty of position characterizes bonds in this class.

B Bonds which are rated B generally lack characteristics of desirable investments. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any long period of time may be small.

Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest.

Ca Bonds which are rated Ca present obligations which are speculative in a high degree. Such issues are often in default
or have other marked shortcomings.

C Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing.
</TABLE>

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

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

COMMERCIAL PAPER RATINGS

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

<PAGE>

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

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

BOND RATINGS

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

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

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

<TABLE>
<CAPTION>
<S> <C>
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is
extremely strong.

AA Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the highest-rated issues
only in small degree.

A Debt rated A has a strong capacity to pay interest and repay principal although they are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories.

BBB Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for debt in this category than for debt in higher-rated
categories.

Bonds rated AAA, AA, A and BBB are considered investment grade bonds.

BB Debt rated BB has less near-term vulnerability to default than other speculative grade debt. However, it faces major
ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to inadequate
capacity to meet timely interest and principal payment.

B Debt rated B has a greater vulnerability to default but presently has the capacity to meet interest payments and principal
repayments. Adverse business, financial or economic conditions would likely impair capacity or willingness to pay
interest and repay principal.

CCC Debt rated CCC has a current identifiable vulnerability to default, and is dependent upon favorable business, financial
and economic conditions to meet timely payments of interest and repayments of principal. In the event of adverse business,
financial or economic conditions, it is not likely to have the capacity to pay interest and repay principal.

CC The rating CC is typically applied to debt subordinated to senior debt which is assigned an actual or implied CCC rating.

C The rating C is typically applied to debt subordinated to senior debt which is assigned an actual or implied CCC--debt
rating.

Cl The rating Cl is reserved for income bonds on which no interest is being paid.

NR Indicates that no rating has been requested, that there is insufficient information on which to base a rating or that
Standard & Poor's does not rate a particular type of obligation as a matter of policy.

<PAGE>

Bonds rated BB, B, CCC, CC and C are regarded as having predominantly speculative characteristics with respect to capacity
to pay interest and repay principal. BB indicates the least degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.

Plus (+) or minus (-): The ratings from AA to CCC may be modified by the addition of a plus or minus sign to show relative
standing within the major ratings categories.

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

COMMERCIAL PAPER RATINGS

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

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

<TABLE>
<CAPTION>
<S> <C>
A-1 indicates that the degree of safety regarding timely payment is very strong.

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

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

<PAGE>

DEAN WITTER
DIVERSIFIED INCOME TRUST
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048

TRUSTEES

Jack F. Bennett
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Dr. Manuel H. Johnson
Paul Kolton
Michael E. Nugent
Philip J. Purcell
John L. Schroeder

OFFICERS

Charles A. Fiumefreddo
Chairman and Chief Executive Officer

Sheldon Curtis
Vice President, Secretary and
General Counsel

Peter M. Avelar
Vice President

Rajesh K. Gupta
Vice President

Vinh Q. Tran
Vice President

Thomas F. Caloia
Treasurer

CUSTODIANS

The Bank of New York
90 Washington Street
New York, New York 10286

The Chase Manhattan Bank
One Chase Plaza
New York, New York 10005

TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT

Dean Witter Trust Company
Harborside Financial Center
Plaza Two
Jersey City, New Jersey 07311

INDEPENDENT ACCOUNTANTS

Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036

INVESTMENT MANAGER

Dean Witter InterCapital, Inc.