MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST, 485BPOS, 1999-02-26

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
485BPOS, 1999-02-26

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 26, 1999
REGISTRATION NOS.: 33-44782
811-6515
===============================================================================
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 9 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940 [X]
AMENDMENT NO. 10 [X]

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

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FORMERLY NAMED DEAN WITTER DIVERSIFIED INCOME TRUST
(A MASSACHUSETTS BUSINESS TRUST)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 392-1600
BARRY FINK, ESQ.
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(NAME AND ADDRESS OF AGENT FOR SERVICE)

Copy to:
DAVID M. BUTOWSKY, ESQ.
GORDON ALTMAN BUTOWSKY
WEITZEN SHALOV & WEIN
114 WEST 47TH STREET
NEW YORK, NEW YORK 10036
----------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:

As soon as practicable after this Post-Effective Amendment becomes effective.

IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)

X immediately upon filing pursuant to paragraph (b)
---
on February 26, 1999 pursuant to paragraph (b)
---
60 days after filing pursuant to paragraph (a)
---
on (date) pursuant to paragraph (a) of rule 485.
---

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

AMENDING THE PROSPECTUS AND UPDATING FINANCIAL STATEMENTS

===============================================================================
<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
CROSS-REFERENCE SHEET
FORM N-1A

<TABLE>
<S> <C> <C>
ITEM CAPTION
PART A PROSPECTUS
1. ............. Cover Page; Back Cover
2. ............. Investment Objective; Principal Investment
Strategies, Principal Risks, Past Performance
3. ............. Fees and Expenses
4. ............. Investment Objective; Additional Investment
Strategy Information; Additional Risk
Information
5. ............. Not Applicable
6. ............. Fund Management
7. ............. Pricing Fund Shares; How to Buy Shares; How to
Exchange Shares; How to Sell Shares;
Distributions; Tax Consequences
8. ............. Share Class Arrangements
9. ............. Financial Highlights
</TABLE>

PART B STATEMENT OF ADDITIONAL INFORMATION

Information required to be included in Part B is set forth under the
appropriate caption in Part B of this Registration Statement.

PART C

Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.

<PAGE>

PROSPECTUS - FEBRUARY 26, 1999

Morgan Stanley Dean Witter

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

DIVERSIFIED INCOME TRUST

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

<PAGE>

CONTENTS

<TABLE>
<S> <C>
The Fund Investment Objective...............................1
Principal Investment Strategies....................1
Principal Risks....................................2
Past Performance...................................5
Fees and Expenses..................................6
Additional Investment Strategy Information.........7
Additional Risk Information........................8
Fund Management...................................10
Shareholder Information Pricing Fund Shares...............................11
How to Buy Shares.................................11
How to Exchange Shares............................13
How to Sell Shares................................15
Distributions.....................................16
Tax Consequences..................................17
Share Class Arrangements..........................17

Financial Highlights ..................................................24
Our Family of Funds .....................................Inside Back Cover
This Prospectus contains important information about
the Fund. Please read it carefully and keep it for
future reference.

</TABLE>

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

[ ] Growth and Income

[X] INCOME

[ ] Money Market

<PAGE>

THE FUND

[GRAPHIC OMITTED]
INVESTMENT OBJECTIVE
- --------------------
Morgan Stanley Dean Witter Diversified Income Trust is a mutual fund 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. There is no guarantee that the Fund will
achieve these objectives.

[GRAPHIC OMITTED]
PRINCIPAL INVESTMENT STRATEGIES
- -------------------------------
The Fund will normally invest at least 65% of its assets in a diversified
portfolio of fixed-income securities. The Fund's "Investment Manager," Morgan
Stanley Dean Witter Advisors Inc., attempts to equally allocate approximately
one-third of the Fund's assets among three separate groups or market segments
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 group so that following the adjustment the value of the
investments in each group will be equal to the extent practicable. The
Investment Manager diversifies investments among the groups in an effort to
reduce overall portfolio risk -- a general downturn in one group may be offset
by a rise in another.

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

The three groups of Fund investments include: (1) global short-term securities;
(2) mortgage-backed securities and U.S. Government securities; and (3) high
yield securities.

(1) GLOBAL SHORT-TERM SECURITIES. The securities in the first group include:

o 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 instrumentalities or fixed-income securities
issued by a corporation, all of which are rated in one of the two highest
bond rating categories by either Standard & Poor's ("S&P") or Moody's
Investors Service ("Moody's") or, if unrated, are determined by the
Investment Manager to be of equivalent quality;

o Certificates of deposit and bankers' acceptances (a) issued or guaranteed by,
or time deposits maintained at, banks and (b) rated in the two highest
short-term rating categories by either S&P, Moody's or Duff & Phelps or, if
unrated, are determined by the Investment Manager to be of high
creditworthiness; and

o Commercial paper rated in the two highest short-term rating categories by
either S&P, Moody's or Duff & Phelps or, if unrated, issued by U.S. or
foreign companies having outstanding debt securities rated A or higher by
S&P or Moody's.

Each security in this first group will have a short-term maturity remaining
(three years or less) when the Fund purchases the investment.

The Investment Manager will actively manage the Fund's assets in this group in
accordance with a global market strategy which may also include entering into
forward foreign currency exchange contracts. Consistent with this 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.

1
<PAGE>

(2) MORTGAGE-BACKED SECURITIES AND U.S. GOVERNMENT SECURITIES. The securities
in the second group include:

o Fixed-rate and adjustable rate mortgage-backed securities that are issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or by
private issuers that are rated in the highest bond rating category by
Moody's or S&P or, if not rated, are determined to be of comparable quality
by the Investment Manager;

o U.S. Treasury securities, such as bills, notes, bonds and zero coupon
securities (without restrictions as to remaining maturity at time of
purchase); and

o U.S. Government agency securities, such as discount notes, medium-term notes,
debentures and zero coupon securities (without restrictions as to remaining
maturity at time of purchase).

(3) HIGH YIELD SECURITIES. The securities in the third group include 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. Fixed-income securities rated Ba or lower by Moody's
or BB or lower by S&P are considered speculative investments, commonly known as
"junk bonds." The securities in this group may include both convertible and
non-convertible debt securities and preferred stock. They also may include
"Rule 144A" securities, which are subject to resale restrictions. The Fund does
not have any minimum quality rating standard for this group of investments.
Thus, the Fund may invest in fixed-income securities that may already be in
default on payment of interest or principal.

***

Fixed-income securities are debt securities and can take the form of
bonds, notes or commercial paper. The issuer of the debt security borrows money
from the investor who buys the security. Most debt securities pay either fixed
or adjustable rates of interest at regular intervals until they mature, at
which point investors get their principal back.

In pursuing the Fund's investment objective, the Investment Manager has
considerable leeway in deciding which investments it buys, holds or sells on a
day-to-day basis -- and which trading strategies it uses. For example, the
Investment Manager in its discretion may determine to use some permitted
trading strategies while not using others. In addition to the three groups of
fixed-income securities, the Fund may also invest in options and futures,
forward currency contracts, and common stock and warrants.

[GRAPHIC OMITTED]
PRINCIPAL RISKS
- ---------------
The Fund's share price will fluctuate with changes in the market value of the
Fund's portfolio securities. The Fund's yield also will vary based on the yield
of the Fund's portfolio securities. Neither the value nor the yield of the U.S.
Government securities that the Fund invests in (or the value or yield of the
Fund's shares) is guaranteed by the U.S. Government. When you sell Fund shares,
they may be worth less than what you paid for them and, accordingly, you can
lose money investing in this Fund.

FIXED-INCOME SECURITIES. Principal risks of investing in the Fund are
associated with its fixed-income investments. All fixed-income securities are
subject to two types of

2
<PAGE>

risk: credit risk and interest rate risk. Credit risk refers to the possibility
that the issuer of a security will be unable to make interest payments and/or
repay the principal on its debt.

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

HOW INTEREST RATES AFFECT BOND PRICES
- -------------------------------------------------------------------------------
PRICE PER $1,000 OF A BOND IF INTEREST RATES:
------------------------------------------------
INCREASE DECREASE
------------------------------------------------
<S> <C> <C> <C> <C> <C>
BOND MATURITY COUPON 1% 2% 1% 2%
- -------------------------------------------------------------------------------
1 Year N/A $1,000 $1,000 $1,000 $1,000
- -------------------------------------------------------------------------------
5 Years 4.25% $967 $934 $1,038 $1,076
- -------------------------------------------------------------------------------
10 Years 4.75% $930 $867 $1,074 $1,155
- -------------------------------------------------------------------------------
30 Years 5.25% $865 $756 $1,166 $1,376
- -------------------------------------------------------------------------------

</TABLE>

Coupons reflect yields on Treasury securities as of December 31, 1998. The
table is not representative of price changes for mortgage-backed or
asset-backed securities principally because of prepayment risk, and it is not
representative of high yield securities. In addition, the table is an
illustration and does not represent expected yields or share price changes of
any Morgan Stanley Dean Witter mutual fund.

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

FOREIGN SECURITIES. The Fund's investments in foreign securities (including
depository receipts) involve risks in addition to the risks associated with
domestic securities. One additional risk is currency risk. While the price of
Fund shares is quoted and redemption proceeds are paid in U.S. dollars, the
Fund generally converts U.S. dollars to a foreign market's local currency to
purchase a security in that market. If the value of that local currency falls
relative to the U.S. dollar, the U.S. dollar value of the foreign security will
decrease. This is true even if the foreign security's local price remains
unchanged.

Foreign securities also have risks related to political and economic
developments abroad, including expropriations, confiscatory taxation, exchange
control regulation, limitations on the use or transfer of Fund assets, and any
effects of foreign social, economic or political instability. Foreign
companies, in general, are not subject to the regulatory requirements of U.S.
companies and, as such, there may be less publicly available information about
these companies. Moreover, foreign accounting, auditing and financial reporting
standards generally are different from those applicable to U.S. companies.
Finally, in the event of a default of any foreign debt obligations, it may be
more difficult for the Fund to obtain or enforce a judgment against the issuers
of the securities.

3
<PAGE>

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 U.S. counterparts.

Many European countries have adopted or are in the process of adopting a single
European currency, referred to as the "euro." The consequences of the euro
conversion for foreign exchange rates, interest rates and the value of European
securities the Fund may purchase are presently unclear. The consequences may
adversely affect the value and/or increase the volatility of securities held by
the Fund.

MORTGAGE-BACKED SECURITIES. Mortgage-backed securities in which the Fund may
invest have different risk characteristics than traditional debt securities.
Although generally the value of fixed-income securities increases during
periods of falling interest rates and decreases during periods of rising
interest rates, this is not always the case with mortgage-backed securities.
This is due to the fact that principal on underlying mortgages may be prepaid
at any time as well as other factors. Generally, prepayments will increase
during a period of falling interest rates and decrease during a period of
rising interest rates. The rate of prepayments also may be influenced by
economic and other factors. Prepayment risk includes the possibility that, as
interest rates fall, securities with stated interest rates may have the
principal prepaid earlier than expected, requiring the Fund to invest the
proceeds at generally lower interest rates.

Investments in mortgage-backed securities are made based upon, among other
things, expectations regarding the rate of prepayments on underlying mortgage
pools. Rates of prepayment, faster or slower than expected by the Investment
Manager, could reduce the Fund's yield, increase the volatility of the Fund
and/or cause a decline in net asset value. Certain mortgage-backed securities
may be more volatile and less liquid than other traditional types of debt
securities.

HIGH YIELD SECURITIES. The Fund's investments in high yield securities,
commonly known as "junk bonds," pose significant risks. The prices of high
yield securities are likely to be more sensitive to adverse economic changes or
individual corporate developments than higher rated securities. During an
economic downturn or substantial period of rising interest rates, junk bond
issuers and, in particular, highly leveraged issuers may experience financial
stress that would adversely affect their ability to service their principal and
interest payment obligations, to meet their projected business goals or to
obtain additional financing. In the event of a default, the Fund may incur
additional expenses to seek recovery. The Rule 144A securities could have the
effect of increasing the level of Fund illiquidity to the extent the Fund may
be unable to find qualified institutional buyers interested in purchasing the
securities. In addition, periods of economic uncertainty and change probably
would result in an increased volatility of market prices of high yield
securities and a corresponding volatility in the Fund's net asset value.

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

4
<PAGE>

and warrants investments. For more information about these risks, see the
"Additional Risk Information" section.

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

[GRAPHIC OMITTED]
PAST PERFORMANCE
- ----------------

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

ANNUAL TOTAL RETURNS -- CALENDAR YEARS

Year Percentage
1992* 4.95%
1993 9.63%
1994 -1.31%
1995 12.71%
1996 8.36%
1997 6.04%
1998 2.48%

* For the period April 9, 1992 through December 31, 1992

(sidebar)
ANNUAL TOTAL RETURNS
This chart shows how the performance of the Fund's Class B shares has varied
from year to year over the Life of the Fund.
(end sidebar)

The bar chart reflects the performance of Class B shares; the performance of
the other Classes will differ because the Classes have different ongoing fees.
The performance information in the bar chart does not reflect the deduction of
sales charges; if these amounts were reflected, returns would be less than
shown.
During the periods shown in the bar chart, the highest return for a calendar
quarter was 4.34% (quarter ended March 31, 1993) and the lowest return for a
calendar quarter was -1.22% (quarter ended March 31, 1994).

(sidebar)
AVERAGE ANNUAL
TOTAL RETURNS

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

AVERAGE ANNUAL TOTAL RETURNS (FOR THE PERIOD ENDED THE 1998 CALENDAR YEAR)
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PAST 1 YEAR PAST 5 YEARS LIFE OF THE FUND
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A -1.27% -- --
- -------------------------------------------------------------------------------
Class B1 -2.29% 5.26% 6.29%4
- -------------------------------------------------------------------------------
Class C 1.55% -- --
- -------------------------------------------------------------------------------
Class D 3.35% -- --
- -------------------------------------------------------------------------------
Lehman Brothers Mutual Fund
Government/Corporate 8.44% 6.60% 7.36%5
Intermediate Bond Index2
- -------------------------------------------------------------------------------
Lipper Multi-Sector
Income Funds Average3 1.30% 6.11% 7.72%5

</TABLE>

1 Prior to July 28, 1997, the Fund only issued Class B shares.

2 The Lehman Brothers Mutual Fund Government/Corporate Intermediate Bond Index
tracks the performance of government and corporate bonds, including U.S.
Government agency and U.S. treasury securities and corporate and yankee bonds
with maturities of 1 to 10 years. The performance of the index does not
include any expenses, fees or charges. The index is unmanaged and should not
be considered an investment.

3 The Lipper Multi-Sector Income Funds Average tracks the performance of the
funds which seek current income by allocating assets among several different
fixed-income securities sectors (with no more than 65% in any one sector
except for defensive purposes), including U.S. government and foreign
governments, with a significant portion of assets in securities rated below
investment grade, as reported by Lipper Analytical Services.

<PAGE>

4 For the period April 9, 1992 to December 31, 1998.

5 For the period April 30, 1992 to December 31, 1998.

<PAGE>

[GRAPHIC OMITTED]
FEES AND EXPENSES
- -----------------

The Fund offers four Classes of shares: Classes A, B, C and D. Each Class has a
different combination of fees, expenses and other features. The table below
briefly describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. The Fund does not charge account or exchange fees. See the
"Share Class Arrangements" section for further fee and expense information.

(sidebar)
SHAREHOLDER FEES

These fees are paid directly from your investment.
(end sidebar)

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS D
<S> <C> <C> <C> <C>
SHAREHOLDER FEES
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) 4.25%1 None None None
- ------------------------------------------------------------------------------------------------------------
Maximum deferred sales charge (load) (as a
percentage based on the lesser of the offering None2 5.00%3 1.00%4 None
price or net asset value at redemption)
- ------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
- ------------------------------------------------------------------------------------------------------------
Management fee 0.40% 0.40% 0.40% 0.40%
- ------------------------------------------------------------------------------------------------------------
Distribution and service (12b-1) fees 0.24% 0.85% 0.85% None
- ------------------------------------------------------------------------------------------------------------
Other expenses 0.13% 0.13% 0.13% 0.13%
- ------------------------------------------------------------------------------------------------------------
Total annual Fund operating expenses 0.77% 1.38% 1.38% 0.53%
- ------------------------------------------------------------------------------------------------------------
</TABLE>

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

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

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

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

(sidebar)
ANNUAL FUND
OPERATING EXPENSES

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

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

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

<TABLE>
<CAPTION>
IF YOU SOLD YOUR SHARES IF YOU HELD YOUR SHARES
- -------------------------------------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A $500 $661 $835 $1,339 $ 500 $661 $835 $1,339
- ---------------------------------------------------------- ----------------------------------------------
Class B $640 $737 $955 $1,657 $ 140 $437 $755 $1,657
- ---------------------------------------------------------- ----------------------------------------------
Class C $240 $437 $755 $1,657 $ 140 $437 $755 $1,657
- ---------------------------------------------------------- ----------------------------------------------
Class D $54 $170 $296 $665 $ 54 $170 $296 $665
- ---------------------------------------------------------- ----------------------------------------------

</TABLE>

6
<PAGE>

[GRAPHIC OMITTED]
ADDITIONAL INVESTMENT STRATEGY INFORMATION
- ------------------------------------------

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

MORTGAGE-BACKED SECURITIES. One type of mortgage-backed security, in which the
Fund may invest, is a mortgage pass-through security. These securities
represent a participation interest in a pool of residential mortgage loans
originated by U.S. governmental or private lenders such as banks. They differ
from conventional debt securities, which provide for periodic payment of
interest in fixed amounts 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 made by the
individual borrowers on the pooled mortgage loans.

The Fund may invest in mortgage pass-through securities that are issued or
guaranteed by the Government National Mortgage Association, the Federal
National Mortgage Association and the Federal Home Loan Mortgage Corporation.
These securities are either direct obligations of the U.S. Government, or the
issuing agency/instrumentality has the right to borrow from the U.S. Treasury
to meet its obligations, although the Treasury is not legally required to
extend credit to the agency/instrumentality.

Private mortgage pass-through securities also can be Fund investments. They are
issued by private originators of and investors in mortgage loans, including
savings and loan associations and mortgage banks. Since private mortgage
pass-through securities typically are not guaranteed by an entity having the
credit status of a U.S. Government agency, the securities generally are
structured with one or more type of credit enhancement.

OPTIONS AND FUTURES. The Fund may invest in put and call options with respect
to foreign currencies and futures on interest rate indexes. Options and futures
may be used to seek to protect against a decline in securities or currency
prices or an increase in prices of securities or currencies that may be
purchased.

FORWARD CURRENCY CONTRACTS. The Fund's investments also may include forward
currency contracts, which involve the purchase or sale of a specific amount of
foreign currency at the current price with delivery at a specified future date.
The Fund may use these contracts to hedge against adverse price movements in
its portfolio securities and the currencies in which they are denominated. The
Fund also may enter into "cross-currency" hedging transactions involving
currencies other than those in which securities are held or proposed to be
purchased are denominated. The Fund may engage in "anticipatory" hedging
transactions in which it purchases a specific amount of a foreign currency in
order to lock in the current exchange rate of a currency in which a security
that the Fund intends to purchase in the future is denominated. The Fund may
close out the anticipatory hedge without purchasing the security.

COMMON STOCK AND WARRANTS. The Fund may invest up to 20% of its assets in
common stocks. The Fund may acquire stock, among other ways, directly or upon
exercise of warrants attached to other securities or included in a unit with
fixed-income securities or acquired upon conversions of fixed-income
securities.

7
<PAGE>

DEFENSIVE INVESTING. The Fund may take temporary "defensive" positions in
attempting to respond to adverse market conditions. The Fund may invest any
amount of its assets in cash or money market instruments in a defensive posture
when the Investment Manager believes it is advisable to do so. Although taking
a defensive posture is designed to protect the Fund from an anticipated market
downturn, it could have the effect of reducing the benefit from any upswing in
the market.

PORTFOLIO TURNOVER. Although the Fund does not usually engage in substantial
short-term trading, it may from time to time engage in active trading of
portfolio securities to pursue its principal investment strategies. The
portfolio turnover rate is not expected to exceed 200% annually under normal
circumstances. A high turnover rate will increase Fund brokerage costs. It also
may increase the Fund's capital gains, which are passed along to Fund
shareholders as distributions. This, in turn, may increase your tax liability
as a Fund shareholder. See the sections on "Distributions" and "Tax
Consequences."

The percentage limitations relating to the composition of the Fund's portfolio
referenced in "Principal Investment Strategies" apply at the time the Fund
acquires an investment. Subsequent percentage changes that result from market
fluctuations or changes in assets will not require the Fund to sell any
portfolio security. The Fund may change its principal investment strategies
without shareholder approval; however, you would be notified of any changes.

[GRAPHIC OMITTED]
ADDITIONAL RISK INFORMATION
- ---------------------------
As discussed in the "Principal Risks" section, a principal risk of investing in
the Fund is associated with its fixed-income securities investments. This
section provides additional information regarding the principal risks of
investing in the Fund.

OPTIONS AND FUTURES. If the Fund invests in options and/or futures, its
participation in these markets would subject the Fund's portfolio to certain
risks. The Investment Manager's predictions of movements in the direction of
the bond, currency or interest rate markets may be inaccurate, and the adverse
consequences to the Fund (e.g., a reduction in the Fund's net asset value or a
reduction in the amount of income available for distribution) may leave the
Fund in a worse position than if these strategies were not used. Other risks
inherent in the use of options and futures include, for example, the possible
imperfect correlation between the price of options and futures contracts and
movements in the prices of the securities being hedged, and the possible
absence of a liquid secondary market for any particular instrument. Certain
options may be over-the-counter options, which are options negotiated with
dealers; there is no secondary market for these investments.

FORWARD CURRENCY CONTRACTS. The Fund's participation in forward currency
contracts also involves risks. If the Investment Manager employs a strategy
that does not correlate well with the Fund's investments or the currencies in
which the investments are denominated, currency contracts could result in a
loss. The contracts also may increase the Fund's volatility and may involve a
significant risk.

COMMON STOCKS. The Fund's investment in common stocks involves risk. In
general, stock values fluctuate in response to activities specific to the
company as well as

8
<PAGE>

general market, economic and political conditions. Stock prices can fluctuate
widely in response to these factors.

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

9
<PAGE>

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

(sidebar)
MORGAN STANLEY DEAN WITTER ADVISORS INC.

The Investment Manager is widely recognized as a leader in the mutual fund
industry and together with Morgan Stanley Dean Witter Services Company Inc.,
its wholly-owned subsidiary, has more than $127 billion in assets under
management or administration as of January 31, 1999.
(end sidebar)

The Fund's portfolio is managed within the Investment Manager's Taxable Income
Group. Peter M. Avelar, Rajesh K. Gupta, Anne Pickrell and Peter J. Seeley are
the primary portfolio managers of the Fund, Mr. Avelar and Mr. Gupta since its
inception and Ms. Pickrell and Mr. Seeley since February of 1998. Peter M.
Avelar, a Senior Vice President of the Investment Manager, has been managing
portfolios comprised of high yield fixed-income securities at the Investment
Manager for over five years. Rajesh K. Gupta, a Senior Vice President of the
Investment Manager, has been managing portfolios comprised of government
securities at the Investment Manager for over five years. Ms. Pickrell has been
a portfolio manager at the Investment Manager for over five years. Prior to
joining the Investment Manager in July of 1994, Mr. Seeley was a portfolio
manager at Nikko Capital Management.

The Fund pays the Investment Manager a monthly management fee as full
compensation for the services and facilities furnished to the Fund, and for
Fund expenses assumed by the Investment Manager. The fee is based on the Fund's
average daily net assets. For the fiscal year ended October 31, 1998, the Fund
accrued total compensation to the Investment Manager amounting to 0.40% of the
Fund's average daily net assets.

10
<PAGE>

SHAREHOLDER INFORMATION

[GRAPHIC OMITTED]
PRICING FUND SHARES
- -------------------

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

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

The value of the Fund's portfolio securities is based on the securities' market
price when available. When a market price is not readily available, including
circumstances under which the Investment Manager determines that a security's
market price is not accurate, a portfolio security is valued at its fair value,
as determined under procedures established by the Fund's Board of Trustees. In
these cases, the Fund's net asset value will reflect certain portfolio
securities' fair value rather than their market price. In addition, if the Fund
holds securities primarily listed on foreign exchanges, the value of the Fund's
portfolio securities may change on days when you will not be able to purchase
or sell your shares.

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

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

(sidebar)
CONTACTING A FINANCIAL ADVISOR

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

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

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

11
<PAGE>

MINIMUM INVESTMENT AMOUNTS
- -------------------------------------------------------------------------------------------------
MINIMUM INVESTMENT
------------------
INVESTMENT OPTIONS INITIAL ADDITIONAL
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
Regular Accounts $1,000 $ 100
- -------------------------------------------------------------------------------------------------
Individual Retirement Accounts: Regular IRAs $1,000 $ 100
Education IRAs $500 $ 100
- -------------------------------------------------------------------------------------------------
EasyInvest(SM) (Automatically from your
checking or savings account $ 100* $ 100*
or Money Market Fund)
- -------------------------------------------------------------------------------------------------
</TABLE>

* Provided your schedule of investments totals $1,000 in twelve months.

(sidebar)
EASYINVEST(SM)

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

(end sidebar)

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

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

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

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

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

o Make out a check for the total amount payable to: Morgan Stanley Dean Witter
Diversified Income Trust.

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

12
<PAGE>

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

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

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

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

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

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

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

13
<PAGE>

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

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

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

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

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

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

14
<PAGE>

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

<TABLE>
<S> <C>
OPTIONS PROCEDURES
- -------------------- -----------------------------------------------------------------------------------
Contact Your To sell your shares, simply call your Morgan Stanley Dean Witter Financial Advisor
Financial Advisor or other authorized financial representative.
-----------------------------------------------------------------------------------

[GRAPHIC OMITTED]

Payment will be sent to the address to which the account is registered or
deposited in your brokerage account.
- -------------------- -----------------------------------------------------------------------------------
By Letter You can also sell your shares by writing a "letter of instruction" that includes:
[GRAPHIC OMITTED] o your account number;
o the dollar amount or the number of shares you wish to sell;

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

(sidebar)
SYSTEMATIC WITHDRAWAL PLAN

This plan allows you to withdraw money automatically from your Fund account at
regular intervals. Contact your Morgan Stanley Dean Witter Financial Advisor or
other authorized financial representative for more details.
(end sidebar)

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

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

15
<PAGE>

TAX CONSIDERATIONS. Normally, your sale of Fund shares is subject to federal
and state income tax. You should review the "Tax Consequences" section of this
Prospectus and consult your own tax professional about the tax consequences of
a sale.

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

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

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

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

[GRAPHIC OMITTED]

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

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

The Fund passes substantially all of its earnings from income and capital gains
along to its investors as "distributions." The Fund earns interest from
fixed-income investments and income from stocks. These amounts are passed along
to Fund shareholders as "income dividend distributions." The Fund realizes
capital gains whenever it sells securities for a higher price than it paid for
them. These amounts may be passed along as "capital gain distributions."

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

Distributions are reinvested automatically in additional shares of the same
Class and automatically credited to your account, unless you request in writing
that all distributions be paid in cash. If you elect the cash option, the Fund
will mail a check to you no later than seven business days after the
distribution is declared. No interest will accrue on uncashed checks. If you
wish to change how your distributions are paid, your request should be received
by the Fund's transfer agent, Morgan Stanley Dean Witter Trust FSB, at least
five business days prior to the record date of the distributions.

16
<PAGE>

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

Unless your investment in the Fund is through a tax-deferred retirement
account, such as a 401(k) plan or IRA, you need to be aware of the possible tax
consequences when:

o The Fund makes distributions; and

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

TAXES ON DISTRIBUTIONS. Your distributions are normally subject to federal and
state income tax when they are paid, whether you take them in cash or reinvest
them in Fund shares. A distribution also may be subject to local income tax.
Any income dividend distributions and any short-term capital gain distributions
are taxable to you as ordinary income. Any long-term capital gain distributions
are taxable as long-term capital gains no matter how long you have owned shares
in the Fund.

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

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

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

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

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

17
<PAGE>

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

<TABLE>
<CAPTION>
CLASS SALES CHARGE ANNUAL 12B-1FEE
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
A Maximum 4.25% initial sales charge reduced for purchase of
$25,000 or more; shares sold without an initial sales charge are
generally subject to a 1.0% CDSC during the first year 0.25%
- -----------------------------------------------------------------------------------------------
B Maximum 5.0% CDSC during the first year decreasing to 0%
after six years 0.85%
- -----------------------------------------------------------------------------------------------
C 1.0% CDSC during the first year 0.85%
- -----------------------------------------------------------------------------------------------
D None None
- -----------------------------------------------------------------------------------------------
</TABLE>

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

(sidebar)
FRONT-END SALES CHARGE OR FSC

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

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

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

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

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

o Family member accounts (limited to husband, wife and children under the age
of 21).
o Pension, profit sharing or other employee benefit plans of companies and
their affiliates.
o Tax-exempt organizations.

o Groups organized for a purpose other than to buy mutual fund shares.

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

18
<PAGE>

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

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

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

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

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

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

o Employer-sponsored employee benefit plans, whether or not qualified under the
Internal Revenue Code, for which Morgan Stanley Dean Witter Trust FSB serves
as

19
<PAGE>

trustee or Dean Witter Reynolds' Retirement Plan Services serves as
recordkeeper under a written Recordkeeping Services Agreement ("MSDW Eligible
Plans") which have at least 200 eligible employees.

o A MSDW Eligible Plan whose Class B shares have converted to Class A shares,
regardless of the plan's asset size or number of eligible employees.

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

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

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

(sidebar)
CONTINGENT DEFERRED
SALES CHARGE OR CDSC

A fee you pay when you sell shares of certain Morgan Stanley Dean Witter Funds
purchased without an initial sales charge. This fee declines the longer you
hold your shares as set forth in the table.
(end sidebar)

Each time you place an order to sell or exchange shares, shares with no CDSC
will be sold or exchanged first, then shares with the lowest CDSC will be sold
or exchanged next. For any shares subject to a CDSC, the CDSC will be assessed
on an amount equal to the lesser of the current market value or the cost of the
shares being sold.

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

o Sales of shares held at the time you die or become disabled (within the
definition in Section 72(m)(7) of the Internal Revenue Code which relates to
the ability to engage in gainful employment), if the shares are: (i)
registered either in your name (not a trust) or in the names of you and your
spouse as joint tenants with right of survivorship; or (ii) held in a
qualified corporate or self-employed retirement plan, IRA or 403(b)
Custodial Account, provided in either case that the sale is requested within
one year of your death or initial determination of disability.

o Sales in connection with the following retirement plan "distributions":
(i) lump-sum or other distributions from a qualified corporate or
self-employed retirement plan following retirement (or, in the case of a "key
employee" of a "top heavy" plan, following attainment of age 5912); (ii)
distributions from an IRA or 403(b) Custodial Account following attainment of
age 5912; or (iii) a tax-free return of

20
<PAGE>

an excess IRA contribution (a "distribution" does not include a direct
transfer of IRA, 403(b) Custodial Account or retirement plan assets to a
successor custodian or trustee).

o Sales of shares held for you as a participant in a MSDW Eligible Plan.

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

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

DISTRIBUTION FEE. Class B shares are also subject to an annual 12b-1 fee of
0.85% of the lesser of: (a) the average daily aggregate gross purchases by all
shareholders of the Fund's Class B 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 Class B shares sold by
all shareholders since the Fund's inception upon which a CDSC has been imposed
or waived, or (b) the average daily net assets of Class B.

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

In the case of Class B shares held in a MSDW Eligible Plan, the plan is treated
as a single investor and all Class B shares will convert to Class A shares on
the conversion date of the Class B shares of a Morgan Stanley Dean Witter Fund
purchased by that plan.

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

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

21
<PAGE>

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

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

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

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

DISTRIBUTION FEE. Class C shares are subject to an annual distribution (12b-1)
fee of 0.85% of the average daily net assets of that Class. The Class C shares'
distribution fee may cause that Class to have higher expenses and pay lower
dividends than Class A or Class D shares. Unlike Class B shares, Class C shares
have no conversion feature and, accordingly, an investor that purchases Class C
shares may be subject to distribution (12b-1) fees applicable to Class C shares
for an indefinite period.

CLASS D SHARES Class D shares are offered without any sales charge on
purchases or sales and without any distribution (12b-1) fee. Class D shares are
offered only to investors meeting an initial investment minimum of $5 million
($25 million for certain MSDW Eligible Plans) and the following investor
categories:

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

o Employee benefit plans maintained by Morgan Stanley Dean Witter & Co. or any
of its subsidiaries for the benefit of certain employees of Morgan Stanley
Dean Witter & Co. and its subsidiaries.

22
<PAGE>

o Certain unit investment trusts sponsored by Dean Witter Reynolds.

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

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

MEETING CLASS D ELIGIBILITY MINIMUMS. To meet the $5 million ($25 million for
MSDW Eligible Plans) initial investment to qualify to purchase Class D shares
you may combine: (1) purchases in a single transaction of Class D shares of the
Fund and other Morgan Stanley Dean Witter Multi-Class Funds and/or (2) previous
purchases of Class A and Class D shares of Multi-Class Funds and shares of FSC
Funds you currently own, along with shares of Morgan Stanley Dean Witter Funds
you currently own that you acquired in exchange for those shares.

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

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

23
<PAGE>

FINANCIAL HIGHLIGHTS

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

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

CLASS B
- ---------------------------------------------------------------------------------------------------------------
YEARS ENDED OCTOBER 31 1998++ 1997*++ 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 9.46 $ 9.78 $ 9.62 $ 9.37 $ 10.20
- ---------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations
Net investment income 0.68 0.74 0.78 0.77 0.74
Net realized and unrealized gain (loss) (0.46) (0.15) 0.10 0.20 ( 0.80)
---------- -------- -------- -------- --------
Total income (loss) from
investment operations 0.22 0.59 0.88 0.97 ( 0.06)
- ---------------------------------------------------------------------------------------------------------------
Less dividends and distributions from
Net investment income (0.65) (0.91) (0.72) (0.72) ( 0.64)
Net realized gain -- -- -- -- ( 0.01)
Paid-in-capital (0.02) -- -- -- ( 0.12)
---------- -------- -------- -------- --------
Total dividends and distributions (0.67) (0.91) (0.72) (0.72) ( 0.77)
- ---------------------------------------------------------------------------------------------------------------
Net asset value, end of period 9.01 9.46 9.78 9.62 9.37
- ---------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ 2.23% 6.46% 9.49% 10.76% ( 0.69)%
- ---------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------------------------------------------------------------
Expenses 1.38%(1) 1.40% 1.42% 1.44% 1.51%
- ---------------------------------------------------------------------------------------------------------------
Net investment income 7.33%(1) 7.90% 8.38% 8.30% 7.91%
- ---------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $1,024,021 $915,899 $745,581 $542,544 $407,038
- ---------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 130% 104% 82% 87% 60%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>

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

++ The per share amounts were computed using an average number of shares
outstanding during the period.

+ Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.

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

24
<PAGE>

<TABLE>
<CAPTION>
CLASS A++
- -----------------------------------------------------------------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD JULY 28, 1997*
SELECTED PER-SHARE DATA OCTOBER 31, 1998 THROUGH OCTOBER 31, 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $ 9.46 $ 9.40
- ------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income 0.74 0.22
Net realized and unrealized gain (loss) (0.46) 0.04
-------- ---------
Total income from investment operations 0.28 0.26
- ------------------------------------------------------------------------------------------------
Less dividends and distributions from
Net investment income (0.70) (0.20)
Paid-in-capital (0.03) --
-------- ---------
Total dividends and distributions (0.73) (0.20)
- ------------------------------------------------------------------------------------------------
Net asset value, end of period 9.01 9.46
- ------------------------------------------------------------------------------------------------
TOTAL RETURN+ 2.86% 2.74%(1)
- ------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------------------------
Expenses 0.77%(3) 0.85%(2)
- ------------------------------------------------------------------------------------------------
Net investment income 7.94%(3) 8.98%(2)
- ------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $15,130 $4,933
- ------------------------------------------------------------------------------------------------
Portfolio turnover rate 130% 104%
- ------------------------------------------------------------------------------------------------
</TABLE>

CLASS C++
- -----------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA
<S> <C> <C>
- -----------------------------------------------------------------------------------------
Net asset value, beginning of period $ 9.45 $ 9.40
- -----------------------------------------------------------------------------------------
Income from investment operations
Net investment income 0.68 0.20
Net realized and unrealized gain (loss) (0.46) 0.04
-------- ---------
Total income from investment operations 0.22 0.24
- -----------------------------------------------------------------------------------------
Less dividends and distributions from
Net investment income (0.65) (0.19)
Paid-in-capital (0.02) --
-------- ---------
Total dividends and distributions (0.67) (0.19)
- -----------------------------------------------------------------------------------------
Net asset value, end of period 9.00 9.45
- -----------------------------------------------------------------------------------------
TOTAL RETURN+ 2.26% 2.52%(1)
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------
Expenses 1.38%(3) 1.44%(2)
- -----------------------------------------------------------------------------------------
Net investment income 7.33%(3) 8.17%(2)
- -----------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------
Net assets, end of period, in thousands $15,659 $3,773
- -----------------------------------------------------------------------------------------
Portfolio turnover rate 130% 104%
- -----------------------------------------------------------------------------------------
</TABLE>

* The date shares were first issued.

+ Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.

++ The per share amounts were computed using an average number of shares
outstanding during the period.

(1) Not annualized.

(2) Annualized.

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

25
<PAGE>

FINANCIAL HIGHLIGHTS, CONTINUED

CLASS D++
- --------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD JULY 28, 1997*
SELECTED PER-SHARE DATA OCTOBER 31, 1998 THROUGH OCTOBER 31, 1997
<S> <C> <C>
Net asset value, beginning of period $ 9.45 $ 9.40
- --------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income 0.76 0.23
Net realized and unrealized gain (loss) (0.46) 0.02
--------- ---------
Total income from investment operations 0.30 0.25
- --------------------------------------------------------------------------------------------------
Less dividends and distributions from
Net investment income (0.72) (0.20)
Paid-in-capital (0.03) --
--------- ---------
Total dividends and distributions (0.75) (0.20)
- --------------------------------------------------------------------------------------------------
Net asset value, end of period 9.00 9.45
- --------------------------------------------------------------------------------------------------
TOTAL RETURN+ 3.21% 2.69%(1)
- --------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------------
Expenses 0.53%(3) 0.59%(2)
- --------------------------------------------------------------------------------------------------
Net investment income 8.18%(3) 9.26%(2)
- --------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $ 740 $ 99
- --------------------------------------------------------------------------------------------------
Portfolio turnover rate 130% 104%
- --------------------------------------------------------------------------------------------------
</TABLE>

* The date shares were first issued.

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

++ The per share amounts were computed using an average number of shares
outstanding during the period.

(1) Not annualized.

(2) Annualized.

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

26
<PAGE>

NOTES

_________________________________________________________________________

27
<PAGE>

NOTES

_________________________________________________________________________

28
<PAGE>

MORGAN STANLEY DEAN WITTER
FAMILY OF FUNDS

The Morgan Stanley Dean Witter Family of Funds offers investors a wide range of
investment choices. Come on in and meet the family!
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
GROWTH FUNDS GROWTH FUNDS Information Fund

Aggressive Equity Fund Natural Resource Development Securities
American Opportunities Fund Precious Metals and Minerals Trust
Capital Growth Securities
Developing Growth Securities
Equity Fund
Growth Fund GLOBAL/INTERNATIONAL FUNDS
Market Leader Trust
Mid-Cap Growth Fund Competitive Edge Fund - "Best Ideas" Portfolio
Special Value Fund European Growth Fund
Value Fund Fund of Funds - International Portfolio
THEME FUNDS Global Dividend Growth Securities
Financial Services Trust International SmallCap Fund
Health Sciences Trust Japan Fund
Pacific Growth Fund
- --------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME FUNDS Balanced Growth Fund Mid-Cap Dividend Growth Securities
Balanced Income Fund S&P 500 Index Fund
Convertible Securities Trust S&P 500 Select Fund
Dividend Growth Securities Strategist Fund
Fund of Funds - Domestic Portfolio Value/Added Market Series/Equity Portfolio
Income Builder Fund
THEME FUNDS
Utilities Fund
Global Utilities Fund
- --------------------------------------------------------------------------------------------------------------------
INCOME FUNDS GOVERNMENT INCOME FUNDS GLOBAL INCOME FUNDS

Federal Securities Trust World Wide Income Trust
Short-Term U.S. Treasury Trust TAX-FREE INCOME FUNDS
U.S. Government Securities Trust California Tax-Free Income Fund
Hawaii Municipal Trust(FSC)
DIVERSIFIED INCOME FUNDS Limited Term Municipal Trust(NL)
Diversified Income Trust Multi-State Municipal Series Trust(FSC)
New York Tax-Free Income Fund
CORPORATE INCOME FUNDS Tax-Exempt Securities Trust
High Yield Securities
Intermediate Income Securities
Short-Term Bond Fund(NL)
- --------------------------------------------------------------------------------------------------------------------
MONEY MARKET FUNDS TAXABLE MONEY MARKET FUNDS TAX-FREE MONEY MARKET FUNDS
California Tax-Free Daily Income Trust(MM
Liquid Asset Fund(MM) New York Municipal Money Market Trust(MM)
U.S. Government Money Market Trust(MM) Tax-Free Daily Income Trust(MM)

</TABLE>

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

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

MORGAN STANLEY DEAN WITTER
DIVERSIFIED INCOME TRUST

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

(800) 869-NEWS

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

(sidebar)
TICKER SYMBOLS:
Class A: DINAX
- ------------------
Class B: DINBX
- ------------------
Class C: DINCX
- ------------------
Class D: DINDX
- ------------------
(end sidebar)

WWW.DEANWITTER.COM/FUNDS

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

(MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST; INVESTMENT COMPANY ACT
FILE NO. 811-6515)

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION MORGAN STANLEY DEAN WITTER
DIVERSIFIED INCOME TRUST
FEBRUARY 26, 1999

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

This Statement of Additional Information is not a Prospectus. The
Prospectus (dated February 26, 1999) for Morgan Stanley Dean Witter Diversified
Income Trust may be obtained without charge from the Fund at its address or
telephone number listed below or from Dean Witter Reynolds at any of its branch
offices.

Morgan Stanley Dean Witter Diversified Income Trust
Two World Trade Center
New York, New York 10048
(800) 869-NEWS

<PAGE>

<TABLE>

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

<S> <C>
I. Fund History ................................................................. 4
II. Description of the Fund and Its Investments and Risks ....................... 4
A. Classification ............................................................ 4
B. Investment Strategies and Risks ........................................... 4
C. Fund Policies/Investment Restrictions ..................................... 13
III. Management of the Fund ..................................................... 15
A. Board of Trustees ......................................................... 15
B. Management Information .................................................... 15
C. Compensation .............................................................. 20
IV. Control Persons and Principal Holders of Securities ......................... 22
V. Investment Management and Other Services ..................................... 22
A. Investment Manager ........................................................ 22
B. Principal Underwriter ..................................................... 23
C. Services Provided by the Investment Manager and Fund Expenses Paid by Third
Parties .................................................................. 23
D. Dealer Reallowances ....................................................... 24
E. Rule 12b-1 Plan ........................................................... 24
F. Other Service Providers ................................................... 28
VI. Brokerage Allocation and Other Practices .................................... 29
A. Brokerage Transactions .................................................... 29
B. Commissions ............................................................... 29
C. Brokerage Selection ....................................................... 29
D. Directed Brokerage ........................................................ 30
E. Regular Broker-Dealers .................................................... 30
VII. Capital Stock and Other Securities ......................................... 31
VIII. Purchase, Redemption and Pricing of Shares ................................ 31
A. Purchase/Redemption of Shares ............................................. 31
B. Offering Price ............................................................ 32
IX. Taxation of the Fund and Shareholders ....................................... 33
X. Underwriters ................................................................. 35
XI. Calculation of Performance Data ............................................. 35
XII. Financial Statements ....................................................... 36
</TABLE>

2
<PAGE>

GLOSSARY OF SELECTED DEFINED TERMS

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

"Custodian" -- The Bank of New York is the Custodian of the Fund's assets
as described in groupings 2 and 3 in the Fund's Prospectus. The Chase Manhattan
Bank is the Custodian of the Fund's assets as described in grouping 1 in the
Prospectus.

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

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

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

"Fund" -- Morgan Stanley Dean Witter Diversified Income Trust, a
registered open-end investment company.

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

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

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

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

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

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

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

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

3
<PAGE>

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

The Fund was organized as a Massachusetts business trust, under a
Declaration of Trust, on December 20, 1991, with the name Dean Witter
Diversified Income Trust. Effective June 22, 1998, the Fund's name was changed
to Morgan Stanley Dean Witter Diversified Income Trust.

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

A. CLASSIFICATION

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.

B. INVESTMENT STRATEGIES AND RISKS

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

OTHER GLOBAL SHORT-TERM SECURITIES. The Fund may invest in loan
participation interests having a remaining term not exceeding one year in loans
extended by banks to these companies. The Fund also may invest in notes and
commercial paper, the principal amount of which is indexed to certain specific
currency exchange rates. The Fund may purchase these indexed obligations to
generate current income or for hedging purposes.

COLLATERALIZED MORTGAGE OBLIGATIONS. The Fund may invest in CMOs --
collateralized mortgage obligations. CMOs are debt obligations collateralized
by mortgage loans or mortgage pass-through securities (collectively "Mortgage
Assets"). Payments of principal and interest on the Mortgage Assets and any
reinvestment income are used to make payments on the CMOs. CMOs are issued in
multiple classes. Each class has a specific fixed or floating coupon rate and a
stated maturity or final distribution date. The principal and interest on the
Mortgage Assets may be allocated among the classes in a number of different
ways. Certain classes will, as a result of the collection, have more
predictable cash flows than others. As a general matter, the more predictable
the cash flow, the lower the yield relative to other Mortgage Assets. The less
predictable the cash flow, the higher the yield and the greater the risk. The
Fund may invest in any class of CMO.

Certain mortgage-backed securities in which the Fund may invest (e.g.,
certain classes of CMOs) may increase or decrease in value substantially with
changes in interest rates and/or the rates of prepayment. In addition, if the
collateral securing CMOs or any third party guarantees are insufficient to make
payments, the Fund could sustain a loss.

In addition, the Fund may purchase stripped mortgage-backed securities,
which are usually structured in two classes. One class entitles the holder to
receive all or most of the interest but little or none of the principal of a
pool of Mortgage Assets (the interest-only or "IO" Class), while the other
class entitles the holder to receive all or most of the principal but little or
none of the interest (the principal-only or "PO" Class). IOs tend to decrease
in value substantially if interest rates decline and prepayment rates become
more rapid. POs tend to decrease in value substantially if interest rates
increase and the rate of repayment decreases.

ASSET-BACKED SECURITIES. The Fund may invest in asset-backed securities.
Asset-backed securities have risk characteristics similar to mortgage-backed
securities. Like mortgage-backed securities, they generally decrease in value
as a result of interest rate increases, but may benefit less than other
fixed-income securities from declining interest rates, principally because of
prepayments. Also, as in the case of mortgage-backed securities, prepayments
generally increase during a period of declining interest rates although other
factors, such as changes in credit use and payment patterns, may also influence
prepayment rates. Asset-backed securities also involve the risk that various
federal and state consumer laws and other legal and economic factors may result
in the collateral backing the securities being insufficient to support payment
on the securities.

4
<PAGE>

The securitization techniques used to develop mortgage-backed securities
are also applied to a broad range of other assets. 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. New instruments and variations of existing
mortgage-backed securities and asset-backed securities continue to be
developed. The Fund may invest in any of these instruments or variations.

COMMON STOCKS. The Fund may invest in common stocks in an amount up to 20%
of its total assets. 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 exchange 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.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Fund may enter into
forward foreign currency exchange contracts ("forward contracts") as a hedge
against fluctuations in future foreign exchange rates. The Fund may conduct its
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
entering into forward contracts to purchase or sell foreign currencies. A
forward contract involves an obligation to purchase or sell a specific 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. These contracts are traded in the interbank market conducted directly
between currency traders (usually large, commercial and investment banks) and
their customers. Forward contracts only will be entered into with United States
banks and their foreign branches, insurance companies and other dealers whose
assets total $1 billion or more, or foreign banks whose assets total $1 billion
or more. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades.

The Investment Manager also may from time to time utilize forward
contracts to hedge a foreign security held in the portfolio or a security which
pays out principal tied to an exchange rate between the U.S. dollar and a
foreign currency, against a decline in value of the applicable foreign
currency. They also may be used to lock in the current exchange rate of the
currency in which those securities anticipated to be purchased are denominated.
At times, the Fund may enter into "cross-currency" hedging transactions
involving currencies other than those in which securities are held or proposed
to be purchased are denominated.

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The Fund will not enter into forward currency contracts or maintain a net
exposure to these contracts where the consummation of the contracts would
obligate the Fund to deliver an amount of foreign currency in excess of the
value of the Fund's portfolio securities.

Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. It will, however, do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the spread between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer.

The Fund may be limited in its ability to enter into hedging transactions
involving forward contracts by the Internal Revenue Code requirements relating
to qualification as a regulated investment company.

Forward currency contracts may limit gains on portfolio securities that
could otherwise be realized had they not been utilized and could result in
losses. The contracts also may increase the Fund's volatility and may involve a
significant amount of risk relative to the investment of cash.

OPTIONS AND FUTURES TRANSACTIONS. The Fund may engage in transactions in
listed and OTC options. Listed options are issued or guaranteed by the exchange
on which they are traded or by a clearing corporation such as the Options
Clearing Corporation ("OCC"). Ownership of a listed call option gives the Fund
the right to buy from the OCC (in the U.S.) or other clearing corporation or
exchange, the underlying security or currency covered by the option at the
stated exercise price (the price per unit of the underlying security) by filing
an exercise notice prior to the expiration date of the option. The writer
(seller) of the option would then have the obligation to sell to the OCC (in
the U.S.) or other clearing corporation or exchange, the underlying security or
currency at that exercise price prior to the expiration date of the option,
regardless of its then current market price. Ownership of a listed put option
would give the Fund the right to sell the underlying security or currency to
the OCC (in the U.S.) or other clearing corporation or exchange, at the stated
exercise price. Upon notice of exercise of the put option, the writer of the
put would have the obligation to purchase the underlying security or currency
from the OCC (in the U.S.) or other clearing corporation or exchange, at the
exercise price.

Covered Call Writing. The Fund is permitted to write covered call options
on portfolio securities and on the U.S. dollar and foreign currencies in which
they are denominated, without limit.

The Fund will receive from the purchaser, in return for a call it has
written, a "premium;" i.e., the price of the option. Receipt of these premiums
may better enable the Fund to earn a higher level of current income than it
would earn from holding the underlying securities (or currencies) alone.
Moreover, the premium received will offset a portion of the potential loss
incurred by the Fund if the securities (or currencies) underlying the option
decline in value.

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

Options written by the Fund normally have expiration dates of from up to
eighteen months from the date written. The exercise price of a call option may
be below, equal to or above the current market value of the underlying security
at the time the option is written.

Covered Put Writing. As a writer of a covered put option, the Fund incurs
an obligation to buy the security underlying the option from the purchaser of
the put, at the option's exercise price at any time during the option period,
at the purchaser's election. Through the writing of a put option, the Fund
would receive income from the premium paid by purchasers. The potential gain on
a covered put option is limited to the premium received on the option (less the
commissions paid on the transaction). During the

6
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option period, the Fund may be required, at any time, to make payment of the
exercise price against delivery of the underlying security (or currency). The
aggregate value of the obligations underlying puts may not exceed 50% of the
Fund's assets. The operation of and limitations on covered put options in other
respects are substantially identical to those of call options.

Purchasing Call and Put Options. The Fund may purchase listed and OTC call
and put options in amounts equaling up to 5% of its total assets. The purchase
of a call option would enable the Fund, in return for the premium paid to lock
in a purchase price for a security or currency during the term of the option.
The purchase of a put option would enable the Fund, in return for a premium
paid, to lock in a price at which it may sell a security or currency during the
term of the option.

Options on Foreign Currencies. The Fund may purchase and write options on
foreign currencies for purposes similar to those involved with investing in
forward foreign currency exchange contracts.

OTC Options. OTC options are purchased from or sold (written) to dealers
or financial institutions which have entered into direct agreements with the
Fund. With OTC options, such variables as expiration date, exercise price and
premium will be agreed upon between the Fund and the transacting dealer,
without the intermediation of a third party such as the OCC. The Fund will
engage in OTC option transactions only with member banks of the Federal Reserve
Bank System or primary dealers in U.S. Government securities or with affiliates
of such banks or dealers.

Risks of Options Transactions. The successful use of options depends on
the ability of the Investment Manager to forecast correctly interest rates,
currency exchange rates and/or market movements. If the market value of the
portfolio securities (or the currencies in which they are denominated) upon
which call options have been written increases, the Fund may receive a lower
total return from the portion of its portfolio upon which calls have been
written than it would have had such calls not been written. During the option
period, the covered call writer has, in return for the premium on the option,
given up the opportunity for capital appreciation above the exercise price
should the market price of the underlying security (or the value of its
denominated currency) increase, but has retained the risk of loss should the
price of the underlying security (or the value of its denominated currency)
decline. The covered put writer also retains the risk of loss should the market
value of the underlying security decline below the exercise price of the option
less the premium received on the sale of the option. In both cases, the writer
has no control over the time when it may be required to fulfill its obligation
as a writer of the option. Prior to exercise or expiration, an option position
can only be terminated by entering into a closing purchase or sale transaction.
Once an option writer has received an exercise notice, it cannot effect a
closing purchase transaction in order to terminate its obligation under the
option and must deliver or receive the underlying securities at the exercise
price.

The Fund's ability to close out its position as a writer of an option is
dependent upon the existence of a liquid secondary market on option exchanges.
There is no assurance that such a market will exist, particularly in the case
of OTC options.

In the event of the bankruptcy of a broker through which the Fund engages
in transactions in options, the Fund could experience delays and/or losses in
liquidating open positions purchased or sold through the broker and/or incur a
loss of all or part of its margin deposits with the broker. In the case of OTC
options, if the transacting dealer fails to make or take delivery of the
securities underlying an option it has written, in accordance with the terms of
that option, due to insolvency or otherwise, the Fund would lose the premium
paid for the option as well as any anticipated benefit of the transaction.

Each of the exchanges has established limitations governing the maximum
number of call or put options on the same underlying security which may be
written by a single investor, whether acting alone or in concert with others
(regardless of whether such options are written on the same or different
exchanges or are held or written on one or more accounts or through one or more
brokers). An exchange may order the liquidation of positions found to be in
violation of these limits and it may impose other sanctions or restrictions.
These position limits may restrict the number of listed options which the Fund
may write.

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<PAGE>

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

The markets in foreign currency options are relatively new and the Fund's
ability to establish and close out positions on such options is subject to the
maintenance of a liquid secondary market.

There can be no assurance that a liquid secondary market will exist for a
particular option at any specific time.

The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of the
option position may vary with changes in the value of either or both currencies
and have no relationship to the investment merits of a foreign security.
Because foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in
an odd lot market (generally consisting of transactions of less than $1
million) for the underlying foreign currencies at prices that are less
favorable than for round lots.

There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information available is generally representative of very large transactions in
the interbank market and thus may not reflect relatively smaller transactions
(i.e., less than $1 million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock market. To the
extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may
take place in the underlying markets that are not reflected in the options
market.

Futures Contracts. The Fund may purchase and sell interest rate, currency
and index futures contracts that are traded on U.S. and foreign commodity
exchanges on such underlying securities as U.S. Treasury bonds, notes, bills
and GNMA Certificates and/or any foreign government fixed-income security, on
various currencies and on such indexes of U.S. and foreign securities as may
exist or come into existence.

A futures contract purchaser incurs an obligation to take delivery of a
specified amount of the obligation underlying the contract at a specified time
in the future for a specified price. A seller of a futures contract incurs an
obligation to deliver the specified amount of the underlying obligation at a
specified time in return for an agreed upon price. The purchase of a futures
contract enables the Fund, during the term of the contract, to lock in a price
at which it may purchase a security or currency and protect against a rise in
prices pending purchase of portfolio securities. The sale of a futures contract
enables the Fund to lock in a price at which it may sell a security or currency
and protect against declines in the value of portfolio securities.

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

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<PAGE>

Margin. If the Fund enters into a futures contract, it is initially
required to deposit an "initial margin" of cash or U.S. Government securities
or other liquid portfolio securities ranging from approximately 2% to 5% of the
contract amount. Initial margin requirements are established by the exchanges
on which futures contracts trade and may, from time to time, change. In
addition, brokers may establish margin deposit requirements in excess of those
required by the exchanges.

Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing
of funds by a broker's client but is, rather, a good faith deposit on the
futures contract which will be returned to the Fund upon the proper termination
of the futures contract. The margin deposits made are marked to market daily
and the Fund may be required to make subsequent deposits of cash or U.S.
Government securities, called "variation margin," which are reflective of price
fluctuations in the futures contract.

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

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

Limitations on Futures Contracts and Options on Futures. The Fund may not
enter into futures contracts or purchase related options thereon if,
immediately thereafter, the amount committed to margin plus the amount paid for
premiums for unexpired options on futures contracts exceeds 5% of the value of
the Fund's total assets, after taking into account unrealized gains and
unrealized losses on such contracts it has entered into, provided, however,
that in the case of an option that is in-the-money (the exercise price of the
call (put) option is less (more) than the market price of the underlying
security) at the time of purchase, the in-the-money amount may be excluded in
calculating the 5%. However, there is no overall limitation on the percentage
of the Fund's net assets which may be subject to a hedge position.

Risks of Transactions in Futures Contracts and Related Options. The prices
of securities and indexes subject to futures contracts (and thereby the futures
contract prices) may correlate imperfectly with the behavior of the cash prices
of the Fund's portfolio securities (and the currencies in which they are
denominated). Also, prices of futures contracts may not move in tandem with the
changes in prevailing interest rates, market movements and/or currency exchange
rates against which the Fund seeks a hedge. A correlation may also be distorted
(a) temporarily, by short-term traders' seeking to profit from the difference
between a contract or security price objective and their cost of borrowed
funds; (b) by investors in futures contracts electing to close out their
contracts through offsetting transactions rather than meet margin deposit
requirements; (c) by investors in futures contracts opting to make or take
delivery of underlying securities rather than engage in closing transactions,
thereby reducing liquidity of the futures market; and (d) temporarily, by
speculators who view the deposit requirements in the futures markets as less
onerous than margin requirements in the cash market. Due to the possibility of
price distortion in the futures market and because of the possible imperfect
correlation between movements in the prices of securities and movements in the
prices of futures contracts, a correct forecast of interest rate, currency
exchange rate and/or market movement trends by the Investment Manager may still
not result in a successful hedging transaction.

There is no assurance that a liquid secondary market will exist for
futures contracts and related options in which the Fund may invest. In the
event a liquid market does not exist, it may not be possible

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<PAGE>

to close out a futures position and, in the event of adverse price movements,
the Fund would continue to be required to make daily cash payments of variation
margin. In addition, limitations imposed by an exchange or board of trade on
which futures contracts are traded may compel or prevent the Fund from closing
out a contract which may result in reduced gain or increased loss to the Fund.
The absence of a liquid market in futures contracts might cause the Fund to
make or take delivery of the underlying securities (currencies) at a time when
it may be disadvantageous to do so.

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

Futures contracts and options thereon which are purchased or sold on
foreign commodities exchanges may have greater price volatility than their U.S.
counterparts. Furthermore, foreign commodities exchanges may be less regulated
and under less governmental scrutiny than U.S. exchanges. Brokerage
commissions, clearing costs and other transaction costs may be higher on
foreign exchanges. Greater margin requirements may limit the Fund's ability to
enter into certain commodity transactions on foreign exchanges. Moreover,
differences in clearance and delivery requirements on foreign exchanges may
occasion delays in the settlement of the Fund's transactions effected on
foreign exchanges.

In the event of the bankruptcy of a broker through which the Fund engages
in transactions in futures or options thereon, the Fund could experience delays
and/or losses in liquidating open positions purchased or sold through the
broker and/or incur a loss of all or part of its margin deposits with the
broker.

MONEY MARKET SECURITIES. In addition to the short-term fixed-income
securities in which the Fund may otherwise invest, the Fund may invest in
various money market securities for cash management purposes or when assuming a
temporary defensive position, which among others may include commercial paper,
bank acceptances, bank obligations, corporate debt securities, certificates of
deposit, U.S. Government securities, obligations of savings institutions and
repurchase agreements. Such securities include:

U.S. or Foreign Government Securities. Obligations issued or guaranteed as
to principal and interest by the United States or its agencies (such as the
Export-Import Bank of the United States, Federal Housing Administration and
Government National Mortgage Association) or its instrumentalities (such as the
Federal Home Loan Bank), including Treasury bills, notes and bonds;

Bank Obligations. Obligations (including certificates of deposit, time
deposits and bankers' acceptances) of banks subject to regulation by the U.S.
Government and having total assets of $1 billion or more, and instruments
secured by such obligations, not including obligations of foreign branches of
domestic banks except to the extent below;

Eurodollar Certificates of Deposit. Eurodollar certificates of deposit
issued by foreign branches of domestic banks having total assets of $1 billion
or more;

Obligations of Savings Institutions. Certificates of deposit of savings
banks and savings and loan associations, having total assets of $1 billion or
more;

Fully Insured Certificates of Deposit. Certificates of deposit of banks
and savings institutions, having total assets of less than $1 billion, if the
principal amount of the obligation is federally insured by the Bank Insurance
Fund or the Savings Association Insurance Fund (each of which is administered
by the FDIC), limited to $100,000 principal amount per certificate and to 10%
or less of the Fund's total assets in all such obligations and in all illiquid
assets, in the aggregate; and

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<PAGE>

Commercial Paper. Commercial paper rated within the two highest grades by
Standard & Poor's Corporation ("S&P") or the two highest grades by Moody's
Investors Service, Inc. ("Moody's") or, if not rated, issued by a company
having an outstanding debt issue rated at least AA by S&P or Aa by Moody's.

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

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

REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. The Fund may invest up to
25% of its total assets in reverse repurchase agreements and dollar rolls.

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. 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.

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. 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 in which it will maintain
cash, U.S. Government securities or other liquid portfolio securities 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.

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

As with any extensions of credit, there are risks of delay in recovery
and, in some cases, even loss of rights in the collateral should the borrower
of the securities fail financially. However, these loans of portfolio
securities will only be made to firms deemed by the Fund's management to be
creditworthy and when the income which can be earned from such loans justifies
the attendant risks. Upon termination of the loan, the borrower is required to
return the securities to the Fund. Any gain or loss in the market price during
the loan period would inure to the Fund.

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

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

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

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

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

12
<PAGE>

PRIVATE PLACEMENTS. The Fund may invest up to 15% of its net assets in
securities which are subject to restrictions on resale because they have not
been registered under the Securities Act of 1933 (the "Securities Act"), or
which are otherwise not readily marketable. (Securities eligible for resale
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
these 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 the securities for resale and the
risk of substantial delays in effecting the registration.

Rule 144A permits the Fund to sell restricted securities to qualified
institutional buyers without limitation. The Investment Manager, pursuant to
procedures adopted by the Trustees, 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," the security will not be included within
the category "illiquid securities," which under current policy may not exceed
15% of the Fund's net assets. However, investing in Rule 144A securities could
have the effect of increasing the level of Fund illiquidity to the extent the
Fund, at a particular point in time, may be unable to find qualified
institutional buyers interested in purchasing such securities.

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

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

C. FUND POLICIES/INVESTMENT RESTRICTIONS

The investment objectives, policies and restrictions listed below have
been adopted by the Fund as fundamental policies. Under the Investment Company
Act of 1940 (the "Investment Company Act"), a fundamental policy may not be
changed without the vote of a majority of the outstanding voting securities of
the Fund. The Investment Company Act defines a majority as the lesser of (a)
67% or more of the shares present at a meeting of shareholders, if the holders
of 50% of the outstanding shares of the Fund are present or represented by
proxy; or (b) more than 50% of the outstanding shares of the Fund. For purposes
of the following restrictions: (i) all percentage limitations apply immediately
after a purchase or initial investment; and (ii) any subsequent change in any
applicable percentage resulting from market fluctuations or other changes in
total or net assets does not require elimination of any security from the
portfolio.

The Fund will:

1. As a primary objective, seek a high level of current income.

2. Seek to maximize total return but only to the extent consistent with
its primary objective.

13
<PAGE>

The Fund may not:

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

2. Purchase more than 10% of all outstanding voting securities or any
class of securities of any one issuer.

3. Invest more than 25% 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. This restriction does not apply to obligations issued or
guaranteed by the United States Government, its agencies or
instrumentalities.

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

5. Purchase or sell real estate or interests therein, although the Fund
may purchase securities of issuers which engage in real estate operations
and securities secured by real estate or interests therein.

6. Purchase or sell commodities except, the Fund may purchase or sell
(write) futures contracts and related options thereon.

7. Borrow money in excess of 331/3% of the Fund's total assets (including
the proceeds of the borrowings).

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

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

10. Make loans of money or securities, except: (a) by the purchase of
publicly distributed debt obligations; (b) by investment in repurchase or
reverse repurchase agreements; or (c) by lending its portfolio
securities.

11. Make short sales of securities.

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

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

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

15. Invest more than 5% of its net assets in warrants, including not more
than 2% of such assets which are not listed on the New York or American
Stock Exchange. However, warrants acquired by the Fund in units or
attached to other securities may be deemed to be without value.

16. Invest more than 5% of the value of its total assets in securities of
issuers having a record, together with predecessors, of less than 3 years
of continuous operation. This restriction shall not apply to
Mortgage-Backed and Asset-Backed Securities or to any obligation of the
United States Government, its agencies or instrumentalities.

14
<PAGE>

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

18. Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.
For this purpose, Mortgage-Backed Securities and Asset-Backed Securities
are not deemed to be investment companies.

If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage resulting from a change in values of
portfolio securities or amount of total or net assets will not be considered a
violation of any of the foregoing restrictions.

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

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

A. BOARD OF TRUSTEES

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

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

B. MANAGEMENT INFORMATION

TRUSTEES AND OFFICERS. The Board of the Fund consists of nine (9)
Trustees. These same individuals also serve as directors or trustees for all of
the Morgan Stanley Dean Witter Funds. Seven Trustees (77% of the total number)
have no affiliation or business connection with the Investment Manager or any
of its affiliated persons and do not own any stock or other securities issued
by the Investment Manager's parent company, MSDW. These are the
"non-interested" or "independent" Trustees. The other two Trustees (the
"management Trustees") are affiliated with the Investment Manager. All of the
Independent Trustees also serve as Independent Trustees of "Discover Brokerage
Index Series," a mutual fund for which the Investment Manager is the investment
advisor. Four of the seven Independent Trustees are also Independent Trustees
of certain other mutual funds, referred to as the "TCW/DW Funds," for which
MSDW Services Company is the manager and TCW Funds Management, Inc. is the
investment advisor.

The Trustees and executive officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any, with the
Investment Manager, and with the 84 Morgan Stanley Dean Witter Funds, the 11
TCW/DW Funds and Discover Brokerage Index Series, are shown below.

15
<PAGE>

<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------- ---------------------------------------------------
<S> <C>
Michael Bozic (58) ........................ Vice Chairman of Kmart Corporation (since
Trustee December, 1998); Director or Trustee of the Morgan
c/o Kmart Corporation Stanley Dean Witter Funds; Trustee of Discover
3100 West Big Beaver Road Brokerage Index Series; formerly Chairman and
Troy, Michigan Chief Executive Officer of Levitz Furniture
Corporation (November, 1995-November, 1998)
and President and Chief Executive Officer of Hills
Department Stores (May, 1991-July, 1995); formerly
variously Chairman, Chief Executive Officer,
President and Chief Operating Officer (1987-1991)
of the Sears Merchandise Group of Sears, Roebuck
and Co.; Director of Eaglemark Financial Services,
Inc. and Weirton Steel Corporation.
Charles A. Fiumefreddo* (65) .............. Chairman, Director or Trustee, President and Chief
Chairman of the Board, President, Executive Officer of the Morgan Stanley Dean
Chief Executive Officer and Trustee Witter Funds; Chairman, Chief Executive Officer
Two World Trade Center and Trustee of the TCW/DW Funds; Trustee of
New York, New York Discover Brokerage Index Series; formerly
Chairman, Chief Executive Officer and Director of
the Investment Manager, the Distributor and MSDW
Services Company; Executive Vice President and
Director of Dean Witter Reynolds; Chairman and
Director of the Transfer Agent; formerly Director
and/or officer of various MSDW subsidiaries (until
June, 1998).
Edwin J. Garn (66) ........................ Director or Trustee of the Morgan Stanley Dean
Trustee Witter Funds; Trustee of Discover Brokerage Index
c/o Huntsman Corporation Series; formerly United States Senator
500 Huntsman Way (R-Utah)(1974-1992) and Chairman, Senate
Salt Lake City, Utah Banking Committee (1980-1986); formerly Mayor
of Salt Lake City, Utah (1971-1974); formerly
Astronaut, Space Shuttle Discovery (April 12-19,
1985); Vice Chairman, Huntsman Corporation;
Director of Franklin Covey (time management
systems), John Alden Financial Corp. (health
insurance), United Space Alliance (joint venture
between Lockheed Martin and the Boeing
Company) and Nuskin Asia Pacific (multilevel
marketing); member of the board of various civic
and charitable organizations.
John R. Haire (74) ........................ Chairman of the Audit Committee and Director or
Trustee Trustee of the Morgan Stanley Dean Witter Funds;
Two World Trade Center Chairman of the Audit Committee and Trustee of
New York, New York the TCW/DW Funds; Chairman of the Audit
Committee and Chairman of the Audit Committee
and Trustee of Discover Brokerage Index Series;
formerly Chairman of the Independent Directors or
Trustees of the Morgan Stanley Dean Witter Funds
and the TCW/DW Funds (until June, 1998);
formerly President, Council for Aid to Education
(1978-1989) and Chairman and Chief Executive
Officer of Anchor Corporation, an investment
advisor (1964-1978).
</TABLE>

16
<PAGE>

<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------- ----------------------------------------------------
<S> <C>
Wayne E. Hedien (65) ...................... Retired; Director or Trustee of the Morgan Stanley
Trustee Dean Witter Funds; Trustee of Discover Brokerage
c/o Gordon Altman Butowsky Index Series; Director of The PMI Group, Inc.
Weitzen Shalov & Wein (private mortgage insurance); Trustee and Vice
Counsel to the Independent Trustees Chairman of The Field Museum of Natural History;
114 West 47th Street formerly associated with the Allstate Companies
New York, New York (1966-1994), most recently as Chairman of The
Allstate Corporation (March, 1993-December,
1994) and Chairman and Chief Executive Officer of
its wholly-owned subsidiary, Allstate Insurance
Company (July, 1989-December, 1994); director of
various other business and charitable
organizations.
Dr. Manuel H. Johnson (50) ................ Senior Partner, Johnson Smick International, Inc.,
Trustee a consulting firm; Co-Chairman and a founder of
c/o Johnson Smick International, Inc. the Group of Seven Council (G7C), an international
1133 Connecticut Avenue, N.W. economic commission; Director or Trustee of the
Washington, D.C. Morgan Stanley Dean Witter Funds; Trustee of the
TCW/DW Funds; Trustee of Discover Brokerage
Index Series; Director of NASDAQ (since June,
1995); Director of Greenwich Capital Markets, Inc.
(broker-dealer) and NVR, Inc. (home construction);
Chairman and Trustee of the Financial Accounting
Foundation (oversight organization of the Financial
Accounting Standards Board); formerly Vice
Chairman of the Board of Governors of the Federal
Reserve System (1986-1990) and Assistant
Secretary of the U.S. Treasury.
Michael E. Nugent (62) .................... General Partner, Triumph Capital, L.P., a private
Trustee investment partnership; Director or Trustee of the
c/o Triumph Capital, L.P. Morgan Stanley Dean Witter Funds; Trustee of the
237 Park Avenue TCW/DW Funds; Trustee of Discover Brokerage
New York, New York Index Series; formerly Vice President, Bankers
Trust Company and BT Capital Corporation
(1984-1988); director of various business
organizations.
Philip J. Purcell* (55) ................... Chairman of the Board of Directors and Chief
Trustee Executive Officer of MSDW, Dean Witter Reynolds
1585 Broadway and Novus Credit Services Inc.; Director of the
New York, New York Distributor; Director or Trustee of the Morgan
Stanley Dean Witter Funds; Trustee of Discover
Brokerage Index Series; Director and/or officer of
various MSDW subsidiaries.
John L. Schroeder (68) .................... Retired; Director or Trustee of the Morgan Stanley
Trustee Dean Witter Funds; Trustee of the TCW/DW Funds;
c/o Gordon Altman Butowsky Trustee of Discover Brokerage Index Series;
Weitzen Shalov & Wein Director of Citizens Utilities Company; formerly
Counsel to the Independent Trustees Executive Vice President and Chief Investment
114 West 47th Street Officer of the Home Insurance Company (August,
New York, New York 1991-September, 1995).
</TABLE>

17
<PAGE>

<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------- ----------------------------------------------------
<S> <C>
Barry Fink (44) ........................... Senior Vice President (since March, 1997) and
Vice President, Secretary and General Counsel (since February,
Secretary and General Counsel 1997) and Director (since July, 1998) of the
Two World Trade Center Investment Manager and MSDW Services
New York, New York Company; Senior Vice President (since March,
1997) and Assistant Secretary and Assistant
General Counsel (since February, 1997) of the
Distributor; Assistant Secretary of Dean Witter
Reynolds (since August, 1996); Vice President,
Secretary and General Counsel of the Morgan
Stanley Dean Witter Funds and the TCW/DW
Funds (since February, 1997); Vice President,
Secretary and General Counsel of Discover
Brokerage Index Series; previously First Vice
President (June, 1993-February, 1997), Vice
President and Assistant Secretary and Assistant
General Counsel of the Investment Manager and
MSDW Services Company and Assistant Secretary
of the Morgan Stanley Dean Witter Funds and the
TCW/DW Funds.
Peter M. Avelar (40) ...................... Senior Vice President of the Investment Manager;
Vice President Vice President of various Morgan Stanley Dean
Two World Trade Center Witter Funds.
New York, New York
Rajesh K. Gupta (38) ...................... Senior Vice President of the Investment Manager;
Vice President Vice President of various Morgan Stanley Dean
Two World Trade Center Witter Funds.
New York, New York
Anne Pickrell (45) ........................ Vice President of the Investment Manager (since
Vice President April, 1996); formerly Assistant Vice President
Two World Trade Center (April 1992-April 1996); Vice President of various
New York, New York Morgan Stanley Dean Witter Funds.
Peter J. Seeley (49) ...................... Vice President of the Investment Manager (since
Vice President April, 1996); formerly Senior Vice President at
Two World Trade Center Nikko Capital Management; Vice President of
New York, New York various Morgan Stanley Dean Witter Funds.
Thomas F. Caloia (52) ..................... First Vice President and Assistant Treasurer of the
Treasurer Investment Manager and MSDW Services
Two World Trade Center Company; Treasurer of the Morgan Stanley Dean
New York, New York Witter Funds, the TCW/DW Funds and Discover
Brokerage Index Series.
</TABLE>

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

In addition, Mitchell M. Merin, President and Chief Operating Officer of
Asset Management of MSDW, President, Chief Executive Officer and Director of
the Investment Manager and MSDW Services Company, Chairman and Director of the
Distributor and the Transfer Agent, Executive Vice President and Director of
DWR, and Director of various MSDW subsidiaries, Ronald E. Robison, Executive
Vice President, Chief Administrative Officer and Director of the Investment
Manager and MSDW Services Company, Robert S. Giambrone, Senior Vice President
of the Investment Manager, MSDW Services Company, the Distributor and the
Transfer Agent and Director of the Transfer Agent, and Joseph J. McAlinden,
Executive Vice President and Chief Investment Officer of the Investment Manager
and Director of the Transfer Agent are Vice Presidents of the Fund.

18
<PAGE>

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

INDEPENDENT TRUSTEES AND THE COMMITTEES. Law and regulation establish both
general guidelines and specific duties for the Independent Trustees. The Morgan
Stanley Dean Witter Funds seek as Independent Trustees individuals of
distinction and experience in business and finance, government service or
academia; these are people whose advice and counsel are in demand by others and
for whom there is often competition. To accept a position on the Funds' Boards,
such individuals may reject other attractive assignments because the Funds make
substantial demands on their time. Indeed, by serving on the Funds' Boards,
certain Trustees who would otherwise be qualified and in demand to serve on
bank boards would be prohibited by law from doing so. All of the Independent
Trustees serve as members of the Audit Committee. In addition, three of the
Trustees, including two Independent Trustees, serve as members of the
Derivatives Committee and the Insurance Committee.

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

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

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

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

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

TRUSTEE AND OFFICER INDEMNIFICATION. The Fund's Declaration of Trust
provides that no Trustee, officer, employee or agent of the Fund is liable to
the Fund or to a shareholder, nor is any Trustee, officer,

19
<PAGE>

employee or agent liable to any third persons in connection with the affairs of
the Fund, except as such liability may arise from his/her or its own bad faith,
willful misfeasance, gross negligence or reckless disregard of his/her or its
duties. It also provides that all third persons shall look solely to the Fund
property for satisfaction of claims arising in connection with the affairs of
the Fund. With the exceptions stated, the Declaration of Trust provides that a
Trustee, officer, employee or agent is entitled to be indemnified against all
liability in connection with the affairs of the Fund.

C. COMPENSATION

The Fund pays each Independent Trustee an annual fee of $800 plus a per
meeting fee of $50 for meetings of the Board of Trustees, the Independent
Trustees or Committees of the Board of Trustees attended by the Trustee (the
Fund pays the Chairman of the Audit Committee an additional annual fee of
$750). If a Board meeting and a meeting of the Independent Trustees or a
Committee meeting, or a meeting of the Independent Trustees and/or more than
one Committee meeting, take place on a single day, the Trustees are paid a
single meeting fee by the Fund. The Fund also reimburses such Trustees for
travel and other out-of-pocket expenses incurred by them in connection with
attending such meetings. Trustees and officers of the Fund who are or have been
employed by the Investment Manager or an affiliated company receive no
compensation or expenses reimbursed from the Fund for their services as
Trustee. Mr. Haire currently serves as Chairman of the Audit Committee. Prior
to June 1, 1998, Mr. Haire also served as Chairman of the Independent Trustees
for which services the Fund paid him an additional annual fee of $1,200.

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

FUND COMPENSATION

<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME OF INDEPENDENT TRUSTEE FROM THE FUND
- ------------------------------- --------------
<S> <C>
Michael Bozic ................. $1,450
Edwin J. Garn ................. 1,600
John R. Haire ................. 2,850
Wayne E. Hedien ............... 1,550
Dr. Manuel H. Johnson ......... 1,550
Michael E. Nugent ............. 1,600
John L. Schroeder ............. 1,600
</TABLE>

The following table illustrates the compensation paid to the Fund's
Independent Trustees for the calendar year ended December 31, 1998 for services
to the 85 Morgan Stanley Dean Witter Funds and, in the case of Messrs. Haire,
Johnson, Nugent and Schroeder, the 11 TCW/DW Funds that were in operation at
December 31, 1998. Mr. Haire serves as Chairman of the Audit Committee of each
Morgan Stanley Dean Witter Fund and each TCW/DW Fund and, prior to June 1,
1998, also served as Chairman of the Independent Directors or Trustees of those
Funds. With respect to Messrs. Haire, Johnson, Nugent and Schroeder, the TCW/DW
Funds are included solely because of a limited exchange privilege between those
Funds and five Morgan Stanley Dean Witter Money Market Funds. No compensation
was paid to the Fund's Independent Trustees by Discover Brokerage Index Series
for the calendar year ended December 31, 1998.

20
<PAGE>

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

<TABLE>
<CAPTION>
FOR SERVICE FOR SERVICE AS FOR SERVICE AS TOTAL CASH
AS DIRECTOR OR CHAIRMAN OF CHAIRMAN OF COMPENSATION
TRUSTEE AND INDEPENDENT INDEPENDENT FOR SERVICES TO
COMMITTEE FOR SERVICE AS DIRECTORS/TRUSTEES TRUSTEES AND 85 MORGAN
MEMBER OF TRUSTEE AND AND AUDIT AUDIT STANLEY DEAN
85 MORGAN COMMITTEE COMMITTEES OF 85 COMMITTEES OF WITTER FUNDS AND
NAME OF STANLEY DEAN MEMBER OF 11 MORGAN STANLEY 11 TCW/DW 11 TCW/DW
INDEPENDENT TRUSTEE WITTER FUNDS TCW/DW FUNDS DEAN WITTER FUNDS FUNDS FUNDS
- -------------------------- ---------------- ---------------- -------------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Michael Bozic ............ $120,150 -- -- -- $120,150
Edwin J. Garn ............ 132,450 -- -- -- 132,450
John R. Haire ............ 136,450 $66,931 $101,338 $14,725 319,444
Wayne E. Hedien .......... 132,350 -- -- -- 132,350
Dr. Manuel H. Johnson 128,400 62,331 -- -- 190,731
Michael E. Nugent ........ 132,450 62,131 -- -- 194,581
John L. Schroeder ........ 132,450 64,731 -- -- 197,181
</TABLE>

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

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

- ----------

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

21
<PAGE>

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

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

<TABLE>
<CAPTION>
FOR ALL ADOPTING FUNDS
------------------------------
ESTIMATED ANNUAL
RETIREMENT BENEFITS BENEFITS
ESTIMATED ACCRUED AS EXPENSES UPON RETIREMENT(2)
CREDITED YEARS ESTIMATED --------------------------- ---------------------
OF SERVICE AT PERCENTAGE BY ALL FROM ALL
NAME OF RETIREMENT OF ELIGIBLE BY THE ADOPTING FROM THE ADOPTING
INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUND FUNDS FUND FUNDS
- -------------------------- ---------------- ------------- -------- ------------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael Bozic ............ 10 60.44% $ 412 $ 22,377 $1,029 $ 52,250
Edwin J. Garn ............ 10 60.44 709 35,225 1,029 52,250
John R. Haire ............ 10 60.44 1,184 (12,211)(3) 2,418 134,705
Wayne E. Hedien .......... 9 51.37 654 41,979 875 44,413
Dr. Manuel H. Johnson..... 10 60.44 276 14,047 1,029 52,250
Michael E. Nugent ........ 10 60.44 526 25,336 1,029 52,250
John L. Schroeder ........ 8 50.37 826 45,117 861 44,343
</TABLE>

- ----------

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

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

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

The following persons owned 5% or more of the Class A Shares of the Fund
as of February 3, 1999: Private Scavengers Health & Welfare Fund Local Union
#731, I.B. of T, Attn: William Woldman, 1100 East 31st Street P.O. Box 1407,
LaGrange Park, IL 60526-9507 -- 5.699%; The following persons owned 5% or more
of the Class D Shares of the Fund as of February 3, 1999: Morgan Stanley Dean
Witter Trust FSB Trustee, Robbins Manufacturing, P.O. Box 957, Jersey City, NJ
07303-0957 -- 33.993%; Estate of Raymond M. Long Jr., Anne M. Long PERS REP,
1400 Brightwaters Boulevard, St. Petersburg, FL 33704-3810 -- 10.734%; Morgan
Stanley Dean Witter Trust FSB as Agent for The Baptist Homes Foundation of the
West Inc. TTEE FBO Eskeldson Unitr 12/8/98, P.O. Box 503, Jersey City, NJ
07311-3977 -- 9.095%; Rose G.S. Chang and Esther C. Ambo JTTEN, 4151 248th
Court S.E., Issaquah, WA 98029-5754 -- 5.087%.

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

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

A. INVESTMENT MANAGER

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

Pursuant to an Investment Management Agreement (the "Management
Agreement") with the Investment Manager, the Fund has retained the Investment
Manager to provide administrative services and manage the investment of the
Fund's assets, including the placing of orders for the purchase and

22
<PAGE>

sale of portfolio securities. The Fund pays the Investment Manager monthly
compensation calculated daily at the annual rate of 0.40% of the net assets of
the Fund, determined as of the close of each business day. The management fee
is allocated among the Classes pro rata based on the net assets of the Fund
attributable to each Class. For the fiscal years ended October 31, 1996, 1997
and 1998, the Investment Manager accrued total compensation under the
Management Agreement in the amounts of $2,533,576, $3,347,731 and $4,031,496,
respectively.

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

B. PRINCIPAL UNDERWRITER

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

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

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

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

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

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

Expenses not expressly assumed by the Investment Manager under the
Management Agreement or by the Distributor, will be paid by the Fund. These
expenses will be allocated among the four Classes

23
<PAGE>

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

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

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

D. DEALER REALLOWANCES

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

E. RULE 12B-1 PLAN

The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under
the Investment Company Act (the "Plan") pursuant to which each Class, other
than Class D, pays the Distributor compensation accrued daily and payable
monthly at the following annual rates: 0.25% and 0.85% of the average daily net
assets of Class A and Class C, respectively, and, with respect to Class B,
0.85% of the lesser of: (a) the average daily aggregate gross sales of the
Fund's Class B shares since the inception of the Fund (not including
reinvestment of dividends or capital gains distributions), less the average
daily aggregate net asset value of the Fund's Class B shares redeemed since the
Fund's inception upon which a contingent deferred sales charge has been imposed
or upon which such charge has been waived, or (b) the average daily net assets
of Class B.

The Distributor also receives the proceeds of front-end sales charges
("FSCs") and of contingent deferred sales charges ("CDSCs") imposed on certain
redemptions of shares, which are separate and apart from payments made pursuant
to the Plan. The Distributor has informed the Fund that it and/or

24
<PAGE>

Dean Witter Reynolds received the proceeds of CDSCs and FSCs, for the last
three fiscal years ended October 31, in approximate amounts as provided in the
table below (the Distributor did not retain any of these amounts).

<TABLE>
<CAPTION>
1998 1997 1996
--------------------- -------------------- ------------------
<S> <C> <C> <C>
Class A ........... FSCs:(4) $ 121,078 FSCs: $0 FSCs: N/A(5)
CDSCs: $0 CDSCs: $ 38,753 CDSCs: N/A(5)
Class B ........... CDSCs: $1,499,828 CDSCs: $1,414,909 CDSCs: $1,128,359
Class C. .......... CDSCs: $ 13,622 CDSCs: $ 630 CDSCs: N/A(5)
</TABLE>

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

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

The Distributor has informed the Fund that the entire fee payable by Class
A and a portion of the fees payable by each of Class B and Class C each year
pursuant to the Plan equal to 0.20% of the average daily net assets of Class B
and 0.25% of the average daily net assets of Class C are currently each
characterized as a "service fee" under the Rules of the National Association of
Securities Dealers, Inc. (of which the Distributor is a member). The "service
fee" is a payment made for personal service and/or the maintenance of
shareholder accounts. The remaining portion of the Plan fees payable by a
Class, if any, is characterized as an "asset-based sales charge" as such is
defined by the Rules of the Association.

Under the Plan and as required by Rule 12b-1, the Trustees receive and
review promptly after the end of each calendar quarter a written report
provided by the Distributor of the amounts expended under the Plan and the
purpose for which such expenditures were made. Class B shares of the Fund
accrued amounts payable to the Distributor under the Plan, during the fiscal
year ended October 31, 1998, of $8,383,247. This amount is equal to 0.85% of
the average daily net assets of Class B for the fiscal year and was calculated
pursuant to clause (b) of the compensation formula under the Plan. For the
fiscal year ended October 31, 1998, Class A and Class C shares of the Fund
accrued payments under the Plan amounting to $26,694 and $86,869, respectively,
which amounts are equal to 0.24% and 0.85% of the average daily net assets of
Class A and Class C, respectively, for the fiscal year.

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

With respect to Class A shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from proceeds of the FSC, commissions for
the sale of Class A shares, currently a gross sales credit of up to 4.0% of the
amount sold (except as provided in the following sentence) and an annual
residual commission, currently a residual of up to 0.20% of the current value
of the respective accounts for which they are the Financial Advisors or dealers
of record in all cases. On orders of $1 million or more (for which no sales
charge was paid) or net asset value purchases by employer-sponsored employee
benefit plans, whether or not qualified under the Internal Revenue Code, for
which the Transfer Agent serves as Trustee or Dean Witter Reynolds Retirement
Plan Services serves as recordkeeper pursuant to a written Recordkeeping
Services Agreement ("MSDW Eligible Plans"), the Investment Manager compensates
Financial Advisors by paying them, from its own funds, a gross sales credit of
1.0% of the amount sold.

With respect to Class B shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from its own funds, commissions for the sale
of Class B shares, currently a gross sales credit of up to 4.0% of the amount
sold (except as provided in the following sentence) and an annual residual
commission, currently a residual of up to 0.20% of the current value (not
including reinvested dividends or distributions) of the amount sold in all
cases. In the case of Class B shares purchased by MSDW Eligible Plans, Dean
Witter Reynolds compensates its Financial Advisors by paying them, from its own
funds, a gross sales credit of 3.0% of the amount sold.

25
<PAGE>

With respect to Class C shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from its own funds, commissions for the sale
of Class C shares, currently a gross sales credit of up to 1.0% of the amount
sold and an annual residual commission, currently up to 0.85% of the current
value of the respective accounts for which they are the Financial Advisors of
record.

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

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

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

The Fund is authorized to reimburse expenses incurred or to be incurred in
promoting the distribution of the Fund's Class A and Class C shares and in
servicing shareholder accounts. Reimbursement will be made through payments at
the end of each month. The amount of each monthly payment may in no event
exceed an amount equal to a payment at the annual rate of 0.25%, in the case of
Class A, and 0.85%, in the case of Class C, of the average net assets of the
respective Class during the month. No interest or other financing charges, if
any, incurred on any distribution expenses on behalf of Class A and Class C
will be reimbursable under the Plan. With respect to Class A, in the case of
all expenses other than expenses representing the service fee, and, with
respect to Class C, in the case of all expenses other than expenses
representing a gross sales credit or a residual to Financial Advisors and other
authorized financial representatives, such amounts shall be determined at the
beginning of each calendar quarter by the Trustees, including, a majority of
the Independent Trustees. Expenses representing the service fee (for Class A)
or a gross sales credit or a residual to Financial Advisors and other
authorized financial representatives (for Class C) may be reimbursed without
prior determination. In the event that the Distributor proposes that monies
shall be reimbursed for other than such expenses, then in making quarterly
determinations of the amounts that may be reimbursed by the Fund, the
Distributor will provide and the Trustees will review a quarterly budget of
projected distribution expenses to be incurred on behalf of the Fund, together
with a report explaining the purposes and anticipated benefits of incurring
such expenses. The Trustees will determine which particular expenses, and the
portions thereof, that may be borne by the Fund, and in making such a
determination shall consider the scope of the Distributor's commitment to
promoting the distribution of the Fund's Class A and Class C shares.

26
<PAGE>

Each Class paid 100% of the amounts accrued under the Plan with respect to
that Class for the fiscal year ended October 31, 1998 to the Distributor. The
Distributor and Dean Witter Reynolds estimate that they have spent, pursuant to
the Plan, $51,567,062 on behalf of Class B since the inception of the Plan. It
is estimated that this amount was spent in approximately the following ways:
(i) 6.51% ($3,356,022)--advertising and promotional expenses; (ii) 0.49%
($251,575)--printing of prospectuses for distribution to other than current
shareholders; and (iii) 93.0% ($47,959,465)--other expenses, including the
gross sales credit and the carrying charge, of which 5.34% ($2,562,671)
represents carrying charges, 38.71% ($18,567,289) represents commission credits
to Dean Witter Reynolds branch offices and other selected broker-dealers for
payments of commissions to Financial Advisors and other authorized financial
representatives, and 55.95% ($26,829,505) represents overhead and other branch
office distribution-related expenses. The amounts accrued by Class A and Class
C for distribution during the fiscal year ended October 31, 1998 were for
expenses which relate to compensation of sales personnel and associated
overhead expenses.

In the case of Class B shares, at any given time, the expenses of
distributing shares of the Fund may be more or less than the total of (i) the
payments made by the Fund pursuant to the Plan; and (ii) the proceeds of CDSCs
paid by investors upon redemption of shares. For example, if $1 million in
expenses in distributing Class B shares of the Fund had been incurred and
$750,000 had been received as described in (i) and (ii) above, the excess
expense would amount to $250,000. The Distributor has advised the Fund that in
the case of Class B shares the excess distribution expenses, including the
carrying charge designed to approximate the opportunity costs incurred by Dean
Witter Reynolds which arise from it having advanced monies without having
received the amount of any sales charges imposed at the time of sale of the
Fund's Class B shares, totaled $16,985,708 as of October 31, 1998 (the end of
the Fund's fiscal year), which was equal to 1.66% of the net assets of Class B
on such date. Because there is no requirement under the Plan that the
Distributor be reimbursed for all distribution expenses with respect to Class B
shares or any requirement that the Plan be continued from year to year, this
excess amount does not constitute a liability of the Fund. Although there is no
legal obligation for the Fund to pay expenses incurred in excess of payments
made to the Distributor under the Plan and the proceeds of CDSCs paid by
investors upon redemption of shares, if for any reason the Plan is terminated,
the Trustees will consider at that time the manner in which to treat such
expenses. Any cumulative expenses incurred, but not yet recovered through
distribution fees or CDSCs, may or may not be recovered through future
distribution fees or CDSCs.

In the case of Class A and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales commission credited to Morgan Stanley Dean Witter Financial
Advisors and other authorized financial representatives at the time of sale may
be reimbursed in the subsequent calendar year. The Distributor has advised the
Fund that unreimbursed expenses representing a gross sales commission credited
to Morgan Stanley Dean Witter Financial Advisors and other authorized financial
representatives at the time of sale totaled $34,740 in the case of Class C at
December 31, 1998 (the end of the calendar year), which amount was equal to
0.20% of the net assets of Class C on such date and that there were no such
expenses that may be reimbursed in the subsequent year in the case of Class A
or on such date. No interest or other financing charges will be incurred on any
Class A or Class C distribution expenses incurred by the Distributor under the
Plan or on any unreimbursed expenses due to the Distributor pursuant to the
Plan.

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

On an annual basis the Trustees, including a majority of the Independent
Trustees, consider whether the Plan should be continued. Prior to approving the
last continuation of the Plan, the Trustees requested and received from the
Distributor and reviewed all the information which they deemed necessary to

27
<PAGE>

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

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

F. OTHER SERVICE PROVIDERS

(1) TRANSFER AGENT/DIVIDEND-PAYING AGENT

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

(2) CUSTODIAN AND INDEPENDENT ACCOUNTANTS

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

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

(3) AFFILIATED PERSONS

The Transfer Agent is an affiliate of the Investment Manager, and of the
Distributor. As Transfer Agent and Dividend Disbursing Agent, the Transfer
Agent's responsibilities include maintaining shareholder accounts, disbursing
cash dividends and reinvesting dividends, processing account registration
changes, handling purchase and redemption transactions, mailing prospectuses
and reports, mailing and tabulating proxies, processing share certificate
transactions, and maintaining shareholder records and lists. For these
services, the Transfer Agent receives a per shareholder account fee from the
Fund.

28
<PAGE>

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

A. BROKERAGE TRANSACTIONS

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

For the fiscal years ended October 31, 1996, 1997 and 1998, the Fund paid
a total of $91,481, $6,634 and $25,846, respectively, in brokerage commissions.

B. COMMISSIONS

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

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

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

During the fiscal years ended October 31, 1996, 1997 and 1998, the Fund
paid no brokerage commissions to Dean Witter Reynolds. During the period June 1
through October 31, 1997 and during the fiscal year ended October 31, 1998, the
Fund paid no brokerage commissions to Morgan Stanley & Co., which broker-dealer
became an affiliate of the Investment Manager on May 31, 1997 upon consummation
of the merger of Dean Witter, Discover & Co. with Morgan Stanley Group Inc.

C. BROKERAGE SELECTION

The policy of the Fund regarding purchases and sales of securities for its
portfolio is that primary consideration will be given to obtaining the most
favorable prices and efficient executions of transactions.

29
<PAGE>

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

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

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

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

D. DIRECTED BROKERAGE

During the fiscal year ended October 31, 1998, the Fund paid $0 in
brokerage commissions to brokers because of research services provided.

E. REGULAR BROKER-DEALERS

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

30
<PAGE>

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

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

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

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

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

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

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

A. PURCHASE/REDEMPTION OF SHARES

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

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

The Distributor and any authorized broker-dealer have appointed the
Transfer Agent to act as their agent in connection with the application of
proceeds of any redemption of Fund shares to the purchase

31
<PAGE>

of shares of any other Morgan Stanley Dean Witter Fund and the general
administration of the exchange privilege. No commission or discounts will be
paid to the Distributor or any authorized broker-dealer for any transaction
pursuant to the exchange privilege.

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

B. OFFERING PRICE

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

The price of Fund shares, called "net asset value," is based on the value
of the Fund's portfolio securities. Net asset value per share of each Class is
calculated by dividing the value of the portion of the Fund's securities and
other assets attributable to that Class, less the liabilities attributable to
that Class, by the number of shares of that Class outstanding. The assets of
each Class of shares are invested in a single portfolio. The net asset value of
each Class, however, will differ because the Classes have different ongoing
fees.

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
stock exchange is valued at its latest sale price on that exchange, prior to
the time when assets are valued; if there were no sales that day, the security
is valued at the latest bid price (in cases where a security is traded on more
than one exchange, the security is valued on the exchange designated as the
primary market pursuant to procedures adopted 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 may
utilize 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.

Listed options on debt securities are valued at the latest sale price on
the exchange on which they are listed unless no sales of such options have
taken place that day, in which case they will be valued at the mean between
their latest bid and asked prices. Unlisted options on debt securities and all
options on equity securities are valued at the mean between their latest bid
and asked prices. Futures are valued at the latest sale price on the
commodities exchange on which they trade unless the Trustees determine such
price does not reflect their market value, in which case they will be valued at
their fair value as determined in good faith under procedures established by
and under the supervision of the Trustees.

32
<PAGE>

Generally, trading in foreign securities, as well as corporate bonds, U.S.
Government securities and money market instruments, is substantially completed
each day at various times prior to the 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 close of the New York Stock
Exchange. Occasionally, events which may 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 that
may affect the value of such securities occur during such period, then these
securities may be valued at their fair value as determined in good faith under
procedures established by and under the supervision of the Trustees.

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

The Fund generally will make two basic types of distributions: ordinary
dividends and long-term capital gain distributions. These two types of
distributions are reported differently on a shareholder's income tax return and
they are also subject to different rates of tax. The tax treatment of the
investment activities of the Fund will affect the amount and timing and
character of the distributions made by the Fund. Tax issues relating to the
Fund are not generally a consideration for shareholders such as tax exempt
entities and tax-advantaged retirement vehicles such as an IRA or 401(k) plan.
Shareholders are urged to consult their own tax professionals regarding
specific questions as to federal, state or local taxes.

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

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

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

Gains or losses on the Fund's transactions in listed non-equity options,
futures and options on futures generally are treated as 60% long-term and 40%
short-term. When the Fund engages in options and futures transactions, various
tax rules may accelerate or defer recognition of certain gains and losses,
change the character of certain gains or losses, or alter the holding period of
other investments held by the Fund. The application of these rules would
therefore also affect the amount, timing and character of distributions made by
the Fund.

Under certain tax rules, the Fund may be required to accrue a portion of
any discount at which certain securities are purchased as income each year even
though the Fund receives no payments in cash on the security during the year.
To the extent that the Fund invests in such securities, it would be required to
pay out such accrued discount as an income distribution in each year in order
to avoid taxation at the Fund level. Such distributions will be made from the
available cash of the Fund or by liquidation of portfolio securities if
necessary. If a distribution of cash necessitates the liquidation of portfolio
securities, the Investment Manager will select which securities to sell. The
Fund may realize a gain or loss from such sales. In the event the Fund realizes
net capital gains from such transactions, its shareholders may receive a larger
capital gain distribution, if any, than they would in the absence of such
transactions.

TAXATION OF DIVIDENDS AND DISTRIBUTIONS. Shareholders normally will have
to pay federal income taxes, and any state and/or local income taxes, on the
dividends and other distributions they

33
<PAGE>

receive from the Fund. Such dividends and distributions, to the extent that
they are derived from net investment income or short-term capital gains, are
taxable to the shareholder as ordinary income regardless of whether the
shareholder receives such payments in additional shares or in cash.

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. The Taxpayer Relief Act of 1997
reduced the maximum tax on long-term capital gains applicable to individuals
from 28% to 20%.

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

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

After the end of each calendar year, shareholders will be sent full
information on their dividends and capital gain distributions for tax purposes,
including the portion taxable as ordinary income, the portion taxable as
long-term capital gains.

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

In general, a sale of shares results in capital gain or loss, and for
individual shareholders, is taxable at a federal rate dependent upon the length
of time the shares were held. A redemption of a shareholder's Fund shares is
normally treated as a sale for tax purposes. Fund shares held for a period of
one year or less will, for tax purposes, generally result in short-term gains
or losses and those held for more than one year generally result in long-term
gain or loss. Any loss realized by shareholders upon a redemption of shares
within six months of the date of their purchase will be treated as a long-term
capital loss to the extent of any distributions of net long-term capital gains
with respect to such shares during the six-month period.

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

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

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

34
<PAGE>

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

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

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

From time to time the Fund may quote its "yield" and/or its "total return"
in advertisements and sales literature. These figures are computed separately
for Class A, Class B, Class C and Class D shares. Yield is calculated for any
30-day period as follows: the amount of interest income for each security in
the Fund's portfolio is determined in accordance with regulatory requirements;
the total for the entire portfolio constitutes the Fund's gross income for the
period. Expenses accrued during the period are subtracted to arrive at "net
investment income" of each Class. The resulting amount is divided by the
product of the maximum offering price per share on the last day of the period,
multiplied by the average number of shares of the applicable Class outstanding
during the period that were entitled to dividends. This amount is added to 1
and raised to the sixth power. 1 is then subtracted from the result and the
difference is multiplied by 2 to arrive at the annualized yield. For the 30-day
period ended October 31, 1998, the yield, calculated pursuant to the formula
described above, was approximately 7.53%, 7.26%, 7.26% and 8.13% for Class A,
Class B, Class C and Class D, respectively.

The Fund's "average annual total return" represents an annualization of
the Fund's total return over a particular period and is computed by finding the
annual percentage rate which will result in the ending redeemable value of a
hypothetical $1,000 investment made at the beginning of a one, five or ten year
period, or for the period from the date of commencement of operations, if
shorter than any of the foregoing. The ending redeemable value is reduced by
any contingent deferred sales charge ("CDSC") at the end of the one, five, ten
year or other period. For the purpose of this calculation, it is assumed that
all dividends and distributions are reinvested. The formula for computing the
average annual total return involves a percentage obtained by dividing the
ending redeemable value by the amount of the initial investment (which in the
case of Class A shares is reduced by the Class A initial sales charge), taking
a root of the quotient (where the root is equivalent to the number of years in
the period) and subtracting 1 from the result. The average annual total returns
for Class B for the one year, five year and the life of the Fund periods ended
October 31, 1998 were -2.53%, 5.27% and 6.33%, respectively. The average annual
total returns of Class A for the fiscal year ended October 31, 1998 and for the
period July 28, 1997 (inception of the Class) through October 31, 1998 were
- -1.52% and 0.94%, respectively. The average annual total returns of Class C for
the fiscal year ended October 31, 1998 and for the period July 28, 1997
(inception of the Class) through October 31, 1998 were 1.31% and 3.82%,
respectively. The average annual total returns of Class D for the fiscal year
ended October 31, 1998 and for the period July 28, 1997 (inception of the
Class) through October 31, 1998 were 3.21% and 4.73%, respectively.

In addition, the Fund may advertise its total return for each Class over
different periods of time by means of aggregate, average, year-by-year or other
types of total return figures. These calculations may or may not reflect the
imposition of the maximum front-end sales charge for Class A or the deduction
of the CDSC for each of Class B and Class C which, if reflected, would reduce
the performance quoted. For example, the average annual total return of the
Fund may be calculated in the manner described above, but without deduction for
any applicable sales charge. Based on this calculation, the average annual
total returns of Class B for the one year, five year and the life of the Fund
periods ended October 31, 1998, were 2.23%, 5.56% and 6.33%, respectively.
Based on this calculation, the average annual total returns of Class A for the
fiscal year ended October 31, 1998 and for the period July 28, 1997 through
October 31, 1998 were 2.86% and 4.48%, respectively, the average annual total
returns of Class C for the fiscal year ended October 31, 1998 and for the
period July 28, 1997 through October 31, 1998 were 2.26% and 3.82%,
respectively, and the average annual total returns of Class D for the fiscal
year ended October 31, 1998 and for the period July 28, 1997 through October
31, 1998 were 3.21% and 4.73%, respectively.

35
<PAGE>

In addition, the Fund may compute its aggregate total return for each
Class for specified periods by determining the aggregate percentage rate which
will result in the ending value of a hypothetical $1,000 investment made at the
beginning of the period. For the purpose of this calculation, it is assumed
that all dividends and distributions are reinvested. The formula for computing
aggregate total return involves a percentage obtained by dividing the ending
value (without reduction for any sales charge) by the initial $1,000 investment
and subtracting 1 from the result. Based on the foregoing calculation, the
total returns for Class B for the one year, five year and the life of the Fund
periods ended October 31, 1998, were 2.23%, 31.07% and 49.55%, respectively.
Based on the foregoing calculation, the total returns of Class A for the fiscal
year ended October 31, 1998 and for the period July 28, 1997 through October
31, 1998 were 2.86% and 5.68%, respectively, the total returns of Class C for
the fiscal year ended October 31, 1998 and for the period July 28, 1997 through
October 31, 1998 were 2.26% and 4.84%, respectively, and the total returns of
Class D for the fiscal year ended October 31, 1998 and for the period July 28,
1997 through October 31, 1998 were 3.21% and 5.99%, respectively.

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

<TABLE>
<CAPTION>
INVESTMENT AT INCEPTION OF:
-----------------------------------
INCEPTION
CLASS DATE: $10,000 $50,000 $100,000
- ----------------- ---------- --------- --------- -----------
<S> <C> <C> <C> <C>
Class A ......... 07/28/97 $10,119 $50,991 $102,774
Class B ......... 04/09/92 14,955 74,775 149,550
Class C ......... 07/28/97 10,484 52,420 104,840
Class D ......... 07/28/97 10,599 52,995 105,990
</TABLE>

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

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

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

* * * * *

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

36
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1998

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------- ---------------------------------------------------------------- ---------- ----------- --------------
<S> <C> <C> <C> <C>
GOVERNMENT & CORPORATE BONDS (97.5%)
FOREIGN (23.8%)
AUSTRALIA (0.0%)
Cable Television
$ 9,000 Australis Holdings Property Ltd. (a) ............................ 15.00 ++% 11/01/02 $315,000
90 Australis Media Ltd. (a) ....................................... 15.75 ++ 05/15/03 903
4,700 Australis Media Ltd. (Units)++ (a) ............................. 15.75 ++ 05/15/03 47,000
--------------
TOTAL AUSTRALIA ....................................................................... 362,903
--------------
CANADA (1.3%)
Cellular Telephone (0.5%)
6,500 Clearnet Communications Inc. ................................... 14.75 ++ 12/15/05 5,200,000
--------------
Food & Beverages (0.4%)
3,500 Sparkling Spring Water ......................................... 11.50 11/15/07 3,500,000
--------------
Industrial Specialties (0.1%)
12,061 International Semi-Tech Microelectronics ........................ 11.50 ++ 08/15/03 1,447,320
--------------
Other Telecommunications (0.3%)
3,000 MetroNet Communications Corp. .................................. 12.00 08/15/07 3,210,000
--------------
TOTAL CANADA .......................................................................... 13,357,320
--------------
DENMARK (4.7%)
Government Obligation
DKK 313,000 Kingdom of Denmark .............................................. 4.00 02/15/01 49,662,388
--------------
FINLAND (0.4%)
Finance Companies
GBP 2,800 Finnish Export Credit Corp. (b) ................................. 6.75 12/29/00 4,731,835
--------------
FRANCE (3.0%)
Financial -Miscellaneous (0.3%)
ECU 2,000 Agence Francaise de Developpement ............................... 5.50 02/09/01 2,461,014
--------------
Government Obligations (2.7%)
4,500 French Treasury Note (b) ........................................ 4.00 07/12/00 5,392,349
FRF 110,000 French Treasury Note ............................................ 5.50 10/12/01 20,889,607
ECU 1,750 Societe Nationale Chemins de France (b) ......................... 9.375 03/12/01 2,326,653
--------------
28,608,609
--------------
TOTAL FRANCE .......................................................................... 31,069,623
--------------

SEE NOTES TO FINANCIAL STATEMENTS

<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1998, continued

PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------- ---------------------------------------------------------------- ---------- ----------- --------------
GERMANY (3.3%)
Government Obligation (2.1%)
DEM 35,250 German Government Bond (b) ...................................... 5.00% 08/20/01 $22,173,834
--------------
Smaller Banks (1.2%)
ECU 2,500 Bayerische Hypotheken Bank (b) .................................. 7.00 12/22/00 3,148,020
GBP 1,550 Bayerische Hypotheken Bank (b) .................................. 6.75 12/30/99 2,596,611
1,300 Bayerische Vereins Bank (b) ..................................... 7.50 12/27/00 2,227,678
2,600 Deutsche Siedlungs Bank (b) ..................................... 7.50 12/27/00 4,455,627
--------------
12,427,936
--------------
TOTAL GERMANY ......................................................................... 34,601,770
--------------
ITALY (0.3%)
Government Obligation
ITL 5,250 MItaly Treasury Bond ............................................ 10.50 07/15/00 3,563,578
--------------
LUXEMBOURG (1.3%)
Extra Governmental Institutions -Banks
ECU 10,900 European Investment Bank (b) .................................... 6.00 04/04/01 13,607,911
--------------
NETHERLANDS (0.7%)
Other Telecommunications (0.3%)
$ 2,800 Versatel Telecom -144A* ......................................... 13.25 05/15/08 2,604,000
--------------
Smaller Banks (0.4%)
GBP 2,600 Baden Wurt L-Finance (b) ........................................ 7.75 12/14/00 4,478,473
--------------
TOTAL NETHERLANDS ..................................................................... 7,082,473
--------------
NEW ZEALAND (2.5%)
Extra Governmental Institutions -Banks (1.7%)
NZD 33,950 International Bank for Reconstruction & Development (b) ......... 7.00 09/18/00 18,319,352
--------------
Government Obligation (0.8%)
14,000 New Zealand Government Bond (b) ................................. 8.00 02/15/01 7,841,117
--------------
TOTAL NEW ZEALAND ..................................................................... 26,160,469
--------------
NORWAY (1.2%)
Government Obligation
NOK 92,300 Norway Government Bond .......................................... 7.00 05/31/01 13,010,658
--------------
SPAIN (0.0%)
Government Obligation
ESP 50,000 Spain Treasury Bond ............................................. 12.25 03/25/00 396,475
--------------
SWEDEN (2.8%)
Government Obligation
ECU 23,350 Swedish Treasury Bond ........................................... 7.25 06/30/00 29,347,795
--------------

SEE NOTES TO FINANCIAL STATEMENTS

<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1998, continued

PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------- ---------------------------------------------------------------- ---------- ----------- --------------
UNITED KINGDOM (2.3%)
Other Telecommunications (0.2%)
$ 1,700 Esprit Telecom Group PLC ........................................ 10.875% 06/15/08 $1,496,000
--------------
Smaller Banks (1.8%)
ECU 3,000 Abbey National Treasury
Service (b) .................................................... 4.50 08/03/01 3,627,576
GBP 5,600 Abbey National Treasury
Service (b) .................................................... 7.125 03/14/01 9,565,499
3,460 Halifax PLC (b) ................................................. 8.375 12/15/99 5,891,410
--------------
19,084,485
--------------
Transportation (0.3%)
$ 6,400 Alpha Shipping PLC ............................................. 9.50 02/15/08 3,456,000
--------------
TOTAL UNITED KINGDOM .................................................................. 24,036,485
--------------
TOTAL FOREIGN (Identified Cost $256,334,534) .......................................... 250,991,683
--------------
UNITED STATES (73.7%)
CORPORATE BONDS (31.9%)
Aerospace (0.5%)
5,900 Sabreliner Corp. -144A* ......................................... 11.00 06/15/08 5,074,000
--------------
Broadcast Media (1.6%)
3,200 Interep National Radio
Sales -144A* ................................................... 10.00 07/01/08 3,136,000
3,000 Paxson Communications Corp. ..................................... 11.625 10/01/02 2,910,000
5,000 Spanish Broadcasting System, Inc. ............................... 12.50 06/15/02 5,400,000
5,400 Tri-State Outdoor Media Group,
Inc. -144A* .................................................... 11.00 05/15/08 5,157,000
--------------
16,603,000
--------------
Business Services (1.4%)
5,000 Anacomp, Inc. (Series B) ........................................ 10.875 04/01/04 4,975,000
600 Anacomp, Inc. (Series D) ........................................ 10.875 04/01/04 597,000
6,750 Comforce Operating, Inc. ........................................ 12.00 12/01/07 6,682,500
2,700 Entex Information Services,
Inc. -144A* .................................................... 12.50 08/01/06 2,457,000
--------------
14,711,500
--------------
Casino/Gambling (1.7%)
6,800 Aladdin Gaming/Capital Corp. LLC ................................ 13.50 ++ 03/01/10 2,040,000
3,250 Argosy Gaming Co. ............................................... 13.25 06/01/04 3,542,500
2,700 Aztar Corp. .................................................... 13.75 10/01/04 2,875,500
8,900 Fitzgeralds Gaming Corp. (Series B) ............................. 12.25 12/15/04 5,340,000
4,000 Lady Luck Gaming Finance Corp. .................................. 11.875 03/01/01 3,960,000
--------------
17,758,000
--------------

SEE NOTES TO FINANCIAL STATEMENTS

<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1998, continued

PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------- ---------------------------------------------------------------- ---------- ----------- --------------
Cellular Telephone (1.1%)
$ 2,700 American Cellular Corp. -144A* .................................. 10.50 % 05/15/08 $2,565,000
7,300 McCaw International Ltd. ........................................ 13.00 ++ 04/15/07 3,285,000
5,400 Price Communication Cellular Holdings ........................... 11.25 + 08/15/08 4,698,000
2,800 Triton Communications LLC
-144A* ......................................................... 11.00 ++ 05/01/08 1,071,000
--------------
11,619,000
--------------
Computers (1.1%)
5,600 CHS Electronics, Inc. ........................................... 9.875 04/15/05 5,040,000
3,000 IBM Credit Corp. ................................................ 15.00 02/02/99 3,071,400
3,250 Unisys Corp. (Series B) ......................................... 12.00 04/15/03 3,607,500
--------------
11,718,900
--------------
Consumer Sundries (0.6%)
2,500 J.B. Williams Holdings, Inc. .................................... 12.00 03/01/04 2,550,000
5,800 Samsonite Corp. ................................................ 10.75 06/15/08 4,176,000
--------------
6,726,000
--------------
Containers/Packaging (0.3%)
3,500 Packaging Resources, Inc. ....................................... 11.625 05/01/03 3,482,500
--------------
Diversified Manufacturing (0.9%)
5,000 Interlake Corp. ................................................. 12.00 11/15/01 5,000,000
2,800 J.B. Poindexter & Co., Inc. ..................................... 12.50 05/15/04 2,520,000
2,588 Jordan Industries, Inc. (Series B) .............................. 11.75 ++ 04/01/09 1,630,440
--------------
9,150,440
--------------
Finance Companies (1.9%)
GBP 4,200 General Electric Capital Corp. (b) .............................. 6.625 03/16/01 7,124,612
$ 5,000 General Electric Capital Corp. (Series A) ....................... 15.00 01/21/99 5,105,100
GBP 4,675 KFW International Finance (b) ................................... 7.625 12/29/00 8,051,785
--------------
20,281,497
--------------
Food & Beverages (2.3%)
$ 5,400 Envirodyne Industries, Inc. ..................................... 10.25 12/01/01 5,076,000
6,000 General Mills, Inc. ............................................. 15.00 01/29/99 6,138,420
3,000 Mrs. Fields Original ........................................... 10.125 12/01/04 2,670,000
5,000 Pepsico, Inc. ................................................... 15.00 08/06/99 5,396,150
24,225 Specialty Foods Acquisition Corp. (Series B) ................... 13.00 ++ 08/15/05 5,329,500
--------------
24,610,070
--------------
Healthcare (1.4%)
5,250 Pediatric Services of America, Inc. (Series A) ................. 10.00 04/15/08 3,255,000
4,000 Unilab Corp. .................................................... 11.00 04/01/06 4,040,000
7,350 Unison Healthcare Corp. -144A* (c) .............................. 12.25 11/01/06 3,491,250
5,400 Vencor Operating Inc. ........................................... 9.875 05/01/05 4,266,000
--------------
15,052,250
--------------

SEE NOTES TO FINANCIAL STATEMENTS

<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1998, continued

PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------- ---------------------------------------------------------------- ---------- ----------- --------------
Hotels/Resorts (1.7%)
$ 2,700 Epic Resorts LLC -144A* ......................................... 13.00 % 06/15/05 $2,592,000
6,231 Motels of America, Inc. (Series B) .............................. 12.00 04/15/04 5,296,350
3,443 Resort At Summerlin ............................................ 13.00 + 12/15/07 3,425,785
7,000 Walt Disney Co. ................................................ 15.00 12/14/98 7,078,610
--------------
18,392,745
--------------
Industrial Specialties (0.5%)
3,200 International Wire Group, Inc. (Series B) ....................... 11.75 06/01/05 3,232,000
2,250 Outsourcing Services Group, Inc.
-144A* ......................................................... 10.875 03/01/06 2,160,000
--------------
5,392,000
--------------
Movies/Entertainment (0.2%)
3,250 Stuart Entertainment, Inc. (Series B) ........................... 12.50 11/15/04 1,625,000
--------------
Office Equipment/Supplies (0.4%)
4,230 Mosler, Inc. ................................................... 11.00 04/15/03 3,637,800
--------------
Oil, Gas, Equipment & Services (1.2%)
2,800 Northern Offshore ASA -144A* .................................... 10.00 05/15/05 1,960,000
5,000 Texaco Capital, Inc. ............................................ 15.00 01/13/99 5,093,600
4,700 Transamerican Refining Corp. (Units) ++ -144A* ................. 16.00 06/30/03 4,230,000
2,000 Transamerican Refining Corp. (Units) ++ -144A* ................. 16.00 06/30/03 1,800,000
--------------
13,083,600
--------------
Printing, Publishing & Advertising (0.3%)
3,000 American Media Operations, Inc. ................................. 11.625 11/15/04 3,060,000
--------------
Restaurants (2.0%)
48,756 American Restaurant Group Holdings,
Inc. -144A* (d) ............................................... 0.00 12/15/05 14,139,211
4,000 FRD Acquisition Corp. (Series B) ................................ 12.50 07/15/04 3,920,000
6,900 Planet Hollywood International, Inc. ............................ 12.00 04/01/05 3,174,000
--------------
21,233,211
--------------
Retail -Chain (0.3%)
2,912 Kmart Corp. ..................................................... 13.50 01/01/09 3,021,200
--------------
Retail -Food & Drug (0.9%)
3,750 Big V Supermarkets, Inc. (Series B) ............................. 11.00 02/15/04 3,675,000
1,000 Eagle Food Centers, Inc. ........................................ 8.625 04/15/00 940,000
1,000 Pueblo Xtra International, Inc. ................................. 9.50 08/01/03 880,000
5,000 Pueblo Xtra International, Inc. (Series C) ...................... 9.50 08/01/03 4,400,000
--------------
9,895,000
--------------

SEE NOTES TO FINANCIAL STATEMENTS

<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1998, continued

PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------- ---------------------------------------------------------------- ---------- ----------- --------------
Telecommunication Equipment (0.7%)
$ 10,500 FWT, Inc. ....................................................... 9.875% 11/15/07 $7,455,000
--------------
U.S. Telecommunications (5.3%)
5,600 21st Century Telecom Group, Inc. ............................... 12.25 ++ 02/15/08 2,296,000
2,800 Birch Telecom Inc. (Units)++ -144A* ............................. 14.00 06/15/08 2,464,000
3,635 CapRock Communications Corp.
-144A* ......................................................... 12.00 07/15/08 3,089,750
2,700 e. Spire Communications, Inc. ................................... 13.75 07/15/07 2,868,750
6,400 Facilicom International, Inc.
(Series B) ..................................................... 10.50 01/15/08 4,960,000
16,300 Firstworld Communications, Inc.
-144A* ......................................................... 13.00 ++ 04/15/08 5,216,000
3,100 GST Equipment Funding Corp. ..................................... 13.25 05/01/07 3,100,000
700 Hyperion Telecommunication, Inc. (Series B) ..................... 13.00 ++ 04/15/03 483,000
4,700 Hyperion Telecommunication, Inc. (Series B) ..................... 12.25 09/01/04 4,606,000
28,500 In-Flight Phone Corp. (Series B)(e) ............................. 14.00 05/15/02 3,206,250
5,400 Level 3 Communications, Inc. .................................... 9.125 05/01/08 5,089,500
3,350 NextLink Communications LLC ..................................... 12.50 04/15/06 3,542,625
2,700 Optel, Inc. -144A* .............................................. 11.50 07/01/08 2,484,000
6,000 Peoples Telephone Co., Inc. ..................................... 12.25 07/15/02 6,900,000
3,500 Primus Telecommunications
Group, Inc. .................................................... 11.75 08/01/04 3,237,500
2,700 Primus Telecommunications
Group, Inc. .................................................... 9.875 05/15/08 2,214,000
--------------
55,757,375
--------------
Wireless Communication (3.6%)
8,975 Advanced Radio Telecom Corp. .................................... 14.00 02/15/07 7,090,250
18,900 CellNet Data Systems Inc. ....................................... 14.00 ++ 10/01/07 6,048,000
3,100 Echostar DBS Corp. .............................................. 12.50 07/01/02 3,162,000
3,750 Globalstar LP/Capital Corp. ..................................... 11.375 02/15/04 2,475,000
1,850 Globalstar LP/Capital Corp. ..................................... 11.50 06/01/05 1,239,500
4,000 Orbcomm Global LP/Capital Corp. ................................ 14.00 08/15/04 3,560,000
8,750 TCI Satellite Entertainment Corp. .............................. 12.25 ++ 02/15/07 4,725,000
5,850 USA Mobile Communications Holdings, Inc. ....................... 14.00 11/01/04 5,967,000
1,000 Winstar Communications, Inc. ................................... 14.00 ++ 10/15/05 720,000
3,250 Winstar Equipment Corp. ......................................... 12.50 03/15/04 3,022,500
--------------
38,009,250
--------------
TOTAL CORPORATE BONDS (Identified Cost $390,235,757) .................................. 337,349,338
--------------

SEE NOTES TO FINANCIAL STATEMENTS

<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1998, continued

PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------- ---------------------------------------------------------------- ---------- ----------- --------------
MORTGAGE-BACKED SECURITIES (24.5%)
Federal Home Loan Mortgage Corp. (0.5%)
$ 2,897 ................................................................ 7.00% 04/01/04-
06/01/04 $2,954,094
1,736 ................................................................ 8.00 10/01/24-
06/01/25 1,788,925
--------------
4,743,019
--------------
Federal National Mortgage Assoc. (13.0%)
32,260 ................................................................ 6.00 02/01/11-
06/01/13 32,371,062
38,913 ................................................................ 6.50 10/01/08-
06/01/28 39,332,202
31,530 ................................................................ 7.00 08/01/08-
03/01/27 32,206,748
14,191 ................................................................ 7.50 02/01/22-
01/01/27 14,550,154
6,943 ................................................................ 8.00 09/01/01-
06/01/26 7,157,011
11,854 ................................................................ 8.50 07/01/17-
05/01/25 12,339,641
--------------
137,956,818
--------------
Government National Mortgage Assoc. (11.0%)
9,799 ................................................................ 6.00 10/15/23-
09/15/28 9,706,830
1,000 ................................................................ 6.00 ** 990,625
37,107 ................................................................ 6.50 11/20/23-
06/15/28 37,455,501
26,642 ................................................................ 7.00 12/15/22-
11/20/27 27,200,336
31,672 ................................................................ 7.50 05/15/17-
11/15/26 32,608,701
5,573 ................................................................ 8.00 01/15/22-
10/15/24 5,772,769
2,000 ................................................................ 8.50 08/15/22-
12/15/24 2,112,339
--------------
115,847,101
--------------
TOTAL MORTGAGE-BACKED SECURITIES
(Identified Cost $252,002,130) ........................................................ 258,546,938
--------------

SEE NOTES TO FINANCIAL STATEMENTS

<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1998, continued

PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------- ---------------------------------------------------------------- ---------- ----------- --------------
U.S. GOVERNMENT AGENCIES & OBLIGATIONS (17.3%)
Federal Home Loan Banks (b)(1.2%)
$ 5,000 ................................................................ 0.00 % 07/02/12 $1,752,200
5,000 ................................................................ 6.37 09/25/07 5,366,150
5,000 ................................................................ 6.385 10/23/07 5,374,050
--------------
12,492,400
--------------
Federal Home Loan Mortgage Corp. (0.8%)
10,000 ................................................................ 0.00 08/15/02 8,371,800
--------------
Federal National Mortgage Assoc. (b)(3.9%)
NZD 67,600 ................................................................ 7.00 09/26/00 36,458,622
$ 6,000 Principal Strips ............................................... 0.00 02/12/04-
02/01/05 4,449,240
--------------
40,907,862
--------------
13,475 Financing Corp. (0.9%) .......................................... 0.00 03/07/05-
04/06/06 9,677,662
--------------
22,232 Resolution Funding Corp. (1.5%) ................................. 0.00 04/15/05-
10/15/07 16,177,925
--------------
2,320 Tennessee Valley Authority (0.2%) ............................... 0.00 01/15/03 1,904,929
--------------
U.S. Treasury Notes (b)(8.8%)
6,000 ................................................................ 5.375 02/15/01 6,136,260
16,000 ................................................................ 5.625 02/15/06-
05/15/08 17,149,680
13,000 ................................................................ 6.125 08/15/07 14,336,920
13,000 ................................................................ 6.375 09/30/01 13,708,370
38,100 ................................................................ 8.00 05/15/01 41,421,939
--------------
92,753,169
--------------
TOTAL U.S. GOVERNMENT AGENCIES & OBLIGATIONS
(Identified Cost $174,901,497) ......................................................... 182,285,747
--------------
TOTAL UNITED STATES
(Identified Cost $817,139,384) ......................................................... 778,182,023
--------------
TOTAL GOVERNMENT & CORPORATE BONDS
(Identified Cost $1,073,473,918) ....................................................... 1,029,173,706
--------------
</TABLE>

<TABLE>
<CAPTION>
NUMBER OF
SHARES
- -----------
<S> <C> <C>
COMMON STOCKS (f) (0.2%)
Food & Beverages (0.0%)
198,750 Specialty Foods Acquisition Corp. -144A* .................................... 198,750
------------
Hotels/Resorts (0.0%)
2,000 Motels of America, Inc. -144A* .............................................. 20,000
------------
Other Telecommunications (0.0%)
5,143 MetroNet Communications Corp. (Class B)(Canada) (Non-Voting) .............. 116,360
------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1998, continued

<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ------------- ------------
<S> <C> <C>
Restaurants (0.0%)
6,000 American Restaurant Group Holdings, Inc. -- 144A* $ 60
---------
Retail -- Chain (0.1%)
1,229,412 County Seat Stores, Inc. (d) ..................... 1,383,089
---------
Textiles (0.1%)
298,462 United States Leather, Inc. (d) .................. 578,419
---------
TOTAL COMMON STOCKS (Identified Cost $11,824,755). 2,296,678
---------
PREFERRED STOCKS (0.2%)
Oil, Gas, Equipment & Services (0.1%)
458 XCL Ltd. (Conv.) + -- 144A* ...................... 55,022
5,000 XCL Ltd. (Units) ++ (Conv.)+ -- 144A* ............ 600,000
---------
655,022
---------
Restaurants (0.1%)
1,500 American Restaurant Group Holdings, Inc.+ ........ 1,500,000
---------
TOTAL PREFERRED STOCKS (Identified Cost $2,500,232). 2,155,022
---------
</TABLE>

<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE
- ----------- -----------
<S> <C> <C> <C>
WARRANTS (f) (0.0%)
Aerospace (0.0%)
1,000 Sabreliner Corp. -- 144A* ........................ 04/15/03 40,000
---------
Cable & Telecommunication (0.0%)
4,000 Uih Australia/Pacific Inc. ....................... 05/15/06 40
---------
Casino/Gambling (0.0%)
68,000 Aladdin Gaming Enterprises -- 144A* .............. 03/01/10 680
10,773 Fitzgeralds Gaming Corp. ......................... 12/19/98 21,546
3,500 Fitzgeralds South Inc. -- 144A* .................. 03/15/99 35
---------
22,261
---------
Cellular Telephone (0.0%)
5,300 McCaw International Ltd. -- 144A* ................ 04/15/07 1,325
---------
Hotels/Resorts (0.0%)
2,700 Epic Resorts LLC/Capital -- 144A* ................ 06/15/05 27
3,250 Resort At Summerlin -- 144A* ..................... 12/15/07 33
---------
60
---------
Major U.S. Telecommunications (0.0%)
16,300 Firstworld Communications -- 144A* ............... 04/15/08 163
---------
Other Telecommunications (0.0%)
2,800 Versatel Telecom -- 144A* (Netherlands) .......... 05/15/08 28,000
---------
Restaurants (0.0%)
1,500 American Restaurant Group Holdings, Inc.
-- 144A* ......................................... 08/15/00 15
---------
TOTAL WARRANTS (Identified Cost $96,448) .................... 91,864
---------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1998, continued

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS (g)(3.1%)
U.S. GOVERNMENT AGENCIES
$ 16,000 Federal Farm Credit Bank ........................................ 4.74% 11/02/98 $15,997,894
9,000 Federal Home Loan Mortgage Corp. ................................ 4.74 11/02/98 8,998,815
7,800 Federal Home Loan Mortgage Corp. ................................ 5.42 11/02/98 7,798,825
---------------
TOTAL SHORT-TERM INVESTMENTS
(Amortized Cost $32,795,534) ........................................................ 32,795,534
---------------
TOTAL INVESTMENTS
(Identified Cost $1,120,690,887)(h) ...................................... 101.0% 1,066,512,804
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS ........................... (1.0) (10,962,126)
---------------
NET ASSETS .............................................................. 100.0% $1,055,550,678
========== ===============
</TABLE>

- ------------
M In millions.
* Resale is restricted to qualified institutional investors.
** Security purchased on a forward commitment basis with an approximate
principal amount and no definite maturity date; the actual principal
amount and maturity date will be determined upon settlement.
++ Consists of one or more class of securities traded together as a unit;
stocks or bonds with attached warrants.
+ Payment-in-kind security.
++ Currently a zero coupon bond and will pay interest at the rate shown at
a future date.
(a) Issuer in bankruptcy.
(b) Some or all of these securities are segregated in connection with open
forward foreign currency contracts and securities purchased on a
forward commitment basis.
(c) Non-income producing security; bond in default.
(d) Acquired through exchange offer.
(e) Non-income producing security; issuer in bankruptcy.
(f) Non-income producing securities.
(g) Securities were purchased on a discount basis. The interest rates shown
have been adjusted to reflect a money market equivalent yield.
(h) The aggregate cost for federal income tax purposes approximates
identified cost.
The aggregate gross unrealized appreciation is $23,511,483 and the
aggregate gross unrealized depreciation is $77,689,566, resulting in
net unrealized depreciation of $54,178,083.

SEE NOTES TO FINANCIAL STATEMENTS

<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1998, continued

FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT OCTOBER 31, 1998:

<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS IN EXCHANGE DELIVERY APPRECIATION
TO DELIVER FOR DATE (DEPRECIATION)
- ----------------------- ------------------------- ---------- ---------------
<S> <C> <C> <C>
GBP 12,000,000 $ 19,963,200 11/09/98 $ (125,600)
NZD 13,000,000 $ 6,960,850 11/23/98 79,690
NZD 3,700,000 $ 1,981,165 11/23/98 22,681
NZD 11,350,000 $ 5,584,200 11/30/98 (424,641)
NZD 17,450,000 $ 9,149,908 12/02/98 (88,820)
DEM 14,279,000 $ 8,750,728 12/03/98 99,305
GBP 6,950,000 $ 11,620,400 12/07/98 2,687
GBP 9,900,000 $ 16,551,216 12/08/98 2,970
DEM 10,000,000 $ 6,102,398 12/08/98 42,086
NZD 22,800,000 $ 12,003,972 12/09/98 (69,388)
ECU 4,888,000 $ 5,920,786 12/14/98 103,577
DEM 21,935,000 $ 13,336,779 12/15/98 38,971
$ 17,537,257 CHF 23,300,000 12/15/98 (218,902)
----------
Net unrealized depreciation ............................... $ (535,384)
==========
</TABLE>

Currency Abbreviations:

GBP British Pound.
DKK Danish Krone.
ECU European Currency Unit.
FRF French Franc.
DEM German Deutschemark.
ITL Italian Lira.
NZD New Zealand Dollar.
NOK Norwegian Krone.
ESP Spanish Peseta.
CHF Swiss Franc.

SEE NOTES TO FINANCIAL STATEMENTS

<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
October 31, 1998

<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $1,120,690,887).................................... $1,066,512,804
Unrealized appreciation on open forward foreign currency contracts .. 391,967
Cash (including $7,349 in foreign currency).......................... 158,326
Receivable for:
Interest ......................................................... 21,627,732
Shares of beneficial interest sold ............................... 2,779,454
Compensated forward foreign currency contracts ................... 110,081
Prepaid expenses and other assets ................................... 92,134
--------------
TOTAL ASSETS ..................................................... 1,091,672,498
--------------
LIABILITIES:
Unrealized depreciation on open forward foreign currency contracts .. 927,351
Payable for:
Investments purchased ............................................ 26,526,089
Compensated forward foreign currency contracts ................... 3,724,092
Plan of distribution fee ......................................... 754,720
Dividends to shareholders ........................................ 727,034
Shares of beneficial interest repurchased ........................ 712,102
Investment management fee ........................................ 358,993
Payable to bank ..................................................... 2,172,106
Accrued expenses and other payables ................................. 219,333
--------------
TOTAL LIABILITIES ................................................ 36,121,820
--------------
NET ASSETS ....................................................... $1,055,550,678
==============
COMPOSITION OF NET ASSETS:
Paid-in-capital ..................................................... $1,130,918,872
Net unrealized depreciation ......................................... (54,837,590)
Dividends in excess of net investment income ........................ (1,230,297)
Accumulated net realized loss ....................................... (19,300,307)
--------------
NET ASSETS ....................................................... $1,055,550,678
==============
CLASS A SHARES:
Net Assets .......................................................... $ 15,130,255
Shares Outstanding (unlimited authorized, $.01 par value)............ 1,679,965
NET ASSET VALUE PER SHARE ........................................ $ 9.01
==============
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 4.44% of net asset value) ................ $ 9.41
==============
CLASS B SHARES:
Net Assets .......................................................... $1,024,021,371
Shares Outstanding (unlimited authorized, $.01 par value)............ 113,700,790
NET ASSET VALUE PER SHARE ........................................ $ 9.01
==============
CLASS C SHARES:
Net Assets .......................................................... $ 15,659,283
Shares Outstanding (unlimited authorized, $.01 par value)............ 1,740,750
NET ASSET VALUE PER SHARE ........................................ $ 9.00
==============
CLASS D SHARES:
Net Assets .......................................................... $ 739,769
Shares Outstanding (unlimited authorized, $.01 par value)............ 82,178
NET ASSET VALUE PER SHARE ........................................ $ 9.00
==============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

48
<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL STATEMENTS, continued

STATEMENT OF OPERATIONS
For the year ended October 31, 1998

<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME .................................................. $ 87,827,194
-------------
EXPENSES
Plan of distribution fee (Class A shares) ........................ 26,694
Plan of distribution fee (Class B shares) ........................ 8,383,247
Plan of distribution fee (Class C shares) ........................ 86,869
Investment management fee ........................................ 4,031,496
Transfer agent fees and expenses ................................. 652,338
Custodian fees ................................................... 228,162
Registration fees ................................................ 194,884
Shareholder reports and notices .................................. 86,963
Professional fees ................................................ 77,085
Trustees' fees and expenses ...................................... 19,425
Other ............................................................ 23,125
-------------
TOTAL EXPENSES ................................................ 13,810,288
-------------
NET INVESTMENT INCOME ......................................... 74,016,906
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss on:
Investments ................................................... (5,359,906)
Foreign exchange transactions ................................. (3,288,604)
-------------
NET LOSS ...................................................... (8,648,510)
-------------
Net change in unrealized appreciation/depreciation on:
Investments ................................................... (44,181,441)
Translation of forward foreign currency contracts, other assets
and liabilities denominated in foreign currencies ........... 348,092
-------------
NET DEPRECIATION .............................................. (43,833,349)
-------------
NET LOSS ...................................................... (52,481,859)
-------------
NET INCREASE ..................................................... $ 21,535,047
=============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

49
<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL STATEMENTS, continued

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 1998 OCTOBER 31, 1997*
------------------ ------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income ...................................... $ 74,016,906 $ 66,141,534
Net realized loss .......................................... (8,648,510) (8,043,772)
Net change in unrealized depreciation ...................... (43,833,349) (3,943,025)
-------------- -------------
NET INCREASE ............................................ 21,535,047 54,154,737
-------------- -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM :
Net investment income:
Class A shares ........................................... (841,473) (58,752)
Class B shares ........................................... (68,434,466) (79,103,939)
Class C shares ........................................... (726,141) (41,777)
Class D shares ........................................... (29,053) (882)
-------------- -------------
Paid-in-capital:
Class A shares ........................................... (31,733) --
Class B shares ........................................... (2,580,756) --
Class C shares ........................................... (27,384) --
Class D shares ........................................... (1,096) --
-------------- -------------
TOTAL DIVIDENDS AND DISTRIBUTIONS ....................... (72,672,102) (79,205,350)
-------------- -------------
Net increase from transactions in shares of beneficial
interest ................................................. 181,982,946 204,174,498
-------------- -------------
NET INCREASE ............................................ 130,845,891 179,123,885
NET ASSETS:
Beginning of period ........................................ 924,704,787 745,580,902
-------------- -------------
END OF PERIOD
(Including dividends in excess of net investment
income of $1,230,297 and accumulated undistributed
net investment income of $278,119, respectively)........ $1,055,550,678 $ 924,704,787
============== =============
</TABLE>

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

SEE NOTES TO FINANCIAL STATEMENTS

<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1998

1. ORGANIZATION AND ACCOUNTING POLICIES

Morgan Stanley Dean Witter Diversified Income Trust (the "Fund"), formerly Dean
Witter Diversified Income Trust, is registered under the Investment Company Act
of 1940, as amended (the "Act"), as a diversified, open-end management
investment company. The Fund's primary investment objective is to provide a
high level of current income and, as a secondary objective, seeks to maximize
total return, but only when consistent with its primary objective. The Fund was
organized as a Massachusetts business trust on December 20, 1991 and commenced
operations on April 9, 1992. On July 28, 1997, the Fund commenced offering
three additional classes of shares, with the then current shares designated as
Class B shares.

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

The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures. Actual results could differ
from those estimates.

The following is a summary of significant accounting policies:

A. VALUATION OF INVESTMENTS -- (1) an equity security listed or traded on the
New York, American or other domestic or foreign stock exchange is valued at its
latest sale price on that exchange prior to the time when assets are valued; if
there were no sales that day, the security is valued at the latest bid price
(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);
(2) all other portfolio securities for which over-the-counter market quotations
are readily available are valued at the latest available bid price prior to the
time of valuation; (3) when market quotations are not readily available,
including circumstances under which it is determined by Morgan Stanley Dean
Witter Advisors Inc. (the "Investment Manager"), formerly Dean Witter
InterCapital Inc., 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 Trustees; (4) certain portfolio securities may be valued by an outside
pricing service approved by the Trustees. The pricing service may utilize a
matrix system incorporating security quality, maturity and coupon as the
evaluation model parameters, and/or research

51
<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1998, continued

and evaluations by its staff, including review of broker-dealer market price
quotations, if available, in determining what it believes is the fair valuation
of the portfolio securities valued by such pricing service; and (5) short-term
debt securities having a maturity date of more than sixty days at time of
purchase are valued on a mark-to-market basis until sixty days prior to
maturity and thereafter at amortized cost based on their value on the 61st day.
Short-term debt securities having a maturity date of sixty days or less at the
time of purchase are valued at amortized cost.

B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Discounts are accreted over the life of the respective securities. Interest
income is accrued daily.

C. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date
such items are recognized. Distribution fees are charged directly to the
respective class.

D. FOREIGN CURRENCY TRANSLATION -- The books and records of the Fund are
maintained in U.S. dollars as follows: (1) the foreign currency market value of
investment securities, other assets and liabilities and forward foreign
currency contracts are translated at the exchange rates prevailing at the end
of the period; and (2) purchases, sales, income and expenses are translated at
the exchange rates prevailing on the respective dates of such transactions. The
resultant exchange gains and losses are included in the Statement of Operations
as realized and unrealized gain/loss on foreign exchange transactions. Pursuant
to U.S. Federal income tax regulations, certain foreign exchange gains/losses
included in realized and unrealized gain/loss are included in or are a
reduction of ordinary income for federal income tax purposes. The Fund does not
isolate that portion of the results of operations arising as a result of
changes in the foreign exchange rates from the changes in the market prices of
the securities.

E. FORWARD FOREIGN CURRENCY CONTRACTS -- The Fund may enter into forward
foreign currency contracts which are valued daily at the appropriate exchange
rates. The resultant unrealized exchange gains and losses are included in the
Statement of Operations as unrealized foreign currency gain or loss. The Fund
records realized gains or losses on delivery of the currency or at the time the
forward contract is extinguished (compensated) by entering into a closing
transaction prior to delivery.

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

52
<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1998, continued

G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends
and distributions to its shareholders on the record date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which
may differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.

2. INVESTMENT MANAGEMENT AGREEMENT

Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, accrued daily and payable monthly, by applying the
annual rate of 0.40% to the net assets of the Fund determined as of the close
of each business day.

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

3. PLAN OF DISTRIBUTION

Shares of the Fund are distributed by Morgan Stanley Dean Witter Distributors
Inc. (the "Distributor"), an affiliate of the Investment Manager. The Fund has
adopted a Plan of Distribution (the "Plan"), pursuant to Rule 12b-1 under the
Act. The Plan provides that the Fund will pay the Distributor a fee which is
accrued daily and paid monthly at the following annual rates: (i) Class A -- up
to 0.25% of the average daily net assets of Class A; (ii) Class B -- 0.85% of
the lesser of: (a) the average daily aggregate gross sales of the Class B
shares since inception of the Fund (not including reinvestment of dividend or
capital gain distributions) less the average net asset value of the Class B
shares redeemed since the Fund's inception upon which a contingent deferred
sales charge has been imposed or waived; or (b) the average daily net assets of
Class B; and (iii) Class C -- up to 0.85% of the average daily net assets of
Class C. In

53
<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1998, continued

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

In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund
pursuant to the Plan and contingent deferred sales charges paid by investors
upon redemption of Class B shares. Although there is no legal obligation for
the Fund to pay expenses incurred in excess of payments made to the Distributor
under the Plan and the proceeds of contingent deferred sales charges paid by
investors upon redemption of shares, if for any reason the Plan is terminated,
the Trustees will consider at that time the manner in which to treat such
expenses. The Distributor has advised the Fund that such excess amounts,
including carrying charges, totaled $16,985,708 at October 31, 1998.

In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 0.85% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Dean Witter Financial Advisors or other
selected broker-dealer representatives may be reimbursed in the subsequent
calendar year. For the year ended October 31, 1998, the distribution fee was
accrued for Class A shares and Class C shares at the annual rate of 0.24% and
0.85%, respectively.

The Distributor has informed the Fund that for the year ended October 31, 1998,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class B shares and Class C shares of

54
<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1998, continued

$1,499,828 and $13,622, respectively, and received $121,078 in front-end sales
charges from sales of the Fund's Class A shares. The respective shareholders
pay such charges which are not an expense of the Fund.

4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES

The cost of purchases and proceeds from sales of portfolio securities,
excluding short-term investments, for the year ended October 31, 1998
aggregated $1,487,171,489 and $1,267,998,886, respectively. Included in the
aforementioned are purchases and sales of U.S. Government securities of
$557,262,776 and $554,199,808, respectively.

Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager
and Distributor, is the Fund's transfer agent. At October 31, 1998, the Fund
had transfer agent fees and expenses payable of approximately $2,000.

The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended October 31, 1998
included in Trustees' fees and expenses in the Statement of Operations amounted
to $5,678. At October 31, 1998, the Fund had an accrued pension liability of
$36,671 which is included in accrued expenses in the Statement of Assets and
Liabilities.

5. FEDERAL INCOME TAX STATUS

At October 31, 1998, the Fund had a net capital loss carryover of approximately
$19,547,000, which may be used to offset future capital gains to the extent
provided by regulations, which is available through October 31 of the following
years:

<TABLE>
<CAPTION>
AMOUNT IN THOUSANDS
- -----------------------------------------------------------
2002 2003 2004 2005 2006
- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
$ 3,024 $3,677 $2,482 $7,131 $3,233
======== ====== ====== ====== ======
</TABLE>

As of October 31, 1998, the Fund had temporary book/tax differences primarily
attributable to the mark-to-market of open forward foreign currency exchange
contracts and compensated forward foreign currency exchange contracts, capital
loss deferrals on wash sales and interest on bonds in default and permanent
book/tax differences primarily attributable to foreign currency losses. To
reflect reclassifications arising from the permanent differences, dividends in
excess of net investment income was charged and accumulated net realized loss
was credited $5,494,189.

55
<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1998, continued

6. SHARES OF BENEFICIAL INTEREST

Transactions in shares of beneficial interest were as follows:

<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 1998 OCTOBER 31, 1997*
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT
CLASS A SHARES
Sold .............................. 1,401,139 $ 13,091,543 558,411 $ 5,262,008
Reinvestment of dividends ......... 27,410 253,604 1,750 16,494
Redeemed .......................... (270,021) (2,522,912) (38,724) (367,538)
--------- -------------- ------- --------------
Net increase -- Class A ........... 1,158,528 10,822,235 521,437 4,910,964
--------- -------------- ------- --------------
CLASS B SHARES
Sold .............................. 62,883,534 586,332,969 55,563,733 525,362,254
Reinvestment of dividends ......... 3,352,666 31,127,964 3,620,754 34,158,956
Redeemed .......................... (49,343,181) (459,483,799) (38,605,240) (364,124,514)
----------- -------------- ----------- --------------
Net increase -- Class B ........... 16,893,019 157,977,134 20,579,247 195,396,696
----------- -------------- ----------- --------------
CLASS C SHARES
Sold .............................. 1,498,137 13,967,448 404,022 3,813,369
Reinvestment of dividends ......... 46,283 427,613 2,302 21,713
Redeemed .......................... (202,794) (1,873,959) (7,200) (68,099)
----------- -------------- ----------- --------------
Net increase -- Class C ........... 1,341,626 12,521,102 399,124 3,766,983
----------- -------------- ----------- --------------
CLASS D SHARES
Sold .............................. 76,565 707,582 10,494 99,638
Reinvestment of dividends ......... 1,631 15,003 23 217
Redeemed .......................... (6,535) (60,110) -- --
----------- -------------- ----------- --------------
Net increase -- Class D ........... 71,661 662,475 10,517 99,855
----------- -------------- ----------- --------------
Net increase in Fund .............. 19,464,834 $ 181,982,946 21,510,325 $ 204,174,498
=========== ============== =========== ==============
</TABLE>

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

7. PURPOSE OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS

The Fund may enter into forward foreign currency contracts ("forward
contracts") to facilitate settlement of foreign currency denominated portfolio
transactions or to manage its foreign currency exposure or to sell, for a fixed
amount of U.S. dollars or other currency, the amount of foreign currency
approximating the value of some or all of its holdings denominated in such
foreign currency or 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 its holdings to be hedged. Additionally, when the Investment
Manager anticipates purchasing securities at some time in the future, the Fund
may enter into a forward contract to purchase an amount of currency equal to
some or all the value of the anticipated purchase for a fixed amount of U.S.
dollars or other currency.

56
<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1998, continued

To hedge against adverse interest rate, foreign currency and market risks, the
Fund may enter into written options on interest rate futures and interest rate
futures contracts ("derivative investments").

Forward contracts and derivative instruments involve elements of market risk in
excess of the amount reflected in the Statement of Assets and Liabilities. The
Fund bears the risk of an unfavorable change in the foreign exchange rates
underlying the forward contracts. Risks may also arise upon entering into these
contracts from the potential inability of the counterparties to meet the terms
of their contracts.

At October 31, 1998, there were outstanding forward contracts used to
facilitate settlement of foreign currency denominated portfolio transactions
and manage foreign currency exposure.

57
<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL HIGHLIGHTS

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

<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER 31
---------------------------------------------------------------------------
1998++ 1997*++ 1996 1995 1994
---------------- ---------------------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
CLASS B SHARES
SELECTED PER SHARE DATA
Net asset value, beginning of period ................... $ 9.46 $ 9.78 $ 9.62 $ 9.37 $ 10.20
-------------- --------- --------- --------- ---------
Income (loss) from investment operations:
Net investment income ................................. 0.68 0.74 0.78 0.77 0.74
Net realized and unrealized gain (loss) ............... (0.46) (0.15) 0.10 0.20 (0.80)
-------------- ---------- --------- --------- ---------
Total income (loss) from investment operations ......... 0.22 0.59 0.88 0.97 (0.06)
-------------- ---------- --------- --------- ---------
Less dividends and distributions from:
Net investment income ................................. (0.65) (0.91) (0.72) (0.72) (0.64)
Net realized gain ..................................... -- -- -- -- (0.01)
Paid-in-capital ....................................... (0.02) -- -- -- (0.12)
-------------- ---------- ---------- ---------- ---------
Total dividends and distributions ...................... (0.67) (0.91) (0.72) (0.72) (0.77)
-------------- ---------- ---------- ---------- ---------
Net asset value, end of period ......................... $ 9.01 $ 9.46 $ 9.78 $ 9.62 $ 9.37
============== ========== ========== ========== =========
TOTAL RETURN+ .......................................... 2.23% 6.46% 9.49% 10.76% (0.69)%
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 1.38%(1) 1.40% 1.42% 1.44% 1.51%
Net investment income .................................. 7.33%(1) 7.90% 8.38% 8.30% 7.91%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $1,024,021 $915,899 $745,581 $542,544 $407,038
Portfolio turnover rate ................................ 130% 104% 82% 87% 60%

</TABLE>

- -------------
* Prior to July 28, 1997, the Fund issued one class of shares. All shares
of the Fund held prior to that date have been designated Class B shares.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.
(1) Reflects overall Fund ratios for investment income and non-class
specific expenses.

SEE NOTES TO FINANCIAL STATEMENTS
58
<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL HIGHLIGHTS, continued

<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR JULY 28, 1997*
ENDED THROUGH
OCTOBER 31, 1998 OCTOBER 31, 1997
--------------------- -------------------
<S> <C> <C>
CLASS A SHARES++
SELECTED PER SHARE DATA
Net asset value, beginning of period ............. $ 9.46 $ 9.40
------------- ------------
Income from investment operations:
Net investment income ........................... 0.74 0.22
Net realized and unrealized gain (loss)......... (0.46) 0.04
------------- ------------
Total income from investment operations .......... 0.28 0.26
------------- ------------
Less dividends and distributions from:
Net investment income ........................... (0.70) (0.20)
Paid-in-capital ................................. (0.03) --
------------- ------------
Total dividends and distributions ................ (0.73) (0.20)
------------- ------------
Net asset value, end of period ................... $ 9.01 $ 9.46
============= ============
TOTAL RETURN+ .................................... 2.86% 2.74%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ......................................... 0.77%(3) 0.85%(2)
Net investment income ............................ 7.94%(3) 8.98%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands .......... $15,130 $4,933
Portfolio turnover rate .......................... 130% 104%
CLASS C SHARES++
SELECTED PER SHARE DATA
Net asset value, beginning of period ............. $ 9.45 $ 9.40
------------- ------------
Income from investment operations:
Net investment income ........................... 0.68 0.20
Net realized and unrealized gain (loss)......... (0.46) 0.04
------------- ------------
Total income from investment operations .......... 0.22 0.24
------------- ------------
Less dividends and distributions from:
Net investment income ........................... (0.65) (0.19)
Paid-in-capital ................................. (0.02) --
------------- ------------
Total dividends and distributions ................ (0.67) (0.19)
------------- ------------
Net asset value, end of period ................... $ 9.00 $ 9.45
============= ============
TOTAL RETURN+ .................................... 2.26% 2.52%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ......................................... 1.38%(3) 1.44%(2)
Net investment income ............................ 7.33%(3) 8.17%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands .......... $15,659 $3,773
Portfolio turnover rate .......................... 130% 104%
</TABLE>

- -------------
* The date shares were first issued.
+ Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class
specific expenses.

SEE NOTES TO FINANCIAL STATEMENTS

<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL HIGHLIGHTS, continued

<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR JULY 28, 1997*
ENDED THROUGH
OCTOBER 31, 1998 OCTOBER 31, 1997
------------------ -----------------
<S> <C> <C>
CLASS D SHARES++
SELECTED PER SHARE DATA
Net asset value, beginning of period ............. $ 9.45 $ 9.40
-------- --------
Income from investment operations:
Net investment income ........................... 0.76 0.23
Net realized and unrealized gain (loss)......... (0.46) 0.02
-------- --------
Total income from investment operations .......... 0.30 0.25
-------- --------
Less dividends and distributions from:
Net investment income ........................... (0.72) (0.20)
Paid-in-capital ................................. (0.03) --
-------- --------
Total dividends and distributions ................ (0.75) (0.20)
-------- --------
Net asset value, end of period ................... $ 9.00 $ 9.45
======== ========
TOTAL RETURN+ .................................... 3.21% 2.69%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ......................................... 0.53%(3) 0.59%(2)
Net investment income ............................ 8.18%(3) 9.26%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands .......... $ 740 $ 99
Portfolio turnover rate .......................... 130% 104%
</TABLE>

- -------------
* The date shares were first issued.
+ Calculated based on the net asset value as of the last business day of
the period.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class
specific expenses.

SEE NOTES TO FINANCIAL STATEMENTS

<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
REPORT OF INDEPENDENT ACCOUNTANTS

TO THE SHAREHOLDERS AND TRUSTEES
OF MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST

In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Morgan Stanley Dean Witter
Diversified Income Trust (the "Fund"), formerly Dean Witter Diversified Income
Trust, at October 31, 1998, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities at October 31, 1998 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
December 17, 1998

<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST

PART C OTHER INFORMATION

Item 23. Exhibits

2. Amended and Restated By-Laws of the Registrant dated January 28,
1999.

10. Consent of Independent Accountants.

14. Financial Data Schedules as of October 31, 1998.

All other exhibits were previously filed via EDGAR and are hereby incorporated
by reference.

Item 24. Persons Controlled by or Under Common Control With the Fund.

None

Item 25. Indemnification

Pursuant to Section 5.3 of the Registrant's Declaration of Trust and
under Section 4.8 of the Registrant's By-Laws, the indemnification of the
Registrant's trustees, officers, employees and agents is permitted if it is
determined that they acted under the belief that their actions were in or not
opposed to the best interest of the Registrant, and, with respect to any
criminal proceeding, they had reasonable cause to believe their conduct was not
unlawful. In addition, indemnification is permitted only if it is determined
that the actions in question did not render them liable by reason of willful
misfeasance, bad faith or gross negligence in the performance of their duties or
by reason of reckless disregard of their obligations and duties to the
Registrant. Trustees, officers, employees and agents will be indemnified for the
expense of litigation if it is determined that they are entitled to
indemnification against any liability established in such litigation. The
Registrant may also advance money for these expenses provided that they give
their undertakings to repay the Registrant unless their conduct is later
determined to permit indemnification.

Pursuant to Section 5.2 of the Registrant's Declaration of Trust and
paragraph 8 of the Registrant's Investment Management Agreement, neither the
Investment Manager nor any trustee, officer, employee or agent of the Registrant
shall be liable for any action or failure to act, except in the case of bad
faith, willful misfeasance, gross negligence or reckless disregard of duties to
the Registrant.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a trustee, officer, or controlling person of the Registrant
in connection with the successful defense of any action, suit or proceeding) is
asserted against the Registrant by such trustee, officer or controlling person
in connection with the shares being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act, and will
be governed by the final adjudication of such issue.

The Registrant hereby undertakes that it will apply the indemnification
provision of its by-laws in a manner consistent with Release 11330 of the
Securities and Exchange Commission under the

1
<PAGE>

Investment Company Act of 1940, so long as the interpretation of Sections 17(h)
and 17(i) of such Act remains in effect.

Registrant, in conjunction with the Investment Manager, Registrant's
Trustees, and other registered investment management companies managed by the
Investment Manager, maintains insurance on behalf of any person who is or was a
Trustee, officer, employee, or agent of Registrant, or who is or was serving at
the request of Registrant as a trustee, director, officer, employee or agent of
another trust or corporation, against any liability asserted against him and
incurred by him or arising out of his position. However, in no event will
Registrant maintain insurance to indemnify any such person for any act for which
Registrant itself is not permitted to indemnify him.

Item 26. Business and Other Connections of Investment Advisor

See "The Fund and Its Management" in the Prospectus regarding the
business of the investment advisor. The following information is given regarding
officers of Morgan Stanley Dean Witter Advisors Inc. ("MSDW Advisors"). MSDW
Advisors is a wholly-owned subsidiary of Morgan Stanley Dean Witter & Co. The
principal address of the Morgan Stanley Dean Witter Funds is Two World Trade
Center, New York, New York 10048.

The term "Morgan Stanley Dean Witter Funds" refers to the following
registered investment companies:

Closed-End Investment Companies
(1) Morgan Stanley Dean Witter California Insured Municipal Income Trust
(2) Morgan Stanley Dean Witter California Quality Municipal Securities
(3) Morgan Stanley Dean Witter Government Income Trust
(4) Morgan Stanley Dean Witter High Income Advantage Trust
(5) Morgan Stanley Dean Witter High Income Advantage Trust II
(6) Morgan Stanley Dean Witter High Income Advantage Trust III
(7) Morgan Stanley Dean Witter Income Securities Inc.
(8) Morgan Stanley Dean Witter Insured California Municipal Securities
(9) Morgan Stanley Dean Witter Insured Municipal Bond Trust
(10) Morgan Stanley Dean Witter Insured Municipal Income Trust
(11) Morgan Stanley Dean Witter Insured Municipal Securities
(12) Morgan Stanley Dean Witter Insured Municipal Trust
(13) Morgan Stanley Dean Witter Municipal Income Opportunities Trust
(14) Morgan Stanley Dean Witter Municipal Income Opportunities Trust II
(15) Morgan Stanley Dean Witter Municipal Income Opportunities Trust III
(16) Morgan Stanley Dean Witter Municipal Income Trust
(17) Morgan Stanley Dean Witter Municipal Income Trust II
(18) Morgan Stanley Dean Witter Municipal Income Trust III
(19) Morgan Stanley Dean Witter Municipal Premium Income Trust
(20) Morgan Stanley Dean Witter New York Quality Municipal Securities
(21) Morgan Stanley Dean Witter Prime Income Trust
(22) Morgan Stanley Dean Witter Quality Municipal Income Trust
(23) Morgan Stanley Dean Witter Quality Municipal Investment Trust
(24) Morgan Stanley Dean Witter Quality Municipal Securities

Open-end Investment Companies
(1) Active Assets California Tax-Free Trust
(2) Active Assets Government Securities Trust
(3) Active Assets Money Trust
(4) Active Assets Tax-Free Trust

2
<PAGE>

(5) Morgan Stanley Dean Witter Aggressive Equity Fund
(6) Morgan Stanley Dean Witter American Value Fund
(7) Morgan Stanley Dean Witter Balanced Growth Fund
(8) Morgan Stanley Dean Witter Balanced Income Fund
(9) Morgan Stanley Dean Witter California Tax-Free Daily Income Trust
(10) Morgan Stanley Dean Witter California Tax-Free Income Fund
(11) Morgan Stanley Dean Witter Capital Growth Securities
(12) Morgan Stanley Dean Witter Competitive Edge Fund, "Best Ideas Portfolio"
(13) Morgan Stanley Dean Witter Convertible Securities Trust
(14) Morgan Stanley Dean Witter Developing Growth Securities Trust
(15) Morgan Stanley Dean Witter Diversified Income Trust
(16) Morgan Stanley Dean Witter Dividend Growth Securities Inc.
(17) Morgan Stanley Dean Witter Equity Fund
(18) Morgan Stanley Dean Witter European Growth Fund Inc.
(19) Morgan Stanley Dean Witter Federal Securities Trust
(20) Morgan Stanley Dean Witter Financial Services Trust
(21) Morgan Stanley Dean Witter Fund of Funds
(22) Morgan Stanley Dean Witter Global Dividend Growth Securities
(23) Morgan Stanley Dean Witter Global Utilities Fund
(24) Morgan Stanley Dean Witter Growth Fund
(25) Morgan Stanley Dean Witter Hawaii Municipal Trust
(26) Morgan Stanley Dean Witter Health Sciences Trust
(27) Morgan Stanley Dean Witter High Yield Securities Inc.
(28) Morgan Stanley Dean Witter Income Builder Fund
(29) Morgan Stanley Dean Witter Information Fund
(30) Morgan Stanley Dean Witter Intermediate Income Securities
(31) Morgan Stanley Dean Witter International SmallCap Fund
(32) Morgan Stanley Dean Witter Japan Fund
(33) Morgan Stanley Dean Witter Limited Term Municipal Trust
(34) Morgan Stanley Dean Witter Liquid Asset Fund Inc.
(35) Morgan Stanley Dean Witter Market Leader Trust
(36) Morgan Stanley Dean Witter Mid-Cap Dividend Growth Securities
(37) Morgan Stanley Dean Witter Mid-Cap Growth Fund
(38) Morgan Stanley Dean Witter Multi-State Municipal Series Trust
(39) Morgan Stanley Dean Witter Natural Resource Development Securities Inc.
(40) Morgan Stanley Dean Witter New York Municipal Money Market Trust
(41) Morgan Stanley Dean Witter New York Tax-Free Income Fund
(42) Morgan Stanley Dean Witter Pacific Growth Fund Inc.
(43) Morgan Stanley Dean Witter Precious Metals and Minerals Trust
(44) Morgan Stanley Dean Witter S&P 500 Index Fund
(45) Morgan Stanley Dean Witter S&P 500 Select Fund
(46) Morgan Stanley Dean Witter Select Dimensions Investment Series
(47) Morgan Stanley Dean Witter Select Municipal Reinvestment Fund
(48) Morgan Stanley Dean Witter Short-Term Bond Fund
(49) Morgan Stanley Dean Witter Short-Term U.S. Treasury Trust
(50) Morgan Stanley Dean Witter Special Value Fund
(51) Morgan Stanley Dean Witter Strategist Fund
(52) Morgan Stanley Dean Witter Tax-Exempt Securities Trust
(53) Morgan Stanley Dean Witter Tax-Free Daily Income Trust
(54) Morgan Stanley Dean Witter U.S. Government Money Market Trust
(55) Morgan Stanley Dean Witter U.S. Government Securities Trust
(56) Morgan Stanley Dean Witter Utilities Fund

3
<PAGE>

(57) Morgan Stanley Dean Witter Value-Added Market Series
(58) Morgan Stanley Dean Witter Value Fund
(59) Morgan Stanley Dean Witter Variable Investment Series
(60) Morgan Stanley Dean Witter World Wide Income Trust

The term "TCW/DW Funds" refers to the following registered investment
companies:

Open-End Investment Companies
(1) TCW/DW Emerging Markets Opportunities Trust
(2) TCW/DW Global Telecom Trust
(3) TCW/DW Income and Growth Fund
(4) TCW/DW Latin American Growth Fund
(5) TCW/DW Mid-Cap Equity Trust
(6) TCW/DW North American Government Income Trust
(7) TCW/DW Small Cap Growth Fund
(8) TCW/DW Total Return Trust

Closed-End Investment Companies
(1) TCW/DW Term Trust 2000
(2) TCW/DW Term Trust 2002
(3) TCW/DW Term Trust 2003

NAME AND POSITION WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION
MORGAN STANLEY DEAN OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
WITTER ADVISORS INC. AND NATURE OF CONNECTION
- --------------------------- ------------------------------------------------

Mitchell M. Merin President and Chief Operating Officer of Asset
President, Chief Executive Management of Morgan Stanley Dean Witter & Co.
Officer and Director ("MSDW"); Chairman and Director of Morgan
Stanley Dean Witter Distributors Inc. ("MSDW
Distributors") and Morgan Stanley Dean Witter
Trust FSB ("MSDW Trust"); President, Chief
Executive Officer and Director of Morgan Stanley
Dean Witter Services Company Inc. ("MSDW
Services"); Vice President of the Morgan Stanley
Dean Witter Funds, TCW/DW Funds and Discover
Brokerage Index Series; Executive Vice President
and Director of Dean Witter Reynolds Inc.
("DWR"); Director of various MSDW subsidiaries.

Thomas C. Schneider Executive Vice President and Chief Strategic and
Executive Vice Administrative Officer of MSDW; Executive Vice
President and Chief President and Chief Financial Officer of MSDW
Financial Officer Services; Director of DWR and MSDW.

Joseph J. McAlinden Vice President of the Morgan Stanley Dean Witter
Executive Vice President Funds and Discover Brokerage Index Series;
and Chief Investment Director of MSDW Trust.
Officer

Ronald E. Robison Executive Vice President, Chief Administrative
Executive Vice President, Officer and and Director of MSDW Services; Vice
Chief Administrative President of the Morgan Stanley Dean Witter
Officer and Director Funds, TCW/DW Funds and Discover Brokerage
Index Series.

4
<PAGE>

Edward C. Oelsner, III
Executive Vice President

Barry Fink Assistant Secretary of DWR; Senior Vice
Senior Vice President, President, Secretary, General Counsel and
Secretary and General Director of MSDW Services; Senior Vice
Counsel President, Assistant Secretary and Assistant
General Counsel of MSDW Distributors; Vice
President, Secretary and General Counsel of the
Morgan Stanley Dean Witter Funds, TCW/DW
Funds and Discover Brokerage Index Series.

Peter M. Avelar Vice President of various Morgan Stanley Dean
Senior Vice President Witter Funds.

Mark Bavoso Vice President of various Morgan Stanley Dean
Senior Vice President Witter Funds.

Rosalie Clough
Senior Vice President
and Director of Marketing

Richard Felegy
Senior Vice President

Edward F. Gaylor Vice President of various Morgan Stanley Dean
Senior Vice President Witter Funds.

Robert S. Giambrone Senior Vice President of MSDW Services, MSDW
Senior Vice President Distributors and MSDW Trust and Director of MSDW
Trust; Vice President of the Morgan Stanley Dean
Witter Funds, TCW/DW Funds, and Discover
Brokerage Index Series.

Rajesh K. Gupta Vice President of various Morgan Stanley Dean
Senior Vice President Witter Funds.

Kenton J. Hinchliffe Vice President of various Morgan Stanley Dean
Senior Vice President Witter Funds, and Discover Brokerage Index
Series.

Kevin Hurley Vice President of various Morgan Stanley Dean
Senior Vice President Witter Funds.

Margaret Iannuzzi
Senior Vice President

Jenny Beth Jones Vice President of various Morgan Stanley Dean
Senior Vice President Witter Funds.

John B. Kemp, III President of MSDW Distributors.
Senior Vice President

5
<PAGE>

Anita H. Kolleeny Vice President of various Morgan Stanley Dean
Senior Vice President Witter Funds.

Jonathan R. Page Vice President of various Morgan Stanley Dean
Senior Vice President Witter Funds.

Ira N. Ross Vice President of various Morgan Stanley Dean
Senior Vice President Witter Funds.

Guy G. Rutherfurd, Jr. Vice President of various Morgan Stanley Dean
Senior Vice President Witter Funds.

Rochelle G. Siegel Vice President of various Morgan Stanley Dean
Senior Vice President Witter Funds.

James Solloway
Senior Vice President

Jayne M. Stevlingson Vice President of various Morgan Stanley Dean
Senior Vice President Witter Funds.

Paul D. Vance Vice President of various Morgan Stanley Dean
Senior Vice President Witter Funds.

Elizabeth A. Vetell
Senior Vice President
and Director of Shareholder
Communication

James F. Willison Vice President of various Morgan Stanley Dean
Senior Vice President Witter Funds.

Douglas Brown
First Vice President

Frank Bruttomesso First Vice President and Assistant Secretary of
First Vice President MSDW Services; Assistant Secretary of the Morgan
and Assistant Secretary Stanley Dean Witter Funds, TCW/DW Funds and
Discover Brokerage Index Series.

Thomas F. Caloia First Vice President and Assistant Treasurer of
First Vice President MSDW Services; Assistant Treasurer of MSDW
and Assistant Distributors; Treasurer and Chief Financial
Treasurer and Accounting Officer of the Morgan Stanley
Dean Witter Funds, TCW/DW Funds and Discover
Brokerage Index Series.

Thomas Chronert
First Vice President

6
<PAGE>

Marilyn K. Cranney Assistant Secretary of DWR; First Vice
First Vice President President and Assistant Secretary of MSDW
and Assistant Secretary Services; Assistant Secretary of the Morgan
Stanley Dean Witter Funds, TCW/DW Funds and
Discover Brokerage Index Series.

Salvatore DeSteno Vice President of MSDW Services.
First Vice President

Michael Interrante First Vice President and Controller of MSDW
First Vice President Services; Assistant Treasurer of MSDW
and Controller Distributors; First Vice President and
Treasurer of MSDW Trust.

David Johnson
First Vice President

Stanley Kapica
First Vice President

LouAnne D. McInnis First Vice President and Assistant Secretary of
First Vice President MSDW Services; Assistant Secretary of the
and Assistant Secretary Morgan Stanley Dean Witter Funds, TCW/DW Funds
and Discover Brokerage Index Series.

Carsten Otto First Vice President and Assistant Secretary of
First Vice President MSDW Services; Assistant Secretary of the
and Assistant Secretary Morgan Stanley Dean Witter Funds, TCW/DW Funds
and Discover Brokerage Index Series.

Ruth Rossi First Vice President and Assistant Secretary of
First Vice President MSDW Services; Assistant Secretary of the
and Assistant Secretary Morgan Stanley Dean Witter Funds, TCW/DW
Funds and Discover Brokerage Index Series.

James P. Wallin
First Vice President

Robert Zimmerman
First Vice President

Dale Albright
Vice President

Joan G. Allman
Vice President

Andrew Arbenz
Vice President

Joseph Arcieri Vice President of various Morgan Stanley Dean
Vice President Witter Funds.

7
<PAGE>

Nancy Belza
Vice President

Maurice Bendrihem
Vice President and
Assistant Controller

Dale Boetcher
Vice President

Ronald Caldwell
Vice President

Joseph Cardwell
Vice President

Philip Casparius
Vice President

David Dineen
Vice President

Michael Durbin
Vice President

Sheila Finnerty Vice President of Morgan Stanley Dean Witter
Vice President Prime Income Trust.

Jeffrey D. Geffen
Vice President

Sandra Gelpieryn
Vice President

Michael Geringer
Vice President

Ellen Gold
Vice President

Stephen Greenhut
Vice President

Peter W. Gurman
Vice President

Matthew Haynes Vice President of various Morgan Stanley Dean
Vice President Witter Funds.

8
<PAGE>

Peter Hermann Vice President of various Morgan Stanley Dean
Vice President Witter Funds.

David Hoffman
Vice President

Christopher Jones
Vice President

Kevin Jung
Vice President

Carol Espejo Kane
Vice President

Michelle Kaufman Vice President of various Morgan Stanley Dean
Vice President Witter Funds.

Paula LaCosta Vice President of various Morgan Stanley Dean
Vice President Witter Funds.

Thomas Lawlor
Vice President

Todd Lebo Vice President and Assistant Secretary
Vice President of MSDW Services; Assistant Secretary of the
Morgan Stanley Dean Witter Funds, TCW/DW Funds
and Discover Brokerage Index Series.

Gerard J. Lian Vice President of various Morgan Stanley Dean
Vice President Witter Funds.

Nancy Login
Vice President

Steven MacNamara
Vice President

Catherine Maniscalco Vice President of Morgan Stanley Dean Witter
Vice President Natural Resource Development Securities Inc.

Albert McGarity
Vice President

Teresa McRoberts Vice President of Morgan Stanley Dean Witter
Vice President S&P 500 Select Fund.

Mark Mitchell
Vice President

9
<PAGE>

Julie Morrone
Vice President

Mary Beth Mueller
Vice President

David Myers Vice President of Morgan Stanley Dean Witter
Vice President Natural Resource Development Securities Inc.

Richard Norris
Vice President

George Paoletti Vice President of Morgan Stanley Dean Witter
Vice President Information Fund.

Anne Pickrell Vice President of various Morgan Stanley Dean
Vice President Witter Funds.

John Roscoe
Vice President

Hugh Rose
Vice President

Robert Rossetti Vice President of various Morgan Stanley Dean
Vice President Witter Funds.

Carl F. Sadler
Vice President

Deborah Santaniello
Vice President

Howard A. Schloss Vice President of Morgan Stanley Dean Witter
Vice President Federal Securities Trust.

Peter J. Seeley Vice President of various Morgan Stanley Dean
Vice President Witter Funds.

Robert Stearns
Vice President

Naomi Stein
Vice President

10
<PAGE>

Michael Strayhorn
Vice President

Kathleen H. Stromberg Vice President of various Morgan Stanley Dean
Vice President Witter Funds.

Marybeth Swisher
Vice President

Robert Vanden Assem
Vice President

Alice Weiss Vice President of various Morgan Stanley Dean
Vice President Witter Funds.

John Wong
Vice President

Item 27. Principal Underwriters

(a) Morgan Stanley Dean Witter Distributors Inc. ("MSDW Distributors"), a
Delaware corporation, is the principal underwriter of the Registrant. MSDW
Distributors is also the principal underwriter of the following investment
companies:

(1) Active Assets California Tax-Free Trust
(2) Active Assets Government Securities Trust
(3) Active Assets Money Trust
(4) Active Assets Tax-Free Trust
(5) Morgan Stanley Dean Witter Aggressive Equity Fund
(6) Morgan Stanley Dean Witter American Value Fund
(7) Morgan Stanley Dean Witter Balanced Growth Fund
(8) Morgan Stanley Dean Witter Balanced Income Fund
(9) Morgan Stanley Dean Witter California Tax-Free Daily Income Trust
(10) Morgan Stanley Dean Witter California Tax-Free Income Fund
(11) Morgan Stanley Dean Witter Capital Growth Securities
(12) Morgan Stanley Dean Witter Competitive Edge Fund, "Best Ideas
Portfolio"
(13) Morgan Stanley Dean Witter Convertible Securities Trust
(14) Morgan Stanley Dean Witter Developing Growth Securities Trust
(15) Morgan Stanley Dean Witter Diversified Income Trust
(16) Morgan Stanley Dean Witter Dividend Growth Securities Inc.
(17) Morgan Stanley Dean Witter Equity Fund
(18) Morgan Stanley Dean Witter European Growth Fund Inc.
(19) Morgan Stanley Dean Witter Federal Securities Trust
(20) Morgan Stanley Dean Witter Financial Services Trust
(21) Morgan Stanley Dean Witter Fund of Funds
(22) Morgan Stanley Dean Witter Global Dividend Growth Securities
(23) Morgan Stanley Dean Witter Global Utilities Fund
(24) Morgan Stanley Dean Witter Growth Fund

11
<PAGE>

(25) Morgan Stanley Dean Witter Hawaii Municipal Trust
(26) Morgan Stanley Dean Witter Health Sciences Trust
(27) Morgan Stanley Dean Witter High Yield Securities Inc.
(28) Morgan Stanley Dean Witter Income Builder Fund
(29) Morgan Stanley Dean Witter Information Fund
(30) Morgan Stanley Dean Witter Intermediate Income Securities
(31) Morgan Stanley Dean Witter International SmallCap Fund
(32) Morgan Stanley Dean Witter Japan Fund
(33) Morgan Stanley Dean Witter Limited Term Municipal Trust
(34) Morgan Stanley Dean Witter Liquid Asset Fund Inc.
(35) Morgan Stanley Dean Witter Market Leader Trust
(36) Morgan Stanley Dean Witter Mid-Cap Dividend Growth Securities
(37) Morgan Stanley Dean Witter Mid-Cap Growth Fund
(38) Morgan Stanley Dean Witter Multi-State Municipal Series Trust
(39) Morgan Stanley Dean Witter Natural Resource Development
Securities Inc.
(40) Morgan Stanley Dean Witter New York Municipal Money Market Trust
(41) Morgan Stanley Dean Witter New York Tax-Free Income Fund
(42) Morgan Stanley Dean Witter Pacific Growth Fund Inc.
(43) Morgan Stanley Dean Witter Precious Metals and Minerals Trust
(44) Morgan Stanley Dean Witter Prime Income Trust
(45) Morgan Stanley Dean Witter S&P 500 Index Fund
(46) Morgan Stanley Dean Witter S&P 500 Select Fund
(47) Morgan Stanley Dean Witter Short-Term Bond Fund
(48) Morgan Stanley Dean Witter Short-Term U.S. Treasury Trust
(49) Morgan Stanley Dean Witter Special Value Fund
(50) Morgan Stanley Dean Witter Strategist Fund
(51) Morgan Stanley Dean Witter Tax-Exempt Securities Trust
(52) Morgan Stanley Dean Witter Tax-Free Daily Income Trust
(53) Morgan Stanley Dean Witter U.S. Government Money Market Trust
(54) Morgan Stanley Dean Witter U.S. Government Securities Trust
(55) Morgan Stanley Dean Witter Utilities Fund
(56) Morgan Stanley Dean Witter Value-Added Market Series
(57) Morgan Stanley Dean Witter Value Fund
(58) Morgan Stanley Dean Witter Variable Investment Series
(59) Morgan Stanley Dean Witter World Wide Income Trust
(1) TCW/DW Emerging Markets Opportunities Trust
(2) TCW/DW Global Telecom Trust
(3) TCW/DW Income and Growth
(4) TCW/DW Latin American Growth Fund
(5) TCW/DW Mid-Cap Equity Trust
(6) TCW/DW North American Government Income Trust
(7) TCW/DW Small Cap Growth Fund
(8) TCW/DW Total Return Trust

(b) The following information is given regarding directors and officers of MSDW
Distributors not listed in Item 26 above. The principal address of MSDW
Distributors is Two World Trade Center, New York, New York 10048. Other
than Mr. Purcell, who is a Trustee of the Registrant, none of the following
persons has any position or office with the Registrant.

Name Positions and Office with MSDW Distributors
- ---- -------------------------------------------

Christine Edwards Executive Vice President, Secretary, Director
and Chief Legal Officer

12
<PAGE>

Michael T. Gregg Vice President and Assistant Secretary

James F. Higgins Director

Fredrick K. Kubler Senior Vice President, Assistant Secretary and
Chief Compliance Officer

Philip J. Purcell Director

John Schaeffer Director

Charles Vidala Senior Vice President and Financial
Principal

Item 28. Location of Accounts and Records

All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules thereunder
are maintained by the Investment Manager at its offices, except records
relating to holders of shares issued by the Registrant, which are maintained by
the Registrant's Transfer Agent, at its place of business as shown in the
prospectus.

Item 29. Management Services

Registrant is not a party to any such management-related service
contract.

Item 30. Undertakings

None

13
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and State of New York on the 26th day of February, 1999.

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST

/s/ Barry Fink
--------------
Barry Fink
Vice President and Secretary

Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 9 has been signed below by the following persons
in the capacities and on the dates indicated.

SIGNATURES TITLE DATE

(1) Principal Executive Officer President, Chief
Executive Officer,
By: /s/ Charles A. Fiumefreddo Trustee and Chairman 2/26/99
-----------------------------
Charles A. Fiumefreddo

(2) Principal Financial Officer Treasurer and Principal
Accounting Officer
By: /s/ Thomas F. Caloia 2/26/99
-----------------------------
Thomas F. Caloia

(3) Majority of the Trustees

Charles A. Fiumefreddo (Chairman)
Philip J. Purcell

By: /s/ Barry Fink 2/26/99
-----------------------------
Barry Fink
Attorney-in-Fact

Michael Bozic Manuel H. Johnson
Edwin J. Garn Michael E. Nugent
John R. Haire John L. Schroeder
Wayne E. Hedien

By: /s/ David M. Butowsky 2/26/99
-----------------------------
David M. Butowsky
Attorney-in-Fact

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MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
EXHIBIT INDEX

2. Amended and Restated By-Laws of the Registrant dated January 28, 1999.

10. Consent of Independent Accountants.

14. Financial Data Schedules as of October 31, 1998.

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BY-LAWS

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST

AMENDED AND RESTATED AS OF JANUARY 28, 1999

ARTICLE I

DEFINITIONS

The terms "Commission," "Declaration," "Distributor," "Investment
Adviser," "Majority Shareholder Vote," "1940 Act," "Shareholder," "Shares,"
"Transfer Agent," "Trust," "Trust Property," and "Trustees" have the respective
meanings given them in the Declaration of Trust of Morgan Stanley Dean Witter
Diversified Income Trust dated December 20, 1991, as amended from time to time.

ARTICLE II

OFFICES

SECTION 2.1. Principal Office. Until changed by the Trustees, the
principal office of the Trust in the Commonwealth of Massachusetts shall be in
the City of Boston, County of Suffolk.

SECTION 2.2. Other Offices. In addition to its principal office in the
Commonwealth of Massachusetts, the Trust may have an office or offices in the
City of New York, State of New York, and at such other places within and
without the Commonwealth as the Trustees may from time to time designate or the
business of the Trust may require.

ARTICLE III

SHAREHOLDERS' MEETINGS

SECTION 3.1. Place of Meetings. Meetings of Shareholders shall be held at
such place, within or without the Commonwealth of Massachusetts, as may be
designated from time to time by the Trustees.

SECTION 3.2. Meetings. Meetings of Shareholders of the Trust shall be held
whenever called by the Trustees or the President of the Trust and whenever
election of a Trustee or Trustees by Shareholders is required by the provisions
of Section 16(a) of the 1940 Act, for that purpose. Meetings of Shareholders
shall also be called by the Secretary upon the written request of the holders
of Shares entitled to vote not less than twenty-five percent (25% ) of all the
votes entitled to be cast at such meeting, except to the extent otherwise
required by Section 16(c) of the 1940 Act, as made applicable to the Trust by
the provisions of Section 2.3 of the Declaration. Such request shall state the
purpose or purposes of such meeting and the matters proposed to be acted on
thereat. Except to the extent otherwise required by Section 16(c) of the 1940
Act, as made applicable to the Trust by the provisions of Section 2.3 of the
Declaration, the Secretary shall inform such Shareholders of the reasonable
estimated cost of preparing and mailing such notice of the meeting, and upon
payment to the Trust of such costs, the Secretary shall give notice stating the
purpose or purposes of the meeting to all entitled to vote at such meeting. No
meeting need be called upon the request of the holders of Shares entitled to
cast less than a majority of all votes entitled to be cast at such meeting, to
consider any matter which is substantially the same as a matter voted upon at
any meeting of Shareholders held during the preceding twelve months.

SECTION 3.3. Notice of Meetings. Written or printed notice of every
Shareholders' meeting stating the place, date, and purpose or purposes thereof,
shall be given by the Secretary not less than ten (10) nor more than ninety
(90) days before such meeting to each Shareholder entitled to vote at such
meeting. Such notice shall be deemed to be given when deposited in the United
States mail, postage prepaid, directed to the Shareholder at his address as it
appears on the records of the Trust.

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SECTION 3.4 Quorum and Adjournment of Meetings. Except as otherwise
provided by law, by the Declaration or by these By-Laws, at all meetings of
Shareholders, the holders of a majority of the Shares issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall
be requisite and shall constitute a quorum for the transaction of business. In
the absence of a quorum, the Shareholders present or represented by proxy and
entitled to vote thereat shall have the power to adjourn the meeting from time
to time. The Shareholders present in person or represented by proxy at any
meeting and entitled to vote thereat also shall have the power to adjourn the
meeting from time to time if the vote required to approve or reject any
proposal described in the original notice of such meeting is not obtained (with
proxies being voted for or against adjournment consistent with the votes for
and against the proposal for which the required vote has not been obtained).
The affirmative vote of the holders of a majority of the Shares then present in
person or represented by proxy shall be required to adjourn any meeting. Any
adjourned meeting may be reconvened without further notice or change in record
date. At any reconvened meeting at which a quorum shall be present, any
business may be transacted that might have been transacted at the meeting as
originally called.

SECTION 3.5. Voting Rights, Proxies. At each meeting of Shareholders, each
holder of record of Shares entitled to vote thereat shall be entitled to one
vote in person or by proxy for each Share of beneficial interest of the Trust
and for the fractional portion of one vote for each fractional Share entitled
to vote so registered in his or her name on the records of the Trust on the
date fixed as the record date for the determination of Shareholders entitled to
vote at such meeting. Without limiting the manner in which a Shareholder may
authorize another person or persons to act for such Shareholder as proxy
pursuant hereto, the following shall constitute a valid means by which a
Shareholder may grant such authority:

(i) A Shareholder may execute a writing authorizing another person or
persons to act for such Shareholder as proxy. Execution may be
accomplished by the Shareholder or such Shareholder's authorized
officer, director, employee, attorney-in-fact or another agent signing
such writing or causing such person's signature to be affixed to such
writing by any reasonable means including, but not limited to, by
facsimile or telecopy signature. No written evidence of authority of a
Shareholder's authorized officer, director, employee, attorney-in-fact
or other agent shall be required; and

(ii) A Shareholder may authorize another person or persons to act for
such Shareholder as proxy by transmitting or authorizing the
transmission of a telegram or cablegram or by other means of
telephonic, electronic or computer transmission to the person who will
be the holder of the proxy or to a proxy solicitation firm, proxy
support service organization or like agent duly authorized by the
person who will be the holder of the proxy to receive such
transmission, provided that any such telegram or cablegram or other
means of telephonic, electronic or computer transmission must either
set forth or be submitted with information from which it can be
determined that the telegram, cablegram or other transmission was
authorized by the Shareholder.

No proxy shall be valid after eleven months from its date, unless otherwise
provided in the proxy. At all meetings of Shareholders, unless the voting is
conducted by inspectors, all questions relating to the qualification of voters
and the validity of proxies and the acceptance or rejection of votes shall be
decided by the chairman of the meeting. In determining whether a telegram,
cablegram or other electronic transmission is valid, the chairman or inspector,
as the case may be, shall specify the information upon which he or she relied.
Pursuant to a resolution of a majority of the Trustees, proxies may be
solicited in the name of one or more Trustees or Officers of the Trust. Proxy
solicitations may be made in writing or by using telephonic or other electronic
solicitation procedures that include appropriate methods of verifying the
identity of the Shareholder and confirming any instructions given thereby.

SECTION 3.6. Vote Required. Except as otherwise provided by law, by the
Declaration of Trust, or by these By-Laws, at each meeting of Shareholders at
which a quorum is present, all matters shall be decided by Majority Shareholder
Vote.

SECTION 3.7. Inspectors of Election. In advance of any meeting of
Shareholders, the Trustees may appoint Inspectors of Election to act at the
meeting or any adjournment thereof. If Inspectors of Election are not so
appointed, the chairman of any meeting of Shareholders may, and on the request
of any

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Shareholder or his proxy shall, appoint Inspectors of Election of the meeting.
In case any person appointed as Inspector fails to appear or fails or refuses
to act, the vacancy may be filled by appointment made by the Trustees in
advance of the convening of the meeting or at the meeting by the person acting
as chairman. The Inspectors of Election shall determine the number of Shares
outstanding, the Shares represented at the meeting, the existence of a quorum,
the authenticity, validity and effect of proxies, shall receive votes, ballots
or consents, shall hear and determine all challenges and questions in any way
arising in connection with the right to vote, shall count and tabulate all
votes or consents, determine the results, and do such other acts as may be
proper to conduct the election or vote with fairness to all Shareholders. On
request of the chairman of the meeting, or of any Shareholder or his proxy, the
Inspectors of Election shall make a report in writing of any challenge or
question or matter determined by them and shall execute a certificate of any
facts found by them.

SECTION 3.8. Inspection of Books and Records. Shareholders shall have such
rights and procedures of inspection of the books and records of the Trust as
are granted to Shareholders under Section 32 of the Business Corporation Law of
the Commonwealth of Massachusetts.

SECTION 3.9. Action by Shareholders Without Meeting. Except as otherwise
provided by law, the provisions of these By-Laws relating to notices and
meetings to the contrary notwithstanding, any action required or permitted to
be taken at any meeting of Shareholders may be taken without a meeting if a
majority of the Shareholders entitled to vote upon the action consent to the
action in writing and such consents are filed with the records of the Trust.
Such consent shall be treated for all purposes as a vote taken at a meeting of
Shareholders.

SECTION 3.10. Presence at Meetings. Presence at meetings of shareholders
requires physical attendance by the shareholder or his or her proxy at the
meeting site and does not encompass attendance by telephonic or other
electronic means.

ARTICLE IV

TRUSTEES

SECTION 4.1. Meetings of the Trustees. The Trustees may in their
discretion provide for regular or special meetings of the Trustees. Regular
meetings of the Trustees may be held at such time and place as shall be
determined from time to time by the Trustees without further notice. Special
meetings of the Trustees may be called at any time by the President and shall
be called by the President or the Secretary upon the written request of any two
(2) Trustees.

SECTION 4.2. Notice of Special Meetings. Written notice of special
meetings of the Trustees, stating the place, date and time thereof, shall be
given not less than two (2) days before such meeting to each Trustee,
personally, by telegram, by mail, or by leaving such notice at his place of
residence or usual place of business. If mailed, such notice shall be deemed to
be given when deposited in the United States mail, postage prepaid, directed to
the Trustee at his address as it appears on the records of the Trust. Subject
to the provisions of the 1940 Act, notice or waiver of notice need not specify
the purpose of any special meeting.

SECTION 4.3. Telephone Meetings. Subject to the provisions of the 1940
Act, any Trustee, or any member or members of any committee designated by the
Trustees, may participate in a meeting of the Trustees, or any such committee,
as the case may be, by means of a conference telephone or similar
communications equipment if all persons participating in the meeting can hear
each other at the same time. Participation in a meeting by these means
constitutes presence in person at the meeting.

SECTION 4.4. Quorum, Voting and Adjournment of Meetings. At all meetings
of the Trustees, a majority of the Trustees shall be requisite to and shall
constitute a quorum for the transaction of business. If a quorum is present,
the affirmative vote of a majority of the Trustees present shall be the act of
the Trustees, unless the concurrence of a greater proportion is expressly
required for such action by law, the Declaration or these By-Laws. If at any
meeting of the Trustees there be less than a quorum present, the Trustees
present thereat may adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum shall have been obtained.

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SECTION 4.5. Action by Trustees Without Meeting. The provisions of these
By-Laws covering notices and meetings to the contrary notwithstanding, and
except as required by law, any action required or permitted to be taken at any
meeting of the Trustees may be taken without a meeting if a consent in writing
setting forth the action shall be signed by all of the Trustees entitled to
vote upon the action and such written consent is filed with the minutes of
proceedings of the Trustees.

SECTION 4.6. Expenses and Fees. Each Trustee may be allowed expenses, if
any, for attendance at each regular or special meeting of the Trustees, and
each Trustee who is not an officer or employee of the Trust or of its
investment manager or underwriter or of any corporate affiliate of any of said
persons shall receive for services rendered as a Trustee of the Trust such
compensation as may be fixed by the Trustees. Nothing herein contained shall be
construed to preclude any Trustee from serving the Trust in any other capacity
and receiving compensation therefor.

SECTION 4.7. Execution of Instruments and Documents and Signing of Checks
and Other Obligations and Transfers. All instruments, documents and other
papers shall be executed in the name and on behalf of the Trust and all checks,
notes, drafts and other obligations for the payment of money by the Trust shall
be signed, and all transfer of securities standing in the name of the Trust
shall be executed, by the Chairman, the President, any Vice President or the
Treasurer or by any one or more officers or agents of the Trust as shall be
designated for that purpose by vote of the Trustees; notwithstanding the above,
nothing in this Section 4.7 shall be deemed to preclude the electronic
authorization, by designated persons, of the Trust's Custodian (as described
herein in Section 9.1) to transfer assets of the Trust, as provided for herein
in Section 9.1.

SECTION 4.8. Indemnification of Trustees, Officers, Employees and
Agents. (a) The Trust shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Trust) by reason of the fact
that he is or was a Trustee, officer, employee, or agent of the Trust. The
indemnification shall be against expenses, including attorneys' fees,
judgments, fines, and amounts paid in settlement, actually and reasonably
incurred by him in connection with the action, suit, or proceeding, if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Trust, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the Trust, and, with respect to any criminal action or proceeding,
had reasonable cause to believe that his conduct was unlawful.

(b) The Trust shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or on behalf of the Trust to obtain a judgment or decree in its favor
by reason of the fact that he is or was a Trustee, officer, employee, or agent
of the Trust. The indemnification shall be against expenses, including
attorneys' fees actually and reasonably incurred by him in connection with the
defense or settlement of the action or suit, if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Trust; except that no indemnification shall be made in respect of any
claim, issue, or matter as to which the person has been adjudged to be liable
for negligence or misconduct in the performance of his duty to the Trust,
except to the extent that the court in which the action or suit was brought, or
a court of equity in the county in which the Trust has its principal office,
determines upon application that, despite the adjudication of liability but in
view of all circumstances of the case, the person is fairly and reasonably
entitled to indemnity for those expenses which the court shall deem proper,
provided such Trustee, officer, employee or agent is not adjudged to be liable
by reason of his willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.

(c) To the extent that a Trustee, officer, employee, or agent of the Trust
has been successful on the merits or otherwise in defense of any action, suit
or proceeding referred to in subsection (a) or (b) or in defense of any claim,
issue or matter therein, he shall be indemnified against expenses, including
attorneys' fees, actually and reasonably incurred by him in connection
therewith.

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(d) (1) Unless a court orders otherwise, any indemnification under
subsections (a) or (b) of this section may be made by the Trust only as
authorized in the specific case after a determination that indemnification of
the Trustee, officer, employee, or agent is proper in the circumstances because
he has met the applicable standard of conduct set forth in subsections (a) or
(b).

(2) The determination shall be made:

(i) By the Trustees, by a majority vote of a quorum which consists
of Trustees who were not parties to the action, suit or proceeding; or

(ii) If the required quorum is not obtainable, or if a quorum of
disinterested Trustees so directs, by independent legal counsel in a
written opinion; or

(iii) By the Shareholders.

(3) Notwithstanding any provision of this Section 4.8, no person shall
be entitled to indemnification for any liability, whether or not there is
an adjudication of liability, arising by reason of willful misfeasance,
bad faith, gross negligence, or reckless disregard of duties as described
in Section 17(h) and (i) of the Investment Company Act of 1940 ("disabling
conduct"). A person shall be deemed not liable by reason of disabling
conduct if, either:

(i) a final decision on the merits is made by a court or other
body before whom the proceeding was brought that the person to be
indemnified ("indemnitee") was not liable by reason of disabling conduct;
or

(ii) in the absence of such a decision, a reasonable
determination, based upon a review of the facts, that the indemnitee was
not liable by reason of disabling conduct, is made by either--

(A) a majority of a quorum of Trustees who are neither
"interested persons" of the Trust, as defined in Section 2(a)(19)
of the Investment Company Act of 1940, nor parties to the action,
suit or proceeding, or

(B) an independent legal counsel in a written opinion.

(e) Expenses, including attorneys' fees, incurred by a Trustee, officer,
employee or agent of the Trust in defending a civil or criminal action, suit or
proceeding may be paid by the Trust in advance of the final disposition thereof
if:

(1) authorized in the specific case by the Trustees; and

(2) the Trust receives an undertaking by or on behalf of the
Trustee, officer, employee or agent of the Trust to repay the advance if
it is not ultimately determined that such person is entitled to be
indemnified by the Trust; and

(3) either, (i) such person provides a security for his
undertaking, or

(ii) the Trust is insured against losses by reason of any lawful
advances, or

(iii) a determination, based on a review of readily available
facts, that there is reason to believe that such person ultimately
will be found entitled to indemnification, is made by either--

(A) a majority of a quorum which consists of Trustees who are
neither "interested persons" of the Trust, as defined in Section
2(a)(19) of the 1940 Act, nor parties to the action, suit or
proceeding, or

(B) an independent legal counsel in a written opinion.

(f) The indemnification provided by this Section shall not be deemed
exclusive of any other rights to which a person may be entitled under any
by-law, agreement, vote of Shareholders or disinterested Trustees or otherwise,
both as to action in his official capacity and as to action in another capacity
while holding the office, and shall continue as to a person who has ceased to
be a Trustee, officer, employee, or agent and inure to the benefit of the
heirs, executors and administrators of such person; provided that no

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person may satisfy any right of indemnity or reimbursement granted herein or to
which he may be otherwise entitled except out of the property of the Trust, and
no Shareholder shall be personally liable with respect to any claim for
indemnity or reimbursement or otherwise.

(g) The Trust may purchase and maintain insurance on behalf of any person
who is or was a Trustee, officer, employee, or agent of the Trust, against any
liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such. However, in no event will the Trust purchase
insurance to indemnify any officer or Trustee against liability for any act for
which the Trust itself is not permitted to indemnify him.

(h) Nothing contained in this Section shall be construed to protect any
Trustee or officer of the Trust against any liability to the Trust or to its
security holders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.

ARTICLE V

COMMITTEES

SECTION 5.1. Executive and Other Committees. The Trustees, by resolution
adopted by a majority of the Trustees, may designate an Executive Committee
and/or committees, each committee to consist of two (2) or more of the Trustees
of the Trust and may delegate to such committees, in the intervals between
meetings of the Trustees, any or all of the powers of the Trustees in the
management of the business and affairs of the Trust. In the absence of any
member of any such committee, the members thereof present at any meeting,
whether or not they constitute a quorum, may appoint a Trustee to act in place
of such absent member. Each such committee shall keep a record of its
proceedings.

The Executive Committee and any other committee shall fix its own rules or
procedure, but the presence of at least fifty percent (50%) of the members of
the whole committee shall in each case be necessary to constitute a quorum of
the committee and the affirmative vote of the majority of the members of the
committee present at the meeting shall be necessary to take action.

All actions of the Executive Committee shall be reported to the Trustees
at the meeting thereof next succeeding to the taking of such action.

SECTION 5.2. Advisory Committee. The Trustees may appoint an advisory
committee which shall be composed of persons who do not serve the Trust in any
other capacity and which shall have advisory functions with respect to the
investments of the Trust but which shall have no power to determine that any
security or other investment shall be purchased, sold or otherwise disposed of
by the Trust. The number of persons constituting any such advisory committee
shall be determined from time to time by the Trustees. The members of any such
advisory committee may receive compensation for their services and may be
allowed such fees and expenses for the attendance at meetings as the Trustees
may from time to time determine to be appropriate.

SECTION 5.3. Committee Action Without Meeting. The provisions of these
By-Laws covering notices and meetings to the contrary notwithstanding, and
except as required by law, any action required or permitted to be taken at any
meeting of any Committee of the Trustees appointed pursuant to Section 5.1 of
these By-Laws may be taken without a meeting if a consent in writing setting
forth the action shall be signed by all members of the Committee entitled to
vote upon the action and such written consent is filed with the records of the
proceedings of the Committee.

ARTICLE VI

OFFICERS

SECTION 6.1. Executive Officers. The executive officers of the Trust shall
be a Chairman, a President, one or more Vice Presidents, a Secretary and a
Treasurer. The Chairman shall be selected from among the Trustees but none of
the other executive officers need be a Trustee. Two or more offices, except
those of President and any Vice President, may be held by the same person, but
no officer shall execute,

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acknowledge or verify any instrument in more than one capacity. The executive
officers of the Trust shall be elected annually by the Trustees and each
executive officer so elected shall hold office until his successor is elected
and has qualified.

SECTION 6.2. Other Officers and Agents. The Trustees may also elect one or
more Assistant Vice Presidents, Assistant Secretaries and Assistant Treasurers
and may elect, or may delegate to the President the power to appoint, such
other officers and agents as the Trustees shall at any time or from time to
time deem advisable.

SECTION 6.3. Term and Removal and Vacancies. Each officer of the Trust
shall hold office until his successor is elected and has qualified. Any officer
or agent of the Trust may be removed by the Trustees whenever, in their
judgment, the best interests of the Trust will be served thereby, but such
removal shall be without prejudice to the contractual rights, if any, of the
person so removed.

SECTION 6.4. Compensation of Officers. The compensation of officers and
agents of the Trust shall be fixed by the Trustees, or by the President to the
extent provided by the Trustees with respect to officers appointed by the
President.

SECTION 6.5. Power and Duties. All officers and agents of the Trust, as
between themselves and the Trust, shall have such authority and perform such
duties in the management of the Trust as may be provided in or pursuant to
these By-Laws, or to the extent not so provided, as may be prescribed by the
Trustees; provided, that no rights of any third party shall be affected or
impaired by any such By-Law or resolution of the Trustees unless he has
knowledge thereof.

SECTION 6.6. The Chairman. The Chairman shall preside at all meetings of
the Shareholders and of the Trustees, shall be a signatory on all Annual and
Semi-Annual Reports as may be sent to shareholders, and he shall perform such
other duties as the Trustees may from time to time prescribe.

SECTION 6.7. The President. (a) The President shall be the chief executive
officer of the Trust; he shall have general and active management of the
business of the Trust, shall see that all orders and resolutions of the
Trustees are carried into effect, and, in connection therewith, shall be
authorized to delegate to one or more Vice Presidents such of his powers and
duties at such times and in such manner as he may deem advisable.

(b) In the absence of the Chairman, the President shall preside at all
meetings of the shareholders and the Board of Trustees; and he shall perform
such other duties as the Board of Trustees may from time to time prescribe.

SECTION 6.8. The Vice Presidents. The Vice Presidents shall be of such
number and shall have such titles as may be determined from time to time by the
Trustees. The Vice President, or, if there be more than one, the Vice
Presidents in the order of their seniority as may be determined from time to
time by the Trustees or the President, shall, in the absence or disability of
the President, exercise the powers and perform the duties of the President, and
he or they shall perform such other duties as the Trustees or the President may
from time to time prescribe.

SECTION 6.9. The Assistant Vice Presidents. The Assistant Vice President,
or, if there be more than one, the Assistant Vice Presidents, shall perform
such duties and have such powers as may be assigned them from time to time by
the Trustees or the President.

SECTION 6.10. The Secretary. The Secretary shall attend all meetings of
the Trustees and all meetings of the Shareholders and record all the
proceedings of the meetings of the Shareholders and of the Trustees in a book
to be kept for that purpose, and shall perform like duties for the standing
committees when required. He shall give, or cause to be given, notice of all
meetings of the Shareholders and special meetings of the Trustees, and shall
perform such other duties and have such powers as the Trustees, or the
President, may from time to time prescribe. He shall keep in safe custody the
seal of the Trust and affix or cause the same to be affixed to any instrument
requiring it, and, when so affixed, it shall be attested by his signature or by
the signature of an Assistant Secretary.

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SECTION 6.11. The Assistant Secretaries. The Assistant Secretary, or, if
there be more than one, the Assistant Secretaries in the order determined by
the Trustees or the President, shall, in the absence or disability of the
Secretary, perform the duties and exercise the powers of the Secretary and
shall perform such duties and have such other powers as the Trustees or the
President may from time to time prescribe.

SECTION 6.12. The Treasurer. The Treasurer shall be the chief financial
officer of the Trust. He shall keep or cause to be kept full and accurate
accounts of receipts and disbursements in books belonging to the Trust, and he
shall render to the Trustees and the President, whenever any of them require
it, an account of his transactions as Treasurer and of the financial condition
of the Trust; and he shall perform such other duties as the Trustees, or the
President, may from time to time prescribe.

SECTION 6.13. The Assistant Treasurers. The Assistant Treasurer, or, if
there shall be more than one, the Assistant Treasurers in the order determined
by the Trustees or the President, shall, in the absence or disability of the
Treasurer, perform the duties and exercise the powers of the Treasurer and
shall perform such other duties and have such other powers as the Trustees, or
the President, may from time to time prescribe.

SECTION 6.14. Delegation of Duties. Whenever an officer is absent or
disabled, or whenever for any reason the Trustees may deem it desirable, the
Trustees may delegate the powers and duties of an officer or officers to any
other officer or officers or to any Trustee or Trustees.

ARTICLE VII

DIVIDENDS AND DISTRIBUTIONS

Subject to any applicable provisions of law and the Declaration, dividends
and distributions upon the Shares may be declared at such intervals as the
Trustees may determine, in cash, in securities or other property, or in Shares,
from any sources permitted by law, all as the Trustees shall from time to time
determine.

Inasmuch as the computation of net income and net profits from the sales
of securities or other properties for federal income tax purposes may vary from
the computation thereof on the records of the Trust, the Trustees shall have
power, in their discretion, to distribute as income dividends and as capital
gain distributions, respectively, amounts sufficient to enable the Trust to
avoid or reduce liability for federal income taxes.

ARTICLE VIII

CERTIFICATES OF SHARES

SECTION 8.1. Certificates of Shares. Certificates for Shares of each
series or class of Shares shall be in such form and of such design as the
Trustees shall approve, subject to the right of the Trustees to change such
form and design at any time or from time to time, and shall be entered in the
records of the Trust as they are issued. Each such certificate shall bear a
distinguishing number; shall exhibit the holder's name and certify the number
of full Shares owned by such holder; shall be signed by or in the name of the
Trust by the President, or a Vice President, and countersigned by the Secretary
or an Assistant Secretary or the Treasurer and an Assistant Treasurer of the
Trust; shall be sealed with the seal; and shall contain such recitals as may be
required by law. Where any certificate is signed by a Transfer Agent or by a
Registrar, the signature of such officers and the seal may be facsimile,
printed or engraved. The Trust may, at its option, determine not to issue a
certificate or certificates to evidence Shares owned of record by any
Shareholder.

In case any officer or officers who shall have signed, or whose facsimile
signature or signatures shall appear on, any such certificate or certificates
shall cease to be such officer or officers of the Trust, whether because of
death, resignation or otherwise, before such certificate or certificates shall
have been delivered by the Trust, such certificate or certificates shall,
nevertheless, be adopted by the Trust and be issued and delivered as though the
person or persons who signed such certificate or certificates or whose
facsimile signature or signatures shall appear therein had not ceased to be
such officer or officers of the Trust.

8
<PAGE>

No certificate shall be issued for any share until such share is fully
paid.

SECTION 8.2. Lost, Stolen, Destroyed and Mutilated Certificates. The
Trustees may direct a new certificate or certificates to be issued in place of
any certificate or certificates theretofore issued by the Trust alleged to have
been lost, stolen or destroyed, upon satisfactory proof of such loss, theft, or
destruction; and the Trustees may, in their discretion, require the owner of
the lost, stolen or destroyed certificate, or his legal representative, to give
to the Trust and to such Registrar, Transfer Agent and/or Transfer Clerk as may
be authorized or required to countersign such new certificate or certificates,
a bond in such sum and of such type as they may direct, and with such surety or
sureties, as they may direct, as indemnity against any claim that may be
against them or any of them on account of or in connection with the alleged
loss, theft or destruction of any such certificate.

ARTICLE IX

CUSTODIAN

SECTION 9.1. Appointment and Duties. The Trust shall at times employ a
bank or trust company having capital, surplus and undivided profits of at least
five million dollars ($5,000,000) as custodian with authority as its agent, but
subject to such restrictions, limitations and other requirements, if any, as
may be contained in these By-Laws and the 1940 Act:

(1) to receive and hold the securities owned by the Trust and deliver
the same upon written or electronically transmitted order;

(2) to receive and receipt for any moneys due to the Trust and deposit
the same in its own banking department or elsewhere as the Trustees may
direct;

(3) to disburse such funds upon orders or vouchers;

all upon such basis of compensation as may be agreed upon between the Trustees
and the custodian. If so directed by a Majority Shareholder Vote, the custodian
shall deliver and pay over all property of the Trust held by it as specified in
such vote.

The Trustees may also authorize the custodian to employ one or more
sub-custodians from time to time to perform such of the acts and services of
the custodian and upon such terms and conditions as may be agreed upon between
the custodian and such sub-custodian and approved by the Trustees.

SECTION 9.2. Central Certificate System. Subject to such rules,
regulations and orders as the Commission may adopt, the Trustees may direct the
custodian to deposit all or any part of the securities owned by the Trust in a
system for the central handling of securities established by a national
securities exchange or a national securities association registered with the
Commission under the Securities Exchange Act of 1934, or such other person as
may be permitted by the Commission, or otherwise in accordance with the 1940
Act, pursuant to which system all securities of any particular class or series
of any issuer deposited within the system are treated as fungible and may be
transferred or pledged by bookkeeping entry without physical delivery of such
securities, provided that all such deposits shall be subject to withdrawal only
upon the order of the Trust.

ARTICLE X

WAIVER OF NOTICE

Whenever any notice of the time, place or purpose of any meeting of
Shareholders, Trustees, or of any committee is required to be given in
accordance with law or under the provisions of the Declaration or these
By-Laws, a waiver thereof in writing, signed by the person or persons entitled
to such notice and filed with the records of the meeting, whether before or
after the holding thereof, or actual attendance at the meeting of shareholders,
Trustees or committee, as the case may be, in person, shall be deemed
equivalent to the giving of such notice to such person.

9
<PAGE>

ARTICLE XI

MISCELLANEOUS

SECTION 11.1. Location of Books and Records. The books and records of the
Trust may be kept outside the Commonwealth of Massachusetts at such place or
places as the Trustees may from time to time determine, except as otherwise
required by law.

SECTION 11.2 Record Date. The Trustees may fix in advance a date as the
record date for the purpose of determining the Shareholders entitled to (i)
receive notice of, or to vote at, any meeting of Shareholders, or (ii) receive
payment of any dividend or the allotment of any rights, or in order to make a
determination of Shareholders for any other proper purpose. The record date, in
any case, shall not be more than one hundred eighty (180) days, and in the case
of a meeting of Shareholders not less than ten (10) days, prior to the date on
which such meeting is to be held or the date on which such other particular
action requiring determination of Shareholders is to be taken, as the case may
be. In the case of a meeting of Shareholders, the meeting date set forth in the
notice to Shareholders accompanying the proxy statement shall be the date used
for purposes of calculating the 180 day or 10 day period, and any adjourned
meeting may be reconvened without a change in record date. In lieu of fixing a
record date, the Trustees may provide that the transfer books shall be closed
for a stated period but not to exceed, in any case, twenty (20) days. If the
transfer books are closed for the purpose of determining Shareholders entitled
to notice of a vote at a meeting of Shareholders, such books shall be closed
for at least ten (10) days immediately preceding the meeting.

SECTION 11.3. Seal. The Trustees shall adopt a seal, which shall be in
such form and shall have such inscription thereon as the Trustees may from time
to time provide. The seal of the Trust may be affixed to any document, and the
seal and its attestation may be lithographed, engraved or otherwise printed on
any document with the same force and effect as if it had been imprinted and
attested manually in the same manner and with the same effect as if done by a
Massachusetts business corporation under Massachusetts law.

SECTION 11.4. Fiscal Year. The fiscal year of the Trust shall end on such
date as the Trustees may by resolution specify, and the Trustees may by
resolution change such date for future fiscal years at any time and from time
to time.

SECTION 11.5. Orders for Payment of Money. All orders or instructions for
the payment of money of the Trust, and all notes or other evidences of
indebtedness issued in the name of the Trust, shall be signed by such officer
or officers or such other person or persons as the Trustees may from time to
time designate, or as may be specified in or pursuant to the agreement between
the Trust and the bank or trust company appointed as Custodian of the
securities and funds of the Trust.

ARTICLE XII

COMPLIANCE WITH FEDERAL REGULATIONS

The Trustees are hereby empowered to take such action as they may deem to
be necessary, desirable or appropriate so that the Trust is or shall be in
compliance with any federal or state statute, rule or regulation with which
compliance by the Trust is required.

ARTICLE XIII

AMENDMENTS

These By-Laws may be amended, altered, or repealed, or new By-Laws may be
adopted, (a) by a Majority Shareholder Vote, or (b) by the Trustees; provided,
however, that no By-Law may be amended, adopted or repealed by the Trustees if
such amendment, adoption or repeal requires, pursuant to law, the Declaration,
or these By-Laws, a vote of the Shareholders. The Trustees shall in no event
adopt By-Laws which are in conflict with the Declaration, and any apparent
inconsistency shall be construed in favor of the related provisions in the
Declaration.

10
<PAGE>

ARTICLE XIV

DECLARATION OF TRUST

The Declaration of Trust establishing Morgan Stanley Dean Witter
Diversified Income Trust, dated December 20, 1991, a copy of which, together
with all amendments thereto, is on file in the office of the Secretary of the
Commonwealth of Massachusetts, provides that the name Morgan Stanley Dean
Witter Diversified Income Trust refers to the Trustees under the Declaration
collectively as Trustees, but not as individuals or personally; and no Trustee,
Shareholder, officer, employee or agent of Morgan Stanley Dean Witter
Diversified Income Trust shall be held to any personal liability, nor shall
resort be had to their private property for the satisfaction of any obligation
or claim or otherwise, in connection with the affairs of said Morgan Stanley
Dean Witter Diversified Income Trust, but the Trust Estate only shall be
liable.

<PAGE>

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 9 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
December 17, 1998, relating to the financial statements and financial
highlights of Morgan Stanley Dean Witter Diversified Income Trust, formerly
Dean Witter Diversified Income Trust, which appears in such Statement of
Additional Information, and to the incorporation by reference of our report
into the Prospectus which constitutes part of this Registration Statement. We
also consent to the references to us under the headings "Custodian and
Independent Accountants" and "Experts" in such Statement of Additional
Information and to the reference to us under the heading "Financial Highlights"
in such Prospectus.

PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
February 22, 1999

<PAGE>

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