MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST, 485BPOS, 2000-01-31

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
485BPOS, 2000-01-31

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 31, 2000
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. 10 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940 [X]
AMENDMENT NO. 11 [X]

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

MORGAN STANLEY 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:
STUART M. STRAUSS, ESQ.
MAYER, BROWN & PLATT
1675 BROADWAY
NEW YORK, NY 10019
----------------
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)

[ ] immediately upon filing pursuant to paragraph (b)
[X] on February 3, 2000 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>

PROSPECTUS - FEBRUARY 3, 2000

Morgan Stanley Dean Witter

----------------------------------------------------------------
DIVERSIFIED INCOME TRUST

[GRAPHIC OMITTED]

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

The Fund Investment Objectives ............................1

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

Principal Risks ..................................3

Past Performance .................................6

Fees and Expenses ................................7

Additional Investment Strategy Information .......8

Additional Risk Information ......................9

Fund Management .................................11

Shareholder Information Pricing Fund Shares .............................12

How to Buy Shares ...............................12

How to Exchange Shares ..........................14

How to Sell Shares ..............................16

Distributions ...................................18

Tax Consequences ................................18

Share Class Arrangements ........................19

Financial Highlights ................................................28
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.

<PAGE>

THE FUND

[GRAPHIC OMITTED]

INVESTMENT OBJECTIVES
- ---------------------
Morgan Stanley Dean Witter Diversified Income Trust seeks a high level of
current income as its primary investment objective. As a secondary objective,
the Fund seeks to maximize total return but only to the extent consistent with
its primary objective.

[GRAPHIC OMITTED]
PRINCIPAL INVESTMENT STRATEGIES
- -------------------------------

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

The Fund will normally invest at least 65% of its total 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.

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.

1
<PAGE>

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.

(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 which are purchased at a
discount and either (i) pay no interest, or (ii) accrue interest, but make
no payments until maturity (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 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.

In pursuing the Fund's investment objectives, 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.

2
<PAGE>

[GRAPHIC OMITTED]
PRINCIPAL RISKS
- ---------------

There is no assurance that the Fund will achieve its investment objectives. 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 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
------------------------------------------------
BOND MATURITY COUPON 1% 2% 1% 2%
- --------------------------------------------------------------------------------
1 Year N/A $1,000 $1,000 $1,000 $1,000
- --------------------------------------------------------------------------------
5 Years 5.875 $951 $920 $1,018 $1,054
- --------------------------------------------------------------------------------
10 Years 6.00 $910 $853 $1,038 $1,110
- --------------------------------------------------------------------------------
30 Years 5.125 $841 $748 $1,093 $1,264
- --------------------------------------------------------------------------------

Coupons reflect yields on Treasury securities as of December 31, 1999. 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.

3
<PAGE>

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.

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.

4
<PAGE>

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,
common stock and warrants and convertible securities 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
the FDIC or any other government agency.

5
<PAGE>

[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.

(side bar)
ANNUAL TOTAL RETURNS
This chart shows how the performance of the Fund's Class B shares has varied
from year to year over the past 7 calendar years.
(end sidebar)

ANNUAL TOTAL RETURNS -- CALENDAR YEARS

9.63% -1.31% 12.71% 8.36% 6.04% 2.48% -2.78%
----- ------ ------ ----- ----- ----- ------
1993 '94 '95 '96 '97 '98 '99

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 -1.41% (quarter ended March 31, 1999).

(side bar)
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 (AS OF DECEMBER 31, 1999)
- --------------------------------------------------------------------------------
LIFE OF THE FUND
PAST 1 YEAR PAST 5 YEARS (SINCE 4/9/92)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A(1) -6.26% -- --
- --------------------------------------------------------------------------------
Class B -7.28% 4.94% 5.07%
- --------------------------------------------------------------------------------
Class C(1) -3.67% -- --
- --------------------------------------------------------------------------------
Class D(1) -1.71% -- --
- --------------------------------------------------------------------------------
Lehman Brothers Mutual Fund
Government/Corporate
Intermediate Bond Index(2) 0.39% 7.10% 6.42%(3)
- --------------------------------------------------------------------------------
</TABLE>

(1) Classes A, C and D commenced operations on July 28, 1997.

(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) For the period April 30, 1992 to December 31, 1999.

6
<PAGE>

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

The table below briefly describes the fees and expenses that you may pay if you
buy and hold shares of the Fund. 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 Fund does not charge account or exchange fees. See the
"Share Class Arrangements" section for further fee and expense information.

(side bar)
SHAREHOLDER FEES
These fees are paid directly from your investment.
(end sidebar)

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
- -------------------------------------------------------------------------------------------------------
SHAREHOLDER FEES
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
price or net asset value at redemption) None(2) 5.00%(3) 1.00%(4) None
- -------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
- -------------------------------------------------------------------------------------------------------
Management fee 0.40% 0.40% 0.40% 0.40%
- -------------------------------------------------------------------------------------------------------
Distribution and service (12b-1) fees 0.19% 0.85% 0.85% None
- -------------------------------------------------------------------------------------------------------
Other expenses 0.13% 0.13% 0.13% 0.13%
- -------------------------------------------------------------------------------------------------------
Total annual Fund operating expenses 0.72% 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 if you sell your shares 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 if you sell your shares within one year after purchase.

(side bar)
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, 1999.
(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
- ------------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------- --------------------------------------
CLASS A $495 $645 $809 $1,281 $495 $645 $809 $1,281
- ------------------------------------------------- --------------------------------------
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>

7
<PAGE>

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

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

This section provides additional information relating to 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

8
<PAGE>

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.

Convertible Securities. The Fund may invest in convertible securities which are
securities that generally pay dividends or interest and may be converted into
common stock. These securities may carry risks associated with both fixed-income
securities and common stocks. To the extent that a convertible security's
investment value is greater than its conversion value, its price will be likely
to increase when interest rates fall and decrease when interest rates rise, as
with a fixed-income security. If the conversion value exceeds the investment
value, the price of the convertible security will tend to fluctuate directly
with the price of the underlying equity security.

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. When the Fund takes a defensive position, it may not achieve its
investment objectives.

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, such as 200%, 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
apply at the time the Fund acquires an investment and refer to the Fund's net
assets, unless otherwise noted. Subsequent percentage changes that result from
market fluctuations 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.

9
<PAGE>

[GRAPHIC OMITTED]
ADDITIONAL RISK INFORMATION
- ---------------------------

This section provides additional information relating to 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. 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 and Warrants. The Fund's investment in common stocks and warrants
involve risks. In general, stock values fluctuate in response to activities
specific to the company as well as general market, economic and political
conditions. Stock prices can fluctuate widely in response to these factors.

10
<PAGE>

[GRAPHIC OMITTED]

FUND MANAGEMENT

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

(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, had approximately $145 billion in assets under
management as of December 31, 1999.
(end sidebar)

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

The Fund's portfolio is managed within the Investment Manager's Taxable Income
Group. Peter M. Avelar, Rajesh K. Gupta and Peter J. Seeley are the primary
portfolio managers of the Fund, Mr. Avelar and Mr. Gupta since the inception of
the Fund and Mr. Seeley since February 1998. Peter M. Avelar, a Senior Vice
President of the Investment Manager and Director of the High Yield Group 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, Director of the
Taxable Fixed-Income Group and Chief Administrative Officer of Investments of
the Investment Manager, has been managing portfolios comprised of government
securities at the Investment Manager for over five years. Peter J. Seeley, a
Vice President of the Investment Manager, has been managing portfolios comprised
of global fixed-income securities at the Investment Manager for over five years.

The Fund pays the Investment Manager a monthly management fee as full
compensation for the services and facilities furnished to the Fund, and for Fund
expenses assumed by the Investment Manager. The fee is based on the Fund's
average daily net assets. For the fiscal year ended October 31, 1999, the Fund
accrued total compensation to the Investment Manager amounting to 0.40% of the
Fund's average daily net assets.

11
<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. With respect to
securities that are 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

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

(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 (877) 937-MSDW (toll-free) 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.msdw.com/individual/funds
(end sidebar)

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

Because every investor has different immediate financial needs and long-term
investment goals, the Fund offers investors four Classes of shares: Classes A,
B, C and D. Class D shares are only offered to a limited group of investors.
Each Class of shares offers a distinct structure of sales charges, distribution
and service fees, and other features that are designed to address a variety of
needs. Your

12
<PAGE>

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 purchase order. Your payment is due on the third business day
after you place your purchase order. We reserve the right to reject any order
for the purchase of Fund shares.

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

MINIMUM INVESTMENT AMOUNTS
- ----------------------------------------------------------------------------

MINIMUM INVESTMENT
------------------------
INVESTMENT OPTIONS INITIAL ADDITIONAL
- ----------------------------------------------------------------------------
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 or Money Market Fund) $100* $100*
- ----------------------------------------------------------------------------

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

There is no minimum investment amount if you purchase Fund shares through: (1)
the Investment Manager's mutual fund asset allocation plan, 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.

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.

13
<PAGE>

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

[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, a Money Market Fund, North American Government Income Trust
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. Since exchanges are available only into
continuously offered Morgan Stanley Dean Witter Funds, exchanges are not
available into any new Morgan Stanley Dean Witter Fund during its initial
offering period, or when shares of a particular Morgan Stanley Dean Witter Fund
are not being offered for purchase.

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.
The check writing privilege is not available for Money Market Fund shares you
acquire in an exchange.

14
<PAGE>

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

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

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

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.

Limitations on Exchanges. Certain patterns of exchanges may result in the Fund
limiting or prohibiting, at its discretion, additional purchases and/or
exchanges. Determinations in this regard may be made based on the frequency or
dollar amount of previous 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.

15
<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.

OPTIONS PROCEDURES
- --------------------------------------------------------------------------------
Contact Your To sell your shares, simply call your Morgan Stanley Dean
Financial Advisor Witter Financial Advisor or other authorized financial
representative.
----------------------------------------------------------
[GRAPHIC OMITTED] Payment will be sent to the address to which the account
is registered or deposited in your 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, NJ 07303. If you hold share
certificates, you must return the certificates, along with
the letter and any required additional documentation.
----------------------------------------------------------
A check will be mailed to the name(s) and address in which
the account is registered, or
otherwise according to your instructions.
- --------------------------------------------------------------------------------
Systematic If your investment in all of the Morgan Stanley Dean
Withdrawal Plan Witter Family of Funds has a total market value of at
least $10,000, you may elect to withdraw amounts of $25 or
[GRAPHIC OMITTED] more, or in any whole percentage of a Fund's balance
(provided the amount is at least $25), on a monthly,
quarterly, semi-annual or annual basis, from any Fund with
a balance of at least $1,000. Each time you add a Fund to
the plan, you must meet the plan requirements.
----------------------------------------------------------
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.
----------------------------------------------------------

16
<PAGE>

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

Payment may be postponed or the right to sell your shares suspended under
unusual circumstances. If you request to sell shares that were recently
purchased by check, your sale will not be effected until it has been verified
that the check has been honored.

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.

17
<PAGE>

[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 to shareholders monthly. Capital gains, if any,
are usually distributed 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.

[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

18
<PAGE>

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
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.

19
<PAGE>

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

<TABLE>
<CAPTION>
MAXIMUM
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.

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:

(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)

FRONT-END SALES CHARGE
------------------------------------------------
AMOUNT OF PERCENTAGE OF PUBLIC APPROXIMATE PERCENTAGE
SINGLE TRANSACTION OFFERING PRICE OF NET 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>

20
<PAGE>

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.

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 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

21
<PAGE>

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, which may be deducted from your investment.

Other 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 termination fees, 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 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 An 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.

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

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

22
<PAGE>

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.

(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)

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

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 59 1/2); (ii)
distributions from an IRA or 403(b) Custodial Account following attainment
of age 59 1/2; or (iii) a tax-free return of an excess IRA contribution (a
"distribution" does not include a direct transfer of IRA, 403(b) Custodial
Account or retirement plan assets to a successor custodian or trustee).

o Sales of shares held for you as a participant in an 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

23
<PAGE>

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.

o Sales of shares if you simultaneously invest the proceeds in the Investment
Manager's mutual fund asset allocation program, pursuant to which investors
pay an asset-based fee. Any shares you acquire in connection with the
Investment Manager's mutual fund asset allocation program are subject to
all of the terms and conditions of that program, including termination
fees, mandatory sale or transfer restrictions on termination.

All waivers will be granted only following the Fund's 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 an 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.

24
<PAGE>

If you exchange your Class B shares for shares of a Money Market Fund, a No-Load
Fund, North American Government Income Trust 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.

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.

25
<PAGE>

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
termination fees, 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.

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.

26
<PAGE>

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.

27
<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, independent
accountants, whose report, along with the Fund's financial statements, is
included in the annual report, which is available upon request.

<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FOR THE YEAR JULY 28, 1997*
ENDED ENDED THROUGH
SELECTED PER-SHARE DATA OCTOBER 31, 1999 OCTOBER 31, 1998 OCTOBER 31, 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS A++
- -----------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 9.01 $ 9.46 $ 9.40
- -----------------------------------------------------------------------------------------------------------
Income (loss) from investment operations
Net investment income 0.74 0.74 0.22
Net realized and unrealized gain (loss) (0.87) (0.46) 0.04
-------- -------- -------
Total income (loss) from investment operations (0.13) 0.28 0.26
- -----------------------------------------------------------------------------------------------------------
Less dividends and distributions from
Net investment income (0.63) (0.70) (0.20)
Paid-in-capital (0.09) (0.03) --
-------- -------- -------
Total dividends and distributions (0.72) (0.73) (0.20)
- -----------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 8.16 $ 9.01 $ 9.46
- -----------------------------------------------------------------------------------------------------------
TOTAL RETURN+ (1.61)% 2.86% 2.74%(1)
- -----------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------------------------
Expenses 0.72%(3) 0.77%(3) 0.85%(2)
- -----------------------------------------------------------------------------------------------------------
Net investment income 8.56%(3) 7.94%(3) 8.98%(2)
- -----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $21,828 $15,130 $4,933
- -----------------------------------------------------------------------------------------------------------
Portfolio turnover rate 71% 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.

28
<PAGE>

<TABLE>
<CAPTION>
Years ended October 31 1999++ 1998++ 1997*++ 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS B
- -----------------------------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 9.01 $ 9.46 $ 9.78 $ 9.62 $ 9.37
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations
Net investment income 0.68 0.68 0.74 0.78 0.77
Net realized and unrealized gain (loss) (0.87) (0.46) (0.15) 0.10 0.20
-------- ---------- -------- -------- --------
Total income (loss) from investment
operations (0.19) 0.22 0.59 0.88 0.97
- -----------------------------------------------------------------------------------------------------------------------
Less dividends and distributions from
Net investment income (0.58) (0.65) (0.91) (0.72) (0.72)
Paid-in-capital (0.08) (0.02) -- -- --
-------- ---------- -------- -------- --------
Total dividends and distributions (0.66) (0.67) (0.91) (0.72) (0.72)
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 8.16 $ 9.01 $ 9.46 $ 9.78 $ 9.62
- -----------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ (2.14)% 2.23% 6.46% 9.49% 10.76%
- -----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
Expenses 1.38%(1) 1.38%(1) 1.40% 1.42% 1.44%
- -----------------------------------------------------------------------------------------------------------------------
Net investment income 7.90%(1) 7.33%(1) 7.90% 8.38% 8.30%
- -----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $859,553 $1,024,021 $915,899 $745,581 $542,544
- -----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 71% 130% 104% 82% 87%
- -----------------------------------------------------------------------------------------------------------------------
</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.

29
<PAGE>

<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FOR THE YEAR JULY 28, 1997*
ENDED ENDED THROUGH
SELECTED PER-SHARE DATA OCTOBER 31, 1999 OCTOBER 31, 1998 OCTOBER 31, 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS C++
- -----------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 9.00 $ 9.45 $ 9.40
- ------------------------------------------------- ----------- -------- -----------
Income (loss) from investment operations
Net investment income 0.68 0.68 0.20
Net realized and unrealized gain (loss) (0.87) (0.46) 0.04
----------- -------- -----------
Total income (loss) from investment operations (0.19) 0.22 0.24
- -----------------------------------------------------------------------------------------------------------
Less dividends and distributions from
Net investment income (0.58) (0.65) (0.19)
Paid-in-capital (0.08) (0.02) --
----------- -------- -----------
Total dividends and distributions (0.66) (0.67) (0.19)
- -----------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 8.15 $ 9.00 $ 9.45
- -----------------------------------------------------------------------------------------------------------
TOTAL RETURN+ (2.25)% 2.26% 2.52%(1)
- -----------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------------------------
Expenses 1.38%(3) 1.38%(3) 1.44%(2)
- -----------------------------------------------------------------------------------------------------------
Net investment income 7.90%(3) 7.33%(3) 8.17%(2)
- -----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $ 9,450 $15,659 $ 3,773
- -----------------------------------------------------------------------------------------------------------
Portfolio turnover rate 71% 130% 104%
- -----------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FOR THE YEAR JULY 28, 1997*
ENDED ENDED THROUGH
SELECTED PER-SHARE DATA OCTOBER 31, 1999 OCTOBER 31, 1998 OCTOBER 31, 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS D++
- -----------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 9.00 $ 9.45 $ 9.40
- -----------------------------------------------------------------------------------------------------------
Income (loss) investment operations
Net investment income 0.76 0.76 0.23
Net realized and unrealized gain (loss) (0.88) (0.46) 0.02
----------- --------- -----------
Total income (loss) from investment operations (0.12) 0.30 0.25
- -----------------------------------------------------------------------------------------------------------
Less dividends and distributions from
Net investment income (0.64) (0.72) (0.20)
Paid-in-capital (0.09) (0.03) --
----------- --------- -----------
Total dividends and distributions (0.73) (0.75) (0.20)
- -----------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 8.15 $ 9.00 $ 9.45
- -----------------------------------------------------------------------------------------------------------
TOTAL RETURN+ (1.42)% 3.21% 2.69%(1)
- -----------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------------------------
Expenses 0.53%(3) 0.53%(3) 0.59%(2)
- -----------------------------------------------------------------------------------------------------------
Net investment income 8.75%(3) 8.18%(3) 9.26%(2)
- -----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $ 1,046 $ 740 $ 99
- -----------------------------------------------------------------------------------------------------------
Portfolio turnover rate 71% 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.

31
<PAGE>

NOTES

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

32
<PAGE>

NOTES

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

33
<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!

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
GROWTH FUNDS GROWTH FUNDS Health Sciences Trust

Aggressive Equity Fund Information Fund

American Opportunities Fund Natural Resource Development Securities

Capital Growth Securities GLOBAL/INTERNATIONAL FUNDS

Developing Growth Securities Competitive Edge Fund - "Best Ideas" Portfolio

Growth Fund European Growth Fund

Market Leader Trust Fund of Funds - International Portfolio

Mid-Cap Equity Trust International Fund

Next Generation Trust International SmallCap Fund

Small Cap Growth Fund Japan Fund

Special Value Fund Latin American Growth Fund

21st Century Trend Fund Pacific Growth Fund

THEME FUNDS

Financial Services Trust
- ------------------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME FUNDS Balanced Growth Fund Total Market Index Fund

Balanced Income Fund Total Return Trust

Convertible Securities Trust Value Fund

Dividend Growth Securities Value/Added Market Series/Equity Portfolio

Equity Fund THEME FUNDS

Fund of Funds - Domestic Portfolio Real Estate Fund

Income Builder Fund Utilities Fund

Mid-Cap Dividend Growth Securities GLOBAL FUNDS

S&P 500 Index Fund Global Dividend Growth Securities

S&P 500 Select Fund Global Utilities Fund

Strategist Fund
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FUNDS GOVERNMENT INCOME FUNDS GLOBAL INCOME FUNDS

Federal Securities Trust North American Government Income Trust

Short-Term U.S. Treasury Trust World Wide Income Trust

U.S. Government Securities Trust TAX-FREE INCOME FUNDS

DIVERSIFIED INCOME FUNDS California Tax-Free Income Fund

Diversified Income Trust Hawaii Municipal Trust(FSC)

CORPORATE INCOME FUNDS Limited Term Municipal Trust(NL)

High Yield Securities Multi-State Municipal Series Trust(FSC)

Intermediate Income Securities New York Tax-Free Income Fund

Short-Term Bond Fund(NL) Tax-Exempt Securities Trust
- ------------------------------------------------------------------------------------------------------------------------------
MONEY MARKET FUNDS TAXABLE MONEY MARKET FUNDS TAX-FREE MONEY MARKET FUNDS

Liquid Asset Fund(MM) California Tax-Free Daily Income Trust(MM)

U.S. Government Money Market Trust(MM) New York Municipal 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 back 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
North American Government Income Trust and 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>

PROSPECTUS - FEBRUARY 3, 2000

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

(800) 869-NEWS

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

WWW.MSDW.COM/INDIVIDUAL/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 (202) 942-8090. Reports and
other information about the Fund are available on the EDGAR Database on the
SEC's Internet site (www.sec.gov), and copies of this information may be
obtained, after paying a duplicating fee, by electronic request at the following
e-mail address: [email protected], or by writing the Public Reference Section
of the SEC, Washington, DC 20549-0102.

TICKER SYMBOLS:

Class A: DINAX
- -------------------------------
Class B: DINBX
- -------------------------------
Class C: DINCX
- -------------------------------
Class D: DINDX
- -------------------------------

(THE FUND'S INVESTMENT COMPANY ACT FILE NO. IS 811-6515)

Morgan Stanley Dean Witter

----------------------------------------------------------------
DIVERSIFIED INCOME TRUST

[GRAPHIC OMITTED]

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

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION Morgan Stanley Dean Witter
Diversified Income Trust
February 3, 2000

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

This Statement of Additional Information is not a Prospectus. The
Prospectus (dated February 3, 2000) 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 OF CONTENTS
- --------------------------------------------------------------------------------

I. Fund History ..................................................... 4

II. Description of the Fund and Its Investments and Risks ............ 4

A. Classification ............................................. 4

B. Investment Strategies and Risks ............................ 4

C. Fund Policies/Investment Restrictions ...................... 14

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 ................ 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 ........................................ 30

D. Directed Brokerage ......................................... 30

E. Regular Broker-Dealers ..................................... 31

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

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.

<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

4
<PAGE>

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.

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

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<PAGE>

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.

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.

A call option is "covered" if the Fund owns the underlying security subject
to the option or has an absolute and immediate right to acquire that security
without additional cash consideration (or for additional consideration (in cash,
Treasury bills or other liquid portfolio securities) held in a segregated
account on the Fund's books) upon conversion or exchange of other securities
held in its portfolio. A call

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<PAGE>

option is also covered if the Fund holds a call on the same security as the call
written where the exercise price of the call held is (i) equal to or less than
the exercise price of the call written or (ii) greater than the exercise price
of the call written if the difference is maintained by the Fund in cash,
Treasury bills or other liquid portfolio securities in a segregated account on
the Fund's books.

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. A writer of a covered put option 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 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). A put option is "covered" if the Fund maintains cash,
Treasury bills or other liquid portfolio securities with a value equal to the
exercise price in a segregated account on the Fund's books, or holds a put on
the same security as the put written where the exercise price of the put held is
equal to or greater than the exercise price of the put written. 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.

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<PAGE>

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.

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.

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<PAGE>

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.

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

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<PAGE>

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 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. 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 also 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.

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

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

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<PAGE>

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

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.

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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.

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.

12
<PAGE>

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.

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 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 were designed in such a way
that they may not be able to 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.

Improperly functioning trading systems may result in settlement problems
and liquidity issues. Corporate and governmental data processing errors could
result in production problems for individual companies and overall economic
uncertainties. Operations ran smoothly from the last week in December through
the first few weeks of January, but the year 2000 issue may yet have an adverse
impact on financial market participants and other entities, including the
companies whose stocks are contained in the Fund's portfolio.

13
<PAGE>

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. As a secondary objective, seek to maximize total return but only to
the extent consistent with its primary objective.

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 33 1/3% 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.

14
<PAGE>

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.

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 eight (8)
Trustees. These same individuals also serve as directors or trustees for all of
the Morgan Stanley Dean Witter Funds. Six

15
<PAGE>

Trustees (75% of the total number) have no affiliation or business connection
with the Investment Manager or any of its affiliated persons and do not own any
stock or other securities issued by the Investment Manager's parent company,
MSDW. These are the "non-interested" or "independent" Trustees. The other two
Trustees (the "management Trustees") are affiliated with the Investment Manager.

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 93 Morgan Stanley Dean Witter Funds, are shown
below.

Charles A. Fiumefreddo* (66) .............. Chairman, Director or Trustee, and Chief Executive
Chairman of the Board, Officer of the Morgan Stanley Dean Witter Funds;
Chief Executive Officer and Trustee formerly Chairman, Chief Executive Officer and
Two World Trade Center Director of the Investment Manager, the Distributor
New York, New York 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 (67) ........................ Director or Trustee of the Morgan Stanley Dean
Trustee Witter Funds; formerly United States Senator
c/o Huntsman Corporation (R-Utah)(1974-1992) and Chairman, Senate
500 Huntsman Way Banking Committee (1980-1986); formerly Mayor
Salt Lake City, Utah of Salt Lake City, Utah (1971-1974); formerly
Astronaut, Space Shuttle Discovery (April 12-19,
1985); Vice Chairman, Huntsman Corporation (chemical
company); Director of Franklin Covey (time management
systems), BMW Bank of North America, Inc. (industrial
loan corporation), United Space Alliance (joint
venture between Lockheed Martin and the Boeing
Company) and Nuskin Asia Pacific (multilevel
marketing); member of the board of various civic and
charitable organizations.
</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; Director of The PMI Group,
c/o Mayer, Brown & Platt Inc. (private mortgage insurance); Trustee and
Counsel to the Independent Trustees Vice Chairman of The Field Museum of Natural
1675 Broadway History; formerly associated with the Allstate
New York, New York Companies (1966-1994), most recently as
Chairman of The Allstate Corporation (March
1993-December 1994) and Chairman and Chief Executive
Officer of its wholly-owned subsidiary, Allstate
Insurance Company (July 1989-December 1994); director
of various other business and charitable
organizations.

Dr. Manuel H. Johnson (50) ................ Senior Partner, Johnson Smick International, Inc.,
Trustee a consulting firm; Co-Chairman and a founder of
c/o Johnson Smick International, Inc. the Group of Seven Council (G7C), an international
1133 Connecticut Avenue, N.W. economic commission; Chairman of the Audit
Washington, D.C. Committee and Director or Trustee of the Morgan
Stanley Dean Witter Funds; 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 (63) .................... General Partner, Triumph Capital, L.P., a private
Trustee investment partnership; Chairman of the Insurance
c/o Triumph Capital, L.P. Committee and Director or Trustee of the Morgan
237 Park Avenue Stanley Dean Witter Funds; formerly Vice
New York, New York President, Bankers Trust Company and BT Capital
Corporation (1984-1988); director
of various business organizations.

Philip J. Purcell* (56) ................... 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; Director of American
Airlines, Inc. and its parent company, AMR
Corporation; Director and/or officer of various
MSDW subsidiaries.

John L. Schroeder (69) .................... Retired; Chairman of the Derivatives Committee
Trustee and Director or Trustee of the Morgan Stanley
c/o Mayer, Brown & Platt Dean Witter Funds; Director of Citizens Utilities
Counsel to the Independent Trustees Company; (telecommunications, gas, electric and
1675 Broadway water utilities company); formerly Executive Vice
New York, New York President and Chief Investment Officer of the
Home Insurance Company (August 1991-
September 1995).
</TABLE>

17
<PAGE>

<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------- ----------------------------------------------------
<S> <C>
Mitchell M. Merin (46) .................... President and Chief Operating Officer of Asset
President Management of MSDW (since December 1998);
Two World Trade Center President and Director (since April 1997) and Chief
New York, New York Executive Officer (since June 1998) of the
Investment Manager and MSDW Services Company;
Chairman, Chief Executive Officer and Director of the
Distributor (since June 1998); Chairman and Chief
Executive Officer (since June 1998) and Director
(since January 1998) of the Transfer Agent; Director
of various MSDW subsidiaries; President of the Morgan
Stanley Dean Witter Funds (since May 1999); Trustee
of various Van Kampen investment companies (since
December 1999); previously Chief Strategic Officer of
the Investment Manager and MSDW Services Company and
Executive Vice President of the Distributor (April
1997-June 1998), Vice President of the Morgan Stanley
Dean Witter Funds (May 1997-April 1999), and
Executive Vice President of Dean Witter, Discover &
Co.

Barry Fink (45) ........................... Executive Vice President (since December 1999)
Vice President, and Secretary and General Counsel (since
Secretary and General Counsel February 1997) and Director (since July 1998) of
Two World Trade Center the Investment Manager and MSDW Services
New York, New York Company; Executive Vice President (since
December 1999) 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 (since February 1997); previously
Senior Vice President (March 1997-December 1999),
First Vice President (June 1993-February 1997), Vice
President and Assistant Secretary and Assistant
General Counsel of the Investment Manager and MSDW
Services Company, Senior Vice President of the
Distributor (March 1997-December 1999) and Assistant
Secretary of the Morgan Stanley Dean Witter Funds.

Peter M. Avelar (41) ...................... Director of the High Yield Group and Senior Vice
Vice President President of the Investment Manager; Vice
Two World Trade Center President of various Morgan Stanley Dean Witter
New York, New York Funds.

Rajesh K. Gupta (39) ...................... Director of the Taxable Fixed-Income Group, Chief
Vice President Administrative Officer of Investments and Senior
Two World Trade Center Vice President of the Investment Manager; Vice
New York, New York President of various Morgan Stanley Dean Witter
Funds.

Peter J. Seeley (50) ...................... 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.
</TABLE>

18
<PAGE>

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

In addition, Ronald E. Robison, Executive Vice President, Chief
Administrative Officer and Director of the Investment Manager and MSDW Services
Company, Robert S. Giambrone, Senior Vice President of the Investment Manager,
MSDW Services Company, the Distributor and the Transfer Agent and Director of
the Transfer Agent, and Joseph J. McAlinden, Executive Vice President and Chief
Investment Officer of the Investment Manager and Director of the Transfer Agent
are Vice Presidents of the Fund.

In addition, Marilyn K. Cranney, Todd Lebo, 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 Natasha Kassian, Assistant
Vice President and Assistant General Counsel of the Investment Manager and MSDW
Services Company, are Assistant Secretaries of the Fund.

INDEPENDENT DIRECTORS/TRUSTEES AND THE COMMITTEES. Law and regulation
establish both general guidelines and specific duties for the independent
directors/trustees. The Morgan Stanley Dean Witter Funds seek as independent
directors/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.
All of the independent directors/trustees serve as members of the Audit
Committee. In addition, three of the directors/trustees, including two
independent directors/trustees, serve as members of the Derivatives Committee
and the Insurance Committee.

The independent directors/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 directors/trustees are required to select and nominate individuals
to fill any independent director/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 DIRECTORS/TRUSTEES FOR
ALL MORGAN STANLEY DEAN WITTER FUNDS. The independent directors/trustees and the
Funds' management believe that having the same independent directors/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 directors/trustees for each of the Funds or even of sub-groups of
Funds. They believe that

19
<PAGE>

having the same individuals serve as independent directors/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 directors/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 directors/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 directors/trustees, of the caliber, experience and
business acumen of the individuals who serve as independent directors/trustees
of the Morgan Stanley Dean Witter Funds.

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

C. COMPENSATION

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

The following table illustrates the compensation that the Fund paid to its
Independent Trustees for the fiscal year ended October 31, 1999.

FUND COMPENSATION

AGGREGATE
COMPENSATION
NAME OF INDEPENDENT TRUSTEE FROM THE FUND
- --------------------------- --------------
Michael Bozic ............................................ $1,550
Edwin J. Garn ............................................ 1,600
Wayne E. Hedien .......................................... 1,650
Dr. Manuel H. Johnson .................................... 2,100
Michael E. Nugent ........................................ 1,933
John L. Schroeder ........................................ 1,933

<PAGE>

The following table illustrates the compensation paid to the Fund's
Independent Trustees for the calendar year ended December 31, 1999 for services
to the 93 Morgan Stanley Dean Witter Funds that were in operation at December
31, 1999.

CASH COMPENSATION FROM MORGAN STANLEY DEAN WITTER FUNDS

TOTAL CASH
COMPENSATION
FOR SERVICES TO
93 MORGAN
NAME OF STANLEY DEAN
INDEPENDENT TRUSTEE WITTER FUNDS
- ------------------------------- ----------------
Michael Bozic ...................................... $134,600
Edwin J. Garn ...................................... 138,700
Wayne E. Hedien .................................... 138,700
Dr. Manuel H. Johnson .............................. 208,638
Michael E. Nugent .................................. 193,324
John L. Schroeder .................................. 193,324

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 director/ 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/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/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 accrued as expenses on the books of
the Adopting Funds. Such benefits 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,
1999 and by the 55 Morgan Stanley Dean Witter Funds (including the Fund) for the
year ended December 31, 1999, and the estimated retirement benefits for the
Independent Trustees, to commence upon their retirement, from the Fund as of
October 31, 1999 and from the 55 Morgan Stanley Dean Witter Funds as of December
31, 1999.

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% $380 $20,933 $ 907 $50,588
Edwin J. Garn ............ 10 60.44 631 31,737 909 50,675
Wayne E. Hedien .......... 9 51.37 718 39,566 771 43,000
Dr. Manuel H. Johnson..... 10 60.44 256 13,129 1,360 75,520
Michael E. Nugent ........ 10 60.44 479 23,175 1,209 67,209
John L. Schroeder ........ 8 50.37 751 41,558 960 52,994
</TABLE>

- ----------

(2) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1) on
page 21.

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

The following persons owned 5% or more of the outstanding Class D shares of
the Fund as of January 3, 2000: Morgan Stanley Dean Witter Trust FSB as Trustee,
Robbins Manufacturing, P.O. Box 957, Jersey City, NJ 07303-0957 - 22.623%;
Florence Eckel Burton Trustee, FBO Florence Eckel Burton, Rev Trust Dated
12/10/85, 17 Bishop Boulevard 108, Holly Hill, FL 32117-2535 - 10.492%;
Josephine Slater, 127 South Sheridan, Deland, FL 32720-5022 - 5.168%; Morgan
Stanley Dean Witter Trust FSB, Agent for the Baptist Homes Foundation of the
West Inc., Trustee FBO Eskeldson 12/8/98, P.O. Box 503, Jersey City, NJ
07311 - 5.101%.

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,
NY 10048. The Investment Manager is a wholly-owned subsidiary of MSDW, a
Delaware corporation. MSDW is a preeminent global financial services firm that
maintains leading market positions in each of its three primary businesses:
securities, asset management and credit services.

Pursuant to an Investment Management Agreement (the "Management Agreement")
with the Investment Manager, the Fund has retained the Investment Manager to
provide administrative services and manage the investment of the Fund's assets,
including the placing of orders for the purchase and sale of portfolio
securities. The Fund pays the Investment Manager monthly compensation calculated
daily 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, 1997, 1998 and 1999, the Investment
Manager accrued total compensation under the Management Agreement in the amounts
of $3,347,731, $4,031,496 and $4,056,513, respectively.

22
<PAGE>

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 cost of educational and/or business-related trips, and educational and/or
promotional and business-related expenses. 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

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

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

Expenses not expressly assumed by the Investment Manager under the
Management Agreement or by the Distributor, will be paid by the Fund. These
expenses will be allocated among the four Classes of shares pro rata based on
the net assets of the Fund attributable to each Class, except as described
below. Such expenses include, but are not limited to: expenses of the Plan of
Distribution pursuant to Rule 12b-1; charges and expenses of any registrar,
custodian, stock transfer and dividend disbursing agent; brokerage commissions;
taxes; engraving and printing share certificates; registration costs of the Fund
and its shares under federal and state securities laws; the cost and expense of
printing, including

23
<PAGE>

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, including a majority of the Independent 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 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).

24
<PAGE>

<TABLE>
<CAPTION>
1999 1998 1997
--------------------- -------------------- ---------------------
<S> <C> <C> <C>
Class A ........... FSCs:(1) $ 59,153 FSCs:(1) $ 121,078 FSCs:(1) $ 0
CDSCs: $ 9,748 CDSCs: $ 0 CDSCs: $ 38,753
Class B ........... CDSCs: $1,855,516 CDSCs: $1,499,828 CDSCs: $1,414,909
Class C. .......... CDSCs: $ 18,712 CDSCs: $ 13,622 CDSCs: $ 630
</TABLE>

- ----------

(1) FSCs apply to Class A only.

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, 1999, of $8,277,812. 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, 1999, Class A and Class C shares of the Fund accrued payments under the Plan
amounting to $38,350 and $164,809, respectively, which amounts are equal to
0.19% 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.

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

25
<PAGE>

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 Investment Manager pays a retention fee to Financial Advisors at an
annual rate of 0.05% of the value of shares of the Fund sold after January 1,
2000 and held for at least one year. Shares purchased through the reinvestment
of dividends will be eligible for a retention fee, provided that such dividends
were earned on shares otherwise eligible for a retention fee payment. Shares
owned in variable annuities, closed-end fund shares and shares held in 401(k)
plans where the Transfer Agent or Dean Witter Reynolds's Retirement Plan
Services is either recordkeeper or trustee are not eligible for a retention fee.

For the first year only, the retention fee is paid on any shares of the
Fund sold after January 1, 2000 and held by shareholders on December 31, 2000.

The retention fees are paid by the Investment Manager from its own assets,
which may include profits from investment management fees payable under the
Management Agreement, as well as from borrowed funds.

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").
These expenses may include the cost of Fund-related educational and/or
business-related trips or payment of Fund-related educational and/or promotional
expenses of Financial Advisors. 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

26
<PAGE>

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.

Each Class paid 100% of the amounts accrued under the Plan with respect to
that Class for the fiscal year ended October 31, 1999 to the Distributor. The
Distributor and Dean Witter Reynolds estimate that they have spent, pursuant to
the Plan, $59,797,814 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)
6.78% ($4,055,103)-advertising and promotional expenses; (ii) 0.48%
($287,068)-printing of prospectuses for distribution to other than current
shareholders; and (iii) 92.74% ($55,455,643)-other expenses, including the gross
sales credit and the carrying charge, of which 5.72% ($3,169,313) represents
carrying charges, 39.03% ($21,646,541) 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 55.25% ($30,639,789) represents overhead and other branch
office distribution-related expenses. The amounts accrued by Class A and a
portion of the amounts accrued by Class C under the Plan during the fiscal year
ended October 31, 1999 were service fees. The remainder of the amounts accrued
by Class C 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 $15,033,265 as of October 31, 1999 (the end of
the Fund's fiscal year), which was equal to 1.75% 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 $1,204 in the case of Class C at
December 31, 1999 (end of the calendar year), which amount was equal to 0.01% of
the net assets of Class C on such date

27
<PAGE>

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
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, NJ 07311.

(2) CUSTODIAN AND INDEPENDENT ACCOUNTANTS

The Bank of New York, 100 Church Street, New York, NY 10007 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, NY 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.

28
<PAGE>

PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, NY
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 and is
reimbursed for its out-of-pocket expenses in connection with such services.

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, 1997, 1998 and 1999, the Fund paid a
total of $6,634, $25,846 and $0, 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, 1997, 1998 and 1999, the Fund did
not effect any principal transactions with Dean Witter Reynolds.

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 commis-

29
<PAGE>

sions, 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, 1997, 1998 and 1999, 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 and
1999, 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. 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, 1999, the Fund did not pay any
brokerage commissions to brokers because of research services provided.

30
<PAGE>

E. REGULAR BROKER-DEALERS

During the fiscal year ended October 31, 1999, 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.

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 the actions
of the Trustees. In addition, under certain circumstances, the shareholders may
call a meeting to remove the Trustees and the Fund is required to provide
assistance in communication with shareholders about such a meeting. The voting
rights of shareholders are not cumulative, so that holders of more than 50
percent of the shares voting can, if they choose, elect all Trustees being
selected, while the holders of the remaining shares would be unable to elect any
Trustees.

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.

31
<PAGE>

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

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

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

B. OFFERING PRICE

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

The price of 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,

32
<PAGE>

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.

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

33
<PAGE>

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 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 maximum tax on long-term capital gains
applicable to individuals is 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 and 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. Under current law, the maximum tax on long-term capital gains is 20%.
Any loss realized by shareholders upon a sale or 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.

34
<PAGE>

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.

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, 1999, the yield, calculated pursuant to the formula
described above, was approximately 9.07%, 8.87%, 8.86% and 9.73% 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, 1999 were -6.67%, 4.96% and 5.17%, respectively. The average annual
total returns of Class A for the fiscal year ended October 31, 1999 and for the
period July 28, 1997 (inception of the Class) through October 31, 1999 were
- -5.79% and -0.19%, respectively. The average annual total returns of Class C for
the fiscal year ended October 31, 1999 and for the period July 28, 1997
(inception of the Class) through October 31, 1999 were -3.16% and 1.09%,
respectively. The average annual total returns of Class D for the fiscal year
ended October 31, 1999 and for the period July 28, 1997 (inception of the Class)
through October 31, 1999 were -1.42% and 1.96%, 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,

35
<PAGE>

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, 1999, were -2.14%, 5.25%
and 5.17%, respectively. Based on this calculation, the average annual total
returns of Class A for the fiscal year ended October 31, 1999 and for the period
July 28, 1997 through October 31, 1999 were -1.61% and 1.74%, respectively, the
average annual total returns of Class C for the fiscal year ended October 31,
1999 and for the period July 28, 1997 through October 31, 1999 were -2.25% and
1.09%, respectively, and the average annual total returns of Class D for the
fiscal year ended October 31, 1999 and for the period July 28, 1997 through
October 31, 1999 were -1.42% and 1.96%, respectively.

In addition, the Fund may compute its aggregate total return for each Class
for specified periods by determining the aggregate percentage rate which will
result in the ending value of a hypothetical $1,000 investment made at the
beginning of the period. For the purpose of this calculation, it is assumed that
all dividends and distributions are reinvested. The formula for computing
aggregate total return involves a percentage obtained by dividing the ending
value (without reduction for any sales charge) by the initial $1,000 investment
and subtracting 1 from the result. Based on the foregoing calculation, the total
returns for Class B for the one year, five year and the life of the Fund periods
ended October 31, 1999, were -2.14%, 29.15% and 46.35%, respectively. Based on
the foregoing calculation, the total returns of Class A for the fiscal year
ended October 31, 1999 and for the period July 28, 1997 through October 31, 1999
were -1.61% and 3.98%, respectively, the total returns of Class C for the fiscal
year ended October 31, 1999 and for the period July 28, 1997 through October 31,
1999 were -2.25% and 2.47%, 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, 1999 were -1.42% and 4.48%, 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 (declined) to the following amounts at
October 31, 1999:

<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 $9,956 $50,170 $101,121
Class B ......... 04/09/92 14,635 73,175 146,350
Class C ......... 07/28/97 10,247 51,235 102,470
Class D ......... 07/28/97 10,448 52,240 104,480
</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, 1999 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, 1999

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GOVERNMENT & CORPORATE BONDS (93.4%)
FOREIGN (24.1%)
AUSTRALIA (1.3%)
Cable Television (0.0%)
$ 12,468 Australis Holdings Property Ltd. (a)...... 15.00++% 11/01/02 $ 249,360
90 Australis Media Ltd. (a) ................. 15.75++ 05/15/03 451
4,700 Australis Media Ltd. (Units)#(a) ....... 15.75++ 05/15/03 23,500
------------
273,311
------------
Government Obligation (1.3%)
AUD 18,200 Queensland Treasury Corp. ................ 8.00 08/14/01 11,968,851
------------
TOTAL AUSTRALIA ....................................................... 12,242,162
------------
BERMUDA (0.2%)
Other Telecommunications
$ 1,800 Globenet Comm Group Ltd. -
144A* .................................... 13.00 07/15/07 1,804,500
------------
CANADA (1.4%)
Beverages - Non-Alcoholic (0.5%)
5,500 Sparkling Spring Water ................... 11.50 11/15/07 4,400,000
------------
Cellular Telephone (0.2%)
1,800 Clearnet Communications Inc. ............. 14.75++ 12/15/05 1,710,000
------------
Consumer Electronics/Appliances (0.1%)
12,061 International Semi-Tech
Microelectronics (a) ..................... 11.50++ 08/15/03 603,050
------------
Consumer/Business Services (0.2%)
1,800 MDC Communication Corp. .................. 10.50 12/01/06 1,746,000
------------
Government & Agencies (0.2%)
GBP 1,141 Ontario (Province of) .................... 11.125 02/14/01 1,972,978
------------
Other Telecommunications (0.2%)
$ 1,800 Worldwide Fiber Inc. - 144A* ............. 12.00 08/01/09 1,800,000
------------
TOTAL CANADA .......................................................... 12,232,028
------------
DENMARK (4.9%)
Government Obligation
DKK 290,000 Kingdom of Denmark (b) ................... 8.00 11/15/01 43,977,416
------------
GERMANY (4.3%)
Government Obligations
EUR 18,250 Germany (Republic of) .................... 4.50 08/19/02 19,377,326
18,300 Germany (Republic of) .................... 4.50 05/17/02 19,441,993
------------
38,819,319
------------
NETHERLANDS (1.9%)
Government Obligation (1.7%)
13,500 Netherlands Government Bond .............. 8.50 03/15/01 15,091,326
------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

37
<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
Portfolio of Investments October 31, 1999, continued

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Other Telecommunications (0.2%)
$ 1,800 Versatel Telecom ........................ 13.25 % 05/15/08 $ 1,800,000
-----------
TOTAL NETHERLANDS .................................................. 16,891,326
-----------
NEW ZEALAND (1.5%)
Extra Governmental Institutions - Banking
NZD 27,000 International Bank for
Reconstruction & Development (b)......... 7.25 04/09/01 13,821,464
-----------
NORWAY (4.8%)
Contract Drilling (0.3%)
$ 4,600 Northern Offshore ASA ................... 10.00 05/15/05 2,806,000
-----------
Government Obligation (4.5%)
NOK 311,800 Norway Government Bond (b) .............. 7.00 05/31/01 40,503,802
-----------
TOTAL NORWAY ....................................................... 43,309,802
-----------
UNITED KINGDOM (3.8%)
Cellular Telephone (0.2%)
$ 3,500 Dolphin Telecom PLC - 144A* ............. 14.00++ 05/15/09 1,382,500
-----------
Government Obligation (2.4%)
GBP 13,200 U.K. Treasury Bond ...................... 7.00 06/07/02 22,080,564
-----------
International Banks (1.0%)
5,600 Abbey National Treasury Service (b)...... 7.125 03/14/01 9,270,090
-----------
Other Telecommunications (0.2%)
$ 1,800 Esprit Telecom Group PLC ................ 10.875 06/15/08 1,818,000
-----------
TOTAL UNITED KINGDOM ............................................... 34,551,154
-----------
TOTAL FOREIGN (Identified Cost $242,445,538)........................ 217,649,171
-----------
UNITED STATES (69.3%)
CORPORATE BONDS (30.0%)
Advertising (0.4%)
3,200 Interep National Radio Sales ............ 10.00 07/01/08 3,176,000
-----------
Aerospace (0.2%)
2,700 Sabreliner Corp. - 144A* ................ 11.00 06/15/08 1,849,500
-----------
Broadcast/Media (1.2%)
5,000 Spanish Broadcasting System ............. 12.50 06/15/02 5,700,000
4,800 Tri-State Outdoor Media Group,
Inc. .................................... 11.00 05/15/08 4,704,000
-----------
10,404,000
-----------
Cable Television (0.8%)
5,600 21st Century Telecom Group, Inc.......... 12.25++ 02/15/08 2,520,000
575 James Cable Partners L.P. ............... 10.75 08/15/04 573,563
3,000 Knology Holdings Inc. ................... 11.875++ 10/15/07 1,680,000
3,700 Optel, Inc. (a) ......................... 13.00 02/15/05 1,221,000
4,500 Optel, Inc. (Series B) (a) .............. 11.50 07/01/08 1,485,000
-----------
7,479,563
-----------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

38
<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
Portfolio of Investments October 31, 1999, continued

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Casino/Gambling (1.1%)
$ 12,740 Aladdin Gaming Holdings/Capital
Corp. LLC ................................. 13.50++% 03/01/10 $ 4,968,600
8,900 Fitzgeralds Gaming Corp.
(Series B) (c) ............................ 12.25 12/15/04 4,895,000
------------
9,863,600
------------
Cellular Telephone (1.3%)
1,800 American Cellular Corp. ..................... 10.50 05/15/08 1,935,000
1,800 Dobson/Sygnet Communications ................ 12.25 12/15/08 1,930,500
7,300 McCaw International Ltd. .................... 13.00++ 04/15/07 4,567,975
3,000 Tritel PCS Inc. - 144A* ..................... 12.75++ 05/15/09 1,807,500
2,200 Triton Communications LLC ................... 11.00++ 05/01/08 1,518,000
------------
11,758,975
------------
Construction/Agricultural
Equipment/Trucks (0.3%)
2,800 J.B. Poindexter & Co., Inc. ................. 12.50 05/15/04 2,632,000
------------
Consumer Electronics/Appliances (0.3%)
2,700 Windmere-Durable Holdings, Inc. ............. 10.00 07/31/08 2,565,000
------------
Consumer Specialties (0.5%)
5,800 Samsonite Corp. ............................. 10.75 06/15/08 4,814,000
------------
Consumer/Business Services (1.2%)
1,200 Anacomp, Inc. (Series B) .................... 10.875 04/01/04 1,188,000
600 Anacomp, Inc. (Series D) .................... 10.875 04/01/04 594,000
6,750 Comforce Operating, Inc. .................... 12.00 12/01/07 4,725,000
7,600 Entex Information Services, Inc. ............ 12.50 08/01/06 4,180,000
------------
10,687,000
------------
Containers/Packaging (1.0%)
5,650 Envirodyne Industries, Inc. ................. 10.25 12/01/01 4,237,500
1,800 Impac Group Inc. (Series B) ................. 10.125 03/15/08 1,620,000
3,500 Packaging Resources, Inc. ................... 11.625 05/01/03 3,500,000
------------
9,357,500
------------
Diversified Electronic Products (0.3%)
2,700 High Voltage Engineering, Inc. .............. 10.50 08/15/04 2,484,000
------------
Diversified Financial Services (0.8%)
GBP 4,200 General Electric Capital Corp. (b) .......... 6.625 03/16/01 6,906,887
------------
Diversified Manufacturing (0.5%)
$ 1,800 Eagle-Picher Industries, Inc. ............... 9.375 03/01/08 1,530,000
2,588 Jordan Industries, Inc. (Series B) .......... 11.75++ 04/01/09 1,682,200
1,800 Jordan Industries, Inc. ..................... 10.375 08/01/07 1,656,000
------------
4,868,200
------------
Electronic Distributors (0.1%)
5,600 CHS Electronics, Inc. ....................... 9.875 04/15/05 448,000
------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

39
<PAGE>

Morgan Stanley Dean Witter Diversified Income Trust
Portfolio of Investments October 31, 1999, continued

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Food Chains (0.8%)
$ 2,250 Big V Supermarkets, Inc.
(Series B) ........................... 11.00 % 02/15/04 $ 2,266,875
1,000 Eagle Food Centers, Inc. ............... 8.625 04/15/00 900,000
5,000 Pueblo Xtra International, Inc.
(Series C) ........................... 9.50 08/01/03 3,750,000
------------
6,916,875
------------
Food Distributors (0.4%)
2,700 Fleming Companies, Inc. (Series B)...... 10.625 07/31/07 2,416,500
1,800 Volume Services of America Inc. ........ 11.25 03/01/09 1,773,000
------------
4,189,500
------------
Hotels/Resorts (0.8%)
2,700 Epic Resorts LLC (Series B) ............ 13.00 06/15/05 2,295,000
6,231 Motels of America, Inc. (Series B)...... 12.00 04/15/04 2,617,020
3,904 Resort At Summerlin .................... 13.00 12/15/07 2,733,003
------------
7,645,023
------------
Industrial Specialties (0.6%)
3,200 International Wire Group, Inc.
(Series B) ........................... 11.75 06/01/05 3,288,000
2,250 Outsourcing Services Group, Inc.
(Series B) ........................... 10.875 03/01/06 1,980,000
------------
5,268,000
------------
Major Banks (0.2%)
GBP 1,000 Morgan Guaranty Trust Corp. ............ 7.375 12/28/01 1,642,913
------------
Media Conglomerates (1.1%)
$ 9,800 Walt Disney Co. ........................ 13.50 03/10/00 10,065,482
------------
Medical Specialties (0.6%)
5,100 Mediq Inc./PRN Life Support
Services Inc. ........................ 11.00 06/01/08 1,683,000
5,400 Universal Hospital Services, Inc. ...... 10.25 03/01/08 3,780,000
------------
5,463,000
------------
Medical/Nursing Services (0.4%)
5,250 Pediatric Services of America, Inc.
(Series A) ........................... 10.00 04/15/08 3,255,000
------------
Military/Gov't/Technical (0.2%)
1,800 Loral Space & Communications
Ltd. ................................. 9.50 01/15/06 1,440,000
------------
Office Equipment/Supplies (0.4%)
4,230 Mosler, Inc. ........................... 11.00 04/15/03 3,341,700
------------
Oil Refining/Marketing (0.1%)
6,700 Transamerican Refining
Corp. (a) (c) ........................ 16.00 06/30/03 938,000
------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

40
<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
Portfolio of Investments October 31, 1999, continued

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Other Telecommunications (3.9%)
$ 6,500 Birch Telecom Inc. ........................ 14.00 % 06/15/08 $ 6,435,000
3,000 DTI Holdings Inc. (Series B) .............. 12.50++ 03/01/08 1,080,000
6,400 Facilicom International, Inc.
(Series B) .............................. 10.50 01/15/08 5,760,000
16,300 Firstworld Communications, Inc. ........... 13.00++ 04/15/08 8,313,000
28,500 In-Flight Phone Corp.
(Series B) (a) (c) ...................... 14.00 05/15/02 3,135,000
2,700 Pac-West Telecommunications
Group, Inc. ............................. 13.50 02/01/09 2,747,250
3,500 Primus Telecommunications Group,
Inc. .................................... 11.75 08/01/04 3,430,000
2,700 Primus Telecommunications Group,
Inc. .................................... 9.875 05/15/08 2,376,000
1,800 Viatel, Inc. .............................. 11.25 04/15/08 1,710,000
------------
34,986,250
------------
Package Goods/Cosmetics (0.3%)
2,500 J.B. Williams Holdings, Inc. .............. 12.00 03/01/04 2,500,000
------------
Printing/Forms (0.3%)
2,700 Premier Graphics Inc. ..................... 11.50 12/01/05 2,457,000
------------
Restaurants (2.3%)
48,756 American Restaurant Group
Holdings, Inc. - 144A* (d) .............. 0.00 12/15/05 16,577,006
5,200 FRD Acquisition Corp. (Series B) .......... 12.50 07/15/04 2,964,000
1,800 Friendly Ice Cream Corp. .................. 10.50 12/01/07 1,530,000
------------
21,071,006
------------
Retail - Specialty (0.2%)
1,800 Pantry, Inc. .............................. 10.25 10/15/07 1,728,000
------------
Services to the Health Industry (0.2%)
1,800 Unilab Corp. .............................. 11.00 04/01/06 2,007,000
------------
Specialty Foods/Candy (0.7%)
44,552 SFAC New Holdings Inc. (d) ................ 13.00++ 06/15/09 6,682,757
------------
Telecommunications (2.8%)
1,800 CapRock Communications Corp.
(Series B) .............................. 12.00 07/15/08 1,773,000
3,600 Covad Communications Group,
Inc. .................................... 12.50 02/15/09 3,528,000
5,400 e. Spire Communications, Inc. ............. 13.75 07/15/07 4,644,000
2,700 Focal Communications Corp.
(Series B) .............................. 12.125++ 02/15/08 1,566,000
1,800 GST Equipment Funding ..................... 13.25 05/01/07 1,800,000
1,800 Hyperion Telecommunication, Inc.
(Series B) .............................. 12.25 09/01/04 1,912,500
1,800 Level 3 Communications, Inc. .............. 9.125 05/01/08 1,678,500
1,800 NextLink Communications LLC ............... 12.50 04/15/06 1,917,000
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

41
<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
Portfolio of Investments October 31, 1999, continued

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 5,400 Rhythms Netconnections - 144A*......... 12.75 % 04/15/09 $ 4,833,000
3,000 Talton Holdings, Inc. (Series B) ...... 11.00 06/30/07 2,700,000
-----------
26,352,000
-----------
Telecommunications Equipment (0.1%)
10,500 FWT, Inc. (a) (c) ..................... 9.875 11/15/07 840,000
-----------
Wireless Communications (3.6%)
11,300 Advanced Radio Telecom Corp. .......... 14.00 02/15/07 9,944,000
900 Arch Escrow Corp. ..................... 13.75 04/15/08 657,000
21,800 CellNet Data Systems Inc. ............. 14.00++ 10/01/07 4,360,000
750 Globalstar LP/Capital Corp. ........... 11.375 02/15/04 405,000
1,000 Globalstar LP/Capital Corp. ........... 10.75 11/01/04 530,000
1,850 Globalstar LP/Capital Corp. ........... 11.50 06/01/05 1,017,500
3,500 Orbcomm Global LP/Capital Corp. 14.00 08/15/04 2,870,000
4,600 Paging Network, Inc. .................. 10.125 08/01/07 1,426,000
8,300 Paging Network, Inc. .................. 10.00 10/15/08 2,573,000
5,850 USA Mobile Communications
Holdings, Inc. ...................... 14.00 11/01/04 5,177,250
3,250 Winstar Equipment Corp. ............... 12.50 03/15/04 3,347,500
-----------
32,307,250
-----------
TOTAL CORPORATE BONDS
(Identified Cost $359,780,295)..................................... 270,390,981
-----------
MORTGAGE-BACKED SECURITIES (25.5%)
Federal Home Loan Mortgage Corp. (0.3%)
1,989 ...................................... 7.00 04/01/04 1,986,937
826 ...................................... 8.00 10/01/24 843,333
-----------
2,830,270
-----------
Federal National Mortgage Assoc. (12.7%)
37,828 ...................................... 6.00 02/01/11-
11/01/28 36,108,134
35,767 ...................................... 6.50 11/01/08-
12/01/23 34,593,914
23,008 ...................................... 7.00 10/01/08-
04/01/17 22,601,969
10,199 ...................................... 7.50 12/01/22 10,218,596
3,771 ...................................... 8.00 10/01/01-
06/01/22 3,840,219
6,598 ...................................... 8.50 07/01/17 6,826,545
-----------
114,189,377
-----------
Government National Mortgage Assoc. (12.5%)
22,953 ...................................... 6.00 10/15/23 21,289,294
39,182 ...................................... 6.50 11/20/23-
05/15/24 37,407,754
25,511 ...................................... 7.00 12/15/22-
02/20/26 24,986,001
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

42
<PAGE>

Morgan Stanley Dean Witter Diversified Income Trust
Portfolio of Investments October 31, 1999, continued

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 23,837 ...................................... 7.50 % 05/15/17-
07/20/25 $23,881,679
3,935 ...................................... 8.00 08/15/22 4,019,754
1,365 ...................................... 8.50 08/15/22 1,418,819
-----------
113,003,301
-----------
TOTAL MORTGAGE-BACKED SECURITIES
(Identified Cost $234,666,947)................................... 230,022,948
-----------
U.S. GOVERNMENT AGENCIES & OBLIGATIONS (13.8%)
Federal Home Loan Banks (b) (1.5%)
5,000 ...................................... 0.00 07/02/12 1,831,400
5,000 ...................................... 6.37 09/25/07 4,892,600
5,000 ...................................... 6.385 10/23/07 4,896,550
2,000 ...................................... 5.45 01/12/09 1,816,940
-----------
13,437,490
-----------
10,000 Federal Home Loan Mortgage
Corp. (1.0%) ........................ 0.00 08/15/02 8,394,400
-----------
Federal National Mortgage Assoc. (b) (2.1%)
NZD 28,230 ...................................... 7.00 09/26/00 14,397,070
$ 6,000 Principal Strips ...................... 0.00 02/12/04-
02/01/05 4,326,610
-----------
18,723,680
-----------
13,475 Financing Corp. (1.0%) ................ 0.00 03/07/05-
04/06/06 9,175,901
-----------
3,000 Freddie Mac (0.3%) .................... 5.75 04/15/08 2,813,850
-----------
22,232 Resolution Funding Corp. (1.7%) ....... 0.00 04/15/05-
10/15/07 15,270,473
-----------
2,320 Tennessee Valley Authority (0.2%)...... 0.00 01/15/03 1,880,801
-----------
U.S. Treasury Notes (b) (6.0%)
7,500 ...................................... 5.625 02/15/06-
05/15/08 7,262,425
13,000 ...................................... 6.125 08/15/07 12,957,620
32,000 ...................................... 6.25 01/31/02 32,270,400
2,000 ...................................... 6.375 09/30/01 2,020,000
-----------
54,510,445
-----------
TOTAL U.S. GOVERNMENT AGENCIES & OBLIGATIONS
(Identified Cost $127,696,191)................................... 124,207,040
-----------
TOTAL UNITED STATES (Identified Cost $722,143,433)............... 624,620,969
-----------
TOTAL GOVERNMENT & CORPORATE BONDS
(Identified Cost $964,588,971)................................... 842,270,140
-----------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

43
<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
Portfolio of Investments October 31, 1999, continued

<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
- ----------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (e) (0.2%)
Casino/Gambling (0.0%)
10,773 Fitzgerald Gaming Corp. (Class D)* ................... $ 11
------------
Cellular Telephone (0.0%)
1 Price Communications Corp. ........................... 22
------------
Clothing/Shoe/Accessory Stores (0.0%)
1,31,596 County Seat Stores, Inc. (d) ......................... 11,795
------------

Hotels/Resorts (0.0%)
2,000 Motels of America, Inc. - 144A* ...................... 500
------------

Medical/Nursing Services (0.2%)
512,862 Raintree Healthcare Corp. (d) ........................ 1,384,727
------------

Restaurants (0.0%)
6,000 American Restaurant Group Holdings, Inc. - 144A* ..... 1,500
------------

Specialty Foods/Candy (0.0%)
2,423 SFAC New Holdings Inc. (d)* .......................... 606
198,750 Specialty Foods Acquisition Corp. - 144A* ............ 49,688
------------
50,294
------------
Textiles (0.0%)
298,462 United States Leather, Inc. (d) ...................... 373,077
------------

TOTAL COMMON STOCKS
(Identified Cost $18,740,864)......................... 1,821,926
------------
CONVERTIBLE PREFERRED STOCKS (0.2%)
Oil & Gas Production (0.0%)
1,273 XCL Ltd. + - 144A* .................................. 2,547
5,000 XCL Ltd. # (Units) + - 144A* ....................... 10,000
------------

12,547
------------
Oil Refining/Marketing (0.0%)
11,760 TCR Holding Corp. (Class B) (Non-Voting) ............. 117
6,468 TCR Holding Corp. (Class C) (Non-Voting) ............. 65
17,052 TCR Holding Corp. (Class D) (Non-Voting) ............. 171
35,280 TCR Holding Corp. (Class E) (Non-Voting) ............. 353
------------

706
------------
Restaurants (0.2%)
1,780 American Restaurant Group Holdings, Inc. (Non-Conv.)+. 1,602,000
------------

TOTAL CONVERTIBLE PREFERRED STOCKS
(Identified Cost $2,785,241).......................... 1,615,253
------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

44
<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
Portfolio of Investments October 31, 1999, continued

<TABLE>
<CAPTION>
NUMBER EXPIRATION
OF WARRANTS DATE VALUE
- -----------------------------------------------------------------------------------------

<S> <C> <C>
WARRANTS (e) (0.2%)
Aerospace (0.0%)
1,000 Sabreliner Corp. - 144A* ....................... 04/15/03 $ 10,000
------------
Broadcasting (0.0%)
4,000 UIH Australia/Pacific Inc. ..................... 05/15/06 100,000
------------
Casino/Gambling (0.0%)
68,000 Aladdin Gaming Enterprises, Inc. - 144A* ....... 03/01/10 680
------------
Cellular Telephone (0.0%)
5,300 McCaw International Ltd. - 144A* ............... 04/15/07 13,250
------------

Hotels/Resorts (0.0%)
2,700 Epic Resorts LLC/Capital - 144A* ............... 06/15/05 27
3,250 Resort At Summerlin - 144A* .................... 12/15/07 32
59
------------
Oil Refining/Marketing (0.0%)
6,700 Transamerican Refining Corp. - 144A* ........... 06/30/03 7
------------

Other Telecommunications (0.2%)
6,500 Birch Telecom Inc. - 144A* ..................... 06/15/08 357,500
15,000 DTI Holdings Inc. - 144A* ...................... 03/01/08 150
16,300 Firstworld Communications, Inc. - 144A* ........ 04/15/08 1,141,000
2,800 Versatel Telecom - 144A* (Netherlands) ......... 05/15/08 406,000
------------
1,904,650
------------
Restaurants (0.0%)
1,500 American Restaurant Group Holdings,
- 144A* ...................................... 08/15/08 15
------------
TOTAL WARRANTS
(Identified Cost $31,714)............................. 2,028,661
------------
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
- -------------- ------------ ----------
<S> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS (4.3%)
UNITED STATES
TIME DEPOSITS (f) (3.7%)
EUR 25,811 Chase Manhattan Bank ................. 2.45 % 11/03/99 27,219,884
NOK 26,605 Chase Manhattan Bank ................. 5.25 11/03/99 3,399,272
CHF 5,075 Chase Manhattan Bank ................. 1.00 11/03/99 3,335,409
----------
TOTAL TIME DEPOSITS
(Identified Cost $34,492,340)................................. 33,954,565
----------
REPURCHASE AGREEMENT (0.6%)
$ 5,097 The Bank of New York (dated
10/29/99; proceeds $5,099,029) (g)
(Identified Cost $5,096,825)........ 5.188 11/01/99 5,096,825
----------
TOTAL SHORT-TERM INVESTMENTS
(Identified Cost $39,589,165)................................. 39,051,390
----------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

45
<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
Portfolio of Investments October 31, 1999, continued

<TABLE>
<CAPTION>
VALUE
------------
<S> <C> <C>
TOTAL INVESTMENTS
(Identified Cost $1,025,735,955) (h) 98.3% $886,787,370

CASH AND OTHER ASSETS IN EXCESS OF
LIABILITIES .................... 1.7 15,090,282
----- ------------
NET ASSETS ..................... 100.0% $901,877,652
====== ============

</TABLE>

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

* Resale is restricted to qualified institutional investors.
# 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 securities.
(f) Subject to withdrawal restrictions until maturity.
(g) Collateralized by $4,360,413 U.S. Treasury Bond 8.125% due 08/15/19
valued at $5,198,762.
(h) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation is
$7,114,719 and the aggregate gross unrealized depreciation is
$146,063,304, resulting in net unrealized depreciation of $138,948,585.

SEE NOTES TO FINANCIAL STATEMENTS

46
<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
Portfolio of Investments October 31, 1999, continued

FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT OCTOBER 31, 1999:

<TABLE>
<CAPTION>
CONTRACTS IN EXCHANGE DELIVERY UNREALIZED
TO DELIVER FOR DATE APPRECIATION
- -------------------- ------------- ---------- -------------
<S> <C> <C> <C>
GBP 4,574,700 $ 7,650,271 11/26/99 $129,037
AUD 19,122,000 $12,448,422 11/29/99 278,608
EUR 14,084,351 $14,929,412 11/29/99 43,755
NZD 9,891,134 $ 5,097,495 11/29/99 85,360
NZD 30,572,032 $15,770,888 11/29/99 279,123
--------
Total unrealized appreciation ............... $815,883
========
</TABLE>

Currency Abbreviations:
- -----------------------
AUD Australian Dollar.
GBP British Pound.
DKK Danish Krone.
EUR Euro.
NZD New Zealand Dollar.
NOK Norwegian Krone.
CHF Swiss Franc.

SEE NOTES TO FINANCIAL STATEMENTS

47
<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
Financial Statements

STATEMENT OF ASSETS AND LIABILITIES
October 31, 1999

<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments in securities, at value
(identified cost $1,025,735,955)........................................ $ 886,787,370
Unrealized appreciation on open forward foreign currency contracts ....... 815,883
Cash (including $15,793 in foreign currency).............................. 19,405,341
Receivable for:
Interest .............................................................. 18,604,011
Shares of beneficial interest sold .................................... 692,513
Investments sold ...................................................... 550,000
Prepaid expenses and other assets ........................................ 80,119
--------------
TOTAL ASSETS .......................................................... 926,935,237
--------------
LIABILITIES :
Payable for:
Investments purchased ................................................. 23,232,402
Shares of beneficial interest repurchased ............................. 678,004
Plan of distribution fee .............................................. 648,710
Investment management fee ............................................. 312,375
Accrued expenses and other payables ...................................... 186,094
--------------
TOTAL LIABILITIES ..................................................... 25,057,585
--------------
NET ASSETS ............................................................ $ 901,877,652
==============
COMPOSITION OF NET ASSETS :
Paid-in-capital .......................................................... $1,066,716,329
Net unrealized depreciation .............................................. (138,213,933)
Dividends in excess of net investment income ............................. (2,194,141)
Accumulated net realized loss ............................................ (24,430,603)
--------------
NET ASSETS ............................................................ $ 901,877,652
==============
CLASS A SHARES:
Net Assets ............................................................... $21,828,073
Shares Outstanding (unlimited authorized, $.01 par value)................. 2,676,009
NET ASSET VALUE PER SHARE ............................................. $8.16
=====

MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 4.44% of net asset value) ....................... $8.52
=====

CLASS B SHARES:
Net Assets ............................................................... $859,553,262
Shares Outstanding (unlimited authorized, $.01 par value)................. 105,352,476
NET ASSET VALUE PER SHARE ............................................. $8.16
=====

CLASS C SHARES:
Net Assets ............................................................... $19,450,430
Shares Outstanding (unlimited authorized, $.01 par value)................. 2,387,310
NET ASSET VALUE PER SHARE ............................................. $8.15
=====

CLASS D SHARES:
Net Assets ............................................................... $1,045,887
Shares Outstanding (unlimited authorized, $.01 par value)................. 128,252
NET ASSET VALUE PER SHARE ............................................. $8.15
=====

</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, 1999

<TABLE>
<CAPTION>
NET INVESTMENT INCOME:
<S> <C>
INTEREST INCOME ...................................................... $ 94,077,232
------------
EXPENSES
Plan of distribution fee (Class A shares) ............................ 38,350
Plan of distribution fee (Class B shares) ............................ 8,277,812
Plan of distribution fee (Class C shares) ............................ 164,809
Investment management fee ............................................ 4,056,513
Transfer agent fees and expenses ..................................... 701,621
Custodian fees ....................................................... 273,617
Registration fees .................................................... 115,501
Shareholder reports and notices ...................................... 114,012
Professional fees .................................................... 113,437
Trustees' fees and expenses .......................................... 16,958
Other ................................................................ 20,341
------------
TOTAL EXPENSES .................................................... 13,892,971
------------
NET INVESTMENT INCOME ............................................. 80,184,261
------------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss on:
Investments ....................................................... (14,070,175)
Foreign exchange transactions ..................................... (4,382,219)
------------
NET LOSS .......................................................... (18,452,394)
------------
Net change in unrealized appreciation/depreciation on:
Investments ....................................................... (84,770,503)
Translation of forward foreign currency contracts, other assets and
liabilities denominated in foreign currencies ................... 1,394,160
------------
NET DEPRECIATION .................................................. (83,376,343)
------------
NET LOSS .......................................................... (101,828,737)
------------
NET DECREASE ......................................................... $(21,644,476)
============
</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, 1999 OCTOBER 31, 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income .................................... $ 80,184,261 $ 74,016,906
Net realized loss ........................................ (18,452,394) (8,648,510)
Net change in unrealized depreciation .................... (83,376,343) (43,833,349)
-------------- --------------
NET INCREASE (DECREASE) ............................... (21,644,476) 21,535,047
-------------- --------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Class A shares ........................................ (1,474,948) (841,473)
Class B shares ........................................ (64,975,880) (68,434,466)
Class C shares ........................................ (1,307,832) (726,141)
Class D shares ........................................ (67,347) (29,053)
Paid-in-capital:
Class A shares ........................................ (204,223) (31,733)
Class B shares ........................................ (8,996,654) (2,580,756)
Class C shares ........................................ (181,085) (27,384)
Class D shares ........................................ (9,325) (1,096)
-------------- --------------
TOTAL DIVIDENDS AND DISTRIBUTIONS ..................... (77,217,294) (72,672,102)
-------------- --------------
Net increase (decrease) from transactions in shares of
beneficial interest .................................... (54,811,256) 181,982,946
-------------- --------------
NET INCREASE (DECREASE) ............................... (153,673,026) 130,845,891
NET ASSETS:
Beginning of period ...................................... 1,055,550,678 924,704,787
-------------- --------------
END OF PERIOD
(Including dividends in excess of net investment
income of $2,194,141 and $1,230,297, respectively)..... $ 901,877,652 $1,055,550,678
============== ==============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

50
<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
Notes to Financial Statements October 31, 1999

1. ORGANIZATION AND ACCOUNTING POLICIES

Morgan Stanley Dean Witter Diversified Income Trust (the "Fund") is registered
under the Investment Company Act of 1940, as amended (the "Act"), as a
diversified, open-end management investment company. The Fund'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 converted to a multiple class share structure.

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") 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 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

<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
Notes to Financial Statements October 31, 1999, continued

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.

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

52
<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
Notes to Financial Statements October 31, 1999, continued

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 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

53
<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
Notes to Financial Statements October 31, 1999, continued

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 affiliate of the Investment Manager and Distributor, and other
selected broker-dealers for their opportunity costs in advancing such amounts,
which compensation would be in the form of a carrying charge on any unreimbursed
expenses.

In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
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 $15,033,265 at October 31, 1999.

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, 1999, the distribution fee was
accrued for Class A shares and Class C shares at the annual rate of 0.19% and
0.85%, respectively.

The Distributor has informed the Fund that for the year ended October 31, 1999,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class A shares, Class B shares and Class C shares of $9,748, $1,855,516
and $18,712 , respectively and received $59,153 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.

54
<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
Notes to Financial Statements October 31, 1999, continued

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, 1999 aggregated
$687,350,486 and $791,809,606, respectively. Included in the aforementioned are
purchases and sales of U.S. Government securities of $160,588,132 and
$226,307,765, respectively.

Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At October 31, 1999, the Fund had
transfer agent fees and expenses payable of approximately $1,000.

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, 1999 included
in Trustees' fees and expenses in the Statement of Operations amounted to
$5,065. At October 31, 1999, the Fund had an accrued pension liability of
$39,248 which is included in accrued expenses in the Statement of Assets and
Liabilities.

5. FEDERAL INCOME TAX STATUS

At October 31, 1999, the Fund had a net capital loss carryover of approximately
$24,281,000, 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>
AMOUNTS IN THOUSANDS
- -----------------------------------------------------------------------
2002 2003 2004 2005 2006 2007
- ----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$3,024 $3,677 $2,482 $7,131 $3,233 $4,734
====== ====== ====== ====== ====== ======
</TABLE>

As of October 31, 1999, 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 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
$13,322,098.

55
<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
Notes to Financial Statements October 31, 1999, 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, 1999 OCTOBER 31, 1998
-------------------------------- ----------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold ................................................ 2,848,419 $ 24,256,392 1,401,139 $ 13,091,543
Reinvestment of dividends and distributions ......... 65,553 563,411 27,410 253,604
Redeemed ............................................ (1,917,929) (16,068,227) (270,021) (2,522,912)
---------- -------------- --------- --------------
Net increase - Class A .............................. 996,043 8,751,576 1,158,528 10,822,235
---------- -------------- --------- --------------
CLASS B SHARES
Sold ................................................ 46,504,109 405,026,436 62,883,534 586,332,969
Reinvestment of dividends and distributions ......... 3,786,566 32,666,180 3,352,666 31,127,964
Redeemed ............................................ (58,638,989) (507,410,583) (49,343,181) (459,483,799)
----------- -------------- ----------- --------------
Net increase (decrease) - Class B ................... (8,348,314) (69,717,967) 16,893,019 157,977,134
----------- -------------- ----------- --------------
CLASS C SHARES
Sold ................................................ 1,432,185 12,480,926 1,498,137 13,967,448
Reinvestment of dividends and distributions ......... 94,887 815,013 46,283 427,613
Redeemed ............................................ (880,512) (7,540,173) (202,794) (1,873,959)
----------- -------------- ----------- --------------
Net increase - Class C .............................. 646,560 5,755,766 1,341,626 12,521,102
----------- -------------- ----------- --------------
CLASS D SHARES
Sold ................................................ 82,581 708,190 76,565 707,582
Reinvestment of dividends and distributions ......... 5,374 46,101 1,631 15,003
Redeemed ............................................ (41,881) (354,922) (6,535) (60,110)
----------- -------------- ----------- --------------
Net increase - Class D .............................. 46,074 399,369 71,661 662,475
----------- -------------- ----------- --------------
Net increase (decrease) in Fund ..................... (6,659,637) $ (54,811,256) 19,464,834 $ 181,982,946
=========== ============== =========== ==============
</TABLE>

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, 1999, 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, 1999, 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 PERIOD
FOR THE YEAR FOR THE YEAR JULY 28, 1997*
ENDED ENDED THROUGH
OCTOBER 31, 1999 OCTOBER 31, 1998 OCTOBER 31, 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS A SHARES#
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $ 9.01 $ 9.46 $ 9.40
------- ------- -------
Income (loss) from investment operations:
Net investment income ................................. 0.74 0.74 0.22
Net realized and unrealized gain (loss) ............... (0.87) (0.46) 0.04
------- ------- -------
Total income (loss) from investment operations ......... (0.13) 0.28 0.26
------- ------- -------
Less dividends and distributions from:
Net investment income ................................. (0.63) (0.70) (0.20)
Paid-in-capital ....................................... (0.09) (0.03) -
------- ------- -------
Total dividends and distributions ...................... (0.72) (0.73) (0.20)
------- ------- -------
Net asset value, end of period ......................... $ 8.16 $ 9.01 $ 9.46
======= ======= =======
TOTAL RETURN + ......................................... (1.61)% 2.86% 2.74%(1)

RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 0.72 %(3) 0.77%(3) 0.85%(2)
Net investment income .................................. 8.56 %(3) 7.94%(3) 8.98%(2)

SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $21,828 $15,130 $4,933
Portfolio turnover rate ................................ 71 % 130% 104%
</TABLE>

- -------------
* The date shares were first issued.
# 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) 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 YEAR ENDED OCTOBER 31
-----------------------------------------------------------------------
1999# 1998# 1997*# 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period ............. $ 9.01 $ 9.46 $ 9.78 $ 9.62 $ 9.37
------- ------- ------- ------- -------
Income (loss) from investment operations:
Net investment income ........................... 0.68 0.68 0.74 0.78 0.77
Net realized and unrealized gain (loss) ......... (0.87) (0.46) (0.15) 0.10 0.20
------- ------- ------- ------- -------
Total income (loss) from investment operations ... (0.19) 0.22 0.59 0.88 0.97
------- ------- ------- ------- -------
Less dividends and distributions from:
Net investment income ........................... (0.58) (0.65) (0.91) (0.72) (0.72)
Paid-in-capital ................................. (0.08) (0.02) -- -- --
------- ------- ------- ------- -------
Total dividends and distributions ................ (0.66) (0.67) (0.91) (0.72) (0.72)
------- ------- ------- ------- -------
Net asset value, end of period ................... $ 8.16 $ 9.01 $ 9.46 $ 9.78 $ 9.62
======= ======= ======= ======= =======
TOTAL RETURN + ................................... (2.14)% 2.23% 6.46% 9.49% 10.76%
RATIOS TO AVERAGE NET ASSETS:
Expenses ......................................... 1.38 %(1) 1.38%(1) 1.40% 1.42% 1.44%
Net investment income ............................ 7.90 %(1) 7.33%(1) 7.90% 8.38% 8.30%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands .......... $859,553 $1,024,021 $915,899 $745,581 $542,544
Portfolio turnover rate .......................... 71 % 130% 104% 82% 87%

</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

59
<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
Financial Highlights, continued

<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FOR THE YEAR JULY 28, 1997*
ENDED ENDED THROUGH
OCTOBER 31, 1999 OCTOBER 31, 1998 OCTOBER 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS C SHARES#
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $ 9.00 $ 9.45 $ 9.40
------- ------- -------
Income (loss) from investment operations:
Net investment income ................................. 0.68 0.68 0.20
Net realized and unrealized gain (loss) ............... (0.87) (0.46) 0.04
------- ------- -------
Total income (loss) from investment operations ......... (0.19) 0.22 0.24
------- ------- -------
Less dividends and distributions from:
Net investment income ................................. (0.58) (0.65) (0.19)
Paid-in-capital ....................................... (0.08) (0.02) --
------- ------- -------
Total dividends and distributions ...................... (0.66) (0.67) (0.19)
------- ------- -------
Net asset value, end of period ......................... $ 8.15 $ 9.00 $ 9.45
======= ======= =======
TOTAL RETURN + ......................................... (2.25)% 2.26% 2.52%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 1.38 %(3) 1.38%(3) 1.44%(2)
Net investment income .................................. 7.90 %(3) 7.33%(3) 8.17%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $19,450 $15,659 $3,773
Portfolio turnover rate ................................ 71 % 130% 104%
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

60
<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
Financial Highlights, continued

<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FOR THE YEAR JULY 28, 1997*
ENDED ENDED THROUGH
OCTOBER 31, 1999 OCTOBER 31, 1998 OCTOBER 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS D SHARES#
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $ 9.00 $ 9.45 $ 9.40
------- -------- --------
Income (loss) from investment operations:
Net investment income ................................. 0.76 0.76 0.23
Net realized and unrealized gain (loss) ............... (0.88) (0.46) 0.02
------- -------- --------
Total income (loss) from investment operations ......... (0.12) 0.30 0.25
------- -------- --------
Less dividends and distributions from:
Net investment income ................................. (0.64) (0.72) (0.20)
Paid-in-capital ....................................... (0.09) (0.03) -
------- -------- --------
Total dividends and distributions ...................... (0.73) (0.75) (0.20)
------- -------- --------
Net asset value, end of period ......................... $ 8.15 $ 9.00 $ 9.45
======= ======== ========
TOTAL RETURN + ......................................... (1.42)% 3.21% 2.69%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 0.53 %(3) 0.53%(3) 0.59%(2)
Net investment income .................................. 8.75 %(3) 8.18%(3) 9.26%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $1,046 $740 $99
Portfolio turnover rate ................................ 71 % 130% 104%
</TABLE>

- -------------
* The date shares were first issued.
# The per share amounts were computed using an average number of shares
outstanding during the period.
+ Calculated based on the net asset value as of the last business day of 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

61
<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") at October 31, 1999, 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 indicated, 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, 1999 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 20, 1999

<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST

PART C OTHER INFORMATION

Item 23 Exhibits
- ------- ----------------------------------------------------------------------
1(a). Declaration of Trust of the Registrant, dated December 18, 1991, is
incorporated by reference to Exhibit 1 of Post-Effective Amendment No.
4 to the Registration Statement on Form N-1A, filed on January 25,
1996.

1(b). Instrument Establishing and Designating Additional Classes, dated July
28, 1997, is incorporated by reference to Exhibit 1 of Post-Effective
Amendment No. 6 to the Registration Statement on Form N-1A, filed on
July 14, 1997.

1(c). Amendment to the Declaration of Trust of the Registrant, dated June 22,
1998, is incorporated by reference to Exhibit 1 of Post-Effective
Amendment No. 8 to the Registration Statement on Form N-1A, filed on
December 28, 1998.

2. Amended and Restated By-Laws of the Registrant, dated May 1, 1999,
filed herein.

3. Not Applicable.

4. Amended Investment Management Agreement between the Registrant and
Morgan Stanley Dean Witter Advisors Inc., dated April 30, 1998, is
incorporated by reference to Exhibit 5 of Post-Effective Amendment No.
8 to the Registration Statement on Form N-1A, filed on December 28,
1998.

5(a). Amended Distribution Agreement, dated June 22, 1998, is
incorporated by reference to Exhibit 6(a) of Post-Effective Amendment
No. 8 to the Registration Statement on Form N-1A, filed on December 28,
1998.

5(b). Selected Dealers Agreement between Morgan Stanley Dean Witter
Distributors Inc. and the Registrant, is incorporated by reference to
Exhibit 6(b) of Post-Effective Amendment No. 2 to the Registration
Statement on Form N-1A, filed on December 30, 1993.

5(c). Omnibus Selected Dealer Agreement between Morgan Stanley Dean Witter
Distributors Inc. and National Financial Services Corporation, dated
October 17, 1998, is incorporated by reference to Exhibit 6(b) of
Post-Effective Amendment No. 8 to the Registration Statement on Form
N-1A, filed on December 28, 1998.

6. Second Amended and Restated Retirement Plan for Non-Interested
Directors or Trustees, dated May 8, 1997, filed herein.

7(a). Custody Agreement between The Bank of New York and the Registrant is
incorporated by reference to Exhibit 8 of Post-Effective Amendment No.
4 to the Registration Statement on Form N-1A, filed on January 25,
1996.

1
<PAGE>

7(b). Amendment to the Custody Agreement between The Bank of New York and the
Registrant is incorporated by reference to Exhibit 8 of Post-Effective
Amendment No. 5 to the Registration Statement on Form N-1A, filed on
December 24, 1996.

8(a). Amended and Restated Transfer Agency and Service Agreement is
incorporated by reference to Exhibit 8 of Post-Effective Amendment No.
8 to the Registration Statement on Form N-1A, filed on December 28,
1998.

8(b). Amended Services Agreement, dated June 22, 1998, is incorporated by
reference to Exhibit 9 of Post-Effective Amendment No. 8 to the
Registration Statement on Form N-1A, filed on December 28, 1998.

9. Opinion of Sheldon Curtis, Esq., dated February 27, 1992, is
incorporated by reference to Exhibit 10 of Post-Effective Amendment No.
1 to the Registration Statement on Form N-1A, filed on February 28,
1992, and is filed herein.

10. Consent of Independent Accountants, filed herein.

11. Not Applicable.

12. Not Applicable.

13. Amended and Restated Plan of Distribution pursuant to Rule 12b-1, dated
July 28, 1997, is incorporated by reference to Exhibit 15 of
Post-Effective Amendment No. 6 to the Registration Statement on Form
N-1A, filed on July 14, 1997.

14. Amended Multi-Class Plan pursuant to Rule 18f-3, dated June 22, 1998,
is incorporated by reference to Exhibit 18 of Post-Effective Amendment
No. 8 to the Registration Statement on Form N-1A, filed on December 28,
1998.

Other Powers of Attorney are incorporated by reference to Exhibit (Other) of
Post-Effective Amendment No. 3 to the Registration Statement on Form
N-1A, filed on December 22, 1994, and in the case of Wayne E. Hedien,
is incorporated by reference to Exhibit (Other) of Post-Effective
Amendment No. 7 to the Registration Statement on Form N-1A, filed on
February 6, 1998.

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

2
<PAGE>

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 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 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
<PAGE>

(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
(5) Morgan Stanley Dean Witter 21st Century Trend Fund
(6) Morgan Stanley Dean Witter Aggressive Equity Fund
(7) Morgan Stanley Dean Witter American Opportunities Fund
(8) Morgan Stanley Dean Witter Balanced Growth Fund
(9) Morgan Stanley Dean Witter Balanced Income Fund
(10) Morgan Stanley Dean Witter California Tax-Free Daily Income Trust
(11) Morgan Stanley Dean Witter California Tax-Free Income Fund
(12) Morgan Stanley Dean Witter Capital Growth Securities
(13) Morgan Stanley Dean Witter Competitive Edge Fund, "Best Ideas Portfolio"
(14) Morgan Stanley Dean Witter Convertible Securities Trust
(15) Morgan Stanley Dean Witter Developing Growth Securities Trust
(16) Morgan Stanley Dean Witter Diversified Income Trust
(17) Morgan Stanley Dean Witter Dividend Growth Securities Inc.
(18) Morgan Stanley Dean Witter Equity Fund
(19) Morgan Stanley Dean Witter European Growth Fund Inc.
(20) Morgan Stanley Dean Witter Federal Securities Trust
(21) Morgan Stanley Dean Witter Financial Services Trust
(22) Morgan Stanley Dean Witter Fund of Funds
(23) Morgan Stanley Dean Witter Global Dividend Growth Securities
(24) Morgan Stanley Dean Witter Global Utilities Fund
(25) Morgan Stanley Dean Witter Growth Fund
(26) Morgan Stanley Dean Witter Hawaii Municipal Trust
(27) Morgan Stanley Dean Witter Health Sciences Trust

4
<PAGE>

(28) Morgan Stanley Dean Witter High Yield Securities Inc.
(29) Morgan Stanley Dean Witter Income Builder Fund
(30) Morgan Stanley Dean Witter Information Fund
(31) Morgan Stanley Dean Witter Intermediate Income Securities
(32) Morgan Stanley Dean Witter International Fund
(33) Morgan Stanley Dean Witter International SmallCap Fund
(34) Morgan Stanley Dean Witter Japan Fund
(35) Morgan Stanley Dean Witter Latin American Growth Fund
(36) Morgan Stanley Dean Witter Limited Term Municipal Trust
(37) Morgan Stanley Dean Witter Liquid Asset Fund Inc.
(38) Morgan Stanley Dean Witter Market Leader Trust
(39) Morgan Stanley Dean Witter Mid-Cap Dividend Growth Securities
(40) Morgan Stanley Dean Witter Mid-Cap Equity Trust
(41) Morgan Stanley Dean Witter Multi-State Municipal Series Trust
(42) Morgan Stanley Dean Witter Natural Resource Development Securities Inc.
(43) Morgan Stanley Dean Witter New York Municipal Money Market Trust
(44) Morgan Stanley Dean Witter New York Tax-Free Income Fund
(45) Morgan Stanley Dean Witter Next Generation Trust
(46) Morgan Stanley Dean Witter North American Government Income Trust
(47) Morgan Stanley Dean Witter Pacific Growth Fund Inc.
(48) Morgan Stanley Dean Witter Real Estate Fund
(49) Morgan Stanley Dean Witter S&P 500 Index Fund
(50) Morgan Stanley Dean Witter S&P 500 Select Fund
(51) Morgan Stanley Dean Witter Select Dimensions Investment Series
(52) Morgan Stanley Dean Witter Select Municipal Reinvestment Fund
(53) Morgan Stanley Dean Witter Short-Term Bond Fund
(54) Morgan Stanley Dean Witter Short-Term U.S. Treasury Trust
(55) Morgan Stanley Dean Witter Small Cap Growth Fund
(56) Morgan Stanley Dean Witter Special Value Fund
(57) Morgan Stanley Dean Witter Strategist Fund
(58) Morgan Stanley Dean Witter Tax-Exempt Securities Trust
(59) Morgan Stanley Dean Witter Tax-Free Daily Income Trust
(60) Morgan Stanley Dean Witter Total Market Index Fund
(61) Morgan Stanley Dean Witter Total Return Trust
(62) Morgan Stanley Dean Witter U.S. Government Money Market Trust
(63) Morgan Stanley Dean Witter U.S. Government Securities Trust
(64) Morgan Stanley Dean Witter Utilities Fund
(65) Morgan Stanley Dean Witter Value-Added Market Series
(66) Morgan Stanley Dean Witter Value Fund
(67) Morgan Stanley Dean Witter Variable Investment Series
(68) Morgan Stanley Dean Witter World Wide Income Trust

5
<PAGE>

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 Management of Morgan Stanley Dean Witter & Co.
Executive Officer and ("MSDW); Chairman, Chief Executive Officer and
Director 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");
President of the Morgan Stanley Dean Witter Funds;
Executive Vice President and Director of Dean Witter
Reynolds Inc. ("DWR"); Director of various MSDW
subsidiaries; Trustee of various Van Kampen
investment companies.

Barry Fink Assistant Secretary of DWR; Executive Vice President,
Executive Vice President, Secretary, General Counsel and Director of MSDW
Secretary, General Services; Executive Vice President, Assistant
and Counsel and Director Secretary Assistant General Counsel of MSDW
Distributors; Vice President, Secretary and General
Counsel of the Morgan Stanley Dean Witter Funds.

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

Ronald E. Robison President MSDW Trust; Executive Vice President, Chief
Executive Vice President, Administrative Officer and Director of MSDW Services;
Chief Administrative Vice President of the Morgan Stanley Dean Witter
Officer and Director Funds.

Edward C. Oelsner, III
Executive Vice President

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

Peter M. Avelar Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
and Director of the High
Yield Group

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

Douglas Brown
Senior Vice President

6
<PAGE>

Rosalie Clough
Senior Vice President
and Director of Marketing

Richard Felegy
Senior Vice President

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

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

Rajesh K. Gupta Vice President of various Morgan Stanley Dean Witter
Senior Vice President, Funds.
Director of the Taxable
Fixed Income Group and
Chief Administrative Officer -
Investments

Kenton J. Hinchliffe Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.

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

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

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

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

Anita H. Kolleeny Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
and Director of Sector
Rotation

Jonathan R. Page Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
and Director of the
Money Market Group

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

7
<PAGE>

Guy G. Rutherfurd, Jr. Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
and Director of the Growth
Group

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

James Solloway
Senior Vice President

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

Paul D. Vance Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
and Director of the Growth
and Income Group

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

James F. Willison Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
and Director of the
Tax-Exempt Fixed
Income Group

Raymond A. Basile
First Vice President

Thomas F. Caloia First Vice President and Assistant Treasurer of MSDW
First Vice President Services; Assistant Treasurer of MSDW Distributors;
and Assistant Treasurer and Chief Financial and Accounting
Treasurer Treasurer Officer of the Morgan Stanley Dean Witter
Funds.

Thomas Chronert
First Vice President

Marilyn K. Cranney Assistant Secretary of DWR; First Vice President and
First Vice President Assistant Secretary of MSDW Services; Assistant
and Assistant Secretary Secretary of MSDW Distributors and the Morgan
Stanley Dean Witter Funds.

8
<PAGE>

Salvatore DeSteno First Vice President of MSDW Services.
First Vice President

Peter W. Gurman
First Vice President

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

David Johnson
First Vice President

Stanley Kapica
First Vice President

Douglas J. Ketterer
First Vice President

Todd Lebo First Vice President and Assistant Secretary of MSDW
First Vice President and Services; Assistant Secretary of MSDW Distributors and
Assistant Secretary the Morgan Stanley Dean Witter Funds.

Lou Anne D. McInnis First Vice President and Assistant Secretary of MSDW
First Vice President and Services; Assistant Secretary of MSDW Distributors and
Assistant Secretary the Morgan Stanley Dean Witter Funds.

Carsten Otto First Vice President and Assistant Secretary of MSDW
First Vice President Services; Assistant Secretary of MSDW Distributors and
and Assistant Secretary the Morgan Stanley Dean Witter Funds.

Carl F. Sadler
First Vice President

Ruth Rossi First Vice President and Assistant Secretary of MSDW
First Vice President and Services; Assistant Secretary of MSDW Distributors and
Assistant Secretary the Morgan Stanley Dean Witter Funds.

James P. Wallin
First Vice President

Robert Abreu
Vice President

Dale Albright
Vice President

9
<PAGE>

Joan G. Allman
Vice President

Andrew Arbenz
Vice President

Armon Bar-Tur Vice President of various Morgan Stanley Dean Witter
Vice President Funds.

Nancy Belza
Vice President

Maurice Bendrihem
Vice President and
Assistant Controller

Thomas A. Bergeron
Vice President

Philip Bernstein
Vice President

Dale Boettcher
Vice President

Michelina Calandrella
Vice President

Ronald Caldwell
Vice President

Joseph Cardwell
Vice President

Liam Carroll
Vice President

Philip Casparius
Vice President

Annette Celenza
Vice President

Aaron Clark
Vice President

10
<PAGE>

William Connerly
Vice President

Michael J. Davey
Vice President

David Dineen
Vice President

Glen H. Frey
Vice President

Jeffrey D. Geffen
Vice President

Sandra Gelpieryn
Vice President

Charmaine George
Vice President

Michael Geringer
Vice President

Gail Gerrity-Burke
Vice President

Peter Gewirtz
Vice President

Ellen Gold
Vice President

Stephen Greenhut
Vice President

Trey Hancock
Vice President

Laury A. Haskamp
Vice President

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

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

11
<PAGE>

David T. Hoffman
Vice President

Thomas G. Hudson II
Vice President

Kevin Jung Vice President of various Morgan Stanley Dean Witter
Vice President Funds.

Carol Espejo-Kane
Vice President

Nancy Karole-Kennedy
Vice President

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

Kimberly LaHart
Vice President

Thomas Lawlor
Vice President

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

Cameron J. Livingstone
Vice President

Nancy Login
Vice President

Sharon Loguercio
Vice President

Steven MacNamara
Vice President

Catherine Maniscalco Vice President of various Morgan Stanley Dean Witter
Vice President Funds.

Peter R. McDowell
Vice President

Albert McGarity
Vice President

12
<PAGE>

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

Mark Mitchell
Vice President

Julie Morrone Vice President of various Morgan Stanley Dean Witter
Vice President Funds.

Mary Beth Mueller
Vice President

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

James Nash
Vice President

Richard Norris
Vice President

Hilary A. O'Neill
Vice President

Anne Pickrell
Vice President

Frances Roman
Vice President

Dawn Rorke
Vice President

John Roscoe Vice President of Morgan Stanley Dean Witter
Vice President Real Estate Fund.

Hugh Rose
Vice President

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

Sally Sancimino
Vice President

Deborah Santaniello
Vice President

13
<PAGE>

Patrice Saunders
Vice President

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

Alison M. Sharkey
Vice President

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

Ronald B. Silvestri
Vice President

Robert Stearns
Vice President

Naomi Stein
Vice President

Michael Strayhorn
Vice President

Marybeth Swisher
Vice President

Michael Thayer
Vice President

Robert Vanden Assem
Vice President

David Walsh
Vice President

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

John Wong
Vice President

The principal address of MSDW Advisors, MSDW Services, MSDW
Distributors, DWR, and the Morgan Stanley Dean Witter Funds is Two World Trade
Center, New York, New York 10048. The principal address of MSDW is 1585
Broadway, New York, New York 10036. The principal address of MSDW Trust is 2
Harborside Financial Center, Jersey City, New Jersey 07311.

14
<PAGE>

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 21st Century Trend Fund
(6) Morgan Stanley Dean Witter Aggressive Equity Fund
(7) Morgan Stanley Dean Witter American Opportunities Fund
(8) Morgan Stanley Dean Witter Balanced Growth Fund
(9) Morgan Stanley Dean Witter Balanced Income Fund
(10) Morgan Stanley Dean Witter California Tax-Free Daily Income Trust
(11) Morgan Stanley Dean Witter California Tax-Free Income Fund
(12) Morgan Stanley Dean Witter Capital Growth Securities
(13) Morgan Stanley Dean Witter Competitive Edge Fund, "Best Ideas Portfolio"
(14) Morgan Stanley Dean Witter Convertible Securities Trust
(15) Morgan Stanley Dean Witter Developing Growth Securities Trust
(16) Morgan Stanley Dean Witter Diversified Income Trust
(17) Morgan Stanley Dean Witter Dividend Growth Securities Inc.
(18) Morgan Stanley Dean Witter Equity Fund
(19) Morgan Stanley Dean Witter European Growth Fund Inc.
(20) Morgan Stanley Dean Witter Federal Securities Trust
(21) Morgan Stanley Dean Witter Financial Services Trust
(22) Morgan Stanley Dean Witter Fund of Funds
(23) Morgan Stanley Dean Witter Global Dividend Growth Securities
(24) Morgan Stanley Dean Witter Global Utilities Fund
(25) Morgan Stanley Dean Witter Growth Fund
(26) Morgan Stanley Dean Witter Hawaii Municipal Trust
(27) Morgan Stanley Dean Witter Health Sciences Trust
(28) Morgan Stanley Dean Witter High Yield Securities Inc.
(29) Morgan Stanley Dean Witter Income Builder Fund
(30) Morgan Stanley Dean Witter Information Fund
(31) Morgan Stanley Dean Witter Intermediate Income Securities
(32) Morgan Stanley Dean Witter International Fund
(33) Morgan Stanley Dean Witter International SmallCap Fund
(34) Morgan Stanley Dean Witter Japan Fund
(35) Morgan Stanley Dean Witter Latin American Growth Fund
(36) Morgan Stanley Dean Witter Limited Term Municipal Trust
(37) Morgan Stanley Dean Witter Liquid Asset Fund Inc.
(38) Morgan Stanley Dean Witter Market Leader Trust
(39) Morgan Stanley Dean Witter Mid-Cap Dividend Growth Securities
(40) Morgan Stanley Dean Witter Mid-Cap Equity Trust
(41) Morgan Stanley Dean Witter Multi-State Municipal Series Trust
(42) Morgan Stanley Dean Witter Natural Resource Development Securities Inc.
(43) Morgan Stanley Dean Witter New York Municipal Money Market Trust
(44) Morgan Stanley Dean Witter New York Tax-Free Income Fund
(45) Morgan Stanley Dean Witter Next Generation Trust

15
<PAGE>

(46) Morgan Stanley Dean Witter North American Government Income Trust
(47) Morgan Stanley Dean Witter Pacific Growth Fund Inc.
(48) Morgan Stanley Dean Witter Prime Income Trust
(49) Morgan Stanley Dean Witter Real Estate Fund
(50) Morgan Stanley Dean Witter S&P 500 Index Fund
(51) Morgan Stanley Dean Witter S&P 500 Select Fund
(52) Morgan Stanley Dean Witter Short-Term Bond Fund
(53) Morgan Stanley Dean Witter Short-Term U.S. Treasury Trust
(54) Morgan Stanley Dean Witter Small Cap Growth Fund
(55) Morgan Stanley Dean Witter Special Value Fund
(56) Morgan Stanley Dean Witter Strategist Fund
(57) Morgan Stanley Dean Witter Tax-Exempt Securities Trust
(58) Morgan Stanley Dean Witter Tax-Free Daily Income Trust
(59) Morgan Stanley Dean Witter Total Market Index Fund
(60) Morgan Stanley Dean Witter Total Return Trust
(61) Morgan Stanley Dean Witter U.S. Government Money Market Trust
(62) Morgan Stanley Dean Witter U.S. Government Securities Trust
(63) Morgan Stanley Dean Witter Utilities Fund
(64) Morgan Stanley Dean Witter Value-Added Market Series
(65) Morgan Stanley Dean Witter Value Fund
(66) Morgan Stanley Dean Witter Variable Investment Series
(67) Morgan Stanley Dean Witter World Wide Income 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
- ---- -------------------------------------------

Michael T. Gregg Vice President and Assistant Secretary.

James F. Higgins Director

Philip J. Purcell Director

John Schaeffer Director

Charles Vadala 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.

16
<PAGE>

Item 30. Undertakings

Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.

<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 31st day of January, 2000.

MORGAN STANLEY DEAN WITTER
DIVERSIFIED INCOME TRUST

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

Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 10 has been signed below by the following persons
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
(1) Principal Executive Officer Chairman, Chief Executive Officer
and Trustee

By: /s/ Charles A. Fiumefreddo 01/31/00
----------------------------------
Charles A. Fiumefreddo

(2) Principal Financial Officer Treasurer and Principal
Accounting Officer

By: /s/ Thomas F. Caloia 01/31/00
----------------------------------
Thomas F. Caloia

(3) Majority of the Trustees

Charles A. Fiumefreddo (Chairman)
Philip J. Purcell

By: /s/ Barry Fink 01/31/00
----------------------------------
Barry Fink
Attorney-in-Fact

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

By: /s/ David M. Butowsky 01/31/00
----------------------------------
David M. Butowsky
Attorney-in-Fact
</TABLE>

<PAGE>

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST

EXHIBIT INDEX

2. Amended and Restated By-Laws of the Registrant, dated May 1,
1999.

6. Second Amended and Restated Retirement Plan for Non-Interested
Directors or Trustees, dated May 8, 1997.

9. Opinion of Sheldon Curtis, Esq., dated February 27, 1992.

10. Consent of Independent Accountants.

<PAGE>
BY-LAWS

MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
AMENDED AND RESTATED AS OF MAY 1, 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.

<PAGE>
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

2
<PAGE>
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.

3
<PAGE>
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.

4
<PAGE>
(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

5
<PAGE>
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,

6
<PAGE>
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 or her 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 Chairman 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 or her 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 Chairman to the
extent provided by the Trustees with respect to officers appointed by the
Chairman.

SECTION 6.5. Powers 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 such third
party has knowledge thereof.

SECTION 6.6. The Chairman. The Chairman shall be the chief executive
officer of the Trust, shall preside at all meetings of the Shareholders and
of the Trustees, 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 the President or to one or more Vice Presidents such of his or
her powers and duties at such times and in such manner as he or she may deem
advisable, shall be a signatory on all Annual and Semi-Annual Reports as may
be sent to Shareholders, and shall perform such other duties as the Trustees
may from time to time prescribe.

SECTION 6.7. The President. The President shall perform such duties as the
Trustees and the Chairman may from time to time prescribe and shall, in the
absence or disability of the Chairman, exercise the powers and perform the
duties of the Chairman. The President shall be authorized to delegate to one
or more Vice Presidents such of his or her powers and duties at such times
and in such manner as he or she may deem advisable.

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 shall be more than one, the
Vice Presidents in such order as may be determined from time to time by the
Trustees or the Chairman, shall, in the absence or disability of the
President, exercise the powers and perform the duties of the President, and
shall perform such other duties as the Trustees or the Chairman may from time
to time prescribe.

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

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 or she 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
Chairman may from time to time prescribe. He or she 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 or her 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 shall be more than one, the Assistant Secretaries in such order as may
be determined from time to time by the Trustees or the Chairman, 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 Chairman may from time to time prescribe.

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

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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.

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.

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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.

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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.

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SECOND AMENDED AND RESTATED
RETIREMENT PLAN FOR
NON-INTERESTED TRUSTEES
OR DIRECTORS

Certain of the investment companies for which Morgan Stanley Dean Witter
Advisors Inc. ("MSDW Advisors") currently acts as manager or adviser adopted
a Retirement Plan for Non-Interested Trustees and Directors (the "Original
Plan") on February 21, 1991 (the "Commencement Date"). The Original Plan was
amended and restated on October 22, 1993, effective January 1, 1994 and
further amended by First Amendment dated December 19, 1995 and by Second
Amendment dated May 8, 1997. The participating Funds now desire to amend and
restate the Plan further as provided herein effective as of the Commencement
Date (as so amended, the "Plan"), for the purposes of expanding the
flexibility of Non-Interested Trustees and Directors to make and change their
elections of benefits.

1. DEFINITIONS

(a) "Independent Board Member" shall mean (i) a Trustee of an Adopting
Fund if the Adopting Fund is organized as a Massachusetts business trust,
(ii) a Director of an Adopting Fund if the Adopting Fund is organized as a
corporation, and (iii) a "director" (as such term is defined in Section
2(a)(12) of the Investment Company Act of 1940, as amended [the "Act"]) of an
Adopting Fund if the Adopting Fund is any other type of organization, who in
any such case is not an interested person (as such term is defined in Section
2(a)(19) of the Act) of MSDW Advisors.

(b) "Eligible Board Member" shall mean an Independent Board Member who at
the time of Retirement (as hereinafter defined) has served as an Independent
Board Member of any Adopting Fund for at least five years, or such lesser
period as may be determined by the Board.

(d) "Eligible Retirement Date" shall mean, with respect to any Independent
Board Member, the later of (i) January 1, 1993, (ii) the first day of the
calendar month following the month in which such Independent Board Member's
seventy-second birthday occurs, or (iii) such later date as the Board may
establish as his or her "Eligible Retirement Date."

(e) "Retirement" shall mean any termination of service of an Independent
Board Member except any termination which the Board determines to have
resulted from the Independent Board Member's willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct
of the office of Independent Board Member.

(f) "Benefit" shall mean with respect to any Eligible Board Member, (i)
the Regular Benefit, unless the Alternate Benefit has been elected or the
Early Benefit granted, (ii) the Alternate Benefit, if elected by such
Eligible Board Member, unless the Early Benefit has been granted, or (iii)
the Early Benefit, if granted by the Board.

(g) "Eligible Compensation" shall mean, with respect to any Eligible Board
Member of any Adopting Fund, an amount equal to one-fifth of the total
compensation, inclusive of compensation as a member of the Board or of a
Board Committee or as chairperson of a Board Committee, earned by such
Eligible Board Member for Eligible Service with respect to such Adopting Fund
(other than under this Plan) in the five year period prior to the date of his
or her Retirement.

(h) "Actuarial Equivalent" shall mean an actuarially equivalent benefit,
as computed by the Board with the advice of an enrolled actuary (as defined
in the Employee Retirement Income Security Act of 1974, as amended
["ERISA"]), using assumptions determined by the Board at the time of the
computation.

(i) "Board" shall mean, with respect to any Adopting Fund, the Board of
Directors or Trustee or "directors," (as such term is defined in Section
2(a)(12) of the Act, of such Adopting Fund.

(j) "Adoption Date" shall mean February 21, 1991.

<PAGE>
2. ELIGIBILITY

Each Eligible Board Member will be eligible to receive a Benefit from each
Adopting Fund commencing on such Eligible Board Member's Eligible Retirement
Date.

3. RETIREMENT DATE; AMOUNT OF BENEFIT

(a) Retirement. Each Independent Board Member will retire not later than
his or her Eligible Retirement Date. The foregoing provision shall be deemed
by the adoption of this Plan by any Fund to be an amendment of such Fund's
by-laws superseding any provision therein that an Independent Board Member
shall serve until his or her successor shall have been elected and qualified.
Notwithstanding the foregoing, the Board of any Adopting Fund may, to avoid
the simultaneous retirement of more than one of the Independent Board Members
or for any other appropriate reason, waive the obligation of any Independent
Board Member to retire on such date and may establish a later date as his or
her "Eligible Retirement Date." Any establishment of an Eligible Retirement
Date may be further extended by the Board.

(b) Regular Retirement Benefit. Upon Retirement, each Eligible Board
Member will receive, commencing as of such Eligible Board Member's Eligible
Retirement Date and continuing for the remainder of the Eligible Board
Member's life, from each Adopting Fund a retirement benefit (the "Regular
Benefit") paid at an annual rate equal to the percentage of his or her
Eligible Compensation established by resolution of the Board of such Adopting
Fund most recently adopted prior to the date of his or her retirement (the
"Most Recent Resolution") as the "Minimum Percentage," PLUS an additional
percentage of such Eligible Compensation for each full month of Eligible
Service for any of the Adopting Funds in excess of five years established by
the Most Recent Resolution as the "Monthly Additional Percentage," up to the
percentage established by the Most Recent Resolution as the "Maximum
Percentage" of such Eligible Compensation for ten or more years of Eligible
Service for any of the Adopting Funds.

(c) Election of Alternate Payment of Benefit. Each Independent Board
Member shall have the option, exercisable at any time, and revisable at any
time and from time to time, prior to his or her first acceptance of benefits
under the Plan to elect (i) to receive, subject to being or becoming an
Eligible Board Member, a retirement benefit (the "Alternate Benefit") based
upon the combined life expectancy of such Eligible Board Member and his or
her spouse on the date of such Eligible Board Member's Retirement (rather
than solely upon such Eligible Board Member's own life, as shall be the case
unless such Eligible Board Member shall otherwise elect as provided in this
Section 3(c)), and (ii) if the Independent Board Member elects to receive the
Alternate Benefit, to elect a benefit either (x) to the last survivor of the
Eligible Board Member or spouse, whether the Eligible Board Member or spouse
is the last survivor (a "joint and last survivor" benefit) or (y) to the
Eligible Board Member's spouse if the spouse survives the Eligible Board
Member (a "joint and contingent survivor" benefit) equal in periodic amount
to a percentage (the "Designated Survivor's Percentage") of the periodic
amount that would be, or would be assumed to be, in effect while both the
Eligible Board Member and spouse were alive. The Designated Survivor's
Percentage shall be the percentage stated in the most recently delivered
notice of election given by such Independent Board Member, or, if no
percentage is stated in any such notice, 100%. Payment of the Alternate
Benefit shall commence on the later of such Eligible Board Member's Eligible
Retirement Date or the date of his or her Retirement, shall be reduced to the
Designated Survivor's Percentage (if less than 100%) upon the earlier of the
deceases of the Eligible Board Member and spouse in the case of a joint and
last survivor benefit, or of the Eligible Board Member in the case of a joint
and contingent survivor benefit, and shall be payable through the remainder
of the life of the survivor of such Eligible Board Member and spouse. The
Alternate Benefit shall be the Actuarial Equivalent of the Regular Benefit
provided under paragraph 3(b). In the event of the death of an Eligible Board
Member who has chosen the Alternate Benefit prior to such Eligible Board
Member's Retirement, his or her spouse shall be entitled to a retirement
benefit, commencing upon such death, which shall be the Actuarial Equivalent
of the benefit such spouse would have received had such Eligible Board Member
died on his or her Eligible Retirement Date.

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(d) Early Payment of Benefit. An Eligible Board Member for good cause may
apply to the Board of any Adopting Fund for, and, at the discretion of such
Board, may be granted, a retirement benefit (the "Early Benefit") which is
the Actuarial Equivalent of the Regular Benefit or Alternate Benefit
previously elected by such Eligible Board Member. Payment of the Early
Benefit shall commence on a date fixed by the Board in its sole discretion as
such Eligible Board Member's Eligible Retirement Date and shall be payable
through the remainder of such Eligible Board Member's life, or, if the
Alternate Benefit had been elected, the later of the lives of such Eligible
Board Member and spouse. Good cause for these purposes may include (but is
not limited to) the permanent disability of the Eligible Board Member.

(e) Anything contained herein to the contrary notwithstanding, upon the
adoption by an Adopting Fund of a plan of liquidation, such Adopting Fund
shall pay to each Eligible Board Member who has retired, in lieu of his or
her Benefit from such Adopting Fund, an amount (the "Lump Sum") equal to the
then present value of the Benefit, using a discount rate determined by the
Board at the time of the computation. The Lump Sum shall be paid by such
Adopting Fund at or before the final liquidation and dissolution of such
Adopting Fund.

4. TIME OF PAYMENT

The Benefit to each Eligible Board Member or his or her spouse will,
except as provided in Section 3(c), 3(d) or 3(e) hereof, commence on such
Eligible Board Member's Eligible Retirement Date and will be paid each year
in quarterly installments that are as nearly equal as possible on the first
day of each calendar quarter.

5. PAYMENT OF BENEFIT; ALLOCATION OF COSTS

Each Adopting Fund is responsible for the payment of Benefits based upon
Eligible Compensation from such Adopting Fund, as well as its proportionate
share of all expenses of administration of the Plan, including without
limitation all accounting and legal fees and expenses and fees and expenses
of any enrolled actuary. The obligations of each Adopting Fund to pay such
benefits and expenses will not be secured or funded in any manner, and such
obligations will not have any preference over the lawful claims of the
Adopting Funds' creditors and stockholders, shareholders, beneficiaries or
limited partners, as the case may be. To the extent that an Adopting Fund
consists of one or more separate portfolios, such costs and expenses will be
allocated among such portfolios in the proportion that compensation of
Independent Board Members is allocated among such portfolios.

6. ADMINISTRATION

(a) Administration. Any question involving entitlement to payments under
or the administration of the Plan will be referred to the Board, which shall
make all interpretations and determinations necessary or desirable for the
Plan's administration (such interpretations and determinations to be final
and conclusive) and shall cause such records to be kept as may be necessary
for the administration of the Plan.

7. MISCELLANEOUS

(a) Rights Not Assignable. The right to receive any payment under the Plan
is not transferable or assignable. Except as otherwise provided herein with
respect to the Alternate Benefit, the Plan shall not create any benefit,
cause of action, right of sale, transfer, assignment, pledge, encumbrance, or
other such right in any spouse or heirs or the estate of any Eligible Board
Member or retired Eligible Board Member.

(b) Amendment, etc. With respect to each Adopting Fund, the Board,
including a majority of the Independent Board Members of such Board, may at
any time amend or terminate the Plan or waive any provision of the Plan,
PROVIDED, that except as otherwise provided herein, no amendment, termination
or waiver will impair the rights of an Independent Board Member to receive
upon Retirement the payments which would have been made to such Independent
Board Member had there been no such amendment, termination or waiver (based
upon such Board Member's Eligible Service to the date of such amendment,
termination or waiver) or the rights of a retired Eligible Board Member to
receive any Benefit due under the Plan, without the consent of such
Independent Board Member or Eligible Board Member. Notwithstanding any
provision to the contrary, the Board, with the concurrence of a majority of
the Independent Board Members of such Board and without the consent of any
individual Independent

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Board Member, may at any time (i) amend or terminate the Plan to comply with
any applicable provision of law or any rule or regulation adopted, or
proposed to be adopted, by any governmental agency or any decision of any
court or administrative agency, (ii) change any assumptions used to determine
what benefit may be an Actuarial Equivalent, or (iii) terminate the Plan of
an Adopting Fund (an "Acquired Adopting Fund") substantially all the assets
of which are acquired by an entity which is itself an Adopting Fund (the
"Acquiring Adopting Fund") pursuant to a plan of reorganization between the
Acquired Adopting Fund and the Acquiring Adopting Fund (the "Reorganization
Plan"), such termination to be deemed approved upon adoption of the
Reorganization Plan and to be effective upon the effectiveness of the
reorganization contemplated thereby without liability or further obligation
for any benefits accrued or otherwise payable to an Independent Board Member
by the Acquired Adopting Fund.

(c) No Right to Reelection. Nothing in the Plan will create any obligation
on the part of the Board to nominate any Independent Board Member for
reelection.

(d) Vacancies. Although the Board will retain the right to increase or
decrease its size, it shall be the general policy to replace each retired
Independent Board Member by selecting a new Independent Board Member from
candidates recommended by the remaining Independent Board Members.

(e) Consulting. Each retired Eligible Board Member may render such
services for any of the Adopting Funds, for such compensation, as may be
agreed upon from time to time by such retired Eligible Board Member and the
Board.

(f) Effectiveness. The Plan will be effective for all Independent Board
Members who have dates of Retirement occurring on or after the Adoption Date.
Periods of Eligible Service shall include periods commencing prior to such
date.

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SCHEDULE A

MORGAN STANLEY DEAN WITTER FUNDS:
FUNDS THAT HAVE ADOPTED THE RETIREMENT PLAN
FOR NON-INTERESTED TRUSTEES OR DIRECTORS

MARCH 1999

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 American Value Fund
6. Morgan Stanley Dean Witter California Insured Municipal Income Trust
7. Morgan Stanley Dean Witter California Quality Municipal Securities
8. Morgan Stanley Dean Witter California Tax-Free Daily Income Trust
9. Morgan Stanley Dean Witter California Tax-Free Income Fund
10. Morgan Stanley Dean Witter Capital Growth Securities
11. Morgan Stanley Dean Witter Convertible Securities Trust
12. Morgan Stanley Dean Witter Developing Growth Securities Trust
13. Morgan Stanley Dean Witter Diversified Income Trust
14. Morgan Stanley Dean Witter Dividend Growth Securities Inc.
15. Morgan Stanley Dean Witter European Growth Fund Inc.
16. Morgan Stanley Dean Witter Federal Securities Trust
17. Morgan Stanley Dean Witter Global Dividend Growth Securities
18. Morgan Stanley Dean Witter Government Income Trust
19. Morgan Stanley Dean Witter Health Sciences Trust
20. Morgan Stanley Dean Witter High Income Advantage Trust
21. Morgan Stanley Dean Witter High Income Advantage Trust II
22. Morgan Stanley Dean Witter High Yield Securities Inc.
23. Morgan Stanley Dean Witter Income Securities Inc.
24. Morgan Stanley Dean Witter Insured Municipal Bond Trust
25. Morgan Stanley Dean Witter Insured Municipal Income Trust
26. Morgan Stanley Dean Witter Insured Municipal Securities
27. Morgan Stanley Dean Witter Insured Municipal Trust
28. Morgan Stanley Dean Witter Intermediate Income Securities
29. Morgan Stanley Dean Witter Limited Term Municipal Trust
30. Morgan Stanley Dean Witter Liquid Asset Fund Inc.
31. Morgan Stanley Dean Witter Multi-State Municipal Series Trust
32. Morgan Stanley Dean Witter Municipal Income Opportunities Trust
33. Morgan Stanley Dean Witter Municipal Income Opportunities Trust II
34. Morgan Stanley Dean Witter Municipal Income Opportunities Trust III
35. Morgan Stanley Dean Witter Municipal Income Trust
36. Morgan Stanley Dean Witter Municipal Income Trust II
37. Morgan Stanley Dean Witter Municipal Premium Income Trust
38. Morgan Stanley Dean Witter Natural Resource Development Securities Inc.
39. Morgan Stanley Dean Witter New York Municipal Money Market Trust
40. Morgan Stanley Dean Witter New York Tax-Free Income Fund
41. Morgan Stanley Dean Witter Pacific Growth Fund Inc.
42. Morgan Stanley Dean Witter Prime Income Trust
43. Morgan Stanley Dean Witter Quality Municipal Income Trust

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44. Morgan Stanley Dean Witter Quality Municipal Investment Trust
45. Morgan Stanley Dean Witter Quality Municipal Securities
46. Morgan Stanley Dean Witter Short-Term U.S. Treasury Trust
47. Morgan Stanley Dean Witter Strategist Fund
48. Morgan Stanley Dean Witter Tax-Exempt Securities Trust
49. Morgan Stanley Dean Witter Tax-Free Daily Income Trust
50. Morgan Stanley Dean Witter U.S. Government Money Market Trust
51. Morgan Stanley Dean Witter U.S. Government Securities Trust
52. Morgan Stanley Dean Witter Utilities Fund
53. Morgan Stanley Dean Witter Value-Added Market Series
54. Morgan Stanley Dean Witter Variable Investment Series
55. Morgan Stanley Dean Witter World Wide Income Trust

<PAGE>

DEAN WITTER DIVERSIFIED INCOME TRUST

February 27, 1992

Dean Witter Diversified Income Trust
Two World Trade Center
New York, New York 10048

Dear Sirs:

With respect to the Registration Statement on Form N-1A (File No. 33-44782)
(the "Registration Statement") filed by Dean Witter Diversified Income Trust, a
Massachusetts business trust (the "Fund"), with the Securities and Exchange
Commission for the purpose of registering under the Securities Act of 1933, as
amended, an indefinite number of shares of Beneficial Interest of $0.01 par
value of the Fund (the "Shares"), I, as your counsel, have examined such Fund
records, certificates and other documents and reviewed such questions of law as
I have considered necessary or appropriate for the purposes of this opinion, and
on the basis of such examination and review, I advise you that, in my opinion,
proper trust proceedings have been taken by the Fund so that the Shares have
been validly authorized; and when the Shares have been issued and sold in
accordance with the terms of the Underwriting Agreement referred to in the
Registration Statement, the Shares will be validly issued, fully paid and
non-assessable.

As to matters of Massachusetts law contained in the foregoing opinion, I
have relied upon the opinion of Lane & Altman, dated February 27, 1992.

I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to me under the caption "Validity of
Shares of Beneficial Interest" in the Statement of Additional Information
forming a part of the Registration Statement. In giving this consent, I do not
thereby admit that I am within the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder.

Very truly yours,

/s/ Sheldon Curtis
---------------------------------
Sheldon Curtis
Senior Vice President and
General Counsel

SC:lc

0476/L.1/2

<PAGE>

Consent of Independent Accountants

We hereby consent to the use in this Registration Statement on Form N-1A of our
report dated December 20, 1999, relating to the financial statements and
financial highlights of Morgan Stanley Dean Witter Diversified Income Trust,
which appears in such Registration Statement. We also consent to the references
to us under the headings "Custodian and Independent Accountants" and "Experts"
in such Registration Statement.

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
Janaury 26, 2000