AS filed pursuant to Rule 497(c)
                                                       Registration No.333-58643
                                                                        811-8861
                                                            MORGAN STANLEY FUNDS



                                                                  Morgan Stanley
                                                                      Value Fund


                                           A mutual fund that seeks total return

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MORGAN STANLEY


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.

                                                                      Prospectus
                                                                January 27, 2006


Contents

THE FUND

      Investment Objective..................................................1

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

      Principal Risks.......................................................2

      Past Performance......................................................4

      Fees and Expenses.....................................................6

      Additional Investment Strategy Information............................7

      Additional Risk Information...........................................8

      Portfolio Holdings....................................................8

      Fund Management.......................................................9


SHAREHOLDER INFORMATION

      Pricing Fund Shares..................................................11

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

      Limited Portability................................................. 13

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

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

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

      Frequent Purchases and Redemptions of Fund Shares................... 19

      Tax Consequences.....................................................20

      Share Class Arrangements.............................................20

      Additional Information...............................................29


FINANCIAL HIGHLIGHTS...................................................... 30


MORGAN STANLEY FUNDS....................................... Inside Back Cover


This Prospectus contains important information about the Fund. Please read it
carefully and keep it for future reference.



The Fund

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INVESTMENT OBJECTIVE


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Morgan Stanley Value Fund seeks total return.

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PRINCIPAL INVESTMENT STRATEGIES

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The Fund normally invests at least 65% of its assets in common stock that
the Fund's "Investment Adviser," Morgan Stanley Investment Advisors Inc.,
believes is undervalued and currently is not being recognized within the
marketplace. In deciding which securities to buy, hold or sell, the Investment
Adviser begins with a universe of companies that have attributes that may
qualify them as value companies. The Investment Adviser then screens these
companies for liquidity and then relative value using an appropriate valuation
measure for each sector or industry. The Investment Adviser evaluates the
companies relative to competitive and market conditions within each industry.
The Investment Adviser then conducts a fundamental analysis of each company to
identify those companies believed to be attractively valued relative to other
companies within the industry.

Common stock is a share ownership or equity interest in a corporation. It may
or may not pay dividends, as some companies reinvest all of their profits back
into their businesses, while others pay out some of their profits to
shareholders as dividends.


The Fund's stock investments may include foreign securities held either
directly or in the form of depositary receipts. However, the Fund may only
invest up to 25% of its net assets in foreign securities that are not listed in
the United States on a national securities exchange. A depositary receipt is
generally issued by a bank or financial institution and represents an ownership
interest in the common stock or other equity securities of a foreign company.

The remaining 35% of the Fund's assets may be invested in (i) convertible
securities, (ii) investment grade fixed-income securities and (iii) U.S.
government securities. In addition, the Fund may utilize forward foreign
currency exchange contracts.


The Fund may invest up to 15% of its net assets in real estate investment
trusts ("REITs").


[sidebar]
------------
TOTAL RETURN

An investment objective having the goal of selecting securities with the
potential to rise in price and pay out income.
[end sidebar]


                                                                               1


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PRINCIPAL RISKS

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There is no assurance that the Fund will achieve its investment objective.
The Fund's share price and return will fluctuate with changes in the market
value of the Fund's portfolio securities. 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.

COMMON STOCKS. A principal risk of investing in the Fund is associated with its
common stock investments. 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.

FOREIGN SECURITIES. The Fund's investments in foreign securities involve risks
that are in addition to the risks associated with domestic securities. One
additional risk is currency risk. While the price of Fund shares is quoted 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 economic and political
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.
In addition, differences in clearance and settlement procedures in foreign
markets may occasion delays in settlement of the Fund's trades effected in
those markets and could result in losses to the Fund due to subsequent declines
in the value of the securities subject to the trades.


Depositary receipts involve many of the same risks as those associated with
direct investment in foreign securities. In addition, the underlying issuers of
certain depositary receipts, particularly unsponsored or unregistered
depositary receipts, are under no obligation to distribute shareholder
communications to the holders of such receipts, or to pass through to them any
voting rights with respect to the deposited securities.

CONVERTIBLE SECURITIES. The Fund also may invest a portion of its assets in
convertible securities, which are securities that generally pay interest and
may be converted into common stock. These securities may carry risks associated
with both common stock and fixed-income securities.


FIXED-INCOME SECURITIES. 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. While the Fund invests in
investment grade fixed-income securities, certain of these securities have
speculative characteristics. Interest rate risk refers to fluctuations in the
value of a


2



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. Accordingly, a rise in
the general level of interest rates may cause the price of the Fund's
fixed-income securities to fall substantially.

U.S. GOVERNMENT SECURITIES. The U.S. government securities in which the Fund
invests can be subject to credit risk and interest rate risk. While the credit
risk associated with U.S. government securities generally is considered to be
minimal, the interest rate risk can be substantial. The Fund is not limited as
to the maturities of the securities in which it may invest. Thus, a rise in the
general level of interest rates may cause the price of the Fund's portfolio
securities to fall substantially. (Zero coupon securities are typically subject
to greater price fluctuations than comparable securities that pay interest.)


REAL ESTATE INVESTMENT TRUSTS ("REITS"). REITs pool investors' funds for
investments primarily in commercial real estate or real estate properties. Like
mutual funds, REITs have expenses, including advisory and administration fees,
that are paid by their shareholders. As a result, you will absorb duplicate
levels of fees when the Fund invests in REITs. The performance of any Fund REIT
holdings ultimately depends on the types of real property in which the REITs
invest and how well the property is managed. A general downturn in real estate
values also can hurt REIT performance. In addition, REITs are subject to
certain provisions under federal tax law. The failure of a company to qualify
as a REIT could have adverse consequences for the Fund, including significantly
reducing return to the Fund on its investment in such company.

OTHER RISKS. The performance of the Fund also will depend on whether or not the
Investment Adviser is successful in applying the Fund's investment strategies.
The Fund is also subject to other risks from its permissible investments,
including the risks associated with forward foreign currency exchange
contracts. 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.


                                                                               3


[sidebar]
--------------------
ANNUAL TOTAL RETURNS

This chart shows how the performance of the Fund's Class B shares has varied
from year to year over the past seven calendar years.
[end sidebar]


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PAST PERFORMANCE

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


ANNUAL TOTAL RETURNS -- CALENDAR YEARS

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1999 ........................... -2.15%
2000 ........................... 17.59%
2001 ...........................  0.18%
2002 ...........................-24.98%
2003 ........................... 31.52%
2004 ........................... 16.08%
2005 ...........................  3.56%


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 21.66% (quarter ended June 30, 2003) and the lowest return for a
calendar quarter was -23.83% (quarter ended September 30, 2002).



4


AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2005)




                                                                                                   LIFE OF FUND
                                                                                         PAST 5       (SINCE
                                                                           PAST 1 YEAR   YEARS       11/25/98)

Class A -- Return Before Taxes                                              --1.11%       3.17%        4.16%
Class B -- Return Before Taxes                                              --1.44%       3.16%        4.16%
Class B -- Return After Taxes on Distributions1                             --1.84%       3.06%        4.09%
Class B -- Return After Taxes on Distributions and Sale of Fund Shares      --0.93%       2.66%        3.56%
Class C -- Return Before Taxes                                               2.57%        3.51%        4.17%
Class D -- Return Before Taxes                                               4.59%        4.54%        5.22%
           Standard & Poor's 500 (Registered Trademark)  Index2              4.91%        0.55%        2.27%
           S&P 500/Barra Value Index3                                        6.33%        2.54%        5.01%
           Lipper Large-Cap Value Funds Index4                               6.26%        2.27%        3.66%
           Lipper Multi-Cap Value Funds Index5                               6.33%        6.25%        6.59%




(1)   These returns do not reflect any tax consequences from a sale of your
      shares at the end of each period, but they do reflect any applicable
      sales charges on such a sale.

(2)   The Standard & Poor's 500 Index (S&P 500 (Registered Trademark) ) is a
      broad-based index, the performance of which is based on the performance
      of 500 widely-held common stocks chosen for market size, liquidity and
      industry group representation. Indexes are unmanaged and their returns do
      not include any sales charges or fees. Such costs would lower
      performance. It is not possible to invest directly in an index.

(3)   The S&P 500/Barra Value Index is a market capitalization-weighted index
      of the stocks in the S&P 500 (Registered Trademark)  Index having lower
      price-to-book ratios. Indexes are unmanaged and their returns do not
      include any sales charges or fees. Such costs would lower performance. It
      is not possible to invest directly in an index.

(4)   The Lipper Large-Cap Value Funds Index is an equally weighted performance
      index of the largest qualifying funds (based on net assets) in the Lipper
      Large-Cap Value Funds classification. The Index, which is adjusted for
      capital gains distributions and income dividends, is unmanaged and should
      not be considered an investment. There are currently 30 funds represented
      in this Index. The Fund is in the Lipper Large-Cap Value Funds
      classification as of September 30, 2005.

(5)   The Lipper Multi-Cap Value Funds Index is an equally weighted performance
      index of the largest qualifying funds (based on net assets) in the Lipper
      Multi-Cap Value Funds classification. The Index, which is adjusted for
      capital gains distributions and income dividends, is unmanaged and should
      not be considered an investment. There are currently 30 funds represented
      in this Index.


Included in the table are the after-tax returns for the Fund's Class B shares.
The after-tax returns for the Fund's other Classes will vary from the Class B
shares' returns. After-tax returns are calculated using the historical highest
individual federal marginal income tax rates during the period shown and do not
reflect the impact of state and local taxes. Actual after-tax returns depend on
an investor's tax situation and may differ from those shown, and after-tax
returns are not relevant to investors who hold their Fund shares through
tax-deferred arrangements, such as 401(k) plans or individual retirement
accounts. After-tax returns may be higher than before-tax returns due to
foreign tax credits and/or an assumed benefit from capital losses that would
have been realized had Fund shares been sold at the end of the relevant
periods, as applicable.


[sidebar]
----------------------------
AVERAGE ANNUAL TOTAL RETURNS

This table compares the Fund's average annual total returns with those of
indices that represent a broad measure of market performance, as well as indices
that represent a group of similar mutual funds, 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 (unless otherwise noted).
[end sidebar]

                                                                               5


[sidebar]
----------------
SHAREHOLDER FEES

These fees are paid directly from your investment.
[end sidebar]


[sidebar]

------------------------------
ANNUAL FUND OPERATING EXPENSES

These expenses are deducted from the Fund's assets.
[end sidebar]


--------------------------------------------------------------------------------
FEES AND EXPENSES

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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, which should be considered in selecting a Class of shares. The
Fund does not charge account or exchange fees. However, certain shareholders may
be charged an order processing fee by the broker-dealer through which shares are
purchased, as described below. See the "Share Class Arrangements" section for
further fee and expense information.


SHAREHOLDER FEES



                                                    CLASS A      CLASS B     CLASS C      CLASS D

Maximum sales charge (load) imposed on
purchases (as a percentage of offering price)        5.25%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)              None2        5.00%3      1.00%4        None
Redemption fee(5)                                    2.00%        2.00%       2.00%         2.00%


ANNUAL FUND OPERATING EXPENSES




                                                    CLASS A      CLASS B     CLASS C      CLASS D

Advisory fee*                                        0.42%        0.42%       0.42%        0.42%
Distribution and service (12b-1) fees(6)             0.25%        1.00%       0.99%        0.00%
Other expenses*                                      0.30%        0.30%       0.30%        0.30%
Total annual Fund operating expenses*(7)             0.97%        1.72%       1.71%        0.72%



*     Expense information in the table has been restated to reflect current
      fees (see "Fund Management").

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

(2)   Investments that are not subject to any sales charges 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 18 months 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.

(5)   Payable to the Fund on shares redeemed within seven days of purchase. The
      redemption fee is based on the redemption proceeds. See "Shareholder
      Information--How to Sell Shares" for more information on redemption fees.


(6)   The Fund has adopted a Rule 12b-1 Distribution Plan pursuant to which it
      reimburses the distributor for distribution-related expenses (including
      personal services to shareholders) incurred on behalf of Class A, Class B
      and Class C shares in an amount each month up to an annual rate of 0.25%,
      1.00% and 1.00% of the average daily net assets of Class A, Class B and
      Class C shares, respectively.


(7)   Effective November 18, 2005, the Investment Adviser has agreed to cap the
      total annual Fund operating expenses (except for brokerage and 12b-1
      fees) for one year by assuming the Fund's "other expenses" and/or waiving
      the Fund's advisory fees, and Morgan Stanley Services Company Inc., the
      Fund's administrator, has agreed to waive the Fund's administrative fees,
      to the extent such operating expenses on an annualized basis exceed 0.75%
      of the average daily net assets of the Fund.


6


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 your shares at the end of each period.




                   IF YOU SOLD YOUR SHARES:               YOU HELD YOUR SHARES:
          -----------------------------------------------------------------------------
           1 YEAR   3 YEARS  5 YEARS   10 YEARS   1 YEAR   3 YEARS   5 YEARS   10 YEARS
          -----------------------------------------------------------------------------

Class A     $619      $818    $1,033    $1,652     $619      $818     $1,033    $1,652
Class B     $675      $842    $1,133    $2,030     $175      $542       $933    $2,030
Class C     $274      $539      $928    $2,019     $174      $539       $928    $2,019
Class D      $74      $230      $401      $894      $74      $230       $401      $894



While Class B and Class C shares do not have any front-end sales charges, their
higher ongoing annual expenses (due to higher 12b-1 fees) mean that over time
you could end up paying more for these shares than if you were to pay front-end
sales charges for Class A shares.

ORDER PROCESSING FEE. Morgan Stanley DW Inc. ("Morgan Stanley DW") charges
clients an order processing fee of $5.25 (except in certain circumstances,
including, but not limited to, activity in fee-based accounts, exchanges,
dividend reinvestments and systematic investment and withdrawal plans) when a
client buys or redeems shares of the Fund. Please consult your Morgan Stanley
Financial Advisor for more information regarding this fee.

--------------------------------------------------------------------------------
ADDITIONAL INVESTMENT STRATEGY INFORMATION

[GRAPHIC OMITTED]

This section provides additional information relating to the Fund's investment
strategies.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Fund's investments also may
include forward foreign currency exchange 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 movements in the foreign currencies in which portfolio
securities are denominated. In addition, the Fund may use these investments to
modify its exposure to various currency markets.

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 total assets in cash or money market instruments in a defensive
posture that may be inconsistent with the Fund's principal investment
strategies when the Investment Adviser 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 objective.


                                                                               7


PORTFOLIO TURNOVER. The Fund may engage in active and frequent trading of its
portfolio securities. The Financial Highlights Table at the end of this
Prospectus shows the Fund's portfolio turnover rates during recent fiscal
years. A portfolio turnover rate of 200%, for example, is equivalent to the
Fund buying and selling all of its securities two times during the course of
the year. A high portfolio turnover rate (over 100%) could result in high
brokerage costs and an increase in taxable capital gains distributions to the
shareholders. 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. Subsequent percentage
changes that result from market fluctuations generally will not require the
Fund to sell any portfolio security. However, the Fund may be required to sell
its illiquid securities holdings or reduce its borrowings, if any, in response
to fluctuations in the value of such holdings. The Fund may change its
principal investment strategies without shareholder approval; however, you
would be notified of any changes.

--------------------------------------------------------------------------------
ADDITIONAL RISK INFORMATION

[GRAPHIC OMITTED]

This section provides additional information relating to the risks of investing
in the Fund.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Use of forward foreign currency
exchange contracts involves risks. If the Investment Adviser 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, thus, could
involve a significant risk.

--------------------------------------------------------------------------------
PORTFOLIO HOLDINGS

[GRAPHIC OMITTED]

A description of the Fund's policies and procedures with respect to the
disclosure of the Fund's portfolio securities is avalaible in the Fund's
Statement of Additional Information.


8


--------------------------------------------------------------------------------
FUND MANAGEMENT

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The Fund has retained the Investment Adviser--Morgan Stanley Investment Advisors
Inc.--to provide investment advisory services. The Investment Adviser is a
wholly-owned subsidiary of Morgan Stanley, a preeminent global financial
services firm that maintains leading market positions in each of its three
primary businesses: securities, asset management and credit services. Morgan
Stanley is a full service securities firm engaged in securities trading and
brokerage activities, as well as providing investment banking, research and
analysis, financing and financial advisory services. The Investment Adviser's
address is 1221 Avenue of the Americas, New York, NY 10020.

PORTFOLIO MANAGEMENT. The Fund is managed by members of the Investment Adviser's
Multi-Cap Value team. The team consists of portfolio managers and analysts.
Current members of the team jointly and primarily responsible for the day-to-day
management of the Fund's portfolio are B. Robert Baker, Jr., Jason S. Leder and
Kevin C. Holt, each a Managing Director of the Investment Adviser.

Mr. Baker has worked in an investment management capacity for the Investment
Adviser since November 1991 and began managing the Fund in October 2003. Mr.
Leder has worked in an investment management capacity for the Investment Adviser
since April 1995 and began managing the Fund in October 2003. Mr. Holt has
worked in an investment management capacity for the Investment Adviser since
August 1999 and began managing the Fund in October 2003.


Mr. Baker is the lead manager of the Fund and Messrs. Leder and Holt are
co-portfolio managers. Each team member is responsible for specific sectors. Mr.
Baker is responsible for execution of the overall strategy of the Fund.

The Fund's Statement of Additional Information provides additional information
about the portfolio managers' compensation structure, other accounts managed by
the portfolio managers and the portfolio managers' ownership of securities in
the Fund.

The composition of the team may change without notice from time to time.


Prior to November 1, 2004, the Fund had retained the Investment Adviser to
provide administrative services and to manage the investment of the Fund's
assets pursuant to an investment management agreement (the "Management
Agreement") pursuant to which the Fund paid the Investment Adviser a monthly
management fee as full compensation for the services and facilities furnished to
the Fund, and for Fund expenses assumed by the Investment Adviser at the
following annual rate: 0.50% of the portion of the daily net assets not
exceeding $1 billion; 0.45% of the portion of the daily net assets exceeding $1
billion but not exceeding $2 billion; 0.40% of the portion of the daily net
assets exceeding $2 billion but not exceeding $3 billion; and 0.35% of the
portion of the daily net assets exceeding $3 billion.


[sidebar]
---------------------------------------
MORGAN STANLEY INVESTMENT ADVISORS INC.

The Investment Adviser is widely recognized as a leader in the mutual fund
industry and had approximately $90 billion in assets under management or
administration as of December 31, 2005.
[sidebar]


                                                                               9



Effective November 1, 2004, the Board of Trustees approved an amended and
restated investment advisory agreement to remove the administrative services
component from the Management Agreement and to reduce the investment advisory
fee to the annual rate of 0.42% of the portion of the daily net assets not
exceeding $1 billion; 0.37% of the portion of the daily net assets exceeding $1
billion but not exceeding $2 billion; 0.32% of the portion of the daily net
assets exceeding $2 billion but not exceeding $3 billion; and 0.27% of the
portion of the daily net assets exceeding $3 billion. The administrative
services previously provided to the Fund by the Investment Adviser are being
provided by Morgan Stanley Services Company Inc. ("Administrator") pursuant to
a separate administration agreement entered into by the Fund with the
Administrator. Such change resulted in a 0.08% reduction in the advisory fee
concurrent with the implementation of a 0.08% administration fee pursuant to
the new administration agreement.


For the fiscal year ended September 30, 2005, the Fund paid total compensation
to the Investment Adviser amounting to 0.42% of the Fund's average daily net
assets.


Although the entities providing administration services to the Fund have
changed, the Morgan Stanley personnel performing such services remain the same.
Furthermore, the changes have not resulted in any increase in the amount of
total combined fees paid by the Fund for investment advisory and administration
services, or any decrease in the nature or quality of the investment advisory
or administration services received by the Fund.


A discussion regarding the basis for the Board of Trustees' approval of the
investment advisory agreement is available in the Fund's annual report to
shareholders for the fiscal year ended September 30, 2005.



10


Shareholder Information

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

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


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 Adviser 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 addition, with respect to securities that primarily are listed on foreign
exchanges, when an event occurs after the close of such exchanges that is likely
to have changed the value of the securities (for example, a percentage change in
value of one or more U.S. securities indices in excess of specified thresholds),
such securities will be valued at their fair value, as determined under
procedures established by the Fund's Board of Trustees. Securities also may be
fair valued in the event of a significant development affecting a country or
region or an issuer-specific development which is likely to have changed the
value of the security.


In these cases, the Fund's net asset value will reflect certain portfolio
securities' fair value rather than their market price. Fair value pricing
involves subjective judgment and it is possible that the fair value determined
for a security is materially different than the value that could be realized
upon the sale of that security. 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.

To the extent the Fund invests in open-end management companies that are
registered under the Investment Company Act of 1940, as amended ("Investment
Company Act") the Fund's net asset value is calculated based upon the net asset
value of such fund. The prospectuses for such funds explain the circumstances
under which they will use fair pricing and its effects.

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 60 days or less at the time of purchase are valued at amortized cost.
However, if the cost does not reflect the securities' market value, these
securities will be valued at their fair value.


                                                                              11


[sidebar]
------------------------------
CONTACTING A FINANCIAL ADVISOR

If you are new to the Morgan Stanley Funds and would like to contact a Morgan
Stanley Financial Advisor, call toll-free 1-866-MORGAN8 for the telephone
number of the Morgan Stanley office nearest you. You may also access our office
locator on our Internet site at: www.morganstanley.com/funds
[end sidebar]

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HOW TO BUY SHARES

[GRAPHIC OMITTED]

You may open a new account to buy Fund shares or buy additional Fund shares for
an existing account by contacting your Morgan Stanley Financial Advisor or other
authorized financial representative. Your Financial Advisor will assist you,
step-by-step, with the procedures to invest in the Fund. The Fund's transfer
agent, Morgan Stanley Trust ("Transfer Agent"), in its sole discretion, may
allow you to purchase shares directly by calling and requesting an application.

To help the government fight the funding of terrorism and money laundering
activities, federal law requires all financial institutions to obtain, verify
and record information that identifies each person who opens an account. What
this means to you: when you open an account, we will ask your name, address,
date of birth, and other information that will allow us to identify you. If we
are unable to verify your identity, we reserve the right to restrict additional
transactions and/or liquidate your account at the next calculated net asset
value after your account is closed (less any applicable sales/account charges
and/or tax penalties) or take any other action required by law.

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 Morgan Stanley 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 (plus 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. The Fund, in its sole discretion, may
waive the minimum initial and additional investment amounts in certain cases.
We reserve the right to reject any order for the purchase of Fund shares for
any reason.

ORDER PROCESSING FEE. Morgan Stanley DW charges clients an order processing fee
of $5.25 (except in certain circumstances, including, but not limited to,
activity in fee-based accounts, exchanges, dividend reinvestments and
systematic investment and withdrawal plans) when a client buys or redeems
shares of the Fund. Please consult your Morgan Stanley Financial Advisor for
more information regarding this fee.


12


MINIMUM INVESTMENT AMOUNTS



                                                                                  MINIMUM INVESTMENT
                                                                                ----------------------
INVESTMENT OPTIONS                                                              INITIAL     ADDITIONAL

Regular Account                                                                  $1,000        $100
Individual Retirement Account                                                    $1,000        $100
Coverdell Education Savings Account                                                $500        $100
EasyInvest (Registered Trademark)
(Automatically from your checking or savings account or Money Market Fund)         $100*       $100*


* Provided your schedule of investments totals $1,000 in 12 months.

There is no minimum investment amount if you purchase Fund shares through: (1)
the Investment Adviser's mutual fund asset allocation program; (2) a program,
approved by the Fund's distributor, in which you pay an asset-based fee for
advisory, administrative and/or brokerage services; (3) the following programs
approved by the Fund's distributor: (i) qualified state tuition plans described
in Section 529 of the Internal Revenue Code or (ii) certain other investment
programs that do not charge an asset-based fee; (4) employer-sponsored employee
benefit plan accounts; or (5) the reinvestment of dividends in additional Fund
shares.

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 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 Value Fund.

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

--------------------------------------------------------------------------------
LIMITED PORTABILITY

[GRAPHIC OMITTED]

Most Fund shareholders hold their shares with Morgan Stanley DW. Please note
that your ability to transfer your Fund shares to a brokerage account at another
securities dealer may be limited. Fund shares may only be transferred to
accounts held at a limited number of securities dealers or financial
intermediaries that have entered into agreements with the Fund's distributor.
After a transfer, you may purchase additional shares of the Morgan Stanley Funds
you owned before the transfer, but you may not be able to purchase shares of any
other Morgan

[sidebar]
---------------------------------
EasyInvest (Registered Trademark)

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 Financial Advisor for
further information about this service.
[end sidebar]



                                                                              13


Stanley Funds or exchange shares of the fund(s) you own for shares of other
Morgan Stanley Funds (as described below under "How to Exchange Shares"). If
you wish to transfer Fund shares to a securities dealer or other financial
intermediary that has not entered into an agreement with the Fund's
distributor, you may request that the securities dealer or financial
intermediary maintain the shares in an account at the Transfer Agent registered
in the name of such securities dealer or financial intermediary for your
benefit. You may also hold your Fund shares in your own name directly with the
Transfer Agent. Other options may also be available; please check with the
respective securities dealer or financial intermediary. If you choose not to
hold your shares with the Transfer Agent, either directly or through a
securities dealer or other financial intermediary, you must redeem your shares
and pay any applicable CDSC.

--------------------------------------------------------------------------------
HOW TO EXCHANGE SHARES
[GRAPHIC OMITTED]

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, or the Limited Duration U.S. Treasury
Trust, without the imposition of an exchange fee. Front-end sales charges are
not imposed on exchanges of Class A shares. See the inside back cover of this
Prospectus for each Morgan Stanley Fund's designation as a Multi-Class Fund,
No-Load Fund or Money Market Fund. If a Morgan Stanley Fund is not listed,
consult the inside back cover of that fund's current prospectus for its
designation.

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 Funds,
exchanges are not available into any new Morgan Stanley Fund during its initial
offering period, or when shares of a particular Morgan Stanley Fund are not
being offered for purchase. An exchange of Fund shares held for less than seven
days from the date of purchase will be subject to the 2% redemption fee
described under the section "How to Sell Shares."

EXCHANGE PROCEDURES. You can process an exchange by contacting your Morgan
Stanley Financial Advisor or other authorized financial representative.
Otherwise, you must forward an exchange privilege authorization form to the
Transfer Agent and then write the Transfer Agent or call toll-free (800)
869-NEWS to place an exchange order. You can obtain an exchange privilege
authorization form by contacting your Morgan Stanley Financial Advisor or other
authorized financial representative or by calling toll-free (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 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, as described above, are received. 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 or
in certain cases without notice. See "Limitations on Exchanges." The check
writing privilege is not available for Money Market Fund shares you acquire in
an exchange.


14


TELEPHONE EXCHANGES. For your protection when calling Morgan Stanley Trust, 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 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 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 Fund, there are important tax considerations. For tax
purposes, the exchange out of the Fund is considered a sale of the Fund's
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 past exchanges and/or purchase or
sale transactions involving the Fund or other Morgan Stanley Funds may result
in the Fund rejecting, limiting or prohibiting, at its sole discretion, and
without prior notice, additional purchases and/or exchanges and may result in a
shareholder's account being closed. Determinations in this regard may be made
based on the frequency or dollar amount of the previous exchanges or purchase
or sale transactions. The Fund reserves the right to reject an exchange request
for any reason.

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

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


                                                                              15


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

[GRAPHIC OMITTED]

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 Financial Advisor or other authorized
Financial Advisor  financial representative. 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:
                   o your account number;
                   o the name of the Fund;
                   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 Trust. (You should contact Morgan Stanley
                   Trust toll-free 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 Trust 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 Funds has a total market value of at least
Withdrawal Plan    $10,000, you may elect to withdraw amounts of $25 or more, or in any whole percentage of a
                   fund's balance (provided the amount is at least $25), on a monthly, quarterly, semi-annual or
                   annual basis, from any fund with a balance of at least $1,000. Each time you add a fund to the
                   plan, you must meet the plan requirements.

                   Amounts withdrawn are subject to any applicable CDSC. A CDSC may be waived under
                   certain circumstances. See the Class B waiver categories listed in the "Share Class
                   Arrangements" section of this Prospectus.



16





OPTIONS            PROCEDURES
--------------------------------------------------------------------------------------------------------------------

Systematic         To sign up for the systematic withdrawal plan, contact your Morgan Stanley Financial Advisor
Withdrawal Plan    or call toll-free (800) 869-NEWS. You may terminate or suspend your plan at any time. Please
(continued)        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.
--------------------------------------------------------------------------------------------------------------------


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.

ORDER PROCESSING FEE. Morgan Stanley DW charges clients an order processing fee
of $5.25 (except in certain circumstances, including, but not limited to,
activity in fee-based accounts, exchanges, dividend reinvestments and
systematic investment and withdrawal plans) when a client buys or redeems
shares of the Fund. Please consult your Morgan Stanley Financial Advisor for
more information regarding this fee.

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 60 days' notice, to sell the
shares of any shareholder (other than shares held in an individual retirement
account ("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 (Registered Trademark) , 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 60 days to make an additional investment in an amount that will
increase the value of your account to at least the required amount before the
sale is processed. No CDSC will be imposed on any involuntary sale.

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

REDEMPTION FEE. Fund shares redeemed within seven days of purchase will be
subject to a 2% redemption fee, payable to the Fund. The redemption fee is
designed to protect the Fund and its remaining shareholders from the effects of
short-term trading. The redemption fee is not imposed on redemptions made: (i)
through systematic


                                                                              17


withdrawal/exchange plans, (ii) through pre-approved asset allocation programs,
(iii) of shares received by reinvesting income dividends or capital gain
distributions, (iv) through certain collective trust funds or other pooled
vehicles and (v) on behalf of advisory accounts where client allocations are
solely at the discretion of the Morgan Stanley Investment Management investment
team. The redemption fee is based on, and deducted from, the redemption
proceeds. Each time you redeem or exchange shares, the shares held the longest
will be redeemed or exchanged first.

The redemption fee may not be imposed on transactions that occur through
certain omnibus accounts at financial intermediaries. Certain financial
intermediaries may apply different methodologies than those described above in
assessing redemption fees, may impose their own redemption fee that may differ
from the Fund's redemption fee or may impose certain trading restrictions to
deter market timing and frequent trading. If you invest in the Fund through a
financial intermediary, please read that financial intermediary's materials
carefully to learn about any other restrictions or fees that may apply.

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

[GRAPHIC OMITTED]

The Fund passes substantially all of its earnings from income and capital gains
along to its investors as "distributions." The Fund earns income from stocks and
interest from fixed-income investments. 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 shares because distribution fees that Class B and Class C shares pay
are higher. Normally, income dividends are distributed to shareholders
annually. 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. However, if you purchase Fund shares through a Morgan
Stanley Financial Advisor or other authorized financial representative within
three business days prior to the record date for the distribution, the
distribution will automatically be paid to you in cash, even if you did not
request to receive all distributions in cash. No interest will accrue on
uncashed checks. If you wish to change how your distributions are paid, your
request should be received by the Transfer Agent at least five business days
prior to the record date of the distributions.

[sidebar]
--------------------
TARGETED DIVIDENDSSM

You may select to have your Fund distributions automatically invested in other
Classes of Fund shares or Classes of another Morgan Stanley Fund that you own.
Contact your Morgan Stanley Financial Advisor for further information about this
service.

[sidebar]

18


--------------------------------------------------------------------------------
FREQUENT PURCHASES AND REDEMPTIONS OF FUND SHARES

[GRAPHIC OMITTED]

Frequent purchases and redemptions of Fund shares by Fund shareholders are
referred to as "market-timing" or "short-term trading" and may present risks for
other shareholders of the Fund, which may include, among other things, dilution
in the value of Fund shares held by long-term shareholders, interference with
the efficient management of the Fund's portfolio, increased brokerage and
administrative costs, incurring unwanted taxable gains and forcing the Fund to
hold excess levels of cash.

In addition, the Fund is subject to the risk that market timers and/or
short-term traders may take advantage of time zone differences between the
foreign markets on which the Fund's portfolio securities trade and the time as
of which the Fund's net asset value is calculated ("time-zone arbitrage"). For
example, a market timer may purchase shares of the Fund based on events
occurring after foreign market closing prices are established, but before the
Fund's net asset value calculation, that are likely to result in higher prices
in foreign markets the following day. The market timer would redeem the Fund's
shares the next day when the Fund's share price would reflect the increased
prices in foreign markets, for a quick profit at the expense of long-term Fund
shareholders.

The Fund's policies with respect to valuing portfolio securities are described
in "Shareholder Information--Pricing Fund Shares."

The Fund discourages and does not accommodate frequent purchases and
redemptions of Fund shares by Fund shareholders and the Fund's Board of
Trustees has adopted policies and procedures with respect to such frequent
purchases and redemptions. The Fund's policies with respect to purchases,
redemptions and exchanges of Fund shares are described in the "How to Buy
Shares," "How to Exchange Shares" and "How to Sell Shares" sections of this
Prospectus. Except as described in each of these sections, and with respect to
trades that occur through omnibus accounts at intermediaries, as described
below, the Fund's policies regarding frequent trading of Fund shares are
applied uniformly to all shareholders. With respect to trades that occur
through omnibus accounts at intermediaries, such as investment managers,
broker-dealers, transfer agents and third party administrators, the Fund (i)
has requested assurance that such intermediaries currently selling Fund shares
have in place internal policies and procedures reasonably designed to address
market-timing concerns and has instructed such intermediaries to notify the
Fund immediately if they are unable to comply with such policies and procedures
and (ii) requires all prospective intermediaries to agree to cooperate in
enforcing the Fund's policies with respect to frequent purchases, redemptions
and exchanges of Fund shares.

Omnibus accounts generally do not identify customers' trading activity to the
Fund on an individual basis. Therefore, with respect to trades that occur
through omnibus accounts at intermediaries, the Fund is currently limited in
its ability to monitor trading activity or enforce the redemption fee with
respect to customers of such intermediaries. The ability of the Fund to monitor
exchanges made by the underlying shareholders in omnibus accounts, therefore,
is severely limited. Consequently, the Fund must rely on the financial
intermediary to monitor frequent short-term trading within the Fund by the
financial intermediary's customers. Certain intermediaries may not have the
ability to assess a redemption fee. There can be no assurance that the Fund
will be able to eliminate all market-timing activities.


                                                                              19


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

[GRAPHIC OMITTED]

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

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 Fund.

TAXES ON DISTRIBUTIONS. Your distributions are normally subject to federal and
state income tax when they are paid, whether you take them in cash or reinvest
them in Fund shares. A distribution also may be subject to local income tax.
Any income dividend distributions and any short-term capital gain distributions
are taxable to you as ordinary income. Any long-term capital gain distributions
are taxable as long-term capital gains, no matter how long you have owned
shares in the Fund. Under current law, a portion of the ordinary income
dividends you receive may be taxed at the same rate as long-term capital gains.
However, even if income received in the form of ordinary income dividends is
taxed at the same rates as long-term capital gains, such income will not be
considered long-term capital gains for other federal income tax purposes. For
example, you generally will not be permitted to offset ordinary income
dividends with capital losses. Short-term capital gain distributions will
continue to be taxed at ordinary income rates.

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 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 federal backup withholding tax on
taxable distributions and redemption proceeds (as of the date of this
Prospectus this rate is 28%). Any withheld amount would be sent to the IRS as
an advance payment of your taxes due on your income.

--------------------------------------------------------------------------------
SHARE CLASS ARRANGEMENTS

[GRAPHIC OMITTED]

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 Financial Advisor or other
authorized financial representative can help you decide which Class may be
appropriate for you.


20


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.

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



CLASS    SALES CHARGE                                                                                 MAXIMUM ANNUAL 12B-1 FEE

  A      Maximum 5.25% initial sales charge reduced for purchases of $25,000 or more; shares
         purchased without an initial sales charge are generally subject to a 1.00% CDSC during the
         first 18 months                                                                                      0.25%
  B      Maximum 5.00% CDSC during the first year decreasing to 0% after six years                            1.00%
  C      1.00% CDSC during first year                                                                         1.00%
  D      None                                                                                                 None


Certain shareholders may be eligible for reduced sales charges (i.e., breakpoint
discounts), CDSC waivers and eligibility minimums. Please see the information
for each Class set forth below for specific eligibility requirements. You must
notify your Morgan Stanley Financial Advisor or other authorized financial
representative (or Morgan Stanley Trust if you purchase shares directly through
the Fund) at the time a purchase order (or in the case of Class B or Class C
shares, a redemption order) is placed that the purchase (or redemption)
qualifies for a reduced sales charge (i.e., breakpoint discount), CDSC waiver or
eligibility minimum. Similar notification must be made in writing when an order
is placed by mail. The reduced sales charge, CDSC waiver or eligibility minimum
will not be granted if: (i) notification is not furnished at the time of order;
or (ii) a review of the records of Morgan Stanley DW or other authorized dealer
of Fund shares, or the Transfer Agent does not confirm your represented
holdings.

In order to obtain a reduced sales charge (i.e., breakpoint discount) or to meet
an eligibility minimum, it may be necessary at the time of purchase for you to
inform your Morgan Stanley Financial Advisor or other authorized financial
representative (or Morgan Stanley Trust if you purchase shares directly through
the Fund) of the existence of other accounts in which there are holdings
eligible to be aggregated to meet the sales load breakpoints or eligibility
minimums. In order to verify your eligibility, you may be required to provide
account statements and/or confirmations regarding shares of the Fund or other
Morgan Stanley funds held in all related accounts described below at Morgan
Stanley or by other authorized dealers, as well as shares held by related
parties, such as members of the same family or household, in order to determine
whether you have met a sales load breakpoint or eligibility minimum. The Fund
makes available, in a clear and prominent format, free of charge, on its web
site, www.morganstanley.com, information regarding applicable sales loads,
reduced sales charges (i.e., breakpoint discounts), sales load waivers and
eligibility minimums. The web site includes hyperlinks that facilitate access to
the information.


                                                                              21


[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]


CLASS A SHARES Class A shares are sold at net asset value plus an initial sales
charge of up to 5.25% of the public offering price. 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 CDSC of 1.00% on sales made within 18 months
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 and shareholder services (12b-1) fee
of up to 0.25% of the average daily net assets of the Class. The maximum annual
12b-1 fee payable by Class A shares is lower than the maximum annual 12b-1 fee
payable by Class B or Class C shares.

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



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

Less than $25,000                            5.25%                     5.54%
$25,000 but less than $50,000                4.75%                     4.99%
$50,000 but less than $100,000               4.00%                     4.17%
$100,000 but less than $250,000              3.00%                     3.09%
$250,000 but less than $500,000              2.50%                     2.56%
$500,000 but less than $1 million            2.00%                     2.04%
$1 million and over                          0.00%                     0.00%


You may benefit from a reduced sales charge schedule (i.e., breakpoint
discount) for purchases of Class A shares of the Fund, by combining, in a
single transaction, your purchase with purchases of Class A shares of the Fund
by the following related accounts:

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

o A family member account (limited to spouse, and children under the age of 21).

o Pension, profit sharing or other employee benefit plans of companies and
  their affiliates.

o Employer sponsored and individual retirement accounts (including IRAs, Keogh,
  401(k), 403(b), 408(k) and 457(b) Plans).

o Tax-exempt organizations.

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

COMBINED PURCHASE PRIVILEGE. You will have the benefit of reduced sales charges
by combining purchases of Class A shares of the Fund for any related account in
a single transaction with purchases of any class of shares of other Morgan
Stanley Multi-Class Funds for the related account or any other related account.
For the purpose of this combined purchase privilege, a "related account" is:

o A single account (including an individual account, a joint account and a trust
  account established solely for the benefit of the individual).

22


o A family member account (limited to spouse, and children under the age of 21,
  but including trust accounts established solely for the benefit of a spouse,
  or children under the age of 21).

o An IRA and single participant retirement account (such as a Keogh).

o An UGMA/UTMA account.

RIGHT OF ACCUMULATION. You may benefit from a reduced sales charge if the
cumulative net asset value of Class A shares of the Fund purchased in a single
transaction, together with the net asset value of all classes of shares of
Morgan Stanley Multi-Class Funds (including shares of Morgan Stanley
Non-Multi-Class Funds which resulted from an exchange from Morgan Stanley
Multi-Class Funds) held in related accounts amounts to $25,000 or more. For the
purposes of the rights of accumulation privilege, a related account is any one
of the accounts listed under "Combined Purchase Privilege" above.


NOTIFICATION. You must notify your Morgan Stanley Financial Advisor or other
authorized financial representative (or Morgan Stanley Trust if you purchase
shares directly through the Fund) at the time a purchase order is placed that
the purchase qualifies for a reduced sales charge under any of the privileges
discussed above. 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 Morgan Stanley DW or other authorized dealer of Fund shares or the
Transfer Agent does not confirm your represented holdings.


In order to obtain a reduced sales charge under any of the privileges discussed
above, it may be necessary at the time of purchase for you to inform your
Morgan Stanley Financial Advisor or other authorized financial representative
(or Morgan Stanley Trust if you purchase shares directly through the Fund) of
the existence of other accounts in which there are holdings eligible to be
aggregated to meet the sales load breakpoint and/or right of accumulation
threshold. In order to verify your eligibility, you may be required to provide
account statements and/or confirmations regarding shares of the Fund or other
Morgan Stanley Funds held in all related accounts described above at Morgan
Stanley or by other authorized dealers, as well as shares held by related
parties, such as members of the same family or household, in order to determine
whether you have met the sales load breakpoint and/or right of accumulation
threshold. The Fund makes available, in a clear and prominent format, free of
charge, on its web site, www.morganstanley.com, information regarding
applicable sales loads and reduced sales charges (i.e., breakpoint discounts).
The web site includes hyperlinks that facilitate access to the information.

LETTER OF INTENT. The above 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 within a 13-month period. The initial purchase
under a Letter of Intent must be at least 5% of the stated investment goal. The
Letter of Intent does not preclude the Fund (or any other Multi-Class Fund)
from discontinuing sales of its shares. To determine the applicable sales
charge reduction, you may also include: (1) the cost of shares of other Morgan
Stanley 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 historical cost of shares of other funds you
currently own acquired in exchange for shares of funds purchased during that
period at a price including a front-end sales charge. You may combine purchases
and exchanges by family members (limited to spouse, and children under the age
of 21) during the periods referenced


                                                                              23


in (1) and (2) above. You should retain any records necessary to substantiate
historical costs because the Fund, its Transfer Agent and any financial
intermediaries may not maintain this information. You can obtain a Letter of
Intent by contacting your Morgan Stanley Financial Advisor or other authorized
financial representative, or by calling toll-free (800) 869-NEWS. If you do not
achieve the stated investment goal within the 13-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. Shares
acquired through reinvestment of distributions are not aggregated to achieve
the stated investment goal.

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 a banking affiliate of the Investment Adviser provides
  discretionary trustee services.

o Persons participating in a fee-based investment program (subject to all of
  its terms and conditions, including termination fees, and 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 Qualified state tuition plans described in Section 529 of the Internal
  Revenue Code and donor-advised charitable gift funds (subject to all
  applicable terms and conditions) and certain other investment programs that
  do not charge an asset-based fee and have been approved by the Fund's
  distributor.

o Employer-sponsored employee benefit plans, whether or not qualified under the
  Internal Revenue Code, for which an entity independent from Morgan Stanley
  serves as recordkeeper under an alliance or similar agreement with Morgan
  Stanley's Retirement Plan Solutions ("Morgan Stanley Eligible Plans").

o A Morgan Stanley 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 Insurance company separate accounts that have been approved by the Fund's
  distributor.

o Current or retired Directors or Trustees of the Morgan Stanley 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 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.


24


[sidebar]
----------------------------------------
CONTINGENT DEFERRED SALES CHARGE OR CDSC

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

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.

YEAR SINCE PURCHASE PAYMENT MADE       CDSC AS A PERCENTAGE 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

The CDSC is assessed on an amount equal to the lesser of the then market value
of the shares or the historical cost of the shares (which is the amount
actually paid for the shares at the time of original purchase) being redeemed.
Accordingly, no sales charge is imposed on increases in net asset value above
the initial purchase price. In determining whether a CDSC applies to a
redemption, it is assumed that the shares being redeemed first are any shares
in the shareholders Fund account that are not subject to a CDSC, followed by
shares held the longest in the shareholder's account.


Broker-dealers or other financial intermediaries may impose a limit on the
dollar value of a Class B share purchase order that they will accept. For
example, a Morgan Stanley Financial Advisor generally will not accept purchase
orders for Class B shares that in the aggregate amount to $25,000 or more. You
should discuss with your financial advisor which share class is most
appropriate for you, based on the size of your investment, your expected time
horizon for holding the shares and other factors, bearing in mind the
availability of reduced sales loads on Class A share purchases of $25,000 or
more and for existing shareholders who hold over $25,000 in Morgan Stanley
Funds.


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 individual name or in the names of you and your
    spouse as joint tenants with right of survivorship; (ii) registered in the
    name of a trust of which (a) you are the settlor and that is revocable by
    you (i.e., a "living trust") or (b) you and your spouse are the settlors and
    that is revocable by you or your spouse (i.e., a "joint living trust"); or
    (iii) held in a qualified corporate or self-employed retirement plan, IRA or
    403(b) Custodial Account, provided in each 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


                                                                              25


    (or, in the case of a "key employee" of a "top heavy" plan, following
    attainment of age 591/2); (ii) distributions from an IRA or 403(b) Custodial
    Account following attainment of age 591/2; 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 in connection with the Systematic Withdrawal Plan of up to
    12% annually of the value of each fund from which plan sales are made. The
    percentage is determined on the date you establish the Systematic Withdrawal
    Plan and based on the next calculated share price. You may have this CDSC
    waiver applied in amounts up to 1% per month, 3% per quarter, 6%
    semi-annually or 12% annually. Shares with no CDSC will be sold first,
    followed by those with the lowest CDSC. As such, the waiver benefit will be
    reduced by the amount of your shares that are not subject to a CDSC. If you
    suspend your participation in the plan, you may later resume plan payments
    without requiring a new determination of the account value for the 12% CDSC
    waiver.

o   Sales of shares purchased prior to April 1, 2004 or acquired in exchange for
    shares purchased prior to April 1, 2004, if you simultaneously invest the
    proceeds from such sale in the Investment Adviser's mutual fund asset
    allocation program, pursuant to which investors pay an asset-based fee. Any
    shares acquired in connection with the Investment Adviser's mutual fund
    asset allocation program are subject to all of the terms and conditions of
    that program, including termination fees, and 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 Morgan Stanley Financial Advisor or other
authorized financial representative or call toll-free (800) 869-NEWS.


DISTRIBUTION FEE. Class B shares are also subject to an annual distribution and
shareholder services (12b-1) fee of up to 1.00% of the average daily net assets
of Class B shares. The maximum annual 12b-1 fee payable by Class B shares is
higher than the maximum annual 12b-1 fee payable by Class A shares.


CONVERSION FEATURE. After eight years, Class B shares will convert
automatically to Class A shares of the Fund with no initial sales charge. The
eight-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 eight-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.

In the case of Class B shares held in a Morgan Stanley 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 Fund
purchased by that plan.

If you exchange your Class B shares for shares of a Money Market Fund, a
No-Load Fund or the Limited Duration 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


26


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 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 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 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 1.00% 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.


Brokers, dealers or other financial intermediaries may impose a limit on the
dollar value of a Class C share purchase order that they will accept. For
example, a Morgan Stanley Financial Advisor generally will not accept purchase
orders for Class C shares that in the aggregate amount to $250,000 or more. You
should discuss with your financial advisor which share class is most
appropriate for you based on the size of your investment, your expected time
horizon for holding the shares and other factors, bearing in mind the
availability of reduced sales loads on Class A share purchases of $25,000 or
more and for existing shareholders who hold over $25,000 in Morgan Stanley
Funds.


DISTRIBUTION FEE. Class C shares are subject to an annual distribution and
shareholder services (12b-1) fee of up to 1.00% of the average daily net assets
of that Class. The maximum annual 12b-1 fee payable by Class C shares is higher
than the maximum annual 12b-1 fee payable by Class A 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 and shareholder
services (12b-1) fees applicable to Class C shares for as long as the investor
owns such shares.

CLASS D SHARES

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

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



                                                                              27


o   Persons participating in a fee-based investment program (subject to all of
    its terms and conditions, including termination fees, and 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. With respect to Class D shares
    held through the Morgan Stanley Choice Program, at such time as those Fund
    shares are no longer held through the program, the shares will be
    automatically converted into Class A shares (which are subject to higher
    expenses than Class D shares) based on the then current relative net asset
    values of the two Classes.

o   Certain investment programs that do not charge an asset-based fee and have
    been approved by the Fund's distributor.

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

o   Certain unit investment trusts sponsored by Morgan Stanley DW or its
    affiliates.

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.

o The Investment Adviser and its affiliates with respect to shares held in
  connection with certain deferred compensation programs established for their
  employees.

A purchase order that meets the requirements for investment in Class D shares
can be made only in Class D shares.

Class D shares are not offered for investments made through Section 529 plans,
donor-advised charitable gift funds and insurance company separate accounts
(regardless of the size of the investment).

MEETING CLASS D ELIGIBILITY MINIMUMS. To meet the $5 million ($25 million for
Morgan Stanley 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 Multi-Class Funds; and/or (2)
previous purchases of Class A and Class D shares of Multi-Class Funds you
currently own, along with shares of Morgan Stanley Funds you currently own that
you acquired in exchange for those shares. Shareholders cannot combine
purchases made by family members or a shareholder's other related accounts in a
single transaction for purposes of meeting the $5 million initial investment
minimum requirement to qualify to purchase Class D shares.

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


PLAN OF DISTRIBUTION (RULE 12B-1 FEES) The Fund has adopted a Plan of
Distribution in accordance with Rule 12b-1 under the Investment Company Act with
respect to the Class A, Class B and Class C shares. (Class D shares are offered
without any 12b-1 fee.) 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



28


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
and reduce your return in these Classes and may cost you more than paying other
types of sales charges.

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

[GRAPHIC OMITTED]

The Investment Adviser and/or distributor may pay compensation (out of their own
funds and not as an expense of the Fund) to certain affiliated or unaffiliated
brokers, dealers or other financial intermediaries or service providers in
connection with the sale or retention of Fund shares and/or shareholder
servicing. Such compensation may be significant in amount and the prospect of
receiving any such additional compensation may provide such affiliated or
unaffiliated entities with an incentive to favor sales of shares of the Fund
over other investment options. Any such payments will not change the net asset
value or the price of the Fund's shares. For more information, please see the
Fund's Statement of Additional Information.


                                                                              29


Financial Highlights

The financial highlights table is intended to help you understand the Fund's
financial performance for the periods indicated. Certain information reflects
financial results for a single Fund share throughout each period. 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 Deloitte & Touche LLP, an independent
registered public accounting firm, whose report, along with the Fund's
financial statements, are incorporated by reference in the Statement of
Additional Information from the Fund's annual report, which is available upon
request.


CLASS A SHARES




 FOR THE YEAR ENDED SEPTEMBER 30,                 2005        2004      2003       2002        2001

SELECTED PER SHARE DATA:
Net asset value, beginning of period             $12.23      $10.10    $ 7.86     $10.74      $10.33
                                                 ------      ------    ------     ------      ------
Income (loss) from investment operations:
  Net investment income++                          0.19        0.12      0.07       0.04        0.06
  Net realized and unrealized gain (loss)          1.00        2.10      2.17      (2.92)       0.35
                                                 ------      ------    ------     ------      ------
Total income (loss) from investment operations     1.19        2.22      2.24      (2.88)       0.41
                                                 ------      ------    ------     ------      ------
Less dividends from net investment income         (0.15)      (0.09)       --         --          --
                                                 ------      ------    ------     ------      ------
Net asset value, end of period                   $13.27      $12.23    $10.10     $ 7.86      $10.74
----------------------------------------------------------------------------------------------------
TOTAL RETURN+                                      9.71%      22.06%    28.50%    (26.82)%      3.97%
----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS(1):
Expenses                                           0.97%       1.28%     1.53%      1.42%       1.45%
Net investment income                              1.50%       1.06%     0.78%      0.36%       0.50%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands         $73,559     $16,621   $12,972    $11,396     $26,350
Portfolio turnover rate                              31%         83%       61%        56%         45%
----------------------------------------------------------------------------------------------------




++    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.


30


CLASS B SHARES




FOR THE YEAR ENDED SEPTEMBER 30,                   2005       2004       2003       2002          2001

SELECTED PER SHARE DATA:
Net asset value, beginning of period              $11.80     $ 9.74      $7.64     $10.52        $10.20
                                                  ------     ------      -----     ------        ------
Income (loss) from investment operations:
  Net investment income (loss)++                    0.09       0.03       0.00      (0.04)        (0.03)
  Net realized and unrealized gain (loss)           0.95       2.03       2.10      (2.84)         0.35
                                                  ------     ------      -----     ------        ------
Total income (loss) from investment operations      1.04       2.06       2.10      (2.88)         0.32
                                                  ------     ------      -----     ------        ------
Less dividends from net investment income          (0.05)        --         --         --            --
                                                  ------     ------      -----     ------        ------
Net asset value, end of period                    $12.79     $11.80      $9.74     $ 7.64        $10.52
---------------------------------------------------------------------------------------------------------
TOTAL RETURN+                                       8.85%     21.15%     27.49%    (27.38)%        3.14%
---------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS(1):
Expenses                                            1.72%      2.03%      2.28%      2.18%         2.21%
Net investment income (loss)                        0.75%      0.31%      0.03%     (0.40)%       (0.26)%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands         $249,346   $334,125   $304,486   $321,210      $470,659
Portfolio turnover rate                               31%        83%        61%        56%           45%
---------------------------------------------------------------------------------------------------------




++    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.


                                                                              31


          Financial Highlights (Continued)

CLASS C SHARES





FOR THE YEAR ENDED SEPTEMBER 30,                  2005           2004          2003         2002           2001

SELECTED PER SHARE DATA:
Net asset value, beginning of period             $11.81         $ 9.75        $ 7.64       $10.52         $10.20
                                                 ------         ------        ------       ------         ------
Income (loss) from investment operations:
  Net investment income (loss)++                   0.10           0.04          0.01        (0.04)         (0.03)
  Net realized and unrealized gain (loss)          0.95           2.02          2.10        (2.84)          0.35
                                                 ------         ------        ------       ------         ------
Total income (loss) from investment operations     1.05           2.06          2.11        (2.88)          0.32
                                                 ------         ------        ------       ------         ------
Less dividends from net investment income         (0.06)            --            --           --             --
                                                 ------         ------        ------       ------         ------
Net asset value, end of period                   $12.80         $11.81*       $ 9.75       $ 7.64         $10.52
-------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+                                      8.93%         21.15%        27.62%      (27.38)%         3.14%
-------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS(1):
Expenses                                             1.71%        2.00%         2.21%        2.18%          2.21%
Net investment income (loss)                         0.76%        0.34%         0.10%       (0.40)%        (0.26)%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands          $ 24,526      $26,297       $22,068      $21,688        $28,097
Portfolio turnover rate                             31%             83%           61%          56%            45%
-------------------------------------------------------------------------------------------------------------------




++    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.

*     Includes the effect of dividends from net investment income of $0.002 per
      share.

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


32


CLASS D SHARES





 FOR THE YEAR ENDED SEPTEMBER 30,                 2005        2004       2003      2002        2001

SELECTED PER SHARE DATA:
Net asset value, beginning of period             $12.39      $10.23     $ 7.94    $10.83      $10.39
                                                 ------      ------     ------    ------      ------
Income (loss) from investment operations:
  Net investment income++                          0.23        0.16       0.09      0.06        0.09
  Net realized and unrealized gain (loss)          0.99        2.12       2.20     (2.95)       0.35
                                                 ------      ------     ------    ------      ------
Total income (loss) from investment operations     1.22        2.28       2.29     (2.89)       0.44
                                                 ------      ------     ------    ------      ------
Less dividends from net investment income         (0.17)      (0.12)        --        --          --
                                                 ------      ------     ------    ------      ------
Net asset value, end of period                   $13.44      $12.39     $10.23    $ 7.94      $10.83
-------------------------------------------------------------------------------------------------------
TOTAL RETURN+                                      9.91%      22.42%     28.84%   (26.69)%      4.23%
-------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS(1):
Expenses                                           0.72%       1.03%      1.28%     1.18%       1.21%
Net investment income                              1.75%       1.31%      1.03%     0.60%       0.74%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands         $75,832     $68,870    $45,204   $25,424     $13,944
Portfolio turnover rate                              31%         83%        61%       56%         45%
-------------------------------------------------------------------------------------------------------




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


                                                                              33


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                                                                              35


Notes (Continued)

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36


Morgan Stanley Funds




EQUITY                                   ---------------------------------------      FIXED INCOME
----------------------------------       INDEX                                        --------------------------------------
BLEND/CORE                                                                            TAXABLE SHORT TERM
                                         Equally-Weighted S&P 500 Fund
Dividend Growth Securities               KLD Social Index Fund                        Limited Duration Fund*+
Multi-Asset Class Fund                   Nasdaq-100 Index Fund                        Limited Duration U.S. Treasury Trust*
Total Return Trust                       S&P 500 Index Fund
                                         Total Market Index Fund                      --------------------------------------
----------------------------------                                                    TAXABLE INTERMEDIATE TERM
DOMESTIC HYBRID                          ---------------------------------------
                                         SPECIALTY                                    Flexible Income Trust
Allocator Fund                                                                        High Yield Securities
Balanced Growth Fund                     Biotechnology Fund                           Income Trust
Balanced Income Fund                     Convertible Securities Trust                 Mortgage Securities Trust
Income Builder Fund                      Financial Services Trust                     U.S. Government Securities Trust
Strategist Fund                          Global Utilities Fund
                                         Health Sciences Trust                        --------------------------------------
----------------------------------       Information Fund                             TAX-FREE
GLOBAL/INTERNATIONAL                     Natural Resource Development Securities
                                         Real Estate Fund                             California Tax-Free Income Fund
European Equity Fund                     Utilities Fund                               Limited Term Municipal Trust*+
Global Advantage Fund                                                                 New York Tax-Free Income Fund
Global Dividend Growth Securities        ---------------------------------------      Tax-Exempt Securities Trust
International Fund                       VALUE
International SmallCap Fund
International Value Equity Fund          Fundamental Value Fund                       MONEY MARKET*
Japan Fund                               Mid-Cap Value Fund                           --------------------------------------
Pacific Growth Fund                      Small-Mid Special Value Fund                 TAXABLE
                                         Special Value Fund
----------------------------------       Value Fund                                   Liquid Asset Fund
GROWTH                                                                                U.S. Government Money Market

Aggressive Equity Fund                                                                --------------------------------------
American Opportunities Fund                                                           TAX-FREE
Capital Opportunities Trust
Developing Growth Securities Trust                                                    California Tax-Free Daily Income Trust
Growth Fund                                                                           New York Municipal Money Market Trust
Special Growth Fund                                                                   Tax-Free Daily Income Trust


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

Unless otherwise noted, each listed Morgan Stanley Fund is a Multi-Class Fund.
A Multi-Class Fund is a mutual fund offering multiple classes of shares.

*     Single-Class Fund(s)

+     No-Load (Mutual) Fund


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 toll-free (800) 869-NEWS.
Free copies of these documents are also available from our internet site at:
WWW.MORGANSTANLEY.COM/FUNDS.

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

Information about the Fund (including the Statement of Additional Information)
can be viewed and copied at the Securities and Exchange Commission's (the
"SEC") Public Reference Room in Washington, DC. Information about the Reference
Room's operations may be obtained by calling the SEC at (202) 551-8090. 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: publicinfo@sec.gov, or by writing the Public
Reference Section of the SEC, Washington, DC 20549-0102.

TICKER SYMBOLS:
---------------------------------------
CLASS A:     VLUAX    CLASS B:    VLUBX
---------------------------------------
CLASS C:     VLUCX    CLASS D:    VLUDX
---------------------------------------

(THE FUND'S INVESTMENT COMPANY ACT FILE NO. IS 811-8861)

Investments and services offered through Morgan Stanley DW Inc., member SIPC.
Morgan Stanley Distributors Inc., member NASD.

(Copyright)  2006 Morgan Stanley

[GRAPHIC OMITTED]
MORGAN STANLEY

CLF# 36045PRO-00


MORGAN STANLEY FUNDS
[GRAPHIC OMITTED]
                                                                  Morgan Stanley
                                                                      Value Fund
                                                                     36045 01/06




[GRAPHIC OMITTED]
MORGAN STANLEY

                                                                      Prospectus
                                                                January 27, 2006

STATEMENT OF ADDITIONAL INFORMATION                       MORGAN STANLEY
                                                          VALUE FUND
JANUARY 27, 2006

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

     This Statement of Additional Information is not a prospectus. The
Prospectus (dated January 27, 2006) for Morgan Stanley Value Fund may be
obtained without charge from the Fund at its address or telephone number listed
below or from Morgan Stanley DW Inc. at any of its branch offices.


     The Fund's audited financial statements for the fiscal year ended
September 30, 2005, including notes thereto and the report of Deloitte & Touche
LLP, are herein incorporated by reference from the Fund's annual report. A copy
of the Fund's Annual Report to Shareholders must accompany the delivery of this
Statement of Additional Information.





Morgan Stanley
Value Fund
1221 Avenue of the Americas
New York, NY 10020
(800) 869-NEWS



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 ...........................  15
        D. Disclosure of Portfolio Holdings ................................  17
III.    Management of the Fund .............................................  20
        A. Board of Trustees ...............................................  20
        B. Management Information ..........................................  21
        C. Compensation ....................................................  26
IV.     Control Persons and Principal Holders of Securities ................  28
V.      Investment Advisory and Other Services .............................  28
        A. Investment Adviser and Administrator ............................  28
        B. Principal Underwriter ...........................................  29
        C. Services Provided by the Investment Adviser and Administrator ...  30
        D. Dealer Reallowances .............................................  31
        E. Rule 12b-1 Plan .................................................  31
        F. Other Service Providers .........................................  34
        G. Fund Management .................................................  35
        H. Codes of Ethics .................................................  36
        I. Proxy Voting Policy and Proxy Voting Record .....................  36
        J. Revenue Sharing .................................................  38
VI.     Brokerage Allocation and Other Practices ...........................  39
        A. Brokerage Transactions ..........................................  39
        B. Commissions .....................................................  39
        C. Brokerage Selection .............................................  40
        D. Directed Brokerage ..............................................  41
        E. Regular Broker-Dealers ..........................................  41
VII.    Capital Stock and Other Securities .................................  41
VIII.   Purchase, Redemption and Pricing of Shares .........................  42
        A. Purchase/Redemption of Shares ...................................  42
        B. Offering Price ..................................................  42
IX.     Taxation of the Fund and Shareholders ..............................  43
X.      Underwriters .......................................................  46
XI.     Performance Data ...................................................  46
XII.    Financial Statements ...............................................  46
XIII.   Fund Counsel .......................................................  46



                                       2



                      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).

     "Administrator" or "Morgan Stanley Services" - Morgan Stanley Services
Company Inc., a wholly-owned fund services subsidiary of the Investment
Adviser.

     "Custodian" - The Bank of New York.

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

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

     "Fund" - Morgan Stanley Value Fund, a registered open-end investment
company.

     "Independent Trustees" - Trustees who are not "interested persons" (as
defined by the Investment Company Act of 1940, as amended ("Investment Company
Act")) of the Fund.

     "Investment Adviser" - Morgan Stanley Investment Advisors Inc., a
wholly-owned investment adviser subsidiary of Morgan Stanley.

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

     "Morgan Stanley DW" - Morgan Stanley DW Inc., a wholly-owned broker-dealer
subsidiary of Morgan Stanley.

     "Morgan Stanley Funds" - Registered investment companies for which the
Investment Adviser serves as the investment adviser; and that hold themselves
out to investors as related companies for investment and investor services.

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

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

                                       3



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

     The Fund was organized as a Massachusetts business trust, under a
Declaration of Trust, on June 9, 1998, with the name Morgan Stanley Dean Witter
Value Fund. Effective June 18, 2001, the Fund's name was changed to Morgan
Stanley Value Fund.


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

A. CLASSIFICATION

     The Fund is an open-end, diversified management investment company whose
investment objective is total return.

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."

     OPTIONS AND FUTURES TRANSACTIONS. The Fund may engage in transactions in
listed and over-the-counter ("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 United
States) 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 United States) 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 United
States) 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 United States) 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 as 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 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.


                                       4



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

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

     In the event of the bankruptcy of a broker through which the Fund engages
in transactions in options, the Fund could experience delays and/or losses in
liquidating open positions purchased or sold through the broker and/or incur a
loss of all or part of its margin deposits with the broker. In the case of OTC
options, if the transacting dealer fails to make or take delivery of the
securities underlying an option


                                       5



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.

     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


                                       6



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, 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, U.S. government securities or other liquid portfolio 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 Commodity
Futures Trading Commission recently eliminated limitations on futures trading
by certain regulated entities, including registered investment companies, and
consequently registered investment companies may engage in unlimited futures
transactions and options thereon provided that the investment manager or
adviser to the company claims an exclusion from regulation as a commodity pool
operator. In connection with its management of the Fund, the Investment Adviser
has claimed such an exclusion from registration as a commodity pool operator
under the Commodity Exchange Act ("CEA"). Therefore, it is not subject to the
registration and regulatory requirements of the CEA. Therefore there are no
limitations on the extent to which the Fund may engage in non-hedging
transactions involving futures and options thereon except as set forth in the
Fund's Prospectus or Statement of Additional Information. There is no overall
limitation on the percentage of the Fund's net assets which may be subject to a
hedge position.

     Risks of Transactions in Futures Contracts and Related Options. The prices
of securities and indexes subject to futures contracts (and thereby the futures
contract prices) may correlate imperfectly with the behavior of the cash prices
of the Fund's portfolio securities (and the currencies in which they are
denominated). Also, prices of futures contracts may not move in tandem with the
changes in prevailing interest rates, market movements and/or currency exchange
rates against which the Fund seeks a hedge. A correlation may also be distorted
(a) temporarily, by short-term traders' seeking to profit from the difference
between a contract or security price objective and their cost of borrowed
funds; (b) by investors in futures contracts electing to close out their
contracts through offsetting transactions rather than meet margin deposit
requirements; (c) by investors in futures contracts opting to make or take


                                       7



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 Adviser 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 to 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 on 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.

     MONEY MARKET SECURITIES. The Fund may invest in various money market
securities for cash management purposes or when assuming a temporary defensive
position, which among others may


                                       8



include commercial paper, bankers' acceptances, bank obligations, corporate
debt securities, certificates of deposit, U.S. government securities,
obligations of savings institutions and repurchase agreements. Such securities
are limited to:

     U.S. 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 15%
or less of the Fund's total assets in all such obligations and in all illiquid
assets, in the aggregate;


     Commercial Paper. Commercial paper rated within the two highest grades by
Standard and Poor's Rating Group, a division of The McGraw-Hill Companies, Inc.
("S&P"), or by Moody's Investors Service, Inc. ("Moody's") or, if not rated,
issued by a company having an outstanding debt issue rated at least AAA by S&P
or Aaa by Moody's; and


     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 approved by
the Trustees that are 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 Adviser and 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. It is the current policy of the Fund not to
invest in repurchase agreements that do not mature within seven days if any
such investment, together with any other illiquid assets held by the Fund,
amounts to more than 15% of its net assets.


                                       9



     OTHER INVESTMENT VEHICLES. The Fund may acquire shares in other investment
companies including foreign investment companies. Investment in foreign
investment companies may be the sole or most practical means by which the Fund
may participate in certain foreign securities markets. The Fund may invest in
shares of various exchange-traded funds ("ETFs"), including exchange-traded
index and bond funds. Exchange-traded index funds seek to track the performance
of various securities indices. Shares of ETFs have many of the same risks as
direct investments in common stocks or bonds. In addition, their market value
is expected to rise and fall as the value of the underlying index or bonds
rises and falls. The market value of their shares may differ from the net asset
value of the particular fund. As a shareholder in an investment company, the
Fund would bear its ratable share of that entity's expenses, including its
investment advisory and administration fees. At the same time, the Fund would
continue to pay its own advisory and administration fees and other expenses. As
a result, the Fund and its shareholders, in effect, will be absorbing duplicate
levels of fees with respect to investments in other investment companies.

     ZERO COUPON SECURITIES. A portion of the fixed-income securities purchased
by the Fund may be zero coupon securities. Such securities are purchased at a
discount from their face amount, giving the purchaser the right to receive
their full value at maturity. The interest earned on such securities is,
implicitly, automatically compounded and paid out at maturity. While such
compounding at a constant rate eliminates the risk of receiving lower yields
upon reinvestment of interest if prevailing interest rates decline, the owner
of a zero coupon security will be unable to participate in higher yields upon
reinvestment of interest received on interest-paying securities if prevailing
interest rates rise.

     A zero coupon security pays no interest to its holder during its life.
Therefore, to the extent the Fund invests in zero coupon securities, it will
not receive current cash available for distribution to shareholders. In
addition, zero coupon securities are subject to substantially greater price
fluctuations during periods of changing prevailing interest rates than are
comparable securities which pay interest on a current basis. Current federal
tax law requires that a holder (such as the Fund) of a zero coupon security
accrue a portion of the discount at which the security was purchased as income
each year even though the Fund receives no interest payments in cash on the
security during the year.

     INVESTMENT IN REAL ESTATE INVESTMENT TRUSTS. Real Estate Investment Trusts
("REITs") pool investors' funds for investment primarily in income producing
real estate or real estate related loans or interests. A REIT is not taxed on
income distributed to its shareholders or unitholders if it complies with
regulatory requirements relating to its organization, ownership, assets and
income, and with a regulatory requirement that it distribute to its
shareholders or unitholders at least 90% of its taxable income for each taxable
year. Generally, REITs can be classified as Equity REITs, Mortgage REITs or
Hybrid REITs. Equity REITs invest the majority of their assets directly in real
property and derive their income primarily from rents and capital gains from
appreciation realized through property sales. Equity REITs are further
categorized according to the types of real state securities they own, e.g.,
apartment properties, retail shopping centers, office and industrial
properties, hotels, health-care facilities, manufactured housing and
mixed-property types. Mortgage REITs invest the majority of their assets in
real estate mortgages and derive their income primarily from interest payments.
Hybrid REITs combine the characteristics of both Equity and Mortgage REITs.

     A shareholder in the Fund, by investing in REITs indirectly through the
Fund, will bear not only his proportionate share of the expenses of the Fund,
but also, indirectly, the management expenses of the underlying REITs. REITs
may be affected by changes in the value of their underlying properties and by
defaults by borrowers or tenants. Mortgage REITs may be affected by the quality
of the credit extended. Furthermore, REITs are dependent on specialized
management skills. Some REITs may have limited diversification and may be
subject to risks inherent in investments in a limited number of properties, in
a narrow geographic area, or in a single property type. REITs depend generally
on their ability to generate cash flow to make distributions to shareholders or
unitholders, and may be subject to defaults by borrowers and to
self-liquidations. In addition, the performance of a REIT may be affected by
its failure to qualify for tax-free pass-through of income, or its failure to
maintain exemption from registration under the Investment Company Act.

     LOANS OF PORTFOLIO SECURITIES. The Fund may lend its portfolio securities
to brokers, dealers, banks and other institutional investors. By lending its
portfolio securities, the Fund attempts to increase


                                       10



its net investment income through the receipt of interest on the cash
collateral with respect to the loan or fees received from the borrower in
connection with the loan. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan would be for the
account of the Fund. The Fund employs an agent to implement the securities
lending program and the agent receives a fee from the Fund for its services.
The Fund will not lend more than 331|M/3% of the value of its total assets.

     The Fund may lend its portfolio securities so long as the terms, structure
and the aggregate amount of such loans are not inconsistent with the Investment
Company Act or the Rules and Regulations or interpretations of the SEC
thereunder, which currently require that (i) the borrower pledge and maintain
with the Fund collateral consisting of liquid, unencumbered assets having a
value at all times not less than 100% of the value of the securities loaned;
(ii) the borrower add to such collateral whenever the price of the securities
loaned rises (i.e., the borrower "marks to market" on a daily basis); (iii) the
loan be made subject to termination by the Fund at any time; and (iv) the Fund
receive a reasonable return on the loan (which may include the Fund investing
any cash collateral in interest bearing short-term investments), any
distributions on the loaned securities and any increase in their market value.
In addition, voting rights may pass with the loaned securities, but the Fund
will retain the right to call any security in anticipation of a vote that the
Investment Adviser deems material to the security on loan.

     There may be risks of delay and costs involved in recovery of securities
or even loss of rights in the collateral should the borrower of the securities
fail financially. These delays and costs could be greater for foreign
securities. However, loans will be made only to borrowers deemed by the
Investment Adviser to be creditworthy and when, in the judgment of the
Investment Adviser, the income which can be earned from such securities loans
justifies the attendant risk. All relevant facts and circumstances, including
the creditworthiness of the broker, dealer, bank or institution, will be
considered in making decisions with respect to the lending of securities,
subject to review by the Fund's Board of Trustees. The Fund also bears the risk
that the reinvestment of collateral will result in a principal loss. Finally,
there is the risk that the price of the securities will increase while they are
on loan and the collateral will not be adequate to cover their value.

     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 may take place a month or more
after the date of commitment. While the Fund will only purchase securities on a
when-issued, delayed delivery or forward commitment basis with the intention of
acquiring the securities, the Fund may sell the securities before the
settlement date, if it is deemed advisable. The securities so purchased or sold
are subject to market fluctuation and no interest or dividends accrue to the
purchaser prior to the settlement date.

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

     WHEN, AS AND IF ISSUED SECURITIES. The Fund may purchase securities on a
"when, as and if issued" basis, under which the issuance of the security
depends upon the occurrence of a subsequent event, such as approval of a
merger, corporate reorganization or debt restructuring. The commitment for the
purchase of any such security will not be recognized in the portfolio of the
Fund until the Investment Adviser 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, U.S. Government
securities or other liquid portfolio securities equal in value to recognized
commitments for such securities.


                                       11



     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 total 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, as amended (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 Adviser, 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.

     WARRANTS AND SUBSCRIPTION RIGHTS. The Fund may invest in warrants and
subscription rights. A warrant is, in effect, an option to purchase equity
securities at a specific price, generally valid for a specific period of time,
and has no voting rights, pays no dividends and has no rights with respect to
the corporation issuing it. The Fund may acquire warrants attached to other
securities without reference to the foregoing limitations.

     A subscription right is a privilege granted to existing shareholders of a
corporation to subscribe to shares of a new issue of common stock before it is
offered to the public. A subscription right normally has a life of two to four
weeks and a subscription price lower than the current market value of the
common stock.

     CONVERTIBLE SECURITIES. The Fund may invest in securities which are
convertible into common stock or other securities of the same or a different
issuer or into cash within a particular period of time at a specified price or
formula. Convertible securities are generally fixed-income securities (but may
include preferred stock) and generally rank senior to common stock. The value
of a convertible security is a function of its "investment value" (its value as
if it did not have a conversion privilege), and its "conversion value" (the
security's worth if it were to be exchanged for the underlying security, at
market value, pursuant to its conversion privilege).

     To the extent that a convertible security's investment value is greater
than its conversion value, its price will be primarily a reflection of such
investment value and its price will be likely to increase when interest rates
fall and decrease when interest rates rise, as with a fixed-income security
(the credit standing of the issuer and other factors may also have an effect on
the convertible security's value). If the conversion value exceeds the
investment value, the price of the convertible security will rise above its
investment value and, in addition, will sell at some premium over its
conversion value. (This premium represents the price investors are willing to
pay for the privilege of purchasing a fixed-income security with a possibility
of capital appreciation due to the conversion privilege.) At such times the
price of the convertible security will tend to fluctuate directly with the
price of the underlying equity security. Convertible securities may be
purchased by the Fund at varying price levels above their investment values
and/or their conversion values in keeping with the Fund's objective.

     Up to 5% of the Fund's net assets may be invested in convertible
securities that are below investment grade. Debt securities rated below
investment grade are commonly known as "junk bonds."


                                       12



Although the Fund selects these securities primarily on the basis of their
equity characteristics, investors should be aware that convertible securities
rated in these categories are considered high risk securities; the rating
agencies consider them speculative with respect to the issuer's continuing
ability to make timely payments of interest and principal. Thus, to the extent
that such convertible securities are acquired by the Fund, there is a greater
risk as to the timely repayment of the principal of, and timely payment of
interest or dividends on, such securities than in the case of higher-rated
convertible securities.

     FOREIGN INVESTMENT. Investing in foreign securities involves certain
special considerations which are not typically associated with investments in
the securities of U.S. issuers. Foreign issuers are not generally subject to
uniform accounting, auditing and financial reporting standards and may have
policies that are not comparable to those of domestic issuers. As a result,
there may be less information available about foreign issuers than about
domestic issuers. Securities of some foreign issuers are generally less liquid
and more volatile than securities of comparable domestic issuers. There is
generally less government supervision and regulation of stock exchanges,
brokers and listed issuers than in the United States. In addition, with respect
to certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, political and social instability, or diplomatic
development which could affect U.S. investments in those countries. The costs
of investing in foreign countries frequently is higher than the costs of
investing in the United States. Although the Investment Adviser endeavors to
achieve the most favorable execution costs in portfolio transactions, fixed
commissions on many foreign stock exchanges are generally higher than
negotiated commissions on U.S. exchanges.

     Investments in securities of foreign issuers generally are denominated in
foreign currencies. Accordingly, the value of the Fund's assets, as measured in
U.S. dollars may be affected favorably or unfavorably by changes in currency
exchange rates and in exchange control regulations. The Fund may incur costs in
connection with conversions between various currencies.

     Certain foreign governments levy withholding or other taxes on dividend
and interest income. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from investments in such countries.

     EMERGING MARKET SECURITIES. An emerging market security is one issued by a
foreign government or private issuer that has one or more of the following
characteristics: (i) its principal securities trading market is in an emerging
market country, (ii) alone or on a consolidated basis it derives 50% or more of
its annual revenue from either goods produced, sales made or services performed
in emerging markets, or (iii) it is organized under the laws of, or has a
principal office in, an emerging market country. Based on these criteria it is
possible for a security to be considered issued by an issuer in more than one
country. Therefore, it is possible for the securities of an issuer that has one
or more of these characteristics in connection with any emerging market country
not to be considered an emerging market security if it also has one or more of
these characteristics in connection with a developed country.

     Emerging market describes any country which is generally considered to be
an emerging or developing country by major organizations in the international
financial community, such as the International Bank for Reconstruction and
Development (more commonly known as the World Bank) and the International
Finance Corporation. Emerging markets can include every nation in the world
except the United States, Canada, Japan, Australia, New Zealand and most
nations located in Western Europe.

     The economies of individual emerging market countries may differ favorably
or unfavorably from the U.S. economy in such respects as growth of gross
domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Further, the economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been, and may continue to be,
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures. These economies also
have been, and may continue to be, adversely effected by economic conditions in
the countries with which they trade.

     Prior governmental approval for foreign investments may be required under
certain circumstances in some emerging market countries, and the extent of
foreign investment in certain fixed income securities and domestic companies
may be subject to limitation in other emerging market countries.


                                       13



Foreign ownership limitations also may be imposed by the charters of individual
companies in emerging market countries to prevent, among other concerns,
violation of foreign investment limitations. Repatriation of investment income,
capital and the proceeds of sales by foreign investors may require governmental
registration and/or approval in some emerging countries. The Fund could be
adversely affected by delays in, or a refusal to grant, any required
governmental registration or approval for such repatriation. Any investment
subject to such repatriation controls will be considered illiquid if it appears
reasonably likely that this process will take more than seven days.

     Investment in emerging market countries may entail purchasing securities
issued by or on behalf of entities that are insolvent, bankrupt, in default or
otherwise engaged in an attempt to reorganize or reschedule their obligations
and in entities that have little or no proven credit rating or credit history.
In any such case, the issuer's poor or deteriorating financial condition may
increase the likelihood that the Fund will experience losses or diminution in
available gains due to bankruptcy, insolvency or fraud. Emerging market
countries also pose the risk of nationalization, expropriation or confiscatory
taxation, political changes, government regulation, social instability or
diplomatic development (including war) that could affect adversely the
economies of such countries or the value of a fund's investments in those
countries. In addition, it may be difficult to obtain and enforce a judgment in
a court outside the United States.

     Investments in emerging markets may also be exposed to an extra degree of
custodial and/or market risk, especially where the securities purchased are not
traded on an official exchange or where ownership records regarding the
securities are maintained by an unregulated entity (or even the issuer itself).

     DEPOSITARY RECEIPTS. Depositary Receipts represent an ownership interest
in securities of foreign companies (an "underlying issuer") that are deposited
with a depositary. Depositary Receipts are not necessarily denominated in the
same currency as the underlying securities. Depositary Receipts include
American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs") and
other types of Depositary Receipts (which, together with ADRs and GDRs, are
hereinafter collectively referred to as "Depositary Receipts"). ADRs are
dollar-denominated Depositary Receipts typically issued by a U.S. financial
institution which evidence an ownership interest in a security or pool of
securities issued by a foreign issuer. ADRs are listed and traded in the United
States. GDRs and other types of Depositary Receipts are typically issued by
foreign banks or trust companies, although they also may be issued by U.S.
financial institutions, and evidence ownership interests in a security or pool
of securities issued by either a foreign or a U.S. corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use
in securities markets outside the United States.

     Depositary Receipts may be "sponsored" or "unsponsored." Sponsored
Depositary Receipts are established jointly by a depositary and the underlying
issuer, whereas unsponsored Depositary Receipts may be established by a
depositary without participation by the underlying issuer. Holders of
unsponsored Depositary Receipts generally bear all the costs associated with
establishing unsponsored Depositary Receipts. In addition, the issuers of the
securities underlying unsponsored Depositary Receipts are not obligated to
disclose material information in the United States and, therefore, there may be
less information available regarding such issuers and there may not be a
correlation between such information and the market value of the Depositary
Receipts. For purposes of the Fund's investment policies, the Fund's
investments in Depositary Receipts will be deemed to be an investment in the
underlying securities, except that ADRs may be deemed to be issued by a U.S.
issuer.

     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
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,


                                       14



commercial and investment banks) and their customers. Forward contracts only
will be entered into with U.S. banks and their foreign branches, insurance
companies and other dealers 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 Fund may enter into forward contracts under various circumstances. The
typical use of a forward contract is to "lock in" the price of a security in
U.S. dollars or some other foreign currency, which the Fund is holding in its
portfolio. By entering into a forward contract for the purchase or sale, for a
fixed amount of dollars or other currency, of the amount of foreign currency
involved in the underlying security transactions, the Fund may be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar or other currency which is being used for
the security purchase and the foreign currency in which the security is
denominated during the period between the date on which the security is
purchased or sold and the date on which payment is made or received.

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

     The Fund will not enter into forward 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.

     When required by law, the Fund will cause its custodian bank to earmark
cash, U.S. government securities or other appropriate liquid portfolio
securities in an amount equal to the value of the Fund's total assets committed
to the consummation of forward contracts entered into under the circumstances
set forth above. If the value of the securities so earmarked declines,
additional cash or securities will be earmarked on a daily basis so that the
value of such securities will equal the amount of the Fund's commitments with
respect to such contracts.

     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 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.

C. FUND POLICIES/INVESTMENT RESTRICTIONS

     The investment objective, policies and restrictions listed below have been
adopted by the Fund as fundamental policies. Under the Investment Company Act,
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 (unless
otherwise noted); 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, except in the case
of borrowing and investments in illiquid securities.


                                       15



   The Fund will:

   1.  Seek total return.

   The Fund may not:

   1.  As to 75% of its total assets, 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 U.S. government, its agencies or
       instrumentalities) except that 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 (a "Qualifying Portfolio").

   2.  As to 75% of its total assets, purchase more than 10% of all outstanding
       voting securities or any class of securities of any one issuer, except
       that the Fund may invest all or substantially all of its assets in a
       Qualifying Portfolio.

   3.  Invest 25% or more of the value of its total assets in securities of
       issuers in any one industry. This restriction does not apply to
       obligations issued or guaranteed by the U.S. government or its agencies
       or instrumentalities.

   4.  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.

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

   6.  Borrow money, except that the Fund may borrow from a bank for temporary
       or emergency purposes in amounts not exceeding 5% (taken at the lower of
       cost or current value) of its total assets (not including the amount
       borrowed).

   7.  Issue senior securities as defined in the Investment Company Act except
       insofar as the Fund may be deemed to have issued a senior security by
       reason of (a) entering into any repurchase agreement; (b) borrowing
       money; or (c) lending portfolio securities.

   8.  Make loans of money or securities, except by investment in repurchase
       agreements. (For the purpose of this restriction, lending of portfolio
       securities by the Fund is not deemed to be a loan.)

   9.  Make short sales of securities or maintain a short position, unless at
       all times when a short position is open it either owns an equal amount of
       such securities or owns securities which, without payment of any further
       consideration, are convertible into or exchangeable for securities of the
       same issue as, and equal in amount to, the securities sold short.

   10. Engage in the underwriting of securities, except insofar as the Fund may
       be deemed an underwriter under the Securities Act of 1933 in disposing of
       a portfolio security.

   11. Invest for the purpose of exercising control or management of any other
       issuer, except that the Fund may invest all or substantially all of its
       assets in a Qualifying Portfolio.

   12. Purchase or sell commodities or commodities contracts except that the
       Fund may purchase or write interest rate, currency and stock and bond
       index futures contracts and related options thereon.

   13. 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 by the Fund and
       collateral arrangements with respect to initial or variation margin for
       futures by the Fund are not deemed to be pledges of assets.)

   14. Purchase securities on margin (but the Fund may obtain short-term loans
       as are necessary for the clearance of transactions). 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.


                                       16



     In addition, as a non-fundamental policy, the Fund will not invest in
other investment companies in reliance on Sections 12(d)(1)(F), 12(d)(1)(G) or
12(d)(1)(J) of the Investment Company Act.

D. DISCLOSURE OF PORTFOLIO HOLDINGS

     The Fund's Board of Trustees and the Investment Adviser have adopted
policies and procedures regarding disclosure of portfolio holdings (the
"Policy"). Pursuant to the Policy, the Investment Adviser may disclose
information concerning Fund portfolio holdings only if such disclosure is
consistent with the antifraud provisions of the federal securities laws and the
Fund's and the Investment Adviser's fiduciary duties to Fund shareholders. The
Investment Adviser may not receive compensation or any other consideration in
connection with the disclosure of information about the portfolio securities of
the Fund. Consideration includes any agreement to maintain assets in the Fund
or in other investment companies or accounts managed by the Investment Adviser
or by any affiliated person of the Investment Adviser. Non-public information
concerning portfolio holdings may be divulged to third parties only when the
Fund has a legitimate business purpose for doing so and the recipients of the
information are subject to a duty of confidentiality. Under no circumstances
shall current or prospective Fund shareholders receive non-public portfolio
holdings information, except as described below.

     The Fund makes available on its public website the following portfolio
holdings information:


     o  Complete portfolio holdings information quarterly on a calendar quarter
        basis with a minimum 30 calendar day lag.


     o  Top 10 (or top 15) holdings monthly with a minimum 15 business day lag.

     The Fund provides a complete schedule of portfolio holdings for the second
and fourth fiscal quarters in its semiannual and annual reports, and for the
first and third fiscal quarters in its filings with the SEC on Form N-Q.

     All other portfolio holdings information that has not been disseminated in
a manner making it available to investors generally as described above is
non-public information for purposes of the Policy.

     The Fund may make selective disclosure of non-public portfolio holdings.
Third parties eligible to receive such disclosures currently include fund
rating agencies, information exchange subscribers, consultants and analysts,
portfolio analytics providers and service providers, provided that the third
party expressly agrees to maintain the disclosed information in confidence and
not to trade portfolio securities based on the non-public information.
Non-public portfolio holdings information may not be disclosed to a third party
unless and until the arrangement has been reviewed and approved pursuant to the
requirements set forth in the Policy. Subject to the terms and conditions of
any agreement between the Investment Adviser or the Fund and the third party
recipient, if these conditions for disclosure are satisfied, there shall be no
restriction on the frequency with which Fund non-public portfolio holdings
information is released, and no lag period shall apply (unless otherwise
indicated below).

     The Investment Adviser may provide interest lists to broker-dealers who
execute securities transactions for the Fund without entering into a
nondisclosure agreement with the broker-dealers, provided that the interest
list satisfies all of the following criteria: (1) the interest list must
contain only the CUSIP numbers and/or ticker symbols of securities held in all
registered management investment companies advised by the Investment Adviser or
any affiliate of the Investment Adviser (the "MSIM Funds") on an aggregate,
rather than a fund-by-fund basis; (2) the interest list must not contain
information about the number or value of shares owned by a specified MSIM Fund;
(3) the interest list may identify the investment strategy, but not the
particular MSIM Funds, to which the list relates; and (4) the interest list may
not identify the portfolio manager or team members responsible for managing the
MSIM Funds.

     Fund shareholders may elect in some circumstances to redeem their shares
of the Fund in exchange for their pro rata share of the portfolio securities
held by the Fund. Under such circumstances, Fund shareholders may receive a
complete listing of the holdings of the Fund up to seven calendar days prior to
making the redemption request provided that they represent orally or in writing
that they agree not to disclose or trade on the basis of the portfolio holdings
information.


                                       17



     The Fund may discuss or otherwise disclose performance attribution
analyses (i.e., mention the effects of having a particular security in the
portfolio(s)) where such discussion is not contemporaneously made public,
provided that the particular holding has been disclosed publicly. Additionally,
any discussion of the analyses may not be more current than the date the
holding was disclosed publicly.

     The Fund may disclose portfolio holdings to transition managers, provided
that the Fund has entered into a non-disclosure or confidentiality agreement
with the party requesting that the information be provided to the transition
manager and the party to the non-disclosure agreement has, in turn, entered
into a non-disclosure or confidentiality agreement with the transition manager.

     The Investment Adviser and/or the Fund have entered into ongoing
arrangements to make available public and/or non-public information about the
Fund's portfolio securities. Provided that the recipient of the information
falls into one or more of the categories listed below, and the recipient has
entered into a nondisclosure agreement with the Fund, or owes a duty of trust
or confidence to the Investment Adviser or the Fund, the recipient may receive
portfolio holdings information pursuant to such agreement without obtaining
pre-approval from either the Portfolio Holdings Review Committee ("PHRC") or
the Fund's Board of Trustees. In all such instances, however, the PHRC will be
responsible for reporting to the Fund's Board of Trustees, or designated
committee thereof, material information concerning the ongoing arrangements at
each Board's next regularly scheduled Board meeting. Categories of parties
eligible to receive information pursuant to such ongoing arrangements include
fund rating agencies, information exchange subscribers, consultants and
analysts, portfolio analytics providers and service providers.

     The Investment Adviser and/or the Fund currently have entered into ongoing
arrangements with the following parties:



NAME                              INFORMATION DISCLOSED           FREQUENCY(1)                         LAG TIME
----------------------------- ----------------------------- ------------------------ -------------------------------------------

SERVICE PROVIDERS
Institutional Shareholder     Complete portfolio holdings   Twice a month                                 (2)
 Services (ISS) (proxy
 voting agent)(*)

FT Interactive Data Pricing   Complete portfolio holdings   As needed                                     (2)
 Service Provider(*)

Morgan Stanley Trust(*)       Complete portfolio holdings   As needed                                     (2)

The Bank of New York(*)       Complete portfolio holdings   As needed                                     (2)

FUND RATING AGENCIES
     Lipper(*)                Top Ten and Complete          Quarterly basis          Approximately 15 days after quarter end
                              portfolio holdings                                     and approximately 30 days after quarter
                                                                                     end

Morningstar(**)               Top Ten and Complete          Quarterly basis          Approximately 15 days after quarter end
                              portfolio holdings                                     and approximately 30 days after quarter
                                                                                     end

Standard & Poor's(*)          Complete portfolio holdings   Quarterly basis          Approximately 15 day lag

Investment Company            Top Ten portfolio holdings    Quarterly basis          Approximately 15 days after quarter end
  Institute(**)

CONSULTANTS AND ANALYSTS
Americh Massena &             Top Ten and Complete          Quarterly basis(5)       Approximately 10-12 days after quarter end
 Associates, Inc.(*)          portfolio holdings

Bloomberg(**)                 Complete portfolio holdings   Quarterly basis          Approximately 30 days after quarter end

Callan Associates(*)          Top Ten and Complete          Monthly and quarterly    Approximately 10-12 days after
                              portfolio holdings            basis, respectively(5)   month/quarter end

Cambridge Associates(*)       Top Ten and Complete          Quarterly basis(5)       Approximately 10-12 days after quarter end
                              portfolio holdings
Citigroup(*)                  Complete portfolio holdings   Quarterly basis(5)       At least one day after quarter end

CTC Consulting, Inc.(**)      Top Ten and Complete          Quarterly basis          Approximately 15 days after quarter end
                              portfolio holdings                                     and approximately 30 days after quarter
                                                                                     end, respectively


                                       18






NAME                                  INFORMATION DISCLOSED            FREQUENCY(1)                        LAG TIME
------------------------------- -------------------------------- ----------------------- ------------------------------------------

Evaluation Associates(*)        Top Ten and Complete             Monthly and quarterly   Approximately 10-12 days after
                                portfolio holdings               basis, respectively(5)  month/quarter end

Fund Evaluation Group(**)       Top Ten portfolio holdings(3)    Quarterly basis         At least 15 days after quarter end

Jeffrey Slocum &                Complete portfolio holdings(4)   Quarterly basis(5)      Approximately 10-12 days after quarter end
 Associates(*)

Hammond Associates(**)          Complete portfolio holdings(4)   Quarterly basis         At least 30 days after quarter end

Hartland & Co.(**)              Complete portfolio holdings(4)   Quarterly basis         At least 30 days after quarter end

Hewitt Associates(*)            Top Ten and Complete             Monthly and quarterly   Approximately 10-12 days after
                                portfolio holdings               basis, respectively(5)  month/quarter end

Merrill Lynch(*)                Top Ten and Full portfolio       Monthly and quarterly   Approximately 10-12 days after
                                holdings                         basis, respectively(5)  month/quarter end

Mobius(**)                      Top Ten portfolio holdings(3)    Monthly basis           At least 15 days after month end

Nelsons(**)                     Top Ten portfolio holdings(3)    Quarterly basis         At least 15 days after quarter end

Prime Buchholz &                Complete portfolio holdings(4)   Quarterly basis         At least 30 days after quarter end
 Associates, Inc.(**)

PSN(**)                         Top Ten portfolio holdings(3)    Quarterly basis         At least 15 days after quarter end

PFM Asset Management            Top Ten and Complete             Quarterly basis(5)      Approximately 10-12 days after quarter end
 LLC(*)                         portfolio holdings

Russell Investment              Top Ten and Complete             Monthly and quarterly   At least 15 days after month end and at
 Group/Russell/Mellon           portfolio holdings               basis                   least 30 days after quarter end,
 Analytical Services, Inc.(**)                                                           respectively

Stratford Advisory Group,       Top Ten portfolio holdings(6)    Quarterly basis(5)      Approximately 10-12 days after quarter end
 Inc.(*)

Thompson Financial(**)          Complete portfolio holdings(4)   Quarterly basis         At least 30 days after quarter end

Watershed Investment            Top Ten and Complete             Quarterly basis(5)      Approximately 10-12 days after quarter end
 Consultants, Inc.(*)           portfolio holdings

Yanni Partners(**)              Top Ten portfolio holdings(3)    Quarterly basis         At least 15 days after quarter end

PORTFOLIO ANALYTICS
 PROVIDERS
Fact Set(*)                     Complete portfolio holdings      Daily                   One day



----------
(*)  This entity has agreed to maintain Fund non-public portfolio holdings
     information in confidence and not to trade portfolio securities based on
     the non-public portfolio holdings information.

(**) The Fund does not currently have a non-disclosure agreement in place with
     this entity and therefore the entity can only receive publicly available
     information.

(1)  Dissemination of portfolio holdings information to entities listed above
     may occur less frequently than indicated (or not at all).

(2)  Information will typically be provided on a real time basis or as soon
     thereafter as possible.

(3)  Complete portfolio holdings will also be provided upon request from time to
     time on a quarterly basis, with at least a 30 day lag.

(4)  Top Ten portfolio holdings will also be provided upon request from time to
     time, with at least a 15 day lag.

(5)  This information will also be provided upon request from time to time.

(6)  Complete portfolio holdings will also be provided upon request from time to
     time.



     In addition, persons who owe a duty of trust or confidence to the
Investment Adviser or the Fund may receive non-public portfolio holdings
information without entering into a non-disclosure agreement. Currently, these
persons include, (i) the Fund's independent registered public accounting firm
(as of the Fund's fiscal year end and on an as needed basis), (ii) counsel to
the Fund (on an as needed basis), (iii) counsel to the Independent Trustees (on
an as needed basis) and (iv) members of the Board of Trustees (on an as needed
basis).


     All selective disclosures of non-public portfolio holdings information
made to third parties pursuant to the exemptions set forth in the Policy must
be pre-approved by both the PHRC and the Fund's Board of Trustees (or
designated Committee thereof), except for (i) disclosures made to third parties
pursuant to ongoing arrangements (discussed above); (ii) disclosures made to
third parties pursuant to Special Meetings of the PHRC; (iii) broker-dealer
interest lists; (iv) shareholder in-kind distributions; (v) attribution
analysis or (vi) in connection with transition managers. The Investment Adviser
shall report quarterly to the Board of Trustees (or a designated Committee
thereof) information concerning all parties receiving non-public portfolio
holdings information pursuant to an exemption. Procedures to monitor the use of
such non-public portfolio holdings information may include requiring annual
certifications that the


                                       19




recipients have utilized such information only pursuant to the terms of the
agreement between the recipient and the Investment Adviser and, for those
recipients receiving information electronically, acceptance of the information
will constitute reaffirmation that the third party expressly agrees to maintain
the disclosed information in confidence and not to trade portfolio securities
based on the non-public information.


     In no instance may the Investment Adviser or the Fund receive any
compensation or consideration in exchange for the portfolio holdings
information.

     The PHRC is responsible for creating and implementing the Policy and, in
this regard, has expressly adopted it. The following are some of the functions
and responsibilities of the PHRC:

     (a) The PHRC, which will consist of executive officers of the Fund and the
Investment Adviser or their designees, is responsible for establishing
portfolio holdings disclosure policies and guidelines and determining how
portfolio holdings information will be disclosed on an ongoing basis.

     (b) The PHRC will periodically review and have the authority to amend as
necessary the Fund's portfolio holdings disclosure policies and guidelines (as
expressed by the Policy).

     (c) The PHRC will meet at least quarterly to (among other matters): (1)
address any outstanding issues relating to the Policy, including matters
relating to (i) disclosures made to third parties pursuant to ongoing
arrangements (described above); (ii) broker-dealer interest lists; (iii)
shareholder in-kind distributions; (iv) attribution analyses; or (v) in
connection with transition managers; (2) review non-disclosure agreements that
have been executed with third parties and determine whether the third parties
will receive portfolio holdings information; and (3) generally review the
procedures that the Investment Adviser employs to ensure that disclosure of
information about portfolio securities is in the best interests of Fund
shareholders, including procedures to address conflicts between the interests
of Fund shareholders, on the one hand, and those of the Investment Adviser, the
Distributor or any affiliated person of the Fund, the Investment Adviser or the
Distributor on the other.

     (d) Any member of the PHRC may call a Special Meeting of the PHRC to
consider whether a third-party that is not listed in (c) above may receive
non-public portfolio holdings information pursuant to a validly executed
nondisclosure agreement. At least three members of the PHRC, or their
designees, and one member of the Fund's Audit Committee, or his or her
designee, shall be present at the Special Meeting in order to constitute a
quorum. At any Special Meeting at which a quorum is present, the decision of a
majority of the PHRC members present and voting shall be determinative as to
any matter submitted to a vote; provided, however, that the Audit Committee
member, or his or her designee, must concur in the determination in order for
it to become effective.

     (e) The PHRC, or its designee(s), will document in writing all of their
decisions and actions, which documentation will be maintained by the PHRC, or
its designee(s) for a period of at least six years. The PHRC, or its
designee(s), will report their decisions to the Board of Trustees at each
Board's next regularly scheduled Board meeting. The report will contain
information concerning decisions made by the PHRC during the most recently
ended calendar quarter immediately preceding the Board meeting.


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 Adviser 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.


                                       20



B. MANAGEMENT INFORMATION

     TRUSTEES AND OFFICERS. The Board of the Fund consists of nine Trustees.
These same individuals also serve as directors or trustees for all of the funds
advised by the Investment Adviser (the "Retail Funds") and certain of the funds
advised by Morgan Stanley Investment Management Inc. and Morgan Stanley AIP GP
LP (the "Institutional Funds"). Seven Trustees have no affiliation or business
connection with the Investment Adviser or any of its affiliated persons and do
not own any stock or other securities issued by the Investment Adviser's parent
company, Morgan Stanley. These are the "non-interested" or "Independent"
Trustees. The other two Trustees (the "Management Trustees") are affiliated
with the Investment Adviser.

     The Independent Trustees of the Fund, their age, address, term of office
and length of time served, their principal business occupations during the past
five years, the number of portfolios in the Fund Complex (defined below)
overseen by each Independent Trustee (as of December 31, 2005) and other
directorships, if any, held by the Trustees, are shown below. The Fund Complex
includes all open-end and closed-end funds (including all of their portfolios)
advised by the Investment Adviser and any funds that have an investment adviser
that is an affiliated person of the Investment Adviser (including, but not
limited to, Morgan Stanley Investment Management Inc.).




                                                                                               NUMBER OF
                                                                                              PORTFOLIOS
                                                                                                IN FUND
                             POSITION(S)  LENGTH OF                                            COMPLEX
  NAME, AGE AND ADDRESS OF    HELD WITH     TIME          PRINCIPAL OCCUPATION(S) DURING       OVERSEEN    OTHER DIRECTORSHIPS HELD
    INDEPENDENT TRUSTEE      REGISTRANT    SERVED*                PAST 5 YEARS**              BY TRUSTEE          BY TRUSTEE
---------------------------- ----------- ----------- ---------------------------------------- ---------- ---------------------------

Michael Bozic (64)           Trustee     Since       Private Investor; Director or Trustee       197     Director of various
c/o Kramer Levin Naftalis &              April 1994  of the Retail Funds (since April 1994)              business organizations.
Frankel LLP                                          and the Institutional Funds (since July
Counsel to the                                       2003); formerly Vice Chairman of
Independent Trustees                                 Kmart Corporation (December 1998-
1177 Avenue of the Americas                          October 2000), Chairman and Chief
New York, NY 10036                                   Executive Officer of Levitz Furniture
                                                     Corporation (November 1995-
                                                     November 1998) and President and
                                                     Chief Executive Officer of Hills
                                                     Department Stores (May 1991-July
                                                     1995); formerly variously Chairman,
                                                     Chief Executive Officer, President and
                                                     Chief Operating Officer (1987-1991)
                                                     of the Sears Merchandise Group of
                                                     Sears, Roebuck & Co.


Edwin J. Garn (73)           Trustee     Since       Consultant; Director or Trustee of the      197     Director of Franklin Covey
1031 N. Chartwell Court                  January     Retail Funds (since January 1993)                   (time management systems),
Salt Lake City, UT 84103                 1993        and the Institutional Funds (since July             BMW Bank of North America,
                                                     2003); member of the Utah Regional                  Inc. (industrial loan
                                                     Advisory Board of Pacific Corp. (utility            corporation), Escrow Bank
                                                     company); formerly Managing                         USA (industrial loan
                                                     Director of Summit Ventures LLC                     corporation), United Space
                                                     (2000-2004) (lobbying and consulting                Alliance (joint venture
                                                     firm); United States Senator (R-Utah)               between Lockheed Martin
                                                     (1974-1992) and Chairman, Senate                    and the Boeing Company)
                                                     Banking Committee (1980-1986),                      and Nuskin Asia Pacific
                                                     Mayor of Salt Lake City, Utah                       (multilevel marketing);
                                                     (1971-1974), Astronaut, Space                       member of the board of
                                                     Shuttle Discovery (April 12-19, 1985),              various civic and
                                                     and Vice Chairman, Huntsman                         charitable organizations.
                                                     Corporation (chemical company).

 Wayne E. Hedien (71)         Trustee     Since       Retired; Director or Trustee of the         197     Director of The PMI Group
c/o Kramer Levin Naftalis &              September   Retail Funds (since September 1997)                 Inc. (private mortgage
Frankel LLP                              1997        and the Institutional Funds (since July             insurance); Trustee and
Counsel to the                                       2003); formerly associated with the                 Vice Chairman of The Field
Independent Trustees                                 Allstate Companies (1966-1994),                     Museum of Natural History;
1177 Avenue of the Americas                          most recently as Chairman of The                    director of various other
New York, NY 10036                                   Allstate Corporation (March                         business and charitable
                                                     1993-December 1994) and Chairman                    organizations.
                                                     and Chief Executive Officer of its
                                                     wholly-owned subsidiary, Allstate
                                                     Insurance Company (July
                                                     1989-December 1994).



----------
*     This is the earliest date the Trustee began serving the Retail Funds.
      Each Trustee serves an indefinite term, until his or her successor is
      elected.

**    The dates referenced below indicating commencement of service as
      Director/Trustee for the Retail Funds and the Institutional Funds reflect
      the earliest date the Director/Trustee began serving the Retail or
      Institutional Funds, as applicable.

                                       21





                                                                                               NUMBER OF
                                                                                              PORTFOLIOS
                                                                                                IN FUND
                             POSITION(S)  LENGTH OF                                            COMPLEX
  NAME, AGE AND ADDRESS OF    HELD WITH     TIME          PRINCIPAL OCCUPATION(S) DURING       OVERSEEN    OTHER DIRECTORSHIPS HELD
    INDEPENDENT TRUSTEE      REGISTRANT    SERVED*                PAST 5 YEARS**              BY TRUSTEE          BY TRUSTEE
---------------------------- ----------- ----------- ---------------------------------------- ---------- ---------------------------

Dr. Manuel H. Johnson (56)    Trustee    Since       Senior Partner, Johnson Smick                197    Director of NVR, Inc. (home
c/o Johnson Smick Group Inc.             July 1991   International, Inc., a consulting firm;             construction) Director of
888 16th Street, NW                                  Chairman of the Audit Committee and                 KFX Energy; Director of RBS
Suite 740                                            Director or Trustee of the Retail                   Greenwich Capital Holdings
Washington, D.C. 20006                               Funds (since July 1991) and the                     (financial holding
                                                     Institutional Funds (since July 2003);              company).
                                                     Co-Chairman and a founder of the
                                                     Group of Seven Council (G7C), an
                                                     international economic commission;
                                                     formerly Vice Chairman of the Board
                                                     of Governors of the Federal Reserve
                                                     System and Assistant Secretary of
                                                     the U.S.Treasury.

Joseph J. Kearns (63)         Trustee    Since       President, Kearns & Associates LLC           198    Director of Electro Rent
c/o Kearns & Associates LLC              July 2003   (investment consulting); Deputy                     Corporation (equipment
PMB754                                               Chairman of the Audit Committee and                 leasing), The Ford Family
23852 Pacific Coast Highway                          Director or Trustee of the Retail                   Foundation, and the UCLA
Malibu, CA 90265                                     Funds (since July 2003) and the                     Foundation.
                                                     Institutional Funds (since August
                                                     1994); previously Chairman of the
                                                     Audit Committee of the Institutional
                                                     Funds (October 2001-July 2003);
                                                     formerly CFO of the J. Paul Getty
                                                     Trust.

Michael E. Nugent (69)        Trustee    Since       General Partner of Triumph Capital,          197    None.
c/o Triumph Capital, L.P.                July 1991   L.P., a private investment partnership;
445 Park Avenue                                      Chairman of the Insurance Committee
New York, NY 10022                                   and Director or Trustee of the Retail
                                                     Funds (since July 1991) and the
                                                     Institutional Funds (since July 2001);
                                                     formerly Vice President, Bankers
                                                     Trust Company and BT Capital
                                                     Corporation (1984-1988).

Fergus Reid (73)              Trustee    Since       Chairman of Lumelite Plastics                198    Trustee and Director of
c/o Lumelite Plastics                    July 2003   Corporation; Chairman of the                        certain investment
Corporation                                          Governance Committee and Director                   companies in the JPMorgan
85 Charles Colman Blvd.                              or Trustee of the Retail Funds (since               Funds complex managed by
Pawling, NY 12564                                    July 2003) and the Institutional Funds              J.P. Morgan Investment
                                                     (since June 1992).                                   Management Inc.



     The Trustees who are affiliated with the Investment Adviser or affiliates
of the Investment Adviser (as set forth below) and executive officers of the
Fund, their age, address, term of office and length of time served, their
principal business occupations during the past five years, the number of
portfolios in the Fund Complex overseen by each Management Trustee (as of
December 31, 2005) and the other directorships, if any, held by the Trustee,
are shown below.




                                                                                               NUMBER OF
                                                                                              PORTFOLIOS
                                                                                                IN FUND
                                                                                                COMPLEX
                               POSITION(S)  LENGTH OF                                         OVERSEEN BY
  NAME, AGE AND ADDRESS OF      HELD WITH      TIME        PRINCIPAL OCCUPATION(S) DURING     MANAGEMENT   OTHER DIRECTORSHIPS HELD
     MANANGEMENT TRUSTEE        REGISTRANT   SERVED*               PAST 5 YEARS**               TRUSTEE           BY TRUSTEE
----------------------------- ------------ ---------- --------------------------------------- ----------- --------------------------

Charles A. Fiumefreddo (72)   Chairman of  Since      Chairman and Director or Trustee of        197      None.
c/o Morgan Stanley Trust      the Board    July 1991  the Retail Funds (since July 1991)
Harborside Financial Center,  and Trustee             and the Institutional Funds (since July
Plaza Two,                                            2003); formerly Chief Executive
Jersey City, NJ 07311                                 Officer of the Retail Funds (until
                                                      September 2002).

James F. Higgins (57)         Trustee      Since      Director or Trustee of the Retail          197      Director of AXA
c/o Morgan Stanley Trust                   June 2000  Funds (since June 2000) and the                     Financial, Inc. and The
Harborside Financial                                  Institutional Funds (since July 2003);              Equitable Life Assurance
Center,                                               Senior Advisor of Morgan Stanley                    Society of the United
Plaza Two,                                            (since August 2000); Director of the                States (financial
Jersey City, NJ 07311                                 Distributor and Dean Witter Realty                  services).
                                                      Inc.; previously President and Chief
                                                      Operating Officer of the Private Client
                                                      Group of Morgan Stanley (May
                                                      1999-August 2000), and President
                                                      and Chief Operating Officer of
                                                      Individual Securities of Morgan
                                                      Stanley (February 1997-May 1999).



----------
*     This is the earliest date the Trustee began serving the Retail Funds.
      Each Trustee serves an indefinite term, until his or her successor is
      elected.

**    The dates referenced below indicating commencement of service as
      Director/Trustee for the Retail Funds and the Institutional Funds reflect
      the earliest date the Director/Trustee began serving the Retail or
      Institutional Funds, as applicable.


                                       22






                                      POSITION(S)                  LENGTH
   NAME, AGE AND ADDRESS OF            HELD WITH                   OF TIME                   PRINCIPAL OCCUPATION(S) DURING
       EXECUTIVE OFFICER               REGISTRANT                  SERVED*                            PAST 5 YEARS**
------------------------------ ------------------------- -------------------------- ------------------------------------------------

Ronald E. Robison (67)         President and Principal   President (since            President (since September 2005) and Principal
1221 Avenue of the Americas    Executive Officer         September 2005) and         Executive Officer of funds in the Fund Complex
New York, NY 10020                                       Principal Executive         (since May 2003), Managing Director of Morgan
                                                         Officer (since May 2003)    Stanley & Co. Incorporated and Morgan Stanley,
                                                                                     Managing Director and Director of Morgan
                                                                                     Stanley Investment Management Inc., Morgan
                                                                                     Stanley Distribution Inc., and Morgan Stanley
                                                                                     Distributors Inc.; Managing Director, Chief
                                                                                     Administrative Officer and Director of Morgan
                                                                                     Stanley Investment Advisors Inc. and Morgan
                                                                                     Stanley Services Company Inc.; Chief Executive
                                                                                     Officer and Director of Morgan Stanley Trust,
                                                                                     Director of Morgan Stanley SICAV (since May
                                                                                     2004); President (since September 2005) and
                                                                                     Principal Executive Officer (since May 2003) of
                                                                                     the Van Kampen Funds; previously, Executive
                                                                                     Vice President (July 2003-September 2005) of
                                                                                     funds in the Fund Complex and the Van Kampen
                                                                                     Funds. He was also previously President and
                                                                                     Director of the Institutional Funds (March
                                                                                     2001-July 2003), Chief Global Operations
                                                                                     Officer of Morgan Stanley Investment Management
                                                                                     Inc. and Chief Executive Officer and Chairman
                                                                                     of Van Kampen Investor Services.

Joseph J. McAlinden (63)       Vice President            Since July 1995             Managing Director and Chief Investment Officer
1221 Avenue of the Americas                                                          of the Investment Adviser and Morgan Stanley
New York, NY 10020                                                                   Investment Management Inc.; Chief Investment
                                                                                     Officer of the Van Kampen Funds; Vice President
                                                                                     of the Institutional Funds (since July 2003)
                                                                                     and the Retail Funds (since July 1995).

Barry Fink (51)                Vice President            Since February              General Counsel (since May 2000) and Managing
1221 Avenue of the Americas                              1997                        Director (since December 2000) of Morgan
New York, NY 10020                                                                   Stanley Investment Management; Managing
                                                                                     Director (since December 2000), Secretary
                                                                                     (since February 1997) and Director of the
                                                                                     Investment Adviser and the Administrator; Vice
                                                                                     President of the Retail Funds; Assistant
                                                                                     Secretary of Morgan Stanley DW; Vice President
                                                                                     of the Institutional Funds (since July 2003);
                                                                                     Managing Director, Secretary and Director of
                                                                                     the Distributor; previously Secretary (February
                                                                                     1997-July 2003) of the Retail Funds and General
                                                                                     Counsel (February 1997-April 2004) of the
                                                                                     Retail Funds; Vice President and Assistant
                                                                                     General Counsel of the Investment Adviser and
                                                                                     the Administrator (February 1997-December
                                                                                     2001).

Amy R. Doberman (43)           Vice President            Since July 2004             Managing Director and General Counsel, U.S.
1221 Avenue of the Americas                                                          Investment Management; Managing Director of
New York, NY 10020                                                                   Morgan Stanley Investment Management Inc. and
                                                                                     the Investment Adviser, Vice President of the
                                                                                     Institutional and Retail Funds (since July
                                                                                     2004); Vice President of the Van Kampen Funds
                                                                                     (since August 2004); previously, Managing
                                                                                     Director and General Counsel - Americas, UBS
                                                                                     Global Asset Management (July 2000-July 2004)
                                                                                     and General Counsel, Aeltus Investment
                                                                                     Management, Inc. (January 1997-July 2000).

Carsten Otto (42)              Chief Compliance          Since October               Managing Director and U.S. Director of
1221 Avenue of the Americas    Officer                   1995                        Compliance for Morgan Stanley Investment
New York, NY 10020                                                                   Management (since October 2004); Managing
                                                                                     Director of the Investment Adviser and Morgan
                                                                                     Stanley Investment Management Inc.; formerly
                                                                                     Assistant Secretary and Assistant General
                                                                                     Counsel of the Morgan Stanley Retail Funds.

Stefanie V. Chang (39)         Vice President            Since July 2003             Executive Director of Morgan Stanley & Co.
1221 Avenue of the Americas                                                          Incorporated, Morgan Stanley Investment
New York, NY 10020                                                                   Management Inc. and the Investment Adviser;
                                                                                     Vice President of the Institutional Funds
                                                                                     (since December 1997) and the Retail Funds
                                                                                     (since July 2003); formerly practiced law with
                                                                                     the New York law firm of Rogers & Wells (now
                                                                                     Clifford Chance US LLP).

Francis J. Smith (40)          Treasurer                 Treasurer since             Executive Director of the Investment Adviser
c/o Morgan Stanley Trust       and Chief                 July 2003 and               and the Administrator (since December 2001);
Harborside Financial Center,   Financial                 Chief Financial             previously, Vice President of the Retail Funds
Plaza Two,                     Officer                   Officer since               (September 2002-July 2003); Vice President of
Jersey City, NJ 07311                                    September 2002              the Investment Adviser and the Administrator
                                                                                     (August 2000- November 2001) and Senior Manager
                                                                                     at PricewaterhouseCoopers LLP (January
                                                                                     1998-August 2000).

Thomas F. Caloia (59)          Vice President            Since July 2003             Executive Director (since December 2002) and
c/o Morgan Stanley Trust                                                             Assistant Treasurer of the Investment Adviser,
Harborside Financial Center,                                                         the Distributor and the Administrator;
Plaza Two,                                                                           previously Treasurer of the Retail Funds (April
Jersey City, NJ 07311                                                                1989-July 2003); formerly First Vice President
                                                                                     of the Investment Adviser, the Distributor and
                                                                                     the Administrator.

Mary E. Mullin (38)            Secretary                 Since July 2003             Executive Director of Morgan Stanley & Co.
1221 Avenue of the Americas                                                          Incorporated, Morgan Stanley Investment
New York, NY 10020                                                                   Management Inc. and the Investment Adviser;
                                                                                     Secretary of the Institutional Funds (since
                                                                                     June 1999) and the Retail Funds (since July
                                                                                     2003); formerly practiced law with the New York
                                                                                     law firms of McDermott, Will & Emery and
                                                                                     Skadden, Arps, Slate, Meagher & Flom LLP.



----------
*     This is the earliest date the Officer began serving the Retail Funds.
      Each Officer serves an indefinite term, until his or her successor is
      elected.

**    The dates referenced below indicating commencement of service as an
      Officer for the Retail and Institutional Funds reflect the earliest date
      the Officer began serving the Retail or Institutional Funds, as
      applicable.


                                       23



     In addition, the following individuals who are officers of the Investment
Adviser or its affiliates serve as assistant secretaries of the Fund: Lou Anne
D. McInnis, Joseph Benedetti, Joanne Antico, Daniel Burton, Joanne Doldo, Tara
A. Farrelly, Alice J. Gerstel, Eric C. Griffith, Edward J. Meehan, Elisa
Mitchell, Elizabeth Nelson, Debra Rubano, Rita Rubin, Sheri L. Schreck and
Julien H. Yoo.

     For each Trustee, the dollar range of equity securities beneficially owned
by the Trustee in the Fund and in the Family of Investment Companies (Family of
Investment Companies includes all of the registered investment companies
advised by the Investment Adviser, Morgan Stanley Investment Management Inc.
and Morgan Stanley AIP GP LP) for the calendar year ended December 31, 2005 is
shown below.




                                                                              AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES IN
                                                                               ALL REGISTERED INVESTMENT COMPANIES OVERSEEN
                            DOLLAR RANGE OF EQUITY SECURITIES IN THE FUND      BY TRUSTEE IN FAMILY OF INVESTMENT COMPANIES
     NAME OF TRUSTEE                  (AS OF DECEMBER 31, 2005)                         (AS OF DECEMBER 31, 2005)
------------------------   -----------------------------------------------   -----------------------------------------------
Independent:

Michael Bozic                                   $0                                            Over $100,000
Edwin J. Garn                                   $0                                            Over $100,000
Wayne E. Hedien                                 $0                                            Over $100,000
Dr. Manuel H. Johnson                           $0                                            Over $100,000
Joseph J. Kearns(1)                             $0                                            Over $100,000
Michael E. Nugent                         $50,000-100,000                                     Over $100,000
Fergus Reid(1)                                  $0                                            Over $100,000
Interested:
Charles A. Fiumefreddo                    $50,000-100,000                                     Over $100,000
James F. Higgins                           Over $100,000                                      Over $100,000



----------

(1)   Includes the total amount of compensation deferred by the Trustee at his
      election pursuant to a deferred compensation plan. Such deferred
      compensation is placed in a deferral account and deemed to be invested in
      one or more of the Retail Funds or Institutional Funds (or portfolio
      thereof) that are offered as investment options under the plan. As of
      December 31, 2005, the value (including interest) of the deferral
      accounts for Messrs. Kearns and Reid was $786,542 and $766,622,
      respectively, pursuant to the deferred compensation plan.


     As to each Independent Trustee and his immediate family members, no person
owned beneficially or of record securities in an investment advisor or
principal underwriter of the Fund, or a person (other than a registered
investment company) directly or indirectly controlling, controlled by or under
common control with an investment advisor or principal underwriter of the Fund.

     INDEPENDENT TRUSTEES AND THE COMMITTEES. Law and regulation establish both
general guidelines and specific duties for the Independent Trustees. The Retail
Funds seek as Independent Trustees individuals of distinction and experience in
business and finance, government service or academia; these are people whose
advice and counsel are in demand by others and for whom there is often
competition. To accept a position on the Retail Funds' boards, such individuals
may reject other attractive assignments because the Retail Funds make
substantial demands on their time. All of the Independent Trustees serve as
members of the Audit Committee. In addition, three Trustees, including two
Independent Trustees, serve as members of the Insurance Committee, and three
Independent Trustees serve as members of the Governance Committee.

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

     The Board of Trustees has a separately-designated standing Audit Committee
established in accordance with Section 3(a)(58)(A) of the Securities Exchange
Act of 1934, as amended. The Audit Committee is charged with recommending to
the full Board the engagement or discharge of the Fund's independent registered
public accounting firm; directing investigations into matters within the scope
of the independent registered public accounting firm's duties, including the
power to retain outside specialists; reviewing with the independent registered
public accounting firm the audit plan and results of the auditing engagement;
approving professional services provided by the independent registered


                                       24




public accounting firm and other accounting firms prior to the performance of
the services; reviewing the independence of the independent registered public
accounting firm; 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 Fund has adopted a
formal, written Audit Committee Charter. During the Fund's fiscal year ended
September 30, 2005, the Audit Committee held eight meetings.


     The members of the Audit Committee of the Fund are currently Michael
Bozic, Edwin J. Garn, Wayne E. Hedien, Dr. Manuel H. Johnson, Joseph J. Kearns,
Michael E. Nugent and Fergus Reid. None of the members of the Fund's Audit
Committee is an interested person, as defined under the Investment Company Act,
of the Fund (with such disinterested Trustees being Independent Trustees or
individually, Independent Trustee). Each Independent Trustee is also
"independent" from the Fund under the listing standards of the New York Stock
Exchange, Inc. (NYSE). The current Chairman of the Audit Committee of the Fund
is Dr. Manuel H. Johnson.


     The Board of Trustees of the Fund also has a Governance Committee. The
Governance Committee identifies individuals qualified to serve as Independent
Trustees on the Fund's Board and on committees of such Board and recommends
such qualified individuals for nomination by the Fund's Independent Trustees as
candidates for election as Independent Trustees, advises the Fund's Board with
respect to Board composition, procedures and committees, develops and
recommends to the Fund's Board a set of corporate governance principles
applicable to the Fund, monitors and makes recommendations on corporate
governance matters and policies and procedures of the Fund's Board of Trustees
and any Board committees and oversees periodic evaluations of the Fund's Board
and its committees. The members of the Governance Committee of the Fund are
currently Michael Bozic, Edwin J. Garn and Fergus Reid, each of whom is an
Independent Trustee. The current Chairman of the Governance Committee is Fergus
Reid. During the Fund's fiscal year ended September 30, 2005, the Governance
Committee held three meetings.


     The Fund does not have a separate nominating committee. While the Fund's
Governance Committee recommends qualified candidates for nominations as
Independent Trustees, the Board of Trustees of the Fund believes that the task
of nominating prospective Independent Trustees is important enough to require
the participation of all current Independent Trustees, rather than a separate
committee consisting of only certain Independent Trustees. Accordingly, each
current Independent Trustee (Michael Bozic, Edwin J. Garn, Wayne E. Hedien, Dr.
Manuel H. Johnson, Joseph J. Kearns, Michael E. Nugent and Fergus Reid, for all
funds) participates in the election and nomination of candidates for election
as Independent Trustees for the Fund. Persons recommended by the Fund's
Governance Committee as candidates for nomination as Independent Trustees shall
possess such knowledge, experience, skills, expertise and diversity so as to
enhance the Board's ability to manage and direct the affairs and business of
the Fund, including, when applicable, to enhance the ability of committees of
the Board to fulfill their duties and/or to satisfy any independence
requirements imposed by law, regulation or any listing requirements of the
NYSE. While the Independent Trustees of the Fund expect to be able to continue
to identify from their own resources an ample number of qualified candidates
for the Fund's Board as they deem appropriate, they will consider nominations
from shareholders to the Board. Nominations from shareholders should be in
writing and sent to the Independent Trustees as described below under the
caption "Shareholder Communications".


     There were 14 meetings of the Board of Trustees of the Fund held during
the fiscal year ended September 30, 2005. The Independent Trustees of the Fund
also met six times during that time, in addition to the 14 meetings of the full
Board.

     Finally, the Board has formed an Insurance Committee to review and monitor
the insurance coverage maintained by the Fund. The Insurance Committee
currently consists of Messrs. Nugent, Fiumefreddo and Hedien. Messrs. Nugent
and Hedien are Independent Trustees. During the Fund's fiscal year ended
September 30, 2005, the Insurance Committee held seven meetings.


     ADVANTAGES OF HAVING SAME INDIVIDUALS AS TRUSTEES FOR THE RETAIL FUNDS AND
INSTITUTIONAL FUNDS. The Independent Trustees and the Fund's management believe
that having the same Independent Trustees for each of the Retail Funds and
Institutional Funds avoids the duplication of effort that would arise from
having different groups of individuals serving as Independent Trustees for each
of the funds or even of sub-groups of funds. They believe that having the same
individuals serve as


                                       25



Independent Trustees of all the Retail Funds and Institutional Funds tends to
increase their knowledge and expertise regarding matters which affect the Fund
Complex generally and enhances their ability to negotiate on behalf of each
fund with the fund's service providers. This arrangement also precludes the
possibility of separate groups of Independent Trustees arriving at conflicting
decisions regarding operations and management of the funds and avoids the cost
and confusion that would likely ensue. Finally, having the same Independent
Trustees serve on all fund boards enhances the ability of each fund to obtain,
at modest cost to each separate fund, the services of Independent Trustees, of
the caliber, experience and business acumen of the individuals who serve as
Independent Trustees of the Retail Funds and Institutional 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 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.

     SHAREHOLDER COMMUNICATIONS. Shareholders may send communications to the
Fund's Board of Trustees. Shareholders should send communications intended for
the Fund's Board by addressing the communications directly to the Board (or
individual Board members) and/or otherwise clearly indicating in the salutation
that the communication is for the Board (or individual Board members) and by
sending the communication to either the Fund's office or directly to such Board
member(s) at the address specified for each Trustee previously noted. Other
shareholder communications received by the Fund not directly addressed and sent
to the Board will be reviewed and generally responded to by management, and
will be forwarded to the Board only at management's discretion based on the
matters contained therein.

C.  COMPENSATION


     Each Independent Trustee receives an annual fee of $180,000 for serving the
Retail Funds and the Institutional Funds. Prior to October 1, 2005, each
Independent Trustee received an annual retainer fee of $168,000 for serving the
Retail Funds and the Institutional Funds. In addition, each Independent Trustee
received $2,000 for attending each of the four quarterly board meetings and two
performance meetings that occur each year, so that an Independent Trustee who
attended all six meetings received total compensation of $180,000 for serving
the funds.


     The Chairman of the Audit Committee receives an additional annual retainer
fee of $60,000. Other Committee Chairmen and the Deputy Chairman of the Audit
Committee receive an additional annual retainer fee of $30,000. The aggregate
compensation paid to each Independent Trustee is paid by the Retail Funds and
the Institutional Funds, and is allocated on a pro rata basis among each of the
operational funds/portfolios of the Retail Funds and the Institutional Funds
based on the relative net assets of each of the funds/portfolios. Mr.
Fiumefreddo receives an annual fee for his services as Chairman of the Boards of
the Retail Funds and the Institutional Funds and for administrative services
provided to each Board.


     The Fund also reimburses such Trustees for travel and other out-of-pocket
expenses incurred by them in connection with attending such meetings. Trustees
of the Fund who are employed by the Investment Adviser or an affiliated company
receive no compensation or expense reimbursement from the Fund for their
services as Trustee.

     Effective April 1, 2004, the Fund began a Deferred Compensation Plan (the
"DC Plan"), which allows each Independent Trustee to defer payment of all, or a
portion, of the fees he or she receives for serving on the Board of Trustees
throughout the year. Each eligible Trustee generally may elect to have the
deferred amounts credited with a return equal to the total return on one or
more of the Retail Funds or Institutional Funds (or portfolios thereof) that
are offered as investment options under the DC Plan. At the Trustee's election,
distributions are either in one lump sum payment, or in the form of equal
annual


                                       26



installments over a period of five years. The rights of an eligible Trustee and
the beneficiaries to the amounts held under the DC Plan are unsecured and such
amounts are subject to the claims of the creditors of the Fund.

     Prior to April 1, 2004, the Institutional Funds maintained a similar
Deferred Compensation Plan (the "Prior DC Plan"), which also allowed each
Independent Trustee to defer payment of all, or a portion, of the fees he or
she received for serving on the Board of Trustees throughout the year. The DC
Plan amends and supersedes the Prior DC Plan and all amounts payable under the
Prior DC Plan are now subject to the terms of the DC Plan (except for amounts
paid during the calendar year 2004, which remain subject to the terms of the
Prior DC Plan).

     The following table shows aggregate compensation payable to each of the
Fund's Trustees from the Fund for the fiscal year ended September 30, 2005 and
the aggregate compensation payable to each of the Fund's Trustees by the Fund
Complex (which includes all of the Retail and Institutional Funds) for the
calendar year ended December 31, 2005.


                                  COMPENSATION



                                                                  NUMBER OF
                                                              PORTFOLIOS IN THE
                                                                FUND COMPLEX
                                                               FROM WHICH THE      TOTAL COMPENSATION
                                       TOTAL COMPENSATION     TRUSTEE RECEIVED       FROM THE FUND
NAME OF INDEPENDENT TRUSTEE:              FROM THE FUND        COMPENSATION(5)         COMPLEX(5)
----------------------------          --------------------   ------------------   -------------------

Michael Bozic(1)(3) ...............          $  562                 170                 $180,000
Edwin J. Garn(1)(3) ...............             555                 170                  178,000
Wayne E. Hedien(1)(2) .............             562                 170                  180,000
Dr. Manuel H. Johnson(1) ..........             746                 170                  240,000
Joseph J. Kearns(1)(4) ............             650                 171                  217,000
Michael E. Nugent(1)(2) ...........             654                 170                  210,000
Fergus Reid(1)(3) .................             654                 171                  215,000

NAME OF INTERESTED TRUSTEE:
---------------------------
Charles A. Fiumefreddo(2) .........           1,104                 170                  360,000
James F. Higgins ..................               0                 170                        0



----------
(1)   Member of the Audit Committee. Dr. Johnson is the Chairman of the Audit
      Committee and Mr. Kearns is the Deputy Chairman of the Audit Committee.

(2)   Member of the Insurance Committee. Mr. Nugent is the Chairman of the
      Insurance Committee.

(3)   Member of the Governance Committee. Mr. Reid is the Chairman of the
      Governance Committee.

(4)   Includes amounts deferred at the election of the Trustee under the DC
      Plan.


(5)   Because the funds in the Fund Complex have different fiscal year ends,
      the amounts shown in these columns are presented on a calendar year
      basis.


     Prior to December 31, 2003, 49 of the Retail Funds (the "Adopting Funds"),
not including the Fund, had adopted a retirement program under which an
Independent Trustee who retired after serving for at least five years as an
Independent Trustee of any such fund (an "Eligible Trustee") would have been
entitled to retirement payments, based on factors such as length of service,
upon reaching the eligible retirement age. On December 31, 2003, the amount of
accrued retirement benefits for each Eligible Trustee was frozen, and will be
payable, together with a return of 8% per annum, at or following each such
Eligible Trustee's retirement as shown in the table below.


     The following table illustrates the retirement benefits accrued to the
Fund's Independent Trustees by the Adopting Funds for the calendar year ended
December 31, 2005, and the estimated retirement benefits for the Independent
Trustees from the Adopting Funds for each calendar year following retirement.
Messrs. Kearns and Reid did not participate in the retirement program.


                                       27






                                  RETIREMENT BENEFITS ACCRUED AS    ESTIMATED ANNUAL BENEFITS UPON
                                           FUND EXPENSES                       RETIREMENT
                                          BY ALL ADOPTING                 (1)FROM ALL ADOPTING
NAME OF INDEPENDENT TRUSTEE:                   FUNDS                              FUNDS
-------------------------------   -------------------------------   --------------------------------

Michael Bozic .................               $ 19,439                           $46,871
Edwin J. Garn .................                (10,738)(2)                        46,917
Wayne E. Hedien ...............                 37,860                            40,020
Dr. Manuel H. Johnson .........                 19,701                            68,630
Michael E. Nugent .............                 35,471                            61,377




----------
(1)   Total compensation accrued under the retirement plan, together with a
      return of 8% per annum, will be paid annually commencing upon retirement
      and continuing for the remainder of the Trustee's life.

(2)   Mr. Garn's retirement expense is negative due to the fact that his
      retirement date has been extended to October 31, 2007, and therefore the
      expense has been over accrued.



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

     The following owned 5% or more of the outstanding Class A shares as of
January 3, 2006: Hare & Co., c/o The Bank of New York, P.O. Box 11203, New
York, NY 11203.


     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 ADVISORY AND OTHER SERVICES
--------------------------------------------------------------------------------

A. INVESTMENT ADVISER AND ADMINISTRATOR

     The Investment Adviser to the Fund is Morgan Stanley Investment Advisors
Inc., a Delaware corporation, whose address is 1221 Avenue of the Americas, New
York, NY 10020. The Investment Adviser is a wholly-owned subsidiary of Morgan
Stanley, a Delaware corporation. Morgan Stanley 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.


     Prior to November 1, 2004, pursuant to an investment management agreement
(the "Management Agreement") with the Investment Adviser, the Fund had retained
the Investment Adviser to provide administrative services and to manage the
investment of the Fund's assets, including the placing of orders for the
purchase and sale of portfolio securities. Prior to May 1, 2004, the rate was
1.00% of the Fund's average daily net assets. The Fund paid the Investment
Advisor monthly compensation calculated daily by applying the annual rates to
the net assets of the Fund determined as of the close of each business day.
Effective May 1, 2004, the investment management fee was reduced from 1.00% of
the portion of the daily net assets not exceeding $1 billion; and 0.90% of the
portion of the daily net assets exceeding $1 billion to 0.50% of the portion of
the daily net assets not exceeding $1 billion; 0.45% of the portion of the
daily net assets exceeding $1 billion but not exceeding $2 billion; 0.40% of
the portion of the daily net assets exceeding $2 billion but not exceeding $3
billion; and 0.35% of the portion of the daily net assets exceeding $3 billion.
The management fee was allocated among the Classes pro rata based on the net
assets of the Fund attributable to each Class.

     The Board of Trustees of the Fund approved amending and restating,
effective November 1, 2004, the Management Agreement to remove the
administration services component from the Investment Management Agreement and
to reduce the investment advisory fee to the annual rates of 0.42% of the
portion of the daily net assets not exceeding $1 billion; 0.37% of the portion
of the daily net assets exceeding $1 billion but not exceeding $2 billion;
0.32% of the portion of the daily net assets exceeding $2 billion but not
exceeding $3 billion; and 0.27% of the portion of the daily net assets
exceeding $3 billion. The advisory fee is allocated among the Classes pro rata
based on the net assets of the Fund attributable to each Class. The Fund's
Investment Adviser continues to provide investment advisory services under an
Amended and Restated Investment Advisory Agreement ("Investment Advisory



                                       28




Agreement"). The administration services previously provided to the Fund by the
Investment Adviser are being provided by Morgan Stanley Services Company Inc.
("Administrator"), a wholly-owned subsidiary of the Investment Adviser,
pursuant to a separate administration agreement ("Administration Agreement")
entered into by the Fund with the Administrator. Such change resulted in a
0.08% reduction in the advisory fee concurrent with the implementation of a
0.08% administration fee pursuant to the new administration agreement. Under
the terms of the Administration Agreement, the Administrator provides the same
administrative services previously provided by the Investment Adviser.

     For the fiscal years ended September 30, 2003, 2004 and 2005, the Fund
accrued total compensation under the Management Agreement and the Investment
Advisory Agreement in the amounts of $3,764,280, $3,368,580 and $1,969,403,
respectively.

     For the period November 1, 2004 through September 30, 2005, the
Administrator accrued total compensation under the Administration Agreement in
the amount of $339,011.

     Although the entities providing administrative services to the Fund have
changed, the Morgan Stanley personnel performing such services remains the
same. Furthermore, the changes did not result in any increase in the amount of
total combined fees paid by the Fund for investment advisory and administrative
services, or any decrease in the nature or quality of the investment advisory
or administrative services received by the Fund.


     During the fiscal years ended September 30, 2003 and the period October 1,
2003 through November 28, 2003, Morgan Stanley Investments LP, a Pennsylvania
limited liability partnership that was an indirect subsidiary of Morgan
Stanley, acted as sub-advisor for the Fund (the "Former Sub-Advisor").

     Pursuant to the former sub-advisory agreement (the "Former Sub-Advisory
Agreement") between the Investment Adviser and the Former Sub-Advisor, the
Former Sub-Advisor was retained, subject to the overall supervision of the
Investment Adviser and the Trustees of the Fund, to continuously furnish
investment advice concerning individual security selections, asset allocations
and overall economic trends and to manage the Fund's portfolio. As compensation
for its service, the Investment Adviser paid the Former Sub-Advisor
compensation equal to 40% of its monthly compensation. For the fiscal year
ended September 30, 2003 and for the period October 1, 2003 through November
28, 2003, the Former Sub-Advisor accrued total compensation under the Former
Sub-Advisory Agreement in the amounts of $1,505,712 and $260,019, respectively.

B. PRINCIPAL UNDERWRITER

     The Fund's principal underwriter is the Distributor (which has the same
address as the Investment Adviser). In this capacity, the Fund's shares are
distributed by the Distributor. The Distributor has entered into a selected
dealer agreement with Morgan Stanley DW, 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 Morgan Stanley.

     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


                                       29



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 ADVISER AND ADMINISTRATOR

     The Investment Adviser manages the investment of the Fund's assets,
including the placing of orders for the purchase and sale of portfolio
securities. The Investment Adviser 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 Administration Agreement, the Administrator
maintains certain of the Fund's books and records and furnishes, at its own
expense, the office space, facilities, equipment, clerical help and bookkeeping
as the Fund may reasonably require in the conduct of its business. The
Administrator also assists in 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 the independent
registered public accounting firm and attorney is, in the opinion of the
Administrator, necessary or desirable). The Administrator also bears the cost
of telephone service, heat, light, power and other utilities provided to the
Fund.


     Expenses not expressly assumed by the Investment Adviser under the
Investment Advisory Agreement or by the Administrator under the Administration
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 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 Adviser or any corporate affiliate of the Investment Adviser; 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 Adviser (not including
compensation or expenses of attorneys who are employees of the Investment
Adviser); fees and expenses of the Fund's independent registered public
accounting firm; 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 Investment Advisory Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Investment Adviser is not liable to the Fund or any
of its investors for any act or omission by the Investment Adviser or for any
losses sustained by the Fund or its investors.

     The Investment Advisory Agreement will remain in effect from year to year,
provided continuance of the Investment Advisory 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 Independent Trustees.


                                       30



     The Administration Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Administrator is not liable to the Fund or any of
its investors for any act or omission by the Administrator or for any losses
sustained by the Fund or its investors. The Administration Agreement will
continue unless terminated by either party by written notice delivered to the
other party within 30 days.

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 maximum annual rates: 0.25%, 1.00% and 1.00% of the
average daily net assets of Class A, Class B and Class C, respectively.

     Effective May 1, 2004, the Board approved an Amended and Restated Plan of
Distribution Pursuant to Rule 12b-1 (the "Amended Plan") converting the Plan
with respect to Class B shares from a "compensation" to a "reimbursement" plan
similar to that of Class A and Class C. Except as otherwise described below,
the terms of the Plan remain unchanged.

     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 Morgan
Stanley DW received the proceeds of CDSCs and FSCs, for the last three fiscal
years ended September 30, in approximate amounts as provided in the table below
(the Distributor did not retain any of these amounts).




                              2005                      2004                      2003
                     -----------------------   -----------------------   -----------------------

Class A ..........   FSCs:(1)     $ 37,761     FSCs:(1)     $ 45,163     FSCs:(1)     $ 24,630
                     CDSCs:       $      0     CDSCs:       $      0     CDSCs:       $      0
Class B ..........   CDSCs:       $597,218     CDSCs:       $645,881     CDSCs:       $848,953
Class C ..........   CDSCs:       $  3,805     CDSCs:       $  2,693     CDSCs:       $  2,887



------------
(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 0.25% of such Class' average daily net assets are
currently each characterized as a "service fee" under the Rules of the NASD (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 NASD.


     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. For the fiscal year ended
September 30, 2005, Class A, Class B and Class C shares of the Fund accrued
payments under the Plan amounting to $105,306, $3,126,205 and $270,412,
respectively, which amounts are equal to 0.25%, 1.00% and 0.99% of the average
daily net assets of Class A, Class B 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.


                                       31



     With respect to Class A shares, Morgan Stanley DW 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 5.00% of
the amount sold and an annual residual commission, currently a residual of up
to 0.25% of the current value of the respective accounts for which they are the
Financial Advisors or dealers of record in all cases.

     With respect to Class B shares, Morgan Stanley DW 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 4.00% of the amount
sold and an annual residual commission, currently a residual of up to 0.25% of
the current value of the amount sold in all cases.

     With respect to Class C shares, Morgan Stanley DW 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 1.00% of the amount
sold and an annual residual commission, currently up to 1.00% of the current
value of the respective accounts for which they are the Financial Advisors of
record.

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

     The distribution fee that the Distributor receives from the Fund under the
Plan, in effect, offsets distribution expenses incurred under the Plan on
behalf of the Fund and, in the case of Class B shares, opportunity costs, such
as the gross sales credit and an assumed interest charge thereon ("carrying
charge"). 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. For example, the Distributor has
implemented a compensation program available only to Financial Advisors meeting
specified criteria under which certain marketing and/or promotional expenses of
those Financial Advisors are paid by the Distributor out of compensation it
receives under the Plan. 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 1.00%, in the case of Class C, of the average net assets of the
respective Class during the month. No interest or other financing charges, if
any, incurred on any distribution expenses on behalf of Class A and Class C
will be reimbursable under the Plan. With respect to Class A, in the case of
all expenses other than expenses representing the service fee, and, with
respect to Class C, in the case of all expenses other than expenses
representing a gross sales credit or a residual to Financial Advisors and other
authorized financial representatives, such amounts shall be determined at the
beginning of each calendar quarter by the Trustees, including, a majority of
the Independent Trustees. Expenses representing the service fee (for Class A)
or a gross sales credit or a residual to Financial Advisors and other
authorized financial representatives (for Class C) may be reimbursed without
prior Board 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


                                       32



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 September 30, 2005 to the Distributor. The
Distributor and Morgan Stanley DW estimate that they have spent, pursuant to
the Plan, $32,223,251 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) 13.43% ($4,326,263)-advertising and promotional expenses; (ii) 0.22%
($70,835)-printing and mailing of prospectuses for distribution to other than
current shareholders; and (iii) 86.35% ($27,826,153)-other expenses, including
the gross sales credit and the carrying charge, of which 5.62% ($1,564,726)
represents carrying charges, 39.07% ($10,872,231) represents commission credits
to Morgan Stanley DW's branch offices and other selected broker-dealers for
payments of commissions to Financial Advisors and other authorized financial
representatives, and 55.30% ($15,389,196) 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 September 30, 2005 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
Morgan Stanley DW 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 $7,138,110 as of September 30, 2005 (the end of
the Fund's fiscal year), which was equal to approximately 2.86% 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.


     Under the Amended Plan, the Fund is authorized to reimburse the
Distributor for its actual distribution expenses incurred on behalf of Class B
shares and from unreimbursed distribution expenses, on a monthly basis, the
amount of which may in no event exceed an amount equal to payment at the annual
rate of 1.00% of average daily net assets of Class B shares.

     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 1.00% 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 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 there were no such expenses that may be reimbursed in the subsequent
year in the case of Class A or Class C at December 31, 2005 (end of the
calendar year). 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 Adviser, Morgan Stanley


                                       33



DW, Morgan Stanley Services 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 Morgan
Stanley DW's branch offices made possible by the 12b-1 fees, Morgan Stanley DW
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.

     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. 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 30 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 Trust 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, 2nd Floor, Jersey City, NJ 07311.

     (2) CUSTODIAN AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     The Bank of New York, 100 Church Street, New York, NY 10286, is the
Custodian of the Fund's assets. Any of the Fund's cash balances with the
Custodian in excess of $100,000 are unprotected by federal deposit insurance.
These balances may, at times, be substantial.


     Deloitte & Touche LLP, Two World Financial Center, New York, NY 10281, is
the independent registered public accounting firm of the Fund. The Fund's
independent registered public accounting firm is responsible for auditing the
annual financial statements.


  (3) AFFILIATED PERSONS

     The Transfer Agent is an affiliate of the Investment Adviser and 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.


                                       34



G. FUND MANAGEMENT

OTHER ACCOUNTS MANAGED BY THE PORTFOLIO MANAGERS


     As of September 30, 2005, B. Robert Baker managed 16 mutual funds with a
total of approximately $24.9 billion in assets; two pooled investment vehicles
other than mutual funds with a total of approximately $1.4 billion in assets;
and 19,730 other accounts (which include separate accounts managed under
certain "wrap fee programs"), with a total of approximately $2.2 billion in
assets.

     As of September 30, 2005, Jason Leder managed 16 mutual funds with a total
of approximately $24.9 billion in assets; two pooled investment vehicles other
than mutual funds with a total of approximately $1.4 billion in assets; and
19,730 other accounts (which include separate accounts managed under certain
"wrap fee programs"), with a total of approximately $2.2 billion in assets.

     As of September 30, 2005, Kevin Holt managed 16 mutual funds with a total
of approximately $24.9 billion in assets; two pooled investment vehicles other
than mutual funds with a total of approximately $1.4 billion in assets; and
19,730 other accounts (which include separate accounts managed under certain
"wrap fee programs"), with a total of approximately $2.2 billion in assets.

     Because the portfolio managers may manage assets for other investment
companies, there may be an incentive to favor one client over another resulting
in conflicts of interest. For instance, the Investment Adviser may receive fees
from certain accounts that are higher than the fee it receives from the Fund,
or it may receive a performance-based fee on certain accounts. In those
instances, the portfolio managers may have an incentive to favor the higher
and/or performance-based fee accounts over the Fund. The portfolio managers of
the Fund do not currently manage assets for other investment companies, pooled
investment vehicles or other accounts that charge a performance fee. The
Investment Adviser has adopted trade allocation and other policies and
procedures that it believes are reasonably designed to address these and other
conflicts of interest.


PORTFOLIO MANAGER COMPENSATION STRUCTURE

     The portfolio managers receive a combination of base compensation and
discretionary compensation, comprising a cash bonus and several deferred
compensation programs described below. The methodology used to determine
portfolio manager compensation is applied across all funds/accounts managed by
the portfolio manager.

     BASE SALARY COMPENSATION. Generally, portfolio managers receive base
salary compensation based on the level of their position with the Investment
Adviser.

     DISCRETIONARY COMPENSATION. In addition to base compensation, portfolio
managers may receive discretionary compensation.

     Discretionary compensation can include:

     o  Cash Bonus;

     o  Morgan Stanley's Equity Incentive Compensation Program (EICP) awards-a
        mandatory program that defers a portion of discretionary year-end
        compensation into restricted stock units or other awards based on Morgan
        Stanley common stock that are subject to vesting and other conditions;


     o  Investment Management Deferred Compensation Plan (IMDCP) awards-a
        mandatory program that defers a portion of discretionary year-end
        compensation and notionally invests it in designated funds advised by
        the Investment Adviser or its affiliates. The award is subject to
        vesting and other conditions. Portfolio managers must notionally invest
        a minimum of 25% to a maximum of 75% of the IMDCP deferral into a
        combination of a money market fund and the designated funds they manage
        that are included in the IMDCP fund menu, which may or may not include
        the Fund;


     o  Voluntary Deferred Compensation Plans-voluntary programs that permit
        certain employees to elect to defer a portion of their discretionary
        year-end compensation and directly or notionally


                                       35



        invest the deferred amount: (1) across a range of designated investment
        funds, including funds advised by the Adviser or its affiliates; and/or
        (2) in Morgan Stanley stock units.

     Several factors determine discretionary compensation, which can vary by
portfolio management team and circumstances. In order of relative importance,
these factors include:

     o  Investment performance. A portfolio manager's compensation is linked to
        the pre-tax investment performance of the funds/accounts managed by the
        portfolio manager. Investment performance is calculated for one-, three-
        and five-year periods measured against a fund's/account's primary
        benchmark (as set forth in the fund's prospectus), indices and/or peer
        groups, where applicable. Generally, the greatest weight is placed on
        the three- and five-year periods.

     o  Revenues generated by the investment companies, pooled investment
        vehicles and other accounts managed by the portfolio manager.

     o  Contribution to the business objectives of the Investment Adviser.

     o  The dollar amount of assets managed by the portfolio manager.

     o  Market compensation survey research by independent third parties.

     o  Other qualitative factors, such as contributions to client objectives.

     o  Performance of Morgan Stanley and Morgan Stanley Investment Management,
        and the overall performance of the Global Investor Group, a department
        within Morgan Stanley Investment Management that includes all investment
        professionals.


SECURITIES OWNERSHIP OF PORTFOLIO MANAGERS

     As of September 30, 2005, the dollar range of Fund shares beneficially
owned by the portfolio manager in the Fund is shown below:

B. Robert Baker:  None(1)
Kevin C. Holt:    $10,001 - $50,000(1)
Jason S. Leder:   None(1)

----------
(1)   In addition, the portfolio manager has made investments in one or more
      other mutual funds managed by the same portfolio management team pursuant
      to a similar strategy.


H. CODES OF ETHICS

     The Fund, the Investment Adviser and the Distributor have each adopted a
Code of Ethics pursuant to Rule 17j-1 under the Investment Company Act. The
Codes of Ethics are designed to detect and prevent improper personal trading.
The Codes of Ethics permit personnel subject to the Codes to invest in
securities, including securities that may be purchased, sold or held by the
Fund, subject to a number of restrictions and controls, including prohibitions
against purchases of securities in an initial public offering and a
preclearance requirement with respect to personal securities transactions.

I. PROXY VOTING POLICY AND PROXY VOTING RECORD

     The Board of Trustees believes that the voting of proxies on securities
held by the Fund is an important element of the overall investment process. As
such, the Trustees have delegated the responsibility to vote such proxies to
the Investment Adviser. The following is a summary of the Investment Adviser's
Proxy Voting Policy ("Proxy Policy").

     The Investment Adviser uses its best efforts to vote proxies on securities
held in the Fund as part of its authority to manage, acquire and dispose of
Fund assets. In this regard, the Investment Adviser has formed a Proxy Review
Committee ("Committee") comprised of senior investment professionals that is
responsible for creating and implementing the Proxy Policy. The Committee meets
monthly but may meet more frequently as conditions warrant. The Proxy Policy
provides that the Investment Adviser will vote proxies in the best interests of
clients consistent with the objective of maximizing long-term investment


                                       36



returns. The Proxy Policy provides that the Investment Adviser will generally
vote proxies in accordance with pre-determined guidelines contained in the
Proxy Policy. The Investment Adviser may vote in a manner that is not
consistent with the pre-determined guidelines, provided that the vote is
approved by the Committee. The Investment Adviser generally will not vote a
proxy if it has sold the affected security between the record date and the
meeting date.

     The Proxy Policy provides that, unless otherwise determined by the
Committee, votes will be cast in the manner described below:

     o  Generally, routine proposals will be voted in support of management.

     o  With regard to the election of directors, where no conflict exists and
        where no specific governance deficiency has been noted, votes will be
        cast in support of management's nominees.

     o  The Investment Adviser will vote in accordance with management's
        recommendation with respect to certain non-routine proposals (i.e.,
        reasonable capitalization changes, stock repurchase programs, stock
        splits, certain compensation-related matters, certain anti-takeover
        measures, etc.).

     o  The Investment Adviser will vote against certain non-routine proposals
        (i.e., unreasonable capitalization changes, establishment of cumulative
        voting rights for the election of directors, requiring supermajority
        shareholder votes to amend by-laws, indemnification of auditors, etc.).

     o  The Investment Adviser will vote in its discretion with respect to
        certain non-routine proposals (i.e., mergers, acquisitions, take-overs,
        spin-offs, etc.), which may have a substantive financial or best
        interest impact on an issuer.

     o  The Investment Adviser will vote for certain proposals it believes call
        for reasonable charter provisions or corporate governance practices
        (i.e., requiring auditors to attend annual shareholder meetings,
        requiring that members of compensation, nominating and audit committees
        be independent, reducing or eliminating supermajority voting
        requirements, etc.).

     o  The Investment Adviser will vote against certain proposals it believes
        call for unreasonable charter provisions or corporate governance
        practices (i.e., proposals to declassify boards, proposals to require a
        company to prepare reports that are costly to provide or that would
        require duplicative efforts or expenditure that are of a non-business
        nature or would provide no pertinent information from the perspective of
        institutional shareholders, etc.).

     o  Certain other proposals (i.e., proposals requiring directors to own
        large amounts of company stock to be eligible for election, requiring
        diversity of board membership relating to broad based social, religious
        or ethnic groups, etc.) generally are evaluated by the Committee based
        on the nature of the proposal and the likely impact on shareholders.

     While the proxy voting process is well-established in the United States
and other developed markets with a number of tools and services available to
assist an investment manager, voting proxies of non-U.S. companies located in
certain jurisdictions, particularly emerging markets, may involve a number of
problems that may restrict or prevent the Investment Adviser's ability to vote
such proxies. As a result, non-U.S. proxies will be voted on a best efforts
basis only, after weighing the costs and benefits to the Fund of voting such
proxies.

CONFLICTS OF INTEREST

     If the Committee determines that an issue raises a material conflict of
interest, or gives rise to a potential material conflict of interest, the
Committee will request a special committee to review, and recommend a course of
action with respect to, the conflict in question and that the Committee will
have sole discretion to cast a vote.

THIRD PARTIES


     To assist in its responsibility for voting proxies, the Investment Adviser
has retained Institutional Shareholder Services ("ISS") Glass Lewis and Proxy
Governance, Inc. as experts in the proxy voting



                                       37




and corporate governance area. In addition to ISS Glass Lewis and Proxy
Governance, Inc., the Investment Adviser may from time to time retain other
proxy research providers. ISS Glass Lewis, Proxy Governance, Inc., and these
other proxy research providers are referred to herein as "Research Providers."
The services provided to the Investment Adviser by the Research Providers
include in-depth research, global issuer analysis, and voting recommendations.
While the Investment Adviser may review and utilize recommendations made by the
Research Providers in making proxy voting decisions, it is in no way obligated
to follow such recommendations. In addition to research, the Research Providers
provide vote execution, reporting and recordkeeping. The Committee carefully
monitors and supervises the services provided by the Research Providers.


FURTHER INFORMATION

     A copy of the Proxy Policy, as well as the Fund's most recent proxy voting
record for the 12-month period ended June 30, filed with the SEC, are available
without charge on our web site at www.morganstanley.com/funds. The Fund's proxy
voting record is also available without charge on the SEC's web site at
www.sec.gov.

J. REVENUE SHARING

     The Investment Adviser and/or Distributor may pay compensation, out of
their own funds and not as an expense of the Fund, to Morgan Stanley DW and
certain unaffiliated brokers, dealers or other financial Intermediaries
("Intermediaries") in connection with the sale or retention of Fund shares
and/or shareholder servicing. For example, the Investment Adviser or the
Distributor may pay additional compensation to Morgan Stanley DW and to
Intermediaries for the purpose of promoting the sale of Fund shares,
maintaining share balances and/or for sub-accounting, administrative or
shareholder processing services. Such payments are in addition to any
distribution fees, service fees and/or transfer agency fees that may be payable
by the Fund. The additional payments may be based on factors, including level
of sales (based on gross or net sales or some specified minimum sales or some
other similar criteria related to sales of the Fund and/or some or all other
Morgan Stanley Funds), amount of assets invested by the Intermediary's
customers (which could include current or aged assets of the Fund and/or some
or all other Morgan Stanley Funds), the Fund's advisory fees, some other agreed
upon amount, or other measures as determined from time to time by the
Investment Adviser and/or Distributor.

     These payments currently include the following amounts which are paid to
Morgan Stanley DW and other Intermediaries or their salespersons in accordance
with the applicable compensation structure:


   (1)   On sales of $1 million or more of Class A shares (for which no sales
         charge was paid) or net asset value purchases by certain employee
         benefit plans, Morgan Stanley DW and other Intermediaries receive a
         gross sales credit of up to 1.00% of the amount sold.*

   (2)   On sales of Class D shares (other than shares held by participants in
         the Morgan Stanley Funds Portfolio Architectsm Program, the Morgan
         Stanley Fund Solutionsm Program, the Morgan Stanley Personal
         Portfoliosm Program and Morgan Stanley Corporate Retirement
         Solutions), Morgan Stanley DW and other Intermediaries receive a gross
         sales credit of 0.25% of the amount sold and an annual fee of up to
         0.15% of the current value of the Class D shares held in the
         applicable accounts. There is a chargeback of 100% of the gross sales
         credit amount paid if the Class D shares are redeemed in the first
         year and a chargeback of 50% of the gross sales credit amount paid if
         the shares are redeemed in the second year.


   (3)   On sales of Class A, B and C shares (except purchases through 401(k)
         platforms or shares, if any, held by participants in the Morgan
         Stanley Fund Solutionsm Program, the Morgan Stanley Personal
         Portfoliosm Program and Morgan Stanley Corporate Retirement Solutions)
         through Morgan Stanley DW's Mutual Fund Network:

----------
*     Commissions or transaction fees paid to Morgan Stanley DW or other
      Intermediaries who initiate and are responsible for purchases of $1
      million or more are computed on a percentage of the dollar value of such
      shares sold as follows: 1.00% on sales of $1 million to $2 million, plus
      0.75% on the next $1 million, plus 0.50% on the next $2 million, plus
      0.25% on the excess over $5 million.


                                       38




      o   An amount up to 0.11% of gross sales of such Fund shares; and


      o   An annual fee in an amount up to 0.03% of the value of such Fund
          shares in excess of $9 billion.


   (4)   An annual fee in an amount equal to 0.20% of the value of Fund shares
         sold through 401(k) platforms.


     The prospect of receiving, or the receipt of, additional compensation, as
described above, by Morgan Stanley DW or other Intermediaries may provide
Morgan Stanley DW or other Intermediaries and/or Financial Advisors and other
salespersons with an incentive to favor sales of shares of the Fund over other
investment options with respect to which Morgan Stanley DW or any Intermediary
does not receive additional compensation (or receives lower levels of
additional compensation). These payment arrangements, however, will not change
the price that an investor pays for shares of the Fund. Investors may wish to
take such payment arrangements into account when considering and evaluating any
recommendations relating to Fund shares.

     You should review carefully any disclosure by such brokers, dealers or
other Intermediaries as to their compensation.


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

A. BROKERAGE TRANSACTIONS

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


     For the fiscal years ended September 30, 2003, 2004 and 2005, the Fund
paid a total of $943,742, $983,547, and $313,184, 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 Morgan Stanley DW. The
Fund will limit its transactions with Morgan Stanley DW 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 Morgan Stanley DW only when the price available from Morgan
Stanley DW is better than that available from other dealers.

     During the fiscal years ended September 30, 2003, 2004 and 2005, the Fund
did not effect any principal transactions with Morgan Stanley DW.

     Brokerage transactions in securities listed on exchanges or admitted to
unlisted trading privileges may be effected through Morgan Stanley DW, 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


                                       39



broker in a commensurate arm's-length transaction. Furthermore, the Trustees,
including the Independent Trustees, have adopted procedures which are
reasonably designed to provide that any commissions, fees or other remuneration
paid to an affiliated broker or dealer are consistent with the foregoing
standard. The Fund does not reduce the management fee it pays to the Investment
Adviser by any amount of the brokerage commissions it may pay to an affiliated
broker or dealer.

     During the fiscal years ended September 30, 2003, 2004 and 2005, the Fund
did not pay any brokerage commissions to Morgan Stanley DW.


     During the fiscal years ended September 30, 2003, 2004 and 2005, the Fund
paid a total of $28,415, $4,218 and $3,574, respectively, in brokerage
commissions to Morgan Stanley & Co. During the fiscal year ended September 30,
2005, the brokerage commissions paid to Morgan Stanley & Co. represented
approximately 1.14% of the total brokerage commissions paid by the Fund during
the year and were paid on account of transactions having an aggregate dollar
value equal to approximately 0.82% of the aggregate dollar value of all
portfolio transactions of the Fund during the year for which commissions were
paid.


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. The Investment
Adviser is prohibited from directing brokerage transactions on the basis of the
referral of clients on the sale of shares of advised investment companies.
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 Adviser 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 Adviser 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 foreign 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 Adviser
effects transactions with those brokers and dealers who they believe provide
the most favorable prices and are capable of providing efficient executions. If
the Investment Adviser 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 Adviser. 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 Adviser from brokers and dealers may be utilized by the
Investment Adviser and any of its asset management affiliates in the management
of accounts of some of their other clients and may not in all cases benefit the
Fund directly.


     The Investment Adviser, and certain of its affiliates, currently serve as
investment adviser to a number of clients, including other investment
companies, and may in the future act as investment adviser to others. It is the
practice of the Investment Adviser and its affiliates to cause purchase and
sale transactions (including transactions in certain initial and secondary
public offerings) to be allocated among clients whose assets they manage
(including the Fund) in such manner as they deem 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



                                       40



same or comparable securities, the availability of cash for investment, the
size of investment commitments generally held and the opinions of the persons
responsible for managing the portfolios of the Fund and other client accounts.
The Investment Adviser and its affiliates may operate one or more order
placement facilities and each facility will implement order allocation in
accordance with the procedures described above. From time to time, each
facility may transact in a security at the same time as other facilities are
trading in that security.

D. DIRECTED BROKERAGE


     During the fiscal year ended September 30, 2005, the Fund paid $207,546 in
brokerage commissions in connection with transactions in the aggregate amount
of $173,636,465 to brokers because of research services provided.


E. REGULAR BROKER-DEALERS


     During the fiscal year ended September 30, 2005, the Fund purchased
securities issued by Citigroup Global Markets Inc., JP Morgan Chase & Co.,
Goldman Sachs, & Co. and Merrill Lynch, Pierce Fenner & Smith Inc. which
issuers were among the ten brokers or ten dealers which executed transactions
for or with the Fund in the largest dollar amounts during the period. At
September 30, 2005 the Fund held securities issued by Banc of America
Securities LLC, Bank of New York (The), Citigroup Global Markets Inc., Merrill
Lynch, Pierce Fenner & Smith Inc., Lehman Brothers Inc. and JP Morgan Chase &
Co. with market values of $13,446,740, $4,052,698, $12,827,536, $3,515,355,
$978,432 and $3,610,152, respectively.



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 Trustees and the Fund is required to provide
assistance in communicating with shareholders about such a meeting. The voting
rights of shareholders are not cumulative, so that holders of more than 50% 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


                                       41



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.

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


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

A. PURCHASE/REDEMPTION OF SHARES

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

     TRANSFER AGENT AS AGENT. With respect to the redemption or repurchase of
Fund shares, the application of proceeds to the purchase of new shares in the
Fund or any other Morgan Stanley 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 is liable for its own negligence and not for the default or
negligence of its correspondents or for losses in transit. The Fund is not
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 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 transactions 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 a 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.

     OUTSIDE BROKERAGE ACCOUNTS. If a shareholder wishes to maintain his or her
fund account through a brokerage company other than Morgan Stanley DW, he or
she may do so only if the Distributor has entered into a selected dealer
agreement with that brokerage company. Accounts maintained through a brokerage
company other than Morgan Stanley DW may be subject to certain restrictions on
subsequent purchases and exchanges. Please contact your brokerage company or
the Transfer Agent for more information.

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,
Morgan Stanley DW and other authorized dealers as described in Section "V.
Investment Advisory 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.


                                       42



     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
exchange is valued at its latest sale price, prior to the time when assets are
valued; if there were no sales that day, the security is valued at the mean
between the last reported bid and asked price; (2) an equity portfolio security
listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price;
if there were no sales that day, the security is valued at the mean between the
last reported bid and asked price; and (3) all other portfolio securities for
which over-the-counter market quotations are readily available are valued at
the mean between the last reported bid and asked 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. For equity securities traded on
foreign exchanges, the last reported sale price or the latest bid price may be
used if there were no sales on a particular day. When market quotations are not
readily available, including circumstances under which it is determined by the
Investment Adviser that the sale price, the bid price or the mean between the
last reported bid and asked price 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 NYSE.

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

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

     Listed options on debt securities are valued at the latest sale price on
the exchange on which they are listed unless no sales of such options have
taken place that day, in which case, they will be valued at the mean between
their closing bid and asked prices. Unlisted options on debt securities are
valued at the mean between their latest bid and asked price. Futures are valued
at the latest price published by the commodities exchange on which they trade
unless it is determined that 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 of 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 NYSE. 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 NYSE. 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 NYSE 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.
The tax treatment of the investment activities of the Fund will affect the
amount, timing and character of the distributions made by the Fund. The
following discussion is only a summary of certain tax considerations generally
affecting the Fund and shareholders of the Fund and is not intended as a
substitute for careful tax planning. 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.


                                       43



     Investment Company Taxation. The Fund intends to continue to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended. 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
timely 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 generally be
long-term capital gains or losses if the securities have a tax holding period
of more than one year at the time of such sale. Gains or losses on the sale of
securities with a tax holding period of one year or less will be short-term
capital gains or losses. Special tax rules may change the normal treatment of
gains and losses recognized by the Fund when the Fund invests in forward
foreign currency exchange contracts, options, futures transactions, and
non-U.S. corporations classified as "passive foreign investment companies"
("PFICs"). Those special tax rules can, among other things, affect the
treatment of capital gain or loss as long-term or short-term and may result in
ordinary income or loss rather than capital gain or loss. The application of
these special rules would therefore also affect the character of distributions
made by the Fund.

     Under certain tax rules, the Fund may be required to accrue a portion of
any discount at which certain securities are purchased as income each year even
though the Fund receives no payments in cash on the security during the year.
To the extent that the Fund invests in such securities, it would be required to
pay out such income 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 Adviser 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 be
subject 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 generally taxable to the
shareholder as ordinary income regardless of whether the shareholder receives
such payments in additional shares or in cash. Under current law, a portion of
the ordinary income dividends received by a shareholder may be taxed at the
same rate as long-term capital gains. However, even if income received in the
form of ordinary income dividends is taxed at the same rates as long-term
capital gains, such income will not be considered long-term capital gains for
other federal income tax purposes. For example, you generally will not be
permitted to offset ordinary income dividends with capital losses. Short-term
capital gain distributions will continue to be taxed at ordinary income rates.

     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. Under current law, the maximum tax
rate on long- term capital gains available to non-corporate shareholders is
15%. Without future congressional action, the maximum tax rate on long-term
capital gains would return to 20% in 2009, and the maximum rate on all
dividends would move to 35% in 2009 and 39.6% in 2011.


     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 to shareholders of record of such month and paid in January then such
amounts will be treated for tax purposes as received by the shareholders on
December 31.


                                       44



     Subject to certain exceptions, a corporate shareholder may be eligible for
a 70% dividends received deduction to the extent that the Fund earns and
distributes qualifying dividends from its investments. Distributions of net
capital gains by the Fund will not be eligible for the dividends received
deduction.


     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. Recently enacted legislation amends certain rules relating to regulated
investment companies. This legislation, among other things, modifies the
federal income tax treatment of certain distributions to foreign investors. The
Fund will no longer be required to withhold any amounts with respect to
distributions to foreign shareholders that are properly designated by the Fund
as "interest-related dividends" or "short-term capital gain dividends,"
provided that the income would not be subject to federal income tax if earned
directly by the foreign shareholder. Currently, however, the Fund will continue
to withhold these amounts regardless of the fact that it is no longer required
to do so. Distributions attributable to gains from "U.S. real property
interests" (including certain U.S. real property holding corporations,
including certain REITs and certain capital gain distributions from REITs) will
generally be subject to federal withholding tax and will give rise to an
obligation on the part of the foreign shareholder to file a U.S. tax return.
Also, such gain may be subject to a 30% branch profits tax in the hands of a
foreign shareholder that is a corporation. The provisions contained in the
legislation relating to distributions to foreign persons generally would apply
to distributions with respect to taxable years of regulated investment
companies beginning after December 31, 2004 and before January 1, 2008.
Prospective investors are urged to consult their tax advisors regarding the
specific tax consequences relating to the legislation.


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

     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 at the time of such sale or redemption will, for tax purposes,
generally result in short-term gains or losses and those held for more than one
year will generally result in long-term capital gains or losses. Under current
law, the maximum tax rate on long-term capital gains available to non-corporate
shareholders generally is 15%. Without future congressional action, the maximum
tax rate on long-term capital gains would return to 20% in 2009. 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 adjusted 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.


                                       45



     Exchanges of Fund shares for shares of another fund, including shares of
other Morgan Stanley 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
Fund, followed by the purchase of shares in the other fund.

     The ability to deduct capital losses may be limited. In addition, if a
shareholder realizes a loss on the redemption or exchange of a fund's shares
and reinvests in that fund's shares or substantially identical 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
Plan."


XI. PERFORMANCE DATA
--------------------------------------------------------------------------------

       AVERAGE ANNUAL RETURNS ASSUMING DEDUCTION OF MAXIMUM SALES CHARGE

                        PERIOD ENDED SEPTEMBER 30, 2005.




                      INCEPTION
CLASS                   DATE        1 YEAR      5 YEARS     LIFE OF FUND
------------------   ----------   ----------   ---------   -------------

Class A ..........   11/25/98         3.95%       4.41%         3.71%
Class B ..........   11/25/98         3.85%       4.38%         3.73%
Class C ..........   11/25/98         7.93%       4.76%         3.76%
Class D ..........   11/25/98         9.91%       5.78%         4.80%



          AVERAGE ANNUAL RETURNS ASSUMING NO DEDUCTION OF SALES CHARGE
                        PERIOD ENDED SEPTEMBER 30, 2005.




                      INCEPTION
CLASS                   DATE        1 YEAR      5 YEARS     LIFE OF FUND
------------------   ----------   ----------   ---------   -------------

Class A ..........   11/25/98         9.71%       5.54%         4.53%
Class B ..........   11/25/98         8.85%       4.72%         3.73%
Class C ..........   11/25/98         8.93%       4.76%         3.76%
Class D ..........   11/25/98         9.91%       5.78%         4.80%



         AGGREGATE TOTAL RETURNS ASSUMING NO DEDUCTION OF SALES CHARGE
                        PERIOD ENDED SEPTEMBER 30, 2005.




                      INCEPTION
CLASS                   DATE        1 YEAR       5 YEARS      LIFE OF FUND
------------------   ----------   ----------   -----------   -------------

Class A ..........   11/25/98         9.71%        30.93%         35.43%
Class B ..........   11/25/98         8.85%        25.93%         28.52%
Class C ..........   11/25/98         8.93%        26.15%         28.74%
Class D ..........   11/25/98         9.91%        32.47%         37.85%



  AVERAGE ANNUAL AFTER-TAX RETURNS ASSUMING DEDUCTION OF MAXIMUM SALES CHARGE
                                    CLASS B
                        PERIOD ENDED SEPTEMBER 30, 2005




                                                   INCEPTION                               LIFE OF
CALCULATION METHODOLOGY                               DATE        1 YEAR      5 YEARS       FUND
-----------------------------------------------   -----------   ----------   ---------   ----------

After taxes on distributions ..................   11/25/98          3.78%       4.37%        3.72%
After taxes on distributions and redemptions ..   11/25/98          2.60%       3.77%        3.22%




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

     The Fund's audited financial statements for the fiscal year ended
September 30, 2005, including notes thereto and the report of Deloitte & Touche
LLP, are herein incorporated by reference from the Fund's annual report. A copy
of the Fund's Annual Report to Shareholders must accompany the delivery of this
Statement of Additional Information.



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XIII. FUND COUNSEL
--------------------------------------------------------------------------------

     Clifford Chance US LLP, located at 31 West 52nd Street, New York, NY
10019, acts as the Fund's legal counsel.

                                   * * * * *

     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.


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