AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 4, 2003
REGISTRATION NO. 2-70423

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM N-14

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [X]

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

PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. [ ]

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MORGAN STANLEY
DIVIDEND GROWTH SECURITIES INC.
A Maryland Corporation
(Exact Name of Registrant as Specified in Charter)

1221 AVENUE OF THE AMERICAS
NEW YORK, NY 10020
(Address of Principal Executive Offices)

(800) 869-6397
(Registrant's Telephone Number)

BARRY FINK, ESQ.
1221 AVENUE OF THE AMERICAS,
NEW YORK, NEW YORK 10020
(Name and Address of Agent for Service)

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

COPY TO:
STUART M. STRAUSS, ESQ.
Mayer, Brown, Rowe & Maw LLP
1675 Broadway
New York, New York 10019

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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.

The Exhibit Index is located on page [ ]

PURSUANT TO RULE 429, THIS REGISTRATION STATEMENT RELATES TO SHARES
PREVIOUSLY REGISTERED BY THE REGISTRANT ON FORM N-1A (REGISTRATION NOS.
2-70423; 811-3128).

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MORGAN STANLEY EQUITY FUND

1221 AVENUE OF THE AMERICAS
NEW YORK, NY 10020
(800) 869-NEWS

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 16, 2003

TO THE SHAREHOLDERS OF MORGAN STANLEY EQUITY FUND

Notice is hereby given of a Special Meeting of the Shareholders of Morgan
Stanley Equity Fund ("Equity") to be held in Room 209, 2nd Floor, 1221 Avenue
of the Americas, New York, NY 10020, at 9:00 A.M., New York time, on December
16, 2003, and any adjournments thereof (the "Meeting"), for the following
purposes:

1. To consider and vote upon an Agreement and Plan of Reorganization, dated
July 31, 2003 (the "Reorganization Agreement"), between Equity and Morgan
Stanley Dividend Growth Securities Inc. ("Dividend Growth"), pursuant to
which substantially all of the assets of Equity would be combined with
those of Dividend Growth and shareholders of Equity would become
shareholders of Dividend Growth receiving shares of Dividend Growth with a
value equal to the value of their holdings in Equity (the
"Reorganization"); and

2. To act upon such other matters as may properly come before the Meeting.

The Reorganization is more fully described in the accompanying Proxy
Statement and Prospectus and a copy of the Reorganization Agreement is attached
as Exhibit A thereto. Shareholders of record at the close of business on
September 30, 2003 are entitled to notice of, and to vote at, the Meeting.
Please read the Proxy Statement and Prospectus carefully before telling us,
through your proxy or in person, how you wish your shares to be voted.
Alternatively, if you are eligible to vote telephonically by touchtone
telephone or electronically on the Internet (as discussed in the enclosed Proxy
Statement) you may do so in lieu of attending the Meeting in person. THE BOARD
OF TRUSTEES OF EQUITY RECOMMENDS YOU VOTE IN FAVOR OF THE REORGANIZATION. WE
URGE YOU TO SIGN, DATE AND MAIL THE ENCLOSED PROXY PROMPTLY.

By Order of the Board of Trustees,

BARRY FINK,
Secretary

October 15, 2003

YOU CAN HELP AVOID THE NECESSITY AND EXPENSE OF SENDING FOLLOW-UP LETTERS TO
ENSURE A QUORUM BY PROMPTLY RETURNING THE ENCLOSED PROXY. IF YOU ARE UNABLE
TO BE PRESENT IN PERSON, PLEASE FILL IN, SIGN AND RETURN THE ENCLOSED PROXY
IN ORDER THAT THE NECESSARY QUORUM BE REPRESENTED AT THE MEETING. THE
ENCLOSED ENVELOPE REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
SHAREHOLDERS WILL BE ABLE TO VOTE TELEPHONICALLY BY TOUCHTONE TELEPHONE OR
ELECTRONICALLY ON THE INTERNET BY FOLLOWING INSTRUCTIONS ON THEIR PROXY
CARDS OR ON THE ENCLOSED VOTING INFORMATION CARD.

MORGAN STANLEY DIVIDEND GROWTH SECURITIES, INC.

1221 AVENUE OF THE AMERICAS
NEW YORK, NY 10020
(800) 869-NEWS

ACQUISITION OF THE ASSETS OF
MORGAN STANLEY EQUITY FUND

BY AND IN EXCHANGE FOR SHARES OF
MORGAN STANLEY DIVIDEND GROWTH SECURITIES INC.

This Proxy Statement and Prospectus is being furnished to shareholders of
Morgan Stanley Equity Fund ("Equity") in connection with an Agreement and Plan
of Reorganization, dated July 31, 2003 (the "Reorganization Agreement"),
pursuant to which substantially all the assets of Equity will be combined with
those of Morgan Stanley Dividend Growth Securities Inc. ("Dividend Growth") in
exchange for shares of Dividend Growth (the "Reorganization"). As a result of
this transaction, shareholders of Equity will become shareholders of Dividend
Growth and will receive shares of Dividend Growth with a value equal to the
value of their holdings in Equity. The terms and conditions of this transaction
are more fully described in this Proxy Statement and Prospectus and in the
Reorganization Agreement between Equity and Dividend Growth, attached hereto as
Exhibit A. The address of Equity is that of Dividend Growth set forth above.
This Proxy Statement also constitutes a Prospectus of Dividend Growth, which is
dated October , 2003, filed by Dividend Growth with the Securities and
Exchange Commission (the "Commission") as part of its Registration Statement on
Form N-14 (the "Registration Statement").

Dividend Growth is an open-end management investment company whose
investment objective is to seek to provide reasonable current income and
long-term growth of income and capital. The fund normally invests at least 80%
of its assets in common stocks of companies with a record of paying dividends
and the potential for increasing dividends. Dividend Growth's Investment
Manager, Morgan Stanley Investment Advisors Inc., initially employs a
quantitative screening process in an attempt to identify a number of common
stocks which are undervalued and which have a record of paying dividends. The
Advisor then applies qualitative analysis to determine which stocks it believes
have the potential to increase dividends and, finally, to determine whether any
of the stocks should be added to or sold from Dividend Growth's portfolio.

This Proxy Statement and Prospectus sets forth concisely information about
Dividend Growth that shareholders of Equity should know before voting on the
Reorganization Agreement. A copy of the Prospectus for Dividend Growth dated
April 29, 2003, is attached as Exhibit B and incorporated herein by reference.
Also enclosed and incorporated herein by reference is Dividend Growth's Annual
Report for the fiscal year ended February 28, 2003. A Statement of Additional
Information relating to the Reorganization, described in this Proxy Statement
and Prospectus, dated October , 2003, has been filed with the Commission and
is also incorporated herein by reference. Also incorporated herein by reference
are Equity's Prospectus, dated July 30, 2003, and Annual Report for its fiscal
year ended May 31, 2003. Such documents are available without charge by calling
(800) 869-NEWS (toll-free).

Investors are advised to read and retain this Proxy Statement and Prospectus
for future reference.

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

THIS PROXY STATEMENT AND PROSPECTUS IS DATED OCTOBER , 2003.

TABLE OF CONTENTS
PROXY STATEMENT AND PROSPECTUS

PAGE
-----

INTRODUCTION .......................................................................... 1
General ............................................................................. 1
Record Date; Share Information ...................................................... 1
Proxies ............................................................................. 2
Expenses of Solicitation ............................................................ 3
Vote Required ....................................................................... 3
SYNOPSIS .............................................................................. 4
The Reorganization .................................................................. 4
Fee Table ........................................................................... 5
Tax Consequences of the Reorganization .............................................. 8
Comparison of Equity and Dividend Growth ............................................ 8
PRINCIPAL RISK FACTORS ................................................................ 11
THE REORGANIZATION .................................................................... 12
The Proposal ........................................................................ 12
The Board's Consideration ........................................................... 12
The Reorganization Agreement ........................................................ 13
Tax Aspects of the Reorganization ................................................... 15
Description of Shares ............................................................... 16
Capitalization Table (unaudited) .................................................... 17
Appraisal Rights .................................................................... 17
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS ........................ 17
Investment Objectives and Policies .................................................. 17
Investment Restrictions ............................................................. 18
ADDITIONAL INFORMATION ABOUT EQUITY AND DIVIDEND GROWTH ............................... 19
General ............................................................................. 19
Financial Information ............................................................... 19
Management .......................................................................... 19
Description of Securities and Shareholder Inquiries ................................. 19
Dividends, Distributions and Taxes .................................................. 19
Purchases, Repurchases and Redemptions .............................................. 19
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE ........................................... 20
FINANCIAL STATEMENTS AND EXPERTS ...................................................... 20
LEGAL MATTERS ......................................................................... 20
AVAILABLE INFORMATION ................................................................. 20
OTHER BUSINESS ........................................................................ 21
Exhibit A - Agreement and Plan of Reorganization, dated July 31, 2003, by and between
Equity and Dividend Growth ........................................................... A-1
Exhibit B - Prospectus of Dividend Growth dated April 29, 2003 ........................ B-1

MORGAN STANLEY EQUITY FUND
1221 AVENUE OF THE AMERICAS
NEW YORK, NY 10020
(800) 869-NEWS

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PROXY STATEMENT AND PROSPECTUS

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SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 16, 2003

INTRODUCTION

GENERAL

This Proxy Statement and Prospectus is being furnished to the shareholders
of Morgan Stanley Equity Fund ("Equity"), an open-end diversified management
investment company, in connection with the solicitation by the Board of
Trustees of Equity (the "Board") of proxies to be used at the Special Meeting
of Shareholders of Equity to be held in Room 209, 2nd Floor, 1221 Avenue of the
Americas, New York, NY 10020, at 9:00 A.M., New York time, on December 16, 2003
and any adjournments thereof (the "Meeting"). It is expected that the first
mailing of this Proxy Statement and Prospectus will be made on or about October
15, 2003.

At the Meeting, Equity shareholders ("Shareholders") will consider and
vote upon an Agreement and Plan of Reorganization, dated July 31, 2003 (the
"Reorganization Agreement"), between Equity and Morgan Stanley Dividend Growth
Securities Inc. ("Dividend Growth"), pursuant to which substantially all of the
assets of Equity will be combined with those of Dividend Growth in exchange for
shares of Dividend Growth. As a result of this transaction, Shareholders will
become shareholders of Dividend Growth and will receive shares of Dividend
Growth equal to the value of their holdings in Equity on the date of such
transaction (the "Reorganization"). Pursuant to the Reorganization, each
Shareholder will receive the class of shares of Dividend Growth that
corresponds to the class of shares of Equity currently held by that
Shareholder. Accordingly, as a result of the Reorganization, each Class A,
Class B, Class C and Class D Shareholder of Equity will receive Class A, Class
B, Class C or Class D shares of Dividend Growth, respectively. The shares to be
issued by Dividend Growth pursuant to the Reorganization (the "Dividend Growth
Shares") will be issued at net asset value without an initial sales charge.
Further information relating to Dividend Growth is set forth herein and in
Dividend Growth's current Prospectus, dated April 29, 2003 ("Dividend Growth's
Prospectus"), attached to this Proxy Statement and Prospectus and incorporated
herein by reference.

The information concerning Equity contained herein has been supplied by
Equity and the information concerning Dividend Growth contained herein has been
supplied by Dividend Growth.

RECORD DATE; SHARE INFORMATION

The Board has fixed the close of business on September 30, 2003 as the
record date (the "Record Date") for the determination of the Shareholders
entitled to notice of, and to vote at, the Meeting. As of the Record Date,
there were shares of Equity issued and outstanding. Shareholders
on the Record Date are entitled to one vote per share and a fractional vote for
a fractional share on each matter submitted to a vote at the Meeting. A
majority of the outstanding shares entitled to vote, represented in person or
by proxy, will constitute a quorum at the Meeting.

The following persons were known to own of record or beneficially 5% or
more of the outstanding shares of a class of Equity as of the Record Date:

NAME AND ADDRESS % OF OWNERSHIP NATURE OF OWNERSHIP
------------------ ---------------- --------------------

Class A ..........
Class B ..........
Class C ..........
Class D ..........

As of the Record Date, the trustees and officers of Equity, as a group,
owned less than 1% of the outstanding shares of Equity.

The following persons were known to own of record or beneficially 5% or
more of the outstanding shares of a class of Dividend Growth as of the Record
Date:

NAME AND ADDRESS % OF OWNERSHIP NATURE OF OWNERSHIP
------------------ ---------------- --------------------

Class A ..........
Class B ..........
Class C ..........
Class D ..........

As of the Record Date, the trustees and officers of Dividend Growth, as a
group, owned less than 1% of the outstanding shares of Dividend Growth.

PROXIES

The enclosed form of proxy, if properly executed and returned, will be
voted in accordance with the choice specified thereon. The proxy will be voted
in favor of the Reorganization Agreement unless a choice is indicated to vote
against or to abstain from voting on the Reorganization Agreement. The Board
knows of no business, other than that set forth in the Notice of Special
Meeting of Shareholders, to be presented for consideration at the Meeting.
However, the proxy confers discretionary authority upon the persons named
therein to vote as they determine on other business, not currently
contemplated, which may come before the Meeting. Abstentions and, if
applicable, broker "non-votes" will not count as votes in favor of the
Reorganization Agreement, and broker "non-votes" will not be deemed to be
present at the meeting for purposes of determining whether the Reorganization
Agreement has been approved. Broker "non-votes" are shares held in street name
for which the broker indicates that instructions have not been received from
the beneficial owners or other persons entitled to vote and for which the
broker does not have discretionary voting authority. If a Shareholder executes
and returns a proxy but fails to indicate how the votes should be cast, the
proxy will be voted in favor of the Reorganization Agreement. The proxy may be
revoked at any time prior to the voting thereof by: (i) delivering written
notice of revocation to the Secretary of Equity, 1221 Avenue of the Americas,
New York, NY 10020; (ii) attending the Meeting and voting in person; or (iii)
completing and returning a new proxy (whether by mail or, as discussed below,
by touchtone telephone or the Internet) (if returned and received in time to be
voted). Attendance at the Meeting will not in and of itself revoke a proxy.

In the event that the necessary quorum to transact business or the vote
required to approve or reject the Reorganization Agreement is not obtained at
the Meeting, the persons named as proxies may propose one or more adjournments
of the Meeting to permit further solicitation of proxies. Any such adjournment
will require the affirmative vote of the holders of a majority of shares of
Equity present in person or by proxy at the Meeting. The persons named as
proxies will vote in favor of such adjournment those proxies which they are

entitled to vote in favor of the Reorganization Agreement and will vote against
any such adjournment those proxies required to be voted against the
Reorganization Agreement. Abstentions and, if applicable, broker "non votes"
will not be counted for purposes of approving an adjournment.

EXPENSES OF SOLICITATION

All expenses of this solicitation, including the cost of preparing and
mailing this Proxy Statement and Prospectus, will be borne by Equity, which
expenses are expected to approximate $148,000. Equity and Dividend Growth will
bear all of their respective other expenses associated with the Reorganization.

The solicitation of proxies will be by mail, which may be supplemented by
solicitation by mail, telephone or otherwise through officers of Equity or
officers and regular employees of Morgan Stanley Investment Advisors Inc.
("Morgan Stanley Investment Advisors" or the "Investment Manager"), Morgan
Stanley Trust (or the "Transfer Agent"), Morgan Stanley Services Company Inc.
("Morgan Stanley Services") and/or Morgan Stanley DW Inc. ("Morgan Stanley
DW"), without special compensation therefor. As described below, Equity will
employ Alamo Direct Mail Services Inc. ("Alamo") to make telephone calls to
Shareholders to remind them to vote. In addition, Equity may also employ D.F.
King & Co., Inc. ("D.F. King") as proxy solicitor if it appears that the
required number of votes to achieve quorum will not be received. In the event
of a solicitation by D.F. King, Equity would pay D.F. King $3,000 and the
expenses outlined below.

Shareholders will be able to vote their shares by touchtone telephone or
by Internet by following the instructions on the proxy card or on the Voting
Information Card accompanying this Proxy Statement. To vote by Internet or by
telephone, Shareholders can access the website or call the toll-free number
listed on the proxy card or noted in the enclosed voting instructions. To vote
by Internet or by telephone, Shareholders will need the "control number" that
appears on the proxy card.

In certain instances Morgan Stanley Trust, Alamo and/or D.F. King may call
Shareholders to ask if they would be willing to have their votes recorded by
telephone. The telephone voting procedure is designed to authenticate
Shareholders' identities, to allow Shareholders to authorize the voting of
their shares in accordance with their instructions and to confirm that their
instructions have been recorded properly. No recommendation will be made as to
how a Shareholder should vote on any proposal other than to refer to the
recommendations of the Board. Equity has been advised by counsel that these
procedures are consistent with the requirements of applicable law. Shareholders
voting by telephone in this manner will be asked for their social security
number or other identifying information and will be given an opportunity to
authorize proxies to vote their shares in accordance with their instructions.
To ensure that the Shareholders' instructions have been recorded correctly they
will receive a confirmation of their instructions in the mail. A special
toll-free number set forth in the confirmation will be available in case the
information contained in the confirmation is incorrect. Although a
Shareholder's vote may be taken by telephone, each Shareholder will receive a
copy of this Proxy Statement and may vote by mail using the enclosed proxy card
or by touchtone telephone or the Internet as set forth above. The last proxy
vote received in time to be voted, whether by proxy card, touchtone telephone
or Internet, will be the last vote that is counted and will revoke all previous
votes by the Shareholder. With respect to telephone calls by Alamo, expenses
would be approximately $1.00 per outbound telephone contact. With respect to
the solicitation of a telephonic vote by D.F. King, approximate additional
expenses may include $6.00 per telephone vote transacted, $3.25 per outbound or
inbound telephone contact and costs relating to obtaining Shareholders'
telephone numbers and providing additional materials upon Shareholder request,
which would be borne by Equity.

VOTE REQUIRED

Approval of the Reorganization Agreement by the Shareholders requires the
affirmative vote of a majority (i.e., more than 50%) of the shares of Equity
represented in person or by proxy and entitled to vote at the

Meeting, provided a quorum is present at the Meeting. If the Reorganization
Agreement is not approved by Shareholders, Equity will continue in existence
and the Board will consider alternative actions.

SYNOPSIS

The following is a synopsis of certain information contained in or
incorporated by reference in this Proxy Statement and Prospectus. This synopsis
is only a summary and is qualified in its entirety by the more detailed
information contained or incorporated by reference in this Proxy Statement and
Prospectus and the Reorganization Agreement. Shareholders should carefully
review this Proxy Statement and Prospectus and Reorganization Agreement in
their entirety and, in particular, Dividend Growth's Prospectus, which is
attached to this Proxy Statement and incorporated herein by reference.

THE REORGANIZATION

The Reorganization Agreement provides for the transfer of substantially
all the assets of Equity, subject to stated liabilities, to Dividend Growth in
exchange for the Dividend Growth Shares. The aggregate net asset value of the
Dividend Growth Shares issued in the exchange will equal the aggregate value of
the net assets of Equity received by Dividend Growth. On or after the closing
date scheduled for the Reorganization (the "Closing Date"), Equity will
distribute the Dividend Growth Shares received by Equity to Shareholders as of
the Valuation Date (as defined below under "The Reorganization Agreement") in
complete liquidation of Equity and Equity will thereafter be dissolved and
deregistered under the Investment Company Act of 1940, as amended (the "1940
Act"). As a result of the Reorganization, each Shareholder will receive that
number of full and fractional Dividend Growth Shares equal in value to such
Shareholder's pro rata interest in the net assets of Equity transferred to
Dividend Growth. Pursuant to the Reorganization, each Shareholder will receive
the class of shares of Dividend Growth that corresponds to the class of shares
of Equity currently held by that Shareholder. Accordingly, as a result of the
Reorganization, each Class A, Class B, Class C and Class D Shareholder of
Equity will become a holder of Class A, Class B, Class C or Class D shares of
Dividend Growth, respectively. Shareholders holding their shares of Equity in
certificate form will be asked to surrender their certificates in connection
with the Reorganization. Shareholders who do not surrender their certificates
prior to the Closing Date will still receive their shares of Dividend Growth;
however, such Shareholders will not be able to redeem, transfer or exchange the
Dividend Growth Shares received until the old certificates have been
surrendered. The Board has determined that the interests of Shareholders will
not be diluted as a result of the Reorganization.

At least one but not more than 20 business days prior to the Valuation
Date, Equity will declare and pay a dividend or dividends which, together with
all previous such dividends, will have the effect of distributing to
Shareholders all of Equity's investment company taxable income for all periods
since the inception of Equity through and including the Valuation Date
(computed without regard to any dividends paid deduction), and all of Equity's
net capital gain, if any, realized in such periods (after reduction for any
capital loss carryforward).

FOR THE REASONS SET FORTH BELOW UNDER "THE REORGANIZATION -- THE BOARD'S
CONSIDERATION," THE BOARD, INCLUDING THE TRUSTEES WHO ARE NOT "INTERESTED
PERSONS" OF EQUITY ("INDEPENDENT TRUSTEES"), AS THAT TERM IS DEFINED IN THE
1940 ACT, HAS CONCLUDED THAT THE REORGANIZATION IS IN THE BEST INTERESTS OF
EQUITY AND ITS SHAREHOLDERS AND RECOMMENDS APPROVAL OF THE REORGANIZATION
AGREEMENT.

FEE TABLE

The following table briefly describes the fees and expenses that a
shareholder of Equity and Dividend Growth may pay if they buy and hold shares
of each respective fund. These expenses are deducted from each respective
fund's assets and are based on expenses paid by Equity for its fiscal year
ended May 31, 2003, and by Dividend Growth for its fiscal year ended February
28, 2003. Equity and Dividend Growth each pay expenses for management of their
assets, distribution of their shares and other services, and those expenses are
reflected in the net asset value per share of each fund. The table also sets
forth pro forma fees for the surviving combined fund (Dividend Growth)
reflecting what the fee schedule would have been on February 28, 2003, if the
Reorganization had been consummated twelve months prior to that date.

Shareholder Fees

PRO FORMA
COMBINED
EQUITY DIVIDEND GROWTH (DIVIDEND GROWTH)
--------------- ----------------- ------------------

MAXIMUM SALES CHARGE (LOAD) IMPOSED ON PURCHASES
(AS A PERCENTAGE OF OFFERING PRICE)
Class A ............................................... 5.25%(1) 5.25%(1) 5.25%(1)
Class B ............................................... none none none
Class C ............................................... none none none
Class D ............................................... none none none
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON REINVESTED
DIVIDENDS
Class A ............................................... none none none
Class B ............................................... none none none
Class C ............................................... none none none
Class D ............................................... 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)
Class A ............................................... none (2) none (2) none (2)
Class B ............................................... 5.00%(3) 5.00%(3) 5.00%(3)
Class C ............................................... 1.00%(4) 1.00%(4) 1.00%(4)
Class D ............................................... none none none
REDEMPTION FEES
Class A ............................................... none none none
Class B ............................................... none none none
Class C ............................................... none none none
Class D ............................................... none none none
EXCHANGE FEE
Class A ............................................... none none none
Class B ............................................... none none none
Class C ............................................... none none none
Class D ............................................... none none none

Annual Fund Operating Expenses (expenses that are deducted from fund assets)

PRO FORMA
COMBINED
EQUITY DIVIDEND GROWTH (DIVIDEND GROWTH)
---------- ----------------- ------------------

MANAGEMENT FEES
Class A ............................. 0.85% 0.41% 0.41%
Class B ............................. 0.85% 0.41% 0.41%
Class C ............................. 0.85% 0.41% 0.41%
Class D ............................. 0.85% 0.41% 0.41%
DISTRIBUTION AND SERVICE (12b-1) FEES
Class A ............................. 0.25% 0.23% 0.23%
Class B ............................. 1.00% 1.00% 1.00%
Class C ............................. 1.00% 1.00% 0.99%
Class D ............................. none none none
OTHER EXPENSES
Class A ............................. 0.44% 0.13% 0.13%
Class B ............................. 0.44% 0.13% 0.13%
Class C ............................. 0.44% 0.13% 0.13%
Class D ............................. 0.44% 0.13% 0.13%
TOTAL ANNUAL FUND OPERATING EXPENSES
Class A ............................. 1.54% 0.77% 0.77%
Class B ............................. 2.29% 1.54% 1.54%
Class C ............................. 2.29% 1.54% 1.53%
Class D ............................. 1.29% 0.54% 0.54%

- ----------
(1) Reduced for purchases of $25,000 and over (see "Share Class Arrangements
-- Class A Shares" in each fund's Prospectus).

(2) Investments that are not subject to any sales charge at the time of
purchase are subject to a Contingent Deferred Sales Charge ("CDSC") of
1.00% that will be imposed if you sell your shares within one year after
purchase, except for certain specific circumstances (see "Purchases,
Exchanges and Redemptions" below and "Share Class Arrangements -- Class A
Shares" in each fund's Prospectus).

(3) The CDSC is scaled down to 1.00% during the sixth year, reaching zero
thereafter. (See "Purchases, Exchanges and Redemptions" below and "Share
Class Arrangements -- Class B Shares" in each fund's Prospectus).

(4) Only applicable to redemptions made within one year after purchase (see
"Purchases, Exchanges and Redemptions" below and "Share Class
Arrangements -- Class C Shares" in each fund's Prospectus).

EXAMPLE

To attempt to show the effect of these expenses on an investment over
time, the hypotheticals shown below have been created. The examples assumes
that an investor invests $10,000 in either Equity or Dividend Growth or the new
combined fund (Dividend Growth), that the investment has a 5% return each year
and that the operating expenses for each fund remain the same (as set forth in
the chart above). Although a shareholder's actual costs may be higher or lower,
the tables below show a shareholder's costs at the end of each period based on
these assumptions depending upon whether or not a shareholder sold his shares
at the end of each period.

If a shareholder SOLD His Shares:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ---------

Equity
Class A ......... $673 $ 986 $1,320 $2,263
Class B ......... $732 $1,015 $1,425 $2,626
Class C ......... $332 $ 715 $1,225 $2,626
Class D ......... $131 $ 409 $ 708 $1,556
Dividend Growth
Class A ......... $600 $ 758 $ 930 $1,429
Class B ......... $657 $ 786 $1,039 $1,834
Class C ......... $257 $ 486 $ 839 $1,824
Class D ......... $ 55 $ 173 $ 302 $ 677
Pro Forma Combined
Class A ......... $600 $ 758 $ 930 $1,429
Class B ......... $657 $ 786 $1,039 $1,834
Class C ......... $256 $ 483 $ 834 $1,824
Class D ......... $ 55 $ 173 $ 302 $ 677

If a shareholder HELD His Shares:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ---------

Equity
Class A ......... $673 $986 $1,320 $2,263
Class B ......... $232 $715 $1,225 $2,626
Class C ......... $232 $715 $1,225 $2,626
Class D ......... $131 $409 $ 708 $1,556
Dividend Growth
Class A ......... $600 $758 $ 930 $1,429
Class B ......... $157 $486 $ 839 $1,834
Class C ......... $157 $486 $ 839 $1,834
Class D ......... $ 55 $173 $ 302 $ 677
Pro Forma Combined
Class A ......... $600 $758 $ 930 $1,429
Class B ......... $157 $486 $ 839 $1,834
Class C ......... $156 $483 $ 834 $1,824
Class D ......... $ 55 $173 $ 302 $ 677

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.

The purpose of the foregoing fee tables is to assist the investor or
shareholder in understanding the various costs and expenses that an investor or
shareholder in each fund will bear directly or indirectly. For a more complete
description of these costs and expenses, see "Comparison of Equity and Dividend
Growth -- Investment Management and Distribution Plan Fees; Other Significant
Fees; and Purchases, Exchanges and Redemptions" below.

TAX CONSEQUENCES OF THE REORGANIZATION

As a condition to the Reorganization, Equity will receive an opinion of
Mayer, Brown, Rowe & Maw LLP to the effect that the Reorganization will
constitute a tax-free reorganization for federal income tax purposes, and that
no gain or loss will be recognized by Equity or the Shareholders of Equity for
federal income tax purposes as a result of the transactions included in the
Reorganization. For further information about the tax consequences of the
Reorganization, see "The Reorganization -- Tax Aspects of the Reorganization"
below.

COMPARISON OF EQUITY AND DIVIDEND GROWTH

INVESTMENT OBJECTIVES AND POLICIES. The investment objective of Equity is
to seek total return. The investment objective of Dividend Growth is to seek to
provide reasonable current income and long-term growth of income and capital.

Equity's stock and other equity investments may include foreign securities
(held either directly or in the form of depositary receipts). Equity may only
invest up to 25% of its net assets in foreign securities that are not listed in
the U.S. on a national securities exchange.

Equity's Sub-Advisor, Morgan Stanley Investments LP, invests the fund's
assets by pursuing an investing strategy that combines both value and growth
styles. The Sub-Advisor's investment process is designed to identify growing
companies whose stock in the Sub-Advisor's opinion is attractively valued and
has low but rising expectations, and to diversify holdings across market
sectors. Individual securities are selected based on, among other things,
quantitative screens and fundamental research by in-house industry analysts.

Dividend Growth's "Investment Manager," Morgan Stanley Investment Advisors
Inc., initially employs a quantitative screening process in an attempt to
identify a number of common stocks which are undervalued and which have a
record of paying dividends. The Investment Manager then applies qualitative
analysis to determine which stocks it believes have the potential to increase
dividends and, finally, to determine whether any of the stocks should be added
to or sold from the Fund's portfolio. The Fund's stock investments may include
foreign securities held directly (or in the form of depositary receipts that
are listed in the U.S. on a national securities exchange).

Each Fund may invest 20% of its assets in convertible and fixed-income
securities.

The principal differences between the funds' investment policies are more
fully described under "Comparison of Investment Objectives, Policies and
Restrictions" below.

The investment policies of both Equity and Dividend Growth are not
fundamental and may be changed by the Board of Trustees of Equity and Board of
Directors of Dividend Growth.

INVESTMENT MANAGEMENT AND DISTRIBUTION PLAN FEES. Equity and Dividend
Growth obtain management services from Morgan Stanley Investment Advisors. For
the fiscal year ended May 31, 2003, Equity paid Morgan Stanley Investment
Advisors monthly compensation calculated daily by applying the annual rate of
0.85% of the portion of the fund's average daily net assets not exceeding $500
million; 0.825% of the next $500 million; and 0.80% of the portion of daily net
assets exceeding $1 billion. With respect to Dividend Growth, for the fiscal
year ended February 28, 2003, the fund paid Morgan Stanley Investment Advisors
monthly compensation calculated daily by applying the following annual rates to
the fund's daily net assets: 0.625% of

the portion of such daily net assets not exceeding $250 million; 0.50% of the
portion of such daily net assets exceeding $250 million, but not exceeding $1
billion; 0.475% of the portion of such daily net assets exceeding $1 billion
but not exceeding $2 billion; 0.45% to the portion of daily net assets
exceeding $2 billion but not exceeding $3 billion; 0.425% to the portion of
daily net assets exceeding $3 billion but not exceeding $4 billion; 0.40% to
the portion of daily net assets exceeding $4 billion but not exceeding $5
billion; 0.375% to the portion of daily net assets exceeding $5 billion but not
exceeding $6 billion; 0.350% to the portion of daily net assets exceeding $6
billion but not exceeding $8 billion; 0.325% to the portion of daily net assets
exceeding $8 billion but not exceeding $10 billion; 0.30% to the portion of
daily net assets exceeding $10 billion but not exceeding $15 billion; and
0.275% to the portion of daily net assets exceeding $15 billion. Each class of
both funds' shares is subject to the same management fee rates applicable to
the respective fund.

Both Equity and Dividend Growth have adopted distribution plans ("Plans")
pursuant to Rule 12b-1 under the 1940 Act. In the case of Class A and Class C
shares, each fund's Plan provides that the fund will reimburse Morgan Stanley
Distributors Inc. (the "Distributor") and others for the expenses of certain
activities and services incurred by them in connection with the distribution of
the Class A and Class C shares of the fund. Reimbursement for these expenses is
made in monthly payments by each fund to the Distributor which will in no event
exceed amounts equal to payments at the annual rates of 0.25% and 1.0% of the
average daily net assets of Class A and Class C shares, respectively. In the
case of Class B shares, Equity's Plan provides that the fund will pay the
Distributor a fee, which is accrued daily and paid monthly, at the annual rate
of 1.0% of the average daily net assets of Class B shares. Dividend Growth's
Plan provides that, with respect to Class B, the fund will pay the Distributor
a fee, which is accrued daily and paid monthly, at the annual rate of 1.0% of
the lesser of: (a) the average daily aggregate gross sales of the Class B
shares since the inception of Dividend Growth's Plan on July 2, 1984 (not
including reinvestment of dividends or capital gains distributions), less the
average daily aggregate net asset value of the Class B shares redeemed since
Dividend Growth's Plan inception upon which a contingent deferred sales charge
has been imposed or upon which such charge has been waived; or (b) the average
daily net assets of Class B shares issued net of Class B shares redeemed, since
the inception of Dividend Growth's Plan. The 12b-1 fee is paid for the services
provided and the expenses borne by the Distributor and others in connection
with the distribution of each fund's Class B shares. There are no 12b-1 fees
applicable to each fund's Class D shares. For further information relating to
the 12b-1 fees applicable to each class of Dividend Growth's shares, see the
section entitled "Share Class Arrangements" in Dividend Growth's Prospectus,
attached hereto. The Distributor also receives the proceeds of any CDSC paid by
the funds' shareholders at the time of redemption. The CDSC schedules
applicable to each of Equity and Dividend Growth are set forth below under
"Purchases, Exchanges and Redemptions."

OTHER SIGNIFICANT FEES. Both Equity and Dividend Growth pay additional
fees in connection with their operations, including legal, auditing, transfer
agent, trustees fees and custodial fees. See "Synopsis -- Fee Table" above for
the percentage of average net assets represented by such "Other Expenses."

PURCHASES, EXCHANGES AND REDEMPTIONS. Class A shares of each fund are sold
at net asset value plus an initial sales charge of up to 5.25%. The initial
sales charge is reduced for certain purchases. Investments of $1 million or
more are not subject to any sales charges at the time of purchase, but are
generally subject to a CDSC of 1.0% on redemptions made within one year after
purchase (except for certain specific circumstances fully described in each
fund's Prospectus).

Class B shares of each fund are offered at net asset value with no initial
sales charge, but are subject to the same CDSC schedule set forth below:

CLASS B SHARES OF EQUITY AND
YEAR SINCE PURCHASE PAYMENT MADE DIVIDEND GROWTH
- ------------------------------------- -----------------------------

First .......................... 5.0%
Second ......................... 4.0%
Third .......................... 3.0%
Fourth ......................... 2.0%
Fifth .......................... 2.0%
Sixth .......................... 1.0%
Seventh and thereafter ......... none

Class C shares of each fund are sold at net asset value with no initial
sales charge, but are subject to a CDSC of 1.0% on redemptions made within one
year after purchase. The CDSC may be waived for certain redemptions (which are
fully described under the section "Share Class Arrangements" in each fund's
Prospectus).

Class D shares of each fund are available only to limited categories of
investors and are sold at net asset value with no initial sales charge or CDSC.

The CDSC is paid to the Distributor. Shares of Equity and Dividend Growth
are distributed by the Distributor and offered by Morgan Stanley DW and other
dealers who have entered into selected dealer agreements with the Distributor.
For further information relating to the CDSC schedules applicable to each of
the classes of shares of Equity and Dividend Growth, see the section entitled
"Share Class Arrangements" in each fund's Prospectus.

Shares of each class of Equity and Dividend Growth may be exchanged for
shares of the same class of any other continuously offered Multi-Class Fund, or
for shares of a No-Load Fund, a Money Market Fund or Limited Duration U.S.
Treasury Trust (each, an "Exchange Fund"), without the imposition of an
exchange fee. In addition, Class A shares of each fund may be exchanged for
shares of an FSC Fund (funds subject to a front-end sales charge) (also, an
"Exchange Fund"). See the inside back cover of the Dividend Growth Prospectus
for each Morgan Stanley Fund's designation as a Multi-Class Fund, No-Load Fund,
Money Market Fund or an FSC Fund. Upon consummation of the Reorganization, the
foregoing exchange privileges will still be applicable to shareholders of the
combined fund (Dividend Growth).

Dividend Growth Shares distributed to Shareholders as a result of the
Reorganization will not be subject to an initial sales charge.

With respect to both funds, no CDSC is imposed at the time of any
exchange, although any applicable CDSC will be imposed upon ultimate
redemption. For purposes of calculating the holding period in determining any
applicable CDSC upon redemption of shares received as a result of the
Reorganization, any period during which the Shareholder held shares of a fund
that charged a CDSC (e.g., Equity) will be counted. During the period of time a
Dividend Growth or Equity shareholder remains in an Exchange Fund, the holding
period (for purposes of determining the CDSC rate) is frozen. Both Equity and
Dividend Growth provide telephone exchange privileges to their shareholders.
For greater details relating to exchange privileges applicable to Dividend
Growth, see the section entitled "How to Exchange Shares" in Dividend Growth's
Prospectus.

Shareholders of Equity and Dividend Growth may redeem their shares for
cash at any time at the net asset value per share next determined; however,
such redemption proceeds may be reduced by the amount of any

applicable CDSC. Both Equity and Dividend Growth offer a reinstatement
privilege whereby a shareholder who has not previously exercised such privilege
whose shares have been redeemed or repurchased may, within thirty-five days
after the date of redemption or repurchase, reinstate any portion or all of the
proceeds thereof in shares of the same class from which such shares were
redeemed or repurchased and receive a pro rata credit for any CDSC paid in
connection with such redemption or repurchase. Equity and Dividend Growth may
redeem involuntarily, at net asset value, most accounts valued at less than
$100.

DIVIDENDS. Each fund declares dividends separately for each of its
classes. Equity pays dividends from net investment income annually. Dividend
Growth pays dividends quarterly. Equity usually distributes net capital gains,
if any, in December. Dividend Growth usually distributes capital gains, if any,
in June and December. Each fund, however, may determine either to distribute or
to retain all or part of any net long-term capital gains in any year for
reinvestment. With respect to each fund, dividends and capital gains
distributions are automatically reinvested in additional shares of the same
class of shares of the fund at net asset value unless the shareholder elects to
receive cash.

PRINCIPAL RISK FACTORS

The share price and return of Dividend Growth and Equity will fluctuate
with changes in the market value of their respective portfolio securities. The
market value of the funds' portfolio securities will increase or decrease due
to a variety of economic, market and political factors which cannot be
predicted.

Both funds invest in common stocks. 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. A portion of Equity's investments may be in common
stock of small and medium-sized companies which may be subject to greater risks
and volatility than stocks of larger, more established companies.

Both funds may invest in foreign securities (including depositary
receipts). Equity may only invest up to 25% of its net assets in foreign
securities not listed in the United States on a national securities exchange.
Investments in foreign securities involve risks in addition to the risks
associated with domestic securities. One additional risk is currency risk.
While the price of fund shares is quoted in U.S. dollars, the funds generally
convert 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 funds' trades
effected in those markets and could result in losses to a fund due to
subsequent declines in the value of the securities subject to the trades.

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.

Both funds may invest in fixed income securities. 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.

Equity may invest in small and medium-sized companies. Investing in
securities of these companies involves greater risk than is customarily
associated with investing in more established companies. These companies'
stocks may be more volatile and less liquid than the stocks of more established
companies. These stocks may have returns that vary, sometimes significantly,
from the overall stock market.

Both funds may invest in convertible securities. Investments in
convertible securities subject the funds to the risks associated with both
common stock and fixed-income securities. To the extent that a convertible
security's investment value is greater than its conversion value, its price
will likely increase when interest rates fall and decrease when interest rates
rise, as with a fixed-income security. If the conversion value exceeds the
investment value, the price of the convertible security will tend to fluctuate
directly with the price of the underlying equity security. A portion of the
funds' convertible investments may be rated below investment grade. Securities
rated below investment grade are commonly known as "junk bonds" and have
speculative risk characteristics.

Both funds may utilize forward foreign currency exchange contracts.
Investments in forward foreign currency exchange contracts involve the purchase
or sale of a specific amount of foreign currency at the current price with
delivery at a specified future date. The funds may use these contracts to hedge
against adverse movements in the foreign currencies in which portfolio
securities are denominated. In addition, the funds may use these instruments to
modify exposure to various currency markets.

The foregoing discussion is a summary of the principal risk factors. For a
more complete discussion of the risks of each fund, see "Principal Risks" and
"Additional Risk Information" in the Prospectus of Equity and in Dividend
Growth's Prospectus, both of which are incorporated herein by reference.

THE REORGANIZATION

THE PROPOSAL

The Board of Trustees of Equity, including the Independent Trustees,
having reviewed the financial position of Equity and the prospects for
achieving economies of scale through the Reorganization and having determined
that the Reorganization is in the best interests of Equity and its Shareholders
and that the interests of Shareholders will not be diluted as a result thereof,
recommends approval of the Reorganization by Shareholders of Equity.

THE BOARD'S CONSIDERATION

At a meeting held on July 31, 2003, the Board, including the Independent
Trustees, unanimously approved the Reorganization Agreement and determined to
recommend that Shareholders approve the Reorganization Agreement. In reaching
this decision, the Board made an extensive inquiry into a number of factors,
particularly the comparative expenses currently incurred in the operations of
Equity and Dividend Growth. The Board also considered other factors, including,
but not limited to: Equity's inability to grow assets as expected; the general
compatibility of the investment objectives, policies and restrictions of Equity
and Dividend Growth; including the terms and conditions of the Reorganization
which would affect the price of shares to be issued in the Reorganization; the
tax-free nature of the Reorganization; and any direct or indirect costs to be
incurred by Equity and Dividend Growth in connection with the Reorganization.

In recommending the Reorganization to Shareholders, the Board of Equity
considered that the Reorganization would have the following benefits to
Shareholders:

1. Once the Reorganization is consummated, the expenses which would be
borne by shareholders of each class of the "combined fund" (Dividend Growth)
will be appreciably lower on a percentage basis than the expenses per share of
each corresponding class of Equity. This is primarily attributable to the fact
that the investment management fee rate paid by Dividend Growth for its last
fiscal year (0.41%) is substantially lower than the investment management fee
rate paid by Equity for its last fiscal year (0.85%). The Board also noted that
Dividend Growth's "Other Expenses" for its last fiscal year (0.13%) were lower
than Equity's "Other Expenses" for its last fiscal year (0.44%). Furthermore,
to the extent that the Reorganization would result in Shareholders becoming
shareholders of a combined larger fund, further economies of scale could be
achieved since various fixed expenses (e.g., auditing and legal) can be spread
over a larger number of shares. The Board noted that the expense ratio for each
class of Equity was significantly higher (for its fiscal year ended May 31,
2003) than the expense ratio for each corresponding class of Dividend Growth
(for its fiscal year ended February 28, 2003).

2. Shareholders would have continued participation in a fund that invests
principally in common stocks.

3. The Reorganization is intended to qualify as a tax-free reorganization
for federal income tax purposes, pursuant to which no gain or loss will be
recognized by Equity or its Shareholders for federal income tax purposes as a
result of transactions included in the Reorganization.

The Board of Directors of Dividend Growth, including a majority of the
Independent Directors of Dividend Growth, also has determined that the
Reorganization is in the best interests of Dividend Growth and its shareholders
and that the interests of existing shareholders of Dividend Growth will not be
diluted as a result thereof. The transaction will enable Dividend Growth to
acquire investment securities which are consistent with Dividend Growth's
investment objective, without the brokerage costs attendant to the purchase of
such securities in the market. Finally, the Board considered that even if the
benefits enumerated above are not realized, the costs to the fund are
sufficiently minor to warrant taking the opportunity to realize those benefits.

THE REORGANIZATION AGREEMENT

The terms and conditions under which the Reorganization would be
consummated, as summarized below, are set forth in the Reorganization
Agreement. This summary is qualified in its entirety by reference to the
Reorganization Agreement, a copy of which is attached as Exhibit A to this
Proxy Statement and Prospectus.

The Reorganization Agreement provides that (i) Equity will transfer all of
its assets, including portfolio securities, cash (other than cash amounts
retained by Equity as a "Cash Reserve" in the amount sufficient to discharge
its liabilities not discharged prior to the Valuation Date (as defined below)
and for expenses of the dissolution), cash equivalents and receivables to
Dividend Growth on the Closing Date in exchange for the assumption by Dividend
Growth of stated liabilities of Equity, including all expenses, costs, charges
and reserves, as reflected on an unaudited statement of assets and liabilities
of Equity prepared by the Treasurer of Equity as of the Valuation Date (as
defined below) in accordance with generally accepted accounting principles
consistently applied from the prior audited period, and the delivery of the
Dividend Growth Shares; (ii) such Dividend Growth Shares would be distributed
to Shareholders on the Closing Date or as soon as practicable thereafter; (iii)
Equity would be dissolved; and (iv) the outstanding shares of Equity would be
canceled.

The number of Dividend Growth Shares to be delivered to Equity will be
determined by dividing the aggregate net asset value of each class of shares of
Equity acquired by Dividend Growth by the net asset value per share of the
corresponding class of shares of Dividend Growth; these values will be
calculated as of the close of business of the New York Stock Exchange on the
third business day following the receipt of the requisite

approval by Shareholders of the Reorganization Agreement or at such other time
as Equity and Dividend Growth may agree (the "Valuation Date"). As an
illustration, assume that on the Valuation Date, Class B shares of Equity had
an aggregate net asset value (not including any Cash Reserve of Equity) of
$100,000. If the net asset value per Class B share of Dividend Growth were $10
per share at the close of business on the Valuation Date, the number of Class B
shares of Dividend Growth to be issued would be 10,000 ($100,000 (divided by)
$10). These 10,000 Class B shares of Dividend Growth would be distributed to
the former Class B shareholders of Equity. This example is given for
illustration purposes only and does not bear any relationship to the dollar
amounts or shares expected to be involved in the Reorganization.

On the Closing Date or as soon as practicable thereafter, Equity will
distribute pro rata to its Shareholders of record as of the close of business
on the Valuation Date, the Dividend Growth Shares it receives. Each Shareholder
will receive the class of shares of Dividend Growth that corresponds to the
class of shares of Equity currently held by that Shareholder. Accordingly, the
Dividend Growth Shares will be distributed as follows: each of the Class A,
Class B, Class C and Class D shares of Dividend Growth will be distributed to
holders of Class A, Class B, Class C and Class D shares of Equity,
respectively. Dividend Growth will cause its transfer agent to credit and
confirm an appropriate number of Dividend Growth Shares to each Shareholder.
Certificates for Dividend Growth Shares will be issued only upon written
request of a Shareholder and only for whole shares, with fractional shares
credited to the name of the Shareholder on the books of Dividend Growth.
Shareholders who wish to receive certificates representing their Dividend
Growth Shares must, after receipt of their confirmations, make a written
request to Dividend Growth's transfer agent, Morgan Stanley Trust, Harborside
Financial Center, Plaza Two, Jersey City, New Jersey 07311. Shareholders of
Equity holding their shares in certificate form will be asked to surrender such
certificates in connection with the Reorganization. Shareholders who do not
surrender their certificates prior to the Closing Date will still receive their
shares of Dividend Growth; however, such Shareholders will not be able to
redeem, transfer or exchange the Dividend Growth Shares received until the old
certificates have been surrendered.

The Closing Date will be on the Valuation Date or in no event later than
the next business day following the Valuation Date. The consummation of the
Reorganization is contingent upon the approval of the Reorganization by the
Shareholders and the receipt of the other opinions and certificates set forth
in Sections 6, 7 and 8 of the Reorganization Agreement and the occurrence of
the events described in those Sections, certain of which may be waived by
Equity or Dividend Growth. The Reorganization Agreement may be amended in any
mutually agreeable manner.

The Reorganization Agreement may be terminated and the Reorganization
abandoned at any time, before or after approval by Shareholders or by mutual
consent of Equity and Dividend Growth. In addition, either party may terminate
the Reorganization Agreement upon the occurrence of a material breach of the
Reorganization Agreement by the other party or if, by May 31, 2004, any
condition set forth in the Reorganization Agreement has not been fulfilled or
waived by the party entitled to its benefits.

Under the Reorganization Agreement, within one year after the Closing
Date, Equity shall: either pay or make provision for all of its liabilities and
distribute any remaining amount of the Cash Reserve (after paying or making
provision for such liabilities and the estimated cost of making the
distribution) to former Shareholders of Equity that received Dividend Growth
Shares. Equity shall be dissolved and deregistered as an investment company
promptly following the distributions of shares of Dividend Growth to
Shareholders of record of Equity.

The effect of the Reorganization is that Shareholders who vote their
shares in favor of the Reorganization Agreement are electing to sell their
shares of Equity (at net asset value on the Valuation Date calculated after
subtracting any Cash Reserve) and reinvest the proceeds in Dividend Growth
Shares at net asset value and

without recognition of taxable gain or loss for Federal income tax purposes.
See "Tax Aspects of the Reorganization" below. As noted in "Tax Aspects of the
Reorganization" below, if Equity recognizes net gain from the sale of
securities prior to the Closing Date, such gain, to the extent not offset by
capital loss carryforwards, will be distributed to Shareholders prior to the
Closing Date and will be taxable to Shareholders as capital gain.

Shareholders will continue to be able to redeem their shares of Equity at
net asset value next determined after receipt of the redemption request
(subject to any applicable CDSC) until the close of business on the business
day next preceding the Closing Date. Redemption requests received by Equity
thereafter will be treated as requests for redemption of shares of Dividend
Growth.

TAX ASPECTS OF THE REORGANIZATION

TAX CONSEQUENCES OF THE REORGANIZATION TO THE SHAREHOLDERS. The
Reorganization is intended to qualify for federal income tax purposes as a
tax-free reorganization under Section 368(a)(1)(C) of the Internal Revenue Code
of 1986, as amended (the "Code").

As a condition to the Reorganization, Equity and Dividend Growth will
receive an opinion of Mayer, Brown, Rowe & Maw LLP to the effect that, based on
certain assumptions, facts, the terms of the Reorganization Agreement and
representations set forth in the Reorganization Agreement or otherwise provided
by Equity and Dividend Growth (including a representation to the effect that
Dividend Growth has no plan or intention to sell or otherwise dispose of more
than sixty-six percent of the assets of Equity acquired in the Reorganization
except for dispositions made in the ordinary course of business):

1. The transfer of Equity's assets in exchange for the Dividend Growth
Shares and the assumption by Dividend Growth of certain stated liabilities of
Equity followed by the distribution by Equity of the Dividend Growth Shares to
Shareholders in exchange for their Equity shares pursuant to and in accordance
with the terms of the Reorganization Agreement will constitute a
"reorganization" within the meaning of Section 368(a)(1)(C) of the Code, and
Equity and Dividend Growth will each be a "party to a reorganization" within
the meaning of Section 368(b) of the Code;

2. No gain or loss will be recognized by Dividend Growth upon the receipt
of the assets of Equity solely in exchange for the Dividend Growth Shares and
the assumption by Dividend Growth of the stated liabilities of Equity;

3. No gain or loss will be recognized by Equity upon the transfer of the
assets of Equity to Dividend Growth in exchange for the Dividend Growth Shares
and the assumption by Dividend Growth of the stated liabilities or upon the
distribution of Dividend Growth Shares to Shareholders in exchange for their
Equity shares;

4. No gain or loss will be recognized by Shareholders upon the exchange of
the shares of Equity for the Dividend Growth Shares;

5. The aggregate tax basis for the Dividend Growth Shares received by each
of the Shareholders pursuant to the Reorganization will be the same as the
aggregate tax basis of the shares in Equity held by each such Shareholder
immediately prior to the Reorganization;

6. The holding period of the Dividend Growth Shares to be received by each
Shareholder will include the period during which the shares in Equity
surrendered in exchange therefor were held (provided such shares in Equity were
held as capital assets on the date of the Reorganization);

7. The tax basis of the assets of Equity acquired by Dividend Growth will
be the same as the tax basis of such assets of Equity immediately prior to the
Reorganization; and

8. The holding period of the assets of Equity in the hands of Dividend
Growth will include the period during which those assets were held by Equity.

The advice of Counsel is not binding on the Internal Revenue Service or
the courts and neither Equity nor Dividend Growth has sought a ruling with
respect to the tax treatment of the Reorganization.

SHAREHOLDERS SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE EFFECT, IF
ANY, OF THE PROPOSED TRANSACTION IN LIGHT OF THEIR INDIVIDUAL CIRCUMSTANCES.
BECAUSE THE FOREGOING DISCUSSION ONLY RELATES TO THE FEDERAL INCOME TAX
CONSEQUENCES OF THE PROPOSED TRANSACTION, SHAREHOLDERS SHOULD ALSO CONSULT
THEIR TAX ADVISORS AS TO STATE AND LOCAL TAX CONSEQUENCES, IF ANY, OF THE
PROPOSED TRANSACTION.

TAX CONSEQUENCES OF THE REORGANIZATION TO EQUITY AND DIVIDEND
GROWTH. Under the Code, the Reorganization may result in limitations on the
utilization of the capital loss carryovers of Equity. The effect of any such
limitations will depend on the existence and amount of Equity and Dividend
Growth capital loss carryovers, built-in capital losses and built-in capital
gains at the time of the Reorganization. A fund will have built-in capital
gains if the aggregate fair market value of its assets on the date of the
Reorganization exceeds its aggregate tax basis in such assets and a fund will
have built-in capital losses if its tax basis in its assets exceeds the fair
market value of such assets on the date of the Reorganization.

As of May 31, 2003, Equity had capital loss carryovers of approximately
$115.9 million and, as of June 30, 2003, Equity had net unrealized built-in
capital losses of approximately $2.6 million. As of February 28, 2003, Dividend
Growth had no capital loss carryovers. Subject to the limitation described in
the succeeding paragraph, Equity's capital loss carryovers will be available to
offset any capital gains recognized on the disposition of (i) assets acquired
by the combined fund after the date of the Reorganization; (ii) assets of
Dividend Growth held by the combined fund, but only to the extent such capital
gains are attributable to an increase in the value of such assets above fair
market value of such assets on the date of the Reorganization; and (iii) assets
of Equity held by the combined fund. However, the combined fund will be unable
to utilize Equity's capital loss carryovers to offset any capital gains
recognized on the disposition of assets held by Dividend Growth as of the date
of the Reorganization to the extent such capital gains are attributable to the
built-in capital gains of such assets on the date of the Reorganization. As of
June 30, 2003, Dividend Growth had net unrealized capital gains of
approximately $3.8 billion.

In addition, under the Code, there will be a limitation on the ability of
the combined fund to offset future capital gains with Equity's net unrealized
built-in capital losses if the combined fund recognizes such losses within five
years of the Reorganization. While the actual amount of such limitation will be
determined at the time of the Reorganization, if, for example, the
Reorganization had occurred on June 27, 2003, each year approximately $5.6
million of Equity's capital loss carryovers would have been able to be utilized
in any year by the combined fund. Thus, as a result of the Reorganization, a
significant portion of the capital loss carryforwards of Equity will not be
able to be utilized.

DESCRIPTION OF SHARES

Dividend Growth shares to be issued pursuant to the Reorganization
Agreement will, when issued, be fully paid and non-assessable by Dividend
Growth and transferable without restrictions and will have no preemptive
rights. Class B shares of Dividend Growth, like Class B shares of Equity, have
a conversion feature pursuant to which approximately ten years after the date
of the original purchase of such shares, the shares will convert automatically
to Class A shares, based on the relative net asset values of the two classes
and with no additional sales charge. For greater details regarding the
conversion feature, including the method by which the ten year period is
calculated and the treatment of reinvested dividends, see "Share Class
Arrangements" in each fund's Prospectus.

CAPITALIZATION TABLE (UNAUDITED)

The following table sets forth the capitalization of Dividend Growth and
Equity as of June 30, 2003 and on a pro forma combined basis as if the
Reorganization had occurred on that date:

NET ASSET
SHARES VALUE
NET ASSETS OUTSTANDING PER SHARE
----------------- ------------- ----------

CLASS A
- -----------------------------------------------------
Equity .............................................. $ 4,225,716 608,397 $ 6.95
Dividend Growth ..................................... $ 118,945,608 3,079,967 $ 38.62
Combined Fund (Dividend Growth) (pro forma) ......... $ 123,171,324 3,189,385 $ 38.62

CLASS B
- ------------------------------------------------------
Equity .............................................. $ 107,788,934 16,152,110 $ 6.67
Dividend Growth ..................................... $6,643,264,433 171,607,606 $ 38.71
Combined Fund (Dividend Growth) (pro forma) ......... $6,751,053,367 174,392,130 $ 38.71

CLASS C
- ------------------------------------------------------
Equity .............................................. $ 7,913,236 1,181,213 $ 6.70
Dividend Growth ..................................... $ 95,231,962 2,469,190 $ 38.57
Combined Fund (Dividend Growth) (pro forma) ......... $ 103,145,198 2,674,356 $ 38.57

CLASS D
- ------------------------------------------------------
Equity .............................................. $ 6,767,178 961,474 $ 7.04
Dividend Growth ..................................... $ 454,797,575 11,772,586 $ 38.63
Combined Fund (Dividend Growth) (pro forma) ......... $ 461,564,753 11,947,765 $ 38.63

TOTAL CLASS A, B, C, D
- ------------------------------------------------------
Equity .............................................. $ 126,695,064 -- --
Dividend Growth ..................................... $7,312,239,578 -- --
Combined Fund (Dividend Growth) (pro forma) ......... $7,438,934,642 -- --

APPRAISAL RIGHTS

Shareholders will have no appraisal rights in connection with the
Reorganization.

COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS

INVESTMENT OBJECTIVES AND POLICIES

Equity's investment objective is to seek total return. Dividend Growth's
investment objective is to provide reasonable current income and long-term
growth of income and capital.

Equity seeks to achieve its investment objective by normally investing at
least 80% of its assets in common stocks and other equity securities. Dividend
Growth seeks to achieve its investment objective by normally investing at least
80% of its assets in common stocks of companies with a record of paying
dividends and the potential for increasing dividends. Equity's Sub-Advisor,
Morgan Stanley Investments, LP, invests Equity's assets by pursuing an
investing strategy that combines both value and growth styles. The
Sub-Advisor's investment process is designed to identify growing companies
whose stock, in the Sub-Advisor's opinion, is attractively valued and has low
but rising expectations, and to diversify holdings across market sectors.
Individual securities are selected based on, among other things, quantitative
screens and fundamental research by in-house industry analysts. Dividend
Growth's Investment Manager, Morgan Stanley Investment Advisors

Inc., initially employs a quantitative screening process in an attempt to
identify a number of common stocks which are undervalued and which have a
record of paying dividends. The Advisor then applies qualitative analysis to
determine which stocks it believes have the potential to increase dividends
and, finally, to determine whether any of the stocks should be added to or sold
from Dividend Growth's portfolio. Both Equity and Dividend Growth may invest in
foreign securities (including depositary receipts). Equity 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. Equity and Dividend Growth may
each invest 20% of its assets in convertible and fixed income securities.
Dividend Growth may utilize forward foreign currency exchange contracts.

During periods in which, in the opinion of each fund's Investment Manager
or Sub-Advisor in the case of Equity, market conditions warrant a reduction of
some or all of the respective funds' securities holdings, the funds may take
temporary "defensive" positions that are inconsistent with each fund's
principal investment strategies in which the funds may invest any amount of
their total assets in cash or money market instruments.

Each of the funds may engage in active and frequent trading of portfolio
securities. The Financial Highlights Table at the end of each fund's Prospectus
shows each fund's portfolio turnover during recent fiscal years. A portfolio
turnover 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 fund's shareholders.

The investment policies of both Equity and Dividend Growth are not
fundamental and may be changed by their respective Boards. The foregoing
discussion is a summary of the principal differences and similarities between
the investment policies of the funds. For a more complete discussion of each
fund's policies, see "Principal Investment Strategies" and "Additional
Investment Strategy Information" in each fund's Prospectus and "Description of
the Fund and Its Investments and Risks" in each fund's Statement of Additional
Information.

INVESTMENT RESTRICTIONS

The investment restrictions adopted by Equity and Dividend Growth as
fundamental policies are substantially similar and are summarized under the
caption "Description of the Fund and Its Investments and Risks -- Fund
Policies/Investment Restrictions" in their respective Statements of Additional
Information. A fundamental investment restriction cannot be changed without the
vote of the majority of the outstanding voting securities of a fund, as defined
in the 1940 Act. The material differences are as follows: (a) Dividend Growth
may not (i) invest more than 5% of the value of its total assets in the
securities of issuers having a record, together with predecessors, of less than
three years of continuous operation. This restriction does not apply to
obligations of the United States government, its agencies or instrumentalities;
(ii) invest in securities of any issuer if, to the knowledge of Dividend
Growth, any officer or director of Dividend Growth or the Investment Manager
owns more than 1/2 of 1% of the outstanding securities of the issuer, and the
officers and directors who own more than 1/2 of 1% own in the aggregate more
than 5% of the outstanding securities of the issuer; (iii) write, purchase or
sell puts, calls or combinations thereof; (iv) invest more than 5% of the value
of its net assets in warrants, including not more than 2% of such assets in
warrants not listed on either the New York or American Stock Exchange. However,
the acquisition of warrants attached to other securities is not subject to this
limitation; (b) both funds may not purchase or sell real estate or interests
therein, including limited partnership interests for Dividend Growth, although
both funds may purchase securities of issuers which engage in real estate
operations and securities secured by real estate or interests therein.
Furthermore, as a non-fundamental policy, Equity may not invest in other
investment companies in reliance on Section 12(d)(1)(F), 12(d)(1)(G) or
12(d)(1)(J) of the 1940 Act. In addition, both Equity and Dividend Growth may
not (a) invest more than 5% of the value of their total assets in the
securities of any one issuer (other than

obligations issued or guaranteed by the United States Government, its agencies
or instrumentalities) and (b) purchase more than 10% of all outstanding voting
securities or any class of securities of any one issuer; except that with
respect to Equity, restrictions (a) and (b) above only apply with respect to
75% of Equity's total assets. Notwithstanding the above, each of Equity and
Dividend Growth 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. Both
funds may not purchase or sell commodities or commodities futures contracts
except that Equity may purchase or sell interest rate, currency and stock and
bond index futures contracts or options thereon. Neither Equity nor Dividend
Growth can engage in the underwriting of securities, except insofar as the Fund
may be deemed an underwriter under the Securities Act in disposing of a
portfolio security. For purposes of this restriction, Dividend Growth is
subject to a limitation of an aggregate amount of 5% of Dividend Growth's total
assets.

ADDITIONAL INFORMATION ABOUT EQUITY
AND DIVIDEND GROWTH

GENERAL

For a discussion of the organization and operation of Dividend Growth and
Equity, see "Fund Management," "Investment Objective" and "Principal Investment
Strategies" in their respective Prospectuses, and "Fund History" in their
respective Statements of Additional Information.

FINANCIAL INFORMATION

For certain financial information about Dividend Growth and Equity, see
"Financial Highlights" and "Past Performance" in their respective Prospectuses.

MANAGEMENT

For information about the Board of Trustees of Equity and the Board of
Directors of Dividend Growth, Investment Manager and the Distributor of
Dividend Growth and Equity and the Sub-Advisor of Equity, see "Fund Management"
in their respective Prospectuses and "Management of the Fund" in their
respective Statements of Additional Information.

DESCRIPTION OF SECURITIES AND SHAREHOLDER INQUIRIES

For a description of the nature and most significant attributes of shares
of Equity and Dividend Growth, and information regarding shareholder inquiries,
see "Capital Stock and Other Securities" in their respective Statements of
Additional Information.

DIVIDENDS, DISTRIBUTIONS AND TAXES

For a discussion of Dividend Growth's and Equity's policies with respect
to dividends, distributions and taxes, see "Distributions" and "Tax
Consequences" in their respective Prospectuses as well as the discussion herein
under "Synopsis -- Purchases, Exchanges and Redemptions."

PURCHASES, REPURCHASES AND REDEMPTIONS

For a discussion of how Dividend Growth's and Equity's shares may be
purchased, repurchased and redeemed, see "How to Buy Shares," "How to Exchange
Shares" and "How to Sell Shares" in their respective Prospectuses.

MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE

For a discussion of Dividend Growth's performance, see management's letter
to shareholders in its Annual Report for its fiscal year ended February 28,
2003 accompanying this Proxy Statement and Prospectus. For a discussion of the
performance of Equity, see its Annual Report for its fiscal year ended May 31,
2003.

FINANCIAL STATEMENTS AND EXPERTS

The financial statements of Dividend Growth, for the fiscal year ended
February 28, 2003, and Equity, for the fiscal year ended May 31, 2003, that are
incorporated by reference in the Statement of Additional Information relating
to the Registration Statement on Form N-14 of which this Proxy Statement and
Prospectus forms a part, have been audited by Deloitte & Touche LLP,
independent auditors. The financial statements have been incorporated by
reference in reliance upon such reports given upon the authority of said firm
as experts in accounting and auditing.

LEGAL MATTERS

Certain legal matters concerning the issuance of shares of Dividend Growth
will be passed upon by Mayer, Brown, Rowe & Maw LLP, New York, New York. Such
firm will rely on Maryland counsel as to matters of Maryland law.

AVAILABLE INFORMATION

Additional information about Equity and Dividend Growth is available, as
applicable, in the following documents which are incorporated herein by
reference: (i) Dividend Growth's Prospectus dated April 29, 2003 attached to
this Proxy Statement and Prospectus, which Prospectus forms a part of
Post-Effective Amendment No. 27 to Dividend Growth's Registration Statement on
Form N-1A (File Nos. 2-70423; 811-3128); (ii) Dividend Growth's Annual Report
for its fiscal year ended February 28, 2003, accompanying this Proxy Statement
and Prospectus; (iii) Equity's Prospectus dated July 30, 2003 which Prospectus
forms a part of Post-Effective Amendment No. 5 to Equity's Registration
Statement on Form N-1A (File Nos. 333-49585; 811-8739); and (iv) Equity's
Annual Report for its fiscal year ended May 31, 2003. The foregoing documents
may be obtained without charge by calling (800) 869-NEWS (toll-free).

Equity and Dividend Growth are subject to the informational requirements
of the Securities Exchange Act of 1934, as amended, and in accordance
therewith, file reports and other information with the Commission. Proxy
material, reports and other information about Equity and Dividend Growth which
are of public record can be viewed and copied at the SEC's Public Reference
Room in Washington, D.C. Information about the Reference Room's operations may
be obtained by calling the Commission at (202) 942-8090. Reports and other
information about each fund are available on the EDGAR Database on the
Commission'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 Commission, Washington, D.C. 20549-0102.

OTHER BUSINESS

Management of Equity knows of no business other than the matters specified
above which will be presented at the Meeting. Since matters not known at the
time of the solicitation may come before the Meeting, the proxy as solicited
confers discretionary authority with respect to such matters as properly come
before the Meeting, including any adjournment or adjournments thereof, and it
is the intention of the persons named as attorneys-in-fact in the proxy to vote
this proxy in accordance with their judgment on such matters.

By Order of the Board of Trustees

Barry Fink,
Secretary

October 15, 2003

EXHIBIT A

AGREEMENT AND PLAN OF REORGANIZATION

THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is made as of this
31st day of July, 2003, by and between MORGAN STANLEY DIVIDEND GROWTH
SECURITIES INC., a Maryland corporation ("Dividend Growth") and MORGAN STANLEY
EQUITY FUND, a Massachusetts business trust ("Equity").

This Agreement is intended to be and is adopted as a "plan of
reorganization" within the meaning of Treas. Reg. 1.368-2(g), for a
reorganization under Section 368(a)(1) of the Internal Revenue Code of 1986, as
amended (the "Code"). The reorganization ("Reorganization") will consist of the
transfer to Dividend Growth of substantially all of the assets of Equity in
exchange for the assumption by Dividend Growth of all stated liabilities of
Equity and the issuance by Dividend Growth of shares of capital stock, par value
$0.01 per share (the "Dividend Growth Shares"), to be distributed, after the
Closing Date hereinafter referred to, to the shareholders of Equity in
liquidation of Equity as provided herein, all upon the terms and conditions
hereinafter set forth in this Agreement.

In consideration of the premises and of the covenants and agreements
hereinafter set forth, the parties hereto covenant and agree as follows:

1. THE REORGANIZATION AND LIQUIDATION OF EQUITY

1.1 Subject to the terms and conditions herein set forth and on the basis
of the representations and warranties contained herein, Equity agrees to
assign, deliver and otherwise transfer the Equity Assets (as defined in
paragraph 1.2) to Dividend Growth and Dividend Growth agrees in exchange
therefor to assume all of Equity's stated liabilities on the Closing Date as
set forth in paragraph 1.3(a) and to deliver to Equity the number of Dividend
Growth Shares, including fractional Dividend Growth Shares, determined in the
manner set forth in paragraph 2.3. Such transactions shall take place at the
closing provided for in paragraph 3.1 ("Closing").

1.2 (a) The "Equity Assets" shall consist of all property, including
without limitation, all cash (other than the "Cash Reserve" (as defined in
paragraph 1.3(b)), cash equivalents, securities and dividend and interest
receivables owned by Equity, and any deferred or prepaid expenses shown as an
asset on Equity's books on the Valuation Date.

(b) On or prior to the Valuation Date, Equity will provide Dividend Growth
with a list of all of Equity's assets to be assigned, delivered and otherwise
transferred to Dividend Growth and a list of the stated liabilities to be
assumed by Dividend Growth pursuant to this Agreement. Equity reserves the
right to sell any of the securities on such list but will not, without the
prior approval of Dividend Growth, acquire any additional securities other than
securities of the type in which Dividend Growth is permitted to invest and in
amounts agreed to in writing by Dividend Growth. Dividend Growth will, within a
reasonable time prior to the Valuation Date, furnish Equity with a statement of
Dividend Growth's investment objectives, policies and restrictions and a list
of the securities, if any, on the list referred to in the first sentence of
this paragraph that do not conform to Dividend Growth's investment objective,
policies and restrictions. In the event that Equity holds any investments that
Dividend Growth is not permitted to hold, Equity will dispose of such
securities on or prior to the Valuation Date. In addition, if it is determined
that the portfolios of Equity and Dividend Growth, when aggregated, would
contain investments exceeding certain percentage limitations imposed upon
Dividend Growth with respect to such investments, Equity if requested by
Dividend Growth will, on or prior to the Valuation Date, dispose of and/or
reinvest a sufficient amount of such investments as may be necessary to avoid
violating such limitations as of the Closing Date (as defined in paragraph
3.1).

A-1

1.3 (a) Equity will endeavor to discharge all of its liabilities and
obligations on or prior to the Valuation Date. Dividend Growth will assume all
stated liabilities, which includes, without limitation, all expenses, costs,
charges and reserves reflected on an unaudited Statement of Assets and
Liabilities of Equity prepared by the Treasurer of Equity as of the Valuation
Date in accordance with generally accepted accounting principles consistently
applied from the prior audited period.

(b) On the Valuation Date, Equity may establish a cash reserve, which
shall not exceed 5% of Equity's net assets as of the close of business on the
Valuation Date ("Cash Reserve") to be retained by Equity and used for the
payment of its liabilities not discharged prior to the Valuation Date and for
the expenses of dissolution.

1.4 In order for Equity to comply with Section 852(a)(1) of the Code and
to avoid having any investment company taxable income or net capital gain (as
defined in Sections 852(b)(2) and 1222(11) of the Code, respectively) in the
short taxable year ending with its dissolution, Equity will on or before the
Valuation Date (a) declare a dividend in an amount large enough so that it will
have declared dividends of all of its investment company taxable income and net
capital gain, if any, for such taxable year (determined without regard to any
deduction for dividends paid) and (b) distribute such dividend.

1.5 On the Closing Date or as soon as practicable thereafter, Equity will
distribute Dividend Growth Shares received by Equity pursuant to paragraph 1.1
pro rata to its shareholders of record determined as of the close of business
on the Valuation Date ("Equity Shareholders"). Each Equity Shareholder will
receive the class of shares of Dividend Growth that corresponds to the class of
shares of Equity currently held by that Equity Shareholder. Accordingly, the
Dividend Growth Shares will be distributed as follows: each of the Class A,
Class B, Class C and Class D shares of Dividend Growth will be distributed to
holders of Class A, Class B, Class C and Class D shares of Equity,
respectively. Such distribution will be accomplished by an instruction, signed
by Equity's Secretary, to transfer Dividend Growth Shares then credited to
Equity's account on the books of Dividend Growth to open accounts on the books
of Dividend Growth in the names of the Equity Shareholders and representing the
respective pro rata number of Dividend Growth Shares due such Equity
Shareholders. All issued and outstanding shares of Equity simultaneously will
be canceled on Equity's books; however, share certificates representing
interests in Equity will represent a number of Dividend Growth Shares after the
Closing Date as determined in accordance with paragraph 2.3. Dividend Growth
will issue certificates representing Dividend Growth Shares in connection with
such exchange only upon the written request of an Equity Shareholder.

1.6 Ownership of Dividend Growth Shares will be shown on the books of
Dividend Growth's transfer agent. Dividend Growth Shares will be issued in the
manner described in Dividend Growth's current Prospectus and Statement of
Additional Information.

1.7 Any transfer taxes payable upon issuance of Dividend Growth Shares in
a name other than the registered holder of Dividend Growth Shares on Equity's
books as of the close of business on the Valuation Date shall, as a condition
of such issuance and transfer, be paid by the person to whom Dividend Growth
Shares are to be issued and transferred.

1.8 Any reporting responsibility of Equity is and shall remain the
responsibility of Equity up to and including the date on which Equity is
dissolved and deregistered pursuant to paragraph 1.9.

1.9 Within one year after the Closing Date, Equity shall pay or make
provision for the payment of all its liabilities and taxes, and distribute to
the shareholders of Equity as of the close of business on the Valuation Date
any remaining amount of the Cash Reserve (as reduced by the estimated cost of
distributing it to shareholders). If and to the extent that any trust, escrow
account, or other similar entity continues after the close of such one-year
period in connection either with making provision for payment of liabilities or
taxes or

A-2

with distributions to shareholders of Equity, such entity shall either (i)
qualify as a liquidating trust under Section 7701 of the Code (and applicable
Treasury Regulations thereunder) or other entity which does not constitute a
continuation of Equity for federal income tax purposes, or (ii) be subject to a
waiver under Section 368(a)(2)(G)(ii) of the complete distribution requirement
of Section 368(a)(2)(G)(i) of the Code. Equity shall be dissolved as a
Massachusetts business trust and deregistered as an investment company under
the Investment Company Act of 1940, as amended ("1940 Act"), promptly following
the making of all distributions pursuant to paragraph 1.5 (and, in any event,
within one year after the Closing Date).

1.10 Copies of all books and records maintained on behalf of Equity in
connection with its obligations under the 1940 Act, the Code, state blue sky
laws or otherwise in connection with this Agreement will promptly after the
Closing be delivered to officers of Dividend Growth or their designee and
Dividend Growth or its designee shall comply with applicable record retention
requirements to which Equity is subject under the 1940 Act.

2. VALUATION

2.1 The value of the Equity Assets shall be the value of such assets
computed as of 4:00 p.m. on the New York Stock Exchange on the third business
day following the receipt of the requisite approval by shareholders of Equity
of this Agreement or at such time on such earlier or later date after such
approval as may be mutually agreed upon in writing (such time and date being
hereinafter called the "Valuation Date"), using the valuation procedures set
forth in Dividend Growth's then current Prospectus and Statement of Additional
Information.

2.2 The net asset value of a Dividend Growth Share shall be the net asset
value per share computed on the Valuation Date, using the valuation procedures
set forth in Dividend Growth's then current Prospectus and Statement of
Additional Information.

2.3 The number of Dividend Growth Shares (including fractional shares, if
any) to be issued hereunder shall be determined, with respect to each class, by
dividing the aggregate net asset value of each class of Equity shares
(determined in accordance with paragraph 2.1) by the net asset value per share
of the corresponding class of shares of Dividend Growth (determined in
accordance with paragraph 2.2). For purposes of this paragraph, the aggregate
net asset value of each class of shares of Equity shall not include the amount
of the Cash Reserve.

2.4 All computations of value shall be made by Morgan Stanley Services
Company Inc. ("Morgan Stanley Services") in accordance with its regular
practice in pricing Dividend Growth. Dividend Growth shall cause Morgan Stanley
Services to deliver a copy of its valuation report at the Closing.

3. CLOSING AND CLOSING DATE

3.1 The Closing shall take place on the Valuation Date or in no event
later than the next business day following the Valuation Date (the "Closing
Date"). The Closing shall be held as of 9:00 a.m. Eastern time, or at such
other time as the parties may agree. The Closing shall be held in a location
mutually agreeable to the parties hereto. All acts taking place at the Closing
shall be deemed to take place simultaneously as of 9:00 a.m. Eastern time on
the Closing Date unless otherwise provided.

3.2 Portfolio securities held by Equity and represented by a certificate
or other written instrument shall be presented by it or on its behalf to The
Bank of New York (the "Custodian"), as custodian for Dividend Growth, for
examination no later than five business days preceding the Valuation Date. Such
portfolio securities (together with any cash or other assets) shall be
delivered by Equity to the Custodian for the account of Dividend Growth on or
before the Closing Date in conformity with applicable custody provisions under
the

A-3

1940 Act and duly endorsed in proper form for transfer in such condition as to
constitute good delivery thereof in accordance with the custom of brokers. The
portfolio securities shall be accompanied by all necessary Federal and state
stock transfer stamps or a check for the appropriate purchase price of such
stamps. Portfolio securities and instruments deposited with a securities
depository (as defined in Rule 17f-4 under the 1940 Act) shall be delivered on
or before the Closing Date by book-entry in accordance with customary practices
of such depository and the Custodian. The cash delivered shall be in the form
of a Federal Funds wire, payable to the order of "The Bank of New York,
Custodian for Morgan Stanley Dividend Growth Fund."

3.3 In the event that on the Valuation Date, (a) the New York Stock
Exchange shall be closed to trading or trading thereon shall be restricted or
(b) trading or the reporting of trading on such Exchange or elsewhere shall be
disrupted so that, in the judgment of both Dividend Growth and Equity, accurate
appraisal of the value of the net assets of Dividend Growth or the Equity
Assets is impracticable, the Valuation Date shall be postponed until the first
business day after the day when trading shall have been fully resumed without
restriction or disruption and reporting shall have been restored.

3.4 If requested, Equity shall deliver to Dividend Growth or its designee
(a) at the Closing, a list, certified by its Secretary, of the names, addresses
and taxpayer identification numbers of the Equity Shareholders and the number
and percentage ownership of outstanding Equity shares owned by each such Equity
Shareholder, all as of the Valuation Date, and (b) as soon as practicable after
the Closing, all original documentation (including Internal Revenue Service
forms, certificates, certifications and correspondence) relating to the Equity
Shareholders' taxpayer identification numbers and their liability for or
exemption from back-up withholding. Dividend Growth shall issue and deliver to
such Secretary a confirmation evidencing delivery of Dividend Growth Shares to
be credited on the Closing Date to Equity or provide evidence satisfactory to
Equity that such Dividend Growth Shares have been credited to Equity's account
on the books of Dividend Growth. At the Closing, each party shall deliver to
the other such bills of sale, checks, assignments, share certificates, if any,
receipts or other documents as such other party or its counsel may reasonably
request.

4. COVENANTS OF EQUITY AND DIVIDEND GROWTH

4.1 Except as otherwise expressly provided herein with respect to Equity,
Dividend Growth and Equity each will operate its business in the ordinary
course between the date hereof and the Closing Date, it being understood that
such ordinary course of business will include customary dividends and other
distributions.

4.2 Dividend Growth will prepare and file with the Securities and Exchange
Commission ("Commission") a registration statement on Form N-14 under the
Securities Act of 1933, as amended ("1933 Act"), relating to Dividend Growth
Shares ("Registration Statement"). Equity will provide Dividend Growth with the
Proxy Materials as described in paragraph 4.3 below, for inclusion in the
Registration Statement. Equity will further provide Dividend Growth with such
other information and documents relating to Equity as are reasonably necessary
for the preparation of the Registration Statement.

4.3 Equity will call a meeting of its shareholders to consider and act
upon this Agreement and to take all other action necessary to obtain approval
of the transactions contemplated herein. Equity will prepare the notice of
meeting, form of proxy and proxy statement (collectively, "Proxy Materials") to
be used in connection with such meeting; provided that Dividend Growth will
furnish Equity with its currently effective prospectus for inclusion in the
Proxy Materials and with such other information relating to Dividend Growth as
is reasonably necessary for the preparation of the Proxy Materials.

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4.4 Equity will assist Dividend Growth in obtaining such information as
Dividend Growth reasonably requests concerning the beneficial ownership of
Equity shares.

4.5 Subject to the provisions of this Agreement, Dividend Growth and
Equity will each take, or cause to be taken, all action, and do or cause to be
done, all things reasonably necessary, proper or advisable to consummate and
make effective the transactions contemplated by this Agreement.

4.6 Equity shall furnish or cause to be furnished to Dividend Growth
within 30 days after the Closing Date a statement of Equity's assets and
liabilities as of the Closing Date, which statement shall be certified by
Equity's Treasurer and shall be in accordance with generally accepted
accounting principles consistently applied. As promptly as practicable, but in
any case within 60 days after the Closing Date, Equity shall furnish Dividend
Growth, in such form as is reasonably satisfactory to Dividend Growth, a
statement certified by Equity's Treasurer of Equity's earnings and profits for
Federal income tax purposes that will be carried over to Dividend Growth
pursuant to Section 381 of the Code.

4.7 As soon after the Closing Date as is reasonably practicable, Equity
(a) shall prepare and file all Federal and other tax returns and reports of
Equity required by law to be filed with respect to all periods ending on or
before the Closing Date but not theretofore filed and (b) shall pay all Federal
and other taxes shown as due thereon and/or all Federal and other taxes that
were unpaid as of the Closing Date, including without limitation, all taxes for
which the provision for payment was made as of the Closing Date (as represented
in paragraph 5.2(k)).

4.8 Dividend Growth agrees to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act and the 1940 Act and to
make such filings required by the state Blue Sky and securities laws as it may
deem appropriate in order to continue its operations after the Closing Date.

5. REPRESENTATIONS AND WARRANTIES

5.1 Dividend Growth represents and warrants to Equity as follows:

(a) Dividend Growth is a validly existing Maryland corporation with full
power to carry on its business as presently conducted;

(b) Dividend Growth is a duly registered, open-end, management investment
company, and its registration with the Commission as an investment company
under the 1940 Act and the registration of its shares under the 1933 Act
are in full force and effect;

(c) All of the issued and outstanding shares of Dividend Growth have been
offered and sold in compliance in all material respects with applicable
registration requirements of the 1933 Act and state securities laws. Shares
of Dividend Growth are registered in all jurisdictions in which they are
required to be registered under state securities laws and other laws, and
said registrations, including any periodic reports or supplemental filings,
are complete and current, all fees required to be paid have been paid, and
Dividend Growth is not subject to any stop order and is fully qualified to
sell its shares in each state in which its shares have been registered;

(d) The current Prospectus and Statement of Additional Information of
Dividend Growth conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the regulations
thereunder and do not include any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading;

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(e) Dividend Growth is not in, and the execution, delivery and
performance of this Agreement will not result in a, material violation of
any provision of Dividend Growth's Articles of Incorporation or By-Laws or
of any agreement, indenture, instrument, contract, lease or other
undertaking to which Dividend Growth is a party or by which it is bound;

(f) No litigation or administrative proceeding or investigation of or
before any court or governmental body is presently pending or, to its
knowledge, threatened against Dividend Growth or any of its properties or
assets which, if adversely determined, would materially and adversely
affect its financial condition or the conduct of its business; and Dividend
Growth knows of no facts that might form the basis for the institution of
such proceedings and is not a party to or subject to the provisions of any
order, decree or judgment of any court or governmental body which
materially and adversely affects, or is reasonably likely to materially and
adversely affect, its business or its ability to consummate the
transactions herein contemplated;

(g) The Statement of Assets and Liabilities, Statement of Operations,
Statement of Changes in Net Assets and Financial Highlights for the year
ended February 28, 2003, of Dividend Growth audited by Deloitte & Touche
LLP (copies of which will be furnished to Equity), fairly present, in all
material respects, Dividend Growth's financial condition as of such date in
accordance with generally accepted accounting principles, and its results
of such operations, changes in its net assets and financial highlights for
such period, and as of such date there will be no known liabilities of
Dividend Growth (contingent or otherwise) not disclosed therein that would
be required in accordance with generally accepted accounting principles to
be disclosed therein;

(h) All issued and outstanding Dividend Growth Shares are, and at the
Closing Date will be, duly and validly issued and outstanding, fully paid
and nonassessable with no personal liability attaching to the ownership
thereof, except as set forth under the caption "Capital Stock and Other
Securities" in Dividend Growth's current Statement of Additional
Information incorporated by reference in the Registration Statement.
Dividend Growth does not have outstanding any options, warrants or other
rights to subscribe for or purchase any of its shares;

(i) The execution, delivery and performance of this Agreement have been
duly authorized by all necessary action on the part of Dividend Growth, and
this Agreement constitutes a valid and binding obligation of Dividend
Growth enforceable in accordance with its terms, subject as to enforcement,
to bankruptcy, insolvency, reorganization, moratorium and other laws
relating to or affecting creditors rights and to general equity principles.
No other consents, authorizations or approvals are necessary in connection
with Dividend Growth's performance of this Agreement;

(j) Dividend Growth Shares to be issued and delivered to Equity, for the
account of the Equity Shareholders, pursuant to the terms of this Agreement
will at the Closing Date have been duly authorized and, when so issued and
delivered, will be duly and validly issued Dividend Growth Shares, and will
be fully paid and non-assessable.

(k) All material Federal and other tax returns and reports of Dividend
Growth required by law to be filed on or before the Closing Date have been
filed and are correct, and all Federal and other taxes shown as due or
required to be shown as due on said returns and reports have been paid or
provision has been made for the payment thereof, and to the best of
Dividend Growth's knowledge, no such return is currently under audit and no
assessment has been asserted with respect to any such return;

(l) For each taxable year since its inception, Dividend Growth has met
the requirements of Subchapter M of the Code for qualification and
treatment as a "regulated investment company" and

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neither the execution or delivery of nor the performance of its obligations
under this Agreement will adversely affect, and no other events are
foreseen or are reasonably likely to occur which will adversely affect the
ability of Dividend Growth to continue to meet the requirements of
Subchapter M of the Code;

(m) Since February 28, 2003 there has been no change by Dividend Growth
in accounting methods, principles, or practices, including those required
by generally accepted accounting principles;

(n) The information furnished or to be furnished by Dividend Growth for
use in registration statements, proxy materials and other documents which
may be necessary in connection with the transactions contemplated hereby
shall be accurate and complete in all material respects and shall comply in
all material respects with Federal securities and other laws and
regulations applicable thereto; and

(o) The Proxy Materials to be included in the Registration Statement
(only insofar as they relate to Dividend Growth) will, on the effective
date of the Registration Statement and on the Closing Date, not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which such statements were made, not
materially misleading.

5.2 Equity represents and warrants to Dividend Growth as follows:

(a) Equity is a validly existing Massachusetts business trust with full
power to carry on its business as presently conducted;

(b) Equity is a duly registered, open-end, management investment company,
and its registration with the Commission as an investment company under the
1940 Act and the registration of its shares under the 1933 Act are in full
force and effect;

(c) All of the issued and outstanding shares of beneficial interest of
Equity have been offered and sold in compliance in all material respects
with applicable requirements of the 1933 Act and state securities laws.
Shares of Equity are registered in all jurisdictions in which they are
required to be registered and said registrations, including any periodic
reports or supplemental filings, are complete and current, all fees
required to be paid have been paid, and Equity is not subject to any stop
order and is fully qualified to sell its shares in each state in which its
shares have been registered;

(d) The current Prospectus and Statement of Additional Information of
Equity conform in all material respects to the applicable requirements of
the 1933 Act and the 1940 Act and the regulations thereunder and do not
include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading;

(e) Equity is not, and the execution, delivery and performance of this
Agreement will not result, in a material violation of any provision of
Equity's Declaration of Trust or By-Laws or of any agreement, indenture,
instrument, contract, lease or other undertaking to which Equity is a party
or by which it is bound;

(f) No litigation or administrative proceeding or investigation of or
before any court or governmental body is presently pending or, to its
knowledge, threatened against Equity or any of its properties or assets
which, if adversely determined, would materially and adversely affect its
financial condition or the conduct of its business; and Equity knows of no
facts that might form the basis for the institution of such proceedings and
is not a party to or subject to the provisions of any order, decree or
judgment of any court or governmental body which materially and adversely
affects, or is reasonably likely to materially and adversely effect, its
business or its ability to consummate the transactions herein contemplated;

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(g) The Statement of Assets and Liabilities, Statement of Operations,
Statement of Changes in Net Assets and Financial Highlights of Equity for
the year ended May 31, 2003, audited by Deloitte & Touche LLP (copies of
which have been or will be furnished to Dividend Growth) fairly present, in
all material respects, Equity's financial condition as of such date, and
its results of operations, changes in its net assets and financial
highlights for such period in accordance with generally accepted accounting
principles, and as of such date there were no known liabilities of Equity
(contingent or otherwise) not disclosed therein that would be required in
accordance with generally accepted accounting principles to be disclosed
therein;

(h) Equity has no material contracts or other commitments (other than
this Agreement) that will be terminated with liability to it prior to the
Closing Date;

(i) All issued and outstanding shares of Equity are, and at the Closing
Date will be, duly and validly issued and outstanding, fully paid and
nonassessable with no personal liability attaching to the ownership
thereof, except as set forth under the caption "Capital Stock and Other
Securities" in Equity's current Statement of Additional Information
incorporated by reference in the Statement of Additional Information to
this Registration Statement. Equity does not have outstanding any options,
warrants or other rights to subscribe for or purchase any of its shares,
nor is there outstanding any security convertible to any of its shares. All
such shares will, at the time of Closing, be held by the persons and in the
amounts set forth in the list of shareholders submitted to Dividend Growth
pursuant to paragraph 3.4;

(j) The execution, delivery and performance of this Agreement will have
been duly authorized prior to the Closing Date by all necessary action on
the part of Equity, and subject to the approval of Equity's shareholders,
this Agreement constitutes a valid and binding obligation of Equity,
enforceable in accordance with its terms, subject as to enforcement to
bankruptcy, insolvency, reorganization, moratorium and other laws relating
to or affecting creditors rights and to general equity principles. No other
consents, authorizations or approvals are necessary in connection with
Equity's performance of this Agreement;

(k) All material Federal and other tax returns and reports of Equity
required by law to be filed on or before the Closing Date shall have been
filed and are correct and all Federal and other taxes shown as due or
required to be shown as due on said returns and reports have been paid or
provision has been made for the payment thereof, and to the best of
Equity's knowledge, no such return is currently under audit and no
assessment has been asserted with respect to any such return;

(l) For each taxable year since its inception, Equity has met all the
requirements of Subchapter M of the Code for qualification and treatment as
a "regulated investment company" and neither the execution or delivery of
nor the performance of its obligations under this Agreement will adversely
affect, and no other events are foreseen or are reasonably likely to occur
which will adversely affect the ability of Equity to continue to meet the
requirements of Subchapter M of the Code;

(m) At the Closing Date, Equity will have good and valid title to the
Equity Assets, subject to no liens (other than the obligation, if any, to
pay the purchase price of portfolio securities purchased by Equity which
have not settled prior to the Closing Date), security interests or other
encumbrances, and full right, power and authority to assign, deliver and
otherwise transfer such assets hereunder, and upon delivery and payment for
such assets, Dividend Growth will acquire good and marketable title
thereto, subject to no restrictions on the full transfer thereof, including
any restrictions as might arise under the 1933 Act;

(n) On the effective date of the Registration Statement, at the time of
the meeting of Equity's shareholders and on the Closing Date, the Proxy
Materials (exclusive of the currently effective Dividend Growth Prospectus
contained therein) will (i) comply in all material respects with the
provisions of the 1933 Act, the Securities Exchange Act of 1934, as amended
("1934 Act") and the 1940 Act and the

A-8

regulations thereunder and (ii) not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading. Any
other information furnished by Equity for use in the Registration Statement
or in any other manner that may be necessary in connection with the
transactions contemplated hereby shall be accurate and complete and shall
comply in all material respects with applicable Federal securities and
other laws and regulations thereunder;

(o) Equity will, on or prior to the Valuation Date, declare one or more
dividends or other distributions to shareholders that, together with all
previous dividends and other distributions to shareholders, shall have the
effect of distributing to the shareholders all of its investment company
taxable income and net capital gain, if any, through the Valuation Date
(computed without regard to any deduction for dividends paid);

(p) Equity has maintained or has caused to be maintained on its behalf all
books and accounts as required of a registered investment company in
compliance with the requirements of Section 31 of the 1940 Act and the Rules
thereunder; and

(q) Equity is not acquiring Dividend Growth Shares to be issued hereunder
for the purpose of making any distribution thereof other than in accordance
with the terms of this Agreement.

6. CONDITIONS PRECEDENT TO OBLIGATIONS OF EQUITY

The obligations of Equity to consummate the transactions provided for
herein shall be subject, at its election, to the performance by Dividend Growth
of all the obligations to be performed by it hereunder on or before the Closing
Date and, in addition thereto, the following conditions:

6.1 All representations and warranties of Dividend Growth contained in
this Agreement shall be true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date with the same force and
effect as if made on and as of the Closing Date;

6.2 Dividend Growth shall have delivered to Equity a certificate of its
President and Treasurer, in a form reasonably satisfactory to Equity and dated
as of the Closing Date, to the effect that the representations and warranties
of Dividend Growth made in this Agreement are true and correct at and as of the
Closing Date, except as they may be affected by the transactions contemplated
by this Agreement, and as to such other matters as Equity shall reasonably
request;

6.3 Equity shall have received a favorable opinion from Mayer, Brown, Rowe
& Maw LLP, counsel to Dividend Growth, dated as of the Closing Date, to the
effect that:

(a) Dividend Growth is a validly existing Maryland corporation, and has
the power to own all of its properties and assets and to carry on its
business as presently conducted (Maryland counsel may be relied upon in
delivering such opinion); (b) Dividend Growth is a duly registered,
open-end, management investment company, and its registration with the
Commission as an investment company under the 1940 Act is in full force and
effect; (c) this Agreement has been duly authorized, executed and delivered
by Dividend Growth and, assuming that the Registration Statement complies
with the 1933 Act, the 1934 Act and the 1940 Act and regulations thereunder
and assuming due authorization, execution and delivery of this Agreement by
Equity, is a valid and binding obligation of Dividend Growth enforceable
against Dividend Growth in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium and
other laws relating to or affecting creditors rights and to general equity
principles; (d) Dividend Growth Shares to be issued to Equity Shareholders
as provided by

A-9

this Agreement are duly authorized and upon such delivery will be validly
issued, fully paid and non-assessable, and no shareholder of Dividend
Growth has any preemptive rights to subscription or purchase in respect
thereof (Maryland counsel may be relied upon in delivering such opinion);
(e) the execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, violate
Dividend Growth's Articles of Incorporation or By-Laws; and (f) to the
knowledge of such counsel, no consent, approval, authorization or order of
any court or governmental authority of the United States or any state is
required for the consummation by Dividend Growth of the transactions
contemplated herein, except such as have been obtained under the 1933 Act,
the 1934 Act and the 1940 Act and such as may be required under state
securities laws; and

6.4 As of the Closing Date, there shall have been no material change in
the investment objective, policies and restrictions nor any increase in the
investment management fees or annual fees pursuant to Dividend Growth's 12b-1
plan of distribution from those described in Dividend Growth's Prospectus dated
April 29, 2003 and Statement of Additional Information dated April 29, 2003.

7. CONDITIONS PRECEDENT TO OBLIGATIONS OF DIVIDEND GROWTH

The obligations of Dividend Growth to complete the transactions provided
for herein shall be subject, at its election, to the performance by Equity of
all the obligations to be performed by it hereunder on or before the Closing
Date and, in addition thereto, the following conditions:

7.1 All representations and warranties of Equity contained in this
Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated by
this Agreement, as of the Closing Date with the same force and effect as if
made on and as of the Closing Date;

7.2 Equity shall have delivered to Dividend Growth at the Closing a
certificate of its President and its Treasurer, in form and substance
satisfactory to Dividend Growth and dated as of the Closing Date, to the effect
that the representations and warranties of Equity made in this Agreement are
true and correct at and as of the Closing Date, except as they may be affected
by the transactions contemplated by this Agreement, and as to such other
matters as Dividend Growth shall reasonably request;

7.3 Equity shall have delivered to Dividend Growth a statement of the
Equity Assets and its liabilities, together with a list of Equity's portfolio
securities and other assets showing the respective adjusted bases and holding
periods thereof for income tax purposes, as of the Closing Date, certified by
the Treasurer of Equity;

7.4 Equity shall have delivered to Dividend Growth within three business
days after the Closing a letter from Deloitte & Touche LLP for the taxable
years ended May 31, 2002 and 2003, dated as of the Closing Date stating that
(a) such respective firm has performed a limited review of the federal and
state income tax returns of Equity for each of the respective taxable years
and, based on such limited review, nothing came to their attention that caused
them to believe that such returns did not properly reflect, in all material
respects, the federal and state income tax liabilities of Equity for the
periods covered thereby, (b) for the period from May 31, 2003 to and including
the Closing Date, Deloitte & Touche LLP has performed a limited review (based
on unaudited financial data) to ascertain the amount of applicable federal,
state and local taxes and has determined that same either have been paid or
reserves have been established for payment of such taxes, and, based on such
limited review, nothing came to their attention that caused them to believe
that the taxes paid or reserves set aside for payment of such taxes were not
adequate in all material respects for the satisfaction of all federal, state
and local tax liabilities for the period from May 31, 2003 to and including the
Closing Date and (c) based on such limited reviews, nothing came to their
attention that caused them to believe that Equity would not qualify as a
regulated investment company for Federal income tax purposes for any such year
or period;

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7.5 Dividend Growth shall have received at the Closing a favorable opinion
from Mayer, Brown, Rowe & Maw LLP, counsel to Equity, dated as of the Closing
Date to the effect that:

(a) Equity is a validly existing Massachusetts business trust and has the
power to own all of its properties and assets and to carry on its business
as presently conducted (Massachusetts counsel may be relied upon in
delivering such opinion); (b) Equity is a duly registered, open-end,
management investment company under the 1940 Act, and its registration with
the Commission as an investment company under the 1940 Act is in full force
and effect; (c) this Agreement has been duly authorized, executed and
delivered by Equity and, assuming that the Registration Statement complies
with the 1933 Act, the 1934 Act and the 1940 Act and the regulations
thereunder and assuming due authorization, execution and delivery of this
Agreement by Dividend Growth, is a valid and binding obligation of Equity
enforceable against Equity in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium and
other laws relating to or affecting creditors rights and to general equity
principles; (d) the execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, violate
Equity's Declaration of Trust or By-Laws; and (e) to the knowledge of such
counsel, no consent, approval, authorization or order of any court or
governmental authority of the United States or any state is required for
the consummation by Equity of the transactions contemplated herein, except
such as have been obtained under the 1933 Act, the 1934 Act and the 1940
Act and such as may be required under state securities laws; and

7.6 On the Closing Date, the Equity Assets shall include no assets that
Dividend Growth, by reason of limitations of the fund's Articles of
Incorporation or otherwise, may not properly acquire.

8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF DIVIDEND GROWTH AND EQUITY

The obligations of Equity and Dividend Growth hereunder are each subject
to the further conditions that on or before the Closing Date:

8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares of
Equity in accordance with the provisions of Equity's Declaration of Trust, and
certified copies of the resolutions evidencing such approval shall have been
delivered to Dividend Growth;

8.2 On the Closing Date, no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with,
this Agreement or the transactions contemplated herein;

8.3 All consents of other parties and all other consents, orders and
permits of Federal, state and local regulatory authorities (including those of
the Commission and of state Blue Sky and securities authorities, including
"no-action" positions of and exemptive orders from such Federal and state
authorities) deemed necessary by Dividend Growth or Equity to permit
consummation, in all material respects, of the transactions contemplated herein
shall have been obtained, except where failure to obtain any such consent,
order or permit would not involve risk of a material adverse effect on the
assets or properties of Dividend Growth or Equity;

8.4 The Registration Statement shall have become effective under the 1933
Act, no stop orders suspending the effectiveness thereof shall have been issued
and, to the best knowledge of the parties hereto, no investigation or
proceeding for that purpose shall have been instituted or be pending,
threatened or contemplated under the 1933 Act;

8.5 Equity shall have declared and paid a dividend or dividends and/or
other distribution or distributions that, together with all previous such
dividends or distributions, shall have the effect of distributing to the Equity

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Shareholders all of Equity's investment company taxable income (computed
without regard to any deduction for dividends paid) and all of its net capital
gain (after reduction for any capital loss carry-forward and computed without
regard to any deduction for dividends paid) for all taxable years ending on or
before the Closing Date; and

8.6 The parties shall have received the opinion of the law firm of Mayer,
Brown, Rowe & Maw LLP (based on such representations as such law firm shall
reasonably request), addressed to Dividend Growth and Equity, which opinion may
be relied upon by the shareholders of Equity, substantially to the effect that,
for federal income tax purposes:

(a) The transfer of Equity's assets in exchange for Dividend Growth
Shares and the assumption by Dividend Growth of certain stated liabilities
of Equity followed by the distribution by Equity of Dividend Growth Shares
to the Equity Shareholders in exchange for their Equity shares pursuant to
and in accordance with the terms of the Reorganization Agreement will
constitute a "reorganization" within the meaning of Section 368(a)(1)(C) of
the Code, and Equity and Dividend Growth will each be a "party to a
reorganization" within the meaning of Section 368(b) of the Code;

(b) No gain or loss will be recognized by Dividend Growth upon the
receipt of the assets of Equity solely in exchange for Dividend Growth
Shares and the assumption by Dividend Growth of the stated liabilities of
Equity;

(c) No gain or loss will be recognized by Equity upon the transfer of the
assets of Equity to Dividend Growth in exchange for Dividend Growth Shares
and the assumption by Dividend Growth of the stated liabilities or upon the
distribution of Dividend Growth Shares to the Equity Shareholders in
exchange for their Equity shares;

(d) No gain or loss will be recognized by the Equity Shareholders upon
the exchange of the Equity shares for Dividend Growth Shares;

(e) The aggregate tax basis for Dividend Growth Shares received by each
Equity Shareholder pursuant to the reorganization will be the same as the
aggregate tax basis of the Equity shares held by each such Equity
Shareholder immediately prior to the Reorganization;

(f) The holding period of Dividend Growth Shares to be received by each
Equity Shareholder will include the period during which the Equity shares
surrendered in exchange therefor were held (provided such Equity shares
were held as capital assets on the date of the Reorganization);

(g) The tax basis of the assets of Equity acquired by Dividend Growth
will be the same as the tax basis of such assets to Equity immediately
prior to the Reorganization; and

(h) The holding period of the assets of Equity in the hands of Dividend
Growth will include the period during which those assets were held by
Equity.

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Notwithstanding anything herein to the contrary, neither Dividend Growth
nor Equity may waive the conditions set forth in this paragraph 8.6.

9. FEES AND EXPENSES

9.1 (a) Dividend Growth shall bear its expenses incurred in connection
with the entering into, and carrying out of, the provisions of this
Agreement, including legal, accounting, Commission registration fees and Blue
Sky expenses. Equity shall bear its expenses incurred in connection with the
entering into and carrying out of the provisions of this Agreement, including
legal and accounting fees, printing, filing and proxy solicitation expenses
and portfolio transfer taxes (if any) incurred in connection with the
consummation of the transactions contemplated herein.

(b) In the event the transactions contemplated herein are not consummated
by reason of Equity being either unwilling or unable to go forward (other
than by reason of the nonfulfillment or failure of any condition to
Equity's obligations specified in this Agreement), Equity's only obligation
hereunder shall be to reimburse Dividend Growth for all reasonable
out-of-pocket fees and expenses incurred by Dividend Growth in connection
with those transactions.

(c) In the event the transactions contemplated herein are not consummated
by reason of Dividend Growth being either unwilling or unable to go forward
(other than by reason of the nonfulfillment or failure of any condition to
Dividend Growth's obligations specified in this Agreement), Dividend
Growth's only obligation hereunder shall be to reimburse Equity for all
reasonable out-of-pocket fees and expenses incurred by Equity in connection
with those transactions.

10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES

10.1 This Agreement constitutes the entire agreement between the parties.

10.2 The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection
herewith shall survive the consummation of the transactions contemplated
herein, except that the representations, warranties and covenants of Equity
hereunder shall not survive the dissolution and complete liquidation of Equity
in accordance with Section 1.9.

11. TERMINATION

11.1 This Agreement may be terminated and the transactions contemplated
hereby may be abandoned at any time prior to the Closing:

(a) by the mutual written consent of Equity and Dividend Growth;

(b) by either Dividend Growth or Equity by notice to the other, without
liability to the terminating party on account of such termination
(providing the terminating party is not otherwise in material default or
breach of this Agreement), if the Closing shall not have occurred on or
before May 31, 2004; or

(c) by either Dividend Growth or Equity, in writing without liability to
the terminating party on account of such termination (provided the
terminating party is not otherwise in material default or breach of this
Agreement), if (i) the other party shall fail to perform in any material
respect its agreements contained herein required to be performed on or
prior to the Closing Date, (ii) the other party materially breaches any of
its representations, warranties or covenants contained herein, (iii) the
Equity Shareholders fail to approve this Agreement at any meeting called
for such purpose at which a quorum was present or (iv) any other condition
herein expressed to be precedent to the obligations of the terminating
party has not been met and it reasonably appears that it will not or cannot
be met.

A-13

11.2 (a) Termination of this Agreement pursuant to paragraphs 11.1 (a) or
(b) shall terminate all obligations of the parties hereunder and there shall
be no liability for damages on the part of Dividend Growth or Equity, or the
trustees or officers of Dividend Growth or Equity, to any other party or its
trustees or officers.

(b) Termination of this Agreement pursuant to paragraph 11.1 (c) shall
terminate all obligations of the parties hereunder and there shall be no
liability for damages on the part of Dividend Growth or Equity, or the
trustees or officers of Dividend Growth or Equity, except that any party in
breach of this Agreement shall, upon demand, reimburse the non-breaching
party for all reasonable out-of-pocket fees and expenses incurred in
connection with the transactions contemplated by this Agreement, including
legal, accounting and filing fees.

12. AMENDMENTS

This Agreement may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by the parties.

13. MISCELLANEOUS

13.1 The article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.

13.2 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.

13.3 This Agreement shall be governed by and construed in accordance with
the laws of the Commonwealth of Massachusetts.

13.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm or corporation, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.

13.5 The obligations and liabilities of Dividend Growth hereunder are
solely those of Dividend Growth. It is expressly agreed that no shareholder,
nominee, trustee, officer, agent, or employee of Dividend Growth shall be
personally liable hereunder. The execution and delivery of this Agreement have
been authorized by the trustees of Dividend Growth and signed by authorized
officers of Dividend Growth acting as such, and neither such authorization by
such trustees nor such execution and delivery by such officers shall be deemed
to have been made by any of them individually or to impose any liability on any
of them personally.

13.6 The obligations and liabilities of Equity hereunder are solely those
of Equity. It is expressly agreed that no shareholder, nominee, trustee,
officer, agent, or employee of Equity shall be personally liable hereunder. The
execution and delivery of this Agreement have been authorized by the trustees
of Equity and signed by authorized officers of Equity acting as such, and
neither such authorization by such trustees nor such execution and delivery by
such officers shall be deemed to have been made by any of them individually or
to impose any liability on any of them personally.

A-14

IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed by a duly authorized officer.

MORGAN STANLEY EQUITY FUND

By:
--------------------------------------
Name: Charles A. Fiumefreddo
Title: Chairman

MORGAN STANLEY DIVIDEND GROWTH
SECURITIES INC.

By:
--------------------------------------
Name: Barry Fink
Title: Vice President

A-15

EXHIBIT B

[MORGAN STANLEY LOGO OMITTED]

Morgan Stanley Dividend Growth Securities

A mutual fund that seeks to provide [GRAPHIC OMITTED]
reasonable current income and
long-term growth of income and
capital

Prospectus | April 29, 2003

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.

Contents

The Fund INVESTMENT OBJECTIVE ............................................. 1

PRINCIPAL INVESTMENT STRATEGIES .................................. 1

PRINCIPAL RISKS .................................................. 2

PAST PERFORMANCE ................................................. 3

FEES AND EXPENSES ................................................ 5

ADDITIONAL INVESTMENT STRATEGY INFORMATION ....................... 6

ADDITIONAL RISK INFORMATION ...................................... 7

FUND MANAGEMENT .................................................. 8

Shareholder Information PRICING FUND SHARES .............................................. 9

HOW TO BUY SHARES ................................................ 9

HOW TO EXCHANGE SHARES ........................................... 11

HOW TO SELL SHARES ............................................... 12

DISTRIBUTIONS .................................................... 14

TAX CONSEQUENCES ................................................. 15

SHARE CLASS ARRANGEMENTS ......................................... 16

Financial Highlights .................................................................. 24

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

[GRAPHIC OMITTED]

INVESTMENT OBJECTIVE
- --------------------
Morgan Stanley Dividend Growth Securities Inc. seeks to provide reasonable
current income and long-term growth of income and capital.

[GRAPHIC OMITTED]

PRINCIPAL INVESTMENT STRATEGIES
- -------------------------------
The Fund will normally invest at least 80% of its assets in common stocks of
companies with a record of paying dividends and the potential for increasing
dividends. The Fund's "Investment Manager," Morgan Stanley Investment Advisors
Inc., initially employs a quantitative screening process in an attempt to
identify a number of common stocks which are undervalued and which have a record
of paying dividends. The Investment Manager then applies qualitative analysis to
determine which stocks it believes have the potential to increase dividends and,
finally, to determine whether any of the stocks should be added to or sold from
the Fund's portfolio.

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

The Fund's stock investments may include foreign securities held directly (or in
the form of depositary receipts that are listed in the U.S. on a national
securities exchange).

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. 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 20% of the Fund's assets may be invested in fixed-income and
convertible securities.

In addition, the Fund may utilize forward foreign currency exchange contracts.

In pursuing the Fund's investment objective, the Investment Manager has
considerable leeway in deciding which investments it buys, holds or sells on a
day-to-day basis -- and which trading strategies it uses. For example, the
Investment Manager in its discretion may determine to use some permitted
trading strategies while not using others.

[GRAPHIC OMITTED]

PRINCIPAL RISKS
- ---------------
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.

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, including
depositary receipts, involve risks that are in addition to the risks associated
with domestic securities. One additional risk is currency risk. In particular,
the price of securities could be adversely affected by changes in the exchange
rate between the U.S. dollar and a foreign market's local currency.

Foreign securities also have risks related to economic and political
developments abroad, including 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.

Depositary receipts involve substantially identical risks to 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.

Other Risks. The performance of the Fund also will depend on whether or not the
Investment Manager 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 its investments in fixed-income and
convertible securities. 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.

[GRAPHIC OMITTED]

PAST PERFORMANCE
- ----------------

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

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 10 calendar years.

ANNUAL TOTAL RETURNS - CALENDAR YEARS

[GRAPHIC OMITTED]

14.20% -3.18% 34.89% 19.27% 25.66% 17.82% -1.07% 5.33% -9.18% -19.36%
- ------ ------ ------ ------ ------ ------ ------ ----- ------ -------
1993 '94 '95 '96 '97 '98 '99 2000 '01 '02

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.
Year-to-date total return as of March 31, 2003 was -4.39%.

During the periods shown in the bar chart, the highest return for a calendar
quarter was 15.74% (quarter ended June 30, 1997) and the lowest return for a
calendar quarter was -20.42% (quarter ended September 30, 2002).

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

AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2002)

- -----------------------------------------------------------------------------------------------------------------
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS LIFE OF FUND
- -----------------------------------------------------------------------------------------------------------------

Class A1: Return Before Taxes -22.99% -2.55% -- -1.75%
- -----------------------------------------------------------------------------------------------------------------
Standard & Poor's 500 Index(2) -22.09% -0.58% -- 0.25%
- -----------------------------------------------------------------------------------------------------------------
Lipper Large-Cap Value Index(3) -19.68% -0.39% -- 0.38%
- -----------------------------------------------------------------------------------------------------------------
Class B1: Return Before Taxes -23.26% -2.39% 7.23% --
- -----------------------------------------------------------------------------------------------------------------
Return After Taxes on Distributions(4) -23.94% -3.79% 5.97% --
- -----------------------------------------------------------------------------------------------------------------
Return After Taxes on Distributions and Sale of
Fund Shares -13.84% -1.85% 5.82% --
- -----------------------------------------------------------------------------------------------------------------
Standard & Poor's 500 Index(2) -22.09% -0.58% 9.35% --
- -----------------------------------------------------------------------------------------------------------------
Lipper Large-Cap Value Index(3) -19.68% -0.39% 8.72% --
- -----------------------------------------------------------------------------------------------------------------
Class C1: Return Before Taxes -20.12% -2.22% -- -1.49%
- -----------------------------------------------------------------------------------------------------------------
Standard & Poor's 500 Index(2) -22.09% -0.58% -- 0.25%
- -----------------------------------------------------------------------------------------------------------------
Lipper Large-Cap Value Index(3) -19.68% -0.39% -- 0.38%
- -----------------------------------------------------------------------------------------------------------------
Class D1: Return Before Taxes -18.54% -1.26% -- -0.53%
- -----------------------------------------------------------------------------------------------------------------
Standard & Poor's 500 Index(2) -22.09% -0.58% -- 0.25%
- -----------------------------------------------------------------------------------------------------------------
Lipper Large-Cap Value Index(3) -19.68% -0.39% -- 0.38%
- -----------------------------------------------------------------------------------------------------------------

1 Class B commenced operations on March 30, 1981. Classes A, C and D commenced
operations on July 28, 1997.

2 The Standard & Poor's (Registered Trademark) 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. The Index does not include any expenses,
fees or charges. The Index is unmanaged and should not be considered an
investment.

3 The Lipper Large-Cap Value Fund 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.

4 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.

The above table shows 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.

[GRAPHIC OMITTED]

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

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

CLASS A CLASS B CLASS C CLASS D
- --------------------------------------------------------------------------------------------------

SHAREHOLDER FEES
- --------------------------------------------------------------------------------------------------
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) None(2) 5.00%(3) 1.00%(4) None
- --------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
- --------------------------------------------------------------------------------------------------
Management fee 0.41% 0.41% 0.41% 0.41%
- --------------------------------------------------------------------------------------------------
Distribution and service (12b-1) fees 0.23% 1.00% 1.00% None
- --------------------------------------------------------------------------------------------------
Other expenses 0.13% 0.13% 0.13% 0.13%
- --------------------------------------------------------------------------------------------------
Total annual Fund operating expenses 0.77% 1.54% 1.54% 0.54%
- --------------------------------------------------------------------------------------------------

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

ANNUAL FUND OPERATING EXPENSES
These expenses are deducted from the Fund's assets and are based on expenses
paid for the fiscal year ended February 28, 2003.

[end sidebar]

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

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

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

4 Only applicable if you sell your shares within one year after purchase.

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

Class A $600 $758 $ 930 $1,429 $600 $758 $930 $1,429
- ---------- ---- ---- ------ ------ ---- ---- ---- ------
Class B $657 $786 $1,039 $1,834 $157 $486 $839 $1,834
- ---------- ---- ---- ------ ------ ---- ---- ---- ------
Class C $257 $486 $ 839 $1,834 $157 $486 $839 $1,834
- ---------- ---- ---- ------ ------ ---- ---- ---- ------
Class D $ 55 $173 $ 302 $ 677 $ 55 $173 $302 $ 677
- ---------- ---- ---- ------ ------ ---- ---- ---- ------

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.

[GRAPHIC OMITTED]

ADDITIONAL INVESTMENT STRATEGY INFORMATION
- ------------------------------------------
This section provides additional information relating to the Fund's principal
investment strategies.

Other Investments. The Fund may invest up to 20% of its assets in convertible
debt securities, convertible preferred securities, U.S. government securities,
investment grade corporate debt securities and/or money market securities. Up
to 5% of the Fund's assets may be invested in convertible securities rated
below investment grade. The Fund's fixed-income investments may include zero
coupon securities, which are purchased at a discount and generally accrue
interest, but make no payments until maturity.

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 instruments 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 assets in cash or money market instruments in a defensive posture
when the Investment Manager believes it is advisable to do so. Although taking
a defensive posture is designed to protect the Fund from an anticipated market
downturn, it could have the effect of reducing the benefit from any upswing in
the market. When the Fund takes a defensive position, it may not achieve its
investment objective.

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 will generally not require the
Fund to sell any portfolio security. However, the Fund may be required to sell
its illiquid securities holdings, 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.

[GRAPHIC OMITTED]

ADDITIONAL RISK INFORMATION
- ---------------------------
This section provides additional information relating to the principal risks of
investing in the Fund.

Convertible Securities. The Fund may invest a portion of its assets in
convertible securities, which are debt or preferred securities that generally
pay interest or dividends and may be converted into common stock. These
securities may carry risks associated with both common stock and fixed-income
securities. A portion of the Fund's convertible investments may be rated below
investment grade. Securities rated below investment grade are commonly known as
"junk bonds" and have speculative characteristics.

Forward Foreign Currency Exchange Contracts. Use of forward foreign currency
exchange contracts involves risks. If the Investment Manager employs a strategy
that does not correlate well with the Fund's investments or the currencies in
which the investments are denominated, currency contracts could result in a
loss. The contracts also may increase the Fund's volatility and, thus, could
involve a significant risk.

Interest rate risk refers to fluctuations in the value of a fixed-income
security resulting from changes in the general level of interest rates. When
the general level of interest rates goes up, the prices of most fixed-income
securities go down. When the general level of interest rates goes down, the
prices of most fixed-income securities go up. (Zero coupon securities are
typically subject to greater price fluctuations than comparable securities that
pay interest.)

[GRAPHIC OMITTED]

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

The Fund has retained the Investment Manager -- Morgan Stanley Investment
Advisors Inc. -- to provide administrative services, manage its business affairs
and invest its assets, including the placing of orders for the purchase and sale
of portfolio securities. The Investment Manager is a wholly-owned subsidiary of
Morgan Stanley, a preeminent global financial services firm that maintains
leading market positions in each of its three primary businesses: securities,
asset management and credit services. Its address is 1221 Avenue of the
Americas, New York, NY 10020. 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.

[sidebar]
MORGAN STANLEY INVESTMENT ADVISORS INC.
The Investment Manager is widely recognized as a leader in the mutual fund
industry and together with Morgan Stanley Services Company Inc., its
wholly-owned subsidiary, had approximately $115 billion in assets under
management as of March 31, 2003.
[end sidebar]

The Fund's portfolio is managed within the Large Cap Value team. Current
members of the team include Richard M. Behler, a Managing Director of the
Investment Manager, Steven Epstein and Brian L. Kramp, Executive Directors of
the Investment Manager, Matthew S. Levitties and Eric F. Scharpf, Vice
Presidents of the Investment Manager, and Douglas W. Kugler and Matthew H.
Taylor, Senior Associates of the Investment Manager.

The Fund pays the Investment Manager a monthly management fee as full
compensation for the services and facilities furnished to the Fund, and for
Fund expenses assumed by the Investment Manager. The fee is based on the Fund's
average daily net assets. For the fiscal year ended February 28, 2003 the Fund
accrued total compensation to the Investment Manager amounting to 0.41% of the
Fund's average daily net assets.

Shareholder Information

[GRAPHIC OMITTED]

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

The net asset value 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 Manager determines that a security's
market price is not accurate, a portfolio security is valued at its fair value,
as determined under procedures established by the Fund's Board of Directors. In
these cases, the Fund's net asset value will reflect certain portfolio
securities' fair value rather than their market price.

An exception to the Fund's general policy of using market prices concerns its
short-term debt portfolio securities. Debt securities with remaining maturities
of sixty days or less at the time of purchase 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.

[GRAPHIC OMITTED]

HOW TO BUY SHARES
- -----------------
You may open a new account to buy Fund shares or buy additional Fund shares for
an existing account by contacting your Morgan Stanley 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, in its sole discretion, may allow you to purchase shares directly by
calling and requesting an application.

[sidebar]
CONTACTING A FINANCIAL ADVISOR
If you are new to the Morgan Stanley Funds and would like to contact a
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]

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

When you buy Fund shares, the shares are purchased at the next share price
calculated (less any applicable front-end sales charge for Class A shares)
after we receive your 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.

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

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

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

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

There is no minimum investment amount if you purchase Fund shares through: (1)
the Investment Manager's mutual fund asset allocation plan, (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 and (ii) certain other investment
programs that do not charge an asset-based fee, or (4) employer-sponsored
employee benefit plan accounts.

Investment Options for Certain Institutional and Other Investors/Class D
Shares. To be eligible to purchase Class D shares, you must qualify under one
of the investor categories specified in the "Share Class Arrangements" section
of this Prospectus.

Subsequent Investments Sent Directly to the Fund. In addition to buying
additional Fund shares for an existing account by contacting your Morgan
Stanley 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 Dividend
Growth Securities Inc.

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

[GRAPHIC OMITTED]

HOW TO EXCHANGE SHARES
- ----------------------

Permissible Fund Exchanges. You may exchange shares of any Class of the Fund
for the same Class of any other continuously offered Multi-Class Fund, or for
shares of a No-Load Fund, a Money Market Fund or Limited Duration U.S. Treasury
Trust, without the imposition of an exchange fee. In addition, Class A shares
of the Fund may be exchanged for shares of an FSC Fund (funds subject to a
front-end sales charge). See the inside back cover of this Prospectus for each
Morgan Stanley Fund's designation as a Multi-Class Fund, No-Load Fund, Money
Market Fund or an FSC Fund. If a Morgan Stanley Fund is not listed, consult the
inside back cover of that fund's current prospectus for its designation.

Exchanges may be made after shares of the fund acquired by purchase have been
held for thirty days. There is no waiting period for exchanges of shares
acquired by exchange or dividend reinvestment. The current prospectus for each
fund describes its investment objective(s), policies and investment minimums,
and should be read before investment. Since exchanges are available only into
continuously offered Morgan Stanley 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.

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

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

The Fund may terminate or revise the exchange privilege upon required notice.
The check writing privilege is not available for Money Market Fund shares you
acquire in an exchange.

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.

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 Fund shares --
and the exchange into the other fund is considered a purchase. As a result, you
may realize a capital gain or loss.

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

Limitations on Exchanges. Certain patterns of past exchanges and/or purchase or
sale transactions involving the Fund or other Morgan Stanley Funds may result
in the Fund limiting or prohibiting, at its discretion, additional purchases
and/or exchanges. Determinations in this regard may be made based on the
frequency or dollar amount of the previous exchanges or purchase or sale
transactions. You will be notified in advance of limitations on your exchange
privileges.

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

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

[GRAPHIC OMITTED]

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

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

Contact Your To sell your shares, simply call your Morgan Stanley Financial Advisor or other authorized
Financial Advisor financial representative.
---------------------------------------------------------------------------------------------
[GRAPHIC OMITTED] Payment will be sent to the address to which the account is registered, or deposited in your
brokerage account.
- ----------------------------------------------------------------------------------------------------------------

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

By Letter You can also sell your shares by writing a "letter of instruction" that includes:
o your account number;
[GRAPHIC o the name of the Fund;
OMITTED] 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
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
[GRAPHIC annual basis, from any fund with a balance of at least $1,000. Each time you add a fund to the
OMITTED] plan, you must meet the plan requirements.
--------------------------------------------------------------------------------------------------
Amounts withdrawn are subject to any applicable CDSC. A CDSC may be waived under certain
circumstances. See the Class B waiver categories listed in the "Share Class Arrangements"
section of this Prospectus.
--------------------------------------------------------------------------------------------------
To sign up for the Systematic Withdrawal Plan, contact your Morgan Stanley Financial Advisor or
call (800) 869-NEWS. You may terminate or suspend your plan at any time. Please remember
that withdrawals from the plan are sales of shares, not Fund "distributions," and ultimately may
exhaust your account balance. The Fund may terminate or revise the plan at any time.
- -------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

[GRAPHIC OMITTED]

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

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."

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

The Fund declares income dividends separately for each Class. Distributions paid
on Class A and Class D shares usually will be higher than for Class B and Class
C because distribution fees that Class B and Class C pay are higher. Normally,
income dividends are distributed to shareholders quarterly. Capital gains, if
any, are usually distributed in June and 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
Financial Advisor 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 Fund's transfer agent, Morgan Stanley Trust,
at least five business days prior to the record date of the distributions.

[GRAPHIC OMITTED]

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

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

o The Fund makes distributions; and

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

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

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

When you open your Fund account, you should provide your social security or tax
identification number on your investment application. By providing this
information, you will avoid being subject to a federal backup withholding tax
(approximately 30% currently) on taxable distributions and redemption proceeds.
Any withheld amount would be sent to the IRS as an advance tax payment.

[GRAPHIC OMITTED]

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

The general public is offered three Classes: Class A shares, Class B shares and
Class C shares, which differ principally in terms of sales charges and ongoing
expenses. A fourth Class, Class D shares, is offered only to a limited category
of investors. Shares that you acquire through reinvested distributions will not
be subject to any front-end sales charge or CDSC -- contingent deferred sales
charge.

Sales personnel may receive different compensation for selling each Class of
shares. The sales charges applicable to each Class provide for the distribution
financing of shares of that Class.

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

MAXIMUM
CLASS SALES CHARGE ANNUAL 12b-1 FEE
- -------------------------------------------------------------------------------------------------------------

A Maximum 5.25% initial sales charge reduced for purchase of $25,000 or more;
shares sold without an initial sales charge are generally subject to a 1.0% CDSC
during the first year 0.25%
- -------------------------------------------------------------------------------------------------------------
B Maximum 5.0% CDSC during the first year decreasing to 0% after six years 1.00%
- -------------------------------------------------------------------------------------------------------------
C 1.0% CDSC during the first year 1.00%
- -------------------------------------------------------------------------------------------------------------
D None None
- -------------------------------------------------------------------------------------------------------------

CLASS A SHARES Class A shares are sold at net asset value plus an initial sales
charge of up to 5.25%. The initial sales charge is reduced for purchases of
$25,000 or more according to the schedule below. Investments of $1 million or
more are not subject to an initial sales charge, but are generally subject to a
contingent deferred sales charge, or CDSC, of 1.0% on sales made within one year
after the last day of the month of purchase. The CDSC will be assessed in the
same manner and with the same CDSC waivers as with Class B shares. Class A
shares are also subject to a distribution (12b-1) fee of up to 0.25% of the
average daily net assets of the Class. This fee is lower than the distribution
fee paid by Class B or Class C.

The Fund will not accept a purchase order for Class A shares that qualifies for
investment in Class D shares.

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

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%
- ---------------------------------------------------------------------------------------

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

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

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

o Family member accounts (limited to husband, wife and children under the age
of 21).

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

o Tax-exempt organizations.

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

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

Right of Accumulation. You also may benefit from a reduction of sales charges
if the cumulative net asset value of Class A shares of the Fund purchased in a
single transaction, together with shares of other funds you currently own which
were previously purchased at a price including a front-end sales charge (or
Class A shares purchased at $1 million or more), and shares acquired through
reinvestment of distributions, amounts to $25,000 or more. Also, if you have a
cumulative net asset value of all your Class A and Class D shares equal to at
least $5 million (or $25 million for certain employee benefit plans), you are
eligible to purchase Class D shares of any fund subject to the fund's minimum
initial investment requirement.

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
Inc. ("Morgan Stanley DW") or other authorized dealer of Fund shares or the
Fund's transfer agent does not confirm your represented holdings.

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

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

o A trust for which a banking affiliate of the Investment Manager provides
discretionary trustee 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 (i) Morgan Stanley Trust serves as trustee,
(ii) Morgan Stanley's Retirement Plan Services serves as recordkeeper under a
written Recordkeeping Services Agreement or (iii) an entity independent from
Morgan Stanley serves as recordkeeper under an alliance or similar agreement
with Morgan Stanley's Retirement Plan Services (together, "Morgan Stanley
Eligible Plans"), provided that, in the case of (i) and (ii) above, any such
plan has at least 200 eligible employees.

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

o Current or retired Directors 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.

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.

CDSC AS A PERCENTAGE
YEAR SINCE PURCHASE PAYMENT MADE OF AMOUNT REDEEMED
- -----------------------------------------------------------

First 5.0%
- -----------------------------------------------------------
Second 4.0%
- -----------------------------------------------------------
Third 3.0%
- -----------------------------------------------------------
Fourth 2.0%
- -----------------------------------------------------------
Fifth 2.0%
- -----------------------------------------------------------
Sixth 1.0%
- -----------------------------------------------------------
Seventh and thereafter None
- -----------------------------------------------------------

[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]

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

The Fund will generally not accept a purchase order for Class B shares in the
amount of $100,000 or more.

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

o Sales of shares held at the time you die or become disabled (within the
definition in Section 72(m)(7) of the Internal Revenue Code which relates to
the ability to engage in gainful

employment), if the shares are: (i) registered either in your name (not a
trust) or in the names of you and your spouse as joint tenants with right of
survivorship; or (ii) held in a qualified corporate or self-employed
retirement plan, IRA or 403(b) Custodial Account, provided in either case
that the sale is requested within one year of your death or initial
determination of disability.

o Sales in connection with the following retirement plan "distributions": (i)
lump-sum or other distributions from a qualified corporate or self-employed
retirement plan following retirement (or, in the case of a "key employee" of
a "top heavy" plan, following attainment of age 59 1/2); (ii) distributions
from an IRA or 403(b) Custodial Account following attainment of age 59 1/2;
or (iii) a tax-free return of an excess IRA contribution (a "distribution"
does not include a direct transfer of IRA, 403(b) Custodial Account or
retirement plan assets to a successor custodian or trustee).

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

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

o Sales of shares that are attributable to reinvested distributions from, or
the proceeds of, certain unit investment trusts sponsored by Morgan Stanley
DW.

o Sales of shares if you simultaneously invest the proceeds in the Investment
Manager's mutual fund asset allocation program, pursuant to which investors
pay an asset-based fee. Any shares you acquire in connection with the
Investment Manager's mutual fund asset allocation program are subject to all
of the terms and conditions of that program, including termination fees, 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 Financial Advisor or call (800) 869-NEWS.

Distribution Fee. Class B shares are subject to an annual distribution (12b-1)
fee of 1.0% of the lesser of: (a) the average daily aggregate gross purchases
by all shareholders of the Fund's Class B shares since the inception of the
12b-1 plan on July 2, 1984 (not including reinvestments of dividends or capital
gains distributions), less the average daily aggregate net asset value of the
Fund's Class B shares sold by all shareholders since the inception of the 12b-1
plan upon which a CDSC has been imposed or waived, or (b) the average daily net
assets of Class B attributable to shares issued, net of related shares sold,
since the inception of the 12b-1 plan. This fee is higher than the annual
distribution fee paid by Class A.

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

In the case of Class B shares held in a 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.

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

If you exchange your Class B shares for shares of a Money Market Fund, a
No-Load Fund or 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 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 in a regular account 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 distribution (12b-1) fees, if any, you paid on those shares while in that
Fund up to the amount of any applicable CDSC.

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

CLASS C SHARES Class C shares are sold at net asset value with no initial sales
charge but are subject to a CDSC of 1.0% on sales made within one year after the
last day of the month of purchase. The

CDSC will be assessed in the same manner and with the same CDSC waivers as with
Class B shares. The Fund will not accept a purchase order for Class C shares in
the amount of $1 million or more.

Distribution Fee. Class C shares are subject to an annual distribution (12b-1)
fee of up to 1.0% of the average daily net assets of that Class. This fee is
higher than the annual distribution fee paid by Class A. Unlike Class B shares,
Class C shares have no conversion feature and, accordingly, an investor that
purchases Class C shares may be subject to distribution (12b-1) fees applicable
to Class C shares for an indefinite period.

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

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

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.

A purchase order that meets the requirements for investment in Class D 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
that have been approved by the Fund's distributor (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 and
shares of FSC Funds you currently own, along with shares of Morgan Stanley
Funds you currently own that you acquired in exchange for those shares.

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

PLAN OF DISTRIBUTION (RULE 12b-1 FEES) The Fund has adopted a Plan of
Distribution in accordance with Rule 12b-1 under the Investment Company Act of
1940 with respect to the distribution of Class A, Class B and Class C shares.
(Class D shares are offered without any distribution 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
Class C shares. Because these fees are paid out of the Fund's assets on an
ongoing basis, over time these fees will increase the cost of your investment in
these Classes and may cost you more than paying other types of sales charges.

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

Class A Shares:
- ------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED FEBRUARY 28,
----------------------------------------------------------------------------
2003 2002 2001 2000* 1999

- ------------------------------------------------------------------------------------------------------------------------------
SELECTED PER SHARE DATA:
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $46.44 $52.54 $50.11 $60.22 $58.39
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income[+/+] 0.68 0.71 0.84 0.94 1.05
Net realized and unrealized gain (loss) (11.41) (3.51) 8.35 (7.75) 3.58
--------- --------- --------- --------- ---------
Total income (loss) from investment operations (10.73) (2.80) 9.19 ( 6.81) 4.63
- ------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions from:
Net investment income (0.72) (0.70) (0.92) (0.99) (1.02)
Net realized gain (0.98) (2.60) (5.84) (2.31) (1.78)
--------- --------- ---------- --------- ----------
Total dividends and distributions (1.70) (3.30) (6.76) (3.30) (2.80)
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $34.01 $46.44 $52.54 $50.11 $60.22
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ (23.66)% (5.35)% 19.31% (12.07)% 8.10%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS(1):
- ------------------------------------------------------------------------------------------------------------------------------
Expenses 0.77% 0.73% 0.73% 0.67% 0.64%
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income 1.69% 1.46% 1.57% 1.52% 1.76%
- ------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $104,419 $145,257 $223,106 $214,669 $227,457
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 7% 0% 1% 4% 13%
- ------------------------------------------------------------------------------------------------------------------------------

* Year ended February 29.

[+/+] 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.

Class B Shares
- ---------------------------------------------------------------------------------
FOR THE YEAR ENDED FEBRUARY 28,
---------------------------------
2003 2002
- ---------------------------------------------------------------------------------

SELECTED PER SHARE DATA:
- ---------------------------------------------------------------------------------
Net asset value, beginning of period $46.46 $52.54
- ---------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income[+/+] 0.37 0.34
Net realized and unrealized gain (loss) (11.41) (3.50)
--------- ---------
Total income (loss) from investment operations (11.04) (3.16)
- ---------------------------------------------------------------------------------
Less dividends and distributions from:
Net investment income (0.40) (0.32)
Net realized gain (0.98) (2.60)
--------- ---------
Total dividends and distributions (1.38) (2.92)
- ---------------------------------------------------------------------------------
Net asset value, end of period $34.04 $46.46
- ---------------------------------------------------------------------------------
TOTAL RETURN+ (24.27)% (6.06)%
- ---------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS(1):
- ---------------------------------------------------------------------------------
Expenses 1.54% 1.49%
- ---------------------------------------------------------------------------------
Net investment income 0.92% 0.70%
- ---------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------
Net assets, end of period, in thousands $6,020,242 $9,865,150
- ---------------------------------------------------------------------------------
Portfolio turnover rate 7% 0%
- ---------------------------------------------------------------------------------

Class B Shares
- ----------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED FEBRUARY 28,
--------------------------------------------------
2001 2000* 1999
- ----------------------------------------------------------------------------------------------------

SELECTED PER SHARE DATA:
- ----------------------------------------------------------------------------------------------------
Net asset value, beginning of period $50.10 $60.18 $58.36
- ----------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income[+/+] 0.47 0.64 0.77
Net realized and unrealized gain (loss) 8.35 (7.73) 3.58
---------- ---------- ----------
Total income (loss) from investment operations 8.82 (7.09) 4.35
- ----------------------------------------------------------------------------------------------------
Less dividends and distributions from:
Net investment income (0.54) (0.68) (0.75)
Net realized gain (5.84) (2.31) (1.78)
---------- ---------- -----------
Total dividends and distributions (6.38) (2.99) (2.53)
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $52.54 $50.10 $60.18
- ----------------------------------------------------------------------------------------------------
TOTAL RETURN+ 18.48% (12.49)% 7.59%
- ----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS(1):
- ----------------------------------------------------------------------------------------------------
Expenses 1.42% 1.15% 1.11%
- ----------------------------------------------------------------------------------------------------
Net investment income 0.88% 1.04% 1.29%
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ----------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $11,819,378 $12,869,283 $18,060,848
- ----------------------------------------------------------------------------------------------------
Portfolio turnover rate 1% 4% 13%
- ----------------------------------------------------------------------------------------------------

* Year ended February 29.

[+/+] 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.

Class C Shares
- --------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED FEBRUARY 28,
------------------------------------------------------------------------------
2003 2002 2001 2000* 1999
- --------------------------------------------------------------------------------------------------------------------------------

SELECTED PER SHARE DATA:
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $46.32 $52.44 $49.96 $60.02 $58.28
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income[+/+] 0.37 0.35 0.50 0.47 0.59
Net realized and unrealized gain (loss) (11.38) (3.49) 8.32 (7.70) 3.56
-------- --------- --------- --------- ---------
Total income (loss) from investment operations (11.01) (3.14) 8.82 (7.23) 4.15
- --------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions from:
Net investment income (0.41) (0.38) (0.50) (0.52) (0.63)
Net realized gain (0.98) (2.60) (5.84) (2.31) (1.78)
-------- --------- ---------- --------- ----------
Total dividends and distributions (1.39) (2.98) (6.34) (2.83) (2.41)
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $33.92 $46.32 $52.44 $49.96 $60.02
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ (24.26)% (6.05)% 18.54% (12.73)% 7.26%
- --------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS(1):
- --------------------------------------------------------------------------------------------------------------------------------
Expenses 1.54% 1.48% 1.37% 1.43% 1.43%
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.92% 0.71% 0.93% 0.76% 0.97%
- --------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $82,544 $124,976 $139,320 $135,496 $144,425
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 7% 0% 1% 4% 13%
- --------------------------------------------------------------------------------------------------------------------------------

* Year ended February 29.

[+/+] 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.

Class D Shares
- -------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED FEBRUARY 28,
-----------------------------------------------------------------------------
2003 2002 2001 2000* 1999
- -------------------------------------------------------------------------------------------------------------------------------

SELECTED PER SHARE DATA:
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $46.47 $52.59 $50.16 $60.26 $58.43
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income[+/+] 0.77 0.83 0.97 1.09 1.17
Net realized and unrealized gain (loss) (11.41) (3.53) 8.35 (7.76) 3.59
--------- --------- --------- --------- ---------
Total income (loss) from investment operations (10.64) (2.70) 9.32 (6.67) 4.76
- -------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions from:
Net investment income (0.82) (0.82) (1.05) (1.12) (1.15)
Net realized gain (0.98) (2.60) (5.84) (2.31) (1.78)
--------- --------- ---------- --------- ----------
Total dividends and distributions (1.80) (3.42) (6.89) (3.43) (2.93)
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $34.03 $46.47 $52.59 $50.16 $60.26
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ (23.50)% (5.10)% 19.60% (11.85)% 8.33%
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS(1):
- -------------------------------------------------------------------------------------------------------------------------------
Expenses 0.54% 0.49% 0.48% 0.43% 0.43%
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income 1.92% 1.70% 1.82% 1.76% 1.97%
- -------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- -------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $376,299 $480,234 $423,519 $405,246 $488,987
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 7% 0% 1% 4% 13%
- -------------------------------------------------------------------------------------------------------------------------------

* Year ended February 29.

[+/+] 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.

Notes

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

Morgan Stanley Funds
- --------------------------------------------------------------------------------

O GLOBAL/INTERNATIONAL FUNDS

European Growth Fund

Fund of Funds - International Portfolio

Global Advantage Fund

Global Dividend Growth Securities

International Fund

International SmallCap Fund

International Value Equity Fund

Japan Fund

Latin American Growth Fund

Pacific Growth Fund

O GROWTH FUNDS

21st Century Trend Fund

Aggressive Equity Fund

All Star Growth Fund

American Opportunities Fund

Capital Opportunities Trust

Developing Growth Securities Trust

Growth Fund

KLD Social Index Fund

Market Leader Trust

Nasdaq-100 Index Fund

New Discoveries Fund

Next Generation Trust

Small-Mid Special Value Fund

Special Growth Fund

Special Value Fund

Tax-Managed Growth Fund

O GROWTH + INCOME FUNDS

Allocator Fund

Balanced Growth Fund

Balanced Income Fund

Convertible Securities Trust

Dividend Growth Securities

Equity Fund

Fund of Funds - Domestic Portfolio

Fundamental Value Fund

Income Builder Fund

Mid-Cap Value Fund

S&P 500 Index Fund

Strategist Fund

Total Market Index Fund

Total Return Trust

Value Fund

Value-Added Market Series--Equity Portfolio

O INCOME FUNDS

Federal Securities Trust

Flexible Income Trust

High Yield Securities

Limited Duration Fund(NL)

Limited Duration U.S. Treasury Trust

Liquid Asset Fund (MM)

Quality Income Trust

U.S. Government Money Market Trust (MM)

U.S. Government Securities Trust

O SPECIALTY FUNDS

Biotechnology Fund

Financial Services Trust

Global Utilities Fund

Health Sciences Trust

Information Fund

Natural Resource Development Securities

Real Estate Fund

Technology Fund

Utilities Fund

O TAX-FREE INCOME FUNDS

California Tax-Free Daily Income Trust (MM)

California Tax-Free Income Fund

Hawaii Municipal Trust (FSC)

Limited Term Municipal Trust (NL)

Multi-State Municipal Series Trust (FSC)

New York Municipal Money Market Trust (MM)

New York Tax-Free Income Fund

Tax-Exempt Securities Trust

Tax-Free Daily Income Trust (MM)

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

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 designation, e.g., Multi-Class Fund or Money Market Fund.

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

Information also provides additional information about the Fund. The Statement
of Additional Information is incorporated herein by reference (legally is part
of this Prospectus). For a free copy of any of these documents, to request
other information about the Fund, or to make shareholder inquiries, please
call:

(800) 869-NEWS

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

www.morganstanley.com/funds

Information about the Fund (including the Statement of Additional Information)
can be viewed and copied at the Securities and Exchange Commission's Public
Reference Room in Washington, DC. Information about the Reference Room's
operations may be obtained by calling the SEC at (202) 942-8090. Reports and
other information about the Fund are available on the EDGAR Database on the
SEC's Internet site (www.sec.gov) and copies of this information may be
obtained, after paying a duplicating fee, by electronic request at the
following E-mail address: publicinfo@sec.gov, or by writing the Public
Reference Section of the SEC, Washington, DC 20549-0102.

TICKER SYMBOLS:

Class A: DIVAX
- --------------------------------------------------
Class B: DIVBX
- --------------------------------------------------

Class C: DIVCX
- --------------------------------------------------
Class D: DIVDX
- --------------------------------------------------

(THE FUND'S INVESTMENT COMPANY ACT FILE NO. IS 811-3128)
CLF#37910PRO

[MORGAN STANLEY LOGO OMITTED]

Morgan Stanley Dividend
Growth Securities

A mutual fund that seeks to provide reasonable current income and
long-term growth of income and capital

Prospectus April 29, 2003

Morgan Stanley Dividend Growth Securities Inc.
LETTER TO THE SHAREHOLDERS O FEBRUARY 28, 2003

Dear Shareholder:

For the 12 months ended February 28, 2003, the U.S. equity market suffered
another year of decline as concerns about the pace of economic recovery,
corporate-governance scandals and geopolitical issues took center stage. These
factors led to a broad-based weakness in the market, with investor psychology
decidedly negative. The underlying market fundamentals appear to be positive,
however, as fiscal and monetary policies are stimulative. We believe our
portfolio is well positioned to benefit and perform well as the U.S. economy
improves and foreign tensions ease. Stocks with reasonable valuations coupled
with favorable profitability and growth characteristics and good dividend
yields should reward investors as market sentiment becomes more positive.

Performance and Portfolio

For the 12-month period ended February 28, 2003, Morgan Stanley Dividend Growth
Securities' Class A, B, C and D shares produced total returns of -23.66
percent, -24.27 percent, -24.26 percent and -23.50 percent, respectively.
During the same period, the Standard & Poor's 500 Index (S&P 500) produced a
total return of -22.68 percent and the Lipper Large-Cap Value Index produced a
total return of -21.68 percent. The performance of the Fund's four share
classes varies because each has different expenses. Total return figures assume
the reinvestment of all distributions but do not reflect the deduction of any
applicable sales charges. If sales charges were included, performance would be
lower. Past performance is no guarantee of future results.

Sector selection was a strong positive factor for the year, stock selection a
negative one. Sector selection was most favorable in the beverage and personal
product areas, where the Fund is overweighted relative to the S&P 500. The
Fund's underweighting in the technology sector and overweighting in basic
resources benefited its performance. A slight overexposure to the utility
sector hurt performance, as did an underweighting in the health-care area.
Other sector exposures were neutral factors overall.

Stock selection detracted from the Fund's performance, most notably in
technology, energy and health-care stocks. Relatively good performance in the
heavy industry, utility and financial services names provided a partial offset.

The Fund's performance for the year was adversely influenced by a relatively
small number of holdings in which corporate events precipitated a
disproportionate decline in share prices, most notably in Electronic Data
Systems and El Paso Corp. Conversely, strong performance was seen in several of
the financial services names (Bank America and PNC Financial), heavy industry
(Deere) and utilities (FPL Group). As the fiscal year ended, the Fund's
positions were being trimmed in the energy sector, while financial services
commitments were being increased.

Morgan Stanley Dividend Growth Securities Inc.
LETTER TO THE SHAREHOLDERS O FEBRUARY 28, 2003 continued

Looking Ahead

Economic data released during the first part of February confirmed that the
U.S. economy was gaining speed at the start of the year. January retail sales,
industrial production and employment reports all came in stronger than most
analysts' expectations. In fact, the data suggested that annualized real growth
rates in the 3 to 4 percent range were possible during the first part of 2003.

Then the economy appeared to hit an air pocket. The consumer confidence report
released on February 25 was far weaker than expected, marking the lowest
monthly reading for this series since October 1993. We believe the data were
adversely affected by the increasing likelihood of war with Iraq and heightened
concerns regarding potential terrorist activities. Although in our opinion the
data from the confidence report are not an especially accurate guide to
spending, the magnitude of the drop made it nearly certain that the robust
retail sales gains evident through January would not continue into February.

Making matters worse in the near term is a spike in energy prices resulting
from geopolitical tensions and unusually cold weather in many parts of the
country. Although the U.S. economy is less vulnerable to oil price shocks today
than it was in the 1970s, higher energy prices are likely to hurt consumer
spending and present another obstacle to growth.

While the U.S. economy was able to dodge several double-dip recession scares
last year, we believe that the domestic economy is facing yet another set of
obstacles. The upward revision to fourth-quarter gross domestic product seemed
to suggest that the economy had enough momentum to overcome recent setbacks.
Given such resilience, there is a far greater probability that the current set
of challenges could prove to be temporary. We believe that energy prices should
stabilize or decline as spring approaches. Furthermore, we feel that the
situation with Iraq will be resolved, while highly accommodative monetary and
fiscal policies remain focused on stimulating aggregate demand.

We continue to regard Morgan Stanley Dividend Growth Securities Inc. as well
positioned to benefit and perform well as the U.S. economy improves and
investor sentiment becomes more positive. Portfolio transactions continue to
reflect our commitment to the dividend growth discipline, which we believe
should be a clear beneficiary of any proposal to eliminate dividend taxation as
part of an economic stimulus package. In our opinion, the Fund's sector
distribution demonstrates a distinct cyclical bias, while its portfolio
valuations are reasonable and its overall profitability and growth expectations
are favorable. We believe that this is consistent with our disciplined
valuation-based portfolio management process that emphasizes dividend-paying
securities.

Morgan Stanley Dividend Growth Securities Inc.
LETTER TO THE SHAREHOLDERS O FEBRUARY 28, 2003 continued

We appreciate your ongoing support of Morgan Stanley Dividend Growth Securities
Inc. and look forward to continuing to serve your investment needs.

Very truly yours,

/s/ Charles A. Fiumefreddo /s/ Mitchell M. Merin

Charles A. Fiumefreddo Mitchell M. Merin
Chairman of the Board President and CEO

Annual Householding Notice

To reduce printing and mailing costs, the Fund attempts to eliminate duplicate
mailings to the same address. The Fund delivers a single copy of certain
shareholder documents, including shareholder reports, prospectuses and proxy
materials, to investors with the same last name who reside at the same address.
Your participation in this program will continue for an unlimited period of
time unless you instruct us otherwise. You can request multiple copies of these
documents by calling (800) 350-6414, 8:00 a.m. to 8:00 p.m., ET. Once our
Customer Service Center has received your instructions, we will begin sending
individual copies for each account within 30 days.

Morgan Stanley Dividend Growth Securities Inc.
FUND PERFORMANCE O FEBRUARY 28, 2003

GROWTH OF $10,000 CLASS B
-------------------------

[GRAPHIC OMITTED]

Date Total S&P 500 Lipper
------------------- ---------------- -------------- -----------------
February 28, 1993 10,000 10,000 10,000
------------------- ---------------- -------------- -----------------
February 28, 1994 10,998 10,834 11,176
------------------- ---------------- -------------- -----------------
February 28, 1995 11,356 11,631 11,731
------------------- ---------------- -------------- -----------------
February 28, 1996 14,764 15,668 15,430
------------------- ---------------- -------------- -----------------
February 28, 1997 17,918 19,765 18,977
------------------- ---------------- -------------- -----------------
February 28, 1998 23,132 26,685 24,575
------------------- ---------------- -------------- -----------------
February 28, 1999 24,888 31,949 27,044
------------------- ---------------- -------------- -----------------
February 28, 2000 21,780 35,696 27,670
------------------- ---------------- -------------- -----------------
February 28, 2001 25,804 32,766 29,511
------------------- ---------------- -------------- -----------------
February 28, 2002 24,241 29,654 27,441
------------------- ---------------- -------------- -----------------
February 28, 2003 18,359(3) 22,930 21,492
------------------- ---------------- -------------- -----------------

-----------------------------------------------------------
--- Fund --- S&P 500(4) ---Lipper(5)
-----------------------------------------------------------

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH
LESS THAN THEIR ORIGINAL COST. THE GRAPH AND TABLE DO NOT REFLECT THE DEDUCTION
OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION
OF FUND SHARES. PERFORMANCE FOR CLASS A, CLASS B, CLASS C, AND CLASS D SHARES
WILL VARY DUE TO DIFFERENCES IN SALES CHARGES AND EXPENSES.

AVERAGE ANNUAL TOTAL RETURNS - PERIOD ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
CLASS A SHARES*
- -------------------------------------------------------------------
1 Year (23.66)%(1) (27.67)%(2)
5 Years (3.90)%(1) (4.94)%(2)
Since Inception (7/28/97) (1.66)%(1) (2.60)%(2)

CLASS C SHARES+
- -------------------------------------------------------------------
1 Year (24.26)%(1) (25.00)%(2)
5 Years (4.62)%(1) (4.62)%(2)
Since Inception (7/28/97) (2.38)%(1) (2.38)%(2)

CLASS B SHARES**
- -------------------------------------------------------------------
1 Year (24.27)%(1) (27.93)%(2)
5 Years (4.52)%(1) (4.80)%(2)
10 Years 6.26 %(1) 6.26 %(2)

CLASS D SHARES++
- -------------------------------------------------------------------
1 Year (23.50)%(1)
5 Years (3.68)%(1)
Since Inception (7/28/97) (1.43)%(1)

- ------------
(1) Figure shown assumes reinvestment of all distributions and does not
reflect the deduction of any sales charges.
(2) Figure shown assumes reinvestment of all distributions and the deduction
of the maximum applicable sales charge. See the Fund's current prospectus
for complete details on fees and sales charges.
(3) Closing value assuming a complete redemption on February 28, 2003.
(4) The Standard & Poor's 500 Stock Index (S&P 500) is a broad-based index,
the performance of which is based on the average performance of 500
widely held common stocks. The performance of the Index does not include
any expenses, fees or charges. The Index is unmanaged and should not be
considered an investment.
(5) The Lipper Large-Cap Value Fund 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 maximum front-end sales charge for Class A is 5.25%.
** The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%.
The CDSC declines to 0% after six years.
+ The maximum contingent deferred sales charge for Class C is 1% for shares
redeemed within one year of purchase.
++ Class D has no sales charge.

Morgan Stanley Dividend Growth Securities Inc.
PORTFOLIO OF INVESTMENTS o FEBRUARY 28, 2003

NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------
Common Stocks (99.4%)
Aerospace & Defense (1.0%)
1,293,000 Goodrich Corp. ................. $19,873,410
495,415 Northrop Grumman Corp. ......... 42,952,480
-----------
62,825,890
-----------
Aluminum (3.4%)
3,323,700 Alcan Aluminum Ltd.
(Canada) ....................... 94,459,554
6,433,000 Alcoa, Inc. .................... 131,876,500
-----------
226,336,054
-----------
Apparel/Footwear (1.3%)
2,433,600 VF Corp. ....................... 82,377,360
-----------
Auto Parts: O.E.M. (2.8%)
3,179,900 Delphi Corp. ................... 24,580,627
2,044,200 Johnson Controls, Inc. ......... 159,365,832
-----------
183,946,459
-----------
Beverages: Non-Alcoholic (2.2%)
3,553,000 Coca-Cola Co. (The) ............ 142,901,660
-----------
Chemicals: Agricultural (0.1%)
581,199 Monsanto Co. ................... 9,543,288
-----------
Chemicals: Major Diversified (3.8%)
4,453,400 Dow Chemical Co. (The) ......... 121,577,820
3,545,700 Du Pont (E.I.) de Nemours
& Co., Inc. .................. 130,020,819
-----------
251,598,639
-----------
Computer Processing
Hardware (0.7%)
2,828,400 Hewlett-Packard Co. ............ 44,830,140
-----------
Discount Stores (2.4%)
5,513,400 Target Corp. ................... 157,958,910
-----------
Electric Utilities (5.4%)
3,407,000 Exelon Corp. ................... 167,454,050
2,031,200 FirstEnergy Corp. .............. 59,920,400
2,287,600 FPL Group, Inc. ................ 128,128,476
-----------
355,502,926
-----------

NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------------
Electronics/Appliances (1.3%)
1,720,300 Whirlpool Corp. ................ $84,741,978
-----------
Finance/Rental/Leasing (3.3%)
2,822,900 Fannie Mae ..................... 180,947,890
2,703,400 MBNA Corp. ..................... 37,442,090
-----------
218,389,980
-----------
Financial Conglomerates (2.5%)
2,200,300 Citigroup, Inc. ................ 73,358,002
4,081,800 J.P. Morgan Chase & Co. ........ 92,575,224
-----------
165,933,226
-----------
Food Distributors (2.0%)
2,828,900 Supervalu, Inc. ................ 39,378,288
3,350,400 SYSCO Corp. .................... 90,862,848
-----------
130,241,136
-----------
Food: Major Diversified (2.2%)
3,738,400 PepsiCo, Inc. .................. 143,255,488
-----------
Forest Products (1.9%)
2,530,900 Weyerhaeuser Co. ............... 126,165,365
-----------
Home Improvement Chains (0.9%)
2,541,500 Home Depot, Inc. (The) ......... 59,598,175
-----------
Household/Personal Care (7.2%)
3,424,400 Avon Products, Inc. ............ 178,068,800
2,555,200 Kimberly-Clark Corp. ........... 117,104,816
2,195,800 Procter & Gamble Co. (The) 179,748,188
-----------
474,921,804
-----------
Industrial Conglomerates (8.6%)
1,297,600 3M Co. ......................... 162,680,112
4,964,400 General Electric Co. ........... 119,393,820
4,073,200 Honeywell International, Inc. 93,235,548
3,212,300 United Technologies Corp. ...... 188,176,534
-----------
563,486,014
-----------
Industrial Specialties (1.0%)
1,487,900 PPG Industries, Inc. ........... 69,038,560
-----------

See Notes to Financial Statements

Morgan Stanley Dividend Growth Securities Inc.
PORTFOLIO OF INVESTMENTS o FEBRUARY 28, 2003 continued

NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------------
Information Technology
Services (2.5%)
2,141,400 International Business
Machines Corp. ................... $ 166,922,130
-------------
Integrated Oil (7.5%)
4,283,200 BP PLC (ADR) (United
Kingdom) ......................... 163,232,752
5,499,800 Exxon Mobil Corp. ................. 187,103,196
3,601,800 Royal Dutch Petroleum Co.
(NY Registered Shares)
(Netherlands) .................... 142,883,406
-------------
493,219,354
-------------
Life/Health Insurance (3.8%)
3,281,500 Jefferson-Pilot Corp. ............. 123,712,550
4,380,500 Lincoln National Corp. ............ 124,099,565
-------------
247,812,115
-------------
Major Banks (5.2%)
3,066,400 Bank of America Corp. ............. 212,317,536
4,818,400 KeyCorp ........................... 114,340,632
344,400 PNC Financial Services
Group ............................ 15,473,892
-------------
342,132,060
-------------
Major Telecommunications (2.6%)
4,964,400 Verizon Communications
Inc. ............................. 171,668,952
-------------
Motor Vehicles (1.8%)
1,394,400 DaimlerChrysler AG
(Germany) ........................ 42,626,808
2,235,100 General Motors Corp. .............. 75,479,327
-------------
118,106,135
-------------
Multi-Line Insurance (0.3%)
386,900 American International
Group, Inc. ...................... 19,070,301
-------------
Office Equipment/Supplies (2.1%)
4,477,700 Pitney Bowes, Inc. ................ 138,987,808
-------------
Oil & Gas Production (0.5%)
745,200 Kerr-McGee Corp. .................. 30,732,048
-------------

NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------------
Oil Refining/Marketing (0.1%)
383,500 Marathon Oil Corp. ................ $ 8,855,015
23,500 Sunoco, Inc. ...................... 831,665
-------------
9,686,680
-------------
Pharmaceuticals: Major (10.1%)
5,214,400 Bristol-Myers Squibb Co. .......... 121,495,520
2,484,400 Merck & Co., Inc. ................. 131,052,100
3,407,000 Pharmacia Corp. ................... 140,777,240
5,548,500 Schering-Plough Corp. ............. 99,983,970
4,963,400 Wyeth ............................. 174,959,850
-------------
668,268,680
-------------
Property - Casualty Insurers (0.5%)
1,672,800 Travelers Property Casualty
Corp. (Class A) .................. 26,179,320
237,600 Travelers Property Casualty
Corp. (Class B) .................. 3,777,840
-------------
29,957,160
-------------
Pulp & Paper (1.7%)
1,805,400 International Paper Co. ........... 63,243,162
2,030,700 Meadwestvaco Corp. ................ 47,091,933
-------------
110,335,095
-------------
Railroads (2.6%)
4,429,100 Burlington Northern Santa
Fe Corp. ......................... 110,727,500
2,270,700 CSX Corp. ......................... 60,991,002
-------------
171,718,502
-------------
Tobacco (0.7%)
1,158,600 Altria Group, Inc. ................ 44,779,890
-------------
Trucks/Construction/Farm
Machinery (3.4%)
1,461,400 Caterpillar, Inc. ................. 68,685,800
3,833,500 Deere & Co. ....................... 158,630,230
-------------
227,316,030
-------------
Total Common Stocks
(Cost $3,467,694,417).............. 6,544,305,992
-------------

See Notes to Financial Statements

Morgan Stanley Dividend Growth Securities Inc.
PORTFOLIO OF INVESTMENTS O FEBRUARY 28, 2003 continued

PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ------------------------------------------------------------
Short-Term Investment (0.4%)
Repurchase Agreement
$ 27,648 Joint repurchase agreement
account 1.36% due
03/03/03 (dated
02/28/03; proceeds
$27,651,133) (a)
(Cost $27,648,000) .......... $ 27,648,000

Total Investments
(Cost $3,495,342,417) (b)..... 99.8% 6,571,953,992
Other Assets in Excess of
Liabilities .................. 0.2 11,549,736
----- --------------
Net Assets ................... 100.0% $6,583,503,728
===== ==============

- -------------------
ADR American Depository Receipt.
(a) Collateralized by federal agency and U.S. Treasury obligations.
(b) The aggregate cost for federal income tax purposes approximates
the aggregate cost for book purposes. The aggregate gross unrealized
appreciation is $3,275,643,755 and the aggregate gross unrealized
depreciation is $199,032,180, resulting in net unrealized appreciation
of $3,076,611,575.

See Notes to Financial Statements

Morgan Stanley Dividend Growth Securities Inc.
FINANCIAL STATEMENTS

Statement of Assets and Liabilities
February 28, 2003

Assets:
Investments in securities, at value
(cost $3,495,342,417).................................................... $ 6,571,953,992
Receivable for:
Dividends .............................................................. 23,935,302
Investments sold ....................................................... 17,022,291
Capital stock sold ..................................................... 2,777,144
Prepaid expenses and other assets ........................................ 125,319
---------------
Total Assets ........................................................... 6,615,814,048
---------------
Liabilities:
Payable for:
Investments purchased .................................................. 16,823,917
Capital stock redeemed ................................................. 8,052,171
Distribution fee ....................................................... 4,792,906
Investment management fee .............................................. 2,227,278
Accrued expenses and other payables ...................................... 414,048
---------------
Total Liabilities ...................................................... 32,310,320
---------------
Net Assets ............................................................. $ 6,583,503,728
===============
Composition of Net Assets:
Paid-in-capital .......................................................... $ 3,313,978,150
Net unrealized appreciation .............................................. 3,076,611,575
Accumulated undistributed net investment income .......................... 24,473,032
Accumulated undistributed net realized gain .............................. 168,440,971
---------------
Net Assets ............................................................. $ 6,583,503,728
===============
Class A Shares:
Net Assets ............................................................... $ 104,418,750
Shares Outstanding (500,000,000 shares authorized, $.01 par value)........ 3,070,137
Net Asset Value Per Share .............................................. $34.01
======
Maximum Offering Price Per Share,
(net asset value plus 5.54% of net asset value) ........................ $35.89
======
Class B Shares:
Net Assets ............................................................... $ 6,020,241,883
Shares Outstanding (500,000,000 shares authorized, $.01 par value)........ 176,860,245
Net Asset Value Per Share .............................................. $34.04
======
Class C Shares:
Net Assets ............................................................... $ 82,544,417
Shares Outstanding (500,000,000 shares authorized, $.01 par value)........ 2,433,559
Net Asset Value Per Share .............................................. $33.92
======
Class D Shares:
Net Assets ............................................................... $ 376,298,678
Shares Outstanding (500,000,000 shares authorized, $.01 par value)........ 11,059,292
Net Asset Value Per Share .............................................. $34.03
======

See Notes to Financial Statements

Morgan Stanley Dividend Growth Securities Inc.
FINANCIAL STATEMENTS continued

Statement of Operations
For the year ended February 28, 2003

Net Investment Income:
Income
Dividends (net of $2,567,712 foreign withholding tax)......... $ 207,647,151
Interest ..................................................... 1,000,191
----------------
Total Income ............................................... 208,647,342
----------------
Expenses
Distribution fee (Class A shares) ............................ 277,221
Distribution fee (Class B shares) ............................ 78,270,587
Distribution fee (Class C shares) ............................ 1,031,853
Investment management fee .................................... 34,965,682
Transfer agent fees and expenses ............................. 9,614,762
Shareholder reports and notices .............................. 451,914
Custodian fees ............................................... 357,785
Registration fees ............................................ 138,825
Professional fees ............................................ 59,738
Directors' fees and expenses ................................. 50,539
Other ........................................................ 44,053
----------------
Total Expenses ............................................. 125,262,959
----------------
Net Investment Income ...................................... 83,384,383
----------------
Net Realized and Unrealized Gain (Loss):
Net realized gain ............................................ 168,461,681
Net change in unrealized appreciation ........................ (2,624,203,210)
----------------
Net Loss ................................................... (2,455,741,529)
----------------
Net Decrease ................................................. $ (2,372,357,146)
================

See Notes to Financial Statements

Morgan Stanley Dividend Growth Securities Inc.
FINANCIAL STATEMENTS continued

Statement of Changes in Net Assets

FOR THE YEAR FOR THE YEAR
ENDED ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
------------------- ------------------

Increase (Decrease) in Net Assets:
Operations:
Net investment income ....................................................... $ 83,384,383 $ 85,746,909
Net realized gain ........................................................... 168,461,681 500,598,963
Net change in unrealized appreciation ....................................... (2,624,203,210) (1,352,563,468)
---------------- ----------------
Net Decrease .............................................................. (2,372,357,146) (766,217,596)
---------------- ----------------
Dividends and Distributions to Shareholders from:
Net investment income
Class A shares ............................................................ (2,241,425) (2,783,320)
Class B shares ............................................................ (77,556,153) (69,875,706)
Class C shares ............................................................ (1,055,263) (1,014,430)
Class D shares ............................................................ (8,637,871) (7,472,548)
Net realized gain
Class A shares ............................................................ (2,997,124) (9,765,004)
Class B shares ............................................................ (197,956,757) (560,593,722)
Class C shares ............................................................ (2,584,634) (6,922,405)
Class D shares ............................................................ (10,202,124) (23,888,388)
---------------- ----------------
Total Dividends and Distributions ......................................... (303,231,351) (682,315,523)
---------------- ----------------
Net decrease from capital stock transactions ................................ (1,356,525,019) (541,171,887)
---------------- ----------------
Net Decrease .............................................................. (4,032,113,516) (1,989,705,006)
Net Assets:
Beginning of period ......................................................... 10,615,617,244 12,605,322,250
---------------- ----------------
End of Period
(Including accumulated undistributed net investment income of $24,473,032 and
$30,579,334, respectively).................................................. $ 6,583,503,728 $ 10,615,617,244
================ ================

See Notes to Financial Statements

Morgan Stanley Dividend Growth Securities Inc.
NOTES TO FINANCIAL STATEMENTS o FEBRUARY 28, 2003

1. Organization and Accounting Policies

Morgan Stanley Dividend Growth Securities Inc. (the "Fund") is registered under
the Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Fund's investment objective is to
provide reasonable current income and long-term growth of income and capital.
The Fund seeks to achieve its objective by investing primarily in common stock
of companies with a record of paying dividends and the potential for increasing
dividends. The Fund was incorporated in Maryland on December 22, 1980 and
commenced operations on March 30, 1981. On July 28, 1997, the Fund converted to
a multiple class share structure.

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

The following is a summary of significant accounting policies:

A. Valuation of Investments - (1) an equity portfolio security listed or traded
on the New York or American Stock Exchange, Nasdaq, 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 latest bid price (in
cases where securities are traded on more than one exchange, the securities are
valued on the exchange designated as the primary market pursuant to procedures
adopted by the Directors); (2) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest available bid price; (3) when market quotations are not readily
available, including circumstances under which it is determined by Morgan
Stanley Investment Advisors Inc. (the "Investment Manager") that sale and bid
prices are not reflective of a security's market value, portfolio securities
are valued at their fair value as determined in good faith under procedures
established by and under the general supervision of the Directors; (4) certain
portfolio securities may be valued by an outside pricing service approved by
the Directors; and (5) short-term debt securities having a maturity date of
more than sixty days at time of purchase are valued on a mark-to-market basis
until sixty days prior to maturity and thereafter at amortized cost based on
their value on the 61st day. Short-term debt securities having a maturity date
of sixty days or less at the time of purchase are valued at amortized cost.

B. Accounting for Investments - Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the

Morgan Stanley Dividend Growth Securities Inc.
NOTES TO FINANCIAL STATEMENTS o FEBRUARY 28, 2003 continued

identified cost method. Dividend income and other distributions are recorded on
the ex-dividend date. Discounts are accreted and premiums are amortized over
the life of the respective securities. Interest income is accrued daily.

C. Repurchase Agreements - Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other affiliated
entities managed by the Investment Manager, may transfer uninvested cash
balances into one or more joint repurchase agreement accounts. These balances
are invested in one or more repurchase agreements and are collateralized by
cash, U.S. Treasury or federal agency obligations. The Fund may also invest
directly with institutions in repurchase agreements. The Fund's custodian
receives the collateral, which is marked-to-market daily to determine that the
value of the collateral does not decrease below the repurchase price plus
accrued interest.

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

E. Federal Income Tax Policy - It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Accordingly, no federal income tax provision is required.

F. Dividends and Distributions to Shareholders - Dividends and distributions to
shareholders are recorded on the ex-dividend date.

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

2. Investment Management Agreement

Pursuant to an Investment Management Agreement with the Investment Manager, the
Fund pays a management fee, accrued daily and payable monthly, by applying the
following annual rates to the net assets of the Fund determined at the close of
each business day: 0.625% to the portion of daily net assets not exceeding $250
million; 0.50% to the portion of daily net assets exceeding $250 million but
not exceeding $1 billion; 0.475% to the portion of daily net assets exceeding
$1 billion but not exceeding $2 billion; 0.45% to the portion of daily net
assets exceeding $2 billion but not exceeding $3 billion; 0.425% to the portion
of daily net assets exceeding $3 billion but not exceeding $4 billion; 0.40% to
the portion of daily net assets exceeding $4 billion but not exceeding $5
billion; 0.375% to the portion of daily net assets exceeding $5 billion but not
exceeding $6 billion; 0.35% to the portion of daily net assets exceeding $6
billion but not exceeding $8 billion; 0.325% to the portion of daily net assets

Morgan Stanley Dividend Growth Securities Inc.
NOTES TO FINANCIAL STATEMENTS o FEBRUARY 28, 2003 continued

exceeding $8 billion but not exceeding $10 billion; 0.30% to the portion of
daily net assets exceeding $10 billion but not exceeding $15 billion; and
0.275% to the portion of daily net assets exceeding $15 billion.

3. Plan of Distribution

Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the
"Distributor"), an affiliate of the Investment Manager. The Fund has adopted a
Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The
Plan provides that the Fund will pay the Distributor a fee which is accrued
daily and paid monthly at the following annual rates: (i) Class A - up to 0.25%
of the average daily net assets of Class A; (ii) Class B - 1.0% of the lesser
of: (a) the average daily aggregate gross sales of the Class B shares since the
inception of the Plan on July 2, 1984 (not including reinvestment of dividend
or capital gain distributions) less the average daily aggregate net asset value
of the Class B shares redeemed since the Plan's inception upon which a
contingent deferred sales charge has been imposed or waived; or (b) the average
daily net assets of Class B attributable to shares issued, net of related
shares redeemed, since the Plan's inception; and (iii) Class C - up to 1.0% of
the average daily net assets of Class C.

In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund
pursuant to the Plan and contingent deferred sales charges paid by investors
upon redemption of Class B shares. Although there is no legal obligation for
the Fund to pay expenses incurred in excess of payments made to the Distributor
under the Plan and the proceeds of contingent deferred sales charges paid by
investors upon redemption of shares, if for any reason the Plan is terminated,
the Directors will consider at that time the manner in which to treat such
expenses. The Distributor has advised the Fund that such excess amounts totaled
$19,666,162 at February 28, 2003.

In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Financial Advisors or other selected
broker-dealer representatives may be reimbursed in the subsequent calendar
year. For the year ended February 28, 2003, the distribution fee was accrued
for Class A shares and Class C shares at the annual rate of 0.23% and 1.0%,
respectively.

The Distributor has informed the Fund that for the year ended February 28,
2003, it received contingent deferred sales charges from certain redemptions of
the Fund's Class A shares, Class B shares and Class C shares of $1,136,
$7,218,194 and $23,538, respectively and received $256,156 in front-end sales
charges from sales of the Fund's Class A shares. The respective shareholders
pay such charges which are not an expense of the Fund.

Morgan Stanley Dividend Growth Securities Inc.
NOTES TO FINANCIAL STATEMENTS o FEBRUARY 28, 2003 continued

4. Security Transactions and Transactions with Affiliates

The cost of purchases and the proceeds from sales of portfolio securities,
excluding short-term investments, for the year ended February 28, 2003
aggregated $555,872,614 and $1,986,837,983, respectively. Included in the
aforementioned transactions are purchases of $8,986,500 and sales of $2,623,000
for portfolio transactions with other Morgan Stanley funds, including a net
realized gain of $1,757,431.

For the year ended February 28, 2003, the Fund incurred brokerage commissions
of $256,270 with Morgan Stanley & Co., Inc., an affiliate of the Investment
Manager and Distributor, for portfolio transactions executed on behalf of the
Fund.

The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Directors of the Fund who will have served as independent
Directors for at least five years at the time of retirement. Benefits under
this plan are based on years of service and compensation during the last five
years of service. Aggregate pension costs for the year ended February 28, 2003
included in Directors' fees and expenses in the Statement of Operations
amounted to $7,374. At February 28, 2003, the Fund had an accrued pension
liability of $60,251, which is included in accrued expenses in the Statement of
Assets and Liabilities.

Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor,
is the Fund's transfer agent. At February 28, 2003, the Fund had transfer agent
fees and expenses payable of approximately $36,000.

5. Federal Income Tax Status

The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for tax purposes, are reported as distributions of paid-in-capital.

Morgan Stanley Dividend Growth Securities Inc.
NOTES TO FINANCIAL STATEMENTS O FEBRUARY 28, 2003 continued

The tax character of distributions paid was as follows:

FOR THE YEAR FOR THE YEAR
ENDED ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
------------------- ------------------

Ordinary income ....................... $ 89,490,712 $ 82,596,164
Long-term capital gains ............... 213,740,639 599,719,359
-------------- ------------
Total distributions ................... $ 303,231,351 $682,315,523
============== ============

As of February 28, 2003, the tax-basis components of accumulated earnings were as
follows:

Undistributed ordinary income ......... $ 24,533,283
Undistributed long-term gains ......... 168,440,971
--------------
Net accumulated earnings .............. 192,974,254
Temporary differences ................. (60,251)
Net unrealized appreciation ........... 3,076,611,575
--------------
Total accumulated earnings ............ $3,269,525,578
==============

As of February 28, 2003, the Fund had temporary book/tax differences
attributable to a non-deductible expense.

Morgan Stanley Dividend Growth Securities Inc.
NOTES TO FINANCIAL STATEMENTS O FEBRUARY 28, 2003 continued

6. Capital Stock

Transactions in capital stock were as follows:

FOR THE YEAR FOR THE YEAR
ENDED ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
------------------------------------ -----------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------- ------------------- --------------- -------------------

CLASS A SHARES
Sold ................................................ 807,118 $ 31,752,569 1,853,136 $ 87,205,199
Reinvestment of dividends and distributions ......... 106,190 4,371,930 241,094 11,509,496
Redeemed ............................................ (970,871) (38,277,429) (3,213,151) (148,457,471)
-------- ---------------- ---------- ----------------
Net decrease - Class A .............................. (57,563) (2,152,930) (1,118,921) (49,742,776)
-------- ---------------- ---------- ----------------
CLASS B SHARES
Sold ................................................ 9,619,119 386,653,422 14,258,875 702,654,795
Reinvestment of dividends and distributions ......... 6,030,065 248,999,928 12,074,663 575,026,673
Redeemed ............................................ (51,108,510) (2,008,751,524) (38,995,126) (1,883,819,908)
----------- ---------------- ----------- ----------------
Net decrease - Class B .............................. (35,459,326) (1,373,098,174) (12,661,588) (606,138,440)
----------- ---------------- ----------- ----------------
CLASS C SHARES
Sold ................................................ 492,590 19,786,226 656,729 32,237,834
Reinvestment of dividends and distributions ......... 84,072 3,456,704 160,212 7,598,604
Redeemed ............................................ (841,485) (33,132,034) (775,439) (37,390,096)
----------- ---------------- ----------- ----------------
Net increase (decrease) - Class C ................... (264,823) (9,889,104) 41,502 2,446,342
----------- ---------------- ----------- ----------------
CLASS D SHARES
Sold ................................................ 3,402,262 136,185,393 4,712,582 228,576,094
Reinvestment of dividends and distributions ......... 433,093 17,658,220 631,010 29,749,007
Redeemed ............................................ (3,110,440) (125,228,424) (3,062,922) (146,062,114)
----------- ---------------- ----------- ----------------
Net increase - Class D .............................. 724,915 28,615,189 2,280,670 112,262,987
----------- ---------------- ----------- ----------------
Net decrease in Fund ................................ (35,056,797) $ (1,356,525,019) (11,458,337) $ (541,171,887)
=========== ================ =========== ================

Morgan Stanley Dividend Growth Securities Inc.
FINANCIAL HIGHLIGHTS

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

FOR THE YEAR ENDED FEBRUARY 28,
-----------------------------------------------------------------------------
2003 2002 2001 2000* 1999
--------------- --------------- -------------- --------------- --------------

Class A Shares
Selected Per Share Data:
Net asset value, beginning of period ............... $46.44 $52.54 $50.11 $60.22 $58.39
------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income+/+ .......................... 0.68 0.71 0.84 0.94 1.05
Net realized and unrealized gain (loss) ........... (11.41) (3.51) 8.35 (7.75) 3.58
------ ------ ------ ------ ------
Total income (loss) from investment operations ..... (10.73) (2.80) 9.19 (6.81) 4.63
------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income ............................. (0.72) (0.70) (0.92) (0.99) (1.02)
Net realized gain ................................. (0.98) (2.60) (5.84) (2.31) (1.78)
------ ------ ------ ------ ------
Total dividends and distributions .................. (1.70) (3.30) (6.76) (3.30) (2.80)
------ ------ ------ ------ ------
Net asset value, end of period ..................... $34.01 $46.44 $52.54 $50.11 $60.22
====== ====== ====== ====== ======
Total Return+ ..................................... (23.66)% (5.35)% 19.31% (12.07)% 8.10%

Ratios to Average Net Assets(1):
Expenses ........................................... 0.77% 0.73% 0.73% 0.67% 0.64%
Net investment income .............................. 1.69% 1.46% 1.57% 1.52% 1.76%

Supplemental Data:
Net assets, end of period, in thousands ............ $104,419 $145,257 $223,106 $214,669 $227,457
Portfolio turnover rate ............................ 7% 0% 1% 4% 13%

- ------------
* Year ended February 29.
+/+ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.
(1) Reflects overall Fund ratios for investment income and non-class specific
expenses.

See Notes to Financial Statements

Morgan Stanley Dividend Growth Securities Inc.
FINANCIAL HIGHLIGHTS continued

FOR THE YEAR ENDED FEBRUARY 28,
--------------------------------------------------------------------------------
2003 2002 2001 2000* 1999
--------------- --------------- --------------- ---------------- ---------------

Ratios to Average Net Assets(1):
Expenses .............................. 1.54% 1.49% 1.42% 1.15% 1.11%
Net investment income ................. 0.92% 0.70% 0.88% 1.04% 1.29%

Supplemental Data:
Net assets, end of period, in
thousands ............................. $6,020,242 $9,865,150 $11,819,378 $12,869,283 $18,060,848
Portfolio turnover rate ............... 7% 0% 1% 4% 13%

See Notes to Financial Statements

Morgan Stanley Dividend Growth Securities Inc.
FINANCIAL HIGHLIGHTS continued

FOR THE YEAR ENDED FEBRUARY 28,
---------------------------------------------------------------------------
2003 2002 2001 2000* 1999
------------- ------------------------------- --------------- ---------

Class C Shares
Selected Per Share Data:
Net asset value, beginning of period .............. $46.32 $52.44 $49.96 $60.02 $58.28
------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income+/+ ......................... 0.37 0.35 0.50 0.47 0.59
Net realized and unrealized gain (loss) .......... (11.38) (3.49) 8.32 (7.70) 3.56
------ ------ ------ ------ ------
Total income (loss) from investment operations .... (11.01) (3.14) 8.82 (7.23) 4.15
------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income ............................ (0.41) (0.38) (0.50) (0.52) (0.63)
Net realized gain ................................ (0.98) (2.60) (5.84) (2.31) (1.78)
------ ------ ------ ------ ------
Total dividends and distributions ................. (1.39) (2.98) (6.34) (2.83) (2.41)
------ ------ ------ ------ ------
Net asset value, end of period .................... $33.92 $46.32 $52.44 $49.96 $60.02
====== ====== ====== ======
Total Return+ .................................... (24.26)% (6.05)% 18.54% (12.73)% 7.26%

Ratios to Average Net Assets(1):
Expenses .......................................... 1.54% 1.48% 1.37% 1.43% 1.43%
Net investment income ............................. 0.92% 0.71% 0.93% 0.76% 0.97%

Supplemental Data:
Net assets, end of period, in thousands ........... $82,544 $124,976 $139,320 $135,496 $144,425
Portfolio turnover rate ........................... 7% 0% 1% 4% 13%

See Notes to Financial Statements

Morgan Stanley Dividend Growth Securities Inc.
FINANCIAL HIGHLIGHTS continued

Class D Shares
Selected Per Share Data:
Net asset value, beginning of period ............... $46.47 $52.59 $50.16 $60.26 $58.43
------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income+/+ .......................... 0.77 0.83 0.97 1.09 1.17
Net realized and unrealized gain (loss) ........... (11.41) (3.53) 8.35 (7.76) 3.59
------ ------ ------ ------ ------
Total income (loss) from investment operations ..... (10.64) (2.70) 9.32 (6.67) 4.76
------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income ............................. (0.82) (0.82) (1.05) (1.12) (1.15)
Net realized gain ................................. (0.98) (2.60) (5.84) (2.31) (1.78)
------ ------ ------ ------ ------
Total dividends and distributions .................. (1.80) (3.42) (6.89) (3.43) (2.93)
------ ------ ------ ------ ------
Net asset value, end of period ..................... $34.03 $46.47 $52.59 $50.16 $60.26
====== ====== ====== ====== ======
Total Return+ ..................................... (23.50)% (5.10)% 19.60% (11.85)% 8.33%

Ratios to Average Net Assets(1):
Expenses ........................................... 0.54% 0.49% 0.48% 0.43% 0.43%
Net investment income .............................. 1.92% 1.70% 1.82% 1.76% 1.97%

Supplemental Data:
Net assets, end of period, in thousands ............ $376,299 $480,234 $423,519 $405,246 $488,987
Portfolio turnover rate ............................ 7% 0% 1% 4% 13%

- ------------
* Year ended February 29.
+/+ 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.

See Notes to Financial Statements

Morgan Stanley Dividend Growth Securities Inc.
INDEPENDENT AUDITORS' REPORT

To the Shareholders and Board of Directors of
Morgan Stanley Dividend Growth Securities Inc.:

We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Dividend Growth Securities Inc. (the "Fund"), including the portfolio
of investments, as of February 28, 2003, and the related statements of
operations for the year then ended and changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of
the five years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures
included confirmation of securities owned as of February 28, 2003, by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Morgan Stanley Dividend Growth Securities Inc. as of February 28, 2003, the
results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended, in conformity
with accounting principles generally accepted in the United States of America.

Deloitte & Touche LLP
New York, New York
April 9, 2003

2003 Federal Tax Notice (unaudited)

During the fiscal year ended February 28, 2003, the Fund paid to its
shareholders $0.98 per share from long-term capital gains. For such
period, 100% of the income dividends paid qualified for the dividends
received deduction available to corporations.

Morgan Stanley Dividend Growth Securities Inc.
DIRECTOR AND OFFICER INFORMATION

Independent Directors:

Term of
Office and
Position(s) Length of
Name, Age and Address of Held with Time
Independent Director Registrant Served*
- -------------------------------------- ------------- ----------------

Michael Bozic (62) Director Since
c/o Mayer, Brown, Rowe & Maw April 1994
Counsel to the Independent Directors
1675 Broadway
New York, NY

Edwin J. Garn (70) Director Since
c/o Summit Ventures LLC January 1993
1 Utah Center
201 S. Main Street
Salt Lake City, UT

Wayne E. Hedien (68) Director Since
c/o Mayer, Brown, Rowe & Maw September 1997
Counsel to the Independent Directors
1675 Broadway
New York, NY

Number of
Portfolios in
Fund
Complex
Overseen
Name, Age and Address of by
Independent Director Principal Occupation(s) During Past 5 Years Director**
- -------------------------------------- ------------------------------------------------ --------------

Michael Bozic (62) Retired; Director or Trustee of the Morgan 123
c/o Mayer, Brown, Rowe & Maw Stanley Funds and TCW/DW Term Trust 2003;
Counsel to the Independent Directors formerly Vice Chairman of Kmart Corporation
1675 Broadway (December 1998-October 2000), Chairman and
New York, NY Chief Executive Officer of Levitz Furniture
Corporation (November 1995-November 1998)
and President and Chief Executive Officer of
Hills Department Stores (May 1991-July 1995);
formerly variously Chairman, Chief Executive
Officer, President and Chief Operating Officer
(1987-1991) of the Sears Merchandise Group
of Sears, Roebuck & Co.

Edwin J. Garn (70) Director or Trustee of the Morgan Stanley 123
c/o Summit Ventures LLC Funds and TCW/DW Term Trust 2003; formerly
1 Utah Center United States Senator (R-Utah) (1974-1992)
201 S. Main Street and Chairman, Senate Banking Committee
Salt Lake City, UT (1980-1986); formerly Mayor of Salt Lake City,
Utah (1971-1974); formerly Astronaut, Space
Shuttle Discovery (April 12-19, 1985); Vice
Chairman, Huntsman Corporation (chemical
company); member of the Utah Regional
Advisory Board of Pacific Corp.

Wayne E. Hedien (68) Retired; Director or Trustee of the Morgan 123
c/o Mayer, Brown, Rowe & Maw Stanley Funds and TCW/DW Term Trust 2003;
Counsel to the Independent Directors formerly associated with the Allstate
1675 Broadway Companies (1966-1994), most recently as
New York, NY Chairman of The Allstate Corporation
(March 1993-December 1994) and Chairman
and Chief Executive Officer of its wholly-owned
subsidiary, Allstate Insurance Company
(July 1989-December 1994).

Name, Age and Address of
Independent Director Other Directorships Held by Director
- -------------------------------------- ------------------------------------------------

Michael Bozic (62) Director of Weirton Steel Corporation.
c/o Mayer, Brown, Rowe & Maw
Counsel to the Independent Directors
1675 Broadway
New York, NY

Edwin J. Garn (70) Director of Franklin Covey (time management
c/o Summit Ventures LLC systems), BMW Bank of North America, Inc.
1 Utah Center (industrial loan corporation), United Space
201 S. Main Street Alliance (joint venture between Lockheed Martin
Salt Lake City, UT and the Boeing Company) and Nuskin Asia
Pacific (multilevel marketing); member of the
board of various civic and charitable
organizations.

Wayne E. Hedien (68) Director of The PMI Group Inc. (private
c/o Mayer, Brown, Rowe & Maw mortgage insurance); Trustee and Vice
Counsel to the Independent Directors Chairman of The Field Museum of Natural
1675 Broadway History; director of various other business and
New York, NY charitable organizations.

Morgan Stanley Dividend Growth Securities Inc.
DIRECTOR AND OFFICER INFORMATION continued

Term of
Office and
Position(s) Length of
Name, Age and Address of Held with Time
Independent Director Registrant Served*
- --------------------------------------- ------------- ------------

Dr. Manuel H. Johnson (53) Director Since
c/o Johnson Smick International, Inc. July 1991
1133 Connecticut Avenue, N.W.
Washington, D.C.

Michael E. Nugent (66) Director Since
c/o Triumph Capital, L.P. July 1991
237 Park Avenue
New York, NY

Number of
Portfolios in
Fund
Complex
Overseen
Name, Age and Address of by
Independent Director Principal Occupation(s) During Past 5 Years Director**
- --------------------------------------- ------------------------------------------------- --------------

Dr. Manuel H. Johnson (53) Chairman of the Audit Committee and Director 123
c/o Johnson Smick International, Inc. or Trustee of the Morgan Stanley Funds and
1133 Connecticut Avenue, N.W. TCW/DW Term Trust 2003; Senior Partner,
Washington, D.C. Johnson Smick International, Inc., a consulting
firm; 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.

Michael E. Nugent (66) Chairman of the Insurance Committee and 200
c/o Triumph Capital, L.P. Director or Trustee of the Morgan Stanley
237 Park Avenue Funds and TCW/DW Term Trust 2003; director/
New York, NY trustee of various investment companies
managed by Morgan Stanley Investment
Management Inc. and Morgan Stanley
Investments LP (since July 2001); General
Partner, Triumph Capital, L.P., a private
investment partnership; formerly Vice
President, Bankers Trust Company and BT
Capital Corporation (1984-1988).

Name, Age and Address of
Independent Director Other Directorships Held by Director
- --------------------------------------- ----------------------------------------------

Dr. Manuel H. Johnson (53) Director of NVR, Inc. (home construction);
c/o Johnson Smick International, Inc. Chairman and Trustee of the Financial
1133 Connecticut Avenue, N.W. Accounting Foundation (oversight organization
Washington, D.C. of the Financial Accounting Standards Board).

Michael E. Nugent (66) Director of various business organizations.
c/o Triumph Capital, L.P.
237 Park Avenue
New York, NY

Morgan Stanley Dividend Growth Securities Inc.
DIRECTOR AND OFFICER INFORMATION continued

Interested Directors:

Term of
Office and
Position(s) Length of
Name, Age and Address of Held with Time
Interested Director Registrant Served*
- ------------------------------ ----------------------- ------------

Charles A. Fiumefreddo (69) Chairman of the Board Since
c/o Morgan Stanley Trust and Director July 1991
Harborside Financial Center,
Plaza Two,
Jersey City, NJ

James F. Higgins (54) Director Since
c/o Morgan Stanley Trust June 2000
Harborside Financial Center,
Plaza Two,
Jersey City, NJ

Philip J. Purcell (59) Director Since
1585 Broadway April 1994
New York, NY

Number of
Portfolios in
Fund
Complex
Name, Age and Address of Overseen
Interested Director Principal Occupation(s) During Past 5 Years by Director**
- ------------------------------ --------------------------------------------------- ---------------

Charles A. Fiumefreddo (69) Chairman and Director or Trustee of the 123
c/o Morgan Stanley Trust Morgan Stanley Funds and TCW/DW Term Trust
Harborside Financial Center, 2003; formerly Chairman, Chief Executive
Plaza Two, Officer and Director of the Investment Manager,
Jersey City, NJ the Distributor and Morgan Stanley Services,
Executive Vice President and Director of
Morgan Stanley DW, Chairman and Director of
the Transfer Agent, and Director and/or officer
of various Morgan Stanley subsidiaries (until
June 1998) and Chief Executive Officer of the
Morgan Stanley Funds and the TCW/DW Term
Trusts (until September 2002).

James F. Higgins (54) Director or Trustee of the Morgan Stanley 123
c/o Morgan Stanley Trust Funds and TCW/DW Term Trust 2003 (since
Harborside Financial Center, June 2000); Senior Advisor of Morgan Stanley
Plaza Two, (since August 2000); Director of the Distributor
Jersey City, NJ and Dean Witter Realty Inc.; Director of AXA
Financial, Inc. and The Equitable Life Assurance
Society of the United States (financial services);
previously President and Chief Operating
Officer of the Private Client Group of Morgan
Stanley (May 1999-August 2000), President
and Chief Operating Officer of Individual
Securities of Morgan Stanley
(February 1997-May 1999).

Philip J. Purcell (59) Director or Trustee of the Morgan Stanley 123
1585 Broadway Funds and TCW/DW Term Trust 2003;
New York, NY Chairman of the Board of Directors and Chief
Executive Officer of Morgan Stanley and
Morgan Stanley DW; Director of the Distributor;
Chairman of the Board of Directors and Chief
Executive Officer of Novus Credit Services Inc.;
Director and/or officer of various Morgan
Stanley subsidiaries.

Name, Age and Address of
Interested Director Other Directorships Held by Director
- ------------------------------ --------------------------------------------

Charles A. Fiumefreddo (69) None
c/o Morgan Stanley Trust
Harborside Financial Center,
Plaza Two,
Jersey City, NJ

James F. Higgins (54) None
c/o Morgan Stanley Trust
Harborside Financial Center,
Plaza Two,
Jersey City, NJ

Philip J. Purcell (59) Director of American Airlines, Inc. and its
1585 Broadway parent company, AMR Corporation.
New York, NY

- ------------
* Each Director serves an indefinite term, until his or her successor is
elected.
** The Fund Complex includes all open and closed-end funds (including all of
their portfolios) advised by Morgan Stanley Investment Advisors Inc. and
any funds that have an investment advisor that is an affiliated person of
Morgan Stanley Investment Advisors Inc. (including but not limited to,
Morgan Stanley Investment Management Inc., Morgan Stanley Investments LP
and Van Kampen Asset Management Inc.).

Morgan Stanley Dividend Growth Securities Inc.
DIRECTOR AND OFFICER INFORMATION continued

Officers:

Term of
Office and
Position(s) Length of
Name, Age and Address of Held with Time
Executive Officer Registrant Served*
- ------------------------------ ------------------- -----------------

Mitchell M. Merin (49) President and President since
1221 Avenue of the Americas Chief Executive May 1999 and
New York, NY Officer Chief Executive
Officer since
September 2002

Barry Fink (48) Vice President, Since
1221 Avenue of the Americas Secretary and February 1997
New York, NY General Counsel

Joseph J. McAlinden (60) Vice President Since
1221 Avenue of the Americas July 1995
New York, NY

Ronald E. Robison (64) Vice President Since
1221 Avenue of the Americas October 1998
New York, NY

Thomas F. Caloia (56) Treasurer Since
c/o Morgan Stanley Trust April 1989
Harborside Financial Center,
Plaza Two
Jersey City, NJ

Francis Smith (37) Vice President Since
c/o Morgan Stanley Trust and Chief September 2002
Harborside Financial Center, Financial Officer
Plaza Two,
Jersey City, NJ

Name, Age and Address of
Executive Officer Principal Occupation(s) During Past 5 Years
- ---------------------------- --------------------------------------------------

Mitchell M. Merin (49) President and Chief Operating Officer of Morgan Stanley Investment Management
1221 Avenue of the Americas (since December 1998); President, Director (since April 1997) and Chief Executive
New York, NY Officer (since June 1998) of the Investment Manager and Morgan Stanley Services;
Chairman, Chief Executive Officer and Director of the Distributor (since June
1998); Chairman (since June 1998) and Director (since January 1998) of the
Transfer Agent; Director of various Morgan Stanley subsidiaries; President (since
May 1999) and Chief Executive Officer (since September 2002) of the Morgan Stanley
Funds and TCW/DW Term Trust 2003; Trustee (since December 1999) and President and
Chief Executive Officer (since October 2002) of the Van Kampen Open-End Funds and
President and Chief Executive Officer (since December 2002) of the Van Kampen
Closed-End Funds; previously Chief Strategic Officer of the Investment Manager and
Morgan Stanley Services and Executive Vice President of the Distributor (April
1997-June 1998), Vice President of the Morgan Stanley Funds (May 1997-April 1999),
and Executive Vice President of Morgan Stanley.

Barry Fink (48) General Counsel (since May 2000) and Managing Director (since December 2000) of
1221 Avenue of the Americas Morgan Stanley Investment Management; Managing Director (since December 2000), and
New York, NY Director (since July 1998) of the Investment Manager and Morgan Stanley Services;
Assistant Secretary of Morgan Stanley DW; Vice President, Secretary and General
Counsel of the Morgan Stanley Funds and TCW/DW Term Trust 2003 (since February
1997); Vice President and Secretary of the Distributor; previously, Vice President
and Assistant General Counsel of the Investment Manager and Morgan Stanley
Services (February 1997 - December 2001).

Joseph J. McAlinden (60) Managing Director and Chief Investment Officer of the Investment Manager, Morgan
1221 Avenue of the Americas Stanley Investment Management Inc. and Morgan Stanley Investments LP; Director of
New York, NY the Transfer Agent; Chief Investment Officer of the Van Kampen Funds.

Ronald E. Robison (64) Managing Director, Chief Administrative Officer and Director (since February 1999)
1221 Avenue of the Americas of the Investment Manager and Morgan Stanley Services and Chief Executive Officer
New York, NY and Director of the Transfer Agent; previously Managing Director of the TCW Group
Inc.

Thomas F. Caloia (56) Executive Director (since December 2002) and Assistant Treasurer of the Investment
c/o Morgan Stanley Trust Manager, the Distributor and Morgan Stanley Services; previously First Vice
Harborside Financial Center, President of the Investment Manager, the Distributor and Morgan Stanley Services;
Plaza Two Treasurer of the Morgan Stanley Funds.
Jersey City, NJ

Francis Smith (37) Vice President and Chief Financial Officer of the Morgan Stanley Funds and TCW/DW
c/o Morgan Stanley Trust Term Trust 2003 (since September 2002); Executive Director of the Investment
Harborside Financial Center, Manager and Morgan Stanley Services (since December 2001); previously Vice
Plaza Two, President of the Investment Manager and Morgan Stanley Services (August
Jersey City, NJ 2000-November 2001), Senior Manager at PricewaterhouseCoopers LLP (January
1998-August 2000) and Associate-Fund Administration at BlackRock Financial
Management (July 1996-December 1997).

- ------------
* Each Officer serves an indefinite term, until his or her successor is
elected.

(This page has been left blank intentionally.)

DIRECTORS

Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell

OFFICERS

Charles A. Fiumefreddo
Chairman of the Board

Mitchell M. Merin
President and Chief Executive Officer

Barry Fink
Vice President, Secretary and General Counsel

Joseph J. McAlinden
Vice President

Ronald E. Robison
Vice President

Thomas F. Caloia
Treasurer

Francis Smith
Vice President and Chief Financial Officer

TRANSFER AGENT

Morgan Stanley Trust
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311

INDEPENDENT AUDITORS

Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281

INVESTMENT MANAGER

Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020

This report is submitted for the general information of the shareholders of the
Fund. For more detailed information about the Fund, its fees and expenses and
other pertinent information, please read its Prospectus. The Fund's Statement of
Additional Information contains additional information about the Fund, including
its directors. It is available, without charge, by calling (800) 869-NEWS.

This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective Prospectus. Read the
Prospectus carefully before investing.

Investments and services offered through Morgan Stanley DW Inc., member SIPC.
Morgan Stanley Funds are distributed by Morgan Stanley Distributors Inc.

Morgan Stanley Distributors Inc., member NASD.

[MORGAN STANLEY LOGO OMITTED]
37910RPT-10499D03-AD-4/03

[MORGAN STANLEY LOGO OMITTED]

[GRAPHIC OMITTED]

MORGAN STANLEY
DIVIDEND GROWTH
SECURITIES

Annual Report

February 28, 2003

[MORGAN STANLEY LOGO]

Morgan Stanley Equity Fund

<Table>

A mutual fund that seeks total return [EQUITY FUND GRAPHIC]
</Table>

Prospectus July 30, 2003
</Table>

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.

Contents

<Table>

The Fund INVESTMENT OBJECTIVE........................................ 1

PRINCIPAL INVESTMENT STRATEGIES............................. 1

PRINCIPAL RISKS............................................. 1

PAST PERFORMANCE............................................ 3

FEES AND EXPENSES........................................... 4

ADDITIONAL INVESTMENT STRATEGY INFORMATION.................. 5

ADDITIONAL RISK INFORMATION................................. 6

FUND MANAGEMENT............................................. 7

Shareholder Information PRICING FUND SHARES......................................... 8

HOW TO BUY SHARES........................................... 8

HOW TO EXCHANGE SHARES...................................... 9

HOW TO SELL SHARES.......................................... 12

DISTRIBUTIONS............................................... 13

TAX CONSEQUENCES............................................ 14

SHARE CLASS ARRANGEMENTS.................................... 15

Financial Highlights ............................................................ 22

Morgan Stanley Funds ................................................INSIDE BACK COVER

THIS PROSPECTUS CONTAINS IMPORTANT INFORMATION ABOUT THE FUND.
PLEASE READ IT CAREFULLY AND KEEP IT FOR FUTURE REFERENCE.
</Table>

The Fund

INVESTMENT OBJECTIVE
[TARGET ICON]

Morgan Stanley Equity Fund seeks total return.

PRINCIPAL INVESTMENT STRATEGIES
[CHESS ICON]

The Fund will normally invest at least 80% of its
assets in common stocks and other equity securities.
The Fund's "Sub-Advisor," Morgan Stanley Investments
LP, invests the Fund's assets by pursuing an
investing strategy that combines both value and
growth styles.

The Fund's stock and other equity securities
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 U.S. on a national securities exchange.

- -------------------------
TOTAL RETURN
An investment objective
having the goal of
selecting securities
with the potential to
rise in price and pay
out income.

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

The Sub-Advisor's investment process is designed to identify growing companies
whose stock in the Sub-Advisor's opinion is attractively valued and has low but
rising expectations, and to diversify holdings across market sectors. Individual
securities are selected based on, among other things, quantitative screens and
fundamental research by in-house industry analysts.

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. 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 20% of the Fund's assets may be invested in convertible and
fixed-income securities. In addition, the Fund may utilize forward foreign
currency exchange contracts.

In pursuing the Fund's investment objective, the Sub-Advisor has considerable
leeway in deciding which investments it buys, holds or sells on a day-to-day
basis -- and which trading strategies it uses. For example, the Sub-Advisor in
its discretion may determine to use some permitted trading strategies while not
using others.

PRINCIPAL RISKS
[SCALE ICON]

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.
1

Small and Medium-Sized Companies. The Fund may invest in small and medium-sized
companies. Investing in securities of these companies involves greater risk than
is customarily associated with investing in more established companies. These
companies' stocks may be more volatile and less liquid than the stocks of more
established companies. These stocks may have returns that vary, sometimes
significantly, from the overall stock market.

Foreign Securities. The Fund's investments in foreign securities may 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.

Other Risks. The performance of the Fund also will depend on whether or not the
Sub-Advisor 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 convertible and fixed-income securities and 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.

PAST PERFORMANCE
[CALENDAR ICON]

<Table>

- -------------------------
ANNUAL TOTAL RETURNS -- CALENDAR YEARS
ANNUAL TOTAL RETURNS The bar chart reflects
This chart shows how the the performance of Class
performance of the Fund's Class B shares; the performance
B shares has varied from year of the other Classes will
to year over the past four differ because the
calendar years. 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. Year-to-date
total return as of June
30, 2003 was 10.61%.
</Table>

[BAR CHART]

<Table>

1999 26.78
2000 -10.46
'01 -18.06
'02 -27.52
</Table>

During the periods shown in the bar chart, the highest return for a calendar
quarter was 19.40% (quarter ended December 31, 1999) and the lowest return for a
calendar quarter was -18.55% (quarter ended September 30, 2002).

<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2002)
-----------------------------------------------------------------------------
LIFE OF FUND
(FUND SPECIFIC) PAST 1 YEAR (SINCE 07/29/98)
-----------------------------------------------------------------------------

Class A -- Return Before Taxes -30.82% -8.24%
-----------------------------------------------------------------------------
Class B -- Return Before Taxes -31.15% -8.17%
-----------------------------------------------------------------------------
Class B -- Return After Taxes on
Distributions(1) -31.15% -9.03%
-----------------------------------------------------------------------------
Class B -- Return After Taxes on
Distributions and Sales of Fund
Shares -19.12% -6.33%
-----------------------------------------------------------------------------
Class C -- Return Before Taxes -28.27% -7.75%
-----------------------------------------------------------------------------
Class D -- Return Before Taxes -26.94% -6.91%
-----------------------------------------------------------------------------
The Standard and Poor's 500 Index(2) -22.09% -4.11%
-----------------------------------------------------------------------------
Lipper Large-Cap Core Fund Index(3) -21.23% -4.37%
-----------------------------------------------------------------------------
</Table>

(1) These returns do not reflect any tax
consequences from a sale of 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(R)) 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) Lipper Large-Cap Core Fund Index is an equally
weighted performance index of the largest
qualifying funds (based on net assets) in the
Lipper Large-Cap Core 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.

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

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

The above table shows 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.

[CASH ICON]FEES AND EXPENSES

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

<Table>
<Caption>
CLASS A CLASS B CLASS C CLASS D
------------------------------------------------------------------------------

SHAREHOLDER FEES
------------------------------------------------------------------------------
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) None(2) 5.00%(3) 1.00%(4) None
------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
------------------------------------------------------------------------------
Management fee 0.85% 0.85% 0.85% 0.85%
------------------------------------------------------------------------------
Distribution and service (12b-1) fees 0.25% 1.00% 1.00% None
------------------------------------------------------------------------------
Other expenses 0.44% 0.44% 0.44% 0.44%
------------------------------------------------------------------------------
Total annual Fund operating expenses 1.54% 2.29% 2.29% 1.29%
------------------------------------------------------------------------------
</Table>

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

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

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

(4) Only applicable if you sell your shares within
one year after purchase.

- -------------------------
SHAREHOLDER FEES
These fees are paid
directly from your
investment.

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

ANNUAL FUND OPERATING
EXPENSES
These expenses are
deducted from the Fund's
assets and are based on
expenses paid for the
fiscal year ended May
31, 2003.

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

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.

<Table>
<Caption>
IF YOU SOLD YOUR SHARES: IF YOU HELD YOUR SHARES:
- ------------------------------------------------ -------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------ -------------------------------------

Class A $ 673 $ 986 $1,320 $2,263 $ 673 $ 986 $1,320 $2,263
------------------------------------
- ------------------------------------------------
Class B $ 732 $1,015 $1,425 $2,626 $ 232 $ 715 $1,225 $2,626
------------------------------------
- ------------------------------------------------
Class C $ 332 $ 715 $1,225 $2,626 $ 232 $ 715 $1,225 $2,626
------------------------------------
- ------------------------------------------------
Class D $ 131 $ 409 $ 708 $1,556 $ 131 $ 409 $ 708 $1,556
------------------------------------
- ------------------------------------------------
</Table>

ADDITIONAL INVESTMENT STRATEGY INFORMATION
[CHESS ICON]

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

Convertible and Fixed-Income Securities. The Fund may invest up to 20% of its
assets in (i) convertible securities, (ii) investment grade fixed-income
securities of domestic and foreign companies and governments and international
organizations, and (iii) U.S. government securities.

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 instruments 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 assets in cash or money market instruments in a defensive posture
when the Investment Manager or Sub-Advisor 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.

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 Fund's 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, 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
[SCALE ICON]

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

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. Certain investment grade fixed-income
securities have speculative characteristics. Interest rate risk refers to
fluctuations in the value of a fixed-income security resulting from changes in
the general level of interest rates. When the general level of interest rates
goes up, the prices of most fixed-income securities go down. When the general
level of interest rates goes down, the prices of most fixed-income securities go
up. (Zero coupon securities are typically subject to greater price fluctuations
than comparable securities that pay interest.)

Convertible Securities. The Fund may also 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 fixed-income securities and common stocks. To the extent that a convertible
security's investment value is greater than its conversion value, its price will
likely increase when interest rates fall and decrease when interest rates rise,
as with a fixed-income security. If the conversion value exceeds the investment
value, the price of the convertible security will tend to fluctuate directly
with the price of the underlying equity security. The convertible securities in
which the Fund may invest may be rated below investment grade. Securities rated
below investment grade are commonly known as "junk bonds" and have speculative
credit risk characteristics.

FUND MANAGEMENT
[PEOPLE ICON]

The Fund has retained the Investment
Manager -- Morgan Stanley Investment Advisors
Inc. -- to provide administrative services and
manage its business affairs. The Investment Manager
has, in turn, contracted with the
Sub-Advisor -- Morgan Stanley Investments LP -- to
invest the Fund's assets, including the placing of
orders for the purchase and sale of portfolio
securities. The Investment Manager is a wholly-owned
subsidiary of Morgan Stanley, a preeminent global
financial services firm that maintains leading
market positions in each of its three primary
businesses: securities, asset management and credit
services. Its address is 1221 Avenue of the
Americas, New York, New York 10020. 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 Sub-Advisor manages assets of approximately $385 billion as of June 30, 2003
for investment companies, employee benefit plans, endowments, foundations and
other institutional investors. The Sub-Advisor is an indirect subsidiary of
Morgan Stanley. The Sub-Advisor's address is One Tower Bridge, West
Conshohocken, Pennsylvania.

- -------------------------
MORGAN STANLEY
INVESTMENT ADVISORS INC.
The Investment Manager
is widely recognized as
a leader in the mutual
fund industry and
together with Morgan
Stanley Services Company
Inc., its wholly-owned
subsidiary, had
approximately $115
billion in assets under
management as of June
30, 2003.

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

The Fund's assets are managed within the Large Cap Value team. Current members
of the team include Richard M. Behler, Managing Director of the Sub-Advisor,
Steven Epstein and Brian Kramp, Executive Directors of the Sub-Advisor, Matthew
Levitties and Eric Scharpf, Vice Presidents of the Sub-Advisor and Douglas
Kugler and Matthew Taylor, Senior Associates of the Sub-Advisor.

The Fund pays the Investment Manager a monthly management fee as full
compensation for the services and facilities furnished to the Fund, and for Fund
expenses assumed by the Investment Manager. The fee is based on the Fund's
average daily net assets. For the fiscal year ended May 31, 2003, the Fund
accrued total compensation to the Investment Manager amounting to 0.85% of the
Fund's average daily net assets. The Investment Manager pays the Sub-Advisor
compensation equal to 40% of its compensation for services and facilities
furnished to the Fund.

Shareholder Information

PRICING FUND SHARES
[DOLLAR ICON]

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

An exception to the Fund's general policy of using market prices concerns its
short-term debt portfolio securities. Debt securities with remaining maturities
of 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.

HOW TO BUY SHARES
[HANDS ICON]

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, in its sole discretion, may
allow you to purchase shares directly by calling and
requesting an application.

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

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

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.

<Table>
<Caption>
MINIMUM INVESTMENT AMOUNTS
--------------------------------------------------------------------------------------
MINIMUM INVESTMENT
--------------------------
INVESTMENT OPTIONS INITIAL ADDITIONAL
--------------------------------------------------------------------------------------

Regular Accounts $1,000 $100
--------------------------------------------------------------------------------------
Individual Retirement
Accounts $1,000 $100
--------------------------------------------------------------------------------------
Coverdell Education Savings Account $ 500 $100
--------------------------------------------------------------------------------------
EasyInvest(SM) $ 100* $100*
(Automatically from your
checking or savings account
or Money Market Fund)
--------------------------------------------------------------------------------------
</Table>

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

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

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

There is no minimum investment amount if you purchase Fund shares through: (1)
the Investment Manager's mutual fund asset allocation plan; (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; or (4) employer-sponsored
employee benefit plan accounts.

Investment Options For Certain Institutional and Other Investors/Class D
Shares. To be eligible to purchase Class D shares, you must qualify under one of
the investor categories specified in the "Share Class Arrangements" section of
this Prospectus.

Subsequent Investments Sent Directly to the Fund. In addition to buying
additional Fund shares for an existing account by contacting your Morgan Stanley
Financial Advisor, you may send a check directly to the Fund. To buy additional
shares in this manner:

- - 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).

- - Make out a check for the total amount payable to: Morgan Stanley Equity Fund.

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

HOW TO EXCHANGE SHARES
[ARROWS ICON]

Limited Duration U.S. Treasury Trust, without the imposition of an exchange fee.
In addition, Class A shares of the Fund may be exchanged for shares of an FSC
Fund (funds subject to a front-end sales charge). See the inside back cover of
this Prospectus for each Morgan Stanley Fund's designation as a Multi-Class
Fund, No-Load Fund, Money Market Fund or an FSC Fund. If a Morgan Stanley Fund
is not listed, consult the inside back cover of that fund's current prospectus
for its designation.

Exchanges may be made after shares of the fund acquired by purchase have been
held for 30 days. There is no waiting period for exchanges of shares acquired by
exchange or dividend reinvestment. The current prospectus for each fund
describes its investment objective(s), policies and investment minimums, and
should be read before investment. Since exchanges are available only into
continuously offered Morgan Stanley 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.

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

The Fund may terminate or revise the exchange privilege upon required notice.
The check writing privilege is not available for Money Market Fund shares you
acquire in an exchange.

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

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 limiting or prohibiting, at its discretion, additional purchases and/or
exchanges. Determinations in this regard may be made based on the frequency or
dollar amount of the previous exchanges or purchase or sale transactions. You
will be notified in advance of limitations on your exchange privileges.

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 (800) 869-NEWS.

HOW TO SELL SHARES
[HANDS ICON]

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

<Table>
<Caption>
OPTIONS PROCEDURES

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

CONTACT YOUR To sell your shares, simply call your Morgan Stanley
FINANCIAL ADVISOR Financial Advisor or other authorized financial
[PHONE ICON] 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
[LETTER ICON] instruction" that includes:
- your account number;
- the name of the Fund;
- the dollar amount or the number of shares you wish to
sell;
- the Class of shares you wish to sell; and
- 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 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
WITHDRAWAL PLAN total market value of at least $10,000, you may elect to
[ARROWS ICON] 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.
------------------------------------------------------------
To sign up for the systematic withdrawal plan, contact your
Morgan Stanley Financial Advisor or call (800) 869-NEWS.
You may terminate or suspend your plan at any time. Please
remember that withdrawals from the plan are sales of
shares, not Fund "distributions," and ultimately may
exhaust your account balance. The Fund may terminate or
revise the plan at any time.
- ---------------------------------------------------------------------------------
</Table>

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 IRA or 403(b) Custodial
Account) whose shares, due to sales by the shareholder, have a value below $100,
or in the case of an account opened through EasyInvest (SM), if after 12 months
the shareholder has invested less than $1,000 in the account.

However, before the Fund sells your shares in this manner, we will notify you
and allow you 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.

DISTRIBUTIONS
[CHECK BOX ICON]

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 because distribution fees that Class B and
Class C 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.

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

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 Fund's transfer agent, Morgan Stanley Trust,
at least five business days prior to the record date of the distributions.

[1040 ICON]TAX CONSEQUENCES

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

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

- - The Fund makes distributions; and

- - 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 recently enacted legislation, 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
rate 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.

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 for such year.

[ABCD ICON]SHARE CLASS ARRANGEMENTS

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

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:

<Table>
<Caption>
MAXIMUM
CLASS SALES CHARGE ANNUAL 12b-1 FEE

- ---------------------------------------------------------------------------------------
A Maximum 5.25% initial sales charge reduced for purchase of
$25,000 or more; shares sold without an initial sales charge
are generally subject to a 1.0% CDSC during the first year. 0.25%
- ---------------------------------------------------------------------------------------
B Maximum 5.0% CDSC during the first year decreasing to 0%
after six years. 1.00%
- ---------------------------------------------------------------------------------------
C 1.0% CDSC during first year 1.00%
- ---------------------------------------------------------------------------------------
D None None
- ---------------------------------------------------------------------------------------
</Table>

CLASS A SHARES Class A shares are sold at net asset value plus an initial
sales charge of up to 5.25%. The initial sales charge is reduced for purchases
of $25,000 or more according to the schedule below. Investments of $1 million or
more are not subject to an initial sales charge, but are generally subject to a
contingent deferred sales charge, or CDSC, of 1.0% on sales made within one year
after the last day of the month of purchase. The CDSC will be assessed in the
same manner and with the same CDSC waivers as with Class B shares. Class A
shares are also subject to a distribution (12b-1) fee of up to 0.25% of the
average daily net assets of the Class. This fee is lower than the distribution
fee paid by Class B or Class C.

The Fund will not accept a purchase order for Class A shares that qualifies for
investment in Class D 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:

<Table>
<Caption>
FRONT-END SALES CHARGE
----------------------------------------------
AMOUNT OF PERCENTAGE OF APPROXIMATE PERCENTAGE
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%
--------------------------------------------------------------------------------
</Table>

- -------------------------
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.

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

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

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

- - Family member accounts (limited to husband, wife and children under the age of
21).

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

- - Tax-exempt organizations.

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

Right of Accumulation. You also may benefit from a reduction of sales charges,
if the cumulative net asset value of Class A shares of the Fund purchased in a
single transaction, together with shares of other Morgan Stanley Funds you
currently own which were previously purchased at a price including a front-end
sales charge (or Class A shares purchased at $1 million or more), and shares
acquired through reinvestment of distributions, amounts to $25,000 or more.
Also, if you have a cumulative net asset value of all your Class A and Class D
shares equal to at least $5 million (or $25 million for certain employee benefit
plans), you are eligible to purchase Class D shares of any fund subject to the
fund's minimum initial investment requirement.

You must notify your Morgan Stanley Financial Advisor or other authorized
financial representative (or Morgan Stanley Trust if you purchase directly
through the Fund), at the time a purchase order is placed, that the purchase
qualifies for the reduced sales charge under the Right of Accumulation. Similar
notification must be made in writing when an order is placed by mail. The
reduced sales charge will not be granted if: (i) notification is not furnished
at the time of the order; or (ii) a review of the records of
16

Morgan Stanley DW Inc. ("Morgan Stanley DW") or other authorized dealer of Fund
shares or the Fund's transfer agent does not confirm your represented holdings.

Letter of Intent. The schedule of reduced sales charges for larger purchases
also will be available to you if you enter into a written "Letter of Intent." A
Letter of Intent provides for the purchase of Class A shares of the Fund or
other Multi-Class Funds or shares of FSC Funds within a 13-month period. The
initial purchase under a Letter of Intent must be at least 5% of the stated
investment goal. To determine the applicable sales charge reduction, you may
also include: (1) the cost of shares of other Morgan Stanley Funds which were
previously purchased at a price including a front-end sales charge during the
90-day period prior to the distributor receiving the Letter of Intent, and (2)
the cost of shares of other funds you currently own acquired in exchange for
shares of funds purchased during that period at a price including a front-end
sales charge. You can obtain a Letter of Intent by contacting your Morgan
Stanley Financial Advisor or other authorized financial representative, or by
calling (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.

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:

- - A trust for which a banking affiliate of the Investment Manager provides
discretionary trustee services.

- - 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.

- - 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.

- - Employer-sponsored employee benefit plans, whether or not qualified under the
Internal Revenue Code, for which (i) Morgan Stanley Trust serves as trustee,
(ii) Morgan Stanley's Retirement Plan Services serves as recordkeeper under a
written Recordkeeping Services Agreement or (iii) an entity independent from
Morgan Stanley serves as recordkeeper under an alliance or similar agreement
with Morgan Stanley's Retirement Plan Services (together, "Morgan Stanley
Eligible Plans"), provided that, in the case of (i) and (ii) above, any such
plan has at least 200 eligible employees.

- - 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.

- - Insurance company separate accounts that have been approved by the Fund's
distributor.

- - A client of a Morgan Stanley Financial Advisor who joined us from another
investment firm within six months prior to the date of purchase of Fund
shares, and who used the proceeds from the sale of shares of a proprietary
mutual fund of that Financial Advisor's previous firm that imposed either a
front-end or

deferred sales charge to purchase Class A shares, provided that: (1) the client
sold the shares not more than 60 days prior to the purchase of Fund shares, and
(2) the sale proceeds were maintained in the interim in cash or a Money Market
Fund.

- - 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.

- - 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.

<Table>
<Caption>
CDSC AS A PERCENTAGE
YEAR SINCE PURCHASE PAYMENT MADE OF AMOUNT REDEEMED

----------------------------------------------------------------------------
First 5.0%
----------------------------------------------------------------------------
Second 4.0%
----------------------------------------------------------------------------
Third 3.0%
----------------------------------------------------------------------------
Fourth 2.0%
----------------------------------------------------------------------------
Fifth 2.0%
----------------------------------------------------------------------------
Sixth 1.0%
----------------------------------------------------------------------------
Seventh and thereafter None
----------------------------------------------------------------------------
</Table>

- -------------------------
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.

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

The Fund will generally not accept a purchase order for Class B shares in the
amount of $100,000 or more.

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

- - Sales of shares held at the time you die or become disabled (within the
definition in Section 72(m)(7) of the Internal Revenue Code which relates to
the ability to engage in gainful employment), if the shares are: (i)
registered either in your name (not a trust) or in the names of you and your
spouse as joint tenants with right of survivorship; or (ii) held in a
qualified corporate or self-employed retirement plan, IRA or 403(b) Custodial
Account, provided in either case that the sale is requested within one year of
your death or initial determination of disability.
18

- - Sales in connection with the following retirement plan "distributions": (i)
lump-sum or other distributions from a qualified corporate or self-employed
retirement plan following retirement (or, in the case of a "key employee" of a
"top heavy" plan, following attainment of age 59 1/2); (ii) distributions from
an IRA or 403(b) Custodial Account following attainment of age 59 1/2; or
(iii) a tax-free return of an excess IRA contribution (a "distribution" does
not include a direct transfer of IRA, 403(b) Custodial Account or retirement
plan assets to a successor custodian or trustee).

- - Sales of shares held for you as a participant in a Morgan Stanley Eligible
Plan.

- - 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.

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

Distribution Fee. Class B shares are subject to an annual distribution (12b-1)
fee of 1.0% of the average daily net assets of Class B. This fee is higher than
the annual distribution fee paid by Class A.

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

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

If you exchange your Class B shares for shares of a Money Market Fund, 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.

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 distribution (12b-1) fees you paid
on those shares while in that fund up to the amount of any applicable CDSC.

CLASS C SHARES Class C shares are sold at net asset value with no initial
sales charge but are subject to a CDSC of 1.0% on sales made within one year
after the last day of the month of purchase. The CDSC will be assessed in the
same manner and with the same CDSC waivers as with Class B shares. The Fund will
not accept a purchase order for Class C shares in the amount of $1 million or
more.

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

- - Investors participating in the Investment Manager'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.

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.

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

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

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

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

- - 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.

A purchase order that meets the requirements for investment in Class D 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 that
have been approved by the Fund's distributor (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 and shares of FSC
Funds you currently own, along with shares of Morgan Stanley Funds you currently
own that you acquired in exchange for those shares.

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).

<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------------------
CLASS A SHARES FOR THE PERIOD
FOR THE YEAR ENDED MAY 31, JULY 29, 1998*
--------------------------------------------------------- THROUGH
2003 2002 2001 2000 MAY 31, 1999
- -------------------------------------------------------------------------------------------------------------------

SELECTED PER SHARE DATA:
- -------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.81 $9.74 $12.88 $11.76 $10.00
- -------------------------------------------------------------------------------------------------------------------
Income (loss) from investment
operations:
Net investment income (loss)++ 0.03 (0.01) (0.01) (0.03) 0.01
Net realized and unrealized gain
(loss) (1.03) (1.88) (1.64) 1.22 1.75
------ ------- ------- ------- ------
Total income (loss) from investment
operations (1.00) (1.89) (1.65) 1.19 1.76
- -------------------------------------------------------------------------------------------------------------------
Less distributions from net realized
gain -- (0.04) (1.49) (0.07) --
- -------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $6.81 $7.81 $9.74 $12.88 $11.76
- -------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ (12.80)% (19.46)% (13.59)% 10.12 % 17.60%(1)
- -------------------------------------------------------------------------------------------------------------------

RATIOS TO AVERAGE NET ASSETS(3):
- -------------------------------------------------------------------------------------------------------------------
Expenses 1.54 % 1.35 % 1.27 % 1.29 % 1.38%(2)
- -------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.41 % (0.07)% (0.08)% (0.25)% 0.07%(2)
- -------------------------------------------------------------------------------------------------------------------

SUPPLEMENTAL DATA:
- -------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in
thousands $4,176 $6,608 $10,481 $12,483 $7,933
- -------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 56 % 96 % 162 % 184 % 80%(1)
- -------------------------------------------------------------------------------------------------------------------
</Table>

* Commencement of operations.

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

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

(1) Not annualized.

(2) Annualized.

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

<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------------------
CLASS B SHARES FOR THE PERIOD
FOR THE YEAR ENDED MAY 31, JULY 29, 1998*
--------------------------------------------------------- THROUGH
2003 2002 2001 2000 MAY 31, 1999
- -------------------------------------------------------------------------------------------------------------------

SELECTED PER SHARE DATA:
- -------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.57 $9.51 $12.71 $11.69 $10.00
- -------------------------------------------------------------------------------------------------------------------
Income (loss) from investment
operations:
Net investment loss++ (0.02) (0.07) (0.10) (0.12) (0.07)
Net realized and unrealized gain
(loss) (1.00) (1.83) (1.61) 1.21 1.76
-------- -------- -------- -------- ---------
Total income (loss) from investment
operations (1.02) (1.90) (1.71) 1.09 1.69
- -------------------------------------------------------------------------------------------------------------------
Less distributions from net realized
gain -- (0.04) (1.49) (0.07) --
- -------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $6.55 $7.57 $9.51 $12.71 $11.69
- -------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ (13.47)% (20.03)% (14.28)% 9.32 % 16.90 %(1)
- -------------------------------------------------------------------------------------------------------------------

RATIOS TO AVERAGE NET ASSETS(3):
- -------------------------------------------------------------------------------------------------------------------
Expenses 2.29 % 2.10 % 2.04 % 2.04 % 2.13 %(2)
- -------------------------------------------------------------------------------------------------------------------
Net investment loss (0.34)% (0.82)% (0.85)% (1.00)% (0.68)%(2)
- -------------------------------------------------------------------------------------------------------------------

SUPPLEMENTAL DATA:
- -------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in
thousands $107,680 $184,612 $303,227 $374,215 $273,345
- -------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 56 % 96 % 162 % 184 % 80 %(1)
- -------------------------------------------------------------------------------------------------------------------
</Table>

* Commencement of operations.

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

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

(1) Not annualized.

(2) Annualized.

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

Financial Highlights, continued

<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------------------
CLASS C SHARES FOR THE PERIOD
FOR THE YEAR ENDED MAY 31, JULY 29, 1998*
--------------------------------------------------------- THROUGH
2003 2002 2001 2000 MAY 31, 1999
- -------------------------------------------------------------------------------------------------------------------

SELECTED PER SHARE DATA:
- -------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.60 $9.54 $12.73 $11.70 $10.00
- -------------------------------------------------------------------------------------------------------------------
Income (loss) from investment
operations:
Net investment loss++ (0.02) (0.06) (0.09) (0.12) (0.04)
Net realized and unrealized gain
(loss) (1.01) (1.84) (1.61) 1.22 1.74
-------- -------- -------- --------- ----------
Total income (loss) from investment
operations (1.03) (1.90) (1.70) 1.10 1.70
- -------------------------------------------------------------------------------------------------------------------
Less distributions from net realized
gain -- (0.04) (1.49) (0.07) --
- -------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $6.57 $7.60 $9.54 $12.73 $11.70
- -------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ (13.55)% (19.97)% (14.17)% 9.31 % 17.10 %(1)
- -------------------------------------------------------------------------------------------------------------------

RATIOS TO AVERAGE NET ASSETS(3):
- -------------------------------------------------------------------------------------------------------------------
Expenses 2.29 % 2.01 % 1.96 % 2.04 % 1.91 %(2)
- -------------------------------------------------------------------------------------------------------------------
Net investment loss (0.34)% (0.73)% (0.77)% (1.00)% (0.46)%(2)
- -------------------------------------------------------------------------------------------------------------------

SUPPLEMENTAL DATA:
- -------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in
thousands $7,872 $13,156 $19,604 $24,711 $15,744
- -------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 56 % 96 % 162 % 184 % 80 %(1)
- -------------------------------------------------------------------------------------------------------------------
</Table>

* Commencement of operations.

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

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

(1) Not annualized.

(2) Annualized.

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

<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------------------
CLASS D SHARES FOR THE PERIOD
FOR THE YEAR ENDED MAY 31, JULY 29, 1998*
--------------------------------------------------------- THROUGH
2003 2002 2001 2000 MAY 31, 1999
- -------------------------------------------------------------------------------------------------------------------

SELECTED PER SHARE DATA:
- -------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.89 $9.82 $12.95 $11.79 $10.00
- -------------------------------------------------------------------------------------------------------------------
Income (loss) from investment
operations:
Net investment income (loss)++ 0.04 0.01 0.02 (0.01) 0.03
Net realized and unrealized gain
(loss) (1.03) (1.90) (1.66) 1.24 1.76
-------- -------- -------- -------- --------
Total income (loss) from investment
operations (0.99) (1.89) (1.64) 1.23 1.79
- -------------------------------------------------------------------------------------------------------------------
Less distributions from net realized
gain -- (0.04) (1.49) (0.07) --
- -------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $6.90 $7.89 $9.82 $12.95 $11.79
- -------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ (12.55)% (19.30)% (13.43)% 10.43% 17.90%(1)
- -------------------------------------------------------------------------------------------------------------------

RATIOS TO AVERAGE NET ASSETS(3):
- -------------------------------------------------------------------------------------------------------------------
Expenses 1.29 % 1.10 % 1.04 % 1.04% 1.13%(2)
- -------------------------------------------------------------------------------------------------------------------
Net investment income 0.66 % 0.18 % 0.15 % 0.00% 0.32%(2)
- -------------------------------------------------------------------------------------------------------------------

SUPPLEMENTAL DATA:
- -------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in
thousands $6,486 $8,230 $8,888 $5,339 $69
- -------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 56 % 96 % 162 % 184% 80%(1)
- -------------------------------------------------------------------------------------------------------------------
</Table>

* Commencement of operations.

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

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

(1) Not annualized.

(2) Annualized.

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

Notes

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

Notes

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

Notes

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

MORGAN STANLEY FUNDS
- --------------------------------------------------------------------------------

<Table>

- - GLOBAL/INTERNATIONAL FUNDS - GROWTH + INCOME FUNDS - SPECIALTY FUNDS
European Growth Fund Biotechnology Fund
Fund of Funds - International Portfolio Allocator Fund Financial Services Trust
Global Advantage Fund Balanced Growth Fund Global Utilities Fund
Global Dividend Growth Securities Balanced Income Fund Health Sciences Trust
International Fund Convertible Securities Trust Information Fund
International SmallCap Fund Dividend Growth Securities Natural Resource Development Securities
International Value Equity Fund Equity Fund Real Estate Fund
Japan Fund Fund of Funds - Domestic Portfolio Technology Fund
Latin American Growth Fund Fundamental Value Fund Utilities Fund
Pacific Growth Fund Income Builder Fund - TAX-FREE INCOME FUNDS
- - GROWTH FUNDS Mid-Cap Value Fund
California Tax-Free Daily Income Trust (MM)
S&P 500 Index Fund
21st Century Trend Fund California Tax-Free Income Fund
Strategist Fund
Aggressive Equity Fund Hawaii Municipal Trust (FSC)
Total Market Index Fund
All Star Growth Fund Limited Term Municipal Trust (NL)
Total Return Trust
American Opportunities Fund Multi-State Municipal Series Trust (FSC)
Value Fund
Capital Opportunities Trust New York Municipal Money Market Trust (MM)
Value-Added Market Series -
Developing Growth Securities Trust Equity Portfolio New York Tax-Free Income Fund
Growth Fund - INCOME FUNDS Tax-Exempt Securities Trust
KLD Social Index Fund Tax-Free Daily Income Trust (MM)
Federal Securities Trust
Market Leader Trust
Flexible Income Trust
Nasdaq-100 Index Fund
High Yield Securities
New Discoveries Fund
Limited Duration Fund(NL)
Next Generation Trust
Limited Duration U.S. Treasury
Small-Mid Special Value Fund Trust
Special Growth Fund Liquid Asset Fund (MM)
Special Value Fund Quality Income Trust
Tax-Managed Growth Fund U.S. Government Money Market
Trust (MM)
U.S. Government Securities Trust
</Table>

- --------------------------------------------------------------------------------
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
designation, e.g., Multi-Class Fund or Money Market Fund.

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

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

(800) 869-NEWS

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

www.morganstanley.com/funds

Information about the Fund (including the Statement of Additional
Information) can be viewed and copied at the Securities and Exchange
Commission's Public Reference Room in Washington, DC. Information about
the Reference Room's operations may be obtained by calling the SEC at
(202) 942-8090. Reports and other information about the Fund are
available on the EDGAR Database on the SEC's Internet site (www.sec.gov),
and copies of this information may be obtained, after paying a
duplicating fee, by electronic request at the following E-mail address:
publicinfo@sec.gov, or by writing the Public Reference Section of the
SEC, Washington, DC 20549-0102.

TICKER SYMBOLS:

<Table>

Class A: EQFAX Class C: EQFCX
--------------------- --------------------
Class B: EQFBX Class D: EQFDX
--------------------- --------------------
</Table>

(THE FUND'S INVESTMENT COMPANY ACT FILE NO. IS 811-8739)

CLF #36035

[MORGAN STANLEY LOGO]

Morgan Stanley
Equity Fund

[EQUITY FUND GRAPHIC]

A mutual fund that seeks
total return

Prospectus July 30, 2003
</Table>

Morgan Stanley Equity Fund
LETTER TO THE SHAREHOLDERS - MAY 31, 2003

Dear Shareholder:

The 12-month period ended May 31, 2003, began with growing fears of a double-dip
recession. Gross domestic product (GDP) had slowed sharply from its
unsustainable first quarter rate of 5.8 percent. By June 2002, legitimate
questions had arisen concerning the path of corporate earnings, the vitality of
capital spending, and the sustainability of consumer confidence. Raw materials
price strength, low interest rates and pro-growth monetary and fiscal
policymakers buoyed an outlook for modest economic growth. The double-dip
recession did not occur as feared and the economy grew modestly throughout the
period under review and continues to show signs of improvement.

During the period under review, the stock market disengaged from the economic
recovery and, by October 2002, had fallen to a cyclical low. Disappointing
corporate earnings and wide-scale downward earnings forecasts propelled the
market's decline. Buying optimism appeared to be sapped by recurrent concerns
about corporate accounting, bankruptcy filings, corporate-governance scandals
and persistent fear of a potential economic retrenchment resulting from a
possible war with Iraq. Following the October 9 low, however, the stock market
rallied. Following a temporary, war-related pause, the stock market ended this
reporting period recovering strongly from the October bottom. By May 31, 2003,
the Standard & Poor's 500 Index (S&P 500) had rebounded nearly 26 percent from
its October low.

Performance and Portfolio Strategy

For the 12-month period ended May 31, 2003, Morgan Stanley Equity Fund's Class
A, B, C and D shares returned -12.80 percent, -13.47 percent, -13.55 percent and
- -12.55 percent, respectively. During the same period, the S&P 500 posted a
return of -8.06 percent, while the Lipper Large-Cap Core Funds Index returned
- -8.74 percent. The performance of the Fund's four share classes varies because
each has different expenses. The total return figures given assume the
reinvestment of all distributions but do not reflect the deduction of any
applicable sales charges. If sales charges were included, performance would be
lower. Past performance is no guarantee of future results.

According to Morgan Stanley Investments LP, the Fund's sub-advisor, the Fund
underperformed the S&P 500 due largely to poor results in the first half of the
period, caused primarily by its holdings in the technology and energy sectors.

The Fund began the period with an overweighting in both value-oriented cyclical
stocks and growth cyclicals. The sub-advisor believes that this positioning was
consistent with the underlying economic recovery and the steady improvement in
the absolute and relative forward earnings

Morgan Stanley Equity Fund
LETTER TO THE SHAREHOLDERS - MAY 31, 2003 continued

estimates of these types of stocks. The sub-advisor trimmed relatively
higher-beta (riskier) positions in oil-well equipment and service, and offshore
drilling companies and technology (sharply reducing or eliminating semicapital
equipment manufacturers and semiconductor positions.) The sub-advisor also
reduced the Fund's exposure to publishing and broadcasting and replaced
trading-sensitive electric power exposure with distribution-dependent utilities.
The sub-advisor added to the Fund's strategic emphasis on banks and consumer
credit. Within the remaining energy exposure, the Fund added what it believed to
be less-volatile international oil stocks. The sub-advisor also boosted select
defensive growth positions by adding to existing positions.

We appreciate your ongoing support of Morgan Stanley Equity Fund and look
forward to continuing to serve your investment needs.

<Table>

Very truly yours,

/s/ CHARLES A. FIUMEFREDDO /s/ MITCHELL M. MERIN
Charles A. Fiumefreddo Mitchell M. Merin
Chairman of the Board President
</Table>

Morgan Stanley Equity Fund
MISCELLANEOUS INFORMATION - MAY 31, 2003 continued

ANNUAL HOUSEHOLDING NOTICE

To reduce printing and mailing costs, the Fund attempts to eliminate duplicate
mailings to the same address. The Fund delivers a single copy of certain
shareholder documents including shareholder reports, prospectuses and proxy
materials to investors with the same last name and who reside at the same
address. Your participation in this program will continue for an unlimited
period of time, unless you instruct us otherwise. You can request multiple
copies of these documents by calling (800) 350-6414, 8:00 am to 8:00 pm, ET.
Once our Customer Service Center has received your instructions, we will begin
sending individual copies for each account within 30 days.

PROXY VOTING POLICIES AND PROCEDURES

A description of the Fund's policies and procedures with respect to the voting
of proxies relating to the Fund's portfolio securities is available without
charge, upon request, by calling (800) 869-NEWS. This information is also
available on the Securities and Exchange Commission's website at
http://www.sec.gov.

Morgan Stanley Equity Fund
FUND PERFORMANCE - MAY 31, 2003

GROWTH OF $10,000
($ in Thousands)

[LINE GRAPH]
<Table>
<Caption>
CLASS A CLASS B CLASS C CLASS D S&P 500
------- ------- ------- ------- -------

July 29, 1998 9475.00 10000.00 10000.00 10000.00 10000.00
August 31, 1998 7788.00 8220.00 8220.00 8230.00 8518.00
November 30, 1998 9267.00 9750.00 9750.00 9780.00 10395.00
February 28, 1999 9987.00 10500.00 10500.00 10560.00 11098.00
May 31, 1999 11143.00 11690.00 11710.00 11790.00 11706.00
August 31, 1999 10839.00 11350.00 11370.00 11470.00 11910.00
November 30, 1999 11522.00 12030.00 12070.00 12200.00 12567.00
February 29, 2000 12099.00 12619.00 12639.00 12819.00 12399.00
May 31, 2000 12270.00 12780.00 12800.00 13020.00 12932.00
August 31, 2000 13185.00 13705.00 13725.00 13996.00 13852.00
November 30, 2000 11299.00 11724.00 11744.00 12005.00 12035.00
February 28, 2001 10701.00 11070.00 11101.00 11363.00 11382.00
May 31, 2001 10603.00 10955.00 10986.00 11271.00 11566.00
August 31, 2001 9460.00 9757.00 9789.00 10066.00 10474.00
November 30, 2001 9362.00 9630.00 9662.00 9963.00 10565.00
February 28, 2002 8868.00 9107.00 9128.00 9442.00 10301.00
May 31, 2002 8540.00 8760.00 8792.00 9096.00 9966.00
August 31, 2002 7162.00 7325.00 7358.00 7632.00 8591.00
November 30, 2002 7217.00 7371.00 7404.00 7701.00 8822.00
February 28, 2003 6506.00 6631.00 6652.00 6940.00 7965.00
May 31, 2003 7446.00 7449.00 7601.00 7995.00 9163.00

LIPPER
------

July 29, 1998 10000.00
August 31, 1998 8480.00
November 30, 1998 10138.00
February 28, 1999 10844.00
May 31, 1999 11275.00
August 31, 1999 11437.00
November 30, 1999 12098.00
February 29, 2000 12377.00
May 31, 2000 12683.00
August 31, 2000 13835.00
November 30, 2000 11808.00
February 28, 2001 11147.00
May 31, 2001 11321.00
August 31, 2001 10221.00
November 30, 2001 10301.00
February 28, 2002 10082.00
May 31, 2002 9808.00
August 31, 2002 8522.00
November 30, 2002 8662.00
February 28, 2003 7885.00
May 31, 2003 8951.00
</Table>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH
LESS THAN THEIR ORIGINAL COST. THE GRAPH AND TABLE DO NOT REFLECT THE DEDUCTION
OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF
FUND SHARES. PERFORMANCE FOR CLASS A, CLASS B, CLASS C, AND CLASS D SHARES WILL
VARY DUE TO DIFFERENCES IN SALES CHARGES AND EXPENSES.

AVERAGE ANNUAL TOTAL RETURNS - PERIOD ENDED MAY 31, 2003
- --------------------------------------------------------------------------------

<Table>
<Caption>
CLASS A SHARES*
- -------------------------------------------------------

1 Year (12.80)%(1) (17.38)%(2)
Since Inception (7/29/98) (4.86)%(1) (5.91)%(2)

CLASS B SHARES**
- -------------------------------------------------------

1 Year (13.47)%(1) (17.80)%(2)
Since Inception (7/29/98) (5.57)%(1) (5.91)%(2)

CLASS C SHARES+
- -------------------------------------------------------

1 Year (13.55)%(1) (14.42)%(2)
Since Inception (7/29/98) (5.51)%(1) (5.51)%(2)

CLASS D SHARES++
- -------------------------------------------------------

1 Year (12.55)%(1)
Since Inception (7/29/98) (4.62)%(1)
</Table>

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

(1) Figure shown assumes reinvestment of all distributions and
does not reflect the deduction of any sales charges.
(2) Figure shown assumes reinvestment of all distributions and
the deduction of the maximum applicable sales charge. See
the Fund's current prospectus for complete details on fees
and sales charges.
(3) Closing value assuming a complete redemption on May 31,
2003.
(4) The Standard and Poor's 500 Index (S&P 500(R)) 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.
(5) The Lipper Large-Cap Core Fund Index is an equally weighted
performance index of the largest qualifying funds (based on
net assets) in the Lipper Large-Cap Core 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 maximum front-end sales charge for Class A is 5.25%.
** The maximum contingent deferred sales charge (CDSC) for
Class B is 5.0%. The CDSC declines to 0% after six years.
+ The maximum contingent deferred sales charge for Class C is
1% for shares redeemed within one year of purchase.
++ Class D has no sales charge.

Morgan Stanley Equity Fund
PORTFOLIO OF INVESTMENTS - MAY 31, 2003

<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------

Common Stocks (97.2%)
Aerospace & Defense
(1.2%)
23,300 Boeing Co. .............. $ 714,611
8,900 Northrop Grumman
Corp. .................. 782,755
------------
1,497,366
------------
Auto Parts: O.E.M. (1.7%)
101,800 Delphi Corp. ............ 897,876
15,200 Johnson Controls,
Inc. ................... 1,265,400
------------
2,163,276
------------
Beverages: Non-Alcoholic
(2.4%)
65,100 Coca Cola Co. (The)...... 2,966,607
------------
Building Products (0.7%)
34,000 Masco Corp. ............. 836,400
------------
Chemicals: Major
Diversified (1.0%)
51,300 Engelhard Corp. ......... 1,290,195
------------
Chemicals: Specialty
(1.4%)
40,900 Air Products & Chemicals,
Inc. ................... 1,782,831
------------
Computer Communications
(0.7%)
53,700 Cisco Systems, Inc.*..... 874,236
------------
Computer Processing
Hardware (2.7%)
17,100 Dell Computer Corp.*..... 535,059
131,600 Hewlett-Packard Co. ..... 2,566,200
64,900 Sun Microsystems,
Inc.*................... 281,017
------------
3,382,276
------------
Contract Drilling (0.3%)
14,400 GlobalSantaFe Corp. ..... 358,272
------------
Discount Stores (5.0%)
72,900 Target Corp. ............ 2,670,327
70,100 Wal-Mart Stores, Inc. ... 3,687,961
------------
6,358,288
------------
</Table>

<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------

Drugstore Chains (0.4%)
18,000 CVS Corp. ............... $ 469,800
------------
Electric Utilities (1.7%)
37,800 Exelon Corp. ............ 2,165,940
------------
Electrical Products
(0.9%)
29,700 Cooper Industries, Ltd.
(Class A)............... 1,184,733
------------
Finance/Rental/ Leasing
(4.7%)
10,200 Fannie Mae............... 754,800
43,200 Freddie Mac.............. 2,583,792
130,900 MBNA Corp. .............. 2,624,545
------------
5,963,137
------------
Financial Conglomerates
(2.9%)
70,300 Citigroup, Inc. ......... 2,883,706
25,600 Principal Financial
Group, Inc. ............ 813,056
------------
3,696,762
------------
Food Retail (0.5%)
39,200 Kroger Co. (The)*........ 629,160
------------
Food: Major Diversified
(1.3%)
28,000 Unilever N.V.
(Netherlands)........... 1,638,000
------------
Home Improvement Chains
(2.5%)
95,900 Home Depot, Inc. (The)... 3,115,791
------------
Household/Personal Care
(2.7%)
33,200 Avon Products, Inc. ..... 2,023,208
15,200 Procter & Gamble Co. .... 1,395,664
------------
3,418,872
------------
Industrial Conglomerates
(9.1%)
160,300 General Electric Co. .... 4,600,610
72,100 Honeywell International,
Inc. ................... 1,889,020
</Table>

See Notes to Financial Statements
5

Morgan Stanley Equity Fund
PORTFOLIO OF INVESTMENTS - MAY 31, 2003 continued

<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------

177,600 Tyco International Ltd.
(Bermuda)............... $ 3,143,520
27,300 United Technologies
Corp. .................. 1,863,225
------------
11,496,375
------------
Information Technology
Services (2.5%)
57,700 Accenture Ltd. (Class A)
(Bermuda)*.............. 1,010,904
24,000 International Business
Machines Corp. ......... 2,112,960
------------
3,123,864
------------
Integrated Oil (2.1%)
39,200 Exxon Mobil Corp. ....... 1,426,880
28,000 Royal Dutch Petroleum Co.
(Netherlands)........... 1,275,400
------------
2,702,280
------------
Internet Software/
Services (1.0%)
68,700 Check Point Software
Technologies Ltd.
(Israel)*............... 1,291,560
------------
Investment Banks/ Brokers
(2.5%)
9,600 Goldman Sachs Group, Inc.
(The)................... 782,400
7,700 Lehman Brothers Holdings,
Inc. ................... 551,551
40,800 Merrill Lynch & Co.,
Inc. ................... 1,766,640
------------
3,100,591
------------
Investment Managers
(1.4%)
64,700 Mellon Financial
Corp. .................. 1,757,899
------------
Major Banks (8.4%)
58,100 Bank of America Corp. ... 4,311,020
64,600 Comerica, Inc. .......... 2,989,042
57,100 PNC Financial Services
Group................... 2,812,175
11,000 Wachovia Corp............ 441,980
------------
10,554,217
------------
</Table>

<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------

Major Telecommunications
(2.4%)
34,800 SBC Communications,
Inc. ................... $ 886,008
56,600 Verizon Communications
Inc. ................... 2,142,310
------------
3,028,318
------------
Media Conglomerates
(2.5%)
35,400 AOL Time Warner Inc.*.... 538,788
31,700 Disney (Walt) Co.
(The)................... 622,905
43,300 Viacom, Inc. (Class
B)*..................... 1,971,016
------------
3,132,709
------------
Motor Vehicles (0.2%)
7,000 General Motors Corp. .... 247,310
------------
Multi-Line Insurance
(1.2%)
16,900 American International
Group, Inc. ............ 978,172
11,300 Hartford Financial
Services Group, Inc.
(The)................... 527,032
------------
1,505,204
------------
Oil Refining/Marketing
(2.2%)
38,100 Total S.A. (ADR)
(France)................ 2,802,255
------------
Packaged Software (5.1%)
39,400 BMC Software, Inc.*...... 668,224
194,700 Microsoft Corp. ......... 4,791,567
74,300 Oracle Corp.*............ 966,643
------------
6,426,434
------------
Pharmaceuticals: Major
(10.6%)
89,500 Bristol-Myers Squibb
Co. .................... 2,291,200
56,300 Merck & Co., Inc. ....... 3,129,154
114,700 Pfizer, Inc. ............ 3,557,994
71,500 Schering-Plough Corp. ... 1,319,175
69,900 Wyeth.................... 3,065,115
------------
13,362,638
------------
Property - Casualty
Insurers (0.9%)
67,700 Travelers Property
Casualty Corp. (Class
A)...................... 1,105,541
</Table>

See Notes to Financial Statements
6

Morgan Stanley Equity Fund
PORTFOLIO OF INVESTMENTS - MAY 31, 2003 continued

<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------

2,900 Travelers Property
Casualty Corp. (Class
B)...................... $ 46,893
------------
1,152,434
------------
Pulp & Paper (0.9%)
32,300 International Paper
Co. .................... 1,184,441
------------
Regional Banks (2.5%)
133,300 U.S. Bancorp............. 3,159,210
------------
Semiconductors (1.2%)
19,200 Analog Devices, Inc.*.... 740,160
17,200 Intel Corp. ............. 358,448
11,900 Maxim Integrated
Products, Inc. ......... 466,599
------------
1,565,207
------------
Telecommunications
Equipment (2.1%)
91,700 Motorola, Inc. .......... 781,284
83,700 Nokia Corp. (ADR)
(Finland)............... 1,509,948
11,500 QUALCOMM Inc. ........... 386,170
------------
2,677,402
------------
Tobacco (2.3%)
68,900 Altria Group, Inc. ...... 2,845,570
------------
Trucks/Construction/Farm
Machinery (1.4%)
33,600 Caterpillar, Inc. ....... 1,752,240
------------
Total Common Stocks
(Cost $127,721,942)...... 122,660,100
------------
</Table>

<Table>
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ------------------------------------------------------

Short-Term Investment (2.8%)
Repurchase Agreement
$ 3,552 Joint repurchase
agreement account 1.325%
due 06/02/03 (dated
05/30/03; proceeds
$3,552,392) (a)
(Cost $3,552,000)....... $ 3,552,000
------------

Total Investments
(Cost $131,273,942) (b)..... 100.0% 126,212,100
Other Assets in Excess of
Liabilities................. 0.0 2,333
----- ------------
Net Assets.................. 100.0% $126,214,433
===== ============
</Table>

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

<Table>

ADR American Depository Receipt.
* Non-income producing security.
(a) Collateralized by federal agency and U.S. Treasury
obligations.
(b) The aggregate cost for federal income tax purposes
is $134,166,386. The aggregate gross unrealized
appreciation is $7,767,330 and the aggregate gross
unrealized depreciation is $15,721,616, resulting
in net unrealized depreciation of $7,954,286.
</Table>

See Notes to Financial Statements
7

Morgan Stanley Equity Fund
FINANCIAL STATEMENTS

Statement of Assets and Liabilities
May 31, 2003

<Table>

Assets:
Investments in securities, at value
(cost $131,273,942)........................................ $126,212,100
Receivable for:
Dividends............................................... 254,629
Shares of beneficial interest sold...................... 68,110
Foreign withholding taxes reclaimed..................... 5,138
Prepaid expenses and other assets........................... 76,010
-------------
Total Assets............................................ 126,615,987
-------------
Liabilities:
Payable for:
Shares of beneficial interest redeemed.................. 135,890
Distribution fee........................................ 97,113
Investment management fee............................... 89,262
Accrued expenses and other payables......................... 79,289
-------------
Total Liabilities....................................... 401,554
-------------
Net Assets.............................................. $126,214,433
=============
Composition of Net Assets:
Paid-in-capital............................................. $255,852,250
Net unrealized depreciation................................. (5,061,842)
Accumulated net realized loss............................... (124,575,975)
-------------
Net Assets.............................................. $126,214,433
=============
Class A Shares:
Net Assets.................................................. $4,176,277
Shares Outstanding (unlimited authorized, $.01 par value)... 613,281
Net Asset Value Per Share............................... $6.81
=====
Maximum Offering Price Per Share,
(net asset value plus 5.54% of net asset value)........ $7.19
=====
Class B Shares:
Net Assets.................................................. $107,680,291
Shares Outstanding (unlimited authorized, $.01 par value)... 16,447,779
Net Asset Value Per Share............................... $6.55
=====
Class C Shares:
Net Assets.................................................. $7,871,633
Shares Outstanding (unlimited authorized, $.01 par value)... 1,197,719
Net Asset Value Per Share............................... $6.57
=====
Class D Shares:
Net Assets.................................................. $6,486,232
Shares Outstanding (unlimited authorized, $.01 par value)... 940,143
Net Asset Value Per Share............................... $6.90
=====
</Table>

See Notes to Financial Statements
8

Morgan Stanley Equity Fund
FINANCIAL STATEMENTS continued

Statement of Operations
For the year ended May 31, 2003

<Table>

Net Investment Loss:
Income
Dividends (net of $36,356 foreign withholding tax).......... $ 2,739,652
Interest.................................................... 11,210
------------
Total Income............................................ 2,750,862
------------
Expenses
Distribution fee (Class A shares)........................... 11,127
Distribution fee (Class B shares)........................... 1,218,001
Distribution fee (Class C shares)........................... 89,250
Investment management fee................................... 1,198,948
Transfer agent fees and expenses............................ 345,199
Professional fees........................................... 63,677
Custodian fees.............................................. 63,359
Shareholder reports and notices............................. 62,008
Registration fees........................................... 59,715
Trustees' fees and expenses................................. 13,657
Other....................................................... 9,479
------------
Total Expenses.......................................... 3,134,420
------------
Net Investment Loss..................................... (383,558)
------------
Net Realized and Unrealized Loss:
Net realized loss........................................... (30,520,188)
Net change in unrealized depreciation....................... (1,109,467)
------------
Net Loss................................................ (31,629,655)
------------
Net Decrease................................................ $(32,013,213)
============
</Table>

See Notes to Financial Statements
9

Morgan Stanley Equity Fund
FINANCIAL STATEMENTS continued

Statement of Changes in Net Assets

<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
MAY 31, 2003 MAY 31, 2002
------------ -------------

Increase (Decrease) in Net Assets:
Operations:
Net investment loss......................................... $ (383,558) $ (2,058,450)
Net realized loss........................................... (30,520,188) (36,807,159)
Net change in unrealized depreciation....................... (1,109,467) (24,229,573)
------------ -------------
Net Decrease............................................ (32,013,213) (63,095,182)
------------ -------------
Distributions to Shareholders from Net Realized Gain:
Class A shares.............................................. -- (36,175)
Class B shares.............................................. -- (1,047,547)
Class C shares.............................................. -- (70,366)
Class D shares.............................................. -- (31,602)
------------ -------------
Total Distributions..................................... -- (1,185,690)
------------ -------------

Net decrease from transactions in shares of beneficial
interest.................................................. (54,378,727) (65,311,885)
------------ -------------
Net Decrease............................................ (86,391,940) (129,592,757)
Net Assets:
Beginning of period......................................... 212,606,373 342,199,130
------------ -------------
End of Period............................................... $126,214,433 $ 212,606,373
============ =============
</Table>

See Notes to Financial Statements
10

Morgan Stanley Equity Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2003

1. Organization and Accounting Policies

Morgan Stanley Equity Fund (the "Fund") is registered under the Investment
Company Act of 1940, as amended (the "Act"), as a diversified, open-end
management investment company. The Fund's investment objective is total return.
The Fund seeks to achieve its objective by investing at least 80% of its assets
in equity securities. The Fund was organized as a Massachusetts business trust
on April 6, 1998 and commenced operations on July 29, 1998.

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

The following is a summary of significant accounting policies:

A. Valuation of Investments -- (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; (3) all other equity 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; (4) 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; (5) when market quotations are not readily available or Morgan
Stanley Investment Advisors Inc. (the "Investment Manager") or Morgan Stanley
Investments, LP (the "Sub-Advisor"), an affiliate of the Investment Manager,
determines that the latest sale price, the bid price or the mean between the
last reported bid and asked price do not reflect 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; (6) certain portfolio securities may be valued by an outside pricing
service approved by the Fund's Trustees; and (7) short-term debt securities
having a maturity date of more than sixty days at time of purchase are valued on
a mark-to-market basis until sixty days prior to maturity and thereafter at
amortized cost based on their value on the

Morgan Stanley Equity Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2003 continued

61st day. Short-term debt securities having a maturity date of sixty days or
less at the time of purchase are valued at amortized cost.

B. Accounting for Investments -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date.
Discounts are accreted and premiums are amortized over the life of the
respective securities. Interest income is accrued daily.

C. Repurchase Agreements -- Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other affiliated
entities managed by the Investment Manager, may transfer uninvested cash
balances into one or more joint repurchase agreement accounts. These balances
are invested in one or more repurchase agreements and are collateralized by
cash, U.S. Treasury or federal agency obligations. The Fund may also invest
directly with institutions in repurchase agreements. The Fund's custodian
receives the collateral, which is marked-to-market daily to determine that the
value of the collateral does not decrease below the repurchase price plus
accrued interest.

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

E. Federal Income Tax Policy -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Accordingly, no federal income tax provision is required.

F. Dividends and Distributions to Shareholders -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.

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

2. Investment Management and Sub-Advisory Agreements

Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, accrued daily and payable monthly, by applying the
following annual rates to

Morgan Stanley Equity Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2003 continued

the net assets of the Fund determined as of the close of each business day:
0.85% to the portion of daily net assets not exceeding $500 million; 0.825% to
the portion of daily net assets exceeding $500 million but not exceeding $1.0
billion; and 0.80% to the portion of daily net assets in excess of $1.0 billion.

Under a Sub-Advisory Agreement between the Sub-Advisor and the Investment
Manager, the Sub-Advisor provides the Fund with investment advice and portfolio
management relating to the Fund's investments in securities, subject to the
overall supervision of the Investment Manager. As compensation for its services
provided pursuant to the Sub-Advisory Agreement, the Investment Manager pays the
Sub-Advisor compensation equal to 40% of its monthly compensation.

3. Plan of Distribution

Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the
"Distributor"), an affiliate of the Investment Manager and Sub-Advisor. The Fund
has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the
Act. The Plan provides that the Fund will pay the Distributor a fee which is
accrued daily and paid monthly at the following annual rates: (i) Class A -- up
to 0.25% of the average daily net assets of Class A; (ii) Class B -- 1.0% of the
average daily net assets of Class B; and (iii) Class C -- up to 1.0% of the
average daily net assets of Class C.

In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts totaled
$13,266,252 at May 31, 2003.

Morgan Stanley Equity Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2003 continued

year ended May 31, 2003, the distribution fee was accrued for Class A shares and
Class C shares at the annual rate of 0.25% and 1.0%, respectively.

The Distributor has informed the Fund that for the year ended May 31, 2003, it
received contingent deferred sales charges from certain redemptions of the
Fund's Class A shares, Class B shares and Class C shares of $48, $418,696 and
$945, respectively and received $6,186 in front-end sales charges from sales of
the Fund's Class A shares. The respective shareholders pay such charges which
are not an expense of the Fund.

4. Security Transactions and Transactions with Affiliates

The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended May 31, 2003 aggregated $79,555,024
and $136,137,049, respectively.

Morgan Stanley Trust, an affiliate of the Investment Manager, Distributor and
Sub-Advisor, is the Fund's transfer agent. At May 31, 2003 the Fund had transfer
agent fees and expenses payable of approximately $1,400.

5. Federal Income Tax Status

The tax character of distributions paid was as follows:

<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
MAY 31, 2003 MAY 31, 2002
------------ ------------

Long-term capital gains............ -- $1,185,690
</Table>

Morgan Stanley Equity Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2003 continued

As of May 31, 2003, the tax-basis components of accumulated losses were as
follows:

<Table>

Net accumulated earnings.................................... --
Capital loss carryforward*.................................. $(115,916,937)
Post-October losses......................................... (5,766,594)
Net unrealized depreciation................................. (7,954,286)
-------------
Total accumulated losses.................................... $(129,637,817)
=============
</Table>

* As of May 31, 2003, the Fund had a net capital loss carryforward of
$115,916,937 of which $72,628,713 will expire on May 31, 2010 and $43,288,224
will expire on May 31, 2011 to offset future capital gains to the extent
provided by regulations.

As of May 31, 2003, the Fund had temporary book/tax differences attributable to
post-October losses (capital losses incurred after October 31 within the taxable
year which are deemed to arise on the first business day of the Fund's next
taxable year) and capital loss deferrals on wash sales and permanent book/tax
differences attributable to a net operating loss. To reflect reclassifications
arising from the permanent differences, paid-in-capital was charged and net
investment loss was credited $383,558.

Morgan Stanley Equity Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2003 continued

6. Shares of Beneficial Interest

Transactions in shares of beneficial interest were as follows:

<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
MAY 31, 2003 MAY 31, 2002
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------

CLASS A SHARES
Sold................................................. 38,862 $ 240,137 104,703 $ 895,027
Reinvestment of distributions........................ -- -- 4,279 35,775
Redeemed............................................. (271,518) (1,731,127) (339,078) (2,852,564)
---------- ------------ ---------- ------------
Net decrease - Class A............................... (232,656) (1,490,990) (230,096) (1,921,762)
---------- ------------ ---------- ------------
CLASS B SHARES
Sold................................................. 841,764 5,222,239 2,233,050 18,589,949
Reinvestment of distributions........................ -- -- 119,169 968,840
Redeemed............................................. (8,792,030) (54,142,346) (9,845,957) (81,335,286)
---------- ------------ ---------- ------------
Net decrease - Class B............................... (7,950,266) (48,920,107) (7,493,738) (61,776,497)
---------- ------------ ---------- ------------
CLASS C SHARES
Sold................................................. 69,173 432,176 173,681 1,447,732
Reinvestment of distributions........................ -- -- 8,372 68,235
Redeemed............................................. (603,380) (3,705,728) (505,981) (4,194,055)
---------- ------------ ---------- ------------
Net decrease - Class C............................... (534,207) (3,273,552) (323,928) (2,678,088)
---------- ------------ ---------- ------------
CLASS D SHARES
Sold................................................. 412,887 2,678,940 576,295 4,871,658
Reinvestment of distributions........................ -- -- 3,098 26,149
Redeemed............................................. (515,317) (3,373,018) (441,986) (3,833,345)
---------- ------------ ---------- ------------
Net increase (decrease) - Class D.................... (102,430) (694,078) 137,407 1,064,462
---------- ------------ ---------- ------------
Net decrease in Fund................................. (8,819,559) $(54,378,727) (7,910,355) $(65,311,885)
========== ============ ========== ============
</Table>

Morgan Stanley Equity Fund
FINANCIAL HIGHLIGHTS

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

<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR ENDED MAY 31, JULY 29, 1998*
------------------------------------------------ THROUGH
2003 2002 2001 2000 MAY 31, 1999
------ ------ ------- ------- --------------

Class A Shares
Selected Per Share Data:

Net asset value, beginning of period..................... $ 7.81 $ 9.74 $12.88 $11.76 $10.00
------ ------ ------ ------ ------

Income (loss) from investment operations:
Net investment income (loss)++....................... 0.03 (0.01) (0.01) (0.03) 0.01
Net realized and unrealized gain (loss).............. (1.03) (1.88) (1.64) 1.22 1.75
------ ------ ------ ------ ------

Total income (loss) from investment operations........... (1.00) (1.89) (1.65) 1.19 1.76
------ ------ ------ ------ ------

Less distributions from net realized gain................ -- (0.04) (1.49) (0.07) --
------ ------ ------ ------ ------

Net asset value, end of period........................... $ 6.81 $ 7.81 $ 9.74 $12.88 $11.76
====== ====== ====== ====== ======

Total Return+............................................ (12.80)% (19.46)% (13.59)% 10.12% 17.60%(1)

Ratios to Average Net Assets(3):
Expenses................................................. 1.54% 1.35% 1.27% 1.29% 1.38%(2)

Net investment income (loss)............................. 0.41% (0.07)% (0.08)% (0.25)% 0.07%(2)

Supplemental Data:
Net assets, end of period, in thousands.................. $4,176 $6,608 $10,481 $12,483 $7,933

Portfolio turnover rate.................................. 56% 96% 162% 184% 80%(1)
</Table>

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

<Table>

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

See Notes to Financial Statements
17

Morgan Stanley Equity Fund
FINANCIAL HIGHLIGHTS continued

<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR ENDED MAY 31, JULY 29, 1998*
------------------------------------------------------ THROUGH
2003 2002 2001 2000 MAY 31, 1999
-------- -------- -------- -------- --------------

Class B Shares
Selected Per Share Data:

Net asset value, beginning of period.............. $7.57 $9.51 $12.71 $11.69 $10.00
----- ----- ------ ------ ------

Income (loss) from investment operations:
Net investment loss++......................... (0.02) (0.07) (0.10) (0.12) (0.07)
Net realized and unrealized gain (loss)....... (1.00) (1.83) (1.61) 1.21 1.76
----- ----- ------ ------ ------

Total income (loss) from investment operations.... (1.02) (1.90) (1.71) 1.09 1.69
----- ----- ------ ------ ------

Less distributions from net realized gain......... -- (0.04) (1.49) (0.07) --
----- ----- ------ ------ ------

Net asset value, end of period.................... $6.55 $7.57 $ 9.51 $12.71 $11.69
===== ===== ====== ====== ======

Total Return+..................................... (13.47)% (20.03)% (14.28)% 9.32% 16.90 %(1)

Ratios to Average Net Assets(3):
Expenses.......................................... 2.29% 2.10% 2.04% 2.04% 2.13 %(2)

Net investment loss............................... (0.34)% (0.82)% (0.85)% (1.00)% (0.68)%(2)

Supplemental Data:
Net assets, end of period, in thousands........... $107,680 $184,612 $303,227 $374,215 $273,345

Portfolio turnover rate........................... 56% 96% 162% 184% 80 %(1)
</Table>

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

<Table>

See Notes to Financial Statements
18

Morgan Stanley Equity Fund
FINANCIAL HIGHLIGHTS continued

<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR ENDED MAY 31, JULY 29, 1998*
------------------------------------------------- THROUGH
2003 2002 2001 2000 MAY 31, 1999
------ ------- ------- ------- --------------

Class C Shares
Selected Per Share Data:

Net asset value, beginning of period.................... $7.60 $ 9.54 $12.73 $11.70 $10.00
----- ------ ------ ------ ------

Income (loss) from investment operations:
Net investment loss++............................... (0.02) (0.06) (0.09) (0.12) (0.04)
Net realized and unrealized gain (loss)............. (1.01) (1.84) (1.61) 1.22 1.74
----- ------ ------ ------ ------

Total income (loss) from investment operations.......... (1.03) (1.90) (1.70) 1.10 1.70
----- ------ ------ ------ ------

Less distributions from net realized gain............... -- (0.04) (1.49) (0.07) --
----- ------ ------ ------ ------

Net asset value, end of period.......................... $6.57 $ 7.60 $ 9.54 $12.73 $11.70
===== ====== ====== ====== ======

Total Return+........................................... (13.55)% (19.97)% (14.17)% 9.31% 17.10 %(1)

Ratios to Average Net Assets(3):
Expenses................................................ 2.29% 2.01% 1.96% 2.04% 1.91 %(2)

Net investment loss..................................... (0.34)% (0.73)% (0.77)% (1.00)% (0.46)%(2)

Supplemental Data:
Net assets, end of period, in thousands................. $7,872 $13,156 $19,604 $24,711 $15,744

Portfolio turnover rate................................. 56% 96% 162% 184% 80 %(1)
</Table>

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

<Table>

See Notes to Financial Statements
19

Morgan Stanley Equity Fund
FINANCIAL HIGHLIGHTS continued

<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR ENDED MAY 31, JULY 29, 1998*
---------------------------------------------- THROUGH
2003 2002 2001 2000 MAY 31, 1999
------ ------ ------ ------ --------------

Class D Shares
Selected Per Share Data:

Net asset value, beginning of period....................... $7.89 $9.82 $12.95 $11.79 $10.00
----- ----- ------ ------ ------

Income (loss) from investment operations:
Net investment income (loss)++......................... 0.04 0.01 0.02 (0.01) 0.03
Net realized and unrealized gain (loss)................ (1.03) (1.90) (1.66) 1.24 1.76
----- ----- ------ ------ ------

Total income (loss) from investment operations............. (0.99) (1.89) (1.64) 1.23 1.79
----- ----- ------ ------ ------

Less distributions from net realized gain.................. -- (0.04) (1.49) (0.07) --
----- ----- ------ ------ ------

Net asset value, end of period............................. $6.90 $7.89 $ 9.82 $12.95 $11.79
===== ===== ====== ====== ======

Total Return+.............................................. (12.55)% (19.30)% (13.43)% 10.43% 17.90%(1)

Ratios to Average Net Assets(3):
Expenses................................................... 1.29% 1.10% 1.04% 1.04% 1.13%(2)

Net investment income...................................... 0.66% 0.18% 0.15% 0.00% 0.32%(2)

Supplemental Data:
Net assets, end of period, in thousands.................... $6,486 $8,230 $8,888 $5,339 $69

Portfolio turnover rate.................................... 56% 96% 162% 184% 80%(1)
</Table>

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

<Table>

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

See Notes to Financial Statements
20

Morgan Stanley Equity Fund
INDEPENDENT AUDITORS' REPORT

To the Shareholders and Board of Trustees of
Morgan Stanley Equity Fund:

We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Equity Fund (the "Fund"), including the portfolio of investments, as of
May 31, 2003, and the related statements of operations for the year then ended
and changes in net assets for each of the two years in the period then ended,
and the financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of May 31, 2003, by correspondence with the custodian. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Morgan
Stanley Equity Fund as of May 31, 2003, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the periods
presented, in conformity with accounting principles generally accepted in the
United States of America.

Deloitte & Touche LLP
New York, New York
July 9, 2003

Morgan Stanley Equity Fund
TRUSTEE AND OFFICER INFORMATION

Independent Trustees:
<Table>
<Caption>
Number of
Term of Portfolios in
Position(s) Office and Fund Complex
Name, Age and Address of Held with Length of Overseen by
Independent Trustee Registrant Time Served* Principal Occupation(s) During Past 5 Years Trustee**
- ------------------------------------- ----------- -------------- ------------------------------------------- -------------

Michael Bozic (62) Trustee Since April Retired; Director or Trustee of the Morgan 123
c/o Mayer, Brown, Rowe & Maw 1994 Stanley Funds and TCW/DW Term Trust 2003;
Counsel to the Independent Trustees formerly Vice Chairman of Kmart Corporation
1675 Broadway (December 1998-October 2000), Chairman and
New York, NY Chief Executive Officer of Levitz Furniture
Corporation (November 1995-November 1998)
and President and Chief Executive Officer
of Hills Department Stores (May 1991-July
1995); formerly variously Chairman, Chief
Executive Officer, President and Chief
Operating Officer (1987-1991) of the Sears
Merchandise Group of Sears, Roebuck & Co.

Edwin J. Garn (70) Trustee Since January Director or Trustee of the Morgan Stanley 123
c/o Summit Ventures LLC 1993 Funds and TCW/DW Term Trust 2003; formerly
1 Utah Center United States Senator (R-Utah) (1974-1992)
201 S. Main Street and Chairman, Senate Banking Committee
Salt Lake City, UT (1980-1986); formerly Mayor of Salt Lake
City, Utah (1971-1974), Astronaut, Space
Shuttle Discovery (April 12-19, 1985) and
Vice Chairman, Huntsman Corporation
(chemical company); member of the Utah
Regional Advisory Board of Pacific Corp.

Wayne E. Hedien (69) Trustee Since Retired; Director or Trustee of the Morgan 123
c/o Mayer, Brown, Rowe & Maw September 1997 Stanley Funds and TCW/DW Term Trust 2003;
Counsel to the Independent Trustees formerly associated with the Allstate
1675 Broadway Companies (1966- 1994), most recently as
New York, NY Chairman of The Allstate Corporation (March
1993-December 1994) and Chairman and Chief
Executive Officer of its wholly-owned
subsidiary, Allstate Insurance Company
(July 1989-December 1994).

Name, Age and Address of
Independent Trustee Other Directorships Held by Trustee
- ------------------------------------- -----------------------------------

Michael Bozic (62) Director of Weirton Steel
c/o Mayer, Brown, Rowe & Maw Corporation.
Counsel to the Independent Trustees
1675 Broadway
New York, NY

Edwin J. Garn (70) Director of Franklin Covey (time
c/o Summit Ventures LLC management systems), BMW Bank of
1 Utah Center North America, Inc. (industrial
201 S. Main Street loan corporation), United Space
Salt Lake City, UT Alliance (joint venture between
Lockheed Martin and the Boeing
Company) and Nuskin Asia Pacific
(multilevel marketing); member of
the board of various civic and
charitable organizations.

Wayne E. Hedien (69) Director of The PMI Group Inc.
c/o Mayer, Brown, Rowe & Maw (private mortgage insurance);
Counsel to the Independent Trustees Trustee and Vice Chairman of The
1675 Broadway Field Museum of Natural History;
New York, NY director of various other business
and charitable organizations.
</Table>

Morgan Stanley Equity Fund
TRUSTEE AND OFFICER INFORMATION continued
<Table>
<Caption>
Number of
Term of Portfolios in
Position(s) Office and Fund Complex
Name, Age and Address of Held with Length of Overseen by
Independent Trustee Registrant Time Served* Principal Occupation(s) During Past 5 Years Trustee**
- ------------------------------------- ----------- -------------- ------------------------------------------- -------------

Dr. Manuel H. Johnson (54) Trustee Since July Chairman of the Audit Committee and 123
c/o Johnson Smick International, Inc. 1991 Director or Trustee of the Morgan Stanley
2099 Pennsylvania Avenue, N.W. Funds and TCW/DW Term Trust 2003; Senior
Suite 950 Partner, Johnson Smick International, Inc.,
Washington, D.C. a consulting firm; 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.

Michael E. Nugent (67) Trustee Since July Chairman of the Insurance Committee and 214
c/o Triumph Capital, L.P. 1991 Director or Trustee of the Morgan Stanley
445 Park Avenue Funds and TCW/DW Term Trust 2003;
New York, NY director/trustee of various investment
companies managed by Morgan Stanley
Investment Management Inc. and Morgan
Stanley Investments LP (since July 2001);
General Partner, Triumph Capital, L.P., a
private investment partnership; formerly
Vice President, Bankers Trust Company and
BT Capital Corporation (1984-1988).

Name, Age and Address of
Independent Trustee Other Directorships Held by Trustee
- ------------------------------------- -----------------------------------

Dr. Manuel H. Johnson (54) Director of NVR, Inc. (home
c/o Johnson Smick International, Inc. construction); Chairman and Trustee
2099 Pennsylvania Avenue, N.W. of the Financial Accounting
Suite 950 Foundation (oversight organization
Washington, D.C. of the Financial Accounting
Standards Board); Director of RBS
Greenwich Capital Holdings
(financial holding company).

Michael E. Nugent (67) Director of various business
c/o Triumph Capital, L.P. organizations.
445 Park Avenue
New York, NY
</Table>

Morgan Stanley Equity Fund
TRUSTEE AND OFFICER INFORMATION continued

Interested Trustees:
<Table>
<Caption>
Number of
Term of Portfolios in
Position(s) Office and Fund Complex
Name, Age and Address of Held with Length of Overseen by
Interested Trustee Registrant Time Served* Principal Occupation(s) During Past 5 Years Trustee**
- ------------------------------------- ----------- -------------- ------------------------------------------- -------------

Charles A. Fiumefreddo (70) Chairman of Since July Chairman and Director or Trustee of the 123
c/o Morgan Stanley Trust the Board 1991 Morgan Stanley Funds and TCW/DW Term Trust
Harborside Financial Center, and Trustee 2003; formerly Chairman, Chief Executive
Plaza Two, Officer and Director of the Investment
Jersey City, NJ Manager, the Distributor and Morgan Stanley
Services, Executive Vice President and
Director of Morgan Stanley DW, Chairman and
Director of the Transfer Agent, and
Director and/or officer of various Morgan
Stanley subsidiaries (until June 1998) and
Chief Executive Officer of the Morgan
Stanley Funds and the TCW/DW Term Trusts
(until September 2002).

James F. Higgins (55) Trustee Since June Director or Trustee of the Morgan Stanley 123
c/o Morgan Stanley Trust 2000 Funds and TCW/DW Term Trust 2003 (since
Harborside Financial Center, June 2000); Senior Advisor of Morgan
Plaza Two, Stanley (since August 2000); Director of
Jersey City, NJ the Distributor and Dean Witter Realty
Inc.; Director of AXA Financial, Inc. and
The Equitable Life Assurance Society of the
United States (financial services);
previously President and Chief Operating
Officer of the Private Client Group of
Morgan Stanley (May 1999-August 2000),
President and Chief Operating Officer of
Individual Securities of Morgan Stanley
(February 1997-May 1999).

Philip J. Purcell (59) Trustee Since April Director or Trustee of the Morgan Stanley 123
1585 Broadway 1994 Funds and TCW/DW Term Trust 2003; Chairman
New York, NY of the Board of Directors and Chief
Executive Officer of Morgan Stanley and
Morgan Stanley DW; Director of the
Distributor; Chairman of the Board of
Directors and Chief Executive Officer of
Novus Credit Services Inc.; Director and/or
officer of various Morgan Stanley
subsidiaries.

Name, Age and Address of
Interested Trustee Other Directorships Held by Trustee
- ------------------------------------- -----------------------------------

Charles A. Fiumefreddo (70) None
c/o Morgan Stanley Trust
Harborside Financial Center,
Plaza Two,
Jersey City, NJ

James F. Higgins (55) None
c/o Morgan Stanley Trust
Harborside Financial Center,
Plaza Two,
Jersey City, NJ

Philip J. Purcell (59) Director of American Airlines, Inc.
1585 Broadway and its parent company, AMR
New York, NY Corporation.
</Table>

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

* Each Trustee serves an indefinite term, until his or her successor is
elected.
** The Fund Complex includes all open and closed-end funds (including all of
their portfolios) advised by Morgan Stanley Investment Advisors Inc. and any
funds that have an investment advisor that is an affiliated person of Morgan
Stanley Investment Advisors Inc. (including but not limited to, Morgan
Stanley Investment Management Inc., Morgan Stanley Investments LP and Van
Kampen Asset Management Inc.).

Morgan Stanley Equity Fund
TRUSTEE AND OFFICER INFORMATION continued

Officers:

<Table>
<Caption>
Term of
Position(s) Office and
Name, Age and Address of Held with Length of
Executive Officer Registrant Time Served* Principal Occupation(s) During Past 5 Years
- ------------------------------ --------------- -------------- ------------------------------------------------------------

Mitchell M. Merin (49) President Since May 1999 President and Chief Operating Officer of Morgan Stanley
1221 Avenue of the Americas Investment Management (since December 1998); President,
New York, NY Director (since April 1997) and Chief Executive Officer
(since June 1998) of the Investment Manager and Morgan
Stanley Services; Chairman, Chief Executive Officer and
Director of the Distributor (since June 1998); Chairman
(since June 1998) and Director (since January 1998) of the
Transfer Agent; Director of various Morgan Stanley
subsidiaries; President (since May 1999) of the Morgan
Stanley Funds and TCW/DW Term Trust 2003; Trustee (since
December 1999) and President and Chief Executive Officer
(since October 2002) of the Van Kampen Open-End Funds and
President and Chief Executive Officer (since December 2002)
of the Van Kampen Closed-End Funds; previously Chief
Strategic Officer of the Investment Manager and Morgan
Stanley Services and Executive Vice President of the
Distributor (April 1997-June 1998), Chief Executive Officer
(September 2002-April 2003) and Vice President (May
1997-April 1999) of the Morgan Stanley Funds and the TCW/DW
Term Trusts, and Executive Vice President of Morgan Stanley.

Ronald E. Robison (64) Executive Vice Since April Managing Director, Chief Administrative Officer and Director
1221 Avenue of the Americas President and 2003 (since February 1999) of the Investment Manager and Morgan
New York, NY Principal Stanley Services, Chief Executive Officer and Director of
Executive the Transfer Agent and Executive Vice President and
Officer Principal Executive Officer of the Morgan Stanley Funds and
TCW/DW Term Trust 2003 (since April 2003); previously
Managing Director of the TCW Group Inc.

Barry Fink (48) Vice President, Since February General Counsel (since May 2000) and Managing Director
1221 Avenue of the Americas Secretary and 1997 (since December 2000) of Morgan Stanley Investment
New York, NY General Counsel Management; Managing Director (since December 2000), and
Director (since July 1998) of the Investment Manager and
Morgan Stanley Services; Assistant Secretary of Morgan
Stanley DW; Vice President, Secretary and General Counsel of
the Morgan Stanley Funds and TCW/DW Term Trust 2003 (since
February 1997); Managing Director, Director and Secretary of
the Distributor; previously, Vice President and Assistant
General Counsel of the Investment Manager and Morgan Stanley
Services (February 1997-December 2001).

Joseph J. McAlinden (60) Vice President Since July Managing Director and Chief Investment Officer of the
1221 Avenue of the Americas 1995 Investment Manager, Morgan Stanley Investment Management
New York, NY Inc. and Morgan Stanley Investments LP; Director of the
Transfer Agent, Chief Investment Officer of the Van Kampen
Funds.

Francis Smith (37) Vice President Since Vice President and Chief Financial Officer of the Morgan
c/o Morgan Stanley Trust and Chief September 2002 Stanley Funds and TCW/DW Term Trust 2003 (since September
Harborside Financial Center, Financial 2002); Executive Director of the Investment Manager and
Plaza Two, Officer Morgan Stanley Services (since December 2001); previously
Jersey City, NJ Vice President of the Investment Manager and Morgan Stanley
Services (August 2000-November 2001) and Senior Manager at
PricewaterhouseCoopers LLP (January 1998-August 2000).

Thomas F. Caloia (57) Treasurer Since April Executive Director (since December 2002) and Assistant
c/o Morgan Stanley Trust 1989 Treasurer of the Investment Manager, the Distributor and
Harborside Financial Center, Morgan Stanley Services; previously First Vice President of
Plaza Two, the Investment Manager, the Distributor and Morgan Stanley
Jersey City, NJ Services; Treasurer of the Morgan Stanley Funds.
</Table>

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

* Each Officer serves an indefinite term, until his or her successor is elected.

(This Page Intentionally Left Blank)

TRUSTEES

Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell

OFFICERS

Charles A. Fiumefreddo
Chairman of the Board

Mitchell M. Merin
President

Ronald E. Robison
Executive Vice President and Principal Executive Officer

Barry Fink
Vice President, Secretary and General Counsel

Joseph J. McAlinden
Vice President

Francis Smith
Vice President and Chief Financial Officer

Thomas F. Caloia
Treasurer

TRANSFER AGENT

Morgan Stanley Trust
Harborside Financial Center -- Plaza Two
Jersey City, New Jersey 07311

INDEPENDENT AUDITORS

Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281

INVESTMENT MANAGER

Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020

Sub-Advisor

Morgan Stanley Investments LP
One Tower Bridge
West Conshohocken, Pennsylvania 19428

This report is submitted for the general information of shareholders of the
Fund. For more detailed information about the Fund, its fees and expenses and
other pertinent information, please read its Prospectus. The Fund's Statement
of Additional Information contains additional information about the Fund,
including its trustees. It is available, without charge, by calling (800)
869-NEWS.

This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective Prospectus. Read the
Prospectus carefully before investing.

Investments and services offered through Morgan Stanley DW Inc., member SIPC.
Morgan Stanley Funds are distributed by Morgan Stanley Distributors Inc.

Morgan Stanley Distributors Inc., member NASD.

MORGAN STANLEY
EQUITY FUND

Annual Report
May 31, 2003

36035RPT-11444F03-AP-6/03

MORGAN STANLEY DIVIDEND GROWTH SECURITIES INC.
PART B
STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information relates to the shares of Morgan
Stanley Dividend Growth Securities Inc. ("Dividend Growth") to be issued
pursuant to an Agreement and Plan of Reorganization, dated July 31, 2003,
between Dividend Growth and Morgan Stanley Equity Fund ("Equity") in connection
with the acquisition by Dividend Growth of substantially all of the assets,
subject to stated liabilities, of Equity. This Statement of Additional
Information does not constitute a prospectus. This Statement of Additional
Information does not include all information that a shareholder should consider
before voting on the proposals contained in the Proxy Statement and Prospectus,
and, therefore, should be read in conjunction with the related Proxy Statement
and Prospectus, dated October , 2003. A copy of the Proxy Statement and
Prospectus may be obtained without charge by mailing a written request to
Dividend Growth, c/o Morgan Stanley Trust, Harborside Financial Center, Plaza
Two, Jersey City, NJ 07311 or by calling (800) 869-NEWS (TOLL FREE). Please
retain this document for future reference.

The date of this Statement of Additional Information is October , 2003.

B-1

TABLE OF CONTENTS

PAGE
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INTRODUCTION .......................................... B-3
ADDITIONAL INFORMATION ABOUT DIVIDEND GROWTH .......... B-3
ADDITIONAL INFORMATION ABOUT EQUITY ................... B-4
FINANCIAL STATEMENTS .................................. B-5

B-2

INTRODUCTION

This Statement of Additional Information is intended to supplement the
information provided in the Proxy Statement and Prospectus dated October ,
2003 (the "Proxy Statement and Prospectus"). The Proxy Statement and Prospectus
has been sent to Equity shareholders in connection with the solicitation of
proxies by the Board of Trustees of Equity to be voted at the Special Meeting
of shareholders of Equity to be held on December 16, 2003. This Statement of
Additional Information incorporates by reference the Statement of Additional
Information of Dividend Growth dated April 29, 2003 and the Statement of
Additional Information of Equity dated July 30, 2003.

ADDITIONAL INFORMATION ABOUT DIVIDEND GROWTH

INVESTMENT OBJECTIVES AND POLICIES

For additional information about Dividend Growth's investment objective
and policies, see "Description of the Fund and Its Investments and Risks" in
Dividend Growth's Statement of Additional Information.

MANAGEMENT

For additional information about the Board of Directors, officers and
management personnel of Dividend Growth, see "Management of the Fund" and
"Investment Management and Other Services" in Dividend Growth's Statement of
Additional Information.

INVESTMENT ADVISORY AND OTHER SERVICES

For additional information about Dividend Growth's investment manager, see
"Investment Management and Other Services" in Dividend Growth's Statement of
Additional Information. For additional information about Dividend Growth's
independent auditors, see "Investment Management and Other Services" in
Dividend Growth's Statement of Additional Information. For additional
information about other services provided to Dividend Growth, see "Investment
Management and Other Services" in Dividend Growth's Statement of Additional
Information.

PORTFOLIO TRANSACTIONS AND BROKERAGE

For additional information about brokerage allocation practices, see
"Brokerage Allocation and Other Practices" in Dividend Growth's Statement of
Additional Information.

DESCRIPTION OF FUND SHARES

For additional information about the voting rights and other
characteristics of the shares of Dividend Growth, see "Capital Stock and Other
Securities" in Dividend Growth's Statement of Additional Information.

PURCHASE, REDEMPTION AND PRICING OF SHARES

For additional information about the purchase and redemption of Dividend
Growth's shares and the determination of net asset value, see "Purchase,
Redemption and Pricing of Shares" in Dividend Growth's Statement of Additional
Information.

DIVIDENDS, DISTRIBUTIONS AND TAX STATUS

For additional information about Dividend Growth's policies regarding
dividends and distributions and tax matters affecting Dividend Growth and its
shareholders, see "Taxation of the Fund and Shareholders" in Dividend Growth's
Statement of Additional Information.

B-3

DISTRIBUTION OF SHARES

For additional information about Dividend Growth's distributor and the
distribution agreement between Dividend Growth and its distributor, see
"Investment Management and Other Services" and "Underwriters" in Dividend
Growth's Statement of Additional Information.

PERFORMANCE DATA

For additional information about Dividend Growth's performance, see
"Calculation of Performance Data" in Dividend Growth's Statement of Additional
Information.

ADDITIONAL INFORMATION ABOUT EQUITY

INVESTMENT OBJECTIVES AND POLICIES

For additional information about Equity's investment objective and
policies, see "Description of the Fund and Its Investments and Risks" in
Equity's Statement of Additional Information.

MANAGEMENT

For additional information about the Board of Trustees, officers and
management personnel of Equity, see "Management of the Fund" and "Investment
Management and Other Services" in Equity's Statement of Additional Information.

INVESTMENT ADVISORY AND OTHER SERVICES

For additional information about Equity's investment manager, see
"Investment Management and Other Services" in Equity's Statement of Additional
Information. For additional information about Equity's independent auditors,
see "Investment Management and Other Services" in Equity's Statement of
Additional Information. For additional information about other services
provided to Equity, see "Investment Management and Other Services" in Equity's
Statement of Additional Information.

PORTFOLIO TRANSACTIONS AND BROKERAGE

For additional information about brokerage allocation practices, see
"Brokerage Allocation and Other Practices" in Equity's Statement of Additional
Information.

DESCRIPTION OF FUND SHARES

For additional information about the voting rights and other
characteristics of the shares of Equity, see "Capital Stock and Other
Securities" in Equity's Statement of Additional Information.

PURCHASE, REDEMPTION AND PRICING OF SHARES

For additional information about the purchase and redemption of Equity's
shares and the determination of net asset value, see "Purchase, Redemption and
Pricing of Shares" in Equity's Statement of Additional Information.

DIVIDENDS, DISTRIBUTIONS AND TAX STATUS

For additional information about Equity's policies regarding dividends and
distributions and tax matters affecting Equity and its shareholders, see
"Taxation of the Fund and Shareholders" in Equity's Statement of Additional
Information.

DISTRIBUTION OF SHARES

For additional information about Equity's distributor and the distribution
agreement between Equity and its distributor, see "Investment Management and
Other Services" and "Underwriters" in Equity's Statement of Additional
Information.

B-4

PERFORMANCE DATA

For additional information about Equity's performance, see "Calculation of
Performance Data" in Equity's Statement of Additional Information.

FINANCIAL STATEMENTS

Dividend Growth's most recent audited financial statements are set forth
in Dividend Growth's Annual Report for the fiscal year ended February 28, 2003.
A copy of the Annual Report accompanies, and is incorporated by reference in,
the Proxy Statement and Prospectus. Equity's most recent audited financial
statements are set forth in Equity's Annual Report for the fiscal year ended
May 31, 2003, which is incorporated by reference in the Proxy Statement and
Prospectus.

B-5

STATEMENT OF ADDITIONAL INFORMATION
MORGAN STANLEY
DIVIDEND GROWTH
APRIL 29, 2003 SECURITIES INC.

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

This Statement of Additional Information is not a prospectus. The
Prospectus (dated April 29, 2003) for Morgan Stanley Dividend Growth Securities
Inc. 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.

Morgan Stanley Dividend Growth Securities Inc.
1221 Avenue of the Americas
New York, New York 10020

(800) 869-NEWS

TABLE OF CONTENTS
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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 ....................... 8

III. Management of the Fund ......................................... 10

A. Board of Directors .......................................... 10

B. Management Information ...................................... 10

C. Compensation ................................................ 15

IV. Control Persons and Principal Holders of Securities ............ 17

V. Investment Management and Other Services ....................... 17

A. Investment Manager .......................................... 17

B. Principal Underwriter ....................................... 18

C. Services Provided by the Investment Manager ................. 18

D. Dealer Reallowances ......................................... 19

E. Rule 12b-1 Plan ............................................. 19

F. Other Service Providers ..................................... 23

G. Codes of Ethics ............................................. 24

VI. Brokerage Allocation and Other Practices ....................... 24

A. Brokerage Transactions ...................................... 24

B. Commissions ................................................. 24

C. Brokerage Selection ......................................... 25

D. Directed Brokerage .......................................... 26

E. Regular Broker-Dealers ...................................... 26

VII. Capital Stock and Other Securities ............................. 26

VIII. Purchase, Redemption and Pricing of Shares ..................... 26

A. Purchase/Redemption of Shares ............................... 26

B. Offering Price .............................................. 27

IX. Taxation of the Fund and Shareholders .......................... 28

X. Underwriters ................................................... 30

XI. Calculation of Performance Data ................................ 30

XII. Financial Statements ........................................... 32

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

"Custodian" - The Bank of New York.

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

"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 Dividend Growth Securities Inc., a registered
open-end investment company.

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

"Investment Manager" - Morgan Stanley Investment Advisors Inc., a
wholly-owned investment advisor 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 Manager serves as the investment advisor and that hold themselves
out to investors as related companies for investment and investor services.

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

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

I. FUND HISTORY
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The Fund was incorporated in the state of Maryland on December 22, 1980
under the name InterCapital Dividend Growth Securities Inc. On March 16, 1983
the Fund's shareholders approved a change in the Fund's name, effective March
22, 1983, to Dean Witter Dividend Growth Securities Inc. On June 22, 1998, the
name of the Fund was changed to Morgan Stanley Dean Witter Dividend Growth
Securities Inc. Effective June 18, 2001, the Fund's name was changed to Morgan
Stanley Dividend Growth Securities Inc.

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 to provide reasonable current income and long-term
growth of income and capital.

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."

MONEY MARKET SECURITIES. In addition to the money market securities in
which the Fund may otherwise invest, the Fund may invest in various money
market securities for cash management purposes or when assuming a temporary
defensive position, which among others may include commercial paper, 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 10%
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 & Poor's Corporation ("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 AA by S&P or Aa by Moody's; and

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 Directors designed to minimize such risks. These procedures include
effecting repurchase transactions only with large, well-capitalized and
well-established financial institutions whose financial condition will be
continually monitored by the Investment Manager. 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.

INVESTMENT IN REAL ESTATE INVESTMENT TRUSTS. The Fund may invest in real
estate investment trusts, which pool investors' funds for investments primarily
in commercial real estate properties. Investment in real estate investment
trusts may be the most practical available means for the Fund to invest in the
real estate industry (the Fund is prohibited from investing in real estate
directly). As a shareholder in a real estate investment trust, the Fund would
bear its ratable share of the real estate investment trust's expenses,
including its advisory and administration fees. At the same time the Fund would
continue to pay its own investment management fees and other expenses, as a
result of which the Fund and its shareholders in effect will be absorbing
duplicate levels of fees with respect to investments in real estate investment
trusts.

LENDING PORTFOLIO SECURITIES. The Fund may lend its portfolio securities
to brokers, dealers and other financial institutions, provided that the loans
are callable at any time by the Fund, and are at all times secured by cash or
cash equivalents, which are maintained in a segregated account pursuant to
applicable regulations and that are equal to at least 100% of the market value,
determined daily, of the loaned securities. The advantage of these loans is
that the Fund continues to receive the income on the loaned securities while at
the same time earning interest on the cash amounts deposited as collateral,
which will be invested in short-term obligations.

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

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

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

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

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

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

PRIVATE PLACEMENTS. The Fund may invest up to 15% of its net assets in
securities which are subject to restrictions on resale because they have not
been registered under the Securities Act of 1933 (the "Securities Act"), or
which are otherwise not readily marketable. (Securities eligible for resale
pursuant to Rule 144A under the Securities Act, and determined to be liquid
pursuant to the procedures discussed in the following paragraph, are not
subject to the foregoing restriction.) These securities are generally referred
to as private placements or restricted securities. Limitations on the resale of
these securities may have an adverse effect on their marketability, and may
prevent the Fund from disposing of them promptly at reasonable prices. The Fund
may have to bear the expense of registering the securities for resale and the
risk of substantial delays in effecting the registration.

Rule 144A permits the Fund to sell restricted securities to qualified
institutional buyers without limitation. The Investment Manager, pursuant to
procedures adopted by the Directors, 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 acquire warrants and
subscription rights attached to other securities. 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.

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.

ZERO COUPON SECURITIES. A portion of the fixed-income securities purchased
by the Fund may be "zero coupon" securities. These are debt securities which
have been stripped of their unmatured interest coupons and receipts or which
are certificates representing interests in such stripped debt obligations and
coupons. Such securities are purchased at a discount from their face amount,
giving the purchaser the right to receive their full value at maturity. A zero
coupon security pays no interest to its holder during its life. Its value to an
investor consists of the difference between its face value at the time of
maturity and the price for which it was acquired, which is generally an amount
significantly less than its face value (sometimes referred to as a "deep
discount" price).

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
if prevailing interest rates rise. For this reason, zero coupon securities are
subject to substantially greater market price fluctuations during periods of
changing prevailing interest rates than are comparable debt securities which
make current distributions of interest. 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.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Fund may enter into
forward foreign currency exchange contracts ("forward contracts") as a hedge
against fluctuations in future foreign exchange rates. The Fund may conduct its
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
entering into forward contracts to purchase or sell foreign currencies. A
forward contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large, commercial and investment banks) and
their customers. Forward contracts only will be entered into with United States
banks and their foreign branches, insurance companies and other dealers 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 Manager 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 currency contracts or maintain a net
exposure to these contracts where the consummation of the contracts would
obligate the Fund to deliver an amount of foreign currency in excess of the
value of the Fund's portfolio securities.

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

CONVERTIBLE SECURITIES. The Fund may invest in securities which are
convertible into common stock or other security 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 stocks in a
corporation's capital structure and, therefore, entail less risk than the
corporation's 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. 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.

C. FUND POLICIES/INVESTMENT RESTRICTIONS

of (a) 67% or more of the shares present at a meeting of shareholders, if the
holders of 50% of the outstanding shares of the Fund are present or represented
by proxy; or (b) more than 50% of the outstanding shares of the Fund. For
purposes of the following restrictions: (i) all percentage limitations apply
immediately after a purchase or initial investment; and (ii) any subsequent
change in any applicable percentage resulting from market fluctuations or other
changes in total or net assets does not require elimination of any security
from the portfolio.

The Fund will:

1. Seek to provide reasonable current income and long-term growth of
income and capital.

The Fund may not:

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

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

3. Invest more than 25% of the value of its total assets in securities of
issuers in any one industry. This restriction does not apply to bank
obligations or obligations issued or guaranteed by the United States
Government, its agencies or instrumentalities.

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

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

6. Purchase or sell commodities or commodity futures contracts.

7. 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).

8. Pledge its assets or assign or otherwise encumber them, except to
secure permitted borrowings.

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

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

11. Make short sales of securities.

12. Purchase securities on margin, except for short-term loans as are
necessary for the clearance of portfolio securities.

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

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

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

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

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

18. Write, purchase or sell puts, calls or combinations thereof.

19. Invest more than 5% of the value of its net assets in warrants,
including not more than 2% of such assets in warrants not listed on
either the New York or American Stock Exchange. However, the acquisition
of warrants attached to other securities is not subject to this
restriction.

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

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

A. BOARD OF DIRECTORS

The Board of Directors of the Fund oversees the management of the Fund but
does not itself manage the Fund. The Directors review various services provided
by or under the direction of the Investment Manager to ensure that the Fund's
general investment policies and programs are properly carried out. The
Directors 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 Directors are generally characterized
as a duty of loyalty and a duty of care. The duty of loyalty requires a
Director to exercise his or her powers in the interest of the Fund and not the
Director's own interest or the interest of another person or organization. A
Director 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 Director reasonably
believes to be in the best interest of the Fund and its shareholders.

B. MANAGEMENT INFORMATION

DIRECTORS AND OFFICERS. The Board of the Fund consists of eight Directors.
These same individuals also serve as directors or trustees for all of the
Morgan Stanley Funds. Five Directors have no affiliation or business connection
with the Investment Manager or any of its affiliated persons and do not own any
stock or other securities issued by the Investment Manager's parent company,
Morgan Stanley. These are the "non-interested" or "Independent Directors." The
other three Directors (the "Management Directors") are affiliated with the
Investment Manager.

The Independent Directors of the Fund, their 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 Director (as of December 31, 2002), and other directorships, if
any, held by the Director, are shown below. The Fund Complex includes all open-
and closed-end funds (including all of their portfolios) advised by Morgan
Stanley Investment Advisors Inc. and any funds that have an investment advisor
that is an affiliated person of Morgan Stanley Investment Advisors Inc.
(including, but not limited to, Morgan Stanley Investment Management Inc.,
Morgan Stanley Investments LP and Van Kampen Asset Management Inc.).

POSITION(S) LENGTH OF
NAME, AGE AND ADDRESS OF HELD WITH TIME
INDEPENDENT DIRECTOR REGISTRANT SERVED*
- ---------------------------- ------------- ------------

Michael Bozic (62) Director Since
c/o Mayer, Brown, Rowe & April 1994
Maw
Counsel to the Independent
Directors
1675 Broadway
New York, NY

Edwin J. Garn (70) Director Since
c/o Summit Ventures LLC January
1 Utah Center 1993
201 S. Main Street
Salt Lake City, UT

Wayne E. Hedien (69) Director Since
c/o Mayer, Brown, Rowe & September
Maw 1997
Counsel to the Independent
Directors
1675 Broadway
New York, NY

Dr. Manuel H. Johnson (54) Director Since
c/o Johnson Smick July 1991
International, Inc.
2099 Pennsylvania Avenue
NW
Suite 950
Washington, D.C. 20006

Michael E. Nugent (66) Director Since
c/o Triumph Capital, L.P. July 1991
237 Park Avenue
New York, NY

NUMBER OF
PORTFOLIOS IN
FUND
COMPLEX
NAME, AGE AND ADDRESS OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS HELD
INDEPENDENT DIRECTOR PAST 5 YEARS BY DIRECTOR BY DIRECTOR
- ---------------------------- ----------------------------------------- -------------- -----------------------------

Michael Bozic (62) Retired; Director or Trustee of the 123 Director of Weirton Steel
c/o Mayer, Brown, Rowe & Morgan Stanley Funds and TCW/DW Corporation.
Maw Term Trust 2003; formerly Vice
Counsel to the Independent Chairman of Kmart Corporation
Directors (December 1998-October 2000),
1675 Broadway Chairman and Chief Executive Officer
New York, NY 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 (70) Director or Trustee of the Morgan 123 Director of Franklin Covey
c/o Summit Ventures LLC Stanley Funds and TCW/DW Term (time management
1 Utah Center Trust 2003; formerly United States systems), BMW Bank of
201 S. Main Street Senator (R-Utah)(1974-1992) and North America, Inc.
Salt Lake City, UT Chairman, Senate Banking (industrial loan
Committee (1980-1986); formerly corporation), United Space
Mayor of Salt Lake City, Utah Alliance (joint venture
(1971-1974); formerly Astronaut, between Lockheed Martin
Space Shuttle Discovery (April 12-19, and the Boeing Company)
1985) and Vice Chairman, Huntsman and Nuskin Asia Pacific
Corporation (chemical company); (multilevel marketing);
member of the Utah Regional member of the board of
Advisory Board of Pacific Corp. various civic and
charitable organizations.

Wayne E. Hedien (69) Retired; Director or Trustee of the 123 Director of The PMI Group
c/o Mayer, Brown, Rowe & Morgan Stanley Funds and TCW/DW Inc. (private mortgage
Maw Term Trust 2003; formerly associated insurance); Trustee and
Counsel to the Independent with the Allstate Companies Vice Chairman of The
Directors (1966-1994), most recently as Field Museum of Natural
1675 Broadway Chairman of The Allstate Corporation History; director of various
New York, NY (March 1993-December 1994) and other business and
Chairman and Chief Executive Officer charitable organizations.
of its wholly-owned subsidiary, Allstate
Insurance Company (July
1989-December 1994).

Dr. Manuel H. Johnson (54) Chairman of the Audit Committee and 123 Director of NVR, Inc.
c/o Johnson Smick Director or Trustee of the Morgan (home construction);
International, Inc. Stanley Funds and TCW/DW Term Chairman and Trustee of
2099 Pennsylvania Avenue Trust 2003; Senior Partner, Johnson the Financial Accounting
NW Smick International, Inc., a consulting Foundation (oversight
Suite 950 firm; Co-Chairman and a founder of organization of the
Washington, D.C. 20006 the Group of Seven Council (G7C), Financial Accounting
an international economic Standards Board); Director
commission; formerly Vice Chairman of RBS Greenwich Capital
of the Board of Governors of the Holdings (financial holding
Federal Reserve System and company).
Assistant Secretary of the U.S.
Treasury.

Michael E. Nugent (66) Chairman of the Insurance Committee 214 Director of various
c/o Triumph Capital, L.P. and Director or Trustee of the Morgan business organizations.
237 Park Avenue Stanley Funds and TCW/DW Term
New York, NY Trust 2003; director/trustee of various
investment companies managed by
Morgan Stanley Investment
Management Inc. and Morgan
Stanley Investments LP (since July
2001); General Partner, Triumph
Capital, L.P., a private investment
partnership; formerly Vice President,
Bankers Trust Company and BT
Capital Corporation (1984-1988).

- ----------
* This is the date the Director began serving the Morgan Stanley Funds.

The Directors who are affiliated with the Investment Manager or affiliates
of the Investment Manager (as set forth below) and executive officers of the
Fund, their 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 Director and the other directorships, if
any, held by the Director, are shown below.

POSITION(S) LENGTH OF
NAME, AGE AND ADDRESS OF HELD WITH TIME
MANAGEMENT DIRECTOR REGISTRANT SERVED*
- ------------------------------ ------------- -------------

Charles A. Fiumefreddo (69) Chairman Since July
c/o Morgan Stanley Trust of the 1991
Harborside Financial Center, Board
Plaza Two, and
Jersey City, NJ Director

James F. Higgins (55) Director Since June
c/o Morgan Stanley Trust 2000
Harborside Financial Center,
Plaza Two,
Jersey City, NJ

Philip J. Purcell (59) Director Since April
1585 Broadway 1994
New York, NY

NUMBER OF
PORTFOLIOS IN
FUND
COMPLEX
NAME, AGE AND ADDRESS OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS HELD
MANAGEMENT DIRECTOR PAST 5 YEARS BY DIRECTOR BY DIRECTOR
- ------------------------------ ---------------------------------------- -------------- ------------------------------

Charles A. Fiumefreddo (69) Chairman and Director or Trustee of 123 None
c/o Morgan Stanley Trust the Morgan Stanley Funds and
Harborside Financial Center, TCW/DW Term Trust 2003; formerly
Plaza Two, Chairman, Chief Executive Officer
Jersey City, NJ and Director of the Investment
Manager, the Distributor and Morgan
Stanley Services, Executive Vice
President and Director of Morgan
Stanley DW, Chairman and Director
of the Transfer Agent and Director
and/or officer of various Morgan
Stanley subsidiaries (until June 1998)
and Chief Executive Officer of the
Morgan Stanley Funds and the
TCW/DW Term Trusts (until
September 2002).

James F. Higgins (55) Director or Trustee of the Morgan 123 None
c/o Morgan Stanley Trust Stanley Funds and TCW/DW Term
Harborside Financial Center, Trust 2003 (since June 2000); Senior
Plaza Two, Advisor of Morgan Stanley (since
Jersey City, NJ August 2000); Director of the
Distributor and Dean Witter Realty
Inc.; Director of AXA Financial, Inc.
and The Equitable Life Assurance
Society of the United States (financial
services); previously President and
Chief Operating Officer of the Private
Client Group of Morgan Stanley (May
1999-August 2000), President and
Chief Operating Officer of Individual
Securities of Morgan Stanley
(February 1997-May 1999).

Philip J. Purcell (59) Director or Trustee of the Morgan 123 Director of American
1585 Broadway Stanley Funds and TCW/DW Term Airlines, Inc. and its parent
New York, NY Trust 2003; Chairman of the Board of company, AMR
Directors and Chief Executive Officer Corporation.
of Morgan Stanley and Morgan
Stanley DW; Director of the
Distributor; Chairman of the Board of
Directors and Chief Executive Officer
of Novus Credit Services Inc.;
Director and/or officer of various
Morgan Stanley subsidiaries.

- ----------

* This is the date the Director began serving the Morgan Stanley Funds.

POSITION(S)
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED
- ------------------------------ --------------------- ----------------------

Mitchell M. Merin (49) President Since May 1999
1221 Avenue of the Americas
New York, NY

Barry Fink (48) Vice President, Since February 1997
1221 Avenue of the Americas Secretary and
New York, NY General Counsel

Thomas F. Caloia (57) Treasurer Since April 1989
c/o Morgan Stanley Trust
Harborside Financial Center,
Plaza Two,
Jersey City, NJ

Ronald E. Robison (64) Executive Vice Since April 2003
1221 Avenue of the Americas President and
New York, NY Principal Executive
Officer

Joseph J. McAlinden (60) Vice Since July 1995
1221 Avenue of the Americas President
New York, NY

Francis Smith (37) Vice President Since September 2002
c/o Morgan Stanley Trust and Chief
Harborside Financial Center, Financial Officer
Plaza Two,
Jersey City, NJ

NAME, AGE AND ADDRESS OF
EXECUTIVE OFFICER PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
- ------------------------------ ---------------------------------------------------------------

Mitchell M. Merin (49) President and Chief Operating Officer of Morgan Stanley
1221 Avenue of the Americas Investment Management (since December 1998); President,
New York, NY Director (since April 1997) and Chief Executive Officer (since
June 1998) of the Investment Manager and Morgan Stanley
Services; Chairman, Chief Executive Officer and Director of
the Distributor (since June 1998); Chairman (since June
1998) and Director (since January 1998) of the Transfer
Agent; Director of various Morgan Stanley subsidiaries;
President (since May 1999), of the Morgan Stanley Funds
and TCW/DW Term Trust 2003; Trustee (since December
1999) and President and Chief Executive Officer (since
October 2002) of the Van Kampen Open-End Funds and
President and Chief Executive Officer (since December
2002) of the Van-Kampen Closed-End Funds; previously
Chief Strategic Officer of the Investment Manager and
Morgan Stanley Services, Executive Vice President of the
Distributor (April 1997-June 1998), Chief Executive
Officer (September 2002-April 2003) and Vice President
(May 1997-April 1999) of the Morgan Stanley Funds and TCW/DW
Term Trust 2003, and Executive Vice President of Morgan Stanley.

Barry Fink (48) General Counsel (since May 2000) and Managing Director
1221 Avenue of the Americas (since December 2000) of Morgan Stanley Investment
New York, NY Management; Managing Director (since December 2000), of
the Investment Manager and Morgan Stanley Services;
Assistant Secretary of Morgan Stanley DW; Vice President,
Secretary and General Counsel of the Morgan Stanley
Funds and TCW/DW Term Trust 2003; Managing Director,
Director and Secretary of the Distributor; previously, Vice
President and Assistant General Counsel of the Investment
Manager and Morgan Stanley Services (February
1997-December 2001).

Thomas F. Caloia (57) Executive Director (since December 2002) and Assistant
c/o Morgan Stanley Trust Treasurer of the Investment Manager, the Distributor and
Harborside Financial Center, Morgan Stanley Services; Treasurer of the Morgan Stanley
Plaza Two, Funds. Formerly First Vice President of the Investment
Jersey City, NJ Manager, the Distributor and Morgan Stanley Services.

Ronald E. Robison (64) Managing Director, Chief Administrative Officer and Director
1221 Avenue of the Americas (since February 1999) of the Investment Manager and
New York, NY Morgan Stanley Services, Chief Executive Officer and
Director of the Transfer Agent and Executive Vice President
and Principal Executive Officer of the Morgan Stanley Funds
and TCW/DW Term Trust 2003 (since April 2003); previously
Managing Director of the TCW Group Inc.

Joseph J. McAlinden (60) Managing Director and Chief Investment Officer of the
1221 Avenue of the Americas Investment Manager, Morgan Stanley Investment
New York, NY Management Inc. and Morgan Stanley Investments LP;
Director of the Transfer Agent. Chief Investment Officer of
the Van Kampen Funds.

Francis Smith (37) Vice President and Chief Financial Officer of the Morgan
c/o Morgan Stanley Trust Stanley Funds and TCW/DW Term Trust 2003 (since
Harborside Financial Center, September 2002); Executive Director of the Investment
Plaza Two, Manager and Morgan Stanley Services (since December
Jersey City, NJ 2001); previously Vice President of the Investment Manager
and Morgan Stanley Services (August 2000-November
2001), Senior Manager at PricewaterhouseCoopers LLP
(January 1998-August 2000).

In addition, A. Thomas Smith III, Managing Director and General Counsel of
the Investment Manager and Morgan Stanley Services, is a Vice President and
Assistant Secretary of the Fund, and Sara Badler, Stefanie Chang-Yu, Lou Anne
D. McInnis, Carsten Otto and Ruth Rossi, Executive Directors and Assistant
General Counsels of the Investment Manager and Morgan Stanley Services, Marilyn
K. Cranney, First Vice President and Assistant General Counsel of the
Investment Manager and Morgan Stanley Services, Joanne Doldo, Natasha Kassian,
Elisa Mitchell, Elizabeth Nelson and Sheldon Winicour, Vice Presidents and
Assistant General Counsels of the Investment Manager and Morgan Stanley
Services and Bennett MacDougall, a Senior Staff Attorney of the Fund, are
Assistant Secretaries of the Fund.

For each Director, the dollar range of equity securities beneficially
owned by the Director is shown below.

AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES IN
ALL REGISTERED INVESTMENT COMPANIES OVERSEEN
DOLLAR RANGE OF EQUITY SECURITIES IN THE FUND BY DIRECTOR IN FAMILY OF INVESTMENT COMPANIES
NAME OF DIRECTOR (AS OF DECEMBER 31, 2002) (AS OF DECEMBER 31, 2002)
- ------------------------ ----------------------------------------------- -----------------------------------------------

INDEPENDENT:
Michael Bozic $10,001 - $50,000 over $100,000
Edwin J. Garn $50,001 - $100,000 over $100,000
Wayne E. Hedien none over $100,000
Dr. Manuel H. Johnson over $100,000 over $100,000
Michael E. Nugent $50,001 - $100,000 over $100,000
INTERESTED:
Charles A. Fiumefreddo over $100,000 over $100,000
James F. Higgins none over $100,000
Philip J. Purcell $50,001 - $100,000 over $100,000

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

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

The Audit Committee is charged with recommending to the full board the
engagement or discharge of the Fund's independent auditors; directing
investigations into matters within the scope of the independent auditors'
duties, including the power to retain outside specialists; reviewing with the
independent auditors the audit plan and results of the auditing engagement;
approving professional services provided by the independent auditors and other
accounting firms prior to the performance of the services; reviewing the
independence of the independent auditors; 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 Audit Committee currently consists of Messrs. Johnson, Bozic,
Hedien, Garn and Nugent. During the Fund's fiscal year ended February 28, 2003,
the Audit Committee held nine meetings.

The board of each fund has a Derivatives Committee to approve parameters
for and monitor the activities of the Fund with respect to derivative
investments, if any, made by the Fund. The Derivatives Committee currently
consists of Mr. Fiumefreddo and all of the Independent Directors of the Fund.
During the Fund's fiscal year ended February 28, 2003, the Derivatives
Committee held four meetings.

Finally, the board of each fund 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. During
the Fund's fiscal year ended February 28, 2003, the Insurance Committee held
two meetings.

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

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

C. COMPENSATION

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

The following table illustrates the compensation that the Fund paid to its
Directors for the fiscal year ended February 28, 2003.

FUND COMPENSATION

AGGREGATE
COMPENSATION
NAME OF DIRECTOR FROM THE FUND
- -------------------------------- --------------

Michael Bozic .................. $ 1,700
Edwin J. Garn .................. 1,700
Wayne E. Hedien ................ 1,700
Dr. Manuel H. Johnson .......... 2,400
Michael E. Nugent .............. 2,200
Charles A. Fiumefreddo ......... 26,204

The following table illustrates the compensation paid to the Fund's
Directors for the calendar year ended December 31, 2002 for services to the 94
registered Morgan Stanley Funds (consisting of 123 portfolios) that were in
operation at December 31, 2002. None of the Fund's Directors received
compensation from any other funds in the Fund Complex, except for Mr. Nugent
who received compensation for service as Director/Trustee to 15 other
registered funds (consisting of 77 portfolios) in the Fund Complex.

CASH COMPENSATION FROM MORGAN STANLEY FUNDS

TOTAL CASH
COMPENSATION
FOR SERVICES TO
94 MORGAN
STANLEY FUNDS
AND OTHER FUNDS
NAME OF DIRECTOR IN THE FUND COMPLEX
- -------------------------------- --------------------

Michael Bozic .................. $ 159.650
Edwin J. Garn .................. 159,650
Wayne E. Hedien ................ 158,950
Dr. Manuel H. Johnson .......... 226,063
Michael E. Nugent .............. 296,475
Charles A. Fiumefreddo ......... 360,000

As of the date of this Statement of Additional Information, 49 of the
Morgan Stanley Funds, including the Fund, have adopted a retirement program
under which an Independent Director/Trustee who retires after serving for at
least five years (or such lesser period as may be determined by the Board) as
an Independent Director/Trustee of any Morgan Stanley Fund that has adopted the
retirement program (each such Fund referred to as an "Adopting Fund" and each
such director/trustee referred to as an "Eligible Director") is entitled to
retirement payments upon reaching the eligible retirement age (normally, after
attaining age 72). Annual payments are based upon length of service.

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

The following table illustrates the retirement benefits accrued to the
Fund's Independent Directors by the Fund for the fiscal year ended February 28,
2003 and by the 49 Morgan Stanley Funds (including the Fund) for the calendar
year ended December 31, 2002, and the estimated retirement benefits for the
Independent Directors, to commence upon their retirement, from the Fund as of
February 28, 2003 and from the 49 Morgan Stanley Funds as of December 31, 2002.
For the calendar year ended December 31, 2002, no retirement benefits were
accrued to the Independent Directors from any other funds in the Fund Complex.

- ----------

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

RETIREMENT BENEFITS FROM THE FUND AND ALL MORGAN STANLEY FUNDS

FOR ALL ADOPTING FUNDS ESTIMATED ANNUAL
-------------------------------- RETIREMENT BENEFITS BENEFITS
ESTIMATED ACCRUED AS EXPENSES UPON RETIREMENT(2)
CREDITED YEARS ESTIMATED --------------------- -----------------------
OF SERVICE AT PERCENTAGE BY ALL FROM FROM ALL
NAME OF RETIREMENT OF ELIGIBLE BY THE ADOPTING THE ADOPTING
INDEPENDENT DIRECTOR (MAXIMUM 10) COMPENSATION FUND FUNDS FUND FUNDS
- ------------------------------- ---------------- ------------- -------- ---------- -------- ---------

Michael Bozic ................. 10 60.44% $385 $18,457 $ 967 $47,838
Edwin J. Garn ................. 10 60.44 564 23,881 985 47,878
Wayne E. Hedien ............... 9 51.37 730 34,473 837 40,842
Dr. Manuel H. Johnson ......... 10 60.44 392 19,803 1,420 70,050
Michael E. Nugent ............. 10 60.44 661 32,362 1,269 62,646

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

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

The following owned 5% or more of the outstanding shares of Class A of the
Fund as of April 8, 2003: State Street Bank and Trust Co., for benefit of
ADP/Morgan Stanley Alliance, 105 Rosemont Avenue, Westwood, MA 02090-2318 -
21.34%. The following owned 5% or more of the outstanding shares of Class D of
the Fund as of April 8, 2003: MAC & Co., Mutual Funds Operations, Morgan
Stanley DPSP/START Plan, PO Box 3198, Pittsburgh, PA 15230-3198 - 38.81%.

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

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

A. INVESTMENT MANAGER

The Investment Manager 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 Manager 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.

Pursuant to an Investment Management Agreement (the "Management
Agreement") with the Investment Manager, the Fund has retained the Investment
Manager to provide administrative services and manage the investment of the
Fund's assets, including the placing of orders for the purchase and sale of
portfolio securities. The Fund pays the Investment Manager monthly compensation
calculated daily by applying the following annual rates to the net assets of
the Fund determined as of the close of each business day: 0.625% to the portion
of daily net assets not exceeding $250 million; 0.50% to the portion of daily
net assets exceeding $250 million but not exceeding $1 billion; 0.475% to the
portion of daily net assets exceeding $1 billion but not exceeding $2 billion;
0.45% to the portion of daily net assets exceeding $2 billion but not exceeding
$3 billion; 0.425% to the portion of daily net assets exceeding
$3 billion but not exceeding $4 billion; 0.40% to the portion of daily net
assets exceeding $4 billion but not exceeding $5 billion; 0.375% to the portion
of daily net assets exceeding $5 billion but not exceeding $6 billion; 0.350%
to the portion of daily net assets exceeding $6 billion but not exceeding $8
billion; 0.325% to the portion of daily net assets exceeding $8 billion but not
exceeding $10 billion; 0.30% to the portion of daily net assets exceeding $10
billion but not exceeding $15 billion and 0.275% to the portion of daily net
assets exceeding $15 billion. The management fee is allocated among the Classes
pro rata based on the net assets of the Fund attributable to each Class. For
the fiscal years ended February 28, 2001, 2002 and 2003, the Investment Manager
accrued total compensation under the Management Agreement in the amounts of
$49,611,170, $44,454,256 and $34,965,682, respectively.

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

In approving the Management Agreement, the Board of Directors, including
the Independent Directors, considered the nature, quality and scope of the
services provided by the Investment Manager, the performance, fees and expenses
of the Fund compared to other similar investment companies, the Investment
Manager's expenses in providing the services, the profitability of the
Investment Manager and its affiliated companies and other benefits they derive
from their relationship with the Fund and the extent to which economies of
scale are shared with the Fund. The Independent Directors met with and reviewed
reports from third parties about the foregoing factors and changes, if any, in
such items since the preceding year's deliberations. The Independent Directors
noted their confidence in the capability and integrity of the senior management
and staff of the Investment Manager and the financial strength of the
Investment Manager and its affiliated companies. The Independent Directors
weighed the foregoing factors in light of the advice given to them by their
legal counsel as to the law applicable to the review of investment advisory
contracts. Based upon its review, the Board of Directors, including all of the
Independent Directors, determined, in the exercise of its business judgment,
that approval of the Management Agreement was in the best interests of the Fund
and its shareholders.

B. PRINCIPAL UNDERWRITER

The Fund's principal underwriter is the Distributor (which has the same
address as the Investment Manager). In this capacity, the Fund's shares are
distributed by the Distributor. The Distributor has entered into a selected
dealer agreement with 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 negligence or reckless disregard of its obligations, the Distributor is
not liable to the Fund or any of its shareholders for any error of judgment or
mistake of law or for any act or omission or for any losses sustained by the
Fund or its shareholders.

C. SERVICES PROVIDED BY THE INVESTMENT MANAGER

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

Under the terms of the Management Agreement, in addition to managing the
Fund's investments, the Investment Manager maintains certain of the Fund's
books and records and furnishes, at its own expense, the office space,
facilities, equipment, clerical help, bookkeeping and certain legal services as
the Fund may reasonably require in the conduct of its business, including the
preparation of prospectuses, proxy statements and reports required to be filed
with federal and state securities

commissions (except insofar as the participation or assistance of independent
auditors and attorneys is, in the opinion of the Investment Manager, necessary
or desirable). The Investment Manager also bears the cost of telephone service,
heat, light, power and other utilities provided to the Fund.

Expenses not expressly assumed by the Investment Manager under the
Management Agreement or by the Distributor, will be paid by the Fund. These
expenses will be allocated among the four Classes of shares pro rata based on
the net assets of the Fund attributable to each Class, except as described
below. Such expenses include, but are not limited to: expenses of the Plan of
Distribution pursuant to Rule 12b-1; charges and expenses of any registrar,
custodian, stock transfer and dividend disbursing agent; brokerage commissions;
taxes; engraving and printing share certificates; registration costs of the
Fund and its shares under federal and state securities laws; the cost and
expense of printing, including typesetting, and distributing prospectuses of
the Fund and supplements thereto to the Fund's shareholders; all expenses of
shareholders' and Directors' meetings and of preparing, printing and mailing of
proxy statements and reports to shareholders; fees and travel expenses of
Directors or members of any advisory board or committee who are not employees
of the Investment Manager or any corporate affiliate of the Investment Manager;
all expenses incident to any dividend, withdrawal or redemption options;
charges and expenses of any outside service used for pricing of the Fund's
shares; fees and expenses of legal counsel, including counsel to the Directors
who are not interested persons of the Fund or of the Investment Manager (not
including compensation or expenses of attorneys who are employees of the
Investment Manager); fees and expenses of the Fund's independent auditors;
membership dues of industry associations; interest on Fund borrowings; postage;
insurance premiums on property or personnel (including officers and Directors)
of the Fund which inure to its benefit; extraordinary expenses (including, but
not limited to, legal claims and liabilities and litigation costs and any
indemnification relating thereto); and all other costs of the Fund's operation.
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 Directors.

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

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

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% and 1.0% of the average
daily net assets of Class A and Class C, respectively, and, with respect to
Class B, 1.0% of the lesser of: (a) the average daily aggregate gross sales of
the Fund's Class B shares since the inception of the Plan on July 2, 1984 (not
including reinvestment of dividends or capital gains distributions), less the
average daily aggregate net asset value of the Fund's Class B shares redeemed
since the Plan's inception upon which a contingent deferred sales charge has
been imposed or upon which such charge has been waived, or (b) the average
daily net assets of Class B attributable to Class B shares issued, net of Class
B shares redeemed, since the inception of the Plan.

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 February 28, in approximate amounts as provided in the table below
(the Distributor did not retain any of these amounts).

2003 2002 2001
--------------------------- ------------------------- --------------------------

Class A .......... FSCs:(1) $ 256,156 FSCs:(1) $ 270,768 FSCs:(1) $ 343,208
CDSCs: $ 1,136 CDSCs: $ 1,743 CDSCs: $ 9,741

Class B .......... CDSCs: $ 7,218,194 CDSCs: $9,002,713 CDSCs: $15,730,311

Class C .......... CDSCs: $ 23.538 CDSCs: $ 36,197 CDSCs: $ 65,973

- ----------
(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 Directors receive and
review promptly after the end of each calendar quarter a written report
provided by the Distributor of the amounts expended under the Plan and the
purpose for which such expenditures were made. Class B shares of the Fund
accrued amounts payable to the Distributor under the Plan, during the fiscal
year ended February 28, 2003, of $78,270,587. This amount is equal to 1.00% of
the average daily net assets of Class B for the fiscal year and was calculated
pursuant to clause (b) of the compensation formula under the Plan. For the
fiscal year ended February 28, 2003, Class A and Class C shares of the Fund
accrued payments under the Plan amounting to $277,221 and $1,031,853,
respectively, which amounts are equal to 0.23% and 1.00% of the average daily
net assets of Class A and Class C, respectively, for the fiscal year.

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

With respect to Class A shares, 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 5.0% of the
amount sold (except as provided in the following sentence) 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. On orders of $1 million or more (for which no sales
charge was paid) or net asset value purchases by employer-sponsored employee
benefit plans, whether or not qualified under the Internal Revenue Code, for
which (i) the Transfer Agent serves as trustee, (ii) Morgan Stanley's
Retirement Plan Services serves as recordkeeper pursuant to a written
Recordkeeping Services Agreement or (iii) an entity independent from Morgan
Stanley serves as recordkeeper under an alliance or similar agreement with
Morgan Stanley's Retirement Plan Services ("Morgan Stanley Eligible Plans"),
the Investment Manager compensates Financial Advisors by paying them, from its
own funds, a gross sales credit of 1.0% of the amount sold.

or distributions) of the amount sold in all cases. In the case of Class B
shares purchased by Morgan Stanley Eligible Plans, Morgan Stanley DW
compensates its Financial Advisors by paying them, from its own funds, a gross
sales credit of 3.0% of the amount sold.

With respect to Class C shares, 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 1.0% of the amount
sold and an annual residual commission, currently up to 1.0% of the current
value of the respective accounts for which they are the Financial Advisors of
record.

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

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

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

The distribution fee that the Distributor receives from the Fund under the
Plan, in effect, offsets distribution expenses incurred under the Plan on
behalf of the Fund and, in the case of Class B shares, opportunity costs, such
as the gross sales credit and an assumed interest charge thereon ("carrying
charge"). These expenses may include the cost of Fund-related educational
and/or business-related trips or payment of Fund-related educational and/or
promotional expenses of Financial Advisors. 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 1.0%, 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 Directors, including, a majority of the Independent Directors. Expenses
representing the service fee (for Class A) or a gross sales credit or a
residual to Financial Advisors and other authorized financial representatives
(for Class C) may be reimbursed without prior determination. In the event that
the Distributor proposes that monies shall be reimbursed for other than such
expenses, then in making quarterly determinations of the amounts that may be
reimbursed by the Fund, the Distributor will provide and the Directors will
review a quarterly budget of projected distribution expenses to be incurred on
behalf of the Fund, together with a report explaining the purposes and
anticipated benefits of incurring such expenses. The Directors 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 February 28, 2003 to the Distributor. The
Distributor and Morgan Stanley DW estimate that they have spent, pursuant to
the Plan, $1,237,829,881 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) 2.18% ($27,025,565) -- advertising and promotional expenses; (ii) 0.13%
($1,660,731) -- printing of prospectuses for distribution to other than current
shareholders; and (iii) 97.68% ($1,209,143,585) -- other expenses, including the
gross sales credit and the carrying charge, of which 9.72% ($117,514,469)
represents carrying charges, 37.38% ($451,934,454) represents commission credits
to Morgan Stanley DW branch offices and other selected broker-dealers for
payments of commissions to Financial Advisors and other authorized financial
representatives, and 52.90% ($639,694,662) 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 were service fees
during the fiscal year ended February 28, 2003. 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 $19,666,162 as of February 28, 2003, which was
equal to 0.33% 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 Directors will consider at that time
the manner in which to treat such expenses. Any cumulative expenses incurred,
but not yet recovered through distribution fees or CDSCs, may or may not be
recovered through future distribution fees or CDSCs.

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 unreimbursed expenses representing a gross sales
commission credited to Morgan Stanley Financial Advisors and other authorized
financial representatives at the time of sale totaled $2,803 in the case of
Class C at December 31, 2002 (the end of the calendar year), which amount was
equal to 0.0031% of the net assets of Class C on such date, and that there were
no such expenses that may be reimbursed in the subsequent year in the case of
Class A on such date. No interest or other financing charges will be incurred
on any Class A or Class C distribution expenses incurred by the Distributor
under the Plan or on any unreimbursed expenses due to the Distributor pursuant
to the Plan.

No interested person of the Fund nor any Independent Director has any
direct financial interest in the operation of the Plan except to the extent
that the Distributor, the Investment Manager, Morgan Stanley 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 Directors, including a majority of the Independent
Directors, consider whether the Plan should be continued. Prior to approving
the last continuation of the Plan, the Directors 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 Directors considered: (1) the Fund's experience under the Plan
and whether such experience indicates that the Plan is operating as
anticipated; (2) the benefits the Fund had obtained, was obtaining and would be
likely to obtain under the Plan, 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 Directors, including each of the Independent Directors, determined
that continuation of the Plan would be in the best interest of the Fund and
would have a reasonable likelihood of continuing to benefit the Fund and its
shareholders. In the Directors' quarterly review of the Plan, they will
consider its continued appropriateness and the level of compensation provided
therein.

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

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 AUDITORS

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,
serves as the independent auditors of the Fund. The independent auditors are
responsible for auditing the annual financial statements of the Fund.

(3) AFFILIATED PERSONS

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

G. CODES OF ETHICS

The Fund, the Investment Manager 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.

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

A. BROKERAGE TRANSACTIONS

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

For the fiscal years ended February 28, 2001, 2002 and 2003, the Fund paid
a total of $4,801,392, $1,859,503 and $3,837,668, 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 February 28, 2001, 2002 and 2003, 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
broker in a commensurate arm's-length transaction. Furthermore, the Directors,
including the Independent Directors, have adopted procedures which are
reasonably designed to provide that any commissions, fees or other remuneration
paid to an affiliated broker or dealer are consistent with the foregoing
standard. The Fund does not reduce the management fee it pays to the Investment
Manager by any amount of the brokerage commissions it may pay to an affiliated
broker or dealer.

During the fiscal years ended February 28, 2001, 2002 and 2003, the Fund
paid a total of $337,322, $34,427 and $0, respectively, in brokerage
commissions to Morgan Stanley DW.

During the fiscal years ended February 28, 2001, 2002 and 2003, the Fund
paid a total of $326,490, $311,200 and $256,270, respectively, in brokerage
commissions to Morgan Stanley & Co. During the fiscal year ended February 28,
2003, the brokerage commissions paid to Morgan Stanley & Co. represented
approximately 6.68% of the total brokerage commissions paid by the Fund for
this period and were paid on account of transactions having an aggregate dollar
value equal to approximately 9.58% 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. Consistent with this
policy, when securities transactions are effected on a stock exchange, the
Fund's policy is to pay commissions which are considered fair and reasonable
without necessarily determining that the lowest possible commissions are paid
in all circumstances. The Fund believes that a requirement always to seek the
lowest possible commission cost could impede effective portfolio management and
preclude the Fund and the Investment Manager from obtaining a high quality of
brokerage and research services. In seeking to determine the reasonableness of
brokerage commissions paid in any transaction, the Investment Manager relies
upon its experience and knowledge regarding commissions generally charged by
various brokers and on its judgment in evaluating the brokerage and research
services received from the broker effecting the transaction. These
determinations are necessarily subjective and imprecise, as in most cases an
exact dollar value for those services is not ascertainable.

In seeking to implement the Fund's policies, the Investment Manager
effects transactions with those brokers and dealers who the Investment Manager
believes provide the most favorable prices and are capable of providing
efficient executions. If the Investment Manager believes the prices and
executions are obtainable from more than one broker or dealer, it may give
consideration to placing portfolio transactions with those brokers and dealers
who also furnish research and other services to the Fund or the Investment
Manager. The services may include, but are not limited to, any one or more of
the following: information as to the availability of securities for purchase or
sale; statistical or factual information or opinions pertaining to investment;
wire services; and appraisals or evaluations of portfolio securities. The
information and services received by the Investment Manager from brokers and
dealers may be utilized by the Investment Manager 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 Manager and certain of its affiliates currently serve as
investment manager to a number of clients, including other investment
companies, and may in the future act as investment manager or advisor to
others. It is the practice of the Investment Manager and its affiliates to
cause purchase and sale transactions 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 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 Manager 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 February 28, 2003, the Fund paid $2,914,739
in brokerage commissions in connection with transactions in the aggregate
amount of $1,806,239,747 to brokers because of research services provided.

E. REGULAR BROKER-DEALERS

During the fiscal year ended February 28, 2003, the Fund did not purchase
securities issued by issuers which were among the ten brokers or the ten dealers
that executed transactions for or with the Fund in the largest dollar amounts
during the year. At February 28, 2003 the Fund held securities issued by Bank of
America Corp. and Citigroup, Inc., with market values of $212,317,536 and
$73,358,002, respectively.

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

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

All shares of common stock 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, as discussed
herein, Class A, Class B and Class C bear the expenses related to the
distribution of their respective shares.

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
Directors may call special meetings of shareholders for action by shareholder
vote as may be required by the Investment Company Act or the Fund's By-Laws.
Under certain circumstances the Directors may be removed by action of the
Directors. In addition, under certain circumstances the shareholders may call a
meeting to remove the Directors 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 percent of the
shares voting can, if they choose, elect all Directors being selected, while
the holders of the remaining shares would be unable to elect any Directors.

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.

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 transaction pursuant to the exchange
privilege.

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

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 Management and Other Services - E. Rule 12b-1 Plan." The price of
Fund shares, called "net asset value," is based on the value of the Fund's
portfolio securities. Net asset value per share of each Class is calculated by
dividing the value of the portion of the Fund's securities and other assets
attributable to that Class, less the liabilities attributable to that Class, by
the number of shares of that Class outstanding. The assets of each Class of
shares are invested in a single portfolio. The net asset value of each Class,
however, will differ because the Classes have different ongoing fees.

In the calculation of the Fund's net asset value: (1) an equity portfolio
security listed or traded on the New York or American Stock Exchange or other
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 equity 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. When market quotations are not
readily available, including circumstances under which it is determined by the
Investment Manager that the sale 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
Directors. For valuation purposes, quotations of foreign portfolio securities,
other assets and liabilities and forward contracts stated in foreign currency
are translated into U.S. dollar equivalents at the prevailing market rates prior
to the close of the New York Stock Exchange.

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

Certain of the Fund's portfolio securities may be valued by an outside
pricing service approved by the Fund's Directors. 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.

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

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

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

INVESTMENT COMPANY TAXATION. The Fund intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as 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
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.

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 Manager will select which securities to sell. The Fund may realize a
gain or loss from such sales. In the event the Fund realizes net capital gains
from such transactions, its shareholders may receive a larger capital gain
distribution, if any, than they would in the absence of such transactions.

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 realized by non-corporate shareholders
generally is 20%. A special lower tax rate of 18% on long-term capital gains is
available to non-corporate shareholders to the extent the distributions of
long-term capital gains are derived from securities which the Fund purchased
after December 31, 2000, and held for more than five years.

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

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.

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, for tax purposes,
generally will result in short-term capital 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 realized by
non-corporate shareholders generally is 20%. A special lower tax rate of 18% on
long-term capital gains is available for non-corporate shareholders who
purchased shares after December 31, 2000, and held such shares for more than
five years. This special lower tax rate of 18% for five-year property does not
apply to non-corporate shareholders holding Fund shares which were purchased on
or prior to December 31, 2000, unless such shareholders made an election to
treat the Fund shares as being sold and reacquired on January 1, 2001. Any loss
realized by shareholders upon a sale or redemption of shares within six months
of the date of their purchase will be treated as a long-term capital loss to
the extent of any distributions of net long-term capital gains with respect to
such shares during the six-month period.

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

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
first fund, followed by the purchase of shares in the second fund.

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

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

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

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

From time to time, the Fund may quote its "total return" in advertisements
and sales literature. These figures are computed separately for Class A, Class
B, Class C and Class D shares. The Fund's "average annual total return"
represents an annualization of the Fund's total return over a particular period
and is computed by finding the annual percentage rate which will result in the
ending redeemable value of a hypothetical $1,000 investment made at the
beginning of a one, five or ten year period, or for the period from the date of
commencement of operations, if shorter than any of the foregoing. The ending
redeemable value is reduced by any contingent deferred sales charge ("CDSC") at
the end of the one, five, ten year or other period. For the purpose of this
calculation, it is assumed that all dividends and distributions are reinvested.
The formula for computing the average annual total return involves a percentage
obtained by dividing the ending redeemable value by the amount of the initial
investment (which in the case of Class A shares is reduced by the Class A
initial sales charge), taking a root of the quotient (where the root is
equivalent to the number of years in the period) and subtracting 1 from the
result. Based on this calculation, the average annual total returns are as
follows:

AVERAGE ANNUAL RETURNS ASSUMING DEDUCTION OF MAXIMUM SALES CHARGE
PERIOD ENDING FEBRUARY 28, 2003

INCEPTION
CLASS DATE 1 YEAR 5 YEARS 10 YEARS LIFE OF FUND
- ----------------- ---------- ------------ ----------- ---------- -------------

Class A ......... 07/28/97 -27.67% -4.94% - -2.60%
Class B ......... 03/30/81 -27.93% -4.80% 6.26% -
Class C ......... 07/28/97 -25.00% -4.62% - -2.38%
Class D ......... 07/28/97 -23.50% -3.68% - -1.43%

example, the average annual total return of the Fund may be calculated in the
manner described above, but without deduction for any applicable sales charge.
Based on this calculation, the average annual total returns are as follows:

AVERAGE ANNUAL RETURNS ASSUMING NO DEDUCTION OF SALES CHARGE
PERIOD ENDING FEBRUARY 28, 2003

INCEPTION
CLASS DATE 1 YEAR 5 YEARS 10 YEARS LIFE OF FUND
- ----------------- ---------- ------------ ----------- ---------- -------------

Class A ......... 07/28/97 -23.66% -3.90% - -1.66%
Class B ......... 03/30/81 -24.27% -4.52% 6.26% -
Class C ......... 07/28/97 -24.26% -4.62% - -2.38%
Class D ......... 07/28/97 -23.50% -3.68% - -1.43%

In addition, the Fund may compute its aggregate total return for each
Class for specified periods by determining the aggregate percentage rate which
will result in the ending value of a hypothetical $1,000 investment made at the
beginning of the period. For the purpose of this calculation, it is assumed
that all dividends and distributions are reinvested. The formula for computing
aggregate total return involves a percentage obtained by dividing the ending
value (without reduction for any sales charge) by the initial $1,000 investment
and subtracting 1 from the result. Based on the foregoing calculation, the
aggregate total returns are as follows:

AGGREGATE TOTAL RETURNS ASSUMING NO DEDUCTION OF SALES CHARGE
PERIOD ENDING FEBRUARY 28, 2003

INCEPTION
CLASS DATE 1 YEAR 5 YEARS 10 YEARS LIFE OF FUND
- ----------------- ---------- ------------ ------------ ---------- -------------

Class A ......... 07/28/97 -23.66% -18.06% - -8.92%
Class B ......... 03/30/81 -24.27% -20.63% 83.59% -
Class C ......... 07/28/97 -24.26% -21.05% - -12.61%
Class D ......... 07/28/97 -23.50% -17.09% - -7.71%

The Fund may also advertise the performance of hypothetical investments of
$10,000, $50,000 and $100,000 in each Class of shares of the Fund by adding 1
to the Fund's aggregate total return to date (expressed as a decimal and
without taking into account the effect of any applicable CDSC) and multiplying
by $9,475, $48,000 and $97,000 in the case of Class A (investments of $10,000,
$50,000 and $100,000 adjusted for the initial sales charge) or by $10,000,
$50,000 and $100,000 in the case of each of Class B, Class C and Class D, as
the case may be. Investments of $10,000, $50,000 and $100,000 in each Class at
inception of the Class would have grown or declined to the following amounts at
February 28, 2003:

INVESTMENT AT INCEPTION OF:
INCEPTION -----------------------------------
CLASS DATE $10,000 $50,000 $100,000
- ----------------- ---------- --------- ---------- ----------

Class A ......... 07/28/97 $8,630 $43,718 $88,348
Class B ......... 03/30/81 98,861 494,305 988,610
Class C ......... 07/28/97 8,739 43,695 87,390
Class D ......... 07/28/97 9,229 46,145 92,290

The after-tax returns of the Fund may also be advertised or otherwise
reported. This is generally calculated in a manner similar to the computation
of average annual total returns discussed above,

except that the calculation also reflects the effect of taxes on returns. Based
on these calculations, the average annual total returns after taxes on
distributions and after taxes on distributions and redemptions for Class B are
as follows:

AVERAGE ANNUAL AFTER-TAX RETURNS ASSUMING DEDUCTION OF MAXIMUM SALES CHARGE
CLASS B

PERIOD ENDING FEBRUARY 28, 2003

INCEPTION
CALCULATION METHODOLOGY DATE 1 YEAR 5 YEARS 10 YEARS
- ------------------------------------------------------ ---------- ------------ ----------- ---------

After taxes on distributions ......................... 03/30/81 -28.57% -6.16% 5.02%
After taxes on distributions and redemptions ......... 03/30/81 -16.68% -3.66% 5.03%

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

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

EXPERTS. The financial statements of the Fund for the fiscal year ended
February 28, 2003 included in this Statement of Additional Information and
incorporated by reference in the Prospectus have been so included and
incorporated in reliance on the report of Deloitte & Touche LLP, independent
auditors, given on the authority of said firm as experts in auditing and
accounting.

* * * * *

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

Morgan Stanley Dividend Growth Securities Inc.
Portfolio of Investments [ ] February 28, 2003

NUMBER
OF
SHARES VALUE
- ----------------------------------------------------------------------

Common Stocks (99.4%)
Aerospace & Defense (1.0%)
1,293,000 Goodrich Corp. ................. $19,873,410
495,415 Northrop Grumman Corp. ......... 42,952,480
-----------
62,825,890
-----------
Aluminum (3.4%)
3,323,700 Alcan Aluminum Ltd. (Canada) ... 94,459,554
6,433,000 Alcoa, Inc. .................... 131,876,500
-----------
226,336,054
-----------
Apparel/Footwear (1.3%)
2,433,600 VF Corp. ....................... 82,377,360
-----------
Auto Parts: O.E.M. (2.8%)
3,179,900 Delphi Corp. ................... 24,580,627
2,044,200 Johnson Controls, Inc. ......... 159,365,832
-----------
183,946,459
-----------
Beverages: Non-Alcoholic (2.2%)
3,553,000 Coca-Cola Co. (The) ............ 142,901,660
-----------
Chemicals: Agricultural (0.1%)
581,199 Monsanto Co. ................... 9,543,288
-----------
Chemicals: Major Diversified (3.8%)
4,453,400 Dow Chemical Co. (The) ......... 121,577,820
3,545,700 Du Pont (E.I.) de Nemours
& Co., Inc. .................. 130,020,819
-----------
251,598,639
-----------
Computer Processing
Hardware (0.7%)
2,828,400 Hewlett-Packard Co. ............ 44,830,140
-----------
Discount Stores (2.4%)
5,513,400 Target Corp. ................... 157,958,910
-----------
Electric Utilities (5.4%)
3,407,000 Exelon Corp. ................... 167,454,050
2,031,200 FirstEnergy Corp. .............. 59,920,400
2,287,600 FPL Group, Inc. ................ 128,128,476
-----------
355,502,926
-----------

NUMBER
OF
SHARES VALUE
- ----------------------------------------------------------------------

Electronics/Appliances (1.3%)
1,720,300 Whirlpool Corp. ................ $84,741,978
-----------
Finance/Rental/Leasing (3.3%)
2,822,900 Fannie Mae ..................... 180,947,890
2,703,400 MBNA Corp. ..................... 37,442,090
-----------
218,389,980
-----------
Financial Conglomerates (2.5%)
2,200,300 Citigroup, Inc. ................ 73,358,002
4,081,800 J.P. Morgan Chase & Co. ........ 92,575,224
-----------
165,933,226
-----------
Food Distributors (2.0%)
2,828,900 Supervalu, Inc. ................ 39,378,288
3,350,400 SYSCO Corp. .................... 90,862,848
-----------
130,241,136
-----------
Food: Major Diversified (2.2%)
3,738,400 PepsiCo, Inc. .................. 143,255,488
-----------
Forest Products (1.9%)
2,530,900 Weyerhaeuser Co. ............... 126,165,365
-----------
Home Improvement Chains (0.9%)
2,541,500 Home Depot, Inc. (The) ......... 59,598,175
-----------
Household/Personal Care (7.2%)
3,424,400 Avon Products, Inc. ............ 178,068,800
2,555,200 Kimberly-Clark Corp. ........... 117,104,816
2,195,800 Procter & Gamble Co. (The)...... 179,748,188
-----------
474,921,804
-----------
Industrial Conglomerates (8.6%)
1,297,600 3M Co. ......................... 162,680,112
4,964,400 General Electric Co. ........... 119,393,820
4,073,200 Honeywell International, Inc. .. 93,235,548
3,212,300 United Technologies Corp. ...... 188,176,534
-----------
563,486,014
-----------
Industrial Specialties (1.0%)
1,487,900 PPG Industries, Inc. ........... 69,038,560
-----------

See Notes to Financial Statements

Morgan Stanley Dividend Growth Securities Inc.
Portfolio of Investments [ ] February 28, 2003 continued

NUMBER
OF
SHARES VALUE
- ---------------------------------------------------------------------------

Information Technology
Services (2.5%)
2,141,400 International Business
Machines Corp. .................. $ 166,922,130
-------------
Integrated Oil (7.5%)
4,283,200 BP PLC (ADR) (United Kingdom) ..... 163,232,752
5,499,800 Exxon Mobil Corp. ................. 187,103,196
3,601,800 Royal Dutch Petroleum Co.
(NY Registered Shares)
(Netherlands) ................... 142,883,406
-------------
493,219,354
-------------
Life/Health Insurance (3.8%)
3,281,500 Jefferson-Pilot Corp. ............. 123,712,550
4,380,500 Lincoln National Corp. ............ 124,099,565
-------------
247,812,115
-------------
Major Banks (5.2%)
3,066,400 Bank of America Corp. ............. 212,317,536
4,818,400 KeyCorp ........................... 114,340,632
344,400 PNC Financial Services Group ...... 15,473,892
-------------
342,132,060
-------------
Major Telecommunications (2.6%)
4,964,400 Verizon Communications Inc. ....... 171,668,952
-------------
Motor Vehicles (1.8%)
1,394,400 DaimlerChrysler AG (Germany) ...... 42,626,808
2,235,100 General Motors Corp. .............. 75,479,327
-------------
118,106,135
-------------
Multi-Line Insurance (0.3%)
386,900 American International
Group, Inc. ..................... 19,070,301
-------------
Office Equipment/Supplies (2.1%)
4,477,700 Pitney Bowes, Inc. ................ 138,987,808
-------------
Oil & Gas Production (0.5%)
745,200 Kerr-McGee Corp. .................. 30,732,048
-------------

NUMBER
OF
SHARES VALUE
- ---------------------------------------------------------------------------

Oil Refining/Marketing (0.1%)
383,500 Marathon Oil Corp. ................ $ 8,855,015
23,500 Sunoco, Inc. ...................... 831,665
-------------
9,686,680
-------------
Pharmaceuticals: Major (10.1%)
5,214,400 Bristol-Myers Squibb Co. .......... 121,495,520
2,484,400 Merck & Co., Inc. ................. 131,052,100
3,407,000 Pharmacia Corp. ................... 140,777,240
5,548,500 Schering-Plough Corp. ............. 99,983,970
4,963,400 Wyeth ............................. 174,959,850
-------------
668,268,680
-------------
Property - Casualty Insurers (0.5%)
1,672,800 Travelers Property Casualty
Corp. (Class A) ................. 26,179,320
237,600 Travelers Property Casualty
Corp. (Class B) ................. 3,777,840
-------------
29,957,160
-------------
Pulp & Paper (1.7%)
1,805,400 International Paper Co. ........... 63,243,162
2,030,700 Meadwestvaco Corp. ................ 47,091,933
-------------
110,335,095
-------------
Railroads (2.6%)
4,429,100 Burlington Northern Santa
Fe Corp. ........................ 110,727,500
2,270,700 CSX Corp. ......................... 60,991,002
-------------
171,718,502
-------------
Tobacco (0.7%)
1,158,600 Altria Group, Inc. ................ 44,779,890
-------------
Trucks/Construction/Farm
Machinery (3.4%)
1,461,400 Caterpillar, Inc. ................. 68,685,800
3,833,500 Deere & Co. ....................... 158,630,230
-------------
227,316,030
-------------
Total Common Stocks
(Cost $3,467,694,417).............. 6,544,305,992
-------------

See Notes to Financial Statements

Morgan Stanley Dividend Growth Securities Inc.
Portfolio of Investments [ ] February 28, 2003 continued

PRINCIPAL
AMOUNT
IN
THOUSANDS VALUE
- ------------------------------------------------------------

Short-Term Investment (0.4%)
Repurchase Agreement
$27,648 Joint repurchase agreement
account 1.36% due
03/03/03 (dated
02/28/03; proceeds
$27,651,133) (a)
(Cost $27,648,000) ........ $27,648,000
-----------

Total Investments
(Cost $3,495,342,417) (b)..... 99.8 % 6,571,953,992
Other Assets in Excess of
Liabilities .................. 0.2 11,549,736
--- -------------
Net Assets ................... 100.0 % $6,583,503,728
====== ==============

- ---------------------------
ADR American Depository Receipt.

(a) Collateralized by federal agency and U.S. Treasury obligations.

(b) The aggregate cost for federal income tax purposes approximates
the aggregate cost for book purposes. The aggregate gross
unrealized appreciation is $3,275,643,755 and the aggregate gross
unrealized depreciation is $199,032,180, resulting in net
unrealized appreciation of $3,076,611,575.

See Notes to Financial Statements

Morgan Stanley Dividend Growth Securities Inc.
FINANCIAL STATEMENTS

Statement of Assets and Liabilities
February 28, 2003

Assets:

Investments in securities, at value
(cost $3,495,342,417).................................................... $ 6,571,953,992
Receivable for:
Dividends .............................................................. 23,935,302
Investments sold ....................................................... 17,022,291
Capital stock sold ..................................................... 2,777,144
Prepaid expenses and other assets ........................................ 125,319
---------------
Total Assets ........................................................... 6,615,814,048
---------------
Liabilities:
Payable for:
Investments purchased .................................................. 16,823,917
Capital stock redeemed ................................................. 8,052,171
Distribution fee ....................................................... 4,792,906
Investment management fee .............................................. 2,227,278
Accrued expenses and other payables ...................................... 414,048
---------------
Total Liabilities ...................................................... 32,310,320
---------------
Net Assets ............................................................. $ 6,583,503,728
===============
Composition of Net Assets:
Paid-in-capital .......................................................... $ 3,313,978,150
Net unrealized appreciation .............................................. 3,076,611,575
Accumulated undistributed net investment income .......................... 24,473,032
Accumulated undistributed net realized gain .............................. 168,440,971
---------------
Net Assets ............................................................. $ 6,583,503,728
===============
Class A Shares:
Net Assets ............................................................... $ 104,418,750
Shares Outstanding (500,000,000 shares authorized, $.01 par value)........ 3,070,137
Net Asset Value Per Share .............................................. $ 34.01
===============
Maximum Offering Price Per Share,
(net asset value plus 5.54% of net asset value) ........................ $ 35.89
===============
Class B Shares:
Net Assets ............................................................... $ 6,020,241,883
Shares Outstanding (500,000,000 shares authorized, $.01 par value)........ 176,860,245
Net Asset Value Per Share .............................................. $ 34.04
===============
Class C Shares:
Net Assets ............................................................... $ 82,544,417
Shares Outstanding (500,000,000 shares authorized, $.01 par value)........ 2,433,559
Net Asset Value Per Share .............................................. $ 33.92
===============
Class D Shares:
Net Assets ............................................................... $ 376,298,678
Shares Outstanding (500,000,000 shares authorized, $.01 par value)........ 11,059,292
Net Asset Value Per Share .............................................. $ 34.03
===============

See Notes to Financial Statements

Morgan Stanley Dividend Growth Securities Inc.
FINANCIAL STATEMENTS continued

Statement of Operations
For the year ended February 28, 2003

Net Investment Income:

Income
Dividends (net of $2,567,712 foreign withholding tax)......... $ 207,647,151
Interest ..................................................... 1,000,191
----------------
Total Income ............................................... 208,647,342
----------------
Expenses
Distribution fee (Class A shares) ............................ 277,221
Distribution fee (Class B shares) ............................ 78,270,587
Distribution fee (Class C shares) ............................ 1,031,853
Investment management fee .................................... 34,965,682
Transfer agent fees and expenses ............................. 9,614,762
Shareholder reports and notices .............................. 451,914
Custodian fees ............................................... 357,785
Registration fees ............................................ 138,825
Professional fees ............................................ 59,738
Directors' fees and expenses ................................. 50,539
Other ........................................................ 44,053
----------------
Total Expenses ............................................. 125,262,959
----------------
Net Investment Income ...................................... 83,384,383
----------------
Net Realized and Unrealized Gain (Loss):
Net realized gain ............................................ 168,461,681
Net change in unrealized appreciation ........................ (2,624,203,210)
----------------
Net Loss ................................................... (2,455,741,529)
----------------
Net Decrease ................................................. $ (2,372,357,146)
================

See Notes to Financial Statements

Morgan Stanley Dividend Growth Securities Inc.
FINANCIAL STATEMENTS continued

Statement of Changes in Net Assets

FOR THE YEAR FOR THE YEAR
ENDED ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
------------------- ------------------

See Notes to Financial Statements

Morgan Stanley Dividend Growth Securities Inc.
NOTES TO FINANCIAL STATEMENTS [ ] FEBRUARY 28, 2003

1. Organization and Accounting Policies

The following is a summary of significant accounting policies:

A. Valuation of Investments -- (1) an equity portfolio security listed or traded
on the New York or American Stock Exchange, Nasdaq, 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 latest bid price (in cases
where securities are traded on more than one exchange, the securities are valued
on the exchange designated as the primary market pursuant to procedures adopted
by the Directors); (2) all other portfolio securities for which over-the-counter
market quotations are readily available are valued at the latest available bid
price; (3) when market quotations are not readily available, including
circumstances under which it is determined by Morgan Stanley Investment Advisors
Inc. (the "Investment Manager") that sale and bid prices are not reflective of a
security's market value, portfolio securities are valued at their fair value as
determined in good faith under procedures established by and under the general
supervision of the Directors; (4) certain portfolio securities may be valued by
an outside pricing service approved by the Directors; and (5) short-term debt
securities having a maturity date of more than sixty days at time of purchase
are valued on a mark-to-market basis until sixty days prior to maturity and
thereafter at amortized cost based on their value on the 61st day. Short-term
debt securities having a maturity date of sixty days or less at the time of
purchase are valued at amortized cost.

Morgan Stanley Dividend Growth Securities Inc.
NOTES TO FINANCIAL STATEMENTS [ ] FEBRUARY 28, 2003 CONTINUED

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

F. Dividends and Distributions to Shareholders -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.

2. Investment Management Agreement

Morgan Stanley Dividend Growth Securities Inc.
NOTES TO FINANCIAL STATEMENTS [ ] FEBRUARY 28, 2003 CONTINUED

3. Plan of Distribution

Morgan Stanley Dividend Growth Securities Inc.
NOTES TO FINANCIAL STATEMENTS [ ] FEBRUARY 28, 2003 CONTINUED

4. Security Transactions and Transactions with Affiliates

5. Federal Income Tax Status

Morgan Stanley Dividend Growth Securities Inc.
NOTES TO FINANCIAL STATEMENTS [ ] FEBRUARY 28, 2003 CONTINUED

The tax character of distributions paid was as follows:

FOR THE YEAR FOR THE YEAR
ENDED ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
------------------- ------------------

As of February 28, 2003, the tax-basis components of accumulated earnings were as
follows:

As of February 28, 2003, the Fund had temporary book/tax differences
attributable to a non-deductible expense.

Morgan Stanley Dividend Growth Securities Inc.
NOTES TO FINANCIAL STATEMENTS [ ] FEBRUARY 28, 2003 CONTINUED

6. Capital Stock

Transactions in capital stock were as follows:

Morgan Stanley Dividend Growth Securities Inc.
FINANCIAL HIGHLIGHTS

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

FOR THE YEAR ENDED FEBRUARY 28,
-------------------------------
2003 2002
--------------- ---------------

Class A Shares
Selected Per Share Data:
Net asset value, beginning of period ................. $46.44 $52.54
---------- ----------
Income (loss) from investment operations:
Net investment income[+/+] .......................... 0.68 0.71
Net realized and unrealized gain (loss) ............. (11.41) (3.51)
---------- ----------
Total income (loss) from investment operations ....... (10.73) (2.80)
---------- ----------
Less dividends and distributions from:
Net investment income ............................... (0.72) (0.70)
Net realized gain ................................... (0.98) (2.60)
---------- ----------
Total dividends and distributions .................... (1.70) (3.30)
---------- ----------
Net asset value, end of period ....................... $ 34.01 $46.44
========== ==========
Total Return+ ........................................ (23.66)% ( 5.35)%
Ratios to Average Net Assets(1):
Expenses ............................................. 0.77 % 0.73 %
Net investment income ................................ 1.69 % 1.46 %
Supplemental Data:
Net assets, end of period, in thousands .............. $104,419 $145,257
Portfolio turnover rate .............................. 7 % 0 %

FOR THE YEAR ENDED FEBRUARY 28,
---------------------------------------------
2001 2000* 1999
-------------- --------------- --------------

Class A Shares
Selected Per Share Data:
Net asset value, beginning of period ................. $ 50.11 $60.22 $58.39
--------- ---------- ---------
Income (loss) from investment operations:
Net investment income|P^ ............................ 0.84 0.94 1.05
Net realized and unrealized gain (loss) ............. 8.35 (7.75) 3.58
--------- ---------- ---------
Total income (loss) from investment operations ....... 9.19 (6.81) 4.63
--------- ---------- ---------
Less dividends and distributions from:
Net investment income ............................... (0.92) (0.99) (1.02)
Net realized gain ................................... (5.84) (2.31) (1.78)
---------- ---------- ----------
Total dividends and distributions .................... (6.76) (3.30) (2.80)
---------- ---------- ----------
Net asset value, end of period ....................... $ 52.54 $50.11 $60.22
========== ========== ==========
Total Return\^ ....................................... 19.31% (12.07)% 8.10%
Ratios to Average Net Assets(1):
Expenses ............................................. 0.73% 0.67 % 0.64%
Net investment income ................................ 1.57% 1.52 % 1.76%
Supplemental Data:
Net assets, end of period, in thousands .............. $223,106 $214,669 $227,457
Portfolio turnover rate .............................. 1% 4 % 13%

- -----------
* Year ended February 29.

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

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

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

See Notes to Financial Statements

Morgan Stanley Dividend Growth Securities Inc.
FINANCIAL HIGHLIGHTS continued

Class B Shares
Selected Per Share Data:
Net asset value, beginning of
period ................................ $46.46 $52.54 $50.10 $60.18 $58.36
---------- ---------- ---------- --------- ---------
Income (loss) from investment
operations:
Net investment income[+/+] ........... 0.37 0.34 0.47 0.64 0.77
Net realized and unrealized gain
(loss) .............................. (11.41) (3.50) 8.35 (7.73) 3.58
---------- ---------- ---------- --------- ---------
Total income (loss) from
investment operations ................. (11.04) (3.16) 8.82 (7.09) 4.35
---------- ---------- ---------- --------- ---------
Less dividends and distributions
from:
Net investment income ................ (0.40) (0.32) (0.54) (0.68) (0.75)
Net realized gain .................... (0.98) (2.60) (5.84) (2.31) (1.78)
---------- ---------- ---------- --------- ---------
Total dividends and distributions ..... (1.38) (2.92) (6.38) (2.99) (2.53)
---------- ---------- ---------- --------- ---------
Net asset value, end of period ........ $34.04 $ 46.46 $52.54 $50.10 $60.18
========== ========== ========== ========= =========
Total Return+......................... (24.27)% (6.06)% 18.48 % (12.49)% 7.59 %
Ratios to Average Net Assets(1):
Expenses .............................. 1.54 % 1.49 % 1.421.15 % 1.11%
Net investment income ................. 0.92 % 0.70 % 0.881.04 % 1.29%
Supplemental Data:
Net assets, end of period, in
thousands ............................. $6,020,242 $9,865,150 $11,819,378 $12,869,283 $18,060,848
Portfolio turnover rate ............... 7 % 0 % 1% 4 % 13%

- -----------
* Year ended February 29.

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

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

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

See Notes to Financial Statements

Morgan Stanley Dividend Growth Securities Inc.
FINANCIAL HIGHLIGHTS continued

FOR THE YEAR ENDED FEBRUARY
28,
-----------------------------
2003 2002
------------- ---------------

Class C Shares
Selected Per Share Data:
Net asset value, beginning of period ................. $46.32 $52.44
-------- ----------
Income (loss) from investment operations:
Net investment income[+/+] .......................... 0.37 0.35
Net realized and unrealized gain (loss) ............. (11.38) (3.49)
-------- ----------
Total income (loss) from investment operations ....... (11.01) (3.14)
-------- ----------
Less dividends and distributions from:
Net investment income ............................... (0.41) (0.38)
Net realized gain ................................... (0.98) (2.60)
-------- ----------
Total dividends and distributions .................... (1.39) (2.98)
-------- ----------
Net asset value, end of period ....................... $33.92 $ 46.32
======== ==========
Total Return+ ........................................ (24.26)% (6.05)%
Ratios to Average Net Assets(1):
Expenses ............................................. 1.54 % 1.48 %
Net investment income ................................ 0.92 % 0.71 %
Supplemental Data:
Net assets, end of period, in thousands .............. $82,544 $124,976
Portfolio turnover rate .............................. 7 % 0 %

FOR THE YEAR ENDED FEBRUARY 28,
---------------------------------------------
2001 2000* 1999
-------------- --------------- --------------

Class C Shares
Selected Per Share Data:
Net asset value, beginning of period ................. $49.96 $60.02 $58.28
--------- ---------- ---------
Income (loss) from investment operations:
Net investment income[+/+] .......................... 0.50 0.47 0.59
Net realized and unrealized gain (loss) ............. 8.32 (7.70) 3.56
--------- ---------- ---------
Total income (loss) from investment operations ....... 8.82 (7.23) 4.15
--------- ---------- ---------
Less dividends and distributions from:
Net investment income ............................... (0.50) (0.52) (0.63)
Net realized gain ................................... (5.84) (2.31) (1.78)
---------- ---------- ----------
Total dividends and distributions .................... (6.34) (2.83) (2.41)
---------- ---------- ----------
Net asset value, end of period ....................... $52.44 $49.96 $60.02
========== ========== ==========
Total Return+ ........................................ 18.54% (12.73)% 7.26%
Ratios to Average Net Assets(1):
Expenses ............................................. 1.37% 1.43 % 1.43%
Net investment income ................................ 0.93% 0.76 % 0.97%
Supplemental Data:
Net assets, end of period, in thousands .............. $139,320 $135,496 $144,425
Portfolio turnover rate .............................. 1% 4 % 13%

- -----------
* Year ended February 29.

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

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

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

See Notes to Financial Statements

Morgan Stanley Dividend Growth Securities Inc.
FINANCIAL HIGHLIGHTS continued

FOR THE YEAR ENDED FEBRUARY 28,
-------------------------------
2003 2002
--------------- ---------------

Class D Shares
Selected Per Share Data:
Net asset value, beginning of period ................. $46.47 $52.59
---------- ----------
Income (loss) from investment operations:
Net investment income[+/+] .......................... 0.77 0.83
Net realized and unrealized gain (loss) ............. (11.41) (3.53)
---------- ----------
Total income (loss) from investment operations ....... (10.64) (2.70)
---------- ----------
Less dividends and distributions from:
Net investment income ............................... (0.82) (0.82)
Net realized gain ................................... (0.98) (2.60)
---------- ----------
Total dividends and distributions .................... (1.80) (3.42)
---------- ----------
Net asset value, end of period ....................... $34.03 $46.47
========== ==========
Total Return+ ........................................ (23.50)% ( 5.10)%
Ratios to Average Net Assets(1):
Expenses ............................................. 0.54 % 0.49 %
Net investment income ................................ 1.92 % 1.70 %
Supplemental Data:
Net assets, end of period, in thousands .............. $376,299 $480,234
Portfolio turnover rate .............................. 7 % 0 %

FOR THE YEAR ENDED FEBRUARY 28,
---------------------------------------------
2001 2000* 1999
-------------- --------------- --------------

Class D Shares
Selected Per Share Data:
Net asset value, beginning of period ................. $50.16 $60.26 $58.43
--------- ---------- ---------
Income (loss) from investment operations:
Net investment income[+/+] .......................... 0.97 1.09 1.17
Net realized and unrealized gain (loss) ............. 8.35 (7.76) 3.59
--------- ---------- ---------
Total income (loss) from investment operations ....... 9.32 (6.67) 4.76
--------- ---------- ---------
Less dividends and distributions from:
Net investment income ............................... (1.05) (1.12) (1.15)
Net realized gain ................................... (5.84) (2.31) (1.78)
---------- ---------- ----------
Total dividends and distributions .................... (6.89) (3.43) (2.93)
---------- ---------- ----------
Net asset value, end of period ....................... $52.59 $50.16 $60.26
========== ========== ==========
Total Return+ ........................................ 19.60% (11.85)% 8.33%
Ratios to Average Net Assets(1):
Expenses ............................................. 0.48% 0.43 % 0.43%
Net investment income ................................ 1.82% 1.76 % 1.97%
Supplemental Data:
Net assets, end of period, in thousands .............. $423,519 $405,246 $488,987
Portfolio turnover rate .............................. 1% 4 % 13%

- -----------
* Year ended February 29.

[+/+] 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.

See Notes to Financial Statements

Morgan Stanley Dividend Growth Securities Inc.
INDEPENDENT AUDITORS' REPORT

To the Shareholders and Board of Directors of
Morgan Stanley Dividend Growth Securities Inc.:

Deloitte & Touche LLP
New York, New York
April 9, 2003

2003 Federal Tax Notice (unaudited)

<Table>

STATEMENT OF ADDITIONAL INFORMATION MORGAN STANLEY
EQUITY FUND
JULY 30, 2003
</Table>

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

This Statement of Additional Information is not a prospectus. The
Prospectus (dated July 30, 2003) for the Morgan Stanley Equity 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.

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

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

<Table>

I. Fund History................................................ 4
II. Description of the Fund and Its Investments and Risks....... 4
A. Classification..................................... 4
B. Investment Strategies and Risks.................... 4
C. Fund Policies/Investment Restrictions.............. 13
III. Management of the Fund...................................... 15
A. Board of Trustees.................................. 15
B. Management Information............................. 15
C. Compensation....................................... 21
IV. Control Persons and Principal Holders of Securities......... 22
V. Investment Management and Other Services.................... 23
A. Investment Manager and Sub-Advisor................. 23
B. Principal Underwriter.............................. 24
C. Services Provided by the Investment Manager and the
Sub-Advisor........................................ 24
D. Dealer Reallowances................................ 25
E. Rule 12b-1 Plan.................................... 25
F. Other Service Providers............................ 29
G. Codes of Ethics.................................... 30
VI. Brokerage Allocation and Other Practices.................... 30
A. Brokerage Transactions............................. 30
B. Commissions........................................ 30
C. Brokerage Selection................................ 31
D. Directed Brokerage................................. 31
E. Regular Broker-Dealers............................. 32
VII. Capital Stock and Other Securities.......................... 32
VIII. Purchase, Redemption and Pricing of Shares.................. 33
A. Purchase/Redemption of Shares...................... 33
B. Offering Price..................................... 33
IX. Taxation of the Fund and Shareholders....................... 34
X. Underwriters................................................ 36
XI. Calculation of Performance Data............................. 36
XII. Financial Statements........................................ 38
XIII. Proxy Voting Policy and Procedures......................... Appendix A

</Table>

GLOSSARY OF SELECTED DEFINED TERMS

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

"Custodian"--The Bank of New York.

"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 Equity Fund, a registered open-end investment
company.

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

"Investment Manager"--Morgan Stanley Investment Advisors Inc., a
wholly-owned investment advisor 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 Manager serves as the investment advisor and that hold themselves out
to investors as related companies for investment and investor services.

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

"Sub-Advisor"--Morgan Stanley Investments LP (formerly Miller Andersen &
Sherrerd, LLP), an indirect subsidiary of Morgan Stanley.

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

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

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

The Fund was organized as a Massachusetts business trust, under a
Declaration of Trust, on April 6, 1998 with the name Morgan Stanley Dean Witter
Equity Fund. Effective June 18, 2001, the Fund's name was changed to Morgan
Stanley Equity 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

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

The Sub-Advisor 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.

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.

OPTIONS AND FUTURES TRANSACTIONS. The Fund may engage in transactions in
listed and OTC options. Listed options are issued or guaranteed by the exchange
on which they are traded or by a clearing corporation such as the Options
Clearing Corporation ("OCC"). Ownership of a listed call option gives the Fund
the right to buy from the OCC (in the 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.

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.

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.

Stock Index Options. The Fund may invest in options on stock indexes.
Options on stock indexes are similar to options on stocks except that, rather
than the right to take or make delivery of stock at a specified price, an option
on a stock index gives the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the stock index upon which the
option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option. This amount of cash is equal to
such difference between the closing price of the index and the exercise price of
the option expressed in dollars times a specified multiple. The writer of the
option is obligated, in return for the premium received, to make delivery of
this amount.

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

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

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

it has written, in accordance with the terms of that option, due to insolvency
or otherwise, the Fund would lose the premium paid for the option as well as any
anticipated benefit of the transaction.

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

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

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

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

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

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

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

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

Although most futures contracts call for actual delivery or acceptance of
securities, the contracts usually are closed out before the settlement date
without the making or taking of delivery. Index futures contracts provide for
the delivery of an amount of cash equal to a specified dollar amount times the
difference between the index value at the open or close of the last trading day
of the contract and the

futures contract price. A futures contract sale is closed out by effecting a
futures contract purchase for the same aggregate amount of the specific type of
security (currency) and the same delivery date. If the sale price exceeds the
offsetting purchase price, the seller would be paid the difference and would
realize a gain. If the offsetting purchase price exceeds the sale price, the
seller would pay the difference and would realize a loss. Similarly, a futures
contract purchase is closed out by effecting a futures contract sale for the
same aggregate amount of the specific type of security (currency) and the same
delivery date. If the offsetting sale price exceeds the purchase price, the
purchaser would realize a gain, whereas if the purchase price exceeds the
offsetting sale price, the purchaser would realize a loss. There is no assurance
that the Fund will be able to enter into a closing transaction.

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

Risks of Transactions in Futures Contracts and Related Options. The prices
of securities and indexes subject to futures contracts (and thereby the futures
contract prices) may correlate imperfectly with the behavior of the cash prices
of the Fund's portfolio securities (and the currencies in which they are
denominated). Also, prices of futures contracts may not move in tandem with the
changes in prevailing interest rates, market movements and/or currency exchange
rates against which the Fund seeks a hedge. A correlation may also be distorted
(a) temporarily, by short-term traders' seeking to profit from the difference
between a contract or security price objective and their cost of borrowed funds;
(b) by investors in futures contracts electing to close out their contracts
through offsetting transactions rather than meet margin deposit requirements;
(c) by investors in futures contracts opting to make or
8

take delivery of underlying securities rather than engage in closing
transactions, thereby reducing liquidity of the futures market; and (d)
temporarily, by speculators who view the deposit requirements in the futures
markets as less onerous than margin requirements in the cash market. Due to the
possibility of price distortion in the futures market and because of the
possible imperfect correlation between movements in the prices of securities and
movements in the prices of futures contracts, a correct forecast of interest
rate, currency exchange rate and/or market movement trends by the Investment
Manager may still not result in a successful hedging transaction.

There is no assurance that a liquid secondary market will exist for futures
contracts and related options in which the Fund may invest. In the event a
liquid market does not exist, it may not be possible to close out a futures
position and, in the event of adverse price movements, the Fund would continue
to be required to make daily cash payments of variation margin. The absence of a
liquid market in futures contracts might cause the Fund to make or take delivery
of the underlying securities (currencies) at a time when it may be
disadvantageous to do so.

Exchanges also limit the amount by which the price of a futures contract
may move on any day. If the price moves equal 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 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:

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;

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 which 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 Manager and/or Sub-Advisor. 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.

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 advisory
and administration fees. At the same time, the Fund would continue to pay its
own investment management 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.

SPDRS. The Fund may invest in securities referred to as SPDRs (known as
"spiders") that are designed to track the S&P 500 Index. SPDRs represent an
ownership interest in the SPDR Trust, which holds a portfolio of common stocks
that closely tracks the price performance and dividend yield of the S&P 500
Index. SPDRs trade on the American Stock Exchange like shares of common stock.

SPDRs have the same risks as direct investments in common stocks. The
market value of SPDRs is expected to rise and fall as the S&P 500 Index rises
and falls. If the Fund invests in SPDRs, it would, in addition to its own
expenses, indirectly bear its ratable share of the SPDRs' expenses.

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 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.

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

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

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

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

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

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

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 (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 Sub-Advisor, 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.
12

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 stocks in a
corporation's capital structure and, therefore, entail less risk than the
corporation's 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". 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.

WARRANTS AND SUBSCRIPTION RIGHTS. The Fund may invest in warrants and
subscription rights. Warrants are, in effect, an option to purchase equity
securities at a specific price, generally valid for a specific period of time,
and have no voting rights, pay no dividends and have no rights with respect to
the corporations issuing them. The Fund may acquire warrants attached to other
securities without reference to the foregoing limitations.

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

The Fund will:

1. 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 United States 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. 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 are not deemed to be pledges of assets.

8. 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.

9. 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.)

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

11. 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.

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

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

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

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.

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

A. BOARD OF TRUSTEES

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

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

B. MANAGEMENT INFORMATION

TRUSTEES AND OFFICERS. The Board of the Fund consists of eight Trustees.
These same individuals also serve as directors or trustees for all of the Morgan
Stanley Funds. Five Trustees have no affiliation or business connection with the
Investment Manager or any of its affiliated persons and do not own any stock or
other securities issued by the Investment Manager's parent company, Morgan
Stanley. These are the "non-interested" or "Independent Trustees". The other
three Trustees (the "Management Trustees") are affiliated with the Investment
Manager.

The Independent Trustees of the Fund, their 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, 2002), and other directorships, if any,
held by the Trustee, are shown below. The Fund Complex includes all open- and
closed-end funds (including all of their portfolios) advised by Morgan Stanley
Investment Advisors Inc. and any funds that have an investment advisor that is
an affiliated person of Morgan Stanley Investment Advisors Inc. (including, but
not limited to, Morgan Stanley Investment Management Inc., Morgan Stanley
Investments LP and Van Kampen Asset Management Inc.).

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

Michael Bozic (62) Trustee Since April Retired; Director or 123 Director of Weirton
c/o Mayer, Brown, Rowe & 1994 Trustee of the Morgan Steel Corporation.
Maw LLP Stanley Funds and TCW/DW
Counsel to the Independent Term Trust 2003;
Trustees formerly Vice Chairman
1675 Broadway of Kmart Corporation
New York, NY (December 1998-October
2000), Chairman and
Chief Executive Officer
of Levitz Furniture
Corporation (November
1995-November 1998) and
President and Chief
Executive Officer of
Hills Department Stores
(May 1991-July 1995);
formerly variously
Chairman, Chief
Executive Officer,
President and Chief
Operating Officer (1987-
1991) of the Sears
Merchandise Group of
Sears, Roebuck & Co.

Edwin J. Garn (70) Trustee Since January Director or Trustee of 123 Director of Franklin
c/o Summit Ventures LLC 1993 the Morgan Stanley Funds Covey (time management
1 Utah Center and TCW/DW Term Trust systems), BMW Bank of
201 S. Main Street 2003; formerly United North America, Inc.
Salt Lake City, UT States Senator (R- (industrial loan
Utah)(1974-1992) and corporation), United
Chairman, Senate Banking Space Alliance (joint
Committee (1980-1986); venture between Lockheed
formerly Mayor of Salt Martin and the Boeing
Lake City, Utah Company) and Nuskin Asia
(1971-1974), Astronaut, Pacific (multilevel
Space Shuttle Discovery marketing); member of
(April 12-19, 1985) and the board of various
Vice Chairman, Huntsman civic and charitable
Corporation (chemical organizations.
company); member of the
Utah Regional Advisory
Board of Pacific Corp.

Wayne E. Hedien (69) Trustee Since Retired; Director or 123 Director of The PMI
c/o Mayer, Brown, Rowe & September 1997 Trustee of the Morgan Group Inc. (private
Maw LLP Stanley Funds and TCW/DW mortgage insurance);
Counsel to the Independent Term Trust 2003; Trustee and Vice
Trustees formerly associated with Chairman of The Field
1675 Broadway the Allstate Companies Museum of Natural
New York, NY (1966-1994), most History; director of
recently as Chairman of various other business
The Allstate Corporation and charitable
(March 1993-December organizations.
1994) and Chairman and
Chief Executive Officer
of its wholly-owned
subsidiary, Allstate
Insurance Company (July
1989-December 1994).
</Table>

Dr. Manuel H. Johnson (54) Trustee Since July Chairman of the Audit 123 Director of NVR, Inc.
c/o Johnson Smick 1991 Committee and Director (home construction);
International, Inc. or Trustee of the Morgan Chairman and Trustee of
2099 Pennsylvania Avenue, Stanley Funds and TCW/DW the Financial Accounting
N.W. Term Trust 2003; Senior Foundation (oversight
Suite 950 Partner, Johnson Smick organization of the
Washington, D.C. International, Inc., a Financial Accounting
consulting firm; Co- Standards Board);
Chairman and a founder Director of RBS
of the Group of Seven Greenwich Capital
Council (G7C), an Holdings (financial
international economic holding company).
commission; formerly
Vice Chairman of the
Board of Governors of
the Federal Reserve
System and Assistant
Secretary of the U.S.
Treasury.

Michael E. Nugent (67) Trustee Since July Chairman of the 214 Director of various
c/o Triumph Capital, L.P. 1991 Insurance Committee and business organizations.
445 Park Avenue Director or Trustee of
New York, NY the Morgan Stanley Funds
and TCW/DW Term Trust
2003; director/trustee
of various investment
companies managed by
Morgan Stanley
Investment Management
Inc. and Morgan Stanley
Investments LP (since
July 2001); General
Partner, Triumph
Capital, L.P., a private
investment partnership;
formerly Vice President,
Bankers Trust Company
and BT Capital
Corporation (1984-1988).

</Table>

The Trustees who are affiliated with the Investment Manager or affiliates
of the Investment Manager (as set forth below) and executive officers of the
Fund, their 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 and the other directorships, if any,
held by the Trustee, are shown below.

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

Charles A. Fiumefreddo (70) Chairman of Since July Chairman, Director or 123 None
c/o Morgan Stanley Trust the Board, 1991 Trustee of the Morgan
Harborside Financial Center, and Trustee Stanley Funds and TCW/DW
Plaza Two, Term Trust 2003;
Jersey City, NJ formerly Chief Executive
Officer of the Morgan
Stanley Funds and the
TCW/DW Term Trusts
(until September 2002).
</Table>

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

James F. Higgins (55) Trustee Since June Director or Trustee of 123 Director of AXA
c/o Morgan Stanley Trust 2000 the Morgan Stanley Funds Financial, Inc. and The
Harborside Financial Center, and TCW/DW Term Trust Equitable Life Assurance
Plaza Two, 2003 (since June 2000); Society of the United
Jersey City, NJ Senior Advisor of Morgan States (financial
Stanley (since August services).
2000); Director of the
Distributor and Dean
Witter Realty Inc.;
previously President and
Chief Operating Officer
of the Private Client
Group of Morgan Stanley
(May 1999-August 2000),
President and Chief
Operating Officer of
Individual Securities of
Morgan Stanley (February
1997-May 1999).

Philip J. Purcell (59) Trustee Since April Director or Trustee of 123 Director of American
1585 Broadway 1994 the Morgan Stanley Funds Airlines, Inc. and its
New York, NY and TCW/DW Term Trust parent company, AMR
2003; Chairman of the Corporation.
Board of Directors and
Chief Executive Officer
of Morgan Stanley and
Morgan Stanley DW;
Director of the
Distributor; Chairman of
the Board of Directors
and Chief Executive
Officer of Novus Credit
Services Inc.; Director
and/or officer of
various Morgan Stanley
subsidiaries.
</Table>

- ---------------
* This is the date the Trustee began serving the Morgan Stanley Funds.

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

Mitchell M. Merin (49) President Since May 1999 President and Chief Operating Officer of Morgan Stanley
1221 Avenue of the Americas Investment Management; President, Director and Chief
New York, NY Executive Officer of the Investment Manager and Morgan
Stanley Services; Chairman, Chief Executive Officer and
Director of the Distributor; Chairman and Director of
the Transfer Agent; Director of various Morgan Stanley
subsidiaries; President (since May 1999) of the Morgan
Stanley Funds and TCW/DW Term Trust 2003; Trustee (since
December 1999) and President and Chief Executive Officer
(since October 2002) of the Van Kampen Open-End Funds
and President and Chief Executive Officer (since
December 2002) of the Van Kampen Closed-End Funds, Chief
Executive Officer (September 2002-April 2003) and Vice
President (May 1997-April 1999) of the Morgan Stanley
Funds and the TCW/DW Term Trusts.

Barry Fink (48) Vice Since February 1997 General Counsel (since May 2000) and Managing Director
1221 Avenue of the Americas President, (since December 2000) of Morgan Stanley Investment
New York, NY Secretary Management; Managing Director (since December 2000), and
and Director (since July 1998) of the Investment Manager and
General Morgan Stanley Services; Assistant Secretary of Morgan
Counsel Stanley DW; Vice President, Secretary and General
Counsel of the Morgan Stanley Funds and TCW/DW Term
Trust 2003; Vice President and Secretary of the
Distributor; previously, Vice President, Assistant
General Counsel of the Investment Manager and Morgan
Stanley Services (February 1997-December 2001).
</Table>

Thomas F. Caloia (57) Treasurer Since April 1989 Executive Director (since December 2003) and Assistant
c/o Morgan Stanley Trust Treasurer of the Investment Manager, the Distributor and
Harborside Financial Center, Morgan Stanley Services; Treasurer of the Morgan Stanley
Plaza Two, Funds. Formerly First Vice President of the Investment
Jersey City, NJ Manager, the Distributor and Morgan Stanley Services.

Ronald E. Robison (64) Vice Since April, 1998 Managing Director, Chief Administrative Officer,
1221 Avenue of the Americas President Director (since February, 1999) of the Investment
New York, NY Manager and Morgan Stanley Services, Chief Executive
Officer and Director of the Transfer Agent; and
Executive Vice President and Principal Executive Officer
of the Morgan Stanley Funds and TCW/DW Term Trust 2003
(since April 2003). Previously Managing Director of the
TCW Group Inc.

Joseph J. McAlinden (60) Vice Since July 1995 Managing Director, Morgan Stanley Investment Management
1221 Avenue of the Americas President Inc. and Morgan Stanley Investments LP; Director of the
New York, NY Transfer Agent. Chief Investment Officer of the Van
Kampen Funds and Chief Investment Officer of the
Investment Manager.

Francis Smith (37) Vice Since September Vice President and Chief Financial Officer of the Morgan
c/o Morgan Stanley Trust President 2002 Stanley Funds and TCW/DW Term Trust 2003 (since
Harborside Financial Center, and Chief September 2002); Executive Director of the Investment
Plaza Two, Financial Manager and Morgan Stanley Services (since December
Jersey City, NY Officer 2001); previously, Vice President of the Investment
Manager and Morgan Stanley Services (August
2000-November 2001) and Senior Manager at
PricewaterhouseCoopers LLP (January 1998-August 2000).
</Table>

In addition, A. Thomas Smith III, Managing Director and General Counsel of
the Investment Manager and Morgan Stanley Services, is a Vice President and
Assistant Secretary of the Fund, and Sara Badler, Stefanie Chang-Yu, Lou Anne D.
McInnis, Carsten Otto and Ruth Rossi, Executive Directors and Assistant General
Counsels of the Investment Manager and Morgan Stanley Services, Marilyn K.
Cranney, First Vice President and Assistant General Counsel of the Investment
Manager and Morgan Stanley Services, and Joanne Doldo, Natasha Kassian, Elisa
Mitchell, Elizabeth Nelson, and Sheldon Winicour, Vice Presidents and Assistant
General Counsels of the Investment Manager and Morgan Stanley Services, and
Bennett MacDougall, a Senior Staff Attorney, are Assistant Secretaries of the
Fund.

For each Trustee, the dollar range of equity securities beneficially owned
by the Trustee is shown below.

<Table>
<Caption>
AGGREGATE DOLLAR RANGE OF EQUITY
SECURITIES IN
ALL REGISTERED INVESTMENT COMPANIES
OVERSEEN
DOLLAR RANGE OF EQUITY SECURITIES IN THE BY TRUSTEE IN FAMILY OF INVESTMENT
FUND COMPANIES
NAME OF TRUSTEE (AS OF DECEMBER 31, 2002) (AS OF DECEMBER 31, 2002)
- ------------------------------ --------------------------------------------- --------------------------------------------

INDEPENDENT:
Michael Bozic none over $100,000
Edwin J. Garn none over $100,000
Wayne E. Hedien none over $100,000
Dr. Manuel H. Johnson none over $100,000
Michael E. Nugent none over $100,000
INTERESTED:
Charles A. Fiumefreddo $10,001 - $50,000 over $100,000
James F. Higgins none over $100,000
Philip J. Purcell none over $100,000
</Table>

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.

finance, government service or academia; these are people whose advice and
counsel are in demand by others and for whom there is often competition. To
accept a position on the funds' boards, such individuals may reject other
attractive assignments because the funds make substantial demands on their time.
All of the Independent Directors/Trustees serve as members of the Audit
Committee. In addition, six of the Directors/Trustees, including two Independent
Directors/Trustees, serve as members of the Derivatives Committee and three
Directors/Trustees including two Independent Trustees serve as members of the
Insurance Committee.

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

The Audit Committee is charged with recommending to the full board the
engagement or discharge of the Fund's independent auditors; directing
investigations into matters within the scope of the independent auditors'
duties, including the power to retain outside specialists; reviewing with the
independent auditors the audit plan and results of the auditing engagement;
approving professional services provided by the independent auditors and other
accounting firms prior to the performance of the services; reviewing the
independence of the independent auditors; 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 Audit Committee currently consists of Messrs. Johnson, Bozic, Hedien,
Garn and Nugent. During the Fund's fiscal year ended May 31, 2003, the audit
committee held six meetings.

The board of each fund has a Derivatives Committee to approve parameters
for and monitor the activities of the Fund with respect to derivative
investments, if any, made by the Fund. The Derivatives Committee currently
consists of Mr. Fiumefreddo and all the Independent Trustees of the Fund. During
the Fund's fiscal year ended May 31, 2003, the Derivatives Committee held four
meetings.

Finally, the board of each fund 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. During
the Fund's fiscal year ended May 31, 2003, the Insurance Committee held one
meeting.

ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT DIRECTORS/TRUSTEES FOR
ALL MORGAN STANLEY FUNDS. The Independent Directors/Trustees and the funds'
management believe that having the same Independent Directors/Trustees for each
of the Morgan Stanley Funds avoids the duplication of effort that would arise
from having different groups of individuals serving as Independent
Directors/Trustees for each of the funds or even of sub-groups of funds. They
believe that having the same individuals serve as Independent Directors/Trustees
of all the funds tends to increase their knowledge and expertise regarding
matters which affect the Fund complex generally and enhances their ability to
negotiate on behalf of each fund with the fund's service providers. This
arrangement also precludes the possibility of separate groups of Independent
Directors/Trustees arriving at conflicting decisions regarding operations and
management of the funds and avoids the cost and confusion that would likely
ensue. Finally, having the same Independent Directors/Trustees serve on all fund
boards enhances the ability of each fund to obtain, at modest cost to each
separate fund, the services of Independent Directors/Trustees, of the caliber,
experience and business acumen of the individuals who serve as Independent
Directors/Trustees of the Morgan Stanley 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
20

reckless disregard of his/her or its duties. It also provides that all third
persons shall look solely to the Fund property for satisfaction of claims
arising in connection with the affairs of the Fund. With the exceptions stated,
the Declaration of Trust provides that a Trustee, officer, employee or agent is
entitled to be indemnified against all liability in connection with the affairs
of the Fund.

C. COMPENSATION

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

The following table illustrates the compensation that the Fund paid to its
Trustees for the fiscal year ended May 31, 2003.

FUND COMPENSATION

<Table>
<Caption>
AGGREGATE
COMPENSATION
NAME OF TRUSTEE FROM THE FUND
- --------------- --------------

Michael Bozic............................................... $1,750
Edwin J. Garn............................................... 1,750
Wayne E. Hedien............................................. 1,750
Dr. Manuel H. Johnson....................................... 2,450
Michael E. Nugent........................................... 2,250
Charles A. Fiumefreddo...................................... 3,067
</Table>

The following table illustrates the compensation paid to the Fund's
Trustees for the calendar year ended December 31, 2002 for services to the 94
registered Morgan Stanley Funds (consisting of 123 portfolios) that were in
operation at December 31, 2002. None of the Fund's Trustees received
compensation from any other funds in the Fund Complex, except for Mr. Nugent who
received compensation for service as Director/Trustee to 15 other registered
funds (consisting of 79 portfolios) in the Fund Complex.

CASH COMPENSATION FROM MORGAN STANLEY FUNDS

<Table>
<Caption>
TOTAL CASH COMPENSATION
FOR SERVICES TO 94
MORGAN STANLEY FUNDS
AND OTHER FUNDS
NAME OF TRUSTEE IN THE FUND COMPLEX
- --------------- -----------------------

Michael Bozic............................................... $159,650
Edwin J. Garn............................................... 159,650
Wayne E. Hedien............................................. 158,950
Dr. Manuel H. Johnson....................................... 226,063
Michael E. Nugent........................................... 296,475
Charles A. Fiumefreddo...................................... 360,000
</Table>

As of the date of this Statement of Additional Information, 49 of the
Morgan Stanley Funds, not including the Fund, have adopted a retirement program
under which an Independent Director/Trustee who retires after serving for at
least five years (or such lesser period as may be determined by the Board) as an
Independent Director/Trustee of any Morgan Stanley Fund that has adopted the
retirement program (each such Fund referred to as an "Adopting Fund" and each
such Director/Trustee referred to as an "Eligible Trustee") is entitled to
retirement payments upon reaching the eligible retirement age (normally, after
attaining age 72). Annual payments are based upon length of service.

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

The following table illustrates the retirement benefits accrued to the
Fund's Independent Trustees by the 49 Morgan Stanley Funds (not including the
Fund) for the calendar year ended December 31, 2002, and the estimated
retirement benefits for the Independent Trustees, to commence upon their
retirement, from the 49 Morgan Stanley Funds as of the calendar year ended
December 31, 2002. For the calendar year ended December 31, 2002, no retirement
benefits were accrued to the Independent Trustees from any other funds in the
Fund Complex.

RETIREMENT BENEFITS FROM ALL MORGAN STANLEY FUNDS

<Table>
<Caption>
RETIREMENT ESTIMATED
BENEFITS ANNUAL
ESTIMATED ACCRUED AS BENEFITS UPON
CREDITED YEARS ESTIMATED EXPENSES RETIREMENT
OF SERVICE AT PERCENTAGE OF BY ALL FROM ALL
RETIREMENT ELIGIBLE ADOPTING ADOPTING
NAME OF INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUNDS FUNDS(2)
- --------------------------- -------------- ------------- ---------- -------------

Michael Bozic................................ 10 60.44% $18,457 $47,838
Edwin J. Garn................................ 10 60.44 23,881 47,878
Wayne E. Hedien.............................. 9 51.37 34,473 40,842
Dr. Manuel H. Johnson........................ 10 60.44 19,803 70,050
Michael E. Nugent............................ 10 60.44 32,362 62,646
</Table>

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

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

The following owned 5% or more of the outstanding shares of Class A of the
Fund on July 8, 2003: Walter A. Sherman, Trustee, Walter A. Sherman Rev. Trust,
dated 8/25/99, 5043 29th Avenue South, Minneapolis, MN 55417-1328 -- 12.12% and
George S. Smith, Jr. and Pamela J. Smith, JTTEN, 52 Devonshire Dr., Morganville,
NJ -- 6.41%.

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

(1) An Eligible Trustee may elect alternative payments of his or her retirement
benefits based upon the combined life expectancy of the Eligible Trustee and
his or her spouse on the date of such Eligible Trustee's retirement. In
addition, the Eligible Trustee may elect that the surviving spouse's
periodic payment of benefits will be equal to a lower percentage of the
periodic amount when both spouses were alive. The amount estimated to be
payable under this method, through the remainder of the later of the lives
of the Eligible Trustee and spouse, will be the actuarial equivalent of the
Regular Benefit.
22

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

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

A. INVESTMENT MANAGER AND SUB-ADVISOR

The Investment Manager 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 Manager 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.

The Sub-Advisor is Morgan Stanley Investments LP, a Pennsylvania limited
partnership founded in 1969, and is wholly-owned by indirect subsidiaries of
Morgan Stanley. The Sub-Advisor is located at One Tower Bridge, West
Conshohocken, Pennsylvania 19428.

Pursuant to an Investment Management Agreement (the "Management Agreement")
with the Investment Manager, the Fund has retained the Investment Manager to
provide administrative services and to manage the business affairs of the Fund.
The Fund pays the Investment Manager monthly compensation calculated daily by
applying the annual rates to the Fund's daily net assets: 0.85% of the portion
of daily net assets not exceeding $500 million; 0.825% of the next $500 million;
and 0.80% of the portion of daily net assets exceeding $1 billion. The
management fee is allocated among the Classes pro rata based on the net assets
of the Fund attributable to each Class. For the fiscal years ended May 31, 2001,
2002, and 2003, the Investment Manager accrued total compensation under the
Management Agreement in the amount of $3,402,421, $2,273,024, and $1,198,948
respectively.

Pursuant to a sub-advisory agreement (the "Sub-Advisory Agreement") between
the Investment Manager and the Sub-Advisor, the Sub-Advisor has been retained,
subject to the overall supervision of the Investment Manager 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 Manager
pays the Sub-Advisor compensation equal to 40% of its monthly compensation. For
the fiscal years ended May 31, 2001, 2002, and 2003, the Sub-Advisor accrued
total compensation under the Sub-Advisory Agreement in the amount of $1,360,968,
$909,210, and $479,579, respectively.

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

In approving the Management Agreement and the Sub-Advisory Agreement, the
Board of Trustees, including the Independent Trustees, considered the nature,
quality and scope of the services provided by the Investment Manager and the
Sub-Advisor; the performance, fees and expenses of the Fund compared to other
similar investment companies; the Investment Manager's expenses in providing the
services; the profitability of the Investment Manager and its affiliated
companies and other benefits they derive from their relationship with the Fund;
and the extent to which economies of scale are shared with the Fund. The
Independent Trustees met with and reviewed reports from third parties about the
foregoing factors and changes, if any, in such items since the preceding year's
deliberations. The Independent Trustees noted their confidence in the capability
and integrity of the senior management and staff of the Investment Manager and
the financial strength of the Investment Manager and its affiliated companies.
The Independent Trustees weighed the foregoing factors in light of the advice
given to them by their legal counsel as to the law applicable to the review of
investment advisory contracts. Based upon its review, the Board of Trustees,
including all of the Independent Trustees, determined, in the exercise of its
business judgment, that approval of the Management Agreement and the
Sub-Advisory Agreement was in the best interests of the Fund and its
shareholders.

B. PRINCIPAL UNDERWRITER

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.

C. SERVICES PROVIDED BY THE INVESTMENT MANAGER AND SUB-ADVISOR

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

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

Expenses not expressly assumed by the Investment Manager under the
Management Agreement, the Sub-Advisor under the Sub-Advisory Agreement or 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 Manager or any
corporate affiliate of the Investment Manager; all expenses

incident to any dividend, withdrawal or redemption options; charges and expenses
of any outside service used for pricing of the Fund's shares; fees and expenses
of legal counsel, including counsel to the Trustees who are not interested
persons of the Fund or of the Investment Manager or the Sub-Advisor (not
including compensation or expenses of attorneys who are employees of the
Investment Manager or the Sub-Advisor); fees and expenses of the Fund's
independent auditors; membership dues of industry associations; interest on Fund
borrowings; postage; insurance premiums on property or personnel (including
officers and Trustees) of the Fund which inure to its benefit; extraordinary
expenses (including, but not limited to, legal claims and liabilities and
litigation costs and any indemnification relating thereto); and all other costs
of the Fund's operation. The 12b-1 fees relating to a particular Class will be
allocated directly to that Class. In addition, other expenses associated with a
particular Class (except advisory or custodial fees) may be allocated directly
to that Class, provided that such expenses are reasonably identified as
specifically attributable to that Class and the direct allocation to that Class
is approved by the Trustees.

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

D. DEALER REALLOWANCES

E. RULE 12b-1 PLAN

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 fiscal years ending May 31,
2001, 2002, and 2003, in approximate amounts as provided in the table below (the
Distributor did not retain any of these amounts).

<Table>
<Caption>
2003 2002 2001
-------------------- -------------------- --------------------

Class A........................ FCSs:(1) $ 6,186 FSCs:(1) $ 17,518 FCSs:(1) $ 64,581
CDSCs: $ 48 CDSCs: $ 0 CDSCs: $ 0
Class B........................ CDSCs: $418,696 CDSCs: $610,137 CDSCs: $686,624
Class C........................ CDSCs: $ 945 CDSCs: $ 1,474 CDSCs: $ 8,464
</Table>

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

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 May 31, 2003, Class
A, Class B and Class C shares of the Fund accrued payments under the Plan
amounting to $11,127, $1,218,001 and $89,250, respectively, which amounts are
equal to 0.25%, 1.00% and 1.00% of the average daily net assets of Class A,
Class B and Class C, respectively, for the fiscal year.

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 5.0% of the amount sold
(except as provided in the following sentence) 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. On orders of $1 million or more (for which no sales charge
was paid) or net asset value purchases by employer-sponsored employee benefit
plans, whether or not qualified under the Internal Revenue Code, for which (i)
the Transfer Agent serves as Trustee, (ii) Morgan Stanley's Retirement Plan
Services serves as recordkeeper pursuant to a written Recordkeeping Services
Agreement or (iii) an entity independent from Morgan Stanley serves as
recordkeeper under an alliance or similar agreement with Morgan Stanley's
Retirement Plan Services ("Morgan Stanley Eligible Plans"), the Investment
Manager compensates Financial Advisors by paying them, from its own funds, a
gross sales credit of 1.0% of the amount sold.

With respect to Class B shares, 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 5.0% of the amount sold (except
as provided in the following sentence) and an annual residual commission,
currently a residual of up to 0.25% of the current value (not including
reinvested dividends or distributions) of the amount sold in all cases. In the
case of Class B shares purchased by Morgan Stanley Eligible Plans, Morgan
Stanley DW compensates its Financial Advisors by paying them, from its own
funds, a gross sales credit of 3.0% of the amount sold.

With respect to Class C shares, 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 1.0% of the amount sold and an
annual residual commission, currently up to 1.0% of the current value of the
respective accounts for which they are the Financial Advisors of record.

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

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 1.0%, in the case of Class C, of the average net assets of the respective
Class during the month. No interest or other financing charges, if any, incurred
on any distribution expenses on behalf of Class A and Class C will be
reimbursable under the Plan. With respect to Class A, in the case of all
expenses other than expenses representing the service fee, and, with respect to
Class C, in the case of all expenses other than expenses representing a gross
sales credit or a residual to Financial Advisors and other authorized financial
representatives, such amounts shall be determined at the beginning of each
calendar quarter by the Trustees, including, a majority of the Independent
Trustees. Expenses representing the service fee (for Class A) or a gross sales
credit or a residual to Financial Advisors and other authorized financial
representatives (for Class C) may be reimbursed without prior determination. In
the event that the Distributor proposes that monies shall be reimbursed for
other than such expenses, then in making quarterly determinations of the amounts
that may be reimbursed by the Fund, the Distributor will provide and the
Trustees will review a quarterly budget of projected distribution expenses to be
incurred on behalf of the Fund, together with a report explaining the purposes
and anticipated benefits of incurring such expenses. The Trustees will determine
which particular expenses, and the portions thereof, that may be borne by the
Fund, and in making such a determination shall consider the scope of the
Distributor's commitment to promoting the distribution of the Fund's Class A and
Class C shares.
27

Each Class paid 100% of the amounts accrued under the Plan with respect to
that Class for the fiscal year ended May 31, 2003 to the Distributor. The
Distributor and Morgan Stanley DW estimate that they have spent, pursuant to the
Plan, $28,744,611 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)
20.18% $5,800,532--advertising and promotional expenses; (ii) 0.48%
$137,326)--printing of prospectuses for distribution to other than current
shareholders; and (iii) 79.34% $22,806,753--other expenses, including the gross
sales credit and the carrying charge, of which 8.74% $1,993,839 represents
carrying charges, 37.78% $5,800,532 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 37.78% $8,616,546 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 May 31, 2003 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 $13,266,252 as of May 31, 2003 (the end of the fiscal year),
which was equal to approximately 12.32% of the net assets of Class B on such
date. Because there is no requirement under the Plan that the Distributor be
reimbursed for all distribution expenses with respect to Class B shares or any
requirement that the Plan be continued from year to year, this excess amount
does not constitute a liability of the Fund. Although there is no legal
obligation for the Fund to pay expenses incurred in excess of payments made to
the Distributor under the Plan and the proceeds of CDSCs paid by investors upon
redemption of shares, if for any reason the Plan is terminated, the Trustees
will consider at that time the manner in which to treat such expenses. Any
cumulative expenses incurred, but not yet recovered through distribution fees or
CDSCs, may or may not be recovered through future distribution fees or CDSCs.

In the case of Class A and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales commission credited to Morgan Stanley Financial Advisors and other
authorized financial representatives at the time of sale may be reimbursed in
the subsequent calendar year. The Distributor has advised the Fund that
unreimbursed expenses representing a gross sales commission credited to Morgan
Stanley Financial Advisors and other authorized financial representatives at the
time of sale totaled approximately $1,167 in the case of Class C at December 31,
2002 (the end of the calendar year), which amount was equal to 0.01% of the net
assets of Class C on such date, and that there were no such expenses that may be
reimbursed in the subsequent year in the case of Class A on such date. No
interest or other financing charges will be incurred on any Class A or Class C
distribution expenses incurred by the Distributor under the Plan or on any
unreimbursed expenses due to the Distributor pursuant to the Plan.

No interested person of the Fund nor any Independent Trustee has any direct
financial interest in the operation of the Plan except to the extent that the
Distributor, the Investment Manager, Morgan Stanley 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
28

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. In the Trustees' quarterly review of the Plan, they will consider
its continued appropriateness and the level of compensation provided therein.

The Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval by the shareholders of the
affected Class or Classes of the Fund, and all material amendments to the Plan
must also be approved by the Trustees in the manner described above. The Plan
may be terminated at any time, without payment of any penalty, by vote of a
majority of the Independent Trustees or by a vote of a majority of the
outstanding voting securities of the Fund (as defined in the Investment Company
Act) on not more than 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

(2) CUSTODIAN AND INDEPENDENT AUDITORS

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.

(3) AFFILIATED PERSONS

The Transfer Agent is an affiliate of the Investment Manager, the
Sub-Advisor 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.

G. CODES OF ETHICS

The Fund, the Investment Manager, the Sub-Advisor 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.

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

A. BROKERAGE TRANSACTIONS

Subject to the general supervision of the Trustees, the Investment Manager
and the Sub-Adviser are 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. 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 May 31, 2001, 2002 and 2003, the Fund paid a
total of $1,403,156, $786,628 and $385,254, 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 May 31, 2001, 2002 and 2003, 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 broker in a commensurate
arm's-length transaction. Furthermore, the Trustees, including the Independent
Trustees, have adopted procedures which are reasonably designed to provide that
any commissions, fees or other remuneration paid to an affiliated broker or
dealer are consistent with the foregoing standard. The Fund does not reduce the
management fee it pays to the Investment Manager by any amount of the brokerage
commissions it may pay to an affiliated broker or dealer.

During the fiscal years ended May 31, 2001, 2002 and 2003, the Fund did not
pay any brokerage commissions to an affiliated broker or dealer.

C. BROKERAGE SELECTION

The policy of the Fund regarding purchases and sales of securities for its
portfolio is that primary consideration will be given to obtaining the most
favorable prices and efficient executions of transactions. Consistent with this
policy, when securities transactions are effected on a stock exchange, the
Fund's policy is to pay commissions which are considered fair and reasonable
without necessarily determining that the lowest possible commissions are paid in
all circumstances. The Fund believes that a requirement always to seek the
lowest possible commission cost could impede effective portfolio management and
preclude the Fund and the Investment Manager and/or the Sub-Advisor from
obtaining a high quality of brokerage and research services. In seeking to
determine the reasonableness of brokerage commissions paid in any transaction,
the Investment Manager and/or the Sub-Advisor rely 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 Manager and/or
the Sub-Advisor effect transactions with those brokers and dealers who they
believe provide the most favorable prices and are capable of providing efficient
executions. If the Investment Manager and/or the Sub-Advisor believes the prices
and executions are obtainable from more than one broker or dealer, it may give
consideration to placing portfolio transactions with those brokers and dealers
who also furnish research and other services to the Fund or the Investment
Manager and/or the Sub-Advisor. 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 and/or
opinions pertaining to investment; wire services; and appraisals or evaluations
of portfolio securities. The information and services received by the Investment
Manager and/or the Sub-Advisor from brokers and dealers may be utilized by them
and any of their 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 Manager, the Sub-Advisor and certain of their affiliates
currently serve as investment adviser to a number of clients, including other
investment companies, and may in the future act as investment manager or advisor
to others. It is the practice of the Investment Manager, the Sub-Advisor and
their affiliates to cause purchase and sale transactions 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 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
Manager, the Sub-Advisor and their 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 May 31, 2003, the Fund paid $276,215 in
brokerage commissions in connection with transactions in the aggregate amount of
$134,711,592 to brokers because of research services provided.

E. REGULAR BROKER-DEALERS

During the fiscal year ended May 31, 2003, the Fund purchased securities
issued by Goldman Sachs Group Inc., Merrill Lynch & Co. Inc., and Bank of
America Corp., which issuers were among the ten brokers or the ten dealers that
executed transactions for or with the Fund in the largest dollar amounts during
the year. At May 31, 2003, the Fund held securities issued by Citigroup Inc.,
Goldman Sachs Group Inc., Merrill Lynch & Co. Inc., and Bank of America Corp.,
with market values of $2,883,706, $782,400, $1,766,640, and $4,311,020,
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. Under certain circumstances, the Trustees may be removed by the
actions of the Trustees. In addition, under certain circumstances, the
shareholders may call a meeting to remove the Trustees and the Fund is required
to provide assistance in 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 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 Management and Other Services--E. Rule 12b-1 Plan." The price of Fund
shares, called "net asset value," is based on the value of the Fund's portfolio
securities. Net asset value per share of each Class is calculated by dividing
the value of the portion of the Fund's securities and other assets attributable
to that Class, less the liabilities attributable to that Class, by the number of
shares of that Class outstanding. The assets of each Class of shares are
invested in a single portfolio. The net asset value of each Class, however, will
differ because the Classes have different ongoing fees.

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 Manager 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 New York Stock Exchange.

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 does not reflect the securities' market value, in which case these
securities will be valued at their fair value as determined by the Trustees.

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

Listed options on debt securities are valued at the latest sale price on
the exchange on which they are listed unless no sales of such options have taken
place that day, in which case they will be valued at the mean between their
latest bid and asked prices. Unlisted options on debt securities 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 Trustees.

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

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

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

INVESTMENT COMPANY TAXATION. The Fund intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986 as 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
distributes such income and capital gains to its shareholders.

Gains or losses on sales of securities by the Fund will be long-term
capital gains or losses if the securities have a tax holding period of more than
one year 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 Manager and/or Sub-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 have
to pay federal income taxes, and any state and/or local income taxes, on the
dividends and other distributions they receive from the Fund. Such dividends and
distributions, to the extent that they are derived from net investment income or
short-term capital gains, are taxable to the shareholder as ordinary income
regardless of whether the shareholder receives such payments in additional
shares or in cash. Under recently enacted legislation, 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 generally 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 dividends would move
to 35% in 2009 and 39.6% in 2011.

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 capital gains or losses and those held for more
than one year will generally result in long-term gains or losses. Under current
law, the maximum tax rate on long-term capital gains realized by 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 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.

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

From time to time, the Fund may quote its "total return" in advertisements
and sales literature. These figures are computed separately for Class A, Class
B, Class C and Class D shares. The Fund's

"average annual total return" represents an annualization of the Fund's total
return over a particular period and is computed by finding the annual percentage
rate which will result in the ending redeemable value of a hypothetical $1,000
investment made at the beginning of a one, five or ten year period, or for the
period from the date of commencement of operations, if shorter than any of the
foregoing. The ending redeemable value is reduced by any contingent deferred
sales charge ("CDSC") at the end of the one, five, ten year or other period. For
the purpose of this calculation, it is assumed that all dividends and
distributions are reinvested. The formula for computing the average annual total
return involves a percentage obtained by dividing the ending redeemable value by
the amount of the initial investment (which in the case of Class A shares is
reduced by the Class A initial sales charge), taking a root of the quotient
(where the root is equivalent to the number of years in the period) and
subtracting 1 from the result. Based on this calculation, the average annual
total returns are as follows:

AVERAGE ANNUAL RETURNS ASSUMING DEDUCTION OF MAXIMUM SALES CHARGE

PERIOD ENDING MAY 31, 2003

<Table>
<Caption>
INCEPTION
CLASS DATE: 1 YEAR LIFE OF FUND
- ----- --------- ------ ------------

Class A.............................................. 07/29/98 -17.38% -5.91%
Class B.............................................. 07/29/98 -17.80% -5.91%
Class C.............................................. 07/29/98 -14.42% -5.51%
Class D.............................................. 07/29/98 -12.55% -4.62%
</Table>

In addition, the Fund may advertise its total return for each Class over
different periods of time by means of aggregate, average, year-by-year or other
types of total return figures. These calculations may or may not reflect the
imposition of the maximum front-end sales charge for Class A or the deduction of
the CDSC for each of Class B and Class C which, if reflected, would reduce the
performance quoted. For example, the average annual total return of the Fund may
be calculated in the manner described above, but without deduction for any
applicable sales charge. Based on this calculation, the average annual total
returns are as follows:

AVERAGE ANNUAL RETURNS ASSUMING NO DEDUCTION OF SALES CHARGE

PERIOD ENDING MAY 31, 2003

<Table>
<Caption>
INCEPTION
CLASS DATE: 1 YEAR LIFE OF FUND
- ----- --------- ------ ------------

Class A.............................................. 07/29/98 -12.80% -4.86%
Class B.............................................. 07/29/98 -13.47% -5.57%
Class C.............................................. 07/29/98 -13.55% -5.51%
Class D.............................................. 07/29/98 -12.55% -4.62%
</Table>

In addition, the Fund may compute its aggregate total return for each Class
for specified periods by determining the aggregate percentage rate which will
result in the ending value of a hypothetical $1,000 investment made at the
beginning of the period. For the purpose of this calculation, it is assumed that
all dividends and distributions are reinvested. The formula for computing
aggregate total return involves a percentage obtained by dividing the ending
value (without reduction for any sales charge) by the initial

$1,000 investment and subtracting 1 from the result. Based on the foregoing
calculation, the aggregate total returns are as follows:

AGGREGATE TOTAL RETURNS ASSUMING NO DEDUCTION OF SALES CHARGE

PERIOD ENDING MAY 31, 2003

<Table>
<Caption>
INCEPTION
CLASS DATE: 1 YEAR LIFE OF FUND
- ----- --------- ------ ------------

Class A.............................................. 07/29/98 -12.80% -21.41%
Class B.............................................. 07/29/98 -13.47% -24.20%
Class C.............................................. 07/29/98 -13.55% -23.99%
Class D.............................................. 07/29/98 -12.55% -20.45%
</Table>

The Fund may also advertise the performance of hypothetical investments of
$10,000, $50,000 and $100,000 in each Class of shares of the Fund by adding 1 to
the Fund's aggregate total return to date (expressed as a decimal and without
taking into account the effect of any applicable CDSC) and multiplying by
$9,475, $48,000 and $97,000 in the case of Class A (investments of $10,000,
$50,000 and $100,000 adjusted for the initial sales charge) or by $10,000,
$50,000 and $100,000 in the case of each of Class B, Class C and Class D, as the
case may be. Investments of $10,000, $50,000 and $100,000 in each Class at
inception of the Class would have declined to the following amounts at May 31,
2003:

<Table>
<Caption>
INVESTMENT AT INCEPTION OF:
INCEPTION ----------------------------
CLASS DATE: $10,000 $50,000 $100,000
----- --------- ------- ------- --------

Class A.............................................. 07/29/98 $7,446 $37,723 $76,232
Class B.............................................. 07/29/98 $7,580 $37,900 $75,800
Class C.............................................. 07/29/98 $7,601 $38,005 $76,010
Class D.............................................. 07/29/98 $7,955 $39,775 $79,550
</Table>

The after-tax returns of the Fund may also be advertised or otherwise
reported. This is generally calculated in a manner similar to the computation of
average annual total returns discussed above, except that the calculation also
reflects the effect of taxes on returns. Based on these calculations, the
average annual total returns after taxes on distributions and after taxes on
distributions and redemptions for Class B are as follows:

AVERAGE ANNUAL AFTER-TAX RETURNS ASSUMING DEDUCTION OF MAXIMUM SALES CHARGE

CLASS B

PERIOD ENDING MAY 31, 2003

<Table>
<Caption>
INCEPTION
CALCULATION METHODOLOGY DATE: 1 YEAR LIFE OF FUND
- ----------------------- --------- ------ ------------

After taxes on distributions........................ 07/29/98 -17.80% -6.71%
After taxes on distributions and redemptions........ 07/29/98 -10.93% -4.65%
</Table>

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

EXPERTS. The financial statements of the Fund for the fiscal year ended
May 31, 2003, included in this Statement of Additional Information and
incorporated by reference in the Prospectus have been so included and
incorporated in reliance on the report of Deloitte & Touche LLP, independent
auditors, given on the authority of said firm as experts in auditing and
accounting.

* * * * *

Morgan Stanley Equity Fund
PORTFOLIO OF INVESTMENTS - MAY 31, 2003

<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------

See Notes to Financial Statements
39

Morgan Stanley Equity Fund
PORTFOLIO OF INVESTMENTS - MAY 31, 2003 continued

<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------

See Notes to Financial Statements
40

Morgan Stanley Equity Fund
PORTFOLIO OF INVESTMENTS - MAY 31, 2003 continued

<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------

<Table>

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

<Table>

See Notes to Financial Statements
41

Morgan Stanley Equity Fund
FINANCIAL STATEMENTS

Statement of Assets and Liabilities
May 31, 2003

<Table>

Assets:
Investments in securities, at value
(cost $131,273,942)........................................ $126,212,100
Receivable for:
Dividends............................................... 254,629
Shares of beneficial interest sold...................... 68,110
Foreign withholding taxes reclaimed..................... 5,138
Prepaid expenses and other assets........................... 76,010
-------------
Total Assets............................................ 126,615,987
-------------
Liabilities:
Payable for:
Shares of beneficial interest redeemed.................. 135,890
Distribution fee........................................ 97,113
Investment management fee............................... 89,262
Accrued expenses and other payables......................... 79,289
-------------
Total Liabilities....................................... 401,554
-------------
Net Assets.............................................. $126,214,433
=============
Composition of Net Assets:
Paid-in-capital............................................. $255,852,250
Net unrealized depreciation................................. (5,061,842)
Accumulated net realized loss............................... (124,575,975)
-------------
Net Assets.............................................. $126,214,433
=============
Class A Shares:
Net Assets.................................................. $4,176,277
Shares Outstanding (unlimited authorized, $.01 par value)... 613,281
Net Asset Value Per Share............................... $6.81
=============
Maximum Offering Price Per Share,
(net asset value plus 5.54% of net asset value)........ $7.19
=============
Class B Shares:
Net Assets.................................................. $107,680,291
Shares Outstanding (unlimited authorized, $.01 par value)... 16,447,779
Net Asset Value Per Share............................... $6.55
=============
Class C Shares:
Net Assets.................................................. $7,871,633
Shares Outstanding (unlimited authorized, $.01 par value)... 1,197,719
Net Asset Value Per Share............................... $6.57
=============
Class D Shares:
Net Assets.................................................. $6,486,232
Shares Outstanding (unlimited authorized, $.01 par value)... 940,143
Net Asset Value Per Share............................... $6.90
=============
</Table>

See Notes to Financial Statements
42

Morgan Stanley Equity Fund
FINANCIAL STATEMENTS continued

Statement of Operations
For the year ended May 31, 2003

<Table>

See Notes to Financial Statements
43

Morgan Stanley Equity Fund
FINANCIAL STATEMENTS continued

Statement of Changes in Net Assets

<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
MAY 31, 2003 MAY 31, 2002
------------ -------------

See Notes to Financial Statements
44