<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST Two World Trade Center, New York,
New York 10048
LETTER TO THE SHAREHOLDERS October 31, 1996
DEAR SHAREHOLDER:
During the twelve-month period ended October 31, 1996, interest rates as
measured by U.S. Treasury securities were highly volatile. In late 1995,
rates declined as data supported the perception that the economy had indeed
slowed. This perception, however, quickly reversed itself in early 1996 when
consumer demand, rebates and incentives by auto dealers, and low mortgage
rates drove retail sales and housing starts sharply higher. As a result of
continued inventory liquidation and strong employment data, interest rates
rose causing considerable concern about a quickly rebounding economy and a
possible inflation surge. Then, by early September 1996, interest rates began
to decline as evidence of a moderating economy and the unlikelihood of the
Federal Reserve Board taking overt action to slow the economy became
apparent. On October 31, 1996, the thirty-year Treasury bond yielded 6.64
percent compared to 6.33 percent twelve months ago.
Outside the United States, European bond markets continued to respond to
ongoing significant progress in those countries' deficit reduction programs
and to improving inflation outlooks. These developments allowed European
central banks to periodically reduce short-term rates. As a result, yields
broadly declined across the European markets, especially in Italy, Spain and
Sweden. Hence, since the beginning of the fiscal year through October 1996,
three-year bond yields in Italy dropped from 11 percent to 7 percent.
Likewise, three-year yields declined by about 3.5 percentage points in Spain
and by about 3.1 percentage points in Sweden. Yields on three-year bonds in
Canada and Australia also declined, by about 2.0 percentage points and 1.2
percentage points, respectively.
In the foreign exchange markets, the U.S. dollar, reacting to improving
interest rate differentials and a stronger U.S. economic outlook, appreciated
against most major currencies; 10.5 percent against the Japanese yen and 7.2
percent against the German mark. However, the dollar index, which measures
the U.S. currency's strength against other currencies, registered a more
modest gain of about 4 percent.
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
LETTER TO THE SHAREHOLDERS October 31, 1996, continued
DEAN WITTER DIVERSIFIED INCOME TRUST
GROWTH OF $10,000
LEHMAN GOVERNMENT/
CORPORATE INTERMEDIATE
<TABLE>
<CAPTION>
DATE TOTAL INDEX LIPPER IX
---- ----- ----- ---------
<S> <C> <C> <C>
April 9, 1992 $10,000 $10,000 $10,000
October 31, 1992 $10,373 $10,620 $10,641
October 31, 1993 $11,410 $11,679 $12,336
October 31, 1994 $11,332 $11,454 $11,700
October 31, 1995 $12,551 $12,888 $13,247
October 31, 1996 $13,546 (3) $13,637 $14,442
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
1 YEAR LIFE OF FUND
------ ------------
9.49 (1) 7.22 (1)
4.49 (2) 6.88 (2)
Fund Lehman (4) Lipper IX (5)
------ ------ ------
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS.
- -----------------------------------------------------
(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 contingent deferred sales charge (CDSC) (1
Year-5%, since inception-2%). See the Fund's current prospectus for
complete details on fees and sales charges.
(3) Closing value after the deduction of a 2% CDSC, assuming a complete
redemption on October 31, 1996.
(4) The Lehman Brothers Mutual Fund Government/Corporate Intermediate Bond
Index tracks the performance of government and corporate bonds, including
U.S. Government agency and U.S. Treasury securities and corporate and
yankee bonds with maturities of 1 to 10 years. The performance of the
index does not include any expenses, fees or charges. The Index is
unmanaged and should not be considered an investment.
(5) The Lipper General Bond Funds Index is an equally-weighted performance
index of the largest- qualifying funds (based on net assets) in the Lipper
General Bond Funds objective. The Index, which is adjusted for capital
gains distributions and income dividends, is unmanaged and should not be
considered an investment. There are currently 10 funds represented in this
Index.
PERFORMANCE AND PORTFOLIO
Against this backdrop, Dean Witter Diversified Income Trust produced a total
return of 9.49 percent for the twelve months ended October 31, 1996, compared
to a return of 5.81 percent for the Lehman Brothers Mutual Fund
Government/Corporate Intermediate Bond Index and 9.02 percent for the Lipper
General Bond Funds Index. The accompanying chart illustrates the growth of a
$10,000 investment in the Fund from inception (April 9, 1992) versus the
performance of similar investments in the issues that comprise the unmanaged
Lehman Brothers Mutual Fund Government/Corporate Intermediate Bond and the
Lipper General Bond Funds Indexes.
As of October 31, 1996, the Fund's net assets exceeded $745 million. Assets
were divided equally among short-term global securities, U.S. government and
agency-backed securities and higher yielding corporate bonds. During the
fiscal year, the Fund's dividends totaled $0.72 per share.
SHORT-TERM GLOBAL SECTOR
This year's performance of the Fund's global sector was attributable to
investments in markets that exhibited continuously improving inflation
outlooks and fiscal discipline and to timely moves by the Fund to protect its
overseas investments from the strengthening of the dollar. In addition, the
Fund maintained its weightings in Italy, Spain and Sweden to take advantage
of the higher yields available in those markets relative to the U.S. and
rising bond prices. Furthermore, the global sector also increased investment
in Australia and New Zealand to participate in the higher and stable yields
and exchange rates of those countries. We hedged most of the Fund's European
currency risks back into the dollar as the U.S. currency appreciated in
value. As of October 31, 1996, 72 percent of the Fund's global sector assets
were in Europe, 23 percent were in the Pacific Basin countries and 5 percent
were in North America.
U.S. GOVERNMENT/MORTGAGE SECTOR
For the period under review, mortgage-backed securities outperformed similar
maturity U.S. Treasury securities.
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
LETTER TO THE SHAREHOLDERS October 31, 1996, continued
Accordingly, as cash flows permitted, we purchased current coupon
mortgage-backed securities at attractive levels, enhancing the Fund's
prospects for higher total returns. As of October 31, 1996,
85 percent of this sector of the Fund was comprised of mortgage-backed
securities issued by Federal National Mortgage Association (FNMA), Government
National Mortgage Association (GNMA), and Federal Home Loan Mortgage Corp.
(FHLMC) with 6.5 to 8.0 percent coupons, 10 percent consisted of U.S. agency
strips and the remaining 5 percent consisted of U.S. Treasuries.
HIGH-YIELD SECTOR
The investment strategy of the Fund's high-yield sector remained essentially
unchanged over the past year, with a continued emphasis on discounted B-rated
issues. In today's market, many of these issues can be purchased below par
providing significant appreciation potential and an attractive yield (of
about 11 to 12 percent) versus comparable U.S. Treasuries. In light of the
rebounding economy, we feel comfortable with the earnings outlook of most of
our B-rated issuers. Recognizing that the economy may slow somewhat during
the remainder of 1996, we have tried to limit the portfolio's volatility by
focusing primarily on growth-related, recession-resistant industries such as
cable, media, food and beverage, and telecommunications.
LOOKING AHEAD
We expect the U.S. economy to maintain a slow to moderate pace for the fourth
quarter of 1996 and into 1997. Before taking overt action to slow the
economy, the Federal Reserve Board is likely to look for sustained
confirmation of rising inflation and a stronger economy. We believe that
inflation will remain subdued, albeit at a slightly higher level than 1996.
Outside the U.S., European bond markets should perform well as a result of
continued progress in deficit reduction programs and improving inflation
outlooks.
We appreciate your ongoing support of Dean Witter Diversified Income Trust
and look forward to continuing to serve your investment objectives in the
months and years to come.
Very truly yours,
/s/ Charles A. Fiumefreddo
CHARLES A. FIUMEFREDDO
Chairman of the Board
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GOVERNMENT & CORPORATE BONDS (93.1%)
AUSTRALIA (3.4%)
Government Obligations
Au$ 23,211 Queensland Treasury Corp. (a) .................................. 8.00 % 05/14/97 $ 18,513,885
7,300 Queensland Treasury Corp. ...................................... 12.00 05/15/97 5,939,674
995 Queensland Treasury Corp. ...................................... 8.00 07/14/99 811,444
--------------
TOTAL AUSTRALIA ..................................................................... 25,265,003
--------------
CANADA (1.4%)
Government Obligations
Ca$ 7,150 Canada Treasury Bond ........................................... 8.00 11/01/98 5,707,601
6,200 Canada Treasury Bond ........................................... 5.75 03/01/99 4,752,298
--------------
TOTAL CANADA ........................................................................ 10,459,899
--------------
DENMARK (4.6%)
Government Obligations
DKr 152,900 Denmark Treasury Note (a) ...................................... 9.00 11/15/98 28,503,046
32,400 Denmark Treasury Note (a) ...................................... 6.00 02/15/99 5,723,694
--------------
34,226,740
--------------
GERMANY (2.6%)
Finance (0.5%)
DEM 6,000 Deutsche Finance BV (a) ........................................ 6.25 04/08/97 3,998,024
--------------
Government Obligations (2.1%)
16,800 Bundes Obligation (a) .......................................... 8.375 01/20/97 11,186,719
6,450 Bundes Obligation (a) .......................................... 6.875 02/24/99 4,523,073
--------------
15,709,792
--------------
TOTAL GERMANY ....................................................................... 19,707,816
--------------
IRELAND (0.9%)
Government Obligation
IEP 3,850 Ireland Treasury Bond .......................................... 9.75 06/01/98 6,611,019
--------------
ITALY (3.9%)
Finance (0.1%)
ITL 230 M Abbey National Treasury Bond (a) ............................... 11.00 04/21/97 153,349
900 M Credit Suisse Finance Gibraltar (a) ............................ 11.625 05/27/97 603,722
--------------
757,071
--------------
Government Obligation (3.8%)
40,425 M Italy Treasury Bond (a) ........................................ 9.50 02/01/99 27,964,218
--------------
TOTAL ITALY ......................................................................... 28,721,289
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1996, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NEW ZEALAND (1.9%)
Government Obligations
NZ$ 10,660 New Zealand Treasury Bond (a) .................................. 9.00 % 11/15/96 $ 7,528,215
9,500 New Zealand Treasury Bond (a) .................................. 10.00 07/15/97 6,794,190
--------------
TOTAL NEW ZEALAND ................................................................... 14,322,405
--------------
PORTUGAL (1.5%)
Government Obligation
PTE 1,693 M Portugal Treasury Bond (a) ..................................... 8.375 01/23/99 11,399,942
--------------
SPAIN (3.3%)
Government Obligations
ESP 1,016 M Spain Treasury Bond (a) ........................................ 11.45 08/30/98 8,572,475
941 M Spain Treasury Bond (a) ........................................ 9.90 10/31/98 7,788,068
990 M Spain Treasury Bond (a) ........................................ 9.40 04/30/99 8,204,450
--------------
TOTAL SPAIN ......................................................................... 24,564,993
--------------
SWEDEN (4.5%)
Finance (0.4%)
SEK 18,000 Deutsche Bank Finance NV ....................................... 10.25 02/24/97 2,776,166
--------------
Government Obligation (4.1%)
180,800 Sweden Treasury Bond (a) ....................................... 11.00 01/21/99 30,549,757
--------------
TOTAL SWEDEN ........................................................................ 33,325,923
--------------
UNITED KINGDOM (0.7%)
Government Obligation
pounds
sterling
3,200 United Kingdom Government Bond (Conv.) ........................ 7.00 08/06/97 5,238,296
--------------
UNITED STATES (64.4%)
Aerospace (0.6%)
$ 4,750 Sabreliner Corp. (Series B) .................................... 12.50 04/15/03 4,465,000
--------------
Automotive (1.4%)
4,800 Am General Corporation ......................................... 12.875 05/01/02 4,632,000
3,000 Envirotest Systems, Inc. ....................................... 9.125 03/15/01 2,760,000
2,500 Toyota Motor Corp. ............................................. 15.00 09/26/97 2,701,200
--------------
10,093,200
--------------
Broadcast Media (1.1%)
4,000 Paxson Communications Corp. .................................... 11.625 10/01/02 4,120,000
4,000 Spanish Broadcasting System, Inc. .............................. 7.50 06/15/02 4,240,000
--------------
8,360,000
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1996, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Business Services (1.8%)
$ 7,376 Anacomp, Inc. .................................................. 13.00 +% 06/04/02 $ 7,781,680
5,250 Xerox Corp. .................................................... 15.00 06/10/97 5,534,760
--------------
13,316,440
--------------
Cable & Telecommunications (6.0%)
4,235 Adelphia Communications Corp. (Series B) ....................... 9.50 + 02/15/04 3,535,823
5,050 American Communications Services, Inc. ......................... 13.00 ++ 11/01/05 2,828,000
5,400 AT&T Capital Corp. ............................................. 15.00 05/05/97 5,644,782
3,846 Falcon Holdings Group L.P. (Series B) .......................... 11.00 + 09/15/03 3,548,166
1,850 Frontiervision Corp. ........................................... 11.00 10/15/06 1,836,125
9,000 Hyperion Telecommunications Inc. ............................... 13.00 ++ 04/15/03 5,265,000
6,800 IXC Communications Inc. (Series B) ............................. 12.50 10/01/05 7,140,000
28,500 In-Flight Phone Corp. (Series B) ............................... 14.00 ++ 05/15/02 10,830,000
4,000 Peoples Telephone Co., Inc. .................................... 12.25 07/15/02 4,200,000
--------------
44,827,896
--------------
Computer Equipment (1.5%)
4,000 Advanced Micro Devices ......................................... 11.00 08/01/03 4,180,000
3,300 Unisys Corp. ................................................... 15.00 07/01/97 3,489,750
3,275 Unisys Corp. (Conv.) ........................................... 8.25 03/15/06 3,741,687
--------------
11,411,437
--------------
Consumer Products (0.3%)
2,500 J.B. Williams Holdings, Inc. ................................... 12.00 03/01/04 2,562,500
--------------
Electrical & Alarm Systems (0.6%)
4,980 Mosler, Inc. ................................................... 11.00 04/15/03 4,606,500
--------------
Electronics -Semiconductors (0.5%)
4,400 Integrated Device Technology (Conv.) ........................... 5.50 06/01/02 3,564,000
--------------
Entertainment/Gaming & Lodging (4.9%)
12,455 Cobblestone Holdings, Inc. -144A* .............................. 0.00 06/01/04 4,779,606
4,400 Fitzgeralds Gaming Corp. (Units)++ ............................. 13.00 12/31/02 3,740,000
4,400 Lady Luck Gaming Finance Corp. ................................. 11.875 03/01/01 4,356,000
7,920 Motels of America, Inc. (Series B) ............................. 12.00 04/15/04 6,652,800
3,350 Nextlink Communications ........................................ 12.50 04/15/06 3,433,750
3,800 Orbcomm Global -144A* .......................................... 14.00 08/15/04 3,838,000
4,000 Players International, Inc. .................................... 10.875 04/15/05 3,980,000
1,500 Plitt Theaters, Inc. (Canada) .................................. 10.875 06/15/04 1,522,500
5,000 President Riverboat Casinos, Inc. .............................. 13.00 09/15/01 4,100,000
--------------
36,402,656
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1996, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial (0.4%)
$ 2,500 Household Finance Corp. ........................................ 15.00 % 09/25/97 $ 2,700,725
--------------
Foods & Beverages (2.9%)
9,100 Envirodyne Industries, Inc. .................................... 10.25 12/01/01 8,235,500
3,850 Great American Cookie Inc. ..................................... 10.875 01/15/01 3,368,750
22,550 Specialty Foods Acquisition Corp. (Series B) ................... 13.00 ++ 08/15/05 9,132,750
1,500 Specialty Foods Corp. .......................................... 11.25 08/15/03 1,200,000
--------------
21,937,000
--------------
Healthcare (0.9%)
6,300 Unilab Corp. ................................................... 11.00 04/01/06 4,819,500
1,850 Unison Healthcare .............................................. 12.25 11/01/06 1,863,875
--------------
6,683,375
--------------
Manufacturing (1.5%)
1,995 Alpine Group, Inc. (Series B) .................................. 12.25 07/15/03 2,134,650
4,000 Exide Electronics Group ........................................ 11.50 03/15/06 4,220,000
5,000 Uniroyal Technology Corp. ...................................... 11.75 06/01/03 4,950,000
--------------
11,304,650
--------------
Manufacturing -Diversified (1.4%)
3,000 Interlake Corp. ................................................ 12.125 03/01/02 3,150,000
2,800 J.B. Poindexter & Co., Inc. .................................... 12.50 05/15/04 2,744,000
4,815 Jordan Industries, Inc. ........................................ 10.375 08/01/03 4,706,662
--------------
10,600,662
--------------
Oil & Gas (0.3%)
2,500 Empire Gas Corp. ............................................... 7.00 07/15/04 2,175,000
--------------
Publishing (1.5%)
5,000 Affiliated Newspapers Investments, Inc. ........................ 13.25 ++ 07/01/06 3,900,000
11,200 Marvel Holdings, Inc. .......................................... 0.00 04/15/98 4,704,000
2,500 United States Banknote Corp. (Series B) ........................ 10.375 06/01/02 2,362,500
--------------
10,966,500
--------------
Restaurants (1.8%)
6,000 American Restaurant Group Holdings, Inc. ....................... 14.00 ++ 12/15/05 2,175,000
1,025 Boston Chicken Inc. (Conv.) .................................... 4.50 02/01/04 1,335,063
9,800 FRD Acquisition Corp. .......................................... 12.50 07/15/04 9,800,000
--------------
13,310,063
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1996, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Retail (1.1%)
$ 3,350 Apparel Ventures, Inc. (Series B) .............................. 12.25 % 12/31/00 $ 2,546,000
1,959 Cort Furniture Rental Corp. .................................... 12.00 09/01/00 2,064,296
10,450 County Seat Stores Co. (b) ..................................... 12.00 10/01/02 3,239,500
--------------
7,849,796
--------------
Textiles -Apparel Manufacturers (1.0%)
3,800 Reeves Industries, Inc. ........................................ 11.00 07/15/02 3,591,000
4,500 U.S. Leather, Inc. ............................................. 10.25 07/31/03 3,825,000
--------------
7,416,000
--------------
Transportation (0.4%)
3,040 Trans World Airlines Inc. ...................................... 12.00+ 11/03/98 2,986,800
--------------
U.S. Government & Agency Obligations (32.5%)
3,695 Federal Home Loan Mortgage
Corp. (0.5%) ................................................... 8.00 10/01/24-
06/01/25 3,777,464
--------------
Federal National Mortgage Assoc. (a) (15.9%)
6,000 Principal Strip ................................................ 0.00 02/12/04-
02/01/05 3,539,600
3,950 ................................................................. 6.00 02/01/11-
03/01/11 3,804,523
22,903 ................................................................. 6.50 10/01/08-
02/01/24 22,314,898
31,624 ................................................................. 7.00 08/01/08-
12/01/25 31,087,877
20,770 ................................................................. 7.50 02/01/22-
11/01/25 20,808,572
14,040 ................................................................. 8.00 09/01/01-
06/01/26 14,367,088
21,808 ................................................................. 8.50 07/01/17-
05/01/25 22,591,917
--------------
118,514,475
--------------
Government National Mortgage Assoc. (a) (11.8%)
4,532 ................................................................. 6.50 11/20/23-
02/20/24 4,314,165
3,000 ................................................................. 6.50 ** 2,868,757
18,477 ................................................................. 7.00 12/15/22-
10/15/26 18,103,843
8,000 ................................................................. 7.00 ** 7,847,500
39,581 ................................................................. 7.50 05/15/17-
10/15/26 39,682,203
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1996, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 3,000 ................................................................. 7.50 % ** $ 3,009,375
8,127 ................................................................. 8.00 01/15/22-
10/15/24 8,310,226
3,648 ................................................................. 8.50 08/15/22-
12/15/24 3,787,109
--------------
87,923,178
--------------
Resolution Funding Corp. (a) (2.1%)
27,000 ................................................................. 0.00 10/15/04-
07/15/05 15,695,190
--------------
U.S. Treasury Notes (a) (1.7%)
3,000 ................................................................. 4.75 09/30/98-
10/31/98 2,945,370
1,600 ................................................................. 5.50 11/15/98 1,591,744
2,000 ................................................................. 5.75 10/31/00 1,980,640
2,000 ................................................................. 6.25 08/31/00 2,015,640
4,000 ................................................................. 6.375 09/30/01 4,045,840
--------------
12,579,234
--------------
U.S. Treasury Strip (a) (0.5%)
4,000 ................................................................. 0.00 05/15/97 3,888,840
--------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS .......................................... 242,378,381
--------------
TOTAL UNITED STATES ................................................................. 479,918,581
--------------
TOTAL GOVERNMENT & CORPORATE BONDS
(Identified Cost $702,467,281) ...................................................... 693,761,906
--------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (c) (1.4%)
Electrical & Alarm Systems (0.1%)
33,600 Protection One, Inc. ........................................... 378,000
--------------
Entertainment/Gaming & Lodging (0.0%)
12,455 Cobblestone Holdings, Inc. ..................................... 211,735
2,000 Motels of America, Inc. -144A* ................................. 140,000
--------------
351,735
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1996, continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Foods & Beverages (0.6%)
332,675 Seven-Up/RC Bottling Co. Southern California, Inc. (d) ......... $ 3,825,762
198,750 Specialty Foods Acquisition Corp. -144A* ....................... 285,803
--------------
4,111,565
--------------
Healthcare (0.1%)
410,000 Unigene Laboratories, Inc. ..................................... 1,037,812
120,800 Unilab Corp. ................................................... 75,500
--------------
1,113,312
--------------
Manufacturing -Diversified (0.5%)
162,500 Thermadyne Holdings Corp. (d) .................................. 3,717,188
--------------
Oil & Gas (0.1%)
196,500 HarCor Energy, Inc. ............................................ 933,375
--------------
Restaurants (0.0%)
6,000 American Restaurant Group Holdings, Inc. -144A* ................ 36,000
--------------
TOTAL COMMON STOCKS
(Identified Cost $10,153,560) .................................. 10,641,175
--------------
PREFERRED STOCKS (c) (0.4%)
Entertainment/Gaming & Lodging
80,000 Fitzgeralds Gaming Corp. (Units)++ ............................. 1,840,000
27,000 Lady Luck Gaming Finance Corp. ................................. 843,750
--------------
TOTAL PREFERRED STOCKS
(Identified Cost $2,792,450) ................................... 2,683,750
--------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE VALUE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
WARRANTS (c) (0.1%)
Aerospace (0.0%)
1,000 Sabreliner Corp. (Restricted) -144A* ............................ 04/15/03 10,000
--------------
Cable & Telecommunications (0.1%)
9,000 Hyperion Telecommunication Inc. -144A* .......................... 04/01/01 450,000
11,500 In-Flight Phone Corp. -144A* .................................... 08/31/02 69,000
--------------
519,000
--------------
Containers (0.0%)
2,000 Crown Packaging Holdings, Ltd. (Canada) -144A* .................. 11/01/03 20
--------------
Entertainment/Gaming & Lodging (0.0%)
2,899 Fitzgerald Gaming Corp. ........................................ 12/19/98 13,045
3,500 Fitzgeralds South Inc. -144A* ................................... 03/15/99 4
--------------
13,049
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1996, continued
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE VALUE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Manufacturing (0.0%)
4,000 Exide Electronics, Inc. -144A* .................................. 03/15/06 $ 140,000
49,000 Uniroyal Technology Corp. ...................................... 06/01/03 67,375
--------------
207,375
--------------
Oil & Gas (0.0%)
3,450 Empire Gas Corp. ............................................... 07/15/04 34,500
--------------
Retail (0.0%)
1,500 County Seat Holdings Co. ....................................... 10/15/98 15
--------------
TOTAL WARRANTS
(Identified Cost $1,040,968) ................................................. 783,959
--------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS (6.4%)
TIME DEPOSITS (e) (0.4)
IRELAND (0.0%)
IEP 192 Bankers Trust .................................................. 5.50 % 11/06/96 312,069
--------------
ITALY (0.1%)
ITL 496,930 Bankers Trust .................................................. 7.50 11/06/96 327,229
--------------
NEW ZEALAND (0.1%)
NZ$ 1,310 Bankers Trust .................................................. 9.25 11/06/96 925,519
--------------
SPAIN (0.2%)
Banking -International
ESP 200,945 Bank of New York ............................................... 6.6875 11/06/96 1,571,478
--------------
TOTAL TIME DEPOSITS
(Identified Cost $3,131,932)....................................................... 3,136,295
--------------
GOVERNMENT & AGENCY OBLIGATIONS (f) (3.7%)
NEW ZEALAND (1.8%)
NZ$ 19,680 New Zealand Treasury Bill (a) .................................. 8.83 04/09/97 13,398,471
--------------
UNITED STATES (1.9%)
$ 14,065 Federal Home Loan Mortgage Corp. ............................... 5.53 11/01/96 14,065,000
--------------
TOTAL GOVERNMENT & AGENCY OBLIGATIONS
(Amortized Cost $27,577,634) ..................................................... 27,463,471
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1996, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REPURCHASE AGREEMENT (2.3%)
$ 17,192 The Bank of New York (dated 10/31/96; proceeds $17,194,809;
collateralized by $4,470,785 U.S. Treasury Bond 11.25% due
02/15/15 valued at $6,713,620 and $9,156,879 U.S. Treasury
Bond 8.00% due 11/15/21 valued at $10,822,466) (Identified
Cost $17,192,242) .............................................. 5.375% 11/01/96 $ 17,192,242
--------------
TOTAL SHORT-TERM INVESTMENTS
(Identified Cost $47,901,808) ....................................................... 47,792,008
--------------
TOTAL INVESTMENTS
(Identified Cost $764,356,067) (g) ....................................... 101.4% 755,662,798
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS ........................... (1.4) (10,081,896)
----- --------------
NET ASSETS ............................................................... 100.0% $745,580,902
===== ==============
</TABLE>
- ------------
M In millions.
* Resale is restricted to qualified institutional investors.
** Security purchased on a forward commitment basis with an approximate
principal amount and no definite maturity date; the actual principal
amount and maturity date will be determined upon settlement.
++ Consists of one or more class of securities traded together as a
unit; generally bonds with attached stocks/warrants.
+ Payment-in-kind security.
++ Currently a zero coupon bond and will pay interest at the rate shown
at a future specified date.
(a) Some or all of these securities are segregated in connection with
open forward foreign currency contracts and securities purchased on a
forward committment basis.
(b) Non-income producing security, issuer in default.
(c) Non-income producing securities.
(d) Acquired through exchange offer.
(e) Subject to withdrawal restrictions until maturity.
(f) Securities were purchased on a discount basis. The interest rates
shown have been adjusted to reflect a money market equivalent yield.
(g) The aggregate cost for federal income tax purposes is $764,502,942;
the aggregate gross unrealized appreciation is $16,176,596 and the
aggregate gross unrealized depreciation is $25,016,740, resulting in
net unrealized depreciation of $8,840,144.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1996, continued
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT OCTOBER 31, 1996:
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS DELIVERY APPRECIATION/
TO DELIVER IN EXCHANGE FOR DATE DEPRECIATION
-------------- ---------------- ---------- --------------
<S> <C> <C> <C>
$ 5,972,894 DKr 34,877,520 11/01/96 $ 9,015
DEM 17,950,000 $ 12,315,609 11/12/96 486,014
NLG 11,643,500 $ 7,093,951 01/13/97 210,837
DEM 9,120,000 $ 6,099,518 07/29/97 3,921
BEF 159,300,000 $ 5,211,281 07/31/97 (2,063)
CHF 43,000,000 $ 35,875,188 09/19/97 892,130
yen 2,245,000,000 $ 20,815,948 10/31/97 (15,529)
---------------
Net unrealized appreciation ................ $1,584,325
===============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $764,356,067) ......... $755,662,798
Unrealized appreciation on open forward
foreign currency contracts ............. 1,601,917
Cash (including $921,121 in foreign
currency) .............................. 9,100,490
Receivable for:
Interest .............................. 16,715,307
Shares of beneficial interest sold ... 2,571,781
Compensated forward foreign currency
contracts ............................ 1,688,164
Investments sold ...................... 997,969
Deferred organizational expenses ....... 13,153
Prepaid expenses and other assets ...... 105,553
--------------
TOTAL ASSETS .......................... 788,457,132
--------------
LIABILITIES:
Unrealized depreciation on open forward
foreign currency contracts ............. 17,592
Payable for:
Investments purchased ................. 39,794,461
Shares of beneficial interest
repurchased .......................... 1,274,240
Dividends ............................. 745,239
Plan of distribution fee .............. 527,077
Investment management fee ............. 248,036
Compensated forward foreign currency
contracts ............................ 54,288
Accrued expenses and other payables .... 215,297
--------------
TOTAL LIABILITIES ..................... 42,876,230
--------------
NET ASSETS:
Paid-in-capital ......................... 747,402,397
Net unrealized depreciation ............. (7,061,216)
Accumulated undistributed net investment
income ................................. 12,819,524
Accumulated net realized loss ........... (7,579,803)
--------------
NET ASSETS ............................ $745,580,902
==============
NET ASSET VALUE PER SHARE,
76,228,524 shares outstanding
(unlimited shares authorized of $.01
par value) ............................. $9.78
=====
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1996
<TABLE>
<CAPTION>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME (net of $299,738 foreign
withholding tax) ........................ $62,025,343
-------------
EXPENSES
Plan of distribution fee ................. 5,383,849
Investment management fee ................ 2,533,576
Transfer agent fees and expenses ........ 390,840
Custodian fees ........................... 307,103
Registration fees ........................ 135,460
Professional fees ........................ 82,977
Shareholder reports and notices .......... 58,262
Organizational expenses .................. 30,268
Trustees' fees and expenses .............. 24,345
Other .................................... 16,325
-------------
TOTAL EXPENSES ......................... 8,963,005
-------------
NET INVESTMENT INCOME .................. 53,062,338
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain on:
Investments ............................ 1,695,473
Foreign exchange transactions .......... 3,212,632
-------------
NET GAIN ............................... 4,908,105
-------------
Net change in unrealized depreciation on:
Investments ............................ (3,517,689)
Translation of forward foreign currency
contracts, other assets and
liabilities denominated in foreign
currencies ............................ 3,458,343
-------------
NET DEPRECIATION ....................... (59,346)
-------------
NET GAIN ............................... 4,848,759
-------------
NET INCREASE ............................. $57,911,097
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 1996 OCTOBER 31, 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income ................................. $ 53,062,338 $ 38,917,441
Net realized gain (loss) .............................. 4,908,105 (6,654,035)
Net change in unrealized depreciation ................. (59,346) 15,624,921
---------------- ----------------
NET INCREASE ........................................ 57,911,097 47,888,327
Dividends from net investment income .................. (47,280,275) (35,658,766)
Net increase from transactions in shares of beneficial
interest ............................................. 192,406,387 123,275,734
---------------- ----------------
NET INCREASE ........................................ 203,037,209 135,505,295
NET ASSETS:
Beginning of period ................................... 542,543,693 407,038,398
---------------- ----------------
END OF PERIOD
(Including undistributed net investment income of
$12,819,524 and $3,816,429, respectively) ........... $745,580,902 $542,543,693
================ ================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1996
1. ORGANIZATION AND ACCOUNTING POLICIES
Dean Witter Diversified Income Trust (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Fund's primary investment
objective is to provide a high level of current income and, as a secondary
objective, seeks to maximize total return, but only when consistent with its
primary objective. The Fund was organized as a Massachusetts business trust
on December 20, 1991 and commenced operations on April 9, 1992.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures. Actual results could differ
from those estimates. The following is a summary of significant accounting
policies:
A. VALUATION OF INVESTMENTS -- (1) an equity security listed or traded on the
New York, American or other domestic or foreign stock exchange is valued at
its latest sale price on that exchange prior to the time when assets are
valued; if there were no sales that day, the security is valued at the latest
bid price (in cases where securities are traded on more than one exchange,
the securities are valued on the exchange designated as the primary market by
the Trustees); (2) all other portfolio securities for which over-the-counter
market quotations are readily available are valued at the latest available
bid price prior to the time of valuation; (3) when market quotations are not
readily available, including circumstances under which it is determined by
the Investment Manager that sale or bid prices are not reflective of a
security's market value, portfolio securities are valued at their fair value
as determined in good faith under procedures established by and under the
general supervision of the Trustees; (4) certain portfolio securities may be
valued by an outside pricing service approved by the Trustees. The pricing
service utilizes a matrix system incorporating security quality, maturity and
coupon as the evaluation model parameters, and/or research and evaluations by
its staff, including review of broker-dealer market price quotations, if
available, in determining what it believes is the fair valuation of the
portfolio securities valued by such pricing service; and (5) short-term debt
securities having a 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.
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1996, continued
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on
the trade date (date the order to buy or sell is executed). Realized gains
and losses on security transactions are determined by the identified cost
method. Discounts are accreted over the life of the respective securities.
Interest income is accrued daily.
C. FOREIGN CURRENCY TRANSLATION -- The books and records of the Fund are
maintained in U.S. dollars as follows: (1) the foreign currency market value
of investment securities, other assets and liabilities and forward contracts
are translated at the exchange rates prevailing at the end of the period; and
(2) purchases, sales, income and expenses are translated at the exchange
rates prevailing on the respective dates of such transactions. The resultant
exchange gains and losses are included in the Statement of Operations as
realized and unrealized gain/loss on foreign exchange transactions. Pursuant
to U.S. Federal income tax regulations, certain foreign exchange gains/losses
included in realized and unrealized gain/loss are included in or are a
reduction of ordinary income for federal income tax purposes. The Fund does
not isolate that portion of the results of operations arising as a result of
changes in the foreign exchange rates from the changes in the market prices
of the securities.
D. FORWARD FOREIGN CURRENCY CONTRACTS -- The Fund may enter into forward
foreign currency contracts which are valued daily at the appropriate exchange
rates. The resultant unrealized exchange gains and losses are included in the
Statement of Operations as unrealized foreign currencies gain or loss. The
Fund records realized gains or losses on delivery of the currency or at the
time the forward contract is extinguished (compensated) by entering into a
closing transaction prior to delivery.
E. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends
and distributions to its shareholders on the record date. The amount of
dividends and distributions from net investment income and net realized
capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends
and distributions which exceed net investment income and net realized capital
gains for financial reporting purposes but not for tax purposes are reported
as
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1996, continued
dividends in excess of net investment income or distributions in excess of
net realized capital gains. To the extent they exceed net investment income
and net realized capital gains for tax purposes, they are reported as
distributions of paid-in-capital.
G. ORGANIZATIONAL EXPENSES -- Dean Witter InterCapital Inc. (the "Investment
Manager") paid the organizational expenses of the Fund in the amount of
approximately $151,000 which have been reimbursed for the full amount
thereof. Such expenses have been deferred and are being amortized on the
straight-line method over a period not to exceed five years from the
commencement of operations.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, accrued daily and payable monthly, by applying the
annual rate of 0.40% to the net assets of the Fund determined as of the close
of each business day.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, office space, facilities,
equipment, clerical, bookkeeping and certain legal services and pays the
salaries of all personnel, including officers of the Fund who are employees
of the Investment Manager. The Investment Manager also bears the cost of
telephone services, heat, light, power and other utilities provided to the
Fund.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Dean Witter Distributors Inc. (the
"Distributor"), an affiliate of the Investment Manager. The Fund has adopted
a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act
pursuant to which the Fund pays the Distributor compensation, accrued daily
and payable monthly, at an annual rate of 0.85% of the lesser of: (a) the
average daily aggregate gross sales of the Fund's shares since the inception
of the Fund (not including reinvestment of dividend or capital gain
distributions) less the average daily aggregate net asset value of the Fund's
shares redeemed since the Fund's inception upon which a contingent deferred
sales charge has been imposed or upon which such charge has been waived; or
(b) the Fund's average daily net assets. Amounts paid under the Plan are paid
to the Distributor to compensate it for the services provided and the
expenses borne by it and others in the distribution of the Fund's shares,
including the payment of commissions for sales of the Fund's shares and
incentive compensation to, and expenses of, account executives of Dean Witter
Reynolds Inc., an affiliate of the Investment Manager and Distributor, and
other employees or selected broker-dealers, who engage in or support
distribution of the Fund's shares or who service shareholder accounts,
including
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1996, continued
overhead and telephone expenses, printing and distribution of prospectuses
and reports used in connection with the offering of the Fund's shares to
other than current shareholders and preparation, printing and distribution of
sales literature and advertising materials. In addition, the Distributor may
be compensated under the Plan for its opportunity costs in advancing such
amounts, which compensation would be in the form of a carrying charge on any
unreimbursed expenses incurred by the Distributor.
Provided that the Plan continues in effect, any cumulative expenses incurred
but not yet recovered may be recovered through future distribution fees from
the Fund and contingent deferred sales charges from the Fund's shareholders.
Although there is no legal obligation for the Fund to pay expenses incurred
in excess of payments made to the Distributor under the Plan and the proceeds
of contingent deferred sales charges paid by investors upon redemption of
shares, if for any reason the Plan is terminated, the Trustees will consider
at that time the manner in which to treat such expenses. The Distributor has
advised the Fund that such excess amounts, including carrying charges,
totaled $12,284,935 at October 31, 1996.
The Distributor has informed the Fund that for the year ended October 31,
1996, it received approximately $1,128,000 in contingent deferred sales
charges from certain redemptions of the Fund's shares.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities,
excluding short-term investments, for the year ended October 31, 1996 were as
follows:
<TABLE>
<CAPTION>
PURCHASES SALES
-------------- --------------
<S> <C> <C>
Corporate Bonds ........................ $347,502,734 $289,130,184
Foreign Government Bonds ............... 189,265,055 143,517,636
U.S. Government and Agency Obligations 136,990,181 69,146,818
</TABLE>
Dean Witter Trust Company, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At October 31, 1996, the Fund had
transfer agent fees and expenses payable of approximately $37,000.
The Fund has an unfunded noncontributory defined benefit pension plan
covering all independent Trustees of the Fund who will have served as
independent Trustees for at least five years at the time of retirement.
Benefits under this plan are based on years of service and compensation
during the last five years of service. Aggregate pension costs for the year
ended October 31, 1996 included in Trustees' fees
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1996, continued
and expenses in the Statement of Operations amounted to $10,068. At October
31, 1996, the Fund had an accrued pension liability of $28,014 which is
included in accrued expenses in the Statement of Assets and Liabilities.
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
OCTOBER 31, 1996 OCTOBER 31, 1995
------------------------------ -----------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Sold ...................... 36,480,365 $353,997,564 21,219,776 $201,648,052
Reinvestment of dividends . 2,052,285 19,859,631 1,592,451 15,089,111
-------------- -------------- ------------- --------------
38,532,650 373,857,195 22,812,227 216,737,163
Repurchased ............... (18,707,218) (181,450,808) (9,852,773) (93,461,429)
-------------- -------------- ------------- --------------
Net increase .............. 19,825,432 $192,406,387 12,959,454 $123,275,734
============== ============== ============= ==============
</TABLE>
6. FEDERAL INCOME TAX STATUS
At October 31, 1996, the Fund had a net capital loss carryover of
approximately $9,067,000 of which $3,024,000 will be available through
October 31, 2002 and $3,677,000 will be available through October 31, 2003
and $2,366,000 will be available through October 31, 2004 to offset future
capital gains to the extent provided by regulations.
As of October 31, 1996, the Fund had temporary book/tax differences primarily
attributable to the mark-to-market of open forward foreign currency exchange
contracts and compensated forward foreign currency exchange contracts and
permanent book/tax differences primarily attributable to foreign currency
gains. To reflect reclassifications arising from permanent book/tax
differences for the year ended October 31, 1996, accumulated net realized
loss was charged and accumulated undistributed net investment income was
credited $3,221,032.
7. PURPOSE OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Fund may enter into forward foreign currency contracts ("forward
contracts") to facilitate settlement of foreign currency denominated
portfolio transactions or to manage its foreign currency exposure or to sell,
for a fixed amount of U.S. dollars or other currency, the amount of foreign
currency approximating the value of some or all of its holdings denominated
in such foreign currency or an amount of foreign currency other than the
currency in which the securities to be hedged are denominated approximating
the value of some or all of its holdings to be hedged. Additionally, when the
Investment Manager anticipates
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1996, continued
purchasing securities at some time in the future, the Fund may enter into a
forward contract to purchase an amount of currency equal to some or all the
value of the anticipated purchase for a fixed amount of U.S. dollars or other
currency.
To hedge against adverse interest rate, foreign currency and market risks,
the Fund may enter into written options on interest rate futures and interest
rate futures contracts ("derivative investments").
At October 31, 1996, there were outstanding forward contracts used to
facilitate settlement of foreign currency denominated portfolio transactions
and manage foreign currency exposure.
These derivative instruments involve elements of market risk in excess of the
amount reflected in the Statement of Assets and Liabilities. The Fund bears
the risk of an unfavorable change in the foreign exchange rates underlying
the forward contracts. Risks may also arise upon entering into these
contracts from the potential inability of the counterparties to meet the
terms of their contracts.
At October 31, 1996, the Fund's cash balance consisted principally of
interest bearing deposits with Chase Manhattan Bank N.A., the Fund's
custodian.
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 31 APRIL 9, 1992*
------------------------------------------------------ THROUGH
1996 1995 1994 1993 OCTOBER 31, 1992
------------ ------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .. $9.62 $9.37 $10.20 $10.01 $ 10.00
------------ ------------ ------------ ------------ ----------------
Net investment income .................. 0.78 0.77 0.74 0.77 0.37
Net realized and unrealized gain (loss) 0.10 0.20 (0.80) 0.20 --
------------ ------------ ------------ ------------ ----------------
Total from investment operations ...... 0.88 0.97 (0.06) 0.97 0.37
------------ ------------ ------------ ------------ ----------------
Less dividends and distributions from:
Net investment income ................. (0.72) (0.72) (0.64) (0.73) (0.36)
Net realized gain ..................... -- -- (0.01) (0.05) --
Paid-in-capital ....................... -- -- (0.12) -- --
------------ ------------ ------------ ------------ ----------------
Total dividends and distributions ..... (0.72) (0.72) (0.77) (0.78) (0.36)
------------ ------------ ------------ ------------ ----------------
Net asset value, end of period ......... $9.78 $9.62 $ 9.37 $10.20 $ 10.01
============ ============ ============ ============ ================
TOTAL INVESTMENT RETURN+ .............. 9.49% 10.76% (0.69)% 10.00% 3.73%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................... 1.42% 1.44% 1.51% 1.58%(4) 0.85%(2)(3)
Net investment income .................. 8.38% 8.30% 7.91% 7.92%(4) 7.86%(2)(3)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $745,581 $542,544 $407,038 $167,137 $55,297
Portfolio turnover rate ................ 82% 87% 60% 117% 37%(1)
</TABLE>
- ------------
* Commencement of operations.
+ 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) If the Fund had borne all expenses that were assumed or waived by the
Investment Manager, the above annualized expense and net investment
income ratios would have been 2.08% and 6.63%, respectively.
(4) If the Fund had borne all expenses that were assumed or waived by the
Investment Manager, the above annualized expense and net investment
income ratios would have been 1.66% and 7.84%, respectively.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF DEAN WITTER DIVERSIFIED INCOME TRUST
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Dean Witter
Diversified Income Trust (the "Fund") at October 31, 1996, 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 four years in the period then ended and for the period April 9, 1992
(commencement of operations) through October 31, 1992, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at October
31, 1996 by correspondence with the custodian and brokers and the application
of alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
December 17, 1996
<PAGE>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo DEAN WITTER
Edwin J. Garn DIVERSIFIED
John R. Haire INCOME TRUST
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Sheldon Curtis
Vice President, Secretary and General Counsel
Peter M. Avelar
Vice President
Rajesh K. Gupta
Vice President
Vinh Q. Tran
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Dean Witter Trust Company
Harborside Financial Center -Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Dean Witter InterCapital Inc.
Two World Trade Center ANNUAL REPORT
New York, New York 10048 OCTOBER 31, 1996
This report is submitted for the general information of shareholders of the
Fund. For more detailed information about the Fund, its officers and trustees,
fees, expenses and other pertinent information, please see the prospectus of
the Fund.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective prospectus.
