<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
LETTER TO THE SHAREHOLDERS April 30, 1998
Two World Trade Center, New York, New York 10048
DEAR SHAREHOLDER:
The fixed-income markets had a mixed performance during the six-month period
ended April 30, 1998. The first half of this period was marked by declining
interest rates in all of the major bond markets, whereas the second half saw
European bond yields stabilize while rates in the United States edged slightly
higher.
THE U.S. BOND MARKET
In the United States, the bond market initially benefited from its safe-haven
status as global investors sought relief from the ongoing turbulence in the
Southeast Asian financial markets. As 1998 began, however, the growing U.S.
economy and record-low unemployment ignited fears that inflation might begin to
move higher. As a result, yields on three-year U.S. Treasuries increased from
their January low of 5.19 percent to 5.60 percent on April 30.
THE GLOBAL BOND SECTOR
Meanwhile, the European bond markets also saw yields moving lower, at first in
conjunction with those in the United States, then later in response to the
major European countries' reports of ongoing moderate growth with low
inflation. Further supporting the European markets, particularly those in the
south (e.g., Italy and Spain), was the market's realization that the European
Monetary Union and the common European currency, the euro, would be launched on
schedule in January 1999. As a result, three-year German government bond yields
registered a net decline of 28 basis points (0.28 percent) over the period,
while three-year Italian bond yields fell 100 basis points (1 percent).
With the flight into U.S. assets came a further strengthening of the U.S.
dollar. This upward move of the U.S. currency also reflected the attractiveness
of U.S. money market interest rates to international investors as well as the
firmness of the U.S. economy relative to other major economies.
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
LETTER TO THE SHAREHOLDERS April 30, 1998, continued
THE HIGH-YIELD BOND SECTOR
Following some market weakness in 1997's fourth quarter as a result of the
emerging market crisis, the high-yield bond sector proceeded to stabilize and
recover during the early part of 1998, given the continued strength in the U.S.
economy. This strength in the U.S. economy has resulted in solid earnings
improvements on the part of many high-yield companies and has provided the fuel
for the sharp equity market advance experienced during the period. Many
high-yield companies have taken advantage of higher equity valuations to raise
equity and strengthen their own balance sheets. The resulting credit quality
improvement has helped keep the high-yield market's performance strong relative
to that of many of the other fixed-income markets.
PERFORMANCE AND PORTFOLIO STRATEGY
For the six-month period ended April 30, 1998, Dean Witter Diversified Income
Trust's Class B shares posted a total return of 2.58 percent, compared to 3.11
percent for the Lehman Brothers Mutual Fund Government/Corporate Intermediate
Bond Index and 4.58 for the Lipper Multi-Sector Income Funds Average. For the
same period, the Fund's Class A, C and D shares had total returns of 2.90
percent, 2.60 percent and 3.12 percent, respectively. The performance of the
Fund's four share classes varies because of differing expenses.
The Global Short-Term Bond Component. Throughout this period, the Fund's global
short-term bond component continued its strategy of investing in markets that
have attractive values commensurate with low relative risk. This component
maintained its overweighting in the United States through January 1998, when
market expectations for an Asian-induced economic slowdown began to wane. As
the component reduced its U.S. exposure, assets were reallocated to Europe,
particularly to the higher-yielding southern countries, to take advantage of
the stronger performance of those markets. This component also increased its
allocation to New Zealand, which has a significant amount of export exposure to
Asia. As its economy slows down from the Asian crisis, its bond market should
perform well.
The currency risks associated with the European bond investments were hedged
back into the U.S. dollar for most of the six-month period. This tactic
effectively protected the Fund's global short-term bond component from the
decline in the values of those currencies. In mid April, as Europe began to
reflect a strengthening economy, some of these hedges were removed, in order to
take advantage of the appreciation of those currencies.
In the months ahead, we anticipate a continuation of the global bond
component's strategy of diversification in global markets, with an emphasis on
markets that exhibit a stable inflation outlook and improving fiscal
discipline. As the advent of the new European Monetary Union approaches, and
with the
2
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
LETTER TO THE SHAREHOLDERS April 30, 1998, continued
formation of the new European Central Bank, we believe there will continue to
be a credible anti-inflationary policy in the new united Europe, as well as
ongoing pressure on the individual governments to reduce their budget deficits.
In addition, we anticipate that global growth will continue to be moderate as
the Asian economies slowly recover, allowing the global bond markets to
continue to offer compelling value over the months ahead.
The U.S. Government/Mortgage Component. With the decline in interest rates over
the past six months, yields on current-coupon 30-year pass-through
mortgage-backed securities declined from 7 percent in October 1997 to 6.5
percent in April 1998. Over this period, these securities outperformed similar
duration U.S. Treasury issues. In addition, yield spreads between U.S. agency
obligations and Treasuries widened considerably during the height of the Asian
currency crisis in late 1997. As cash flows permitted, we substantially
increased the Fund's exposure to this sector by purchasing both callable and
noncallable agency obligations at very attractive levels, thereby enhancing the
Fund's prospects for current income and total return.
As of April 30, 1998, 21.8 percent of the Fund's U.S. government/mortgage
component was invested in mortgage-backed securities issued by Federal National
Mortgage Association (FNMA), Government National Mortgage Association (GNMA)
and Federal Home Loan Mortgage Corporation (FHLMC), with coupons of 6.00
percent to 8.50 percent. The component's remaining assets were invested in U.S.
agency obligations (9.5 percent) and U.S. Treasuries (10.7 percent).
The High-Yield Corporate Bond Component. As the economy has continued to expand
over the past few years, the Fund's high-yield component has tended to
concentrate on B-rated issues. In a growing economy one can generally find
undervalued upgrade candidates in this sector of the market that provide
attractive yields as well as appreciation potential. Given our expectation for
ongoing growth in the economy this year, we continue to feel that many of these
issues are very attractive investments. However, in light of the lower market
yields available today and the potential for a modest correction in the market,
we have taken some defensive steps for the high-yield component's portfolio
over the past year. These include increasing the component's allocation to the
higher-quality end of the market (BB-rated issues or higher). We feel that
these holdings will better protect shareholders during a potentially nervous
market environment as well as provide the liquidity and portfolio flexibility
needed to take advantage of higher, more attractive market yields in the
future.
In addition, the Fund's high-yield bond component has sold many of its heavily
cyclical positions and is now focused mainly on more-predictable,
recession-resistant and growth sectors of the economy such as food and
beverages, health care, telecommunications and media and cable. In some of
these sectors, such as media and telecommunications, we expect to see continued
consolidation, which should bode well for
3
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
LETTER TO THE SHAREHOLDERS April 30, 1998, continued
many of the Fund's individual holdings. Finally, in keeping with our more
defensive posture, we will continue to limit our exposure to the foreign
emerging high-yield markets, particularly given the risk associated with the
ongoing crisis in many emerging markets.
The one- to two-year outlook for the high-yield market remains positive, with
our expectations for continued economic growth and a relatively favorable
interest-rate environment. We caution, however, that during this period the
possibility exists for another round of investor nervousness in reaction to
potential Federal Reserve Board moves or another disruption in emerging
markets.
We appreciate your ongoing support of Dean Witter Diversified Income Trust and
look forward to continuing to serve your investment needs.
Very truly yours,
/s/ Charles A. Fiumefreddo
CHARLES A. FIUMEFREDDO
Chairman of the Board
4
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 1998 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GOVERNMENT & CORPORATE BONDS (96.8%)
FOREIGN (23.9%)
CANADA (0.8%)
Automotive (0.3%)
$ 3,250 Speedy Muffler King Inc. ................. 10.875% 10/01/06 $ 2,925,000
------------
Entertainment/Gaming & Lodging (0.1%)
1,000 Plitt Theaters, Inc. ..................... 10.875 06/15/04 1,087,500
------------
Foods & Beverages (0.4%)
3,500 Sparkling Spring Water -- 144A* .......... 11.50 11/15/07 3,657,500
------------
TOTAL CANADA ................................................... 7,670,000
------------
DENMARK (a) (3.4%)
Government Obligation
DKK 214,000 Kingdom of Denmark ....................... 9.00 11/15/00 34,418,859
------------
FINLAND (a) (0.5%)
Financial
POUND
STERLING 2,800 Finnish Export Credit Corp. .............. 6.75 12/29/00 4,672,471
------------
GERMANY (a) (4.1%)
Banks
DEM 16,500 Allgemeine HypothekenBank AG ............. 5.75 03/13/00 9,423,977
POUND
STERLING 1,550 Bayerische Hypotheken Bank ............... 6.75 12/30/99 2,572,524
1,300 Bayerische VereinsBank ................... 7.50 12/27/00 2,207,537
DEM 16,500 Depfa-Bank ............................... 6.00 08/28/00 9,498,413
16,500 Rheinische HypothekenBank AG ............. 5.50 12/20/99 9,371,596
15,000 Westland Bank ............................ 5.75 12/01/00 8,604,010
------------
TOTAL GERMANY .................................................. 41,678,057
------------
ITALY (a) (4.8%)
Government Obligations
ITL 1,725 M Italy Treasury Bond ...................... 10.50 04/01/00 1,074,426
39,750 M Italy Treasury Bond ...................... 10.50 11/01/00 25,438,205
34,925 M Italy Treasury Bond ...................... 9.50 02/01/01 22,106,027
------------
TOTAL ITALY .................................................... 48,618,658
------------
NEW ZEALAND (3.1%)
Banks (0.8%)
NZD 15,400 International Bank for Reconstruction
& Development ............................ 7.00 09/18/00 8,323,824
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government Obligation (a) (2.3%)
NZD 40,800 New Zealand Government Bond ................ 8.00 % 02/15/01 $ 22,804,382
------------
TOTAL NEW ZEALAND ................................................ 31,128,206
------------
SPAIN (3.1%)
Government Obligations
ESP 990 M Spain Treasury Bond (a) .................... 9.40 04/30/99 6,813,781
3,300 M Spain Treasury Bond ........................ 12.25 03/25/00 24,672,261
------------
TOTAL SPAIN ...................................................... 31,486,042
------------
SWEDEN (a) (2.6%)
Government Obligation
SEK 183,200 Swedish Treasury Bond ...................... 10.25 05/05/00 26,019,862
------------
UNITED KINGDOM (1.5%)
Banks (a) (0.5%)
DEM 8,450 Suedwest LB Capital Markets ................ 7.00 03/31/00 4,924,903
------------
Financial (a) (0.6%)
POUND
STERLING 3,460 Halifax PLC ................................ 8.375 12/15/99 5,883,284
------------
Transportation (0.4%)
$ 4,250 Alpha Shipping PLC -- 144A* ................ 9.50 02/15/08 4,080,000
------------
TOTAL UNITED KINGDOM ............................................. 14,888,187
------------
TOTAL FOREIGN
(Identified Cost $240,400,940).................................... 240,580,342
------------
UNITED STATES (72.9%)
CORPORATE BONDS (30.9%)
Aerospace (0.4%)
4,000 Sabreliner Corp. (Series B) ................ 12.50 04/15/03 4,220,000
------------
Automotive (0.3%)
3,000 Toyota Motor Credit Corp. .................. 15.00 09/25/98 3,108,990
------------
Broadcast Media (1.6%)
90 Australis Media Ltd. ....................... 15.75 ++ 05/15/03 9,031
4,700 Australis Media Ltd (Units)# ............... 15.75 ++ 05/15/03 470,000
3,100 Echostar DBS Corp. ......................... 12.50 07/01/02 3,510,750
3,000 Paxson Communications Corp. ................ 11.625 10/01/02 3,210,000
5,000 Spanish Broadcasting System, Inc. .......... 12.50 06/15/02 5,750,000
4,000 TCI Satellite Entertainment Corp. .......... 12.25 ++ 02/15/07 2,870,000
------------
15,819,781
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Business Services (1.5%)
$ 5,000 Anacomp, Inc. (Series B) ................... 10.875% 04/01/04 $ 5,350,000
6,750 Comforce Operating Inc. .................... 12.00 12/01/07 7,290,000
2,000 Xerox Credit Corp. ......................... 15.00 06/26/98 2,026,520
------------
14,666,520
------------
Cable & Telecommunications (9.5%)
2,250 21st Century Telecom Group, Inc. --
144A* ...................................... 12.25++ 02/15/08 1,271,250
3,000 Adelphia Communications Corp.
(Series B) ................................. 9.25 10/01/02 3,105,000
6,725 Advanced Radio Telecommunication ........... 14.00 02/15/07 7,397,500
2,700 American Communications Services,
Inc. ....................................... 13.75 07/15/07 3,199,500
6,500 Clearnet Communications Inc. ............... 14.75++ 12/15/05 5,460,000
2,300 FirstWorld Communication (Units)# --
144A* ...................................... 13.00++ 04/15/08 1,178,750
3,850 FrontierVision Operating Partners L.P....... 11.00 10/15/06 4,254,250
3,250 FWT Inc. ................................... 9.875 11/15/07 3,120,000
750 GlobalStar LP/Capital ...................... 11.375 02/15/04 770,625
2,000 Globalstar LP/Capital Corp. ................ 10.75 11/01/04 2,020,000
3,100 GST Equipment Funding Corp. ................ 13.25 05/01/07 3,596,000
4,700 Hyperion Telecommunication, Inc.
(Series B) ................................. 12.25 09/01/04 5,217,000
28,500 In-Flight Phone Corp. (Series B) (b) ....... 14.00++ 05/15/02 3,918,750
7,300 McCaw International Ltd. ................... 13.00++ 04/15/07 4,964,000
3,000 Metronet Communications .................... 12.00 08/15/07 3,450,000
4,200 Nextel Communications ...................... 10.65++ 09/15/07 2,824,500
3,350 NextLink Communications LLC ................ 12.50 04/15/06 3,806,437
4,000 Orbcomm Global LP/Capital .................. 14.00 08/15/04 4,700,000
3,250 Paging Network, Inc. ....................... 10.125 08/01/07 3,416,563
6,000 Peoples Telephone Co., Inc. ................ 12.25 07/15/02 6,360,000
10,000 Price Communications Cellular
Holdings ................................... 13.50++ 08/01/07 6,925,000
3,500 Primus Telecommunications Group ............ 11.75 08/01/04 3,850,000
2,800 Triton Communications -- 144A* ............. 11.00++ 05/01/08 1,655,500
4,000 USA Mobile Communications Holdings,
Inc. ....................................... 14.00 11/01/04 4,410,000
1,000 Winstar Communications ..................... 14.00++ 10/15/05 820,000
3,250 Winstar Equipment Corp. .................... 12.50 03/15/04 3,648,125
------------
95,338,750
------------
Chemicals (0.3%)
3,250 Harris Chemical North America, Inc. ........ 10.75 10/15/03 3,420,625
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Computer Equipment (1.1%)
$ 4,250 CHS Electronics Inc. -- 144A* .................. 9.875% 04/15/05 $ 4,196,875
3,000 IBM Credit Corp. ............................... 15.00 02/02/99 3,201,660
3,250 Unisys Corp. -- (Series B) ..................... 12.00 04/15/03 3,672,500
------------
11,071,035
------------
Consumer Products (0.3%)
2,500 J.B. Williams Holdings, Inc. ................... 12.00 03/01/04 2,618,750
------------
Electrical & Alarm Systems (0.4%)
4,230 Mosler, Inc. ................................... 11.00 04/15/03 3,764,700
------------
Entertainment/Gaming & Lodging (4.1%)
3,250 Argosy Gaming Co. .............................. 13.25 06/01/04 3,672,500
2,700 Aztar Corp. .................................... 13.75 10/01/04 3,111,750
4,000 Fitzgerald Gaming Corp. -- 144A* ............... 12.25 12/15/04 4,090,000
4,000 Lady Luck Gaming Finance Corp. ................. 11.875 03/01/01 4,150,000
5,670 Motels of America, Inc. (Series B) ............. 12.00 04/15/04 5,528,250
3,000 Players International, Inc. .................... 10.875 04/15/05 3,251,250
3,250 Resort At Summer/Ras Co. -- 144A* .............. 13.00+ 12/15/07 3,461,250
4,000 Riviera Holdings Corp. ......................... 10.00 08/15/04 3,980,040
3,250 Stuart Entertainment, Inc. (Series B) .......... 12.50 11/15/04 2,681,250
7,000 Walt Disney Co. ................................ 15.00 12/14/98 7,390,460
------------
41,316,750
------------
Finance (2.0%)
3,500 Cityscape Financial Corp. (Series A) ........... 12.75 06/01/04 1,400,000
ITL 3,000M General Electric Capital Corp. ................. 10.375 06/14/00 1,880,926
$ 5,000 General Electric Capital Corp. (Series A) 15.00 01/21/99 5,325,800
3,000 Household Finance Corp. ........................ 15.00 09/25/98 3,105,990
POUND
STERLING 4,675 KFW International Finance (a) .................. 7.625 12/29/00 7,976,319
------------
19,689,035
------------
Foods & Beverages (2.0%)
$ 5,250 Envirodyne Industries, Inc. .................... 10.25 12/01/01 5,289,375
6,000 General Mills, Inc. ............................ 15.00 01/29/99 6,412,560
3,000 PepsiCo, Inc. .................................. 15.00 08/06/98 3,073,500
12,125 Specialty Foods Acquisition Corp.
(Series B) ..................................... 13.00++ 08/15/05 5,274,375
------------
20,049,810
------------
Healthcare (0.8%)
4,000 Unilab Corp. ................................... 11.00 04/01/06 4,260,000
7,350 Unison Healthcare Corp. -- 144A* ............... 12.25 11/01/06 3,969,000
------------
8,229,000
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Manufacturing (0.3%)
$ 3,011 International Semi-Tech
Microelectronics ............................. 11.50++% 08/15/03 $ 1,008,685
2,250 Outsourcing Services Group, Inc. --
144A* ........................................ 10.875 03/01/06 2,317,500
------------
3,326,185
------------
Manufacturing -- Diversified (1.0%)
5,000 Interlake Corp. .............................. 12.00 11/15/01 5,512,500
2,800 J.B. Poindexter & Co., Inc. .................. 12.50 05/15/04 2,884,000
2,588 Jordan Industries, Inc. (Series B) ........... 11.75++ 04/01/09 1,695,140
------------
10,091,640
------------
Oil & Gas (1.1%)
5,000 Texaco Capital, Inc. ......................... 15.00 01/13/99 5,314,300
3,700 TransAmerica Refining Corp. (Units)# --
144A* ........................................ 16.00 06/30/03 3,977,500
2,000 TransAmerica Refining Corp. (Units)# --
144A* ........................................ 16.00 06/30/03 2,150,000
------------
11,441,800
------------
Publishing (0.3%)
3,000 American Media Operations, Inc. .............. 11.625 11/15/04 3,247,500
------------
Restaurants (1.6%)
15,756 American Restaurant Group Holdings,
Inc. -- 144A* (c) ............................ 0.00 12/15/05 3,072,401
3,000 Carrols Corp. ................................ 11.50 08/15/03 3,180,000
4,000 FRD Acquisition Corp. (Series B) ............. 12.50 07/15/04 4,420,000
2,750 Friendly Ice Cream Corp. ..................... 10.50 12/01/07 2,928,750
3,250 Planet Hollywood International --
144A* ........................................ 12.00 04/01/05 3,193,125
------------
16,794,276
------------
Retail (0.3%)
2,912 Kmart Corp. .................................. 13.50 01/01/09 3,144,960
------------
Retail -- Food Chains (1.8%)
3,750 Big V Supermarkets, Inc. (Series B) .......... 11.00 02/15/04 3,937,500
1,000 Eagle Food Centers, Inc. ..................... 8.625 04/15/00 997,500
3,000 Mrs. Fields Original -- 144A* ................ 10.125 12/01/04 2,992,500
4,750 Pantry, Inc. ................................. 10.25 10/15/07 4,892,500
1,000 Pueblo Xtra International, Inc. .............. 9.50 08/01/03 975,000
5,000 Pueblo Xtra International, Inc.
(Series C) ................................... 9.50 08/01/03 4,875,000
------------
18,670,000
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Textiles -- Apparel Manufacturers (0.2%)
$ 4,000 U.S. Leather, Inc. (d) ................... 10.25 % 07/31/03 $ 1,780,000
------------
TOTAL CORPORATE BONDS
(Identified Cost $322,350,160) .................................... 311,810,107
------------
MORTGAGE-BACKED SECURITIES (21.8%)
Federal Home Loan Mortgage Corp. (0.6%)
3,635 ......................................... 7.00 04/01/04--
06/01/04 3,688,772
2,507 ......................................... 8.00 10/01/24--
06/01/25 2,596,266
------------
6,285,038
------------
Federal National Mortgage Assoc. (11.9%)
3,371 ......................................... 6.00 02/01/11--
03/01/11 3,321,152
37,376 ......................................... 6.50 10/01/08--
03/01/27 37,291,136
35,118 ......................................... 7.00 08/01/08--
03/01/27 35,518,387
17,858 ......................................... 7.50 02/01/22--
01/01/27 18,321,305
9,566 ......................................... 8.00 09/01/01--
06/01/26 9,846,845
15,387 ......................................... 8.50 07/01/17--
05/01/25 16,074,352
------------
120,373,177
------------
Government National Mortgage Assoc. (9.3%)
18,217 ......................................... 6.50 11/20/23--
04/20/28 18,021,833
28,316 ......................................... 7.00 12/15/22--
11/20/27 28,631,614
36,563 ......................................... 7.50 05/15/17--
11/15/26 37,535,347
6,396 ......................................... 8.00 01/15/22--
10/15/24 6,635,623
2,508 ......................................... 8.50 08/15/22--
12/15/24 2,644,051
------------
93,468,468
------------
TOTAL MORTGAGE-BACKED SECURITIES
(Identified Cost $215,357,650)..................................... 220,126,683
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS (20.2%)
Federal Home Loan Banks (a) (2.9%)
$ 5,000 .......................................... 0.00% 07/02/12 $ 1,687,850
5,000 .......................................... 5.825 11/19/99 5,014,000
2,520 .......................................... 5.845 01/22/08 2,484,544
DEM 8,900 .......................................... 6.00 08/23/00 5,120,139
$ 5,000 .......................................... 6.295 08/15/07 5,093,700
5,000 .......................................... 6.370 09/25/07 5,121,350
5,000 .......................................... 6.385 10/23/07 5,127,600
------------
29,649,183
------------
10,000 Federal Home Loan Mortgage
Corp. (0.8%) .............................. 0.00 08/15/02 7,826,200
------------
Federal National Mortgage Assoc.(a) (1.6%)
5,000 .......................................... 5.80 02/22/06 4,940,000
NZD 13,800 .......................................... 7.00 09/26/00 7,438,258
$ 6,000 Principal Strip ........................... 0.00 02/12/04--
02/01/05 4,067,140
------------
16,445,398
------------
14,000 Financing Corp. (1.0%) .................... 0.00 06/06/01--
04/06/06 9,991,470
------------
48,632 Resolution Funding Corp. (3.0%) ........... 0.00 04/15/05--
10/15/07 30,578,765
------------
2,320 Tennesee Valley Authority (0.2%) .......... 0.00 01/15/03 1,765,543
------------
U.S. Treasury Notes (10.7%)
65,900 .......................................... 5.375 02/15/01 65,509,213
23,500 .......................................... 6.00 08/15/00 23,691,760
18,000 .......................................... 6.125 08/15/07 18,481,140
------------
107,682,113
------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(Identified Cost $202,859,239).................................. 203,938,672
------------
TOTAL UNITED STATES
(Identified Cost $740,567,049).................................. 735,875,462
------------
TOTAL GOVERNMENT & CORPORATE BONDS
(Identified Cost $980,967,989).................................. 976,455,804
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 1998 (unaudited) continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (e) (0.8%)
Entertainment/Gaming & Lodging (0.0%)
2,000 Motels of America, Inc. -- 144A* ..................................... $ 110,000
------------
Foods & Beverages (0.0%)
198,750 Specialty Foods Acquisition Corp. -- 144A* ........................... 198,750
------------
Healthcare (0.1%)
292,900 Unigene Laboratories, Inc. ........................................... 805,475
------------
Restaurants (0.0%)
6,000 American Restaurant Group Holdings, Inc. -- 144A* .................... 60
------------
Retail (0.7%)
1,389,850 County Seat Stores, Inc. (c) (f) ..................................... 6,644,873
------------
TOTAL COMMON STOCKS
(Identified Cost $9,030,525).......................................... 7,759,158
------------
PREFERRED STOCKS (0.2%)
Oil & Gas (0.1%)
211 XCL Ltd. (Conv.)+ -- 144A* ........................................... 37,980
5,000 XCL Ltd. (Units)# (Conv.)+ -- 144A* .................................. 900,000
------------
937,980
------------
Restaurants (e)(0.1%)
1,500 American Restaurant Group Holdings, Inc. (Units)# -- 144A* .......... 1,515,000
------------
TOTAL PREFERRED STOCKS
(Identified Cost $2,500,000).......................................... 2,452,980
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE
- ------------- ----------
<S> <C> <C> <C>
WARRANTS (e) (0.1%)
Aerospace (0.0%)
1,000 Sabreliner Corp. -- 144A* ................................ 04/15/03 15,000
----------
Cable & Telecommunications (0.1%)
9,000 Hyperion Telecommunication, Inc. (Series B) -- 144A*...... 04/01/01 945,000
5,300 McCaw International Ltd. -- 144A* ........................ 04/15/07 1,325
3,000 Metronet Communications -- 144A* ......................... 08/15/07 30
4,000 UIH Australia/Pacific Inc. ............................... 05/15/06 40
----------
946,395
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 1998 (unaudited) continued
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE VALUE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Containers (0.0%)
2,000 Crown Packaging Holdings, Ltd. (Canada) -- 144A* 11/01/03 $ 20
------------
Entertainment/Gaming & Lodging (0.0%)
10,773 Fitzgeralds Gaming Corp. ........................ 12/19/98 48,478
3,500 Fitzgeralds South Inc. -- 144A* ................. 03/15/99 35
3,250 Resort At Summerlin Corp. -- 144A* .............. 12/15/07 33
------------
48,546
------------
Retail (0.0%)
1,500 County Seat Holdings Co. ........................ 10/15/98 2
------------
TOTAL WARRANTS
(Identified Cost $239,855).................................. 1,009,963
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
- --------------- ---------- ------------
<S> <C> <C> <C> <C>
SHORT-TERM INVESTMENT (0.7%)
REPURCHASE AGREEMENT
$ 7,072 The Bank of New York (dated 04/30/98;
proceeds $7,072,845) (g)
(Identified Cost $7,071,765) ........ 5.50% 05/01/98 7,071,765
---------
TOTAL INVESTMENTS
(Identified Cost $999,810,134) (h).............. 98.6% 994,749,670
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES 1.4 14,089,351
-------- -----------
NET ASSETS ..................................... 100.0% $1,008,839,021
-------- ==============
</TABLE>
- ---------------------
M In millions.
* Resale is restricted to qualified institutional investors.
# Consists of one or more class of securities traded together as a unit;
stocks or bonds with attached stocks or 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 commitment basis.
(b) Non-income producing securities; issuer in bankruptcy.
(c) Acquired through exchange offer.
(d) Non-income producing security; issuer in default.
(e) Non-income producing securities.
(f) Includes 498,645 shares which are due from the issuer pursuant to a
reorganization.
(g) Collateralized by $6,728,755 U.S. Treasury Bill 0% due 10/29/98 valued
at $6,558,583 and $468,168 U.S. Treasury Bond 9.125% due 05/15/18
valued at $654,617.
(h) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation is
$25,746,207 and the aggregate gross unrealized depreciation is
$30,806,671, resulting in net unrealized depreciation of $5,060,464.
SEE NOTES TO FINANCIAL STATEMENTS
13
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 1998 (unaudited) continued
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT APRIL 30, 1998:
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS IN EXCHANGE DELIVERY APPRECIATION
TO DELIVER FOR DATE (DEPRECIATION)
- ------------------ ---------------- ---------- ---------------
<S> <C> <C> <C>
NLG 17,475,000 $ 8,567,016 05/13/98 $ (84,659)
FRF 76,730,000 $ 12,632,491 05/18/98 (130,275)
NZD 13,000,000 $ 7,426,250 05/20/98 250,250
NZD 13,000,000 $ 7,436,000 05/20/98 260,000
DEM 28,700,000 $ 16,431,925 06/15/98 405,568
NLG 33,121,000 $ 16,824,732 06/15/98 394,687
ATS 189,287,230 $ 15,050,508 06/30/98 12,555
DEM 26,900,000 $ 15,049,793 06/30/98 16,037
DEM 14,885,000 $ 8,209,696 09/10/98 (140,977)
FRF 200,014,000 $ 32,832,508 09/10/98 (649,163)
NLG 33,555,000 $ 16,422,768 09/10/98 (303,132)
ATS 161,522,000 $ 12,721,072 09/18/98 (170,161)
----------
Net unrealized depreciation .............. $ (139,270)
==========
</TABLE>
Currency Abbreviations:
- -----------------------
ATS Austrian Schilling.
POUND STERLING British Pound.
DKK Danish Krone.
NLG Dutch Guilder.
FRF French Franc.
DEM German Deutchemark.
ITL Italian Lira.
NZD New Zealand Dollar.
ESP Spanish Peseta.
SEK Swedish Krona.
SEE NOTES TO FINANCIAL STATEMENTS
14
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
April 30, 1998 (unaudited)
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value (identified cost $999,810,134)........ $ 994,749,670
Unrealized appreciation on open forward foreign currency contracts ....... 1,339,097
Cash (including $613,904 in foreign currency)............................. 929,824
Receivable for:
Interest .............................................................. 19,027,140
Investments sold ...................................................... 16,763,071
Shares of beneficial interest sold .................................... 2,095,687
Compensated forward foreign currency contracts ........................ 1,149,635
Prepaid expenses ......................................................... 107,470
--------------
TOTAL ASSETS .......................................................... 1,036,161,594
--------------
LIABILITIES:
Unrealized depreciation on open forward foreign currency contracts ....... 1,478,367
Payable for:
Investments purchased ................................................. 20,802,761
Compensated forward foreign currency contracts ........................ 1,889,776
Shares of beneficial interest repurchased ............................. 1,135,422
Dividends to shareholders ............................................. 793,392
Plan of distribution fee .............................................. 698,213
Investment management fee ............................................. 331,131
Accrued expenses ......................................................... 193,511
--------------
TOTAL LIABILITIES ..................................................... 27,322,573
--------------
NET ASSETS ............................................................ $1,008,839,021
==============
COMPOSITION OF NET ASSETS:
Paid-in-capital .......................................................... $1,045,842,843
Net unrealized depreciation .............................................. (4,828,037)
Accumulated undistributed net investment income .......................... 1,502,739
Accumulated net realized loss ............................................ (33,678,524)
--------------
NET ASSETS ............................................................ $1,008,839,021
==============
CLASS A SHARES:
Net Assets ............................................................... $10,889,148
Shares Outstanding (unlimited authorized, $.01 par value)................. 1,163,010
NET ASSET VALUE PER SHARE ............................................. $9.36
=====
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 4.44% of net asset value) ..................... $9.78
=====
CLASS B SHARES:
Net Assets ............................................................... $987,378,095
Shares Outstanding (unlimited authorized, $.01 par value)................. 105,452,941
NET ASSET VALUE PER SHARE ............................................. $9.36
=====
CLASS C SHARES:
Net Assets ............................................................... $10,254,878
Shares Outstanding (unlimited authorized, $.01 par value)................. 1,096,373
NET ASSET VALUE PER SHARE ............................................. $9.35
=====
CLASS D SHARES:
Net Assets ............................................................... $316,900
Shares Outstanding (unlimited authorized, $.01 par value)................. 33,868
NET ASSET VALUE PER SHARE ............................................. $9.36
=====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
15
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the six months ended April 30, 1998 (unaudited)
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME ...................................................... $ 43,040,415
-------------
EXPENSES
Plan of distribution fee (Class A shares) ............................ 9,780
Plan of distribution fee (Class B shares) ............................ 4,031,983
Plan of distribution fee (Class C shares) ............................ 29,524
Investment management fee ............................................ 1,928,870
Transfer agent fees and expenses ..................................... 309,441
Registration fees .................................................... 91,566
Custodian fees ....................................................... 81,964
Professional fees .................................................... 40,044
Shareholder reports and notices ...................................... 34,311
Trustees' fees and expenses .......................................... 9,686
Other ................................................................ 8,282
-------------
TOTAL EXPENSES .................................................... 6,575,451
-------------
NET INVESTMENT INCOME ............................................. 36,464,964
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments ....................................................... (18,434,567)
Foreign exchange transactions ..................................... 902,029
-------------
NET LOSS .......................................................... (17,532,538)
-------------
Net change in unrealized depreciation on:
Investments ....................................................... 4,936,177
Translation of forward foreign currency contracts, other assets and
liabilities denominated in foreign currencies ................... 1,240,027
-------------
NET APPRECIATION .................................................. 6,176,204
-------------
NET LOSS .......................................................... (11,356,334)
-------------
NET INCREASE ......................................................... $ 25,108,630
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
16
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
APRIL 30, 1998 OCTOBER 31, 1997*
- --------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income ................................ $ 36,464,964 $ 66,141,534
Net realized loss .................................... (17,532,538) (8,043,772)
Net change in unrealized depreciation ................ 6,176,204 (3,943,025)
-------------- -------------
NET INCREASE ...................................... 25,108,630 54,154,737
-------------- -------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT
INCOME:
Class A shares ....................................... (345,036) (58,752)
Class B shares ....................................... (34,620,340) (79,103,939)
Class C shares ....................................... (264,263) (41,777)
Class D shares ....................................... (10,705) (882)
-------------- -------------
TOTAL DIVIDENDS ................................... (35,240,344) (79,205,350)
-------------- -------------
Net increase from transactions in shares of beneficial
interest ........................................... 94,265,948 204,174,498
-------------- -------------
NET INCREASE ...................................... 84,134,234 179,123,885
NET ASSETS:
Beginning of period .................................. 924,704,787 745,580,902
-------------- -------------
END OF PERIOD
(Including undistributed net investment income of
$1,502,739 and $278,119, respectively)............. $1,008,839,021 $ 924,704,787
============== =============
</TABLE>
- ---------------------
* Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
17
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 1998 (unaudited)
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. On July 28, 1997, the Fund
commenced offering three additional classes of shares, with the then current
shares designated as Class B shares.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase, some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year,
six years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures. Actual results could differ
from those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) an equity security listed or traded on the
New York, American or other domestic or foreign stock exchange is valued at its
latest sale price on that exchange prior to the time when assets are valued; if
there were no sales that day, the security is valued at the latest bid price
(in cases where securities are traded on more than one exchange, the securities
are valued on the exchange designated as the primary market pursuant to
procedures adopted 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 Dean Witter InterCapital Inc. (the "Investment Manager") that
sale or bid prices are not reflective of a security's market value, portfolio
securities are valued at their fair value as determined in good faith under
procedures established by and under the general supervision of the Trustees;
(4) certain portfolio securities may be valued by an outside pricing service
approved by the Trustees. The pricing service may utilize a matrix system
incorporating security quality, maturity and coupon as the evaluation model
parameters, and/or research and evaluations by its staff, including review of
broker-dealer market price quotations, if available, in determining what it
18
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 1998 (unaudited) continued
believes is the fair valuation of the portfolio securities valued by such
pricing service; and (5) short-term debt securities having a maturity date of
more than sixty days at time of purchase are valued on a mark-to-market basis
until sixty days prior to maturity and thereafter at amortized cost based on
their value on the 61st day. Short-term debt securities having a maturity date
of sixty days or less at the time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Discounts are accreted over the life of the respective securities. Interest
income is accrued daily.
C. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date
such items are recognized. Distribution fees are charged directly to the
respective class.
D. FOREIGN CURRENCY TRANSLATION -- The books and records of the Fund are
maintained in U.S. dollars as follows: (1) the foreign currency market value of
investment securities, other assets and liabilities and forward foreign
currency contracts are translated at the exchange rates prevailing at the end
of the period; and (2) purchases, sales, income and expenses are translated at
the exchange rates prevailing on the respective dates of such transactions. The
resultant exchange gains and losses are included in the Statement of Operations
as realized and unrealized gain/loss on foreign exchange transactions. Pursuant
to U.S. Federal income tax regulations, certain foreign exchange gains/losses
included in realized and unrealized gain/loss are included in or are a
reduction of ordinary income for federal income tax purposes. The Fund does not
isolate that portion of the results of operations arising as a result of
changes in the foreign exchange rates from the changes in the market prices of
the securities.
E. FORWARD FOREIGN CURRENCY CONTRACTS -- The Fund may enter into forward
foreign currency contracts which are valued daily at the appropriate exchange
rates. The resultant unrealized exchange gains and losses are included in the
Statement of Operations as unrealized foreign currency gain or loss. The Fund
records realized gains or losses on delivery of the currency or at the time the
forward contract is extinguished (compensated) by entering into a closing
transaction prior to delivery.
F. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
19
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 1998 (unaudited) continued
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends
and distributions to its shareholders on the record date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which
may differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, accrued daily and payable monthly, by applying the
annual rate of 0.40% to the net assets of the Fund determined as of the close
of each business day.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Fund who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone services,
heat, light, power and other utilities provided to the Fund.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Dean Witter Distributors Inc. (the
"Distributor"), an affiliate of the Investment Manager. The Fund has adopted a
Plan of Distribution (the "Plan"), pursuant to Rule 12b-1 under the Act. The
Plan provides that the Fund will pay the Distributor a fee which is accrued
daily and paid monthly at the following annual rates: (i) Class A - up to 0.25%
of the average daily net assets of Class A; (ii) Class B - 0.85% of the lesser
of: (a) the average daily aggregate gross sales of the Class B shares since
inception of the Fund (not including reinvestment of dividend or capital gain
distributions) less the average net asset value of the Class B shares redeemed
since the Fund's inception upon which a contingent deferred sales charge has
been imposed or waived; or (b) the average daily net assets of Class B; and
(iii) Class C - up to 0.85% of the average daily net assets of Class C. In the
case of Class A
20
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 1998 (unaudited) continued
shares, amounts paid under the Plan are paid to the Distributor for services
provided. In the case of Class B and Class C shares, amounts paid under the
Plan are paid to the Distributor for services provided and the expenses borne
by it and others in the distribution of the shares of these Classes, including
the payment of commissions for sales of these Classes and incentive
compensation to, and expenses of, the account executives of Dean Witter
Reynolds Inc. ("DWR"), an affiliate of the Investment Manager and Distributor,
and others who engage in or support distribution of the shares or who service
shareholder accounts, including overhead and telephone expenses; printing and
distribution of prospectuses and reports used in connection with the offering
of these shares to other than current shareholders; and preparation, printing
and distribution of sales literature and advertising materials. In addition,
the Distributor may utilize fees paid pursuant to the Plan, in the case of
Class B shares, to compensate DWR and other selected broker-dealers for their
opportunity costs in advancing such amounts, which compensation would be in the
form of a carrying charge on any unreimbursed expenses.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund
pursuant to the Plan and contingent deferred sales charges paid by investors
upon redemption of Class B shares. Although there is no legal obligation for
the Fund to pay expenses incurred in excess of payments made to the Distributor
under the Plan and the proceeds of contingent deferred sales charges paid by
investors upon redemption of shares, if for any reason the Plan is terminated,
the Trustees will consider at that time the manner in which to treat such
expenses. The Distributor has advised the Fund that such excess amounts,
including carrying charges, totaled $16,216,729 at April 30, 1998.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 0.85% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to account executives may be reimbursed in the subsequent
calendar year. For the six months ended April 30, 1998, the distribution fee
was accrued for Class A shares and Class C shares at the annual rate of 0.23%
and 0.85%, respectively.
The Distributor has informed the Fund that for the six months ended April 30,
1998, it received contingent deferred sales charges from certain redemptions of
the Fund's Class A shares, Class B shares and Class C shares of $5, $707,278,
and $3,601, respectively and received $67,822 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.
21
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 1998 (unaudited) continued
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities,
excluding short-term investments, for the six months ended April 30, 1998
aggregated $727,062,144 and $582,821,899, respectively. Included in the
aforementioned are purchases and sales of U.S. Government securities of
$284,151,292 and $284,661,810, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager
and Distributor, is the Fund's transfer agent. At April 30, 1998, the Fund had
transfer agent fees and expenses payable of approximately $5,000.
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 six months ended April 30, 1998
included in Trustees' fees and expenses in the Statement of Operations amounted
to $2,395. At April 30, 1998, the Fund had an accrued pension liability of
$34,091 which is included in accrued expenses in the Statement of Assets and
Liabilities.
5. FEDERAL INCOME TAX STATUS
At October 31, 1997, the Fund had an approximate net capital loss carryover of
$16,314,000, which may be used to offset future capital gains to the extent
provided by regulations, which is available through October 31 of the following
years:
<TABLE>
<CAPTION>
AMOUNT IN THOUSANDS
- -----------------------------------------------
2002 2003 2004 2005
---- ---- ---- ----
<S> <C> <C> <C>
$3,024 $3,677 $2,482 $7,131
====== ====== ====== ======
</TABLE>
As of October 31, 1997, 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.
22
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 1998 (unaudited) continued
6. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
APRIL 30, 1998 OCTOBER 31, 1997*
------------------------------------ ------------------------------------
(unaudited)
SHARES AMOUNT SHARES AMOUNT
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold .............................. 796,551 $ 7,494,743 558,411 $ 5,262,008
Reinvestment of dividends ......... 10,009 93,942 1,750 16,494
Redeemed .......................... (164,987) (1,553,296) (38,724) (367,538)
-------- -------------- ------- --------------
Net increase - Class A ............ 641,573 6,035,389 521,437 4,910,964
-------- -------------- ------- --------------
CLASS B SHARES
Sold .............................. 31,042,280 292,155,862 55,563,733 525,362,254
Reinvestment of dividends ......... 1,595,412 14,975,127 3,620,754 34,158,956
Redeemed .......................... (23,992,522) (225,681,873) (38,605,240) (364,124,514)
----------- -------------- ----------- --------------
Net increase - Class B ............ 8,645,170 81,449,116 20,579,247 195,396,696
----------- -------------- ----------- --------------
CLASS C SHARES
Sold .............................. 735,969 6,925,768 404,022 3,813,369
Reinvestment of dividends ......... 15,522 145,544 2,302 21,713
Redeemed .......................... (54,242) (509,819) (7,200) (68,099)
----------- -------------- ----------- --------------
Net increase - Class C ............ 697,249 6,561,493 399,124 3,766,983
----------- -------------- ----------- --------------
CLASS D SHARES
Sold .............................. 24,559 231,320 10,494 99,638
Reinvestment of dividends ......... 449 4,211 23 217
Redeemed .......................... (1,657) (15,581) -- --
----------- -------------- ----------- --------------
Net increase - Class D ............ 23,351 219,950 10,517 99,855
----------- -------------- ----------- --------------
Net increase in Fund .............. 10,007,343 $ 94,265,948 21,510,325 $ 204,174,498
=========== ============== =========== ==============
</TABLE>
- ---------------
* For Class A, C, and D shares, for the period July 28, 1997 (issue date)
through October 31, 1997.
7. PURPOSE OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Fund may enter into forward foreign currency contracts ("forward
contracts") to facilitate settlement of foreign currency denominated portfolio
transactions or to manage its foreign currency exposure or to sell, for a fixed
amount of U.S. dollars or other currency, the amount of foreign currency
approximating the value of some or all of its holdings denominated in such
foreign currency or an amount of foreign currency other than the currency in
which the securities to be hedged are denominated approximating the value of
some or all of its holdings to be hedged. Additionally, when the Investment
Manager anticipates
23
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 1998 (unaudited) 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").
Forward contracts and derivative instruments involve elements of market risk in
excess of the amount reflected in the Statement of Assets and Liabilities. The
Fund bears the risk of an unfavorable change in the foreign exchange rates
underlying the forward contracts. Risks may also arise upon entering into these
contracts from the potential inability of the counterparties to meet the terms
of their contracts.
At April 30, 1998, there were outstanding forward contracts used to facilitate
settlement of foreign currency denominated portfolio transactions and manage
foreign currency exposure.
24
<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 SIX FOR THE YEAR ENDED OCTOBER 31
MONTHS ENDED ------------------------------------------------------------------
APRIL 30, 1998 ++ 1997*++ 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ........ $ 9.46 $ 9.78 $ 9.62 $ 9.37 $ 10.20 $ 10.01
---------- ------- ------- ------- -------- --------
Net investment income ....................... 0.35 0.74 0.78 0.77 0.74 0.77
Net realized and unrealized gain (loss) ..... (0.11) (0.15) 0.10 0.20 (0.80) 0.20
---------- -------- ------- ------- -------- --------
Total from investment operations ............ 0.24 0.59 0.88 0.97 (0.06) 0.97
---------- -------- ------- ------- -------- --------
Less dividends and distributions from:
Net investment income ...................... (0.34) (0.91) (0.72) (0.72) (0.64) (0.73)
Net realized gain .......................... -- -- -- -- (0.01) (0.05)
Paid-in-capital ............................ -- -- -- -- (0.12) --
---------- -------- -------- -------- -------- --------
Total dividends and distributions ........... (0.34) (0.91) (0.72) (0.72) (0.77) (0.78)
---------- -------- -------- -------- -------- --------
Net asset value, end of period .............. $ 9.36 $ 9.46 $ 9.78 $ 9.62 $ 9.37 $ 10.20
========== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN+ .................... 2.58%(1) 6.46% 9.49% 10.76% (0.69)% 10.00%
RATIOS TO AVERAGE NET ASSETS:
Expenses .................................... 1.37%(2) 1.40% 1.42% 1.44% 1.51% 1.58%(3)
Net investment income ....................... 7.56%(2) 7.90% 8.38% 8.30% 7.91% 7.92%(3)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ..... $ 987,378 $915,899 $745,581 $542,544 $407,038 $167,137
Portfolio turnover rate ..................... 63%(1) 104% 82% 87% 60% 117%
</TABLE>
- -------------
* Prior to July 28, 1997, the Fund issued one class of shares. All shares
of the Fund held prior to that date have been designated Class B shares.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) If the Fund had borne all expenses that were assumed or waived by the
Investment Manager, the annualized expense and net investment income
ratios would have been 1.66% and 7.84%, respectively.
SEE NOTES TO FINANCIAL STATEMENTS
25
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX JULY 28, 1997*
MONTHS ENDED THROUGH
APRIL 30, 1998++ OCTOBER 31, 1997++
------------------ -------------------
(unaudited)
<S> <C> <C>
CLASS A SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .............. $ 9.46 $ 9.40
-------- --------
Net investment income ............................. 0.38 0.22
Net realized and unrealized gain (loss) ........... (0.11) 0.04
-------- --------
Total from investment operations .................. 0.27 0.26
-------- --------
Less dividends from net investment income ......... (0.37) (0.20)
-------- --------
Net asset value, end of period .................... $ 9.36 $ 9.46
======== ========
TOTAL INVESTMENT RETURN+ .......................... 2.90%(1) 2.74%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .......................................... 0.75%(2) 0.85%(2)
Net investment income ............................. 8.24%(2) 8.98%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........... $ 10,889 $ 4,933
Portfolio turnover rate ........................... 63%(1) 104%
CLASS C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .............. $ 9.45 $ 9.40
-------- --------
Net investment income ............................. 0.36 0.20
Net realized and unrealized gain (loss) ........... (0.12) 0.04
-------- --------
Total from investment operations .................. 0.24 0.24
-------- --------
Less dividends from net investment income ......... (0.34) (0.19)
-------- --------
Net asset value, end of period .................... $ 9.35 $ 9.45
======== ========
TOTAL INVESTMENT RETURN+ .......................... 2.60%(1) 2.52%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .......................................... 1.37%(2) 1.44%(2)
Net investment income ............................. 7.63%(2) 8.17%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........... $ 10,255 $ 3,773
Portfolio turnover rate ........................... 63%(1) 104%
</TABLE>
- --------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
26
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX JULY 28, 1997*
MONTHS ENDED THROUGH
APRIL 30, 1998++ OCTOBER 31, 1997++
- ----------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
CLASS D SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .............. $ 9.45 $ 9.40
-------- --------
Net investment income ............................. 0.40 0.23
Net realized and unrealized gain (loss) ........... (0.11) 0.02
-------- --------
Total from investment operations .................. 0.29 0.25
-------- --------
Less dividends from net investment income ......... (0.38) (0.20)
-------- --------
Net asset value, end of period .................... $ 9.36 $ 9.45
======== ========
TOTAL INVESTMENT RETURN+ .......................... 3.12%(1) 2.69%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .......................................... 0.52%(2) 0.59%(2)
Net investment income ............................. 8.51%(2) 9.26%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........... $ 317 $ 99
Portfolio turnover rate ........................... 63%(1) 104%
</TABLE>
- --------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Calculated based on the net asset value as of the last business day of
the period.
(1) Not annualized.
(2) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
27
<PAGE>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
Peter M. Avelar
Vice President
Rajesh K. Gupta
Vice President
Anne Pickrell
Vice President
Peter J. Seeley
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Morgan Stanley Dean Witter Trust FSB
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
New York, New York 10048
The financial statements included herein have been taken from the records of
the Fund without examination by the independent accountants and accordingly
they do not express an opinion thereon.
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.
DEAN WITTER
DIVERSIFIED
INCOME TRUST
[Graphic]
SEMIANNUAL REPORT
APRIL 30, 1998
