<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST Two World Trade Center,
LETTER TO THE SHAREHOLDERS October 31, 2000 New York, New York 10048
DEAR SHAREHOLDER:
During the fiscal year ended October 31, 2000, the U.S. economy experienced
strong growth with moderate inflation early in the period, although potentially
inflationary pressures loomed throughout much of the year. Attempting to reduce
the inflation threat on a preemptive basis, the Federal Reserve Board raised the
federal funds rate a total of 125 basis points, from 5.25 percent to 6.50
percent. The Fed stopped raising rates as the economy began to slow in early
summer. As measured by the two-year U.S. Treasury note, short-term interest
rates rose, peaking at 6.91 percent in May. The effect of the interest-rate
increases was less pronounced for long-term Treasuries, which benefited from a
federal government program of buying back outstanding debt. The subsequent
reduction in the supply of long-term Treasuries created an inverted yield curve,
meaning that short-term Treasury yields were atypically higher than those of
longer-term Treasuries.
By May, signs of more-moderate economic growth had begun to appear. Higher
interest rates, a stagnated stock market and high energy prices all contributed
to expectations of slower economic growth. The fixed-income market rallied on
hopes that the Fed's restrictive policy might be nearing its end. On October 31,
2000, the thirty-year Treasury note was yielding 5.78 percent, down more than
100 basis points from its highest level in this period of 6.81 percent.
HIGH-YIELD MARKET OVERVIEW
The period under review proved to be an extremely difficult one for high-yield
bond investors as the high-yield market remained mired in one of its worst
slumps in the past 20 years. As a result of the Fed's tightening actions and the
ensuing higher-interest-rate environment, the financial markets became worried
about a potential hard landing for the U.S. economy and the effect that might
have on future corporate earnings. As investors became more risk averse, we
witnessed a severe flight to quality in the fixed-income markets, with the
high-yield sector being hit
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
LETTER TO THE SHAREHOLDERS October 31, 2000, continued
exceptionally hard. Much as in the last major high-yield market correction ten
years ago, significant investor outflows have greatly exaggerated the decline,
creating an extremely oversold market.
Credit spreads within the fixed-income markets widened dramatically over the
past year and a half as investors came to favor higher-quality securities. As a
result of this flight to quality, the yield spread between high-yield bonds and
comparable U.S. government securities is now approaching its widest margin in
history. Spreads have also broadened between the different tiers within the
high-yield sector as investors have gravitated toward the highest-quality end of
the marketplace. As a result of this trend, lower-yielding, higher-quality
BB-rated bonds have held up significantly better than those in the
higher-yielding, lower-quality B-rated sector. Much as we saw in the high-yield
bear market of 1989 and 1990, investors' reactions have resulted in a sharp
decline in the prices of many high-yield bonds, driving market yields
substantially higher in the process so that yield spreads on many B-rated bonds
are approaching their highest levels on record.
GLOBAL BOND MARKET OVERVIEW
Although most of the world's investment-grade bond markets showed notable
improvement during the year ended October 31, 2000, the continued strength of
the U.S. dollar relative to most investment-grade currencies resulted in
currency losses for most non-dollar-denominated investments. The primary factor
underpinning the U.S. dollar has been the unprecedented strength of the domestic
economy. Through January, the strength of the global economy also pressured the
investment-grade bond markets. As the global economy cooled to a more
sustainable growth rate and central banks appeared to be at the end of
tightening cycles, the global bond markets began to rally. Despite the relative
weakening of the U.S. economy as well as declining U.S. interest rates and a
huge U.S. current-account deficit, the U.S. dollar remained extremely strong
compared to most other currency units. Much of this strength appeared to be the
result of strong foreign direct investment and portfolio flows into the United
States.
There were a few bright spots in the investment-grade bond markets during the
period under review. The U.K. government market outperformed relative to the
benchmark German market, and the Norwegian, Swedish and British currencies held
up somewhat better than other European currencies.
PERFORMANCE AND PORTFOLIO STRATEGY
For the 12-month period ended October 31, 2000, Morgan Stanley Dean Witter
Diversified Income Trust's Class B shares posted a total return of -7.24
percent, compared to 6.46 percent for the Lehman Brothers U.S. Government/Credit
Intermediate Bond Index (formerly Lehman Brothers Intermediate
Government/Corporate Index). For the same period, the Fund's Class A, C and D
shares had total returns
2
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
LETTER TO THE SHAREHOLDERS October 31, 2000, continued
of -6.66 percent, -7.12 percent and -6.20 percent, respectively. The performance
of the Fund's four share classes varies because of differing expenses. The total
return figures shown assume the reinvestment of all distributions but do not
reflect the deduction of any applicable sales charges.
The Fund's underperformance relative to its benchmark was due primarily to both
its global short-term securities and high-yield securities components. Within
the high-yield component, the Fund's core holdings in the B-rated sector of the
high-yield market sharply underperformed the higher-quality end of the
fixed-income market.
Global Short-Term Securities Component. Throughout the period under review, the
global short-term securities component continued its strategy of seeking the
best-performing markets within the component's investment-grade mandate while
maintaining attractive income and dividend levels. It also kept its duration
exposure below that of most funds in its fund category while the global markets
were under pressure. Because of the Fund's income objectives, it did not invest
in the Japanese markets, where short-term interest rates were near zero. The
Fund also hedged a portion of its currency exposure to limit the effect of
declining non-U.S. exchange rates.
U.S. Government/Mortgage Component. The U.S. Government/Mortgage Component
decreased its weighting of U.S. Treasury and agency holdings as
intermediate-term interest rates trended higher throughout the fourth quarter of
1999 before peaking in February 2000. Throughout the remaining period, the
component began decreasing its exposure to mortgage-backed securities as a
Treasury rally ensued after interest rates peaked a second time in May 2000. By
the end of the fiscal year, this component was comprised of 79 percent
mortgage-backed securities issued by the Federal National Mortgage Association
(FNMA), Government National Mortgage Association (GNMA) and Federal Home Loan
Mortgage Corp. (FHLMC) and the balance in U.S. agency securities.
Long-Term High-Yield Securities Component. As discussed, the past year and a
half has been one of the most difficult periods for the high-yield market,
particularly the B-rated sector, the market's largest one. As a result of
substantial weakness in the high-yield market, we have seen high-yield bond
prices decline sharply and yields rise dramatically over this period. Although
the high-yield securities component's position in the more defensive,
higher-quality end of the market held up relatively well in this turbulent
market environment, its long-term core position in the B-rated sector was
adversely affected over the past year. With yields on many high-yield issues at
or near 10-year highs and currently trading at significant discounts to their
stated maturity value, we currently view the high-yield sector as extremely
undervalued, although the timing of a recovery is still very uncertain at this
point. As the market outlook improves over time, we would expect to see
investment flows turn positive once again, creating stronger demand for many of
today's depressed high-yield bonds.
3
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
LETTER TO THE SHAREHOLDERS October 31, 2000, continued
In light of the increasingly volatile market environment, however, the
high-yield securities component's portfolio manager has indicated his intention
to gradually reposition the component's portfolio. Over time, we anticipate
balancing the portfolio across high-yield sectors - particularly among B-rated
and BB-rated issues. This strategy should better enable this component to
provide competitive long-term returns with less overall performance volatility.
LOOKING AHEAD
We believe that economic growth will moderate and inflation will remain at
acceptable levels in the months ahead. This situation should create a benign
environment for the U.S. government bond markets. With the high-yield bond
sector and non-dollar investment-grade bond markets being at historically cheap
levels, we currently view these markets as potentially rewarding investment
opportunities.
We appreciate your ongoing support of Morgan Stanley Dean Witter Diversified
Income Trust and look forward to continuing to serve your investment needs.
Very truly yours,
/s/ CHARLES A. FIUMEFREDDO /s/ MITCHELL M. MERIN
-------------------------- ---------------------
CHARLES A. FIUMEFREDDO MITCHELL M. MERIN
Chairman of the Board President
4
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FUND PERFORMANCE October 31, 2000
Growth of $10,000 - Class B
($ in Thousand)
TOTAL LEHMAN
April 9, 1992 $10,000 $10,000
April 30, 1992 10,050 10,000
July 31, 1992 10,328 10,510
October 31, 1992 10,373 10,620
January 31, 1993 10,739 10,930
April 30, 1993 11,060 11,236
July 31, 1993 11,277 11,415
October 31, 1993 11,410 11,675
January 31, 1994 11,712 11,793
April 30, 1994 11,343 11,349
July 31, 1994 11,378 11,522
October 31, 1994 11,332 11,450
January 31, 1995 11,455 11,631
April 30, 1995 11,952 12,087
July 31, 1995 12,420 12,538
October 31, 1995 12,551 12,886
January 31, 1996 12,932 13,306
April 30, 1996 13,093 13,036
July 31, 1996 13,352 13,203
October 31, 1996 13,742 13,635
January 31, 1997 13,783 13,779
April 30, 1997 13,738 13,871
July 31, 1997 14,322 14,401
October 31, 1997 14,629 14,656
January 31, 1998 14,872 15,000
April 30, 1998 15,007 15,112
July 31, 1998 15,177 15,374
October 31, 1998 14,955 15,992
January 31, 1999 15,114 16,143
April 30, 1999 15,022 16,074
July 31, 1999 14,893 15,947
October 31, 1999 14,635 16,150
January 31, 2000 14,516 16,058
April 30, 2000 14,438 16,322
July 31, 2000 14,306 16,763
October 31, 2000 13,575(3) 17,193
----------------------------------
--- Fund --- Lehman(4)
----------------------------------
Past performance is not predictive of future returns. Investment return and
principal value will fluctuate. When you sell fund shares, they may be worth
less than their original cost. Performance for Class A, Class C, and Class D
shares will vary from the performance of Class B shares shown above due to
differences in sales charges and expenses.
Average Annual Total Returns
--------------------------------------------------------------------------------
Class A Shares*
--------------------------------------------------------------------
Period Ended 10/31/00
---------------------------
1 Year (6.66)%(1) (10.62)%(2)
Since Inception (7/28/97) (0.91)%(1) (2.22)%(2)
Class B Shares**
-------------------------------------------------------------------
Period Ended 10/31/00
---------------------------
1 Year (7.24)%(1) (11.52)%(2)
5 Years 1.58 %(1) 1.31 %(2)
Since Inception (4/9/92) 3.63 %(1) 3.63 %(2)
Class C Shares+
-------------------------------------------------------------------
Period Ended 10/31/00
---------------------------
1 Year (7.12)%(1) (7.97)%(2)
Since Inception (7/28/97) (1.50)%(1) (1.50)%(2)
Class D Shares++
--------------------------------------------------------------------
Period Ended 10/31/00
---------------------------
1 Year (6.20)%(1)
Since Inception (7/28/97) (0.62)%(1)
---------------
(1) Figure shown assumes reinvestment of all distributions and does not reflect
the deduction of any sales charges.
(2) Figure shown assumes reinvestment of all distributions and the deduction of
the maximum applicable sales charge. See the Fund's current prospectus for
complete details on fees and sales charges.
(3) Closing value assuming a complete redemption on October 31, 2000.
(4) The Lehman Brothers Intermediate U.S. Government/Credit Index (formerly
Lehman Brothers Intermediate Government/Corporate Index) tracks the
performance of U.S. government and corporate obligations, including U.S.
government agency and Treasury securities, and corporate and Yankee bonds
with maturities of 1 to 10 years. The Index does not include any expenses,
fees or charges. The Index is unmanaged and should not be considered an
investment.
* The maximum front-end sales charge for Class A is 4.25%.
** The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%.
The CDSC declines to 0% after six years.
+ The maximum contingent deferred sales charge for Class C shares is 1% for
shares redeemed within one year of purchase.
++ Class D shares have no sales charge.
5
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GOVERNMENT & CORPORATE BONDS (92.4%)
FOREIGN (27.8%)
AUSTRALIA (0.0%)
Cable/Satellite TV
$ 12,468 Australis Holdings Property
Ltd. (a) ................................ 15.00++% 11/01/02 $ 124,680
90 Australis Media Ltd. (a) (c) ............ 15.75 05/15/03 903
4,700 Australis Media Ltd. (Units)# (a) (c)
15.75 05/15/03 47,000
------------
TOTAL AUSTRALIA .................................................... 172,583
------------
CANADA (3.0%)
Beverages - Non-Alcoholic (0.7%)
5,500 Sparkling Spring Water .................. 11.50 11/15/07 4,290,000
------------
Consumer/Business Services (0.2%)
1,300 MDC Communication Corp. ................. 10.50 12/01/06 1,183,000
------------
Electronics/Appliances (0.0%)
12,061 International Semi-Tech
Microelectronics, Inc. (a) (c) ........ 11.50 08/15/03 120,610
------------
Government Obligations (1.9%)
CAD 14,150 Canada Government Bond .................. 5.50 09/01/02 9,230,664
1,141 Ontario (Province of) ................... 11.125 02/14/01 1,672,702
------------
10,903,366
------------
Specialty Telecommunications (0.2%)
$ 1,300 Worldwide Fiber Inc. .................... 12.00 08/01/09 1,027,000
------------
TOTAL CANADA ....................................................... 17,523,976
------------
DENMARK (5.6%)
Government Obligations
DKK 182,000 Denmark (Kingdom of) .................... 9.00 11/15/00 20,791,160
106,000 Denmark (Kingdom of) (b) ................ 8.00 11/15/01 12,375,193
------------
TOTAL DENMARK ...................................................... 33,166,353
------------
FINLAND (2.3%)
Government Obligation
GBP 9,100 Finland (Republic of) ................... 8.00 04/07/03 13,668,506
------------
GERMANY (3.0%)
Government Obligations
EUR 15,500 Deutschland Republic .................... 6.00 09/15/03 13,453,791
5,000 Germany (Republic of) ................... 8.00 07/22/02 4,438,475
------------
TOTAL GERMANY ...................................................... 17,892,266
------------
</TABLE>
See Notes to Financial Statements
6
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NETHERLANDS (6.9%)
Government Obligations (6.7%)
GBP 9,100 BK Nederlandse ......................... 7.00 % 12/20/02 $ 13,367,440
EUR 13,500 Netherlands Government Bond (b)......... 8.50 03/15/01 11,588,941
17,750 Netherlands (Kingdom of) ............... 5.75 09/15/02 15,222,240
------------
40,178,621
------------
Specialty Telecommunications (0.2%)
$ 1,300 Versatel Telecom International NV....... 13.25 05/15/08 994,500
------------
TOTAL NETHERLANDS ................................................. 41,173,121
------------
NORWAY (2.6%)
Government Obligation
NOK 136,570 Norway Government Bond (b) ............. 9.50 10/31/02 15,327,185
------------
SWEDEN (2.7%)
Government Obligation
SEK 160,000 Swedish Government Bond (b) ............ 5.50 04/12/02 16,215,499
------------
UNITED KINGDOM (1.7%)
Cellular Telephone (0.1%)
$ 2,000 Dolphin Telecom PLC .................... 11.50++ 06/01/08 400,000
3,500 Dolphin Telecom PLC .................... 14.00++ 05/15/09 525,000
------------
925,000
------------
Major Banks (1.4%)
GBP 5,600 Abbey National Treasury
Service (b) .......................... 7.125 03/14/01 8,135,251
------------
Specialty Telecommunications (0.2%)
$ 1,200 Esprit Telecom Group PLC ............... 11.50 12/15/07 276,000
3,600 Esprit Telecom Group PLC ............... 10.875 06/15/08 828,000
------------
1,104,000
------------
TOTAL UNITED KINGDOM .............................................. 10,164,251
------------
TOTAL FOREIGN (Cost $210,822,610) ................................. 165,303,740
------------
UNITED STATES (64.6%)
CORPORATE BONDS (28.8%)
Advertising/Marketing Services (0.5%)
3,200 Interep National Radio Sales Inc. ...... 10.00 07/01/08 2,720,000
------------
Aerospace & Defense (0.5%)
1,300 Loral Space & Communications Ltd........ 9.50 01/15/06 936,000
2,700 Sabreliner Corp. - 144A* ............... 11.00 06/15/08 2,234,250
------------
3,170,250
------------
Broadcast/Media (0.5%)
3,800 Tri-State Outdoor Media Group,
Inc. ................................. 11.00 05/15/08 3,230,000
------------
</TABLE>
See Notes to Financial Statements
7
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Broadcasting (0.1%)
$ 1,200 XM Satellite Radio Holdings Inc. ........ 14.00% 03/15/10 $ 816,000
------------
Cable/Satellite TV (0.2%)
3,000 Knology Holdings Inc. ................... 11.875++ 10/15/07 1,350,000
------------
Casino/Gambling (1.8%)
12,740 Aladdin Gaming Holdings/Capital
Corp. LLC (Series B) .................. 13.50++ 03/01/10 5,733,000
8,900 Fitzgeralds Gaming Corp.
(Series B) (c) ........................ 12.25 12/15/04 4,717,000
------------
10,450,000
------------
Cellular Telephone (1.5%)
1,400 Dobson/Sygnet Communications ............ 12.25 12/15/08 1,379,000
7,300 McCaw International Ltd. ................ 13.00++ 04/15/07 5,146,500
1,500 Tritel PCS Inc. ......................... 12.75++ 05/15/09 967,500
1,500 Triton Communications LLC ............... 11.00++ 05/01/08 1,136,250
------------
8,629,250
------------
Commercial Printing/Forms (0.0%)
2,700 Premier Graphics Inc. (a) (c) ........... 11.50 12/01/05 189,000
------------
Consumer/Business Services (0.9%)
1,200 Anacomp, Inc. (Series B) (c) ............ 10.875 04/01/04 216,000
1,100 Anacomp, Inc. (Series D) (c) ............ 10.875 04/01/04 198,000
6,750 Comforce Operating, Inc. ................ 12.00 12/01/07 3,510,000
1,500 Muzak LLC ............................... 9.875 03/15/09 1,320,000
------------
5,244,000
------------
Containers/Packaging (1.5%)
1,100 Berry Plastics Corp. .................... 12.25 04/15/04 1,001,000
5,650 Envirodyne Industries, Inc. ............. 10.25 12/01/01 4,463,500
3,500 Packaging Resources, Inc. (c) ........... 11.625 05/01/03 3,430,000
------------
8,894,500
------------
Diversified Manufacturing (0.7%)
1,400 Eagle-Picher Industries, Inc. ........... 9.375 03/01/08 1,169,000
2,588 Jordan Industries, Inc. (Series B) ...... 11.75++ 04/01/09 1,630,440
1,800 Jordan Industries, Inc. ................. 10.375 08/01/07 1,620,000
------------
4,419,440
------------
Drugstore Chains (0.1%)
1,700 Rite Aid Corp. .......................... 7.70 02/15/27 340,000
------------
Electronic Distributors (0.0%)
5,600 CHS Electronics, Inc. (a) (c) ........... 9.875 04/15/05 112,000
------------
Electronic Equipment/Instruments (0.3%)
2,700 High Voltage Engineering, Inc. .......... 10.75 08/15/04 1,755,000
------------
Electronics/Appliances (0.2%)
1,400 Windmere-Durable Holdings, Inc. ......... 10.00 07/31/08 1,260,000
------------
</TABLE>
See Notes to Financial Statements
8
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Environmental Services (0.4%)
$ 2,500 Allied Waste North America, Inc.
(Series B) ............................ 10.00 % 08/01/09 $ 2,162,500
------------
Financial Conglomerates (1.0%)
GBP 4,200 General Electric Capital Corp. (b) ...... 6.625 03/16/01 6,088,373
------------
Food Distributors (0.4%)
$ 1,300 Fleming Companies, Inc. (Series B)....... 10.625 07/31/07 975,000
1,300 Volume Services of America Inc. ......... 11.25 03/01/09 1,176,500
------------
2,151,500
------------
Food Retail (0.5%)
2,250 Big V Supermarkets, Inc.
(Series B) ............................ 11.00 02/15/04 1,530,000
850 Eagle Food Centers, Inc. ................ 11.00 04/15/05 425,000
2,367 Pueblo Xtra International, Inc.
(Series C) ............................ 9.50 08/01/03 1,112,490
------------
3,067,490
------------
Food: Specialty/Candy (0.5%)
44,552 SFAC New Holdings Inc. (d) .............. 13.00++ 06/15/09 2,673,103
------------
Hotels/Resorts (0.1%)
2,700 Epic Resorts LLC (Series B) ............. 13.00 06/15/05 810,000
------------
Household/Personal Care (0.3%)
2,015 J.B. Williams Holdings, Inc. ............ 12.00 03/01/04 1,974,700
------------
Industrial Specialties (0.8%)
1,300 Cabot Safety Corp. ...................... 12.50 07/15/05 1,293,500
1,800 Indesco International Inc. .............. 9.75 04/15/08 450,000
1,000 International Wire Group, Inc.
(Series B) ............................ 11.75 06/01/05 995,000
2,250 Outsourcing Services Group, Inc.
(Series B) ............................ 10.875 03/01/06 1,800,000
------------
4,538,500
------------
International Banks (0.8%)
GBP 3,061 KFW International Finance (b) ........... 10.625 09/03/01 4,582,969
------------
Internet Software/Services (0.4%)
$ 2,600 Globix Corp. - 144A* .................... 12.50 02/01/10 1,430,000
1,700 PSINET, Inc. ............................ 11.00 08/01/09 850,000
------------
2,280,000
------------
Major Banks (0.2%)
GBP 1,000 Morgan Guaranty Trust Corp. ............. 7.375 12/28/01 1,462,748
------------
Medical Specialties (0.7%)
$ 5,100 Mediq Inc./PRN Life Support
Services Inc. (c) ..................... 11.00 06/01/08 153,000
5,400 Universal Hospital Services, Inc. ....... 10.25 03/01/08 3,888,000
------------
4,041,000
------------
</TABLE>
See Notes to Financial Statements
9
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Medical/Nursing Services (0.6%)
$ 5,250 Pediatric Services of America, Inc.
(Series A) .............................. 10.00 % 04/15/08 $ 3,675,000
------------
Office Equipment/Supplies (0.7%)
6,890 Mosler, Inc. .............................. 11.00 04/15/03 4,134,000
------------
Other Consumer Specialties (0.8%)
5,800 Samsonite Corp. ........................... 10.75 06/15/08 4,524,000
------------
Restaurants (1.5%)
48,756 American Restaurant Group
Holdings, Inc. - 144A* (d) .............. 0.00 12/15/05 6,338,267
5,200 FRD Acquisition Corp. (Series B) .......... 12.50 07/15/04 1,872,000
1,300 Friendly Ice Cream Corp. .................. 10.50 12/01/07 871,000
------------
9,081,267
------------
Retail - Specialty (0.4%)
1,300 Pantry, Inc. .............................. 10.25 10/15/07 1,202,500
1,700 Petro Stopping Centers L.P. ............... 10.50 02/01/07 1,445,000
------------
2,647,500
------------
Specialty Telecommunications (3.2%)
6,500 Birch Telecom Inc. ........................ 14.00 06/15/08 3,900,000
3,000 DTI Holdings Inc. (Series B) .............. 12.50++ 03/01/08 1,020,000
16,300 Firstworld Communications, Inc. ........... 13.00++ 04/15/08 3,586,000
1,500 Pac-West Telecommunications
Group, Inc. ............................. 13.50 02/01/09 1,335,000
2,300 Primus Telecommunications Group,
Inc. .................................... 12.75 10/15/09 1,173,000
2,700 Primus Telecommunications Group,
Inc. (Series B) ......................... 9.875 05/15/08 1,377,000
3,800 Viatel, Inc. .............................. 11.25 04/15/08 1,976,000
800 Viatel, Inc. .............................. 11.50 03/15/09 416,000
6,400 World Access, Inc. (d) .................... 13.25 01/15/08 4,480,000
------------
19,263,000
------------
Telecommunications (3.3%)
2,400 CapRock Communications Corp. .............. 11.50 05/01/09 2,310,000
1,400 CapRock Communications Corp.
(Series B) .............................. 12.00 07/15/08 1,368,500
1,500 Covad Communications Group, Inc. 12.50 02/15/09 780,000
5,900 e. Spire Communications, Inc. ............. 13.75 07/15/07 3,186,000
1,500 Focal Communications Corp.
(Series B) .............................. 12.125++ 02/15/08 750,000
1,300 Hyperion Telecommunication, Inc.
(Series B) .............................. 12.25 09/01/04 1,105,000
28,500 In-Flight Phone Corp. (Series B) .......... 14.00 05/15/02 1,425,000
1,300 Level 3 Communications, Inc. .............. 9.125 05/01/08 1,053,000
1,000 MGC Communications, Inc. .................. 13.00 04/01/10 610,000
1,300 NextLink Communications LLC ............... 10.75 06/01/09 1,144,000
5,400 Rhythms Netconnections, Inc. .............. 12.75 04/15/09 2,592,000
</TABLE>
See Notes to Financial Statements
10
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 1,200 Startec Global Communications
Corp. ................................... 12.00 % 05/15/08 $ 720,000
3,000 Talton Holdings, Inc. (Series B) .......... 11.00 06/30/07 2,490,000
------------
19,533,500
------------
Truck/Construction/Farm Machinery (0.4%)
2,800 J.B. Poindexter & Co., Inc. ............... 12.50 05/15/04 2,604,000
------------
Wireless Communications (3.0%)
11,300 Advanced Radio Telecom Corp. .............. 14.00 02/15/07 6,780,000
900 Arch Escrow Corp. ......................... 13.75 04/15/08 540,000
21,800 CellNet Data Systems Inc. (a) ............. 14.00++ 10/01/07 109,000
1,000 Globalstar LP/Capital Corp. ............... 10.75 11/01/04 150,000
1,850 Globalstar LP/Capital Corp. ............... 11.50 06/01/05 277,500
3,500 Orbcomm Global LP/Capital
Corp. (a) (c) ........................... 14.00 08/15/04 525,000
4,600 Paging Network, Inc. (a) (c) .............. 10.125 08/01/07 966,000
8,300 Paging Network, Inc. (a) (c) .............. 10.00 10/15/08 1,743,000
5,850 USA Mobile Communications
Holdings, Inc. .......................... 14.00 11/01/04 4,446,000
1,800 Winstar Communications, Inc. -
144A* ................................... 0.00 04/15/10 567,000
2,400 Winstar Communications, Inc. -
144A* ................................... 12.75 04/15/10 1,728,000
------------
17,831,500
------------
TOTAL CORPORATE BONDS
(Cost $288,431,367).................................................... 171,706,090
------------
MORTGAGE-BACKED SECURITIES (26.0%)
Federal Home Loan Mortgage Corp. (0.4%)
1,646 .......................................... 7.00 04/01/04 1,642,906
689 .......................................... 8.00 10/01/24 697,880
------------
2,340,786
------------
Federal National Mortgage Assoc. (13.1%)
29,437 .......................................... 6.00 02/01/11-
04/01/28 28,126,924
29,085 ......................................... 6.50 11/01/08-
11/01/23 28,140,138
4,609 ......................................... 7.00 10/01/08-
04/01/17 4,534,000
8,638 ......................................... 7.50 11/01/22 8,624,800
2,815 ......................................... 8.00 10/01/01-
06/01/22 2,847,048
5,225 ......................................... 8.50 07/01/17 5,336,053
------------
77,608,963
------------
Government National Mortgage Assoc. (12.5%)
21,399 ......................................... 6.00 10/15/23 20,162,028
21,831 ......................................... 6.50 11/20/23-
02/15/26 21,051,936
</TABLE>
See Notes to Financial Statements
11
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 11,590 ............................... 7.00% 12/15/22-
06/20/29 $ 11,387,165
17,439 ............................... 7.50 05/15/17-
11/15/06 17,493,243
3,348 ............................... 8.00 01/15/22 3,402,357
1,132 ............................... 8.50 10/15/24 1,160,523
------------
74,657,252
------------
TOTAL MORTGAGE-BACKED SECURITIES
(Cost $157,748,277)...................................... 154,607,001
------------
U.S. GOVERNMENT AGENCIES & OBLIGATIONS (9.8%)
Federal Home Loan Banks (b) (2.0%)
5,000 ............................... 6.37 09/25/07 4,894,450
5,000 ............................... 6.385 10/23/07 4,897,800
2,000 ................................ 5.45 01/12/09 1,833,260
------------
11,625,510
------------
Federal Home Loan Mortgage Corp. (2.3%)
3,000 ................................ 5.75 04/15/08 2,837,910
15,000 ................................ 0.00 07/02/12-
08/15/02 10,877,850
------------
13,715,760
------------
Federal National Mortgage Assoc. (b) (3.5%)
GBP 9,000 ................................ 6.875 06/07/02 13,178,201
AUD 6,340 ................................ 6.50 07/10/02 3,293,153
$ 6,000 Principal Strips ................ 0.00 02/12/04-
02/01/05 4,607,560
------------
21,078,914
------------
13,475 Financing Corp. (1.7%) .......... 0.00 03/07/05-
04/06/06 9,885,508
------------
2,320 Tennessee Valley Authority (0.3%) 0.00 01/15/03 2,010,651
------------
TOTAL U.S. GOVERNMENT AGENCIES & OBLIGATIONS
(Cost $88,058,776)....................................... 58,316,343
------------
TOTAL UNITED STATES
(Cost $534,238,420)...................................... 384,629,434
------------
TOTAL GOVERNMENT & CORPORATE BONDS
(Cost $745,061,030)...................................... 549,933,174
------------
NUMBER OF
SHARES
------------
COMMON STOCKS (e) (0.2%)
Apparel/Footwear Retail (0.0%)
1,310,596 County Seat Stores, Inc. (d) .......... 11,795
------------
</TABLE>
See Notes to Financial Statements
12
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000, continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Casino/Gambling (0.0%)
10,773 Fitzgerald Gaming Corp. (Class D)* ........................... $ 11
------------
Food Retail (0.0%)
6,435 Eagle Food Centers, Inc. ..................................... 5,430
------------
Food: Specialty/Candy (0.0%)
2,423 SFAC New Holdings Inc. (d)* .................................. 606
198,750 Specialty Foods Acquisition Corp. - 144A* .................... 1,988
------------
2,594
------------
Hotels/Resorts (0.0%)
2,000 Motels of America, Inc. - 144A* .............................. 500
------------
Medical/Nursing Services (0.0%)
512,862 Raintree Healthcare Corp. (d) ................................ 4,616
------------
Restaurants (0.0%)
6,000 American Restaurant Group Holdings, Inc. - 144A* ............. 1,500
------------
Specialty Telecommunications (0.2%)
37,335 Versatel Telecom International NV (Netherlands) (d) .......... 746,700
20,110 World Access, Inc. (d) ....................................... 98,036
------------
844,736
------------
298,462 United States Leather, Inc. (d) .............................. 2,985
------------
Wireless Communications (0.0%)
196,000 FWT, Inc. (Class A) .......................................... 1,960
------------
TOTAL COMMON STOCKS
(Cost $19,171,388)............................................ 876,127
------------
CONVERTIBLE PREFERRED STOCKS (0.3%)
Oil & Gas Production (0.0%)
989 XCL Ltd.+ - 144A* ........................................... 495
5,000 XCL Ltd. (Units)#+ - 144A* ................................... 2,500
------------
2,995
------------
Restaurants (0.1%)
1,886 American Restaurant Group Holdings, Inc. (Series B)
(Non-Conv.) + ................................................ 754,400
------------
Wireless Communications (0.2%)
1,960,000 FWT, Inc. (Series A) (Non-Conv.) ............................. 980,000
------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $11,257,977)............................................ 1,737,395
------------
NUMBER OF EXPIRATION
WARRANTS DATE
---------- -----------
WARRANTS (e) (0.2%)
Aerospace & Defense (0.0%)
1,000 Sabreliner Corp. - 144A* .......... 04/15/03 10,000
------------
</TABLE>
See Notes to Financial Statements
13
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000, continued
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE VALUE
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Broadcasting (0.0%)
4,000 UIH Australia/Pacific Inc. ........................ 05/15/06 $ 60,000
1,200 XM Satellite Radio Holdings Inc. .................. 03/15/10 168,000
------------
228,000
------------
Casino/Gambling (0.0%)
68,000 Aladdin Gaming Enterprises, Inc. - 144A* .......... 03/01/10 680
------------
Cellular Telephone (0.0%)
5,300 McCaw International Ltd. - 144A* .................. 04/15/07 106,000
------------
Hotels/Resorts (0.0%)
2,700 Epic Resorts LLC/Capital - 144A* .................. 06/15/05 27
------------
Restaurants (0.0%)
1,500 American Restaurant Group Holdings, Inc. -
144A* ........................................... 08/15/08 15
------------
Specialty Telecommunications (0.2%)
6,500 Birch Telecom Inc. - 144A* ........................ 06/15/08 650,000
15,000 DTI Holdings Inc. - 144A* ......................... 03/01/08 150
16,300 Firstworld Communications, Inc. - 144A* ........... 04/15/08 244,500
------------
894,650
------------
Telecommunications (0.0%)
1,200 Startec Global Communications Corp. -
144A* ........................................... 05/15/08 1,200
------------
TOTAL WARRANTS
(Cost $316,776)................................................. 1,240,572
------------
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
---------------- ----------- ----------
<S> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS (3.4%)
UNITED STATES
TIME DEPOSITS (f) (2.1%)
NOK 59,063 Chase Manhattan Bank .......... 6.875% 11/02/00 6,358,411
EUR 7,465 Chase Manhattan Bank .......... 4.70 11/03/00 6,338,570
------------
TOTAL TIME DEPOSITS
(Cost $12,533,121)....................................... 12,696,981
------------
REPURCHASE AGREEMENT (1.3%)
$ 7,555 The Bank of New York (dated
10/31/00; proceeds $7,556,795) (g)
(Cost $7,555,444)............. 6.44 11/01/00 7,555,444
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $20,088,565)....................................... 20,252,425
------------
</TABLE>
See Notes to Financial Statements
14
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000, continued
VALUE
---------------
TOTAL INVESTMENTS
(Cost $795,895,736) (h) 96.5% $574,039,693
OTHER ASSETS IN EXCESS OF
LIABILITIES ........... 3.5 20,577,320
----- ------------
NET ASSETS ............ 100.0% $594,617,013
===== ============
---------------------
* Resale is restricted to qualified institutional investors.
# Consists of one or more class of securities traded together as a unit;
stocks or bonds with attached warrants.
+ Payment-in-kind security.
++ Currently a zero coupon bond and will pay interest at the rate shown at a
future date.
(a) Issuer in bankruptcy.
(b) Some or all of these securities are segregated in connection with open
forward foreign currency contracts and securities purchased on a forward
commitment basis.
(c) Non-income producing security; bond in default.
(d) Acquired through exchange offer.
(e) Non-income producing securities.
(f) Subject to withdrawal restrictions until maturity.
(g) Collateralized by $7,562,416 U.S. Treasury Bill 6.25% due 07/31/02 valued
at $7,706,571.
(h) The aggregate cost for federal income tax purposes approximates the
aggregate cost for book purposes. The aggregate gross unrealized
appreciation is $11,396,154 and the aggregate gross unrealized depreciation
is $233,252,197, resulting in net unrealized depreciation of $221,856,043.
See Notes to Financial Statements
15
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000, continued
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT OCTOBER 31, 2000:
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS TO IN EXCHANGE DELIVERY APPRECIATION
DELIVER FOR DATE (DEPRECIATION)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 6,307,965 EUR 7,465,047 11/01/2000 $ 30,607
EUR 15,946,000 $ 13,379,013 11/27/2000 (177,957)
GBP 3,300,000 $ 4,797,411 11/13/2000 10,307
GBP 1,615,235 $ 2,348,956 11/30/2000 5,088
NOK 59,085,846 $ 6,307,833 11/02/2000 (53,008)
----------
Net unrealized depreciation ................ $ (184,963)
==========
</TABLE>
Currency Abbreviations:
-----------------------
AUD Australian Dollar.
GBP British Pound.
CAD Canadian Dollar.
DKK Danish Krone.
EUR Euro.
NOK Norwegian Krone.
SEK Swedish Krona.
See Notes to Financial Statements
16
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
October 31, 2000
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments in securities, at value (cost $795,895,736)................... $574,039,693
Unrealized appreciation on open forward foreign currency contracts ....... 46,002
Cash ..................................................................... 10,865,719
Receivable for:
Interest .............................................................. 14,352,856
Investments sold ...................................................... 3,074,411
Shares of beneficial interest sold .................................... 924,731
Prepaid expenses and other assets ........................................ 49,889
------------
TOTAL ASSETS .......................................................... 603,353,301
------------
LIABILITIES:
Unrealized depreciation on open forward foreign currency contracts ....... 230,965
Payable for:
Investments purchased ................................................. 6,338,571
Shares of beneficial interest repurchased ............................. 1,372,626
Plan of distribution fee .............................................. 445,329
Investment management fee ............................................. 214,041
Accrued expenses and other payables ...................................... 134,756
------------
TOTAL LIABILITIES ..................................................... 8,736,288
------------
NET ASSETS ............................................................ $594,617,013
============
COMPOSITION OF NET ASSETS:
Paid-in-capital .......................................................... $868,179,632
Net unrealized depreciation .............................................. 222,546,422)
Dividends in excess of net investment income ............................. (3,126,277)
Accumulated net realized loss ............................................ (47,889,920)
------------
NET ASSETS ............................................................ $594,617,013
============
CLASS A SHARES:
Net Assets ............................................................... $13,318,287
Shares Outstanding (unlimited authorized, $.01 par value)................. 1,911,492
NET ASSET VALUE PER SHARE ............................................. $6.97
=====
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 4.44% of net asset value) ....................... $7.28
=====
CLASS B SHARES:
Net Assets ............................................................... $565,492,583
Shares Outstanding (unlimited authorized, $.01 par value) ................ 81,046,617
NET ASSET VALUE PER SHARE ............................................. $6.98
=====
CLASS C SHARES:
Net Assets ............................................................... $14,312,911
Shares Outstanding (unlimited authorized, $.01 par value) ................ 2,054,667
NET ASSET VALUE PER SHARE ............................................. $6.97
=====
CLASS D SHARES:
Net Assets ............................................................... $1,493,232
Shares Outstanding (unlimited authorized, $.01 par value)................. 213,723
NET ASSET VALUE PER SHARE ............................................. $6.99
=====
</TABLE>
See Notes to Financial Statements
17
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the year ended October 31, 2000
<TABLE>
<CAPTION>
NET INVESTMENT INCOME:
<S> <C>
INTEREST INCOME ...................................................... $ 75,346,208
------------
EXPENSES
Plan of distribution fee (Class A shares) ............................ 35,950
Plan of distribution fee (Class B shares) ............................ 6,043,295
Plan of distribution fee (Class C shares) ............................ 141,669
Investment management fee ............................................ 2,991,996
Transfer agent fees and expenses ..................................... 574,665
Registration fees .................................................... 99,365
Custodian fees ....................................................... 95,416
Shareholder reports and notices ...................................... 94,666
Professional fees .................................................... 77,919
Trustees' fees and expenses .......................................... 17,188
Other ................................................................ 25,491
------------
TOTAL EXPENSES .................................................... 10,197,620
------------
NET INVESTMENT INCOME ............................................. 65,148,588
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain/(loss) on:
Investments ....................................................... (40,481,232)
Foreign exchange transactions ..................................... 9,895,709
------------
NET LOSS .......................................................... (30,585,523)
------------
Net change in unrealized appreciation/depreciation on:
Investments ....................................................... (82,907,458)
Translation of forward foreign currency contracts, other assets and
liabilities denominated in foreign currencies ................... (1,425,031)
------------
NET DEPRECIATION .................................................. (84,332,489)
------------
NET LOSS .......................................................... (114,918,012)
------------
NET DECREASE ......................................................... $(49,769,424)
============
</TABLE>
See Notes to Financial Statements
18
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 2000 OCTOBER 31, 1999
---------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income .................................... $ 65,148,588 $ 80,184,261
Net realized loss ........................................ (30,585,523) (18,452,394)
Net change in unrealized depreciation .................... (84,332,489) (83,376,343)
-------------- --------------
NET DECREASE .......................................... (49,769,424) (21,644,476)
-------------- --------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Class A shares ........................................ (1,450,663) (1,474,948)
Class B shares ........................................ (52,380,875) (64,975,880)
Class C shares ........................................ (1,259,557) (1,307,832)
Class D shares ........................................ (194,544) (67,347)
Paid-in-capital:
Class A shares ........................................ (131,489) (204,223)
Class B shares ........................................ (4,747,855) (8,996,654)
Class C shares ........................................ (114,168) (181,085)
Class D shares ........................................ (17,634) (9,325)
-------------- --------------
TOTAL DIVIDENDS AND DISTRIBUTIONS ..................... (60,296,785) (77,217,294)
-------------- --------------
Net decrease from transactions in shares of beneficial
interest ............................................... (197,194,430) (54,811,256)
-------------- --------------
NET DECREASE .......................................... (307,260,639) (153,673,026)
NET ASSETS:
Beginning of period ...................................... 901,877,652 1,055,550,678
-------------- --------------
END OF PERIOD
(Including dividends in excess of net investment
income of $3,126,277 and $2,194,141, respectively)..... $ 594,617,013 $ 901,877,652
============== =============
</TABLE>
See Notes to Financial Statements
19
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 2000
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Diversified Income Trust (the "Fund") is registered
under the Investment Company Act of 1940, as amended (the "Act"), as a
diversified, open-end management investment company. The Fund's primary
investment objective is to provide a high level of current income and, as a
secondary objective, seeks to maximize total return, but only when consistent
with its primary objective. The Fund was organized as a Massachusetts business
trust on December 20, 1991 and commenced operations on April 9, 1992. On July
28, 1997, the Fund converted to a multiple class share structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS - (1) an equity portfolio security listed or traded
on the New York or American Stock Exchange, NASDAQ, or other exchange is valued
at its latest sale price prior to the time when assets are valued; if there were
no sales that day, the security is valued at the latest bid price (in cases
where securities are traded on more than one exchange, the securities are valued
on the exchange designated as the primary market 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; (3) when market
quotations are not readily available, including circumstances under which it is
determined by Morgan Stanley Dean Witter Advisors Inc. (the "Investment
Manager") that sale or bid prices are not reflective of a security's market
value, portfolio securities are valued at their fair value as determined in good
faith under procedures established by and under the general supervision of the
Trustees; (4) certain portfolio securities may be valued by an outside pricing
service approved by the Trustees. The pricing service may utilize a matrix
system incorporating security quality, maturity and coupon as the evaluation
model parameters, and/or research and evaluations by its staff, including review
of broker-dealer market price quotations, if available, in determining what it
believes is the fair valuation of the portfolio securities valued by such
pricing service; and (5) short-term debt securities having a maturity date of
20
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 2000, continued
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 ("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.
E. FORWARD FOREIGN CURRENCY CONTRACTS - The Fund may enter into forward
contracts which are valued daily at the appropriate exchange rates. The
resultant unrealized exchange gains and losses are included in the Statement of
Operations as unrealized foreign currency gain or loss. The Fund records
realized gains or losses on delivery of the currency or at the time the forward
contract is extinguished (compensated) by entering into a closing transaction
prior to delivery.
F. FEDERAL INCOME TAX STATUS - It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - The Fund records dividends and
distributions to its shareholders on the record date. The amount of dividends
and distributions from net investment income and net realized capital gains are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. These "book/tax" differences are
either considered
21
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 2000, continued
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax-basis treatment; temporary differences do not require
reclassification. Dividends and distributions which exceed net investment income
and net realized capital gains for tax purposes, are reported as distributions
of paid-in-capital.
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.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Dean Witter Distributors
Inc. (the "Distributor"), an affiliate of the Investment Manager. The Fund has
adopted a Plan of Distribution (the "Plan"), pursuant to Rule 12b-1 under the
Act. The Plan provides that the Fund will pay the Distributor a fee which is
accrued daily and paid monthly at the following annual rates: (i) Class A - up
to 0.25% of the average daily net assets of Class A; (ii) Class B - 0.85% of the
lesser of: (a) the average daily aggregate gross sales of the Class B shares
since inception of the Fund (not including reinvestment of dividend or capital
gain distributions) less the average net asset value of the Class B shares
redeemed since the Fund's inception upon which a contingent deferred sales
charge has been imposed or waived; or (b) the average daily net assets of Class
B; and (iii) Class C - up to 0.85% of the average daily net assets of Class C.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts totaled
$12,579,635 at October 31, 2000.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 0.85% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Dean Witter Financial Advisors or other
selected
22
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 2000, continued
broker-dealer representatives may be reimbursed in the subsequent calendar year.
For the year ended October 31, 2000, the distribution fee was accrued for Class
A shares and Class C shares at the annual rate of 0.20% and 0.85%, respectively.
The Distributor has informed the Fund that for the year ended October 31, 2000,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class A shares, Class B shares and Class C shares of $985, $1,650,129 and
$10,280, respectively and received $25,418 in front-end sales charges from sales
of the Fund's Class A shares. The respective shareholders pay such charges which
are not an expense of the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended October 31, 2000 aggregated
$283,039,098 and $502,923,467, respectively. Included in the aforementioned are
purchases and sales of U.S. Government securities of $75,731,778 and
$217,145,403, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At October 31, 2000, the Fund had
transfer agent fees and expenses payable of approximately $1,000.
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended October 31, 2000 included
in Trustees' fees and expenses in the Statement of Operations amounted to
$4,824. At October 31, 2000, the Fund had an accrued pension liability of
$40,676 which is included in accrued expenses in the Statement of Assets and
Liabilities.
23
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 2000, continued
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 2000 OCTOBER 31, 1999
---------------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold ................................................ 16,027,157 $ 121,559,975 2,848,419 $ 24,256,392
Reinvestment of dividends and distributions ......... 78,885 604,053 65,553 563,411
Redeemed ............................................ (16,870,559) (128,128,766) (1,917,929) (16,068,227)
----------- -------------- ---------- --------------
Net increase (decrease) - Class A ................... (764,517) (5,964,738) 996,043 8,751,576
----------- -------------- ---------- --------------
CLASS B SHARES
Sold ................................................ 30,585,618 235,249,712 46,504,109 405,026,436
Reinvestment of dividends and distributions ......... 3,104,016 23,959,224 3,786,566 32,666,180
Redeemed ............................................ (57,995,493) (448,750,812) (58,638,989) (507,410,583)
----------- -------------- ----------- --------------
Net decrease - Class B .............................. (24,305,859) (189,541,876) (8,348,314) (69,717,967)
----------- -------------- ----------- --------------
CLASS C SHARES
Sold ................................................ 1,559,481 11,632,644 1,432,185 12,480,926
Reinvestment of dividends and distributions ......... 92,656 709,891 94,887 815,013
Redeemed ............................................ (1,984,780) (14,956,054) (880,512) (7,540,173)
----------- -------------- ----------- --------------
Net increase (decrease) - Class C ................... (332,643) (2,613,519) 646,560 5,755,766
----------- -------------- ----------- --------------
CLASS D SHARES
Sold ................................................ 6,633,983 53,098,178 82,581 708,190
Reinvestment of dividends and distributions ......... 14,355 111,419 5,374 46,101
Redeemed ............................................ (6,562,867) (52,283,894) (41,881) (354,922)
----------- -------------- ----------- --------------
Net increase - Class D .............................. 85,471 925,703 46,074 399,369
----------- -------------- ----------- --------------
Net decrease in Fund ................................ (25,317,548) $ (197,194,430) (6,659,637) $ (54,811,256)
=========== ============== ========== ==============
</TABLE>
6. FEDERAL INCOME TAX STATUS
At October 31, 2000, the Fund had a net capital loss carryover of $47,738,000,
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 2006 2007 2008
--------- --------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
$3,024 $3,677 $2,482 $7,131 $3,233 $7,708 $20,483
======== ====== ====== ====== ====== ====== =======
</TABLE>
As of October 31, 2000, the Fund had temporary book/tax differences primarily
attributable to the mark-to-market of open forward foreign currency exchange
contracts, capital loss deferrals on wash sales and interest on bonds in default
and permanent books/tax differences primarily attributable to foreign
24
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 2000, continued
currency losses. To reflect reclassifications arising from the permanent
differences, dividends in excess of net investment income was charged
$10,796,085, paid-in-capital was credited $3,668,879 and accumulated net
realized loss was credited $7,126,206.
7. PURPOSE OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Fund may enter into forward contracts to facilitate settlement of foreign
currency denominated portfolio transactions or to manage its foreign currency
exposure or to sell, for a fixed amount of U.S. dollars or other currency, the
amount of foreign currency approximating the value of some or all of its
holdings denominated in such foreign currency or an amount of foreign currency
other than the currency in which the securities to be hedged are denominated
approximating the value of some or all of its holdings to be hedged.
Additionally, when the Investment Manager anticipates purchasing securities at
some time in the future, the Fund may enter into a forward contract to purchase
an amount of currency equal to some or all the value of the anticipated purchase
for a fixed amount of U.S. dollars or other currency.
To hedge against adverse interest rate, foreign currency and market risks, the
Fund may enter into written options on interest rate futures and interest rate
futures contracts ("derivative investments").
Forward contracts and derivative instruments involve elements of market risk in
excess of the amount reflected in the Statement of Assets and Liabilities. The
Fund bears the risk of an unfavorable change in the foreign exchange rates
underlying the forward contracts. Risks may also arise upon entering into these
contracts from the potential inability of the counterparties to meet the terms
of their contracts.
At October 31, 2000, there were outstanding forward contracts.
8. FUND MERGER
On October 26, 2000, the Trustees of the Fund and Morgan Stanley Dean Witter
World Wide Income Trust ("World Wide") approved a plan of reorganization ("the
Plan") whereby World Wide would be merged into the Fund. The Plan is subject to
the consent of World Wide's shareholders. If approved, the assets of World Wide
would be combined with the assets of the Fund and shareholders of World Wide
would become shareholders of the Fund, receiving shares of the corresponding
class of the Fund equal to the value of their holdings in World Wide.
25
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 31, JULY 28, 1997*
----------------------------------------------- THROUGH
2000 1999 1998 OCTOBER 31, 1997
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES#
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $8.16 $9.01 $9.46 $9.40
----- ----- ----- -----
Income (loss) from investment operations:
Net investment income ................................. 0.72 0.74 0.74 0.22
Net realized and unrealized gain (loss) ............... (1.23) (0.87) (0.46) 0.04
----- ----- ----- -----
Total income (loss) from investment operations ......... (0.51) (0.13) 0.28 0.26
----- ----- ----- -----
Less dividends and distributions from:
Net investment income ................................. (0.62) (0.63) (0.70) (0.20)
Paid-in-capital ....................................... (0.06) (0.09) (0.03) -
----- ----- ----- -----
Total dividends and distributions ...................... (0.68) (0.72) (0.73) (0.20)
----- ----- ----- -----
Net asset value, end of period ......................... $6.97 $8.16 $9.01 $9.46
===== ===== ===== =====
TOTAL RETURN+ .......................................... (6.66)% (1.61)% 2.86% 2.74%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 0.73 %(3) 0.72 %(3) 0.77%(3) 0.85%(2)
Net investment income .................................. 9.28 %(3) 8.56 %(3) 7.94%(3) 8.98%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $13,318 $21,828 $15,130 $4,933
Portfolio turnover rate ................................ 40% 71% 130% 104%
</TABLE>
-------------
* The date shares were first issued.
# The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
See Notes to Financial Statements
26
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------
2000# 1999# 1998# 1997*# 1996
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $8.16 $9.01 $9.46 $9.78 $9.62
----- ----- ----- ----- -----
Income (loss) from investment operations:
Net investment income ................................. 0.67 0.68 0.68 0.74 0.78
Net realized and unrealized gain (loss) ............... (1.22) (0.87) (0.46) (0.15) 0.10
----- ----- ----- ----- -----
Total income (loss) from investment operations ......... (0.55) (0.19) 0.22 0.59 0.88
----- ----- ----- ----- -----
Less dividends and distributions from:
Net investment income ................................. (0.58) (0.58) (0.65) (0.91) (0.72)
Paid-in-capital ....................................... (0.05) (0.08) (0.02) - -
----- ----- ----- ----- -----
Total dividends and distributions ...................... (0.63) (0.66) (0.67) (0.91) (0.72)
----- ----- ----- ----- -----
Net asset value, end of period ......................... $6.98 $8.16 $9.01 $9.46 $9.78
===== ===== ===== ===== =====
TOTAL RETURN+ .......................................... (7.24)% (2.14)% 2.23% 6.46% 9.49%
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 1.38 %(1) 1.38 %(1) 1.38%(1) 1.40% 1.42%
Net investment income .................................. 8.63 %(1) 7.90 %(1) 7.33%(1) 7.90% 8.38%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $565,493 $859,553 $1,024,021 $915,899 $745,581
Portfolio turnover rate ................................ 40% 71% 130% 104% 82%
</TABLE>
--------------
* Prior to July 28, 1997, the Fund issued one class of shares. All shares of
the Fund held prior to that date have been designated Class B shares.
# The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Reflects overall Fund ratios for investment income and non-class specific
expenses.
See Notes to Financial Statements
27
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 31, JULY 28, 1997*
---------------------------------------------- THROUGH
2000 1999 1998 OCTOBER 31, 1997
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS C SHARES#
SELECTED PER SHARE DATA:
Net asset value, beginning of period ............... $8.15 $9.00 $9.45 $9.40
----- ----- ----- -----
Income (loss) from investment operations:
Net investment income ............................. 0.67 0.68 0.68 0.20
Net realized and unrealized gain (loss) ........... (1.22) (0.87) (0.46) 0.04
----- ----- ----- -----
Total income (loss) from investment operations ..... (0.55) (0.19) 0.22 0.24
----- ----- ----- -----
Less dividends and distributions from:
Net investment income ............................. (0.58) (0.58) (0.65) (0.19)
Paid-in-capital ................................... (0.05) (0.08) (0.02) -
----- ----- ----- -----
Total dividends and distributions .................. (0.63) (0.66) (0.67) (0.19)
----- ----- ----- -----
Net asset value, end of period ..................... $6.97 $8.15 $9.00 $9.45
===== ===== ===== =====
TOTAL RETURN+ ...................................... (7.12)% (2.25)% 2.26% 2.52%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ........................................... 1.38 %(3) 1.38 %(3) 1.38%(3) 1.44%(2)
Net investment income .............................. 8.63 %(3) 7.90 %(3) 7.33%(3) 8.17%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ............ $14,313 $19,450 $15,659 $3,773
Portfolio turnover rate ............................ 40% 71% 130% 104%
</TABLE>
--------------
* The date shares were first issued.
# The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
See Notes to Financial Statements
28
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 31, JULY 28, 1997*
---------------------------------------------- THROUGH
2000 1999 1998 OCTOBER 31, 1997
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS D SHARES#
SELECTED PER SHARE DATA:
Net asset value, beginning of period ............... $8.15 $9.00 $9.45 $9.40
----- ----- ----- -----
Income (loss) from investment operations:
Net investment income ............................. 0.33 0.76 0.76 0.23
Net realized and unrealized gain (loss) ........... (0.80) (0.88) (0.46) 0.02
----- ----- ----- -----
Total income (loss) from investment operations ..... (0.47) (0.12) 0.30 0.25
----- ----- ----- -----
Less dividends and distributions from:
Net investment income ............................. (0.63) (0.64) (0.72) (0.20)
Paid-in-capital ................................... (0.06) (0.09) (0.03) -
----- ----- ----- -----
Total dividends and distributions .................. (0.69) (0.73) (0.75) (0.20)
----- ----- ----- -----
Net asset value, end of period ..................... $6.99 $8.15 $9.00 $9.45
===== ===== ===== =====
TOTAL RETURN+....................................... (6.20)% (1.42)% 3.21% 2.69%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ........................................... 0.53 %(3) 0.53 %(3) 0.53%(3) 0.59%(2)
Net investment income .............................. 9.48 %(3) 8.75 %(3) 8.18%(3) 9.26%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ............ $1,493 $1,046 $740 $99
Portfolio turnover rate ............................ 40% 71% 130% 104%
</TABLE>
--------------
* The date shares were first issued.
# The per share amounts were computed using an average number of shares
outstanding during the period.
+ Calculated based on the net asset value as of the last business day of the
period.
(1) Not annualized
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
See Notes to Financial Statements
29
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF MORGAN STANLEY DEAN WITTER
DIVERSIFIED INCOME TRUST:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Dean Witter Diversified Income Trust (the "Fund"), including the
portfolio of investments, as of October 31, 2000, and the related statements of
operations and changes in net assets, and the financial highlights for the year
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit. The statement of changes in net assets for the year ended October 31,
1999 and the financial highlights for each of the respective stated periods
ended October 31, 1999 were audited by other independent accountants whose
report, dated December 20, 1999, expressed an unqualified opinion on that
statement and financial highlights.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 2000, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Morgan
Stanley Dean Witter Diversified Income Trust as of October 31, 2000, the results
of its operations, the changes in its net assets, and the financial highlights
for the year then ended, in conformity with accounting principles generally
accepted in the United States of America.
Deloitte & Touche LLP
New York, New York
December 5, 2000
2000 FEDERAL TAX NOTICE (unaudited)
Of the Fund's ordinary income dividends paid during the fiscal year ended
October 31, 2000, 3.18% was attributable to qualifying Federal
obligations. Please consult your tax advisor to determine if any portion
of the dividends you received is exempt from state income tax.
30
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
CHANGE IN INDEPENDENT ACCOUNTANTS
On July 1, 2000 PricewaterhouseCoopers LLP resigned as independent accountants
of the Fund.
The reports of PricewaterhouseCoopers LLP on the financial statements of the
Fund for the past two fiscal years contained no adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principle.
In connection with its audits for the two most recent fiscal years and through
July 1, 2000, there have been no disagreements with PricewaterhouseCoopers LLP
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of PricewaterhouseCoopers LLP would have caused them to make
reference thereto in their report on the financial statements for such years.
The Fund, with the approval of its Board of Trustees and its Audit Committee,
engaged Deloitte & Touche LLP as its new independent auditors as of July 1,
2000.
31
<PAGE>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Mitchell M. Merin
President
Barry Fink
Vice President, Secretary and General Counsel
Peter M. Avelar
Vice President
Rajesh K. Gupta
Vice President
Peter J. Seeley
Vice President
Sally Sancimino
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
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT MANAGER
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
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.
Read the prospectus carefully before investing.
Morgan Stanley Dean Witter Distributors Inc., member NASD.
MORGAN STANLEY
DEAN WITTER
DIVERSIFIED
INCOME TRUST
[GRAPHIC OMITTED]
ANNUAL REPORT
October 31, 2000
