<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST Two World Trade Center,
LETTER TO THE SHAREHOLDERS April 30, 2000 New York, New York 10048
DEAR SHAREHOLDER:
Amid rising interest rates, many of the world's investment-grade bond markets
declined during the six-month period ended April 30, 2000. The 10-year U.S.
Treasury note yield rose by 20 basis points, as did yields in many European
bond markets. Benchmark German government 10-year yields rose by 15 basis
points during the period. More importantly, the continued strength of the U.S.
dollar relative to many investment-grade currencies resulted in currency losses
for most non-dollar-denominated investments.
The primary factor causing both the weakness in bonds and a strong U.S. dollar
was the unprecedented strength of the U.S. economy. For the United States, this
status increased concern about higher inflation, which prompted the Federal
Reserve Board to continue its policy of raising short-term interest rates.
During the period, the Fed increased the federal funds rate to 6.00 percent in
two steps. Subsequent to the end of the period, at its May meeting, the Fed
raised the federal funds rate an additional 50 basis points. Fortunately, the
federal government's reduced borrowing requirements and a Treasury debt buyback
program partially offset pressures on the bond market. The strong economy and
higher rates also served as a magnet for foreign capital, resulting in an even
stronger dollar. Finally, the relative weakness of foreign currencies allowed
non-U.S. economies to accelerate and inflation pressures to increase, thus
creating pressure on their bond markets.
The high-yield market also continued to remain under pressure during the period
under review. The weak market conditions that began as far back as late 1998
continued into and throughout much of calendar year 1999, as investor concerns
over foreign-market crises and a possible recession were replaced with worries
about sharply rising interest rates, credit-tightening actions by the Federal
Reserve Board, the looming threat of inflation and the uncertainty of the Y2K
bug's effect on corporate earnings and the financial markets. These fears
adversely affected all the fixed-income markets during 1999 and the first four
months of 2000, with Treasuries
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
LETTER TO THE SHAREHOLDERS April 30, 2000, continued
and municipal bonds also suffering significant losses. On a more positive note,
as a result of the weakness in the high-yield market over the past year and a
half, yields on lower-rated corporate bonds are now at their highest level in
nearly a decade. Today, high-yield bonds are providing an unusually large yield
advantage over Treasuries. Historically, abnormally high yield advantages have
signaled a turning point in the high-yield market, eventually resulting in
strong total returns as bond prices recovered.
PERFORMANCE AND PORTFOLIO STRATEGY
For the six-month period ended April 30, 2000, Morgan Stanley Dean Witter
Diversified Income Trust's Class B shares posted a total return of -1.35
percent, compared to 1.07 percent for the Lehman Brothers Government/Corporate
Intermediate Bond Index.1 For the same period, the Fund's Class A, C and D
shares had total returns of -0.90 percent, -1.23 percent and -0.56 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.
Global short-term securities component. Throughout the period under review, the
Fund continued its strategy of seeking the best-performing markets within its
investment-grade mandate while maintaining attractive income and dividend
levels. The limited-duration exposure of about 1.50 years for this portion of
the portfolio was quite helpful in a rising-interest-rate environment. As
mandated in the prospectus, all the securities in this portion of the Fund had
maturities of less than three years. While this portion of the Fund was largely
invested in non-U.S. markets, some of that exposure was currency hedged, and
more than half of this global short-term securities component was invested in
such currencies as the Swedish, Norwegian and the British ones, which held up
better than the euro and other European currencies. All but 39 percent of the
global short-term securities component was currency hedged or cross-hedged by
the end of the period.
U.S. government/mortgage component. During the six-month period ended April 30,
2000, the U.S. government/mortgage component's weighting in mortgage-backed
securities was increased. The Fund's U.S. Treasury and zero-coupon agency
holdings were trimmed as long-term interest rates trended higher in November
and December 1999, before peaking in January 2000. This strategy proved
successful in
---------------
1 The Lehman Brothers Government/Corporate Intermediate Bond Index tracks the
performance of government and corporate bonds, including U.S. government
agency and U.S. Treasury securities and corporate and yankee bonds with
maturities of 1 to 10 years. The performance of the index does not include
any expenses, fees or charges. The index is unmanaged and should not be
considered an investment.
2
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
LETTER TO THE SHAREHOLDERS April 30, 2000, continued
managing volatility. As interest rates moved lower during the first quarter of
2000, a portion of the Fund's mortgage-backed securities was sold and replaced
with U.S. Treasury securities. On April 30, 2000, the U.S. government/mortgage
component was comprised of 74 percent mortgage-backed securities issued by the
Federal National Mortgage Association (FNMA), Government National Mortgage
Association (GNMA) and the Federal Home Loan Mortgage Corp. (FHLMC), 5 percent
in U.S. Treasuries and the balance in U.S. agency securities.
Long-term high-yield securities component. As discussed, the past year and a
half has been an extremely difficult period for the high-yield market,
particularly the B-rated sector, the market's largest area. The result has been
a prolonged weakness in the high-yield market, causing high-yield bond prices
to decline sharply and yields to rise dramatically. Although the high-yield
securities component's position in the more defensive, higher quality end of
the market held up relatively well during the turbulent market environment, its
long-term core position in the B-rated sector was adversely affected. However,
with yields on B-rated issues at 10-year highs and many issues trading at
significant discounts to their stated maturity value, we view the B-rated
sector as extremely undervalued. In light of our positive long-term outlook, we
are maintaining our focus on this large sector of the market, which we believe
offers the Fund strong long-term total return potential.
From an industry perspective we presently view the telecommunications sector as
an excellent investment opportunity, given the overwhelming trend toward
providing expanded worldwide telecommunications services, including voice,
video and data services, over a combination of hardline and wireless networks.
The combination of very strong growth prospects for this area of the economy,
along with an incentive to form strategic partnerships with other major
players, provides the fundamental backdrop for higher profitability and future
significant credit improvement. Included among the high-yield securities
component's current holdings are a number of telecom companies that recently
have either announced important strategic partnerships or have raised equity
capital to fuel future growth and profits.
LOOKING AHEAD
We believe that U.S. economic growth is likely to moderate later in the year,
with inflation remaining at acceptable levels. However, should our economy
continue to display inordinately strong growth coupled with accelerating
inflation, the Fed may need to take a more aggressive stance on monetary
policy. The Fund will continue to monitor market conditions and look for
attractive investment opportunities as they become available.
3
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
LETTER TO THE SHAREHOLDERS April 30, 2000, continued
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 April 30, 2000
AVERAGE ANNUAL TOTAL RETURNS
--------------------------------------------------------------------------------
CLASS A SHARES*
-------------------------------------------------------------------
PERIOD ENDED 4/30/00
---------------------------
1 Year (3.26)%(1) (7.37)%(2)
Since Inception (7/28/97) 1.10 %(1) (0.48)%(2)
CLASS C SHARES+
-------------------------------------------------------------------
PERIOD ENDED 4/30/00
---------------------------
1 Year (3.89)%(1) (4.78)%(2)
Since Inception (7/28/97) 0.44 %(1) 0.44 %(2)
CLASS B SHARES**
-------------------------------------------------------------------
PERIOD ENDED 4/30/00
--------------------------
1 Year (3.89)%(1) (8.33)%(2)
5 Years 3.85 %(1) 3.57 %(2)
Since Inception (4/9/92) 4.66 %(1) 4.66 %(2)
CLASS D SHARES++
-------------------------------------------------------------------
PERIOD ENDED 4/30/00
---------------------------
1 Year (2.82)%(1)
Since Inception (7/28/97) 1.40 %(1)
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST.
---------------
(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.
* 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 CDSC 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 April 30, 2000 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------- ----------------- ---------- ---------------
<S> <C> <C> <C> <C>
GOVERNMENT & CORPORATE BONDS (91.8%)
FOREIGN (25.6%)
AUSTRALIA (0.0%)
Cable Television
$ 12,468 Australis Holdings Property Ltd.(a) 15.00++% 11/01/02 $ 124,680
90 Australis Media Ltd. (a) ..................... 15.75++ 05/15/03 903
4,700 Australis Media Ltd. (Units)** (a) ........... 15.75++ 05/15/03 47,000
------------
TOTAL AUSTRALIA ........................................................... 172,583
------------
BERMUDA (0.2%)
Other Telecommunications
1,300 Globenet Comm Group Ltd. ..................... 13.00 07/15/07 1,306,500
------------
CANADA (2.5%)
Beverages - Non-Alcoholic (0.6%)
5,500 Sparkling Spring Water ....................... 11.50 11/15/07 4,427,500
------------
Consumer Electronics/Appliances (0.0%)
12,061 International Semi-Tech
Microelectronics, Inc. (a) ................... 11.50++ 08/15/03 120,610
------------
Consumer/Business Services (0.2%)
1,300 MDC Communication Corp. ...................... 10.50 12/01/06 1,222,000
------------
Government Obligations (1.5%)
CAD 14,150 Canada Government Bond ....................... 5.50 09/01/02 9,395,776
GBP 1,141 Ontario (Province of) ........................ 11.125 02/14/01 1,824,453
------------
11,220,229
------------
Other Telecommunications (0.2%)
$ 1,300 Worldwide Fiber Inc. ......................... 12.00 08/01/09 1,202,500
------------
TOTAL CANADA .............................................................. 18,192,839
------------
DENMARK (4.9%)
Government Obligations
DKK 182,000 Denmark (Kingdom of) ......................... 9.00 11/15/00 22,655,344
106,000 Denmark (Kingdom of) (b) ..................... 8.00 11/15/01 13,431,555
------------
TOTAL DENMARK ............................................................. 36,086,899
------------
FINLAND (2.0%)
Government Obligation
GBP 9,100 Finland (Republic of) ........................ 8.00 04/07/03 14,583,797
------------
GERMANY (0.7%)
Government Obligation
EUR 5,000 Germany (Republic of) ........................ 8.00 07/22/02 4,851,342
------------
</TABLE>
See Notes to Financial Statements
6
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 2000 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------- ------------- ---------- ---------------
<S> <C> <C> <C> <C>
NETHERLANDS (6.0%)
Government Obligations (5.8%)
EUR 13,500 Netherlands Government Bond (b)......... 8.50 % 03/15/01 $ 12,680,141
GBP 9,100 Netherlands Government Bond ............ 7.00 12/20/02 14,228,819
EUR 17,750 Netherlands (Kingdom of) ............... 5.75 09/15/02 16,465,512
------------
43,374,472
------------
Other Telecommunications (0.2%)
$ 1,300 Versatel Telecom International NV....... 13.25 05/15/08 1,319,500
------------
TOTAL NETHERLANDS .................................................. 44,693,972
------------
NORWAY (2.4%)
Contract Drilling (0.2%)
2,000 Northern Offshore ASA .................. 10.00 05/15/05 1,240,000
------------
Government Obligation (2.2%)
NOK 136,570 Norway Government Bond (b) ............. 9.50 10/31/02 16,252,661
------------
TOTAL NORWAY ....................................................... 17,492,661
------------
SWEDEN (2.5%)
Government Obligation
SEK 160,000 Swedish Government Bond (b) ............ 5.50 04/12/02 18,036,747
------------
UNITED KINGDOM (4.4%)
Cellular Telephone (0.1%)
$ 3,500 Dolphin Telecom PLC .................... 14.00++ 05/15/09 1,085,000
------------
Government Obligation (2.9%)
GBP 13,200 U.K. Treasury Bond (b) ................. 7.00 06/07/02 20,809,774
------------
International Banks (1.2%)
5,600 Abbey National Treasury
Service (b) ............................ 7.125 03/14/01 8,715,568
------------
Other Telecommunications (0.2%)
$ 1,800 Esprit Telecom Group PLC ............... 10.875 06/15/08 1,530,000
------------
TOTAL UNITED KINGDOM ............................................... 32,140,342
------------
TOTAL FOREIGN (Identified Cost $223,102,450)........................ 187,557,682
------------
UNITED STATES (66.2%)
CORPORATE BONDS (30.9%)
Advertising (0.4%)
3,200 Interep National Radio Sales Inc. ...... 10.00 07/01/08 2,912,000
------------
Aerospace (0.3%)
2,700 Sabreliner Corp. - 144A* ............... 11.00 06/15/08 2,220,750
------------
</TABLE>
See Notes to Financial Statements
7
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 2000 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
--------------- ------------- ---------- ---------------
<S> <C> <C> <C> <C>
Broadcasting (0.5%)
$ 3,800 Tri-State Outdoor Media
Group, Inc. ................................. 11.00 % 05/15/08 $ 3,572,000
------------
Cable Television (1.5%)
3,000 Knology Holdings Inc. ....................... 11.875++ 10/15/07 1,897,500
3,700 Optel, Inc. (a) (c) ......................... 13.00 02/15/05 2,849,000
8,000 Optel, Inc. (Series B) (a) (c) .............. 11.50 07/01/08 6,400,000
------------
11,146,500
------------
Casino/Gambling (1.5%)
12,740 Aladdin Gaming Holdings/Capital
Corp. LLC (Series B) ........................ 13.50++ 03/01/10 6,497,400
8,900 Fitzgeralds Gaming Corp.
(Series B) (c) .............................. 12.25 12/15/04 4,717,000
------------
11,214,400
------------
Cellular Telephone (1.2%)
1,400 Dobson/Sygnet Communications ................ 12.25 12/15/08 1,456,000
7,300 McCaw International Ltd. .................... 13.00++ 04/15/07 5,366,595
1,500 Tritel PCS Inc. ............................. 12.75++ 05/15/09 990,000
1,500 Triton Communications LLC ................... 11.00++ 05/01/08 1,072,500
------------
8,885,095
------------
Construction/Agricultural Equipment/Trucks (0.4%)
2,800 J.B. Poindexter & Co., Inc. ................. 12.50 05/15/04 2,604,000
------------
Consumer Electronics/Appliances (0.2%)
1,400 Windmere-Durable Holdings, Inc. ............. 10.00 07/31/08 1,351,000
------------
Consumer Specialties (0.7%)
5,800 Samsonite Corp. ............................. 10.75 06/15/08 4,872,000
------------
Consumer/Business Services (1.7%)
1,200 Anacomp, Inc. (Series B) .................... 10.875 04/01/04 1,080,000
600 Anacomp, Inc. (Series D) .................... 10.875 04/01/04 540,000
6,750 Comforce Operating, Inc. .................... 12.00 12/01/07 3,645,000
5,100 Entex Information Services, Inc. ............ 12.50 08/01/06 5,686,500
1,500 Muzak LLC ................................... 9.875 03/15/09 1,410,000
------------
12,361,500
------------
Containers/Packaging (0.9%)
5,650 Envirodyne Industries, Inc. ................. 10.25 12/01/01 2,994,500
1,200 Impac Group Inc. (Series B) ................. 10.125 03/15/08 1,236,000
3,500 Packaging Resources, Inc. ................... 11.625 05/01/03 2,100,000
------------
6,330,500
------------
Diversified Electronic Products (0.3%)
2,700 High Voltage Engineering, Inc. .............. 10.75 08/15/04 2,106,000
------------
Diversified Financial Services (0.9%)
GBP 4,200 General Electric Capital Corp. (b) .......... 6.625 03/16/01 6,505,983
------------
</TABLE>
See Notes to Financial Statements
8
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 2000 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
--------------- ------------ ---------- ---------------
<S> <C> <C> <C> <C>
Diversified Manufacturing (0.6%)
$ 1,300 Eagle-Picher Industries, Inc. ........... 9.375% 03/01/08 $ 1,098,500
2,588 Jordan Industries, Inc. (Series B) ...... 11.75++ 04/01/09 1,682,200
1,800 Jordan Industries, Inc. ................. 10.375 08/01/07 1,656,000
------------
4,436,700
------------
Electronic Distributors (0.0%)
5,600 CHS Electronics, Inc. (a) (c) ........... 9.875 04/15/05 112,000
------------
Environmental Services (0.1%)
1,300 Allied Waste North America, Inc. ........ 10.00 08/01/09 890,500
------------
Food Chains (0.7%)
2,250 Big V Supermarkets, Inc.
(Series B) ............................. 11.00 02/15/04 2,109,375
1,000 Eagle Food Centers, Inc. (c) ............ 8.625 04/15/00 490,000
5,000 Pueblo Xtra International, Inc.
(Series C) ............................. 9.50 08/01/03 2,500,000
------------
5,099,375
------------
Food Distributors (1.2%)
1,300 Fleming Companies, Inc. (Series B)....... 10.625 07/31/07 1,105,000
44,552 SFAC New Holdings Inc. (d) .............. 13.00++ 06/15/09 6,682,757
1,300 Volume Services of America Inc. ......... 11.25 03/01/09 1,209,000
------------
8,996,757
------------
Hotels/Resorts (0.6%)
2,700 Epic Resorts LLC (Series B) ............. 13.00 06/15/05 1,674,000
3,904 Resort At Summerlin (Series B) .......... 13.00 12/15/07 2,537,789
------------
4,211,789
------------
Industrial Specialties (0.6%)
1,300 Cabot Safety Corp. ...................... 12.50 07/15/05 1,309,750
1,800 Indesco International Inc. .............. 9.75 04/15/08 576,000
1,000 International Wire Group, Inc.
(Series B) ............................. 11.75 06/01/05 1,027,500
2,250 Outsourcing Services Group, Inc.
(Series B) ............................. 10.875 03/01/06 1,845,000
------------
4,758,250
------------
International Banks (0.7%)
GBP 3,061 KFW International Finance (b) ........... 10.625 09/03/01 4,963,684
------------
Internet Services (0.2%)
$ 1,400 Globix Corp. - 144A* .................... 12.50 02/01/10 1,274,000
------------
Major Banks (0.2%)
GBP 1,000 Morgan Guaranty Trust Corp. ............. 7.375 12/28/01 1,549,660
------------
</TABLE>
See Notes to Financial Statements
9
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 2000 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
------------- --------------- ---------- ---------------
<S> <C> <C> <C> <C>
Medical Specialties (0.3%)
$ 5,100 Mediq Inc./PRN Life Support
Services Inc. ............................. 11.00 % 06/01/08 $ 510,000
5,400 Universal Hospital Services, Inc. .......... 10.25 03/01/08 2,052,000
------------
2,562,000
------------
Medical/Nursing Services (0.4%)
5,250 Pediatric Services of America, Inc.
(Series A) ................................ 10.00 04/15/08 2,625,000
------------
Military/Gov't/Technical (0.1%)
1,300 Loral Space & Communications
Ltd. ...................................... 9.50 01/15/06 890,500
------------
Office Equipment/Supplies (0.6%)
6,890 Mosler, Inc. ............................... 11.00 04/15/03 4,478,500
------------
Oil Refining/Marketing (0.0%)
6,700 Transamerican Refining Corp.
(a) (c) ................................... 16.00 06/30/03 83,750
------------
Other Telecommunications (3.6%)
6,500 Birch Telecom Inc. ......................... 14.00 06/15/08 6,500,000
3,000 DTI Holdings Inc. (Series B) ............... 12.50++ 03/01/08 1,515,000
16,300 Firstworld Communications, Inc. ............ 13.00++ 04/15/08 7,498,000
1,500 Pac-West Telecommunications
Group, Inc. ............................... 13.50 02/01/09 1,545,000
2,700 Primus Telecommunications
Group, Inc. ............................... 9.875 05/15/08 2,349,000
1,800 Viatel, Inc. ............................... 11.25 04/15/08 1,602,000
6,400 World Access, Inc. (d) ..................... 13.25 01/15/08 5,792,000
------------
26,801,000
------------
Package Goods/Cosmetics (0.3%)
2,500 J.B. Williams Holdings, Inc. ............... 12.00 03/01/04 2,475,000
------------
Printing/Forms (0.2%)
2,700 Premier Graphics Inc. ...................... 11.50 12/01/05 1,221,750
------------
Restaurants (2.1%)
48,756 American Restaurant Group
Holdings, Inc. - 144A* (d) ................ 0.00 12/15/05 12,310,865
5,200 FRD Acquisition Corp. (Series B) ........... 12.50 07/15/04 2,080,000
1,300 Friendly Ice Cream Corp. ................... 10.50 12/01/07 1,001,000
------------
15,391,865
------------
Retail - Specialty (0.4%)
1,300 Pantry, Inc. ............................... 10.25 10/15/07 1,189,500
1,700 Petro Stopping Centers L.P. ................ 10.50 02/01/07 1,479,000
------------
2,668,500
------------
</TABLE>
See Notes to Financial Statements
10
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 2000 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
------------- ------------ ---------- --------------
<S> <C> <C> <C> <C>
Telecommunications (3.1%)
$ 1,400 CapRock Communications Corp.
(Series B) ........................... 12.00 % 07/15/08 $ 1,344,000
1,500 Covad Communications
Group, Inc. .......................... 12.50 02/15/09 1,455,000
5,400 e. Spire Communications, Inc. ......... 13.75 07/15/07 3,024,000
1,500 Focal Communications Corp.
(Series B) ........................... 12.125++ 02/15/08 982,500
1,800 GST Equipment Funding, Inc. ........... 13.25 05/01/07 990,000
1,300 Hyperion Telecommunication, Inc.
(Series B) ........................... 12.25 09/01/04 1,371,500
1,300 Level 3 Communications, Inc. .......... 9.125 05/01/08 1,131,000
1,300 NextLink Communications LLC ........... 10.75 06/01/09 1,280,500
28,500 In-Flight Phone Corp. (Series B)
(a) (c) .............................. 14.00 05/15/02 2,565,000
5,400 Rhythms Netconnections, Inc. .......... 12.75 04/15/09 4,590,000
1,200 Startec Global Communications
Corp. ................................ 12.00 05/15/08 1,032,000
3,000 Talton Holdings, Inc. (Series B) ...... 11.00 06/30/07 2,640,000
-----------
22,405,500
-----------
Wireless Communications (4.4%)
11,300 Advanced Radio Telecom Corp. .......... 14.00 02/15/07 10,565,500
900 Arch Escrow Corp. ..................... 13.75 04/15/08 747,000
1,222 CellNet Data Systems Inc. -
144A* ................................ 15.00 05/15/00 1,222,000
21,800 CellNet Data Systems Inc. ............. 14.00++ 10/01/07 1,744,000
750 Globalstar LP/Capital Corp. ........... 11.375 02/15/04 255,000
1,000 Globalstar LP/Capital Corp. ........... 10.75 11/01/04 340,000
1,850 Globalstar LP/Capital Corp. ........... 11.50 06/01/05 629,000
3,500 Orbcomm Global LP/Capital Corp......... 14.00 08/15/04 3,325,000
4,600 Paging Network, Inc. (c) .............. 10.125 08/01/07 2,438,000
8,300 Paging Network, Inc. (c) .............. 10.00 10/15/08 4,399,000
5,850 USA Mobile Communications
Holdings, Inc. ....................... 14.00 11/01/04 5,323,500
1,200 Winstar Communications, Inc. -
144A* ................................ 12.75 04/15/10 1,152,000
-----------
32,140,000
-----------
TOTAL CORPORATE BONDS
(Identified Cost $321,310,772).................................... 226,117,808
-----------
</TABLE>
See Notes to Financial Statements
11
<PAGE>
Morgan Stanley Dean Witter Diversified Income Trust
Portfolio of Investments April 30, 2000 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
----------- -- ------------- ---------- ---------------
<S> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES (26.2%)
Federal Home Loan Mortgage Corp. (0.3%)
$ 1,818 .................................... 7.00 % 04/01/04-
06/01/04 $ 1,787,142
747 .................................... 8.00 10/01/24-
06/01/25 746,367
------------
2,533,509
------------
Federal National Mortgage Assoc. (13.1%)
36,168 .................................... 6.00 02/01/11-
02/01/29 33,598,077
30,976 .................................... 6.50 10/01/08-
04/01/29 29,169,202
15,008 .................................... 7.00 08/01/08-
03/01/27 14,382,545
9,481 .................................... 7.50 02/01/22-
07/01/29 9,273,526
3,421 .................................... 8.00 09/01/01-
06/01/26 3,418,245
5,989 .................................... 8.50 07/01/17-
05/01/25 6,071,703
------------
95,913,298
------------
Government National Mortgage Assoc. (12.8%)
22,399 .................................... 6.00 10/15/23-
12/15/28 20,354,864
27,599 .................................... 6.50 11/20/23-
05/15/29 25,839,836
22,441 .................................... 7.00 12/15/22-
06/20/29 21,545,587
21,087 .................................... 7.50 05/15/17-
09/15/29 20,714,233
3,693 .................................... 8.00 01/15/22-
10/15/24 3,701,766
1,221 .................................... 8.50 08/15/22-
12/15/24 1,242,470
------------
93,398,756
------------
TOTAL MORTGAGE-BACKED SECURITIES
(Identified Cost $200,143,035)......................................... 191,845,563
------------
U.S. GOVERNMENT AGENCIES & OBLIGATIONS (9.1%)
Federal Home Loan Banks (b) (1.8%)
5,000 .................................... 0.00 07/02/12 1,923,050
5,000 .................................... 6.37 09/25/07 4,725,900
</TABLE>
See Notes to Financial Statements
12
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 2000 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
--------------- ---------- ---------- ---------------
<S> <C> <C> <C> <C>
$ 5,000 ................................. 6.385% 10/23/07 $ 4,728,150
2,000 ................................. 5.45 01/12/09 1,749,180
------------
13,126,280
------------
Federal Home Loan Mortgage Corp. (1.2%)
10,000 ................................. 0.00 08/15/02 8,476,500
------------
Federal National Mortgage Assoc. (b) (2.4%)
GBP 9,000 ................................. 6.875 06/07/02 13,990,151
$ 6,000 Principal Strips ................. 0.00 02/12/04-
02/01/05 4,309,970
------------
18,300,121
------------
13,475 Financing Corp. (1.3%) ........... 0.00 03/07/05-
04/06/06 9,330,357
------------
3,000 Freddie Mac (0.4%) ............... 5.75 04/15/08 2,716,800
------------
2,232 Resolution Funding Corp. (0.2%) ... 0.00 01/15/07 1,424,842
------------
2,320 Tennessee Valley Authority (0.2%).. 0.00 01/15/03 1,912,074
------------
U.S. Treasury Notes (1.6%)
2,000 ................................. 6.125 08/15/07 1,957,840
10,000 ................................. 6.625 05/15/07 10,062,900
------------
12,020,740
------------
TOTAL U.S. GOVERNMENT AGENCIES & OBLIGATIONS
(Identified Cost $69,782,177)................................ 67,307,714
------------
TOTAL UNITED STATES
(Identified Cost $591,235,984)............................... 485,271,085
------------
TOTAL GOVERNMENT & CORPORATE BONDS
(Identified Cost $814,338,434)............................... 672,828,767
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES
------------
<S> <C> <C>
COMMON STOCKS (e) (0.2%)
Casino/Gambling (0.0%)
10,773 Fitzgerald Gaming Corp. (Class D)* .......................... 11
------------
Clothing/Shoe/Accessory Stores (0.0%)
1,310,596 County Seat Stores, Inc. (d) ................................ 11,795
------------
Food Distributors (0.0%)
2,423 SFAC New Holdings Inc. (d)* ................................. 606
------------
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
------------
</TABLE>
See Notes to Financial Statements
13
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 2000 (unaudited) continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
------------- ---------------
<S> <C> <C>
Other Telecommunications (0.2%)
37,335 Versatel Telecom International NV (Netherlands) (d) ......... $ 1,496,644
20,110 World Access, Inc. (d) ...................................... 315,475
------------
1,812,119
------------
Restaurants (0.0%)
6,000 American Restaurant Group Holdings, Inc. - 144A* ............ 1,500
------------
Specialty Foods/Candy (0.0%)
198,750 Specialty Foods Acquisition Corp. - 144A* ................... 49,688
------------
Telecommunication Equipment (0.0%)
196,000 FWT, Inc. (Class A) ......................................... 1,960
------------
Textiles (0.0%)
298,462 United States Leather, Inc. (d) ............................. 2,985
------------
TOTAL COMMON STOCKS
(Identified Cost $19,159,398)................................ 1,885,780
------------
CONVERTIBLE PREFERRED STOCKS (0.2%)
Oil & Gas Production (0.0%)
989 XCL Ltd.+ - 144A* ........................................... 495
5,000 XCL Ltd. (Units)**+ - 144A* ................................. 2,500
------------
2,995
------------
Oil Refining/Marketing (0.0%)
11,760 TCR Holding Corp. (Class B) (Non-Voting) .................... 117
6,468 TCR Holding Corp. (Class C) (Non-Voting) .................... 65
17,052 TCR Holding Corp. (Class D) (Non-Voting) .................... 170
35,280 TCR Holding Corp. (Class E) (Non-Voting) .................... 353
------------
705
------------
Restaurants (0.1%)
1,886 American Restaurant Group Holdings, Inc. (Series B)
(Non-Conv.)+ ............................................... 377,200
------------
Telecommunication Equipment (0.1%)
1,960,000 FWT, Inc. (Series A) (Non-Conv.) ............................ 980,000
------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Identified Cost $11,262,171)................................ 1,360,900
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE
----------- -----------
<S> <C> <C> <C>
WARRANTS (e) (0.4%)
Aerospace (0.0%)
1,000 Sabreliner Corp. - 144A* .......................... 04/15/03 10,000
------------
Broadcasting (0.0%)
4,000 UIH Australia/Pacific Inc. ........................ 05/15/06 120,000
------------
Casino/Gambling (0.0%)
68,000 Aladdin Gaming Enterprises, Inc. - 144A* .......... 03/01/10 680
------------
</TABLE>
See Notes to Financial Statements
14
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 2000 (unaudited) continued
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE VALUE
---------- ------------ --------------
<S> <C> <C> <C>
Cellular Telephone (0.0%)
5,300 McCaw International Ltd. - 144A* .................. 04/15/07 $ 63,600
------------
Consumer Electronics/Appliances (0.0%)
12,061 International Semiconductor Corp. (Rights) ........ -
------------
Hotels/Resorts (0.0%)
2,700 Epic Resorts LLC/Capital - 144A* .................. 06/15/05 27
3,250 Resort At Summerlin - 144A* ....................... 12/15/07 33
------------
60
------------
Oil Refining/Marketing (0.0%)
6,700 Transamerican Refining Corp. - 144A* .............. 06/30/03 7
------------
Other Telecommunications (0.4%)
6,500 Birch Telecom Inc. - 144A* ........................ 06/15/08 357,500
15,000 DTI Holdings Inc. - 144A* ......................... 03/01/08 150
16,300 Firstworld Communications, Inc. - 144A* ........... 04/15/08 2,200,500
------------
2,558,150
------------
Restaurants (0.0%)
1,500 American Restaurant Group Holdings, Inc. -
144A* ............................................ 08/15/08 15
------------
Telecommunications (0.0%)
1,200 Startec Global Communications Corp. - 144A* 05/15/08 21,600
------------
TOTAL WARRANTS (Identified Cost $53,715)...................... 2,774,112
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
----------------- ---------- ----------
<S> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS (1.9%)
UNITED STATES
TIME DEPOSITS (f) (0.8%)
NOK 44,618 Chase Manhattan Bank ................. 5.75% 05/02/00 4,989,532
SEK 8,800 Chase Manhattan Bank ................. 3.50 05/04/00 984,108
------------
TOTAL TIME DEPOSITS
(Identified Cost $6,412,156)................................. 5,973,640
------------
REPURCHASE AGREEMENT (1.1%)
$ 7,703 The Bank of New York
(dated 04/28/00; proceeds
$7,706,579) (g)
(Identified Cost $7,702,848).......... 5.813 05/01/00 7,702,848
------------
TOTAL SHORT-TERM INVESTMENTS
(Identified Cost $14,115,004)................................ 13,676,488
------------
</TABLE>
See Notes to Financial Statements
15
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 2000 (unaudited) continued
<TABLE>
<CAPTION>
VALUE
---------------
<S> <C> <C> <C>
TOTAL INVESTMENTS
(Identified Cost $858,928,722) (h)............... 94.5% $692,526,047
OTHER ASSETS IN EXCESS OF LIABILITIES 5.5 40,168,195
----- ------------
NET ASSETS ...................................... 100.0% $732,694,242
===== ============
</TABLE>
---------------------
* 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 $4,709,867 U.S. Treasury Bill 0.00% due 05/25/00 valued at
$4,692,158 and $3,029,056 U.S. Treasury Note 6.875% due 05/15/06 valued at
$3,171,256.
(h) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $9,830,894 and the
aggregate gross unrealized depreciation is $176,233,569, resulting in net
unrealized depreciation of $166,402,675.
See Notes to Financial Statements
16
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 2000 (unaudited) continued
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT APRIL 30, 2000:
<TABLE>
<CAPTION>
CONTRACTS IN EXCHANGE DELIVERY UNREALIZED
TO DELIVER FOR DATE APPRECIATION
-------------------- ------------- ---------- -------------
<S> <C> <C> <C>
SEK 8,817,111 $ 1,022,824 05/04/00 $ 36,391
EUR 13,400,000 $12,918,069 05/08/00 728,536
EUR 2,832,700 $ 2,730,440 05/08/00 153,627
GBP 12,626,000 $19,994,534 05/08/00 382,568
EUR 3,285,500 $ 3,161,801 05/12/00 172,215
EUR 20,071,550 $19,277,218 05/18/00 1,005,417
EUR 13,750,000 $13,211,688 05/18/00 694,604
EUR 6,264,803 $ 6,032,066 05/18/00 329,007
GBP 8,719,495 $13,754,393 05/31/00 208,221
----------
Total unrealized appreciation ................ $3,710,586
==========
</TABLE>
Currency Abbreviations:
-----------------------
GBP British Pound.
CAD Canadian Dollar.
DKK Danish Krone.
EUR Euro.
NOK Norwegian Krone.
SEK Swedish Krona.
See Notes to Financial Statements
17
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
April 30, 2000 (unaudited)
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments in securities, at value
(identified cost $858,928,722).......................................... $692,526,047
Unrealized appreciation on open forward foreign currency contracts ....... 3,710,586
Cash ..................................................................... 21,367,806
Receivable for:
Interest .............................................................. 13,971,042
Investments sold ...................................................... 2,871,875
Shares of beneficial interest sold .................................... 860,260
Compensated forward foreign currency contracts ........................ 22,469
Prepaid expenses and other assets ........................................ 86,081
------------
TOTAL ASSETS .......................................................... 735,416,166
------------
LIABILITIES:
Payable for:
Shares of beneficial interest repurchased ............................. 1,112,760
Plan of distribution fee .............................................. 515,121
Investment management fee ............................................. 247,267
Payable to bank ....................................................... 691,499
Accrued expenses and other payables ...................................... 155,277
------------
TOTAL LIABILITIES ..................................................... 2,721,924
------------
NET ASSETS ............................................................ $732,694,242
============
COMPOSITION OF NET ASSETS:
Paid-in-capital .......................................................... $940,099,061
Net unrealized depreciation .............................................. (162,979,131)
Dividends in excess of net investment income ............................. (922,508)
Accumulated net realized loss ............................................ (43,503,180)
------------
NET ASSETS ............................................................ $732,694,242
============
CLASS A SHARES:
Net Assets ............................................................... $ 12,777,345
Shares Outstanding (unlimited authorized, $.01 par value) ................ 1,652,083
NET ASSET VALUE PER SHARE ............................................. $ 7.73
============
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 4.44% of net asset value) ........................ $ 8.07
============
CLASS B SHARES:
Net Assets ............................................................... $702,694,521
Shares Outstanding (unlimited authorized, $.01 par value) ................ 90,833,828
NET ASSET VALUE PER SHARE ............................................. $ 7.74
============
CLASS C SHARES:
Net Assets ............................................................... $ 15,734,261
Shares Outstanding (unlimited authorized, $.01 par value) ................ 2,036,919
NET ASSET VALUE PER SHARE ............................................. $ 7.72
============
CLASS D SHARES:
Net Assets ............................................................... $ 1,488,115
Shares Outstanding (unlimited authorized, $.01 par value) ................ 191,987
NET ASSET VALUE PER SHARE ............................................. $ 7.75
============
</TABLE>
See Notes to Financial Statements
18
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the six months ended April 30, 2000 (unaudited)
<TABLE>
<CAPTION>
NET INVESTMENT INCOME:
<S> <C>
INTEREST INCOME ...................................................... $ 40,179,886
-------------
EXPENSES
Plan of distribution fee (Class A shares) ............................ 15,907
Plan of distribution fee (Class B shares) ............................ 3,310,706
Plan of distribution fee (Class C shares) ............................ 75,272
Investment management fee ............................................ 1,639,529
Transfer agent fees and expenses ..................................... 321,966
Shareholder reports and notices ...................................... 57,448
Custodian fees ....................................................... 56,560
Registration fees .................................................... 55,553
Professional fees .................................................... 50,583
Trustees' fees and expenses .......................................... 8,474
Other ................................................................ 10,278
-------------
TOTAL EXPENSES .................................................... 5,602,276
-------------
NET INVESTMENT INCOME ............................................. 34,577,610
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain/loss on:
Investments ....................................................... (25,659,356)
Foreign exchange transactions ..................................... 6,586,779
-------------
NET LOSS .......................................................... (19,072,577)
-------------
Net change in unrealized appreciation/depreciation on:
Investments ....................................................... (27,454,090)
Translation of forward foreign currency contracts, other assets and
liabilities denominated in foreign currencies ................... 2,688,892
-------------
NET DEPRECIATION .................................................. (24,765,198)
-------------
NET LOSS .......................................................... (43,837,775)
-------------
NET DECREASE ......................................................... $ (9,260,165)
=============
</TABLE>
See Notes to Financial Statements
19
<PAGE>
MORGAN STANLEY 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, 2000 OCTOBER 31, 1999
---------------- -----------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income ....................................... $ 34,577,610 $ 80,184,261
Net realized loss ........................................... (19,072,577) (18,452,394)
Net change in unrealized depreciation ....................... (24,765,198) (83,376,343)
------------- --------------
NET DECREASE ............................................. (9,260,165) (21,644,476)
------------- --------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Class A shares ........................................... (868,897) (1,474,948)
Class B shares ........................................... (31,577,497) (64,975,880)
Class C shares ........................................... (718,624) (1,307,832)
Class D shares ........................................... (140,959) (67,347)
Paid-in-capital:
Class A shares ........................................... - (204,223)
Class B shares ........................................... - (8,996,654)
Class C shares ........................................... - (181,085)
Class D shares ........................................... - (9,325)
------------- --------------
TOTAL DIVIDENDS AND DISTRIBUTIONS ........................ (33,305,977) (77,217,294)
------------- --------------
Net decrease from transactions in shares of beneficial
interest .................................................. (126,617,268) (54,811,256)
------------- --------------
NET DECREASE ............................................. (169,183,410) (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 $922,508 and $2,194,141, respectively) ......... $ 732,694,242 $ 901,877,652
============= ==============
</TABLE>
See Notes to Financial Statements
20
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 2000 (unaudited)
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 security listed or traded on the
New York, American or other domestic or foreign stock exchange is valued at its
latest sale price on that exchange prior to the time when assets are valued; if
there were no sales that day, the security is valued at the latest bid price
(in cases where securities are traded on more than one exchange, the securities
are valued on the exchange designated as the primary market by the Trustees);
(2) all other portfolio securities for which over-the-counter market quotations
are readily available are valued at the latest available bid price prior to the
time of valuation; (3) when market quotations are not readily available,
including circumstances under which it is determined by 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
21
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 2000 (unaudited) continued
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.
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
22
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 2000 (unaudited) continued
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.
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
$13,445,813 at April 30, 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
23
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 2000 (unaudited) continued
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 broker-dealer representatives may be
reimbursed in the subsequent calendar year. For the six months ended April 30,
2000, the distribution fee was accrued for Class A shares and Class C shares at
the annual rate of 0.16% and 0.85%, respectively.
The Distributor has informed the Fund that for the six months ended April 30,
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,
$1,000,682 and $8,121, respectively and received $13,533 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 six months ended April 30, 2000
aggregated $236,753,616 and $391,311,383, respectively. Included in the
aforementioned are purchases and sales of U.S. Government securities of
$62,017,213 and $151,258,307, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager
and Distributor, is the Fund's transfer agent. At April 30, 2000, the Fund had
transfer agent fees and expenses payable of approximately $12,000.
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, 2000
included in Trustees' fees and expenses in the Statement of Operations amounted
to $2,399. At April 30, 2000, the Fund had an accrued pension liability of
$39,876 which is included in accrued expenses in the Statement of Assets and
Liabilities.
24
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 2000 (unaudited) continued
5. 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, 2000 OCTOBER 31, 1999
---------------------------------- --------------------------------
(unaudited)
SHARES AMOUNT SHARES AMOUNT
--------------- ------------------ --------------- ----------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold ................................................. 3,406,301 $ 27,338,442 2,848,419 $ 24,256,392
Reinvestment of dividends and distributions .......... 36,144 288,939 65,553 563,411
Redeemed ............................................. (4,466,371) (35,838,067) (1,917,929) (16,068,227)
---------- -------------- ---------- --------------
Net increase (decrease) - Class A .................... (1,023,926) (8,210,686) 996,043 8,751,576
---------- -------------- ---------- --------------
CLASS B SHARES
Sold ................................................. 11,949,019 95,751,262 46,504,109 405,026,436
Reinvestment of dividends and distributions .......... 1,676,709 13,395,314 3,786,566 32,666,180
Redeemed ............................................. (28,144,376) (225,515,665) (58,638,989) (507,410,583)
----------- -------------- ----------- --------------
Net decrease - Class B ............................... (14,518,648) (116,369,089) (8,348,314) (69,717,967)
----------- -------------- ----------- --------------
CLASS C SHARES
Sold ................................................. 339,108 2,710,859 1,432,185 12,480,926
Reinvestment of dividends and distributions ......... 45,616 363,816 94,887 815,013
Redeemed ............................................. (735,115) (5,870,509) (880,512) (7,540,173)
----------- -------------- ----------- --------------
Net increase (decrease) - Class C .................... (350,391) (2,795,834) 646,560 5,755,766
----------- -------------- ----------- --------------
CLASS D SHARES
Sold ................................................. 6,221,848 49,947,755 82,581 708,190
Reinvestment of dividends and distributions .......... 8,115 65,224 5,374 46,101
Redeemed ............................................. (6,166,228) (49,254,638) (41,881) (354,922)
----------- -------------- ----------- --------------
Net increase - Class D ............................... 63,735 758,341 46,074 399,369
----------- -------------- ----------- --------------
Net decrease in Fund ................................. (15,829,230) $ (126,617,268) (6,659,637) $ (54,811,256)
=========== ============== ========== ==============
</TABLE>
25
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 2000 (unaudited) continued
6. FEDERAL INCOME TAX STATUS
At October 31, 1999, the Fund had a net capital loss carryover of $24,281,000,
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
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$3,024 $3,677 $2,482 $7,131 $3,233 $4,734
====== ====== ====== ====== ====== ======
</TABLE>
As of October 31, 1999, 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, capital
loss deferrals on wash sales and interest on bonds in default.
The investment manager has determined that distribution from paid-in-capital is
likely to occur for the fiscal year ended October 31, 2000.
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 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, 2000, there were outstanding forward contracts used to facilitate
settlement of foreign currency denominated portfolio transactions and manage
foreign currency exposure.
26
<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 SIX FOR THE YEAR FOR THE YEAR JULY 28, 1997*
MONTHS ENDED ENDED ENDED THROUGH
APRIL 30, 2000 OCTOBER 31, 1999 OCTOBER 31, 1998 OCTOBER 31, 1997
------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
(unaudited)
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 ............................ 0.36 0.74 0.74 0.22
Net realized and unrealized gain (loss) .......... (0.44) (0.87) (0.46) 0.04
------ ------ ------ ------
Total income (loss) from investment operations .... (0.08) (0.13) 0.28 0.26
------ ------ ------ ------
Less dividends and distributions from:
Net investment income ............................ (0.35) (0.63) (0.70) (0.20)
Paid-in-capital .................................. - (0.09) (0.03) -
------ ------ ------ ------
Total dividends and distributions ................. (0.35) (0.72) (0.73) (0.20)
------ ------ ------ ------
Net asset value, end of period .................... $ 7.73 $ 8.16 $ 9.01 $ 9.46
====== ====== ====== ======
TOTAL RETURN+ ..................................... (0.90)%(1) (1.61)% 2.86% 2.74%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .......................................... 0.70 %(2)(3) 0.72 %(3) 0.77%(3) 0.85%(2)
Net investment income ............................. 9.10 %(2)(3) 8.56 %(3) 7.94%(3) 8.98%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........... $12,777 $21,828 $15,130 $4,933
Portfolio turnover rate ........................... 30 %(1) 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
27
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR ENDED OCTOBER 31
MONTHS ENDED ----------------------------------------------------------------
APRIL 30, 2000++ 1999++ 1998++ 1997*++ 1996 1995
---------------- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(unaudited)
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period ........... $ 8.16 $ 9.01 $ 9.46 $ 9.78 $ 9.62 $ 9.37
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income ......................... 0.33 0.68 0.68 0.74 0.78 0.77
Net realized and unrealized gain (loss) ....... (0.42) (0.87) (0.46) (0.15) 0.10 0.20
------ ------ ------ ------ ------ ------
Total income (loss) from investment operations . (0.09) (0.19) 0.22 0.59 0.88 0.97
------ ------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income ......................... (0.33) (0.58) (0.65) (0.91) (0.72) (0.72)
Paid-in-capital ............................... - (0.08) (0.02) - - -
------ ------ ------ ------ ------ ------
Total dividends and distributions .............. (0.33) (0.66) (0.67) (0.91) (0.72) (0.72)
------ ------ ------ ------ ------ ------
Net asset value, end of period ................. $ 7.74 $ 8.16 $ 9.01 $ 9.46 $ 9.78 $ 9.62
====== ====== ====== ====== ====== ======
TOTAL RETURN+ ................................. (1.35)%(1) (2.14)% 2.23% 6.46% 9.49% 10.76%
RATIOS TO AVERAGE NET ASSETS:
Expenses ....................................... 1.39 %(2)(3) 1.38 %(3) 1.38%(3) 1.40% 1.42% 1.44%
Net investment income .......................... 8.41 %(2)(3) 7.90 %(3) 7.33%(3) 7.90% 8.38% 8.30%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........ $702,695 $859,553 $1,024,021 $915,899 $745,581 $542,544
Portfolio turnover rate ........................ 30 %(1) 71 % 130% 104% 82% 87%
</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) 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 SIX FOR THE YEAR FOR THE YEAR JULY 28, 1997*
MONTHS ENDED ENDED ENDED THROUGH
APRIL 30, 2000 OCTOBER 31, 1999 OCTOBER 31, 1998 OCTOBER 31, 1997
------------------- ------------------ ------------------ -----------------
(unaudited)
<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 ............................. 0.33 0.68 0.68 0.20
Net realized and unrealized gain (loss) ........... (0.43) (0.87) (0.46) 0.04
------- ------- ------- ------
Total income (loss) from investment operations ..... (0.10) (0.19) 0.22 0.24
------- ------- ------- ------
Less dividends and distributions from:
Net investment income ............................. (0.33) (0.58) (0.65) (0.19)
Paid-in-capital ................................... - (0.08) (0.02) -
------- ------- ------- ------
Total dividends and distributions .................. (0.33) (0.66) (0.67) (0.19)
------- ------- ------- ------
Net asset value, end of period ..................... $ 7.72 $ 8.15 $ 9.00 $ 9.45
====== ====== ====== ======
TOTAL RETURN+ ..................................... (1.23)%(1) (2.25)% 2.26% 2.52%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ........................................... 1.39 %(2)(3) 1.38 %(3) 1.38%(3) 1.44%(2)
Net investment income .............................. 8.41 %(2)(3) 7.90 %(3) 7.33%(3) 8.17%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ............ $15,734 $19,450 $15,659 $3,773
Portfolio turnover rate ............................ 30 %(1) 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
29
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX FOR THE YEAR FOR THE YEAR JULY 28, 1997*
MONTHS ENDED ENDED ENDED THROUGH
APRIL 30, 2000 OCTOBER 31, 1999 OCTOBER 31, 1998 OCTOBER 31, 1997
------------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
(unaudited)
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 ............................. 0.37 0.76 0.76 0.23
Net realized and unrealized gain (loss) ........... (0.41) (0.88) (0.46) 0.02
------ ------ ------ ------
Total income (loss) from investment operations ..... (0.04) (0.12) 0.30 0.25
------ ------ ------ ------
Less dividends and distributions from:
Net investment income ............................. (0.36) (0.64) (0.72) (0.20)
Paid-in-capital ................................... - (0.09) (0.03) -
------ ------ ------ ------
Total dividends and distributions .................. (0.36) (0.73) (0.75) (0.20)
------ ------ ------ ------
Net asset value, end of period ..................... $ 7.75 $ 8.15 $ 9.00 $ 9.45
====== ====== ====== ======
TOTAL RETURN+ ...................................... (0.56)%(1) (1.42)% 3.21% 2.69%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ........................................... 0.54 %(2)(3) 0.53 %(3) 0.53%(3) 0.59%(2)
Net investment income .............................. 9.26 %(2)(3) 8.75 %(3) 8.18%(3) 9.26%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ............ $1,488 $1,046 $740 $99
Portfolio turnover rate ............................ 30 %(1) 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
30
<PAGE>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
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
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
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Morgan Stanely Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
This 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.
Read the prospectus carefully before investing.
Morgan Stanley Dean Witter Distributors Inc., member NASD.
MORGAN STANLEY
DEAN WITTER
DIVERSIFIED
INCOME TRUST
[GRAPHIC OMITTED]
SEMIANNUAL REPORT
April 30, 2000
